Source: http://xixiwest6.tripod.com/justice/efficientbreach.htm
Timestamp: 2018-12-11 06:56:28
Document Index: 119266976

Matched Legal Cases: ['§ 2', '§ 2', '§ 2', '§ 3', '§ 3', '§ 3', '§ 3', 'Art.8', 'Art.8', 'Art.8', 'Art.8', '§ 3', 'Art.107', 'Art.107', 'Art.108', '§ 4', '§ 4', '§ 4', '§ 4', 'Art.119', 'Art.119', '§ 4', 'Art.1', 'Art.1', 'Art.17', 'Art.2', 'Art.8', 'Art.11']

©Simon Xi ZHANG, May 13, 2001
Contract law is one of the very basic core classes at law schools in both the United States and the People’s Republic of China. It is placed in the curriculum of first year study and generally covers both semesters. Indeed, for many first year law students (around the age of 22 in US and 18 in China), contract might be the most familiar type of legal relationships before entering law schools. Contracts and contract law affect relationships between ordinary persons in their daily lives, as well as the business behaviors of multinational corporations in the sophisticated global market. A study on contract law sometimes leads to a rewarding knowledge of the general legal culture of a jurisdiction.
It is generally agreed that with a contractual arrangement, the free wills of two competent persons meet together and they jointly adopt an agreement governing the relationship between themselves (with some sort of images of law) so as to achieve the respective goal envisioned by each party when they shook hands sealing the deal[1].
However, US contract law and Chinese contract law find dramatic difference by comparing the enforcement of performance under the two legal systems. The idea of “efficient breach”, which has become more and more prevalent among American judiciary and academics, is one of the great legal “cultural shocks” for a Chinese law student in his first contract class at US law school.
§ 2 “Efficient Breach” and Different Attitudes of US and Chinese Laws
§ 2.1 Efficient Breach Theory in American Law
Professor Richard Posner, who is now a federal appellate judge at the Seventh Circuit, has been a principal proponent of efficient breach theory. Professor Posner gave an example of this kind of breach:[2]
“Suppose I sign a contract to deliver 100,000 custom-ground widgets at 10 cents apiece to A for use in his boiler factory. After I have delivered 10,000, B comes to me, explains that he desperately needs 25,000 custom-ground widgets at once since otherwise he will be forced to close his pianola factory at great cost, and offers me 15 cents apiece for them. I sell him the widgets and as a result do not complete timely delivery to A, causing him to lose $1,000 in profits. Having obtained an additional profit of $1,250 on the sale to B, I am better off even after reimbursing A for his loss, and B is also better off. The breach is Pareto superior.”
From this economic analysis, The Honorable Judge Posner made a legal conclusion that: “even if the breach is deliberate, it is not necessarily blameworthy. The promisor may simply have discovered that his performance is worth more to someone else. If so, efficiency is promoted by allowing him to break his promise, provided he makes good the promisee’s actual losses.”[3]
Clearly, when people enter into contractual relationship, what is expected is the performance rather than the breach of the promise. How much benefit one may get from a contract depends on how likely the performance will be carried out as originally agreed to. Therefore, whether the law will persistently require a strict performance of promise, or to permit an intentional breacher pay for a compensation to “buy out” the obligation of performance, is a question of fundamentality from an ultimate goal perspective.
§ 2.2 A Chinese Reply to “Efficient Breach”
When Chinese law deals with the same type of problem which would justify an efficient breach in modern American contract law, the Chinese contract law adopts a different resolution: not only will Chinese judge look up to the feasibility and possibility of specific performance before ordering a monetary compensation, the judge also will definitely block any willful and “selfish” breach, i.e., to “kill the efficient breach”, provided that the plaintiff brings the case to the notice of the people’s court before the defendant actually carries out his “vicious plan to break his own promise ‘efficiently’”.
