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undue influence could be dealt with either under the provision of duress or the provision of obvious unfairness of the Contract Law. But many point out that since the undue influence refers to the situation where a party, by using his special relationship with the other party or his special status, imposes pressure on the other party during the contract making process, it is more likely to constitute an obvious unfairness than duress.

5. Consequences of Void and Voidable Contracts

Once again, when a contract becomes void, the contract is of no effect from the very beginning. If a contract is voidable, the effectiveness of the contract is not affected until the contract is avoided and such avoidance takes effect retroactively. The issue that follows the avoidance in either a void or viodable contract is the restitution or compensation to one party or to each other of the parties. In dealing with the consequences of the void and voidale contracts, the Contract Law adopts a number of principles that are acclaimed to be compatible with internationally accepted rules, as reflected mainly in the provisions of UNIDROIT’s Principles of International Commercial Contracts and the United Nations Convention on the International Sale of Goods.

5.1. Avoidance from very beginning

It is provided in Article 56 of the Contract Law that a contract that is null and void or rescinded shall have no legal binding force ever from the very beginning. A contract having no legal binding effect means that the contract is ineffective and shall not be enforced. Therefore, after the contract is avoided, the contractual relationship between the parties ceases to exist. Note that since avoidance occurs after the contract was concluded, it may be made before, during or even after the performance. But whenever the contract is avoided, the avoidance takes effect from the time that contract was concluded.

disparity in Article 3.10 of UNIDROIT’s Principles of International Commercial Contracts. Article 3.10 provides that:

(1)A party may avoid the contract or an individual term of it if, at the time of the conclusion of the contract, the contract or term unjustifiably gave the other party an excessive advantage. Regard is to be had, among other factors, to

(a)the fact that the other party has taken unfair advantage of the first party’s dependence, economic distress or urgent need, or of its improvidence, ignorance, inexperience or lack of bargaining skill. . . .

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5.2. Partial avoidance not affecting the remaining part of the contract

What happens in reality is that in many cases, a contract as a whole is not void or voidable but certain clauses or terms of the contract are. In other words, only part of the contract becomes void or voidable. A general principle is that the partial avoidance of a contract is recognized and permitted. As provided in Article 3.16 of UNIDROIT’s Principles of International Commercial Contracts, where a ground of avoidance affects only individual terms of the contract, the effect of avoidance is limited to those terms unless, having regard to the circumstances, it is unreasonable to uphold the remaining contract. The Contract Law follows this principle by providing that if part of a contract is null and void without affecting the validity of the other parts, the other parts shall still be valid.75

There is an argument that the partial avoidance of a contract under the Contract Law shall meet two requirements. One requirement is divisibility of the contract. The point is that if a contract is indivisible, the avoidance, though partially, will still affect the whole contract. In this regard, the divisibility means that the individual terms of the contract may stand independently from each other. One typical example is the disclaimer clause. As we have discussed, in accordance with Article 53 of the Contract Law, a disclaimer is void and null if it is purposed to exempt the liability for personal injury to the other party or the property damage to the other party as a result of deliberate intent or gross negligence. If a contract contains a disclaimer clause in this nature, the people’s court will take the clause out of the contract so that the contract will remain valid because the disclaimer clause is normally independent from other parts of the contract.

The second requirement involves possibility of partial performance. If an individual term is avoided, the avoidance shall have no direct impact on the validity of remaining part of the contract, and after the avoidance, it is still possible for the parties to perform the valid part of the contract. If, however, the void term, though divisible, is so closely related to other part of the contract that the avoidance would make it meaningless to have the contract, or unreasonable to continue performing the contract. Similarly, if it is found that after avoidance of the individual term, the rights and obligations of the parties are grossly imbalanced, the rest part of the contract may not be enforced because of the fairness concerns.

