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At the other end of the spectrum is the theory of “subjective intention”. In contrast with the “objective expression” theory, the “subjective intention” views the actual intention of the parties as being decisive to the interpretation of contract. Under the “subjective intention” theory, to determine the meaning of a contract term or clause, what really matters is not what the intention of the parties would reasonably appear to be, but is what the parties have actually intended. As a result, if the meaning of the term or clause that the parties have intended to give is found to be different from the literal sense of the language used or from the common understanding of a reasonable person, the parties’ intention controls.22

The third theory is the eclectic theory, which is actually the mix of both “objective expression” and “subjective intention.” This theory is eclectic because it does not take the extreme of either “objective expression” or “subjective intention.” On the contrary, it tries to narrow down the difference between the two opposite theories and combine them together to make a comprehensive approach. Under the eclectic theory, the contract interpretation shall fist try to ascertain the true intention of the parties because of the paramount significance of the parties’ intention to the contract. If however, the parties’ true intention could not be determined or there is a lack of common intention of the parties, the interpretation shall be made with recourse to the common understanding of reasonable persons under the same or similar situation.23

2.3. Contract Interpretation under the Contract Law

The Contract Law provisions that govern the contract interpretation seem to be the product of the compromise of the above debates. On the one hand, the Contract Law attempts to take the majority position, and on the other hand, it is intended to avoid some controversial issues. Under Article 125 of the Contract Law, with regard to disputes between the parties to a contract arising from the understanding of any term or clause of the contract, the true meaning of such term or clause shall be determined according to the words and expressions of the contract, the contents of relevant clauses of the contract, the purpose of the contract, the transaction usages and the principle of good faith.24

For some reason, the Contract Law does not define the contract interpretation. But from Article 125, it can be inferred that the contract interpretation is the process of ascertaining the “true meaning” of the contractual term or

22See Wang Liming and Cui Jianyuan, supra note 12 at pp. 474–478.

23See Wang Liming, supra note 1 at pp. 419–420

24See the Contract Law, art. 125.

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clause in question. And in order to determine the “true meaning”, the interpretation shall be made in accordance with the words and expressions used, relevant clauses, contract purpose, usages as well as in good faith. As far as the interpretation rule is concerned, the Contract Law does not follow either “objective expression” or “subjective intention”. But many Chinese scholars believe that the Contract Law in fact is in favor of the rule that combines both the objective expression and the subjective intention.25

In addition, the Contract Law contains no reference as to who may make contract interpretation. A prevailing understanding is that the Contract Law does not exclude the parties from interpreting the contract.26 To put differently, the Contract Law does not rest the contract interpretation with the hands of court or arbitration body only. Consequently, a wide variety of relevant parties (including the parties to a contract) may interpret the contract. But the difference exists in terms of the legal effect of such interpretation, and for the interpretation to be legally binding it has to be made by the court or the arbitration body.

Under the Article 125, the contract interpretation shall begin with the words and expressions used in the contract. Thus the “plain meaning” of the words and expressions seems to be the threshold of the interpretation because no further efforts would be needed if the meaning of the words and expressions could be determined on its face. When the meaning of the words or expression may not be easily ascertained, the meaning should first be determined by looking at other relevant clauses in the contract. If the ambiguity still exists, the interpretation should be made with resort to the purpose of the contract, the transaction usages and the good faith.

What should be noted is that Article 125 makes the principle of good faith an interpretation determinant. Although it seems too abstract to understand how the good faith principle would help ascertain the meaning of a contract term or clause, most contract scholars in China argue that the good faith principle, though left undefined in the Contract Law, plays a significant role in the contract interpretation and must be observed. It is generally understood in China that the good faith is the supreme rule of contract and as applied to the contract interpretation it requires the interpretation to be made according to commonly accepted business ethics in order to ensure the fair dealing. In this

25For example, according to Li Guoguang, the contract interpretation under the Contract Law shall start with the literal meaning of the words and expressions, and then determine the true meaning by examining the parties’ intention as expressed with a reference to the parties’ actual thinking. See Li Guoguang, supra note 13 at p. 521.

26See Wang Liming, supra note 1 at pp. 412–413.

