Chapter One	31

Another difference is the way the law is drafted. In China, the law usually takes a formality of two parts: general provisions and specific provisions. The general provisions contain the purpose and scope of the law, the principles under which the law is to be applied, and the rules of general application. The specific provisions deal with individual matters that the law is intended to cover. By contrast, in the common law countries, the pragmatism seems to be the dominant force in the legislation where no distinction is clearly made between general and specific provisions of law. More importantly, in China, the general provisions, though they are usually very abstract, may be used in the courts as the legal authority to render their decisions.

One further difference concerns the function of courts. In common law countries, judges are empowered with law-making authority, and a lower court is bound by the decisions made by the higher court. In China, however, courts are granted no law-making power. Under the 1882 Constitution of China (as amended 2004) and 1979 Organic Law of the People’s Courts of China (as amended 1983), the power to interpret law is rested with the Standing Committee of the National People’s Congress,26 and the Supreme People’s Court only has the power to interpret the specific questions concerning the application of law in the judicial proceedings.27 And the Supreme Court’s interpretation is normally made in the form of “opinions” or “answers”.

Therefore, in China, the people’s courts must abide by law or statute but not by precedent, and the higher court decisions have no binding effect on lower courts. In other words, a higher court’s decisions may not be cited as legal authority by which the lower court’s decisions are made. However, with regard to procedural matters concerning court proceeding, the Supreme People’s Court opinions must be followed by the lower courts. Also it should be noted that although the Supreme People’s Court’s “interpretations” are not the “laws’ in China, they have played a significant role in shaping the legal regime of the country and provided courts with “urgently needed gap-fillers”.28

1.3. Theories of Contract Law

With the development of contract law in China after 1979, Chinese scholars as well as legislators have debated over the contract theories. The debates were mainly on the nature and function of the contract law. Although in general, there has been a consensus that contract law regulates the legal relations in civil and commercial matters and contract is in essence a mutual dealing

26See 1982 Constitution of China, art. 67.

27See 1979 Organic Law of People’s Courts of China, art. 33.

28See Wang Chenguang, supra note 9 at p. 21.

32 Chinese Contract Law

between the parties, differences existed as to what contract doctrine would need to be followed and how the contract rules should be addressed under each specific doctrine. During the course of the contact law legislation, there developed four different contract theories that dominated much of the discussions and analysis in this regard.

1.3.1. Economic Means Theory

Originated from former Soviet Union, the economic means theory posits business transactions as a series of economic activities in the different stages of productions and among business entities. Under this approach, contract is the economic means employed by the State to manage and facilitate the economic activities. Maintenance of economic order and the state control (management) constitutes the basis for the law to enforce a contract.

The most distinctive feature of the economic means theory lies with its contract definition. It defines a contract as a device to undertake economic activities between enterprises in the process of production. Based on this definition, contract is termed as “economic contract”. And further, the term “economic contract” is interpreted to mean a number of things. First, the parties to an economic contract are limited to legal person, and no individual or private person may be a party to such contract. Second, the economic contract basically serves as a tool to implement the economic plans of the State, and its contents and formality are all subject to and affected by the State plans. And third, the purpose of the economic contract is to meet the needs of the production and reproduction as well as business operation under the mandate of the State plans.29

The economic means theory possessed a dominant position until late 1980’s and significantly influenced the first two contract laws of China, i.e. 1981 Economic Contract Law and 1985 Foreign Economic Contract Law. As Professor William Jones of Washington University observed, for decades in China, a contract was viewed as (a) a device for making the economic plan concrete; (b) the essential basis of the state economic plan; (c) a means for making the state economic plan accurate; and (4) an essential complement to the state economic plan.30 What was in common in the 1981 Economic Contract Law and the 1985 Foreign Economic Contract Law, which characteristically represented the economic means theory, was that individuals were excluded from being a party to the contract.31

29See Su Huixiang, Theory of Economic Contract Law, 3–5 (Liao Ning People’s Press, 1990).

30See William C. Jones, Basic Principles of Civil Law in China 201–202 (M.E. Sharpe Inc., 1989).

