Source: http://www.cisg.law.pace.edu/cisg/biblio/reiley-fu.html
Timestamp: 2017-12-16 09:00:21
Document Index: 587283619

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Eldon H. Reiley and Hu Run Fu
Reproduced with permission of 24 University of San Francisco Law Review (1989-1990) 25-94
Doing Business in China after Tiananmen Square:
The Impact of Chinese Contract Law and the U.N. Convention
on the Sale of Goods on Sino-American Business Transactions
Eldon H Reiley [*] and Hu Run Fu [**]
Evolution and Structure of China's Contract Laws
"The Golden Years": 1979-1989
The Present Legislative Structure
The Economic Contracts Law
The Foreign Economic Contract Law
The General Principles of Civil Law
Scope of Application of China's Three Contract Laws
Applicability of Non-Chinese Law to Sino-American Contracts
The FECL Made Inapplicable by Choice of Parties
The FECL Made Inapplicable by Closest Connection Test
Absence of Chinese Law Provision
The FECL Subordinated to Treaty: The CISG
The FECL and Substantive Contract Law for Chinese-Foreign Party Contracts
Contracts, Agreements and Preliminary Documents
Circumstances Affecting Validity
Legality of Subject Matter
Absence of Duress or Fraud
Other Circumstances Affecting Validity
Other Chinese Law
The CISG
- Performance Deposits or Down-Payments
- Credit Guarantees
- Collateral Guarantees
Departures from Agreed Performance
Modification, Termination and Extension
Rescission, Avoidance and Suspension of Performance
Resolution of Contract Disputes
Appendix I: Summary Table [Common Law, ECL, FECL, CISG]
Appendix II: Text of the Foreign Economic Contract Law (FECL)
A PERSONAL PREFACE BY PROFESSOR REILLY [1]
On June 2, 1989 I finished teaching a course on American Commercial Law to a class of Chinese graduate law students in Shanghai and repaired to the lakeside resort of Hangzhou for what I thought would be a relaxing weekend in the countryside. Shortly after midnight on the evening of June 3-4, I was awakened by an unusual nighttime demonstration in the street below my hotel. The demonstration was the reaction of students at Hangzhou University to the first news" that the Chinese army had moved on their fellow students demonstrating in Beijing's Tiananmen Square 1000 miles to the north. The next morning telephone poles in Hangzhou were covered with handwritten posters reporting that students' tents had been run over by armored vehicles and that hundreds of students had been killed.
Those events in Tiananmen Square and the subsequent actions of China's government have raised a cloud over the future of Western business [page 25] activities in China. In the decade preceding Tiananmen Square, China had instituted a series of economic reforms that encouraged limited private ownership of business, foreign investments and importation of foreign technology. Now China has seen that an influx of foreign capital is accompanied by an influx of foreign ideas.[2] If China wishes to maintain a vigorous economic development funded by foreign capital, it will have to accommodate the inevitable unrest flowing from an expanded consciousness of its citizenry. If China seeks to close the door on Western influence, the resulting economic upheaval is likely to cause even greater unrest. China's present leadership appears to view this as a dilemma. It is unfortunate that they can not see it as an opportunity.
The immediate economic impact of Tiananmen Square was a cessation of tourist traffic and a diversion of some foreign investments to other nations. There has been no exodus of in-place foreign investment, although many highly visible joint venture hotels, showcases of China's open door policy, languished during the summer tourist season.[3] Current indications are that long range economic policies will not be reversed, and that Western involvement in China's economy will continue.
The decade of economic reform was accompanied by a decade of legislative activity. China sent its scholars throughout the world to study systems of commercial law and import the best of what they observed. With respect to contract law, this task had been largely completed by the spring of 1989, with only implementing regulations and some specialized laws still in the drafting process. It appears that the continuity of this drafting process has not been significantly affected by the political events of 1989.
The new Chinese contract laws are Western oriented and "user friendly," but in many particulars differ significantly from Anglo-American common law of contracts. Attorneys representing American businesses seeking to do business in China must analyze their interests within the context of the Chinese statutory scheme for contracts that is currently in operation. The analysis is complicated by the fact that during the past decade of legislative activity, both China and the United States [page 26] became signatories to the United Nations Convention on Contracts for the International Sale of Goods ("CISG").[4]
There are now three systems of contract law that may apply to Sino-American contracts: (1) American law, including Article 2 of the Uniform Commercial Code; (2) Chinese law, and (3) The United Nations Convention on Contracts for the International Sale of Goods. An appreciation of the differences between these systems, their respective areas of applicability, and the possibilities of controlling their applicability is an important tool for negotiating and performing contracts touching the Peoples Republic of China.
Part I of this article examines the evolution and structure of China's current contract law. It focuses on the three main pieces of legislation that provide different rules for domestic contracts and foreign-related contracts. For Americans doing business in China, the Foreign Economic Contract Law [5] ("FECL ") is the key piece of legislation. Part I explores the relative areas of applicability of each of the three laws and the issues that still exist in identifying the governing Chinese law.
Part II considers the applicability of non-Chinese law, including the CISG. It seeks to highlight the transactions and issues to which the CISG does not apply, and to explore the ability of the parties to control by agreement, or otherwise, the question of governing law.
Part III summarizes the impact of China's FECL and the United Nations Convention on major areas of substantive contract law. It compares the FECL with the CISG and contrasts them with their counterparts in Anglo-American common law, and with parallel provisions for domestic Chinese contracts. Appendix I summarizes the differences among the systems.
I. EVOLUTION AND STRUCTURE OF CHINA'S CONTRACT LAWS
Following the assumption of power by the Communist government in 1949, (a much celebrated event known as "Liberation"), China's then [page 27] existing contract law increasingly fell into disuse. In the emerging planned economy, where businesses were state owned and business transactions were in furtherance of state goals, contract law had little utility. This was the era of the "big pot" phenomenon (everybody made the same wages and ate out of the same "big pot") and of the "iron rice-bowl" employment system (cradle to grave social welfare). Even in foreign relations, contract law withered to slight significance as foreign trade was confined to China's bordering neighbors, and was largely barter-structured in nature.
During the Cultural Revolution, which occurred between 1966 and 1976, business responsibility was dismissed with the slogan: "We want socialist weeds rather than capitalist seedlings." China "reeducated" its intellectuals by sending them to work on the farms. The legal profession was driven underground, legal education was discontinued, and contract law was virtually obliterated. During this period China could be accurately described as a "contractless society."
A. "The Golden Years": 1979-1989
While the end of China's Cultural Revolution is commonly marked by the death of Chairman Mao and the aborted attempt of the "Gang of Four" to seize power in October, 1976, meaningful economic reforms did not occur for another two years. In the interim, China, under the leadership of Hua Guofeng, set unrealistic economic targets that worsened economic imbalances and stifled development of the national economy.
The Third Plenary Session of the Eleventh Party Central Committee in December, 1978, was the turning point that marked the beginning of the decade that the Chinese now refer to as "the Golden Years." The Plenum put forth a long-term strategy that emphasized reformation of the economic system and stepped up economic growth to realize the "four modernizations," in the areas of: (1) agriculture; (2) industry; (3) national defense; and (4) science and technology.
Internal economic reforms were implemented that changed China's "planned economy" into a mixed "planned-market economy." The reforms, which began with agriculture, included encouragement of rural business and rural industrial activities, and were carried quickly to the urban areas. They were based on a "contract responsibility system," which allowed individuals to make and retain private profits after meeting state production goals. These internal economic reforms were accompanied by an "open door" foreign policy that sought foreign trade and foreign investment. China's open door policy started with a few [page 28] designated Special Economic Zones ("SEZ's") and was rapidly expanded to include fourteen major coastal cities and the three major river deltas.
Both the internal economic reforms and the open door policy required a system of contract law. China responded legislatively to this need and created an entirely new contract law system within one decade.
B. The Present Legislative Structure
China has no tradition of common law development through judicial decision. Until 1985, no judicial decisions were reported. Thus, the evolution of China's modern contract law has been effected through legislation and administrative rules. These rules differentiate between domestic and foreign-party contracts.
China's present contract law rests on three key pieces of legislation: the Economic Contracts Law;[6] the Foreign Economic Contract Law; [7] and the General Principles of Civil Law.[8]
1. The Economic Contracts Law
The ECL, effective July 1, 1982, applies to domestic "economic" contracts between Chinese parties. It consists of fifty-seven articles arranged in seven chapters. The bulk of the statute is devoted to twenty articles specifying rules of contract formation (including some specific terms), and responsibilities of each party in the event of breach, for each of ten types of contracts: (1) purchase of goods; (2) construction; (3) processing; (4) transportation of goods; (5) electricity supply; (6) storage; (7) leasing; (8) lending; (9) insurance; and (10) scientific and technology cooperation.[9] The ECL has been followed by a series of implementary rules and regulations by the State Council.[10] Together they provide a legal framework for the contract relationships between state-owned business enterprises controlled by state planning. However, the ECL left unregulated an increasing number of contracts between individual parties. [page 29]
2. The Foreign Economic Contract Law
The FECL, effective July 1, 1985, consists of forty-three articles arranged in seven chapters similar in format to the ECL. It is reproduced in Appendix 2. It applies to contracts between Chinese parties and foreign parties. However, as explained below, considerable caution is necessary when considering the FECL's scope. Implementary regulations under the FECL have not yet been issued.
3. The General Principles of Civil Law
The General Principles is a codification of broad declarations ranging from constitutional rights to family law matters. It is structured in four parts: civil subjects (natural persons and legal persons); civil acts; civil rights; and civil liabilities. Contract law provisions are spread throughout the four parts. Of particular interest are a section entitled "Creditors' Rights,"[11] which focuses on contract obligations including interpretation, assignment and guarantees, and a section entitled "Civil Liability for Breach of Contract."[12] Because of its general nature, the General Principles applies to all contracts governed by Chinese law. It is the basic contract statute for domestic contracts outside the ECL, and it is applicable as supplementary general law to those contracts within the ECL and the FECL.
These three basic contract laws are supplemented by other legislation and regulations applying to specialized types of contracts. China's present contract law system is a legislative skeleton of general principles, which will gradually be fleshed out by implementing regulations and practice. The skeleton stands on two legs: (1) a legislative structure for domestic contracts -- the ECL supplemented by the General Principles and implementing regulations; and (2) a legislative structure for foreign party contracts -- the FECL supplemented by the General Principles, some special foreign trade laws, and implementing regulations anticipated in the near future.
This dual structure of China's contract law is a response to two related concerns. First, domestic contracts are closely tied to the state plan. Government review and approval may be required to an extent that would discourage foreign parties if subjected to the same requirements. For this reason, foreign-related contracts under the FECL are subject to much less state review and control than domestic contracts under the ECL. Secondly, substantive differences between the FECL [page 30] and the ECL are intended to make more Westernized rules applicable to foreign party contracts.[13]
Any Western business entering a relationship subject to Chinese law must determine which Chinese contract law is applicable.
C. Scope of Application of China's Three Contract Laws
It seems clear that the contract sections of the General Principles apply to all contracts subject to Chinese Law. The General Principles defines the contracts to which it applies as "an agreement between parties for establishing, changing or terminating civil relationship."[14] Its application is limited neither by types of parties (foreign or domestic, entity or individual, state or private) nor by the type or purpose of the contract. The quoted language is broad enough to bring all contracts governed by Chinese law within its scope. Thus, the rules set forth in the General Principles supplement the more specific provisions of both the ECL and the FECL, and apply to contracts not governed by the other two laws.
The applications of the ECL and FECL are much less clear. Both laws refer to "economic contracts," but only the ECL contains a definition of this term. The ECL defines economic contracts as "agreements reached by legal persons to define their mutual relations in regard to their rights and duties so as to realize certain economic goals."[15] The limiting words in this definition are "legal persons" and "economic goals."
In China, "legal person" means a juristic person, not a natural person.[16] The term includes Chinese business entities and some government departments. The ECL clearly applies to contracts between two business enterprises or between a business enterprise and a government department. The status of individuals and privately owned businesses under the ECL is not clear. The problem is that at the time the ECL was [page 31] adopted, there was no statutory definition of legal person and there was little business conducted privately by individuals, Today, there is a statutory definition that appears to preclude private individual or partnership businesses from legal person status,[17] Yet, beginning with the farmer, privatization has been moderately encouraged,[18] the Constitution has been amended to recognize private ownership of business,[19] and private individual and partnership businesses are expressly recognized by present day Chinese law.[20] To accommodate these changes (unforeseen by the ECL), it is appropriate to read "legal person" in the ECL Article 2 as "legal entity."
Article 54 of the ECL states: "[E]conomic contracts between individual business households or commune members in the countryside and legal persons should be signed in reference to this law." This provision appears to contemplate contracts between "legal persons" and individuals -- an apparent qualification of ECL Article 2. In limited instances, Article 54 has been construed so as to make the ECL applicable to contracts involving individual parties and private businesses.
When enacted in 1981, the ECL's reference to "economic goals" meant goals established by the state as a part of China's planned economy, Of course, parties may have their own economic goals quite apart from state goals, While the nature of China's economy has broadened since the enactment of the ECL, it does not follow that the meaning of "economic goals" in the ECL has broadened. Other provisions in the ECL tie economic contracts to state plans.[21] Articles 51 through 53 provide an elaborate system of control and supervision over economic [page 32] contracts by "departments of industrial and commercial administration" and by "the People's banks."
For China to apply such limitations to contracts with foreign parties would be inconsistent with the goal of encouraging foreign involvement in its economic development, It follows therefore that "economic contract" as used in the FECL does not mean a contract tied to official state goals. Rather "economic" in the FECL should be read as essentially synonymous with "business."
In addition, it should be noted that although the title of the FECL contains the word "economic" and Article 2 speaks of "economic contracts," all references subsequent to Article 2 use the simple term "contract" instead of "economic contract." This can be read as reinforcing the suggestion that the FECL does not incorporate the definition of economic contract from the ECL.[22]
The FECL also differs markedly from the ECL in its definition of contract parties contained in a clause delineating the application of the FECL. Article 2 of the FECL provides:
"This law shall apply to economic contracts concluded between enterprises or other economic organizations of the People's Republic of China [the Chinese party] and foreign enterprises. other economic organizations or individuals [the foreign party] (hereinafter referred to as "contracts"). However, this provision shall not apply to international transport contracts." (emphasis added)
Several important conclusions are suggested by this brief provision. First, the definition of the Chinese party is different than the ECL's "legal person." The reference to "enterprises or other economic organizations of the [PRC]" signals that the Chinese government or its subunits may not be parties to contracts with non-governmental foreign parties. In practice, Chinese state agencies are not allowed to enter into business contracts with foreigners. This restriction is intended to prevent the state from being responsible for foreign contract obligations. Thus, the FECL is read as limiting the Chinese party to business enterprises, and excluding non-business institutions such as government departments. In spite of the fact that the vast majority of Chinese business entities with legal personality are state-owned enterprises, such businesses are entitled to independently use, possess, transfer, and even [page 33] dispose of the property assigned to them by the state. This enables them to enter into business contracts with foreign parties.
Second, the definition of the Chinese party does not refer to individuals. When the FECL was adopted in 1985, China's private economy was still minimal. Such domestic individual businesses as then existed were not strong enough to engage directly in international transactions. Whether the FECL's silence amounts to rejection of Chinese individuals as contract parties is not clear. Other Chinese foreign-related legislation presents an inconsistent pattern on this issue. China's new foreign trade law (which is still being drafted) does not allow individuals to engage in the import and export business.[23] However, the Regulations on Technology Import Contract expressly permit Chinese individuals to enter into technology import contracts.[24] Practice in the SEZs has allowed individuals to engage in some international business.[25] It is conceivable that the FECL and other Chinese foreign economic legislation will ultimately be interpreted to cover Chinese individuals. It is likely that this will depend on whether, in the aftermath of Tiananmen Square, China continues to encourage the growth of private, individually owned businesses.
Third, whatever the eventual status of Chinese individuals under the FECL, it is clear that the foreign party to an FECL contract may be an individual.
Fourth, a foreign investment in a Chinese enterprise, including joint ventures and wholly foreign owned enterprises, will be viewed as an investment in a Chinese "legal person."[26] In that case, a contract between the enterprise with the foreign investment and another Chinese enterprise will be viewed as a contract between two Chinese legal persons and will be governed by the ECL instead of the FECL. [page 34]
Fifth, the FECL also applies to business contracts between Chinese enterprises and overseas Chinese (including those Chinese residing in Hong Kong, Macao and Taiwan). The practice of treating such contracts as foreign economic contracts is reflected in Chinese judicial practice and foreign economic arbitration.
Sixth, the exclusion of international transport contracts appears to reflect a conclusion that such contracts have unique attributes more appropriately dealt with by special laws (the PRC Maritime Law is under draft) and international conventions such as the Hague Rules (on bills of lading)[27] and the Warsaw Convention (on carrier's liability).[28]
II. APPLICABILITY OF NON-CHINESE LAW TO SINO-AMERICAN CONTRACTS
From the preceding discussion it appears that, in most instances, the Chinese law applicable to business contracts between Chinese parties and American parties will be the 1985 FECL. In some situations, however, a contract otherwise within the FECL may nevertheless be subject to non-Chinese law. These situations, which will be separately considered below; occur when: (1) there is a valid designation of other law by the parties; (2) other law is applicable under the "closest connection" test; (3) other law is looked to because there is no appropriate Chinese law provision; or (4) the FECL is subordinated to an international treaty.