There are sound reasons standing behind the different treatments under different legal systems. A pure textual analysis of legal rules is not an adequate method for comparative law study, it is even insufficient for a study focused towards domestic law because “the life of the law has not been logic: it has been experience”[4]. To find out why the contract law in China does not mirror its American counterpart, it is necessary to go further outside the legal field and endeavor to look up the reasons in the underlying market where business is conducted, to consider the national economic condition which provides for a solid background on which numerous business players working out their specific transactions, to discern the ultimate goal of contract law which is laid down by the legislators, and to appreciate the reception of certain social and moral norms into legal norms as a reflection of der Volkgeist as argued by Frederick von Savigny, while the last examination may be: combining the above as a whole, whether a specific legal rule fits well with a certain society during a given period in the long line of history.
This article aims not to evaluate the soundness or validity of efficient breach in American contract law. The efficient breach theory has troubled American jurists particularly for its interaction with the issue of “tortious interference”[5]. Efficient breach has won favor over many judges and law professors in the United States but opponents still argue that it at most would only qualify as an exception rather than general contract law rule[6]. For the purpose of convenience in comparison and analysis, this article considers the United States (and of course including its individual states) as a jurisdiction where the efficient breach has been accepted as general contract common law rule by operation of the abundant case law.
§ 3 Issues in Chinese Laws Regarding “Efficient Breach”
§ 3.1 Chinese Law as General
The People’s Republic of China is a nation following Marxism-Leninism socialist ideology[7]. At present, within the commercial law and contract law fields, Chinese law tends to show a mixture of European Civil Law and American Law (mainly the statutes which would be categorized under commercial code in continental Europe).
Historically, in the early 20th century, Japanese jurists helped the Chinese Ta’Ch-ing Empire (Qing Dynasty, 1644-1911) to draft the Civil Code, which was never formally promulgated. However, the Japanese influence on early Chinese law drafting work, and the then existing study in China on Japanese politics and law, opened the long-closed door of the Middle Kingdom for modern legal reform and introduced irreversible Chinese dependence thereafter on German Civil Law tradition.
Based upon the Ta’Ch-ing Civil Code version, the first Chinese Civil Code was promulgated and adopted by the National Government of the Republic of China in 1929[8]. Japanese influence was still heavy and the Chinese drafters were scholars who studied German laws abroad[9]. After 1949, the German-type Chinese laws have been preserved in Taiwan by the in-exile KuoMinTang (Nationalist Party) government while the mainland communist China followed socialism and began to copy Stalin’s thought on politics and law. During the Culture Revolution (1966-1976), the legal system in Mainland was totally destroyed, and the National People’s Congress (NPC) was closed from 1965 to 1975[10].
Since early 1980s, China has adopted a “reform and openness” policy. More and more statutes have been laid down by the NPC which has a “Parliament Supremacy” status very close to the Great Britain parliamentary system[11]. With the history of German Civil Law influence and the supremacy of legislative organ, Chinese law is statute-oriented and there is no stare decisis. During recent years, China has borrowed many legal ideas from the United States such as in negotiable instruments, securities and banking regulations. However, the borrowing of US laws is also accompanied by the import of European civil laws. In the end, all the laws have to be “statutorized” and promulgated by NPC.
To study contract law in China must focus the attention to NPC legislation. The Supreme People’s Court does issue judicial interpretative documents which are binding on the judiciary. However, currently there is only one piece of such interpretation and it does not address the issue of performance of contract[12].
§ 3.2 Chinese Contract Laws
The first Chinese contract law was promulgated in 1981 and another two came into existence in 1980s[13]. On October 1, 1999, a new Contract Law[14] substituted all three prior laws and it has been commonly referred to as “Uniform Contract Law” (UCL) by Chinese jurists and legal professionals[15].
The UCL is a codification of legal rules with regard to contracts. Chapters 1 �C 8 are “General Principles” which lay down the rules for the formation, effect, performance, and termination of contracts, transfer and assignment of rights and obligations, responsibility for breach of contract, and “other residual rules”. Chapters 9 �C 23 are “Specific Principles” for fifteen different types of contract such as sale, public utilities, lease, finance lease, construction, transportation, trust and etc… General Principles apply to all kinds of contracts and Specific Principles address the problems only arise from that specific type of transaction.