31In the 1985 Foreign Economic Contract Law, thought individual may be a party to a contract, such individual was restricted to foreigner.

Chapter One	33

1.3.2. Civil Act Theory

The civil act theory tries to explain contract from the conduct of the parties. It emphasizes that contract is an important type of the civil act, and is the legal form reflecting transactional relationship between the parties concerned in the market place.32 According to the civil act theory, the enforceability of a civil act such as to make a contract to a great extent depends on whether such an act is taken on the basis of the consensus of the parties.

Influenced by the Roman law, this theory takes the position that there are three fundamental elements embedded in a contract. First, a contract is created by the mutual act of parties; second, a contract represents the consensus of the parties; and third, a contract is the cause for the occurrence of civil obligation. Therefore, under the civil act theory, contract is a civil act that creates obligation between the parties, and contract law is the law that regulates and enforces such act.33

1.3.3. Agreement Theory

The agreement theory focuses on the meeting of minds of the parties. Proponents of this theory argue that the contract law is purposed to enforce an agreement that records both intention and expected benefits of the parties. Therefore, the state of the mind of the parties is an essential element in determining the validity and enforceability of a contract. A major difference between the agreement theory and the civil act theory is that the former views it critical as to what the parties would think other than how the parties would act.

But, the agreement theory does not mean to ignore the overt act of the parties. On the contrary, it believes that contract is an agreement consisting of not only promises but also actions. The reason is that in order to have a contract, the parties would have to take certain actions such as formalizing promises and compromising differences. Therefore, to the agreement theory, the promise is no more than a preliminary element to make an agreement while a contract would deal with how an agreement is to be made, modified as well as terminated.34

1.3.4. Exchange Theory

The exchange theory premises contract on the exchange of goods or products, and its whole idea is that contract helps realize economic movement in any

32See Wang Liming, the Proposed Draft of the Civil Code of China and Legislative Reasons – Contracts, supra note 5 at p. 195.

33See Li Guoguang, Explanation and Application of the Contract Law, 10–12 (Xinghua Publishing House, 1999).

34See Jiang Ping, A Detailed Explanation of the Contract Law of China, 2–4 (China University of Political Science & Law Press, 1999).

34 Chinese Contract Law

given society. The standing point of this theory is that the market circulation depends on exchange of products and the contract is to facilitate such exchange. Thus, the contract law is to establish a legal norm that makes the exchange of goods or products to take place in an acceptable order.35

It seems that the exchange theory regards contract as a record of business transaction activities as well as the channel through which the exchange of products takes place. The problem under the exchange theory, however, is that it does not seemingly tell what the contract is and what the contract would stand for. But this theory appears to try to promote a concept of voluntary exchange in the market place by actually stressing the function of the contract. In this context, the exchange theory may bear some resemblance to economic theory of contract that regards the contract as a mutual transfer of right to achieve maximum net social benefits.36

Apparently, the Contract Law does not stand on any of the above theories alone, but rather it takes the stance that combines the civil act theory and agreement theory. The Contract Law makes it clear that contract is an agreement and the agreement is aimed at forming a civil relation containing both contractual rights and obligations. In addition, many scholars in China define the contract law as the law to regulate activities of business transactions among civil actors of equal status. They argue that the contract law applies only to the agreement entered into between the parties of equal status.37

What the Contract Law is intended to serve is a three-fold purpose: (a) to protect lawful rights and interests of the parties, (b) to maintain the social economic order, and (c) to promote the construction of socialist modernization.38 But with regard to what would constitute the basis for the enforceability of a contract, the Contract Law seemingly contains no readily answer, though it emphasizes that a contract, once established according to law, shall be legally binding on the parties.

1.4. Definition of Contract

There was no clear definition of contract in China until 1986 when the Civil Code was adopted. Nonetheless, because of the civil law tradition, a commonly held concept was that “contract in essence is an agreement” and this concept was accepted in the Chinese contract law legislation. For example,

35See Wang Jiafu, supra note 7, at pp. 12–16.