A. The FECL Made Inapplicable by Choice of Parties
Article 5 of the FECL states that the law applicable "to the settlement of contract disputes" will be that chosen by the parties, or, where no choice has been made, the law of "the country which has the closest connection with the contract."[29] This reference to other law is subject to significant limitations.
First, the same Article goes on to list three types of contracts to which Chinese law is to be applied in any event: (1) Chinese-foreign equity joint venture contracts; (2) Chinese-foreign contractual joint venture [page 35] contracts; and (3) contracts for Chinese-foreign cooperative exploration and development of natural resources. The reason for this limitation is that the projects under these contracts are all located and operated in China. When negotiating over these contracts, American companies must realize that it is useless to strive for a choice of foreign law.
Secondly, certain fundamental laws and regulations reflecting national policies cannot be avoided by choice of law. American parties should not expect to avoid the application of Chinese laws relating to taxation, customs, protection of environment, foreign exchange administration, and labor by insisting on agreement to the application of the law of another country.
Finally, the choice of law power is limited to "the settlement of contract disputes."[30] Many issues, including some contract law issues, may not be viewed as falling within "the settlement of contract disputes." Questions of contract formation, including offer, acceptance, consideration, mistake, duress, and fraud, could conceivably be placed outside this description.
The choice of law language in the FECL may be contrasted with the choice of law clause drafted by China's Ministry of Foreign Economic Relations and Trade ("MOFERT")[32] for use by Chinese negotiators for joint venture contracts: "The formation of this contract, its validity, interpretation, execution, and settlement of the disputes shall be governed by the laws of the People's Republic of China."[32] This clause could be read as suggesting that "settlement of the disputes" does not include formation, validity, interpretation, and execution. However, just as persuasively, this language indicates that Chinese trade practice recognizes that these issues are subject to choice of law. It is generally understood by Chinese lawyers that the "settlement of contract disputes" clause would be broadly interpreted so as not to curtail choice of law by the parties.
The most significant practical limitation to choice of law by the parties is that few Chinese negotiators will agree to a choice of law other than Chinese law.
It is not unusual for both parties to insist on a clause specifying the applicability of the law of their own country with such vehemence that a deadlock is created. Only rarely is such a deadlock resolved by agreement to the law of a third country, since this would normally create uncertainties for both parties. More often the applicable law is left [page 36] unspecified. One common solution developed by Chinese and foreign companies, when the application of law clause is left open, is to include an arbitration clause enabling the arbitral tribunal to decide what law applies.[33]
B. The FECL Made Inapplicable by Closest Connection Test
For contracts in which the parties have failed to agree on the choice of law, Article 5 of the FECL provides that "the law of the country with the closest connection with the contract shall apply." This reference to other law is subject to the same limitations (excepted types of contracts and state policy) as choice of law by the parties.
The country with the closest connection is determined by the arbitral tribunal or court, considering the specific circumstances relating to the contract. Determining factors include where the contract was negotiated, where the contract was signed, where performance was to take place, and where the arbitration or litigation is located.
To help determine the country with the "closest connection," the Supreme People's Court has suggested some specific rules in its Answers to Questions of FECL Application (" Answers").[34] [page 37]
The rules suggested in the Answers are based on the places of business of the parties. Sometimes parties have several places of business. In that case, the court may select among all the places of business the place with the closest relationship to the contract. If one party has no place of business, the court will instead consider that party's domicile or residence.
The effect of failure to agree on the choice of law is radically different if a contract is governed by the CISG instead of the FECL, For such contracts the CISG applies, unless the parties have agreed to exclude its application.[35] Therefore, for Sino-American sale of goods contracts where the parties have not specified other applicable law (or otherwise agreed to exclude the application of the CISG), the provisions of the CISG will apply to all matters within its scope, and there will be no search for the country with the closest connection unless the issue in dispute is one not covered by the CISG.
C. Absence of Chinese Law Provision
If Chinese law has not yet made provision for some matter that is to be governed by Chinese law, Article 5 of the FECL provides for the application of "international practice," This refers to those generally recognized rules and usages customarily observed in international business transactions, The CISG may quickly come to be viewed as evidence of international practice. [page 38]
D. The FECL Subordinated to Treaty: The CISG
If an international treaty or convention to which China has acceded is found in conflict with Chinese Law, the FECL, in Article 6, unambiguously subordinates itself to the treaty, except where China has made reservations. The use of reservations is illustrated by China's reservations to Article 28(1) of the Paris Convention for the Protection of Industrial Property (made to exclude jurisdiction by the International Court of Justice), and to Articles II and 1(1)(b) of the United Nations Convention for the International Sale of Goods (made to preserve. China's writing requirement for contract formation and to confine CISG applicability to contracts between parties in two ratifying nations).
The CISG became effective on January 1, 1988, after having been ratified by ten nations. By November of 1989, It had received a total of twenty ratifications, including. that of both China and the United States.[36] Additional ratifications are expected to follow rapidly. The CISG applies to contracts for the sale of goods when parties have their places of business in different States, and those States are both signatories to the CISG.[37]
By its own terms, the CISG does not apply to certain types of sales contracts and issues. The contracts to which it is not applicable are:
Sales of goods purchased as consumer goods, unless the seller had no reason to know of the intended use;
Sales by auction;
Sales on execution or by authority of law;
Sales of stocks, shares, investment securities, negotiable instruments or money;
Sales of ships, vessels, hovercrafts or aircraft;[38] and
Sales of electricity. [page 39]
The issues that the CISG does not govern are validity of the contract or of any provision,[39] effect of the contract on property in the goods sold,[40] and liability of the seller for death or personal injury.[41]
Article 98 of the CISG forbids reservations by signatories except as expressly authorized in Articles 92, 95 and 96. The United States made a jurisdictional reservation under Article 95.[42] China made a similar jurisdictional reservation pursuant to Article 95, but China also made a reservation to " Article 11 as well as the provisions in the Convention relating to Article 11. " Article 11 of the CISG authorizes formation of contracts without a writing. The effect of China's reservation is to make its "Statute of Frauds" applicable to the formation of all sales contracts between Chinese parties and foreign parties, unless Chinese law has been made inapplicable by the parties choice or the closest connection test.[43]
The CISG puts forth its own reservation with respect to specific performance. A court is not bound to enter a judgment of specific performance, even when otherwise required by the CISG, unless it "... would do so under its own law in respect of similar contracts of sale not governed by ..." the Convention.[44]
Applicability of the CISG is also subject to a wide degree of control by the parties. Article 6 provides: "The parties may exclude the application of this Convention or, subject to Article 12, derogate from or vary the effect of any of its provisions." Just what this language means with respect to a contract that is otherwise within the scope of China's FECL is unclear. By excluding the application of the CISG, the parties to a Sino-American contract could quite clearly place their contract back under the FECL. Could the parties alternatively select the law of another jurisdiction, such as Article 2 of the Uniform Commercial Code? It seems that the first phrase in Article 6 allows total avoidance of the application of the Convention, while the second phrase permits avoidance of selected clauses. To place a Sino-American sale of goods contract under Article 2 of the U.C.C. instead of the CISG, the parties should by agreement first exclude the application of the CISG, and then exercise their power under the FECL to agree on the application of the [page 40] law of the State in which the American party is located. To exclude the application of the CISG without also agreeing to other applicable law will merely plunge the parties (or the court) into a search for the country with the closest connection.[45] Even when the parties wish the Convention to apply, a well drafted contract will specify a backup choice of law for those issues not within the Convention.
As more nations ratify the CISG, some interesting issues are created. How will the application of this Convention be kept uniform when its provisions are being interpreted and applied by courts in twenty or more nations? Will decisions by European or American courts be reported in China and applied by Chinese courts and vice-versa?[46]
III. THE FECL AND SUBSTANTIVE CONTRACT LAW FOR CHINESE-FOREIGN PARTY CONTRACTS
To the extent Chinese law is applicable to Chinese-foreign party business contracts, the applicable law will usually be the FECL. Part II considered the circumstances under which Chinese law may be inapplicable. In many matters, particularly contract formation, it is easier and wiser to be aware of Chinese law requirements and comply with them. Part III takes a hard look at the FECL in specific areas dealing with contract formation, alteration, remedies, and dispute resolution. Where relevant, the FECL is contrasted with the ECL, common law and the CISG.
The rules of contract formation in China generally reflect the principles prevailing in the international business community. For purely domestic contracts, the ECL requires consistency with China's planned economy and incorporates procedures that are not part of the FECL. Contracts formed under the FECL should meet not only the express requirements of that law, but also such other standards as may be implied from consistent provisions in the General Principles and current contract law practice. [page 41]
The statutory definitions of contracting parties discussed in Part I.C. above create a starting point for analyzing the concerns an American party should have about the contractual capacity of its Chinese counterpart. Article 2 of the FECL expressly limits the Chinese parties to "enterprises and other economic organizations." The issue of whether or not Chinese individuals can be contracting parties was discussed above. In addition, this limitation has been further narrowed in practice to those economic entities whose legal person statuses are duly registered and authorized to contract with foreign parties. As noted, this limitation excludes government agencies even though they may be qualified parties for domestic economic contracts.
To substantiate a Chinese party's contracting capacity, American parties should request an inspection of: (1) registration approval, including authorization to enter into contracts with foreign parties; (2) business licenses; and (3) articles of association and other credentials. Such an inspection will normally also include an inspection of documents relating to credit and financial standing. The American party should make sure that the contemplated transactions do not go beyond the Chinese party's scope of business authority, which will be indicated in these documents. With long term projects, such as joint ventures, American partners should scrutinize the duration of the business license of a Chinese company. If the duration is shorter than that of the project, the American party should turn to another partner unless the Chinese party can have its license extended to be as long as the project. Finally, the American party should also make sure that the Chinese person signing the contract is a legal representative or otherwise possesses proper signing authority. If signing authority is based on agency, the agent should be asked to show his power of attorney.
American parties are also expected to possess proper capacity to contract. Under Chinese law, foreign corporate entities capacity is determined by the law of the place where they are incorporated.[47] Foreign individuals will be deemed to have capacity to contract in China if they are considered competent under Chinese law, even though they are regarded as incompetent under the law of their own countries.[48] Under the General Principles, a mentally sound person who has reached the age of [page 42] eighteen possesses full capacity for civil activities, including signing contracts.[49]
The Chinese party may likewise want to inspect the American party's documents. For example, the Regulations of the Shenzhen SEZ on Foreign Economic Contracts [50] provide that both parties to a foreign economic contract should furnish each other documents, including certificates of registration, balance sheets, credit credentials, notarized letters of guarantee, and evidence of the authority of their representatives to sign the contract. The FECL is silent on these particulars.
2. A Writing
Under Western law, the use of a writing by the contracting parties may have significance far beyond the question of whether a writing was required. For example, the fact that parties elected to use a writing may preclude evidence of oral agreements, and raise questions of adhesion or of the effect of oral modifications. The fact that a writing was contemplated but not completed may raise issues of contract formation. In China, where there is a universal Statute of Frauds, many of these issues are not encountered. There are, however, other Chinese law issues relating to writings that are both significant and surprising. These are considered here.
a. The Statute of Frauds
American lawyers are accustomed to a legal system where some contracts are required to be evidenced by a writing, while for other contracts of equal or greater significance, there is no writing requirement. Over the last century, the British have gone much further than Americans in limiting the scope of this peculiar Anglo-idiosyncrasy known as the Statute of Frauds.[51] American attorneys continue to wallow around in an arbitrary and illogical writing requirement.[52] The CISG has gone to the extreme of abolishing a writing requirement for contracts within [page 43] its scope.[53] These provisions, however, have expressly provided for reservations by signatories. In ratifying the CISG, China made its reservation to preserve its writing requirement even for international sale of goods contracts. Therefore, parties to all Sino-American contracts, including those within the CISG, should be cognizant of the scope and ramifications of China's writing requirement.
Chinese law requires virtually all contracts to be in writing. For domestic Chinese contracts, Article 3 of the ECL stipulates that they be "in written form" and "signed," subject only to an unimportant exception for contracts that are to be "fulfilled immediately."
For foreign-related contracts, Article 7 of the FECL provides:
"A contract shall be formed as soon as the parties to it have reached a written agreement on the terms and have signed the contract. If an agreement is reached by means of letters, telegrams, or telex and one party requests a signed letter of confirmation, the contract shall be fulfilled only after the letter of confirmation is signed."
Note that this language requires the signature of both parties, not merely that of the party to be charged. Further, unlike the American Statute of Frauds, this requires that the contract (not merely a sufficient memo) be in writing.
It appears from Article 7 of the FECL that the required writing may be either a contract document signed by both parties or an exchange of separate written communications constituting an offer and acceptance. In the latter case, actual signatures do not seem to be required. However, the second sentence of Article 7 appears to empower either party to prevent (or undo) the formation of a contract of the latter type by merely requesting a confirmation letter.[54]
For Sino-American sale of goods contracts within the CISG, China's reservation makes Article 7 of the FECL applicable unless the parties have made an effective designation of other law or, unless American law is applicable under the closest connection test. This has the additional impact of rendering many of the specific offer and acceptance rules of the CISG inapplicable to oral offers or oral acceptances.[55] [page 44]
b. Appendices
Article 8 of the FECL provides that, "Appendices specified in a contract shall be integral parts of the contract."
This provision, which raises appendices to the same dignity as the formal contract, offers interesting opportunities for contract negotiations. Because of this provision, unusual terms likely to be resisted if placed in the body of a contract may be lodged instead in an appendix with no dilution of legal force.
c. Contracts, Agreements and Preliminary Documents
American business executives occasionally express surprise at finding that documents (even though entitled "Agreements") that they have signed with Chinese are not legally binding writings. In the Chinese view, contracts, and sometimes agreements, are regarded as binding, but letters of intent, protocols, and memoranda of understanding are generally considered not binding. When only non-binding documents have been signed, it is entirely possible that the Chinese parties have signed similar documents with other competitors for the same project.
The Chinese are accustomed to labeling preliminary incomplete documents "agreements" that are superseded by later "contracts." This practice is reflected in the Implementary Regulations of the Sino-Foreign Joint Venture Law ("Joint Venture Regulations").[56] Under Article 13 of the Joint Venture Regulations, an "agreement" refers to a document containing agreement on some major points concerning the establishment of a joint venture. By contrast, a "contract" is the final document concluded between the parties. The contract prevails over the agreement in case of conflict. The more recently enacted FECL does not suggest such a distinction.
For sale of goods contracts within the CISG, matters relating to distinctions between contracts and preliminary documents would be worked out under its formation provisions contained in Articles 14-24, especially Article 19, which parallels section 2-207 of the U.C.C.
Contrary to the general rule in common law countries, a contract is enforceable in China even though it lacks consideration.
However, the FECL recognizes something close to consideration by its reference in Article 3 to "the principle of equality and mutual [page 45] benefit." This vague provision is usually interpreted as requiring that both parties' economic rights and obligations under a contract be comparable. The Chinese principle of equality and mutual benefit differs from the American requirement of consideration in two respects. First, it appears to contemplate an equivalency which is not part of the American doctrine. Second, it clearly does not contain the American "bargained for" requirement.
It is unfortunate that the Chinese principle is merely a guiding principle. It remains to be further specified by future regulations and interpretations.
The Chinese attitude toward the role of consideration is consistent with the CISG, which does not require consideration for either the formation or modification of contracts for the sale of goods.
4. Circumstances Affecting Validity
a. Government Approval
For many contracts subject to the FECL, there is no general requirement of prior government approval. However, Article 7 of the FECL expressly specifies that in those instances where other Chinese law does require government approval, such a contract "shall be formed only after such approval is granted." Contracts subject to approval are mainly limited to Chinese-foreign joint ventures, cooperative exploration of natural resources, compensation trade,[57] loan service, and transfer of technology. Approval must be obtained from MOFERT or local authorities designated by MOFERT, depending on the importance of the project. Many other contracts, sales contracts in particular, may be signed by Chinese foreign trade companies. ("FTCs")[58] and other Chinese entities with complete autonomy.
Although an approval requirement may trouble or even frustrate American companies seeking business in China, the Chinese view this requirement as appropriate for a government striving to implement state plans. The approval process enables the government to control the inflow of foreign capital and the use of limited foreign exchange reserves, and to avoid trade deficits. To facilitate the flow of foreign investment, and streamline the much-criticized bureaucracy, MOFERT has relaxed [page 46] approval formalities by delegating much of its former approval authority to various local authorities.
b. Legality of Subject Matter
Article 9 of the FECL provides that, "Contracts that violate the law or the public interest of the People's Republic of China shall be void." The "law" referred to here is the Chinese Constitution, the basic laws made by the National People's Congress and its Standing Committee and the State Council's administrative legislation. Parties to a contract must strictly comply with the compulsory provisions of these laws; any violation would render the contract partially or totally voidable.[59] Article 9 of the FECL allows the parties to remedy partial voidness by correcting the original provisions. The requirement of compliance with Chinese public interest is an open-ended provision. Whether a contract is in compliance will be decided by courts, according to the specific circumstances.