§ 3.2.1 “Basics” in General Principles & Performance of Contractual Obligation
Chapter 1 is the first chapter of General Principles. The title of this chapter is “general rules” and it only includes eight provisions. No doubt these eight provisions embody the most important ideas of the whole UCL. Furthermore, recalling that Chinese judiciary cannot make any law, and the State Council as the head of the Administration cannot make any regulation contrary to the “laws” promulgated by NPC, these eight provisions can be regarded as the core “do’s and do-not’s” rules for the entire Chinese contract law!
Art.8, the last one of the “big eights” provisions, of UCL provides that “The contract formed in accordance with the law is legally binding on the parties. Parties shall perform his obligation as agreed in the contract, and shall not change or dissolve the contract without authorization.”[16]
A provision in General Rules like this article 8 always seems to be self-explanatory and as an appeal to good moral or sound policy. But a further thought and examination of Art.8 may reveal the very basis how a Chinese court will deal with a contracting party who is going to take an “efficient breach”, driven by the impetus of maximization of interest[17]. The judge will likely feel obliged to declare the efficient breacher violating the second sentence of Art.8.
The reason is that there is difference between a ruling that “who breaches his promise should compensate the injured party” and the commandment that “you shall perform your obligation as agreed and shall not breach it”.
For an American efficient breacher, she is only restrained by the former ruling and there is no such commandment similar to the latter one. The efficient breacher is at free to breach the contract, so long as to pay a sum of compensation; upon walking off an American court presiding by the Honorable Judge Posner, the breacher is even morally praised as a good citizen who increases the economic benefit of our society as a whole. Such a result is unthinkable for any Chinese who is raised up by the teaching of the wisdom and morality of Confucius. The Chinese breacher first will face the latter commandment “you shall not breach…”. It is only after the judge reprimands him for his unethical breach of a legally binding contract, then does the former ruling “who breaches should compensate…” come into play.
The effect of the inter-play of the dual “ruling” and “commandment” will be clearly exemplified in this fact pattern: if Chinese breacher was brought to the court by the opposing party before the breacher actually appropriated the contractual corpore and delivering it to a third party for an “efficient” contract, absolutely the breacher would have to honor his obligation under the first contract. If he had more commodities in the warehouse, it was fine to deliver them to the third party later; but if he could not perform obligations under both contracts, the UCL Art.8 would give protection precedence to the first contractor over the third party.
§ 3.2.2 Residual in General Principles & Performance of Contractual Obligation
The first provision in Chapter 7 “Liability for Breach of Contract” is Art.107: “The party who does not perform contractual obligation, or performs the obligation in such a manner as not in accordance with the agreement, shall continue the performance, or take remedial steps, or pay damages, or bear other responsibilities for breach of contract.”
It is not clear whether Art.107 is meant to give an application sequence for different types of responsibilities by stating continuation before remedial steps, which is then followed by monetary damages.
Similar provisions appeared in the three contract laws abrogated by UCL as well. The past history has indicated that China favors specific performance (i.e., continuation of performance) most. The reason will be discussed in more details later. Therefore, it is totally contrary to the common law rule that “monetary damages in principle, specific performance as exception”. Of course Chinese commentators also agree that certain contractual obligations in personam can not be subject to specific performance[18].
The legal text itself uses the problematic term “continuation of performance”. If the defaulting party has not taken any step of performance at all, it is not logically correct to mention “continuation”. And if the defaulting party performed the obligation in a way not in accordance with the agreement, it is not technically correct to order him of “continuation of performance”. However, this weird term does not seem to trouble Chinese legislators and judges. Also, law professors, students and lawyers all know that what the law really means is to ask for a “specific performance”[19].
By insisting on a specific performance, the breacher’s “efficient dream” may not be possible to come true. Still, as discussed above, the injured party may block the efficient breach by instituting the case before actual delivery under that “efficient contract” with the third party. Art.108 of UCL permits the party to institute a case under certain circumstances of which the common law will refer to as “anticipatory breach”. Under UCL, anticipatory breach is thus a “killer” of efficient breach.
