Preface

Many business leaders from overseas who have come to work in China or who are planning to tap into the Chinese market are keen to learn about Chinese law. However, they usually concentrate on laws that deal with more pragmatic topics such as foreign-invested enterprises, import and export procedures, debt and equity financing, foreign exchange control, taxation, etc.

They seem not to realize that those laws are inextricably linked with Chinese civil law.

According to China’s General Principles of Civil Law, civil law governs property relations and personal relations between persons of equal status, including between individual citizens, between legal persons, and between individual citizens and legal persons. Civil law can be seen as a basic law that applies to all major aspects of social life, including economic activity. Civil law forms the basis for virtually all business-related laws and regulations in China. It is an indispensable stepping stone on the way to an understanding of the more specific rules and regulatory policies that relate to doing business in China. In addition, a good knowledge of civil law reveals a fuller picture of China’s economic systems, particularly its property system, the rationale behind them, and the policy orientations that will steer their future development.

Most books on the subject of civil law are heavily theoretical. This book will not follow suit. First, it strongly emphasizes topics which are related to business and which foreign businesspeople are more likely to find useful, such as property rights law, law of contract, and tort liability law. In addition, practical examples are included.

This book is the outcome of the work of many people. I would like to express my sincere thanks to Professor Ip Yiu-keung, Dean of the Lee Shau Kee

viii Preface

School of Business and Administration of the Open University of Hong Kong (OUHK), for his leadership and tremendous support and encouragement, without which this project could not have been completed so smoothly. My heartfelt thanks go to my colleagues Ms Shi Xuemei and Dr Candy Liu, whose comments on the draft version were most helpful. I am also deeply indebted to colleagues in the OUHK’s Educational Technology and Publishing Unit, namely Ms Linda Chow, Dr Eva Tsang, Ms Caroline Leung, Ms Kawin Chan, and Mr Tim Maraun, for their marvellous organizational and implementation work during the design, editing and publishing process — special appreciation is given to Caroline and Tim for their valuable contributions.

This book is based on the course materials for the OUHK course Principles and Practices of Chinese Civil Law, which is part the University’s Master of Laws in Chinese Business Law programme. The contributions of Walter Lee, Jenny Chung and Dr Xie Hongfei, the developers of earlier versions of the course materials, are gratefully acknowledged.

While this book is no doubt the product of a collective endeavour, all errors and omissions are solely my responsibility.

Zhang Xiaoyang

About the author

Zhang Xiaoyang is an associate professor in the Lee Shau Kee School of Business and Administration at the Open University of Hong Kong (OUHK). He holds a PhD from the Law School of Strathclyde University in the United Kingdom. His current research interests focus on Chinese business law, international economic law and regulatory regimes. He was responsible for architecting the key frameworks and principal themes of the OUHK’s innovative, business-oriented e-learning programmme Master of Laws

in Chinese Business Law. Dr Zhang previously held a number of positions with multinational and Chinese conglomerates, and has both international and China business experience. Examples of his many published papers in law journals include ‘Contemplating privatisation of China’s rural land ownership’ in Amicus Curiae (Journal of the Society for Advanced Legal Studies); ‘Eliminating privileges enjoyed by foreign investors in China: Rationality and ramifications under a unified tax code’ in Deakin Law Review (Deakin University); ‘Intended model and consequences of launching domestic projects with overseas loans: Reflections on Chinese legal perspectives of project finance’ in Journal of International Commercial Law (Ashgate); ‘Arena of real estate investment in China: Game rules for foreign investors’ in International Trade and Business Law Annual (Cavendish); and ‘More involvement in real business: Assessing China’s FIE holding companies’ in

Journal of Business Law (Sweet & Maxwell).

Chapter 1

An introduction to civil law

Introduction

Our lives are inextricably linked to civil law. The transactions people are a part of in life may give rise to the formation of contracts, changes in property ownership or the assumption of liabilities. People involved in estate planning may have to deal with complex issues in connection with marriage and inheritance. All these matters fall within the sphere of civil law.

But what is civil law? The Collins Dictionary of Law (Stewart and Burgess

1996, 68) lists a number of definitions. These include ‘the domestic law of any particular nation,’ ‘the law of ancient Rome,’ ‘law or legal systems based on Roman law,’ ‘law that is not criminal law’ and ‘law that is not military law.’

In this book, ‘civil law’ generally refers to one branch of law or a law code in a civil law system. It is composed of principles, rules and regulations that govern property relations and personal relations, with respect to the rights and duties of persons who carry out activities of their own accord on an equal footing, subject to no interference by any state power.

The civil law system and the common law system are the two best-known legal systems in the world. The term ‘civil law’ as one branch of law or a law code is widely employed in civil law systems. Laws in a civil law system are principally derived from various law codes in the form of statutes (legislation). By comparison, laws in a common law system come from binding judicial precedents (case law), alongside statutes. Conventionally, a common law system does not attach great importance to a systematic demarcation of branches of law. Thus a codified civil law may not be found in a common law system. However, the main substance of civil law does exist in a common law

2 An introduction to civil law

system. Other than being contained in a civil code, it can be found in different areas of law covering specific subject matter.

On the whole, Chinese law can be viewed as having virtually the same characteristics as those of a civil law system, in terms of the essential forms of law and general categorization of law.

The origins of civil law systems can be traced back to Roman law, which served as a basis for the subsequent development of civil law systems in other places around the globe. In light of Roman law, all law can be divided into two categories: public law and private law. Examples of public law can be cited from constitutional law, criminal law and administrative law; and examples of private law can be found in the fields of civil law and business or commercial law. In essence, civil law provides building blocks for private law, which most closely impacts business transactions and social dealings in everyday life. In this sense, civil law can be seen as the foundation of business law.

In Article 2 of China’s General Principles of Civil Law (a representative Chinese statute on civil law), ‘civil law’ is described as the law governing property relations and personal relations forged between civil subjects (i.e. persons) of equal status, including such relations between citizens (i.e. natural persons), between legal persons, or between citizens and legal persons.

While civil law systems in different areas of the world may differ to a certain degree due to evolution and adaptation, the fundamental doctrines and structure of civil law are largely universal in civil law systems. On the whole, the contemporary civil law framework is supported by essential components, such as the General Principles of Civil Law, the law of property (the Chinese terminology is ‘property rights law’), the law of contract, the law of tort (also known as ‘tort liability law’), family law, the law of succession, as well as some important concepts in connection with obligations (e.g. negotiorum gestio and unjust enrichment).

However, as this book is business-oriented, it will not cover some civil law topics such as family law and the law of succession.

This first chapter discusses law and legal systems in a general sense before turning to the more specialized area of civil law.

Law and legal systems 3

Law and legal systems

This section introduces some basic information about law and legal systems, in particular the Chinese legal system.

The characteristics of law

What is law? This is not an easy question to answer. In fact, there is no standard description of law, because the meaning and spirit of law is understood from different perspectives and for different purposes by different people at different times.

For instance, according to natural law theorists, law is ‘a set of moral norms’ and is associated with ‘justice and right, accessible to reason, which can be used as standards to judge the exercise of human power’ (Waldron 2005, 181), while law is positioned in Marxist theory as ‘an instrument of class domination used by a ruling class to maintain and advance its interests’ (McCoubrey and White 1993, 109).

In Osborn’s Concise Law Dictionary (Woodley 2005, 238), an entry for ‘law’ reads as follows:

A law is an obligatory rule of conduct. The commands of him or them that have coercive power (Hobbes). A law is a rule of conduct imposed and enforced by the Sovereign (Austin). But the law is the body of principles recognized and applied by the State in the administration of justice (Salmond). Blackstone, however, maintained that a rule of law made on a pre-existing custom exists as positive law apart from the legislator or judge.

As this book concerns Chinese law, it is essential to begin by considering how law is perceived in prevailing Chinese jurisprudence, which closely follows Marxist theory.

According to the prevailing view in Chinese academia,1 law is created by the state at a certain point in human history; it is enforceable by state machines

1See, e.g. B Y Li 2001, 31–35, 49–53 and 91–94; Shen 2001, 27–31 and 38–39; and M H Wang 2005, 23–30, 35, 206–10 and 241–43.

4 An introduction to civil law

such as judicial organs, and the police and military forces; it represents a set of norms governing human conduct (not human thought); but it governs important human conduct only, and not trifles. The following discussion is based on this view.

Law: Governing human conduct with state compulsion

Law is created by the state at a certain point in human history. It cannot be in place until certain conditions are fulfilled. Those conditions include: sovereign states coming into being, adjudication systems being available, and a sense of rights and duties becoming rooted in the human mind. Law is developed for the purpose of constructing an effective regime under which society can be kept in good order. It is enforced by the state using state machines such as judicial organs, and the police and military forces.

The evolution of law is an outcome of the complex interaction of economic, political, cultural and philosophical factors. A legal system’s soundness relies on how economic fruition is achieved at various levels in society, and its success depends on whether the state is able to render abiding protection and respect for the rights and duties of its citizens (especially relating to the protection of the assets of private individuals).

In essence, the law charts a course for human conduct. The cardinal rights and duties of human beings are encapsulated in the law, which in turn provides a mechanism for safeguarding those rights and duties.

By formulating a series of bottom-line norms, law governs human conduct. But law does not govern human thought. In other words, people can be punished by law for what they have done, but not for what they have thought. So, if Jack hates Jill and kills her, Jack will be charged with murder. However, if Jack hates Jill but does not take action, Jack will not face a charge.

Law, moral teaching and religious doctrine can all be categorized as norms employed to guide human conduct. Although the law may embrace elements of morality and religion to various degrees, moral teaching or religious doctrine are no substitute for law and have no binding force in a court of law. Only law can be enforced by relying on state compulsion through state machines like judicial organs, and the police and military forces. In other

Law and legal systems 5

words, only law can generate a compulsive force for governing human behaviour. For example, although Catholic churches are strongly against abortion, a Catholic woman who chooses to have an abortion does not break the law.

The legitimacy and authority of law comes from its rationality. Rationality can be acquired from classroom theory or practical experience. The rationality of law is to a large extent derived from practical experience. Law reveals the collective rationality of humankind. In a democratic society, such collective rationality is usually a result of a democratic process (e.g. the establishment of a legislature through universal suffrage). Without the rationality of law, legal civilization and justice could not be achieved in the modern world (and people might, for example, still face Medieval-style ‘trial by ordeal,’ which used torture, such as trial by water, to judge guilt or innocence in the name of God’s will).

Law: Governing important human conduct only

A legal proverb says ‘the law does not concern itself with trivial matters’ (de minimis non curat lex). This is true in today’s complex society: given the limited legislative and judicial resources available to the state, law can only focus on tackling matters that are of great significance to the well-being of the people and society.

For the parties involved, taking court action is both expensive and timeconsuming, and, worse still, casts a shadow over human relations. Averting unnecessary legal action is held in particularly high regard by the Chinese, who are inclined towards maintaining good relations with other people and find this a key to achieving success in business transactions and social dealings. There are some far less drastic ways of settling disagreements or disputes than bringing a case to court, e.g. conciliation, negotiation and arbitration.

The goals of law

The goals of law can be viewed as justice, rights and order. These contribute to the ultimate goals of peace, freedom and happiness.

6 An introduction to civil law

Justice

Justice is the main goal of law. Without a legal system operated on the basis of justice, people’s freedom and happiness can be arbitrarily interfered with or sabotaged. However, maintaining justice is not easy. For example, in a rapidly growing society, upholding justice to contain imbalances in wealth and power may come at a cost to general economic gain.

The notion of ‘justice’ is in fact relative and constantly changes. It is defined based on the specific morality, customs and behaviour that prevail in a given society at a certain time.

The early desire for justice in China is suggested by the ancient Chinese character for ‘law,’ which is composed of the symbols for water, flow and unicorn. The character implies that people are equal and law, like a unicorn, amounts to justice and righteousness. Even though justice may have different meanings in different places and at different times, this Chinese character suggests characteristics that most legal systems require to fairly regulate interpersonal relationships and maintain social order.

Rights

Most people are aware that law penalizes criminals. Another significant goal of law is to protect citizens’ rights. In Western culture, the relationship between law and rights is frequently recognized.

In China, the earliest codification of Chinese law was the Fa jing (the Classic of Law), written by Li Kui in around 400 BC. It seems to present law as a tool for the state to combat crime rather than to protect people’s rights.

In contemporary jurisprudence around the world, law recognizes and safeguards the rights of individuals. For example, constitutional law prescribes the basic rights of citizens, while civil law works out the various personal rights and property rights of natural persons and legal persons.

The following case occurred in China in 2001 (Xie and Xie 2009; F Zhang 2004). The Ministry of Railways decided to raise the price of rail tickets by 20% to 30% during the Chinese New Year holidays. A certain Mr Qiao argued that the price increase was unlawful. He asked the court to have the decision of the Ministry of Railways overturned. Although Mr Qiao eventually lost the

Law and legal systems 7

case, his courageousness in trying to safeguard his rights sets a good example for other citizens who may not be used to challenging government decisions. Since this case, public consultation has become a precondition for major price increases by government departments.

China nowadays is making apparent strides towards the goals of respecting citizens’ rights and abiding by the rule of law.

Order

Another goal of law is order. Law attempts to safeguard the interests of the existing social hierarchy and people of all persuasions. It tends to give way to reform only if it can be ensured that the whole society will benefit. Therefore, law tends to be conservative, evolve slowly, minimize undesirable change, and respect the wisdom of tradition and precedent. This partly explains the doctrine of precedent that is applied in common law systems.

Take the prohibition on begging in public places imposed by local administrations in some Chinese cities. Many beggars complain that this deprives them of their habitual right to beg and that the prohibition should be lifted so that they can survive. Should the beggars’ claim be supported?

Perhaps it is difficult to provide a clear-cut answer without considering the specific context, but on the whole, it is important that a balance be sought between imposing rules to maintain order and respecting tradition or custom. Although the law does not prescribe any right to beggars, the prohibition against begging in public places could negate beggars’ right to make a living. This might give rise to charges of disregarding the needs of vulnerable people.

Here is another example. In a case that took place in Qing dynasty China, a young man and a young woman disputed the nature of their relationship.2 The man claimed that the woman was his child bride (his de jure wife when she was a minor; his de facto wife when she reached majority). The man claimed that after reaching majority the woman suddenly backed out, trying to marry another man. According to the woman, she and the young man had the same

2The case is described in literary Chinese in the work Yue wei cao tang bi ji [Fantastic Tales by Ji Xiaolan], Vol. 10, by Ji Xiaolan. The English title is borrowed from Sun Haichen’s translation.

8 An introduction to civil law

biological parents, and he had forced her to marry him. As no evidence was available to ascertain their true identities, a decision made either way could be erroneous. The most cautious way to settle this dispute would be to assume that there was no marriage between them so as to avoid the risk of allowing a brother to marry his sister. People must not be given any chance to act in a manner that could potentially be morally unacceptable and transgress social ethics.

It should be noted that law is not monolithic. Judges should avoid being rigid and getting bogged down in the literal expression and interpretation of law. Instead, they should look at the root of law, and balance the interests of all relevant parties in order to achieve equity, social cohesion and harmony. This can help to tackle social contradictions or at least to prevent them from spiralling out of control.

Common law and civil law systems

The common law and civil law systems are not the only legal systems. For example, there are religious legal systems (most notably Islamic law), pluralistic legal systems that combine attributes of more than one legal system (e.g. in Israel, Scotland and South Africa), and the ideologically distinctive socialist legal system based on the model of the former Soviet Union.

However, on the whole, the common law and civil law systems are the most representative.

The common law system

The origin of the term ‘common law’ lies in early sources of English law. The development of the common law system into a rather complete and centrally administered system began in England in the eleventh century, after the Norman Conquest.

A striking feature of a common law system is the binding effect of judicial precedents. This is the doctrine of precedent or stare decisis. This means that a decision by a court in one case ought to be made in the same way in a future case if the material facts of the two cases are identical. A lower court is bound by the decision made by a higher court, but not vice versa.

Law and legal systems 9

The accumulation of case decisions leads to the formation of laws that are deemed to be created by judges (this is where the term ‘case law’ comes from). In a common law system, case law is a main source of law, alongside written enactments in the form of legislation (statutes) and treaties. It is not exaggerating to say that case law has been woven into the fabric of common law systems, which prioritize the achievement of justice and flexible application of legal doctrines over rigidly following the literal interpretation of written laws.

While areas of law exist in a common law system, they are not categorized as systematically as in a civil law system, where branches of law are clearly and logically structured.

Common law systems are currently adopted in many jurisdictions, in particular in Commonwealth countries and former British territories, e.g. England, Wales, Northern Ireland, the United States (except Louisiana), Canada (except Quebec), Brunei, Hong Kong, India, Malaysia, Pakistan, Singapore, Australia and New Zealand.

The civil law system

The legal system of civil law (also known as ‘Continental European Law’) is strongly influenced by Roman law. Unlike in a common law system, the doctrine of precedent does not apply in a civil law system. The primary source of law in a civil law system is law codes in the form of various statutory laws on specific subject matter. Neither the decisions of judges nor the interpretations of statutory laws made by judges form a source of law in a civil law system.

Most civil law jurisdictions attach great importance to systematically classifying various statutory laws into specified branches of law, e.g. constitutional law, civil law, commercial law, administrative law, criminal law, criminal litigation law, civil litigation law, etc. These statutory laws, supplemented by other forms of legislation that are legally enforceable, such as rules, regulations, decrees, orders, etc., lay down the foundation of a civil law system in a logical and well-defined manner.

A civil code, among statutory laws, occupies the most prominent position in civil law systems. Civil law as an independent law code emerged as a

10 An introduction to civil law

result of economic development in Continental Europe. The key substance of contemporary civil law mainly originated in Roman law. Roman law spanned more than one thousand years, from the Twelve Tables (the earliest Roman law code) of the fifth century BC to the Corpus Juris Civilis (a complete collection of Roman law) in the sixth century. The Corpus Juris Civilis laid the foundation for law in most Continental European jurisdictions.

In the nineteenth and twentieth centuries, the creation of civil codes progressed rapidly worldwide. In Continental Europe, a wave of civil codes were promulgated in many countries, e.g. the French Civil Code, the Austrian Civil Code, the Portuguese Civil Code, the Spanish Civil Code, the German Civil Code, the Swiss Civil Code, etc. Among these, the French Civil Code and the German Civil Code are seen as most instrumental. They have had a far-reaching influence on the dissemination and growth of the civil law mode in Europe and beyond. Since this first wave, fresh civil codes or amendments have appeared in places like Italy, the province of Quebec in Canada, the Netherlands, Russia, Kazakhstan, Turkmenistan, Kyrgyzstan, Vietnam, Mongolia, etc.

Civil law systems currently operate in many countries and regions in Europe, Asia, Africa and Latin America. Typical examples in Continental Europe are some ‘Latin countries’ like France, Belgium, Portugal, Spain and Italy, which were strongly influenced by the French Civil Code; and certain ‘Germanic countries’ such as Germany, Austria, Switzerland and the Netherlands, which were significantly influenced by the German Civil Code. In Asia, three Chinese jurisdictions (i.e. the mainland, Macau and Taiwan) adopted civil law systems.

Civil law and common law systems differ in the main in their philosophical pursuits. Civil law places a strong emphasis on logicality, rationalism and the systemization of laws which are envisaged to be predictable, transparent and stable. Judgements are made on the basis of what written law says and the court’s interpretation of written law. A common law system, while not loosening its grip on justice and fairness, seeks a flexible approach to tackling practical problems. In doing so, it maintains an empirical and utilitarian approach, and is inclined to be unburdened by existing rules when coming across complex or unprecedented circumstances.

Law and legal systems 11

However, it should be noted that the differences between civil law and common law have narrowed in recent years. As economic globalization accelerates, people have begun to share similar views here and there relating to legal reasoning, legal techniques or sources of law, and have also started to mull over the likelihood of globalization in legal fields.

The categorization of law in civil law systems

A unique feature of civil law systems, including Chinese law, is that law is divided into categories. While these may vary, normally law can be classified into basic law and non-basic law, general law and special law, substantive law and procedural law, national law and international law, and on a more essential level public law and private law.

It should be borne in mind that the significance of some categorizations might be no more than academic.

Basic law / Non-basic law

Law can be categorized into basic law and non-basic law.

Constitutional law is the basic law of the state, and has supremacy in terms of status and binding force over all other laws (including not only the laws promulgated at the national level, but also other official documents that have legally binding effect issued in various forms such as rules, regulations, decrees, circulars, orders, etc.). The essential political, economic and legal systems of the state must be forged in compliance with the constitution.

All laws other than the constitution are viewed as non-basic laws, and they are subject to the governance of the constitution. The promulgation and application of non-basic laws should not at any time contravene the constitution.

General law / Special law

Law can be categorized into general law and special law.

‘General law’ refers to legal provisions of a general nature that are applied to all persons, regardless of subject matter or geographical location. Taking Chinese law as an example, laws such as the General Principles of Civil Law,

12 An introduction to civil law

the Criminal Law, the Civil Litigation Law, and the Criminal Litigation Law can all be placed in the domain of general law.

Special law is created to have applicability only in special situations, in terms of specified persons, subject matter or geographical location. The following examples are again taken from Chinese law: the Law on Protection of Minors and the Law on Protection of Disabled Persons solely apply to some specified groups of people; the Basic Law of the Hong Kong Special Administrative Region exclusively applies to Hong Kong; the application of the Law on Regional National Autonomy is limited to autonomous regions of minority nationalities; and the Contract Law applies to a specific aspect of civil law regarding contracts.

As a special law is designed to address specific problems on top of a general law, in principle a special law takes precedence over a general law.

Substantive law / Procedural law

Law can be categorized into substantive law and procedural law.

‘Substantive law’ refers to a set of rules and principles contained in each major branch of law that governs the material rights and obligations of subjects to which the law in question applies. For example, in a general sense, civil law, criminal law, company law, contract law, the law of property, the law of tort, etc., can be categorized as substantive law.

‘Procedural law’ refers to a set of rules that governs the forms and procedures of litigation in connection with both dispute resolution under civil law and prosecution under criminal law. In this sense, civil litigation law, criminal litigation law, administrative litigation law, and law of arbitration, for instance, can be taken as kinds of procedural law.

It is important to ensure the achievement of justice in both substantive and procedural matters.

National law / International law

Law can be categorized into national law and international law.

‘National law’ (also known as ‘municipal law’ or ‘domestic law’) normally refers to the internal law operative in an individual sovereign state.

Law and legal systems 13

In a narrow sense, international law means public international law only. Public international law exists in the form of international treaties, conventions and agreements; and internationally accepted standards and customs. It governs the relations among sovereign states and international organizations, with respect to issues such as crime-fighting, war, diplomacy, judicial cooperation, human rights, delimitation of coastlines, environmental protection, etc.

In a broad sense, international law includes public international law and private international law.

Private international law is also known as ‘rules of conflict of laws.’ The sources of law in private international law consist of national laws in the main, and some international conventions and customs. Private international law determines the applicability of a national law that will govern a specific cross-border civil and/or commercial matter in connection with natural and legal persons other than states and international organizations. Specifically it regulates matters such as in which jurisdiction a case with cross-border factors is eligible for being heard and adjudicated, what national law governs the rights and duties of the persons in a dispute if foreign elements are involved in the case, and whether judgments rendered by foreign courts or overseas arbitral awards can be recognized and enforced in another jurisdiction.

International law is proliferating in this period of globalization. With more and more international cooperation at various levels, it is arguable whether the traditional division between public international law and private international law will continue to be meaningful, when in many cases involvement of private persons as well as states and perhaps international organizations may need to be concurrently called for.

Public law / Private law

Law can be categorized into public law and private law.

In civil law systems public law and private law (an invention of Roman law) are seen as two essential limbs of law. From a historical standpoint, public law is normally viewed as a set of rules for state politics, whereas private law is for civil society; thus civil law is synonymous with private law.

14 An introduction to civil law

Theoretically, public law regulates relations between the state (and its affiliates which are entitled to exercise certain state powers) and persons or organizations that have no state power. So power and obedience form the basis of public law.

Constitutional law, criminal law, administrative law and tax law are examples of public law.

Civil law is supposed to govern the relations between equal subjects, i.e. between natural persons and/or legal persons having no power and obedience relations. In this respect, company law, partnership law and contract law are examples of private law.

In a civil law system, the division between public law and private law plays an important part in constructing appropriate institutions as regards a number of issues, for example, resorting to the means of assistance or sanction, opting for courts to hear and handle certain types of cases and determining the propriety of legal procedures.

Traditionally, there have been two theories regarding the relations between public law and private law.

One is the public law priority theory. According to this theory, private law gives way to public law, in the sense that public power governs all aspects of life and social relations; the state can withhold the rights granted to individuals, and it can do so on the ground that personal interests need to be sacrificed for the sake of the interests of society.

The other is the private law priority theory. In this theory, the purpose of creating public law is to protect individuals’ private rights; private rights are deemed to be sacrosanct and inviolable; in a civilized society, deprivation without legitimacy of people’s private rights is strictly prohibited.

In practice, there has been increasing interchange between the application of public law and that of private law, which overlap on many occasions. The traditional view on private law is being adjusted amid the widespread slight shift in most mature economies in the world from advocating a laissez-faire approach towards being more like welfare states. On the other hand, private law doctrines (e.g. respect for freedom and equality and abiding by contracts) have exerted an ever greater influence on the substance of public law, leading to public law being privatized in certain places.

Law and legal systems 15

An overview of the Chinese legal system

Historically, Chinese legal culture has been quite influential in Asia. It seems that ancient Chinese law did not have the categories of civil law and criminal law. Criminal sanctions were emphasized and little attention was paid to protecting individuals’ civil rights. Moreover, legal philosophy conceded that individuals were not equal before the law, and different laws applied to different people principally depending on social position.

Chinese legal philosophy was strongly influenced by Confucianism, which advocated ‘ruling by custom, by virtue and by people.’ Another influential school was Legalism. It upheld the use of strict laws and harsh punishments to control society.

After the Opium Wars in the nineteenth century, the Chinese legal system started to be significantly influenced by Western jurisprudence. In the early twentieth century (i.e. in the late Qing dynasty), the Chinese government organized the drafting of a series of law codes based on German law. In 1911 the Draft Civil Code of the Great Qing was created; however, it was not implemented because the Qing dynasty was overthrown during the 1911 Xinhai Revolution.

Later on, when the government of the Republic of China (controlled by the Kuomintang) took power in China, the law codes of the country were further developed into Six Codes, which were systematically constructed in the fields of constitutional law, civil law, commercial law, criminal law, civil litigation law and criminal litigation law. The key components of a Civil Code were promulgated in 1929 and 1930.

With the founding of the People’s Republic of China by the Chinese Communist Party in 1949, the existing legal system was abolished on the mainland. A socialist legal system was quickly set up in the 1950s and 1960s. At that time, the fledging Chinese legal system was tremendously influenced by the USSR: state power and public ownership played a prominent role in all spheres of life.

During the Cultural Revolution in China from 1966 to 1976 there was a breakdown in the legal regime and legal development came to a standstill.

China started to implement a policy of economic reform and opening-up in the late 1970s. From the early 1990s a socialist market economy was

16 An introduction to civil law

developed by giving up the planned economy that had been in place for over four decades. The change in the economic landscape fuelled all-round development of China’s legal system. This accelerated after China’s accession to the World Trade Organization in 2001.

Today, a relatively complete legal system exists that accommodates China’s political and economic objectives. It is based on civil law systems, and in particular the German system. It has also absorbed some common law philosophies (especially in business law fields) in order to comply with international practice.

The current legal framework

China’s legal framework exists within the context of the powers vested in various state organs. According to the Constitutional Law, the National People’s Congress (NPC) is the highest state power. Along with its Standing Committee, it exercises the state’s legislative power (Articles 57 and 58). The Chinese president and vice president are elected by the NPC (Article 79, paragraph 1). The State Council has the greatest executive power and is the highest executive body (Article 85). The people’s courts, among which the Supreme People’s Court is the highest, constitute China’s judicial bodies (Article 123; Article 127, paragraph 1). The people’s procuratorates oversee the enforcement of law, with the Supreme People’s Procuratorate at the highest level (Article 129; Article 132, paragraph 1). The Central Military Commission leads China’s armed forces, and its chairman is accountable to the NPC and its Standing Committee (Article 93, paragraph 1; Article 94).

China’s legal system is characterized by the enactment and application of statutes that govern all aspects of life. In 2000, the Law on Legislation was promulgated providing a general framework under which the fundamental principles and procedures of legislation are provided in detail. The Law on Legislation was enacted according to the Constitutional Law, which has supreme legal force over all other sources of law. Apart from the Constitutional Law, there are other sources of legislation in a broad sense. In terms of supremacy and precedence, these are as follows:

1the Constitutional Law

2laws at the national level

Law and legal systems 17

3administrative regulations of the State Council

4local regulations on the provincial and municipal levels and selfgoverning regulations of autonomous regions of minority nationalities

5rules issued by the State Council’s departments/committees and various local governments.

Items 2 to 5 above can be made, amended or annulled pursuant to the Law on Legislation (Law on Legislation, Articles 1, 2 and 78).

According to the Law on Legislation, the power of legislation at the national level is solely vested in the NPC and its Standing Committee (Article 7, paragraph 1). Enactment and amendment of laws on the national level with respect to civil and criminal matters, state organizations, etc. fall within the scope of legislation of the NPC (Article 7, paragraph 2). Enactment and amendment of laws on the national level not within the scope of legislation of the NPC is carried out by its Standing Committee (Article 7, paragraph 3). Its Standing Committee is also empowered to revise laws made by the NPC when the NPC is not in session (Article 7, paragraph 3). Moreover, the power of interpreting laws belongs to the Standing Committee (Article 42, paragraph 1).

The administrative regulations that apply to the whole country are issued by the State Council pursuant to the Constitutional Law and the laws promulgated at the national level (Law on Legislation, Article 56, paragraph 1).

The people’s congresses of provinces, autonomous regions and municipalities that are under the direct governance of the central government can formulate local regulations of their own that apply to their jurisdictions only, given that those local regulations do not contravene the Constitutional Law, the general laws issued at the national level or the administrative regulations that apply to the whole country issued by the State Council (Law on Legislation, Article 63, paragraph 1). The autonomous regions of minority nationalities can formulate self-governing regulations by taking into account the uniqueness of the political, economic and cultural attributes of their localities. These self-governing regulations exclusively apply to the autonomous regions that formulate them. These regions can adapt the laws promulgated at the national level and the administrative regulations issued by the State Council applying to the whole country to accommodate local conditions (Article 66; Article 81, paragraph 1).

18 An introduction to civil law

The State Council’s departments (including the various ministries and committees/commissions, the People’s Bank of China, the Auditing

Department, and the administrative organizations directly affiliated with the

State Council) can formulate their own rules (Law on Legislation, Article 71, paragraph 1). Local governments can do so as well (Article 73, paragraph 1).

As to supremacy and precedence, the Law on Legislation sets out a number of principles. Firstly, the Constitutional Law is given the status of supremacy, so all other laws promulgated on the national level, the administrative regulations issued by the State Council, the local regulations on the provincial and municipal levels and the self-governing regulations of autonomous regions of minority nationalities, and the rules issued by the State Council’s departments/committees and various local governments, shall not contravene the Constitutional Law (Law on Legislation, Article 78). Secondly, the laws promulgated on the national level take precedence over the administrative regulations issued by the State Council, the local regulations on the provincial and municipal levels, and the rules issued by the State Council’s departments or committees and various local governments (Article 79, paragraph 1). Thirdly, the administrative regulations issued by the State Council are superior to the local regulations on the provincial and municipal levels, and the rules issued by the State Council’s departments/committees and various local governments (Article 79, paragraph 2). Fourthly, the local regulations on the provincial and municipal levels prevail over the rules formulated by local governments on the same or lower level (Article 80, paragraph 1).And fifthly, the rules issued by the

State Council’s departments/committees hierarchically have the same binding force as the rules formulated by various local governments (Article 82).

As to the relationship between general law and special law as well as between new law and old law, the Law on Legislation contains the following prescriptions regarding laws promulgated on the national level, administrative regulations issued by the State Council, local regulations at the provincial and municipal levels and self-governing regulations of autonomous regions of minority nationalities, and rules issued by the State Council’s departments/ committees and various local governments: if there is any difference between the general provisions and the special provisions formulated by the same lawmaker, the special provisions will prevail; if there is any discrepancy between the new provisions and the old provisions formulated by the same lawmaker, the new provisions will prevail (Article 83).

Law and legal systems 19

The Law on Legislation also provides that law is non-retrospective, unless allowing retrospective effect is for the special circumstance of better safeguarding the rights and interests of citizens, legal persons and other organizations (Article 84). This is important because in principle people are allowed to do anything that is currently not prohibited by law. If laws are retrospective, acts before the promulgation of a law may be punished retrospectively, giving rise to dire and unfair pitfalls.

Branches of law in Chinese jurisprudence

Academia in China has an inclination towards organizing laws into branches. While there is no standard list of branches, the following ten branches, which can be found in many textbooks written by Chinese scholars (Yan 2003, 59–65; Ge 2007, 150–54; W X Zhang 1999, 81–84), can serve as a reference:

1Constitutional law, including laws such as the Constitutional Law, and constitutional documents like the Organic Law of National People’s Congress, Organic Law of State Council, Organic Laws of Local People’s Congresses and Governments at Various Levels, Organic Law of People’s Courts, Organic Law of People’s Procuratorates, Electoral Law of National People’s Congress and Local People’s Congresses at Various Levels, Nationality Law, Law on National Flag, Law on Regional Autonomy of Minority Nationalities, etc.

2Civil and commercial law, including laws such as the General Principles of Civil Law, Contract Law, Property Rights Law, Tort Liability Law, Copyright Law, Patent Law, Trademark Law, Marriage Law, Law of Succession, Law of Adoption, Company Law, Sino-Foreign Equity Joint Venture Enterprise Law, Sino-Foreign Cooperative Joint Venture Enterprise Law, Wholly Foreign-Owned Enterprise Law, Securities Law, Maritime Law, Law on Negotiable Instruments, Law of Trusts, Insurance Law, Bankruptcy Law, etc.

3Criminal law, including the Criminal Law.

4Administrative law, including laws such as the Law on Administrative Penalty, Law on Administrative Supervision, Law on Administrative

20 An introduction to civil law

Reconsideration, Law on Administrative Permission, Law on State Compensation, Customs Law, etc.

5Litigation and non-litigation procedural law, including laws such as the Civil Litigation Law, Criminal Litigation Law, Administrative Litigation Law, Arbitration Law, etc.

6Economic law, including laws such as the Tax Law, Law on Commercial Banks, Law on Product Quality, Anti-Unfair Competition Law, AntiMonopoly Law, Foreign Trade Law, etc.

7Labour law, including laws such as the Labour Law, Employment Contract Law, Employment Promotion Law, Trade Union Law, etc.

8Laws on science, education, culture and health, including laws such as the Law on Progress of Science and Technology, Education Law, Compulsory Education Law, Higher Education Law, Vocational Educational Law, Law on Protection of Culture Heritage, Archives Law, Pharmaceutical Administrative Law, Food Hygiene Law, etc.

9Resources and environmental protection law, including laws such as the Land Administration Law, Water Law, Forest Law, Fishery Law, Mineral Resources Law, Law on Water and Soil Conservation, Environmental Protection Law, Law on the Protection of Wildlife, etc.

10Military law, including laws such as the National Defence Law, Military Service Law, Garrison Law of the Hong Kong Special Administrative Region, Garrison Law of the Macao Special Administrative Region, etc.

From the founding of the People’s Republic of China in 1949 up to the end of 2010, in terms of the laws that are still in effect, the National People’s Congress and its Standing Committee enacted 236 statutes, the State Council issued around 690 administrative regulations, and local people’s congresses at various levels and their standing committees released about 8,600 local regulations (Xinhua 2011).

This concludes the overview of law and legal systems, including the Chinese legal system. The next section moves on to the main theme of this book: civil law.

The structural components of civil law

21

The structural components of civil law

The Chinese legal system basically follows the practice of Continental European jurisdictions where civil law systems prevail. In most places where a civil law system is adopted, civil law is deemed as a cornerstone of private law, and it normally exists as a codified branch of law in the form of a civil code.

The French Civil Code (1804) and the German Civil Code (1896) stand out as the most influential models. The German Civil Code was enacted almost a century later than the French Civil Code, and its authors learned from earlier work in the civil law field. The German Civil Code is considered to have a more systematic and logical structure and more explicit and precise legal wording than any earlier civil codes.

A major difference between the French Civil Code and the German Civil Code is the absence of a single chapter on general principles in the French Civil Code. From a theoretical point of view, the German model is generally composed of three major elements, i.e. general principles of civil law, laws on persons and laws on things.

The general principles of civil law manifest some basic ingredients of civil law in connection with both persons and things. They relate to civil rights, civil subjects (including natural persons and legal persons), things, juristic acts, agency and limitations of actions.

‘Laws on persons’ generally refers to family law and the law of succession.

Laws on things can be classified into the law of property and the law of obligations. The law of property (i.e. property rights law) focuses on issues such as ownership, usufructuary rights, security rights and possession. The law of obligations governs the creation and discharge of obligations, contracts, torts and some other important concepts relating to obligations such as negotiorum gestio and unjust enrichment.

Civil law in China

The German model strongly influenced Chinese law in the field of civil law.

Since the founding of the People’s Republic of China, there have been three

22 An introduction to civil law

major attempts to construct a civil code, in 1954, 1962 and 1979, but none succeeded, and China has yet to promulgate a civil code.

In the absence of a civil code, the National People’s Congress approved passage of the General Principles of Civil Law in 1986, which was promulgated as a kind of tentative civil code laying down the foundation of legal regulations in connection with civil matters. At that time the civil law regime in China was still in its initial stages of development. Since then a civil law framework has been gradually developed.

Although China does not yet have a civil code, laws on many civil matters (in the wider sense, including commercial matters) can now be found in many single statutes, including the General Principles of Civil Law, Contract Law, Land Administration Law, Urban Real Estate Administration Law, Farmland Contracting Law, Property Rights Law, Tort Liability Law, Sino-Foreign Equity Joint Venture Enterprise Law, Sino-Foreign Cooperative Joint Venture Enterprise Law, Wholly Foreign-Owned Enterprise Law, Company Law, Partnership Law, Patent Law, Trademark Law, Copyright Law, Marriage Law, Adoption Law, Law of Succession, etc. Moreover, various administrative regulations and rules governing civil matters have been issued by the State Council and local legislatures and governments, which, in conjunction with the relevant judicial interpretations of the Supreme People’s Court and the relevant international treaties, agreements and customs in the fields of civil law, also constitute important sources of law under China’s civil law regime.

A prospective Chinese civil code, if released in the future, is quite likely to be based on the German model.

The nature of civil law

In a modern society, various relationships are formed in everyday life arising from business transactions and social dealings. Such relationships can be boiled down to two general types. The first is a relationship established on an equal basis, in terms of legal status, between private individuals, between private individuals and organizations, or between different organizations, no matter whether the parties involved are natural persons or legal persons (regardless of whether or not any party involved is a government department or government agency vested with state power). The other is a relationship

The nature of civil law

23

forged on an unequal basis, in terms of legal status, between private individuals/ organizations without any state power and government departments/agencies vested with state power.

As an illustration, when somebody buys food at a supermarket, the transaction gives rise to a contractual relationship between the person and the supermarket on the basis that the person’s legal status and that of the supermarket are equal. However, when a person pays personal tax to the government, the person’s relationship with the government is compulsorily formed for the purpose of fulfilling the tax obligations that are imposed on the person by the government. In this circumstance the person’s relationship with the government is not forged on an equal basis.

Civil law concerns the first kind of relationship only, i.e. the relationship established on an equal basis in terms of legal status.

Pursuant to China’s General Principles of Civil Law, ‘civil law’ is defined as governing property relations and personal relations between parties (i.e. persons) of equal status, including such relations between citizens (i.e. natural persons), between legal persons, or between citizens and legal persons (Article 2). The parties when engaged in civil activities are of equal status (Article 3).

Here, property relations are mainly in connection with proprietary rights and creditors’ rights. The former are regulated by the law of property (i.e. property rights law), and the latter by the law of obligations (e.g. the law of contract). Personal relations are based on individuality and the formation of derivative identity. ‘Individuality’ refers to the civil rights vested in each individual (such as the portrait right, the right to reputation, etc.). The formation of derivative identity can be illustrated in relationships arising from marriage, child-bearing and adoption.

Then, what is the relationship between civil law and business activities? Here is an example. John Li and Samuel Wang formed a partnership in Beijing for running a food business. As their business grew rapidly, they decided to turn the partnership into a limited liability company. The business of the company was very successful, attracting more and more customers. However, some customers, after signing contracts, defaulted on their payments to the company.

24 An introduction to civil law

This example illustrates that business activities can always be subject to regulation under a civil law framework: the establishment of a partnership is governed by the Partnership Law; converting the partnership into a limited liability company requires going through the procedures and meeting the requirements of incorporation which are prescribed by the Company Law; selling products to customers gives rise to contractual relationships subject to the Contract Law; default of payment leads to a breach of contract, the consequence of which is also provided in the Contract Law. The Partnership Law, the Company Law and the Contract Law are all within the domain of civil law.

In a nutshell, as opposed to constitutional law, which is the cornerstone of public law, civil law is fundamental to private law. Civil law is a substantive law directing human conduct in civil activities. It is not punitive. It is most commonly enforced by relying on monetary compensation.

Fundamental civil law doctrines

There are a few fundamental doctrines of civil law that guide conduct in civil activities and serve as a yardstick for the court to determine civil wrongs. Strict adherence to these doctrines facilitates business transactions and social dealings, and the protection of citizens’ rights.

These doctrines are private law autonomy, equality, fairness and impartiality, good faith, and good public order and social customs.

Private law autonomy

The doctrine of private law autonomy emphasizes the importance of respecting the free will of individuals as regards the formation of a civil law relationship. Essentially, people are free. Given that no prohibition or restriction is imposed by law, people can do what they want at will. For example, they are free to dispose of assets, to make post-death arrangements for estates, to set up businesses by incorporation, or, as more commonly encountered, to enter into contracts.

The freedom to make a contract is particularly meaningful, because contractual relationships are formed in everyday life. Such freedom permeates

Fundamental civil law doctrines

25

each and every phase of contract establishment and implementation. So in this sense, it can be further divided into the freedom to enter into a contract, the freedom to choose with whom to make a contract, and the freedom to decide the content and the form of a contract.

The doctrine of private law autonomy applies to all private law relationships. The rationale is that business transactions and social dealings are made according to individuals’ free will. Such free will should not be unreasonably interfered with by the state, which would slow down or hinder the efficiency of civil activities. In light of the doctrine of private law autonomy, the doctrine of the sanctity of private rights is derived, which further emphasizes the supremacy of people’s civil rights and the necessity of protecting those rights from interference by the state.

Private law autonomy is a driving force behind an efficient market economy and the safeguarding of private rights and wealth from arbitrary interference by the state. However, excessive autonomy may exacerbate social injustice by increasing the uneven distribution of wealth and bargaining power. To alleviate this problem, the state must create certain standards to limit exploitation of private law autonomy. Many countries have done this through sound social welfare systems and other means of caring for the disadvantaged.

The doctrine of private law autonomy can be found in Article 4 of the General Principles of Civil Law, which mentions voluntariness as a basis on which civil activities are conducted.

Equality

The core of the doctrine of equality is that all persons in civil activities are of equal status and no person is allowed to impose his will on other persons. Nevertheless, the equality concerned is limited to opportunities only, and does not embrace results.

In other words, civil law attempts to offer a level playing field as a starting point on which all persons can compete equally. But it cannot guarantee that business transactions and social dealings will bring about equality in final outcomes. The result of competition is likely to be different for each person.

26 An introduction to civil law

The doctrine of equality is advocated in the General Principles of Civil Law, which provides that civil subjects when engaged in civil acts are of equal status (Article 3) and all citizens’ capacity to exercise civil rights is equal (Article 10).

Fairness and impartiality

The doctrine of fairness and impartiality can be understood from the standpoint of carrying out civil activities in a fair and unbiased way. In order to achieve such fairness and impartiality, the resolution of problems arising from civil activities must be based on facts and be in accordance with the law.

Resolution should be detached from the influence of authorities or powers or the blindness of rigidly adhering to rules and regulations.

Essentially, the pursuit of fairness and impartiality stems from a desire for justice. This is common to every society, although such justice can be construed and interpreted in various ways by different people, in different places and at different times.

The doctrine of fairness and impartiality can be found in Article 4 of the General Principles of Civil Law which requires that civil activities be carried out in a fair fashion and comply with the principle of equal price. However, this principle cannot be narrowly interpreted. For example, somebody may want to pay $100,000 for a jacket previously worn by a retired football superstar. Whether others think this is a fair price or not does not affect the validity of the transaction, which is supposed to be effected according to the buyer’s free will.

Good faith

According to one online legal dictionary, ‘good faith’ (bona fide in Latin) refers to ‘honesty; a sincere intention to deal fairly with others’ or ‘a sincere belief or motive without any malice or the desire to defraud others’ (TheFreeDictionary).

The core of the doctrine of good faith is the honesty based on which business transactions and social dealings are conducted. It is in the context of this doctrine that judges construe the law, especially when legal vacua require the interpretation of the law pursuant to the spirit of good faith.

Summary 27

The doctrine of good faith is covered in Article 4 of the General Principles of Civil Law, which requires people to follow the principle of honesty and credibility in civil activities.

Good public order and social customs

The doctrine of good public order and social customs denotes a legal requirement that the nature of a civil act must be commensurate with mainstream moral and ethical standards in a society. This refers to the moral and ethical standards generally acknowledged and accepted under the prevailing ideology advocated in a society.

In Chinese society, this doctrine mainly relates to issues like managing society in the spirit of the rule of law, safeguarding human rights, taking care of vulnerable people, etc. Like the doctrine of good faith, judges often use this legal principle as a yardstick to determine parties’ rights and obligations when adjudicating disputes. They do so with a view to upholding mainstream moral and ethical standards for the sake of the interests of the majority.

Under Article 7 of the General Principles of Civil Law, in civil activities people need to observe social ethics, and not injure public interest, damage economic plans of the state or distort the order of economic activities. This provision is a means of advocating good public order and social customs.

Summary

In China and in the wider world there is no standard description of law. Law is understood by Chinese academia as being created by the state at a certain point in human history, and being enforceable by state machines. Law governs important human conduct only.

Common law and civil law are the two major legal systems in the world. China’s law regime bears the distinctive features of a civil law system. Chinese law can be categorized into ten general branches of law: constitutional law; civil and commercial law; criminal law; administrative law; litigation and non-litigation procedure law; economic law; labour law; laws on science, education, culture and health; resources and environmental protection law; and military law.

28 An introduction to civil law

China has not yet promulgated its civil code. However, there is a civil law framework in China, which is composed of single statutes on many civil matters (in the wider sense, including commercial matters), along with various administrative regulations and rules issued by the State Council and local jurisdictions, the relevant judicial interpretations of the Supreme People’s Court, as well as the relevant international treaties or agreements and customs.

Under Chinese law, the role of civil law is understood as governing the property relations and personal relations between civil subjects of equal status.

The fundamental civil law doctrines include private law autonomy, equality, fairness and impartiality, good faith, and good public order and social customs.

Practice questions

1Mrs Wang, an entrepreneur, has chronic liver disease and receives frequent treatment by Dr Li. Last month, Dr Li told Mrs Wang that he was a 10% shareholder in a promising pharmaceutical company, and willing to sell her a part of his stake in the company for RMB 1 million. This price was much higher than the market value of the shares. Mrs Wang agreed. Shortly thereafter, the value of the shares dropped sharply, so Mrs Wang suffered a huge loss.

‘In accordance with the doctrine of private law autonomy, the stake transfer between Dr Li and Mrs Wang was a valid transaction.’ Is this a reasonable view?

2Huang is the founder of a company, ABC. He is a shareholder of ABC, holding a 70% stake in the company. ABC and Huang have entered into an employment contract, according to which Huang is paid a monthly salary for his service as the company’s chief executive officer.

Huang recently applied to join ABC’s employee health insurance scheme, but the insurer turned down his application on the ground that ABC is his company and he cannot be counted as an employee.

Discuss.

Practice questions

29

3TT is an insurance company in Shenzhen. According to the latest statistics released by Shenzhen TV, more than half of drivers given breath-tests last month were drink-driving at night.

Yang is a manager at TT. He proposes that the company design a new kind of insurance covering all drink-driving accidents. He believes launching such insurance perfectly conforms to the spirit of freedom of contract, because whether customers buy it is entirely up to them.

Is Yang’s proposal reasonable?

Guidelines for answers

1In principle, people should be free to determine with whom to enter into contracts and to choose the terms and conditions of their contracts, providing that nothing contravenes law. The key point in this case is whether under the doctor–patient relationship Mrs Wang voluntarily transacted without succumbing to any duress and undue influence.

2A company is an independent legal entity separate from its shareholders personally. In theory, there should be nothing wrong with Huang being employed by his company. Unless his employment contract was entered as a sham, in light of the doctrine of fairness and impartiality his status as the major shareholder of ABC should not affect his eligibility for joining the company’s employee health insurance scheme.

3Pursuing private law autonomy and freedom of contract must not contravene the doctrine of good public order and social customs that disallows any act from violating the law or deviating from mainstream moral and ethical standards. Drink-driving is an offence punishable under the law. Offering insurance that covers drink-driving accidents is no different from encouraging drink-driving, and will harm public security.

Chapter 2

General principles of civil law

Introduction

As noted in Chapter 1, Chinese civil law governs property relations and personal relations between civil subjects of equal status. It is basically structured on the German model, under which civil law is generally composed of three major elements: general principles of civil law, laws on things and laws on persons.

The general principles of civil law are of relevance to both persons and things, and relate to civil rights, civil subjects (including natural persons and legal persons), things, juristic acts, agency and limitation of actions, which are the topics of this chapter.

Laws on things can be classified into the law of property and the law of obligations. The law of property (i.e. property rights law) focuses on issues in connection with immovable property and movable property, such as ownership, usufructuary rights, security rights and possession. The law of obligations principally relates to the creation and discharge of obligations, contracts, torts and some important concepts like negotiorum gestio and unjust enrichment.

Laws on persons chiefly comprise family law and the law of succession.

China has not yet promulgated a civil code. At present, the Chinese civil law regime relies on scores of single statutes mostly in the form of laws governing specific civil matters (in the wider sense, including commercial matters), such as the General Principles of Civil Law (hereinafter referred to as the ‘GPCL’),1 Contract Law, Property Rights Law, Tort Liability Law, Marriage

1The GPLC (in Chinese) can be found at: http://news.xinhuanet.com/legal/2003-01/21/content_

5679530.htm. There is no official English version. The author uses his own English translation in this book. Another English translation is available at: http://www.npc.gov.cn/englishnpc/ Law/2007-12/12/content_1383941.htm.

Civil rights

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Law, Adoption Law, Law of Succession, etc. The components of the civil law framework also include a slew of administrative regulations and rules issued by the State Council and local jurisdictions; relevant judicial interpretations of the Supreme People’s Court; and relevant international treaties, agreements and customs.

Civil rights

In property relations and personal relations between civil subjects of equal status, a civil subject, whether a natural person or a legal person, is vested by civil law with certain rights, which allow the civil subject in everyday life to do something, not to do something, or to gain entitlement to oppose other civil subjects doing something. Such rights can be generally perceived as civil rights.

The definition of ‘civil rights’

Civil rights are derived from the law. They are legally enforceable and protected by the law. However, it is difficult to define ‘civil rights.’ Doctrines about civil rights stem from the civil law jurisdictions that occupy a predominant position in Continental Europe. But even in those jurisdictions, there is no standard definition of ‘civil rights.’

While ‘civil rights’ appears to be an abstract legal term, civil rights, in essence, describe what one can do, while civil obligations indicate what one must do. For average citizens, enjoying rights and fulfilling obligations are two sides of the same coin. It is impossible to enjoy rights without fulfilling obligations. Nor is it likely that one would be asked to only fulfil obligations without being given any rights to enjoy. For example, in many places people have the right to enjoy free or affordable public schools, hospitals and libraries. On the other hand, it is virtually an ineluctable obligation to pay tax to the government.

Within the scope of civil law, people possess civil rights that entitle them to do whatever they desire to do, given that no prohibition against or restriction on doing so has been imposed by the law. Hence, no person or organization (including the government) is allowed to restrain people’s freedom of exercising their civil rights.

32 General principles of civil law

For example, if the law does not stipulate that people need to pay estate tax or inheritance tax, tax will not be levied when the property of a deceased family member is transferred to them. The government is not in a position to request people to pay estate tax or inheritance tax without a sound legal basis. In other words, the right of enjoying tax holidays in this regard is subject to no intervention by the government.

Similarly, a university cannot decline a hepatitis B carrier’s application for admission if the law does not expressly provide that a person with such a health status is not allowed to be admitted as a university student. So a hepatitis B carrier’s right to become a university student cannot be denied on the basis that he has this illness.

However, freely enjoying civil rights does not mean that exercising civil rights will not be subject to any restriction at all. The government may intervene in certain circumstances by employing its public power to block the exercise of civil rights if such power is granted by the law in order to prevent civil rights from being excessively or abusively exercised.

On the whole, exercising civil rights in China shall accord with Article 51 of China’s Constitutional Law,2 which stipulates that a person when enjoying his freedom and exercising his rights must not infringe on the interests of the state, the society or the collective, or on the lawful freedom and rights of other persons. Moreover, civil rights should be exercised in compliance with the fundamental civil law doctrines covered in Chapter 1, such as good faith, good public order and social customs, etc.

Take the following example. Professor Li, President of Golden Sunshine University in Shanghai, is strongly against full-time university students getting married before they finish their studies. He believes that getting married and having a baby will adversely affect a student’s university life and is also morally inappropriate at such a young age, even though most university students may have statutorily reached majority. The university recently released a notice to all its students advising them that ‘it is the university’s

2China’s Constitutional Law (in Chinese) can be found at: http://www.gov.cn/gongbao/ content/2004/content_62714.htm. There is no official English version of this law. The author uses his own English translation in this book. Another English translation is available at: http://www

.npc.gov.cn/englishnpc/Law/2007-12/05/content_1381903.htm.

Civil rights

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new policy that any student who gets married before graduation will be immediately dismissed from the university.’ Is the university in a position to dismiss a student if the student fails to abide by this notice? The answer is that university policy cannot override the law. Since no legal prohibition is imposed on the right of university students to get married, dismissing a student under such scenario is against the law.

How are civil rights categorized in China?

Chinese academia tends to categorize concepts, perhaps out of the need to construct theoretical frameworks that appear well-structured and systematic. It is open for discussion whether such categorizations are reasonable or important; nevertheless, it is useful to have a basic understanding of the rationale behind them.

In Chinese jurisprudence, civil rights are generally categorized into property rights and non-property rights based on the subject matter embodied in the rights. However, from the angle of achieving different objectives by exercising civil rights, there is another method of categorization in which civil rights are categorized under the right of dominion, right of claim, right of formation or right of defence.

Property rights and non-property rights

Categorizing civil rights into property rights and non-property rights seems to be the most practical method and the easiest to apprehend as it focuses on subject matter.

Property rights

‘Property rights’ refers to those civil rights that normally have an economic value. This means they can usually be measured in monetary terms. They have nothing to do with a person’s personality or personal identity. Rights on visible and physical assets, rights exercisable by creditors and rights over invisible property (e.g. intellectual property) can all be considered property rights.

34 General principles of civil law

Non-property rights

‘Non-property rights’ refers to those civil rights that normally are indistinguishable from rights of personality and rights of personal identity.

Rights of personality subsist in a person’s own self, and can be expressed in various forms, such as the right to life and health, the right to a name, the right to reputation, the right to public esteem, the portrait right, etc.

Rights of personal identity are built on specific personal relationships, such as the right of parents over their children who have not reached majority, the right of spouses and the right of family members arising from the relationships formed on the basis of descent, marriage, adoption, etc.

In general, property rights have an economic value, whereas non-property rights do not. But this is not always the case. A property right may exist over a confidential private letter which may not be measurable in monetary terms but could be highly valued by its author and/or the person it was addressed to. In contrast, as a kind of non-property right, the portrait right of a celebrity will most likely carry an economic value; if it is infringed, the right holder can claim for damages which are economically measurable.

The rights of dominion, claim, formation and defence

The categories of right of dominion, right of claim, right of formation and right of defence aim at exhibiting the nature of civil rights from the standpoint of pursuing different objectives. Such categorization is in fact more of an academic necessity than of practical relevance, so it may appear too theoretical and perhaps less accessible to readers.

The right of dominion

The literal meaning of ‘right of dominion’ is a kind of civil right which allows a specific person to control the subject matter embodied in the right exclusively, freely and independently.

Rights on visible and physical property in a general sense, rights over intellectual property, rights of personality, rights of personal identity, etc., can all be viewed as rights of dominion.

Civil rights

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The right of dominion is exercisable entirely at the discretion of a person who is entitled to such right. He can freely exercise such right in an independent fashion, and is not required to seek consent from any other person on earth for doing so. In this sense, the right of dominion is of an exclusive nature. However, its exclusivity must be publicized in a certain manner (e.g. by registration) in order to tell the public at large that such right exists and to prevent any infringement and interference that may cause injury to the exclusive enjoyment of the right.

The right of claim

‘Right of claim’ refers to the right of a person to request another person to do something or not to do something.

The right exercisable by a creditor over a debt due to him might be given as an example of the right of claim. It can be deduced from this example that the right of claim relates to specific persons only, rather than to the public at large. A creditor is entitled to exercise his right of claim for a debt, but his claim can only be made against his debtor. The subject matter with respect to the creditor’s right of claim is in the debtor’s possession. The objective sought after by the creditor cannot be achieved by exercising such right of claim if the debtor does not favourably respond to his claim. When this happens, taking court action will be an option for the creditor.

Sometimes it may not be easy to distinguish between the right of claim and the right of dominion. Say T finished writing a novel last month. What kind of right does T have over this novel: the right of claim or the right of dominion? T owns the copyright over his novel, which can be deemed as a kind of right of dominion because T’s such right is exclusive and is exercisable against the whole world rather than any specific person, and as T can freely and independently fight against any infringement of his copyright. The right of claim, on the other hand, is exercisable between specific persons only.

The right of formation

In the spirit of private law autonomy, the formation and variation of a legal relationship shall only be carried out after the parties which establish such relationship reach consensus on doing so.

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‘Right of formation,’ however, refers to the right granted by the law, which is exercisable by one party under exceptional circumstances to alter or revoke an established legal relationship unilaterally according to his own will. The rights of revoking, discharging or ratifying a contract can be viewed as rights of formation.

The right of defence

The right of defence can be taken as the counterpart of the right of claim. The sine qua non (which roughly means the ‘indispensable ingredient’) of exercising the right of defence by one person is the exercise of the right of claim by another person against him. In order to assert his right of defence, the former has to admit in the first instance that the latter is entitled to exercise his right of claim. If the former denies the latter’s right of claim, the former will not be in a position to exercise his right of defence accordingly.

Say Alan makes a claim against Betty for RMB 20,000 that he lent her and that she failed to pay him back on time. If Betty refuses to repay Alan on the ground that he never lent her such money, she is exercising her right of denial, but not her right of defence, because she does not accept Alan’s claim that she owes him money. However, if Betty argues that she was supposed to repay Alan RMB 18,000 (rather than RMB 20,000), she is exercising her right of defence since she admits she owes Alan some money, but disputes the amount.

Here is an example that covers the various rights discussed above. Great Land has its own plants and the patents for its products. It entered into a contract with Golden Sunshine for purchasing raw materials. The raw materials delivered by Golden Sunshine were intolerably defective, but Golden Sunshine refused to replace the goods. Earlier, under another contract, Great Land sold its products to Silver Moonlight and it delivered the goods on time. Four years had passed since the deadline for making payment, but Silver Moonlight had not paid Great Land. What types of civil rights if any does each of these companies have and can each of them exercise? The answer is that Great Land is entitled to exercise its property rights over the movable and immovable property in its plant, as well as the patents, which are its intellectual property. These can be deemed rights of dominion. After Great Land and Golden Sunshine entered into a contract for purchasing raw materials, each party could exercise its right of claim against the other,

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requesting the other party to fulfil its contractual obligations. Since Golden

Sunshine refused to replace the defective goods it delivered to Great Land, Golden Sunshine was in breach, and Great Land was entitled to rescind the contract unilaterally, which could be manifested by exercising its right of formation. Great Land is in a position to exercise its right of claim by requesting Silver Moonlight to make the overdue payment immediately. In response to Great Land’s claim, Silver Moonlight may exercise its right of defence by refusing to pay on the ground that Great Land made its claim after a prescribed time limit.

Civil subjects: Natural persons

Civil law governs property relations and personal relations between civil subjects of equal status. Civil subjects embrace natural persons (i.e. real human beings) as well as legal persons (e.g. corporations). In some circumstances, the state may act as a civil subject, and it does so usually by appearing in its capacity as a government agency.

A civil subject is perceived to be in possession of an independent legal personality separate from others. Such legal personality is seen in a civil subject’s capacity (i.e. civil capacity), which decides whether and to what extent that civil subject is able to successfully establish property relations and personal relations with other civil subjects.

Civil capacity can be divided into the capacity to be a holder of civil rights (i.e. the capacity for civil rights) and the capacity to perform civil acts which generate legal effects (i.e. the capacity for civil conduct). These two kinds of civil capacity apply to both natural persons and legal persons.

The civil capacity of a natural person

The term ‘natural person,’ which most frequently appears in private law, does not exactly mean ‘citizen,’ which is a term usually employed in the context of public law or international law. The scope of ‘natural person’ is wider than ‘citizen.’ For example, natural persons living in China may include Chinese citizens, citizens of other states and persons with no citizenship (i.e. stateless persons).

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A natural person’s civil capacity determines whether he is able to act and interact with other natural persons or legal persons with a view to forging property relations and personal relations between them, and if so, on what scale. This capacity, as mentioned above, includes the capacity for civil rights and the capacity for civil conduct.

The capacity for civil rights

A natural person’s entitlement to enjoy civil rights and fulfil civil obligations has to be ascertained by the appropriateness and sufficiency of his capacity for civil rights.

In China, the GPCL provides that natural persons have the capacity for civil rights from birth until death, and that they enjoy civil rights and fulfil civil obligations, as stipulated in Article 9 of the GPCL. Hence, it can be seen that a natural person’s capacity for civil rights basically has nothing to do with his age. However, certain kinds of capacity for civil rights are subject to reaching a specific age. For example, a person needs to reach a statutorily prescribed age in order to be qualified for getting married. Also, a fetus may under special circumstances be granted a certain capacity for civil rights, say, the entitlement to be given a share of an estate for the purpose of succession.

Consider the following case. T is a 15-year-old high-school student in Shanghai. He participated in the Writing Contest for Young Authors, and his novelette Wind was awarded the Rising Star Book Prize. Great Land Press, a publisher in Shanghai, sponsored the contest. It included Wind in its book series in new literature, which received a highly favourable response from readers countrywide. T’s father requested that Great Land Press pay T a royalty. Great Land Press refused, countering that ‘at T’s age his novel is not copyrighted.’ This argument is groundless. T’s capacity for civil rights (including copyright) starts from his birth. As the author, T owns the copyright and is entitled to a royalty from Great Land Press for the use of his novel.

The GPCL (Article 10) states that all natural persons are equal in their capacity for civil rights. This equality, it should be noted, is historically recent, and is attributable to contemporary political movements around the world seeking civilization, democracy and human dignity in unequal societies.

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The contents and the scope of a natural person’s capacity for civil rights are granted by the law. In this sense, nobody is in a position to give up or transfer to other persons his capacity for civil rights. Nor is any person’s capacity for civil rights susceptible to restriction or deprivation imposed by other persons. The capacity for civil rights entitles a natural person to enjoy all sorts of civil rights allowed by the law, even including those rights that may appear to be abstract but objectively exist in substance, no matter whether or not they will be actually enjoyed.

The capacity for civil conduct

A natural person’s performance of civil acts must be commensurate with (not in excess of) his civil rights. In addition, in order for those acts to produce legal effects, he must have the proper capacity for civil conduct. That is to say, he must have the ability to independently enjoy civil rights and independently fulfil civil obligations (including assuming civil responsibilities).

A natural person’s capacity for civil conduct, along with his capacity for civil rights, completes his civil capacity, which enables him to enjoy civil rights and assume civil obligations to such an extent that a legally effective civil act can be successfully performed by him.

A natural person’s capacity for civil conduct is recognized by the law; thus it cannot be restricted or revoked in any circumstance, unless doing so is allowed by the law and in strict compliance with the procedures stipulated in the law.

Under Chinese law this capacity is classified based on age, intellectual ability and mental health into three major types: full capacity, limited capacity and no capacity. Differentiating one type from another aims at conferring on mature and sensible adults the full capacity to perform civil acts, and in the meantime protecting the lawful rights of minors and mentally disordered people through appropriate means.

Full capacity for civil conduct

A natural person who attains a statutory minimum age with appropriate intellectual ability is normally bestowed by the law with full capacity for civil conduct. A natural person with full capacity for civil conduct is supposed to be fully competent to independently carry out any sort of lawful activities.

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In China, according to the GPCL (Article 11, paragraph 1), a natural person aged 18 or above is viewed as an adult and deemed to be a person with full capacity for civil conduct able to independently carry out civil activities. Here, the age of 18 is the dividing line between minority and majority, and adulthood is used as the threshold for a natural person to gain entitlement to full capacity for civil conduct.

The GPCL (Article 11, paragraph 2) further mentions that a natural person below the age of 18 but attaining the age of 16 will be deemed to be a person with full capacity for civil conduct if that person relies on what he earns from his work as the main source of income for making a living. This provision makes it possible, in a country with a sizable population competing for limited jobs, for a minor reaching the age of 16 who is in urgent need of money to support himself or his family to work legally.

Limited capacity for civil conduct

Some natural persons are viewed as persons with limited capacity for civil conduct, and they can only independently carry out civil activities on a scale commensurate with their age, intellectual ability and mental health.

In China, according to the GPCL (Article 12, paragraph 1), a minor aged ten or above is a person with limited capacity for civil conduct, and is only able to carry out those civil activities that are appropriate in terms of his age and intellectual ability, other than which shall be carried out by his agent ad litem on his behalf or carried out by himself with the consent of his agent ad litem.