In regulating domestic contracts, the ECL uses much sterner language to tie domestic contracts to state plans and goals. The full text of Article 4 of the ECL provides:
"The making of economic contracts should abide by State laws and accord with State policies and plans. No one and no unit are allowed to conduct illegal activities, disrupt economic order, violate State plans, harm State and public interests, or seek illegal profits under the camouflage of economic contracts."
c. Absence of Duress or Fraud
Article 10 of the FECL provides that contracts concluded by means of fraud or duress are void. It is obvious that this provision is derived from contract principles shared by most other countries. In China, however, it is reinforced by the statute's emphasis on "equality and mutual benefit" during contract formulation.[60] This restriction is intended to prohibit either party from using superior bargaining power to impose unreasonable clauses on the other.[61]
The emphasis placed by Chinese law on equality may lead to findings of duress in circumstances where American lawyers would not expect such a result.[62] For domestic contracts, the concern about unequal [page 47] bargaining power is expressed by even more explicit language in Article 5 of the ECL: "The making of economic contracts should be based on the principle of equality, mutual benefit, agreement through consultation, and equal rewards. Neither party should impose its own will on the other party, and no unit or individual is allowed to interfere illegally."
Fraud, including bribery, also renders a contract voidable.
d. Other Circumstances Affecting Validity
As noted above, the FECL expressly identifies several grounds for voiding contracts, including: (1) absence of government approval when required; (2) violation of Chinese law; (3) contravention of China's social or public interest; (4) duress; and 5) fraud. This short list is only the beginning. Because foreign economic contracts are also subject to, the General Priniples where the FECL is silent, other circumstances speciecified in the General Principles may also affect the validity of a contract.
Article 58 of the General Principles lists incapacity to contract, malicious conspiracy, and pursuit of unlawful purposes as voiding grounds. Two additional voiding grounds suggested in Article 59 are gross mistake about the substance of the act and substantial unfairness,[63] These appear to parallel the Western doctrine of unconscionability, but in China these doctrines have not yet been given specific content. Like duress, it is anticipated that less will be required to raise these voiding grounds, or excuses for non-performance under Chinese law than under current American law.
The Supreme People's Court's Answers to Some Questions Application of FECL list the voiding grounds discussed above, together with non-fulfillment of the writing requirement, lack of authority to sign, and surpassing business scope.[64]
Since the CISG does not apply to issues of contract validity, American lawyers should expect a contract for the delivery of goods to or from China to be subject to Chinese law on contract validity. A major concern, beside meeting any requirement of government approval, would be [page 48] the expanded concept of duress and unfairness flowing from the principle of "equality and mutual benefit."
The CISG exclusion of matters of contract validity has an uncertain scope. There is presently no basis for defining "validity." The exclusion is clearly intended to preserve applicability of national law on matters of major public policy, for example illegality and duress. But does it also subject CISG contracts to local notions of unconscionability, penalties and liquidated damage clauses? This issue relates not only to the interplay between the Convention and national laws, but also to the freedom of contract of the parties.[65]
5. Mutual Assent
Except for general references to agreement of the parties, no provision of the FECL refers to "offer" or "acceptance" or attempts to define those terms or the process by which agreement may be reached. Nor does the FECL suggest rules for revocation or retraction of contract proposals.
It is expected that offer and acceptance rules will be specified in the detailed rules to implement the FECL and the People's Republic of China Foreign Trade Law, both of which are currently being drafted. In the meantime, American parties may anticipate two approaches to specific offer and acceptance issues recourse to international practice, or recourse to other Chinese law.
a. International Practice
Article 5 of the FECL provides that, "For matters that are not covered in the law of the Peoples Republic of China international practice shall be followed."
If resort is made to international practice, the detailed offer and acceptance rules in the CISG may be looked to as evidence of international practice even for those contracts not within the CISG. The CISG's offer and acceptance rules are summarized at the end of this section.[66]
b. Other Chinese law
An offer and acceptance practice has developed in transactions between Chinese FTCs and foreign parties. The existence of this practice [page 49] may be sufficient to avoid the reference to international practice, or may be viewed as evidence of international practice and will probably provide the basis for the FECL implementary rules.
i. Offer
The Chinese have developed a distinctive trade practice by dividing offers into "false offers" and "true offers." A false offer is actually an invitation to make an offer while a true offer is not only capable of ripening into a contract upon acceptance, but it is also irrevocable. A Chinese true offer therefore corresponds to an American "firm offer" or option.
A true or firm offer must meet four basic conditions. First, it must be made to specific persons. Second, it must convey an express intention to conclude a contract with the offeree, often by using such beginning expressions as "offer firm," "offer," "quote," "can supply," or "bid." Third, its major terms and conditions must be definite; together with an expiration date, it should contain major terms free of any reservations concerning quality, quantity, price, shipment and payment. Fourth, it must reach the offeree, but it may be withdrawn prior to that time.[67]
Chinese FTCs treat a true offer as irrevocable during the time period specified for the offer to remain open. If no time is specified, the offer is irrevocable for a reasonable period. Therefore, an American party receiving a true offer from a Chinese company can expect that the offer is irrevocable and valid for a stated, or reasonable, period of time.
In contrast, a "false" offer is indefinite and frequently includes terms that are incomplete, ambiguous or conditional. To Chinese companies, it is not binding even though purportedly accepted by the offeree. In practice, Chinese FTCs often make such "offers" in the form of quotations, price lists or proforma invoices as well as in normal correspondence. When receiving such an "offer," an American company should interpret it as only an invitation to make a true offer.
Chinese trade practice adheres to the "mirror-image" rule. All but the most minor deviations from the offer will cause an acceptance to be viewed as a counter-offer. An American business that places some alterations or additions in its reply to an offer should be aware that the [page 50] Chinese party normally would not treat such a response as a valid acceptance.
According to Chinese trade practice, a contract is formed when a valid acceptance reaches the offeror. Like civil law countries, China embraces the receipt rule; an acceptance is not effective until it is received. Therefore, unlike the leading American case of Morrison v. Thoelke,[68] the offeree may retract its acceptance until it is received by the offeror.
An unusual provision in the writing requirement in the FECL appears to create a situation where either party may prevent the formation of a contract by requesting a letter of confirmation.[69] Unless both parties have signed a written contract, the formation of a contract that would otherwise have arisen from an exchange of forms, may be deferred by a request for such a letter. In that case, no contract is formed until the letter is supplied by the other party. This provision is derived from long-established trade practice adopted by Chinese FTCs. When an FTC makes an agreement with its foreign counterpart through an exchange of business communications, it places the major agreed terms in a confirmation, which it signs and sends to the foreign party for counter-signature. The contract is formed only when the confirmation has been signed by both parties. At that point, the previous exchanges of business correspondence are replaced by the signed confirmation. While this trade practice appears sound, its codification in Article 7 of the FECL raises troublesome issues. It is unclear how long after an exchange of forms such a confirming letter request may be made with the effect of undoing the contract. Nor is it clear whether the pendency of such a request extends the irrevocability of the offer, whether the requesting party may withdraw its request, or whether the confirming document must be signed by the requesting party as well as by the recipient of the request, or what happens to inconsistent or additional terms in the earlier forms.[70]
This provision has a large potential for mischief. American parties should be alerted to the need to respond promptly to requests for letters of confirmation. They should also understand the havoc that could ensue if they initiate a request for a confirming letter.[72] [page 51]
c. The CISG
For Sino-American contracts for the sale of goods, a very different analysis is provided by the detailed provisions of the CISG that control the formation of the contract, unless the parties have agreed on the applicability of other law. Under the CISG, an offer is revocable unless it indicates otherwise or the offeree has relied on it.[72] No consideration is required to create a firm offer.[73]
A proposal is an offer if it: 1) is addressed to one or more specific persons; 2) indicates the goods; 3) expressly or implicitly makes provision for determining quantity and price; and 4) indicates an intent to be bound.[74]
The CISG partially modifies the "mail-box" rule. As under common law, the dispatch of an acceptance cuts off the power of the offeror to revoke an offer. [75] For other purposes, however, such as retraction of acceptance, an acceptance is not effective until received and may be effectively overtaken by a retraction prior to that time.[76]
The "mirror image" rule is also partially modified by the CISG. Minor alterations in the acceptance will not prevent if from being effective, unless the offeror objects orally or by written notice, to the discrepancies.[77] If the offeror does not object, such additional or different terms become part of the contract. The Convention list additional terms that will be deemed material alterations and therefore not within this mirror-image exception.[78] These include: terms "relating" to price, payment, quantity, quality, delivery, liability, and dispute settlement. The list is non-exclusive.[79] [page 52]
One of the problems in section 2-207 of the U.C.C. appears to have been corrected in CISG Article 19. Section 2-207(1) provides that "additional" or "different" terms in an acceptance do not prevent a contract from arising. Section 2-207(2) specifies the circumstances under which "additional terms" become part of the contract. This paragraph fails to indicate what happens to "different" terms. The omission, which some have suggested is attributable to a printer's error,[80] raises not only the question of "What happens to different terms?," but also the following questions: "What's the difference between 'additional' terms and 'different' terms?;" "Are 'different' terms material alterations that do not become part of the contract?;" "Should 'different' terms be viewed as 'conflicting' terms which cancel each other out?"[81] The CISG avoids these issues by providing in Article 19(2) that "modifications contained in the acceptance" becomes part of the contract under the CISG formula. "Modifications" includes both additional and different terms.[82]
A more serious issue under section 2-207 is not directly addressed by the CISG and is compounded by China's reservation: what happens when the parties do not achieve a contract in the forms, but by their conduct indicate that they believe a contract has been made, and a subsequent dispute arises? What terms control such a transaction? At common law, the "last shot rule" gave precedence to the terms in the last form.[83] The formula in section 2-207(3) defines the contract by the terms "on which the writings of the parties agree" plus the gap-filling provisions of Article 2. This formula encountered considerable judicial resistance.[84] The CISG has no counterpart to section 2-207(3). It recognizes contracts through conduct,[85] but it offers no formula for determining the [page 53] terms of such contracts. The best solution in these cases would be to find a contract consisting of the negotiated terms, supplemented by trade usage and course of dealing [86] and the provisions of the CISG.[87]
China's reservation to Article 11 of the CISG theoretically negates the formation of a contract through conduct. The resulting structure of the law provides no basis for resolving problems resulting from deliveries of goods following an exchange of asymmetrical forms.
In addition, the reservation to Article 11 makes it impossible for oral acceptances or oral offers to ripen into contracts without confirmatory writings. This reservation thus renders many of the specific offer and acceptance rules of the CISG inapplicable to non-written communications. [88]
6. Indefiniteness
In Chinese law, problems of indefiniteness in basic terms are addressed by the General Principles. Article 88 supplies terms for quality, time of performance, place of performance, and price when these cannot be ascertained from the contract. The price provision is of particular interest. Article 88(4) of the General Principles provides:
"If the price agreed by the parties is unclear, the state-fixed price shall apply. If there is no state-fixed price, the price shall be based on market price or the price of a similar article or remuneration for a similar service."
A sale of goods contract within the CISG is subject to more detailed gap filling provisions located in Part III of the CISG. These focus on places of delivery (Art. 31), place of payment (Art. 57), time of delivery (Art. 38), time of payment (Art. 58), quality of goods (Art. 35), and failure to make specifications required of the buyer (Art. 65).
One of the most difficult interpretational questions under the CISG is whether a contract can be formed if the price term is omitted. Article 14(1) provides that an offer is "sufficiently definite" if it "indicates the goods and expressly or implicitly fixes or makes provision for determining [page 54] the quantity and the price." Does this mean that a contract is not formed if price is not expressly or implicitly fixed?
In what is arguably a contradiction, Article 55 provides:
Since Article 14 merely states when an offer is "sufficiently definite," it does not necessarily follow that it is fatally indefinite if a price term is omitted. On that reading, Article 55 may be read as curing a price-term deficiency.[89] On the other hand, it has been suggested that Article 55 is only intended to apply when a national reservation has rendered Part II of the Convention (containing Art. 14) inapplicable, and a contract has been formed under non-CISG law without a price term. Under CISG Article 92(1), a State may avoid being bound by Part II of the Convention, which includes Article 14, but remain bound by Part III of the Convention, which includes Article 55.[90] Under this analysis, a Sino-American contract within the CISG could not be formed without a price term since neither China nor the United States has made a reservation to Part II.
7. Suggested Terms
While Chinese statutory law is remarkably silent about the offer and acceptance process, it prescribes terms to be included in economic contracts in excruciating detail. For domestic contracts, Article 12 of the ECL list the "principle clauses" required. These are clauses relating to subject matter.(i.e. goods, services, construction), quantity and quality, price and payment, time limit, place and manner of performance, and liability for breach. Subsequent articles specify the content of these clauses for the ten types of economic contracts specifically covered.[91]
Article 12 of the FECL lists ten specific terms that should be included in contracts within its scope.[92] In addition, it singles out three types of clauses for detailed treatment, discussed below. [page 55]
a. Risks and Insurance
Article 13 of the FECL provides that, "so far as it may require, a contract shall provide for the limits of the risks to be borne by the parties in performing the object; if necessary, it shall provide for the coverage of insurance for the object." In sales contracts, where clauses of this nature are often used, this means the contract should specify at what moment risk of loss or damage to the goods transfers from one party to the other. While the FECL's provisions on impossibility excuse are relatively complete,[93] it is silent on risk for other accidental damage or loss.
For sale of goods contracts under the CISG, Articles 67-69 specify that the risk passes from the seller to the buyer, when the sellers hands over the goods to a carrier.[94]
b. Duration and Extension
Article 14 of the FECL provides that, "Where a contract needs to be performed continuously over a long period, the parties shall set a period of validity for the contract and may also stipulate conditions for its extension and its termination before its expiry." This provision applies particularly to long-term contracts for joint ventures, co-operative exploration of natural resources, and the transfer of technology. Although the FECL indicates that the parties may freely decide on contract duration and extension, this freedom is sometimes restricted by ceilings imposed by other Chinese laws on durations.[95] Duration beyond [page 56] these limits is subject to special approval by the relevant. authorities. Other laws may also require approval of extension or early termination of a contract.
c. Guaranties
Article 15 of the FECL provides that, "In the contract the parties may agree to provide a guaranty. The guarantor shall be held liable within the agreed scope of guaranty." The second sentence of Article 15 means that the guarantor and principal debtor will be jointly and severally liable for breach of contract, and that the scope of guaranties cannot be extended without the prior permission of the guarantor.
Although the guaranty provision in Article 15 is not compulsory, it is common for ether party to a foreign-Chinese contract to require guaranties for financing arrangements and other contractual obligations. Many Chinese companies insist on including a guaranty, especially when the foreign party is new to China.
The major forms [96] of guaranties used in foreign economic contracts are (1) performance deposits or down payments; (2) credit guaranties; and (3) collateral guaranties.
Performance Deposits or Down-Payments
A fixed sum of money may be placed with the other party as security for performance of the contract. This is forfeited if the depositing party fails in its undertaking. The deposit may be returned or applied as part payment when the depositor has duly performed its obligations. However, under Article 14 of the ECL and Article 89 of the General Principles, if the party accepting the deposit fails in performance, it must pay back double the deposit amount.
Credit Guaranties
A third party guarantor may promise to ensure the performance of the contract obligations. The guarantor is held jointly and severally liable when the obligor fails in performing its obligations. In practice, the guarantor may be a bank or other financial institution. Formerly, it was customary for foreign companies to require guaranties from the Chinese [page 57] authority with administrative control over a business enterprise. This can no longer be done because the Chinese government deems it inappropriate for its branches to be directly involved in ordinary business transactions,
Collateral Guaranties
A contracting party (obligor) or a third party may provide collateral as security for performance obligations by encumbering part of its property in favor of the other party, or by delivering possession to the other party. When the obligor fails to perform the agreed obligations, the obligee may get paid from the proceeds gained by selling the encumbered property.[97] The obligee will continue to have a claim for any resulting deficiency.
When collateral is offered by the Chinese party for the performance of contract obligations, the American obligee should make certain that the Chinese business has full title to the encumbered property by inspecting its business license and asset certificates, American parties should also note that, unlike western countries, Chinese law does not permit land and other natural resources to be mortgaged. Although a Chinese state enterprise can encumber its own machinery and plant, the land it occupies cannot be so encumbered. An exception allows foreigners who rent land in China to mortgage their right to use the land.
B. Departures from Agreed Performance
Several distinct provisions of the FECL deal with circumstances under which a performance different from that originally contemplated may be rendered without resulting in liability for breach: excuse, assignment, modification, termination and extension,
1. Excuse
Unanticipated circumstances may relieve one party to a contract from all or part of its obligations to perform, Common law has categorized the cases as "impossibility," "frustration of purpose," "commercial [page 58] impracticability," and "mistake."[98] China has appropriated the French "force majeure." Whatever the label, excuse for impossibility or force majeure poses two major and distinct issues: what events trigger the excuse and what is the scope of the excuse once triggered?
With regard to triggering events, the common law focuses on the seriousness of the event and its foreseeability.[99] Implicit in the latter concept is the requirement that the event occur without fault and beyond the control of the excused party. In civil law jurisdictions, determination of excuse availability is not markedly different.