Suppose the breacher has already efficiently breached his promise by delivering the corpore to a third party, for many reasons (as discussed later), the court will still order a specific performance rather than monetary compensation. No doubt there are circumstances that the breacher will find financially difficulty[20], thus the court is indeed using specific performance as an effective punishment to make the planned “efficient” breach to result in a very inefficient end for the breacher. The breacher may find himself in a financial loss after the full process. This has an intimidating effect to any person who wants to play an efficient breach trick.
§ 4 Analysis of Reasons Behind Chinese Refusal to “Efficient Breach”
§ 4.1 Aftermath of the Central Planned Economy
During the past fifty years, for twenty-six years (1956 �C 1982) China was adopting a policy of complete central planned economy. The state drafted Five-Year-Plan and annual plan which laid down the actual amount of production out-put for each production sector, from steel to thermos . The state claimed to work out this type of “feasible” plan because it was said the production in accordance with the plan would completely match the demand. Indeed this was truth so long as we realize that the demand was also calculated by the state and we further presume such estimation on five-year-demand was reliable, which was so natural to the one billion Chinese people (technically, not consumers) from 1950s until mid-1980s[21].
All the industries were owned by the State. The farms of the peasants were run by the local Agriculture Commune, and farmers were forbidden to participate in any private production for profit[22]. The retailing was also preserved for state-run shops and groceries. Every citizen had to live in the city or village where one’s household registry was kept on file, once moving without governmental approval, the food and cloth supply was actually cut off completely[23]. In one word, the state controlled the whole running of the economy. It was a strict and systemized control from the production to demand, from a person’s workload at the working-unit during daytime to one’s consumption at home in the evening[24].
Therefore, the notion of contract was non-existence in China during that time. All the productions and transactions were not “performance of contractual obligation” but the “performance of state production duty”. The manager at a SOE steel factory was required to “buy” coals from a given SOE mine, and he was required to “sell” the product to certain SOE automobile manufactures. There was not any market in existence where the businesses could negotiate among each other and entering into contracts by themselves. The non-performance of the state plan “contract” meant to lose the job. The willful obstruction of the performance entitled the manager to be condemned as an anti-revolutionary and thrown into jail.
When the first Economic Contract Law was promulgated, the complete central planned economy was already abandoned. The economy was still predominantly governed by the plan yet supplemented by a sort of free negotiation and production among the SOEs themselves. One provision in the law still read as that the production as ordered by the governmental instructive plan shall be performed[25].
The influence on contract law by this past planned economy history is not lying lifelessly in legal history museum even at present when China is adamantly negotiating the admission into the World Trade Organization. It is hard to imagine that the real order and law in the 21st century China can change over one single night when China hugged the free market as a part of the ideal “market economy with Chinese socialist characteristics” in 1992[26] or when a new Contract Law was laid down by the end of last century[27].
The judiciary has been used to punishing the party who breaches the contract: it is against state plan by non-performance, it disrupts orderly market situation, it creates hardship for other business which also need to carry out state plan, and for an efficient breacher it is indeed profiting on a margin which is above the ordinary price. There is no sound reason to expect judges now to reward an “efficient breacher” only because he is selling a susceptible principle proposed by American jurists. The Chinese judiciary is still not independent from the influence of party policy or immune from the tempt (sometimes coercion) of local protectionism[28]. Foreign commentators have also criticized the lack of competence of Chinese judiciary[29]. To formulate a powerful argument persuading Chinese judges to welcome the introduction of efficient breach theory into Chinese contract law is still very hard, at present.
§ 4.2 Confucianism Morality & Trustworthiness Expectation on Market Players
When people are talking about China, it is not only a communist regime, but also a country with a five-thousand-year history standing behind. Of the four ancient cultures in the world, Babylon, China, Egypt and India, only China survives the rise and fall in the history and keeps alive the traditional culture and its most important representative -- the ideogram (Chinese characters).
Traditional Chinese culture is mainly dominated by Confucianism. Loyalty and Trustworthiness are the basic manners a Chinese man must follow in dealing with his emperor, family, friends and fellowmen[30].
