136 Chinese Contract Law

We hold that a great caution must be taken for the application of the standard of obvious unfairness to a contract dispute. A contract that is obvious unfair normally refers to the contract that was concluded to the disadvantage of one party who was clearly lack of experience or was in emergent situation. In this case, the agreement reached between plaintiff and defendant was the real intention of them and did not violate the law, and its validity must therefore be upheld. On this ground the unit price per cubic meter as agreed upon by the parties was effective, by which the parties must be bound. The trial court’s decision requiring the project price to be based on the appraisal of a third party violated the agreement of the parties and must then be reversed.

In reaching its decision on the project price, the trial court relied on Article 62 (2) of the Contract Law. Article 62 (2) provides that 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”. This case, however, does not fall within the coverage of Article 61 (2) because the parties have agreed on the price and the only thing was left out with regard to the price was the unexpected work under the water.

The trial court erred in applying Article 62 to the case where there is specific agreed term concerning certain matter. What the trial court did was to try to use Article 62 to fill the gap, and thus confused the contract interpretation with contract-gap-filling. The difference between contract interpretation and the contract-gap-filling is that the interpretation takes place where a term is provided but it does not clearly express the meaning of the parties, and the contract-gap-filling might be needed when there is no agreed term. Here the price term is clear with regard to all of the work not under the water, and what is needed is to figure out how much it would cost for the work under the water.

It is true that the rising of underneath water level resulted in increase of the work difficulty and costs to plaintiff, for which defendant shall compensate. The compensated amount may be determined on the appraisal of the third party. Thus, the order of the trial court as to the refund and counterclaim is affirmed and the decisions as to the payment of defendant is reversed and modified to the amount of RMB 3,364,021 Yuan.

*

*

*

*

*

The Beijing High People’s Court in the Big Dragon case attempted to separate the contract interpretation from the gap filling for the contract. In the case where the interpretation is needed, there exist contract terms but meaning of the terms needs to be clarified. The gap filling on the other hand is to help determine the matter that is not covered by the agreed terms or missed out by the parties.

2.5. Proof of the Terms of the Contract – No Parol Evidence

In short, under the Contract Law, the contract interpretation is needed when there appear disputable terms, uncertain or missing terms, or inconsistent versions if the contract is made in different languages. In addition, the Contract Law has special provisions that regulate the interpretation of standard contracts. These provisions will be discussed separately in this chapter. But a common

Chapter Five	137

scheme is that to interpret the terms of contract certain evidences must be sought or presented, particularly when the parties offer contradictive arguments over the specific meaning of the terms or clause.

A hard question in this regard is whether any extrinsic evidence could be introduced to help ascertain the meaning of the term or clause in question. Under Article 61 of the Contract Law, if certain terms of the contract are uncertain, the parties may enter into a supplementary agreement to overcome the uncertainty of the terms in questions. But the supplementary agreement is something that the parties negotiated after the interpretation became an issue. Article 125 of the Contract Law is silent about what the parties may bring up to the contract interpretation, it is then unclear whether other relevant evidence such as the records of negotiation, side agreement, or memos may be used to help interpret the contract.

In China, there is no such concept as “parol evidence” that is popularly used in the United States to bar the admission of any prior writing or oral agreement or contemporaneous oral agreement between the parties to vary or contradict the writing of the contract if the contract is intended to be complete and final.37 In Chinese courts, an infallible rule is “to seek truth from the fact.” In application of this rule to the contract interpretation, it seems very likely that all evidences relevant to help prove the meaning of the parties would be admissible. As a matter of fact, despite the Contract Law provisions, it has been held that in contract interpretation some ancillary evidence or materials could be used to aid the determination of the terms of the contract.

The “ancillary evidence” is understood to include the history of the contract negotiations of the parties.38 In a book written by a group of judges of the Supreme People’s Court to explain the Contract Law, it is suggested that taking the contract as a whole, the interpretation should not be limited to the context of the contract, but rather in order to determine the meaning of the parties, all other materials related to the contract, such as previous drafts, negotiation records, letters, telegraphs, telex, shall all be used.39 Thus it is discernable that in practice, the Chinese courts are open to all relevant evidences when making the interpretation of the contract. Consequently, an important question the courts may have to face is how to identify the truthfulness of each of the evidences that are introduced.40

37See Johnson v. Curran, 633 P. 2d 994, 995 (Alaska, 1981). See also UCC § 2-202.

38See Cui Yunning, supra note 17, at p. 35.

39See Li Guoguang, supra note 13 at pp. 521–522.

40In the Untied States, the parol evidence rule is purposed to secure business stability. As Professor Calamari pointed out, the policy behind the parol evidence rule is “to give the writing a preferred status so as to render it immune to perjured testimony and the risk of “uncertain testimony of slippery memory”. But the rule has received many criticisms for its complexity and rigidness.