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legal person. The Contract Law alters such judicial practice. Article 50 of the Contract Law provides that where a legal representative or person-in-charge of a legal person or other organization exceeds his or her power to conclude a contract, the act of such representation shall be effective except that the other party knows or ought to know that the representation is beyond the authorized power.21

Therefore, in connection with contracts, a legal representative’s conduct overstepping the authorized power is now generally deemed valid under the Contract Law. In its “Explanations to the Questions Concerning Implementation of the Contract Law of the People’s Republic of China”, the Supreme People’s Court further affirms the validity of a contract that is made by a legal person’s agent exceeding authority. Under Article 10 of the Explanations, where a contract is concluded by a legal representative who has overstepped the authorized business power, the people’s courts may not avoid the contract on the ground of exceeding authority, except that such contract violates the restriction or licensing imposed by the State on the business transactions or operation, or the law or administrative regulations that prohibit such business transactions or operation.22

2.3. Right to Request Ratification or to Rescind Contract

Because the ratification, once needed, will ultimately determine the validity and effect of a contract entered by a person with limited civil capacity or without civil capacity, or by an unauthorized or not duly authorized agent, it is important that the ratification is made in a timely manner in order to reduce the risk of uncertainty that the other party may face. In addition to the concern about the interest of the other party, the social need for stabilizing the business transactions and maintaining a sound order of economic activities would also require an efficient ascertainment of the effectiveness of the contract that is in doubt.

To that end, the Contract Law provides the other party with two alternatives to a contract for which the ratification is wanted. The first alternative is to ask for ratification or to “urge to ratify”. Under Articles 47 and 48 of the Contract Law, if there is the need for ratification of a contract, the other party may urge the agent ad litem or the principal to ratify the contract within one month.23

21See the Contract Law, art. 50.

22See the Supreme People’s Court, “Explanations”, supra note 3, art. 10.

23As discussed, the agent ad litem in China refers to the person who serves as the guardian for the one who has limited civil capacity or has no civil capacity. See the Contract Law, Articles 47 and 48.

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If the said agent ad litem or the principal makes no expression of the ratification within the one-month period, it shall be deemed as a refusal of the ratification, and consequently the contract shall be regarded void if made by a person without or with limited capacity for civil conduct, or the agent shall be held liable if the contract is made without authorization of the principal.

The second alternative is to rescind the contract. As provided in Articles 47 and 48 of the Contract Law, if the ratification is required for a contract and before the ratification is made, the other party with bona fide has the right to rescind the contract. If the other party chooses to rescind the contract, the rescission shall be made by way of notice. To simplify, the exercise of the right to rescind shall meet two requirements: the rescission must be made before the ratification and a notice of rescission must be given.

As a practical matter for the agent ad litem or principal, the one-month time period for ratification serves a two-fold purpose. First, it is the statutory limitation for making the ratification, and second, the right to ratify is waived if not exercised within one month and shall not be revived afterwards. For purposes of ratification, the one-month period starts from the day when the request for ratification is made. The Contract Law however does not provide a time limit for requesting the ratification, and thus it would be up to the other party to decide whether to make a request for ratification. With regard to the term of bona fide, it is understood to mean that the other party did no know or had no reason to know that the party at issue had no or limited capacity for civil conduct or the agent in question had no authority at the time of contract.

2.4. No Right to Dispose

The Contract Law contains a special provision that applies to the situation where a person who disposes of the other person’s property through a contract has no right to do so. Under Article 51 of the Contract Law, if a person having no right for the disposal of other person’s assets disposes such assets through a contract, only when the holder of the right to the assets ratifies or the person having no disposal right acquires the right after the conclusion of the contract, shall the contract be valid.24 This provision is unique because it is purposed to establish a rule to deal with the consequence of “no right to dispose” in contract. Because of its involvement in property, Article 51, as many argued, is an introduction of the concept of “right in thing” of property law into contract law.

Perhaps the provision of Article 51 is a bit hard to understand on its face. In essence, it involves the effect of a contract concerning the disposal of a

24 See the Contract Law, art. 51.

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property by the party who is not entitled to. For example, if A borrowed a watch from B, and in the next day A sold the watch to C without B’s consent. Clearly, A was not the owner of the watch and had no right to dispose of (to sell) the watch unless so instructed by B. Then, without B’s consent, the effectiveness of the contract between A and C for the sale of the watch would of course become a question because A’s conduct infringes the ownership of B as to the watch, which would give B every right to reclaim the watch.