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connection, the application of good faith in contract interpretation is actually the application of the notion of fairness as well as the business and public ethics.

For example, on March 14, 2004, in order to observe the “International Consumers Right Day”,27 Beijing Association of Consumers Protection, on the basis of complaints it received from customers in the year 2003, published a list of 10 major unfaith and unethical business conducts that are regarded as clear violation of good faith principle. This list from one aspect represents how the good faith is understood in the general public of China. The 10 major unfaith and unethical business conducts include (1) use of advertisement or other means to provide false information about products or services to mislead consumers; (2) illegal production and sale of unqualified products; (3) use of the advantage of monopoly or exclusive business position to force consumers to buy its products or services; (4) use of unfair standard contract or terms to increase consumers’ obligations and reduce business operator’s liability;

(5) use of deceived means by malicious collaboration among business operators to allure consumers to buy; (6) intentional omission of product and service information that should be expressly stated; (7) use of inferior materials or cutting down of the work for products or services; (8) intentional breach of the agreement with, or promise to, consumers; (9) intentional concealment of the specification, certificate or other related information of the products or services in order to evade legal obligations; and (10) revelation of consumers’ personal information without authorization for purposes of making profits.28

However, when the contract interpretation is made in consistence with business and public ethics under the principle of good faith, the contents ascertained as such may not necessarily be the same as the parties have actually intended. It is then argued that in order to make the contract interpretation more meaningful the good faith shall be the last resort to be used for the interpretation. That is to say that if the true intention of the parties could be ascertained by other means of interpretation, the other means shall first be employed. In this regard, the good faith principle is actually to function as the “filler” to fill in the holes that may appear in the contract interpretation. To speak generally, the good faith may be used as a “catch-all” means to deal with the interpretation of contract.29

27 In 1983, the Organization of International Consumers Union made the March 15 an International Consumers Right Day.

28See Jin Hua Shi Bao (Beijing Times), March 15, 2004 at p. A12.

29In the United States, a distinction is made between contact interpretation and contract construction. The interpretation is to ascertain the meaning of the parties while construction relates the legal effect of words used. According to Professor John Calamari, the construction placed upon an agreement will not necessarily coincide the meaning of the parties. See Calamari & Perillo, The Law of Contracts (5th ed, 1998) 614–615.

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It should be emphasized that under the Contract Law the purpose of contract is not only an important factor for contract interpretation, but also a primary basis for the interpretation concerning the different language versions of a contract. The second paragraph of Article 125 provides that where two or more languages are used in the text of a contract and it is agreed that both versions are equally authentic, it shall be presumed that the terms and expressions in different versions have the same meaning. It is further provided that in case where the terms and expressions in different versions are inconsistent, they shall be interpreted on the basis of the purpose of the contract.

2.4. Supplementary Agreement for Uncertain or Missing Terms

Distinctively, in addition to Article 125 that deals with contract interpretation, Articles 61 and 62 of the Contract Law also contain provisions that apply for the determination of the terms of a contract. Under the Contract Law, however, Articles 61 and 62 may apply only when some specific terms of the contract are missing or uncertain after the contract has taken effect. Because Articles 61 and 62 are intended to provide the mechanism under which the contents of contract may be supplemented by making up the missing term or clarifying the uncertain terms, many in China label Articles 61 and 62 as “contract supplement provisions.” On the opposing side, however, is the view that Articles 61 and 62 are the same as Article 125 in their function. They believe that Articles 61 and 62 are specific provisions for contract interpretation while Article 125 is a general one.30

Under Article 61, if after the contract become effective, there is no agreement between the parties on the terms regarding quality, price or remuneration or place of performance, etc. or such agreement is unclear, the parties may negotiate a supplementary agreement for the clarification purpose. If the parties fail to reach such a supplementary agreement, the terms shall be determined from the context of relevant clauses of the contract or by transaction customs.31 To be simplified, Article 61 makes it optional for the parties to reach a post-contract agreement to fix the problem of uncertain or missing terms in the contract. Alternatively, as the second resort, the transaction customs may be used to help determine the uncertain or missing terms. Again, note that Article 61 is a special provision applicable only to certain specified terms.

