188 Chinese Contract Law

when contract was concluded.66 A same principle is adopted in UNIDROIT’s Principles of International Commercial Contracts, according to which mistake is an erroneous assumption relating to fact or to law existing when contract was concluded.67 In China, however, it may be inferred at least from the Supreme People’s Court’s interpretation that the misunderstanding relating to law is not a ground for avoiding a contract.

4.3. Obvious Unfairness

In China, a contract is also voidable if it is found to be obviously unfair at the time of contract. An obviously unfair contract is the contract in which there is a gross disparity between the rights and obligations of the parties as a result of violation of the principle of fairness of the Contract Law. According to the Supreme People’s Court, a contract is obviously unfair if a party uses his superiority or dominant position or takes advantage of the other party’s inexperience to make the unbalance of rights and obligations between them so obvious that the principles of fairness and equal bargain are clearly offended.68

Indeed, the obvious unfairness is aimed at protect a party normally in a weak position from being unfairly treated by the other. Following the Supreme People’s Court interpretation, scholars almost unanimously classify the obvious unfairness to include three major components. First, there is a clear imbalance between the rights and obligations of the parties. If a party bears obligations excessively over the rights he may have or at a cost of huge losses to him, and the other party is overly benefited, the rights and obligations of the parties would obviously be found imbalanced. Second, there is the situation where injured party was in desperate situation or lack of experience at the time of contract, and the other party took advantage of such desperate situation or inexperience of the injured party and made the contract at the suffering of the injured party. Third, the imparity between the rights and obligations of the parties was present at the time the contract was concluded.

66Such a principle is regarded in the United States as an import from criminal law. In criminal law, ignorance or mistake as to a matter of law is a defense if the ignorance or mistake negatives the purpose, knowledge, belief, recklessness or negligence required to establish a material element of the offense. Model Penal Code, § 2.04(1).

67See UNIDROIT’s Principles of International Commercial Contracts, art. 3.4 (Definition of mistake). In the official comment, it is further indicated that this article equates a mistake relating to facts with a mistake relating to law. Identical legal treatment of the two types of mistake seems justified in view of the increasing complexity of modern legal systems.

68See Supreme People’s Court, Opinions, supra note 9. The term “equal bargain” is normally translated as “to make compensation for equal value.” It means that when making a contract, what a party bargained for should be fairly equal to what he paid for.

Chapter Six	189

Apparently, the notion of the obvious unfairness does not include any risk commonly associated with business operations. Therefore, any imbalance, caused by the change of market situation (e.g. rise or fall of price), between the rights and obligations of the parties after the conclusion of the contract will be deemed as normal business risk for which no relief will be granted with regard to the effect of contract.69

But, the obvious unfairness seems to be intertwined at least in part with exploitation of the other party’s precarious position because they are all involved in taking advantage of the other. A closer look at the two, however, may help distinguish them. Unlike obvious unfairness, the exploitation of the other party’s precarious position has a clear focus on the difficulty facing the other party. In the case of obvious unfairness, the other party may not necessarily in a difficult situation although he may desperately need something. In addition, what matters in finding obvious unfairness is the existence of imbalance between the rights and obligations of the parties, while exploitation of other party’s precarious position mainly concerns the bad faith of a party in taking advantage of the other’s difficulty situation for benefits. Moreover, the obvious unfairness is closely related to the superiority of a party over the other or inexperience of the other party, but the exploitation of the other party’s precarious position primarily deals with the other party’s facing difficulty regardless of superiority or experiences.

Because of its emphasis on imparity between rights and obligations, the obvious unfairness, as many argued, may only apply to onerous contracts (obligation in exchange for benefit), particularly bilateral contracts. If a contract is unilateral or gratuitous (nudum pactum), there is no need to compensate the parties with each other, and then the issue of imparity between the rights and obligations of the parties becomes irrelevant.70 The basic idea of obvious unfairness is that in order for a contract to be protected by the law, it should be a fair dealing between the parties as a result of their free and voluntary choice.

Although the Supreme People’s Court has specified in its interpretation what would constitute obvious unfairness, many still feel that it is necessary to further define what unfairness would be deemed “obvious”. It is true that under both the Contract Law and the interpretation of the Supreme People’s Court, to avoid a contract for unfairness, the unfairness must be obvious. The question is how to determine whether unfairness is obvious. One proposition is that the unfairness is obvious if the gain of a party by unfair means exceeds

69See Wang Liming & Cui Jianyuan, supra note 43 at pp. 285–289; See also Yang Lixin, supra note 55 at pp. 93–94.

70See Li Guoguang, supra note 28 at p. 233. See also Jiang Ping et al, See also Jiang Ping, supra note 55 at p 45.

190 Chinese Contract Law

the limit by the law. For example, in an employment contract, if the salary agreed to pay an employee is far below the level in the same or similar sector or industry, such contract with regard to the salary payment would very likely be deemed as obviously unfair.71

Some scholars in China equate the obvious unfairness with the concept of unconscionability in the US contract law. Under the UCC, if a contract is found to have been unconscionable at the time it was made, the court may refuse to enforce the contract.72 The basic test for unconscionability, as articulated by the official comment of the UCC, is the one-sidedness in the light of the general commercial background and the commercial need of the particular trade or case. If the one-sidedness is to mean the disparity between the rights and obligations of the parties, the unconscionability and obvious unfairness have the commonality, and they both are the policy-driven mechanism to protect against unfair or unconscionable exercise of a legal right.

But, the concept of obvious unfairness in Chinese contract law seems to have a more broader meaning than that of unconscionability. In certain cases a contract that may be deemed unfair may not be unconscionable. For example, if a contract is made by a party who is lack of experience, the contract may smell bad if the inexperience is unfairly exploited by the other party, but the contract may still be a conscionable one. Also, the doctrine of unconscionability is purposed to prevent two evils: “oppression and unfair surprise”.73 The obvious unfairness, as mentioned several times, is more concerned about balance of the rights and obligations of the parties.74

Another point worth mentioning is the doctrine of undue influence. The Contract Law contains no such doctrine nor has the doctrine yet been accepted in China. In the view of many Chinese contract law scholars, the problem of

71See Wang Liming, supra note 7 at 692. In his book, Professor Wang listed the gain exceeding the limit of the law as a factor to find obvious unfair contract.

72UCC § 2-302 reads as follows:

(1)If the court as a matter of law finds the contract or any clause of the contract to have been unconscionable at the time it was made the court may refuse to enforce the contract, or it may enforce the remainder of the contract without the unconscionable clause, or it may so limit the application of any unconscionable clause as to avoid any unconscionable result.

(2)When it is claimed or appears to the court that the contract or any clause thereof may be unconscionable the parties shall be afforded a reasonable opportunity to present evidence as to its commercial setting, purpose and effect to aid the court in making the determination.

73See Calamari & Perillo, supra note 12 at 373.

74As seen from the interpretation of the Supreme People’s Court, the concept of obvious unfairness is adopted in the Contract Law with a reference to the approach of gross