With regard to scope of excuse, there are at least five common law theories with respectable proponents.[100] Here, however, there has been a major difference between common law and civil law. At common law, excuse tends to be an all or nothing matter, grounded in the over-simplified conclusion in Taylor v. Caldwell,[101] that both parties are excused. With more finesse, civil law has developed a refined concept of partial excuse.
The excuse articles in the CISG and FECL reflect civil law influence. The former appears to have been the inspiration for the latter. Direct comparison of the texts is instructive. Article 79 of the CISG provides that a party is excused:
"[F]or a failure to perform any of his obligations if he proves that the failure was due to an impediment beyond his control and that he could not reasonably be expected to have taken the impediment into account [page 59] at the time of the conclusion of the contract or to have avoided or overcome it or its consequences."
The parallel language in the FECL is found in Article 24:
"Force majeure means an event that the parties could not have foreseen at the time of conclusion of the contract, both parties being unable to either avoid or overcome its occurrences and consequences."
The principle differences between the two is that the CISG extends excuse to mistakes about pre-contract circumstances, while the FECL excuse quite clearly is limited to post-contract events.[102]
Treatment of scope of excuse by the CISG is extremely spartan. The Convention recognizes a partial excuse, stating "[a] party is not liable for failure to perform any of his obligations...,"[103] and the excuse "... has effect for the period during which the impediment exists."[104] It does not expressly consider a total excuse, nor does it provide for restitution of deposits or other benefits conferred, or for recovery of reliance costs, except to state that the excuse article does not prevent "either party from exercising any right other than to claim damages. ..."[105]
The FECL does little better with scope of excuse. It provides that the excused party "shall be relieved from all or part of its obligations," "shall be relieved of liability for delayed performance" and "shall have the right to notify the other party that a contract is rescinded."[106] It thus provides for total as well as partial excuse. But there is no provision for restitution of deposits or other benefits or for recovery of reliance costs.
Under either the CISG or the FECL, a contract provision defining the scope of the excuse with respect to advance deposits and reliance costs would be useful. Indeed, the FECL may invite such a clause. The sentence following the definition of force majeure states that, "The scope of force majeure may be specified in the contract." It is not clear what [page 60] this authorization means. Does it authorize specification of the scope of triggering events or specification of the scope of the excuse?[107]
As contracting parties may always subject their obligations to pre-agreed conditions, it makes little sense for a statute to authorize parties to define the events of force majeure. They have that power in any event. The purpose of a force majeure statute is to protect parties from events that they did not provide for. It is consequently more logical to interpret the FECL clause as inviting agreement on the scope of excuse.
Under both the FECL and the CISG, the excused party must promptly inform the other party to allow it to mitigate losses.[108] In addition, under the FECL the excused party "shall also provide a certificate issued by the relevant agency within a reasonable period of time."[109] The quoted sentence requires further explanation. American parties claiming excuse should assemble documentation of force majeure events certified by local chambers of commerce or Chinese consulate offices or in affidavit form. Newspaper articles about the force majeure event are also useful. When Chinese companies claim excuse, the CCPIT is usually called on to provide the evidentiary documents. The "reasonable period" for providing evidence is customarily taken to be fourteen days.
There is general agreement that natural calamities, wars, serious turmoil and devastating accidents qualify as force majeure events. However, Chinese and American perspectives differ considerably as to whether government intervention, for example, refusal to issue export licenses or changes in the state policy, and labor strikes constitute "force majeure" events. Because China's Constitution excludes labor strikes from civil rights,[110] Chinese law does not recognize a labor strike as a force majeure event. In negotiations with the Chinese, few foreign companies have been successful in attempts to obtain Chinese agreement to a specific definition of strikes as an excusing event. In practice, however, Chinese often resort to the criterion of whether an event is beyond the parties' control. Typical wording in many Chinese sales form contracts refers to "an act beyond the seller's control." Like fluctuations in product quality, a strike caused by labor disputes within the seller's company is arguably controllable as far as the seller is concerned. On the other [page 61] hand, transportation strikes and other "third party" strikes beyond the seller's control may be viewed as force majeure.
Similar reasoning could lead to the conclusion that the events in Tiananman Square in June 1989 should qualify as force majeure events for contracts adversely affected by them.
In actual business transactions, foreign companies tend to be most concerned about the possible adverse effect of Chinese government intervention upon their dealings with the Chinese. Appreciating this concern, the Chinese have developed a distinction based on the time of the government action. Laws and regulations existing at the time of contract formation cannot be regarded as force majeure, whereas subsequently promulgated ones may be treated as force majeure due to their unforeseeability. In reality, subsequent laws generally do not affect pre-existing contracts, because most are intended to be non-retroactive to previous business transactions. The FECL contains an unusual explicit statement that joint venture contracts and natural resource development contracts will not be affected by "new legal provisions" while they are being performed.[111] The fact that this provision is limited to the two specified types of contracts creates an unpleasant area of uncertainty for other types of contracts.
To provide further incentives to foreign business, Chinese laws occasionally allow parties to an existing contract to benefit from new preferences specified in subsequent laws. For example, Article 41 of the FECL itself provides that, "If the parties consult and so agree, this law may be applied to contracts formed before the day this law goes into effect."
It is anticipated that future FECL regulations and interpretations will give more content to the scope of force majeure events. In the meantime, a statement made by MOFERT provides guidance. The statement provides that a force majeure event must satisfy these general conditions: (a) it is something that occurs after signing the contract and its occurrence cannot be foreseen by the parties at that time; (b) it results neither from negligence nor fault of the parties concerned; and (c) its occurrence and subsequent consequences cannot be avoided or overcome by the parties concerned.[112] [page 62]
2. Assignment of Contracts
Over the last century, common law has evolved to a system of relatively free assignment of contractual rights and duties. So long as the subject of the assignment is not inherently personal, most contracts may be assigned without the consent of the other party, in the absence of a clause prohibiting assignment. Even contractual clauses prohibiting assignments are severely restricted by statutory limitations.[113]
The ECL for domestic contracts does not contemplate assignment in the common law sense. Chapter III of the ECL, entitled "Modification and Rescission," expressly considers the transfer of contract rights and duties only with respect to a change in business structure.[114]
The more recently enacted General. Principles, however, does have an assignment provision. Article 91 provides:
"If a party to a contract transfers all or part of his contractual rights or obligations to a third party, he shall obtain the other party's consent and may not seek profit there from. Contracts which according to legal provisions are subject to state approval, such as transfers, must be approved by the authority that originally approved the contract, unless the law or the original contract stipulates otherwise."
Recognizing that foreign parties frequently wish to assign parts of contracts, the FECL obligingly provides a separate chapter on assignment.[115] The rule is that whole or partial assignments of rights or obligations require the consent of the other party.[116] For contracts formed with government approval, approval of the assignment is also required.[117] However, both the consent of the other party and approval of the government may be included in the original contract. The FECL expressly qualifies the requirement of government approval with "... unless otherwise stipulated in the approved contract."[118]
The CISG contains no provision on assignment. Assignments of Sino-American sale of goods contracts will therefore be subject to the FECL or (by reference under the closest connection test or by the parties' choice) to section 2-210 of the U.C.C. The drafting lesson is clear. All [page 63] Sino-American contracts in which there is any possibility of assignment should contain a clause consenting in advance to appropriately defined assignments.
3. Modification, Termination and Extension
The FECL contains provisions on alteration of contract duties by mutual agreement and alteration due to the other parties's breach or changed circumstances. The statutory treatment is overlapping. However, only modifications based on mutual agreement are discussed here. The other alterations of contract duties are discussed under the "Excuse" and "Remedies" parts of this article. The statute treats separately modification, termination and extension.
The FECL contemplates modification through "consultation and agreement between the parties."[119] A unilateral modification of the contract without the other party's permission amounts to breach of contract. The requirement for consultation and agreement is different in the ECL. Under certain circumstances (e.g., the State plan has changed), the ECL allows one party to unilaterally alter the contract, but, it must immediately notify the other party.[120]
As with contract assignment under Chinese law, the FECL, requires that major modifications of contracts that originally required government approval also be approved by the appropriate authorities.[121] "Major" here refers to changes to significant clauses. Typical examples are alterations in a joint venture contract of the parties' respective capital contributions or of business scope or duration. The writing requirement also applies since the FECL specifies that modifications "must be in written form."[122] Viewed essentially as a new contract, the modification agreement must also be concluded pursuant to other provisions of the FECL and other Chinese law governing formation of foreign, economic contracts. It follows, as under Western law, that modification agreements must be without duress, fraud, illegality or other invalidating factors. [page 64]
For a sale of goods contract within the CISG, modifications are not generally required to be in writing.[123] Since China's reservation to the CISG was to Article 11 and did not include Article 29, the contract modification Article, there is a resulting uncertainty about the effect of an oral modification to Sino-American sale of goods contracts.[124] To avoid this problem, all modifications of Sino-American contracts should be in writing unless the parties have made an effective designation of other law that does not require a writing.
One of the greatest confusions in the common law of contracts is created by the use of the word "rescission." This term is used to describe both termination by mutual agreement and a unilateral right to terminate due to the other party's breach. In the FECL the Chinese addressed, but did not solve, this confusion. The FECL uses the terms, "termination," "rescission," and "suspension of performance" in a partially overlapping manner. Three distinct consequences are being described: (1) rights created by subsequent mutual agreement; (2) rights resulting from unanticipated external circumstances (force majeure); and (3) rights resulting from a material breach by the other party.
Under the FECL, "termination" spans (1) and (2), although it is primarily concerned with mutual agreement situations. "Rescission" and the lesser remedy of "suspension of performance" span (2) and (3).[125] The CISG introduces the term "avoidance" to describe (3). Rescission (or avoidance) and suspension of performance are discussed below under the section on remedies.
The circumstances under which a foreign economic contract is terminated are listed in Article 31 of the FECL:
"(1) the contract has already been performed in accordance with the agreed terms; (2) an arbitration body or a court has decided that the contract shall be terminated; or [page 65] (3) the parties consult and agree to terminate the contract.[126] Contract termination clauses triggered by bankruptcy, insolvency or liquidation of one of the parties are upheld under case (1)."
Early termination is not treated as a major modification by the FECL. Even for government approved contracts, approval or reporting of terminations is not generally required. The FECL's writing requirement does not apply to terminations. However, other special laws may require approval of terminations of specialized contracts within their scope.
The ECL list five grounds for "change or termination" of domestic Chinese contracts. These range from party agreement that does not "affect the implementations of State plans" to impossibility and a change in State plans. Termination under the ECL requires timely notice and compensation of losses.[127]
Under the CISG, an early termination would be treated as any other modification. However, a writing would not be required because Chinese law does not require a writing.
It has been noted [128] that extension of a contract's term by pre-agreement is authorized by Article 14 of the FECL, subject to other statutory limits on contract duration. Even without pre-agreement, an extension may be achieved as a mutually agreed modification. Many Sino-foreign contracts contain an automatic extension clause. Others require consultation on extension during a specified time period, usually six months, before the contract term expires.
Under the CISG, an extension agreement would be treated as any other modification. A writing should be used due to the uncertainty created by China's reservation to the Convention.
In interpreting the FECL remedy articles,[129] it is helpful to understand the role of specific performance in Chinese law and the Chinese economy. [page 66]
1. Specific Performance
For many domestic Chinese contracts, specific performance is the primary remedy. Damages are a secondary remedy that often are not allowed as long as specific performance is available. The ECL compels the breaching party to continue its performance if the aggrieved party so demands.[130] This emphasis on specific performance of domestic contracts reflects the Chinese view that the State plan is fulfilled through performance of economic contracts. Further, in a planned economy, the market for substitute performance may be very limited or nonexistent.[131] However, in limited circumstances, damages may be the first remedy granted by the court. If a contract does not fall under the state plan, such as contracts for those products or services exceeding the goals set for business entities by the State, damages may be the primary remedy instead of specific performance. This illustrates the market side of the Chinese economy, which is still only a small portion of the total picture.
For contracts within the CISG, specific performance is also the primary remedy.[132] However, in a unique limitation, Article 28 provides that a court is not bound to order specific performance unless it "... would do so under its own law in respect of similar contracts of sale not governed by. .." the Convention. This limitation is likely to lead to forum shopping. American courts may invoke Article 28 to limit specific performance to those situations where it is authorized by Article 2 of the U.C.C.[133]
Surprisingly, the FECL contains express provisions only for damages. Specific performance, if allowed, must be inferred from a reference [page 67] to "other reasonable remedial measures."[134] It is expected that this phrase in the FECL will be construed to include specific performance. This would seem to follow from the primary role accorded to specific performance in domestic Chinese contracts. Moreover, Article III of the General Principles states that civil liability for breach of contract includes "the right to demand fulfillment" of the broken obligations.[135]
The FECL suggests that, if after pursuing other remedies, presumably including specific performance, the aggrieved party is not fully compensated for loss, it may still seek damages.[136] Similar language appears in Articles 45 and 61 of the CISG.
2. Compensatory Damages
Compensatory damages are the cornerstone remedy under the FECL. From the brief statutory language it is not clear whether damages are determined by a common law contract-expectancy approach or by a tort reimburse-reliance approach. The issue is whether consequential damages, such as lost profits indirectly resulting from contract breach, are recoverable.
Article 18 of the FECL states merely that the aggrieved party "is entitled to claim damages or demand other reasonable remedial measures ...."
Article 19 contains the only definition of the measure of damages:
"The liability of a party to pay compensation for the breach of a contract shall be equal to the losses suffered by the other party as a consequence of the breach. However, such compensation may not exceed the loss which the party responsible for the breach ought to have foreseen at the time of the conclusions of the contract as a possible consequence of a breach of contract."
This language expresses two limitations on the measure of damages:
(1) a causal connection, twice expressed in a "consequence" phrase,[137] and (2) foreseeability. Foreseeability is appropriate to limit expectancy [page 68] consequential damages; it is not appropriate to limit tort damages and has only a marginal common law role in measuring contract reliance costs, The prominent foreseeability limitation is strong evidence that the damages measure was intended, and will be interpreted, to include common law expectancy. The foreseeability limit seems to be based on Hadley v. Baxendale.[138] It refers to foreseeability at the time of contracting, not at the time of breach.
The Supreme People's Court's Answers on Applying the FECL help clarify this point. They stipulate that compensable loss from breach includes "injury to property, deduction in quantity or quality, destruction of the property and the expenses incurred from mitigating or eliminating the loss, plus the benefits that could otherwise be acquired if the contract had been duly performed ....," The Answers go on to make clear that "benefit that could otherwise be acquired" includes loss of profits that the breaching party ought to have foreseen.[139]
For goods contracts within the CISG, Article 74 also authorizes damage, including lost profits limited by foreseeability at the time of entering the contract. In the absence of an explicit profit provision in the FECL, Chinese courts and arbitral tribunals may look to the CISG provisions as evidence of international practice in determining damages for loss. No decided cases on this issue are presently available in China.
There is some thought among Western lawyers that Hadley v. Baxendale started the expectancy remedy off on the wrong foot by defining foreseeability with reference to the time of contracting, rather than some later time. Clearly this "wrong foot" has been carried forward under both the CISG and the Chinese FECL. To establish the requisite foreseeability, a foreign party may formally notify the Chinese parties of its specific purpose during the contract negotiation. Some experienced foreign companies, have begun to employ this strategy as a part of contract negotiations in China.
3. Duty to Mitigate
Under common law, four judicial limitations on the expectancy remedy evolved: (1) foreseeability; (2) causation; (3) certainty; and (4) mitigation. We have seen that the FECL, in Article 19, addresses foreseeability and causation, No language in the Chinese statute alludes to certainty. However, Article 21 of the FECL does impose a duty to mitigate on the aggrieved party. The non-breaching party is required to "... [page 69] promptly take appropriate measures to prevent the loss from becoming severer. ..." If the loss increases because of its failure to mitigate, the aggrieved party has no right to demand damages for the increased portion of the loss. Expenses of mitigation are added to the damages recoverable by the aggrieved party. In similar language, Article 77 of the CISG also requires mitigation for contracts within its scope.
The liability for breach provisions in the ECL for domestic Chinese contracts are detailed for each of the ten types of economic contracts separately regulated. There is no reference to a general duty to mitigate, except as a comparative fault provision in Article 32 might be so interpreted: "If both parties are at fault, in accordance with the actual conditions, each party shall be commensurately liable for breach of the contract that is due to its fault." However, the General Principles states a general duty to mitigate, requiring a non-breaching party that is suffering losses to "take prompt measures to prevent the losses from increasing ...."[140]
The role of a duty to mitigate in a legal system where the primary remedy is specific performance is not clear. What mitigation is appropriate if specific performance is ordered? Does the availability of substitute performance limit the specific performance remedy? The CISG and the FECL address this issue in almost identical language.[141] Under each, the result of a failure to mitigate is a reduction in compensatory damages. These provisions can be read to confine the duty to mitigate to those cases where damages are sought and to render the duty inapplicable to requests for specific performance.[142]
4. Payment of Interest
Both the CISG, pursuant to Article 78, and the FECL, pursuant to Article 23, provide for the payment of interest on any amount "in arrears" in almost identical language. In addition, Article 84 of the CISG requires the seller to pay interest on any price refund. A contract term specifying the rate of interest would be useful.[143] [page 70]
At common law, the question of validity of liquidated damage clauses is clouded by historical abhorrence of penalties. A valid clause must be a reasonable forecast of anticipated damages, and ideally should be set in a context where actual damages are inherently difficult of accurate ascertainment.[144] Valid clauses must not be intended as a penalty and some courts have held that they must not be intended to make nonperformance more expensive than performance or even as a "spur" to performance.[145] Elaborate verbal formulations attempting to tight walk on the tension between the "reasonableness of the forecast" and "difficulties of accurate ascertainment" have crept into both the Restatement of Contracts and the U.C.C.[146] Domestic Chinese law wisely ignores this historical baggage.