36The fundamental principle of the economic theory in contract is that if voluntary exchanges are permitted, resources will gravitate toward their most valuable users. See Anthony T. Kronman, The Economics of Contract Law, 1–2 (Little, Brawn & Company, 1979).

37See Wang Liming, Study on Contract Law, Vol. 1, 56–57 (People’s University Press, 2003).

38See Contract Law, art. 1.

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the 1981 Economic Contract Law defined the economic contract as “an agreement between legal persons to ascertain their mutual rights and obligations for purposes of achieving certain economic goal”.39

Under Article 85 of the Civil Code, a contract is defined as an agreement establishing, modifying and terminating the civil relations between the parties. Following this concept, Article 2 of the 1999 Contract Law further defines contract as an agreement establishing, modifying and terminating the relations of civil rights and obligations between natural persons, legal persons or other organizations of equal status.

As compared with the Civil Code concerning the contract definition, the Contract Law seems to be distinctive in several aspects. First, by specifying natural persons as the parties to a contract, the Contract Law departed from previous contract law legislation where Chinese citizens were excluded from making contract (or from the coverage of contract law). Second, the Contract Law has an emphasis that all parties to a contract are equal civil subjects regardless of their respective status. Third, the Contract Law grants “other organizations” the power to make contracts and therefore extends the coverage of contract law to non-legal persons – an unsolved issue in the 1986 Civil Code.

Thus, for purposes of Contract Law, the definition of contract is generally interpreted in China to include the following legal characteristics:

i.Contract is a “civil legal act” performed by natural persons, legal persons and other organizations of equal status.

ii.Contract is purposed to create, change and terminate relationship concerning civil rights and obligations.

iii.Contract is an agreement expressing the will of two or more parties.40

The essence of the “civil legal act” doctrine is to stress that contract is an action of the parties to express their will for civil and economic benefits, and such action must serve a lawful purpose. Scholars in China try to differentiate “legal act” from “de facto act” because the “legal act” is regarded as the act that is premised on the expectation of actors (parties) and will produce anticipated results. Therefore, the “meeting of minds” would be the centerpiece of such legal act. The “de facto act” such as tortious act, however, does not require any meeting of minds nor lead to any mutually expected outcomes.41

With respect to the expression of will of parties in the process of contract making, it is crucial that the meeting of minds is achieved. Two basic factors

39See Economic Contract Law of China (1981), art. 4.

40See Wang Liming, A Novel Discussion on Contract Law – General Principles, 6–7 (China University of Political Science & Law Publishing House, 1996).

41See Wang Liming, Study on Contact Law, supra note 37 at pp. 7–14; see also Wang Jiafu, supra note 7 at pp. 15–18.

36 Chinese Contract Law

are deemed important in making judgment on whether the minds of parties are met. First, the expression of the will must be made mutually. In other words, each party must express to the other what he would bargain for. Second, a consensus between the parties must be reached. Although the parties to a contract each has different business interest, they have to find a common ground on which their mutual interests will best be served. And such a common ground would be the place of the meeting of minds whereby a contract is to be made.

But for making a contract, meeting of minds alone may not be sufficient. What is required then is the “lawful purpose” – a watershed between contract and non-contract. In this sense therefore, contract is further defined by many Chinese scholars as a “lawful civil act”. The point is that only if the expression of the will of the parties is lawful and does not violate any law, may a contract so concluded be binding and enforceable. Thus, if an agreement is made for achieving illegal goal, the agreement as such, though there is a “meeting of minds” or “expression of will”, will not have any effect of contract.

Another focus of the contract definition in China is the equal status of the parties to a contract. It is a very important concept in Chinese contract law and also has a great practical significance. As noted, China is making efforts moving from a planed economy to a market economy. In the planed economy, the government power in the form of plans reaches almost every aspect of business transactions. Under this circumstance, all business transactions were conducted under the government plans and there was no place to argue for equal status between the contractual parties. In the market economy, however, the contract making power is rested with the contractual parties and the market is the primary force in business dealings. In the market, all parties are equal civilly even if a party is the government agency because by engaging in business activities, the government agency would be treated the same as a private party. Under this notion, the structure of business in China is now in transit from the power-based government plan to market-based contract. During this transit, it is necessary and vital as well to treat the contractual parties equally no matter whether they are private person, government agencies or state owed enterprises.

