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5. Incorporation of the State Plan and Government Approval

As we have addressed in the previous chapters, the Contract Law differs sharply from the past contract law legislations in that the Contract Law has abandoned the idea that contract is a tool to implement the state plan. Despite the difference, the Contract Law nevertheless makes no complete departure from the state plan. Although the Contract Law attempts to give the parties the freedom in making a contract by stressing the parties’ right to enter into a contract voluntarily without unlawful interference, such freedom, however, may not be exercised in violation of state plan. To say it alternatively, if there is any conflict between parties’ right to make a contract and the state plan, the state plan would control.

Because of the priority of the state plan, the Contract Law mandates that the parties affected by the state plan shall enter into contracts in compliance with the plan. As noted, the state plan in the Contract Law is phrased as “mandatory task” and “state purchasing order”. The “mandatory task” is referred to the task assigned by the state through administrative means and must be taken and accomplished by the entities affected. The “state purchase order” represents the order placed by one business entity designated by the state to make purchase from another business entity. In the state purchase order case, the contract is to be made between business entities though the state takes a part in it in terms of placing the state purchasing order.

As discussed, under Article 38 of the Contract Law, when the State on the basis of necessity issues its mandatory task or state purchasing order, the relevant legal person or other organization shall conclude contracts between them under the rights and obligations as prescribed by laws and administrative regulations. It is clear that in either state mandatory task case or state purchasing order case, the state plan plays a dominant role in all aspects of the contract and the parties to the contract enjoy very limited freedom. For the purpose of the formation of contract under Article 38, the state plan must be observed and implemented.

In addition to state plan that would affect the formation of a contract, another distinctive character in the Chinese contract law is government approval. To repeat, as required by Article 44 of the Contract Law, if a contract is subject to government approval, such contract, though concluded, will not take effect unless the approval is obtained. What seems problematical, however, is that the Contract Law itself does not specify the contracts that are subject to government approval. Instead, the Contract Law employs so-called “reference clause,” which makes Article 44 subordinate to other legislations or regulations. The point is that under the “reference clause,” legislature or administrative agency may from time to time determine what contracts must under government surveillance through the approval mechanism.

Chapter V

Terms of Contracts

In most Chinese contract books, the terms of contract are discussed in the context of contents of the contract. From a majority point of view, however, the terms of contract and the contents of contract are not the synonym. For example, according to one argument, the contents of contract should be viewed from two aspects: civil legal relations and intrinsic structure. In civil legal relations aspect, the contents of contract refer to the contractual relationship created between the parties, which represent the rights and obligations that the parties have respectively. With regard to intrinsic structure, the contents of contract are simply the terms of contract because the contents are displayed by the terms.1 A few contract scholars tend not to make such distinctions and they deem the two to have the same meaning. For example, in one contract law book in China, the contents of contract are defined as the terms of contract or the specific provisions of the rights and obligations of the parties to the contract.2

The Contract Law seemingly makes no attempt to distinguish the contents of contract from the terms of contract. Instead, the Contract Law provides that the contents of a contract shall be agreed upon the parties, and shall include

1See Wang Liming, Studies on Contract Law, Vol. I, 347–352 (People’s University Press, 2002).

2See Jiang Ping et al, A Detailed Explanation of the Contract Law of Law, 12 (China University of Political Science and Law Press, 1999).

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in general certain terms. For purposes of discussion, this Chapter will mainly deal with 4 major issues: the terms generally included in a contract, interpretation of contract, standard terms, and disclaimers.

1. Terms Generally Included in a Contract

What are the terms that a contract shall normally have? Under Article 12 of the Contract Law, the contents of a contract shall be agreed upon by the parties and in general include the following terms: (a) name and domicile of the parties; (b) subject matter of the contract; (c) quantity; (d) quality; (e) price or remuneration; (f) time limit, place and method of contract; (g) liability for breach of contract; and (h) methods for dispute settlement.3 Obviously, the language of Article 12 has an emphasis on the choice by the parties with regard to the contents of contract.

First, under Article 12 of the Contract Law, the contents of a contract shall be determined and agreed upon by the parties. In the eyes of many Chinese contract law scholars, Article 12 typically implicates the principle of freedom of contract as specified in Article 4 of the Contract Law. Thus, when making a contract, the parties are empowered to decide what they want to be covered in the contract. Second, the terms listed in Article 12 are regarded to be suggestive (or optional) because the tone of Article 12 is not mandatory. This would mean that the parties may or may not use all of them and may also add other terms if necessary for their specific need. Third, the parties may agree afterwards to change the terms and any post agreement so made would be used to replace the responding terms already in the contract.