For domestic contracts, the ECL recognizes and sanctions a punitive aspect of liquidated damages (sometimes translated "breach fees") which are higher than actual damages and equivalent to penalties for breach.[147] On the other hand, when actual loss exceeds the liquidated damage amount, Article 35 of the ECL requires the breaching party to make up the difference. Significantly, this is a one way street, no statutory language requires an adjustment if liquidated damages are greater than actual damages, For certain designated domestic contracts, regulations fix statutory damages that are compulsory and prevail over liquidated damages agreed to by the parties.
For foreign-party contracts, the FECL has been tempered with a common law influence, Even so, it appears that some liquidated damages clauses, which would be invalidated by common law tests, would survive under the FECL. Thus, this is an area in which the question of what law governs may be of primary importance.
Article 20 of the FECL authorizes the inclusion of a liquidated damage provision that either specifies damages for breach as a "certain amount" or specifies the "method for calculating" damages. There is no provision for statutory liquidated damages in the absence of a contractual [page 71] provision. The influence of common law is reflected in the further provision: "[I]f the contractually agreed breach of contract damages are far more or far less than is necessary to compensate for the losses resulting from the breacJ1, the party concerned may request an arbitration body or a court to reduce or increase them appropriately."
To avoid complex problems of proof in ascertaining damages, many form contracts used by Chinese FTCs contain a "penalty clause" specifying that the seller shall pay a "penalty" of a certain percentage (typically five percent) of the value of goods delivered late. This practice is intended to facilitate the easy and speedy payment of damages, as well as to stimulate the supplier to deliver the goods on time. Such a clause is enforceable under domestic Chinese law. It is believed that the clause would be upheld under the FECL, although it might well be invalidated by a common law court. Chinese lawyers view the FECL provision as reflective of the Western approach, and have begun to advise their Chinese clients not to use, the term "penalty" in contract damage clauses.
The CISG does not refer to "liquidated damages" or "penalties" or retention of deposits: A liquidated damage clause is permissible in a contract within the CISG, but the "validity" of the clause may be determined under whatever law would be applicable to the contract in the absence of the Convention.[148] Therefore, the choice of law issues is of significance whether or not the underlying contract is within the CISG.
6. Rescission, Avoidance and Suspension of Performance
The FECL authorizes rescission as a remedy for breach and as an action that may be taken in response to excused non-performance or occurrence of pre-agreed conditions.[149] The lesser remedy of suspension of performance is also authorized in circumstances that may be either a breach or excused non-performance.[150] [page 72]
The CISG uses the term "avoidance" instead of "rescission."[151] Avoidance is available after a fundamental breach by either party [152] and after lesser breaches when the breaching party has failed to perform after an additional period of time noticed by the non-breaching party.[153] Avoidance is also authorized prior to the time of performance if "... it is clear that one of the parties will commit a fundamental breach ....""[154] Thus avoidance is closely tied to the fundamental breach concept. There is no perfect tender rule in the CISG and a buyer may not avoid a contract by rejecting goods with minor non-conformities, as is seemingly authorized by section 2-601 of the U.C.C.[155] Unlike rescission under the FECL, avoidance is not available, following a force majeure event.
Under both the CISG and FECL, avoidance, or unilateral rescission, is effected through a written notice.[156] Although the rescission of contracts, whose formation are required to be approved by the authorities, is not subject to approval by the original authorities, it must be reported to the original authorities for the record.[157]
Under the FECL, when one party has "conclusive evidence that the other party is unable to perform the contract,"[158] it may temporarily suspend its performance of the contract to avoid subsequent losses, but must immediately inform the other party. Here "conclusive evidence" means proof of the occurrence of a force majeure event, of insolvency or bankruptcy of the other party, or loss or destruction of a specified subject matter of the contract. Any such evidence may relieve one party from performance for the time being. However, when the other party provides a full guarantee of its performance, the first party must continue performing. To refuse to perform after receiving a full guaranty of the other party's performance will place the first party itself in breach. To refuse to perform without sufficient "conclusive evidence" is also a breach.[159] [page 73]
Suspension of performance is authorized by the CISG if "... it becomes apparent that the other party will not perform a substantial part of his obligation. ..."[160] Immediate notice of suspension is required. If the other party "provides adequate assurance of his performance," the suspension must be terminated.[161]
7. Other Remedies
We have noted that in addition to compensatory damages plus interest, the FECL refers only to "other reasonable remedial measures."[162] This will surely be amplified when FECL implementary rules are promulgated. In the meantime, parties have recourse to the General Principles, which suggest that other remedies include, inter alia, restitution, repair, reworking or replacement and "extensions of apologies."[163] The phrase should also include other remedies agreed upon by the parties, such as reduction of contract price and even compensation in future transaction.[164]
The CISG specifies numerous remedies in addition to specific performance, damages, avoidance and suspension. These include restitution of price plus interest (Art. 84); restitution of the goods (Art. 84); resale of the goods (Art. 88); and reduction of the price (Art. 50).
The buyer's remedy of reduction of the price is unknown at common law.[165] Under the CISG, this option is available to the buyer if the seller delivers non-conforming goods. The amount of the reduction is "[i]n the same proportion as the value that the goods actually delivered had at the time of delivery bears to the value that conforming goods would have had at that time."[166] The result is similar to damages allowed by section 2-714 of the U.C.C.[167] However, the significance of the price reduction remedy is that it is available to the buyer even when the seller is not liable for damages, for example, when the non-conformity is [page 74] caused by an excusing event.[168] The buyer's right to reduce the price is subject to the seller's right to cure.[169]
If an international sale of goods results in personal injury, the interplay of American law and the CISG creates another remedial twist. In case of breach of warranty resulting in injury to person or property, American law departs from contract principles (i.e. foreseeability) and embraces tort remedies by permitting recovery for injury "proximately resulting from any breach of warranty."[170] The CISG does not apply "... to the liability of the seller for death or personal injury caused by the goods to any person."[171] Therefore, American parties should be aware that even for contracts otherwise within the CISG, liability for personal injury may be defined by the more generous American rule.
D. Resolution of Contract Disputes
An old Chinese proverb says: "To enter a court of law is to enter a tiger's mouth." This reflects the Confucian philosophy that conflict interferes with societal harmony and should be avoided. The Chinese have a strong cultural bias toward settlement of commercial disputes through alternatives to litigation.
Chinese dispute resolution involves four concepts. Consultation refers to discussion between only the disputants. The preferred Chinese term for this activity is "friendly consultation." Mediation and conciliation involve a third party. A mediator makes recommendations, a conciliator does not. However, in a looser usage the terms are often used interchangeably. In arbitration the third party arbitrator makes a decision that is binding on the disputants, but may be subject to challenge.
Parties to domestic contracts are required by the ECL to try to resolve their disputes through consultation.[172] Only if consultation is unsuccessful may an application be made for mediation or arbitration or may a suit be commenced in court. Arbitration is conducted by arbitration commissions within the Industrial and Commercial Administration. Parties have one year after a dispute arises to apply for arbitration. The [page 75] one-year period begins at the time the complainant knew or should have known of the breach. The arbitration decision is theoretically not appealable. However, if either or both parties are dissatisfied with the decision, they may file suit in the People's Court within fifteen days after receiving an arbitration award.[173] The resulting litigation is essentially de novo, but the Chinese court will normally acquaint itself with the arbitration result.
The FECL encourages, but does not require, parties to foreign party contracts to settle their disputes "through consultation, or through mediation by a third party."[174] However, if this is unsuccessful, or if either party so insists, they may proceed directly to arbitration or litigation. The time limit for applying for arbitration or filing suit is four years for a sale of goods contract and that "stipulated separately by law" for any other contract.[175] Statute of limitations for other types of contracts do not yet generally exist, except as provided in Art. 135 of the General Principles.[176] The FECL expressly authorizes arbitration by a non-Chinese tribunal.[177] Unlike the ECL, the FECL does not authorize dissatisfied parties to commence litigation after arbitration.
For foreign party contracts, China's International Economic and Trade Arbitration Commission ("IETAC") will become involved at the consultation stage if so requested by both parties. It will engage in a detailed fact finding process, disclose all information gathered to both parties and point out the strengths and weaknesses of the parties' claims. The average time for completion of an IETAC-assisted consultation is about six months.
Conciliation of foreign party contracts is done by IETAC secretaries at any time before or after arbitration has commenced (but before an arbitration decision). The same fact finding analysis used in IETAC-assisted consultation takes place. However, in a conciliation, the parties may request, or the conciliator may offer, recommendations. [page 76]
To make conciliation more acceptable to American parties, the CCPIT's legal department and the American Arbitration Association, in 1977, created a new procedure called "joint conciliation." In a joint conciliation, the Chinese and American parties each apply to the arbitration institutions in their own country. These appoint, on an equal basis, one or more conciliators to form a joint conciliation team. The United Nations Commission on International Trade Law has drawn on this practice in formulating its conciliations rules for worldwide recommendation.
American parties should consider including joint conciliation provisions as an alternative to other dispute settlement devices.
The CISG contains no provision on either dispute resolution or Statute of Limitations.[178] Under U.C.C. section 2-725, parties have four years to commence an action. Their agreement may reduce this period, however, to any time limit between one and four years. For Sino-American sale of goods contracts, parties should be able to achieve a limitation period of less than four years by express agreement to the shorter period in the contract.
A peculiar aspect of Chinese consultation or mediation is that it does not stop with the commencement of arbitration or litigation. Continued consultation and mediation are encouraged even while arbitration or litigation are under way. One process known as "court mediation" involves the People's court in the mediation process.
When entering a Sino-American contract, the question will be whether to include a clause dealing with dispute resolution. Consultation, conciliation and mediation will be urged whether or not the contract contains a dispute clause.
Because the FECL expressly acknowledges the propriety of arbitration by a non-Chinese tribunal, American parties should consider taking advantage of this method of dispute settlement.[179] If the contract does not contain agreement on applicable law and is not within the CISG, the choice of law may also be determined by a neutral tribunal. It has become common practice for Chinese-foreign contracts to designate Stockholm as the place of arbitration. Less common, but frequently designated alterative arbitration sites are Tokyo, London, Geneva, New York, Hong Kong and Moscow and other capitals of the Eastern European countries. [page 77]
An arbitration clause in a Sino-American contract, or a written agreement to arbitrate subsequently arrived at, will preclude resort to litigation. Under the FECL, it is clear that even a clause designating a non-Chinese arbitral tribunal will deprive the people's courts of jurisdiction,[180] An arbitral award may be enforced in the Chinese courts. As a historical matter, such enforcement has seldom been necessary because Chinese parties voluntarily comply with the awards.
A well drafted arbitration clause may confer upon the arbitration tribunal not only the authority to decide the specific dispute, but also the authority to decide the scope of the dispute clause and the law that governs dispute resolution. Consequently, a well drafted arbitration clause should:
identify the arbitration tribunal or the method of selection of the tribunal;
identify the place or location of the arbitration proceeding;
consider whether the scope of disputes subject to arbitration should be left to the arbitrators, or defined in the clause;
consider whether the determination of applicable law should be left to the arbitrators;
consider whether a contractual. period of limitations should be established for submitting a dispute to arbitration; and
consider whether a joint conciliation clause should be included.
From the foregoing, it may be seen that Chinese law offers a wide opportunity for parties to Sino-American contracts to agree on choice of law, choice of forum and choice of method of dispute resolution. Absent such agreement, if the transaction is a sale of goods, the provisions of the CISG will apply. If the transaction is not a sale of goods, there will be a search for the country with the closest connection. Even when Chinese contract law is applicable, this need not be of great concern to American parties so long as differences, especially those relating to the requirement of a writing, consideration, liquidated damages and specific performance, are understood. The skeletal contract code adopted by China is fair and workable. Differences between Chinese contract law and the CISG and common law are summarized in Appendix I. [page 78]
For the non-Chinese speaking person, interpretation of Chinese law poses unusual hurdles. Significant variations exist between accepted English translations of the principle statutes. In some cases it appears that translations have been made by persons not fully conversant with the nuances of English usage or the peculiar perversity of the Anglo-American legal mind, for example, the "rescission" "termination" distinction in FECL Articles 29 and 31.[181] In other cases it appears that the literal meaning of the Chinese word has been accurately translated, but Chinese usage has gradually changed and the statute is understood by Chinese lawyers to have a different meaning which has not yet been reflected in a formal amendment. For example, "legal person" in ECL Article 2 is now read by Chinese lawyers as "legal entity." In still other cases, the meaning to key statutory terms, most notably "settlement of contract disputes" in Article 5 of the FECL, has been elaborated by formal or informal advisory opinions of the Supreme People's Court, which frequently are not available in English.
However, the uncertainties about doing business in China after Tiananmen Square relate less to what China's laws are than to how they may be applied or changed in the future. It is clear that China's present leadership would like to find a way to maintain or increase foreign investment while curtailing exposure to foreign ideas. In the short term we are likely to see some tightening of intellectual exchanges (scientific, artistic, and academic) and discouragement of private domestic profit making, coupled with enhanced inducements for foreign investment and technology.
American investment will find congenial contract laws, but will it find congenial law enforcement? Little in reports received from China during the last half of 1989 gives reason to believe that its legal system is capable of resisting governmental pressure or of protecting individual rights or property rights. While it seems unlikely that China's leadership would move against foreign investment, China's present legal system is incapable of standing in its way if it chooses to do so. The question facing American businesses contemplating investments in China is whether an environment favorable to foreign investment will be maintained. It will probably be an extended time after the passing of the current leadership before we have an answer. [page 79]
Common Law -- A sufficient memorandum signed by a party to be charged required for sale of goods over $500.00 (U.C.C. �� 2-201), lease of goods over $1,000 (U.C.C. �� 2A-201) and certain other types of contracts.
ECL -- Writing signed by both parties required (Art. 3).
FECL -- Requires writing signed by both parties or exchange of forms satisfying mirror image rule. In latter case, either party may require a confirming letter (Art. 7).
CISG -- No writing requirement (Art. 11), but this is subject to China's reservation to this article, effectively making Article 7 of the FECL applicable.
Common Law -- Bargained for detriment is generally required subject to many exceptions (Restatement 2d � 71).
ECL -- No consideration requirement exists, but a strong principle of "equality and mutual benefit" is stated (Art. 5).
FECL -- Same as ECL (Art. 3).
CISG -- No consideration is required.
Validity/Governmental Approval
Common Law -- Not applicable, except export of some defense items is regulated.
ECL -- Approval and supervision is required for most domestic economic contracts.
FECL -- Governmental approval is not generally mandated, but is required if specific laws require approval for specific types of contracts (Art. 7).
CISG -- Not applicable.
Validity/Duress
Common Law -- Duress and unconscionability require a showing of more than unequal bargaining power or disproportionate benefit to invalidate contracts (U.C.C. �� 2-302). But penalty notions invalidate Liquidated damages clauses (U.C.C. � 2-718(1)). [page 80]
ECL -- Principle of equality and mutual benefit may give broader swath to duress. Conversely, liquidated damage clauses are more broadly upheld (Art. 5).
CISG -- Article 4(a) excludes application of Convention to issues of validity. The extent to which courts will use this to impose local policies and inhibit uniformity is unknown.
Common Law -- Offer is freely revocable even when it states otherwise unless it is an option supported by recitation of purported consideration, a firm offer within U.C.C. �� 2-205, or followed by detrimental reliance.
ECL -- Contains no provisions. But Chinese practice distinguishes true and false offers. True offer is irrevocable.
FECL -- Same as ECL but oral offer cannot be accepted to form a contract under FECL (Art. 7).
CISG -- Offer is revocable unless it states otherwise or is followed by reasonable reliance (Art. 16(2)). No consideration is required for firm offer. China's reservation makes CISG rules inapplicable to oral offers.
Common Law -- Acceptance is effective on dispatch (mail-box rule). Overtaking retraction meets a mixed fate. Mirror image rule has been modified by U.C.C. �� 2-207(1) but not by the Restatement. Contracts in conduct under U.C.C. �� 2-207(3) consist of agreed terms and U.C.C. gap-fillers.
ECL -- Contains no provisions. Under Chinese practice, acceptance is effective on receipt. Mirror image rule is strictly followed. Oral acceptance is ineffective.
FECL -- Same as ECL except that request for conforming letter may undo contract formed by forms (Art. 7).
CISG -- Acceptance is generally effective on receipt (Art. 18(1)). However, dispatch cuts off revocability of offer (Art. 16(1)). Overtaking retraction is effective. Limited modification of mirror-image rule (Art. 19(1)). Provisions recognizing contracts in conduct and oral acceptances are subject to China's reservation. [page 81]
Excuse/Force Majeure
Common Law -- Serious and unforeseeable subsequent event give rise to total excuse. No agreement on theories for limited excuse or loss apportionment. Mistake theory applied to pre-contract events. U.C.C. provides excuse for casualty to identified goods (�� 2613) and commercial impracticability (�� 2-615).