For purposes of contract making, the Contract Law divides the contractual parties into three categories: natural person, legal person and other organizations. Natural person refers to Chinese citizens, foreigners as well as stateless person. Other organizations are not defined in the law. However, according to a judicial interpretation of the Supreme People’s Court, other organizations would mean to include those organizations that are formed under the law with certain assets and organizational structure, but have no independent civil ability and capacity.42

42See the Supreme People’s Court, Opinions on the Matters Concerning Application of the Law of Civil Procedures of the People’s Republic of China. Under the Opinions, other organizations would include partnership, social organization not organized as a legal person, branch of a legal person, and village enterprise.

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Under the Civil Code, legal person is an association that has capacity for civil rights and civil conducts, and independently enjoys civil rights and assumes civil obligations in accordance with the law.43 Legal person is different from other organizations in that a legal person independently bears civil responsibilities while an “other organization” does not. In light of civil activities, an “other organization” is used to denote a non-legal-person, which mainly includes the branch of a legal person, institution or social organization possessing no legal person status but engaging in business operation, and business consortium of non-legal-person.

The following case may help illustrate the difference between legal person and other organizations in the determination of civil liabilities.

Zhejiang Provincial Logistic Bureau Truck Fleet

v.

Wenzhou Lucheng Transportation Co-op and Wuma Labor Services Co.

September 12, 1988 [1988] Zhefa Jingshang Zhi No. 38

On November 15, 1986, Plaintiff and Wenzhou Lucheng Transportation Co-op (WLT) singed a bus rental contract. Under the contract, Plaintiff rented out two 45-seat buses to WLT for one and half years and WLT agreed to pay Plaintiff rental fee in the amount of RMB 5000 per month plus RMB 1050 road preservation fees. WLT picked up the buses from Plaintiff in December and paid RMB 5000 for that month on December 31.

Wuma Labor Services Co. (WLS) was incorporated in 1984, and served as the entity that endorsed WLT’s application for business license and registration. In return, WLT paid WLS administrative fees. Shortly after WLT operated the rented buses, it was involved in a traffic accident and the two buses were heavily damaged. Because of the accident, WLT defaulted its rental payment to Plaintiff. Plaintiff then brought a lawsuit against WLT for unpaid rents and damages to the buses.

During the trial, it was found that WLT was in very bad financial situation and had no money to pay for anything. Plaintiff then amended its claim and added WLS as related third party on the ground that WLS received administrative fees from WLT. In its decision, the trial court granted Plaintiff request to add WLS as the third party to the litigation and held WLS jointly and severally liable for WLT’s debts. Defendant WLS appealed.

On appeal, two legal issues were brought to the Zhejiang High People’s Court for clarification. The first issue was whether WLS should be named as third party or co-defendant in the proceeding. And the second issue was whether WLS should be jointly and severally liable for WLT’s debts. The High Court split on these two issues. One opinion was that Defendant was actually a branch of WLS and had no legal person status, and therefore, WLS should be held liable. According to this opinion, the lower court’s decision should be affirmed with a modification that WLS should be named as a co-defendant, not a third party. An opposite opinion tended to hold that Defendant should be deemed as a legal

43 See Civil Code, supra note 5, art. 36.

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person though its status was very special, and therefore WLS should be separated from the Defendant. The opposite opinion suggested remanding the case on the grounds that there was no legal basis to hold WLS liable.

Because the High Court could not reach consent on how the case should be decided, the case then was reported to the Supreme People’s Court for opinion.44 In its reply, the Supreme People’s Court asked for more evidence to prove the legal status of the Defendant. According to the Supreme People’s Court, if defendant was proven to be an independent enterprise, not a branch of WLS, it would be inappropriate to hold WLS jointly and severally liable. If, however, it was proven that Defendant was indeed a branch of WLS, WLS shall be named as co-defendant and held jointly and severally liable if Defendant was unable to pay its debts.

