Introduction 5
in the government as a gesture of self-blame for the disaster. As a result, Liu Shaoqi came to the front and led the country to recover from economic drawbacks. Under this circumstance, the work on national legislation resumed. In July 1964, the second draft “Civil Code” was complete, where sales relation was one of the 15 chapters.17 Unfortunately however, the effort to adopt the “Civil Code” in China was once again killed due to the “Cultural Revolution” that was launched by Mao in 1966 in order to knock out Liu Shaoqi and his followers who were labeled by Mao as the “representatives of capitalism”.
2. Economic Reform and Reconstruction of Legal System
It was not until 1979 when China finally came out of the shadow of 10-year chaos of the Cultural Revolution the nation begun to rebuild its legal system along with the economic reform. After that, the normal civil legislation resumed in the sense in which all legislative activities started to move forward.18 In 1982, four different versions of the civil code were drafted with an attempt to match up with the changes in the rapid economic reform that began in 1979. In each of these drafts, contact was an important and indispensable part.
However, the activity to enact the civil code was temporarily halted in 1982 because the NPC and its Standing Committee were not quite clear about what would need to be included in the civil code and how the civil code ought to be structured in response to the vast economic reform. In an attempt to better deal with the substantial changes resulting from the reform, the legislature narrowed its focus down on specific areas such as contracts and torts. The underlying rationale was that the separate piece of legislation in certain area would be more efficiently and effectively adapted to the changing economy than a single comprehensive civil code. In addition, the separate legislation would also help provide an experimental basis for a more sophisticated legislation at a later time. Therefore, the contract legislation was then separated out and became an independent one.
17Under the 1964 draft, sales relation was defined as the relation that occurs between units, unit and individual, and individuals for purposes of meeting the needs of production and live, to retail commodities and sell other things according to the principles of voluntariness and equal value within the limits allowed by laws. See He Qinghua, supra note 10 Volume III at pp. 124–126.
18In July 1979, The Second Session of the Fifth National People’s Congress passed seven major laws including Criminal Law, Criminal Procedural Law, as well as the Law of Chinese-Foreign Equity Joint Ventures. By the end of 1982, 26 new laws were adopted, and the most important one was the 1982 Constitution.
6Chinese Contract Law
The economic reform that was aimed at opening China to the outside world (the west developed economies in particular) significantly changed China in many ways. First of all, China moved from a centrally planned economy to a market oriented economy,19 which greatly helped China join the main stream world economy and become one of the fastest growing countries in terms of economic development in the past two decades.20 The reform eventually sent China into the World Trade Organization (WTO) in 2001 after nearly 15 years tough negotiations with the west.
Secondly, China entered into a massive legislation period in which many laws were adopted to regulate the politically and economically changing society. Perhaps the numbers may speak themselves: during the 30 years from 1949 to 1979, there were about 134 laws that were adopted at the national level, and by 1979, only about 23 were still effective; From 1979 to the adoption of the Contract Law in 1999, thousands of laws and regulations were promulgated, and most of them were in economic areas. For instance, in the period of 1979 to 1982, the National People’s Congress and the State Council adopted more than 300 laws and regulations in the first three years of the economic reform, of which some 250 dealt with economic matters.21
Thirdly, China became more and more eagerly as well as readily to absorb foreign “elements” – ideas and concepts. Foreign investment became the major component of the nation’s economy. By the end of 2004, the number of approved foreign investment enterprises (FIEs) reached over 500,000 with a cumulated total direct foreign investment of $562.1 billion. Among Fortune 500, more then 400 companies have investment in China.22 In legal area, taking foreign law and legal system as reference has been becoming an important
19In 1992, the 14th National Conference of the CCP set it as the goal of China’s economic reform to establish a system of the socialist market economy in China. One year late in 1993, the 1982 Constitution was amended to provide that the State pursues socialist market economy. It also provides that the State shall enhance economic legislation and improve macro-control (of the economy).
20According to Chinese President Hu Jingtao, China’s GDP grew at an average rate of 9.4 annually for the past 26 years from 1978–2004. See Hu Jingtao, Keynote Speech at 2005 Fortune Global Forum (Beijing May 16–18). A full text of the Speech is available at http://politics.people.com.cn/GB/1024/3392948.html. For more detailed statistics see http://www.stats.gov.cn.
21See Xing Chuying, supra note 4 at pp. 348–349.