ECL -- Partial or complete exemption from liability for breach with governmental approval (Art. 34).
FECL -- Limited to subsequent events that were unforeseeable with consequences that were unavoidable. Partial as well as total excuse is recognized, but no provision for loss apportionment (Art. 24). Notice followed by proof of event is required (Art. 25).
CISG -- Applies to pre-and post-contract events.
Notice must be given (Art. 79(4)). Test is impediment beyond control, unforeseeability and unavoidable consequences. Applies to partial excuse. Excuse is limited to relief from liability for damages; buyer may still reduce price. No provision for deposit refund or loss apportionment.
Common Law -- Generally free assignability unless inherently personal or valid clause prohibits. Statutes limit anti-assignment clauses (U.C.C. �� 2-210 and �� 9318).
ECL -- Does not contemplate assignment. The General Principles authorize assignment with consent (Art. 91).
FECL -- Authorizes assignment with consent of other party. If governmental approval or original contract was required, approval of assignment is also required. Approval clause may be placed in original contract (Art. 27).
CISG -- Contains no provisions on assignment; FECL or U.C.C. �� 2-210 (2) will apply.
Common Law -- Consent and consideration (theoretically) required. U.C.C. �� 2-209 dispenses with consideration. [page 82]
ECL -- Unilateral modification is possible to conform to state plan. Notice is required. Modification by agreement is authorized provided state plan is not affected (Art. 27).
FECL -- Written consent of both parties required (Art. 28). No consideration required. Major modifications of approved contracts must also be approved.
CISG -- Requires neither writing nor consideration, only mere agreement (Art. 29). It is unclear whether China's reservation to Article 11 of the CISG will make China's writing requirement applicable to modifications under Article 29 of the CISG.
Common Law -- Termination by mutual consent does not require new consideration or a writing.
ECL -- Early termination by agreement is authorized if it does not affect state plans (Art. 27). Notice and compensation may be required.
FECL -- Early termination by agreement is effective without a writing. approval or reporting (Art. 31 & 32). Other laws may require approval of early termination of specific types of contracts. Unilateral rescission requires notice and reporting (Art. 19, 32, 33). Conditions for early termination may be placed in original contract (Art. 14).
CISG -- Contains no specific provision.
Common Law Like any other modifications, consideration and a writing may be required.
ECL -- Contains no specific provisions on extension. Limited modifications by mutual agreement are authorized (Art. 27).
FECL -- Mutual agreement and a writing are required. Pre-agreement in original contract is permissible (Art. 14). Other laws may cap contract duration.
CISG -- Contains no provision, therefore would be treated like any other modification.
Specific Performance [page 83]
Common Law -- Available only when remedy at law is inadequate. For sale of goods, available only when goods unique, or in other proper circumstances (U.C.C. �� 2-716).
ECL -- This is the primary remedy (Art. 35).
FECL -- Compensatory damages are stated to be primary remedy with specific performance to be implied from "other remedies." Practice should make this readily available.
CISG. -- Specific performance is the primary remedy (Art. 46(1) and 62), but is subject to Article 28 authorization for local courts to deny when they would not enter such an order under their own law.
Common Law -- Compensatory damages are the primary remedy including foreseeable loss of profits.
For goods, measure is market-contract price differential (U.C.C. �� 2-708, �� 2-713), plus consequential damages (U.C.C. �� 2-715).
ECL -- Requires payment of "breach of contract damages" (liquidated damages) and compensatory damages. Arts. 35-37. Circumstances requiring damage payments are separately stated for each of the ten types of contracts. Arts. 38-47.
FECL -- Compensatory damages, liquidated damages and other remedies are authorized. Art. 18. Compensatory damages are equal to loss suffered to extent foreseeable at the time of contracting. Art. 19.
CISG -- Authorize damages for loss, including loss of profit subject to foreseeability limitation at time of contracting. Art. 74. When contract is avoided, party claiming damages may recover market/contract price differential at time of avoidance. Art. 76.
Common Law -- Mitigation is a pervasive requirement (U.C.C. �� 2-704(2), 2-706, 2-712 and 2-715(2)).
ECL -- Other than comparative fault provision in Article 32, there is no express requirement. Mitigation is required by the General Principals (Art. 114). Failure to mitigate results in loss of right to compensation for aggravated loss. [page 84]
FECL -- Requires mitigation (Art. 22). Mitigation expenses are added to damages. Failure to mitigate reduces damages but does not appear to limit right to specific performance.
CISG -- Mitigation is required (Art. 77). Failure to mitigate results in damages reduction, but does not detract from specific performance.
Common Law -- Pre-judgement interest is not generally recoverable in absence of contract provision.
ECL -- No provision considers interest.
FECL -- Interest allowed on "the amount in arrears" (Art. 22).
CISG -- Interest allowed on "any sum in arrears" (Art. 18), and on any price refund (Art. 84(1)).
Common Law -- Clauses enforced unless a "penalty" when compared with anticipated or actual harm (U.C.C. ��. 2-718(1); Restatement 2d. � 356).
ECL -- Requires "breach fees" as a penalty for breach. Penalties are not reduced, but additional damages are required if actual damages ate greater than liquidated amount (Art. 35). Some statutes fix statutory damages.
FECL Liquidated damages are authorized. If actual damages are "far" more or less, the parties may request an adjustment.
CISG -- Contains no provision. Liquidated damages clauses are permissible, but the Convention's exclusion of validity questions may invite application of local policies.
Rescission and Avoidance
Common Law -- Recognizes unilateral right to rescind as a result of serious breach by the other party. Rescission is also used to describe termination by mutual agreement.
ECL. -- Art. 27 authorizes modifications and a unilateral "recession" in five enumerated circumstances including agreement. [page 85]
FECL -- Uses "rescission" to describe a unilateral right to terminate triggered by serious breach, serious force majeure or occurrence of pre-agreed conditions (Art. 29). Rescission of part is possible (Art. 30).
CISG -- Uses "avoidance" to describe remedy for fundamental breach or lesser breaches followed by failure to use opportunity to cure (Art. 49 & 64). Avoidance releases both parties from the contract, subject to liability for damages already due and restitution (Art. 81-84). Avoidance is not a remedy for force majeure.
Common Law -- No pre-Litigation requirement. Written arbitration clauses are enforced and will preclude litigation if arbitration is clearly made a condition to litigation.
ECL -- Requires consultation before arbitration or litigation. Disappointed party following arbitration may bring court action within 15 days.
FECL -- Pre-litigation consultation is encouraged but not required. There is no provision for appeal from arbitration. Consultation or mediation may continue after arbitration or litigation has begun.
CISG -- Contains no provision.
ECL Under Chinese law, legal entities with foreign investment, such as Chinese-foreign joint ventures and wholly-owned foreign Chinese enterprises, are regarded as Chinese "legal persons." Contracts between such entities and Chinese parties are within the ECL. The investment contracts of joint ventures are required by Article 5 of the FECL to be governed by Chinese law and specifically enacted Chinese statutes are applicable.
FECL -- Contracts between Chinese businesses and foreign parties are within this statute unless:
Choice of law by the parties or the closest connection test refers to other law; or
Choice is left to arbitration tribunal; or
Contract is for international transportation; or
The CISG is applicable. [page 86]
CISG -- Sino-American contracts for the sale of goods are within CISG in absence of party agreement on other law. If parties exclude CISG, the FECL would apply and refer to law of country with closest connection. Party agreement on applicability of United States law should be viewed as exclusion of CISG under Article 6, and agreement on applicable law under FECL Article 5. Issues not covered by CISG, such as validity, will be controlled by FECL unless the United States is found to have a closer connection. The writing requirement of FECL Article 7 should be assumed to apply unless parties have made an effective designation of other law. [page 87]
Law of the People's Republic of China on Economic Contracts Involving Foreign Interest
(Adopted at the Tenth Session of the Standing Committee of the Sixth National People's Congress, promulgated by Order No.22 of the President of the People's Republic of China on March 21, 1985, and effective as of July 1, 1985)
Chapter II The Conclusion of Contracts
Chapter III The Performance of Contracts and Liability for Breach of Contract
Chapter IV The Assignment of Contracts
Chapter V The Modification, Rescission and Termination of Contracts
Chapter VI The Settlement of Disputes
Article 1 This Law is formulated with a view to protecting the lawful rights and interests of the parties to Chinese-foreign economic contracts and promoting the development of China's foreign economic relations.
Article 2 This Law shall apply to economic contracts concluded between enterprises of other economic organizations of the People's Republic of China and foreign "enterprises, other economic organizations or individuals. (hereinafter referred to as "contracts"). " However, this provision shall not apply to international transport contracts.
Article 3 Contracts shall be concluded according to the principle of equality and mutual benefit and the principle of achieving agreement through consultation.
Article 4 In concluding a contract, the parties must abide by the law of the People's Republic of China and shall not harm the public interest of the People's Republic of China.
Article 5 The parties to a contract may choose the proper law applicable to the settlement of contract disputes. In the absence of such a [page 88] choice by the parties, the law of the country which has the closest connection with the contract shall apply.
The law of the People's Republic of China shall apply to contracts that are to be performed within the territory of the People's Republic of China, namely contracts for Chinese-foreign equity joint ventures, Chinese-foreign contractual joint ventures and Chinese-foreign cooperative exploration and development of natural resources.
For matters that are not covered in the law of the People's Republic of China, international practice shall be followed.
Article 6 Where an international treaty which is relevant to a contract, and to which the People's Republic of China is a contracting party or a signatory, has provided differently from the law of the People's Republic of China, the provisions of the international treaty shall prevail, with the exception of those clauses on which the people's Republic of China has declared reservation.
The Conclusion of Contracts
Article 7 A contract shall be formed as soon as the parties to it have reached a written agreement on the terms and have signed the contract. If an agreement is reached by means of letters, telegrams or telex and one party requests a signed letter of confirmation, the contract shall be formed only after the letter of confirmation is signed.
Contracts which are subject to the approval of the state, as provided for by the laws or administrative regulations of the People's Republic of China, shall be formed only after such approval is granted.
Article 8 Appendices specified in a contract shall be integral parts of the contract.
Article 9 Contracts that violate the law or the public interest of the People's Republic of China shall be void.
In case any terms in a contract violate the law or the public interest of the People's Republic of China, the validity of the contract shall not be affected if such terms are cancelled or modified by the parties through consultations.
Article 10 Contracts that are concluded by means of fraud or duress shall be void.
Article 11 A party which is responsible for the invalidity of a contract shall be liable for the losses suffered by the other party as a result of the contracts becoming invalid.
Article 12 A contract shall, in general, contain the following terms: [page 89]
(1) the corporate or personal names of the contracting parties and their nationalities and principal places of business or domicile;
(2) the date and place of the signing of the contract;
(3) the type of contract and the kind and scope of the object of the contract;
(4) the technical conditions, quality, standards, specifications and quantity of the object of the contract;
(5) the time limit, place and method of performance;
(6) the price, amount and method of payment, and various incidental charges;
(7) whether the contract is assignable and, if it is, the conditions for its assignment;
(8) liability to pay compensation and other liabilities for breach of contract;
(9) the ways for settling contract disputes; and
(10) the language(s) in which the contract is to be written and its validity.
Article 13 So far as it may require, a contract shall provide for the limits of the risks to be borne by the parties in performing the object; if necessary, it shall provide for the coverage of insurance for the object.
Article 14 Where a contract needs to be performed continuously over a long period, the parties shall set a period of validity for the contract and may also stipulate conditions for its extension and its termination before its early termination.
Article 15 In the contract the parties may agree to provide a guaranty. The guarantor shall be held liable within the agreed scope of guaranty.
The Performance of Contracts and Liability for Breach of Contract
Article 16 A contract shall be legally binding as soon as it is established in accordance with the law. The parties shall perform their obligations stipulated in the contract. No party shall unilaterally modify or rescind the contract.
Article 17 A party may temporarily suspend its performance of the contract if it has conclusive evidence that the other party is unable to perform the contract. However, it shall immediately inform the other party of such suspension. It shall perform the contract if and when the other party provides a sure guarantee for performance of the contract. If [page 90] a party suspends performance of the contract without conclusive evidence of the other party's inability to perform the contract, it shall be liable for breach of contract.
Article 18 If a party fails to perform the contract or its performance of the contractual obligations does not conform to the agreed terms, which constitutes a breach of contract, the other party is entitled to claim damages or demand other reasonable remedial measures. If the losses suffered by the other party cannot be completely made up after the adoption of such remedial measures, the other party shall still have the right to claim damages.
Article 19 The liability of a party to pay compensation for the breach of a contract shall be equal to the loss suffered by the other party as a consequence of the breach. However, such compensation may not exceed the loss which the party responsible for the breach ought to have foreseen at the time of the conclusion of the contract as a possible consequence of a breach of contract.
Article 20 The parties may agree in a contract that, if one party breaches the contract, it shall pay a certain amount of breach of contract damages to the other party; they may also agree upon a method for calculating the damages resulting from such a breach.
The breach of contract damages as stipulated in the contract shall be regarded as compensation for the losses resulting from breach of contract. However, if the contractually agreed breach of contract damages are far more or far less than is necessary to compensate for the losses resulting from the breach, the party concerned may request an arbitration body or a court to reduce or increase them appropriately.
Article 21 If both parties breach the contract, each shall be commensurately liable for the breach of contract that is its responsibility.
Article 22 A party which suffers losses resulting from a breach of contract by the other party shall promptly take appropriate measures to prevent the losses from increasing. If the losses are aggravated as a result of its failure to adopt appropriate measures, it shall not be entitled to claim compensation for the aggravated party of the losses.
Article 23 If a party fails to pay on time any amount stipulated as payable in the contract or any other amount related to the contract that is payable, the other party is entitled to interest on the amount in arrears. The method for calculating the interest may be specified in the contract.
Article 24 If a party is prevented from performing all or part of its obligations owing to force majeure, it shall be relieved of all or part of its obligations. [page 91]
If a party cannot perform its obligations within the contractually agreed time limit owing to force majeure, it shall be relieved of the liability for delayed performance during the aftereffect of the event.
Force majeure means an event that the parties could not have foreseen at the time of conclusion of the contract, both parties being unable to either avoid or overcome its occurrence and consequences.
The scope of force majeure may be specified in the contract.
Article 25 The party which fails to perform wholly or in part its contractual obligations owing to force majeure shall promptly inform the other party so as to mitigate possible losses inflicted on the other party, and shall also provide a certificate issued by the relevant agency within a reasonable period of time.
The Assignment of Contracts
Article 26 When a party assigns, wholly or in part, its contractual rights and obligations to a third party, it must obtain the consent of the other party.
Article 27 In the case of a contract which, according to the laws or administrative regulations of the People's Republic of China, is to be formed with the approval of the state, the assignment of the contractual rights and obligations shall be subject to 'the approval' of the authority which approved the contract, unless otherwise stipulated in the approved contract.
The Modification, Rescission and Termination of Contracts
Article 28 A contract may be modified if both parties agree through consultation.
Article 29 A party shall have the right to notify the other party that a contract is rescinded in any of the following situations:
(1) if the other party has breached the contract, thus adversely affecting the economic benefits they expected to receive at the time of the conclusion of the contract;
(2) if the other party fails to perform the contract within the time limit agreed upon in the contract, and again fails to perform it within the reasonable period of time allowed for delayed performance;
(3) if all the obligations under the contract cannot be performed owing to force majeure; or [page 92]
(4) if the contractually agreed conditions for the rescission of the contract are present.
Article 30 For a contract consisting of several independent parts, some may be rescinded according to the provisions of the preceding article while the other parts remain valid.
Article 31 A contract shall be terminated in anyone of the following situations:
(1) if the contract has already been performed in accordance with the agreed terms;
(2) if an arbitration body or a court has decided that the contract shall be terminated; or
(3) if the parties agree through consultation to terminate the contract.
Article 32 Notices or agreements on the modification or rescission of contracts shall be made in writing.
Article 33 In the case of a contract which, according to the laws or administrative regulations of the people's republic of China, is to be established with the approval of the state, any significant modification of the contract shall be subject to the approval of the authority which approved the contract, and the rescission of the contract shall be filed with the same authority for the record.
Article 34 The modification, recession or termination of a contract shall not affect the rights of the parties to claim damages.
Article 35 The contractually agreed terms for the settlement of disputes shall not become invalid because of the rescission or termination of a contract"
Article 36 The contractually agreed terms for the settlement of accounts and liquidation of a contract shall not become invalid because of the rescission or termination of the contract.
The Settlement of Disputes
Article 37 If disputes over a contract develop, the parties shall, as far as possible, settle them through consultation, or through mediation by a third party.
If the parties are unwilling to settle their dispute through consultation or mediation, or if consultation or mediation proves unsuccessful, they may, in accordance with the arbitration clause provided in the contract or a written arbitration agreement reached by the parties afterwards, [page 93] submit the dispute to a Chinese arbitration body or any other arbitration body for arbitration.
Article 38 If no arbitration agreement clause is provided in the contract, and a written arbitration agreement is not reached afterwards, the parties may bring suit in a people's court.