The GPCL (Article 13, paragraph 2) also provides that a mentally disordered person who is unable to fully account for his own conduct is a person with limited capacity for civil conduct, and only able to carry out those civil activities that are appropriate in terms of his mental health. Other civil activities shall be carried out by his agent ad litem on his behalf or carried out by himself with the consent of his agent ad litem.

No capacity for civil conduct

Some natural persons have no capacity at all for civil conduct. They normally include minors below a statutorily prescribed age as well as those mentally disordered people who are unable to recognize and understand what they have done.

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In China, a minor under the age of ten, or a mentally disordered person who is totally unable to account for his conduct, is deemed as a person with no capacity for civil conduct under the GPCL, and such person’s civil activities can only be allowed to be carried out by his agent ad litem on his behalf (Article 12, paragraph 2; Article 13, paragraph 1).

However, some acts performed by such a minor (e.g. receiving small gifts, buying a can of Coke, etc.) can be accepted as effective and legally binding, given that those acts are of a very simple nature and purely for the benefit of the minor without any condition attached to performing the acts.

Judicial declaration of capacity for civil conduct

A mechanism exists in China under which the court can make a judicial declaration about a mentally disordered person’s capacity for civil conduct, according to the status of his mental health.

According to the GPCL (Article 19, paragraph 1), a person or persons whose personal interests are linked with or affected by a mentally disordered person’s capacity for civil conduct may apply to the court for having that mentally disordered person declared as a person with no capacity or limited capacity for civil conduct.

And according to the extent of the mentally disordered person’s recovery, on the application made by a person or persons whose personal interests are linked with or affected by this person who has been declared to be with no capacity or limited capacity for civil conduct, or on the application submitted by this person himself, the court may declare this person as a person with limited capacity or full capacity for civil conduct (GPCL, Article 19, paragraph 2).

Guardianship

Countless people have no capacity or only limited capacity for civil conduct. These people may face problems in effectively carrying out civil activities in order to meet their everyday needs.

In China, the solution to this problem is to employ a guardianship system. Under this system, guardians are appointed for looking after those persons

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who have no capacity or only have limited capacity for civil conduct, with a view to helping them carry out civil activities in order to have their interests and needs suitably satisfied in a timely manner. In practice, the system of guardianship plays an important role in helping minors and mentally disordered people.

Under the GPCL, for a natural person who has no capacity or only has limited capacity for civil conduct, his guardian will be his agent ad litem (Article 14).

The duties of a guardian

According to the Supreme People’s Court’s Opinions on Some Issues Regarding Implementation of the General Principles of Civil Law of the People’s Republic of China (hereinafter referred to as ‘The Supreme People’s Court’s Opinions on the GPCL’) (Articles 10 and 22), a guardian’s responsibility towards a minor or a mentally disordered person who is the ward of the guardian normally includes the following: taking care of the ward’s health; looking after the ward’s daily life; managing and protecting the ward’s property; supervising and directing the ward’s conduct; carrying out civil activities on the ward’s behalf; acting in lawsuits on behalf of the ward; and assuming liabilities for any loss or injury caused by the ward to other persons.

The GPCL (Article 18, paragraph 1) stresses that a guardian shall fulfil the duty of guardianship by safeguarding the lawful rights and interests of his ward pertinent to personal, property-related and other relevant aspects, and the guardian shall not dispose of the ward’s property unless doing so is for the benefit of the ward.

Under the GPCL (Article 18, paragraph 3), if a guardian does not fulfil his duty or his act injures the lawful rights and interests of his ward, he will be held responsible; if a guardian causes a loss to his ward’s property, he will be liable to compensate the loss incurred; the court may disqualify a guardian from carrying out guardianship according to the circumstances.

For example, R, a seven-year-old boy, has lived with his guardian Yang (his late father’s best friend) since his parents died in a car accident a couple of years ago. R inherited a house from his parents. Yang sold the house and used the proceeds to invest. The investment failed badly. Yang is thus liable to compensate R for any loss incurred due to his failed investment and the sale

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of the house. As Yang has breached his duty, he could be disqualified from continuing to act as R’s guardian.

As the system of guardianship is of a remedial nature aimed at making up the ward’s deficiencies, the guardianship will cease once the ward attains or regains his full capacity for civil conduct. That is to say, after a minor reaches majority or a mentally disordered person becomes capable, the guardianship will no longer be necessary. Moreover, the guardianship will come to an end if the guardian passes away or no longer possesses the ability to fulfil the duty required in the guardianship.

As persons with no capacity or limited capacity for civil conduct are normally minors and mentally disordered people, the system of guardianship is correspondingly designed for these two types of persons, giving rise to two types of guardians accordingly: guardians for minors and guardians for mental patients.

Guardians for minors

Once a child is born, a guardianship arises between the child and his parents. The GPCL (Article 16, paragraph 1) provides that a minor’s parents are his guardians.

The GPCL (Article 16, paragraph 2) provides that if the parents of a minor pass away or lack the required competence to be his guardians, a person from one of the following categories who has the required competence may act as his guardian: paternal or maternal grandparent; elder brother or sister; or a relative or friend who has a close relationship with the minor and who is willing to assume the duty of guardianship, subject to certain forms of administrative approval.

In light of the GPCL (Article 16, paragraph 4), if none of the above persons is available to be the guardian, the relevant administrative power from the government will intervene in providing the minor with the required guardianship.

Guardians for mental patients

Similarly, according to the GPCL (Article 17, paragraph 1), a mental patient’s guardian can be a person chosen from among the following categories who

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has the required competence: spouse; adult child; close relative; or a relative or friend who has a close relationship with the mental patient and who is willing to assume the duty of guardianship, subject to certain forms of administrative approval.

Under the GPCL (Article 17, paragraph 3), if none of the above persons is available to be the guardian, the relevant administrative power from the government will intervene in providing the mental patient with the required guardianship.

A judicial declaration of missing status or death

There are cases in which a person lends a large amount of money to a close friend who promises to repay it shortly but then the friend disappears without any trace. Can the money be recovered? In the context of civil law, there is a likelihood that the money can be claimed back fully or partially by resorting to a judicial declaration of missing status or death.

A court can make a judicial declaration that a person who disappeared a specific number of years earlier as prescribed by the law and whose whereabouts are still unknown is missing or dead. Once a judicial declaration like this is obtained, the legal position of the person in question regarding his personal relations with other persons (e.g. marriage) may need to be varied. His legal position in connection with his property may also need to be modified or revoked.

A judicial declaration of missing status

In the circumstance that a person’s whereabouts have been unknown for no less than two years and it is not known if he is still alive, the GPCL (Article 20, paragraph 1) allows any other person whose personal interests are linked with or affected by the person who has disappeared to apply to the court for a judicial declaration that the person in question is missing. When it is said that ‘a person’s whereabouts have been unknown,’ this means no one has known where he is since he left his last known place of residence (Supreme People’s Court’s Opinions on the GPCL, Article 26).

The two-year period will be counted from the date before which he left his last known place of residence (Supreme People’s Court’s Opinions on the

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GPCL, Article 28, paragraph 1). If the disappearance happens during wartime, the two-year period will be counted from the date on which the war ends (GPCL, Article 20, paragraph 2).

According to the Supreme People’s Court’s Opinions on the GPCL (Article 24), the person who can apply to the court for such a judicial declaration of missing status may come from one of the following categories in terms of the relationship with the person who has disappeared: (1) spouse;

(2) parent; (3) child; (4) sibling; (5) grandparent; (6) grandparent-in-law;

(7) grandchild; (8) grandchild-in-law; or (9) other person who has established a relationship, in terms of enjoying civil rights and assuming civil obligations, with the person who has disappeared.

If the court accepts the application, it will issue a proclamation for searching for the person who has disappeared. If after issuing the proclamation a specific period of time lapses and the person still cannot be located, the court will support the application and declare that the person in question is missing.

According to the Supreme People’s Court’s Opinions on the GPCL (Article 34, paragraph 2), the period of proclamation required for judicially declaring a missing person is six months, whereas that prescribed by the Civil Litigation Law (Article 168, paragraph 1) is only three months. While the two laws are contradictory on this point, it can be generally presumed that one should follow the Civil Litigation Law, because the Supreme People’s Court’s Opinions on the GPCL was released earlier than the Civil Litigation Law, and more importantly, the latter as a statute promulgated by the National People’s Congress apparently has greater binding force.

However, judicially declaring a person missing does not mean that the missing person is dead. So such declaration will not bring about changes to the missing person’s personal relations with other persons. Judicially declaring a person missing will only lead to the missing person’s property being placed in the custody of any of the following persons who has a close relationship with him: spouse, parent, adult child, relative or friend; if there is any dispute over the custody or if none of the above persons is available or able to carry out such custody, the property of the missing person will be placed in the custody of a person nominated by the court (GPCL, Article 21, paragraph 1).

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If, after a person is judicially declared missing, the person reappears or his whereabouts are discovered, the court will be in a position to revoke the declaration (GPCL, Article 22).

A judicial declaration of death

According to the GPCL (Article 23, paragraph 1), in the event that a person’s whereabouts have been unknown for no less than four years (or if a person’s disappearance is known to be attributable to an accident and his whereabouts have been unknown for no less than two years since the accident happened) and no one knows where he is and whether he is still alive, any other person whose personal interests are linked with or affected by the person who has disappeared may apply to the court for a judicial declaration that the person in question is dead. Here, as in the case of declaring a person missing, the term ‘a person’s whereabouts have been unknown’ means no one has known where he is since he left his last known place of residence (Supreme People’s Court’s Opinions on the GPCL, Article 26).

The four-year period will be counted from the date before which he left his last known place of residence (Supreme People’s Court’s Opinions on the GPCL, Article 28, paragraph 1). If the disappearance happens during wartime, the four-year period will be counted from the date on which the war ends (GPCL, Article 23, paragraph 2).

According to the Supreme People’s Court’s Opinions on the GPCL (Article 25, paragraph 1), the person who can apply to the court for such judicial declaration of death may come from the categories below in this order of priority, in terms of the relationship with the person who has disappeared:

(1) spouse; (2) parent or child; (3) sibling, grandparent, grandparent-in-law, grandchild or grandchild-in-law; or (4) other person who has established a relationship, in terms of enjoying civil rights and assuming civil obligations, with the person who has disappeared.

Similar to what happens with an application for a judicial declaration of missing status, if the court accepts an application for a judicial declaration of death, it will issue a proclamation for searching for the person who has disappeared. If after issuing the proclamation a specific period of time lapses and there is still no trace of the person who has disappeared so that the court

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is unable to ascertain whether he is alive, the court will support the application and declare that the person in question is dead.

According to the Civil Litigation Law (Article 168, paragraph 1), the period of proclamation required for judicially declaring a person dead is one year (or three months if the person’s disappearance is known to have been caused by an accident and it can be affirmed that his survival is unlikely).

It should be noted that filing an application for a judicial declaration of a person’s death with the court does not need to be preceded by applying for a judicial declaration of his missing status. However, if one person applies for a judicial declaration of missing status whereas another person on the same level in terms of order of priority as shown above applies for a judicial declaration of death, the application for a judicial declaration of death will prevail (Supreme People’s Court’s Opinions on the GPCL, Article 29).

A judicial declaration of death has important legal implications identical to those in the event of natural death. A person judicially declared dead will cease to be a civil subject and his capacity for civil rights and civil conduct will be terminated at the same time. His marriage will dissolve naturally. Any legal relation entered by him with other persons, in terms of enjoying civil rights and assuming civil obligations, will be subject to alteration or extinction. And his estate will be treated as a legacy and dealt with in accordance with the law of succession.

Nonetheless, it is not uncommon for a person judicially declared dead to reappear or be found alive after the declaration has been made by the court. If this happens, the court will be in a position to revoke the declaration (GPCL, Article 24, paragraph 1).

Revocation of a judicial declaration of death may lead to complex consequences that tremendously impact the property relations and/or personal relations in connection with the person in question as well as other persons whose personal interests hinge on the life and death status of the person in question.

Also, once the declaration is cancelled, the person judicially declared dead will be able to have his capacity for civil rights reinstated. In addition, any civil act performed by the person in question during the time he was judicially declared

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dead will be taken as valid, given that he had capacity for civil conduct to competently carry out civil activities (GPCL, Article 24, paragraph 2).

With regard to personal relations, once the declaration is vacated, any modified or revoked personal relationship in connection with the person judicially declared dead, if the modification or revocation is generated due to the judicial declaration of his death, will be restored automatically, unless automatic restoration has become impossible because of an irreversible change of circumstances (e.g. his spouse has remarried after the annulment of the marriage with him). According to the Supreme People’s Court’s Opinions on the GPCL (Article 37), if the spouse of the person judicially declared dead is yet to remarry, their annulled marriage will be restored automatically from the date on which the order of revoking the declaration of death is made by the court; but if the spouse has remarried, no matter what subsequently has happened in this new marriage, the former marriage cannot be automatically restored. That is to say, even if his spouse marries somebody else and then divorces, the former marriage cannot be restored automatically. If the couple wants to revive their relationship as husband and wife, they must register a new marriage. Also, if his child has been adopted by somebody else after the declaration of his death is made, once the declaration is lifted by the court, he will not be in a position to declare the adoption invalid unilaterally; the person who adopts the child and the child himself must both agree to give up this adoption (Supreme People’s Court’s Opinions on the GPCL, Article 38).

Once the declaration of death is cancelled, the person concerned will be entitled to request the return of his property if the ownership of the property has been passed to somebody else due to this declaration of death; if the property no longer exists, he shall be appropriately compensated by the person to whom the ownership of the property has been transferred (GPCL, Article 25).

Rights of personality

As mentioned before, civil rights can be classified into property rights and non-property rights in terms of the subject matter to which the civil rights relate.

‘Non-property rights’ normally refers to personal rights, which can be divided into rights of personality and rights of personal identity.

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As opposed to rights of personal identity derived from specific identity relationships (e.g. the right of parents over their children who have not reached majority, the right of spouses and the right of family members arising from relationships formed on the basis of descent, marriage, adoption, etc.), rights of personality are natural-born and exclusive. Natural persons own rights of personality from the date of their birth. Rights of personality in the eyes of civil law are no less important than property rights.

Theoretically speaking, rights of personality can be further categorized into general rights of personality and special rights of personality.

General rights of personality

The term ‘general rights of personality’ may appear quite abstract, and it may be difficult to arrive at an accurate definition of them.

The GPCL (Article 101) establishes the legal basis of respecting general rights of personality by providing that the human dignity of citizens is protected by the law. In this context, general rights of personality can be conceptualized as human beings’ basic rights of enjoying independence, liberty and dignity in a general sense. They are not about any particular right, interest or benefit; they play the role of laying out theoretical foundations on which specific rights of personality in a more concrete sense can be framed by legislators and legal scholars.

Special rights of personality

The GPCL prescribes a number of special rights of personality, including the right to life and health (Article 98), the right to a name (Article 99), the portrait right (Article 100), the right to reputation (Article 101), the right to public esteem (Article 102) and the right of voluntary marriage (Article 103).

The remainder of this section offers a closer look at the right to a name, the portrait right and the right to reputation.

A natural person’s ‘right to a name’ refers to his right to decide, use or change his name. It prevents unauthorized or inappropriate use of his name by other persons without his permission. The right to a name covers not only official names that are recorded in personal identity documents, but also aliases, stage names and pen names (not including nicknames or pet names).

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The unauthorized or inappropriate use of a person’s name may lead to an infringement of his right to his name, and if this happens, the wrongdoer will be liable to compensate the victim. However, an infringement of the right to a name may sometimes be easily mixed up with an infringement of the right to reputation.

Say Bruce and Sam are not on good terms. In order to sabotage Sam’s reputation, Bruce usurped Sam’s name to place an advertisement in

‘Rendezvous’ (an online dating lounge) which said that ‘Sam wants to find a lifelong partner.’ In fact, Sam is married and well known as a perfect family man. But in this case, although Bruce used Sam’s name without his permission, it might be appropriate to establish that what Bruce did actually injured Sam’s right to his reputation more than his right to his name.

The original purpose of granting a natural person the portrait right was to prevent others from using the person’s portrait for a commercial purpose without the person’s permission. However, it could be debated that the right of portrait should be extended to prohibit unauthorized use of a person’s portrait even for an apparently non-commercial purpose.

A person’s right to reputation concerns how his character and moral conduct are perceived by the public. His right to his reputation could be injured if an unfavourable comment or information in relation to his character and moral conduct is disseminated to the public, having a negative impact on his image and reputation in society. A person’s right of privacy is not expressly contained in Chinese law. An infringement of a person’s right of privacy is usually dealt with in the same way as an infringement of his right to his reputation. Here is an example. ABC is a hospital specializing in treating sexually transmitted diseases. In the newsletter released by ABC last month, a short research article contained the photo of G, who was listed as a patient who contracted such a disease. The newsletter is a publication widely circulated in the country. Some of G’s friends recognized him. G filed a lawsuit against ABC for infringing his right of privacy. Contracting a sexually transmitted disease is deemed to be disgraceful in China. Even though releasing the article in the newsletter could be purely for research purposes, ABC can still be held liable for infringing G’s right of privacy. G would succeed in his action against ABC.

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Civil subjects: Legal persons

Civil subjects include not only natural persons but also legal persons.

The definition of ‘legal person’

A legal person (e.g. a limited liability company) is usually established according to the law by a natural person or a number of natural persons. The natural persons who set up a legal person make contributions to the capitalization of the legal person at the stage when the legal person is born and may continue to do so afterwards. However, in terms of personality, the legal person thus established is a separate legal entity distinct from the natural persons who initiate its formation and inject capital into it.

The GPCL (Article 36, paragraph 1) defines ‘legal person’ as an organization that has the capacity for civil rights and the capacity for civil conduct, and is able to independently enjoy civil rights and assume civil obligations according to the law. In this context, a legal person is characterized by its independent personality as a separate legal entity.

That is to say, a legal person is an entity with independent civil capacity. It has a personality of its own, based on which it enjoys civil rights and assumes civil obligations. It can own property, enter into contracts and sue other persons in its own name and right.

Here is an example. Ma, a real estate tycoon in Beijing, is a major shareholder of ABC, a company incorporated three years ago for the purpose of providing logistics services to some of his family’s businesses. Ma sent his wife and two sons to ABC as its board members. Last month, ABC was going into bankruptcy. XYZ Bank asked Ma to pay back the money borrowed by ABC. Ma refused to do so, on the ground that the money was not borrowed by him personally but by ABC, which is a separate legal entity.

There could be a misunderstanding that liabilities assumed by a legal person (e.g. a limited liability company) are limited. As a matter of fact, a legal person needs to fulfil its liabilities within the scope of all its property to an unlimited extent, until it becomes insolvent (i.e. until its assets are not sufficient to meet its debt obligations), after which it will have no alternative but to be wound up, given that no other person is willing to purchase

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it. Limited liability does not apply to the legal person itself, but to the shareholders or persons who have made capital contributions to the legal person. Different from the legal person, the capital contributors’ losses, in any circumstance, will not surpass their capital contributions made to the legal person. Their maximum liability for the legal person is predetermined, and thus can be deemed to be limited in this special sense.

Types of legal person

Under the GPCL, legal persons are classified into two major types: legal persons as profit-making enterprises; and legal persons basically of a non- profit-making nature, including government agencies, non-profit-making organizations, associations and institutions.

In terms of the ownership’s indigenous or overseas nature, the GPCL (Article 41) enumerates profit-making enterprises as including suitably qualified enterprises with domestic ownership only (i.e. state-owned and collective-owned domestic enterprises) and suitably qualified foreign-invested enterprises (i.e. Sino-foreign equity joint ventures, Sino-foreign cooperative joint ventures and wholly foreign-owned enterprises). Such a profit-making enterprise will assume civil responsibility for the activities carried out in the course of employment by its employees (including its statutory representative) (Article 43). Regardless of the nature of the enterprise’s ownership (whether it is a state-owned enterprise, a collective-owned enterprise or a foreigninvested enterprise), the enterprise will be required to use all its assets to fulfil its civil liabilities arising from the activities carried out in the course of employment by its employees (Article 48).

A government agency with independent operational funds can be deemed to be a legal person on the date of its establishment; any other non-profit-making organization, association or institution may achieve its status as a legal person either automatically on the date of its formation if there is no need for it to go through any formality of registering as a legal person, or after it completes the required registration procedures to become a legal person (GPCL, Article 50).

A profit-making enterprise may, in conjunction with a non-profit-making organization, form a new legal person who has independent civil capacity (GPCL, Article 51).

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Apart from the types of legal person described in the GPCL, there are other ways of categorizing legal persons from the standpoint of academic discussion, such as classifying them into public legal persons and private legal persons, corporations and foundations, profit-making legal persons and legal persons for public interest and welfare, etc.

The establishment of a legal person

A natural person acquires his legal personality after he is born. Unlike a natural person, an organization’s legal personality is not natural-born. An organization can only acquire a legal personality by means of having itself established as a legal person in compliance with the requirements and formalities provided in the law.

Under the GPCL (Article 37), a legal person shall have the following attributes: (1) it is lawfully set up; (2) it has the necessary assets or operational funds; (3) it has a name, administrative and management structures, and operational premises; and (4) it is able to bear civil liability independently.

Different types of legal person may adopt different forms of internal management. A company may opt for its internal management to include general shareholder’s meetings, a board of directors and a supervisory board.

A charity established as a non-profit, charitable trust normally may have no general shareholder’s meetings, no board of directors and no supervisory board; instead, it may use a general assembly of members as its governing body, along with a council as the assembly’s executive arm.

Regardless of the form of internal management, a legal person shall appoint a natural person (usually from its senior management team) as its statutory representative. The statutory representative will be officially documented as the person representing the legal person to exercise its rights in accordance with the law and the legal person’s constitutional documents (GPCL, Article 38). The chairman of the board of directors of a company can be appointed as the company’s statutory representative. If so, his decisions made on behalf of the company bind the company, which means the company is not in a position to deny the validity of his acts on the ground of his lack of authority, unless he acts in a manner exceeding his authority.

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The civil capacity of a legal person

As in the case of a natural person, a legal person needs to have appropriate civil capacity in order to carry out civil activities. Again, similar to a natural person’s civil capacity, a legal person’s civil capacity embraces the capacity for civil rights (the capacity for being a holder of civil rights) and the capacity for civil conduct (the capacity to perform civil acts which generate legal effects).

The GPCL (Article 36, paragraphs 1 and 2) provides that a legal person is an organization that has the capacity for civil rights and the capacity for civil conduct, and is able to independently enjoy civil rights and assume civil obligations in line with the law; a legal person’s capacity for civil rights and capacity for civil conduct commences from the time the legal person is validly formed, and comes to an end when the legal person ceases to exist.

The main difference between a legal person’s civil capacity for civil rights and a natural person’s is that the former could be restrained by the law and by its constitutional documents (e.g. the memorandum of association of a company that confines the company’s business to specific areas). A natural person’s civil capacity for civil rights is virtually subject to no such restriction. A legal person’s capacity for civil rights commences on its establishment and is extinguished when it ceases to exist. A natural person’s capacity for civil rights begins after he is born and fades away when he dies. Legal persons’ civil rights may not be the same as those enjoyed by natural persons. Some civil rights (e.g. the rights in connection with marriage or succession) are exclusive to natural persons, and do not apply to legal persons.

Unlike a natural person, whose capacity for civil conduct can be ascertained pursuant to the law, a legal person’s capacity for civil conduct is largely governed by its constitutional documents. Such capacity to some extent illustrates the legal person’s ability to assume liability for its acts. The legal person will be liable for any wrong committed by its statutory representative and its employees in the course of employment. Either an action or inaction may give rise to committing a wrong. Take the following example. Fast Mover is a removal company that provides house moving services. Li hired Fast Mover to move the contents of his home. Fast Mover sent two staff, S and T, to help Li. When they packed Li’s effects, S broke an expensive vase and T damaged a valuable calligraphy work. Fast Mover as their employer shall bear the liability and compensate Mr Li for the loss incurred by S and T.

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S and T will not personally be liable to make compensation, given that their wrong was committed inadvertently.

Things

The term ‘civil objects’ is opposed to ‘civil subjects.’ ‘Civil subjects’ refers to persons. ‘Civil objects’ may refer to things.

The definition of ‘things’

There are innumerable things in the world, but not all are ‘things’ as defined in civil law (e.g. the sun, the moon, the sea, the sky, etc. are not). In civil law, ‘things’ only refers to material objects that can be controlled by human beings.

The features of a thing in civil law can be summarized as follows:

•It is a material object for human beings to control, so that in the process of exercising such control, people’s civil rights can be enjoyed and their civil obligations fulfilled.

•It exists in a discernible form (e.g. in a solid, liquid or gaseous state).

•It is at people’s disposal.

The term ‘thing’ originates in civil law jurisdictions in Continental Europe. The common law does not have an equivalent for this terminology. Perhaps the closest is ‘property.’ But strictly speaking, ‘property’ does not carry the same meaning as that of ‘thing’ as comprehended in civil law jurisdictions.

From an academic point of view, things can be classified into different types, such as movable things and immovable things; principal things and accessory things; things in commerce and things out of commerce; specific things and genus things; and single things, conjugate things and collective things.

Categorizing things into movable things and immovable things (i.e. movable property and immovable property) is more of practical significance.

‘Immovable things’ normally refers to land and permanent structures affixed to land. All other things are movable things (also known as ‘chattels’).

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The transfer of an immovable thing (e.g. a house) could be relatively complex. It will not become effectively completed without successfully going through a relevant registration process for that purpose (Property Rights Law, Article 9).

Mere physical delivery will not suffice.

Transfer of a movable thing (e.g. a bottle of beer) could be much simpler. It will become valid after its physical delivery is completed (Property Rights Law, Article 23).

Critical/Non-critical components of things

In the eyes of civil law, things are formed on the basis of critical components and non-critical components.

Critical components are the essential ingredients of a thing, without which it may lose its entire value. For example, a book’s critical components could be some of its key pages. If the book is missing any such page, the whole book may become useless.

In contrast, non-critical components are those ingredients of a thing which are far less important, and if removed, would not materially affect the thing’s usefulness. For example, removing a car stereo from a car will have no adverse impact on the car’s engine, so the car can still perform its key function.

The difference between things and fruits

Of close relevance to the concept of ‘things’ is the concept of ‘fruits,’ which was also coined in the civil law jurisdictions in Continental Europe. ‘Fruits’ refers to a yield that is generated from a thing but is a separate thing in its own right.

Sometimes it is difficult to tell things and fruits apart. For example, ripe apples on an apple tree cannot be counted as fruits, as they have not yet dropped (‘separated’) from the tree. Chickens that have been hatched from eggs cannot be counted as fruits either. Eggs no longer exist once they become chickens. When the thing that produces the fruits ceases to exist, there is no basis on which to establish the resulting thing as fruits.

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Fruits can be divided into two types: natural fruits and legal fruits. Natural fruits are the yields that are naturally generated (e.g. oranges dropped from an orange tree, a tiger’s offspring). ‘Legal fruits’ refers to those yields that are derived from the formation of certain forms of legal relationship (e.g. rental income arising from lease agreements or interest income from a savings account).

Natural fruits belong to the owner of the thing from which such fruits are produced; however, in the event that there is concurrently a usufructuary right holder on top of the owner of the thing from which such fruits are derived, the fruits will belong to the usufructuary right holder (unless otherwise agreed). According to the Property Rights Law (Article 116, paragraph 1), a usufructuary right is the right of one person to use and benefit from a thing which is owned by another person.

How the ownership of legal fruits is acquired will depend on whether the relevant parties are in agreement as to whom the fruits belong to; if there is such an agreement, the agreement will be followed; if there is no such agreement, the ownership of the fruits will be decided by adhering to customary rules, pursuant to the Property Rights Law (Article 116, paragraph 2).

Juristic acts

On the whole, civil subjects (i.e. persons), civil objects (e.g. things), together with juristic acts, comprise the key ingredients of a civil law framework for governing property relations and personal relations between civil subjects of equal status.

Countless juristic acts happen in everyday life (e.g. entering into a contract or leaving property to somebody in a will). However, it is difficult to give a precise definition of ‘juristic act,’which is an abstract concept.

The definition of ‘juristic act’

While juristic acts are an essential constituent of a civil law framework, the term ‘juristic act’ is not used in the GPCL. The GPCL uses a slightly different term, ‘civil juristic act’ (Chapter IV, Section 1), which is presumed to more or less mean the same thing.

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‘Civil juristic acts’ under the GPCL (Article 54) are defined as legitimate acts performed by citizens or legal persons for the purpose of creating, altering or ending civil rights and civil obligations. Here, civil juristic acts include legitimate acts only.

In contrast, ‘juristic acts’ normally refer to all kinds of acts, embracing both legitimate and illegitimate ones. Accordingly, juristic acts can be described simply as acts (not necessarily legitimate acts) performed by civil subjects with a view to creating, varying or terminating civil rights and civil obligations. Performing a juristic act is a genuine expression of the actor’s intent.

Whether a juristic act eventually produces legal effects will depend on two conditions: whether such an act can be generated in the first place, and after it is generated whether it can be validated. Different criteria have to be satisfied in order to successfully generate and validate the act respectively.

Criteria for generating a juristic act

In principle, successfully generating a juristic act requires three ingredients: an actor (i.e. the civil subject performing the act); a genuine expression of the actor’s intent; and an object as a goal to be satisfied in the act (e.g. renting an apartment or house is the object of entering into a residential lease agreement).

In normal circumstances, a juristic act can be counted as having been successfully generated if these three elements are all in place. However, in some cases, the law will impose various statutory requirements to be fulfilled on forging certain legal relations between civil subjects, so these three ingredients will not be sufficient to successfully generate a juristic act.

For example, the transfer of land use rights cannot be completed by simply entering into a contract. The government’s approval needs to be sought for such transfer in the first place, followed by a series of rather complex and cumbersome notarization and registration formalities. Another example can be cited from the Contract Law. The Contract Law (Article 367) views a storage contract as having been established only when the subject matter to be stored has been handed over to the storage facility. So the parties to a storage contract will have to make sure that the goods have been delivered to

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the storage facility on time, otherwise they will not be bound by the contract because it will not be deemed as having come into force.

A genuine expression of the actor’s intent plays a pivotal part in successfully generating a juristic act. Such expression is allowed to be made in various forms. According to the GPCL (Article 56), a civil juristic act can be performed in writing, orally or in other forms without any restriction, unless a certain medium is specifically required to be employed as stipulated by the law. That is to say, in normal circumstances, people are free to choose the method of expressing their true intent for performing a juristic act, whether it is an explicit verbal or written expression, or an implicit expression by conduct.

An implicit expression of the actor’s intent by conduct means that the intention of performing a juristic act is not manifested by words orally or in writing, but deduced tacitly from what he has done. For example, John as a tenant was in a residential lease agreement with Alan. After the agreement expired, no new agreement was entered into between the two either verbally or in writing. John continued to occupy the house previously rented to him by Alan. He went on paying his monthly rent to Alan, and Alan accepted his payments. The conduct of John and Alan implies that their previous lease agreement has been tacitly renewed, and they would be bound by the new agreement formed in this way.

In some circumstances, people will not be able to freely choose the method of expressing their intent for performing juristic acts. This happens when the law intervenes by requiring them to express their intent in a prescribed fashion.

Criteria for validating a juristic act

Successfully generating a juristic act is only half of the process towards the act eventually producing legal effects. Some other conditions have to be met to make the act become legally valid.

According to the GPCL (Article 55), in order to constitute a valid civil juristic act, the following conditions have to be met: (1) the actor has the required capacity for civil conduct; (2) there has been a genuine expression of the actor’s intent; and (3) the act is not in violation of the law or against public interest.

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That is to say, whether a successfully generated juristic act can further be validated will depend on the appropriateness of the actor’s capacity for civil conduct, the genuineness of his intent and the legitimacy of the act.

Appropriate capacity for civil conduct

In order to constitute a legally valid juristic act, the first condition to be satisfied is that the actor must possess the appropriate capacity for civil conduct. As mentioned earlier, there are three major types of capacity for civil conduct that may apply to natural persons — full capacity, limited capacity and no capacity

— in terms of a person’s age, intellectual ability and mental health.

A natural person with full capacity for civil conduct is supposed to be able to independently perform a juristic act.

A natural person with limited capacity for civil conduct will only be able to perform a juristic act on a scale commensurate with his age, intellectual ability and mental health. His agent ad litem will on his behalf carry out any activity the performance of which will be in excess of his capacity.

A legal person’s capacity for civil conduct will be restricted by its constitutional documents.

Genuineness of intent

In order to constitute a legally valid juristic act, the second condition to be satisfied is that the actor must have genuinely expressed his intent. His expression of intent must be made out of his true willingness, and on an entirely voluntary basis not affected by any unacceptable element such as deceit, duress or undue influence.

The actor’s genuine expression of intent is at the core of a juristic act’s achieving legal effectiveness in creating, varying or terminating civil rights and civil obligations.

When further interpretation of an expression of intent is required in order to figure out the precise meaning the actor desires to manifest, different approaches of interpretation may need to be taken according to circumstances. This may be a literal interpretation, an interpretation based on the objective to be achieved or on social customs, etc.

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Lawfulness

In order to constitute a legally valid juristic act, the third condition to be satisfied is that the act itself must be lawful. The act must not violate the law or contravene public interest or mainstream ethics advocated in society.

In light of the doctrine of private law autonomy, provided that no prohibition or restriction is imposed by the law, people can perform whatever civil acts they like.

In this respect, legal norms can be viewed as falling into two main categories. One category, including, for example, the Contract Law, in most circumstances provides non-mandatory guidelines only. The other category, including the Property Rights Law, the Tort Liability Law, the Family Law, the Law of Succession, etc., contains many provisions of a restrictive and prohibitive nature that are mandatory and must be strictly obeyed.

The validity of a juristic act

Based on the above analysis, it can be seen that not all juristic acts are legally valid. Juristic acts can be categorized into four major types: valid juristic acts, void juristic acts, voidable juristic acts and juristic acts with undecided validity.

Needless to say, the concept of a ‘valid juristic act’ can be understood as easily as its literal expression. The following sections will elaborate on the characteristics of void juristic acts, voidable juristic acts and juristic acts with undecided validity respectively.

Void juristic acts

‘Void juristic acts’ refers to those acts that have no legal force. For example, entering into a contract for purchasing illegal drugs is a void juristic act. It is unlawful, is not enforceable and has no binding effect.

The characteristics of a void juristic act

There are a number of points to bear in mind regarding the characteristics of a void juristic act.

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Firstly, a void juristic act is absolutely void, and cannot be validated by any means. The act is not invalidated by any person, and its voidness is due to the operation of law. Whether the actor is aware of such voidness or whether such nullity is confirmed by the court or an arbitral tribunal is not essential, and will not affect the act’s invalidity.

Secondly, as described by the GPCL (Article 58, paragraph 2), a void civil act has no legal effect from the onset of performing the act. The Contract Law (Article 56) provides also that a void contract has never had legal force.

Thirdly, if an act is only partially void, the other part of the act unaffected will not be taken as null and void (GPCL, Article 60). In the case of a contract which is partially invalid, the validity of the other part of the contract will not be affected (Contract Law, Article 56).

And fourthly, according to the GPCL (Article 61, paragraph 1), in the event of a void civil act, the party who gains by acquiring certain property due to performing such act shall return the property to the party from whom the property is acquired; the former shall compensate the latter for any loss suffered by the latter as a result of the act; if both parties are at fault, each party shall be liable for shouldering its own responsibility arising from the act. Similarly, in light of the Contract Law (Article 58), in the case of a void contract, any property acquired due to such contract shall be returned; if it is not possible to return the property, the party at fault shall provide reimbursement of an appropriate amount; the party at fault shall compensate the injured party for any loss suffered due to such contract; if both parties are at fault, each party shall be liable for assuming its own responsibility in connection with the contract.

Major grounds of voidness

Usually a juristic act is void due to one of the following reasons: lack of appropriate capacity for civil conduct, performing the act against true willingness or violating the law or public interest.

Lack of appropriate capacity for civil conduct

Lack of appropriate capacity for civil conduct may give rise to a juristic act becoming void. This mainly relates to natural persons (as civil subjects) who have no capacity for civil conduct or only have limited capacity for civil conduct.

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Under the GPCL (Article 58, paragraph 1(1) and (2)), a civil act performed by a natural person who has no or only limited capacity for civil conduct and is, according to the law, not in a position to independently perform such act, is null and void. Take the following example. T, a 16 year-old high school student, looks much older than his real age. On his way home from school, he bought ten lottery tickets at the Social Welfare Lottery Centre, and nobody recognized that he was still a minor. T won a jackpot of RMB 100,000. According to the regulations issued by the Social Welfare Lottery Centre, any person who purchases social welfare lottery tickets must be over the age of 18. Hence, T’s purchase of lottery tickets is a void act. The Social Welfare Lottery Centre did not need to give him the prize money.

There are exceptions to this rule. If such a person performs the act purely for his own personal benefit on a unilateral basis (e.g. accepting gifts, bequests, endowments, gratuities, etc.) or a minor carries out some reasonable activities in everyday life with a reasonably marginal amount of money involved (e.g. buying some stationery, sweets or soft drinks), the act is not void.

Performing the act against true willingness

A juristic act may become void if the actor performs the act not out of his genuine willingness but as a result of being misled or compelled to do so for fear of the threat of force. Deceit or duress or their equivalents are usually the reasons that an act is performed against an actor’s true willingness.

Under the Supreme People’s Court’s Opinions on the GPCL (Article 68), deceit is deemed as a dishonest act of one party who wilfully misrepresents the truth to or conceals the truth from another party, leading to the latter being induced to do something which he would not do if the truth were disclosed to him or not concealed from him. According to the GPCL (Article 58, paragraph 1(3)), a civil act performed not in line with the actor’s true intent due to deceit is void. In this respect, the Contract Law operates in a slightly different way. According to the Contract Law (Article 52, paragraph 1), a contract will be void if it is made due to deceit causing damage to the interest of the country.

Pursuant to the Supreme People’s Court’s Opinions on the GPCL (Article 69), duress is understood as an act of one party who forces another party to do something which he would not do if he were not forced to do so

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by the former, who threatens to cause harm to the life and health, honour, reputation, property, etc. of the latter or of the latter’s family members or friends if the latter is uncooperative in this matter. How the GPCL and the Contract Law legislate can be compared in a slightly different way regarding the voidness of a civil act induced by duress. According to the GPCL (Article 58, paragraph 1(3)), a civil act performed under duress against the actor’s true intent is void. The Contract Law (Article 52, paragraph 1) points out that a contract will be void if it is made under duress causing damage to the interests of the country.

Here is an example. XYZ Bank received an application from ABC, a company, for borrowing RMB 500,000. The application was jointly signed by ABC’s two directors, Robert Li and Mary Tang, who are authorized to apply for loans on behalf of the company. XYZ Bank granted the loan to ABC. But it soon discovered that Mary Tang never agreed to lodge this loan application; her signature was forged by Robert Li. Thus the application did not reflect the company’s intention. The loan granted to ABC can be withdrawn by XYZ Bank.

Violating the law or public interest

A juristic act will be void if it contravenes the law or public interest. The GPCL (Article 58, paragraph 1(4) to (7)) lists the following acts which in essence can all be deemed to be violating the law or public interest, as void civil acts: maliciously conspiring to cause damage to the interests of the country, collectives or individuals; violating the law or public interest; entering contracts for carrying out economic activities not in line with the plan made by the country; and acting under the disguise of a legitimate appearance by concealing an illegitimate purpose.

Here when it is said that a juristic act will be void if it contravenes the law, law not only covers a statute promulgated at the national level, but also an administrative regulation issued by the State Council, a local regulation issued on the provincial or municipal level, a self-governing regulation of an autonomous region of minority nationalities, or a rule issued by the State Council’s departments/committees or by a local government. Saying that a juristic act will be void if it violates public interest stresses the importance of adhering to the civil law doctrine of good public order and social customs, covered in Chapter 1.

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Voidable juristic acts

A void juristic act is invalid from the start, as if it had never been performed. A related but different juristic act is the voidable juristic act, the validity of which is tainted with defects but is tenable unless the act is set aside by the court or an arbitration tribunal. Before it is set aside, it is still a valid act; but once it is set aside, it will be counted as invalid from the outset.

According to the GPCL (Article 59, paragraph 1), a relevant party is entitled to request the court or an arbitration tribunal to set aside a civil act in the event that the person who performs the act is significantly mistaken about the fact relating to his act or the act is an apparently unjust one. A civil act that is set aside will be deemed to be void from the onset (Article 59, paragraph 2).

In light of the Contract Law (Article 54, paragraph 1), a party to a contract is entitled to request the court or an arbitration tribunal to set aside a contract in the event that entering the contract was due to a significant misunderstanding or was apparently unjust conduct. A contract that is set aside will be deemed as never having had any legal effect (Article 56).

There are two major types of juristic acts which are usually considered voidable juristic acts under Chinese law: a juristic act materially misconceived and a juristic act apparently contrary to fairness.

A juristic act materially misconceived

A ‘juristic act materially misconceived’is defined under the Supreme People’s

Court’s Opinions on the GPCL (Article 71) as an act against the actor’s true intent that caused him to suffer a relatively heavy loss, since the actor is significantly mistaken as to the nature of his act, the identity of the other party, the type, quality, specification and quantity of the subject matter; etc.

Certain elements are required for an act to constitute a juristic act materially misconceived. First, the actor undertakes the act under a significant misconception attributable to his own error. Second, there is a causal relationship between the misconception and the act. The act is then performed under such misconception giving rise to an outcome incongruous with the actor’s true intent. And third, the act causes the actor to suffer a relatively heavy loss.

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Take the following example. A classical piano was displayed for sale in ABC, a piano store in Shenzhen. The price was RMB 100,000. Huang collects musical instruments and is in particular interested in old German pianos. Li, the manager of ABC, told Huang that this piano was a well-established German brand called Schneider and that it was made in Germany about 50 years ago. Huang bought the piano. But one of his friends well-versed in piano making suspected that the piano was not made in Germany because the materials used appeared to be far less than 50 years old. Huang asked ABC to confirm if the piano was a real Schneider piano. Yu, the general manager of

ABC, admitted that Li’s statement was not entirely true because the piano was a Schneider-style piano made in Dongguan (in Guangdong) five years ago.

But Yu maintained that what Li said represented his personal opinion only, not that of ABC. He told Huang that Li had left ABC. Huang fumed that he had been misled by Li. He wanted to return the piano to ABC for a full refund. Yu refused to refund Huang’s money, contending that what Huang bought was a quality piano comparable with any original German one. Under such a scenario, Huang may consider applying to the court or an arbitration tribunal to set aside the contract of sale on the ground of having performed an act materially misconceived.

A juristic act apparently contrary to fairness

A ‘juristic act apparently contrary to fairness’ is defined under the Supreme

People’s Court’s Opinions on the GPCL (Article 72) as an act performed by one party who takes advantage of his status or the other party’s inexperience, leading to the rights they enjoy and the obligations they assume towards each other being positioned in a way that overtly deviates from the principle of fairness and exchange at an equal value.

Certain elements are required for an act to constitute a juristic act apparently contrary to fairness. Firstly, one party gains by utilizing his advantageous political, economic or social position, or by taking advantage of the other party’s inexperience, with a view to forcing the latter to perform the act.

Secondly, performing the act leads to the former unjustly acquiring benefits at the expense of the latter. And thirdly, there is a causal relationship between the outcome of the act and the exploitation of the former’s advantageous position over the latter or the latter’s inexperience.

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The Contract Law contains some provisions governing a juristic act that is apparently contrary to fairness. According to Article 54, paragraph 2, where a contract is entered into due to deceit or induced by duress or is made by taking advantage of a party’s plight, the injured party who enters into the contract not in line with his true intent is entitled to apply to the court or an arbitration tribunal for having the contract set aside. Article 52(1) also provides that a contract will be void if it is made due to deceit or induced by duress causing damage to the interests of the country.

The GPCL (Article 58, paragraph 1(3)) also lists as a void civil act an act performed due to deceit or induced by duress or on the basis of taking advantage of a party’s plight resulting in untrue expression of a party’s intent. However, unlike the Contract Law, the GPCL does not mention whether causing damage to the interests of the country is among the prerequisites for constituting a void civil act.

Say Mrs Yang, in her eighties, is partially paralysed and being looked after by her maid, May. May’s husband recently lost his job; the couple is now in financial difficulty in paying off their home mortgage. Great Land Bank, their mortgage lender, asked them to find somebody who could provide it with a guarantee of their debts, otherwise their house would go back to Great Land Bank and be sold at auction. On May’s request, Mrs Yang agreed to provide such a guarantee to Great Land Bank. The guarantee created under this context can be set aside if it can be established that Mrs Yang provided the guarantee involuntarily, because as an old lady whose life entirely relies on the help of the maid she could be quite vulnerable to any undue influence exerted by May.

Also under the Contract Law, a party to a contract who acts against the principle of fairness to enter into the contract may assume liability to make compensation to the other party who is injured by such act. According to the Contract Law (Article 42), one party to a contract shall be liable for making compensation to the other party for the loss incurred by his act of entering into the contract in one of the following circumstances: (1) maliciously negotiating the contract under the disguise of intending to forge a contractual relationship;

(2) wilfully concealing material facts relating to entering the contract from or giving false information to the other party; or (3) performing an act (other than the above) that contravenes the doctrine of good faith.

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The time limit on rescission of a voidable juristic act

The Supreme People’s Court’s Opinions on the GPCL (Article 73, paragraph 2) and the Contract Law (Article 55(1)) both impose a time limit of one year on having a voidable juristic act rescinded. Any application filed with the court or an arbitration tribunal after the time limit lapses will not be able to be supported by the court or an arbitration tribunal. The Contract Law (Article 55(2)) also provides that where a party to a contract has the right to revoke the contract but explicitly indicates or implies by conduct that it has given up such right, the right of that party to set aside the contract will be extinguished accordingly.

Under the GPCL (Article 61, paragraph 1), after a voidable juristic act is set aside, the party who gains by acquiring certain property due to performing such act shall return the property to the party from whom the property is acquired; the former shall compensate the latter for any loss suffered by the latter because of the act; if both parties are at fault, each party shall be liable to shoulder its own responsibility in connection with the act.

According to the Contract Law (Article 58), after a contract is set aside, any property acquired due to such contract shall be returned; if it is not possible to return the property, the party at fault shall provide reimbursement of an appropriate amount; the party at fault shall compensate the injured party for any loss suffered due to such contract; if both parties are at fault, each party shall be liable for assuming its own responsibility in connection with the contract.

Juristic acts with undecided validity

Another type of juristic act is a juristic act with undecided validity. Literally, this refers to an act with pending validity. The act does not produce any legal effect at the present moment. And normally whether the act will produce legal effect depends on if it can eventually be ratified or accepted by a particular party; in other words, if it cannot be ratified or accepted subsequently, the act will continue to have no legal force.

Such acts can usually be classified into two types: an act of a person with limited capacity for civil conduct and an unauthorized act.

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An act of a person with limited civil capacity

‘Person with limited capacity for civil conduct’ usually refers to a minor aged ten or above, or a mentally disordered person who is unable to account for his conduct; and that such a person is only able to carry out those civil activities that are commensurate with his age, intellectual ability and mental health (GPCL, Article 12, paragraph 1; Article 13, paragraph 2). The GPCL (Article 58, paragraph 1(2)) particularly mentions that a civil act performed by a person who according to the law has limited capacity for civil conduct only and is unable to independently perform such act, is null and void. Such act shall be carried out by his agent ad litem on his behalf or by himself with the consent of his agent ad litem (Article 12, paragraph 1; Article 13, paragraph 2).

However, although a civil act performed by a person who according to the law has limited capacity for civil conduct only and is unable to independently perform such act is an invalid act in the eyes of the GPCL, the Contract Law views a contract entered into by a person with limited civil capacity as a contract, the validity of which is undecided; the validity of such a contract depends on whether the contract can eventually be ratified by the agent ad litem of the person in question.

In light of the GPCL (Article 14), the guardian of a person who has limited capacity for civil conduct only is taken as such person’s agent ad litem. Pursuant to the Contract Law (Article 47, paragraph 1), a contract entered by a person with limited capacity for civil conduct may become valid after the contract is ratified by his agent ad litem; a contract entered into by a person with limited capacity for civil conduct will be deemed to be valid and require no ratification of his agent ad litem if the contract serves a purpose of purely benefiting the person in question or if entering such contract appears commensurate with the age, intellectual ability and mental health of the person in question.

As opposed to a person with limited capacity for civil conduct as one party to the contract, the other party to the contract may chase the agent ad litem of the former to ratify the contract within a one month of the contract being made; the inaction of the agent ad litem of the former will be viewed as declining to ratify the contract; and before the contract is ratified, the latter, if he enters the contract in good faith, will be entitled to revoke the contract (Contract Law, Article 47, paragraph 2). Here, ‘in good faith’ refers to a situation where the

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latter, when entering into the contract, is entirely ignorant of the truth that the person with whom he is establishing a contractual relationship is a person who has limited capacity for civil conduct only.

An unauthorized act

An unauthorized act, as a juristic act with undecided validity, may become valid if in the case of agency it can be ratified by the principal, or in the event of other unauthorized acts the actor can subsequently secure the authorization which he has not obtained before.

An unauthorized act may commonly be discovered amidst those activities relating to agency. For example, an agent may perform outside the scope of authority granted to him by his principal; a person may continue to carry out the work as the agent of a principal in the eyes of outsiders even though their agency relationship is no longer in force; a person may purport to be the agent of a principal and may carry out the work as such agent in the name of the principal, when in fact he has no real authority to do so because no such agency relationship exists between the two.

According to the GPCL (Article 66, paragraph 1), where a person purports to be the agent of a principal to carry out activities under the disguise of their non-existent agency relationship, or an agent performs exceeding the scope of authority given to him by his principal, or a person continues to work on behalf of the principal as the agent even though his agency relationship with the principal has terminated, the principal will not be liable for the act performed by the person in question, unless the principal ratifies the act; where the principle notices such irregularity but does not show his objection, the principal’s such inaction will be viewed as his acceptance of the unauthorized act performed.

In light of the Contract Law (Article 48, paragraph 1), if a contract is entered into on behalf of a principal by a person who, with no real authority, pretends to be the agent of that principal, or by an agent who performs outside the scope of authority given to him by his principal, or by a person who continues to work as the agent of his principal in the eyes of outsiders even though their agency relationship is no longer in force, the contract will have no binding effect on the principal unless the principal ratifies the contract. The other party to the contract may chase the principal to ratify the contract within

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one month from the contract being made; the inaction of the principal will be taken as refusing to ratify the contract; before the contract is ratified, the other party, who enters the contract in good faith, is entitled to set aside the contract (Contract Law, Article 48, paragraph 2). Here, ‘in good faith’ denotes that the other party to the contract when entering the contract knows nothing about the truth that the counterpart with whom he is entering into the contract is a person who has no real authority, or is an agent acting in excess of his authority, or is a person who continues to act as an agent even though his agency relationship with his principal is no longer effective.

Regarding such unauthorized acts, the Contract Law (Article 51) provides in a more general sense that where a person who is not authorized to deal with the property of another person has done so by entering a contract, if the contract can be ratified by the latter or the former can subsequently acquire the authorization from the latter to deal with the latter’s property, the contract will be deemed to be valid.

Agency

‘Agency’ is another highly important concept in civil law. Agency relationships can be found here and there in everyday life, especially in economic and business activities.

If someone wants to sell or buy a house, she may appoint a real estate broker to be her agent for the purpose of securing a buyer or locating a house that meets her expectations. If she wants to book a hotel for a few days’ vacation overseas, she may use a travel agent to find the best offer instead of directly calling each hotel by herself. She as the principal empowers the agent to act on her behalf within a specific scope of authority with a view to fulfilling a particular objective.

Then what does agency mean in a legal sense?

The meaning of ‘agency’

In commerce, agency as a kind of relationship is initially between two persons, one (the agent) authorized by the other (the principal) to bring

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the principal into a legal relationship with a third party with a view to the formation of a contractual relationship that binds the principal and the third party.

For example, as a potential passenger, a person will be targeted as a third party in the eyes of airlines and travel agencies. An airline could play the role as the principal which empowers a travel agency to act as its agent. The travel agency’s task is to find an opportunity so that a person can become a passenger of that airline by purchasing its tickets, which leads to the formation of a contractual relationship between that person and the airline. By successfully bringing that person and the airline together, the reward received by the travel agency is the commission or the agency fee paid by the airline according to the contract made between the airline and the travel agency regarding their agency relationship.

It should be noted that in practice, it may not be the third party that negotiates and enters into a contract with the principal directly. On the majority of occasions, it is the agent who negotiates and enters into a contract on behalf of the principal, and most likely directly in the name of the principal, with the third party, although the principal will eventually be bound by what its agent does.

However, the agent is not a messenger or an intermediary whose duty is merely to find a business opportunity and report it to his principal. The principal and the agent should be viewed as two separate entities. In this sense, the agent is entitled to make a decision freely and independently on how to negotiate and whether to enter into a contract with the third party, given that he acts within the scope of his actual authority given by the principal. He does not need to consult his principal in each individual case as regards performing his duty as the agent, provided that he does not exceed his authority.

In general, the creation and maintenance of an agency relationship in an economic activity may involve three parties (i.e. the principal, the agent and the third party), and give rise to the formation of two contractual relationships, one between the principal and the agent as an agency relationship, and the other between the principal and the third party, who are bound by the contract made with the third party by the agent on behalf of the principal.

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The scope of agency

The above theory is basically postulated from the standpoint that an agency relationship is in the context of commerce, which is perhaps of the greatest relevance to understanding the application of this concept in everyday life. Nonetheless, from a more encompassing but less business orientated perspective, agency relationships may be involved in more than just contractual relationships. An agency relationship can also be created where the agent is empowered by the principal to carry out activities of a nonbusiness nature, e.g. performing the duty of guardianship over minors or mentally disordered people, filing a lawsuit on behalf of the principal, etc.

Pursuant to the GPCL (Article 63, paragraphs 1 and 2), a citizen or a legal person is allowed to perform a civil juristic act through an agent, who performs the act in the name of the person who authorizes him to do so, but not in excess of his authority, and the person who authorizes him to do so will bear civil liability for the agent’s act.

However, agency cannot be applied in all circumstances. The GPCL (Article 63, paragraph 3) provides that a person shall not appoint an agent to perform a civil juristic act on his behalf if according to the law or an agreement the act ought to be performed by that person himself. For example, for security reasons a person must complete airport check-in procedures entirely by himself. Also if a worldclass violinist has committed under a contract to perform concerts around the world, he cannot delegate his duty of performance to another person by means of agency since because of his pedigree he cannot be replaced; otherwise he is in breach of his contract. In this regard, the Supreme People’s Court’s Opinions on the GPCL (Article 78) holds the view that where according to the law or an agreement a person is supposed to personally perform a civil act but he fails to do so and the act is actually performed by somebody else, the act thus performed will be null and void. This further substantiates the stance that agency cannot be employed in an unrestrained way.

Another thing to bear in mind is that although it is reasonable to assume that in an ordinary economic activity the agent enters into a contract on behalf of and in the name of the principal with the third party whereas the principal is bound by such contract, this does not mean that a contract cannot be made between the agent and the third party directly in the name of the agent as one party to the contract.

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The Contract Law (Article 402) provides that if the agent within the scope of his authority enters into a contract in his own name with the third party who at the time of making the contract is aware of the agency relationship between the agent and his principal, the contract shall directly bind the principal and the third party, unless there is conclusive evidence proving that the contract binds the agent and the third party only. This stipulation shows that whether the contract is made by the agent in his own name is an issue that could be a mere formality. Given that an agency relationship exists and the third party notices it, the principal will be bound by the contract, no matter whether the contract is made in the name of the principal or the agent. However, if the third party has no idea about the existence of an agency relationship when entering into a contract with the agent, the contract will bind the agent and the third party; but even in such circumstance the principal will be the ultimate party who will bear the consequences of the agent’s action with respect to entering and performing this contract.

Types of agency under Chinese law

The GPCL (Article 64, paragraph 1) enumerates agency as including agency by entrustment, agency by operation of law and agency by designation.

In an agency by entrustment, the agent exercises his power in accordance with the authorization given by the principal; in an agency by operation of law, the agent exercises his power of agency in the light of the law; and in an agency by designation, the agent exercises his power in line with the order of the court or the relevant authority which designates who the agent will be (GPCL, Article 64, paragraph 2).

Agency by entrustment

Entrustment is the most common way of creating an agency relationship between the principal and the agent, in particular in economic activities.

Normally there will be an agency agreement between the principal and the agent for establishing their agency relationship. So the agent is appointed in writing under this contract. However, entering into an agency agreement in writing is not mandatory, so the agent can also be verbally appointed (GPCL, Article 65, paragraph 1).

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The GPCL (Article 69(1) to (5)) lists five relevant instances in which agency by entrustment will cease to exist: (1) the term of the agency expires, or the agency work is completed; (2) the principal cancels his authorization given to the agent, or the agent quits; (3) the agent dies; (4) the agent loses his capacity for civil conduct; or (5) the principal’s or the agent’s status as a legal person ceases to be effective.

Agency by operation of law

‘Agency by operation of law’ refers to an agency relationship which is created irrespective of whether there is any intent to establish such agency relationship, but due to the law under specific circumstances.

An agency relationship forged between a person with no capacity or with limited capacity for civil conduct and his agent ad litem is a typical example. No matter whether establishment of such agency relationship is in line with anyone’s intent, such agency relationship must be forged due to the instruction of the law, for the purpose of protecting the legitimate interests of a special group of persons who without their agent ad litem will not be able to look after themselves or at least not to the degree to which ordinary people do.

The GPCL (Article 70(1), (2), (3) and (5)) indicates four relevant scenarios in which an agency by designation will cease to exist: (1) the principal acquires or recovers his capacity for civil conduct; (2) the principal or the agent dies;

(3) the agent loses his capacity for civil conduct; or (4) the guardianship arising from the agency is terminated due to other reasons.

Agency by designation

‘Agency by designation’ refers to an agency relationship which arises on the basis of complying with an order made by the court or a relevant authority (usually the government) as regards designating the agent by the court or the relevant authority.

This normally happens in the circumstance that a person is not able to perform a civil act himself and needs to be represented by the agent to perform such act on his behalf, but he is not able to appoint such agent. So in a litigation process, the court may appoint an agent for a litigant who is required to be represented by the agent for litigation purposes but is unable to appoint

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such agent by himself. Also, the court may appoint an agent for a judicially declared missing person with a view that the agent will take custody of the property of the missing person.

The GPCL (Article 70(1) to (5)) points out five circumstances in which an agency by designation will cease to exist: (1) the principal acquires or recovers his capacity for civil conduct; (2) the principal or the agent dies;

(3) the agent loses his capacity for civil conduct; (4) the court or the relevant authority that has designated the agent cancels such designation; or (5) the guardianship arising from the agency is terminated due to other reasons.

The authority of an agent

An agent acts on behalf of his principal to deal with a third party, leading to the formation of a legal relationship between his principal and the third party. He is able to do so because he is given authority by his principal. Such authority is usually not unlimited, so the agent shall not act in excess of his authority.

Even within the scope of the principal’s empowerment, the agent will be bound by fulfilling his obligations carefully and in good faith and avoiding any conflict of interest for the principal’s benefit. Failure to do so will incur civil liability to be assumed by the agent.

The GPCL (Article 66, paragraphs 2 to 3) provides that an agent shall be liable for the damage caused to his principal due to his failure to fulfil the obligations as the agent; where the principal’s interests are injured by the act of the agent in collusion with the third party, the agent and the third party shall be held jointly and severally liable for the loss suffered by the principal. When it is said that the agent and the third party shall be held jointly and severally liable for the loss suffered by the principal, this means the liability of the agent and the third party is undivided and mutual on an equal share basis, e.g. if the agent lacks sufficient assets to recoup the principal for the loss, the shortfall will have to be filled by the third party.

While an agent is supposed to act strictly in line with his principal’s instructions, in practice it is not uncommon to encounter a so-called ‘agent’ who in fact has no real authority, or acts in excess of his authority, or does not discontinue to work on behalf of the principal as the agent even though his agency relationship with the principal has come to an end. However, a

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deal brought about under any of these circumstances may eventually produce binding force on the principal if the principal opts for ratification.

Under the GPCL (Article 66, paragraph 1), where a person pretends to be the agent of a principal to carry out activities, or an agent performs exceeding the scope of authority given to him by his principal, or a person continues to work on behalf of the principal as the agent even though his agency relationship with the principal has come to an end, the principal will not be liable for the act performed by the person in question, unless the principal ratifies the act; where anyone notices that someone else is acting on his behalf but does not express his objection, his inaction will be viewed as his acceptance of the unauthorized act performed.

If the principal subsequently ratifies the transaction, the consequences arising from the transaction will legally bind the principal. However, the principal is not committed to exercise his right of ratification. If the principal chooses not to ratify the transaction, the consequences arising from the transaction will not bind the principal; in such circumstance, if the agent’s act incurs damage to the principal and/or the third party, the agent will be liable for compensation.

There is another possibility, that the third party knows that the so-called ‘agent’ purports to act on behalf of the principal but has no real authority, or he acts exceeding his principal’s instructions, or he continues to transact on behalf of the principal after cessation of their agency relationship. If this happens, according to the GPCL (Article 66, paragraph 4), if the transaction entered into between the agent and the third party causes injury to another person, the agent and the third party shall be held jointly and severally liable for the loss suffered by that person.

Ostensible authority

An argument can be made that a third party cannot be expected to know everything that happens between an agent and his principal (e.g. whether the agent has broken or surpassed his principal’s instructions). Moreover, it would be unrealistic for the third party to cast doubt on each and every occasion regarding whether the agent has real authority, when in the eyes of the third party the agent is doing what he appears to have the right to do. It is under this context that the concept ‘ostensible authority’ (also known as ‘apparent authority’) is derived.

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The term ‘ostensible authority’ refers to the authority that is seemingly held by an agent, who a bona fide third party believes has real authority to act on behalf of the principal but in fact has no real authority, or acts in excess of his authority, or whose agency relationship with the principal has expired at this point in time.

A key element contained in ostensible authority is that the third party is totally ignorant of the agent’s lack of authority and has acted by relying on the appearance of the authority shown by the agent. And the third party’s such reliance must be genuine and in good faith. In the event that the existence of an ostensible authority can be established, for the purpose of protecting the interest of the bona fide third party, the principal cannot be allowed to deny that the agent has such authority, and will have to be bound by the act performed by the agent under such ostensible authority.

Here is an example. Mr Tang went to a post office in Shanghai to send an urgent parcel by courier to his business partner in the US. A clerk named Jane helped him. She told Mr Tang that the parcel would arrive at the designated place in the US within three working days. But it took three weeks for Mr Tang’s business partner to receive the parcel because Jane carried out the handling procedures incorrectly, with the result that Mr Tang and his business partner missed a good business opportunity and also suffered large financial losses. In fact, Jane was just a trainee; she was not allowed to contact customers in the post office independently. However, Mr Tang relied on Jane’s ostensible authority to transact with the post office in good faith. He shall be entitled to claim compensation from the post office for a reasonable amount of the loss suffered arising from this transaction.

The GPCL does not use the term ‘ostensible authority.’ But it does describe a situation in connection with ostensible authority by implying that where the principal is aware that a person is pretending to be his agent, or his agent is exceeding the scope of authority, or his previous agent is continuing to work on his behalf as his agent after their agency relationship has come to an end, if the principal does not show his objection, the principal’s inaction will be viewed as his acceptance (Article 66, paragraph 1). Or, to put it differently, if the principal does not object to such irregularity, his silence will be taken as concurrence.

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Sub-delegation of authority

In principle, since an agency relationship is based on the personal trust between the principal and the agent, the agent shall fulfil his obligations personally and not delegate the authority received from his principal to somebody else.

However, in exceptional circumstances, the agent can wholly or partially delegate his authority given by his principal to another person who will then become a sub-agent performing the agent’s duties on behalf of the principal (not on behalf of the agent who delegates the authority to him).

According to the GPCL (Article 68), in the event that the agent needs to subdelegate his authority to another person for the sake of satisfying the interests of the principal, he shall seek the principal’s consent in the first instance; if the agent does not seek the principal’s consent beforehand, he shall inform the principal in a timely manner about this sub-delegation of authority; if the principal does not concur with this sub-delegation of authority, the agent shall be personally liable for what the sub-agent has done, except in an emergency situation where the sub-delegation has to be carried out in order to protect the interests of the principal from being injured imminently.

In this respect, the Supreme People’s Court’s Opinions on the GPCL

(Article 80) exemplifies such emergency situations as those in which the agent is not able to fulfil his obligations due to special circumstances such as sudden illness, breakdown of communications with the principal, etc., and indicates that under such circumstances the agent is not able to contact the principal, and will leave the principal’s interests at risk of being jeopardized or further injured if he does not timely entrust another person to work as the agent by sub-delegating his authority to that person.

After the sub-delegation of authority is effected, the sub-agent cannot act in excess of the agent’s authority. In terms of an agency relationship, the legal relationship between the principal and the agent remains unchanged. The legal position of the sub-agent dictates that he acts as the agent of the principal, not the agent of the agent who delegates authority to him. What the sub-agent does binds the principal only. The agent will not be bound by what the sub-agent does in the course of fulfilling the agent’s obligations within the authority sub-delegated to the sub-agent by the agent.

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The limitation of actions

In 1987, T borrowed RMB 30,000 from R, and promised in writing to pay back this loan within two years. R did not chase T for the debt. When T passed away in 2008, he had still not repaid any money to R. On T’s death, his property passed to his wife, G. In 2010, R got into financial difficulty. R asked

G to pay back the money he had lent to T. G refused on the ground that she knew nothing about it. R threatened to bring G to court to recover the money.

If R now files a lawsuit over this debt, will the court support his claim?

This story raises the important civil law concept of the ‘limitation of actions.’

The definition of ‘limitation of actions’

The term ‘limitation of actions’ describes the effects of the passage of an appropriate time period prescribed by the law (i.e. the limitation period) for bringing court actions, with a core proposition that if a person intends to make a legal claim, he must make it during the limitation period. Bringing legal proceedings after the limitation period elapses will lead to a legal claim becoming stale.

That is to say, where a person intends to take legal action (say, to recover a debt, or to claim compensation for breach of a contract or tort of negligence), he must commence legal proceedings within the limitation period. A court action brought after the limitation period expires will be defeated by the court. However, a limitation period to be applied in a case is not proactively activated by the court during the litigation process, but has to be pleaded by a litigant. This is the rule of the limitation of actions.