A good moral of trustworthiness basically requires keeping one’s promise. An old Chinese saying can be translated into English as “even Achilles cannot draw up the words from a gentleman’s mouth”[31]. To keep the promise is a basic requirement and thus to willfully shrug off one’s responsibility while keeping the benefit from it is an appalling idea for a traditional Chinese gentleman.
The communist rejected some traditional ideology but is still keeping many old teachings as natural reflection of good morality of humankind. “Keep the promise” is one of them.
Ever since the re-introduction of “contract” back into mainland China in early 1980s, the Chinese government has repeatedly emphasized the importance for business to keep good credibility in dealing with each other. The banking industry, credit evaluation system and related ancillary services are still not as advanced as the American counterparts. It is unlikely that in China a seller will look to the potential buyer’s established credit history, whether with the help of banks or other investigation services, to decide the likelihood of the buyer’s actual performance, because such history is essentially non-existent.
Partly as a reparation to this unsatisfactory situation, the State Administration of Industry and Commerce works out a partial solution. The SAIC and its local branches periodically inspect and review a business’s records and its history in dealing with the banks and customers. If the investigated business qualifies for a certain standard, SAIC will issue a certificate bearing “Treasuring the Contract, Honoring the Promise”[32] to the business. No doubt in an information scarcity market, the rewarded business is always eager to make everyone know its possession of such a precious certificate[33].
Very recently, the State Council just issued a document ordering local governments, relative ministries, bureaus and committees to strengthen the administration of an orderly and good market economy[34]. Just as all the similar documents periodically issued by the State Council since mid-1980s, the new decision orders the governmental entities and related commerce chambers to strengthen the administration and monitoring of transactions in the market. The decision specifically invokes “strengthening the teaching of the thought and moral, and establishing a credit system for the whole society”[35].
With the reiteration from the central government of establishing creditworthy behaviors for the market players, it is very hard to imagine the Chinese contract law will deviate from its past practice and admit the “efficient breach” theory into legal system just to create a back-door for those untrustworthy, non-Confucian type of the “crooks in the market”.
§ 4.3 Lack of Alternative Source to Breach “Efficiently”
Another reason in support of Chinese position not acknowledging “efficient breach” is likely to be overlooked ---- most times there lacks alternatively available sources to justify an efficient breach.
When American scholars argue for the efficient breach, one of the preconditioned supposition is that the injured Buyer B will not be worse off when the breacher Seller A enters into and performs a contract with Third Party Buyer C. Under efficient breach theory, B will get a monetary compensation from A in the amount of B’s expected gain from the A-B transaction. In addition, B is always able to subsequently find another contractor to engage in a substitution transaction.
Critics have pointed out that such pure economic analysis neglects many costs B would not have to bear, such as renegotiation cost, readjustment of production, etc.[36] In general, contract damages do not fully compensate the party who is the victim of a breach. Because the topic of this article is not an evaluation of the righteousness of efficient breach theory, I will not go further along this line of argument. Rather, some special situations in Chinese market and economy deserve attention with regard to this “not fully compensate” argument.
In a Chinese market, the precondition that Buyer B will always be able to find alternative source of supply is not valid.
China does not yet have a free market economy in which every ordinary person may establish a business entity to participate in commercial transactions. Private business does have witnessed recent boom and it contributes more and more to Chinese GDP increase and absorbs the unemployed labor from SOEs which are undergoing structural reorganization[37]. However, for many important products, it is still the SOEs which are occupying the supply side of the counter.
In addition, the local protectionism is so prevalent throughout China. Local governments are notorious for placing high barricade for market access or even effectively blocking any new comer into local market, by manipulating the business license issuance procedure, or acting as both a tax collection slacker and a fee levying guttler just according to its own favor or dislike. The business from another district finds difficulty to force out a way into local market, meanwhile, certain major local producers (SOEs or not, local-government-owned or private) will exert heavy influence on the local government trying to maintain and preserve a distortedly advantageous position against other local producers. This can make an injured Buyer B in the above example helpless if the only Seller A may “efficiently breach” the contract at its own will[38].