5.3. Independence of Dispute Settlement Clause

The Contract Law treats the dispute resolution clause in the contract as a special and separate clause, which means that the dispute settlement clause will

75 See Article 56 of the Contract Law.

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remain intact regardless of the legal effect of other clauses in the contract. Under Article 57 of the Contract Law, if a contract is null and void, rescinded or terminated, the validity of the dispute settlement clause independently existing in the contract shall not be affected. Here, the independence is described to mean three things: (a) when the contract is avoided, the dispute settlement clause remains effective; (b) if the contract is rescinded, the rescission does not apply to the dispute settlement clause; and (c) in case the contract is terminated, the effectiveness of the dispute settlement clause shall stay unchanged.76

The independence of dispute settlement clause has a practical importance with regard to the validity of the contract. Assume that a contract dispute is brought to a court, and the court jurisdiction is established on the dispute settlement clause. After the hearing, it is found that the contract is void and the avoidance shall apply retroactively to the time when the contract was concluded. If the dispute settlement clause is not independent from the contract, the avoidance of the contract will make the court’s jurisdiction groundless. Assume again that the parties have their dispute solved under the dispute settlement clause during their performance of the contract, but the contract was declared void and null later on. Then the validity of the settlement of the dispute between the parties will be challenged if the dispute settlement clause is to be affected by the avoidance.

Two points on this matter need to be further addressed. First, if there is a dispute settlement clause in the contract, the clause shall be deemed to have independently existed. Second, the dispute settlement clause may take the form of either a clause in the contract or a separate agreement. As a practical matter, the dispute settlement clause stated in a contract shall include all possible mechanisms, such as amicable negotiation, mediation, arbitration or litigation.

5.4. Restitution and Compensation

There is no doubt that when a contract is avoided, the existing contractual relationship between the parties is terminated. In the meantime, however, after the avoidance of a contract, a new debtor and creditor relationship between the parties may be established by the operation of law. A self-explanatory reason is that before the avoidance of the contract, some performance may have already been made or certain amount of money may have already been paid (e.g. deposit), and then when the contract is avoided, an restitution or compensation may become necessary in order to prevent unjust enrichment. In the United States, such new relationship may be termed as “quasi-contract” under which restitution would be sought for money paid, service provided, or

76 See Yang Lixin, supra note 55 at p. 104.

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damages caused. In China, there is no “quasi-contract” concept, but the remedy for restitution or compensation is available.

Pursuant to the Contract Law, there are three remedies in terms of restitution or compensation. The first one is return of property. Under Article 58 of the Contract Law, after avoidance or rescission of the contract, the property acquired as a result of the contract shall be returned. The very purpose of the return of property is to restore the parties to the position as if there had been no contract.77 In light of restitution, the property includes both in kind and money received. And the return of property could be either unilateral or bilateral depending on whether only one party has received property from the other or the parties have received property from each other. If the parties acquired in kind or cash from each other, the return of property will be bilateral and the money mutually paid will be set off.

The second remedy is monetary compensation. Article 58 of the Contract Law further provides that where the property cannot be returned or the return is unnecessary in the case of contract avoidance, a monetary compensation shall be made. The specific money amount for the compensation shall be dependent on the value of the property. The property that cannot be returned is generally interpreted to refer to the property for which a return is either legally or factually impossible, which includes the property that is lost and not fungible (irreplaceable), or the property that is seriously damaged and irreparable, or the property in the form of know-how or services. Unnecessary return is a bit complicated and all depends on whether, from the viewpoint of the parties, it will make any sense to return the property.78

The third remedy is damage. The damage applies when a party is at fault, which causes the other party to suffer losses. According to Article 58 of the Contract Law, after the avoidance of a contract, the party at fault shall compensate the other party for losses as a result thereof. If both parties are at fault, each party shall be respectively liable. What Article 58 actually tells is that to recover for damage two things must be proved: actual losses and existence of fault. The losses may take place during the conclusion of the contract or occur in the performance of the contract.

77There is a disagreement among Chinese scholars on the nature of the return of property. Some argue that the return of property is based on the right of ownership because when a contract is avoided, the party who acquired the property will lose his ownership of the property and the ownership will be restored back to the original party. Under this theory, the return of property is return of ownership. Others disagree by contending that the return of property is based on the doctrine of unjust enrichment because it is a remedy on the ground of contract not property.

78See Li Guoguang, supra note 28 at pp. 245–246.