If a claimant fails to make his claim by bringing court action within the limitation period, applying the rule of the limitation of actions will deny him the possibility of winning the lawsuit if he commences court action after the expiry of the limitation period. Cutting off a stale claim is based on the rationale that it makes no sense to settle a dispute after a significantly lengthy period has passed since the cause of action arose. For an event that happened a significantly long time ago, it could prove difficult or impossible to find essential evidence relevant to the case. People’s memories may also have faded since the event. In this sense, it is better to leave the case as it is, with a

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view to keeping stable the current social order and landscape, and preventing limited judicial resources from being unnecessarily expended.

However, the expiry of a limitation period only has the effect of extinguishing a claimant’s chance to win his court case. Applying a limitation period will not deprive a person of his right to take legal action to make a claim after passage of the limitation period. If a person takes legal action to make a claim after the limitation period has expired, what will usually happen is that on the defendant’s request for applying the rule of the limitation of actions, the court will examine whether a limitation period applies to the case. If it does, the court will make sure that the limitation period has expired. If so, the court will dismiss the case by not supporting the claim. This process may appear unnecessarily formal, but it highlights the difference between the effect of failing to make a legal claim during the limitation period and the procedural nature of making a legal claim that is allowed at any time without being subject to any limit imposed.

Limitation periods

The GPCL sets out a number of limitation periods that are of different lengths and apply to different circumstances.

Firstly, the GPCL (Article 135) provides that unless the law otherwise stipulates, the limitation period in connection with taking court action for seeking protection of relevant civil rights by the court is two years.

Secondly, the GPCL (Article 136) prescribes a one-year limitation period for making a claim for compensation or a remedy in any of the following circumstances: (1) personal injury; (2) selling defective goods, the quality of which is not up to the standard, but without giving any notice to buyers beforehand; (3) procrastinating or defaulting on rental payment; or

(4) incurrence of loss of one’s property, or infliction of damage to one’s property, which is in the custody of somebody else.

And thirdly, the GPCL (Article 137) indicates that a limitation period is calculated from the date on which a prospective claimant discovers or ought to discover that his rights have been infringed; the court will not protect his rights if twenty years have passed since the date on which the cause of action accrued; under special circumstances, the court may extend the limitation period.

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From the above provisions in the GPCL, a conclusion can roughly be arrived at that a limitation period applied to general cases is two years, and will not exceed twenty years at most. However, an indistinct area that warrants clarification is under what circumstances a limitation period in excess of two years will be applicable, whether there is any specific cause of action that entitles a claimant to the twenty-year limitation period, why and under what particular criteria the court may extend the limitation period, etc. The GPCL appears silent on these questions.

In addition, the Contract Law (Article 129) specifically applies a four-year limitation period to two types of contract: contracts for the international sale of goods and contracts for the import and export of technology. No justification is provided under the Contract Law why these two types of contract are entitled to a four-year limitation period, whereas other types of contract seem not to be. Moreover, it is difficult to accurately define what kind of contract can be determined to be a contract for the international sale of goods, or a contract for the import and export of technology. Nowadays, the effect of globalization makes it less difficult to remove the conventional demarcation line that partitions transactions into two distinct camps: domestic and international. Moreover, international trade at the present time is no longer exclusively earmarked as trade in goods, trade in services and trade in technology, as they can be mingled together in many transactions which are significantly more complex than traditional cross-border dealings. Hence, deliberately differentiating contracts for import and export of technology from other contracts of international trade may appear of far less significance.

According to the Supreme People’s Court’s Opinions on the GPCL (Article 153), where a claimant takes a civil action after the applicable limitation period expires, the court shall take up the case, and after making sure there is no ground for suspending, terminating or extending the limitation period, the court will reject the claim.

In the case cited above, since the limitation period has elapsed, R will lose his right to win the lawsuit if he takes court action for recovering the money he lent to T. However, R’s right to take legal action will not be affected. He can still file a lawsuit for debt repayment against G (T’s wife). His case will be accepted by the court. But most likely the action will eventually be defeated, because if the court cannot establish any ground for suspending, terminating or extending the limitation period, it will flatly decline to support the claim.

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The rule of the limitation of actions does not apply to all civil actions of any nature. In the main, it applies to dealing with creditor/debtor relationships in the fields of the law of obligations, such as contractual obligations, tort victims’ compensation, etc. It does not apply to the protection of civil rights in relation to personal rights (i.e. rights of personality and rights of personal identity). That is to say, protection of the right to life and health, the right to a name, the portrait right, the right to reputation, the right to public esteem, the right of voluntary marriage, etc. will not be subject to the rule of the limitation of actions. Those personal rights will always be under the protection of the law and enforceable no matter how much time has passed. Moreover, the rule of the limitation of actions does not apply to circumstances relating to damage caused to property that belongs to the state, given that the property in question has not been delegated by the state to individuals or legal persons to manage (Supreme People’s Court’s Opinions on the GPCL, Article 170).

While a limitation period imposes a strict time limit within which a claimant must commence legal proceedings in order to win his case by having his right enforced by the court, an expiry of the limitation period will make the claim become stale, but not the claimant’s right. If after the limitation period elapses the claimant’s counterpart volunteers to fulfil an overdue obligation in favour of the claimant, fulfilling such obligation by the claimant’s counterpart under this circumstance will be cut off from any impact rendered by the previous limitation period (GPCL, Article 138); that is to say, performing the unfulfilled obligations anew will have nothing to do with the previous limitation period.

However, where the claimant’s counterpart volunteers to fulfil an overdue obligation in favour of the claimant after the limitation period expires but later on goes back on his word alleging that the limitation period has expired, such refusal to fulfil his obligation anew based on the alleged reason will not be accepted by the court (Supreme People’s Court’s Opinions on the GPCL, Article 171).

The limitation of actions: Suspension, termination and extension

The effects of the limitation of actions can be modified in some circumstances by means of suspension, termination or extension.

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Suspension

The GPCL (Article 139) admits that the effects of the limitation of actions can be suspended if within the last six months of a limitation period during its running the claimant is not able to exercise his right of making a claim due to force majeure or other impediments; the effects of the limitation of actions shall resume on the day when the cause of suspension ceases to exist.

Here, ‘other impediments’ under the Supreme People’s Court’s Opinions on the GPCL are asserted to be circumstances where the rights of a person who has no capacity or limited capacity for civil conduct are violated, he has no agent ad litem to act on his behalf, or his agent ad litem is no longer entitled to act on his behalf, or his agent ad litem dies, or his agent ad litem loses capacity for civil conduct (Article 172).

Termination

Under the GPCL (Article 140), the effects of the limitation of actions can be terminated if during the limitation period’s running one of the relevant parties makes a claim, or commences legal proceedings, or agrees to fulfil his obligations by accepting the claim made by the other party; when such termination happens, the limitation period starts to be calculated anew.

That is to say, the time that has passed during the old limitation period’s running will not be counted if such termination occurs, so it will not be included in the new limitation period. The termination may happen at any stage during the limitation period’s running. And no limit is imposed on the time of such termination.

In this respect, the Supreme People’s Court’s Opinions on the GPCL (Article 173, paragraph 1) provides that where such termination is triggered by a claimant who makes his claim or his counterpart who agrees to fulfil his obligation, if during the new limitation period’s running the claimant makes his claim again or his counterpart agrees to fulfil his obligations again, this can be deemed to be the occurrence of another termination. In this circumstance, the limitation period has to begin again.

Based on the above, it is easy to identify the different roles played by suspension and termination in modifying the effects of the limitation of actions. Firstly, suspension only applies to the last six months of a limitation

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period during its running, but termination can happen at any time. Secondly, the cause of suspension is beyond control, but termination can be triggered by taking an action of one’s own accord. And thirdly, after each termination, the limitation period needs to begin again, but suspension will not negate the ongoing limitation period and will only temporarily stop its running, which can be resumed once the cause of suspension is no longer effective.

Extension

The GPCL (Article 137) allows the court to extend the limitation period under special circumstances.

Such extension only applies when the limitation period has expired but the court believes it is necessary to have the time limit prolonged by a certain amount. It cannot be applied when the limitation period has not come to an end. The law does not expound in a concrete way about under what circumstances the court may at its discretion grant such extension and whether there is any ceiling imposed on exercising such right.

From a theoretical standpoint, it can be generally assumed that the court will only grant such extension when doing so can be justified as upholding social justice and fairness (social justice and fairness can, however, be subject to a broad interpretation).

Summary

A civil subject (a natural person or legal person) has civil rights under the law to do something, not to do something, or to oppose other civil subjects doing something. The civil capacity of a natural person or legal person includes the capacity for civil rights and the capacity for civil conduct.

‘Natural person’ refers to a real human being. A natural person may have full capacity, limited capacity or no capacity for civil conduct, depending on his age, intellectual ability and mental health.

A guardian can be appointed for looking after those persons who have no capacity or limited capacity for civil conduct (i.e. minors and mentally disordered people).

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Where a person’s whereabouts have been unknown for quite a long time and no one knows whether he is still alive, the court will be in a position to declare such person missing or dead according to the circumstances.

A legal person is a separate legal entity from those persons who establish it. It is an entity with independent personality and civil capacity based on which it enjoys civil rights and assumes civil obligations.

Juristic acts are classified into four types: valid juristic acts, void juristic acts, voidable juristic acts and juristic acts with undecided validity.

Agency can be created by entrustment, by operation of law and by designation. An agent shall not act in excess of the authority given by his principal. He must fulfil his obligations in good faith.

The rule of the limitation of actions dictates that where a person intends to take court action in order to make a claim, he must do so within a time period prescribed by the law (i.e. the limitation period).

Practice questions

1Alan Wang intended to borrow some money from Bill Li. He invited Bill for a drink at a pub. Bill agreed to lend Alan RMB 10,000. The money was given to him on the spot. Neither one mentioned when the money was to be paid back.

On their way home from the pub, Alan and Bill were approached by three robbers. Alan tucked the borrowed money into Bill’s pocket and ran away. Bill was robbed of this RMB 10,000. Alan was relieved that he had avoided losing the RMB 10,000 as he had repaid Bill at the right time.

Did Alan successfully fulfil his obligation to pay back the money borrowed from Bill?

2G borrowed RMB 300,000 from S. He promised to pay back the money within six months.

G’s business failed, and he was unable to repay the money. G left home; nobody knew where he had gone. One year after G disappeared, S applied to the court for having G declared missing so that the debt could be repaid

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from G’s property placed in the custody of G’s family members.

Can S successfully obtain such a judicial declaration?

3In 1995, T, an engineer in Beijing, went on a business trip to Shenzhen and disappeared there. In 2005, on the application of T’s wife, B, the court in Beijing declared T dead. In 2007, B married Z.

In 2012, T reappeared. He requested that the court cancel the declaration of his death and declare that B’s marriage with Z had ceased to be valid.

Discuss.

4Yang is a director of a private company, Grand Fortune. He often enters into contracts with outside parties on behalf of the company. Last week, he hired a Bentley chauffeured car for Grand Fortune from XYZ, a firm that offers prestige car hire services.

Yang drove the car to go sightseeing with his two relatives.

Today Grand Fortune received a bill from XYZ and was asked to pay a RMB 100,000 car-rental fee. Grand Fortune refused to pay, on the ground that Yang hired the car without obtaining prior permission from the company.

Discuss.

5Candy borrowed RMB 50,000 from Sandy in 2005. She promised to pay back the money before the end of 2006. Candy failed to keep her promise, but Sandy did not chase her for the money.

In early 2012, Sandy was in financial difficulty. She asked Candy to pay back the money immediately. Candy promised to repay the money in four instalments.

After the first instalment, Candy refused to pay back the remaining amount, on the ground that the first instalment was made purely as a courtesy to Sandy, since with the passage of a sufficiently long period of time her obligation to pay this debt had ceased.

Discuss whether Sandy could recover the remaining amount of money that Candy owed her.

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Guidelines for answers

1A debtor should act in the best interests of his creditor. Alan did not pay back the money in good faith. He passed the risk to Bill to avoid a loss from robbery. This cannot release him from his debt obligation towards Bill.

2Only when two years have passed will it become possible to have a person judicially declared missing. As there is an unsettled debt, S could apply to the court for such a judicial declaration, but not at this point in time.

3The court could cancel the declaration of T’s death. But even though the declaration is vacated, it would not be possible for the previous marriage between T and B to be restored; B’s marriage with Z continues to be valid.

4An agency relationship exists between a company and its directors who may have authority to act on behalf of the company. But a director must act in the best interests of the company. Yang breached his duty. He is liable to pay the car-rental fee personally.

5Since after the limitation period expired Candy agreed to pay back the money, if she failed to fulfil her promise again on the ground of the expiry of the limitation period, such refusal would not be accepted by the court.

Chapter 3

The Property Rights Law

Introduction

Guan Zhong, a politician during the Spring and Autumn Period in ancient China, believed that ‘ethics and social order presuppose economic wellbeing.’ Mencius, the renowned ancient Chinese philosopher and an interpreter of Confucianism in the Warring States Period, held the view that ‘only people who can have their own property have the capacity to behave to high moral standards.’ These sayings suggest the importance of private property in the eyes of these sages, and their view that a system of private ownership is essential to social order.

This chapter will focus on the law of property in China, where the law is known as the Property Rights Law. Despite being a key ingredient in China’s civil law framework, the Property Rights Law was promulgated later than many other laws in China and more than fifty years after the founding of the

People’s Republic of China. This is largely because the Chinese Communist Party had sought to establish a socialist society and ultimately a communist society, in which social assets would be in public ownership.

In the late 1970s, however, China adopted a policy of economic reform and opening-up, which would give rise to a radical transformation of the country’s socioeconomic landscape. In the early 1990s, China abandoned its development strategy that was based on a centrally controlled planned economy, and adopted a new strategy to move towards a free-market economy with socialist characteristics. This has brought an unprecedented growth in wealth in the country and necessitated the legalization and systemization of the protection of private assets. As a result, Article 13, paragraph 1 of the

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Constitutional Law (revised in 2004) made it clear that legitimate private assets are ‘inviolable.’ The enactment of the Property Rights Law in 2007 reinforced this mandate, and can be viewed as a milestone of pragmatism in the development of China’s legal framework within which both public and private assets are envisaged to be safeguarded equally.

This chapter discusses the main features of property rights and analyses how the Property Rights Law is structured, why it is needed in China and how the three cardinal principles advocated under the law should be understood and applied. It then focuses on several key areas of the law: the formation and alteration of property rights; ownership; usufructuary rights; and property rights relating to security.

The promulgation of the Property Rights Law

This section examines how the Property Rights Law was promulgated in China. The first question that needs to be addressed is: what exactly are property rights?

The definition of ‘property rights’

The term ‘property’ under the Property Rights Law covers ‘immovable property’ and ‘movable property’ (Article 2, paragraph 2).

By Article 2, paragraph 3 , a ‘property right’ is viewed as the right over specific property entitling the right holder to directly and exclusively control the property in question; such right may refer to ownership, usufructuary rights or property rights relating to security.

The exclusive nature of a property right lies in the right holder’s eligibility to monopolize the property to such an extent that his property right is enforceable against anyone in the world (other than himself).

For example, the statement ‘I have a luxury watch worth RMB 500,000’ displays my ownership of this watch: I am entitled to exercise my exclusive property right over the watch entirely at my discretion. I can decide whether

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I want to wear it myself or give it to a friend as a gift. No one is allowed to interfere in how I use the watch or the way I dispose of it (if I am willing to do so).

Sun (2008, 9) gives a good description of the features of a property right using the idea of ‘three specifics’: ‘a specific right over a specific property held by a specific person.’

As noted in Chapter 2, laws on things under the conventional civil law regime include the law of property (i.e. the Property Rights Law) and the law of obligations. As opposed to the term ‘property right’ used under the law of property, the right is called the ‘obligee’s right’ (more commonly known as the ‘creditor’s right’) in the law of obligations.

The obligee’s right is closely connected with the obligations that arise from the established property relations as identified in the General Principles of Civil Law (GPCL), Chapter 5, Section 2. In light of Article 84, paragraph 1 of the GPCL, obligations are understood as emanating from a relationship created between two parties, with the party who is entitled to enjoy rights as the obligee (the creditor) and his counterparty who has to fulfil obligations as the obligor (the debtor). According to Article 84, paragraph 2 of the GPCL, the obligee has the right to request the obligor to fulfil the latter’s obligations in line with a contract or pursuant to the law.

However, unlike a property right, which is of an exclusive nature and can be defended against claims made by anyone (other than the right holder) over such right, the obligee’s right can only be enforced against the obligor (i.e. his debtor) and not against anyone else. For example, the statement ‘T owes G RMB 500,000’ illustrates the obligee’s right held by G over T: only G as the obligee (the creditor) is entitled to seek repayment of that RMB 500,000 from

T; and, by the same token, only T as the obligor (the debtor) has to fulfil his obligation of repaying G.

This illustrates the main difference between a property right under the law of property (i.e. under the Property Rights Law) and the obligee’s right under the law of obligations.

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The structure of the Property Rights Law

In March 2007, the National People’s Congress passed the Property Rights Law, which became effective in China on 1 October 2007.1

The Property Rights Law comprises five parts. General provisions are contained in Part 1, and specific provisions in Parts 2 to 5.

Part 1, ‘General provisions,’ includes the following topics: cardinal principles; the creation, modification, transfer and termination of property rights (registration of immovable property, delivery of movable property, and other rules); and the protection of property rights. The rules derived from the general provisions contained in Part 1 apply to the specific provisions included in Parts 2 to 5.

The title of Part 2 is ‘Ownership,’ and it includes the following topics: general rules; state ownership, collective ownership and private ownership; ownership in a condominium; a neighbouring relationship; co-ownership; and special rules on acquiring ownership.

The title of Part 3 is ‘Usufructuary rights,’ and it includes the following topics: general rules; the right to use contracted farmland; the right to use land for construction purposes; the rural household’s right to use land for residential purposes; and easement.

The title of Part 4 is ‘Property rights relating to security,’ and it includes the following topics: general rules; mortgages (ordinary mortgages and maximum mortgages); pledges (pledges of movable property and pledges of right); and liens.

The title of Part 5 is ‘Possession,’ which refers to the situation in which a property (either immovable or movable) is physically kept by a person who temporarily or permanently controls it.

1A Chinese version of the Property Rights Law can be found at: http://www.gov.cn/flfg/2007-

03/19/content_554452.htm. There is no official English version of the Property Rights Law at present. English translations can be found in various sources, where the translations differ. The author uses his own English translation in this book.

The English translation at the following website can also be used as a reference: http://www

.lehmanlaw.com/fileadmin/lehmanlaw_com/laws___regulations/Propoerty_Rights_Law_of_the_

PRC__LLX__03162007.pdf.

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Under Article 2, paragraph 1, the Property Rights Law positions itself as a set of legal regulations governing the ‘attribution and utilization of property.’ The attribution of property, which is established by the ownership of property, is the core, based on which the utilization of property relies on some other kinds of property rights like usufructuary rights and property rights relating to security (in connection with mortgages, pledges or liens).

While ownership, usufructuary rights and property rights relating to security all fall within the scope of property rights, possession (as the main theme in Part 5 of the Property Rights Law) is not a property right, but refers to a situation in which a property is physically occupied by a person, which is a status that protects against any unauthorized or illegitimate occupancy of that property.2

The passage of the Property Rights Law

There was fierce debate in China about whether the Property Rights Law was needed. It took over 13 years from the first draft to final ratification for the law to be passed, longer than for any other law in China, and drafts were deliberated at the Standing Committee of the National People’s Congress and the National People’s Congress eight times in total (Wei 2008, 491–92).

The official view in China on the promulgation of the law can be identified in the following extract from the speech ‘Explanation on China’s Draft Property Rights Law’ delivered by Wang Zhaoguo, vice-chairman of the Standing Committee of the National People’s Congress, at the Fifth Session of the Tenth National People’s Congress in 2007 (Xinhua 2007b):

The property law is a basic civil law that serves to regulate property relationships and adjust civil relationships stemming from attribution and the use of things, and it involves defining the property of the State, the collective, individual and other obligees and protecting property.

2By Article 245 of the Property Rights Law, where the legitimately possessed property (either immovable or movable property) is illegally seized or impaired, the possessor will be entitled to claim for the return of the property within one year after the seizure, or for the elimination of the impairment; and will be eligible to seek compensation for any loss incurred due to such seizure or impairment.

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China’s General Principles of the Civil Law, Land Administration Law, Law on the Administration of the Urban Real Estate, Law on Land Contract in Rural Areas, Guarantee Law, etc., include not a few provisions on property, which have played an important role in economic and social development. As the reform deepens, the openingup extends and the socialist economy, politics, culture and society moves forward, in order to meet the requirements of materializing in an all-round way the scientific concept of development and building of a socialist harmonious society, it is necessary to enact a property law, in accordance with the Constitution and on the basis of experience gained through practice, to stipulate for questions of a general character in the property system and questions in real life calling for urgent regulation, thus further defining the attribution of things to avoid disputes, bring into full play the usefulness of things, protect the property of the obligees and improve the Chinese-style socialist property system.

Enacting the property law is necessitated by the need to uphold the basic socialist economic system. Keeping public ownership dominant and having the economic sectors of diverse forms of ownership develop side- by-side constitute the basic socialist economic system of the State in the primary stage of socialism. Enactment of the property law will serve to define the scope of State-owned property and collective-owned property and the exercise of State ownership and collective ownership and strengthen protection of State-owned and collective-owned property, and will be conducive to consolidating and developing the economic sector of public ownership; and it will serve to define the scope of private property and protect private property in accordance with law, which will be conducive to encouraging, supporting and guiding the development of the economic sector of non-public ownership.

Enacting the property law is necessitated by the need to regulate the order of the socialist market economy. Clear-cut definition of property and fair competition are the basic requirements for developing the socialist market economy. Enactment of the property law will serve to confirm the attribution of things, specify the contents of ownership.

Usufruct and security rights, ensure the equal legal status of the various market subjects and their right to development and protect the property of the obligees in accordance with law — all this will play an important role in developing the socialist market economy.

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Enacting the property law is necessitated by the need to safeguard the immediate interests of the people. As the reform and opening-up and the economy develop, people’s living standards have improved in general, and they urgently require effective protection of their own lawful property accumulated through hard work, of the right to land contractual management they enjoy in accordance with law, and of their other lawful rights and interests. Enactment of the property law will serve to define and protect private ownership, condominium right, right to land contractual management and house-site-use right, for the purpose of protecting the immediate interests of the people, stimulating their vigour to create wealth and promoting social harmony.

Enacting the property law is necessitated by the goal of establishing a Chinese-style socialist legal system by 2010. Property law is an important component part of the civil code, playing the role of a prop in the Chinese-style socialist legal system. Enactment of the property law provides an important step taken within the term of the current National People’s Congress for giving a basic shape to the Chinese-style socialist legal system.

Wang Zhaoguo’s speech was delivered just before the law was to be submitted to the National People’s Congress for final deliberation and voting at that session. The speech reveals legislators’ desire to draft an official piece of legislation titled the ‘property law’ as a crucial step in improving the national economic system by making it more responsive to the rapidly changing domestic and international environments.

In this connection, the Property Rights Law is supposed to cover a range of property-related matters, concentrating on property ownership and utilization, with a view to protecting the property rights of all civil subjects on a level playing field and galvanizing people’s creativity with a more transparent regime for assuring property rights.

It is in this context that the Property Rights Law was finally passed at that session of the National People’s Congress.

A legal framework for the protection of property was in fact already in place prior to the promulgation of the Property Rights Law, though not in the form

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of a single statute.3 The prevailing Constitution (promulgated in 1982, with the latest revisions made in 2004) and the GPCL (enacted in 1986) both contain provisions which can be used as general guidelines for understanding the key substance embodied in a legal framework for the protection of property.

The protection of property under the Constitutional Law

The Constitutional Law stipulates that China is ‘a socialist country under the leadership of the working class on the basis of an alliance between workers and peasants, implementing the people’s democratic dictatorship’ (Article 1, paragraph 1). It further provides in Article 1, paragraph 2 that the socialist system is China’s basic system.

It is under this kind of political system that the Constitution provides overarching direction on important property-related issues such as the essence of China’s socialist economic system, specific types of economy in terms of ownership characteristics, ownership of land and natural resources, protection of public and private property, etc.

The essence of China’s socialist economic system

Under Article 6, paragraph 1 of the Constitutional Law, the essence of China’s socialist economic system is described as ‘socialist public ownership of the means of production’ which serves as ‘the basis of a socialist economic system’; and two types of such socialist public ownership are mentioned: ‘all people’s ownership’ and ‘collective ownership by labourers.’

According to Article 7 of the Constitutional Law, the term ‘all people’s ownership’ has the same meaning as ‘state ownership,’ and economic activities carried out by organizations under state ownership occupy a dominant position in China’s national economy.

3Jiang Ping of China University of Political Science and Law (whose views are presented in Zeng, Xia and Zhang 2007) has stated that ‘the Property Rights Law is not the sole statute relating to China’s property system’; ‘it is tailored to protect rights over visible property, and does not mention the protection of rights over other kinds of property such as the protection of the obligee’s right, intellectual property rights, or the shareholders’ right’; ‘what the Property Rights Law says is not totally new vis-à-vis other enactments preceding the Property Rights Law.’

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Another type of public ownership is ‘collective ownership by labourers’ (also simply known as ‘collective ownership’), which applies to organizations of such nature in both rural and urban areas. Hence, economic organizations in collective ownership are called ‘economic organizations under rural collective ownership by labourers’ or ‘economic organizations under urban collective ownership by labourers’ respectively.

By Article 8, paragraph 1, the Constitutional Law views the economic activities generated by means of cooperatives in rural areas in connection with ‘production, sale, credit, consumption, etc.’ as falling into the domain of economic activities carried out by economic organizations under the rural collective ownership by labourers. Under the same paragraph, a member of such organization (i.e. a peasant) can utilize the land distributed to him for his own production and profit-making purposes based on a contract made between the organization and the member for using the distributed land.

Under Article 8, paragraph 2, the economic activities generated by means of cooperatives in urban areas in the fields of ‘handicraft, manufacturing, construction, transportation, trade, services, etc.’ are included in the economic activities carried out by economic organizations under urban collective ownership by labourers.

Apart from earmarking state ownership and collective ownership by labourers as the two constituents of socialist public ownership, the Constitutional Law also indicates the legitimacy of non-public ownership that is allowed to coexist with socialist public ownership under China’s socialist economic system. The economic activities generated from economic organizations under nonpublic ownership (e.g. private ownership) are asserted to be ‘an important constituent of the socialist market economy’ (Article 11, paragraph 1).

While economic activities carried out by state-owned organizations (i.e. under all people’s ownership) are supposed to play the most influential role in the

Chinese economy, under Article 8, paragraph 3 and Article 11, paragraph 2, the legitimate rights and interests of economic organizations under rural and urban collective ownership by labourers as well as under private ownership are also protected by the law.

With various kinds of property ownership available, China’s basic economic system is portrayed by the Constitutional Law (Article 6, paragraph 2) as

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a regime where public ownership is in the leading position and other kinds of property ownership of a non-public nature are allowed to exist alongside public ownership.

Ownership of land and ownership of natural resources

There are two kinds of land ownership under the Constitutional Law: state ownership and collective ownership. Under Article 10, paragraph 1, land in urban areas is owned by the state. According to Article 10, paragraph 2, land in rural areas or located on the outskirts of cities is owned by collectives, except in circumstances where the law specifically prescribes that such land is owned by the state. Land in China may be subject to expropriation or requisition by the state if the state needs to do so in the public interest; and if this happens, the state will make compensation for carrying out such expropriation or requisition (Article 10, paragraph 3). In light of Article 10, paragraph 4, land ownership in China is not allowed to be assigned from its current owner (i.e. the state or collectives) to any person or entity other than the state or collectives; but land use rights can be transferred so that persons or entities other than the state or collectives can acquire land use rights.

Ownership of natural resources under the Constitutional Law is also classified as state ownership or collective ownership. Pursuant to Article 9, paragraph 1, natural resources such as mineral reserves, water, forests, mountains, prairies, wilderness, shoals, etc. are owned by the state; but forests, mountains, wilderness, shoals, etc. that are prescribed by the law as belonging to collectives are owned by collectives.

Protection of public and private property

The Constitutional Law renders protection to public property owned by the state or collectives as well as to private property owned by individuals.

The law emphasizes the importance of protecting public property against infringement. Article 12 stipulates: ‘The socialist public property is sacred and inviolable. The state protects socialist public property. No organization or individual is allowed to encroach on or damage the property that belongs to the state or collectives.’

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But Article 13, paragraphs 1 and 2 also make clear that private property legitimately owned by individuals is ‘inviolable,’ and individuals are entitled to the state’s protection of their private property and of their inheritance of such private property. However, according to Article 13, paragraph 3, the state may expropriate or requisition private property if it needs to do so in the public interest; if this happens, the state will make compensation to victims who suffer from such expropriation or requisition.

The protection of property under the GPCL

The GPCL Chapter 5 ‘Civil rights,’ Section 1 ‘Property ownership and related property rights’ contains some provisions on the protection of property owned by the state, collectives and individuals.

A product of the 1980s, the GPCL has not been amended since its promulgation, unlike the Constitutional Law, which was revised in 2004. The

GPCL is therefore full of terminology that reflects that era. Although some of this terminology may appear outdated and no longer of great relevance to life today, the principles established under the GPCL are still useful and continue to direct individuals and organizations of various kinds on safeguarding their legitimate rights and on assuming corresponding obligations under the framework of civil law.

Property ownership

The GPCL, first of all, states what ‘property ownership’means, defining it as ‘a property owner’s right to possess, use, gain from and dispose of his property’ (Article 71).

It further states under Article 72, paragraph 1 that property ownership shall not be acquired in any manner that contravenes the law. Moreover, Article 72, paragraph 2 provides that: ‘For property ownership obtained in accordance with a contract or in other legitimate fashions, completion of the property’s acquisition is counted from the time when the property concerned is delivered, unless the law provides otherwise or the relevant parties are in agreement in a different way.’

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The protection of property owned by the state, collectives, individuals and social organizations

In comparison with the Constitutional Law, the protection of property owned by the state, collectives and individuals is elaborated on in a more descriptive way under the GPCL.

Regarding property owned by the state, Article 73 provides: ‘The property owned by the state belongs to all the people. It is sacred and inviolable against any encroachment, plunderage, misappropriation, unauthorized retention, or sabotage by organizations or individuals.’

As to the property owned by collectives, Article 74, paragraph 1 states: ‘The property owned by collectives of labourers belongs to the labourers collectively, and such property may include (1) land, forests, mountains, prairies, wilderness, etc. which belong to collectives according to what the law stipulates; (2) any property that belongs to collective economic organizations;

(3) buildings, reservoirs, farm irrigation facilities, and facilities that are owned by collectives and used for the purpose of carrying out activities in the fields of education, science, culture, healthcare, sports, etc.; and (4) any other kinds of property owned by collectives.’ Article 74, paragraph 3 provides: ‘No organization or individual is allowed to encroach upon, plunder, retain without authorization, sabotage, or illegitimately seize, detain, freeze or confiscate any property owned by collectives.’

Apart from the protection of property owned by the state and collectives, the GPCL also makes clear under Article 75, paragraph 1 that the personal assets of citizens are also protected by the law. It enumerates such assets as including ‘citizens’ legitimate income, housing, savings, daily-use items, cultural relics, books and reading materials, trees, livestock, and the means of production allowed by the law to be owned by individuals, as well as any other legitimate assets.’ Article 75, paragraph 2 further provides: ‘No organization or individual is allowed to encroach upon, plunder, retain without authorization, sabotage, or illegitimately seize, detain, freeze or confiscate any property that is legitimately owned by individuals.’

There are few words in the GPCL about the protection of property owned by social organizations. Article 77 has a single sentence: ‘Legitimate assets

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belonging to social organizations (including religious organizations) are protected by the law.’

Ownership of land

On the basis of the Constitutional Law, the GPCL points out in Article 80, paragraph 1 that organizations in all people’s ownership or collective ownership are eligible to use the land owned by the state, and their such use of the state’s land and any gain from it are protected by the law. However, that same paragraph points out that users of the state’s land have to honour the obligations of ‘managing, protecting and reasonably utilizing the land.’ In light of Article 80, paragraph 3, land ownership is ‘not allowed to be bought or sold, rented out, mortgaged, or illegitimately transferred through other means.’

Regarding rural land, the GPCL indicates under Article 74, paragraph 2 that while such land is in theory owned by all peasants collectively in each village, it is in practice controlled and administered by rural collective organizations at the village level or by villagers’ committees (a kind of self-regulating organization of villagers in China’s rural areas). By Article 80, paragraph 2, individual peasants have the right to enter into contracts with rural collectives for using the land owned by rural collectives or using the land that is owned by the state but is under the control of rural collectives.

Ownership of natural resources

Following the Constitutional Law, the GPCL states in Article 81, paragraph 1 that organizations in all people’s ownership or collective ownership are entitled to use natural resources such as forests, mountains, prairies, wilderness, shoals, water, etc. that are owned by the state; their use and any gain from it are protected by the law. Nonetheless, in the course of using natural resources, users will have to satisfy their obligations of ‘managing, protecting and reasonably utilizing the natural resources concerned,’ according to Article 81, paragraph 1.

Pursuant to Article 81, paragraph 3, individuals and collectives may by establishing contractual relationships enable themselves to use the forests, mountains, prairies, wilderness, shoals, and water that are owned

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by collectives or that are owned by the state but are under the control of collectives.

Article 81, paragraph 4 indicates that mineral reserves and water that are owned by the state, as well as those forests, mountains, wilderness and shoals that are prescribed by the law as belonging to collectives are ‘not allowed to be bought or sold, rented out, mortgaged, or illegitimately transferred through other means.’

Ownership of buried/hidden property

According to Article 79, paragraph 1 of the GPCL, any buried/hidden property the owner of which cannot be identified will be counted as belonging to the state.

Relations between neighbours

Whether people live in cities, towns or the remote countryside, they will have neighbours. The GPCL under Article 83 advocates a spirit of cooperation and requires provision of mutual convenience in neighbourhood relations when tackling practical problems such as the supply of water, drainage, passage, ventilation, lighting, etc.

Also under Article 83, if any party is causing hindrances or damage to a neighbour, he must stop doing so, remove such hindrances, and compensate his neighbour for any injury caused.

The Property Rights Law: An attempt to address practical issues

The above discussion demonstrates that the Constitutional Law, by revealing the essentials of a socialist economic system, provides the basic principles that are the foundation of China’s property regime. The GPCL prescribes rules in a more descriptive way relating to the substance contained in the regime.

Apart from the Constitutional Law and the GPCL, there are other laws predating the Property Rights Law which govern property rights, though the term ‘property rights’ does not appear in them. These laws, which created a series of technical directives in special fields, include the Guarantee Law of

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19954, the Land Administration Law of 1986 (most recently revised in 2004)5, the Urban Real Estate Administration Law of 1994 (revised in 2007)6, the Farmland Contracting Law of 20027, etc.

The legal landscape relating to the protection of property rights before the formation of the Property Rights Law thus comprises a collection of legal guidelines introduced under different laws rather than a single statute tailored to address property rights.

One might raise the following questions: Does China really need the Property Rights Law in addition to those relevant laws already in force? What special purposes is the Property Rights Law supposed to serve against the backdrop of current social and economic vagaries in China?

Firstly, in tune with the Continental civil law tradition, a property rights law is a key building block in a civil law regime. In this sense, China’s Property Rights Law is an important step towards developing a Chinese civil law system faithful to the conventional civil law paradigm.

Secondly, China had flourished economically since its reform and openingup initiatives in the late 1970s. Asset ownership and distribution has changed tremendously in the country. A failure to keep pace with such change left many legal vacuums, and explicit definitions, interpretations and directions were lacking for many issues, in particular regarding the ownership and utilization of property.

4A Chinese version of the Guarantee Law can be found at: http://news.xinhuanet.com/legal/200301/21/content_700658.htm. There is no official English version of the Guarantee Law. A recommended English translation can be found at: http://np.china-embassy.org/eng/EconomyTrade/ zchfl/t167703.htm.

5A Chinese version of the Land Administration Law can be found at: http://news.xinhuanet.com/ zhengfu/2004-08/30/content_1925451.htm. There is no official English version of the Land Administration Law. A recommended English translation can be found at: http://www.fdi.gov.cn/ pub/FDI_EN/Laws/GeneralLawsandRegulations/BasicLaws/P020060620320252818532.pdf. The author uses his own English translation in this book.

6A Chinese version of the Urban Real Estate Administration Law can be found at: http://house. people.com.cn/GB/6195717.html. There is no official English version of the Urban Real Estate

Administration Law. A recommended English translation can be found at: http://www.npc.gov.cn/ englishnpc/Law/2009-02/20/content_1471592.htm.

7A Chinese version of the Farmland Contracting Law can be found at: http://www.china.com.cn/ chinese/PI-c/196651.htm. There is no official English version of the Farmland Contracting Law.

A recommended English translation can be found at: http://www.gov.cn/english/2005-10/09/ content_179389.htm. The author uses his own English translation in this book.

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The following examples are cited to illustrate some of these uncertainties:

•How can the legitimate interests of people who are affected by land expropriation, housing demolition and relocation be safeguarded against infringement arising from the arbitrary exercise of public power?

•Considering that the tenure of the right to use land for construction purposes in urban areas is only 70 years, will a current land user lose his entitlement to use the land 70 years later? Say a person has bought a house in Shanghai. Will that person no longer be able to occupy the house after the 70-year tenure expires?

•Where a peasant has made a contract with the rural collective in his locality for using a piece of collectively owned farmland to carry out his own agricultural production, after such contract comes to an end, will he be able to continue using the farmland, or will he have to surrender it to the collective with a result that he will have no land to support his family’s livelihood?

•More and more urban people are living in high-rise condominiums. Do those homeowners also have ownership over the public facilities in the condominiums, e.g. passageways, lawns, elevators and parking lots?

•In the waves of mergers and acquisitions involving state-owned enterprises, how can it be ensured that assets of those enterprises will not be lost or illegally seized by senior management?

The Property Rights Law attempts to address these and other practical issues.

The three cardinal principles of the Property Rights Law

Generally speaking, the Property Rights Law is designed to deal with the formation and alteration of property rights in connection with immovable and movable property. Three cardinal principles are advocated in the law, namely, the principle of the equal protection of property rights, the principle of the legality of property rights, and the principle of public notice and the goodfaith acquisition of property rights.

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The equal protection of property rights

The principle of the equal protection of property rights has two layers of connotation.

Firstly, property rights are protected under the law.

Some general principles on the protection of property rights are set forth in Chapter 3 of the Property Rights Law as follows.

Where there is a disagreement over the attribution or content of a property right, the relevant parties are entitled to ask to have their rights verified (Article 33).

In the case of unauthorized possession of immovable or movable property, the right holder is entitled to ask the illegal possessor to return the possessed property to him (Article 34).

Where a property right is (or is likely to be) encumbered, the right holder is entitled to ask to have the encumbrance removed or have any danger cleared (Article 35).

If the immovable or movable property is damaged by somebody else, its right holder is entitled to ask to have the damaged property mended, recreated, replaced or restituted (Article 36).

In the event of violating a property right leading to damage caused to the right holder, the right holder is entitled to claim compensation for the damage against the wrongdoer or to ask the wrongdoer to bear other civil liabilities (Article 37).

Where a property right is injured, apart from bearing civil liability, the wrongdoer may also have to assume administrative liability if his act has been in violation of any administrative regulation, or he may face a criminal charge if his wrongdoing has constituted a crime (Article 38, paragraph 2).

By Article 32, a property right holder, if his property right is violated, may choose to have his grievance redressed by means of ‘reconciliation, mediation, arbitration or litigation.’

The second layer of connotation of the principle of the equal protection of property rights is that property rights held by different civil subjects (e.g. the state, collectives and individuals) are equally protected under the law.

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The basis of this theory is found in Articles 3 and 4.

Article 3 provides that: ‘In the preliminary development stage of socialism, the state adheres to operating under a basic economic system where the economy led by public ownership is dominant and the economies taking diversified forms of ownership jointly grow. The state consolidates and develops the economy led by public ownership. And it also encourages, supports and directs the economies controlled under non-public ownership. Running a socialist market economy, the state safeguards the equalitarian legal status and right of development of all players in the market.’

Under Article 4, property rights of the state, collectives and individuals are protected by the law, and no organization or person is allowed to violate such property rights.

Articles 3 and 4 can be easily construed to mean that the property rights of the state, collectives and individuals are protected equally, and no one is entitled to privileged protection.

However, such equality as depicted under the principle of the equal protection of property rights does not appear to unerringly dovetail with the conventional socialist dogma that stresses the uncompromised supremacy of the rights and interests of the state and collectives, to which individuals’ rights and interests must succumb. The inviolability of socialist public assets are articulated in both the Constitutional Law and the GPCL, seemingly suggesting the uneven entitlement of the state, collectives and individuals to asset protection under the law. This has sparked fierce debate on the propriety of constructing and applying the Property Rights Law in socialist China.8

The legality of property rights

Article 5 of the Property Rights Law provides that: ‘The types and contents of property rights are laid out in the law.’

Article 5 illustrates the essence of the principle of the legality of property rights: the types and contents of property rights are prescribed by law and are

8The most renowned contender is Gong Xiantian of Peking University. Gong’s key arguments are covered in Sui (2007).

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not allowed to be created by means of reaching an agreement between any parties based on their willingness and preference.

The conventional civil law doctrine of private law autonomy contradicts the principle of the legality of property rights, and cannot apply to governing property rights. Unlike making contracts, which fully respects the free will of the contracting parties in terms of who enters into the contracts, the method of making the contracts and the adoption of contract terms, the types of property rights and their contents must strictly follow what the law sets out, so they are non-negotiable and non-alterable.

That is to say, not only the types of property rights are fixed as prescribed by the law, so are the contents of property rights, i.e. those in connection with the creation, modification, transfer and termination of property rights.

Of course, in different societies with different political, economic and cultural characteristics, the types and contents of property rights prescribed by law may differ.

Take the following example. During the Cultural Revolution in China, spanning from 1966 to 1976, houses as private assets owned by individuals were viewed as a gain from exploitation of the proletariat by the bourgeoisie. Therefore, private houses owned by individuals were a symbol of class exploitation. Mr Liu, a retired entrepreneur, is an owner of ten large private houses in Beijing. In 1967, under family pressure, he donated all these houses to the government to show that he was completely parting with private assets and joining the proletariat. The government subsequently rented out the houses out as public assets. With the end of the Cultural Revolution and the country’s return to normal political and social life, the government started to return private houses which were confiscated or unwillingly donated to the government during the Cultural Revolution to their original owners. The government gave back Mr Liu’s houses to his only daughter, Miss Liu (both Mr Liu and his wife were deceased). The houses at that time were fully occupied by public housing tenants who had lived there for a long time. Most of them chose to move out immediately, or enter into lease agreements with Miss Liu for their continued occupancy. However, one occupant, Mrs Huang, who has lived there as a public housing tenant for more than thirty years, refused to move out or make a lease agreement with Miss Liu. She argues that as an unemployed old lady she has nowhere to go and no money to rent a

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dwelling. This deadlock is yet to be broken today. So one may wonder if there is any way that Miss Liu’s property right over the house occupied by Mrs Huang can be effectively enforced. In fact, Miss Liu’s ownership of the house is protected under the law. Mrs Huang’s occupancy of the house as a public housing tenant was formed in a special historical circumstance, which could not negate Miss Liu’s entitlement to having the house returned to her. Mrs Huang’s continued occupancy violates Miss Liu’s legitimate property right over the house. Mrs Huang should move out or enter into a lease agreement with Miss Liu. Miss Liu may consider taking court action in order to recover the house from Mrs Huang. As an unemployed old lady, Mrs Huang may have nowhere to go or no money to rent a house. However, tackling this problem, which ought to be the responsibility of the government’s social welfare department, should not constitute a bar to Miss Liu’s enjoyment and realization of her property right over the house.

Public notice and the good-faith acquisition of property rights

The principle of public notice and the good-faith acquisition of property rights can be further divided into two separable but co-related doctrines: the principle of public notice of property rights and the principle of the good-faith acquisition of property rights.

The principle of public notice of property rights

Under the principle of public notice of property rights, the formation or alteration of property rights (such as the creation, modification, transfer or termination of property rights) must be made known to the public in a specific manner as prescribed by the law, to the effect that anyone can be assumed to have noticed such formation or alteration of the property rights before becoming involved in any relevant transaction.

Article 6 of the Property Rights Law contains the key information relevant to the public notice of property rights. Pursuant to Article 6, the creation, modification, transfer or termination of property rights over immovable property must be registered in order to take effect, whereas the creation or transfer of property rights over movable property can be deemed as coming into force once delivery of the property concerned is made and it does not

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need to be registered. In practice, delivery of movable property takes the form of possession of that movable property.

In light of Article 16, the government registration authority maintains a register of immovable property as evidence of the attribution and content of a property right. That is to say, the formation or alteration of a property right of immovable property (e.g. a house), but not movable property (e.g. a book), can be identified by checking this register at the registry.

The formation or alteration of a property right over movable property is supposed to be made known to the public through physical delivery of that property, based on which the public takes it that the property right belongs to the current possessor of that property.

The principle of the good-faith acquisition of property rights

Under the principle of the good-faith acquisition of property rights, where a person transacts in order to acquire a property right by relying on the property right’s open status, if such open status is not a genuine representation, given that he acts in good faith (i.e. he does not know or has no reason to know that such open status is not genuine), the transaction completed will be taken as valid and binding, and he can successfully acquire the property right as a result of that transaction.

The principle of the good-faith acquisition of property rights is expressed in Article 106, paragraphs 1 and 2 of the Property Rights Law.

By Article 106, paragraph 1, where a person who has no right to transfer the immovable or movable property transfers the property in question to another person, the property’s right holder is entitled to have the property returned to him; but unless the law provides otherwise, the transferee can acquire ownership of the immovable or movable property transferred if the transfer can meet the following conditions: (1) the transferee acts in good faith;

(2) the transfer price is reasonable; (3) the immovable or movable property after being transferred has been registered if such registration is required by the law, or has been delivered to the transferee if no such registration is required by the law.

Article 106, paragraph 2 further states that where the transferee acquires ownership of the property as described in the preceding paragraph (i.e.

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Article 106, paragraph 1), the property’s original right holder is entitled to claim compensation for the loss against the transferor who has no right to make such transfer.

Applying the principle of the good-faith acquisition of property rights aims at ensuring that the interests of a bona fide purchaser can be fairly protected, so even though he transacts with a seller who is not entitled to sell what he buys, he will not be deprived of his ownership over the property which he obtains in good faith.

For example, T, who is domiciled overseas, leased his house in Shanghai to G. By bribing an officer in charge of the government’s register on real estate transactions, G discreetly had the house owner’s name recorded at the register changed from T to G, and then sold the house to C. C knew nothing about who the true house owner was, and transacted with G relying on the information provided by the register. In this circumstance, if the house was sold to C at a reasonable price and registration of transferring ownership in the house to C was completed, C as a bona fide purchaser (i.e. a person who purchased the house in good faith) could successfully acquire ownership of the house. His entitlement to owning T’s house would not be denied under the principle of the good-faith acquisition of property rights.

However, the principle of the good-faith acquisition of property rights will not apply if that person does not act in good faith in the course of acquiring the property right. In the above example, if before purchasing the house from G, C clearly understood that G was not the true owner of the house and had no right to sell it, then the transaction between G and C would not be allowed to take effect; so C eventually would not be able to become owner of the house through this deal.

Here is another example. T and G entered into a contract with the following terms: ‘T sells his house to G for RMB 300,000; G pays T RMB 150,000 within a week after the contract is made; T delivers the house to G on the day when he receives this RMB 150,000; the balance is to be paid to T by G within two months after the house is delivered to G.’ Strictly following the contract terms, G paid RMB 150,000 to T, and T delivered the house to G, both on schedule. However, they did not carry out a pre-notice registration at the government registration authority in order that any potential buyer would notice the property right over this house. After G moved into the house,

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C told T that he was willing to buy the house for RMB 350,000. Thus, T and C entered into a contract, according to which T sold the house to C for RMB 350,000. On the same day, C made a full payment to T. They also completed the registration of this transaction at the government registration authority. As a consequence, C was registered as the new owner of the house. C showed to G an official registration paper proving C’s ownership over the house. He asked G to move out of the house within two weeks. G was dumbfounded. He had no doubt that he had legitimately become the owner of the house. G thought that C’s request was ridiculous. How would this problem be resolved? One has to remember that the transfer of a property right over immovable property (e.g. a house) has to be registered in order to take effect.

Entering into a contract and fulfilling the required contractual obligations is not enough. In the current circumstances, C successfully acquired ownership of the house by registering his deal with T. G should move out, although he could recover the RMB 150,000 he paid to T, and make a compensation claim against T for any loss incurred due to T’s breach of the contract.

The Property Rights Law: No panacea

The promulgation of the Property Rights Law was an important move in China’s historical and social evolution. The political philosophy pursued by Sun Yat-sen, the forerunner of China’s democratic revolution, was known as the Three Principles of the People: People’s Nationalism, People’s Democracy and People’s Livelihood. While national independence and a decent livelihood for people have been achieved, the goal of setting greater store by people’s legitimate civil rights on the basis of democracy and justice has not yet been attained. The promulgation of the Property Rights Law is a bold step in this direction. Adding this distinctive new element to the Chinese civil law regime can contribute to the development of China’s general legal system.

However, the Property Rights Law is not a panacea for all problems. It sets out a series of legal directions on property ownership and utilization in more detail than the Constitutional Law or the GPCL do, and is a single statute exclusively focusing on property rights. However, it still lacks the depth and technical fineness required to facilitate effective implementation of the legal principles and regulations prescribed by it. Moreover, it is no substitute for the more technical laws already in force that are of relevance to property rights.

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Hence, unless a series of detailed implementation rules for the Property Rights Law is issued, the role of the law may become less significant. Moreover, even when such rules become available, whether they can ultimately be enforced along with the provisions set out in the Property Rights Law with the expected effect is not an issue that the Property Rights Law itself can handle. This is a problem that often needs to be confronted when enforcing laws in China.

The formation and alteration of property rights

In many textbooks on the Property Rights Law authored by Chinese scholars, a term in Chinese which means literally ‘a change in property rights’ is used as a chapter title (e.g. Liang and Chen 2007, 66–105; L M Wang, Yin and Cheng 2007b, 70–135). In fact, the term is more accurately interpreted as the ‘formation and alteration of property rights,’ which denotes the creation, modification, transfer and termination of property rights.

The creation of a property right refers to bringing into existence a property right over immovable or movable property that did not exist before. For example, with a mortgage established over a house which is used as a secured asset for a loan application, the property right of the lending bank is created. In the event that the borrower fails to pay back the loan, the lending bank is entitled to exercise its property right to have its loan repaid out of the proceeds from selling the mortgaged house.

The modification of a property right refers to making a change to the contents of a property right in existence with the right holder remaining unchanged. For example, the tenure of an acquired land use right may need to be extended in response to a change in circumstances.

The transfer of a property right denotes having a property right assigned from the original property right holder to another person. For example, A sells his house to B, leading to ownership of A’s house being transferred to B.

The termination of a property right is the cessation of an existing property right. For example, with the tenure of a land use right coming to an end, the property right concerned (i.e. the land use right) ceases to exist.

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Key ingredients in the formation and alteration of property rights

On the surface, the formation and alteration of property rights are activated by the formation of a contract by relevant parties for the purpose of creating, modifying, transferring or terminating a property right. However, the formation or alteration of the property right is actually only accomplished when registration is completed for the formation or alteration of the property right in the case of immovable property, or when the property itself is delivered in the case of movable property. In other words, there are two key ingredients in the formation and alteration of a property right: making a contract and giving public notice.

These two key ingredients constitute the main substance embodied in the principle of distinction. In accordance with this principle, establishing a contractual relationship, which is viewed as a juristic act under the law of obligations, ought to be distinguished from the effect of the formation or alteration of property rights as prescribed under the Property Rights Law, although their final goal is the same, i.e. to realize effective formation or alteration of property rights.

In commerce, for example, a purchase or sale contract must be entered into to buy or sell a house. But this merely opens the way to a possible change in the house’s ownership. Only after such transaction is appropriately registered at the government registration authority will the house’s ownership be effectively transferred from the seller to the buyer. Similarly, merely entering into a mortgage contract will not be sufficient for a mortgage to take effect.

To take effect, the mortgage deal must subsequently be registered at the government registration authority.

On the other hand, under the principle of distinction, failing to give proper public notice will not affect the validity of the contract. The contractual relationship established will not be denied, and non-performance or unsatisfactory performance of the contract will lead to assumption of liability for breach of contract in an ordinary sense.

The principle of distinction has its basis in the provisions of the Property Rights Law.

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Article 14 states: ‘The creation, modification, transfer or termination of a property right over immovable property, if it is required by the law to be registered, will start to take effect after it has been documented in the register of immovable property.’

Article 15 provides: ‘A contract made between the relevant parties for creating, modifying, transferring or terminating a property right over immovable property will come into force on its formation, unless the law provides otherwise or the relevant parties have agreed differently; the contract’s validity will not be affected if the required registration is not made.’

Furthermore, Article 23 provides that the creation or transfer of a property right over movable property will start to take effect on such property’s delivery.

Methods for the formation and alteration of property rights

In Chapter 2, a juristic act was conceptualized as an act of a civil subject that gives rise to the creation, variation or termination of his civil rights and civil obligations. The formation and alteration of property rights in China generally take place in two ways: based on juristic acts or not based on juristic acts.

The formation and alteration of property rights based on juristic acts

The most common method used for the formation or alteration of property rights is that based on juristic acts. In this method, the prerequisite for the formation or alteration of property rights is the carrying out of a relevant juristic act. An act of entering into a contract aimed at creating, modifying, transferring or terminating a property right is a typical example of such a juristic act.

However, successful completion of the process of formation or alteration of a property right requires subsequently giving public notice about such juristic act, as illustrated by registration of the act in the case of immovable property or delivery of the property in the case of movable property, so that the formation or alteration of a property right can come into force.

There is an exception to this rule: the formation or alteration of a property right in connection with the right to use contracted farmland, an easement

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or mortgaged movable property does not need to satisfy the requirement of giving public notice; merely appropriately performing a relevant juristic act

(e.g. entering into a contract) will suffice for the formation or alteration of the property right to take effect. In this respect, according to the provisions of the Property Rights Law, the right to use contracted farmland is viewed as being created when the contract for creating such right comes into effect (Article 127, paragraph 1); an easement is viewed as being created when the contract for creating such easement becomes effective (Article 158); a property right over mortgaged movable property is viewed as being created when the contract for creating such mortgage comes into force (Article 188).

The formation and alteration of property rights not based on juristic acts

Another method used for the formation and alteration of property rights is that not based on a juristic act. This method is far less common than the method based on a juristic act.

Under the method not based on a juristic act, the process of the formation or alteration of a property right does not start from performing a juristic act. Instead, the formation or alteration of a property right is directly accomplished by the operation of the law. This usually happens when the formation or alteration of a property right is a result of following a decision made by the government, or a court’s judgment or an arbitral award.

There is no need to have the formation or alteration of property rights not based on juristic act made known to the public in order for it to take effect. However, if after the formation or alteration of a property right using this method is accomplished the property right is further altered, then the rule of giving public notice will apply to this further change, and public notice must be made by means of registration in the case of immovable property or delivery in the case of movable property.

The provisions contained in Section 3 of Chapter 2 of the Property Rights Law relate to the method of the formation and alteration of property rights not based on juristic acts.

According to Article 28, in the event that the creation, modification, transfer or termination of a property right is a result of following a court’s judgment,

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or an arbitral award or a decision made by the government for carrying out the expropriation of the property, the resultant formation or alteration of the property right will come into force when the court’s judgment or the arbitral award or the decision of the government on carrying out expropriation becomes effective (Article 28).

By Article 29, where a property right is acquired as a result of inheritance or bequeathal, such acquisition will become effective when the relevant inheritance or bequeathal comes into force.

Under Article 30, if a property right is established or extinguished as a consequence of carrying out legitimate house construction or dismantlement, the creation or termination of the property right will be deemed to be effective when such activity is accomplished.

Pursuant to Article 31, after a property right over immovable property is acquired in a way described in Articles 28 to 30, any further alteration of the property right will need to be registered; otherwise such further alteration cannot come into force.

For example, John Chen brought to court a dispute between him and Robert Wang on the ownership of a house, which according to the record at the government’s real estate registration authority belonged to Robert. Eventually, it was held by the court that the house belonged to John. Although at the time the judgment was issued the record at the government’s real estate registration authority had not been changed, this would not have any impact on the fact that John had already become the legal owner of the house. Based on this judgment, John is entitled to have the owner’s name changed from Robert Wang to his own name. However, before the record is updated, John is not in a position to sell the house to somebody else or apply for a loan secured by the house.

Public notice of the formation and alteration of property rights

As mentioned earlier, giving public notice of the formation or alteration of the property right for immovable property requires carrying out registration of the formation or alteration, while for movable property it requires delivery of the property.

Take the following example. In 1995, Grand Sunshine (a state-owned enterprise) purchased ten luxury flats from a real estate developer. It then

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offered to sell the flats to members of its senior management team at an unreasonably favourable price as part of their benefits package. Huang, then finance director of Grand Sunshine, bought such a flat. In the flat’s ownership certificate issued by the government registration authority, it is stated that

‘Huang is the owner of this flat and is entitled to sell, mortgage or bequeath the flat given that Grand Sunshine holds a pre-emptive right to buy it in the event that Huang sells it.’ In 2012, Huang was fired by Grand Sunshine due to misconduct in the course of employment. On the day Huang left Grand Sunshine, Grand Sunshine’s Head of Human Resources asked Huang to return his flat to Grand Sunshine on the ground that ‘as we are no longer in an employment relationship, you will not be eligible to continue occupying this flat.’ Would Huang be deprived of his ownership of the flat after being dismissed by Grand Sunshine? The answer is no. Huang legally acquired the flat’s ownership certificate; this indicates that the flat purchased has been properly registered at the government registration authority. The dismissal will have no impact on Huang’s ownership of the house.

The formation and alteration of property rights over immovable property

Immovable property (such as land or houses) is usually viewed as a highvalue asset. So any change made to the related property right has to be treated cautiously. Such prudence is evident in the Property Rights Law, which establishes a registration system for coping with the formation and alteration of property rights over immovable property. Any such formation or alteration must be registered to be legally recognized as coming into force.

In light of Article 9, paragraph 1 of the Property Rights Law, the creation, modification, transfer or termination of property rights over immovable property will be valid only after it is lawfully registered; it will not be valid if it is not registered.

According to Article 14 of the Property Rights Law, the creation, modification, transfer or termination of property rights over immovable property comes into force from the moment it is recorded in the register of immovable property. Here, the register of immovable property refers to a list of records maintained at the government registration authority, which under Article 16 is used as evidence of the attribution and content of property rights.

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For example, T sold his house to G. G thinks he is now owner of the house as he has made full payment to T. In fact, G is not correct, because the house’s ownership can only be officially transferred to G after the transaction between T and G is appropriately registered at the government registration authority.

There is an exception to the requirement that the formation or alteration of property rights over immovable property needs to be registered in order to come into force. The exception applies to the formation or alteration of property rights in connection with the right to use contracted farmland, an easement, or relating to the formation or alteration of property rights not based on a juristic act. Also, Article 9, paragraph 2 of the Property Rights Law provides that the state’s ownership of natural resources does not need to be registered.

Establishing a uniform registration system of immovable property

Article 10 of the Property Rights Law states the following: ‘Immovable property’s registration shall be carried out at the registration authority in charge of the place where the immovable property concerned is located. The state operates a uniform registration system. The law and administration regulations set out the scope of this uniform registration system, the registration authority, and the procedures for carrying out the registration.’

Article 10 obviously suggests an objective of running a uniform registration system of immovable property on a countrywide basis. However, it only establishes some general principles. The Property Rights Law does not include detailed implementation guidelines that could be relied on in the course of operating this uniform registration system.

•Registration authorities

In practice, the registration of immovable property at the present time is operated under the different regimes in China.

In terms of legal guidelines that govern the registration of immovable property, the laws promulgated prior to the enactment of the Property Rights Law, such as the Land Administration Law, the Urban Real Estate Administration Law, the Guarantee Law, etc., are also relevant;

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administrative rules and policies of various government departments at the ministerial level, e.g. the Ministry of Land and Resources and the former Ministry of Construction (now known as the Ministry of Housing and Urban-Rural Development), play an important role too.

At the operational level, the government departments responsible for land administration, real estate administration, forestry administration, and in the fields of the post office and railway, now each run their own registration systems that apply to the registration of the immovable property that belongs to the state-owned enterprises or administrative entities exclusively under their administrative control. This situation of multi-authority registration suggests it will be difficult to develop and run a uniform registration system at present. This is because establishing a single-authority registration framework would sacrifice the vested interests of those registration authorities who may benefit from current multi-authority registration.

Legislators must have been fully appreciative of the current difficulty in running a fully-fledged uniform registration system of immovable property. Therefore, a compromise is made under Article 246 allowing the formation of local regulations on the registration of immovable property that as tentative measures apply to local jurisdictions, before laws and administrative regulations can provide for detailed directions that apply to the whole country on the scope of a uniform registration system of immovable property, the registration authority, and the procedures for carrying out such registration.

Interestingly, the compromise made under Article 246 relates to the ‘formation of local regulations’ only. The Property Rights Law does not mention whether the prevailing framework of multi-authority registration should be abolished or retained.

•Registration documents

Under the Property Rights Law, the principal registration documents relating to the registration of immovable property include registers of immovable property and ownership certificates of immovable property.

By Article 16, registers of immovable property are maintained at the government registration authority evidencing ownership and the content

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of property rights over immovable property. They are a collection of records of registered property rights (e.g. ownership) over the immovable property geographically located within a certain region. They form part of the official archives that are open for public inspection and kept permanently.

Ownership certificates of immovable property are issued to the owners by the government registration authority. According to Article 17, such a certificate is a proof of ownership over immovable property; however, if any information shown in the certificate differs from the data entered into the register, what is recorded in the register will prevail, unless there is evidence proving that an error has been committed in the register.

•The way forward

Although it is unclear how long the current situation will continue, a way ahead might be plotted with reference to the directions established under the Property Rights Law.

Firstly, it is necessary to promulgate a statute exclusively on the registration of immovable property, accompanied by the formation of its detailed implementation rules. Such statute supported by detailed implementation rules will replace all relevant provisions contained in the prevailing laws, rules, regulations and policies, and constitute the sole component of legal guidelines on the registration of immovable property.

Secondly, the framework of multi-authority registration must be scrapped, giving way to a uniform registration system under a single registration authority. The court would be a good choice for taking on the role of this single registration authority (H C Zhu, ‘It should be the People’s Court ...’). A statutory government agency empowered with exclusive authority over the registration of immovable property is another option.

Thirdly, under a uniform registration system, ownership certificates of immovable property must also be uniform. It is difficult to generate such uniformity from the current framework of multi-authority registration under which ownership certificates can be fabricated differently in terms of style and content. This incongruity may seriously weaken the authoritativeness which ownership certificates should represent, and must be rectified by the operation of a uniform registration system.

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Correction of registered particulars

The Property Rights Law permits making a correction to any particular that is wrongly recorded in the register of immovable property.

According to Article 19, paragraph 1, an affected party who claims that a registered particular in the register of immovable property is erroneous can apply to the government registration authority for having the error corrected; if the right holder over the underlying property recorded in the register expresses his consent in writing to making such correction, or the claim can be proved to be true with evidence, then the government registration authority can go ahead with making the correction to that registered particular accordingly.

For example, Alan Wang and his wife, Betty Liu, are both high income professionals. They bought a house and jointly contributed to what they paid for the house, under an understanding that the house is their common property. Due to the negligence of a clerical officer at the government registration authority, Alan was registered as sole owner of the house, without having Betty’s name entered into the register. Betty applied to the government registration authority for making a correction to this registered particular on the ground that she and Alan are joint owners. Can Betty have herself registered as a joint owner? Based on the Property Rights Law (Article 19, paragraph 1), if Alan consents in writing to Betty’s request, or Betty’s claim can be proved to be true by sound evidence demonstrating that the house is the couple’s common property, the government registration authority should make the correction accordingly by recording Betty as a joint owner of the house side by side with Alan.

Registration of dissent

In principle, a wrongly registered particular can be rectified. However, in light of Article 19, paragraph 1 of the Property Rights Law, the precondition must be met that the original registered right holder agrees that the government registration authority can go ahead with the correction or the claimed incorrectness of the registered particular can be proven. Otherwise, the rectification will be blocked.

However, in this situation a mechanism established under the Property Rights Law can be used which enables registering dissent in advance so that

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such disagreement over the property right in question can become public information in the form of a record in the register of immovable property and constitute a constructive notice to any person who after knowing there is a dispute over the property right concerned is then supposed to exercise adequate carefulness when contemplating a transaction involving that property.

Under Article 19, paragraph 2, if the registered right holder does not agree to let the government registration authority rectify a particular in the register of immovable property which is claimed to be wrongfully registered, the affected party may apply to the government registration authority for having his dissent registered. A normal caveat applies under this mechanism of registration of dissent: the registered dissent warns any person who may have an interest in the property concerned in the future that there is now an unsettled disagreement over the property right of this immovable property, and he must be careful when deciding whether to proceed further.

Also according to Article 19, paragraph 2, if a registrant of his dissent intends to settle the dispute by taking legal action, he must start legal proceedings within 15 days after the dissent is registered; otherwise the registration of his dissent will lose its effectiveness.

For example, Peter Yu intends to sell his house in Shanghai to his friend, Andrew Yang. A record in the register of immovable property illustrates that Peter is the owner of this house. However, Alice Yu (Peter Yu’s cousin) claims that the house belongs to her. Peter denies Alice’s claim. Alice decides to settle the dispute by litigation. Before starting to take court action, Alice had the dispute registered at the government registration authority. Although Andrew is very fond of this house, when he detected the dissent registered, he decided not to buy the house from Peter. At last, Alice won her court case. She then sold the house to her friend, Richard.

Pre-notice registration

In real estate transactions, it is not uncommon in the market in China for a real estate developer, after selling a property to one purchaser, to sell the same property again to another purchaser and after that to a third and a fourth purchaser in an attempt to get the best deal. In order to stem this multiple-sale problem, the Property Rights Law introduces a pre-notice registration system.