*

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*

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In the WLT case, the Supreme People’s Court made clear that the legal person status was decisive in determining an entity’s liability and litigation standing. The implication of the Supreme People’s Court opinion is that the “other organization”, though not a legal person”, may conduct civil activities, such as to make a contract, in its own name with others, but whoever forms or creates such organization would be held jointly and severally liable if the organization is unable to pay for its debts arising from the civil activities.45

In regard to legal person, it includes both enterprise legal person and nonenterprise legal person. Enterprise legal person contains state owned enterprises, collectively and privately owned enterprises, publicly listed enterprises, and foreign investment enterprises (known as FIEs). Non-enterprises legal person involves government agencies, institutional units, and other social entities organized as legal person. Since contract is deemed as a civil legal act, all participants in such act shall be equal regardless of their respective social status. The underlying purpose is to promote the idea that contract is a result of free will bargain without coercion or fear on the basis of social status.

Not surprisingly, the contract concept as used in the Contract Law has a clear indication of the civil law tradition. The basic notion is that a contract is

(a) the mutual act of the parties, (b) the manifestation of the will of the parties, and (c) the cause of obligatio. Partly because of this tradition, the Contract Law explicitly provides that contract is “an agreement”. It is interesting to note that most Chinese contract scholars classify American contract law as a typical

44It is a common practice that in Chinese court proceedings, a higher court may be asked for opinion by lower court on certain legal issues that are regarded as substantially important and specifically difficult.

45See, Kong Xiangjun, Analysis and Jurisprudential Research on Difficult Cases in Contract Law, 16–17 (People’s Court Press, 2000).

Chapter One	39

common law contract system where a contract is defined as “a promise or a set of promises”.46 They then believe that the sharp difference in the contract theory between civil law and common law systems is that in common law system the contract is promise-based while under civil law system the contract is agreement-based.47

It is true that in the United States, the study of contract is often regarded as the study of the legal enforcement of promise,48 and the contract is deemed as nothing more than a promise that the law will enforce.49 In this regard, an instantaneous exchange is the US is not regarded as a contract because the exchange is entirely instantaneous and neither party makes any promise to the other.50

In China, however, the study of contract is the study of how agreement is to be made and enforced. From the viewpoint of the Chinese contract law scholars, “promise” is not a mutual act and at least on its face it does not necessarily require a mutual assent. Perhaps, a closer look at the gist of the contract law in each system would help understand the difference. In the United State, the contract law focuses on “why a promise or a set of promises should be enforced” while in China the contract law has an emphasis on “what would constitute an agreement and how an agreement would be enforced”. Additionally, a contract in China is generally regarded as a device to create, modify or terminate the civil relations through an agreement between the parties.51

Also note that in Chinese contract law there is no such concept as “quasicontract” because under the concept of obligatio, certain obligations across over the line between contract and torts could be categorized as either unjust enrichment or negotiorum gestio (voluntary service).52 For example, in the United States, the obligation to return money paid mistakenly to a person to whom it is not owed is characterized as a quasi-contact obligation, while in China it is the obligation arising under the doctrine of unjust enrichment.

46The Restatement defines a “contract” as “a promise of a set of promises for the reach of which the law gives a remedy, or performance of which the law in some way recognizes as a duty” Restatement (Second) of Contracts § 1.

47See Wang Jiafu, supra note 7 at pp. 254–258.

48See Robert E. Scott & Jody S. Kraus, Contract Law and Theory (3rd Ed), 1 (LexisNexis, 2002).

49See Jeffrey Ferriell & Michael Navin, Understanding Contracts, 1 (LexisNexis, 2004).

50See Brian Blum, Contracts, Examples and Explanations (3rd Ed), 5 (Aspen, 2004).

51See Li Guoguang, supra note 33 at p. 11.

52To illustrate, under Article 93 of the Civil Code, if a person provides management or service in order to protect another person’s interests when he is not legally or contractually obligated to do so, he shall be entitled to claim from the beneficiary the expenses necessary for such management or service.