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required, and several other products and services are subject to government guidance pricing.11

The forth issue is the quality term. In China, the quality not only means the specifications of the subject matter of the contract as agreed upon by the parties, but also means the standards set forth by the State that apply to certain products or services. What is true is that the quality standard provided by the state is only the minimum requirement for quality. Thus, the parties may agree on a higher quality standard than that required by the State, but the quality agreed by the parties may never be lower than the State standard in order for the contract to be valid.

Since the Contract Law leaves to the parties the ultimate right to choose the contract terms and makes no mandatory terms for the contract, it is important that the parties have the terms, particularly the key terms, well defined or addressed in the contract at the first place. This will not only help make the contract better represent the true intention of the parties, but also will help have the contract properly interpreted in case a dispute arises. More importantly, it should be borne in mind that a contract in China will not necessarily become invalid or void simply because of the lack of some key terms.

2. Interpretation of Contract

Interpretation of a contract becomes necessary when the parties dispute over certain word, expression, term or clause of the contract, and the dispute occurs where the parties have different understanding as to the actual meaning of the word, expression, term or clause. In general, the interpretation is to help find out the true meaning of the word, expression, term or clause that is in dispute. And the interpretation may also be extended to certain conduct or event that may affect the contract.

11According to the Annex 4, Products subject to state pricing include tobacco, edible salt, natural gas, and pharmaceuticals as well as public utilities (gas, water and electricity); Products subject to government guidance pricing are grain, vegetable oil, processed oil, fertilizer (Urea), silkworm cocoons, and cotton (not carded or combed); Services subject to government pricing include postal and telecommunication services charges, entrance fee for tour sites, and education services charges; Services subject to government guidance pricing are transportation services charges, professional services charges, charges for commission agents’ services, charges for settlement, clearing and transmission services of banks, selling price and renting fee of residential apartments, and health related services. See id., Annex 4.

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2.1. Contract Interpretation Approaches

In China, there is no unified definition of the contract interpretation. The simplest definition deems the interpretation of a contract as “the analysis and explanation made to the meaning of the contract and related documents”.12 An awkward one describes the contract interpretation as “the work to ascertain the real meaning of the terms of contract and look into the effective intention of the parties through all interpretation rules and means in order to resolve disputes”.13

A more difficult question concerning the contract interpretation is how the interpretation should be made. The difficulty lies with the existence of different approaches and standards employed in the interpretation. Among Chinese scholars, they are debating on what would be the practical mechanism for contract interpretation. The debates are centered on (a) who could make the interpretation, (b) what should be interpreted, (c) what purpose the interpretation should serve, and (d) under what rule the interpretation should be made.

There are two approaches with regard to who could make the interpretation. One is called “restrictive” approach, which limits contract interpretation to the one made by certain authorities. Under the “restrictive” approach, the contract interpretation may only be made by the court or arbitration body before which the contract dispute is brought. Scholars who advocate the “restrictive “approach take the position that the contract interpretation in the civil law sense only refers to the interpretation conducted by the court or arbitration body.14 They further argue that the contract interpretation becomes an issue only when the dispute over the contract term arises between the parties, and because the parties differ in their understanding on the disputed term it is necessary to have a “referee” (court or arbitration body) to interpret.15

The other approach views the contract interpretation in a much broad sense and is therefore commonly marked as “broad” approach. As opposed to the “restrictive” approach, the “broad” approach argues that the contract interpretation could be made by the parties and others, including judge, arbitrator, agent ad litem, witness, notary public as well as appraiser, depending on circumstances under which the interpretation is needed. In addition, according

12See Wang Liming and Cui Jianyuan, A new Commentary on Contract Law – General Provisions (reversed edition), 471–474 (China University of Political Science and Law Press, 2000).

13See Li Guoguang, Explanation and Application of the Contract Law, 518 (Xinghua Press, 1999).

14See Liang Huixing, Rules of Contract Interpretation, 539 (Law Press, 1997).

15See Jiang Ping, supra note 2 at p 102.

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to the “broad” approach, certain organization such as consumer protection society may also be qualified to interpret certain terms of contract.16 Despite its broad sense, however, the “broad” approach agrees that other than those made by the court or arbitration body, all contract interpretations would have no legally binding effect though they are important in helping better understand the terms of the contract.