The formation and alteration of property rights

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A pre-notice registration system is described under Article 20, paragraph 1 as follows: In order to ensure realization of a property right in the future, the relevant parties after entering into a sale and purchase agreement relating to a house or other types of immovable property may according to their agreement apply to the registration authority for a pre-notice registration of their transaction. Without obtaining the consent of its right holders, any further disposal of the immovable property concerned after a pre-notice registration is made will not give rise to the effectiveness of any new formation or alteration of a property right over this immovable property.

For example, Remote Dream is a residential high-rise in Shanghai still under construction. Its developer is ABC. Wang entered into a contract with ABC to purchase a flat in Remote Dream. Under such a pre-sale contract, Wang could enjoy a massive discount off the price of buying the same flat for immediate delivery; ABC could use the proceeds of the pre-sale to further finance this property development project. In order to prevent ABC from subsequently selling this flat to another person for a better price, Wang immediately made a pre-notice registration of his transaction with ABC at the government registration authority. Three months later, ABC sold this flat to Li. Li did not realize that the pre-notice registration made by Wang would debar him from acquiring the flat’s ownership.

Under Article 20, paragraph 2, after pre-notice registration, if the property right over the immovable property transacted fails to be registered within three months of the time it can be registered, the pre-notice registration made will lapse. This provision reminds property right holders that pre-notice registration is no substitute for official registration of their property right.

The registration authority’s conduct

The government registration authority is in charge of the registration of any formation or alteration of the property rights of immovable property. To prevent it from inappropriately exercising or abusing its administrative power, the Property Rights Law sets out some provisions that govern the conduct required of the government registration authority.

•Main duties of the government registration authority

In light of Article 12, paragraph 1(1) to (4), the main duties performed by the government registration authority entail checking and examining

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the proofs of ownership and rights and other necessary materials that are provided by applicants; questioning applicants on relevant particulars to be registered; timely carrying out the registration of relevant particulars in accordance with facts; and other duties prescribed by the laws and administrative regulations.

•Liability for incorrect registration

The government registration authority may have to bear liability for incorrect registration that is caused by the errors made by it or attributable to registrants.

Article 21 stipulates that: ‘Where an applicant for the registration of property rights provides false application materials causing damage to another person, he shall be liable for compensating the injured person for any loss or injury suffered. In the event that any registered particular is incorrect causing damage to any person, the registration authority shall make compensation to the injured person; and after making compensation, the registration authority will have recourse for its loss against the person whose act gives rise to this incorrect registration.’

•Restrictions on estimation, annual review and levy of fees

Under the Property Rights Law, the government registration authority is put into a kind of straightjacket in connection with the estimation, annual review and levy of fees regarding registered immovable property.

Those restrictions are designed to set up a firewall against any attempt at utilizing the provision of the registration service for private gain.

According to Article 13, the government registration authority is not in a position to demand that the value of the immovable property to be registered is to be estimated by it.

Also under Article 13, the government registration authority is not allowed to have any immovable property that has been registered re-registered under the guise of carrying out an annual review.

In light of Article 22, the registration fee is charged on the basis of each piece of immovable property, rather than in terms of the immovable property’s size, volume or price.

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The formation and alteration of property rights over movable property

As opposed to the case of immovable property, to satisfy the requirement of public notice, the formation and alteration of property rights over movable property do not need to be registered and all that is required is completing delivery of the property. Here, the term ‘delivery’ indicates moving the property in question from the physical possession of one person to the physical possession of another person who consequently becomes owner of that property.

The principle that delivery is the means of giving public notice pertinent to the formation or alteration of property rights over movable property is established under Article 23 of the Property Rights Law. Under Article 23, the creation or transfer of property rights over movable property is normally deemed to start to take effect when the delivery of the property is accomplished.

The delivery of the movable property can take the following different forms under different circumstances: actual delivery, summary delivery, substituted delivery, and delivery with the transferor’s continued possession.

Actual delivery

Actual delivery falls into the category of delivery mostly commonly encountered in everyday life. For example, T sold his bicycle to G. After G paid T, T left the bicycle to G. The ‘delivery’ was completed, and the bicycle’s ownership was transferred from T to G. Such transfer started to be in force when T handed over his bicycle to G.

Summary delivery

Summary delivery can be construed as a kind of automatic handover of property rights by one person to another, in the circumstance that the property is already in the legitimate possession of the latter prior to this handover. It is carried out in an instant way with no occurrence of physical delivery as the property is already under the control of its prospective owner or user.

Summary delivery is recognized by the Property Rights Law under Article 25, which admits that if the prospective property right holder is already in possession of that movable property before the creation or transfer of that

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property right is completed, then the formation or alteration of that property right in favour of this prospective property right holder will start to come into force when the act of creating or transferring that property right is accomplished.

For example, John Wang leased his computer to Peter Liu. Two days before the lease came to an end, John and Peter entered into a new contract, according to which John would immediately sell this computer to Peter. Since John’s computer happened to be in Peter’s possession when the contract to sell the computer was created, no physical delivery needed to be made and so Peter legitimately obtained ownership of the computer.

Substituted delivery

The scenario to which substituted delivery relates is a special one. In such a scenario, actual delivery of the movable property is replaced by assigning to the person, to whom the property is supposed to be delivered, the entitlement to claim for the return of the property to him. In this sense, physical delivery is substituted by assigning legal entitlement.

For example, Steven Chen is owner of a valuable Italian violin. He leased this violin to Janet Li, a young violinist, for three months, in order that Janet could use the violin at the forthcoming international violinist competition. Then Steven sold this violin to Mr Lei. Since the violin is now in Janet’s possession, Steven could not deliver the violin to Mr Lei before the lease comes to an end. Instead, he assigned to Mr Lei the entitlement to ask Janet to return the violin to him. So on the day the lease expires, Janet should return the violin to Mr Lei, not to Steven.

Article 26 of the Property Rights Law describes the situation in which substituted delivery may happen: where a third party is in legitimate possession of the movable property prior to the property right over this movable property being created or transferred, the person who has an obligation to deliver the movable property concerned to its prospective property right holder may fulfil his obligation by assigning to the prospective property right holder the entitlement to request the third party to return to him the movable property in question.

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Delivery with the transferor’s continued possession

Delivery with the transferor’s continued possession is described under Article 27 of the Property Rights Law as follows: If when the property right over the movable property is transferred the transferor and the transferee further agree to let the transferor continue his possession of the movable property in question after the transfer is completed, the transfer of the property right will be counted as coming into force when this agreement becomes effective.

Such a delivery of movable property usually involves a new legal relationship established between the transferor and the transferee on top of the legal relationship between them pertinent to the transfer of the property right.

For example, George Yan sold his piano to Linda Wang. In the meantime, he made an agreement with Linda according to which Linda would lease the piano back to him so he would not have to deliver the piano to its new owner (i.e. Linda) but could continue to possess and use it. Under this arrangement, George gains from the proceeds of the sale; he continues his possession and employment of the piano by paying Linda a rental; Linda becomes owner of the piano; she also secures a rental income from George.

Ownership

The previous section focused on the general provisions in the Property Rights Law. This and subsequent sections will concentrate on specific types of property rights, the first being ownership.

The special characteristics of the property ownership system in China

Article 39 of the Property Rights Law defines ‘ownership’ as ‘the right of a person to possess, utilize, gain from and dispose of the immovable or movable property that belongs to him.’

Article 40 further provides that: ‘A property owner is entitled to create the usufructuary right and the property right relating to security over his immovable or movable property. Exercising the usufructuary right or the property right relating to security shall not injure the interests of the property owner.’

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As a perpetual right that entitles a property owner to enjoy the property himself or put the property into other uses in whatever legitimate way as he likes, the concept of ‘ownership’adopted in China is not significantly different in substance from that as understood in most other jurisdictions in the world.

However, the Chinese property ownership system operates on the basis of three categories of ownership: state ownership, collective ownership and private ownership. This special feature means that the Chinese property ownership system is unique in many respects.

Since the founding of the People’s Republic of China in 1949, the Chinese property ownership system has undergone considerable change in both political and economic dimensions.

The historical development of the property ownership system: An example

Before the People’s Republic of China was founded, Luo Daxing was a tobacco tycoon in Shenyang (a large industrial city in northeast China). In the late 1940s, the Chinese Communist Party took power in Shenyang after defeating the Kuomintang army in the civil war. Unlike his younger brother who had fled to Hong Kong, Luo Daxing decided to stay in Shenyang to continue his tobacco business. For the better part of the 1950s, there was no substantial change in Luo Daxing’s life. His private assets were well protected by the government. And his quality and standard of living was no lower than before. He was held in high regard by the government because of his standing among local entrepreneurs, so he was appointed a member of the Chinese People’s Political Consultative Conference.

Li Dabao is Luo Daxing’s cousin and lives in a small village not far away from Shenyang. In the early 1950s, land reform swept across rural areas climaxing in the confiscation of farmland from landlords and its redistribution to poor peasants. As Li Dabao had inherited quite a lot of farmland from his father, he was classified by the government as a landlord, a label of condemnation. He was deprived of his farmland, and one piece of the land was assigned to Wang Yiqiang, the poorest peasant in the village. Witnessing the evaporation of his family’s wealth, Li Dabao’s adult son, Li Xiaobao, was disheartened. He left home for Shenyang where he made a living by running a small grocery store.

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In 1956, encouraged by government officials, friends and family members,

Luo Daxing reluctantly participated in the exercise of converting his private business into a public-private joint venture enterprise. This joint venture, known as Bright Road Tobacco Factory, was jointly held by Luo Daxing and the government. Luo Daxing was on the payroll as deputy manager of the factory, rather than in full control of the enterprise as its boss. As a major equity holder of this joint venture, he received a fixed annual dividend paid by the government, in proportion to his shares in the factory at the rate of 5% according to the government’s policy on dealing with public-private joint venture enterprises. In effect, he was in a state of semi-retirement no longer able to exert any significant influence on the management of the factory.

The factory was fully controlled by a party secretary, a retired army officer seconded by the government. Starting from 1966, the fixed annual dividend ceased to be paid to Luo Daxing. He retired in the capacity of an ordinary employee and lived on a state pension. In the late 1960s, Bright Road Tobacco Factory became a fully state-owned enterprise.

Throughout the 1950s, Wang Yiqiang, who was allocated a piece of farmland in the early 1950s as a beneficiary of the land reform, played a leading role in his village in the agricultural collectivization movement advocated by the government. This movement firstly took the organizational form of a ‘mutual aid group,’ then a ‘cooperative’ and finally resulted in the establishment of

‘the people’s commune’ across the country. Peasants joined the people’s commune by contributing their farmland and livestock, which became the collective property of the commune. In the late 1950s, people’s communes were widely set up in rural areas. The old system of private land ownership was replaced by a socialist rural land system of public ownership in the form of collectivization. Under this new system, agricultural planning, production and allocation were centrally controlled by leaders of the people’s commune. As members of the people’s commune, peasants carried out agricultural production according to instructions from leaders of the people’s commune. They were not allowed to carry out any private business in their spare time. Agricultural products were sold to the government at a price below value in order to amass capital for swift industrialization in urban areas. This, of course, was at the cost of farmers’ quality of life.

In 1958, Li Xiaobao’s small grocery store, after being combined with other grocery stores in the town, was converted into an enterprise in collective

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ownership, namely Sunshine Department Store. Li Xiaobao’s wife was then a worker at the Bright Road Tobacco Factory. Later on as an employee of a state-owned enterprise, she was well covered by social welfare (e.g. housing, medical care, pensions, etc.). Although she had a low wage, she basically had nothing to worry about. Li Xiaobao’s wage and social welfare package was more or less on the same level as his wife’s. The only difference was that as an employee of a collective enterprise, his pay came not from the government, but from the income generated by the collective enterprise itself.

In 1966, the Cultural Revolution started. In 1967, most of Luo Daxing’s valuable private assets (in particular, his private houses) were confiscated by

Bright Road Tobacco Factory. The houses were used as the factory cadre’s dormitories.

In 1968, Li Xiaobao’s son, Li Xiang, after graduating from a technical school, joined Bright Road Tobacco Factory as a plumber.

In the late 1970s, economic reform unfolded in China, with rural reform as the bellwether. The rural reform to some extent fell back on the old private production mode. Although rural land still belonged to rural collectives, a new rural land management system called the ‘rural household contract responsibility system’ was widely adopted in the country. Under this system, farmers and rural collectives (as deputies of the government) enter into contracts under which farmers on behalf of a family obtain a piece of rural land from rural collectives for their private use and gain. Farmers no longer work for the people’s commune. They carry out agricultural production for two purposes: supplying the required agricultural products to the government and keeping the remainder for themselves. The rural reform has proven to be a success. It significantly galvanizes the initiatives of farmers who gain considerably from the relaxation of the mode of agricultural production and distribution. With the rural reform in full swing, people’s communes receded into history. Meanwhile, township or village enterprises run by farmers started to play an important part in China’s rural economy. Wang Yiqiang’s grandson, Wang Xiaoliang, prospered as owner of a large village enterprise engaged in manufacturing various kinds of furniture and exporting the furniture to overseas markets.

In the early 1980s, Luo Daxing’s private houses, which were seized by Bright Road Tobacco Factory during the Cultural Revolution, were returned to Luo

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Daxing’s adult children. As Luo Daxing was deceased, his children inherited these private assets.

In the early 1990s, Luo Xiaoxing, son of Luo Daxing’s younger brother, who escaped to Hong Kong in the late 1940s, returned to his hometown, Shenyang, as a foreign investor. By taking advantage of the tax and other favourable measures granted by the Chinese government to foreign direct investors, he partnered with a local state-owned enterprise to set up a Sino-foreign equity joint venture enterprise in Shenyang manufacturing pharmaceutical products.

With the success of China’s economic reform in rural areas, enterprise reform in urban areas (especially in relation to state-owned enterprises) was put on the agenda. In the mid-1990s, Bright Road Tobacco Factory, after merging with other local factories in the same line, was converted into a share-holding company, Bright Road Tobacco Group, in which the state is still the largest equity holder, but capitalization has been diversified including contributions from both indigenous and overseas sources. The management of the old Bright Road Tobacco Factory stepped down, and most of its old workers were laid off. Li Xiang was forced to retire from the newly established Bright Road Tobacco Group on a poor redundancy package, under which he could hardly make ends meet.

In 2001, Sunshine Department Store was on the brink of bankruptcy. Wang Xiaoliang, then a highly successful nouveau riche, by injecting his capital into Sunshine Department Store acquired full control of this collective enterprise. And then by merging Sunshine Department Store with some other local department stores, restaurants and retail outlets, he consolidated the assets of those businesses, based on which a new shareholding private enterprise, Grand River Catering Group, was incorporated, in which Wang Xiaoliang is the largest stakeholder. Previous employees of Sunshine Department Store lost their superannuation privileges. They had to enter into new employment contracts with Grand River Catering Group on a yearly renewal basis, or they would have to accept an early retirement payoff.

China’s economic system under the Constitutional Law: Historical development

The contours of the historical development of China’s economic system from the founding of the People’s Republic of China in 1949 until now are

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captured in some measure by the above example. From a legal point of view, at different times during this development China’s economic system was described slightly differently in constitutional law.

Up to now, four constitutions have been enacted, in 1954, 1975, 1978 and 1982, apart from the Common Principles (a constitutional document promulgated in 1949 as a kind of interim constitution for China during the period from the founding of the People’s Republic of China until 1954).9

The Common Principles: China’s first constitutional document

The Common Principles could be viewed as China’s first constitutional document. It was passed at the First Plenary Session of the Chinese People’s Political Consultative Conference on 29 September 1949, just a couple of days before the founding of the People’s Republic of China on 1 October.10 The Chinese Communist Party, having overthrown the old society, would shortly start to play its new role developing and administering a new society. The Common Principles sets out some general directions for development for this young republic emerging from the ruins of three years of civil war.

The ‘Preamble’ of the Common Principles highlights ‘people’s democratism’ as the political basis of founding a new China, and describes the nature of the forthcoming regime as the ‘people’s democratic dictatorship.’

For the purpose of enforcing the people’s democratic dictatorship, Article 3 in the Common Principles sets out a number of objectives, such as seizing bureaucratic capital for use by the state, replacing a feudal and semi-feudal rural land ownership system with a peasants’ land ownership system, and protecting public and private assets.

By Articles 28 to 31 of the Common Principles, the following four types of ownership were permitted: state economy, cooperative economy, private economy, and national capitalist economy in the form of cooperation between national capital and private capital.

9For a brief history of Chinese constitutions, see G B Zhu (1999).

10The Chinese version of the Common Principles can be found at: http://news.xinhuanet.com/ ziliao/2004-12/07/content_2304465.htm. An English translation does not seem to be available at present. The author uses his own English translation in this book.

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The 1954 Constitutional Law

Considering the tentative nature of the Common Principles, which was in fact adopted as a constitutional document rather than an official constitution, the 1954 Constitutional Law is the first official constitution of the People’s

Republic of China.11

After years of efforts to recover from an economy wrecked by the civil war of the second half of the 1940s, as well as the Korean War in the early 1950s, the acceleration towards a socialist society was put on the country’s agenda. It was in this context that the 1954 Constitution was created.

Under Article 4, a general goal set by the 1954 Constitutional Law for the country is to ‘ensure the gradual elimination of any exploitation system and the development of a socialist society through accomplishing socialist industrialization and socialist transformation.’

Regarding ownership of property, Article 5 uses only the term ‘ownership of the means of production,’12 and enumerates the major types of such ownership as state ownership, collective ownership, individual labourer’s ownership, and capitalist’s ownership.

These types of ownership are not equal in importance under the 1954 Constitutional Law.

Pursuant to Article 6, paragraph 1, priority is given to the development of the state-owned economy (i.e. the economy owned by all Chinese people), which ‘is the leading force in the national economy and constitutes the material base of the country for realizing the socialist transformation.’

According to Article 8, paragraph 1, rural land ownership of the peasants is protected. However, Article 8, paragraph 3 points out that the state implements a policy of restricting and gradually eradicating any economy of affluent farmers.

11The Chinese version of the 1954 Constitutional Law can be found at: http://law.lawtime.cn/ d656694661788.html. An English translation does not seem to be available at present. The author uses his own English translation in this book.

12‘Means of production’ usually refers to items for use in production, such as land, factories, machinery, equipment, tools, raw materials, etc.

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Any industry or commerce of a capitalist nature is a target of socialist transformation. By Article 10, paragraph 2, the state adopts a policy of utilization, restriction and transformation for any industry or commerce of a capitalist nature, and will gradually replace capitalist ownership with ownership by all Chinese people.

Under the 1954 Constitutional Law, private assets are protected by the state. Under Article 11 and Article 12, the state protects any citizen’s ‘legitimate income, savings, houses and ownership of various basic living items’ and ‘right of inheritance over private assets.’

The 1975 Constitutional Law

The 1975 Constitution is the second Chinese constitution.13 At that time the Cultural Revolution was nearing its end.

Under Article 1, China is described as ‘a socialist country led by the Chinese Communist Party under the proletarian dictatorship based on the alliance between workers and peasants.’

By Article 5, paragraph 1, there are two main kinds of ownership of the means of production in China: socialist all people’s ownership and socialist collective ownership by labourers.

According to Article 5, paragraph 2, individuals are allowed to be selfemployed in their own business, but they will be asked to eventually embark on the road of socialist collectivization by working together as a community.

The state economy (i.e. the economy in all people’s ownership) is emphasized in Article 6, paragraph 1 as ‘the leading force in the national economy.’ The people’s commune in the countryside is positioned as an organization in collective ownership (Article 7, paragraph 2).

The 1975 Constitutional Law repeats the provision in the 1954 Constitutional Law that the state protects any citizen’s ‘legitimate income, savings, houses

13The Chinese version of the 1975 Constitutional Law can be found at: http://www.chinalawedu

.com/news/1200/21752/21753/2006/2/ma5362191254162260024560-0.htm. An English translation does not seem to be available at present. The author uses his own English translation in this book.

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and ownership of various basic living items’ and ‘right of inheritance over private assets’ (Article 9, paragraph 2).

The 1978 Constitutional Law

The 1978 Constitutional Law is the third Chinese constitution.14 It was promulgated two years after the Cultural Revolution ended. In terms of the aspects of the 1975 Constitutional Law mentioned above there was no substantial change in substance in the 1978 Constitutional Law.

The 1982 Constitutional Law

The 1982 Constitutional Law is the fourth Chinese constitution. It was enacted a few years after the policy of economic reform and opening-up was launched. The 1982 Constitutional Law underwent four revisions, in 1988, 1993, 1999 and 2004.15

Under the revised 1982 Constitutional Law, the ‘socialist public ownership of the means of production’ (i.e. ‘all people’s ownership’ and ‘collective ownership by labourers’) is emphasized as the ‘basis of China’s socialist economic system’ (Article 6, paragraph 1).

Different from the previous three constitutions, the revised 1982 Constitutional Law, while still supporting the economy in socialist public ownership as a dominant force within the country’s basic economic framework, also embraces the development of the economies in other kinds of ownership (other than public ownership) side by side with development of the economy in public ownership (Article 6, paragraph 2).

The revised 1982 Constitutional Law specifically indicates in Article 11, paragraph 1 that the economies other than the public ownership economy constitute an important part of China’s socialist economy.

While the sacredness and inviolability of socialist public property is stressed in the 1982 Constitutional Law (Article 12, paragraph 1), it also solemnly

14The Chinese version of the 1978 Constitutional Law can be found at: http://china.findlaw.cn/fagui/ gj/21/14.html. An English translation does not seem to be available at present.

15The English translation of the 1982 Constitutional Law at the following website is a good reference: http://www.npc.gov.cn/englishnpc/Law/2007-12/05/content_1381903.htm. The author uses his own English translation in this book.

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states in Article 13, paragraph 1 that ‘legitimately owned private property that belongs to individuals is inviolable.’

Current developments

After 30-odd years of reform and opening-up in China, the substance of various economies under different types of ownership has changed considerably. The state-owned economy is still in a dominant position in the national economy, but in terms of strategic significance and effectiveness rather than the scale and quantity of state-owned enterprises.

At present, the state-owned enterprises that constitute the backbone of China’s national economy can be roughly divided into two types: ones that are directly controlled by the central government, and ones that are controlled by local governments. The former are under the umbrella of the State-owned Assets Supervision and Administration Commission under the State Council; and the latter are managed by the State-owned Assets Supervision and Administration Commission in various local jurisdictions. Most state-owned enterprises under direct control of the central government are giant conglomerates, which now number 116 (SASAC, ‘List of state-owned enterprises’).

On the other hand, in 2009 the non-public ownership economies generated more than one-third of total GDP, registered 50% of the fixed asset investment for the whole society, and also became a main source of employment opportunities (Ministry of Industry and Information Technology of the PRC 2009). Many enterprises under the ownership of all people or the collective ownership by labourers are no longer such in the orthodox sense, but have gradually evolved into companies limited by shares with diverse sources of capital such as the state, indigenous private entrepreneurs, overseas investors or a combination of these.

Regarding co-development of the economies under these different kinds of ownership, China’s former President Hu Jintao said the following in his report delivered at the Seventeenth National Congress of the Chinese Communist Party in 2007 in his capacity as General Secretary of the Central Committee of the Chinese Communist Party:

We need to uphold and improve the basic economic system in which public ownership is dominant and different economic sectors develop

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side by side, unwaveringly consolidate and develop the public sector of the economy, unswervingly encourage, support and guide the development of the non-public sector, ensure the equal protection of property rights, and create a new situation in which all economic sectors compete on an equal footing and reinforce each other. (Xinhua 2007c)

A clear message conveyed in the above talk is the strategic importance of the development of the Chinese economy under a system of multiple types of ownership.

At present, an enterprise established in China might adopt one of the following types of business vehicle: limited liability company, company limited by shares, foreign investment enterprise (Sino-foreign equity joint venture enterprise, Sino-foreign cooperative joint venture enterprise, or wholly foreign-owned enterprise), enterprise in all people’s ownership, enterprise in collective ownership, partnership, or sole trader (i.e. sole proprietorship).

As China’s economic system is developing in more conformity with international norms, it is likely that in the future the types of business vehicle allowed in China may be gradually restricted to focus on the following mainstream business vehicles common in other countries with market economies: limited liability company, company limited by shares, partnership, and sole trader.

State ownership, collective ownership and private ownership

Against the special background of China’s economic system, under the

Property Rights Law property ownership is classified into state ownership, collective ownership and private ownership.

State ownership

The state plays different roles under public law and private law. Under public law, the state is endowed with public power which it exercises in the context of the Constitutional Law. Meanwhile, the state is a civil subject under private law, enjoying and exercising civil rights (including property rights such as ownership) and bearing civil obligations. In this respect, the state’s civil acts, as well as the civil acts of other civil subjects (e.g. natural persons or juristic

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persons) are governed by the rules and regulations established in the civil law regime (including the Property Rights Law).

The Property Rights Law provides for the scope of the property that is owned by the state, and also points out which party exercises a right over state-owned property on behalf of the state.

Property owned by the state

Under the Property Rights Law, Article 45, paragraph 1 conceptualizes the property owned by the state as follows: ‘The property prescribed under the law as the property owned by the state belongs to the state, i.e. it is in all people’s ownership.’

On the basis of this conceptualization, Articles 46 to 52 of the Property Rights Law enumerate the following types of property of which the state holds ownership: mineral reserves, water, and sea areas; land in urban areas, and the land in rural areas and on the outskirts of cities that belongs to the state according to what the law prescribes; natural resources like forests, mountains, prairies, wilderness, shoals, etc. (not including those that belong to collectives according to what the law prescribes); those resources of wild animals and plants that belong to the state according to what the law prescribes; wireless spectrum resources; those cultural relics that belongs to the state in line with what the law prescribes; national defence resources; and infrastructure like railways, roads, electric power facilities, telecommunications facilities, gas pipes, etc., that belongs to the state according to what the law prescribes.

Article 41 of the Property Rights Law excludes any organization or individual from acquiring ownership of the immovable or movable property that must be under state ownership as prescribed by the law.

The above provisions are designed to safeguard the country’s economic lifeline. Apart from these specific kinds of property that must be owned by the state, in a broad sense other kinds of property may also fall into the state’s ownership, although this may not be compulsory.

Exercising rights over state-owned property

According to Article 45, paragraph 2 of the Property Rights Law, in principle the State Council is empowered to exercise rights over state-owned property on behalf of the state. In practice, the state’s assets are divided between and

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managed by the State Council representing the central government and local administrations representing various local governments at different levels.

As the state’s assets in reality exist on the balance sheets of various government departments and government-funded public bodies that directly control them, it is those government departments and government-funded public bodies that exercise the right over state-owned property in the course of operation. As described in Articles 53 and 54, they have the right to possess, utilize and legitimately dispose of the state-owned property that is under their direct control.

Under Article 55 of the Property Rights Law, for those enterprises funded by the state, the State Council and local governments will represent the state to fulfil obligations and enjoy rights and interests as their funders. In practice, since China’s fiscal system is operated under the central government’s management and local governments’ management in parallel, capital contributions made by the government to the enterprises funded by the state embrace the funding given by the central government and the funding provided by local governments respectively. However, regardless of where the funding comes from, the assets funded in such a way are all viewed as belonging to the state. In this sense, local governments as funders are only entitled to the rights and interest as capital contributors, but are not eligible to hold ownership of those enterprises’ assets.

According to Article 67 of the Property Rights Law, the state is allowed to contribute capital for establishing limited liability companies, companies limited by shares and other types of enterprises, and thereby holds entitlement to capital gains, important decision-making powers and the appointment of the management in those enterprises. In light of Article 68, paragraph 1 of the Property Rights Law, the enterprises formed in this way have the right to possess, utilize, earn from and disposal of their immovable or movable property.

Currently, protecting state-owned property from illegal loss is a serious issue. The Property Rights Law, Article 56 states that: ‘State-owned property is protected by the law, barred from encroachment, plunderage, misappropriation, unauthorized retention or sabotage committed by any organization or individual.’ Under Article 57, any person who causes loss of the state’s assets due to abuse of power, gross negligence or by illegitimate means will have to bear legal liability for this.

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Collective ownership

The term ‘collective ownership’ is an abbreviation of ‘collective ownership by labourers,’ which is another important type of ownership within China’s economic system. In any organization under collective ownership (taking the form of either a rural collective or an urban collective), labourers as a community (not as private individuals) can collectively possess, utilize, earn from and dispose of the property that belongs to this collective.

Public ownership of the means of production as the basis of China’s socialist economic system comprises all people’s ownership and collective ownership. Collective ownership can be found in both urban and rural areas. Therefore collectives as a kind of organization (i.e. collectively owned economic organizations, or more simply ‘collective economic organizations’) can be established both in the countryside and in cities.

The Property Rights Law describes what is meant by immovable or movable property that is owned by collectives, and who can exercise rights over collectively owned property on behalf of a collective.

Property owned by collectives

Under Article 58 of the Property Rights Law, the immovable or movable property that belongs to collectives encompasses the land, forests, mountains, prairies, wilderness and shoals that belong to collectives according to what the law prescribes; the buildings, production facilities, and farmland and reservoir facilities that belong to collectives; the facilities relating to education, science, healthcare, sports, etc. that belong to collectives; and any other immovable or movable property that belongs to collectives.

Hence, aside from property that can only be owned by the state, the property that can belong to collectives includes all kinds of property.

Exercising rights over collectively owned property

It is important first to gain some general understanding of China’s local governance at various administrative levels, as this suggests how rural and urban collective organizations are administered.

Pursuant to Article 30 of the Constitutional Law, China is administratively divided into ‘provinces, autonomous regions, and municipalities that are under

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the direct leadership of the central government’; provinces and autonomous regions are further divided into administrative regions at the levels of ‘autonomous prefectures, counties, autonomous counties, and cities’; below the administrative regions at the levels of counties and autonomous counties are ‘townships, townships of various minority nationalities, and towns’; municipalities that are under the direct leadership of the central government and large cities govern ‘districts and counties’; autonomous prefectures govern ‘counties, autonomous counties, and cities’; autonomous regions, autonomous prefectures and autonomous counties refer to those places that are largely ‘self-governed’ by minority nationalities.

Article 1 and Article 5, paragraph 1 of the Organic Law on Local People’s Congresses and Governments at Various Levels16 state that local people’s congresses and local governments established at the level of ‘townships, townships of minority nationalities and towns in rural areas’ and of ‘cities (without districts) and districts that are subject to the jurisdiction of cities,’ represent the lowest level of local governance.

Also, it is revealed in Article 2 of the Organic Law on Urban Residents’ Committees17 that urban residents’ committees play a role in cities as ‘self-governing mass organizations at the grass root level,’ to which local governments ‘provide guidance.’ Moreover, according to Article 2, paragraph 1 and Article 4, paragraph 1 of the Organic Law on Villagers’ Committees18, villagers’ committees established in rural areas are also characterized as ‘self-governing mass organizations at the grass root level,’ to which local governments ‘provide guidance.’ Although literally the government only provides ‘advice’ to residents’ committees set up in cities and villagers’ committees established in the countryside, in practice ‘advice’

16The English translation of the Organic Law on Local People’s Congresses and Governments at Various Levels released on the following website can be used as a reference: http://www.npc

.gov.cn/englishnpc/Law/2007-12/13/content_1384085.htm. The author uses his own English translation in this book.

17The English translation of the Organic Law on Urban Residents’ Committees released on the following website can be used as a reference: http://www.npc.gov.cn/englishnpc/Law/2007-12/12/ content_1383916.htm. The author uses his own English translation in this book.

18The English translation of the Organic Law on Villagers’ Committees released on the following website can be used as a reference: http://www.npc.gov.cn/englishnpc/Law/2007-12/11/ content_1383542.htm. The author uses his own English translation in this book.

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should be construed as ‘instructions’ that are expressed in an indirect way. The government conveys general directions via urban residents’ committees and rural villagers’ committees to various collective organizations in cities and the countryside, with a view that these organizations are able to operate correctly by virtue of laws and government policies.

The Property Rights Law does not directly show which organization represents collectives to exercise rights over collectively owned property. However, it does embody some provisions that suggest an answer.

Article 59 of the Property Rights Law provides that: ‘The peasants’ collectively owned immovable or movable property belongs to members of that community collectively. The following matters shall be decided by members of that community collectively pursuant to legally prescribed procedures: (1) land contracting plans, and issues on contracting land to any organization or individual outside that community; (2) a swap of the contracted land among individual peasants who have contracted the land from collectives; (3) the method of utilizing and allocating relevant fees like land compensation fee, etc.; (4) issues such as the alteration of ownership of any enterprise funded by collectives; and (5) other issues required by the law.’

Article 60 of the Property Rights Law provides that: ‘As regards collectively owned land, forests, mountains, prairies, wilderness, shoals, etc., exercising rights over their ownership shall be carried out as follows: (1) if the property belongs to peasants of a village collectively, the rural collective economic organization at the village level or the villagers’ committee will represent the collective to exercise such right; (2) if the property belongs to two or more than two collectives of peasants in a village, the collective economic organizations concerned in the village or the villagers’ representative teams concerned in the village will represent the collectives to exercise such right; and (3) if the property belongs to a township or a town collectively, the collective economic organization at the township level or at the town level will represent the collective to exercise such right.’

Article 61 of the Property Rights Law states that: ‘For the immovable or movable property that belongs to a collective in urban areas, that collective has the right to possess, utilize, earn from and dispose of the property in line with laws and administrative regulations.’

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According to Article 62 of the Property Rights Law, a collective economic organization, or a villagers’ committee, or a villagers’ representative team has an obligation to show their members the status of the property owned by the collective.

Based on the above provisions of the Property Rights Law, it can be roughly concluded that in principle a collective itself is vested with the rights over its property, and these rights are exercised by a kind of management team formed within the collective.

In order to protect the legitimate interests of members of collectives from injury, the Property Rights Law points out in Article 63 that: ‘Collectively owned property is protected by the law against encroachment, plunderage, unauthorized retention and sabotage by any organization or individual. If a decision made by a collective economic organization or a villager’s committee or its leader injures any legitimate interests of members of collectives, the injured member(s) may ask the people’s court to set aside such decision.’

Like the state, under Article 67 of the Property Rights Law, a collective is permitted to contribute capital for establishing limited liability companies, companies limited by shares and other types of enterprises, and thereby become entitled to capital gains, important decision-making powers and the appointment of the management in those enterprises. According to Article 68, paragraph 1 of the Property Rights Law, such enterprises have the right to possess, utilize, earn from and dispose of their immovable or movable property.

Private ownership

In the past, the term ‘private ownership’ was not used in Chinese law, which used the term ‘individual ownership’ to mean the same thing. The Property Rights Law now explicitly adopts the term ‘private ownership.’ This sends a clear signal that protection of private assets is unreservedly recognized by the law.

However, the Property Rights Law does not set out many provisions in this respect. Under three provisions, the Property Rights Law indicates that a private individual is entitled to hold ownership of immovable or movable property such as his legitimate income, houses, living items, production tools and raw materials (Article 64); an individual’s legitimate savings, investments and

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proceeds from such investments, as well as the right of inheritance and other legitimate interests are protected by the law (Article 65); and individuals’ legitimate assets are protected by the law against encroachment, plunderage and sabotage (Article 66).

Although literally the Property Rights Law does not explicitly stipulate who is entitled to exercise his right over private assets, it can be logically established that private property owners are entitled to exercise their exclusive right over their legitimate private assets, and they can thereby possess, utilize, earn from and dispose of their private assets freely without being subject to any outside intervention.

Like state and collective organizations, under Article 67 of the Property Rights Law an individual is allowed to contribute capital for establishing limited liability companies, companies limited by shares and other types of enterprises, and thereby become entitled to capital gains, important decisionmaking powers and the appointment of the management in those enterprises. According to Article 68, paragraph 1 of the Property Rights Law, such enterprises have the right to possess, utilize, earn from and dispose of their immovable and movable property.

The expropriation and requisition of property

The forced or unfair expropriation of property has posed a serious social problem in China. In order to provide some guidance on rectifying this irregularity, the Property Rights Law has designed a general framework for regulating the expropriation and the requisition of property (actions allowed under exceptional circumstances).

The expropriation of property

The expropriation of property aims at permanently taking away ownership and/or usage rights of immovable property (such as land or houses). Articles 42 and 43 of the Property Rights Law provide for some general principles governing the expropriation of property, with an emphasis on appropriate compensation made to victims who suffer from such expropriation.

Article 42 provides that: ‘In the public interest, collectively owned land, houses and other kinds of immovable property owned by organizations

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or private individuals can be expropriated in accordance with prescribed authorities and procedures under the law. For expropriated land owned by collectives, full compensation shall be made in terms of land compensation fees, subsidies for resettlement, compensation fees for fixtures on the land and growing crops that have not been harvested, etc.; social security fees shall be paid to peasants whose land is expropriated so as to safeguard their legitimate interests and ensure that their normal life can be carried on. For the expropriated houses and other kinds of immovable property owned by organizations or private individuals, the legitimate interests of the affected organizations or private individuals shall be safeguarded, and according to the law they shall be paid compensation for demolition of their property. For expropriated private houses, house owners shall be compensated to the extent that they will be able to live in new houses no worse than the expropriated ones. No organization or individual is allowed to embezzle, misappropriate, retain without authorization, withhold, or deliberately delay payment of compensation fees for the expropriation.’

Article 43 provides that: ‘Special protection is given by the state to farmland which is strictly restricted from being converted into a construction site in order that the state controls land resources employed for construction purposes. The expropriation of collectively owned land not in line with prescribed authorities and procedures under the law is not permitted.’

From the above provisions it can be seen that although ownership is supposed to be an exclusive right of property owners over their property, owners may be dispossessed of their property in the exceptional circumstance of expropriation on the ground of satisfying public interest.

Interestingly, the Property Rights Law seems to be silent on two critical issues in this respect. The first issue is: who is an ‘expropriator’? Expropriation is no business dealing. The property owner’s consent does not need to be obtained and the property owner does not need to be consulted in advance. The spirit of private law autonomy advocated as a conventional civil law doctrine does not pertain to expropriation. Although theoretically the government should be the expropriator, the above two articles do not include the words ‘government’ or

‘state,’leaving the identity of the expropriator to be confirmed.

The second issue is: how should ‘public interest’ be defined, and who is responsible for making sure that post-expropriation use of the property

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genuinely serves public interest? Regrettably no answer to this question can be found from the above two provisions either. Literally ‘public interest’ ought to be the interest of all members of a society. In this sense, activities such as construction of public transportation facilities, national defence facilities, and social welfare infrastructure that are non-profit making (e.g. public hospitals or public schools that provide free or low-fee services to the public) can be deemed as serving public interest. In reality, however, ‘public interest’ lacks explicit legal definition, and illegitimate activities carried out under the guise of ‘satisfying public interest’ are unbridled in many places. There are numerous examples in the field of real estate development. Developers acquire land that is expropriated by forced demolition in the name of carrying out non-profit-making social welfare projects. It turns out these projects do not exist, and developers use the expropriated land for commercial property development to gain excessive profit.

While the Property Rights Law does not clearly address these two issues, they are less serious than the issue of compensation to expropriatees (i.e. organizations or private individuals whose property is expropriated). The

Property Rights Law does not provide for any specific standards to be applied in determining the amount of compensation to be paid to expropriatees. Nor does it set any criteria as regards a bottom line or ceiling for such compensation.

Currently, local governments usually hammer out their own rules for making compensation to expropriatees, so rules may differ from one place to another. Land use fees paid by real estate developers in order to acquire a piece of urban land for property development constitute an important source of income for local governments in China. A brisk real estate market can boost growth in other economic sectors, and local governments try to produce bullish economic data as an indicator of their good performance. In land expropriation (particularly involving the demolition of private houses), effectively balancing public interest and the interest of expropriatees is a big challenge. Compensation has become a sensitive issue that often leads to serious disputes that spark social anger.

For example, in 2004, Huang Zhenyun, a senior citizen in Beijing not satisfied with the compensation offered, bravely fended off construction workers who came to demolish his house by erecting a Chinese national flag and exhibiting a copy of the Chinese Constitutional Law in front of the house as a symbol

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of his stance towards safeguarding private rights (Bao 2004). Another wellknown incident took place in Chongqing, a large city in southwest China (Xinhua 2007a). In 2004, a real estate developer acquired the land use right to carry out property development in an area within which a couple, Yang and Wu, had a two-storey house. The developer planned to demolish the old houses in the area in order to build new ones. Yang and Wu refused to let the construction workers pull down their house because the compensation package offered by the developer was far below their expectation. Yang and Wu’s house was the only one unscathed among the ruins of demolished houses. They stayed in the house with no water or electricity supply for about three years until finally the developer and the couple reached consensus on the amount of compensation after countless rounds of negotiation.

In order to ease the mounting tension that poses an ever greater threat to social stability, the State Council issued a legal guideline in this regard on 21 January 2011, namely the Decree on the Expropriation of Houses over State-owned Land and Compensation.19 Under this decree, an expropriatee is entitled to compensation covering the value of the expropriated house(s), the loss incurred due to the required relocation, and the loss caused from having to suspend production and business (Article 17, paragraph 1). The decree makes clear that the amount of compensation for an expropriated house shall not be lower than the house’s prevailing market price on the date when the public notice of carrying out this expropriation is issued (Article 19, paragraph 1). Furthermore, pursuant to Article 21, paragraph 1 of the decree, an expropriatee can opt for compensation in cash or by means of an ownership swap, taking the form of being allocated another house to his satisfaction.

The most serious issues in cases of compensation to expropriatees in rural areas are the reasonableness of the compensation paid to peasants for expropriated farmland and whether they ultimately receive full compensation. These two issues are related. Facing an increasingly strong demand for land, in principle China has to ensure a minimum of 104 million hectares of land for cultivation (Q Wang 2011). The land owned by collectives in China (i.e. the land in rural areas) cannot be traded in the market unless it is expropriated

19The Chinese version of this decree can be found at: http://www.gov.cn/zwgk/2011-01/21/ content_1790111.htm. An English translation does not seem to be available at present. The author uses his own English translation in this book.

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in the first place thus becoming land no longer belonging to collectives. Only after such expropriation is complete can rural land previously owned by collectives be transferred to real estate developers on payment of land use fees for use in profit-making property development. In order to acquire a land use right, real estate developers have to pay land use fees to the government. In practice, there could be a sharp discrepancy between the land use fees received by the government from real estate developers for acquiring land use rights and the compensation paid to peasant expropriatees. What is even worse is that affected peasants may not receive full compensation. This is because the government pays compensation via rural collectives rather than directly to peasant expropriatees, and some of the funds might be retained.

Here is an example. City B recently won the right to host an important international sports event. This has boosted City B’s plans to enlarge and renovate its public facilities by building new stadiums, gymnasiums, and most noticeably, a high-speed rail line. Many houses will be demolished to make way for this rail line. Mr Chen’s house is one of these. Mr Chen used to work for a state-owned enterprise, Golden Sunshine. The 120 square metre house he currently lives in was sold to him by Golden Sunshine ten years ago for a low price of RMB 50,000 as a subsidized home to a state employee. Now Mr Chen has retired, and Golden Sunshine has been dissolved. The government authority of City B informed Mr Chen yesterday that the amount of compensation to be given to him for the expropriation would be RMB 50,000, and he must find somewhere else to live within three months from this notice.

Mr Chen refused to move out of his home, saying that the compensation was outrageously low. He asked the government to compensate him for an amount in cash not lower than RMB 4,500,000, which is the house’s current market value. Alternatively, he would be willing to accept a house of the same size in a convenient location in exchange for his current home. Both his request for compensation in cash and in kind were turned down by the government authority of City B.

Does Mr Chen have the right to claim an appropriate compensation package? By Article 42 of the Property Rights Law, in the public interest, houses owned by private individuals can be expropriated, and the house owners affected will be compensated for the expropriation. In reality, it may not be easy to run an effective mechanism in China that ensures that expropriation in the name of serving public interest is not arbitrary. In the context of legal guidance

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released by the State Council in 2011, i.e. the Decree on the Expropriation of Houses over State-owned Land and Compensation, an expropriatee is entitled to compensation covering the value of the expropriated house(s), the loss incurred due to the required relocation, and the loss caused from having to suspend production and business (Article 17, paragraph 1). The amount of compensation for an expropriated house shall not be lower than the house’s prevailing market price (Article 19, paragraph 1). And an expropriatee has the right to choose to be compensated in cash or to be allocated another house to his satisfaction (Article 21, paragraph 1). Therefore, Mr Chen is entitled to claim for a compensation package in cash in line with the house’s current market price. He may also choose to be compensated in kind, i.e. to be allocated a house of the same size that can attain his wish and satisfaction.

The requisition of property

There are some similarities between the expropriation and requisition of property. Firstly, both the expropriation and requisition of property result in the dispossession of the property from its owner or from any person/ organization currently in possession of the property as permitted by its owner. Secondly, both the expropriation and requisition of property are epitomized by taking away property on compulsion with no need to obtain the consent of the property’s owner or the property’s current user. And thirdly, both the expropriation and requisition of property are carried out in the name of satisfying the public interest.

However, the requisition of property also has some unique features. Unlike the expropriation of property, which focuses on immovable property, the requisition of property can apply to both immovable property and movable property. While what is taken away in the case of expropriation is the property’s ownership, in the case of requisition of property it is the property’s right of use; in other words, the property is supposed to be returned to its original owner or user once the requisition is no longer necessary. Moreover, unlike the expropriation of property, which in theory can be carried out in non-emergency circumstances, the requisition of property is far less common because it only applies when massive natural disasters or wars occur, resulting in an urgent need to requisition property to deal with these disasters or to provide support to the army.

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The principles of the requisition of property are basically contained in Article 44 of the Property Rights Law. Article 44 provides that: ‘For the purpose of meeting urgent needs such as the elimination of imminent danger, disaster relief, etc., the immovable or movable property of any organization or private individual can be requisitioned in accordance with the prescribed authorities and procedures under the law. The requisitioned immovable or movable property after the purpose of the requisition has been satisfied shall be returned to the original source from which it is requisitioned. Where the requisitioned immovable or movable property is no longer able to be returned due to damage inflicted on it or its loss, compensation shall be made.’

Just as there are murky areas in the expropriation of property, there is ambiguity with respect to the following questions in the requisition of property: whether the government or the state is supposed to be the party exclusively entitled to exercise the right of requisition; how the term ‘public interest’ should be interpreted in the course of requisition; and who will be responsible for making sure that the requisitioned property is really used in the public interest. No clear answers to these questions can be found in the Property Rights Law.

However, as the requisition of property occurs far less frequently, it has not generated as many disputes or confrontations as has the expropriation of property.

Ownership in a condominium building

A growing imbalance between population and amount of land is restricting the quality of life in China’s urban areas. Detached dwellings that were quite common a couple of decades ago are quickly disappearing. High-rise residential buildings are becoming the norm in large and medium-sized cities.

These ‘condominium buildings’ are usually located in a gated community and are multi-unit dwellings composed of all units of housing privately owned by individuals along with some common areas (such as roads, corridors, stairs, entrances, roofs, exterior walls, elevators, public gardens, parking lots, bars, cafeterias, swimming pools, tennis courts, etc.) that all residents in the building are eligible to use (subject to payment according to circumstances).

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In response to the complexity of ownership issues brought about by the rapid development of condominium buildings in cities, the Property Rights Law sets out some general principles with a view to ascertaining various kinds of ownership that may relate to a condominium buildings, especially with regard to common areas.

According to Article 70, a condominium building’s ownership can be divided into two categories: the ownership over the ‘exclusive parts for residential or commercial purposes that are owned by their owners,’ and the ownership over the ‘common areas outside the exclusive parts that are jointly owned and managed by the (aforesaid) owners.’ That is to say, someone who purchases a unit in a condominium building has exclusive ownership of that unit, and along with all other unit owners has joint ownership over the common areas in the building of which that unit is a part. Also, the person in conjunction with other unit owners as a community is entitled to manage the public affairs that are of relevance to all residents in the building.

Hence property owners in a condominium building generally have the following rights: they have an exclusive right over their own property; they hold co-ownership over the common areas in the condominium building; and they have the right to manage the assets under their co-ownership as well as the public affairs in connection with the condominium building.

Exclusive rights over private property

Article 71 of the Property Rights Law defines a property owner’s exclusive right over his private property in a condominium building as ‘an owner’s right to possess, utilize, earn from and dispose of the part in a condominium building that is exclusively owned by him.’ It bans such an owner, when exercising his exclusive right over his private property, from ‘posing any threat to the safety of the building or causing damage to the legitimate interests of other owners.’

According to Article 77 of the Property Rights Law, in principle an owner shall not use his residential dwelling as an office for the purpose of carrying out business. However, Article 77 does not explicitly outlaw such conversion, but merely says that if the owner wants to do so, other property owners who might be affected by his action should concur with what he plans to do. It

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can therefore be construed from Article 77 that provided other owners do not oppose it, a residential dwelling in a condominium building can be used as an office.

In fact, it is not unusual for residential dwellings to be used as offices, classrooms, hair salons, grocery stores, etc. Owners rarely consult neighbours before converting their residential units into offices.

Co-ownership of common areas

In theory, co-ownership over property can be exercised on the basis of different proportions respectively applied to each owner (Property Rights Law, Article 94), or on an entirely joint basis without any divided proportions (Property Rights Law, Article 95). Although the Property Rights Law does not expressly provide for the manner in which co-ownership over common areas in a condominium building is exercised, it can be inferred that the said co-ownership over common areas in a condominium building refers to the former, i.e. property owners in a condominium building jointly own those common areas on the basis of different proportions applied to each owner.

Regarding the issue of co-ownership over common areas in a condominium building, Article 72 of the Property Rights Law stipulates that: ‘A property owner in a condominium building enjoys rights and assumes obligations with respect to the condominium building’s common areas; he is not allowed to give up his rights or to fail to fulfil his obligations. In the event that he transfers his dwelling which is of a residential or business nature to somebody else, his right of co-ownership and co-management over the common areas will be transferred together.’

Under Article 80, apportionment of expenses and proceeds arising from a condominium building and its ancillary facilities will follow the property owners’agreement (if any); otherwise it will be decided in relation to the floor area of each property owner’s exclusive unit to the entire construction area of the building.

Generally speaking, corridors, stairs, entrances, roofs, exterior walls, elevators, etc. in a condominium building are under co-ownership of the property owners in the building.

Ownership of catering and sporting facilities in the gated community where

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a condominium building is located is reliant on the facts of each individual case. If they occupy a site that specifically belongs to the common areas in the building as previously designed and the government city planning authority has approved such design beforehand, they may be deemed as co-owned by the property owners in the condominium building; otherwise they can be deemed as under private ownership.

In reality, many controversies arise in connection with ownership of commonly accessible roads, public gardens, and parking lots within a condominium building. Parking lots deserve particular attention.

Parking lots refer to both open air parking spaces as well as underground garages. In this regard, Article 74, paragraph 1 of the Property Rights Law states that: ‘Parking spaces and garages, if the design of which has been incorporated into a condominium building’s construction plan for vehicle parking, should first of all be used to meet property owners’ requirements.’

Article 74, paragraph 2 of the Property Rights Law is a vague provision. It says that ownership of such parking spaces and garages depends on how the relevant parties decide by means of sale, or lease or giving as a gift. Literally it can be construed that parking lots in a condominium building do not belong to property owners but from the very start are under sole ownership of the developer; the developer is free to sell or lease any parking space to anyone by whatever means; if any property owner wants to use a parking space built in the condominium building, he will have to purchase it or rent it from the developer, and perhaps as a property owner he may have the pre-emptive right to do so.

Article 74, paragraph 3 of the Property Rights Law illustrates a circumstance in which parking lots built on the roads or other sites commonly owned by property owners in a condominium building are under the co-ownership of property owners. Such parking lots normally refer to open air parking spaces designated on the publicly accessible roads within the gated community where a condominium building is located, but do not include any underground garage.

According to Article 73 of the Property Rights Law, some public facilities within the gated community where a condominium building is located, such as publicly accessible roads and public gardens, are under co-ownership of the property owners in the building.

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Property owners’ joint management

In the context of the Property Rights Law, property owners in a condominium building jointly manage those co-owned common areas as well as any public affairs related to the people living in the building and in the gated community. Property owners’ right of joint management to some extent ensures the selfregulating feature the Property Rights Law envisages for a condominium building’s operation and administration in everyday life.

The Property Rights Law requires that some important management issues in a condominium building shall be decided by all property owners. Article 76 lists the following issues, the resolution of which requires ‘the consent of the property owners whose property in aggregate amounts to more than half the total areas in a condominium building and who account for more than half the total property owners in the building’: formulating and amending rules on convening property owners’ assembly meetings; formulating and modifying rules on managing the building and its facilities; election of property owners’ committees or change of such committees’ members; engaging and dismissing any firm or administrator that provides management service to the building; and other issues of material importance in connection with the property owners’ right of co-ownership and joint management.

Article 76 also provides that settling the following issues would require ‘the consent of the property owners whose property in aggregate amounts to more than two thirds of the total areas in a condominium building and who account for more than two thirds of the total property owners in the building’: raising funds to cover maintenance costs of the building and its facilities, and using such funds accordingly; and changing or rebuilding any part of the building and its facilities. Regarding the daily operation and administration of a condominium building, under Article 81, paragraph 1, property owners may choose to carry out the management themselves, or hire an outside firm to provide such management services.

Property owners normally should exercise their right of joint management through convening a property owners’ assembly meeting or a property owners’ committee meeting. Under Article 75, paragraph 1, such a property owners’ assembly or a property owners’ committee can be established by

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property owners themselves. It is supposed to function as a management body on behalf of all the property owners in a condominium building.

Decisions made at a property owners’ assembly meeting or a property owners’ committee meeting have a binding effect on all the property owners in a condominium building (Article 78, paragraph 1).

Disputes between the property owners in a condominium building are common. The Property Law provides for procedures intended to facilitate the effective settlement of such problems. According to Article 83, paragraph 1, a property owners’ assembly or a property owners’ committee is empowered to intervene in order to rectify any infringement committed by one property owner that may injure the interests of another property owner by requesting the wrongdoer to stop what he is doing or to pay the victim for his loss (if any).

Nevertheless, property owners do not have to blindly abide by what a property owners’ assembly or a property owners’ committee has decided. If a property owner feels aggrieved believing that implementing such decision will injure his legitimate interest, he may apply to the court for having the decision set aside (Article 83, paragraph 2).

It is interesting to note that the Property Rights Law is silent on whether a property owners’ assembly or a property owners’ committee possesses a legal personality capable of independently exercising civil rights and fulfilling civil obligations. Such uncertainty may easily provoke disputes over whether a property owners’ assembly or a property owners’ committee is entitled to participate in lawsuits on behalf of property owners.

A neighbouring relationship

Neighbours, i.e. those in adjacent properties, might affect each other through their behaviour, if, for instance, one poses an impediment to the other’s air ventilation or daytime lighting, or discharges pollutants, or does not provide the other with required assistance or convenience.

The concept of a ‘neighbouring relationship’ arose in this context. It refers to a relationship between property owners or occupiers of neighbouring

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properties. These parties are obliged to provide each other with the required minimum degree of convenience.

As an example, assume there are two pieces of land: A and B. A is encircled by B, so no one can enter A without passing through B. In this example, A neighbours B, and any party in connection with A and B will be viewed as having a neighbouring relationship. A will be far less useful if B’s owner or current occupier disallows any other person to pass through B in order to enter A. So letting people pass through B for the purpose of entering A is the required minimum degree of convenience that B’s owner or B’s current occupier should provide to outsiders.

A neighbouring relationship itself is not a property right, but it is of close relevance to the property right enjoyed relating to the adjacent immovable property. In the context of a neighbouring relationship, providing neighbours with the required minimum degree of convenience is a statutory obligation prescribed under the law.

There are some provisions on neighbouring relationships in Chapter 7 of the Property Rights Law.

Regarding the cardinal principles to be adhered to when handling a neighbouring relationship, Article 84 highlights them as ‘providing convenience for production and livelihood,’ ‘pursuing solidarity and mutual aid’ and ‘achieving fairness and reasonableness.’

As to the circumstances in which providing the convenience envisaged in a neighbouring relationship is required, Articles 86 to 88 of the Property Rights Law enumerate the following scenarios: using and draining water; road passage; construction or repair of buildings; installation of the required electric wires and cables, water pipes, heating and gas pipelines; etc.

Articles 89 to 92 of the Property Rights Law require avoidance of causing hindrance to neighbours in a neighbouring relationship and illustrate the likely occurrence of such hindrance in circumstances such as obstructing air ventilation, daytime lighting and sunshine; getting rid of solid wastes; producing atmospheric pollutants, water pollutants, noise, light, and electronic magnetic radiation; dredging; constructing buildings; using and draining water, utilizing road passage, and installing pipelines; etc.

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However, it should be noted that in a neighbouring relationship, neighbours are only required to provide to each other the required minimum degree of convenience, and a higher degree of convenience cannot be statutorily enforced. Seeking a higher degree of convenience requires the establishment of an easement between the two neighbouring parties. An easement is a kind of usufructuary right. The two neighbouring parties may enter into a contract in order to establish an easement, which, in light of this contract, entitles one party to the contract to utilize the property of the other party in certain respects, with a view to accomplishing an enhancement of the attractiveness or usefulness of the former party’s property. Article 156, paragraph 1 of the Property Rights Law provides that: ‘A right holder of an easement is entitled to have his immovable property better utilized by using another person’s immovable property according to a contract made between them.’

The following example illustrates the benefits of establishing an easement.

Sunshine is a continuing education school. Its small campus adjoins Great

Land House, an office building belonging to Great Land Research Institute.

Sunshine has only one entrance, from which it is a 15 minute walk to the nearest bus station. Many of Sunshine’s teachers and students have requested opening another entrance that is significantly closer to the bus station. However, to take this new route, walkers must pass through Great Land House. Therefore, Sunshine entered into an agreement with Great Land Research Institute for the purpose of establishing an easement. According to the agreement, Great Land Research Institute allows Sunshine’s staff and students to pass through Great Land House at any time during office hours; in return, Sunshine pays an annual fee of RMB 10,000 to Great Land Research Institute for this convenience.

The consequences of the bona fide acquisition of property and dealing with found property

Normally property ownership can be acquired based on a contractual relationship, or by donation, bequeath, inheritance, etc. However, there are some special circumstances under which property ownership can be acquired in a different way.

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Example 3.1

T bought 100 packs of Marlboro cigarettes. He temporarily deposited the cigarettes in G’s house. C (G’s friend) was in urgent need of cigarettes. G sold these cigarettes to C, who had no idea that G was not in a position to sell them. C and his friends smoked all the cigarettes. Did C legitimately become owner of these cigarettes?

Example 3.2

Huang lost his diamond ring. The diamond ring was found by Tang, who sold it to Yang. Could Yang become owner of the diamond ring in this situation?

The above examples are related to the rules on the consequences of bona fide acquisition of property and on how to deal with found property that might be lost by somebody else. Chapter 9 of the Property Rights Law, entitled ‘Special rules on acquiring ownership,’ sets out some provisions in these respects.

Bona fide acquisition of property

The Property Rights Law makes bona fide acquisition of property available and acceptable, with a consequence that a buyer may become owner of the property he purchased in good faith. It provides an opportunity to innocent buyers, who do not know that the sellers they are transacting with in fact do not possess ownership of the goods they are selling, to eventually acquire ownership of the goods sold in this way. In other words, the bona fide acquisition system established under the Property Rights Law is in favour of buyers in good faith.

Here, the term ‘good faith’ does not carry any moral dimension. It simply means that the buyer does not know (or under normal circumstances cannot be expected to know) that the seller is in fact short of ownership over the property being sold. Conversely, ‘bad faith’ indicates that the buyer knows (or under normal circumstances can be expected to know) that the seller is not entitled to sell that property over which he does not have ownership; in this case, the bona fide acquisition system operates against a buyer in bad faith, and the buyer will be denied entitlement to ownership of the property bought by him.

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The substance of bona fide acquisition is described in Article 106, paragraph 1 of the Property Rights Law as follows: Where the immovable or movable property is transferred by a person to somebody else while the former has no right to make such transfer, the property’s owner is entitled to have the transferred property recovered; unless the law provides otherwise, the transferee can acquire ownership of the transferred immovable or movable property in the circumstances as below: (1) the transferee is in good faith when the immovable or movable property is transferred to him; (2) the transfer is made at a reasonable price; and (3) the transferred property has been registered if according to the law transferring such property has to be registered, or has been delivered to the transferee if such transfer does not need to be registered.

The rationale behind which a buyer in good faith can be allowed to obtain a good title to the property sold to him by somebody who is not eligible to sell it lies in upholding a spirit of encouraging transactions. In the dynamic, fastgrowing economic society of today, it is unrealistic to expect that each and every buyer can detect a likely pitfall in connection with what he is buying or has carried out a due diligence exercise to make sure that the seller does have ownership of what he is selling. Appropriate implementation of the bona fide acquisition system can be conducive to reducing unnecessary transaction costs and treating innocent buyers fairly.

After the transfer of the property is completed in the manner accepted under the bona fide acquisition system, the original owner of the property can seek compensation against the person who has made such illegitimate transfer for the loss (Property Rights Law, Article 106, paragraph 2).

In Example 3.1 above, C had no idea that G was not in a position to sell the cigarettes to him. In the event that C paid a reasonable price, his purchase would amount to obtaining a good title to these cigarettes. T could seek compensation against G (but not against C).

Dealing with found property

The Property Rights Law also provides for how to handle the unclaimed property lost by somebody after finding it. Article 109 requires that such property should be returned to its owner, and to do so the finder should try to inform its owner to collect it or pass it to the police in the first instance.

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That is to say, it depends on whether the identity or contact details of the property’s owner can be identified by the finder. If they can, the finder should immediately notify the property’s owner of what he has found. If they cannot, the finder will be obliged to hand over the found property to the police as quickly as he can, rather than keeping the property himself.

In Example 3.2 above, Tang found the diamond ring lost by Huang. If Tang was not able to identify to whom the diamond rings belongs, he should quickly hand it over to the police.

Looking after found property voluntarily

Before the finder hands over found property to its owner or to the police, there may be a short period of time within which he volunteers to look after the found property. Although the finder has no legal or contractual obligation to do so, if he chooses to do so, during this period he should try to prevent the found property from being damaged, destroyed or lost, otherwise he may have to recoup such loss in favour of the owner.

For example, Mr Wang found a lost dog. Before he is able to locate the dog’s owner, Mr Wang may voluntarily take care of the dog for its safety and health. The dog’s owner will be required to reimburse Mr Wang for any reasonable expenses incurred for looking after the dog. Mr Wang ought to ensure that the dog is well cared for. He may be liable for any injury caused to the dog during the period the dog is under his care.

In this regard, Article 93 of the GPCL provides that: ‘Where a person provides his management or services with a view to preventing another person’s interest from injury although he is under no legal or contractual obligation to do so, he will be entitled to the beneficiary’s reimbursement of any necessary expenses incurred by him for so doing.’

In this regard, the Property Rights Law imposes an obligation on the finder requiring him to take reasonable care of the found property before the property can be safely returned to its owner. By Article 111, the finder shall carefully look after the lost property, and may have to bear civil liabilities for the property’s loss or damage attributable to his deliberate fault or gross negligence during the time the property is kept by him. In light of Article 112, paragraph 1, the owner or the right holder of the lost property shall reimburse

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the finder for any necessary expenses incurred in the course of looking after the property.

Under Article 112, paragraph 2 of the Property Rights Law, where the owner or the right holder of the lost property has promised a reward to anyone who can help to find the lost property, he shall not go back on the promise after the lost property is returned to him. However, by Article 112, paragraph 3, in the case of the found property being illegitimately misappropriated by the finder, the finder will lose his entitlement to claim for the reimbursement of any necessary expenses incurred for looking after the property against the owner or the right holder of the property, and also be deprived of his eligibility to request the owner or the right holder of the property to stick to his promise to reward the finder.

According to Article 110 of the Property Rights Law, where the finder hands over the found property to the police, the police shall in a timely manner issue public notice inviting the property’s owner to make a claim to the lost property. If the property has been unclaimed after a passage of six months since the public notice is issued, it will become the state’s asset (Article 113).

Bona fide acquisition of found property

In Example 3.2 above, Tang found the diamond ring lost by Huang and sold it to Yang. If Yang had no idea that Tang as the seller was not the diamond ring’s owner and was not in a position to sell it, could Yang thereby legitimately become owner of the diamond ring after he bought it from Tang?

This raises a question of whether a further transaction involving the found property could lead to a buyer in good faith lawfully becoming the property’s new owner.

Under Article 107 of the Property Rights Law, the lost property’s owner is entitled to have the lost property recovered; where the lost property is in the possession of a person to whom the property is transferred by another person who has no right to transfer the property, the lost property’s owner can request the person who has no right to transfer the property to compensate him for the loss; within two years of him becoming aware of to whom the property has been transferred, the lost property’s owner is in a position to request the transferee to return the property; where the property is acquired by the

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transferee through auction or from a dealer who is in a position to sell such property, the lost property’s owner at the time of requesting the transferee to return the property shall reimburse the transferee the money expended for purchasing the property, and the lost property’s owner can claim for reimbursement (given to the transferee) against the person who has no right to dispose of the property (but has done so giving rise to the transfer of the property).

In Example 3.2 above, Huang may have two options. He may seek compensation against Tang for the loss. Alternatively, within two years of finding out the diamond ring has been sold to Yang, he may request Yang to return the diamond ring. Nevertheless, in the event that Yang bought the diamond ring not directly from Tang, but through auction or from a professional dealer (e.g. a jeweller or a pawnbroker) to which Tang sold the diamond ring, if Huang is able to claim back the diamond ring from Yang, he will have to reimburse Yang for what Yang paid for the ring. Then Huang can ask Tang to compensate him for the amount of money reimbursed to Yang.

Usufructuary rights

A usufructuary right, as a kind of property right, is in essence a usage right. Article 117 of the Property Rights Law defines a ‘usufructuary right’ as ‘a right to legitimately possess, utilize and gain from another person’s immovable or movable property.’

Part 3 of the Property Rights Law is devoted to usufructuary rights. It underlines the importance of property’s utilizability, which offers opportunities for people to benefit by using property not in their ownership, and for property owners to benefit by allowing their property to be used by others.

The formation of usufructuary rights allows for the utilization of unused or idle property, which relieves pressure on scarce resources in the face of rapid population growth. This is most apparent in the case of land.