An important implicit of Article 12 is that there is no requirement that certain terms be included in the contract in order for the contract to be valid. The terms listed in Article 12 are intended to provide the guidance for the parties to decide the contract contents. Consequently then, any missing term in a contract may not necessarily render the contract invalid nor adversely affects the conclusion of the contract.4 In addition, the terms may vary in different contracts and the parties are free to make their own decision on a case-by-case basis. But the liberal approach taken in Article 12 seems to make somewhat difficult the interpretation of a contract, particularly when certain key terms are not clear or not included in the contract.

3 See the Contract Law, art. 12.

4In the US, for a sale of goods contract to be valid the quantity term is a must. But this would not be the case in China under the Contract Law.

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Perhaps due to the concerns about unintentionally missing-out of necessary terms of a contract, the Contract Law has attempted to make the contract terms listed as more comprehensive as possible. In addition to Article 12 that suggests the terms for a contract in a broad sense, the Specific Provisions of the Contract Law, which govern specific contracts, also contain the provisions that embrace additional terms for particular contract. For instance, in the Chapter 9 – Contracts for Sales, Article 131 explicitly provides that other than those stipulated in Article 12 of this Law, a sales contract may also contain such terms as package manner, inspection standards and method, format of settlement and clearance, language used in contract and its authenticity.5 A much more detailed provision concerning the terms of a contract can be seen in Article 324 of Chapter 18 – Technology Contracts, which lists 11 terms for a technology contract.6 Once again, those terms, like the terms provided in Article 12, are not compulsory. But in practice, it is common that the listed terms are all included in a contract.

With regard to the terms of a contract in general, there are a number of issues that deserve further discussions. The first issue deals with name and domicile of the parties. Under the Contract Law, a party to a contract could be either a natural person (human being) or a legal person (corporation). The domicile of a person is defined in Article 15 of the 1986 Civil Code to be the place where the person’s residence is registered; if his habitual residence is not the same as his domicile (registered residence), his habitual residence shall be regarded as his domicile.7 The habitual residence is characterized by the Supreme People’s Court as the place where a citizen has consecutively lived for more than one year after leaving his or her domicile.8 As for a legal person, its domicile is defined in Article 39 of the Civil Code as the place where its main administrative office is located.9

5 See the Contract Law, art. 131.

6Article 324 provides that the contents of a technology contract shall be agreed upon by the parties, and shall in general contain the following terms: (a) the name of project; (b) contents, scope and requirements of the targeted project; (c) plan, schedule, time period, place, areas covered and manners of performance; (d) maintenance of confidentiality of technical information and materials; (e) sharing of liability for risks; (f) ownership of technological

	achievements and method of sharing proceeds; (g) standards and method of inspection and
	acceptance; (h) price, remuneration or royalties and method of payment; (i) damages for
	breach of contract or method for calculating the amount for compensation for losses;
	( j) methods for dispute settlement; and (k) interpretation of technical terms and expressions.
7	See the 1986 Civil Code, art. 15.
8	See Supreme People’s Court, “Opinions (Provisional) on Several Matters concerning
	Application and Implementation of the General Principles of the Civil Law of China” (1988).
9	See the 1986 Civil Code, art. 39.

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The second issue concerns concept of the subject matter of contract (Biao Di in Chinese). This is the term very commonly used in China to refer to the target of the rights and obligation of the contract. For example, if a contract is to sell a box of wine, the wine is then the subject matter of the contract. In this context, the subject matter of a contract is also called the object of a contract in China. But the confusion often arises between the subject matter of a contract and the purpose of a contract. Literally speaking, the purpose of a contract has a broader meaning than that of the subject matter of a contract because the parties may have the different goal under the contract but the contract may have only one subject matter. To illustrate, a seller may have the goal of getting the payment in full for the product sold, while a buyer might aim at the product that is expected to get, though the subject matter of the contract is the product to be sold (or purchased from buyer’s viewpoint).

The third issue involves the term of price. As noted, though China is moving toward a market economy, the state plan still pays an important role in its economy. Therefore, the price that is set for the products or services in China at this point still takes three forms: market pricing, government-mandated-pricing and government guidance pricing. The market pricing is the mechanism under which the price is determined according to the market situation with no involvement of government (State or local) action. The government-mandated-pricing is the way in which the price is pre-determined by the government, and may not be changed without government action. The pre-determined price normally applies to the products essential to the state economy. The government guidance pricing is the method between the above two, with which the price may be determined according to the guidance provided by the government. In the guided pricing, the government normally provides a medium price and also provides a range within which the actual price may be fluctuated as a necessary response to the change of market situation.

Under China’s accession to the WTO, China commits to, subject to some exceptions, allowing prices for traded goods and services in every sector to be determined by market force, and China also promises to eliminate multi-tier pricing practices for such goods and services.10 The exceptions are referred to the products and services that may still be subject to price control with notification to the WTO. As listed in Annex 4 to the accession of China, there are a number of the products and services for which the government-mandated-pricing is

10See, Protocol on the Accession of the People’s Republic of China, art. 9. WT/L/432, November 23, 2001.