Also, if the third party C is interested in offering a higher price than the price agreed by A and B in ordinary business negotiation, it is more likely that the subject product is not available everywhere otherwise C may just go to another producer with available productivity to negotiate an ordinary deal without the necessity to pay more-than-adequate. In this situation, B and C are actually competing for the same limited supply of products. To have the contract law support an efficient breach means to throw B out of the deal. Even if with the monetary compensation paid by Seller A, will the injured Buyer B not worse off? Is there any alternative channel of commerce for B, with a money judgment, to find a new contractor for itself? Seems not, or the third party C would have already chased for such alternative available source of supply --- it is because B’s monetary compensation is less than C’s offering price or there would not have been an “efficient breach”[39], and now B is just using the amount of compensation to find alternative supply of which even C who was eager to pay a higher price since the very beginning did not discover yet.
Lack of available resource creates difficulty for efficient breach in a contrary fact patter. Where the Chinese court does permit the Seller A to perform its contract with C, but hold A to comply with its obligation owed to B as well, the court is in fact ordering a “double” performance[40].
This is in accordance with the general preference towards specific performance. UCL Art.119 provides for three exceptions where the breaching party is exempted of specific performance: (1) legally unenforceable or unenforceable as a matter of fact; (2) Object of obligation is not fit for specific performance or the cost of specific performance is extraordinary high; (3) Obligee does not request for specific performance within a reasonable period of time. Except for falling under either of the three exceptions, the court is obliged to order a specific performance.
Therefore, a “double performance” requirement coupled with the lack of abundantly available resource to perform may create a financial hardship for Seller A. As a manufacturer or dealer, A also needs to seek raw materials and supplies in the market for its own production plan. There is extra cost spent in looking for more raw materials. Under American version of efficient breach, the breacher does not need to calculate this extra cost because the breacher is not required to perform the original contract[41]. There is no question of extra cost at all, because the breacher merely appropriates the already obtained raw materials for another use. Under Chinese version, the breacher must consider the cost to find extra source of supply. However, so long as the cost of “secondary” performance is not such extraordinarily high as to trigger Art.119 exception, the court can effectively force the Seller A to lose all its profit made in the “efficient contract” by pressing for a specific performance in favor of Buyer B. In the end, the breach is inefficient and may even be a net loss to the breaching party.
No one likes to breach the promise, even a crook is still dreaming of gaining a descent reputation of “Treasuring the Contract, Honoring the Promise”[42]. If C comes to A asking for a deal and A agrees to C while cannot increase its out-put to perform its obligation owed to B, it is more likely that the subject product and the supply to support its production is really scarce. Therefore, for most circumstances where an efficient breach would happen, the result is to punish a bona fide B by forcing it to accept a harsh result that no one else could fulfill B’s demand. If such is the same result in the United States, there might be less proponent for efficient breach[43].
Chinese market economy is still in the birth period. The lack of a pool of different suppliers in a commercially reasonable given market is the reality. To open a door for efficient breach theory which is acknowledged in the advanced American market is not adequate for the healthy growth for Chinese market. Therefore, without considering the past planned economy history and traditional Chinese morality, just for the sake of the market itself, it is reasonable that the Chinese contract law does not acknowledge the theory of “efficient breach”.
§ 4.4 Imbalance of Information between Foreign & Domestic Market Players
During the past twenty years, foreign business and investment has kept running into Chinese market. After China joins into the World Trade Organization, there will be more and more foreign incomers to domestic market. By that time, China is also subject to the requirement of WTO rules.
The MFN and National Treatment status in GATT aim to maintain a leveling play between domestic and foreign business and investments. However, it is not to say that in reality, the business expertise and financial performance of domestic and foreign players are also at an equally competitive status.
Chinese players have the advantage of local connections with other business players. Foreign players tend to have advantage in business administration and wider exposure to information flowing in the market. Foreign business is also like to take more speedy response to any change in the market than Chinese ones[44]. The modern economy theory acknowledges the phenomenon of “imbalance of information”. It is this imbalance of information that will create potential problems for Chinese business competitors if efficient breach theory is introduced into Chinese contract law.