Unlike a property owner, a usufructuary right holder is only entitled to use the property over which his usufructuary right is established. He is not in a position to dispose of the property through any transaction (such as sale or lease) without the consent of the property owner. Moreover, a usufructuary

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right, in theory, is not perpetual. It has a fixed duration that distinguishes it from ownership.

Part 3 of the Property Rights Law covers the following topics relating to usufructuary rights: general rules; the right to use contracted farmland; the right to use land for construction purposes; the rural household’s right to use land for residential purposes; and easement.

The right to use land for construction purposes is mainly relevant to urban areas, whereas the right to use contracted farmland and a rural household’s right to use land for residential purposes are both exclusively relevant to rural land.

General rules on usufructuary rights

The general rules on usufructuary rights set forth in the Property Rights Law are found in Chapter 10.

Under Article 121, the Property Rights Law emphasizes a usufructuary right holder’s entitlement to compensation in the case that the property over which his usufructuary right is created is expropriated or requisitioned with a consequence that his usufructuary right is thereby extinguished or adversely affected.

In addition to conceptualizing the term ‘usufructuary right’ under Article 117 as ‘a right to legitimately possess, utilize and gain from another person’s immovable or movable property,’ the Property Rights Law specifically mentions usufructuary rights over natural resources.

According to Article 118, usufructuary rights may be created over the natural resources that belong to the state or collectives or that belong to the state but are being used by collectives, in order to ‘possess, utilize and gain from’ such natural resources. Such a system of using natural resources is implemented on a paid basis (Article 119).

Articles 122 and 123 further mention that the following kinds of legitimately obtained usage right over natural resources are protected by the law: the right to use sea areas, the right to prospect mines, the right to water, and the right to carry out aquaculture and fishing activities in water and shoals.

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The right to use land for construction purposes

The right to use land for construction purposes, on most occasions, is of relevance to land in urban areas.

Main features

It is implausible to grasp the main features of the right to use land for construction purposes without having a basic understanding of the principle established in Chinese Constitutional Law of dividing land into two categories: land belonging to the state and land owned by collectives.

According to Article 10, paragraphs 1 and 2 of the Constitutional Law, the land in urban areas is owned by the state, and the land in rural areas as well as on the outskirts of cities is owned by collectives.

Article 135 of the Property Rights Law defines the right to use land for construction purposes as ‘the right to legitimately possess, utilize and gain from the land owned by the state,’ and points out that the right holder is ‘entitled to utilize such land to erect buildings, structures and other auxiliary facilities.’

Nowadays, the right to use land for construction purposes is most closely connected to real estate development in cities. A developer intending to carry out property development on a specific site must acquire a usage right over that piece of land before setting foot on the land to start business. However, the right to use land for construction purposes is not totally irrelevant to rural areas. While Article 135 confines the scope of the land mentioned in the right to use land for construction purposes to ‘the land owned by the state,’ it does not exclude what is provided under Article 43 of the Land Administration Law, which lists three main circumstances under which the right to use land for construction purposes may apply to rural areas when the land owned by rural collectives has to be used: developing dwellings in rural areas, setting up and running township and village enterprises, and establishing public welfare facilities in villages.

Regarding the scope of the right to use land for construction purposes, Article 136 of the Property Rights Law permits that its coverage may relate to the land surface, or the part above or beneath the land. In other words, the right can be created separately over the land surface, the part above the land or the part beneath the land, so that the piece of land can be put to greatest use.

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By Article 142, once the right to use land for construction purposes over a piece of land is acquired, in principle ownership of any building, structure or its auxiliary facilities built on the land by the right holder will belong to the right holder, unless evidence proves otherwise.

Although the land and the buildings, structures and their auxiliary facilities erected on it should be viewed as separate entities, under the Property Rights Law, any formation or alteration relating to the right to use land for construction purposes over a piece of land will also affect the property right over the buildings, structures or auxiliary facilities built on the land; and vice versa.

In this respect, by Article 146, in the event that the right to use land for construction purposes is transferred, swapped, contributed as capital or given as a gift, the property right over any building, structure or auxiliary facilities constructed on the land in question will simultaneously be changed in the same way. Similarly, under Article 147, where any building, structure or auxiliary facilities constructed on a piece of land is transferred, swapped, contributed as capital or given as a gift, the right to use land for construction purposes created over the land in question will simultaneously be changed in the same way.

The right to use land for construction purposes will not be deemed to be valid before it is registered. Under Article 139, the right to use land for construction purposes is validly established at the time of its registration with the registration authority. In practice, after the required registration procedures are completed, the registration authority will issue an official certificate to the right holder authenticating his right to use land for construction purposes over that piece of land. With this certificate in hand, the right holder can carry out any construction or development on the land free from legal obstacles.

According to Article 145, in the circumstance that the registered right to use land for construction purposes is transferred, swapped, contributed as capital or given as a gift, an application shall be made to the registration authority for changing the current registration.

Methods of creating the right

According to Article 137, paragraph 1 of the Property Rights Law, there are two main methods of creating the right to use land for construction purposes over a piece of land: by assignment or by allocation.

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By assignment

Creating the right to use land for construction purposes by assignment refers to the method of acquiring such right from the government (on most occasions through bidding) on payment of a land use fee. In essence, it is a way of acquiring the right to use land for construction purposes on a competitive basis. This is the way that most real estate developers acquire land for property development in cities and is the principal approach for acquiring land in China.

According to Article 138, paragraph 1 of the Property Rights Law, assignment can be completed by taking various concrete forms such as tender, auction, agreement, etc.

Article 137, paragraph 2 of the Property Rights Law requires that the assignment of land to be used for the following purposes be completed under a public bidding approach such as tender or auction: ‘the land to be used for the purpose of carrying out profit-making activities in the fields of industry, commerce, tourism, entertainment, or constructing residential buildings.’ It also requires that the assignment be completed under a public bidding approach such as tender or auction ‘if there are two or more persons intending to acquire such right over the same piece of land.’

By allocation

Creating the right to use land for construction purposes by allocation refers to the method of acquiring such right as a result of being allocated by the government a land use right over a piece of land (in most cases free of charge).

Currently, free allocation of a land use right by the government is relatively rare. It was done more often in the era of the planned economy with the land allocated to government departments, state-owned enterprises or public organizations through administrative decrees.

The Property Rights Law imposes a strict restriction on creating the right to use land for construction purposes by means of allocation (Property Rights Law, Article 137, paragraph 3).

In practice, a land use right acquired by allocation cannot be traded in the market in normal circumstances, as opposed to that acquired by means of assignment.

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Renewal of land use rights

Neither with the right to use land for construction purposes acquired by assignment nor with that obtained by allocation will the right holder be entitled to an indefinite use of the land. That is to say, the duration of the land use right is not unlimited, and there is a fixed time prescribed on using the land granted. After the fixed period, the question of renewal of land use rights arises.

Tenure of land use rights

In 1990, the State Council issued a document, entitled the Interim Regulations on the Assignment and Allocation of Usage Right over State-owned Land in Urban Areas.20 Article 12 of this document sets out a series of rules on the length of tenure for using different types of land, including ‘70 years for land for residential purposes; 50 years for land for industrial purpose; 50 years for land for the purposes of carrying out activities in the fields of education, science and technology, culture, health care and sports; 40 years for land for the purposes of carrying out activities in the fields of commerce, tourism and entertainment; and 50 years for land for a combination of these purposes or other purposes.’

In the context of Article 12, a question can be raised about whether the tenure can be renewed or extended on its expiry date. If the answer is no, a house owner may lose ownership of his house after the passage of 70 years. If the answer is yes, then it needs to be ascertained whether the renewal is automatic, or subject to further review and approval with a possibility that the renewal is not totally ensured.

Different types of land

The Property Rights Law provides a general answer to the question of whether the tenure of land use right can be renewed. It does so by differentiating two categories of land: land used for constructing residential houses and land used for purposes other than constructing residential houses.

20The Chinese version of the Interim Regulations on the Assignment and Allocation of Usage Right over State-owned Land in Urban Areas can be found on the following website: http://www

.law-lib.com/law/law_view.asp?id=6611. An English translation does not seem to be available at present. The author uses his own English translation in this book.

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•Land used for constructing residential houses

According to Article 149, paragraph 1, the right to use land for construction purposes created over land that is used for constructing residential houses can be automatically renewed on its expiry date.

That is to say, if a person buys an apartment, that person’s ownership over that apartment reliant on using the land on which the apartment is constructed will be automatically renewed on the expiry date of the established land use right (usually 70 years). In this sense, the person does not need to worry about losing ownership of the apartment when the land use right expires.

However, the Property Rights Law does not specify the maximum length of a new tenure allowed after the renewal is made. Nor does it clearly point out whether making the renewal will require paying land use fees again to the government in the same way as when the land user initially acquired this land use right.

•Land used for purposes other than constructing residential houses

Regarding the right to use land for construction purposes created over the land that is used for purposes other than constructing residential houses, the Property Rights Law does not explicitly provide whether renewal is guaranteed.

In this regard, Article 149, paragraph 2 provides that: ‘Renewing the right to use land for construction purposes created over the land that is used for purposes other than constructing residential houses is governed by the law. The attribution of the houses and other immovable property on the land in question shall be subject to any agreement made on this matter; where no such agreement is reached or such agreement is reached but not in a clear way, the attribution shall be subject to what the laws and administrative regulations prescribe.’

That is to say, the renewal will not be automatically granted to a land user once the duration of its land use right expires. Whether such right can be renewed will be very much up to an existing contractual understanding on this issue. If the parties concerned at a certain point in time have expressed their willingness to continue using the land after the current

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tenure of land use right expires and such expression has been officially displayed taking the form of a binding contract, then renewing the land use right will not be hindered unless the government wants to expropriate the land in question at the time.

Article 148 states that where the government wants to expropriate the land before the current tenure of land use right comes to an end, the right holder affected will be compensated and be given back the land use fee paid to the government.

The right to use contracted farmland and a rural household’s right to use land for residential purposes

The usufructuary right in connection with using rural land in China specifically refers to two kinds of such right: the right to use contracted farmland, and a rural household’s right to use land for residential purposes.

The right to use contracted farmland entitles peasants to use the land that belongs to rural collectives and is acquired from rural collectives based on contracts made between peasants and rural collectives enabling peasants to carry out production over the land on a fixed tenure basis.

The rural household’s right to use land for residential purposes bestows on peasants eligibility to obtain a piece of land in their rural hometown. They can construct houses on the land in order that every rural household may have somewhere to live.

Land usage in rural areas

The land in China’s rural areas (no matter whether it is used as contracted farmland or land for residential purposes) is owned by rural collectives, not by individual peasants. Peasants do not hold legal title to the land and are only entitled to acquire the usufructuary right (i.e. the usage right) over the land from rural collectives. Such land use right principally covers the right to use contracted farmland and the rural household’s right to use land for residential purposes.

Regarding the concrete form of the rural land’s collective ownership, Article 10 of the Land Administration Law provides that: ‘Where the collectively owned

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rural land is under the ownership of a collective of peasants at the village level in line with the law, the land in question will be managed and administered by the village’s collective economic organization or the villagers’ committee; if the land is under the ownership of more than one collective of peasants at the village level, it will be managed and administered by each such collective or by a team of villagers; in the event that the land belongs to a collective of peasants at the township or town level, it will be managed and administered by the township’s or the town’s rural collective economic organization.’

By Article 11, paragraph 1 of the Land Administration Law, ownership of rural collectively owned land can be identified and ascertained at county-level government departments, which carry out land registration and issue land certificates from which the land’s ownership can be ascertained. According to Article 13 of the Land Administration Law, ownership and usage rights of any legitimately registered rural land are protected under the law. In principle, a land use right over rural land is barred from being traded, or assigned or rented out for construction purposes of no relevance to agriculture (Land Administration Law, Article 63).

It is against the background of this land use model in rural areas that exercising the right to use contracted farmland and the rural household’s right to use land for residential purposes is unveiled and controlled. Establishing this idiosyncratic land use system was an epochal achievement in China’s economic reform, which started with testing the water by overhauling the land use system in rural areas. The collective ownership of rural land is a legacy of the 1950s when collectivization swept the countryside aiming at amassing capital for industrializing China’s cities. While such ownership has been legalized, allowing the establishment of the right to use contracted farmland and the rural household’s right to use land for residential purposes can be deemed as a tolerable compromise that does not pierce the firewall erected between private ownership and collective ownership of land in the countryside.

The past three decades of economic reform have resulted in a drastic transformation of rural life in China. Although the change on the whole has been positive, the disparity between the life of peasants and that of urban residents in terms of social privileges and welfare benefits is not only frighteningly large but also has a tendency to widen further. Moreover, with inadequate knowledge of science and technology, Chinese peasants are facing

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a tough stress-test in the form of fierce international competition with China’s gradual integration into the international arena. In this context, it remains to be seen whether the current rural land use system is sustainable.

The right to use contracted farmland

The right to use contracted farmland is derived from a land contracting system the operation of which commenced in Chinese rural areas in the late 1970s and flourished in the 1980s with the withdrawal of the people’s communes in the countryside. Such right is created on the basis of contracts between rural collectives that own the rural land and peasants who use the land. According to Article 12 of the Farmland Contracting Law, the entity that represents the rural collective of all peasants in a village to enter into such contracts with individual peasants refers to the collective economic organization at the village level or the villagers’ committee.

With the right to use contracted farmland in hand, peasants are able to carry out agricultural production over the land contracted from rural collectives. After they sell a certain amount of harvest to the government as a kind of obligation, the residual agricultural products can be kept for their own use for consumption or further trading. In this way, peasants’ initiatives in agricultural production are stimulated, whereas collective ownership of rural land remains intact.

Regarding the application for exercising the right to use contracted farmland in the Chinese countryside, Article 124, paragraph 2 of the Property Rights Law provides that: ‘A farmland contracting management system applies to the cultivated land, forest land, grass land and other kinds of land for agricultural use that is owned by collectives of peasants or is owned by the state but employed by collectives of peasants according to the law.’ By Article 125, such a right holder is ‘entitled to possess, utilize and gain from the cultivated land, forest land, grassland, etc. that has been contracted by him according to the law, and to engage in production in cultivation and plantation, forestry, husbandry, etc.’

In order to enable peasants to use the land on a long-term basis, Article 126, paragraph 1 of the Property Rights Law prescribes a lengthy tenure for various kinds of contracted farmland, e.g. 30 years for cultivated land, 30 to 50 years for grass land, and 30 to 70 years for forest land. According to Article 126,

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paragraph 2, such tenure can be renewed or extended after it elapses. Thus, any concern over the prospect of continuing to use the land after the tenure expires can basically be removed.

Article 131 of the Property Rights Law states that in normal circumstances rural collectives cannot withdraw the contracted land within the current tenure of the established right to use contracted farmland. Pursuant to Article 128, the right holder (i.e. the peasant who has contracted the farmland from the rural collective) is allowed to sub-contract the land in question, or swap or transfer his land use right, but he is not allowed to use the land for nonagricultural purposes unless doing so can be legitimately approved.

If the contracted land is expropriated, the right holder will be compensated (Property Rights Law, Article 132).

A rural household’s right to use land for residential purposes

A rural household’s right to use land for residential purposes is another important category of usufructuary rights that specially applies to rural land in China. It refers to a land use right granted to peasants who are allocated a piece of land over which such right is established and can use the land to construct their dwellings. Despite the fact that such land is under the ownership of rural collectives, the land use right created over it is exclusively enjoyed by the right holder (i.e. the rural household), whose interests pertaining to the land are protected against infringement.

According to Article 152 of the Property Rights Law, such a right holder is entitled to occupy and utilize the land allocated to it, and the household can build its house and auxiliary facilities on the land for residential purposes.

A rural household’s right to use land for residential purposes bears a strong social welfare characteristic, as peasants are eligible to be granted this land use right free of charge so that they can have a place to live in their hometown. Even in the event of loss of such land caused by force majeure events (e.g. natural disasters), according to Article 154 of the Property Rights Law, a household can be allocated land again as compensation.

It should be noted that such land is granted to a rural household rather than an individual. Under Article 62, paragraph 1 of the Land Administration Law, each rural household is entitled to be allocated one piece of land only for

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residential purposes. In other words, a household with many members has no substantial advantage over a single-person household. In either case, no more than one piece of land for residential purposes will be allocated.

A rural household’s right to use land for residential purposes as a kind of usufructuary right is strongly tied to peasants’ status as rural residents. China’s ‘hukou’ system (i.e. a government-run system for residency allocation, recording and permits) clearly divides Chinese citizens into two categories: holders of urban residency permits and holders of rural residency permits. Only holders of rural residency permits (commonly known as ‘peasants’) are entitled to the rural household’s right to use land for residential purposes. In practice, if an urban resident bought a house built on rural land, he would not be able to obtain any official certificate from the government ascertaining his ownership over the house. In this regard, the State Council issued a regulation in 1999, namely the ‘Notice on strengthening management over land transfers and banning speculative land trading issued by the Secretarial Department of the State Council.’21 Under this regulation, peasant’s dwellings on rural land cannot be sold to urban residents, and urban residents are also not allowed to build residences on rural land.

The Property Rights Law is silent on whether a rural household’s right to use land for residential purposes can be further traded (say, perhaps, firstly among peasants and then extended to encompass urban residents). The uncertainty and opacity surrounding this issue makes it difficult to speculate on the likelihood of such a development.

Here is an example. Andy Lau, a retired Hong Kong civil servant, is tapping into the mainland market to start a second career. In conjunction with a couple of partners, he opened a medical-instrument manufacturing plant in Guangzhou. Since the business requires him to stay on the mainland most of the time, he bought a big flat in Panyu (on the outskirts of Guangzhou), and all his family members have moved there. Andy paid a very large land use fee to get the piece of land on which his manufacturing plant is being constructed. The flat he purchased also cost him a fortune. But until one of his

21The Chinese version of this regulation can be found on the following website: http://www

.chinabaike.com/law/zy/xz/bgt/1335961.html. An English translation does not seem to be available at present.

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close friends recently told him, Andy hadn’t realized that land use rights and land ownership are two different things in China; no private land ownership is allowed; and all land use rights will expire after a certain number of years.

Andy is worried that he might lose his manufacturing plant and his flat after the current land use rights come to an end. Should Andy be concerned?

Land use rights are separated from land ownership in China, where private individuals or organizations can have land use rights, but not (unlike the state or collectives) land ownership. Under Article 12 of the Interim Regulations on Assignment and Allocation of Usage Right over State-owned Land in Urban Areas issued by the State Council, the length of time for using land for residential purposes is 70 years and that for industrial purposes is 50 years. However, this does not mean the right holder will lose his entitlement to continue using the land after the current tenure comes to an end. Regarding whether the tenure of an urban land use right can be renewed, the Property Rights Law divides the land into two categories: land used for constructing residential houses, and land used for the purpose other than constructing residential houses. Article 149, paragraph 1 clearly points out that the right to use the land that is used for constructing residential houses is automatically renewed on its expiry date. The Property Rights Law does not explicitly indicate that the right to use the land that is used for purposes other than constructing residential houses is automatically renewed after the present right expires; but it can be inferred from Article 149, paragraph 2 that in practice renewal should not be a problem, although it cannot be absolutely ensured. Therefore, Andy does not have to worry that he will lose ownership over his flat or his plant after the current tenure of the land use right expires in 70 or 50 years. Nevertheless, if Andy’s flat is built on land that belongs to a rural collective, then he will not be eligible for the ownership of the flat because only Chinese rural residents can become owners of residential houses that are constructed on rural land.

Property rights relating to security

The epicentre of Part 4 in the Property Rights Law is the property right relating to security. Here, the term ‘security’ carries the same meaning as ‘guarantee.’

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A guarantee is quite common in commerce. For example, T applies to ABC Bank for a loan of RMB 1 million. His application is turned down by ABC

Bank because ABC Bank is not satisfied with T’s ability to repay the loan after estimating his current creditworthiness. However, ABC Bank agrees to reconsider the case if T can find a person to provide ABC Bank with an appropriate guarantee to support T’s application. As G is willing to use his house (worth around RMB 2 million) as collateral for T’s bank loan, ABC Bank approves T’s application and grants him the loan. Here, G’s secured house plays a crucial role in the success of T’s loan application. This is because if T defaults in repayment of his loan, ABC Bank can rely on G’s secured house to have T’s debt settled.

The property right underlined in Part 4 of the Property Rights Law is the result of the creation of such security. In practice, the property right holder who has a security interest is usually a creditor who expects his debtor to fulfil debt obligations on time. If his debtor fails to do so, the creditor can exercise his property right based on a guarantee created over the property that is provided to the creditor to secure the debtor’s debt payment.

In this respect, by Article 170 of the Property Rights Law, a property right holder who has a security interest is entitled to be paid out of the proceeds of selling the secured property on a priority basis if his debtor fails to honour the debt obligation that falls due. Under such provision, the entitlement of a property right holder who has a security interest can be construed from two perspectives: firstly, when exercising his right, he is entitled to have the secured property sold in the first place; and secondly, he is entitled to be paid on a priority basis from the proceeds garnered from selling the secured property.

However, it should be noted that if a debtor fails to fulfil his debt obligation, his creditor will not be in a position to directly foreclose the secured property and become that property’s owner. The creditor can only have the secured property sold and then try to get paid out of the proceeds. In practice, a property right holder relating to security needs to apply to the court for an order for having the secured property sold (say by auction) as well as for the enforcement of such order.

Making payment to that creditor is prioritized but not guaranteed, because the same debtor may concurrently have different creditors, so his assets available

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for paying off these debts could be quite limited. If this is the case, the property right holder relating to security (i.e. the creditor) will have priority in being paid over unsecured creditors, in the event that they all rely on the same sale proceeds.

Going back to the above example, if T defaults in repayment of his bank loan, ABC Bank as a property right holder over the secured house provided by G can exercise its right by applying to the court for an order for having the house sold by auction. If a court order can be obtained and enforced, ABC Bank will be given priority in being paid out of the proceeds of the sale. In the event there is no other creditor waiting to be paid relating to this secured house, ABC Bank can ultimately have T’s debt fully settled.

General provisions regarding a property right relating to security

The Property Rights Law sets out some general provisions that are used to govern a property right relating to security.

Article 173 describes the scope of guarantee under a property right relating to security as ‘embracing an entitlement to the principal creditor’s right and the interests accrued thereof, damages for breach of contract, compensation for injuries, and reimbursement of expenditures incurred in the course of looking after the secured asset and realizing a property right relating to security.’

A property right relating to security is of a subordinate nature. It is predicated on a principal contractual relationship already in force between a creditor and his debtor. The subordinate character of a property right relating to security is illustrated under Article 172, paragraph 1, which points out that a contract of guarantee is subordinate to a relevant principal contract under which a creditor’s rights and his debtor’s obligations are established, with the validity of the contract of guarantee subject to the validity of that principal contract.

In the above example, ABC Bank’s property right over G’s secured house is subordinate to ABC Bank’s entitlement to repayment of T’s bank loan as T’s creditor. Without this contractual relationship between ABC Bank and T (as the creditor and the debtor respectively), there will be no basis for ABC Bank to have its property right relating to security over G’s house created and exercised.

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According to Article 81 of the Contract Law, in the event that a creditor assigns his creditor’s rights to a third party, any of his rights subordinate to his creditor’s rights will be deemed to be assigned together. That is to say, assignment of a creditor’s rights depicted in his contract with the debtor regarding their creditor–debtor relationship gives rise to a simultaneous assignment of any other rights subordinate to the creditor’s such principal rights. Among the creditor’s subordinate rights, a property right relating to security can be one of them.

In the above example, if ABC Bank assigns its creditor’s right over payment of T’s debt to XYZ Bank (a creditor to which ABC Bank owes outstanding debts), ABC Bank’s property right relating to security over G’s house will be deemed to be assigned to XYZ Bank also. After the assignment is completed, if T fails to fulfil his debt obligation in favour of ABC Bank, XYZ Bank (as the right holder over the secured house) is entitled to apply to the court for an order to have the house sold; and if the court grants such an order and the sale is carried out, XYZ Bank can have priority in getting paid out of the sale proceeds.

However, assigning a debtor’s obligations to a third party will lead to a different consequence. According to Article 175 of the Property Rights Law, where the creditor agrees to the debtor’s whole or partial assignment of his debt obligations to a third party, the guarantor who has provided security to the debtor’s fulfilment of his debt obligations will no longer need to honour his obligation of guarantee unless he consents in writing to continue doing so after such assignment.

In the above example, if later on T and C enter into an agreement under which T assigns his debt obligation to C who will pay ABC Bank for T’s debt, the obligation of guarantee imposed on G who uses his house as collateral for T’s loan will be released. Unless G expresses in writing his willingness to continue fulfilling his obligation of guarantee after such assignment, C’s default in repayment of the loan will no longer have anything to do with G.

Regarding the extinction of a property right relating to security, Article 177 lists four major scenarios under which such right will come to an end, including the creditor’s right no longer in force, the property right relating to security having been successfully exercised, the creditor having given up his property right relating to security, and other circumstances prescribed by the

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law. In any of these scenarios, a property right relating to security established will cease to be effective.

Mortgages, pledges and liens

For a property right relating to security, the Property Rights Law focuses on three specific forms of security: mortgages, pledges and liens.

Example 3.3

Steven Li enters a contract with Andy Wang. Under the contract, Andy lends RMB 200,000 to Steven who uses his car (worth RMB 300,000) as a security for payment of his debt. The arrangement of this security is registered at the government registration authority. Steven uses the borrowed money to carry out his private business. Meanwhile, he is still in possession of the car secured and drives it to see customers.

Example 3.4

Janet Sun intends to borrow RMB 200,000 from Vanessa Liu. Janet delivers her car (worth RMB 300,000) to Vanessa as a security for payment of her debt so that Vanessa will not worry that Janet will not be able to repay the loan. She agrees that Vanessa may sell the car and use the sale proceeds to offset the debt if she defaults in repayment. Under this arrangement, Vanessa lends the money to Janet. Before repaying the loan, Janet will no longer be able to use her car, which is kept by Vanessa as a security until the debt is fully settled.

Example 3.5

T has his car repaired at ABC Garage which charges T RMB 10,000 for this service. T pays ABC Garage RMB 5,000 only, promising to settle the remaining RMB 5,000 in the following week. The manager of ABC Garage insists on ABC Garage retaining the car until T pays off the balance.

The three examples above relate to a mortgage, a pledge and a lien respectively.

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Mortgages

Chapter 16 of the Property Rights Law focuses on issues in connection with a mortgage.

A mortgage can be understood as a debtor’s act of using (or arranging a third party to use) his or a third party’s property as a security for fulfilment of his debt obligations in favour of his creditor. The creditor can sell the secured property and get paid from the proceeds on a priority basis if the debtor fails to honour his debt obligations. However, the secured property is still physically in possession of the debtor or the third party who provides it as guarantee; the creditor only holds an entitlement to exercise the right to realize the secured property in the case of the debtor’s default in meeting his debt obligations. This understanding is derived from Article 179, paragraph 1.

Pursuant to Article 179, paragraph 2, the debtor or the third party who gives the creditor his security for fulfilment of the debtor’s obligations is known as the ‘mortgagor,’ the creditor who is entitled to exercise his right to realize the secured property in the event of the debtor’s default in honouring his debt obligations is known as the ‘mortgagee,’ and the secured property is termed as the ‘mortgaged property’ (i.e. the security).

According to Article 185, paragraph 1, a mortgage contract needs to be made in writing.

And under Article 186, the mortgagee is not permitted to be in agreement with the mortgagor with a view that the mortgaged property will become the property of the mortgagee in the event that the debtor fails to fulfil his debt obligations.

In other words, the debtor’s default in payment of his debt will not lead to the mortgagee becoming the owner of the mortgaged property. The mortgagee can only expect to recoup his losses by selling the mortgaged property and then having the debt offset from the proceeds of the sale on a priority basis.

In Example 3.3 above, Steven is the mortgagor, using his car as the mortgaged property for payment of his debt in favour of Andy who lends money to Steven under a mortgage arrangement as the mortgagee. Andy does not physically possess the car secured. Only when Steven defaults in meeting his debt obligation will Andy be in a position to exercise his right over the car by selling it, with a view to having the debt offset from the proceeds of the sale on a priority basis.

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What kinds of property can be mortgaged?

Article 180, paragraph 1 of the Property Rights Law describes some kinds of property that can be used as mortgaged property: (1) buildings and other fixtures on the land; (2) the right to use land for construction purposes;

(3)the right to use contracted farmland like barren land, etc., that is acquired by means of invitation to tender, auction, public consultation, etc.;

(4)equipment for production, raw materials, semi-finished goods, and products; (5) buildings, ships and air carriers that currently are under construction; (6) transportation vehicles; (7) any other kinds of property not barred from being mortgaged in light of laws and administrative regulations.

Article 184 sets out the following kinds of property that are not allowed to be used as mortgaged property: (1) land ownership; (2) land use right over collectively owned land; (3) facilities used for education, healthcare and other social welfare purposes that are in possession of those public bodies or social organizations which operate aimed at providing public welfare such as schools, kindergartens, hospitals, etc.; (4) any kind of property, the ownership or usage right of which is unclear or under dispute; (5) any kind of property that has been sealed off, seized, or under official surveillance and control, due to enforcement of law; (6) any other kinds of property barred from being mortgaged according to laws and administrative regulations.

Registration of a mortgage

For those kinds of property that can be used as mortgaged property, the Property Rights Law requires any such mortgage of immovable property to be registered in order that the mortgage can come into force. The Property Rights Law does not require the registration of any such mortgage of movable property. The mortgage of movable property that is not registered will not be denied its legal force, but it cannot be used as a defence against any claim over the property in question made by a bona fide third party. In other words, in order to constitute a valid defence against any claim over the movable property mortgaged, the mortgage must be registered, albeit the nonregistration will not affect the validity of the mortgage itself.

In this respect, Article 187 indicates that the mortgage created over buildings and other fixtures on the land, the right to use land for construction purposes, or the right to use contracted farmland like barren land, etc., that is acquired by means of invitation to tender, auction, open consultation, etc. shall be registered.

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Article 188 points out that a mortgage created over equipment for production, raw materials, semi-finished goods, and products, transportation vehicles, or ships and air carriers that currently are under construction will start to take effect when the mortgage contract is made; and such mortgage, if not registered, cannot be used as a defence to contest any claim over the mortgaged property made by a bona fide third party.

In practice, different government authorities are responsible for the registration of a mortgage relating to different types of mortgaged property. For example, a mortgage over a land use right needs to be registered with the Bureau of Land and Resources; a mortgage over vehicles with the Public Security and Traffic Management Bureau; a mortgage over ships with the Ship Classification and Registration Authority; a mortgage over civil air carriers with the Civil Aviation Authority; a mortgage over ordinary movable property with the Administration for Industry and Commerce; etc.

Mortgages and leases relating to the same property

Article 229 of the Contract Law provides that any change in the ownership of a leased object that happens during the term of the lease will not affect the lease’s validity. This means that the lease prevails over the sale or purchase of the leased object.

However, if the mortgaged property is at the same time under a lease, will the mortgage prevail over the lease? The answer depends on the circumstances. Article 190 of the Property Rights Law provides that: ‘Where the property has been leased before the mortgage contract pertinent to the property is made, the mortgage created will not affect the prior lease. In the event that the mortgaged property is leased after this mortgage is created, the lease cannot be used to contest any claim arising from the mortgage if the mortgage has been registered.’

That is to say, where the interests arising from a mortgage and a lease concurrently exist over the same property, the mortgage will give way to the lease if the lease is created prior to the mortgage.

If the mortgage is established earlier than the lease, whether the mortgage will surrender to the lease depends on if the mortgage has been registered. If the mortgage has not been registered, the lease will prevail over the mortgage. However, if the mortgage has been registered, the mortgage will prevail over

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the lease, and at a certain point in time when the mortgagee exercises his right over the mortgaged property by selling it in order to have the debt paid off from the sale proceeds, the lease may need to be terminated so as to give way to realizing the interests arising from the mortgage; if this happens, the lessee will not be in a position to deter the mortgagee from so doing and may only seek compensation against the lessor.

Sequence of payment between mortgagees

If the same property has been mortgaged in favour of different creditors, what is the sequence of being paid amongst these mortgagees when the mortgaged property is sold for counterbalancing the debts owed to them?

Article 199 of the Property Law provides an answer to this question. It says that: ‘In the case of the same property mortgaged in favour of more than one mortgagee, when the proceeds derived from having the mortgaged property auctioned or sold are used to pay off the debts, such payment shall be made in accordance with the following rules: (1) such payment will be made based on the order of registration if the mortgage has been registered, or in proportion to the debts owed to different creditors when the order of registration cannot be differentiated; (2) the mortgagee in a registered mortgage will be prioritized to be paid over the one in an unregistered mortgage; (3) if the mortgage is not registered, such payment will be made in proportion to the debts owed to different creditors.’

Take the following example. In January, Sun and Xu entered into a contract, according to which Xu loaned Sun RMB 400,000 secured by a mortgage on Sun’s private house. In April, Sun rented this house out to Li on a twoyear lease. In August, Sun’s debt payment came due, but he was not able to pay off the loan. Sun’s house was thus sold in order that Xu’s loan could be repaid from the sale proceeds. Fang, who had bought Sun’s house, intended to have the house immediately refurbished as he planned to use the house as a restaurant. Should Li move out? In principle, where the mortgage is established prior to the lease, whether the mortgage prevails over the lease depends on if the mortgage has been registered. If the mortgage had been registered, Li would have to move out as his right over the lease as a tenant must give way to Xu’s right over the loan secured on Sun’s house. Under this circumstance, Li may seek compensation against Sun. However, if the mortgage had not been registered, Li would not have to move out as his right

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over the lease would take priority over Xu’s right to sell the house for loan repayment.

Pledges

Chapter 17 of the Property Rights Law consists of two sections each of which focuses on one of two types of pledges: a pledge of movable property and a pledge of right.

A pledge of movable property

A pledge of movable property is described under Article 208, paragraph 1 of the Property Rights Law with respect to the following scenario: where in order to secure fulfilment of a debt obligation the debtor or a third party deposits his movable property with the creditor as security for the creditor to physically keep in the event of the debtor failing to fulfil his debt obligation when it falls due or in the event of the occurrence of a circumstance as agreed upon between the relevant parties under which the pledged property can be realized, the creditor will be entitled to be paid out of the proceeds of realizing the pledged property on a priority basis.

By Article 208, paragraph 2, among the relationships in connection with a pledge of movable property, the debtor or the third party is the ‘pledgor,’ the creditor is the ‘pledgee,’ and the secured movable property is the ‘pledged property.’

In Example 3.4 above, Janet (the borrower) deposited her car with Vanessa (the lender) as security for the loan. As the pledgee, Vanessa temporarily took possession of Janet’s car, and could have the car realized to get paid from the proceeds of such realization if Janet eventually defaulted in fulfilment of her debt obligation.

Under Article 210, paragraph 1 of the Property Rights Law, in order to create the pledgee’s right over the pledged property, a pledge contract needs to be made in written form.

A pledge becomes effective as of the time when the movable property to be secured is physically delivered to the creditor (Property Rights Law, Article

212). Once the debtor fulfils his debt obligation and the pledged property is returned to him, the pledge will no longer be in force.

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According to Article 215, paragraph 1 of the Property Rights Law, the pledgee is under an obligation to appropriately keep and look after the pledged property; and in the event that the pledged property is damaged or lost due to the pledgee’s impropriety in keeping and looking after the pledged property, the pledgee will be liable for making compensation. Also, under Article 214 of the Property Rights Law, the pledgee will be liable for making compensation if the pledgee, without obtaining the pledgor’s consent, uses or disposes of the pledged property thus causing damage to the pledgor.

A pledge of right

Different from a pledge of movable property, under a pledge of right what is secured through the deposit with the creditor is not a kind of movable property but the debtor’s or a third party’s certain disposable right over the property that can be assigned by the debtor or the third party to somebody else as a pledge.

Article 223 of the Property Rights Law exhibits the types of right that can be pledged, including those over the following kinds of property: (1) bill of exchange, cheque, promissory note; (2) bond, certificate of deposit;

(3) warehouse receipt, bill of lading; (4) transferrable unit trust or equity;

(5) transferable registered intellectual property right like trademark, patent, copyright, etc.; (6) accounts receivable; (7) any other property right that can be pledged according to laws and administrative regulations.

According to Article 224, Article 226, paragraph 1, Article 227, paragraph 1 and Article 228, paragraph 1, in order to create a pledge of right, the pledge contract is in principle required to be made in writing.

A pledge of right will start to take effect subject to different conditions imposed on different types of such right.

According to Article 224, where a pledge of right is created on the basis of securing the right over a bill of exchange, cheque, promissory note, bond, certificate of deposit, warehouse receipt, or bill of lading, it will start to take effect when proof of such right is delivered to the pledgee.

Pursuant to Article 226, paragraph 1, where a pledge of right is created on the basis of securing the right over a unit trust or equity that has been registered with the securities registration and clearing authority, it will start to take effect when the registration of the pledge is made with the securities registration and

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clearing authority; where a pledge of right is created on the basis of securing the right over an equity other than that which has been registered with the securities registration and clearing authority, it will start to take effect when the registration of the pledge is made with the administration authority for industry and commerce.

According to Article 227, paragraph 1, where a pledge of right is created on the basis of securing the right over registered intellectual property like a trademark, patent, copyright, etc., it will start to be effective when the registration of the pledge is made with the relevant authority in charge of registered intellectual property.

Under Article 228, paragraph 1, where a pledge of right is created on the basis of securing the right over accounts receivable, it will start to be effective when the registration of the pledge is made with the relevant credit reference authority.

Moreover, according to Article 229, the provisions contained in Section 1 (entitled ‘A pledge of movable property’) of Chapter 17 ‘Pledge’ in the Property Rights Law, will apply to governing a pledge of right also, unless there is a provision different from what is provided in Section 2 that exclusively applies to a pledge of right.

Pledges and mortgages

There are two major differences between a pledge and a mortgage. The first lies in who keeps the secured property. The pledged property is delivered to the pledgee who then physically keeps that property. The mortgagee does not physically keep the mortgaged property and only holds his entitlement to realize the mortgaged property under appropriate circumstances. The second is the type of property over which a pledge or a mortgage can be created. In general, movable property or the right over movable property can be pledged; but immovable property cannot be pledged. Both immovable and movable property as well as the right over such property (e.g. the right to use land for construction purposes) can be mortgaged.

Liens

A lien can be understood under Article 230, paragraph 1 of the Property Rights Law in connection with the following scenario: where a debtor fails to

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fulfil his debt obligation that comes due, his creditor may retain his movable property which is already in the creditor’s legitimate possession, and is entitled to be paid off out of the proceeds of realizing the possessed movable property on a priority basis.

That is to say, for a debtor’s movable property which for some reason is in the possession of his creditor and which the creditor has yet to return to the debtor, if the debtor fails to pay off his debt, the creditor can continue to possess that property until the debtor can honour his debt obligation, if the debtor can do so without an unreasonably long delay. Alternatively, if the debt payment appears unlikely, the creditor may sell that property to get paid from the sale proceeds.

In this situation, the creditor becomes the ‘lien holder,’ and the movable property retained by the creditor is viewed as the ‘property under lien’ (Property Rights Law, Article 230, paragraph 2).

In Example 3.5 above, T has his car repaired at ABC Garage. Until T makes full payment for the repairs, ABC Garage is entitled to retain the car. In this circumstance, T’s car becomes the property under lien, with ABC Garage as the lien holder. If T unreasonably delays his payment, ABC Garage can sell the car in order to get paid from the proceeds of the sale.

According to Article 231 of the Property Rights Law, placing a lien on movable property shall be based on the same legal relationship established between the debtor and the creditor in connection with that property. In Example 3.5, such legal relationship exists between T and ABC Garage for repairing the car. The lien is based on this legal relationship.

Here is another example. Wang and Jiang have established two legal relationships. One such relationship relates to a lease under which Jiang rents his classical piano to Wang. The other such relationship arises from a loan granted by Wang to Jiang. Now the term of the lease comes to an end; in the meantime, Wang is due to be repaid for the loan. Jiang fails to make payment on the loan. Wang thus decides not to return the piano to Jiang unless Jiang can fulfil his debt obligation. However, Wang’s retention of Jiang’s piano would not constitute a lien as Wang’s act and Jiang’s default in loan repayment are not based on the same legal relationship.

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Nevertheless, also according to Article 231, placing a lien on movable property in relation to the debtor and the creditor which both are enterprises does not need to be based on the same legal relationship between them in connection with that property.

Another point that deserves special mention is that even if the debtor fails to pay his debt, the lien holder is not allowed to immediately exercise his right to realize the lien. The Property Rights Law requires the lien holder to give the debtor a grace period, and only when after the grace period elapses the debtor has still not fulfilled his debt obligation may the lien holder sell the property placed under lien. In this respect, Article 236, paragraph 1 provides that: ‘The lien holder and the debtor shall reach consensus on a period of time within which the debt payment must be made after placing the lien on the property; in the event of no such consensus being reached or the period of time agreed being inexplicit, the lien holder shall give the debtor such a period of time of more than two months, unless the property under lien is perishable. If after such a period of time passes the debtor has still not fulfilled his debt obligation, the lien holder and the debtor may agree on having the debt offset by the property under lien in cash terms; or the lien holder may get paid out of the proceeds of disposing of the property under lien by sale or auction on a priority basis.’

Under Article 238, after the property under lien is converted into cash or is disposed of by sale or auction, any part of the proceeds in excess of the debt shall belong to the debtor, where any part of the proceeds insufficient to offset the debt shall be made up by the debtor.

Moreover, according to Article 239, for the movable property on which a lien is placed, if that property has already been mortgaged or pledged, then the lien holder shall be entitled to be prioritized in being paid out of the proceeds derived from disposing of the property in question.

Also, the Property Rights Law allows prior exclusion of any movable property from being placed under lien by law or by agreement. In this regard, Article 232 provides: ‘Any movable property that is not allowed to be placed under lien according to the law or to an agreement made by the relevant parties will not be subject to being placed under lien.’

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Summary

The Property Rights Law is designed to deal with the formation and alteration of property rights in connection with immovable and movable property. A property right may refer to ownership, usufructuary rights and property rights relating to security.

Three cardinal principles are advocated under the Property Rights Law: the principle of the equal protection of property rights, the principle of the legality of property rights, and the principle of public notice and the goodfaith acquisition of property rights.

Property ownership in China is classified into state ownership, collective ownership, and private ownership. The expropriation or the requisition of private or collective assets is permitted under special circumstances for the sake of satisfying public interest. Appropriate compensation will be made to victims who suffer from the expropriation or the requisition of their property.

A usufructuary right is a usage right (not ownership). A usufructuary right holder is only entitled to use the property, but is not in a position to dispose of it. The right to use land for construction purposes, the right to use contracted farmland, a rural household’s right to use land for residential purposes, and easement are types of usufructuary right in the Property Rights Law.

The term ‘security’ embodied in a property right relating to security basically has the same meaning as ‘guarantee.’ The Property Rights Law concentrates on three specific forms of security: mortgages, pledges and liens.

Practice questions

1Rainbow Village is located in a remote rural area in southern China. The village is surrounded by three small mountains that abound in limestone, an important raw material in cement and steel making. For generations the importance of this mineral resource had not been noticed by the villagers, let alone outsiders.

Yang is Rainbow Village’s newly elected head. He promised to bring prosperity to the village during his tenure of office. In order to attain this

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goal, Yang organized the villagers to excavate limestone, which is then sold to giant steel conglomerates and building material manufacturers.

In the course of excavation, a piece of inscribed ancient bronzeware was discovered. Yang thought this relic must be of great commercial value. He therefore kept it for himself and decided to sell it to an antique shop someday.

The police interviewed Yang recently, telling him that he cannot have private ownership over an unearthed relic, and Rainbow Village’s excavation and sale of limestone is an illegal activity.

Yang argued that (i) under his leadership Rainbow Village is prospering through labour, (ii) both the excavated limestone and the discovered bronzeware have now become private property, and (iii) the right of private property is protected by law.

Are Yang’s arguments sound?

2T sold his house to G. As T said he lost his identity card, G had to postpone the registration of this transaction at the government registration authority. A week later, T mysteriously disappeared.

ABC Bank asked G to move out of the house. It told G that T borrowed a large sum of money from ABC Bank and the loan was secured against this house. As T failed to pay back the loan, ABC Bank would exercise its right to sell the house at a property auction in order that the proceeds of the sale could be used to repay the money lent to T.

Discuss.

3Song is a peasant from Moonlight Village in Hunan. Over the past twenty years, he has been living in Shenzhen with his family, firstly as a construction worker and now as a foreman.

Last year, Song pulled down his old house in Moonlight Village. On the site of his old house, he constructed a villa-style house and sold it to Professor Wang, an urban resident enthusiastic about living in the countryside. The villagers’ committee of Moonlight Village did not oppose Wang’s purchase.

190 The Property Rights Law

Early this year, the government started an exercise of expropriating some land in Moonlight Village, including the land on which the house bought by Wang is located. Wang is concerned that the house will soon be demolished. He is thinking of claiming for compensation against the government.

Will the government compensate Wang for any loss incurred due to the expropriation of the land?

4Wang is a sole trader selling cooked food products in G County. On the morning of 1 August, Wang sent some live ducks to Spring Song Food Processing Plant (‘Spring Song’), with a view that Spring Song would process the ducks into vacuum-packaged food products. He was charged RMB 5,000 for this service, and the cooked ducks were to be ready for collection on 4 August.

On the afternoon of 1 August, Wang asked Lin (a tailor) to make a light jacket for him. Wang and Lin agreed that ‘Wang will provide the required material for Lin to make the jacket; Lin will charge Wang RMB 1,000 for this tailoring service; the jacket will be ready on 20 August.’

Neither the RMB 5,000 nor the RMB 1,000 mentioned above had yet been paid. A rumour circulated that the government tax administration would shortly investigate an allegation that Wang was dodging tax. For fear of being arrested, Wang fled G County on 2 August. No one knew his whereabouts.

On 4 August, Wang did not show up at Spring Song to collect the cooked ducks. Spring Song tried many times to contact Wang by various means, but all in vain. Since the quality of the cooked ducks could only be maintained for a maximum of 30 days, Spring Song sold the cooked ducks to XYZ Shopping Mall for RMB 15,000.

On 20 August, Wang did not collect his jacket. Lin got hold of Wang on his mobile phone, knowing that Wang was hiding somewhere quite far away from G County. Wang assured Lin that he would collect the jacket in the next few days but there was no trace of him during the following months. On 1 December, Lin sold the jacket for RMB 800 to his cousin.

Discuss if Spring Song or Lin has done anything wrong.

Practice questions

191

5Miss Chang found a lost cat in her garden. The cat was suffering from vomiting and diarrhea, so she brought the cat to see a veterinarian. The veterinarian effectively treated the cat, and charged Miss Chang a medical fee of RMB 2,000.

On the way home, the cat suddenly ran away from Miss Chang into the opposite lane and was killed by a motorcycle going at high-speed.

Mr Lin is the cat’s owner. He thinks Miss Chang is liable for the cat’s death as the accident happened when the cat was under her care. Mr Lin asked Miss Chang to pay him RMB 10,000 for his loss.

Miss Chang refused to pay. She asked Mr Lin to reimburse her the medical fee of RMB 2,000 charged by the veterinarian.

Should Miss Chang pay Mr Lin RMB 10,000, should Mr Lin reimburse Miss Chang RMB 2,000, or both?

Guidelines for answers

1The limestone is a state-owned asset, and is not allowed to be bought or sold under the law. It is also unlawful for Yang to keep the bronzeware for himself because under the law an unearthed relic is an asset of the state.

2Since the transaction between T and G was not registered, T is still owner of the house. ABC Bank is entitled to sell the house to have the loan repaid. G should move out of the house, but can recover what he paid to T and may seek compensation against T for any loss.

3A rural household’s right to use land for residential purposes is exclusively enjoyed by rural residents. Wang holds no good title to the house and is not in a position to be compensated by the government for demolition of the house due to land expropriation.

4Spring Song did nothing wrong by selling the cooked ducks to XYZ Shopping Mall; but out of the RMB 15,000 sale proceeds, it should return RMB 10,000 to Wang. Lin did nothing wrong either by selling the jacket under lien to his cousin; Wang should make up to Lin the shortfall of RMB 200.

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5Mr Lin as the beneficiary should reimburse Miss Chang any reasonable medical expense incurred. If the cat’s death is due to Miss Chang’s negligence, she may have to compensate Mr Lin for the loss; otherwise she does not need to pay anything to Mr Lin.

Chapter 4

The law of contract

Introduction

An important part of the civil law framework, the law of contract can be viewed as one of the laws of greatest relevance to daily life, and particularly to economic and trade activities. A competent individual, or an organization that is lawfully run, will almost inescapably have to deal with various contracts, and on many occasions become a party to a contract and be bound by the legal force of the contractual relationship thereby established.

The earliest contract law in contemporary China emerged as a component of the Book on Obligations (i.e. the law of obligations), which was part of the Civil Code of the Republic of China, implemented in 1930 when the country was under the government of the Republic of China (see e.g. Ling 2002, 10; M Zhang 2006, 29–30). After the People’s Republic of China was established in 1949, the government issued some regulations on administering contract activities, but official legislation in the area of contract law was not put into place until the 1980s (see e.g. Ling 2002, 11–12).

During the 1980s, three laws pertaining to contracts were enacted in China: the Law of Economic Contract (1981), the Law of Economic Contract with Overseas Elements Involved (1985) and the Law of Technology Contract (1987). China was then in the early stages of carrying out its policy of economic reform and opening-up but vastly short of experience in handling market-related legal issues. These three laws were instrumental in filling legal vacuums in order to kick-start the country’s economic resurrection and subsequently spur an economic takeoff. They provided some general answers to legal questions arising from international trade and foreign direct investment that faced the country, which for a protracted period had little contact with mainstream international economies. These three laws were

194 The law of contract

an achievement, even though they had to be concurrently in force to cover different categories of contracts (L M Wang and Cui 2000, 89–90).

In 1999, a uniform contract law entitled the ‘Contract Law of the People’s Republic of China’ (hereinafter the ‘Contract Law’) was promulgated in China.1 As a piece of legislation intended to be applied universally to all kinds of contracts, the Contract Law displaced the three laws from the 1980s. The law, in a sense, ushered in a new era during which the contract law regime could be developed on a common, unified ground.

A few provisions from Chapter 1 ‘General Provisions’ of the 1999 Contract Law give some sense of the law. Articles 3 to 8 contain the following provisions respectively:

•‘The legal status of the parties to a contract is equal, and neither party is allowed to force his own wishes upon the other party.’

•‘The parties are entitled to voluntarily enter into a contract under the law, not subject to any organization or individual’s illegitimate intervention.’

•‘The parties shall have each other’s rights and obligations established under the doctrine of fairness and impartiality.’

•‘The parties shall abide by the doctrine of good faith when exercising rights and performing obligations.’

•‘When forming or performing a contract, the parties shall observe the laws and administrative regulations, pay obeisance to public morality, and stay away from having social economic order destabilized or undermining public interest in society.’

•‘A contract legitimately entered legally binds the parties to it. The parties shall perform their own obligations in accordance with what they have agreed, and are not permitted to arbitrarily alter or discharge the contract. A lawfully formed contract is protected by the law.’

1The full text of the Contract Law (in Chinese) can be found on the following website: http:// www.gov.cn/banshi/2005-07/11/content_13695.htm. English translations can be found in various sources, where the translations differ. The author uses his own English translation in this book. An English translation on the following website can also be used as a reference: http://www.fdi.gov

.cn/pub/FDI_EN/Laws/law_en_info.jsp?docid=50943.

The contract law regime 195

The above provisions convey the spirit of the essential doctrines of contract law, namely, the core doctrine of the freedom of contract, along with the doctrines of equality and voluntariness, fairness and impartiality, good faith, lawfulness, and strict adherence to contract terms.2 These doctrines were implemented to encourage an environment in which the economy could flourish and in the meantime business transactions could be carried out in a reasonably orderly way.

In terms of basic principles, key concepts and legal reasoning, the current contract law regime in China is to some extent comparable to the contract law frameworks in many other countries. This is because the 1999 Contract Law is informed by contract law models in both civil law and common law jurisdictions elsewhere and by the framework of international business law largely represented by international conventions, agreements and customs, for example, the United Nations Convention on Contracts for the International Sale of Goods (CISG) and some model laws of the United Nations Commission on International Trade Law (UNCITRAL) (M Zhang 2006, 11– 13).

For these reasons, the Chinese contract law regime has common ground with international laws, and has fewer distinctively Chinese characteristics than some other Chinese laws, such as the Property Rights Law covered in the previous chapter.

The contract law regime

The Contract Law has three parts: the ‘General Part,’ the ‘Specific Part’ and the ‘Supplementary Part.’ It is divided into 428 articles in 23 chapters.

The ‘General Part,’ Chapters 1–8, provides a set of norms applying to all kinds of contracts. It has chapters on general provisions, the formation of a contract, the validity of a contract, performing a contract, the alteration and the assignment of a contract, the termination of contractual rights and obligations, liability for breach of contract, and miscellaneous provisions.

2The doctrine of strict adherence to contract terms is also known as the doctrine of pacta sunt servanda (a Latin phrase meaning ‘agreements must be kept’).

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The ‘Specific Part,’ Chapters 9–23, does not apply to all kinds of contracts, and is tailored to 15 specific types of contract which make up its chapters: sales contract; contract for supply and use of electricity, water, gas and heat; contract for gift; contract for borrowing money; lease contract; financial leasing contract; contract for contractors work; contract for building engineering services; contract of carriage; contract for transaction over technology; deposit contract; contract for warehousing services; contract of mandate; brokerage contract; and intermediation contract.

This chapter focuses on the ‘General Part’ of the Contract Law. It looks at the legal issues surrounding a contract, from its formation through to its discharge, delving into the fundamentals of the formation of a contract, the validity of a contract, performing a contract, the alteration and the assignment of a contract, discharging a contract, and liability for breach of contract.

It must be emphasized that the main component of the Chinese contract law regime is the Contract Law, but the regime also includes relevant provisions of other laws and a handful of judicial interpretations issued by China’s Supreme People’s Court. Examples are some provisions contained in the General Principles of Civil Law, and two judicial interpretations made by the Supreme People’s Court, namely, the Supreme People’s Court’s Interpretation on Some Questions Relating to the Contract Law of the People’s Republic of China (I) issued in 19993 and (II) issued in 20094, hereinafter called the ‘Supreme People’s Court’s Interpretation on the Contract Law’ (I) and (II).

The formation of a contract

The formation of a contract is the normal starting point for the study of the law of contract. However, it is essential to understand first what a contract is.

3The full text of the Supreme People’s Court’s Interpretation on the Contract Law

(I)(in Chinese) can be found on the following website: http://wenku.baidu.com/ view/320011ec102de2bd96058830.html. No English translation has been identified in any online source.

4The full text of the Supreme People’s Court’s Interpretation on the Contract Law (II) (in Chinese) can be found on the following website: http://www.chinacourt.org/flwk/show.php?file_id=135559. No English translation has been identified in any online source.

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A contract usually takes the form of an agreement (L M Wang and Cui 2000, 4). However, not every agreement amounts to a contract. Generally, an agreement must be assessed to determine if it will give rise to the formation of a legal relationship that produces a legally binding effect on the parties involved and if the court will be in a position to enforce it in the event that the agreement is not observed. If this is the case, the agreement will amount to a contract. If it is not the case, e.g. in the case of a social arrangement between friends or a domestic arrangement between family members, the agreement will not be deemed to be a contract binding any party, and failing to fulfil the agreement will not invoke the court’s intervention.

Below are two agreements that are different in ways that affect their enforceability in a court.

•T invited G to have dinner at the Mandarin Hotel at 8 pm. G accepted the invitation. Hence an agreement was deemed to be reached on this matter between T and G. G arrived at the Mandarin Hotel on time, but T did not show up the whole evening. Thus T failed to fulfil the agreement.

•G and T entered into an agreement under which G lent RMB 1 million to T on the condition that T would repay the loan to G within half a year. But after half a year, T refused to repay the money and gave no reason or justification.

The first is a common agreement in daily life for the purpose of socializing, so it does not give rise to the formation of a legal relationship and cannot be enforced in a court. The second agreement, on the other hand, can be enforced in a court because it is not merely for the purpose of socializing, but constitutes a serious promise giving rise to a legal relationship between T and

G which has a binding force on both parties. T’s failure to fulfil his promise would lead to him facing legal consequences.

Under the Contract Law, a contract is defined as an agreement between natural persons, legal persons or other organizations, who are civil subjects of equal status, with a view to establishing, altering or terminating a relationship pertinent to civil rights and civil obligations (Article 2, paragraph 1). By this definition, a contract can be viewed as establishing the mutuality of intent of

198 The law of contract

contracting parties who fully and commonly recognize and accept the terms of the contract (L M Wang and Cui 2000, 120).

Generally, a contract can only be enforced by one party to the contract against the other party to the contract, and not against anyone outside of the contract. This is the key feature of an important doctrine called ‘privity of contract.’ By this doctrine, where one party to a contract has committed a breach causing an injury to the other party to the contract, the injured party can only claim damages against the contracting party in default and not against any third party who is not a party to the contract (even if the third party has a parental relationship with the defaulting party by financially controlling it).

The Contract Law only applies to contracts pertaining to property relations. It does not apply to agreements in connection with personal relations such as marriage, adoption, guardianship, etc., which, as the Contract Law points out, are governed by other laws (Article 2, paragraph 2).

According to the Contract Law, the parties to a contract at the time of entering into the contract shall possess appropriate capacity for civil rights and for civil conduct (Article 9). That is to say, any contracting party must be competent: he must be a person with full capacity for civil conduct as stipulated in the General Principles of Civil Law (Article 11, paragraph 1). The validity of a contract entered into by any person without full capacity for civil conduct may be thwarted by his incompetence, and whether such a contract can legitimately be allowed to be performed will depend on the circumstances in each individual case.

The formation of a contract in general takes the form of making an offer and accepting the offer (Contract Law, Article 13). Indeed, offer and acceptance are the two indispensable steps in creating a contract.

In contrast to the common law, the element of ‘consideration’ is not essential under Chinese law for entering into a contract. ‘Consideration,’ under common law, refers to anything of value promised to another when making a contract. This may include money, physical objects, services, promised actions, abstinence from a future action and so on. This is not necessary under Chinese law.

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Offer and acceptance

As offer and acceptance are the two indispensable steps in forming a contract, it is important to have a proper understanding of what constitutes an offer and an acceptance, and when they take effect.

What is an offer?

Offers take place virtually every day of people’s lives.

Example 4.1

ABC (a vocational school) intended to buy 50 floor standing airconditioners. It made an enquiry about the selling price with XYZ (an airconditioner vendor). In response, XYZ sent the following fax to ABC:

‘RMB 2,000 per piece (floor standing air-conditioners), cash on delivery, delivery to be made within a week, quotation valid for ten days.’

In this example, the fax sent to ABC (a prospective buyer) can be viewed as an offer made by XYZ, which put forward some conditions of a proposed transaction in the hope that ABC would accept these conditions thus giving rise to the formation of a purchase contract between ABC and XYZ. In this scenario, XYZ as the party making the offer is known as the ‘offeror’; ABC as the party to whom XYZ’s offer is made is known as the ‘offeree.’ In trade activities, an offer is also commonly termed as a ‘quotation.’

In contrast to the above example, on many occasions one may not be aware that one has in effect made an offer by one’s conduct, even though there has been no communication in writing.

Example 4.2

Say, in a supermarket Dan picks up a tub of ice cream that he wants to buy and waits in a checkout lane for the cashier to take payment. Dan’s act constitutes an offer made by him to the supermarket. Dan as the offeror expresses his wish to the supermarket to buy the box of ice cream at the price set by it. The cashier representing the supermarket as the offeree in theory may turn down Dan’s offer by refusing to sell the ice cream to him, albeit in reality this hardly ever happens.

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Example 4.3

Dan hails a taxi and asks to be taken to the railway station. His act can be deemed to be an offer made by him (to purchase a ride) to the taxi driver himself (if he’s a sole trader running his own taxi business) or to the taxi company for which the taxi driver is working as an employee. The taxi driver may refuse to drive Dan; and such refusal may not be an uncommon phenomenon.

Under the Contract Law an offer is one party’s expression of his intent to enter into a contract with another party; such expression of intent must meet certain requirements: (1) its contents are concrete and certain; (2) it declares that once it is accepted by the offeree, the offeror will instantly be bound by what he has expressed (Article 14).

That is to say, an offer is made by one party (the offeror) to another party (the offeree); it states the conditions the offeror proposes to the offeree. An offer expresses the offeror’s clear wish to be bound by these conditions given that the offer is accepted by the offeree.

For Example 4.1, it can be concluded under Article 14 of the Contract Law that the quotation is an offer made by XYZ indicating XYZ’s intent to enter into a contract with ABC to sell air-conditioners to ABC. Once ABC as the offeree accepts the quotation, XYZ as the offeror will be bound by the quotation leading to the immediate establishment of a contractual relationship between ABC and XYZ on the basis of the quotation’s contents.

Offers have some general attributes:

•Firstly, an offer as an expression of intent made by one party to enter into a contract with another party must be made by a specific person (i.e. the offeror).

•Secondly, depending on circumstances, the offeree can be a specific person, or a number of specific persons, or the public at large. In Example 4.1, XYZ made its offer to ABC; but if XYZ concurrently provided the same quotation to TT (another prospective buyer), then XYZ’s offer would be viewed as being made not exclusively to ABC but to two specific prospective buyers. As another example, say that in order

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to find his missing dog, Wang advertised in a local newspaper promising to pay a reward of RMB 5,000 to anyone who could return the dog; such an advertisement could be deemed an offer to the general public.

•Thirdly, an offer must exhibit the offeror’s clear intent to enter into a contract with the offeree. Stating facts, providing information, or exchanging information or opinions will not be counted as making an offer. Following on from Example 4.1, assume that XYZ gave a different reply to ABC’s enquiry: ‘We produce high-quality air-conditioners with the market demand far surpassing our capacity of supply.’ This is not an offer because XYZ is merely stating facts without explicitly indicating its intent to enter into a contract with ABC. If XYZ replied ‘We already have a huge number of orders, but we will see whether a solution can be worked out if you do not mind being charged a higher price,’ this also cannot be counted as an offer, as XYZ is exchanging opinions with ABC without clearly showing its intent to establish a contractual relationship.

•Fourthly, the contents of an offer must be concrete and certain, from which clear and workable terms to be incorporated in a prospective contract can easily be identified, so that once the offeree fully accepts those terms as they stand, a contract will instantly come into being between the offeror and the offeree.

Referring again to Example 4.1, if ABC does not make an enquiry with XYZ, but instead happens to receive a catalogue and price list from XYZ in the mail, should this be taken as an offer or an invitation to treat from XYZ?

An ‘invitation to treat’ refers to an invitation to make an offer (e.g. ‘I invite you to make an offer to me’). Accepting an invitation to treat will not result in the formation of a contract, but only leads to the likelihood of obtaining an offer. So an invitation to treat is not an offer, but it may be mistaken as an offer due to its wording or the way it is made.

Under the Contract Law, an invitation to treat is the expression of intent of a person in anticipation of another person making an offer to him; a mailed price list or catalogue, an auction announcement, an invitation to bid, a prospectus inviting investors to purchase shares or a commercial advertisement can each be viewed as an invitation to treat (Article 15, paragraph 1). Therefore, XYZ mailing a catalogue to ABC is an invitation to treat.

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It should be noted that although a commercial advertisement is normally an invitation to treat, if an advertisement contains relatively detailed conditions of a proposed transaction and the party who placed the advertisement intends to be legally bound by those conditions once anyone accepts them, then it can be an offer in effect. In this regard, the Contract Law provides that a commercial advertisement is deemed to be an offer if its contents fit the attributes of an offer (Article 15, paragraph 2).

In practice, it may not be easy to judge whether an advertisement is an offer or an invitation to treat. It depends on the circumstances. Sometimes, the habit of trade may need to be taken into account when making a judgment

(i.e. whether in a specific circumstance an advertisement counts as an offer in terms of common trade practices).

Say there are two advertisements. Advertisement 1 is shown below.

	Used car for sale!
Model:	Audi A4
Year:	2008
Kilometres:	30,000
Colour:	Black
Location:	Beijing
Payment:	Immediate sale, cash on delivery
Price:	RMB 100,000

Figure 4.1 Advertisement 1

Assume Advertisement 2 is identical to Advertisement 1, except that for the price it gives ‘Negotiable’ rather than a specific amount of money. Which advertisement is an offer and which is an invitation to treat?

An offer is defined under the Contract Law as one party’s expression of his intent to enter into a contract with another party; such expression of intent must meet certain requirements: (1) its contents are concrete and certain; (2) it declares that once it is accepted by the offeree, the offeror will instantly be bound by what he has expressed (Article 14).

The contents of Advertisement 1 and Advertisement 2 are both quite detailed and clear, and they cover some main conditions of a proposed transaction.

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However, as the price is pending in Advertisement 2, the party placing the advertisement does not intend to be legally bound by the listed conditions. Therefore, Advertisement 1 is an offer, whereas Advertisement 2 is an invitation to treat.

Here is another example. Twinkle Star (a real estate developer) advertised its high-rise housing project, Golden Sunshine Apartment Block, in the Shenzhen Daily. The advertisement claimed that ‘Golden Sunshine Apartment Block (under construction) is a new condominium located in the heart of Shenzhen, within five minutes’ walking distance to convenient public transportation and shopping facilities; amenities in this housing complex include a swimming pool, spa, sauna, tennis court, gymnasium, cafeteria, supermarket, etc.; all dwellings are to be delivered to buyers within a year; the current selling price is RMB 30,000 per square meter (valid for 30 days).’ Miss Lin was attracted by the advertisement and bought a small flat. After moving in, she was furious to find that the complex had none of the amenities mentioned in the advertisement, and that public transportation and shopping facilities were not within easy reach. In response to the challenge raised by Miss Lin, Twinkle Star countered that ‘The advertisement is only an invitation to treat, so the information in it is for reference only and carries no force of law.’ Miss Lin intends to file a lawsuit against Twinkle Star for breach of contract. In fact, it is quite likely that Miss Lin will succeed if she goes to court. In Article 3 of ‘An explanation concerning adjudicating disputes arising from transactions of buying and selling commercial real estate’, issued by the Supreme People’s Court in 2003, an advertisement placed to promote the sale of real estate is an invitation to treat; however, if the illustration and promise made by the seller as regards the properties to be sold and their relevant facilities are detailed and explicit, thus exerting a material impact on the selling prices of the houses and on entering into contracts to buy them, such an advertisement shall be viewed as an offer, and the illustration and promise made in it shall be an integral part of the contract, even though they may not be literally incorporated into the contract terms, contravening which will lead to a breach of contract. In this scenario, Twinkle Star is in breach.