22See Hu Jingtao, supra note 20. For the details of the statistics, see the Ministry of Commerce of China (formerly MOFTEC), Statistics of Foreign Investment in China, available at http://www.mofcom.gov.cn.
Introduction 7
part in the process of China’s legislation. The purpose is to “get China connected with the world” – the very commonly used term that demonstrates China’s stated commitment to the membership of the world economy.
3. Contract Law Legislation
The contract law legislation in China began in 1980 when the Economic Contract Law (ECL) was drafted. The drafting work started in October 1980 and the draft was sent to NPC for its review on September 29, 1981. The ECL was adopted on December 13, 1981 and went into effect on July 1, 1982. In essence, the ECL regulated contracts that were entered into for business purposes between legal persons, other economic organizations, individual businesses, and rural business households.23 It is important to note that under the ECL the contact was termed as “economic contract” because at that time the contract was viewed as the legal means to realize economic goals as stipulated by the State plans.24 Also important to note was that the ECL excluded natural person from making economic contracts. The ECL was amended in 1993 to reflect China’s on-going economic reform. The most striking change in the amended ECL was the deletion of the provision that defined the purpose of economic contract as to guarantee the implementation of the state plans. However, the exclusion of natural person remained unchanged.
The second important piece of contract legislation was the Foreign Economic Contract Law (FECL), which was promulgated by the NPC on March 21, 1985. The FECL was designed to apply to the contracts where foreign party or foreign element was involved. Under Article 2 of the FECL, the law applied to economic contracts, concluded between enterprises or other economic organizations of the People’s Republic of China and foreign enterprises, other foreign economic organizations or individuals.25 Once again, no Chinese citizen was allowed as an individual contracting party to enter into a foreign contract. In addition, the FECL did not apply to the contracts of international transportation.
On June 23, 1987, the Technology Contract Law (TCL) was adopted with a stated purpose of providing impetus to scientific and technical development
23See Economic Contract Law of the People’s Republic of China, an English translation is available at http://www.qis.net/chinalaw/prclaw19.htm.
24See Wang Shengming, Introduction to the Contract Law of China and Important Drafts of the Contract Law, 3 (Law Press, 2000).
25See Foreign Economic Contract Law of the People’s Republic of China, an English translation is available at http://www.qis.net/chinalaw/prclaw20.htm.
8Chinese Contract Law
in China. The application of TCL, however, was limited to the contracts between legal persons, between legal persons and citizens, and between citizens, which establish civil rights and obligations in technical development, technology transfer, technical consulting and services. It was the first time in the contract law legislation that the Chinese individuals were permitted to make contract. Because its intended domestic nature, the TCL did not apply to contracts in which one party is a foreign enterprise, other foreign organization or foreign individual.26 In addition, the participation of Chinese individuals in making contract was limited to the technology contract only.27
The adoption of the TCL marked the beginning of China’s “triarchy” period of contract law legislation, where three contract laws simultaneously operated to deal with contracts in respective areas. This practice not only caused much confusion about application of these laws, particular when a contract involved overlapping domestic, foreign and technology matters. But also, it resulted in the inconsistency among the contract laws because each contract law is different from the other in terms of terminology, contents, structures as well as the wordings of contractual principles.
For example, under the ECL, the contractual remedies were based on the principle of “fault”, which meant that whoever at fault in case of breach would be responsible for the damages.28 According to the FECL, however, a breaching party would be liable for the damages in case of breach regardless of the breaching party’s fault.29 Clearly, the FECL did not premise the contractual liability on the fault principle, but on that of strict liability. The conflicting liability principles in ECL and FECL indeed made it difficult, if not impossible, to apply these laws in a predictable and uniform way. Therefore, a call for a unified contract law in China inevitably became an appealing voice all over the nation ever since the ECL was amended in 1993.30
26See Technology Contact Law of the People’s Republic of China, an English translation of the law is available at http://www.qis.net/chinalaw/prclaw21.htm.
27The Technology Contract Law was not supposed to supersede any part of the Economic Contract Law.
28Article 29 of the ECL provided: “due to the fault of one party that causes economic contract not to be performed or not to be completely performed, the party at fault shall be liable for the breach of contract”.
29Pursuant to Article 18 of FECL, in case of breach where one party fails to perform contract obligation or the performance fails to meet the terms as agreed upon in the contract, the other party shall be entitled to demanding damages or other reasonable remedial measures.
30See Wang Shengming, supra note 24 at pp. 4–5.