Article 39 The time limit for filing suit or applying for arbitration in a dispute over a contract for the purchase and sale of goods shall be four years, counting from the day when the party was aware or ought to have been aware of its rights' being infringed upon. The time limit for filing suit or applying for arbitration in a dispute over any other contract shall be stipulated separately by law.
Article 40 If new legal provisions are formulated while contracts for Chinese-foreign equity joint ventures, Chinese-foreign contractual joint ventures, or Chinese-foreign cooperative exploration and development of natural resources, which have been concluded with the approval of the state, are being performed within the territory of the People's Republic of China, the performance may still be based on the terms of the contracts.
Article 41 This Law may apply to contracts concluded before it goes into effect if this is agreed to by the parties through consultation.
Article 42 The State Council shall, in accordance with this Law, formulate rules for its implementation.
Article 43 This Law shall go into effect on July 1, 1985. [page 94]
* J.D., Harvard. Mr. Reiley. a professor at U.S.F. School or Law, teaches Contracts and Commercial Law. He has been a visiting professor at the Shanghai Institute of Foreign Trade (1987) and East China Institute of Politics and Law (1989).
** LLM., Shanghai Institute or Foreign Trade. Mr. Hu is a lecturer in the Economic Law Department. Shanghai Institute of Foreign Trade and affiliated with Shanghai Law Firm No.7. He has been a visiting Professor at the U.S.F. School of Law.
1. The authors wish to make it clear that Mr. Hu did not write and is not responsible for the content or the preface, the conclusion or any or the references in the text to Tiananmen Square.
2. The white "Goddess of Democracy" statue that became the symbol of the protests for the Western world had an obvious Western heritage. However, when Chinese use the word "democracy" they do not necessarily intend the same meaning as Americans. During May, 1989, 1 asked many demonstrators in Shanghai to tell me what the "democracy" protests were really about. Other than the chant, "Li Peng resign, Li Peng resign" which reverberated through the streets of Shanghai during this period, the specifics that I heard were "free press," "economic opportunity" and an end to "corruption in government."
3. Eckhouse, China's Upheaval Was Massacre for Tourism, San Francisco Chronicle, Sept. 29, 1989, at C 1, reports that the loss of tourist revenues in 1989. was $1.3 billion.
4. United Nations Convention on Contracts for the International Sale of Goods. U.N, Doc.A/Conf. 97/18, Annex II (1980). The Convention was signed by both China and the United States on December 11, 1986. It became effective on January 1, 1988. The Convention is referred to in the article as "CISG" or as "the U.N. Convention."
5. Law of the People's Republic of China on Economic Contracts Involving Foreign Interest, (Adopted at the Tenth Session of the Standing Committee of the Six National People's Congress. promulgated by Order No.22 of the President of the People's Republic of China on March 21, 1985, and effective July 1, 1985). A number of widely divergent English translations of this law are in common usage. The official English translation is reprinted in Appendix 2. All quotations in the text are drawn from it. The statute is referred to in the text as the Foreign Economic Contract Law ("FECL").
6. Economic Contract Law of the People's Republic of China. (Adopted at the Fourth Session of the Firth National People's Congress on December 13, 1981, and effective July 1, 1982). This statute is referred to as "ECL" in the text.
7. See supra note S.
8. General Principles of the Civil Law of the People's Republic of China (Adopted at the Fourth Session of the Sixth National People's Congress, promulgated by Order No.37 of the President of the People's Republic of China on Apri112, 1986, and effective as of January 1, 1987). This law is referred to in the text as the "General Principles."
9. ECL, Arts. 17-26 and 38-47.
10. These include Regulations on Economic Contract Arbitration and Rules on Economic Contract Certification.
11. The General Principles, Arts. 84-93.
12. Id. Arts. 111-116.
13. It will be seen, particularly with respect to liquidated damages, specific performance, and dispute resolution, that China's law applicable to domestic contracts is radically non-Western.
14. The General Principles, Art. 85. In other sections the General Principles deals with rights of natural persons (Arts. 9-35), "individual businesses.. (Arts. 26-29), and "individual partnerships" (Arts. 30-33).
15. ECL, Art. 2.
16. The first and only statutory definition of legal person is in the General Principles (1987). It recognizes enterprise legal persons (for profit business which may be state-owned or collectively owned) and non-enterprise legal persons (non-profit organizations). The latter category includes governmental organs (The General Principles, Art. 50). All legal persons are required to have certain attributes, including "establishment in accordance with the law;" "possession of the necessary property or funds;" "possession of its own name; organization and premise;" and "ability to independently bear civil liability."
17. Private businesses owned by individuals, partnerships of two or more citizens, or "leasehold farm households" are recognized in the General Principles (Arts. 26-35), but these are classified as "natural persons" and not as "legal persons."
18. The success of rural reform is evidenced by a trip through the Chinese countryside. Retention of private profits has enabled many farmers to build large new homes which now dot the countryside and are the envy of urban residents.
19. On April 12, 1988, the PRC Constitution, Article 11, was amended by the addition of the following: "The state allows private economy to exist and develop within the scope prescribed by law. Private economy is a supplement to socialist economy with public ownership. The state shall protect the lawful rights and interest of private economy, and shall guide, supervise and administer private economy."
On the same date, the PRC Constitution, Article 10, section 4, was amended by the addition of the following sentence: "No organization or individual may appropriate, buy or sell land, or unlawfully transfer land in other ways. The right to use land may be transferred in accordance with the law."
20. See supra note 14.
21. ECL article 4 provides: "The making of economic contracts should accord with State policies and plans." Article 7 provides: "[C]ontracts in violation of State laws, policies, or plans [are invalid]." Article 16 provides: "[I]f an economic contract runs counter to State or public interest, and if it is intended to be so by both parties, the properties these parties have acquired or may acquire under the contract will be confiscated and put into the State treasury ...."
22. A contrary opinion is expressed in Zhao, A Comparative Study of the Uniform Commercial Code and the Foreign Economic Contract Law of the Peoples Republic of China, 6 INT'L TAX & Bus. LAW. 26, 28 n.15 (1988).
23. Limited copies of this draft legislation have been circulated among trade specialists to solicit their opinions. Until recently China's foreign import and export business was monopolized by state-owned enterprises known as "foreign trade companies" or "FTCs." Chinese producers sold their export items to the FTCs who in turn sold them on the export market. Today FTCs continue to control China's import and export business, however, they occasionally function as commission agents instead of contracting parties.
24. Regulations on Administration of Technology Import Contracts, Art. 2 (promulgated by the State Council on May 24, 1985).
25. These have been mainly small processing, assembling, or compensation trade arrangements.
26. Under Article 8 of the Law of the PRC on Foreign-Capital Enterprises (adopted at the Fourth Session of the Sixth National People's Congress, promulgated by Order No.39 of the President of the PRC and effective April 12, 1986), a wholly foreign owned enterprise which meets the conditions of a legal person under Chinese law "shall acquire the status of a Chinese legal person...."
27. International Convention for Unification of Certain Rules Relating to Bills of Lading, Brussels, 1924 (amended in 1968 and 1979 at Brussels).
28. Convention for Unification of Certain Rules Relating to International Carriage of Air of 12 October 1929 (the Warsaw Convention), and Supplementary Convention and Protocol Thereto, signed at Warsaw on October 12, 1929, and at the Hague in 1955.
29. The General Principles, Article 145, contains similar language:
The parties to a contract involving foreign interests may choose the law applicable to settlement of their contract disputes, except as otherwise stipulated by law. If parties to a contract involving foreign interests have not made a choice, the law of the country to which the contract is most closely connected shall be applied.
30. FECL, Art. 5
31. Even in China this government department is known by its English letter acronym, "MOFERT."
32. MOFERT Form Joint Venture Contract, Art. 58.
33. For example, the joint venture contract between Volkswagen and Shanghai Tractor and Automobile Company is silent on choice of law, but provides for arbitration in Stockholm. (This contract was concluded before the adoption of the FECL, therefore the FECL compulsory requirement for the application of Chinese law to joint venture did not apply). Most form contracts offered by Chinese FTC's do not contain a choice of law clause. They do, however, provide for arbitration at the Foreign Economic and Trade Arbitration Commission within the China Council for the Promotion of International Trade ("CCPIT"). The CCPIT is roughly equivalent to a national Chamber of Commerce.
34. The Supreme People's Court's Answers to Some Questions on Application of Foreign Economic Contract Law, (Issued October 19, 1987) Bulletin of the Supreme People's Court, No.4, ]987. The "Answers" provide:
(a) For contracts for international sale of goods, the law of the place where the seller's business place is situated when the contract was signed generally applies. However, the law of the place where the buyer's place of business is located applies if: (1) the contract was negotiated or signed at the buyer's place of business, or
(2) the contract was formed primarily pursuant to the terms fixed by the buyer and in response to its invitation for tender, or
(3) the contract expressly provides that the seller must perform its obligation to deliver goods at the buyer's place of business. (b) For contracts for bank loans or guarantees, the law of the place where the bank providing loans or guarantees is situated applies.
(c) For insurance contracts the law of the insurer's place of business applies.
(d) For processing contracts the law of the place where the processor's place of business is located applies.
(e) For technology transfer contracts the law of the place where the licensee's place of business is located applies.
(f) For project construction contracts the law of the place where the project is located applies.
(g) For technical consultation or design contracts the law of the place where the client's place of business is located applies.
(h) For service contracts the law of the place where the service is used applies.
(i) For plant and equipment supply contracts the law of the place where the equipment is installed and operated applies.
(j) For agency contracts the law of the place where the agent's place of business is located applies.
(k) For contracts for leasing, sale or mortgage of real estate the law of the place where the real estate is located applies.
(l) For contracts for lease of moveable equipment the law of the place where the lessor's place of business is located applies.
(m) For storage and bailment contracts the law of the place where the bailee's place of business is situated applies.
This analysis would not apply to Sino-American contracts for the sale of goods because, in the absence of a choice of law by the parties, the terms of the CISG will apply to such contracts to the extent they are relevant (subject to China's reservation), unless the parties have "excluded the applications" of the Convention pursuant to CISG, Article 6.
35. CISG. Arts. 1 and 6.
36. The other ratifying nations are Argentina, Australia, Austria, Egypt, Finland, France, Hungary, Italy, Lesotho, Mexico, Sweden, Syria, Yugoslavia and Zambia, and effective January 1, 1990, Norway and the Soviet Socialist Republic of Byelorussia, and effective March 1, 1990, Denmark and the German Democratic Republic.
37. An additional clause, Article 1(1)(b), makes the CISG applicable "when the rules of private international law lead to application of the law of a Contracting State." The United States declared a reservation to this clause. Had it not done so, the Convention would have applied to any sale of goods contract between a U.S. party and a foreign party to which U.S. law would have otherwise been applicable. The effect of the U.S. reservation is to limit the application of the Convention to contracts where the foreign party is also located in a signatory State. For example, consider a contract between a seller located in California and a buyer located in London to which U.S. law is applicable. Without the reservation the applicable U.S. law would have been the CISG; with the reservation the applicable U.S. law is Article 2 of the California U.C.C.
38. An analysis of the aircraft exclusion appears in Winship, Aircraft and International Sales Conventions, 50 J. AIR L. & COM. 1053 (1985).
39. CISG, Art. 4(a).
40. Id. Art. 4(b).
41. Id. Art. 5.
42. See supra text accompanying note 37.
43. For the full text of China's reservation, see infra note 124. The FECL, Art. 7, is a Statute of Frauds for Chinese-foreign party contracts. The ramifications of China's reservation to the CISG are discussed below under "Statute of Frauds," infra text accompanying notes 51-55 and "Mutual Assent," infra text accompanying note 88.
44. CISG, Art. 28.
45. Various choice of law clauses are suggested and discussed by Crawford, Drafting Considerations Under the 1980 United Nations Convention on Contracts for the International Sale of Goods, 8 J.L. & COM. 187 (1988). He suggests that when contracts are concluded through an exchange of forms, parties may wish to consider specifying that their choice of law is a "material term" under CISG, Art. 19(2) to prevent conclusion of a contract under other than the desired law.
46. See Note, Unification and Certainty: The United Nations Convention on Contracts for the International Sale of Goods, 97 HARV. L. REV. 1984, 1998 (1984).
47. Opinions of the Supreme People's Court on Some Problems of Implementing and Enforcing the General Principles of Civil Law of the People's Republic of China (Adopted by the Adjudication Committee of the Supreme People's Court, January 26, 1988), Bulletin of the Supreme People's Court, No.2, 1988 at 17-37.
49. The General Principles. Arts. 11 and 13.
50. Regulation of the Shenzen Special Economic Zones. Article 9 (1989).
51. The United Kingdom Statute of Frauds has been narrowed to the point that its applicability is limited to contracts involving an interest in land. See 15 & 16 Geo. 5 (Law of Property Act 1925) Ch. 20, � 40 (1925), Law Rpts. -- The Public & General Statutes, Vol. 1925; 2 & 3 Eliz. II (Law Reform-Enforcements of Contracts Act 1954) Ch. 34 � 1, Law Rpts. -The Public: & General Statutes, Vol. 1954.
52. New Article 2A of the U.C.C. contains a new Statute of Frauds for leases of goods where the total lease payments are $1000 or more. U.C.C. � 2A-201(1)(a) (1987). However, the impact of the American statute has been softened by section 139 of the Restatement of Contracts. RESTATEMENT (SECOND) OF CONTRACTS �� 139 (1979). The protection-of-reliance principle of this section seems to be gaining general acceptance. But it is not clear whether the various statutes of frauds in the U.C.C. will be qualified by section 139 of the Restatement.
53. CISG, Art. 11. Oral modifications of contracts are authorized by CISG Art. 29. However, an agreement by the parties that modifications must be in writing is enforceable.
54. The impact of this provision on offer and acceptance practice under the FECL is discussed below under "Mutual Assent," infra text accompanying notes 69-71.
55. The CISG offer and acceptance issues are discussed below under "Mutual Assent," infra text accompanying notes 72-88. The impact of China's reservation to the CISG has been explored in Logan, The People's Republic of China and the United Nations Convention on Contracts for the International Sale of Goods: Formation Questions, 5 CHINA L. REP. 53 (1988).
56. Regulations for the Implementation of the Law of the People's Republic of China on Joint Venture Using Chinese and Foreign Investment (amended 1988).
57. Compensation trade contracts generally take the form of foreign companies exporting capital equipment and technology into China, which is in turn paid for in installments by goods produced in China with the imported equipment.
58. See supra note 23.
59. Examples are partial voidness resulting from inclusion in a contract of clauses providing a willful reduction or exemption from taxes, or total invalidity resulting from an illegal subject matter, such as establishing a casino in China.
60. FECL, Art. 3.
61. There are, for example, licensing agreements where Western licensors forced Chinese parties to accept restrictive clauses that were ultimately nullified under Chinese law.
62. Some Chinese scholars consulted by the authors disagree with this suggestion. However, the fact remains that the principle of equality and mutual benefit, as expressed in Chinese law, suggests conclusions (particularly with respect to superior bargaining power) inconsistent with conclusions generated by the American view, of consideration, "duress; and unconscionability.
63. The General Principles, Article 59 provides in part: "A party shall have the right to request a people's court or an arbitration agency to alter or rescind the following civil acts: (1) those performed by an actor who seriously misunderstood the contents of the acts; and (2) those that are obviously unfair."
64. See supra note 34.
65. The validity exclusion has been characterized as "a potential black hole removing issues from the Convention's universe. ..." Winship, Comments on Professor Kastely's Rhetorical Analysis. 8 Nw. I. INT'L L. & Bus. 623, 636 (1988).
66. See infra text accompanying notes 72-88.
67. The Chinese trade practice of true and false offers is discussed in Jinchukou Yewu, Uniform Textbook for Higher Education Import and Export Business, in Foreign TRADE EDUCATION PRESS 207 (1984).
68. IS5 So. 2d 889 (Fla. Dist. Ct. App. 1963).
69. FECL, Art. 7.
70. The FTC trade practice assumed that the confirming document would replace the previous exchange. Article 7 of the FECL does not mandate this result. If it were interpreted with this effect, it would be inconsistent with Article 8(3) of the CISG, which essentially abolishes the parole evidence rule.
71. Havoc will be avoided if no one relies on the contract until the confirming document has been signed and received.
72. CISG Art. 16(2) provides:
"An offer cannot be revoked:
(a) If it indicates, whether by stating a fixed time for acceptance or otherwise, that it is irrevocable; or,
(b) If it was reasonable for the offeree to rely on the offer as being irrevocable and the offeree has acted in reliance on the offer."
73. Id. Art. 16(2)a.
74. Id, Art. 14(1).
75. Id. Art. 16(1).
76. CISG, Art, 22 provides:
"An acceptance may be withdrawn if the withdrawal reaches the offeror before or at the same time as the acceptance would have become effective."
CISG, Art. 18(2) provides in part:
"An acceptance of an offer becomes effective at the moment the indication of assent reaches the offeror. ..."
Therefore, as under China's FECL, the result of Morrison v. Theolke (overtaking withdrawn ineffective) would be reversed.
77. CISG, Art. 19(2).
78. Id. Art. 19(3).
79. The list in CISG Article 19(3) is preceded by the phrase "among other things." The potential scope of this list is also broadened by the modifier "relating," A party's form may designate other terms as material. Issues created by Article 19 are discussed by Vergne, The "Battle of the Forms" Under the 1980 United Nations Convention on Contracts for the International Sale of Goods; 33 AM. J. Comp. L. 233, 253-257 (1985).