When does an offer become effective?

The Contract Law provides that an offer starts to take effect from the moment it reaches the offeree (Article 16, paragraph 1).

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However, the Contract Law does not clarify the meaning of ‘the offer reaches the offeree.’ Does it mean when the offer arrives at the offeree’s habitual or registered residence, regardless of whether the offeree notices the arrival of the offer? Or does it mean when the offeree receives the offer in person, or at least notices the arrival of the offer or is made aware of it by another person?

Controversy may also arise when the communication between the offeror and the offeree is carried out using modern information technology, e.g. email or fax. When the Contract Law was passed, state-of-the-art information technology was not yet in wide use in China, and the law scarcely mentions it. It only mentions in one place that where a contract takes the form of electronic data messages, if the recipient has designated a specific system to receive electronic data messages, the time when a message from the sender enters such system will be deemed to be the time of the message reaching the recipient; if such system has not been designated, the time an electronic data message from the sender first enters any of the recipient’s systems will be taken as the time of the message reaching the recipient (Article 16, paragraph 2). This provision of the 1990s does not offer clear-cut legal guidance. A conservative way of dealing with the resulting uncertainty is for the offeree, after receiving the offer by email or fax, to reply to the offeror in writing to confirm receipt of the offer, indicating the date and if possible the time of receipt.

After an offeree accepts an offer and the offer becomes effective, the offeror is bound by the offer, and he is committed to a contractual relationship instantly established between the offeree and himself on the basis of the offer. Acceptance of the offer is the right of the offeree. The offeree can choose to accept the offer or not to accept the offer. But the offeror cannot refuse to recognize the offeree’s valid acceptance of the offer.

Given that an offer still has binding force, the offeree can accept the offer at any time. However, in normal circumstances, an offer’s binding force will not last forever. Article 20 of the Contract Law indicates the following circumstances under any of which an offer will lapse:

•where a notice of turning down the offer reaches the offeror;

•where the offeror lawfully revokes the offer;

•where the offeree fails to accept the offer upon expiration of the offer’s acceptance period; or

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•where the offeree makes a substantive modification to the offer’s contents.

Going back to Example 4.1, XYZ made an offer by fax to sell air-conditioners to ABC, and the quotation was valid for ten days. Once ABC confirms receipt of the fax, XYZ is then bound by the offer and will be committed to a contractual relationship with ABC if ABC accepts the offer within ten days of receiving the fax. However, if ABC notifies XYZ that it does not wish to take up the offer, or fails to accept the offer within ten days, the offer will lapse.

Equally, if ABC modifies the offer substantively, such as changing the price or requesting delivery within four days, the offer will also lapse. The offer will also lapse if XYZ lawfully revokes the offer.

Withdrawal of an offer

The Contract Law provides that an offer can be withdrawn, given that the notice of withdrawing the offer reaches the offeree before or at the same time the offer reaches the offeree (Article 17). If the notice of withdrawing the offer reaches the offeree after the offer, the offer will continue to bind the offeror.

Revocation of an offer

A revocation of an offer, unlike a withdrawal of an offer, relates to an offer that is already in force, i.e., usually one that has reached the offeree, but has not yet been accepted by the offeree. The Contract Law provides that an offer can be revoked, but the notice of revoking an offer must be able to reach the offeree before the offeree accepts the offer (Article 18).

The Contract Law mentions two circumstances under either of which revoking an offer will not be permitted: (1) ‘where the offeror has set the time for acceptance or has expressly indicated that the offer is irrevocable’ and (2) ‘where the offeree has reasons to believe that the offer is irrevocable and has already done some preparation work for performing the contract’ (Article 19).

What is an acceptance?

Apart from making an offer, the subsequent step needed to form a contract is to accept the offer. Without acceptance of an offer, no contractual relationship is entered into even if the offer is in force.

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Acceptance of an offer is the offeree’s affirmed willingness to enter into a contract with the offeror based on the offer. Under the Contract Law, an acceptance is an expression of the offeree’s consent to an offer (Article 21). In normal circumstances, once the offeree accepts the offer, a contract based on the contents of the offer will instantly be formed between the offeror and the offeree who will be bound by this contractual relationship.

Returning to the previous examples:

•In Example 4.1, in response to ABC’s enquiry about the price of airconditioners, XYZ provided a quotation to ABC. If ABC accepts this quotation within ten days (as required by XYZ), this would mean that ABC took XYZ’s offer, with the consequence that a contract was formed between ABC and XYZ on the basis of the quotation. ABC and XYZ would thus be bound by that contract under which XYZ would sell airconditioners to ABC at the price and under the conditions stipulated in the contract.

•In Example 4.2 Dan wants to buy a tub of ice cream in a supermarket and waits in a checkout lane to pay the cashier. If the cashier accepts his payment, it means that the supermarket accepts Dan’s offer to purchase the ice cream at the price set by it, leading to the simultaneous formation of a contract between the supermarket and Dan, under which they transact over the tub of ice cream.

•In Example 4.3 Dan wants to take a taxi to the railway station. If the taxi driver does not refuse Dan, it means the driver (or his company) accepts Dan’s offer to purchase his (or its) transportation service. Thus a contract is reached between Dan and the driver (or the company): they are bound by the contract under which the driver (or the company) is committed to drive Dan to his destination; and after the driver’s (or the company’s) commitment is fulfilled, it will be Dan’s obligation to pay him (or the company) the fare.

An acceptance has a number of features.

Firstly, the offeree’s acceptance of an offer has the effect of having the offer come to an end and completing the formation of a contract between the offeror and the offeree based on the offer.

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Secondly, an acceptance must be communicated to the offeror in a timely manner within the offer’s acceptance period. Under the Contract Law, an acceptance shall reach the offeror within the time limit prescribed in the offer (Article 23, paragraph 1). To calculate the acceptance period, the Contract Law provides that where an offer is made by post or by telegram, the acceptance period will be calculated from the date of the letter or the date on which the telegram is transmitted; if the letter is not dated, the acceptance period will be counted from the date indicated by the postmark; if an offer is made by instant communications like telephone, facsimile, etc., the acceptance period will commence from the time the offer reaches the offeree (Article 24).

Where no acceptance period is prescribed in an offer, to determine whether an acceptance has been validly received by the offeror, the following rules need to be considered:

•where an offer is made in conversation, unless the parties have agreed otherwise, the acceptance shall be made instantly; and

•if an offer is made in a form other than conversation, the acceptance shall reach the offeror within a reasonable time (Article 23, paragraph 2).

The Contract Law also sets out how to handle a situation where an offer is accepted by the offeree or an acceptance reaches the offeror after the acceptance period expires. Where the offeree accepts an offer after the acceptance period expires, unless the offeror has confirmed with the offeree in a timely manner that the offeree’s acceptance is valid, the offeree’s acceptance will be viewed as a new offer (Article 28). Where the offeree accepts an offer within the acceptance period and in normal circumstances such an acceptance could reach the offeror in time but for some reason the acceptance reaches the offeror after the acceptance period expires, then such acceptance will be deemed to be valid unless the offeror has informed the offeree in a timely manner that such acceptance is not accepted because of its arrival after the acceptance period lapses (Article 29). It can be seen that Article 29 to a certain degree encourages transactions and fosters a spirit of economic activity.

Thirdly, in principle, an acceptance must demonstrate that the offeree unequivocally and unconditionally embraces the offer. If the offeree’s acceptance reveals a change to the original offer, the acceptance may not be

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taken as a valid acceptance but as a new offer (or ‘counter-offer’). Whether an acceptance can still be treated as valid if it deviates from the offer depends on whether the change to the offer is substantive or not.

Under the Contract Law, the contents of an acceptance shall be consistent with those of an offer; the offeree’s acceptance will be deemed to be a new offer if it has made a substantive change to the contents of the offer; a change made to the subject matter, quantity, quality, price or remuneration, time for performance, place of performance, way of performance, liability for breach of contract, and methods of dispute settlement, etc. in relation to the proposed contract will be viewed as a substantive change made to the contents of the offer (Article 30). If a change made to the original offer by the acceptance is non-substantive, then such acceptance will be taken as valid and the contents of the contract thus formed will be subject to the contents of the acceptance, unless the offeror opposes such a change made by the acceptance in a timely manner or the offeror has expressly indicated in the offer that no change is allowed to be made by the acceptance to what is originally said in the offer (Article 31). Hence, an acceptance that brings about a substantive change to the original offer will be deemed not to be a valid acceptance; however, if the contents of the original offer are merely immaterially altered by the acceptance, such non-substantive alteration will not exert any adverse impact on the validity of the acceptance.

Fourthly, under the Contract Law, an acceptance shall be made by giving notice to the offeror, except where such acceptance is allowed to be made by conduct in accordance with a habit of trade or with the offer (Article 22). The term ‘a habit of trade’ is defined under the Supreme People’s Court’s Interpretation on the Contract Law (II) as the practice commonly adopted in a territory where the transaction takes place or the practice commonly adopted in a field or a business line (known to the transacting party when entering the contract), or as a habitual practice carried out by the transacting parties (Article 7).

The offeree is entitled to choose to accept or not to accept an offer. The offeree’s lack of response to an offer does not amount to accepting the offer, and will not give rise to the formation of a contractual relationship between the offeror and the offeree.

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When does an acceptance become effective?

By the Contract Law, an acceptance takes effect when the notice of acceptance reaches the offeror; and if giving such notice is not required, an acceptance will come into force when an act of acceptance is completed in line with a habit of trade or with what is said in the offer (Article 26, paragraph 1). The contract is formed when the acceptance comes into force (Article 25). That is to say, normally from the moment the notice of acceptance reaches the offeror, a contract will be deemed to have been created between the offeror and the offeree.

To affirm the arrival time of an acceptance if a contract is made by means of instantaneous electronic communications, by Article 26, paragraph 2, Article 16, paragraph 2 will apply, i.e. where a contract takes the form of electronic data messages, if the recipient has designated a specific system to receive electronic data messages, the time an electronic data message from the sender enters such specific system will be deemed to be the time of the message reaching the recipient; if such system has not been designated, the time an electronic data message from the sender first enters any of the recipient’s systems will be taken as the time of the message reaching the recipient.

Withdrawal of an acceptance

Pursuant to the Contract Law, an acceptance already made can be withdrawn under the precondition that the notice of withdrawing the acceptance is able to reach the offeror before or at the same time the notice of accepting the offer reaches the offeror (Article 27).

That is to say, the offeree can withdraw his acceptance of the offer, given that the acceptance has not become effective. Therefore, the offeree’s withdrawal of his acceptance will be denied by the law unless the offeror receives the offeree’s notice of withdrawing the acceptance before or at the same time he receives the offeree’s notice of accepting the offer.

Although an acceptance can be withdrawn under certain conditions, an acceptance that has come into force cannot be revoked. Once the acceptance reaches the offeror, a contractual relationship will instantly be entered binding the offeror and the offeree as the contracting parties. The contracting parties

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will have to perform the contract strictly in compliance with the contract, and any contracting party’s failure to do so will lead to him becoming a defaulting party liable for breach of contract.

In daily life, one may come across cases where one has to judge whether a contractual relationship has been established. One needs to consider if the invitation and acceptance have become effective.

Here is an example. Wang has some stamps that were issued in the 1960s. On 12 March, she placed an advertisement in the Beijing Daily to sell a set of such stamps priced at RMB 50,000. Zhou has a passion for collecting old stamps. On 14 March, he called Wang telling her that he was willing to purchase these stamps, but for only RMB 30,000. Wang, while not liking

Zhou’s suggestion, orally agreed to consider it and to give him a final reply within the coming couple of days. On 16 March, Wang sent an email to

Zhou: ‘My bottom line is RMB 40,000. Please confirm if this is acceptable to you on or before the end of March.’ The deadline passed, but Wang still did not receive any feedback from Zhou. On 6 April, Wang sold the stamps to her neighbour, Chang. On 7 April, Wang got Zhou’s email message: ‘I am sorry I have been away for a couple of weeks. I just came back from a tour in

Korea where I could not check my emails. I confirm that your bottom line is acceptable to me.’ Wang told Zhou regrettably that since he did not respond before the deadline, she had sold the stamps to somebody else. Zhou said that Wang had committed a breach of contract. Wang denied she was in breach, believing that she had not entered into any contractual relationship with Zhou on this matter. Wang is correct. According to Article 20 of the Contract Law, an offer will lapse where the offeree fails to accept the offer upon expiration of the offer’s acceptance period. When Zhou accepted Wang’s new offer, the offer had expired.

Does a contract have to take a particular form?

In principle, a contract does not need to take a particular form, unless the law prescribes a particular form for a specific circumstance or the contracting parties have agreed in advance on a particular form. In the light of the Contract Law, the contracting parties may enter into a contract in either written, oral or other forms; if a contract has to be made in writing as required under the law or administrative regulation, the written form shall be adopted;

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and if the contracting parties have reached a consensus beforehand that their contract is to be made in writing, then the written form shall be used (Article 10).

Article 10 to some degree illustrates the spirit of the doctrine of the freedom of contract, in light of which the parties to a prospective contract have liberty to choose the form of a contract (e.g. verbal or written), unless the law requires that in a given circumstance a particular form be taken (e.g. a written form).

The term ‘written form’ is defined under the Contract Law as a form in which the contents can be tangibly displayed, such as a written contract, a letter or an electronic data message (telegram, telex, facsimile, electronic data exchange or email message) (Article 11). If the contracting parties have agreed in advance to enter into a written contract, such a contract will be deemed to be entered into when it is signed or the seals are stamped on it by the contracting parties (Article 32).

Under the Contract Law, if a contract needs to be made in writing as required by the law or administrative regulation or as per what the parties to a prospective contract have agreed in advance, but no such written form has been employed, whereas one contracting party has in effect fulfilled his main contractual obligations, then if the other contracting party accepts such status, it will be deemed that a contract has been made between them (Article 36). Moreover, for entering into a written contract, if prior to signing or having the seals stamped on the contract one contracting party has performed his main contractual obligations and the other contracting party accepts such status, then the contract will be taken as having been entered into (Article 37).

The Contract Law makes scant mention of oral contracts. In reality, unless the law requires that under a certain scenario a contract be made in writing, a contract can be made orally, and it will be as legally enforceable as one in writing. Compared with a written contract, an oral contract can ostensibly be produced more quickly and conveniently. However, with an oral contract solid evidence is often lacking as to what consensus the contracting parties reached. This is particularly a problem when evidence is needed to settle disputes between the contracting parties over contract details. So, it is wise to enter into a contract in written form for a formal deal or commitment.

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From Article 10, aside from being made in written form or oral form, a contract may also be made in ‘other forms.’ Under the Supreme People’s Court’s Interpretation on the Contract Law (II), this term can be construed as ‘by conduct.’ The Supreme People’s Court’s Interpretation on the Contract Law (II) refers to such ‘other forms’ and describes them as a circumstance in connection with the formation of a contract under which while the contract is not entered either orally or in writing the contracting parties’ intent to enter into the contract can be inferred from their civil conduct (Article 2).

Also, under the Supreme People’s Court’s Interpretation on the Contract Law (II), a written contract would be established if the contracting parties choose to ‘sign’ it with thumbprints instead of signing in pen or stamping their seals on it (Article 5). This means that a written contract signed with thumbprints cannot be denied legal effect on the ground that it is not signed or stamped.

When and where is a contract deemed to be created?

The place and time at which a contract is created may affect whether the contract is effective or not.

When is a contract deemed to be created?

In principle a contract is deemed to be created at the moment of an effective acceptance of the offer, whether the contract is made orally, in writing or by conduct. For a contract made in written form, the Contract Law sets out some provisions as to when the contract is deemed to be created.

Firstly, the time of signing a written contract or having the seals stamped on it is viewed as the time the contract is created between the contracting parties (Article 32).

Moreover, where the contracting parties enter into a contract in the form of letters or electronic data messages, before the contract becomes effective the contracting parties may decide to employ the form of a written confirmation certifying that the contract has been made, and the contract is deemed to take effect at the moment such written confirmation is made (Article 33).

In practice, if the time of signing or having the seals stamped on the contract by the two contracting parties is not on the same date (e.g. the two contracting

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parties are in two different cities), the time of the last signing or stamping will be counted as the time the contract is made (G X Zhu 2008, 86).

Where is a contract deemed to be created?

Under the Contract Law, the place where the acceptance takes effect is where the contract is made. For a contract in the form of an electronic data message, the recipient’s main place of business is the place where the contract is made, and if the recipient has no main place of business then the place of his habitual residence is the place where the contract is made; but if the contracting parties have agreed on a place different from what is prescribed above, then the contracting parties’ agreement will prevail (Article 34).

For a written contract, the place where the contracting parties sign or have their seals stamped on the contract is taken as the place where the contract is created (Contract Law, Article 35).

If the contract is signed or stamped in two different places at different times, pursuant to the Supreme People’s Court’s Interpretation on the Contract Law (II), unless the two parties have agreed otherwise, the place of the last signing or stamping is deemed to be the place where the contract is entered into (Article 4).

The terms of a contract

Usually, the terms of a contract are based on mutual consent. Such terms are known as ‘general terms.’ For some types of contracts, however, the terms are not mutually negotiated and are more one-sided. These are known as ‘standard contractual terms.’

The general terms of a contract

A contract’s contents are normally terms or clauses. The contracting parties’ rights and obligations can be understood from the terms of the contract, which state their entitlements and commitments to do something as well as the limitations imposed on each of them from doing something. Under the doctrine of the freedom of contract, as long as laws, government policies and mainstream social ethics are not contravened, the contracting parties have full freedom to decide what kinds of contractual terms are incorporated into their contract.

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Under the Contract Law, the contents of a contract can be determined by the contracting parties; the terms of a relatively formal contract may be in relation to contracting parties’ titles or names and domiciles; subject matter; quantity; quality; price or remuneration; time for performance, place of performance and ways for performance; liability for breach of contract; approach to settling disputes; etc. (Article 12). In practice, the coverage can be narrower or wider subject to the contracting parties’ decision.

Below is an example of the kind of sales contract commonly used in exporting when doing business in China.

Sales Contract

No. :

Signed at:

Date:

Seller:

Address:

Tel:

Fax:

E-mail:

Buyer:

Address:

Tel:

Fax:

E-mail:

The undersigned Seller and Buyer have agreed to close the following transactions according to the terms and conditions set forth as below:

1Name, Specifications and Quality of Commodity:

2Quantity:

3Unit Price and Terms of Delivery:

(The terms FOB, CFR, or CIF shall be subject to the International Rules for the Interpretation of Trade Terms (INCOTERMS 2000) provided by International Chamber of Commerce (ICC) unless otherwise stipulated herein.)

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4Total Amount:

5More or Less:

6Time of Shipment:

Within

days after receipt of L/C allowing transhipment and

partial shipment.

7

Terms of Payment:

By Confirmed, Irrevocable, Transferable and Divisible L/C to be

available by sight draft to reach the Seller before

and to

remain valid for negotiation in China until

after the Time

of Shipment. The L/C must specify that transshipment and partial

shipments are allowed.

The Buyer shall establish a Letter of Credit before the above-

stipulated time, failing which, the Seller shall have the right to rescind

this Contract upon the arrival of the notice at Buyer or to accept

whole or part of this Contract non fulfilled by the Buyer, or to lodge a

claim for the direct losses sustained, if any.

8

Packing:

9

Insurance:

Covering

Risks for

110% of Invoice Value to be

effected by the

.

10Quality/Quantity discrepancy:

In case of quality discrepancy, claim should be filed by the Buyer within 30 days after the arrival of the goods at port of destination, while for quantity discrepancy, claim should be filed by the Buyer within 15 days after the arrival of the goods at port of destination. It is understood that the Seller shall not be liable for any discrepancy of the goods shipped due to causes for which the Insurance Company,

Shipping Company, other Transportation Organization or Post Office are liable.

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11The Seller shall not be held responsible for failure or delay in delivery of the entire lot or a portion of the goods under this Sales Contract in consequence of any Force Majeure incidents which might occur. Force Majeure as referred to in this contract means unforeseeable, unavoidable and insurmountable objective conditions.

12Dispute Resolution:

Any dispute arising from or in connection with this Contract shall be submitted to China International Economic and Trade Arbitration Commission for arbitration which shall be trialed in the city of

and conducted in accordance with the Commission’s arbitration rules in effect at the time of applying for arbitration. The arbitral award is final and binding upon both parties.

13Notices:

All notice shall be written in and served to both parties by fax,

email or courier according to the following addresses. If any changes of the addresses occur, one party shall inform the other party of the change of address within days after the change.

14This Contract is executed in two counterparts each in Chinese and English, each of which shall be deemed equally authentic. This

Contract is in		copies effective since being signed/sealed by
both parties.
The Seller:		The Buyer:

Figure 4.2 An example of a sales contract used in China for exporting

Source: Jiangsu Chamber of Commerce for Import and Export Firms 2007

Standard contractual terms and limitations on the use of exemption clauses

Some types of contracts are more or less the same in each case, so standard contractual terms can be used rather than negotiating terms with each individual client.

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In fact, most of the terms used in an insurance contract, e.g. health insurance, life insurance and auto insurance, are not the result of negotiation with the insurance company. They are unilaterally devised by the company. Such an insurance contract can be considered to be a standard form contract. An insurance company might create standard contractual terms that are in its own interest, leaving buyers with no room to bargain over the terms and having to ‘take it or leave it.’

Standard contractual terms were traditionally more widely employed in transactions over services in fields such as insurance, banking and finance, transportation, telecommunications, tourism, etc. However, nowadays it is no exaggeration to say that people are confronted in virtually every corner of life with standard contractual terms. Do such terms violate the doctrine of the freedom of contract? How can the rights of the other party be fairly protected? An important issue is how to prevent the party providing a standard contract from gaining unfair advantage.

Under the Contract Law, standard contractual terms are interpreted as the contractual terms unilaterally constructed for repeated use by a contracting party beforehand without consulting his counterparty on those terms at the time of entering the contract (Article 39, paragraph 2).

A contracting party supplying unilaterally constructed standard contractual terms must ensure that the terms are fair to all contracting parties. He also has an obligation to remind the other contractual party of these terms and to explain their meaning and the consequences of their implementation.

In this regard, the Contract Law points out that where a contract is made using standard terms, the party supplying the standard terms should under the doctrine of fairness and impartiality be sure to have the rights and obligations of each contracting party clearly set out, take reasonable steps to alert his counterparty to any clause by which his liability can be exempted or curtailed, and upon his counterparty’s request explain the meaning of that clause to his counterparty (Article 39, paragraph 1).

Under the Supreme People’s Court’s Interpretation on the Contract Law (II), if the contracting party supplying the standard contractual terms in the contract has used in the contract some specifically distinguishable letters, symbols or styles to draw his counterparty’s attention to any clause relying on which his

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liability can be waived or curtailed and has provided an explanation of the meaning of that clause to his counterparty on the counterparty’s request at the time of entering the contract, then the requirement to ‘take reasonable steps to alert his counterparty to any clause by which his liability can be exempted or curtailed’ is deemed to have been satisfied; however, the burden of proof that he has fulfilled his obligation of reminding his counterparty falls on the shoulders of the contracting party supplying the standard terms (Article 6).

Also, according to the Supreme People’s Court’s Interpretation on the Contract Law (II), if a contracting party supplying the standard contractual terms used in the contract fails to take reasonable steps to remind his counterparty of and to explain any clause under which his liability can be waived or curtailed, his counterparty may apply to the court for having that clause set aside, and if this happens the court should uphold the revocation (Article 9).

In the light of the Contract Law, any standard contractual term designed for the purpose of enabling a contracting party to be exempted from liability, or exacerbating his counterparty’s liability, or denying the principal rights enjoyed by his counterparty, will be an invalid term; and if a standard contractual term is aimed at enabling a contracting party to be exempted from liability for causing personal injury or for property loss due to his deliberateness or gross negligence, such standard term will also be an invalid one (Article 40).

A standard contractual term does not necessarily have standard interpretations. It is quite likely that a standard term will be construed by different people in different ways. The Contract Law stipulates that in the case of a dispute over the understanding of a standard term, such term shall be interpreted as it is usually understood; if there are no less than two interpretations of a standard term, the interpretation not in favour of the contracting party supplying the standard terms shall be adopted; and if a standard term does not dovetail with a non-standard term in the contract, the non-standard term shall prevail (Article 41).

The validity of a contract

Once the steps of offer and acceptance are completed, normally a contract is established. However, this does not mean that such contract is necessarily

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219

a valid contract having legally binding force. To put it another way, the formation of a contract does not guarantee that the contract will take effect.

In reality, many contracts do automatically take effect once they are established because they meet the requirements of a valid contract. However, many contracts formed have defects that may lead to different consequences. Some contracts, though entered into formally, are invalid contracts (i.e. void contracts) and have no legal force from the outset. Other contracts are voidable contracts: they are valid at present but can be revoked due to their inherent defects. Still other contracts are termed ‘contracts with undecided validity’; they cannot come into force because their validity is yet to be decided due to their deficiencies; at present they have not produced any legal effect, and whether they can become effective depends on whether a relevant party opts to affirm their validity or their deficiencies no longer exist.

The essentials of a valid contract

Regarding the essentials of a valid contract, both the General Principles of Civil Law and the Contract Law set out some provisions.

Under the General Principles of Civil Law, three conditions have to be met for a civil juristic act to be valid: (1) the actor has the required capacity for civil conduct; (2) there is a genuine expression of the actor’s intent; and (3) the act is not in violation of the law or against public interest (Article 55). These three conditions can also be taken as the essential requirements for forming a valid contract.

Some contracts are subject to approval or registration requirements before they can come into force. Pursuant to the Contract Law, if according to the law or administrative regulation a contract’s effectiveness is subject to completion of the relevant approval or registration procedures, then such statutory requirement must be met (Article 44).

Contracting parties may by agreement establish a condition that must be fulfilled in order that their contract can come into force, so their contract will become effective only when such condition is met (Contract Law, Article 45, paragraph 1). Contracting parties may also agree on an effective date of their contract (not necessarily the date on which the contract is formed) (Contract Law, Article 46).

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Some enterprises attempt to tap into an area outside of the business line specified in their business licences (e.g. a cafeteria may want to engage in the freight forwarding business). It is possible for a contract made under such circumstances to be recognized as having legal force. According to the Supreme People’s Court’s Interpretation on the Contract Law (I), the court normally will not hold such a contract invalid, unless entering into the contract is in violation of the law that bans the carrying out of such business or contravenes the government policy of restricting or solely controlling the carrying out of such business (Article 10).

Assume that the business licence issued to XYZ (a private enterprise) by the Administration for Industry and Commerce in Beijing documents XYZ’s business scope as covering only the food business. Attracted by the lucrative steel business, XYZ recently entered into a number of contracts pertaining to buying and selling steel and profited greatly from these transactions. Although selling and buying steel is not within XYZ’s business scope, the contracts thus entered into by XYZ will not be held void by the court unless special permission is statutorily required for engaging in the steel business and XYZ happens to lack such permission.

A void contract

A void contract refers to a contract which seemingly has been created but actually does not have any legal force. Since a void contract is not valid as of its creation. It never has any legal force and thus is not binding on any party to it at any time.

The Contract Law lists five circumstances under any of which a contract made is void: (1) entering into a contract by deceit or duress to undermine national interest; (2) maliciously colluding in undermining the interests of the state, a collective or a third party; (3) concealing an unlawful objective under the disguise of a legitimate form; (4) impairing public interest; and

(5) contravening mandatory provisions of laws or administrative regulations (Article 52). Here the term ‘mandatory provisions’ used in the last circumstance is interpreted under the Supreme People’s Court’s Interpretation on the Contract Law (II) as those mandatory provisions specifically on ‘the validity of a contract’ (Article 14).

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A void contract does not produce a legally binding effect from the outset; however, if only part of a contract is invalid, then the invalid part will not affect the remaining valid part of the contract (Contract Law, Article 56). Also, the invalidity of a contract does not affect the validity of any term or clause that independently exists in the contract that is specifically pertinent to the settlement of disputes in relation to this contract (Article 57).

In the event of a void contract, any property gained as a result of executing such contract shall be returned; and if the return of the property is not feasible or becomes no longer necessary, corresponding compensation shall be made in cash terms instead (Contract Law, Article 58). Also under the circumstance of a void contract, if a party to the contract has committed a fault causing damage to the other contracting party, he will be liable for his counterparty’s loss; but if both parties have been at fault, then each will be held responsible for the outcome caused by each party’s own fault (Article 58).

A voidable contract

A voidable contract refers to a contract which is tainted with a defect but has come into force as a valid contract. Its defect may (but will not necessarily) give rise to its revocation subsequently. In other words, due to the existence of a defect, the contract currently in force can be revoked at a certain point in time by a contracting party who is entitled to exercise his right to rescind the contract, provided that he decides to do so. However, if he decides not to revoke the contract, then its validity will not cease even though the defect is not eradicated.

In practice, a voidable contract in the main relates to a contract, the formation of which disobeys a contracting party’s true intent. Although such a contract has come into force, since its formation does not represent the contracting party’s genuine willingness, it becomes a revocable contract, the validity of which has not been denied presently but which faces the risk of being cancelled at the discretion of a contracting party.

Pursuant to the Contract Law, for a contract made under a material misconception or in an apparently unfair manner, the injured contracting party is entitled to apply to the court or to an arbitral body for revoking the

222 The law of contract

contract (Article 54, paragraph 1). Also, in the event of a contract made due to deceit or duress or by taking advantage of a contracting party’s plight, the injured contracting party who enters into such contract at odds with his true intent is entitled to apply to the court or to an arbitral body for revoking the contract (Article 54, paragraph 2). However, if the injured contracting party merely applies to the court or to an arbitral body for modifying (rather than revoking) the contract, then the court or the arbitral body concerned can only consider the demand for modification and will not be in a position to revoke the contract (Article 54, paragraph 3).

A contract that has been revoked is deemed to have no legally binding effect from the start (Contract Law, Article 56). However, even if a contract is revoked, the revocation does not affect the validity of any term or clause that independently exists in the contract specifically relating to the settlement of disputes in connection with this contract (Contract Law, Article 57).

Under Article 58 of the Contract Law, once a contract is revoked, any property gained as a result of executing the contract shall be returned; and if the return of the property is not feasible or becomes no longer necessary, then the compensation shall be made in cash terms. After a voidable contract in force is revoked, if a contracting party has committed a fault injuring the other contracting party, he will be liable for his counterparty’s loss; if both parties have been at fault, then each will be liable for the result arising from each party’s own fault (Article 58).

The validity of a contracting party’s right to revoke the contract does not last forever. It may end at a certain point in time under specified circumstances.

In this regard, the Contract Law lists two circumstances under either of which the validity of a contracting party’s right to revoke the contract will cease: (1) if a contracting party who has the right to revoke the contract has not exercised such right for a year, since he knows or ought to have known what has happened that may lead to revocation of the contract; and (2) if a contracting party who has the right to revoke the contract, after knowing what has happened that may lead to revocation of the contract, expressly indicates that he has given up such right, or he has given up such right by his conduct (Article 55).

Here is an example. Bright Star is a shop selling Chinese paintings and calligraphy works. T saw a Li Ming painting, ‘Three Horses,’ displayed in

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Bright Star priced at RMB 50,000. Li Ming (who is deceased) is one of the most noted painters in China, famed for his paintings of horses. The manager of Bright Star assured T that this was a genuine painting by Li Ming. T bought the painting, but later discovered that it was painted by another Li Ming, an unknown young painter with the same name. T never had any interest in buying any of this unknown Li Ming’s paintings. T wanted to return the painting to Bright Star for a refund. Bright Star refused to refund T’s money, arguing that the painting T bought from Bright Star was not a bogus work so Bright Star did nothing wrong in this transaction. What advice should one give to T? T’s true intent is to buy a painting by Li Ming (the deceased famous painter). Thus the deal between Bright Star and T could be deemed to have been accomplished under a material misconception (i.e., they formed a voidable contract). The Contract Law provides that for a contract made under a material misconception or in an apparently unfair manner, the injured contracting party is entitled to apply to the court or to an arbitral body for revoking the contract (Article 54, paragraph 1). Therefore, if the dispute between T and Bright Star could not be resolved by negotiation or consultation in an amicable way, T may consider applying to an arbitral body or to the court for revoking the contract, so that his money would be refunded after returning the painting to Bright Star. Of course, if T decides not to take any action, the deal remains valid.

A contract with undecided validity

A contract with undecided validity refers to a contract that seems to have been made on the face of it but in fact has yet to come into force, subject to whether a third person (other than the contracting party) can ratify or admit its validity or whether the contracting party originally without authority to enter into such contract can subsequently gain the required authority. If the third party does not ratify or admit its validity or the contracting party lacking authority cannot later on acquire the required authority, the contract will still not be able to produce any legal effect.

In the eyes of the Contract Law, a contract with undecided validity mainly relates to a contract entered into by a person with limited capacity for civil conduct, or a contract made without proper authorization of agency, or a contract formed under the circumstance of having no right to transact other people’s property.

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A contract entered into by a person with limited capacity for civil conduct

Under the General Principles of Civil Law, a minor aged ten or above or a mentally disordered person who is not able to fully account for his own conduct is a person with limited capacity for civil conduct, and normally his civil activities can only be carried out by his agent ad litem on his behalf or by himself with the consent of his agent ad litem (Article 12; Article 13, paragraph 2).

Under the Contract Law, a contract entered into by a person with limited capacity for civil conduct can only become effective after it is ratified by his agent ad litem; however, a contract entered into by such a person under which he purely enjoys rights, or a contract entered into by him that is level with his age, intellectual ability and mental health, can be deemed to be effective from the start with no need to be ratified by his agent ad litem; in the case of his agent ad litem being silent on this matter, it can be taken that the agent ad litem refuses to ratify the contract; before the contract is ratified, his counterparty who has acted in good faith has the right to revoke the contract, and the revocation shall be made by means of having him informed (Article 47).

By the Supreme People’s Court’s Interpretation on the Contract Law (II), where a person with limited capacity for civil conduct enters into a contract and his agent ad litem ratifies the contract, the ratification will start to take effect when the expression of ratifying the contract made by his agent ad litem reaches him (Article 11).

A contract made without proper authorization of agency

Under the Contract Law, a relevant party may authorize his agent to enter into contracts on his behalf (Article 9, paragraph 2). However, a contract made by a so-called ‘agent’ without proper authorization of agency cannot acquire any legal force unless it is ratified by the principal.

In this regard, the Contract Law provides that a contract made by a person in the name of a principal under the circumstances that as a matter of fact he has no authorization of agency, or he acts in excess of his authority of agency, or his authority of agency has ended, will not be able to bind the principal if the

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principal does not ratify it, but will lead the person in question to face legal consequences; his principal can be urged to ratify the contract within a month, and his principal’s silence on this matter will be taken as a refusal to ratify it; his principal’s ratification shall be made by means of having him informed

(Article 48).

By the Supreme People’s Court’s Interpretation on the Contract Law (II), where a contract is made in the name of a principal by a person purporting to be that principal’s agent who in effect is not, given that the principal has started performing his obligations set out in the contract, such performance will be deemed to be the principal’s ratification of the contract (Article 12).

A bona fide third party, which refers to a party to a contract made by a socalled ‘agent’ without proper authorization of agency, is protected under the Contract Law. If the counterparty in the contract has a good reason to believe that that person in question has authority of agency, then that person’s act as the agent will be deemed to be valid and the contract thus formed will be binding (Contract Law, Article 49). In this circumstance, by the Supreme People’s Court’s Interpretation on the Contract Law (II), the principal can claim compensation against the person who purports to be his agent but in effect has no appropriate authorization of agency for his loss incurred due to the unauthorized act of agency (Article 13).

Another common case is when the deputy of an organization (say, a director or head of a company) enters into contracts on behalf of that organization in excess of the authority given him by the organization. Given that his counterparty in the contract does not know or has no reason to know that he is acting beyond his authority, the contract is valid and binding on the contracting parties (Contract Law, Article 50). That is to say, the contract made will bind the organization.

A contract formed under the circumstance of having no right to transact other people’s property

‘A contract formed under the circumstance of having no right to transact other people’s property’ is not uncommon in everyday life.

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Assume that T and G entered into a lease agreement under which T leased a house from G. At the time of signing the lease agreement, T knew nothing about the fact that the house is actually not owned by G but by G’s brother, C, and G has no right to rent out the house to T. This lease agreement can thus be viewed as ‘a contract with undecided validity’ and can further be categorized as ‘a contract formed under the circumstance of having no right to transact other people’s property.’ Whether this lease agreement can take effect depends on whether C ratifies the agreement or whether G later on can be given the authority (in other words, G can be empowered) to rent out the house that belongs to C.

Under the Contract Law, such a contract will only become effective if the property’s real right holder ratifies the contract or the person in question can later on acquire the right to legitimately transact that property (Article 51).

Performing a contract

After a contract is formed and takes effect, performing the contract becomes essential. Whether the desires of the contracting parties can be fulfilled depends on whether they can fully and successfully perform the contractual obligations set out in the contract.

Assume that T enters into a contract with G to buy 50 tons of fertilizer. As the seller, G should firstly get the fertilizer ready in line with the quality and quantity standards set out in the contract, and then send the fertilizer to T as per the time and place of delivery stipulated in the contract: this is how G is expected to fulfil his contractual obligations. As the buyer, T, after making sure G has satisfactorily delivered the fertilizer in compliance with the contract, should promptly make payment to G by following the payment clause in the contract: this is how T ought to fulfil his contractual obligations.

In establishing this contractual relationship, T wants a supply of fertilizer, whereas G wants revenue. But only when both T and G fully and successfully fulfil their contractual obligations can their aims be realized.

In many cases, however, contracts are not performed as smoothly as expected. Continuing the example above, what should be done in the following examples?

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Example 4.4

T and G agreed on the type, quantity, price, etc. in the contract. G delivered the fertilizer on time to T, but T found the quality to be unsatisfactory, and so refused to pay. G insisted that he had performed the contract, and the contract had not stipulated the quality, so T refusing to pay is a breach of contract. On the other hand, T said that G had not performed the contract satisfactorily, so G had broken the contract first.

Example 4.5

After T and G made the contract, orders for the same product increased and G found it hard to meet demand. Hence T and G agreed that as a way of executing the contract, G would commission another fertilizer manufacturing company, K, to produce the fertilizer required by T; K would strictly comply with what was stated in the relevant contract clauses agreed between T and G. However, K failed to produce and deliver the goods to T.

In many Chinese books on contract law, the following four doctrines are often advocated as the norms to be implemented with respect to performing a contract: the doctrine of full performance, the doctrine of good faith, the doctrine of economic efficiency, and the doctrine of allowing performance to deviate from contract terms due to a major change in circumstances. These doctrines guide the performance of contracts so that it is consistent with the spirit of contract law.

The Contract Law provides that the contracting parties shall fully perform their obligations as per what they have agreed (Article 60, paragraph 1). This is what is advocated under the doctrine of full performance, which may also be termed ‘the doctrine of proper performance,’ ‘the doctrine of correct performance’ or ‘the doctrine of full and proper performance’ (L M Wang and Cui 2000, 319; Cui 2000, 101; C L Wang 2002, 68; Guo 2007, 102; Qu, Liu and Yan 2006, 52).

The doctrine of good faith can be easily understood literally. It is mentioned in the Contract Law, which says that the contracting parties shall follow the doctrine of good faith to perform their obligations of notification, assistance

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and keeping confidentiality, etc., in the light of the contract’s nature and objectives as well as in accordance with habits of trade (Article 60, paragraph 2). Based on such provision, some scholars further put forward ‘the doctrine of providing mutual assistance and cooperation to perform a contract,’ which requires the contracting parties to cooperate and help each other in the spirit of the doctrine of good faith (L M Wang and Cui 2000, 320; Cui 2000, 101–2; Qu, Liu and Yan 2006, 53).

The doctrine of economic efficiency emphasizes the importance of performing a contract aimed toward the best economic yields, by keeping in mind any likely outcome due to an interaction between cost and benefit that occurs when the contract is performed (L M Wang and Cui 2000, 320–21; Cui 2000, 102; Guo 2007, 104). Similarly, the Contract Law provides that where one party to a contract is in breach, the innocent party shall take appropriate measures to curb the loss suffered; failure to take such measures thus giving rise to an enlargement of the loss will deny the innocent party from claiming for damages over the enlarged part of the loss; the party in default will have to bear any reasonable expenses incurred by the innocent party in curbing the enlargement of the loss suffered (Article 119). The Contract Law also points out that with the two parties to a contract in a relationship of obligee and obligor, the obligee can refuse to let the obligor fulfil the obligor’s contractual obligations ahead of schedule, except when the obligor’s fulfilment ahead of schedule will cause no damage to the interest of the obligee; the obligor has to shoulder any extra expenses arising from his early performance of such kind (Article 71). Moreover, the Contract Law stipulates that the obligee can refuse to let the obligor partially perform the obligor’s obligations, except when the obligor’s partial performance will do no harm to the interest of the obligee; the obligor has to bear any extra expenses generated from his partial performance of such kind (Article 72).

The doctrine of allowing performance to deviate from the contract terms due to a major change in circumstances is an exception to the doctrine of full performance. Under the former doctrine, if, after a contract comes into force, a contracting party encounters an unpredictable circumstance totally beyond control and continuing to perform the contract by strictly abiding by the contract under such circumstance will gravely undermine the interest of the contracting party, making the realization of the goal pursued under the contract impossible, then the contracting party can be allowed to perform

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the contract by not exactly following what was agreed in the contract or to entirely discharge the contract (L M Wang and Cui 2000, 321–23; Cui 2000, 102–5; C L Wang 2002, 72–73; Guo 2007, 104–7).

These doctrines can be applied to the examples above. In Example 4.4, if the quality is very bad, G may be breaching the doctrine of good faith, so T’s refusal to pay is reasonable. In Example 4.5, if K cannot deliver the goods, according to the doctrine of full performance, G should bear the responsibility.

The following provides concrete guidelines for handling some common problems in performing contracts.

Performing a contract is the main theme in Chapter 4 of the Contract Law. That chapter covers some provisions in connection with the following issues that deserve special attention due to their material significance in the performance of a contract: supplementing a contract and comprehending contract terms; the performance of a contract involving a third party; a contracting party’s right to turn down the demand for his performance of contractual obligations; and the right of subrogation and the right of revocation.

Supplementing a contract and comprehending contract terms

In performing contracts, it is not uncommon for problems to arise due to unexpected events or the ambiguity of contract terms. If contract clauses provide no clues on how to tackle these problems, the contract will have to be supplemented or interpreted. In Example 4.4 above, for example, the contract terms on the expected quality of fertilizer might need to be supplemented or interpreted to settle the dispute.

The Contract Law includes provisions regarding how to supplement a contract and interpret a contract term that is unclear. Under the Contract Law, after a contract comes into force, if it is found that the contracting parties have yet to reach an agreement on any contract clause relating to quality, price or remuneration, place of performance, etc., or their agreement is not clear enough, then they may supplement the contract by making a further agreement; and if no such further agreement can be made, the lacunas shall be

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filled in the light of the relevant contract terms as they stand or by following habits of trade (Article 61).

That is to say, if no further agreement can be made, the parties can try to carry out an interpretation by relying on the contract terms or by resorting to the prevalent habits of trade relevant to their case. However, if an uncertainty in the contract cannot be removed through these means, the parties can try to apply the rules prescribed under the Contract Law regarding clarifying ambiguity in the following areas:

•for ambiguity over quality standards, following the relevant standards set by the state and industry, or following an accepted common standard or a specific standard that fits well into realizing the contract’s objective

•for ambiguity over price or remuneration, following the relevant market price that applies to the place of performing the contract at the time the contract is made, or adopting the price set or directed by the government if the law requires doing so

•for ambiguity over the place of performing the contract, taking the place in which the party to whom monetary payment is made is located as such place if the contract relates to making monetary payment, or taking the place in which the immovable property is located as such place if the contract relates to delivery of immovable property, or taking the place in which the party who has to perform obligations is located as such place if the contract relates to matters other than the former two

•for ambiguity over the time of performing the contract, the rule of determining such time being that the obligor may perform obligations at any time; the obligee may also request the obligor to perform obligations at any time whereas the obligor should be given an appropriate amount of time to prepare for carrying out the performance

•for ambiguity over the way of performing the contract, adopting a way that can facilitate realization of the contract’s objective

•for ambiguity over which party should shoulder the expense incurred in performing the contract, taking the party who has to perform obligations as the one who will bear such cost (Article 62).

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The performance of a contract involving a third party

The performance of a contract involving a third party usually relates to one of two kinds of contracts: a contract performed in favour of a third party, or a contract performed by a third party.

A contract performed in favour of a third party

In a contract performed in favour of a third party, the two parties agree to an arrangement under which one contracting party will perform his contractual obligations in favour of a third party outside of the contract (i.e. the third party is not a party to this contract). In other words, it is this third party (not the other contracting party) who will benefit from that contracting party’s performance of contractual obligations.

The Contract Law provides that under the circumstance that one contracting party as the obligor will perform his obligations in favour of a third party in the light of what the two contracting parties have agreed, if he fails to perform his obligations in favour of the third party accordingly or his performance fails to comply with what has been agreed, then he shall be held liable to the other contracting party (the obligee) for breach of contract (Article 64).

Assume that ABC (a trading house) enters into a contract with XYZ (a steel products manufacturing company) to purchase rolled steel coil from XYZ. According to their agreement, after XYZ makes delivery ABC will send its payment that ought to be made to XYZ, to another company, TT, to which XYZ owes a debt. While TT can urge ABC to make its payment, if ABC fails to send the payment to TT or ABC pays TT less than the full amount due, ABC will not be liable to TT for breach of contract; ABC will be liable to XYZ for breach of contract.

A contract performed by a third party

In a contract performed by a third party, the two parties agree that a third party outside of the contract will perform the contractual obligations that ought to be performed by a contracting party.

Regarding a contract performed by a third party, the Contract Law points out that where according to what the two contracting parties have agreed the contractual obligations of one contracting party (the obligor) will not be

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performed by himself but will be performed by a third party outside of the contract, in the event that the third party fails to perform accordingly or the third party’s performance does not match what has been agreed, then the contracting party concerned (the obligor) shall be held liable to the other contracting party (the obligee) for breach of contract (Article 65).

In Example 4.5 above, T and G agreed that G would commission another fertilizer manufacturing company, K, to produce the fertilizer required by T; K would strictly comply with what was stated in the contract clauses agreed between T and G. So if K fails to produce and deliver the goods to T in contravention of the quality standards or the time stipulated in the contract, it will be G (rather than K) that becomes liable to T for breach of contract and making up the loss suffered by T.

A contracting party’s right to turn down the demand for his performance of contractual obligations

Performing a contract can be seen as a process of exercising contractual rights and fulfilling contractual obligations. In normal circumstances, a contracting party’s exercise of his contractual rights will always be accompanied by his fulfilment of contractual obligations, whereas a contracting party’s fulfilment of contractual obligations will definitely lead to his enjoyment of certain contractual rights. From the standpoint of exercising contractual rights and assuming contractual obligations, in the process of performing a contract, one contracting party that exercises the right (the obligee) may demand the other contracting party that needs to fulfil the obligation (the obligor) to perform the obligation pursuant to the contract. In this sense, the obligor should endeavour to fully and correctly fulfil his contractual obligations in a timely fashion.

In the meantime, in order to protect the obligor’s interests, the law vests him with the right to turn down the obligee’s demand for the obligor’s performance of contractual obligations when such demand can give rise to damage to the obligor’s interests. Nevertheless, exercising this right can only result in the obligor’s temporary pause in performing the contract. It cannot terminate the contract, nor release the obligor from fulfilling his contractual obligations. Once any factor that may cause damage to the obligor’s interests no longer exists, the obligor will need to perform his contractual obligations as agreed in the contract.

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A contracting party’s role automatically switches from obligor to obligee or vice versa depending on if he is exercising his contractual rights or performing his contractual obligations.

The obligor (as one contracting party) may usually exercise his right to turn down the demand made by the obligee (as the other contracting party) for performing contractual obligations in three scenarios:

•where the two contracting parties are supposed to start performing their contractual obligations at the same time;

•where one contracting party’s performance is supposed to precede the performance of the other contracting party but the former fails to perform his contractual obligations or his performance is not satisfactory; or

•where one contracting party’s performance is supposed to precede the performance of the other contracting party but the former has grave concerns about the likelihood of the latter’s non-performance or about the latter’s performance not being up to expectations.

Regarding the first scenario , the Contract Law provides that where the two contracting parties have obligations to fulfil towards each other and there is no particular sequence for their performance, they shall perform at the same time; one party has the right to decline to satisfy his counterparty’s demand for his performance before his counterparty performs; one party has the right to turn down his counterparty’s demand for his performance if his counterparty’s performance fails to comply with what they have agreed (Article 66).

The refusal of performance described in this scenario may quite often occur in transactions involving cash on delivery (i.e. the buyer pays the seller when the seller physically delivers to him the goods purchased). For example, say that T orders some chicken sandwiches from ABC (a lunch box company), but ABC delivers to him tuna sandwiches. Obviously, ABC has not performed its contractual obligations. Under this circumstance, T can refuse to pay ABC until the sandwiches are replaced (in other words, T can turn down ABC’s demand for performing his contractual obligations until ABC rectifies its own performance).

Regarding the second scenario, under the Contract Law, where the two contracting parties have obligations to perform towards each other and there

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is a particular sequence of their performance, in the event that the party who should perform first fails to perform, the party who is the next to perform has the right to decline the former’s demand for the latter’s performance; if the party who should perform first has performed but the performance is not in conformity with their agreement, the party who is the next to perform has the right to turn down the former’s demand for the latter’s performance accordingly (Article 67). This provision protects the interests of the party who is supposed to perform after his counterparty’s performance.

Here is an example of this second scenario. ABC Hotel sent a fax to Wang confirming his executive room booking and a room rate of RMB 2,000 per night. After checking in, Wang discovered that he had been given a standard room. ABC Hotel explained that ‘all executive rooms have been requisitioned to cater for an important international conference; this standard room has been significantly refurbished according to the executive room standard.’ However, the actual discrepancy was apparent. When Wang checked out, ABC Hotel wanted to charge him RMB 2,000 per night rather than RMB 600 (the price for a standard room), on the ground that ‘your payment should be made as per the fax.’ Wang refused to pay the bill, insisting that he should be charged for a standard room. Example 4.4 above, is also an example of this second scenario.

As to the third scenario, the Contract Law states that the contracting party who ought to perform first may suspend his performance if there is sound evidence that his counterparty’s business has seriously deteriorated, or his counterparty has diverted assets or has discreetly removed funds in order to dodge fulfilling debt obligations, or his counterparty’s business reputation has been damaged, or his counterparty has lost or is likely to lose the capacity to fulfil debt obligations (Article 68, paragraph 1). Suspension of performing contractual obligations under any of these instances will not give rise to breach of contract. However, the suspension would only be temporary, and must be lifted once circumstances change.

Pursuant to the Contract Law, the contracting party who suspends his performance under the circumstance described above shall inform his counterparty in a timely manner about his decision to suspend his performance; if his counterparty can furnish a proper performance guarantee,

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he shall resume the performance of his contractual obligations; if his counterparty is not able to regain the capability to perform the contract within a reasonable time and cannot provide an appropriate performance guarantee either, then he will be allowed to discharge the contract (Article 69).

There must be sound evidence to support the claim that the contracting party who is the next to perform will fail to perform or will not have the required capability to perform. The burden of proof falls on the shoulders of the contracting party who suspends his performance. If he suspends his performance without sound evidence to support the claim, he will face the consequence of being held liable for breach of contract (Contract Law, Article 68, paragraph 2).

Here is an example of this third scenario. Starlight is a giant shipping enterprise well known for transporting iron ore year round, from South

American mines to steel makers in China. To enlarge its fleet, Starlight needs to order some new vessels. For this purpose, it applied to ABC Bank for a bank loan. ABC Bank granted the loan to Starlight. But before ABC Bank gave Starlight the loan as per the schedule, a severe riot broke out in the mines which entirely halted production. As a result, Starlight had nothing to transport at that moment. It was unclear how long the riot would continue and how seriously it might impact Starlight’s cash flow and its ability to repay its loan. ABC Bank decided to temporarily withdraw the loan. Starlight accused ABC Bank of breaching the contract.

In this example, a contractual relationship was established between Starlight and ABC Bank, under which ABC Bank is committed to furnish Starlight with a loan and Starlight in turn has to repay ABC Bank for the loan. In light of Article 68, paragraph 1 of the Contract Law, ABC Bank may suspend the performance of the contract if there is sound evidence proving that Starlight’s business has seriously deteriorated or it has lost its ability to repay the loan due to the riot. The suspension under such circumstance would be temporary, and is not a breach of contract. However, if ABC Bank suspends the performance of the contract not on sound ground, it will be liable for breach of contract (Article 68, paragraph 2). Also, once circumstances at the mines improve, ABC Bank needs to resume performing the contract (i.e. give the loan to Starlight).

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The right of subrogation and the right of revocation

Look at the following examples, which represent situations that are quite common in daily life.

Example 4.6

T borrows RMB 200,000 from G, promising to repay G within six months. After six months, T defaults on repayment, claiming that his dire financial situation is temporarily preventing him from fulfilling his debt obligation. G obtains information from a reliable source that B owes T RMB 300,000, a long overdue debt, and that T has not chased B for repayment. B’s failure to fulfil his debt obligation towards T is indirectly but seriously impeding T’s capability to repay his debt to G. In other words, if B had repaid T the RMB 300,000, most likely T would have been able to perform his debt obligation in favour of G.

Example 4.7

Wang owes Li RMB 500,000 but defaults on repayment on the ground that he has no ability to pay it back at present. Li recently discovered that Wang is the owner of a house valued at RMB 500,000. Li also learned that Wang has just given the house as a gift to his cousin, Song, in order to avert a possible seizure of his house for setting off the debt.

In the above examples, in the course of performing a contract, it is likely that due to the debtor’s inaction an increase in his assets cannot be materialized or the debtor is deliberately diminishing or transferring his assets to dodge repayment of his debt. If this happens, the creditor may exercise his right of subrogation or his right of revocation, depending on the circumstances.

Exercising the right of subrogation

In exercising his right of subrogation, a creditor faces two established contractual relationships: one between his debtor and himself (the creditor) and one between his debtor and his debtor’s debtor.

Under the first contractual relationship, the debtor is supposed to perform the debt obligation fully and in a timely manner. Under the second relationship

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(i.e. between the debtor and the debtor’s debtor), the debtor should ensure that his debtor’s debt obligation can be fulfilled on time in order that his own financial conditions can be improved, which is conducive to strengthening his capability to perform his debt obligation in favour of his creditor in the first contractual relationship. However, if he does not, with a consequence that there is no improvement in his financial conditions, encumbering his performance of debt obligation towards his creditor, then his creditor can step in to make a claim over the debt owed to the debtor by the debtor’s debtor. In other words, the creditor can try to exercise his right of subrogation.

The Contract Law sets out under what conditions and by what means a creditor’s right of subrogation can be exercised. Where the debtor’s inertia to exercise his right as a creditor to make a claim for a debt owed to him that comes due has caused damage to his creditor, his creditor may petition the court to allow his creditor to take over from him and exercise in his creditor’s name the right to make a claim for that debt, unless the claim to be made by him as a creditor is of an exclusive and personal character (Article 73, paragraph 1).

In this context, the Supreme People’s Court’s Interpretation on the Contract Law (I) summarizes the following four points as the conditions to be met in order that a creditor can exercise the right of subrogation:

•the creditor must have a legitimate claim against the debtor;

•an injury must have been caused to the interest of the creditor due to the debtor’s inertia to pursue a claim as a creditor over a debt that comes due;

•the debtor must have a claim against his own debtor over a debt that comes due; and

•the claim to be made by the debtor as a creditor against his own debtor is not of an exclusive and personal nature (Article 11).

Regarding the meaning of a claim that is of an exclusive and personal nature, the Supreme People’s Court’s Interpretation on the Contract Law (I) explains that it refers to a claim for being paid based on established relationships pertinent to raising non-adult children, supporting dependents or heirs, or a claim for remuneration for services, retirement payment, pension, compensation to the family of the deceased, relocation allowance,

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life insurance benefit and compensation for personal injury (Article 12). A creditor’s exercise of his right of subrogation does not apply to any claim of such kind.

For the meaning of ‘where the debtor’s inertia to exercise his right as a creditor to make a claim for a debt owed to him that comes due has caused damage to his creditor,’ the Supreme People’s Court’s Interpretation on the Contract Law (I) construes it as a circumstance under which a debtor fails to fulfil his due debt obligation towards his creditor and also fails to make a claim against his own debtor over a due monetary debt by litigation or arbitration, resulting in his inability to fulfil his debt obligation towards his creditor (Article 13, paragraph 1). Also, if a debtor’s debtor does not think that his creditor (i.e. the debtor) is inactive in pursuing a claim against him over a debt due, he (the debtor’s debtor) should shoulder the burden of proof on this (Article 13, paragraph 2).

A creditor’s exercise of his right of subrogation can only be carried out by bringing court proceedings. In such an action, the creditor who files the lawsuit is the plaintiff, his debtor’s debtor is the defendant, and his debtor can be viewed as a third party (Supreme People’s Court’s Interpretation on the Contract Law (I), Article 16, paragraph 1). Jurisdiction over such a case must be exercised by a court that governs the territory where the defendant (i.e. the debtor’s debtor) is located (Article 14). In practice, the territory where the defendant is located means a specific region the domain of which covers the place of the defendant’s residence or the defendant’s main place of business. If the creditor succeeds in the action, the debtor’s debtor (the defendant) shall perform the debt repayment obligation in favour of the creditor (the plaintiff), rather than towards the debtor to whom the defendant’s debt is owed (Article 20).

Under the Contract Law, any repayment the creditor receives arising from his exercise of the right of subrogation shall not exceed the amount of the debt his debtor owes him (Article 73, paragraph 2). If the creditor who intends to exercise his right of subrogation claims for an amount that surpasses the amount of the debt his debtor owes him or exceeds the amount his debtor’s debtor owes his debtor, the court will not support the excessive part claimed (Supreme People’s Court’s Interpretation on the Contract Law (I), Article 21).

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In such a lawsuit, a defence of the defendant (i.e. the debtor’s debtor) against his own creditor (i.e. the debtor, the third party in this case) can be raised against the plaintiff (i.e. the creditor) (Supreme People’s Court’s Interpretation on the Contract Law (I), Article 18, paragraph 1).

In Example 4.6 above, T defaults on repayment, but G finds out that if it were not for the fact that T is owed an overdue debt by B, T would have been able to repay G. Can G exercise his right of subrogation to protect his right? If so, who is the plaintiff and who is the defendant? If the creditor succeeds in the action, what will be the result? In this example, a creditor–debtor relationship exists between G and T and between T and B also. If B can fulfil his debt repayment obligation towards T, this may enhance T’s capability to repay his debt owed to G. T as a debtor is now unable to repay the loan to G. But as a creditor T has not taken any action (e.g. by means of negotiation, conciliation, arbitration or litigation) to pursue B’s repayment of the money owed to him. In this circumstance, G may bring a court action as the plaintiff against B (the defendant) for exercising his right of subrogation, with a view to being able to take over T’s right as a creditor against B so that B could be forced to fulfil the debt obligation directly in favour of G (not T). Under Article 73, paragraph 2, any repayment the creditor receives arising from his exercise of the right of subrogation shall not exceed the amount of the debt his debtor owes him. The final result would therefore be that B would have to pay RMB 200,000 (not the full RMB 300,000 that he owes T) to G.

Exercising the right of revocation

In a special context and if certain criteria can be met, a creditor is entitled to exercise the right of revocation. Regarding the conditions and means by which a creditor can exercise his right of revocation, the Contract Law provides that where a debtor’s abandonment of his right to make a claim for a debt that comes due or a debtor’s gratis transfer of his assets has caused damage to his creditor, his creditor may petition the court to revoke what he has done; if a debtor transfers his assets at an obviously unreasonably low price thus causing damage to his creditor and the transferee is aware of this, then his creditor may petition the court to revoke what he has done (Article 74, paragraph 1).

In contrast to exercising the right of subrogation in the context of a debtor’s inaction, exercising the right of revocation is in response to a debtor’s

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deliberate act due to which his creditor’s claim for a debt due to be repaid by him is impeded from fulfilment. This is the reason that the Contract Law provides a solution to this problem as described above.

The wording ‘a debtor’s abandonment of his right to make a claim for a debt that comes due’ and ‘the debtor’s gratis transfer of his assets’ are not difficult to comprehend in their literal meanings. Regarding the issue of a debtor’s transfer of his assets at an obviously unreasonably low price, the Supreme People’s Court’s Interpretation on the Contract Law (II) provides that the court judges whether it is such an obviously unreasonably low price, to some extent, by reference to the guided price set by the governmental pricing authority or the prevailing market price (Article 19, paragraph 1). To elaborate, the yardstick employed is fixed at 70% of the guided price set by the governmental pricing authority or 70% of the prevailing market price, and if the debtor transfers his assets at a price lower than this benchmark then the price can be branded as an obviously unreasonably low price (Article 19, paragraph 2).

Similar to exercising the right of subrogation, a creditor’s exercise of his right of revocation can only be carried out through taking court action. Pursuant to Article 24 of the Supreme People’s Court’s Interpretation on the Contract Law (I), in such a lawsuit, the creditor who initiates the litigation is the plaintiff, his debtor is the defendant, whereas the party to whom the debtor’s assets are transferred (either gratuitously or at an obviously unreasonably low price) or the party who benefits from the debtor’s abandonment of the right to make a claim for a debt that comes due is treated as a third party. The creditor brings the lawsuit with a view to applying to the court for cancelling the debtor’s act of giving up his right to make a claim over a debt that comes due or for annulling the debtor’s act of deliberately transferring his assets either gratuitously or at an obviously unreasonably low price.

According to the Supreme People’s Court’s Interpretation on the Contract Law (I), jurisdiction over a case of such kind must be exercised by a court that governs the territory where the defendant (i.e. the debtor) is located (Article 23). Such territory usually refers to a specific area whose scope embraces the place of the defendant’s residence or the defendant’s main place of business.

In Example 4.7, Wang’s house can be used to pay back the debt he owes Li if

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he does not have enough money to fulfil his debt obligation towards Li. Wang gives the house to his cousin, Song, as a gift, intending to dodge repaying his debt. Under this circumstance, Li may file a lawsuit against Wang petitioning the court to set aside this gratuitous transfer of ownership of Wang’s house to Song.

In practice, if the creditor as the plaintiff wins the case, he can then exercise his right of revocation with the result that the debtor’s act is cancelled; and if this happens, according to the Supreme People’s Court’s Interpretation on the Contract Law (I), the debtor’s act revoked is deemed to have no legal effect from the start (Article 25, paragraph 1).

Also it should be noted that in the case of a creditor exercising his right of revocation, any repayment he receives will be capped at the amount of the debt his debtor owes him (Contract Law, Article 74, paragraph 2). To put it another way, the creditor is not in a position to be repaid in excess of the debt owed to him.

The alteration and the assignment of a contract

Under what circumstances can a contract be altered? Besides making alterations based on mutual consensus, can one party make the alteration on his or her own? The alteration and the assignment of a contract are the main themes of Chapter 5 of the Contract Law.

The alteration of a contract

The term ‘alteration of a contract’ refers to a likely change in the contents of a contract, not in the parties to a contract. Such alteration happens after a contract takes effect but before its performance is completed. Once a contract is altered, the parties to the contract must carry out their performance of the contract in line with the altered contract; nevertheless, the validity of any part of the contract that has been performed prior to the alteration will not be denied.

Assume that T and G enter into a contract under which G sells building materials to T. The contract clause stipulates that G makes delivery to T in October. Later on, T and G reach a consensus that the date of delivery be

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postponed to December. Such alteration varies what the contract originally provides for, but it does not give rise to any change in the parties to this contract. This is an example of the alteration of a contract.

Chapter 5 of the Contract Law focuses on the circumstance where the alteration is initiated by the contracting parties because they are in agreement to change the contents of their contract after the contract comes into force. The chapter says that the contracting parties can alter their contract after they come to a consensus to do so (Article 77, paragraph 1).

If there is a statutory requirement that the alteration of a contract is subject to government approval and/or government registration, then such requirement must be complied with (Contract Law, Article 77, paragraph 2). Only after acquiring the required government approval and/or completing the government registration can the alteration become effective.

Say to establish a Sino-foreign equity joint venture enterprise in China, the Chinese and foreign investors first have to enter into a joint venture agreement. The agreement can only become effective after it is approved by the relevant government authority (e.g. the Ministry of Commerce, or the Commission of Commerce in a local jurisdiction, depending on the volume of the investment). By the same token, any change to this agreement must also be approved by the relevant government authority in order to take effect. Under the Implementation Rules of the Sino-Foreign Equity Joint Venture Enterprise Law, a joint venture agreement will come into force only after it is approved by the government authority, and the same requirement applies to making a change to such agreement (Article 14).

Although the ‘alteration of a contract’ mentioned in Chapter 5 of the

Contract Law specifically refers to an alteration made due to the contracting parties’ mutual intent to do so, a contract can also be altered under other circumstances, which are mentioned in other chapters of the Contract Law.

Under Chapter 3 of the Contract Law, for a contract made under a material misconception or entered into under apparently unfair circumstances, the innocent party is entitled to apply to the court or to an arbitral body for altering the contract (Article 54, paragraph 1). In the event of a contract made due to deceit or duress or by taking advantage of a contracting party’s plight, the innocent party entering into the contract at odds with his true intent is

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entitled to apply to the court or to an arbitral body for altering the contract (Article 54, paragraph 2).

Under Chapter 7 of the Contract Law, in the event of a circumstance of force majeure which makes the performance of a contract impossible, normally the relevant contracting party can partially or even wholly be relieved from his contractual obligations to be performed (Article 117, paragraph 1). In other words, under a circumstance of force majeure, a contracting party may unilaterally alter the contract (e.g. ceasing the performance of the contract, or performing the contract in a way different from what the contract stipulates) in order to effectively deal with the emergency situation, and such unilateral alteration of the contract can be acceptable under the law. A circumstance of force majeure is defined under the Contract Law as ‘an objective circumstance which is unpredictable, unavoidable and insurmountable’ (Article 117, paragraph 2).