What should be interpreted is the question that goes to the contents or objects of the interpretation. In general, scholars in China seemingly agree that the interpretation is to construe the terms in dispute, and it therefore shall focus on the literal meaning of the term. However, according to many Chinese contract scholars, in order to made the interpretation more meaningful or in other words, closer to the meaning of the terms to be interpreted, several other matters essential to the interpretation should also be included, because in many cases the literal meaning, standing alone, might not be sufficient. One such matter is the purpose of the contract. The reason is that when the parties enter into a contract, they both may have the intended goal for the contract. Therefore, the interpretation shall be made in consistence with the intended goal.

Another matter is the contract itself. Since any term of a contract is part of the contract, thus to interpret a contract term it is important to take the contract as a whole and look into the substantiality of the term to the contract and the relationship between the term and other terms. In this context, therefore, the interpretation shall be made in light of the whole contract. Also a matter important to the interpretation has to do with commercial usages or customs. In real business settings, the commercial usages or customs possess commonly accepted meaning and are widely observed in the given business transactions or dealings. Thus, the usages or customs have great supplementary value to the contract interpretation, specially when the term to be interpreted appeals very vague.17 In this sense, the commercial usages or customs are often deemed as “blank fillers” that would help define the contractual terms in question.

The purpose that the contract interpretation should serve concerns the ultimate goal or objective of interpretation. Although on its face the interpretation is to reveal the meaning of the term, it is debatable whether the revealing is aimed at ascertaining the actual meaning of the term or digging out the

16See Wang Liming, Studies on Contract Law, supra note 1 at pp. 412–413.

17See generally Jiang Ping, supra note 2 at pp. 102–103; Wang Liming, supra note 1 at pp. 420–428; Li Guoguang, supra note 13 at pp. 518–526; Wang Liming and Chu Jianyuan, supra note 12 at pp. 478–485; and Cui Yunning, General View on Contract Law, 34–38 (China University of People’s Public Security Press, 2003).

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meaning that the parties have intended. It is also arguable whether the interpretation is limited to the meaning of the term or it has to deal with the validity of the contract. Some scholars argue that by inquiring the real meaning of the term according to the intention of the parties, the interpretation is purposed to

(a) make the uncertain contents of the contract reasonably certain, (b) provide supplements to the incomplete contents of the contract, and (c) solve the conflicts among the terms.18

Other scholars contend that the direct purpose of interpretation is to properly determine the rights and obligations of the parties so that the dispute between them could reasonably be solved. Therefore, they argue, the purpose of contract interpretation is not only to ascertain the contents of the contract but also to make a determination on whether the contract has been concluded and whether the contract so concluded is valid.19 For example, according to some scholars, the contract interpretation is premised on the conclusion of the contract, and thus the preliminary question concerning the contract interpretation is whether the contact has been concluded, and if not clear, an interpretation shall be made on the issue of the conclusion first.20

2.2. Contract Interpretation Rules

In regard to the rule of contract interpretation, there are three theories that are widely discussed in China. The first theory is called “objective expression”. Focused on the apparent intention of the parties, the “objective expression” theory is concerned with how the parties’ intention could be expressed objectively. Under this theory, the contract interpretation shall be made on an objective standard, that is, when interpreting a contract term or clause, one should look at what the term or clause in question appears to mean. The underlying idea is that the agreement is not merely a mental state of the parties but rather it is an overt act of them. Therefore, in order to the determine the intention of the parties, the inquiry shall not be limited to what the parties may actually have in mind, more weight shall be given to how the parties reasonably act to have their intention expressed.21

18See Cui Yunning, id at pp. 32–33.

19See Wang Liming, supra note 1 at pp. 407–409.

20A typical example used by Professor Wang to illustrate his point is as follows: A sent B a fax for certain product, and B then immediately delivered the product to A. A refused to accept the product and a dispute arose between A and B. Then to solve the dispute, it must fist look into the contents of the fax to make an interpretation on whether the fax constituted an offer or was simply an invitation for offer. See Wang Liming, id at p. 407.

21See Cui Yunning, supra note 17 at p. 33.