80. Utz, More on the Battle of the Forms: The Treatment of "Different Terms Under the Uniform Commercial Code, 16 U.C.C. L.J. 103, 111-112 (1983).
81. The conclusion that conflicting terms cancel each other out is neither required nor suggested by section 2-207. It is, however, endorsed by a number of cases including Southern Idaho Pipe & Steel v Cal-Cut Pipe & Supply, Inc., 98 Idaho 495, 567 P.2d 1246 (1977), cited with approval by Idaho Power Co. v. Westinghouse Elec. Corp., 596 P.2d 924 (9th Cir. 1979), and supported by at least one-half of White and Summers. WHITE & SUMMERS, UNIFORM COMMERCIAL CODE 33-36 (3d ed. 1988).
82. See Vergne, supra note 79 at 254, concurring on this point.
83. Under this approach the last form dispatched before performance (the "last shot") is viewed as the offer and performance is acceptance. The terms of the contract are those contained in the lat form. This approach confers an arbitrary and irrational significance on the last form.
84. See Roto-Lith, Ltd. v. F.P. Bartlett Co., 297 F.2d 497 (1st Cir. 1962), discussed in Wellington, The Nature of Judicial Review, 91 YALE L.J. 486 (1982).
85. CISG, Art. 18(1) provides: "A statement made by or other conduct of the offeree indicating assent to an offer is an acceptance."
86. Id. Arts. 8 and 9.
87. Id. Arts. 31-34 and Arts. 55-59.
88. CISG provisions made inapplicable to non-written communications include: Article 18(1) on acceptance by statement or conduct; Article 18(2) on acceptance of oral offers; Article 18(3) on acceptance by performance; and possibly Article 8(3) on looking to negotiations and conduct to determine intent.
The full impact of China's reservation is not clear because it is to Article 11 and "the provisions in the Convention relating to Article 11." This could mean only provisions relating to contract formation or it could mean all provisions relating to a writing requirement.
89. HONNOLD, UNIFORM LAW FOR INTERNATIONAL SALES 163 n.8 (1982).
90. Note, The United Nations Convention on Contracts for the International Sale of Goods: Contract Formation and the Battle of the Forms, 21 COLUM. J. TRANSNAT'L L. 529, 535-538 ( 1983).
91. ECL Arts. 17-26 and 38-47.
92. FECL, Art. 12, specifies the following terms:
(3) the type of contract and the categories and scope of the object of the contract;
(4) the technical conditions, quality, standards. specifications, and quantities of the subject matter;
(7) whether the contract is assignable and, if it is, conditions for its assignment;
(10) the language(s) in which the contract is written and its validity.
Among the above, items (3), (4), (5) and (6) are regarded as indispensable in contracts of a general nature. However, the other FECL requirements are viewed as suggestive rather than mandatory. They serve merely as a guide for the parties.
93. Id, Arts. 4, 25 and 29,
94. The uncertainty lurking in the risk provisions of the CISG is discussed in Note, Unification and Certainty: The United Nations Convention on Contracts for the International Sale of Goods, 97 HARV. l., REV. 1984, 1986 (1984).
95. The duration of equity joint venture contracts is capped at 50 years while contracts for technology importation are limited to 10 years, Article 100 of the Regulations for the Implementation of the Law of the People's Republic of China on Joint Ventures Using Chinese and Foreign Investment (1983), was amended by the State Council on January 15, 1986, This article deals with duration.
96. Article 89 of The General Principles lists four types of guarantees: 1) third party credit; 2) pledge of specific property; 3) deposit; and 4) possession of the other party's property.
In the text, the authors have combined "2" and "4" under the heading "Collateral Guaranties" because the rights of the creditor-obligee in both instances are described by the same statutory language.
97. The General Principles, Art. 89 provides that if the other party breaches by nonpayment, "the possessor shall have a lien on the property and may keep the retained property to offset the debt or have priority in satisfying his claim out of the proceeds from the sale of other property pursuant to relevant legal provisions."
This provision illustrates that the development of China's personal property law is still in an embryonic stage. It does not indicate when the lien arises or whether other law may qualify the "priority" conferred.
98. Mistake has been viewed alternatively by common-law lawyers as either preventing a contract from being formed or as giving rise to an excuse for non-performance, Modern law school texts tend to treat mistake as an aspect of impossibility. See. e.g. , DA WSON & HENDERSON, CONTRACTS CASES AND MATERIALS (5th ed. 11987). The distinction is no longer recognized in the Restatement. RESTATEMENT (SECOND) OF CONTRACTS �� 261, 266 (1981).
99. The U.C.C. section 2-615 is generally interpreted to require merely that the event not have been actually foreseen instead of unforeseeable. U.C.C. � 2-615 comments I and 4. The text of the statute contains neither the term "foreseen" or "foreseeable."
100. The so called "American approach" reflected in the Restatement (Second) of Contracts section 272 is based on "benefits conferred", a concept which can be stretched quite far. Compare Carroll v. Bowersock, 100 Kan. 270, 164 P. 143 (1917), with Albre Marble & Tile Co. y. John Brown Co., 338 Mass. 294, 155 N.E.2d 437 (1959). The United Kingdom's Law Reform (Frustrated Contracts,) Act, 1943, 6 & 7 Geo. 6, ch. 40, follows a "restitutional" approach, rejecting a "suspended in mid-air theory" suggested by early cases such as Chandler v. Webster [1904] 1 K.B. 493. Fuller suggested a distinction between incidental and essential reliance expenses, Fuller & Perdue, The Reliance Interest in Contract Damages, 46 YALE L.J. 89-96 (1936). Other scholars opt for "equitable apportionment of loss." See Note, Apportioning Loss after Discharge of 42 Burdensome Contract: A Statutory Solution, 69 YALE L.J. 1054 (1960). While still others suggest assigning the risk to the "superior risk bearer." Posner & Rosenfield, Impossibility and Related Doctrines in Contract Law: An Economic Analysis, 6 J. LEGAL STUD. 83 (1977).
101. 3 Best & S. 826 (King's Bench, 1863). See Birmingham, Why is There Taylor v. Caldwel1? Three Propositions About Impracticability, 23 U.S.F. L. Rev. 379 (1989).
102. The FECL requirement that the excusing event could not have been "foreseen" focuses on events occurring after the time of contracting. The CISG language, "impediment beyond ... control" is broader. See Marcantonio, Unifying the Law of Impossibility, 8 HASTINGS INT'L & COMP. L. REV. 41, 51 (1984) (citing drafting reports and the official commentary).
103. CISG, Art. 79(1).
105. Id. Art. 79(3).
106. FECL, Arts. 4 and 29(3). The right to rescind in Article 29 is prefaced by the qualification that "all of the obligations under the contract cannot be performed owing to force majeure." This is a correct translation, but the English introduces an ambiguity not present in the original Chinese. This could mean either "none can be performed" or "one or more cannot be performed." To reflect the correct Chinese meaning, this cause should be read "none of the obligations can be performed ...." In other words, the right to rescind is triggered by total impossibility, not partial impossibility.
107. In some widely used translations the sentence appears as: "The scope of events of force majeure may be agreed to in the contract." See the translation by Paul, Weiss, Rifkind, Wharton & Garrison, append to Cohen, The New Foreign Contract Law, CHINA Bus. REV. 52, 54-55 (July-August 1985).
108. FECL, Art. 25; CISG, Art. 79(4).
109. FECL, Art. 25.
110. The P.R.C. Constitution does not refer to a right to strike. The enumeration of other civil rights without such a reference is understood to mean that no such right is recognized.
111. FECL, Art. 40.
112. MOFERT Official's Answers to Questions on Foreign Economic Contract Law, 28 CHINA ECON. NEWS 1-2 (July 29, 1985).
113. For sale of goods contracts, U.C.C. section 2-210 (2) insulates assignment rights arising from performance of the assignor's entire obligations from anti-assignment clauses. For assignments of rights to the payment of money, U.C.C. section 9-318(4) invalidates anti-assignment clauses.
114. ECL, Art. 27 provides in part: "If one party is merged or divided, the party or parties resulting from the change shall assume or severally assume the obligation to perform the contract and shall enjoy its or their due rights under the contract."
115. FECL, Chapter IV, Arts. 26 and 27.
116. Id. Art. 26.
117. Id. Art. 27.
118. Id.
119. Id. Art. 28. Unilateral modification is prohibited by Article 16 of the FECL.
120. ECL, Art. 27.
121. FECL, Art. 33.
122. Id. Art. 32.
123. While there is no requirement of a writing, CISG, Article 29, validates an agreement between the parties that requires modifications to be in writing.
124. The text of China's reservation provides, "The People's Republic of China does not consider itself to be bound by subparagraph (b) of paragraph 1 of Article 1 and Article 11 as well as the provisions in the Convention relating to Article 11." Multilateral Treaties in Respect of Which the Secretary General Performs Depository Functions. List of Signatories, Accessions, etc., issued by United Nations Office of Legal Affairs.
125. Termination is defined in FECL, Article 31, rescission is treated in FECL, Articles 29, 30 and 32, suspension of performance is authorized by FECL, Article 17.
126. A termination by mutual agreement which violates Chinese law or public interest will be voided.
127. ECL, Art. 27. Confusingly, the accepted English translation of the ECL uses the word "rescission" to describe termination by mutual agreement. The authors have used the term "termination" in the text to avoid confusing the comparison with the FECL.
128. FECL, Art. 14. See supra text accompanying note 95.
129. FECL, Arts. 16-23.
130. ECL, Art. 35.
131. In an interesting background article, Professor Farnsworth comments that the civil law countries of Eastern Europe particularly favor specific relief because they "have planned economies, with no markets in which buyers can buy substitutes if sellers do not deliver." Farnsworth, Developing International Trade Law, 9 CASE W. RES. INT'L. L. J. 461 (1979).
132. CISG, Arts. 46(1) and 62.
133. U.C.C. section 2-716 authorizes specific performance for the buyer when goods are unique "or in other proper circumstances." For the seller the corresponding provision is section 2-709 (action for price) which is available at the seller's election (in only moderately limited circumstances) because it is a monetary recovery and may be viewed as an action "at law" rather than "in equity." Common law reluctance to grant the specific remedy is the result of historical accident. See BOWEN, THE LION AND THE THRONE 372-390 ( 1956) for a discussion of the Coke-Elsmere dispute in 1616. Modernly, it is justified by arguments for efficient breach and mitigation.
The forum shopping issue is discussed by Gonzalez, Remedies Under the U.N. Convention for the International Sale of Goods, 2 INT'L. TAX & Bus. LAW. 79, 98 (1984). This article suggests parties wishing to avoid specific performance do so by adding a choice of forum clause to their contract or by excluding the application of the Convention's specific performance provisions and adding a choice of law clause. Id. at 98.
134. FECL, Art. 18.
135. The real issue here is whether under the FECL specific performance will be available in every case as a "right" or whether its availability will be discretionary as under common law. If the General Principles is literally applied, specific performance will be available as a right, in which case the FECL, even though it does not mention specific performance is brought into line with domestic Chinese law and civil law jurisdictions.
136. FECL, Art. 18, provides: "If the losses suffered by the other party cannot be completely made up after the adoption of such remedial measures. The other party shall still have the right to claim damages."
137. The General Principles. Article 112, also provides for compensation "equal to the losses consequentially suffered. ..." "Consequentially" should be read as requiring a causal connection and not as necessarily authorizing "consequential damages" as that term is defined by the U,C.C. section 2-715(2).
138. 9 Exch. 341 (1854).
139. See supra note 34.
140. The General Principles. Art. 114.
141. CISG, Art. 77; FECL, Art. 22.
142. Kastely, The Right to Require Performance in International Sales; Towards an International Interpretation of the Vienna Convention, 63 WASH. L. REV. 607, 622 (1988), states flatly "the duty to mitigate (in the CISG) applies only when the aggrieved party claims damages, not when that party pursues the right to performance." The article summarizes the drafting history of CISG, Art. 77.
143. Crawford, Drafting Considerations Under the 1980 United Nations Convention on Contracts for the International Sale of Goods, 8 J.L. & COM. 187, 203 (1988), discusses drafting a suitable interest clause.
144. RESTATEMENT (FIRST) OF CONTRACTS � 339. Southwest Engineering Co. v. United States, 341 F.2d 998 (8th Cir. 1965).
145. Muldoon v. Lynch, 66 Cal. 536, 6 P. 417 (1885).
146. Compare U.C.C. � 2-718(1) with RESTATEMENT (SECOND) OF CONTRACTS � 356(1). Commendably the verbalization has been simplified and the tension virtually eliminated by the most recent reworking of the test in Uniform Commercial Code � 2A-504. Under the new article on leases a clause will pass muster if it is "reasonable in light of the then anticipated harm caused by the default. ..."
147. ECL, Art. 35. Various translations refer to this as "breach fees" or as "breach of contract damages" which are in addition to compensatory damages.
148. The extent to which the CISG exclusion of validity (CISG. Art. 4) will invite disparate national policies to control the enforceability of liquidated damage clause is unclear. This issue is discussed. supra, in text accompanying notes 59-65. It is to be hoped American courts will resist the temptation to apply familiar common law penalty policies to curtail the parties' freedom to contract. The relationship between liquidated damage clauses and the CISG exclusion of validity is discussed in Winship, Commentary on Professor Kastely's Rhetorical Analysis, 8 NW J. OF INT'L L. & Bus. 623, 638 (1988).
149. FECL, Art. 29.
150. Id. Art. 17. The statutory grounds that trigger the unilateral right to rescind are serious breach, serious force majeure. and occurrence of conditions identified in the contract as creating a right to rescind. The latter is illustrated by Sino-foreign oil exploration contracts that provide for rescission by the foreign party if no wells of commercial value are found.
151. CISG, Arts. 49, 64, 72 and 81-84.
152. Fundamental breach is defined in CISG, Art. 25.
153. The buyer's right is described in CISG, Article 49, the seller's right is described in CISG, Article 64. For the breaching party" this is a statutory right to cure. For the aggrieved party, this is a mechanism to covert a minor breach into a fundamental breach.
154. CISG, Art. 72(1).
155. The avoidance remedy is discussed by Winship, International Sale Contracts Under the 1989 Vienna Convention, 17 U.C.C. L.J. 55, 70 (1984), who suggests that "it will probably be more difficult for a party to avoid a contract under the Convention than to cancel under the U.C.C. "
156. CISG, Art. 26; FECL, Art. 32.
157. FECL, Art. 33.
158. Id. Art. 17.
160. CISG, Art. 71.
162. FECL, Art. 18.
163. The General Principles, Art. 134.
164. It is a favorite technique of Chinese FTCs in dealing with claims of foreign parties to offer concessions in future transactions.
165. The problem created by this fact is discussed in Note, Unification and Certainty: The United Nations Convention on Contracts for the International Sale of Goods, 97 HARV. L. REV. 1984, 1993 (1984).
166. CISG, Art. 50. The precise wording of this ratio becomes significant in instances of fluctuating market values.
167. The measure under U.C.C. section 2-714(2) is "the difference between the value of the goods accepted and the value they would have had if they had been as warranted U.C.C. � 2-714(2) (1987).
168. This fact causes Gonzalez. Remedies Under the U.N. Convention for the International Sale of Goods, 2 INT'L TAX & Bus. LAW. 79, 95 (1984), to suggest that the price reduction remedy most closely parallels U.C.C. section 2-613 relating to casualty to identified goods.
169. CISG, Arts. 37 & 48.
170. U.C.C. � 2-715(2)(b) (1987). Without benefit of statute, Lord Denning reached the same result for the United Kingdom in H. Parsons v. Uttley Ingham, All E.R. 525 (C. A. 1978).
171. CISG, Art. 5.
172. ECL Art. 48 provides in part: "If a dispute over an economic contract develops, the parties shall promptly resolve it through consultation."
173. ECL, Art. 48.
174. FECL, Art. 37 provides in part:. "If disputes over a contract develop, the parties shall, as far as possible, settle them through consultation, or through mediation by a third party."
175. Id. Art. 39.
176. The General Principles, Art. 135, contains a general two year statute of limitations for commencing suit. It does not refer to arbitration. This period is shortened to one year for cases "concerning sales of substandard goods".
177. FECL, Art. 37. Under prior laws it was not clear that Chinese courts were required to honor designations of non-Chinese tribunals. See Cohen, The New Foreign Contract Law, CHINA Bus. REV. 52, 53 (July-August 1985).
178. CISG, Art. 39(1) states a two year cut-off for giving notice of non-conforming goods to the seller. No time limit for commencing suit is stated.
179. See supra note 177.
180. FECL, Arts. 37 and 38. The MOFERT suggested arbitration clause for equity joint venture contracts is:
Any dispute arising from execution of, or in connection with the contract shall be settled through friendly consultations between both parties. In case no settlement can be reached through consultations, the dispute shall be submitted to -- Arbitration Organization in -- for arbitration in accordance with its rules of procedure. The arbitral award is final and binding upon both parties.
181. This problem is compounded because English translations of Chinese laws are not readily available in China making it difficult for English-speaking Chinese lawyers to make critical comparisons of the English and Chinese texts.
Pace Law School Institute of International Commercial Law - Last updated June 26, 2006