Here is an example. An airplane flying from Guangzhou to Shanghai, before approaching the territory of Shanghai, got the news that the weather in Shanghai was not suitable for landing. The captain decided to land the airplane in Nanjing (a city not far from Shanghai). While the captain on behalf of the airline unilaterally made a decision to divert the airplane to Nanjing thus altering what the airline and passengers originally agreed, such alteration was acceptable under such exceptional circumstances, and so did not require passengers’ prior consent.

It deserves a special mention that the alteration of a contract means making a change to part of the contents of a contract, rather than materially altering a contract. An example of a material alteration might be converting a contract under which rice is supposed to be transacted into one aimed at buying or selling steel. However, how to draw a dividing line between a material and a non-material alteration of a contract is a topic of debate in academic circles (L M Wang and Cui 2000, 400–401).

The assignment of a contract

The term ‘assignment of a contract’ denotes a contracting party’s act of entering into an agreement with a third party outside of the contract (i.e. with someone who is not a contracting party to the contract) for the purpose of

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transferring his contractual rights and/or his contractual obligations, either wholly or partially, to that third party. The contracting party who makes the transfer is known as the ‘assignor’ and the third party as the ‘assignee.’

The nature of assigning a contract

Assigning a contract in this way does not give rise to an alteration of the contract terms, i.e. the contracting parties’ rights and obligations. However, it adds a new contracting party to the contract, altering the relationships between parties.

Say T enters into a contract with G to borrow RMB 100,000 from G, resulting in the creation of a creditor–debtor relationship between them. The two contracting parties are entitled to their contractual rights and in the meantime have to assume their respective contractual obligations. T has the right to obtain the RMB 100,000 from G but is under obligation to pay back the loan to G at a certain point in time as agreed between them; G is committed to provide this RMB 100,000 to T, and on the other hand, he has a legal claim for this debt of RMB 100,000 owed to him by T. Assume that later on G assigns his right to make a claim over repayment of this debt against T entirely to another person, B. The assignment results in no change to the terms of the original contract between T and G, but alters the composition of the contracting parties. T is still the debtor, but B becomes the creditor. On the other hand, if G merely partially assigns his right to B to make a claim over repayment of the debt against T, then G and B will be the creditors who have a claim over T’s repayment of his debt in proportion to their respective rights as agreed by G and B.

As the example shows, after the assignor in his capacity as an obligee assigns his contractual rights to the third party (the assignee), the assignee becomes an obligee under the contract obtaining the rights assigned to him. In the case of assigning all the assignor’s contractual rights, the assignee will become a new obligee under the contract and completely take the place of the assignor. If the assignor assigns only part of his contractual rights, the assignee will merely be added as a new obligee in parallel with the assignor, who will continue to be an obligee but with fewer contractual rights.

On the other hand, if the assignor in his capacity as an obligor assigns his contractual obligations to the third party (the assignee), the assignee

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will emerge as an obligor under the contract taking over the contractual obligations assigned to him. If it is an assignment of all the assignor’s contractual obligations, the assignee will completely take the place of the assignor, becoming a new contracting party. If the assignor assigns only a part of his contractual obligations to the assignee, the assignee will become a new obligor alongside the assignor, who will continue to be an obligor but with fewer contractual obligations, so that the two will jointly fulfil the contractual obligations in the ratio agreed between them.

Whether it is an assignment of contractual rights or obligations, the contract must be valid. Assigning any rights or obligations pertaining to a contract that is void carries no legal force.

Moreover, if there is a statutory requirement that assigning a certain contractual right or obligation is subject to government approval and/ or government registration, such requirement must be met otherwise the assignment cannot take effect (Contract Law, Article 87). For instance, the Sino-Foreign Cooperative Joint Venture Enterprise Law provides that if one side in such a joint venture intends to assign its whole or partial rights or obligations stipulated in the joint venture agreement, it must have the other side’s consent and also obtain the relevant government approval (Article 10).

Three scenarios

These are the possible scenarios in assigning a contract:

•assigning a party’s contractual rights only;

•assigning only a party’s contractual obligations; or

•assigning a party’s contractual rights together with his contractual obligations.

In the first scenario, an obligee under a contract (the assignor) transfers all or part of his contractual rights to a third party outside of the contract (the assignee), based on what the assignor and the assignee have agreed for such purpose.

In this regard, the Contract Law stipulates that an obligee may assign all or part of his contractual rights to a third party, except where: (1) the assignment

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cannot be made due to the nature of the contract; (2) the assignment cannot be made according to what the contracting parties have agreed; or (3) the assignment cannot be made in light of what the law sets out (Article 79).

Based on these circumstances, what kinds of contract cannot be assigned to others? The rationale behind circumstances 2 or 3 should be self-evident. However, circumstance 1 is more difficult to understand. In practice, it is normally the uniqueness of its contracting party that sets such a contract apart. For example, the obligations contained in a performance contract made with a celebrity singer cannot be assigned to a third party due to the singer’s irreplaceable pedigree and box-office value (L M Wang and Cui 2000, 418).

In assigning contractual rights, the obligee (the assignor) must inform the obligor about this assignment in the first instance, albeit the obligor’s consent to this assignment is not required. According to the Contract Law, the obligor shall be notified of the obligee’s assignment of contractual rights; without such notification, the assignment will not produce a binding effect on the obligor (Article 80, paragraph 1). The obligor’s prior consent is not required, and a notification will suffice for the assignment to have a binding force on the obligor.

After the assignment of contractual rights comes into force, any defence that is likely to be raised by the obligor against the obligee can be raised by the obligor against the assignee as the new obligee (Contract Law, Article 82).

If when the obligor is notified of the obligee’s assignment of contractual rights (enforceable against the obligor), the assignee also needs to fulfil an obligation in favour of the obligor and the assignee’s fulfilment of this obligation is to precede the obligor’s fulfilment of the obligation relating to the obligee’s right assigned, or the two obligations ought to be fulfilled at the same time, then the obligor may make a claim to the assignee for having the fulfilment of these two obligations counterbalanced between him and the assignee (Contract Law, Article 83).

In the second scenario listed above, an obligor under a contract (the assignor) transfers all or part of his contractual obligations to a third party outside of the contract (the assignee), by following what the assignor and the assignee have agreed for such purpose.

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Different from assigning contractual rights, according to the Contract Law, the obligee’s consent is required if the obligor intends to assign his contractual obligations wholly or partially to a third party (Article 84).

If the obligee is not agreeable to the assignment, then the assignment cannot go ahead. This is because changing the obligor may significantly impact the fulfilment of obligations towards the obligee, due to differences between people’s financial standing, creditworthiness and capacity to perform obligations. Only when the obligee is satisfied with the prospective assignee’s financial condition, credit status and ability to perform the obligations to be assigned will it be fair to the obligee if the proposed assignment is allowed to happen.

In contrast, assigning rights by the obligee appears less controlled under the Contract Law as it can come into force without the obligor’s consent, provided that the obligor is notified of the assignment. This is because as the right holder the obligee has total freedom to handle his own rights in a way that he believes will be in his best interests.

After the assignment of contractual obligations becomes effective, any defence that is likely to be raised by the original obligor against the obligee can be raised by the assignee as the new obligor against the obligee (Contract Law, Article 85).

Finally, there is the third scenario: assigning a party’s contractual rights together with his contractual obligations. Since a contracting party under a contract usually has both contractual rights to enjoy and contractual obligations to perform, it is common for a party (the assignor) to assign his contractual rights together with his contractual obligations concurrently to a third party (the assignee).

The Contract Law provides that a contracting party, upon his counterparty’s consent, may assign his contractual rights together with his contractual obligations to a third party (Article 88).

The provisions set out by the Contract Law that separately apply to assigning contractual rights by the obligee and to assigning contractual obligations by the obligor govern assigning a party’s contractual rights together with his contractual obligations (Article 89). That is to say, a party’s assignment of

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rights can come into force without his obligor’s consent in advance, whereas his assignment of obligations is subject to the obligee’s agreement.

The assignor’s assignment of his contractual rights together with his contractual obligations can be initiated by an agreement made for such purpose between the assignor and the assignee based on their free will and by virtue of their mutual intent.

Assignment can also automatically occur under specific circumstances prescribed by the law, most notably associated with corporate restructuring activities like mergers and acquisitions and split-ups. According to the Contract Law, after entering into a contract, if one contracting party merges with another entity, the newly formed legal person or organization will succeed to that party’s exercise of contractual rights and fulfilment of contractual obligations; if one contracting party is split into more than one entity, unless the two contracting parties have agreed otherwise, the legal persons or organizations that are newly created due to the split-up will succeed to that party’s exercise of contractual rights and fulfilment of contractual obligations by jointly and severally enjoying the rights and fulfilling the obligations (Article 90).

Provisions contained in China’s Company Law5 also need to be noted. The Company Law provides that in the case of a merger, any credit or debt of the companies merged shall be inherited by the company that has acquired other companies in the merger or by a newly formed company that has absorbed all the merged companies (Article 175). In a split-up the debts undertaken by a company before its split-up will be assumed jointly and severally by the separate companies it has split into, unless prior to the split-up it has otherwise agreed with the creditor as regards the way of repaying the debts (Article 177).

5The English translation of the Company Law on the following website can be used as a reference: http://www.law-bridge.net/english/LAW/20064/0221042566163.html. The author uses his own translation in this book.

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Discharging a contract

Once a contract is created and comes into force, the best outcome for the parties to the contract is each party’s smooth and successful completion of performing the contract.

Say T enters into a contract with G to purchase 100 tons of rice from G. The contract stipulates that G will deliver the rice to T within a month of signing the contract; and T will make payment to G within a week of receiving G’s delivery. If T and G both perform the contract by strictly and fully living up to the contract, the contract will be deemed to have been successfully performed, amounting to the contractual rights and contractual obligations of T and G coming to an end respectively.

However, life is unpredictable. Many contracts fail to be performed at all, or fail to be performed on time, or fail to be performed in conformance with the contract, thus giving rise to unsuccessful performance, including contracts being discharged, i.e. terminated.

Once a contract is discharged, the legal force the contract carries will accordingly be terminated, and the contractual rights and obligations of the parties to the contract will cease to exist. In this sense, discharge of a contract is a form in which contractual rights and obligations come to an end, though it is not the sole form. The Contract Law enumerates the following circumstances under any of which contractual rights and obligations will come to an end: (1) where the contractual obligations have been fulfilled as per what has been agreed; (2) where the contract has been discharged;

(3)where the contracting parties’ obligations have been counterbalanced;

(4)where the obligor has placed the subject matter in escrow according to the law; (5) where the obligor’s obligations have been exempted by the obligee;

(6)where all the contractual rights and obligations belong to the same party; and (7) any other circumstance prescribed by the law or agreed by the contracting parties, under which contractual rights and obligations will come to an end (Article 91).

Discharging a validly established contractual relationship is not rare and may exert a significant impact on the interests of contracting parties. Therefore, it is necessary to establish a clear understanding of the prerequisites under which a contract may be discharged.

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Under the Contract Law, discharging a contract can be done in two major ways: by agreement and under the circumstances prescribed by the law.

Discharging a contract by agreement

Under the Contract Law, Article 93, discharging a contract by agreement can further be classified into two types: discharging a contract as a result of mutual discussion and discharging a contract by exercising a predetermined contract termination right.

Discharging a contract as a result of mutual discussion

Where the parties to a contract after mutual discussion agree to discharge the contract, the contract can be discharged accordingly (Contract Law, Article 93, paragraph 1). Discharging a contract in this circumstance illustrates the respect shown to the contracting parties’ exercise of their free will that is encouraged under the doctrine of freedom of contract.

Here is an example. ABC (a trading firm) enters into a contract with XYZ (a fertilizer producer) to purchase 100 tons of fertilizer from XYZ. Before XYZ starts to prepare the delivery, ABC is informed that TT (another fertilizer producer) can supply it with the same fertilizer at a much lower price. ABC therefore talks to XYZ to see if XYZ will agree to have their contract cancelled so that ABC can buy the fertilizer from TT instead. XYZ is rarely short of orders, so it does not oppose terminating the contract. The contract between ABC and XYZ is therefore amicably discharged.

Discharging a contract by exercising a predetermined contract termination right

Under the Contract Law, the parties to a contract can be in agreement beforehand on the conditions under which a contracting party has the right to discharge the contract (Article 93, paragraph 2).

Here is an example. Twinkle Star (a shipping company) places an order with AA Shipyard in January for purchasing from AA Shipyard, a Capesize bulk carrier, to be delivered in July. Their contract stipulates that if within a month’s time after the contract is made the selling price in the market of the steel plates to be used in this shipbuilding project rises more than 30% over

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that at the time of entering the contract, AA Shipyard will have a right to opt for unilaterally terminating the contract with no need to obtain Twinkle Star’s agreement. This stipulation thus vests AA Shipyard with a contract termination right. Once this termination right is exercised by AA Shipyard, the contract will be discharged, amounting to an end of all the rights and obligations embodied in the contract.

Discharging a contract by exercising a predetermined contract termination right should be distinguished from the circumstance described in the Contract Law (Article 45, paragraph 1) regarding a contract attached with a condition the accomplishment of which gives rise to annulment of the contract’s validity. In the latter case, once such predetermined condition is satisfied, the contract automatically comes to an end, while in the former case, the contract’s life only ceases if the party who has the contract termination right opts to exercise his right. In the example above, even if the price has gone up by more than 30% within the time set, given that AA Shipyard decides not to exercise its right to terminate the contract, the contract will not be discharged and its binding force will be unaffected.

If a contracting party decides to exercise his contract termination right, he must inform the other party to the contract about his decision to discharge the contract; the discharge will take effect when such notification arrives with the other party to the contract (Contract Law, Article 96, paragraph 1). In other words, if a party fails to notify the other party of his decision to discharge the contract, then the discharge cannot come into force. If the other party after receiving the notification dissents on the discharge, he may petition the court or an arbitral body to adjudicate the effectiveness of the termination (Article 96, paragraph 1). If there is a statutory requirement that such discharge be subject to government approval and/or government registration, this mandatory requirement must be complied with (Article 96, paragraph 2).

A contracting party who is entitled to exercise a predetermined contract termination right may lose this entitlement if he does not exercise his right in time. In this respect, the Contract Law provides that where by virtue of the law or what the contracting parties have agreed there is a time limit set for exercising the contract termination right, the right’s validity will cease if at the end of the time limit the contracting party has not exercised the right; where there is nothing stipulated in the law or the contracting parties have not been in any agreement as regards setting a time limit for exercising the

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contract termination right, then the right’s validity will cease if the contracting party who is entitled to exercise the right does not exercise the right within a reasonable period of time after being urged by his counterparty to exercise the right (Article 95). The law does not define ‘reasonable period of time.’ It should depend on the facts and circumstances in each individual case.

Discharging a contract under the circumstances prescribed by the law

The Contract Law enumerates some specific circumstances, under any of which a contracting party is entitled to unilaterally discharge a contract. Since discharging a contract under any of these circumstances is not a result of the contracting parties having reached a consensus on this matter but is prescribed by the law and is thus mandatory, the consent of any contracting party is not required and no contracting party needs to be consulted. The Contract Law, Article 94 provides that a contracting party can discharge a contract in any of the following circumstances:

•where the goals the contract pursues cannot be realized due to force majeure;

•where before the time for performance arrives a contracting party indicates expressly or by his conduct that he will not perform his primary contractual obligations;

•where a contracting party delays performing his primary contractual obligations, and although being urged to carry out the performance still does not start to perform after a reasonable time passes;

•where a contracting party delays performing contractual obligations or has done something else amounting to breach of contract, with the result that the goals the contract pursues become unrealizable; and

•other circumstances prescribed by the law.

If a contracting party puts forward a demand in the context of any of the above circumstances for discharging a contract, he must notify his counterparty of this demand, and the contract is deemed to be discharged when such notification reaches his counterparty (Article 96, paragraph 1). Without giving

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such notification, the discharge cannot come into force. Moreover, if the party who has been notified of such demand for discharging the contract does not consent to the discharge, then he may petition the court or an arbitral body to adjudicate the effectiveness of the discharge (Article 96, paragraph 1). If the law requires that discharging a contract in this way be further subject to government approval and/or government registration, the requirement must be observed (Article 96, paragraph 2).

Here is an example demonstrating the discharging of a contract under circumstances prescribed by the law. Mount Lake (a trading house) ordered 100 wooden chairs from Red Rain (a shop that sells antique Chinese furniture). They agreed that Mount Lake would make full payment to Red Rain within three days after completion of the delivery of these chairs. Red Rain made the delivery on time. But Mount Lake failed to make any payment to Red Rain by the due date, claiming that it had fallen into unexpected financial hardship and so was unable to pay. It asked Red Rain to grant it a

30-day grace period. After the grace period, Red Rain still did not receive any payment from Mount Lake. Red Rain kept on chasing Mount Lake for payment, but Mount Lake made various excuses. Red Rain feared that Mount Rain would never pay.

Under the Contract Law, a contract can be discharged if a contracting party delays in performing his primary contractual obligations, and although being urged to do so, still does not start to perform after a reasonable time passes

(Article 94). Mount Lake failed to fulfil its payment obligation on time and even after the grace period. Under this circumstance, Red Rain may inform Mount Lake that the contract is terminated and demand Mount Lake to return the goods delivered. If Mount Lake feels aggrieved, it may, pursuant to the Contract Law (Article 96, paragraph 1), express its opposition against the termination of the contract, and petition the court or an arbitral body to adjudicate the effectiveness of the termination.

The effect of discharging a contract

No matter in what way a contract is discharged, the effect is the same: permanent cessation of the contract, with the result that any contractual right or contractual obligation in connection with the contract is no longer in force.

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The Contract Law gives a detailed exposition of the effect of discharging a contract. It provides that after a contract is discharged, any part of the contract not yet performed will cease to be performed; for any part of the contract that has already been performed, according to circumstances and in light of the nature of the contract, the relevant contracting party may try to have it restored to its original state or demand for other remedial measures to be taken, and is entitled to claim compensation for his loss (Article 97).

After a contract is discharged, although it has thus given rise to ending all the contractual rights and contractual obligations, the validity of any settlement clause or liquidation clause contained in the contract will not be affected (Contract Law, Article 98). Any such clause will continue to be in force after the contract is terminated.

Liability for breach of contract

It is not uncommon to see valid contracts being breached as one or more party fails to honour the contractual obligations. Scores of contracts are formed and then either entirely fail to be fulfilled or are performed incongruously or unsatisfactorily.

Assume that T enters into a contract with G to sell 100 bags of fertilizer to G. The required quality standards are stipulated in the contract, which also provides that the fertilizer is to be delivered to G within ten days after the contract is signed. If after one month passes T still has not made delivery with no legitimate reason or justification, T is deemed to be in default (i.e. he has committed a breach of contract). If T makes delivery on time but the fertilizer delivered is not up to the agreed quality standards, then T is deemed to be in breach also.

If a party is in breach of contract, he as a party in default is liable to shoulder the legal responsibility for committing the breach towards the non-breaching party.

Incurring liability for breach of contract

Under the Contract Law, a contracting party who fails to fulfil his contractual obligations or performs his contractual obligations not in a contractually

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agreed way shall bear liability for committing a breach of contract by means of continuing to perform the contract, taking remedial measures, paying damages, etc. (Article 107). If a contracting party has explicitly shown or indicated by his conduct that he will not fulfil his contractual obligations, the other party to the contract may before the time of performance expires demand him to bear liability for breach of contract (Article 108). However, it is unclear why the Contract Law in this place underlines the condition ‘before the time of performance expires,’ as the non-breaching party should not be restrained from claiming against the defaulting party for breach of contract even after the time of performance lapses.

While a defaulting party has to bear liability for breach of contract, such liability is normally remedial rather than punitive in nature. Bearing such liability is to compensate in monetary terms the non-breaching party for any loss suffered arising from the breach. However, bearing liability for breach of contract in the context of the law of contract will not encompass making compensation for the infliction of mental distress suffered by the nonbreaching party, as mental distress belongs to the area of the law of tort rather than the law of contract.

Under certain circumstances, a party committing a breach of contract may be exempted from his liability. In addition, there is more than one remedy available for breach of contract under the Contract Law.

Exemption from liability for breach of contract

Normally a party committing a breach of contract will be liable for his failure to honour contractual obligations. However, he may be exempted from such liability under a circumstance of exemption stipulated by the law or contractually agreed between him and his counterparty.

Statutory exemption from liability for breach of contract

Statutory exemption from liability for breach of contract usually refers to exemption because of a force majeure. However, a force majeure will not necessarily constitute a sufficient reason.

Under the Contract Law, a contracting party who is unable to perform a contract for reasons of force majeure can be partially or entirely exempted

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from being liable for breach of contract, except if the law provides otherwise; if his late performance of the contract precedes the occurrence of the force majeure event, then his liability for breach of contract cannot be exempted (Article 117, paragraph 1).

If a contracting party is unable to perform the contract because of a force majeure, he shall inform the other contracting party about this in a timely manner so as to alleviate the loss that may be caused to the other contracting party, and also produce evidence of such force majeure within a reasonable time (Contract Law, Article 118).

Contractually agreed exemption from liability for breach of contract

Besides statutory exemption from liability for breach of contract, if the contracting parties have agreed beforehand on any specific circumstance under which a party finding himself unable to fulfil his contractual obligations or failing to perform the contract unsatisfactorily can be exempted from liability for breach of contract, the defaulting party may have a chance to be relieved from his liability for the breach committed. The burden of bearing liability for breach of contract is offloaded in this way under the doctrine of the freedom of contract.

However, what the contracting parties have agreed must not contravene the law; nor can it deviate from mainstream ethics or undermine public interest. The Contract Law states that where a standard contractual term is devised for the purpose of enabling a contracting party to be exempted from becoming liable for causing personal injury or for sustaining property loss due to his deliberate fault or gross negligence, such standard term has no validity (Article 53).

Remedies

Remedies available for breach of contract under the Contract Law mainly include continuing to perform a contract, taking remedial measures, paying liquidated damages, and paying damages.

Continuing to perform a contract

In principle a contracting party after committing a breach of contract cannot be exempted from going on to fulfil his existing contractual obligations. To

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put it differently, the contractual obligations of a party in default will not come to an end due to his breach, and he is still under obligation to perform the contract.

Under the Contract Law, Article 109 applies to continuing to perform a contract to fulfil monetary obligations. It provides that if a contracting party has not paid as per price or remuneration, his counterparty may request him to pay.

Also under the Contract Law, if a contracting party fails to perform his non-monetary obligations or his performance of non-monetary obligations does not conform to what the parties to the contract have agreed, then his counterparty may demand him to start the performance of the contract or to perform the contract in compliance with what the contract stipulates (Article 110). That is to say, his obligations to perform the contract will not evaporate as a consequence of his default. Note that this only applies to nonmonetary obligations.

Also, there are certain circumstances prescribed under the Contract Law under which this requirement will not apply, including where the performance is not acceptable by law or not plausible in practical terms; where the subject matter relating to the obligation is not suitable for mandatorily carrying out the performance, or it is too costly to carry out the performance with such subject matter; and where after passage of a reasonable period the obligee has not demanded the obligor to perform the obligation (Article 110).

Taking remedial measures

Requiring a defaulting party to take remedial measures as a kind of remedy for breach of contract is mainly in an attempt to compensate a non-breaching party who suffers a loss due to a quality defect pertaining to the subject matter of the contract.

The Contract Law indicates that liability for breach of contract has to be borne by the defaulting party in accordance with what the contracting parties have agreed, if the quality pertinent to the subject matter of the contract is not up to the contractually agreed standard; but if the contracting parties are not in any agreement on this matter, or their agreement on this matter is not clear enough and remains so after an attempt is made to affirm the

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meaning as per Article 61 of the Contract Law, the non-breaching party may demand the defaulting party to assume liability for breach of contract by repairing, replacing, remaking or returning the good, or reducing the price or remuneration (Article 111). By Article 61 of the Contract Law, after a contract comes into force, if it is found that the contracting parties have yet to reach an agreement on any contract clause relating to quality, price or remuneration, place of performance, etc., or their agreement is not clear enough, then they may supplement the contract by entering a further agreement; and if no such further agreement can be made, the lacunas shall be filled in the light of the relevant contract terms as they stand or by following habits of trade.

If due to the nature of the subject matter of the contract, taking such remedial measures is not feasible, then the non-breaching party may request the defaulting party to bear the liability for breach of contract in other forms (such as continuing to perform the contract, or paying damages). Even if taking remedial measures is a viable choice, the non-breaching party may, in the meantime when he demands the defaulting party to take remedial measures, also request the defaulting party to additionally provide other forms of remedy (such as continuing to perform the contract or paying damages).

Paying liquidated damages

Paying liquidated damages is a kind of remedy provided by a contracting party who is in default to his counterparty (i.e. the non-breaching party) who suffers a loss due to the default. Here, ‘liquidated damages’ refers to a specific sum of money fixed by the two contracting parties in advance (usually at the time of entering the contract), payable to the non-breaching party in the event of a breach.

Regarding paying liquidated damages, the Contract Law provides that the parties to a contract may agree that when one party is in default he shall pay a certain amount of liquidated damages to the other party in the light of the circumstances of the breach, and may also agree on the way of calculating the amount of compensation for the loss incurred by the breach; in the event of the agreed amount of liquidated damages being lower than the amount of the actual loss, the party affected may petition the court or an arbitral body for incrementing the amount of liquidated damages to be paid; in the case of the agreed amount of liquidated damages being apparently higher than the amount of the actual loss, the party affected may petition the court or an arbitral body

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for properly decreasing the amount of liquidated damages to be paid; where the liquidated damages are set to apply to the late performance of the contract, the defaulting party, after paying the liquidated damages to the non-breaching party, will still need to go on to perform his obligations (Article 114).

It is quite common that liquidated damages are mixed up with deposits. Regarding deposits, the Contract Law points out that the parties may in the light of the Guarantee Law agree that one party provides a deposit to his counterparty as a guarantee ensuring that the latter’s claim over the obligations to be performed by the former can be fulfilled, and after the obligations are performed by the former, the deposit will automatically become a part of the contract price or be got back by the former; the party providing the deposit will not be entitled to get the deposit back if he fails to perform his obligations; the party receiving the deposit will return to the party giving the guarantee, twice the amount of the deposit if the party to whom the guarantee is provided fails to perform his obligations (Article 115).

If there is an agreement reached between the contracting parties on liquidated damages as well as on deposits, if a breach of contract occurs later on, the non-breaching party may choose to use either the agreed liquidated damages or the agreed deposit as a remedy provided by the defaulting party for his breach of contract (Contract Law, Article 116).

Paying damages

Paying damages is a main form of remedy for breach of contract. The term ‘damages’ has a more general sense than ‘liquidated damages,’ and denotes a sum of financial compensation given to the non-breaching party under the circumstance of breach of contract. Such sum is not fixed by the contracting parties in advance, but keeps pace with the actual loss incurred.

The Contract Law provides that if one party defaults by failing to perform his contractual obligations or not carrying out the performance in line with the contract, after obligations are fulfilled or after remedial measures are taken, he will have to pay damages to the non-breaching party for any other loss not yet made up (Article 112).

It should be noted that if the contracting parties have mutually decided in advance that paying a predetermined sum of liquidated damages to the non-

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breaching party is the remedy to be used under the circumstance of breach of contract, then paying liquidated damages as a remedy will prevail over paying damages, as a way of respecting the contracting parties’ common willingness under the doctrine of the freedom of contract. Only under the circumstance that the contracting parties make no agreement beforehand on paying liquidated damages may paying damages be used as a remedy for the breach.

Also, two norms have to be abided by in relation to paying damages as a remedy for breach of contract: reasonable prediction and fulfilling the duty to attenuate loss.

Reasonable prediction

The norm of reasonable prediction relates to the fact that a defaulting party’s liability for the loss suffered by a non-breaching party due to breach of contract is confined to a scale that can reasonably be foreseen by the defaulting party when entering into the contract, so the defaulting party does not need to pay damages for any loss surpassing such scale.

The essence of reasonable prediction can be found in the Contract Law, which says that if one contracting party fails to perform his contractual obligations or his performance does not conform to what has been agreed between the two contracting parties thus causing the other contracting party to incur a loss, the amount of damages paid by him to his counterparty shall be equivalent to the loss due to this breach of contract, including the gains that could have been received if the contract had been performed but not exceeding the amount of the loss likely to arise from breach of contract that could be or ought to be foreseen by him (the party in default) at the time of entering the contract (Article 113, paragraph 1).

So, the damages paid by the defaulting party include the compensation for the actual loss directly incurred due to the breach as well as for the predictable loss of any foreseeable gain by the non-breaching party if there were no breach. When the contract is made, the parties are presumed to be able to predict any likely loss in the event of breach of contract and to pre-estimate the extent of such loss. The party in default is not liable for any loss that cannot be reasonably forecasted.

Here is an example. TT is a company providing repair services for kitchen equipment. Two weeks ago, ABC (a bakery) sent TT four ovens to repair.

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The two sides agreed that this repair work would be completed within three days at most because they both understood that any single day’s delay would lead to a loss of RMB 10,000 revenue for ABC. However, TT took five days to fix these ovens. ABC thus claimed damages against TT for a loss of

RMB 20,000. Should TT pay such damages to ABC? In normal circumstances, the answer is yes. TT should pay damages to ABC because RMB 20,000 is the amount reasonably predicted for the two days’ revenue that ABC could have generated if the repair work had been completed on time.

The Contract Law mentions an exception to this norm of reasonable prediction. It says that a supplier of goods or services will be liable for compensating consumers if consumers suffer a loss due to that supplier’s deceitful behaviour, in the context of the provision set out in the Law on Protection of Consumers’ Rights and Interests6 (Article 113, paragraph 2). This specific provision refers to Article 49 of the Law on Protection of Consumers’

Rights and Interests, which indicates that a supplier of goods or services who commits a deceit when selling goods or services to a consumer shall augment the compensation made to the consumer for the loss suffered, and the amount of the increased compensation shall be equivalent to doubling the value of what the consumer has paid for the good purchased or the service garnered from that supplier. It can be seen that if this provision under the Law on Protection of Consumers’ Rights and Interests is applied, the recoupment will be of a punitive nature to a certain degree, rather than purely compensatory.

Fulfilling the duty to attenuate loss

If a breach of contract occurs, while the defaulting party is liable for making compensation to the non-breaching party who suffers a loss arising from the breach, the non-breaching party, in the meantime, also needs to actively mitigate the loss by taking appropriate measures in order to contain the loss from further enlargement. This is the substance of the second norm of fulfilling the duty to attenuate loss.

6The full title of the Law on Protection of Consumers’ Rights and Interests is ‘the Law of the People’s Republic of China on Protection of Consumers’ Rights and Interests.’ Its full text (in English) can be found on the following website: http://www.lehmanlaw.com/resource-centre/laws- and-regulations/consumer-protection/law-of-the-peoples-republic-of-china-on-protection-of-the- rights-and-interests-of-the-consumers-1994.html.

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In this respect, the Contract Law points out that after a party commits a breach of contract, the other party (the non-breaching party) shall take appropriate measures to prevent enlargement of the loss, and failing to do so will deny the non-breaching party’s claim for being compensated for any enlarged part of the loss arising from his inaction; the party in default shall bear any reasonable expense incurred by the non-breaching party in order to mitigate the enlargement of the loss (Article 119).

The non-breaching party’s fulfilment of such kind of duty can be perceived as an application of the doctrine of fairness and impartiality in the circumstance of the breach of contract. Similar advocacy is also discerned in the General Principles of Civil Law, which provides that if a contracting party suffers a loss due to the other contracting party’s breach of contract, that injured party shall take timely measures to curb any increase in the loss, otherwise he will not be entitled to claim for compensation over any enlarged part of the loss due to his failure to do so (Article 114).

Here is an example. ABC (a seafood wholesaler) bought a ton of frozen trout from XYZ (a fish farm). XYZ failed to make delivery on time. This led ABC to bear liability for its default on supplying frozen trout to its customers on time. These customers are the restaurants that placed orders with ABC for supply of this batch of frozen trout within a predetermined time frame. ABC made a claim for damages against XYZ, as due to XYZ’s breach ABC suffered a loss by having to make compensation to its customers. But XYZ refused to admit its breach, arguing that ABC and XYZ interpreted the date of delivery differently. ABC insisted on not accepting XYZ’s late delivery unless XYZ paid damages to it. XYZ did not agree. It left the frozen trout delivered to ABC in an open yard outside ABC’s storage building, claiming that the transaction was completed and that XYZ was relieved of any pending responsibility. After a whole day’s exposure to the sun and heat, most of the frozen trout became unacceptable for eating. Here, ABC failed to perform its duty to attenuate the loss by placing the trout received in its cold storage warehouse while finding a way to settle its squabble with XYZ, resulting in an enlargement of the loss. Because of this, ABC would not be entitled to make a claim against XYZ for any part of the loss arising from its failure to quickly take an appropriate measure to contain the loss.

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Summary

The contract law regime in China is represented by the principal statute of the Contract Law enacted in 1999 and also embraces constituents that take the forms of judicial interpretations issued by the Supreme People’s Court and relevant provisions contained in other laws.

Offer and acceptance are the two indispensable steps in establishing a contractual relationship. An effective acceptance of a valid offer instantly gives rise to the creation of a contract. The formation of a contract does not guarantee that such contract is necessarily a valid one having legally binding force. Whether a contract is valid depends on if it can satisfy all the essential requirements for creating a valid contract. Many contracts have defects in terms of validity leading to various consequences: some are void contracts having no legal force at all from the beginning; some are voidable contracts that are valid at present but their validity is revocable; some are termed ‘contracts with undecided validity,’ and a contract of such kind is not in force currently and whether it can subsequently become effective depends on whether a relevant party chooses to affirm its validity or its deficiencies can be removed.

Whether a contract can successfully be performed in accordance with what the contracting parties have agreed in the contract is a key to fulfilment of the contract’s objectives.

Altering a contract means making a change to the contents of a contract partially rather than entirely. It does not give rise to any change in the contracting parties. In this sense, it is not a material change made to a contract. Assigning a contract refers to a contracting party’s act of entering into an agreement with a third party (who is not a party to the contract) aimed at transferring his contractual rights and/or his contractual obligations, either wholly or partially, to that third party. Assigning a contract does not give rise to the alteration of any predetermined contract terms, but it leads to a change in the composition of the contracting parties.

Before completing the performance of a contract, it is possible that the contract may be discharged for certain reasons. A party in default bears liability for his breach of contract. The main remedies available for breach of contract include continuing to perform a contract, taking remedial measures,

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paying liquidated damages, and paying damages. Paying damages is a main form of remedy for breach of contract, for which two norms need to be followed: reasonable prediction and fulfilling the duty to attenuate loss.

Practice questions

1A roll of film got stuck in Mrs Luo’s camera when she was travelling in

South Africa last month. After returning to Shanghai, she took the camera to ABC Camera Shop (‘ABC’) and asked ABC to get the film out and develop it.

Mrs Luo pre-paid ABC RMB 500 for this service. Mrs Luo found the following clause printed on the back of the receipt issued by ABC: ‘In the event that your film is damaged in the course of being developed, our compensation will only be in a reasonable range.’ Mr Ma, the manager of ABC, further handwrote a line beside this clause: ‘ABC assumes no responsibility for any damage or loss that may result from removing and developing this film.’

The next day Mrs Luo came to collect the photos. Mr Ma told her it took him a whole afternoon to remove the film from the camera but the film was exposed in the process of removal: no part of it could be saved. He refunded Miss Luo the RMB 500 paid.

Mrs Luo asked for more compensation, including the cost of her airplane tickets and some of her travel expenses for her trip to South Africa.

Mr Ma argued that ABC was under no obligation to pay her any compensation other than the RMB 500 refunded, as he had indicated on the receipt that ‘ABC assumes no responsibility for any damage or loss that may result from removing and developing this film.’

Mrs Luo countered that the line handwritten by him had no binding force since it was not in line with the standard clause printed on the back of the receipt.

Whose argument is sound?

Practice questions 265

2In 2011, Li (the insured) bought a life insurance policy from Great Land Insurance Ltd (‘Great Land’) (the insurer). At the time of applying to Great Land for purchasing this policy, Li was asked to complete a medical questionnaire as part of the Insurance Proposal, the contents of which were unilaterally supplied by Great Land. One question in the questionnaire was: ‘Have you ever been diagnosed with any form of heart disease?’ Li’s answer to the question was no. In fact, Li had been told by his doctor many years previously that he had congenital heart disease.

In February 2012, Li died of a sudden heart attack when he was on vacation on Hainan Island. As the sole beneficiary named on this life insurance policy, Li’s wife submitted a claim to Great Land for the death benefit.

Li’s wife received a letter from Great Land which said: ‘After careful investigation, we now understand that your husband wilfully concealed his history of heart disease when he was asked to answer a pertinent question contained in the Insurance Proposal while applying for his life insurance policy. Since the Insurance Proposal constitutes an integral part of the insurance contract later on formed between your husband and Great Land, such contract is now deemed to be invalid from the start. Hence your life insurance claim cannot be entertained.’

Li’s wife strongly dissented. In her view, Great Land’s refusal to pay the death benefit is totally groundless.

Advise Li’s wife.

3Two months ago, Golden Sunshine (a furniture shop) sold a piece of antique furniture to a trading house, Silver Moonlight, for RMB 100,000. Golden Sunshine delivered the furniture to Silver Moonlight on time. But Silver Moonlight defaulted on payment after the deadline for making payment to Golden Sunshine lapsed.

Last week, Golden Sunshine informed Silver Moonlight that Golden Sunshine had assigned its right to make a claim for repayment of this RMB 100,000 against Silver Moonlight to ABC Bank. Silver Moonlight received a letter from ABC bank yesterday, in which ABC Bank demanded Silver Moonlight to make this RMB 100,000 payment to ABC

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Bank within the coming ten days, otherwise ABC Bank would take court action against Silver Moonlight.

Silver Moonlight made the following statements to Golden Sunshine: ‘(1) Silver Moonlight’s pending payment to Golden Sunshine has nothing to do with ABC Bank; (2) Golden Sunshine’s assignment of its right to make a claim for this RMB 100,000 debt to ABC Bank is void, as Silver Moonlight is not agreeable to this transaction; and (3) after performing a quality inspection, Silver Moonlight discovered that the furniture delivered does not meet the standard stipulated in the sales contract; thus no payment will be made to Golden Sunshine until the quality problem is addressed.’

Comment on Silver Moonlight’s arguments.

4City G Post Office purchased a letter-sorting machine from a machine supplier, Green Forrest. Their contract stipulates: ‘Payment will be made in two instalments, with the first 60% made within a week after the contract is entered and the remaining 40% made after the machine is installed and operates error free.’

City G Post Office made the first payment. Green Forrest completed the installation of the machine. The machine operated properly most of the time, but a stoppage problem was discovered on some occasions. Green Forrest was not able to detect the cause.

Green Forrest chased City G Post Office for the second payment. Meanwhile, it promised to tackle the stoppage problem. City G Post

Office started to wonder about Green Forrest’s ability to fix the problem.

It intended to terminate the contract by returning the machine to Green

Forrest in return for a refund of its first payment. Green Forrest disagreed.

Is there any legal basis on which the contract made between City G Post

Office and Green Forrest can be terminated?

5On 15 May, Ma (a businessman in Shenzhen, Guangdong Province) entered into a contract with Huang (a fruit wholesaler in Zhangzhou, Fujian Province). Under the contract, Huang would sell a batch of lychees to Ma for RMB 40,000; Huang would have to deliver the lychees to Ma

Practice questions 267

in Shenzhen before 30 May, otherwise he would be liable to pay Ma RMB 20,000 in liquidated damages.

On 20 May, Huang made a contract with a trucking company, Fast Speed, which would transport the lychees from Zhangzhou to Shenzhen and pass them on to Ma no later than 30 May.

Due to internal mismanagement, Fast Speed did not start to perform the job until 10 June. After the trucks left Zhangzhou, they were stranded on the highway for three days due to an unexpected typhoon. By the time the trucks arrived in Shenzhen on 14 June, about one fourth of the lychees had rotted.

Ma demanded Huang to pay the RMB 20,000 liquidated damages. Huang refused to do so, on the ground that only one fourth of the lychees were damaged, the value of which was far below the amount of RMB 20,000 being 50% of the total contract price.

Huang made a claim for damages against Fast Speed. He asked for a RMB 70,000 compensation package, including RMB 40,000 for the mental stress caused to him due to this incident, along with his loss of another fruit purchase order worth RMB 30,000 which Ma previously agreed to give him but had now withdrawn. Fast Speed maintained this was a force majeure event and Fast Speed did not commit any breach.

Discuss.

Guidelines for answers

1Mr Ma used his handwritten line as a non-standard term. Under the Contract Law, if a standard term does not dovetail with a non-standard term, the non-standard term shall prevail. Hence ABC does not need to make compensation to Mrs Luo except for refunding her RMB 500.

2Some points need to be further investigated: whether Li’s concealment of his history of illness from Great Land is due to deceit or negligence, the relationship if any between his death and his congenital heart disease, and if what Li did led to the contract becoming void or only voidable.

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3The assignment will have a binding effect on Silver Moonlight after Golden Sunshine has duly informed it about the transaction. Silver Moonlight’s consent is not required. Any defence shall be raised by Silver Moonlight directly against ABC Bank, not Golden Sunshine.

4It must be assessed if a contract termination right has been predetermined by the post office and its machine supplier, or their contract is attached with any condition on annulling it, and whether what happened in the case squared with a circumstance prescribed by the law under which a contract can be discharged (with respect to ‘quality’ under Article 148).

5Fast Speed was already in breach before it encountered bad weather. But it is not liable for mental stress under the law of contract; losing a future order is also too remote to be reasonably foreseen. If Huang thinks the amount of liquidated damages far surpasses the actual loss, he may petition to an arbitral body or the court for reducing the amount.

Chapter 5

The Tort Liability Law

Introduction

The principles of civil law illustrate that people enjoy civil rights. However, those rights may be infringed by others, as shown in the following examples:

•Wang incidentally knocked over his vase of flowers from the balcony on the second floor, hitting a passer-by outside his house.

•A cooking gas cylinder in an eatery’s kitchen suddenly exploded. All three of the customers there were seriously wounded.

•Lin got food poisoning after eating some canned corned beef, as the preservative used in the beef far exceeded the permissible level.

•Li often worked at home using a notebook computer provided by his employer. Li quit his job recently, but he did not intend to return the computer.

•TT Hospital never tests blood donors for hepatitis B before they give blood. Huang acquired hepatitis B due to a recent blood transfusion at TT.

What do the above examples have in common? In each, the relevant parties have suffered injury or damage, amounting to an infringement of their legitimate civil rights and interests, i.e. their personal rights and interests or their rights and interests pertinent to property. Such infringement is commonplace in daily life as these rights can be at risk at any time due to another person’s actions or inaction, whether deliberate or not. It is important to know how a victim can be rescued and compensated for loss if such infringement occurs.

On these questions, tort liability law (or simply ‘tort law’ or ‘the law of tort’), which is an important part of the civil law regime in a civil law jurisdiction, provides certain legal guidelines.

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The Longman Dictionary of Law defines ‘tort’ as follows: ‘A civil wrong independent of contract. Liability in tort arises from breach of a duty primarily fixed by law which is towards others generally, breach of which is redressable by a claim for unliquidated damages, affording some measure of compensation’ (Curzon and Richards 2007, 579).

Similarly, a tort is described by the Free Online Dictionary as ‘damage, injury, or a wrongful act done wilfully, negligently, or in circumstances involving strict liability, but not involving breach of contract, for which a civil suit can be brought’; and as ‘a civil wrong arising from an act or failure to act, independently of any contract, for which an action for personal injury or property damages may be brought.’

Tort law in contemporary China can be traced back to the Book on Obligations (i.e. the law of obligations) under the Civil Code implemented in 1930 by the Republic of China (L M Wang 2004, 141–42; Ma and Yu 1998, 997).

From the founding of the People’s Republic of China in 1949 until the promulgation of the General Principles of Civil Law in 1986, legal provisions on tort were few and far between in China. Tort issues were basically handled by relying on the theoretical foundations laid down in the 1950s, which were constructed by translating and transplanting tort law doctrines from the former Soviet Union (Yang 2010, 5). The relevant provisions in the General Principles of Civil Law of 1986 (namely in Chapter 6) as well as some subsequent laws and some judicial interpretations of the Supreme People’s Court can be viewed as having tentatively created piecemeal the legal basis for establishing tort liability and determining tort remedies.

This was the situation until 26 December 2009, when the National People’s Congress passed the Tort Liability Law of the People’s Republic of China (hereinafter called the ‘Tort Liability Law’)1, which came into effect on 1 July 2010.

1The full text of the Tort Liability Law (in Chinese) can be found on the following website: http:// www.gov.cn/flfg/2009-12/26/content_1497435.htm. There are not many English translations. The author uses his own English translation in this chapter. An English translation on the following website can also serve as a reference: http://www.procedurallaw.cn/english/law/201001/ t20100110_300173.html.

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From the above one can understand that for quite some years prior to the enactment of the Tort Liability Law, China had already had a legal mechanism aimed at protecting civil rights against illegitimate infringement. Quite a few laws relating to tort issues in certain specialized fields were in force before the promulgation of the Tort Liability Law, e.g. the State Compensation Law, the Product Liability Law, the Road Traffic Safety Law, the Environmental

Protection Law, the Marine Environmental Protection Law, the Law on Prevention and Rectification of Water Pollution, the Law on Prevention and Rectification of Air Pollution, the Food Safety Law, the Postal Law, the

Marriage Law, the Patent Law, the Trademark Law, the Law on Protection of Consumers’ Rights and Interests and the Anti-Unfair Competition Law.

These laws, forming a kind of ‘special law,’ together with the part of the General Principles of Civil Law that was a kind of ‘general law’ pertaining to tort, significantly contributed to the formation of a mechanism for discerning a legal basis for regulating tortious acts and tort liability in both substantive law and procedural law. Moreover, some judicial interpretations by the Supreme People’s Court regarding tortious acts and tort liability can be viewed as part of China’s current tort law framework, e.g. the Supreme People’s Court’s Opinions on Some Issues Regarding Implementation of the General Principles of Civil Law of the People’s Republic of China, the Interpretation of the Supreme People’s Court on Some Issues Regarding Establishment of Liability and Compensation for Mental Distress Arising from Torts, the Interpretation of the Supreme People’s Court on Some Issues Regarding Application of Law in Cases of Compensation for Personal Injury, the Supreme People’s Court’s Answers to Some Questions in Cases Concerning the Right to Reputation, and Some Provisions Issued by the Supreme People’s Court on Evidence in Civil Litigation, etc. (Yang 2010, 6, 45–51, 70 and 82; L M Wang 2004, 143–45).

Absorbing the relevant cardinal principles advocated under the General Principles of Civil Law, the Tort Liability Law has become a leading statute on tort in China. It further consolidated Chinese tort law and boosted the overall development of China’s civil law regime (Yang 2010, 3–6).

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The Tort Liability Law regime

The purpose of the Tort Liability Law, as explained under the law itself, is to safeguard civil subjects’ legitimate rights and interests, affirm the attribution of tort liability, prevent and sanction tortious acts, and promote social harmony and stability (Article 1).

Under the Tort Liability Law, an infringement upon civil rights and interests will give rise to assumption of tort liability (Article 2, paragraph 1). Here, the term ‘civil rights and interests’ is defined by the Tort Liability Law as covering various kinds of property or personal rights such as the right to life, right to health, right to a name, right to reputation, right to public esteem, portrait right, right of privacy, right of voluntary marriage, right to guardianship, right of ownership, usufructuary right, property right relating to security, copyright, patent right, exclusive right to use a trademark, right of discovery, shareholders right, inheritance right, etc. (Article 2, paragraph 2).

An infringed party is entitled to a claim against the wrongdoer for the latter’s assumption of tort liability (Tort Liability Law, Article 3).

The Tort Liability Law includes 92 articles in 12 chapters: ‘General Provisions’ (Chapter 1), ‘Establishment and Assumption of Tort Liability’ (Chapter 2), ‘Exemption from and Mitigation of Tort Liability’ (Chapter 3), ‘Special Provisions on Alleged Wrongdoers’ (Chapter 4), ‘Product Liability’ (Chapter 5), ‘Liability for Motor Vehicle Accidents’ (Chapter 6), ‘Liability for Medical Malpractice’ (Chapter 7), ‘Liability for Environmental Contamination’ (Chapter 8), ‘Liability for High-risk Activities’ (Chapter 9), ‘Liability for Damage Caused by Animals’ (Chapter 10), ‘Liability for Damage Caused by Objects’ (Chapter 11) and ‘Miscellaneous Provisions’ (Chapter 12).

A dual approach was employed in designing the Tort Liability Law. The law hammers out some general provisions that apply to all kinds of tortious liability. It then expounds a number of special types of tort liability significant for specific areas and professions in China (Yang 2010, 7).

It deserves mention that under the Tort Liability Law, a party who has committed a tort may, at the time of becoming liable in tort, concurrently face administrative liability or criminal liability arising from the tort committed (Article 4, paragraph 1). For example, manufacturing or selling fake alcohol

Three basic principles for establishing tort liability 273

will not only lead the wrongdoer to face tort liability for creating serious health risks, but also give rise to a criminal prosecution against him.

In the event that a wrongdoer has to bear both tort liability and administrative liability or criminal liability, if his personal assets are not sufficient to fulfil all the liabilities incurred, he will have to use his personal assets to satisfy his tort liability in the first instance (Tort Liability Law, Article 4, paragraph 2).

Another point that needs to be mentioned regards a tort issue that is provided for differently in the Tort Liability Law than in a law promulgated before the Tort Liability Law. In this situation, the Tort Liability Law points out that for a tort liability issue, if any other law provides otherwise, what is said in that law will prevail (Article 5). This confirms the custom that what is prescribed concerning a tort issue in laws other than the Tort Liability Law (mostly those concerning tort in certain specialized fields) will normally prevail over what the Tort Liability Law sets out on that issue. So, if on a certain liability issue the Road Traffic Safety Law does not tally with the Tort Liability Law, what is said in the Road Traffic Safety Law will normally prevail. However, according to Yang (2010, 52), this practice is not absolute. If the special law is not in compliance with the cardinal principles and objectives of the Tort Liability Law, it will not prevail over the Tort Liability Law.

The above lists the main areas covered by the Tort Liability Law. The next section outlines the main principles for establishing tort liability. These principles form the basis of the Tort Liability Law, and it is important to understand them before discussing the remedies for tort and the exemption from and mitigation of liability.

Three basic principles for establishing tort liability

Implementing the Tort Liability Law alongside other legal provisions in the general tort law regime more effectively safeguards people’s civil rights. If any of a person’s civil rights (i.e. personal rights or rights pertinent to property) are infringed, the wrongdoer (i.e. the tortfeasor) will become liable in tort to the victim for the injury or damage caused.

Assume ABC Pharmaceuticals uses the photos of Miss Wang (one of the most famous movie stars in the country) on the labels of its products

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without permission. Miss Wang’s portrait right has thus been violated by ABC Pharmaceuticals, which will have to bear tort liability by providing appropriate remedies to Miss Wang, such as ceasing to use the photos, apologizing to her, paying damages, etc.

Tort liability arises from the occurrence of a tort that leads to the formation of a relationship between the wrongdoer and the victim in connection with the relevant right and obligation. The right belongs to the victim, enabling him to claim against the wrongdoer for bearing tort liability, and the obligation falls on the wrongdoer, who has to assume tort liability towards the victim. Given that there is a tort, a relationship will exist between the wrongdoer and the victim, whether the two parties like it or not.

A tort relationship is different from a contractual relationship. The rights and obligations established under a contract entirely depend on the consensus and willingness of the two parties to the contract (G Z Li 1998, 169). But a tort relationship does not derive from the two parties’ agreement; it automatically comes into existence due to the operation of law based on the damage incurred.

Assume that T and G have signed a contract under which G will sell a car to T for $30,000. T has paid, but G has not delivered the car to T, hoping to sell it to someone else at a higher price. Does G’s act constitute an infringement upon T’s property right? Is he liable in tort to T? The answer is no. This example relates to breach of contract, not infringement upon property right. G is liable for breach of a duty imposed by the contractual relationship voluntarily established between T and G; but G does not assume tort liability.

In cases of violations of civil rights, some basic principles need to be followed in order to establish whether tort liability arises, and if so, to whom the liability should be attributed. The Tort Liability Law contains stipulations that express the essence of three basic principles for establishing tort liability: the fault liability principle, the constructive fault liability principle and the nonfault liability principle.

It should be noted that in many books published before the Tort Liability Law was promulgated, some Chinese scholars argued that the basic principles for establishing tort liability should also include ‘the principle of fair allocation of liability.’ Their argument was based on the General Principles of Civil Law and the Supreme People’s Court’s Opinions on Some Issues Regarding

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Implementation of the General Principles of Civil Law. For example, under Article 132 of the General Principles of Civil Law, if none of the relevant parties has been at fault for the damage, the civil responsibility shall be shared among the parties according to the circumstances. Under Article 157 of the Supreme People’s Court’s Opinions on Some Issues Regarding Implementation of the General Principles of Civil Law, if none of the parties has been at fault for the damage but one party has been injured in the course of carrying out activities for his counterparty’s benefit or for their mutual benefit, then the injured party can demand his counterparty or the beneficiary to provide him with a certain amount of economic compensation.

The essence of the fault liability principle, the constructive fault liability principle, and the non-fault liability principle can be clearly discerned in Articles 6 and 7 of the Tort Liability Law. Nonetheless, this does not mean that a consensus has been reached in academia on the general principles for establishing tort liability. Article 24 of the Tort Liability Law resembles Article 132 of the General Principles of Civil Law, stating that where neither the victim nor the tortfeasor has been at fault for the damage, the two sides will share liability according to the actual circumstances. Whether the principle of fair allocation of liability can be viewed as a basic principle for establishing tort liability is debatable, although in practice such debate will not affect the handling of tort-related issues.

The following three examples, which take place at the fictionalABC Hospital in

Shenzhen, help explain the three basic principles for establishing tort liability.

Example 5.1

Wang suffered from acute gastric ulcers. He had to undergo surgery to remove about one fourth of his stomach. During the operation, his doctor wrongly removed an extra half due to gross negligence.

Example 5.2

Liu had an endoscopic examination of his stomach. He was concerned when he saw that the endoscope was not thoroughly cleaned and disinfected after it was used in different patients. Shortly afterwards he was found to have contracted hepatitis. Liu believed that the hepatitis virus passed to him from the endoscope during the test.

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Example 5.3

Huang, a researcher in the hospital’s molecular biology laboratory, was recently diagnosed with leukemia. He had been unaware of his longterm exposure to a hazardous level of radioactive isotopes leaking in the laboratory that the hospital failed to detect and control.

In these examples, would ABC Hospital be held liable in tort to pay compensation to Wang, Liu and Huang for their losses?

In order to effectively deal with the above three examples, it is necessary to have an understanding of the three basic principles mentioned above for establishing tort liability.

The fault liability principle

The Tort Liability Law provides that a person will be liable in tort if another person’s civil rights and interests have been infringed due to his fault (Article 6, paragraph 1). This captures the essence of the fault liability principle, i.e. that a fault must be committed for tort liability to come into existence.

Similar passages can be found in the General Principles of Civil Law, which provides that a citizen or a legal person will face civil liability if the property of the state or a collective has been infringed due to the fault of that citizen or that legal person, or if another person has been personally injured or his property has been damaged due to the fault of that citizen or that legal person (Article 106, paragraph 2).

From the above provisions it can be seen that the fault liability principle emphasizes that a precondition to establishing that a person is liable in tort is the existence of fault, i.e. that person must have been at fault and it is that fault that led to the infringement of another person’s civil rights and interests. If a person has not been at fault, even if it is his act or his object that has given rise to injury to another person’s civil rights and interests, he will not be held liable in tort (Yang 2010, 61).

Here is an example. ABC is a medical equipment manufacturer. It holds a patent on a special technique used in manufacturing endoscopes. Without ABC’s permission, XYZ (another medical equipment manufacturer) discreetly

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used this patented technique to produce its own endoscopes, which sold quite well. What XYZ did obviously violated ABC’s patent right. Since XYZ was at fault, it would be held liable in tort towards ABC.

Following on from the above example, TT Hospital purchased quite a lot of XYZ’s endoscopes. ABC alleged that TT Hospital also infringed its patent right. Could ABC’s allegation against TT Hospital be established? It depends on the facts of the case. If before ABC made the allegation TT Hospital had no idea that it had purchased endoscopes that infringed ABC’s patent right, then since TT Hospital was acting in good faith (i.e. it was at no fault as regards the event of XYZ’s violation of ABC’s patent right), it would not be held liable in tort under the fault liability principle.

In a circumstance under which tort liability ought to be established in light of the fault liability principle, the onus of proof of the fault will be put on the victim. If the victim intends to claim against the alleged wrongdoer for tort liability, he must prove that the alleged wrongdoer has been at fault; if the victim is not able to prove this or he cannot find sufficient evidence to support his claim, the alleged wrongdoer will not be held liable in tort (Yang 2010, 61; L M Wang and Yang 1996, 33; Ma and Yu 1998, 1006).

The fault liability principle generally applies to affirming tortious liability that arises from ordinary tort cases. To put it another way, as a basic principle for establishing tort liability, the fault liability principle should be adopted in all ordinary tort cases, unless the law provides otherwise that another basic principle for establishing tort liability (e.g. the constructive fault liability principle or the non-fault liability principle) is to be applied in order to establish tort liability relating to a specific scenario prescribed by the law (Yang

2010, 61).

Among the provisions in the Tort Liability Law, some concrete instances can be identified in which the fault liability principle must be applied, e.g. when a manager of a public place or an organizer of an activity that involves a large number of people fails to fulfil his duty to ensure safety; in the event of a traffic accident between motor vehicles; in the case of medical malpractice; etc.

The Tort Liability Law provides that where a manager of a public place (like a hotel, department store, bank, transport station, recreational facility, etc.) or

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an organizer of an activity that involves a large number of people fails to fulfil his duty to ensure safety with the result that someone sustains an injury and/or damage, then the manager or the organizer in question shall be held liable in tort (Article 37, paragraph 1).

In a traffic accident between motor vehicles, the Tort Liability Law provides that the relevant provisions contained in the Road Traffic Safety Law shall be applied as regards bearing liability for compensation (Article 48). In accordance with the Road Traffic Safety Law (revised in 2011), in a traffic accident between motor vehicles, the party at fault shall be liable for compensation, and if all the parties are at fault, then after the insurance company has paid its part, they shall all be liable for compensation with respect to any shortfall in proportion to the magnitude of the fault committed by each of them (Article 76, paragraph 1, part 1).

In the instance of medical malpractice, the Tort Liability Law indicates that when a patient is injured in the course of medical treatment, the relevant medical institution as the healthcare provider shall be liable for compensation to the patient if the medical institution or its medical staff has been at fault when providing medical treatment to that patient (Article 54).

In Example 5.1 above, Wang’s gastrectomy was supposed to remove onefourth of his stomach. Due to the doctor’s error, three fourths of Wang’s stomach was removed, unnecessarily exacerbating his health problem. Under Article 54 of the Tort Liability Law, this can be categorized as an ordinary tort case where the fault liability principle shall be applied in order to establish the liability. Wang as the victim has to shoulder the burden of proof, though it would not be difficult for him to prove that his doctor had been at fault. Thus

ABC Hospital would be held liable and have to compensate Wang for his injury.

The constructive fault liability principle

The Tort Liability Law stipulates that where a conclusion can be made by interpretation under the law that a person has been at fault for a tort, if that person cannot prove that he has not been at fault for the tort, then he shall be liable for the tort (Article 6, paragraph 2). This provision captures the essence of the constructive fault liability principle, i.e. there must be a fault committed

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in order to establish the existence of tort liability to be borne, but the existence of the fault does not need to be proved because the assertion that there is such a fault can be made by the court’s interpretation under the law.

On the point that a person must have been at fault for his tort liability to be established, the fault liability principle and the constructive fault liability principle are virtually the same, i.e. even though his act or his object has caused damage to another person’s civil rights and interests, given that no fault is attributable to him, he will not become liable in tort.

The difference between these two principles lies in the following three areas:

•Firstly, to establish tort liability in light of the constructive fault liability principle, the victim will not be required to prove that the wrongdoer has been at fault, and the assertion that the wrongdoer has been at fault can be made by the court which forms this conclusion based on the result of interpreting the law in the context of the relevant facts.

•Secondly, in the course of establishing tort liability under the constructive fault liability principle, if the alleged wrongdoer wishes to overturn the assertion that he has been at fault and it is his fault that has led to the tort, he will have to prove that he has not been at fault (i.e. the burden of proof of no fault will fall on the alleged wrongdoer; if the alleged wrongdoer is not able to prove this or he is not able to provide sufficiently strong evidence to support his denial of the allegation, then the assertion that he has been at fault will be upheld).

•Thirdly, while the fault liability principle is applied to ordinary tort cases with a view to establishing tort liability, the constructive fault liability principle applies only to certain specifically prescribed tortious acts and scenarios, albeit for the same purpose of establishing tort liability.

The provisions in the Tort Liability Law below give a sense of the specifically prescribed tortious acts and scenarios to which the constructive fault liability principle applies:

•Where a person who has no capacity for civil conduct suffers a personal injury during the time he studies or lives in a kindergarten, a school or an educational institution, the kindergarten, the school or the educational institution in question shall be liable in tort to the injured person, but it

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will not be liable if it is able to prove that it has fulfilled its obligations relating to education and proper management. (Article 38)

•In the case of a patient being injured in the course of treatment, the medical institution which treats him will be constructively held to be at fault under one of the following circumstances: (1) where it has violated any of the laws, administrative rules, regulations, or codes of practice pertaining to diagnosis and treatment; (2) where it has deliberately concealed or refused to provide the patient’s medical records that are related to a dispute arising between it and the patient; (3) where it has forged, tampered with, or destroyed the patient’s medical records. (Article 58)

•Where a person is illegitimately in possession of high-risk material giving rise to an injury or damage sustained by someone, the person who illegitimately possesses the material shall be liable in tort. The owner of the material, or the person who is responsible for keeping the material, shall be jointly and severally liable in tort with the person who illegitimately possesses the material, if he is not able to prove that he has fulfilled his obligation of taking great care to prevent such material from being illegitimately possessed by somebody else. (Article 75)

•A zoo shall be liable in tort to anyone for his injury or damage caused by its animals; but it does not need to bear such tort liability if it is able to prove that it has fulfilled its duty of proper animal management. (Article 81)

•Where an object flies in the air or falls down from a building, a structure, a facility, or from anything placed or suspended therein, causing someone to suffer an injury or damage, if the object’s owner, manager or user is not able to prove that he has not been at fault in the accident, then he shall be liable in tort. If another party is also responsible for the injury or damage caused, the object’s owner, manager or user, after compensating the victim, may seek recovery from that party of the compensation paid which should be paid by that party. (Article 85)

•Where a group of stacked objects collapses causing someone an injury or damage, the person who stacked the objects shall be liable in tort if he is not able to prove that he has not been at fault in the accident. (Article 88)

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•Where a tree breaks causing someone to sustain an injury or damage, the owner or the manager of the tree shall be liable in tort if he is not able to prove that he has not been at fault in the accident. (Article 90)

•Where someone’s injury or damage is attributable to an underground facility such as a manhole, the manager of such facility shall be liable in tort if he is not able to prove that he has not been at fault in the accident. (Article 91, paragraph 2)

The constructive fault liability principle applies to Example 5.2 above. Due to the complexity and technicality of medical science, it is hard for the victim to substantiate his claim that the medical institution which treats him has been at fault; carrying the burden of proof can be a costly, lengthy process involving a lot of hearings, expert testimony, etc. However, where the fault of the medical institution is so apparent that even an ordinary person without medical knowledge can spot it, then it is generally accepted that the victim is not required to shoulder the burden of proof; the fault of the medical institution can be directly declared by relying on judicial interpretation. Pursuant to Article 58 of the Tort Liability Law, where a patient has been injured in the course of treatment, the medical institution in which he receives treatment will be constructively held to be at fault in the event that the medical institution has violated any of the laws, administrative rules, regulations, or codes of practice pertaining to diagnosis and treatment. Using an endoscope that is not thoroughly cleaned and disinfected in different patients obviously does not comply with the established code of practice. Liu does not carry the burden of proof to substantiate his claim that ABC Hospital is at fault; and ABC Hospital has to compensate Liu for his suffering accordingly. ABC Hospital may deny the claim; but to succeed in doing so it has to shoulder the burden of proof, verifying that the hospital is not at fault as it has strictly performed all the required cleansing and disinfecting procedures.

Here is another example. Idle Mansion is a three-storey house. The first to the top floors are occupied by the Zhao, Qian and Sun families respectively. All three families have quite a lot of vases of flowers on their balconies. Last week a vase of flowers fell from one of the balconies hitting Li, a passer-by who happened to stop for a rest in front of Idle Mansion. Li was seriously injured.

However, it was difficult to judge from which balcony the vase of flowers fell.

As none of the families admitted the vase was theirs, Li demanded Zhao, Qian and Sun to jointly bear liability. Sun strongly disagreed, arguing that he had

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recently erected an iron fence for his balcony for the purpose of preventing his vases of flowers from falling off, so this accident definitely had nothing to do with him. Could Li receive compensation for his injury, and if so, from whom?

In the case of an object falling down from a building causing a personal injury, under Article 85 of the Tort Liability Law the constructive fault liability principle should be applied. In the above case, either Zhao, Qian or Sun is the tortfeasor, since the vase must have come from one of their balconies. In the event of not being able to affirm who the tortfeasor was, Zhao, Qian and Sun would be held jointly liable for Li’s injury. The essence of the constructive fault liability principle is displayed under the Tort Liability Law saying that where it can be interpreted from the law that a person has been at fault for a tort, if that person cannot prove that he has not been at fault, he shall be held liable in tort (Article 6, paragraph 2). Hence, no burden is on Li to prove the existence of the fault of the tortfeasor; the existence of the fault can be deduced by employing a constructive approach. If Sun intends to be cleared of his liability for Li’s injury, he will have to prove that he has not been at fault in this accident; he may substantiate his claim by showing that he took sufficient measures beforehand to prevent his vases of flowers from falling down.