Having considered the difficulties that Article 61 may encounter and the need for achieving the uniform result, Article 62 encompasses more detailed

30See Wang Liming, supra note 1 at pp. 428–431; See also Cui Yunning, supra note 17 at pp. 159–163.

31See the Contract Law, art. 61.

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provisions that are aimed at making the determination straightforward. According to Article 62, if the relevant terms of the contract agreed by the parties are not clear, nor can they be determined under the provision of Article 61, the following rules shall be applied:

1.If the quality requirements are unclear, the State standards or industrial standards shall be applied; if there are no such standards, the generally accepted standards or specific standards in conformity with the purpose of the contract shall be used.32

2.If the price or remuneration is unclear, the market price of the place of performance at the time when the contract is concluded shall be applied; if the government mandated price or government guidance price shall be followed in accordance with the law, the provisions of the law shall be applied.

3.If the place of performance is unclear, and the payment is in currency, the performance shall be effected at the place of location of the party receiving the payment; if real estate is to be delivered, the performance shall be effected at the place where the real estate is situated; for other subject matters of the contract, the performance shall be effected at the place of the party fulfilling the obligations.

4.If the time limit for the performance is unclear, the obligor may at any time fulfill the obligations, and the obligee may also demand at any time the performance, but the obligor shall be given a necessary preparation time period for the performance.

5.If the method of performance is unclear, the method advantageous to realize the purpose of the contract shall be adopted.

6.If the burden of expenses for performance is unclear, the expenses shall be born by obligor.33

32Different from many other countries or international treaties where the quality standards are basically the conformity with sample or the purposes of the contract, Article 62 of the Contract Law requires that the State or industrial standards be met first. There is a similar provision in the 1986 Civil Code. Article 88 (1) of the Civil Code provides that if the quality requirements are unclear, the State quality standards shall be applied; if there are no State quality standards, generally held standards shall apply. In its Opinions on Several Question Concerning the Implementation of the 1986 Civil Code (Provincial), the Supreme People’s Court interpreted Article 88 (1) to mean that when the contract contains ambiguous requirements for the quality of product, the parties fail to reach an agreement and there are not State quality standards, the standards set up by State ministries or commonly accepted professional standards shall be applied; in the absence of such ministerial or professional standards, the approved enterprise standards shall apply; if there are no approved enterprise standards, the trade standard of the same industry or the approved standards for the similar products shall apply.

33See the Contract Law, art. 62.

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In fact, Article 62 in most parts is simply a restatement of the provision of Article 88 of the Civil Code that contains the provisions for determination of uncertain terms concerning the quality, time limit of performance, place of performance and the price of the contract. What is not covered in Article 62 of the Contract Law is the determination of the right to patent application and the right to the use of patent. Under Article 88 of the Civil Code, if in the contract there is no agreement upon the right to application for patent, the party who has completed invention-creation shall have the right to it; if the contract contains no agreement on the right to the use of patent, either party shall have the right of use.34

But, in the context of the Contract Law, Articles 61 and 62 seems to be more involved in the performance of contract because they are regarded as being applied only in the stage of contract performance.35 But whatever understanding there may be, it looks very likely that Articles 61 and 62, as applied to the contract interpretation, may overlap Article 125. A question that would be raised then is what provision should be applied first when it is requested to determine the terms that are uncertain or disputable. Jurisprudentially speaking, since Articles 61 and 62 are designed to cope with specific terms of a contract, their application shall be attempted at the first place. Keep in mind, however, that the application of Articles 61 and 62 is limited to the filling-in of the specific contract terms that are missing. The following case from the High People’s Court of Beijing may help better explain the interpretation mechanism employed in the Contract Law and used in the courtroom.

Beijing Big Dragon Mechanical Engineering Co. Ltd.

v.

Beijing Kaibor Paddling Company Inc.

High People’s Court of Beijing36

On April 2, 2000, plaintiff and defendant signed an “Agreement on the 3rd Phrase of the Project of Excavation of Water Route”. Under the Agreement, plaintiff was responsible for excavating, removing, and bulldozing soil, and for leveling riverbed as well as stacking rocks at the riverbank. The total volume of workload was 572,000 cubic meters of soil

34See the 1986 Civil Code, art. 88.