The disposal, as specified in Article 51, refers to the legal disposal, which means to determine the fate of the property i.e. to sell the property, to give it away as a gift or to create a mortgage against the property. Under the civil law ownership doctrine, a full ownership consists of three basic property rights: the right to possess, the right to use and the right to dispose. Although each of these three rights may be separated from the ownership, the right to dispose is regarded as the core of the ownership, without which the ownership would not exist. To illustrate, assume that A owns a house, and based on the ownership A has the right to possess, to use and of course to dispose of the house (to sell the house). At his choice, A may rent the house to B and by doing so A’s right to possess and use the house would be transferred to B. Despite the fact that A transfers the right to possess and use the house to B, A’s ownership to the house is still intact. If, however, A transfers his right to dispose of the house to B, A would lose his ownership to the house.

The implication of Article 51 of the Contract Law is that a contract made by a person who has no right to dispose of the assets in question would be valid only if (a) the contract is ratified by the holder of the right, or (b) the person having no right acquires the right afterwards. In the context of Article 51, the holder of the right includes the person who has the right to dispose of the assets, e.g. an agent fully authorized or a bank in the case of foreclosure, and the proper owner. The acquisition of the right may occur through inheritance, purchase or donation. Thus before the ratification or acquisition, the contract made by the person having no right to dispose is the contract that its effect is yet to be determined.

The idea of no right to dispose and its impact on the effect of a contract may not be seen from the contact law concepts in the US as well as many other common law countries. But in the US the provision that may bear some similarity to the extent that the contract would be affected is the warranty of a clean title for the good to be sold under the UCC. For example, according to § 2-312 of the UCC, in a contract for sales, the seller is responsible for the warranty that the title conveyed shall be good and its transfer rightful. Any defect in the warranty may constitute a breach of contract. Nevertheless, the major distinction is that no right to dispose does not necessarily cause a contract invalid but creates a situation where the effect of the contact need to be further ascertained.

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Not surprisingly, Article 51 of the Contract Law turns out to be very controversial because it tends to recognize the effect of the contract made by a party who has no right to dispose of the assets involved at the time of contract. The problem is that Article 51 does not specify what effect of the contract would have if the holder of the right refuses to ratify or no right is acquired by the party in question afterwards. Of course, it might be assumed that without the ratification or acquisition of the right the contract would be void. But a more difficult question that concerns the premise on which Article 51 would stand is whether the contract itself shall be deemed void or the conduct of disposal itself would be invalid, if no ratification or acquisition is obtained. The practical matter is that if the voidness goes to the contract, the contract shall have no effect from the very beginning, but if the conduct of disposal is void, the effect of the contract should not be affected.

Certainly because of the difficulty in resolving the above question that is being debated, the Contract Law makes no attempt to specify the effect of the contract in which a party has no right to dispose absent ratification or subsequent acquisition of the right. The center of the debates is how (and on what legal grounds) to protect the interest of the party who receives the property with good faith or is a bona fide purchaser.25 Interestingly, notwithstanding the debates and the silence of the Contract Law, the people’s courts in their judicial practice have a strong tendency to uphold the validity of the contract made by a person having no right to dispose if the interest of a third party in good faith is involved.

The people’s courts’ position in favor of a bona fide party has its legal source derived from the Supreme People’s Court’s opinions on the implementation of the Civil Code and also from the UNIDROIT’s Principles of International Commercial Contract (PICC). For example, Article 3.3(2) of the PICC clearly states that the mere fact that at the time of conclusion of the

25In drafting the Contract Law, the drafters attempted to solve the “no right to dispose” matter in a more specific way. For example, in January 1995 draft, it was provided that a contract containing the disposal of the property right of other person shall be valid from very beginning if the disposal is ratified by the holder of the right or the right to dispose is acquired afterwards; such contract shall be invalid if the right holder does not ratify or the right to dispose could not be obtained, but the invalidity shall not be used against a bona fide third party. In 1996 draft, the provision was changed to an even more detailed one, which provided that a contract concluded to dispose of the assets of other person by the person having no right to make such a disposal shall be void without the ratification of the right holder or acquisition of the right after conclusion of the contract; a contract to dispose of the property under joint tenancy by one owner without consent of other owners shall be void; but a third party with good faith obtains through registration or payment the property disposed of by the person having no right to dispose or by a owner of the property under joint tenancy without other owners’ agreement shall be protected by law. Those attempts, however, all failed due to inability to obtain a majority in favor.