Here is another example that is also of interest. Andy Wang is a nine-year- old primary school student. His school recently organized a tour to Clear Water Mountain. Clear Water Mountain is famous for its beautiful landscape and also for its monkeys, which unexpectedly jump out at tourists every now and then. The head teacher warned all the students about the following things before they departed: ‘(1) don’t provoke the monkeys; (2) don’t wear red clothes as monkeys may get restless when seeing red and may attack anyone wearing red.’ One of the students, Andy, has a habit of provoking and hitting small animals. Before arriving at the foot of Clear Water Mountain, Andy deliberately put on one of his favourite red sports shirts. His teacher did not stop him. Halfway up the mountain, a large monkey appeared and started to chase tourists for food. Andy was excited to see it, and tried to use a stick to beat the monkey. The monkey bit Andy.

Andy’s father claimed for compensation against the school for his son’s monkey bite. The school refused to make such compensation, countering that it had not been at fault in this accident. Since the injury was incurred

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in the course of hiking up the mountain, the school suggested that Andy’s father directly lodge his claim against Clear Water Mountain Development

Company, the official organization responsible for managing the tourism use of Clear Water Mountain.

Clear Water Mountain Development Company also rejected Andy’s father’s request for compensation. It asserted that a lot of signs had been erected on the mountain warning tourists not to provoke the monkeys.

Is anyone liable for Andy’s injury? In this case, Clear Water Mountain Development Company could hardly be held liable for committing negligence as it has appropriately warned tourists not to provoke monkeys. Nine-year-old Andy has no capacity for civil conduct. His injury was incurred in an outing organized by the school. Andy’s father may try to seek compensation against the school on the ground that it did not properly fulfil its obligations of taking good care of its student during his school time (in light of the Tort Liability Law, Article 38).

The non-fault liability principle

Under the Tort Liability Law, if any civil rights and interests are injured by a person in a given circumstance, provided that the law prescribes that tort liability has to be borne under such circumstance, whether the person has been at fault or not, he shall be liable in tort (Article 7). This stipulation expresses the goal pursued under the non-fault liability principle.

The non-fault liability principle cannot be applied to ordinary tort cases. It only applies to torts that occur in specific circumstances prescribed by the law.

The principle stresses that, providing there is a tortious consequence in one of those circumstances, the relevant party must bear tort liability, regardless of whether he has or has not been at fault (either intentional fault or unintentional fault) for the tort.

Those circumstances mainly pertain to: (1) the tort liability to be assumed by a guardian for any injury or damage caused by a person under his guardianship who has no or only limited capacity for civil conduct; (2) the tort liability to be borne by an employer for any injury or damage caused by his employee in the course of employment; (3) in cases of a triangle relationship in which a staffing agency hires personnel to work for its clients,

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the tort liability to be borne by such a client to which a person employed by the staffing agency is dispatched to work, for any injury or damage caused by that person during the time he works for the client; (4) in the context of carrying out a labour service transaction, the tort liability to be borne by the service receiver for any injury or damage caused by the service provider in the course of providing his service; (5) the tort liability relating to product defects; (6) the tort liability arising from a traffic accident between a motor vehicle and a non-motorized vehicle or a pedestrian, that is to be assumed by the person who drives the motor vehicle; (7) the tort liability with respect to environmental contamination; (8) the tort liability arising from carrying out high-risk activities; (9) the tort liability due to damage caused by animals;

(10)the tort liability to be borne by the state government or its employees for any damage incurred in the course of performing public duties; and

(11)the tort liability pertinent to injuries or damage caused by objects in certain aspects.

The following provisions set out in the relevant laws deserve special notice:

•Under Article 32 of the Tort Liability Law, where a person who has no or only limited capacity for civil conduct has caused an injury or damage to somebody, that person’s guardian shall be liable in tort.

•Pursuant to Article 34, paragraph 1 of of the Tort Liability Law, where an employee causes an injury or damage to somebody in the course of his employment, his employer shall be liable in tort.

•By Article 34, paragraph 2 of the Tort Liability Law, where a staffing agency dispatches a person employed by it to work for its client and the person dispatched causes an injury or damage to somebody during the time he works for that client, the client in question shall be liable in tort.

•In light of Article 35 of the Tort Liability Law, where there is a labour service transaction and the service provider causes an injury or damage to somebody in the course of providing the service, the service receiver shall be liable in tort.

•According to Article 41 of the Tort Liability and Article 122 of the

General Principles of Civil Law, where an injury or damage is caused due to a defect in a product, the product’s producer shall be liable in tort to the victim who suffers from using the defective product.

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•By Article 48 of the Tort Liability Law, in the case of a traffic accident between a motor vehicle and a non-motorized vehicle or a pedestrian, the method of establishing and assuming liability for compensation shall follow the Road Traffic Safety Law. Under Article 76, paragraph 1, part 2 of the Road Traffic Safety Law (revised in 2011), in the circumstance of a traffic accident between a motor vehicle and a non-motorized vehicle or a pedestrian, where the party driving the non-motorized vehicle or the pedestrian is not at fault, the party driving the motor vehicle shall be liable for compensation; if there is evidence proving that the party driving the non-motorized vehicle or the pedestrian is also at fault, then the liability for compensation to be borne by the party driving the motor vehicle shall be lessened to an appropriate extent based on the seriousness of such fault; in the circumstance that the party driving the motor vehicle is not at fault, he will have to bear liability for compensation capped at 10%.

•Article 65 of the Tort Liability Law and Article 124 of the General

Principles of Civil Law respectively set out the tort liability to be assumed for damage caused due to environmental contamination.

•Article 69 of the Tort Liability Law and Article 123 of the General

Principles of Civil Law set out the tort liability to be assumed for damage caused because of carrying out high-risk activities.

•Articles 78 to 80 and Article 82 of the Tort Liability Law and Article 127 of the General Principles of Civil Law respectively set out the tort liability to be assumed by owners or keepers of animals for damage caused by these animals.

•Article 121 of the General Principles of Civil Law sets out the tort liability to be assumed by the state government or its employees for any injury or damage incurred in the course of performing public duties. Article 121 says that governmental bodies or their employees shall bear civil liability if in the course of performing public duties they infringe upon any legitimate rights and interests of individual citizens or legal persons.

•The relevant provisions can be found in the Tort Liability Law and the

General Principles of Civil Law as regards tort liability that arises from injuries or damage caused by objects under certain circumstances. By Article 86, paragraph 1 of the Tort Liability Law, where someone sustains

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an injury or damage due to the collapse of a building, the developer and the building constructor shall be jointly and severally liable in tort. Under Article 89 of the Tort Liability Law, where someone sustains an injury or damage due to objects piled, fallen down or left behind obstructing public passages, the relevant organization or person responsible for those objects shall be liable in tort. Under Article 91, paragraph 1 of the Tort Liability Law and Article 125 of the General Principles of Civil Law, where the injury or damage someone sustained is attributable to a builder’s digging up, repairing or installing underground facilities in public places or on public roads without placing any apparent warning sign or taking safety measures, the builder shall be liable in tort.

When using the non-fault liability principle to establish tort liability, no one (neither the alleged wrongdoer nor the victim) is required to prove that the alleged wrongdoer has been at fault, and the alleged wrongdoer must bear tort liability in all cases whether he is at fault or not; if the alleged wrongdoer intends to be exempted from his tort liability, he will have to prove that a certain factor exists entitling him to be exempted from bearing tort liability (e.g. force majeure, the victim’s deliberate attempt at instigating the damage or injury, a grave error committed by the victim, a third party’s mistake, etc.) (G Z Li 1998, 134).

It can be seen that establishing tort liability under the non-fault liability principle differs from doing so under the constructive fault liability principle described earlier. When establishing tort liability using the constructive fault liability principle, if the alleged wrongdoer intends to be released from bearing tort liability, he will have to prove that he is not at fault in the tort. But where the non-fault liability principle is applied, he only has to prove that there is a sound ground for being released from bearing liability.

Of course, in this regard the dividing line between the non-fault liability principle and the fault liability principle is even neater. In the case of the fault liability principle, the victim has to shoulder the burden of proof in making a case against the alleged wrongdoer; if the victim fails to do so, no tort liability can be established against the alleged wrongdoer.

Example 5.3 above falls within the scope of the special circumstances prescribed by the law of environmental contamination or high-risk activities to which the non-fault liability principle applies. Neither Huang nor ABC

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Hospital is required to carry the burden of proof to substantiate that ABC Hospital is at fault in the radioactive isotopes leak. It can be said that ABC Hospital’s breach of its general duty of protecting against occupational radiation led to this incident. Hence ABC Hospital will be held liable whether it has committed any specific error or not; it will have to compensate Huang for any illness closely related to his exposure to excessive isotope radiation.

Essential elements for establishing a tort case

The fault liability principle, the constructive fault liability principle, and the non-fault liability principle place increasingly less of a burden of proof on the victim in a tort (i.e. the infringed party), from a relatively heavy burden to no burden at all, showing increasing protection of the victim’s rights and interests.

These three principles can be divided into two categories based on the element of fault. The first category includes the fault liability principle and the constructive fault liability principle, in which an alleged wrongdoer will be liable in tort only if he is at fault. The other category includes the non-fault liability principle, in which the alleged wrongdoer will be held liable whether or not he committed any fault.

So fault is an element that is required to establish tort liability in light of the fault liability principle and the constructive fault liability principle. There are three other elements that are also required: illegitimacy, the fact of damage and causation. These three, unlike the element of fault, are also required to establish tort liability in light of the non-fault liability principle.

In all cases, the above four elements can be applied to figure out if a tortious act has been constituted, and, if it has, how the relevant tort liability ought to be borne in terms of appropriately compensating the victim.

Illegitimacy

The element of illegitimacy can be broadly construed as embracing both the illegitimacy of an action that may give rise to the occurrence of a tort, as well as the illegitimacy of inaction that may cause a tortious effect. Here, the meaning of ‘illegitimacy’ can be widened to cover both unlawfulness

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due to violation of law, and unacceptability because of contravention of the conventional civil law doctrine of good public order and social customs (G Z Li 1998, 173; Zhu and Xu 2002, 448).

Here are some examples:

•Wang spread a false rumour that Li had embezzled a large amount of public funds, leading to Li’s reputation being seriously smeared. The illegitimacy of what Wang did is obvious.

•Yang was admitted into ABC Hospital last week due to acute liver disease.

Initially he had been in a relatively stable condition after being treated in the emergency department. But his condition suddenly deteriorated yesterday morning. Dr Lin, the physician in charge of Yang in the hospital, did not take immediate rescue measures because he wanted to go to an international conference to make a keynote speech. Several hours’ delay in the attempt to rescue Yang led to his death. The illegitimacy of Dr Lin’s inaction can be established as he failed to faithfully perform his duty as a doctor towards his patient.

•Without a demolition permit from the government, XYZ (a real estate development company) demolished Mr Huang’s private dwellings with a view to occupying the land to build a new property development. XYZ’s action clearly violates the law.

•Luo has a great deal of animosity towards his neighbour, Zhao. At the opening ceremony of Zhao’s new restaurant, Luo all of a sudden appeared in full mourning dress and loudly played funeral songs to deliberately annoy Zhao and other attendants. Most of Zhao’s friends and clientele are quite superstitious. They felt this was not a good omen. Many of them stopped patronizing Zhao’s restaurant and the restaurant’s sales dipped. Although it appears that what Luo did is not against the law, it should also be deemed illegitimate because it goes against the spirit of the doctrine of good public order and social customs.

The fact of damage

The existence of the fact of damage is also mandatory for establishing a tort case. The mere possibility of an injury or damage being inflicted or

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the deduction that an injury or damage will be inflicted before the actual occurrence of the injury or damage (i.e. with no fact of damage) will not amount to a tortious act and does not lead to any liability in tort. Only when the fact of damage can be affirmed will can a tort case be established, for which relevant liability needs to be borne.

In light of Articles 16, 19 and 22 of the Tort Liability Law, the fact of damage can be divided into three types: the fact of personal injury, the fact of property damage and the fact of mental distress. This is because personal injury, property damage and mental distress are common.

Say a lorry hit a cyclist because the lorry driver did not properly follow the rules of the road. This accident caused personal injury to the cyclist, and also inflicted property damage as his bicycle was crushed by the lorry.

Here’s another example. John Huang and Rachel Chen had been in a relationship for two years. A couple of months ago, Rachel told John that she had decided to leave him. John was furious. He sent harassing instant messages to Rachel almost every day. Rachel claimed that she was suffering from psychological damage as John’s actions caused her mental distress that seriously affected her personal life.

The two required elements to establish tort liability discussed above (i.e. illegitimacy and the fact of damage) are relatively simple, and it is easy to judge their existence. The other two required elements (causation and fault), introduced below, are more complicated: many factors must be considered to decide whether these elements exist.

Causation

Causation is another element required to establish a tort case. It refers to the existence of a causal link between the alleged wrongdoer’s act or an object in his possession and the fact of the damage that has occurred (Ma and Yu 1998, 1033).

A causal link is often not difficult to establish. For example, John and Jack both wanted the same seat on a bus. Their quarrel developed into a physical confrontation culminating in John’s face being badly battered by Jack. Clearly

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what Jack did led to John’s personal injury. A clear causal link exists between the two.

However, some cases are more complex. Disputes often arise regarding which party involved in a case should be held liable in tort for the factual injury or damage. Say a building contractor failed to follow the required building codes when repairing the roof of Wang’s bungalow, leading to a sudden collapse of the roof. Wang was trapped in the debris unable to move. A police rescue team arrived and tried to pull him out. Wang’s right leg was stuck in bricks. It was broken when Wang was forcefully pulled out. Should a causal link be established between Wang’s leg injury and the act of the building contractor, or the act of the rescue team?

The acts of the building contractor and the rescue team are the specific acts performed by the building workers and the rescue team members respectively. The prima facie evidence shows that it is the act of the rescue team that directly caused the fracture of Wang’s right leg; therefore, a causal link can be established between Wang’s leg injury and the act of the rescue team, and the rescue team shall be liable in tort for Wang’s loss. Nonetheless, the rescue team may argue that if the building contractor had acted in compliance with the building codes, the roof would not have collapsed and Wang would not have been trapped in the debris, so there would be no subsequent rescue action. In their view, there is a substantive causal link between Wang’s leg injury and the act of the building contractor; the building contractor is the root cause of the tragedy, so the building contractor should bear tort liability towards Wang.

The above argument has some merits. It should be noted that ‘causation’ does not necessarily mean a causal relationship discerned on the face of the evidence; more accurately in a legal sense it denotes a cause-and-effect relationship from the perspective of ascertaining to whom tort liability should ultimately be attributed. To establish such a cause-and-effect relationship, we’ve got to consider many factors, not only those on the face of the evidence.

In the above example, the act of the rescue team (i.e. forcefully pulling Wang out) is no doubt the direct reason for Wang’s leg injury. However, to accurately establish to which party the liability ought to be attributed, many other factors must be considered, e.g. whether Wang’s leg injury has been

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caused by the negligence of the rescue team and whether forcefully pulling Wang out was necessary (i.e. whether the rescue team could have reasonably foreseen the occurrence of Wang’s leg injury). These factors may significantly impact the attribution of final liability. By considering these factors, an effective estimate can be made about whether it is the building contractor or the rescue team which ought to be liable for Wang’s leg injury, or whether both are liable and should be deemed as joint tortfeasors.

Whether the alleged wrongdoer is able to reasonably foresee the injurious consequences arising out of a tortious act deserves particular attention.

Here is another example. Alan Tang is fond of scaring people by wearing a ghost mask and suddenly jumping out. He did the same thing yesterday to Mrs Yuan. The fright caused Mrs Yuan to have a heart attack on the spot, and she passed away after being put into an ambulance. Under normal circumstances, it would be difficult to establish that what Alan Tang did and Mrs Yuan’s death have any cause and effect relationship in a legal sense, because frightening people in this fashion should not result in a loss of life. However, if Alan Tang knows in advance that Mrs Yuan has heart disease and is easily scared (i.e. if Alan can reasonably foresee the injurious consequences of his act), then a causal link could be well established between his act and Mrs Yuan’s death and he would be held liable.

Fault

In order to establish an ordinary tort case, the element of fault must exist. But it is not required in a case for which the non-fault liability principle needs to be applied.

The term ‘fault’ embraces many kinds of fault, either committed deliberately, or unintentionally due to negligence. In many instances, the law clearly stipulates the particular kind of fault required to establish a specific tort case.

However, if the law does not expressly stipulate this, then the court will have to judge whether a fault has been committed in a particular case. The court will take into account an array of relevant facts, such as the alleged wrongdoer’s capacity for civil conduct, his psychological status, his professional background and seniority, etc.

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The burden of proof

The previous section discussed the elements required for establishing tort liability. Who is to shoulder the burden of proof for each of these elements? This section discusses the burden of proof for cases implementing the fault liability principle, the constructive fault liability principle and the non-fault liability principle respectively.

Ordinary tort cases

An ordinary tort case refers to a tort case in which the fault liability principle must be implemented to affirm and attribute tort liability.

There are four key elements required (illegitimacy, the fact of damage, causation and fault) to establish an ordinary tort case, and the burden of proof falls on the victim who has to prove the existence of all four elements with a view to imposing tort liability on the alleged wrongdoer. This is a rule under the Civil Litigation Law which establishes the principle that the burden of proof is on the party who makes the claim, as well as the relevant judicial interpretation issued by the Supreme People’s Court.

According to the Civil Litigation Law, the party who makes the claim bears the onus to prove his case by providing evidence (Article 64, paragraph 1). Pursuant to Article 2 of the Supreme People’s Court’s Provisions on Evidence in Civil Litigation (released in 2001), the plaintiff initiating a lawsuit is obliged to provide evidence to prove the facts based on which the lawsuit is lodged; the defendant has a duty to produce evidence if he wants to refute the plaintiff’s claim; the party on whom the burden of proof falls will have to bear adverse consequences if that party is not able to produce any evidence or the evidence provided by him is not strong enough to support his claim.

In a tort-related case, if the victim is not able to produce sound evidence to prove the existence of the required four elements, liability will not be able to be established, and the victim’s claim against the alleged wrongdoer for tort remedy will not be able to be supported by the court.

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Special tort cases

A special tort case refers to a tort case in which the constructive fault liability principle or the non-fault liability principle must be implemented to affirm and attribute the relevant tort liability.

In tort-related cases to which the constructive fault liability principle must be applied, the criteria for assessing whether a tortious act has been constituted are virtually the same as the criteria used to establish an ordinary tort case where the fault liability principle needs to be applied, i.e. all four elements of illegitimacy, the fact of damage, causation and fault must exist. The victim is required to bear the burden of proof. However, the victim only needs to prove the existence of three elements: illegitimacy, the fact of damage and causation. The existence of fault does not need to be proved because a conclusion in the affirmative can be deduced by the court on the basis of the relevant facts and interpreting the law. If the alleged wrongdoer wants to overturn the conclusion that he has been at fault, he needs to prove that he has not been at fault.

In a tort-related case to which the non-fault liability principle must be applied, the criteria to be used for estimating whether a tortious act has been constituted differ from those applied to establish a tort case in light of the fault liability principle or the constructive fault liability principle. To establish a tort case under the non-fault liability principle, only three of the four elements are required: illegitimacy, the fact of damage and causation. Likewise, the burden of proof is on the victim to prove the existence of these three elements. No one needs to prove that the alleged wrongdoer has been at fault, because fault is not essential when establishing a tort case based on the non-fault liability principle.

The alleged wrongdoer

It deserves mentioning that while the burden of proof for the existence of the elements required for establishing tort liability lies with the victim and in principle the alleged wrongdoer does not have to do anything in this regard, if the alleged wrongdoer attempts to escape liability or to have liability exempted, they will have to shoulder the burden of proof to show what they want.

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In certain litigation cases, the alleged wrongdoer may defend himself by relying on Article 4, paragraph 1 of the Supreme People’s Court’s Provisions on Evidence in Civil Litigation as follows: (1) in a patent infringement dispute, the burden of proof is on the producer to show that its way of production differs from the patented method; (2) in a tort case where damage is caused due to carrying out high-risk activities, the tortfeasor bears the burden of proof to indicate that the damage is attributable to the victim’s deliberateness; (3) in a tort case where damage is caused due to environmental contamination, the burden of proof lies with the tortfeasor to demonstrate the existence of a special circumstance under which his liability can be exempted or that there is no causal link between what he did and the damage caused; (4) in a tort case where an object flies in the air or falls down from a building, a facility or from anything placed or suspended therein incurring an injury or damage, the object’s owner or manager shoulders the burden of proof to illustrate that he has not been at fault in this event; (5) in a tort case where an animal causes an injury or damage, the owner or keeper of the animal bears the burden of proof to affirm that the victim or a third party has been at fault in the incident; (6) in a tort case where an injury or damage is caused by a defective product, the burden of proof falls on its producer to show that a special circumstance prescribed by law exists under which the liability to be assumed can be exempted; (7) in a tort case involving several persons’ dangerous conduct, any such person bears the burden of proof to disprove the causation between his act and the damage caused; (8) in a tort case in connection with medical malpractice, the burden of proof lies with the relevant medical institution to display that there is no causal link between the treatment provided and the damage caused and no medical malpractice was committed.

Joint, separate and several tort liability

In a tort committed by one wrongdoer, he or she of course will bear full liability. However, many cases of tort involve more than one wrongdoer. In such cases, how should the liability be shared? Here are some examples.

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Example 5.4

Huang is a lecturer in the Department of Mathematics at ABC University. He and his department head, Professor Liu, are not on good terms as he is strongly opposed to Professor Liu’s bureaucracy. A vacancy recently arose for an associate professor in mathematics at ABC University. Huang applied for this position. As a member of the selection panel, Professor Liu made a lot of unfavourable comments on Huang’s academic performance, and such comments in a large measure influenced the selection panel’s final decision that Huang would not be recommended as a candidate. Huang hatched a plan for revenge. On a rainy night, Huang’s two cousins, Chen and Gao, stabbed the tyres of Professor Liu’s car which was left in the university’s car park, while Huang kept guard beside them.

Example 5.5

Wang bought a puppy from a pet shop for RMB 20,000. One night last week, Wang took his dog out for a walk. Li and Yang were riding their motorcycles on the footpath. Seeing the dog, Li was not able to apply the emergency brake in time. His motorcycle knocked the dog down. As Yang was following closely behind Li, his motorcycle hit the dog, too. The dog died. (Li and Yang do not know each other.)

Example 5.6

The scenario is basically the same as Example 5.5 except that Li and Yang are good friends. They were riding motorcycles together with four other friends and when they went down a slope, one of them was not able to apply the emergency brake in time. Some of the motorcycles crashed together and Wang’s dog was hit and eventually died.

These examples will be referred to in the following discussion. They relate to three possible scenarios that are recognized under tort law: liability for jointly committing a tort, liability for separately committing a tort leading to one final result of damage, and tort liability for several persons’ dangerous conduct.

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Liability for jointly committing a tort

Say Wang and Li opened a fast food eatery. To reduce costs, they made burgers using cheap ground beef that had been contaminated with mad cow disease. Many customers developed a brain-wasting illness after eating the burgers. Wang and Li are deemed to be joint tortfeasors. They are jointly liable for the damage done to their customers’ health. Similarly, in Example 5.4, what Huang, Chen and Gao did amounted to jointly committing a tort.

A tort jointly committed involves at least two wrongdoers who have wilfully committed the tort together and are thus joint tortfeasors. In real life there are many instances in which a tort is jointly committed.

Normally, the elements required to establish a tort jointly committed by more than one wrongdoer are the same as those applying to a tort committed by a single person, i.e. illegitimacy, the fact of damage, causation and fault. However, to establish a case in a tort jointly committed by more than one wrongdoer, a precondition is that the wrongdoers must have intentionally and commonly made their decision beforehand to commit the tort. That is to say, they are conspirators. Without the existence of such conspiracy, a tort will not be counted as a tort jointly committed by more than one wrongdoer in the sense described above. Once a tort can be affirmed as a tort jointly committed by more than one wrongdoer, it becomes immaterial how the actual work of committing the tort was done by the wrongdoers, what role each of them played, and whether all of them personally took part in the operation.

The legal consequences that the joint tortfeasors in a tort will face are exhibited in the Tort Liability Law. By Article 8, where two or more persons have jointly committed a tort, they shall be jointly and severally liable for the tort. A similar provision can be found under Article 130 of the General Principles of Civil Law, which points out that if two or more persons have jointly committed a tort, they shall be jointly and severally liable for what they did.

The Tort Liability Law under Articles 13 and 14 explains what the term ‘jointly and severally liable’ means. Pursuant to Article 13, where a number of persons are held jointly and severally liable by law for a tort, the victim is entitled to demand some of them or all of them to bear all the tort liability. And in light of Article 14, it can further be understood that the wrongdoers who are jointly

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and severally liable for a tort shall each shoulder the burden of compensating the victim in terms of the magnitude of their respective responsibilities determined; if their respective responsibilities cannot be determined, then they will have to evenly share the tort liability that is to be borne together; if one of the wrongdoers has paid the victim compensation exceeding the amount he is liable to pay, he is entitled to recover the surplus part from other wrongdoers who are jointly and severally liable with him in the tort.

In Example 5.4 above, Huang, Chen and Gao as joint tortfeasors are jointly and severally liable to Professor Liu for the damage caused to Professor Liu’s property. As the victim, Professor Liu is entitled to demand any one or any two of the three wrongdoers to compensate him for the whole loss. He can also choose to simultaneously request all three wrongdoers to compensate him for the damage to his property. Assume that Professor Liu now approaches Chen and demands that he bear all liability and Chen has complied with Professor Liu’s request. Under this circumstance, Chen has paid more than he needs to pay because the tort liability shall be borne by Huang, Chen and Gao together (either evenly or as per their respective responsibilities determined); thus Chen can demand Huang and Gao to recoup him for the part of the payment that ought to be shouldered by Huang and Gao.

According to Article 14 of the Tort Liability Law, in a tort jointly committed by more than one wrongdoer, if it is not possible to ascertain the joint tortfeasors’ respective responsibilities, those tortfeasors shall evenly share the tort liability. However, if it is possible to affirm the extent to which each tortfeasor can be held liable for the tort, the court will be responsible for making sure, in the course of deciding the case, of the actual amount of compensation each tortfeasor has to pay (L M Wang 2010, 64).

The term ‘jointly and severally liable’ can be defined following the rule established under the General Principles of Civil Law from the standpoint of dealing with a creditor–debtor relationship. Pursuant to Article 87 of that law, where there are two or more creditors, or two or more debtors, in a creditor–debtor relationship, any one of these creditors who is entitled to the entire creditors’ rights on a joint and several basis in light of what is prescribed by law or due to their prior agreement, can demand the debtor(s) to fulfil the required debt obligations; and any one of these debtors who are jointly and severally liable to the creditor(s) for the debts in light of the law or due to their prior agreement, is under an obligation to pay back all the debts,

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and if one of the debtors has done so, he is entitled to request other debtors to reimburse him for the part of the debt obligations he has performed for them.

Also, according to Article 9 of the Tort Liability Law, if A abets B to infringe upon C’s legitimate rights and interests, A can be adjudicated as a joint tortfeasor or a sole tortfeasor (depending on the circumstances) who will partially or wholly bear the liability arising from the tortious act committed by B. In the event of abetting a person who has no capacity for civil conduct (e.g. a minor) or a person who has limited capacity for civil conduct only (e.g. a mentally disordered man) to commit a tort, there is a likelihood that the abettor will be held solely liable for the tort damage incurred. Article 9 provides that if a person abets or aids another person to commit a tortious act, he and the actor shall be jointly and severally liable for the tort; if a person abets or aids another person who has no or only limited capacity for civil conduct to commit a tortious act, the former shall be liable for the tort; in the case of a tort committed by a person who has no or only limited capacity for civil conduct, if his guardian fails to fulfil the necessary guardianship duties with respect to this matter, the guardian shall be held responsible to some degree for the tort. Regarding the responsibility to be assumed by the guardian in the case of a tort committed by a person under his guardianship, whether the guardian will be held wholly liable or only partially liable for the tort will depend on the extent of his failure to accomplish his guardianship duties.

Take the following example. Xue and Huang live next door to one another on the ground floor of a condominium. They often quarrel over the use of public space in the corridor. Xue intends to ‘teach Huang a good lesson’ by giving him a beating, but he feels reluctant to do it himself. Xue starts to frequently complain in front of his son, Xiaoming, that he is being bullied by Huang but feels too weak to defend himself. Xiaoming is furious. He decides to imitate his kung-fu heroes and uphold justice by taking revenge on Huang for his father’s grievances.

One evening, Xiaoming invites a group of friends to play football outside the condominium where he lives. Huang happens to be in his kitchen preparing dinner at the time. Xiaoming accurately and forcefully kicks the ball through

Huang’s window. The window is smashed. Huang is badly cut by the flying glass. Huang believes Xue must have abetted Xiaoming and that this is a deliberate act. But both Huang and Xiaoming firmly deny Huang’s allegation.

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Can anyone be held liable for Huang’s injury? In this case, Xue abetted his fourteen-year-old son (i.e. a person who has limited capacity for civil conduct) to attack Huang, leading to the latter’s personal injury and property damage. Under the Tort Liability Law, Xue as the abettor is liable for the tort committed. The Supreme People’s Court’s Opinions on Some Issues Regarding Implementation of the General Principles of Civil Law of the People’s Republic of China provides that a person who abets or aids another person who has limited capacity for civil conduct to commit a tortious act is deemed to be a joint tortfeasor, and shall bear the principal civil liability in the event (Article 148, paragraph 3).

Liability for separately committing a tort leading to one final result of damage

The Tort Liability Law also sets out the relevant provisions regarding establishing and assuming liability for a tort separately committed by more than one wrongdoer leading to one final result of damage caused to the same victim. In this kind of tort, unlike in a tort jointly committed, there is no conspiracy between the wrongdoers prior to the tort. It is purely a coincidence that what each of them did separately eventually led to the same outcome of damage suffered by the same victim.

As to how liability is borne for such a tort, the Tort Liability Law provides that where two or more persons have separately carried out tortious acts resulting in the same damage, they shall be jointly and severally liable for the damage caused (Article 11). The same law further indicates that where two or more persons have separately carried out tortious acts resulting in the same damage, if their respective responsibilities can be determined, they shall bear the liability in accordance with their respective responsibilities; if their respective responsibilities cannot be determined, they shall evenly share the liability to be assumed by them (Article 12).

Thus, the way liability is assumed for separately committing a tort leading to one final result of damage is similar to the case of jointly committing a tort.

In Example 5.5 above, Li was not able to apply the emergency brake in time and knocked down Wang’s dog, and Yang’s motorcycle also hit the dog. The dog died. Li’s and Yang’s acts led to the death of the dog. It is both an accident

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and a coincidence that the dog got hit twice. Li and Yang did not know each other, and did not conspire to hit the dog. If Li and Yang’s respective responsibilities in this accident can be determined, they will have to pay compensation to Wang in accordance with their respective responsibilities. If their respective responsibilities cannot be determined, then they will need to pay compensation to Wang on the basis of each assuming 50% liability. Also, since either Li’s or Yang’s conduct could directly lead to the dog’s outright death, Li and Yang shall be held jointly and severally liable to Wang for the loss; in this connection, Wang may demand either Li or Yang or both to make up for his loss.

Tort liability for several persons’ dangerous conduct

Another kind of tort liability arises when several persons engage in dangerous conduct at the same time, and as a result endanger another person’s personal safety or damage that person’s property. In a tort case like this, it is unlikely that the culprit can be identified: it may be the conduct of one of those persons that gives rise to the injury or damage, or it may be the conduct of some or all those persons.

This awkward situation can be addressed by relying on the Tort Liability Law. By Article 10, where two or more persons have done something that could endanger the personal safety and/or damage the property of another person, resulting in that person sustaining an injury or that person’s property being damaged, if the actual tortfeasor(s) can be discovered, he (they) shall be held liable; if he (they) cannot be discovered, all the persons responsible for the relevant danger will jointly and severally bear liability for the loss suffered by the victim.

Generally speaking, the way tort liability is assumed in this case is not very different from liability for jointly committing a tort and liability for separately committing a tort leading to one final result of damage. The most distinctive feature of how tort liability is assumed for several persons’ dangerous conduct is the difficulty in identifying the real wrongdoer. Another feature worth noting is that the persons who do something dangerous are not involved in a conspiracy to do so.

Say Alan, Bob and Clement used slingshots to shoot birds in a competition for

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the best score. Dora (a passer-by) incidentally walked past and got hit in her left eye. She became permanently blind in that eye. Under this circumstance, it could be difficult to determine who caused the injury. Since what each of them did could endanger the safety of passers-by, Alan, Bob and Clement would be held jointly and severally liable to Dora for her loss, unless any of them could prove that he was not the cause.

Think back to Example 5.6. Li and Yang, together with four other friends, were riding motorcycles down a slope when one of them was unable to apply the brake in time. Some of the motorcycles crashed together and hit Wang’s dog, killing it. In this case, all the motorcyclists were engaging in the dangerous act of riding down the slope. It is hard to ascertain which of the motorcyclists in the confusion of the crash was actually responsible for the death of Wang’s dog. Hence, all of them would be held jointly and severally liable for the dog’s death.

Having now discussed in detail how to establish tort liability, the next section focuses on the remedies available for tort.

Tort remedy

In accordance with the Tort Liability Law, tort liability is borne mainly by:

(1) discontinuing infringement; (2) clearing away impediments;

(3) eradicating dangers; (4) returning assets; (5) restoring assets to their original state; (6) compensating for losses; (7) making an apology; and

(8) removing bad effects and reviving reputation (Article 15). Any of these approaches can be taken singly, or adopted in combination with one another, as a remedy to be obtained by the victim in a tort (Article 15).

Among these tort remedies, compensating for losses basically means providing monetary compensation. As this is the most usual form of tort remedy, this section discusses it in greater depth.

The Tort Liability Law considers how a victim can claim compensation for different kinds of losses in torts: (1) making a personal injury compensation claim; (2) making a property damage compensation claim; and (3) making a compensation claim for mental distress.

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A personal injury compensation claim

With regard to making a personal injury compensation claim, the Tort Liability Law provides that where a personal injury has been caused in a tort, the tortfeasor shall compensate the injured party for any reasonable expenses incurred in the course of receiving treatment and rehabilitation, such as medical expenses, caretaking expenses, transportation fees, etc., and for the losses of earnings due to the injured party’s unavailability to work. If the injury has left the injured party physically handicapped, the tortfeasor shall compensate the injured party for the costs of using disabled aid equipment and be responsible for paying him disability benefits. If the injury has led to the death of the injured party, the tortfeasor shall provide compensation for his funeral costs and bear the burden of paying death benefits (Article 16).

In the event of the same tort leading to the death of more than one person, the Tort Liability Law allows for paying the same amount of death benefits to each victim (Article 17).

The Tort Liability Law also accepts that any close family member of the deceased victim in a tort is entitled to lodge a claim against the tortfeasor for bearing tort liability (Article 18, paragraph 1).

If there is a person who has paid any reasonable expenses for the deceased injured party, such as medical expenses, funeral costs, etc., that person is entitled to claim a reimbursement for the expenses paid against the tortfeasor (Tort Liability Law, Article 18, paragraph 2).

A property damage compensation claim

Regarding making a property damage compensation claim, compensation has to comply with the principle of full compensation. In light of this principle, the tortfeasor will have to provide full compensation to the victim for any actual loss of his property which is caused in the tort. Such losses include not only direct losses in the form of diminution of the property’s value or destruction of the property itself, but also indirect losses of any reasonable benefits that are readily obtainable by the victim in the circumstance of no such tort (Yang 2010, 143–44; Ma and Yu 1998, 1065–66).

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Under the Tort Liability Law, the market price of the property prevailing when the damage is done to the property in a tort can be viewed as the basis for evaluating the loss of property; however, other standards may also be used to estimate the loss of the property (Article 19).

In some instances, a person who sustains a personal injury in a tort may at the same time also suffer a loss of his property. In this connection, the Tort Liability Law provides that where sustaining a personal injury in a tort leads to a loss of the injured party’s property, the injured party shall be compensated for the loss. If the loss cannot be ascertained whereas the tortfeasor has gained some benefits in the tort, the tortfeasor shall provide compensation to the injured party on the basis of such benefits. If such benefits are not able to be assessed and no consensus can be reached between the tortfeasor and the injured party on the amount of compensation to be provided, with a result that a lawsuit is filed accordingly, the court will decide the amount of compensation to be paid by taking into account the actual circumstances (Article 20).

According to Article 117, paragraphs 1 and 2 of the General Principles of Civil Law, in the case of infringing upon an asset of the state, a collective or a private individual, an attempt shall be made in the first place to return the asset to its right holder or to restore the asset to its original state. Hence, returning the infringed asset to its right holder or restoring it to its original state should normally be deemed to be a precondition to be met before resorting to the tort remedy of providing monetary compensation.

A compensation claim for mental distress

With regard to making a compensation claim for mental distress, the Tort Liability Law indicates that if an infringement upon a person’s personal rights and interests has led him to suffer from severe mental distress, that person is entitled to make a compensation claim for mental distress against the wrongdoer (Article 22).

While the exact wording of ‘making a compensation claim for mental distress’ cannot be found in the General Principles of Civil Law, in light of Article 120, paragraph 1, if any citizen’s right to a name, his portrait right, his right to reputation, or his right to public esteem is infringed, he can pursue a claim

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for discontinuing the infringement, for reviving his reputation, for removing the bad effects or for being given an apology; and he is also entitled to claim compensation for his losses. In judicial practice, this provision is often taken as a legal basis for making a compensation claim for mental distress under the context of the General Principles of Civil Law.

In 2001, the Supreme People’s Court issued and started to implement a judicial interpretation, namely the Supreme People’s Court’s Explanation on Some Issues Regarding How to Determine Liability for Compensating for Mental Distress.2 Making a compensation claim for mental distress is the main theme of this Explanation.

By Article 1 of this Explanation, if a natural person’s personal right is unlawfully violated, such as his right to life, his right to health, his right to his own body, his right to a name, his portrait right, his right to reputation, his right to public esteem, his right to human dignity, his right to personal liberty, etc., he can file a lawsuit in court claiming compensation for mental distress caused by such infringement, and the court should accept the case. Where a person’s privacy or other personal interest is encroached upon due to an act that is committed in violation of public interest or in contravention of public and social morality, the victim can also take court action claiming compensation for mental distress against the wrongdoer, and the court should accept the case.

Under Article 3 of this Explanation, any close family member of a deceased person can bring a court action claiming compensation for mental distress against the wrongdoer who has committed any of the following of tortious acts: (1) infringing upon the deceased person’s name, portrait, reputation or honour by means of insulting, slandering (libelling), degrading or demonizing the deceased person, or using any method in violation of public interest or in contravention of public and social morality; (2) illicitly divulging or utilizing the deceased person’s privacy, or intruding on the deceased person’s privacy by any other means that is in violation of public interest or in contravention of public and social morality; (3) illegally utilizing or impairing the body or the

2A Chinese version of the Supreme People’s Court’s Explanation on Some Issues Regarding How to Determine Liability for Compensating for Mental Distress can be found on the following website: http://www.chinalawedu.com/news/1200/21829/21830/21846/2006/3/ do203011205718360026993-0.htm.

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bones of the deceased person, or causing damage to the body or the bones of the deceased person by any other means that is in violation of public interest or in contravention of public and social morality.

Also, according to Article 4 of this Explanation, if a specific memento having certain personal symbolic meaning is permanently destroyed or damaged as a result of a tortious act committed, its owner is entitled to claim compensation for mental distress by filing a lawsuit against the tortfeasor.

However, in light of this explanation, there are some circumstances under which the court will not accept a lawsuit filed for the purpose of claiming compensation for mental distress, e.g. where a legal person or any other organization, rather than a natural person, makes a claim for mental distress on the ground that its personal right is violated (Article 5); where in a previous lawsuit for tort a relevant party did not claim compensation for mental distress but after that lawsuit ends he brings a new lawsuit claiming compensation for mental distress based on the same fact of damage as that in the previous tort suit (Article 6); and where the mental distress sustained in a tort did not give rise to serious consequences (Article 8, paragraph 1). Special attention needs to be paid to Article 8, paragraph 1: whether the court will accept a lawsuit filed for the purpose of claiming compensation for mental distress depends upon if the mental distress sustained in a tort gives rise to serious consequences.

Take the following scenario. ABC is a well-established company in City G. T is the founder of ABC. Apart from being the major shareholder of the company, T is also the chairman of the board of directors of ABC, overseeing the company’s daily operations. With a strong and sometimes rather stubborn disposition, T is quite clumsy at dealing with the media. During recent years in particular he has not been on good terms with Great Wave Economic News, a popular newspaper in City G. It had tried hard to seek sponsorship from ABC; but because of T’s dissent, its efforts were in vain.

Two months ago, Great Wave Economic News reported that T was detained by the police due to the allegation that ABC was found to be engaged in massive oil smuggling. In fact, T was not detained, and while a rumour had been widely circulated for a long time that ABC amassed its large fortune through illegal means such as smuggling petroleum products, no evidence had so far been found to substantiate the rumour.

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T claimed that the report released by Great Wave Economic News was a heavy blow to the reputation of the company and himself personally. He decided to arrange for ABC and himself to file lawsuits respectively against

Great Wave Economic News for compensation, on the ground that both the company and T had been severely traumatized due to the mental distress caused by what Great Wave Economic News falsely reported.

Could the intended lawsuits succeed? Although to a large extent ABC is under T’s control, from a legal standpoint ABC and T are viewed as two separate entities independent from one another. If ABC lodges a lawsuit against Great Wave Economic News for mental distress, the claim will not succeed. This is because according to Article 5 of the Supreme People’s Court’s Explanation on Some Issues Regarding How to Determine Liability for Compensating for Mental Distress, a legal person cannot make a claim for mental distress. If T personally takes court action for his own compensation, it is quite likely his lawsuit will also fail, as the report issued by Great Wave Economic News seems not to have had a severe negative effect on him. By Article 22 of the Tort Liability Law, if anyone’s personal rights and interests are infringed with a consequence that he suffers severe mental distress, he can make a claim for mental distress compensation. However, in light of the Supreme People’s Court’s Explanation on Some Issues Regarding How to Determine Liability for Compensating for Mental Distress, the court will not accept such a compensation lawsuit for mental distress if there are no serious consequences (Article 8, paragraph 1).

Exemption from and mitigation of liability in tort

Illegitimacy is normally one of the elements required to establish a tort case. But under certain special circumstances, even though an illegitimate act has resulted in the occurrence of the fact of damage, the liability that ought to be borne by the tortfeasor may be reduced or the tortfeasor may even be exempted from liability.

These special circumstances can generally be described as relating to the following: the victim’s fault, the victim’s deliberateness, the wrongful act of a third party, force majeure, self-defence, taking an emergency action to avert danger, the victim’s prior consent, and carrying out official duties.

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A tortfeasor may try to defend himself by pointing to the existence of one of these circumstances, with a view to having his tort liability reduced or being exempted from his tort liability.

The victim’s fault

In a tort incident, if the victim is deemed to be at fault also, the tortfeasor will have a good reason to argue that his liability should be mitigated.

Say T, driving his Honda CRV, made a U-turn near a theatre where U-turns are not allowed. T’s car thus hit G, a pedestrian who happened to run through a red light there. While T caused an injury to G, as G was also at fault in this tort accident (G did not observe the traffic light), T’s liability for G’s loss could be reduced to an extent.

In this respect, the Tort Liability Law provides that if the injury or damage caused in a tort is also attributable to the victim’s fault, the liability to be borne by the tortfeasor may be mitigated (Article 26). The General Principles of Civil Law, Article 131 presents the same view.

Under the Supreme People’s Court’s Explanation on Some Issues Regarding How to Determine Liability for Compensating for Mental Distress, where the victim’s fault has contributed to the occurrence and consequences of the injury or damage caused in a tort, the tortfeasor’s liability for making compensation for mental distress can be alleviated or removed depending on the magnitude of the fault committed by the victim (Article 11).

The victim’s deliberateness

The term ‘the victim’s deliberateness’ relates to a situation where a tort incident occurs as a result of deliberate efforts by the victim to bring about his personal injury or damage to his property in the tort, which is normally unknown to other people. A typical example is a suicide committed for insurance money.

Say Fang’s wife needs to undergo an urgent kidney transplant, but the Fang family does not have enough money to pay for the operation. As Fang bought a life insurance policy a couple of months ago, he decided to commit suicide so that his wife as the beneficiary of the insurance policy could use the

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insurance benefits to pay for her surgery. Fang did so by suddenly jumping out in front of an oncoming car. Fang was hit by the car and died on the spot. The car was driven by Li. Under normal circumstances Li does not need to bear liability for Fang’s death. This is because Fang’s goal was to kill himself, a deliberate act.

As to the occurrence of a tort attributable to the victim’s deliberate conduct, the Tort Liability Law provides that if the injury or damage in a tort is deliberately caused by the victim, the party causing the injury or damage shall not be held liable for the loss (Article 27). Such torts are often related to road traffic accidents. The Road Traffic Safety Law sets out a provision in its Article 76, paragraph 2, stating that if the loss incurred in a traffic accident is intentionally caused by a non-motorist or a pedestrian, the motorist involved will not need to bear any responsibility for the loss.

However, using this defence may only work when the party who caused the injury or damage is not at fault in the tort. If the party is also at fault, he will still be liable for the loss; but he can have his liability mitigated to some extent in light of Article 26 of the Tort Liability Law. In the above example, if at the moment when Fang jumped out in front of Li’s car, Li was drunk driving, Li would still be liable for Fang’s death because of Li’s grave fault; but Li’s liability could be reduced to a certain degree.

The wrongful act of a third party

Under the Tort Liability Law, if the injury or damage in a tort is due to a third party, that third party shall be liable for the tort (Article 28). That is to say, if the property damage or personal injury sustained by the victim is not due to the party who seemingly directly caused the injury or damage, but is entirely attributable to what has been done by a third party (other than the party who seemingly directly caused the injury or damage to the victim), then the third party will be liable for the property damage or personal injury incurred in the tort; the party who seemingly has directly caused the injury or damage will be released from bearing the liability under such circumstance.

Say ABC, a milk product manufacturer, illegally added melamine to all its dairy products. Yang’s infant boy was found to have kidney stones after being fed by his kindergarten powdered milk supplied by ABC. Yang

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intended to take legal action against the kindergarten for his boy’s injury. The kindergarten argued that it knew nothing about the tainted milk powder beforehand. Under this circumstance, unless evidence proves otherwise, the innocent kindergarten will not be held liable for the injury sustained by Yang’s boy; the liability should be borne by ABC (as the third party) to compensate for all the losses incurred.

What needs to be emphasized is that exempting the party who seemingly has directly caused the injury or damage in a tort from bearing liability in the circumstance of the wrongful act of a third party is done on the premise that in essence the injury or damage incurred is solely and entirely attributable to the wrongful act committed by the third party. If the party who seemingly has directly caused the injury or damage has also committed a wrongful act that contributes to the occurrence of the tort, then he cannot be exempted from bearing the liability; however, his liability can be alleviated on a certain scale, and he will have to bear liability in conjunction with the third party as per their respective responsibilities.

Assume that Liu was seriously injured in a car accident due to Wang’s negligent driving. Liu was rushed to ABC Hospital for an emergency surgery. Due to negligence, the surgeon-in-chief gave Liu the wrong medication. A few hours later Liu died. Can Wang defend himself based on the wrongful act of a third party? While ABC Hospital has to take responsibility for the mistake, the wrong committed by it may not constitute the sole reason for Liu’s death.

Liu’s injury was caused by Wang’s wrongful act in the first place, otherwise

Liu would not have been sent to the hospital. Thus generally speaking both Wang and ABC Hospital shall be held liable. However, if when Liu was sent to ABC Hospital he was already in a state of brain death, then even though ABC Hospital committed an error in the course of the surgery, the effect of that error on Liu’s death would be immaterial and could not be counted as the key reason for Liu’s death; and in this case, it is quite likely that Wang would become wholly liable for Liu’s death and he would not be able to have his liability reduced by relying on the wrongful act of a third party.

Force majeure

The term ‘force majeure’ is defined under Article 153 of the General Principles of Civil Law as an objective circumstance which is unpredictable,

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unavoidable and insurmountable. If any injury or damage is caused due to a force majeure event, no one will be held liable for it (General Principles of Civil Law, Article 107; Tort Liability Law, Article 29).

Sudden natural disasters (e.g. earthquakes and tsunamis), disease outbreaks (e.g. SARS), wars, unexpected riots and unrest, etc. are force majeure events common in everyday life. Any of these circumstances can be used as a reason to request exemption from or mitigation of the tort liability to be borne. But a precondition has to be met: the force majeure event must be the sole reason for the occurrence of the tort in question.

Say ABC (a rice wholesaler) commissioned XYZ (a shipping company) to transport a consignment of its rice from the port of Ningbo to Xiamen. When the ship entered the sea territory of Xiamen, a tsunami suddenly swept away the ship, which hit a huge rock and started to sink. The crew survived, but the rice could not be saved. Shall XYZ be liable for ABC’s loss? The answer depends on the circumstances. If XYZ had not received any tsunami forecast before or during the voyage, the occurrence of the tsunami could be deemed to be a force majeure event, due to which XYZ would not be liable to compensate ABC for the loss of its rice. However, if XYZ was also at fault in this incident (e.g. it knew in advance that there would be a tsunami but insisted on commencing the voyage; or due to negligence the crew did not take any measures to protect the cargo), then XYZ would be liable for ABC’s loss; but it might be able to have its liability reduced to some extent.

Self-defence

In reality the term ‘self-defence’ is more often used in a scenario in which one is forced to exercise one’s right of self-defence to stop criminals from threatening one’s life. For example, say a group of criminal suspects refused to be arrested and they fired shots at the police. If, in order to protect his life, a police officer shot dead one of the criminal suspects, this police officer would not be liable for the death caused by him. This is because under the Criminal Law if a person takes action to stop an ongoing illicit encroachment upon the state or the public interest, or upon the personal rights, the property rights or other rights of either himself or another person, thus causing an injury to the offender, what he has done will be deemed to be an exercise of his right of defence and he will bear no criminal liability for the injury (Article 20, paragraph 1).

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Exercising the right of self-defence may also be necessary in a civil law setting when one has to immediately do something to prevent one’s rights and interests from being violated due to man-made causes. Either under Article 128 of the General Principles of Civil Law or by Article 30 of the Tort Liability Law, it is accepted that anyone who has appropriately exercised his right of selfdefence shall not be held liable for the injury or damage caused by him.

Here is another example. Huang works as a junior associate for an accounting firm. Li is his immediate supervisor. Jealous of Huang’s talents, Li kept creating hurdles to Huang’s career advancement. Huang could no longer tolerate Li’s conduct and decided to get back at Li. One night, Huang waited in ambush somewhere near Li’s home. As Li passed by, Huang suddenly jumped out and tried to hit Li with an iron rod. Huang had not realized that Li used to be a martial arts instructor. Li deftly avoided Huang’s first attack, and with one quick move forcibly pushed Huang to the ground. Huang struggled but was subdued by Li. In the tussle, Huang’s arm was twisted by Li, and Huang’s expensive mobile phone fell out of his pocket and broke into pieces on the ground. Since what Li did could be viewed as an act of self-defence, Li would bear no criminal liability for his conduct, and he would also not be held civilly liable for Huang’s personal injury and property damage.

The right of self-defence can be used to avoid tort liability for a loss. But this right must be prudently exercised, not exercised to an extent that far surpasses what is needed to fend off danger.3 Regarding the fair use of self-defence, either by Article 128 of the General Principles of Civil Law or under Article 30 of the Tort Liability Law, it is prescribed that if a person exercises his right of self-defence in excess of a necessary limit, causing unnecessary injury or damage, he shall be liable for the injury or damage on an appropriate scale.

In the above example, if after Huang was subdued, Li continued to thrash him, leading to Huang suffering a head injury requiring hospitalization, then obviously Li’s exercise of his right of self-defence far exceeded the appropriate limit, and Li would be liable for the head injury sustained by Huang.4

3The Criminal Law, Article 20, paragraph 2 also mentions the requirement of keeping an act of self-defence within a necessary limit, exceeding which will lead to the party claiming self-defence bearing certain criminal liability.

4In this circumstance, Li may also be held criminally liable for what he did.

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Taking an emergency action to avert danger

Apart from the ground of self-defence, exemption from or mitigation of tort liability can also be sought on the ground of taking an emergency action to avert danger. On the surface, these two grounds seem similar; the main purpose is the same, i.e. to avoid or stop any present or imminent substantial safety hazard.

However, the right of self-defence is exercised to avoid man-made harm, while an emergency action is exercised in response to a threat that may not be man-made. Taking an emergency action may cause certain damage; but that damage, compared with the far more significant damage that might be caused by the danger, is an unavoidable price that must be paid.

Under Article 129 of the General Principles of Civil Law and Article 31 of the Tort Liability Law, where taking an emergency action to avoid a danger causes any loss, the liability for the loss shall be borne by the person who caused that danger.

Take this example. Liu is a third-year undergraduate student at ABC University. He lives in a dorm on campus. According to the University’s regulations, using gas cookers is strictly forbidden in any dorm room. Liu ignored the regulation and cooked congee on a gas cooker in his room. He then locked the door and went out shopping without turning off the cooker. Wang is a freshman living next door to Liu. He detected a strong smoke smell coming from Liu’s room. Wang used tools to break the door lock, rushed into

Liu’s room and put out the rapidly growing fire. A potentially fatal crisis was defused, notwithstanding the fact that the broken door had to be replaced and

Liu’s new computer was damaged by the water poured by Wang on the fire. What Wang did amounts to an emergency action to contain the fire that could have endangered lives and property in adjacent rooms; thus he was not liable for the losses incurred in connection with the broken door and Liu’s computer. Liu, who caused the danger, shall be responsible for the damage caused to the door.

Where an emergency action is taken to avoid a natural peril, by virtue of Article 129 of the General Principles of Civil Law and Article 31 of the Tort Liability Law, the person taking the emergency action will not be held liable in tort, or will need to bear liability on an appropriate scale only for the loss.

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Say a ship owned and operated by ABC (a shipping company) was wrecked in an unexpected hurricane sailing towards a port while carrying the cargo of XYZ (the consignor). To reduce the weight in order to slow down the sinking of the ship, the crew decided to throw about two-thirds of the cargo into the sea. This worked. Before the ship fully sank, a rescue team arrived, and the whole crew (along with the remaining cargo) was saved. Although the emergency action taken by the crew resulted in the loss of a large of proportion of XYZ’s cargo, ABC shall not be liable for the loss as the crew took action to cope with a potentially deadly situation caused by a natural peril.

Like an action taken under the right of defence, an emergency action to avert danger is also subject to the fair use requirement. According to Article 129 of the General Principles of Civil Law and Article 31 of the Tort Liability Law, where taking an emergency action is in excess of a reasonable limit or the action taken is inappropriate giving rise to an injury or damage, the person taking the emergency action will to a certain extent be held liable for the loss.

The victim’s prior consent

If prior to the occurrence of a tort incident the person who later on becomes the victim has expressed his consent to accept the injury or damage that he clearly realizes may be sustained by him in a likely tort, after the tort really happens the tortfeasor can use the victim’s prior consent as a defence to seek exemption from his tort liability.

The prior consent must be of an entirely voluntary nature, based on the condition that the victim-to-be is fully aware of the prospect that he may suffer an injury or damage by what is to be done by another person, but he allows that person to go ahead with the action and accepts that if such injury or damage happens, that person will not be liable in tort for his loss; the consent should be made free from any type of undue pressure or coercion; and consenting must not contravene any law or err from the civil law doctrine of good public order and social customs (Yang 2004, 212–14).

Say T and G are professional wrestlers. In a match between the two, after several rounds, T all of a sudden wrestled G down to the ground, with a result that G’s left wrist was broken. As a professional wrestler, G must have been fully aware of the likelihood of a physical injury occurring in a match.

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Agreeing to participate in a match already exhibited G’s willingness to take the risk and accept possible injury. Hence T would not be held liable for G’s injury.

Here is another example. Mrs Wang’s family lives in the remote hilly countryside. She now works as a housemaid for Mr Gao’s family in City B. Before her current employment contract came to an end, Mrs Wang begged Mr Gao to renew the contract as she badly needed this job to support her family. Mr Gao agreed, but subject to the following two conditions: (1) during the contract period Mrs Wang is not allowed to take any leave and she has to work on public holidays; (2) Mrs Wang may be asked to take care of a patient who has a contagious disease; and if she is infected with the disease because of it, Mr Gao as her employer will not be liable to compensate her for any injury. Mrs Wang unhappily accepted the two conditions.

She began looking after Mr Gao’s aunt who was suffering from acute hepatitis. Mrs Wang had to work long hours and was not able to get enough sleep. This eventually led to her collapse after being infected with hepatitis. Mrs Wang asks Mr Gao to provide her with compensation for the injury sustained. Can Mr Gao use the victim’s prior consent to the two conditions as a defence to seek exemption from his tort liability?

In this case, Mr Gao would be liable for Mrs Wang’s injury. He imposed two unreasonable conditions on Mrs Wang, whose consent to them was not truly voluntary. The substance of these two conditions clearly violates the law as regards the contents of exemption clauses devised in a contract (see Contract Law, Article 53), and also deviates from the spirit of the civil law doctrine of good public order and social customs. Hence, Mr Gao would be responsible for Mrs Wang’s illness and would have to provide her with compensation.

Carrying out official duties

If a tortious injury or damage is caused in the course of carrying out official duties, given that such a loss is unavoidable and it is a price that must be paid, then no tort liability has to be borne. In practice, either a public servant or a non-government employee, provided that he causes a tortious injury or damage that is unavoidable in the course of performing his official duty, will not be held liable in tort (L M Wang and Yang 1996, 77–78).

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Assume that to rescue a number of hostages who were kidnapped in an airplane, a special forces operation team staged a series of fierce attacks, eventually leaving the airplane bullet riddled. No one in the team would be liable for the damage caused to the airplane as such damage is hardly avoidable during a rescue operation.

Also, say because of severe diabetic complications, Huang had to have his right foot amputated. Dr Li carried out the surgery. The operation was successful. Huang’s loss of his foot would not lead to Dr Li bearing any liability in tort, as it occurred as part of the professional duties carried out by Dr Li as a surgeon in order to save Huang’s life.

Seeking exemption from tort liability on the ground of carrying out official duties cannot be successful if the following precondition is not met: what has been done in the course of carrying out official duties must be reasonable, and indispensable to fulfilling such official duties. Otherwise any person who causes damage when carrying out his official duties will still face the prospect of bearing liability for the losses caused.

Summary

The Tort Liability Law, along with the relevant provisions contained in the General Principles of Civil Law, in the laws concerning torts in certain specialized fields, and in those judicial interpretations of the Supreme People’s Court relating to tortious acts, governs torts in the country. Three basic principles can be detected in the Tort Liability Law for establishing tort liability: the fault liability principle, the constructive fault liability principle and the non-fault liability principle.

To establish a tort case in an ordinary sense, the following four elements should normally be in place: illegitimacy, the fact of damage, causation and fault. Where the fault liability principle or the constructive fault liability principle needs to be applied in order to establish and attribute tort liability, these four elements must all exist. However, where the non-fault liability principle needs to be applied to establish a tort case, the element of fault can be dispensed with.

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The Tort Liability Law prescribes the rules on how tort liability is assumed in terms of liability for jointly committing a tort, for separately committing a tort leading to one final result of damage sustained by the same victim, and for several persons’ dangerous conduct.

There are a number of tort remedies available under the Tort Liability Law, including: (1) discontinuing infringement; (2) clearing away impediments;

(3) eradicating dangers; (4) returning assets; (5) restoring assets to their original state; (6) compensating for losses; (7) making an apology; and

(8) removing bad effects and reviving reputation.

Of these, compensating for losses (i.e. providing monetary compensation) is the most usual remedy. The Tort Liability Law stipulates how a victim can claim compensation for different kinds of losses in torts: making a personal injury compensation claim, making a property damage compensation claim, or making a compensation claim for mental distress.

In certain circumstances, tort liability might be mitigated or the alleged wrongdoer exempted from liability. The circumstances where it is possible to have tort liability reduced or be exempted from liability can be categorized according to the following reasons: the victim’s fault, the victim’s deliberateness, the wrongful act of a third party, force majeure, self-defence, taking an emergency action to avert danger, the victim’s prior consent, and carrying out official duties.

Practice questions

1Hu is an accountant in a very poorly paid job. In order to get some more money, he procures sports shirts, and after working hours goes to ABC University to sell them to students.

A noticeable big placard has been erected in front of the main gate of ABC University, informing people that vendors are prohibited from selling any item on campus without the university’s permission. Hu ignored the warning.

On a Friday night two months ago, Hu went to ABC University trying to tout a new batch of sports shirts. Beneath a path leading to student housing, there is an underground waste water system. The system had

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been repaired by a university maintenance worker that day. After finishing the work, the maintenance worker forgot to put the manhole cover back on. Hu slipped into the opening and broke two bones in his right leg.

Hu had to take one-month of sick leave, and so missed the internal promotion examination organized by the company he works for; he was also unable to escort his son to join a group tour to Hainan Island (they had pre-paid the tour fees to the travel agency and the fees were nonrefundable).

Hu filed a claim against ABC University for compensating him for the losses incurred in the accident, including the loss of a pay increase due to missing the internal promotion examination as well as the loss of the nonrefundable tour fees paid to the travel agency.

Would Hu’s compensation claim be successful?

2After attending a friend’s wedding banquet, Yang had an awful headache, uncontrollable diarrhea and severe vomiting. He was diagnosed as having gotten food poisoning from the following three kinds of food consumed at the banquet: steamed buns (tainted with chemicals), fake Maotai (produced from denatured alcohol), and expired yogurt. They were manufactured and supplied by ABC Food Plant, XYZ Beverage Plant and TT Dairy Plant respectively.

Yang ate a lot at the banquet. It was difficult to ascertain which of these three items caused him to fall ill. The banquet’s organizer was totally innocent; he had no idea of the danger posed by these items.

Under such circumstances, is there any remedy available to Yang?

3a Mr Lin is a multimillionaire well known for having been a poor peasant who became an entrepreneur and philanthropist through many years of hard work. Cai, a journalist, has often asserted that he was one of Mr Lin’s closest friends and he knew many of the secrets of Mr Lin’s success that Mr Lin never disclosed to the public.

Mr Lin passed away two years ago. Cai recently wrote and published a monograph about Mr Lin’s life and career. General readers can easily figure out from what is implied in the book that Mr Lin’s success was

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largely achieved by bribing government officials and carrying out illegal activities orchestrated by an underworld gang.

Mr Lin’s widow, Mrs Lin, protested. She was furious that Mr Lin’s good public reputation and image were totally ruined by Cai’s book. She intends to take legal action against Cai seeking compensation for her mental distress.

Cai believes the court will not accept such a lawsuit as Mr Lin has been dead for years.

Will Mrs Lin’s court action succeed? Explain.

bThe motorcycle driven by Zhao collided with a cyclist, Qian. Qian was injured, but the injury was not serious. Zhao and Qian disputed over who was liable: Qian accused Zhao of failing to obey traffic lights;

Zhao countered that Qian unlawfully rode his bicycle on the sidewalk.

A lawsuit was filed by Qian, who eventually won his case against Zhao by being compensated for all the medical expenses he incurred due to this traffic accident.

A month later, Qian decided to start another proceeding against Zhao. This time he wanted to make a claim for mental distress compensation on the ground that ‘the psychological trauma from this accident still haunts him.’

Will Qian win again? Explain.

4T as a sole trader runs a galvanizing plant in County D (a rural area in North China). The plant produces a lot of poisonous waste water every day that flows into the drainage system managed by the local government of County D.

A few days ago, something went wrong with the drainage system with a consequence that the waste water changed direction and flew into G’s freshwater pond in which G breeds abalone. The pond was badly poisoned; 90% of the abalone died. G supplies abalone to many five-star hotels and seafood restaurants. The loss this time cost him a fortune.

G made a compensation claim against T.

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T argued that the waste water flowed into G’s pond because of the problem with the drainage system, which had nothing to do with his galvanizing plant. He further pointed out that G built this pond by illegally encroaching on another peasant’s rice field, so no liability had to be borne by T.

Should T be held liable for G’s loss? Discuss.

5Mr Chen, a widower in his eighties, occasionally suffers from senile dementia. When his mental illness erupts, he does not recognize people, nor does he know what he is doing. Mr Chen currently lives with Chen Daming, his only son, who looks after him.

On Saturday last week, Mr Chen and Chen Daming visited Sun, their remote relative, to see Sun’s new home. While Chen Daming and Sun were discussing the decoration of Sun’s two-storey detached villa, Mr

Chen quietly went out to the balcony on the second floor to look around. His elbow knocked over a flower pot, which fell over the balcony and hit

Wang who was walking past Sun’s house.

As Wang was seriously injured by the flower pot, he tried to launch a compensation claim against Sun.

Sun declined to compensate Wang for his injury, arguing that he did not knock over the flower pot.

Advise Wang of any rights he may have to claim compensation for his injury, and also discuss the validity of Sun’s argument.

Guidelines for answers

1The liability of ABC University can be mitigated as Hu was also at fault. It shall compensate Hu for his medical expenses. The loss of a pay increase and the tour fees could not be reasonably foreseen; it is highly unlikely that Hu would succeed in his claim over these.

2The actions of ABC, XYZ or TT could all lead to Yang’s injury. As it cannot be ascertained which food is the main cause, these three ought to compensate Yang by sharing the liability in the same proportion.

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3a A natural person’s personal rights will still be protected under the law even after he dies. If Mrs Lin is severely psychologically injured due to Mr Lin’s reputation being tarnished by Cai’s book, she may go to court making a claim against Cai for compensation for her mental distress.

bNormally the court will not accept Qian’s lawsuit this time as he is going to court again claiming compensation for mental distress based on the same damage.

4Under the non-fault liability principle, T is liable for compensating G because of such contamination. Neither the drainage problem nor the socalled encroachment upon another peasant’s rice field may constitute a valid ground on which T’s liability can be exempted.

5Mr Chen shall be deemed a person with no capacity or only limited capacity for civil conduct. If Sun is able to successfully prove that he has not been at fault, he can be cleared of liability. Then as Mr Chen’s guardian, Chen Daming is liable for paying Wang compensation for his injury.