35Also note that Articles 61 and 62 differ from Article 126 in addressing the issues of determination of the contract terms. Articles 61 and 62 are aimed to deal with determination of uncertain terms while Article 125 is applied for the determination of the terms that are in disputes.

36The source of this case is from the First Civil Division of High People’s Court of Beijing,

A Precise Analysis of Beijing Civil Cases, 258 (Legal Press, 2003).

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to be measured by plaintiff and verified by defendant. The unit price of the project was RMB 4.80 per cubic meter. In addition, plaintiff was required to pay RMB 100,000 Yuan deposit up front as the fund to guarantee the quality and timely completion of the project. The contract was to be supervised by Beijing Jinze Municipal Mechanical Engineering Company.

After signing the Agreement, plaintiff made payment under the Agreement in the amount of RMB 100,000 to the project guarantee fund, and then started working on the project site on April 6, 2000. However, during the digging-up of the site, it was found that the water level underneath was rising, which caused to increase both the difficulty and costs of the project due to the requirement for more water-drain equipment and the need for drainage while working on the project. On May 20, 22, 23, and 25, plaintiff sent letter four times to defendant reporting the completion of the project and asking for defendant’s inspection. Defendant refused plaintiff’s request for inspection on the ground that the project had not been complete and the progress of the project was affected by the technical problems confronting plaintiff. Plaintiff then left the project site.

In July 2000, plaintiff brought a lawsuit against defendant at Beijing No. 1 Intermediate People’s Court. Plaintiff alleged that it had a valid agreement with defendant on the project and had performed accordingly, but defendant refused to pay plaintiff in the amount of RMB 8,449,657 Yuan for the project completed. Plaintiff asked the court to order defendant to make the payment and also to refund the RMB 100,000 Yuan deposit to plaintiff.

Defendant argued that the project had quality problems and was unfinished. In addition to asking the trial judge to dismiss plaintiff’s claim, defendant filed a counterclaim against plaintiff. In its counterclaim, defendant requested the court to (a) render the Agreement void, (b) order plaintiff to pay RMB 1,990,000 Yuan for defendant’s economic loss,

(c) ask plaintiff to make public apology for the damage to defendant’ business reputation caused by plaintiff’s petition to the court for attachment, and (d) re-examine and re-appraise the quality of the project. Plaintiff argued that defendant’s refusal of plaintiff’s request for inspection in May was groundless, and there was no way to re-examine the project at the time of lawsuit because situation of the project site had changed.

During the hearing, the court asked Beijing Gaodi Investment Consulting Company Ltd. to make an appraisal of the value of the said project according to then effective pricing parameter of Beijing City. The result of the appraisal demonstrated that the total value of the project was RMB 9,50,319 Yuan, of which the volume of machine-excavated soil was totaled at 617,277 cubic meters and the unit price was RMB 11.96 Yuan per cubic meter, and total debris removed by mechanical equipment were 12,000 cubic meters and unit price was RMB 7.79 Yuan per cubic meter.

The arguments between plaintiff and defendants were centered on two major issues: the first issue is whether defendant shall make payment to plaintiff for the price of project, and the second issue is how to determine the price of the project if defendant should make the payment. The court held that the agreement between plaintiff and defendant was valid, but during the course of construction, the river-level rose, which made it more difficult and more expensive for plaintiff to complete the project, and therefore it would be obviously unfair if defendant paid plaintiff for the project still at the price on the bases of the agreed cubic meters of the soil (namely 572,000 cubic meters). According to the court, the appraisal by Beijing Gaodi Investment Consulting Company Ltd. on the price of the project was fair.

The court further held that defendant’s argument about the incompletion of the project was not supported by any evidence, and should be denied, and defendant’s counterclaim should be also dismissed because it was based on the assertion that plaintiff did not complete the project. In its decision to dismiss defendant’s counterclaim, the court ordered defendant to pay plaintiff for the project in the amount of RMB 8,499,657 Yuan and to refund plaintiff’s deposit of RMB 100,000 Yuan as well. Defendant appealed.