If a foreign business is a buyer, it is generally financially superior to Chinese competitors. Once the foreign player knows of an attractive source of supply, it may compete with the Chinese buyer with help of huge financial support. To give a break to the efficient breacher (which may also be Chinese in a domestic market), the Chinese court is actually driving an economically disadvantaged bona fide Chinese purchaser into difficulty and rewarding the foreign “interceptor”.
If a foreign player acts as a seller, it is very responsive to the information and feedback from the market. Once it captures a fish big enough and the net can only hold one fish at one time, the capturer finds no unwillingness to “set free” the smaller one even if having to feed it with a slim piece at first. The smaller one which is set free might not be free at all, maybe it has to be starved for a while until powerless sunk into the dark sea of the socialist market economy which is dotted with the floating whirlpools of American flavored efficient breach.
In both fact patterns, the more efficient foreign competitor will benefit at the cost of Chinese business if a new legal rule of “efficient breach” permits the foreign business to do so. If Chinese legislators realize this unwelcome result, they will only reject the efficient breach theory and cling to the propaganda “Treasuring the Contract, Honoring the Promise” more closely than ever.
A successful business with sound reputation is unlikely to invoke “efficient breach” as a defense, that does no benefit to its goodwill. This might be the reason that efficient breach cases in contract law textbooks seldom has a Fortune500 defendant. But just a bunch of third class foreign business is enough to disturb the healthy growth of the emerging Chinese market economy. With the market access barricades keeping lowered down as mandated by WTO rules, China might see an incoming of more and more foreign companies with ordinary capital support but an excellent responsiveness to the market information which might be willing to find protection under a newly established efficient breach theory. And by that time, China must still stick to the National Treatment requirement and equal application of justice. More and more domestic business will absolutely feel uneasy and discontent. This may create potential problem of resistance against market access concessions. The agriculture sector is no doubt a traditional backbone for such resistance (though efficient breach has not been a reason relied on), once the industrial and commercial sectors join with the agriculture, a nightmare for foreign investment and free trade proponents is near.
The Chinese contract law does not adopt the efficient breach theory as United States does. There are various cultural, legal historic, economic reasons for this standing point. Considering the emerging market economy in China and with a genuine hope to see the healthy development of this economy, it is wise not to adopt the efficient breach theory from the initiation of the Chinese legislature its own.
(a) Uniform Commercial Code Art.1-201(11): “ ‘Contract’ means the total legal obligation which results from the parties’ agreement as affected by this Act and any other applicable rules of law.”;
(b)Restatement of Contracts, 2nd, Art.1: “A contract is a promise or a set of promises for the breach of which the law gives a remedy, or the performance of which the law in some way recognizes as a duty” and Art.17(1): “Except as…., the formation of a contract requires a bargain in which there is a manifestation of mutual assent to the exchange and a consideration”.
(c) Contract Law of PRC, March 15, 1999 (effective from October 1, 1999) Art.2: “Contract is an agreement made between natural persons, legal persons and/or other entities which are on equal status, with regard to the establishment, modification and termination of relationships in rights and obligations in civil law”.
[2] See, Richard A. Posner, Economic Analysis of Law, p.119 (5th Ed. 1998).
[3] Patton v. Mid-Continent Sys., 841 F.2d 742, 750 (7th Cir. 1988) (Posner, J.).
[4] Oliver Wendell Holmes, The Common Law, p.1 (Mark DeWolfe Howe ed., Little, Brown and Company 1963) (1881)
[5] See, e.g., William Powers, Jr., Symposium on the Law of Bad Faith in Contract and Insurance: I. The availability of tort remedies for breach of contract: border wars, 72 Tex. L. Rev. 1209 (1994)
[6] See, Joseph M. Perillo, Misreading Oliver Wendell Holmes on efficient breach and tortious interference, 68 Fordham L. Rev. 1085 (2000); Note: Resolving the paradox between legal theory and legal fact: the judicial rejection of the theory of efficient breach, 20 Cardozo L. Rev. 321 (1998). (The latter was a law student’s inquiry why the judiciary creates a “paradox” by not sponsoring efficient breach as academic do, Professor Perillo in his article then criticized the student author for his misunderstanding of the law to accept the efficient breach as a general, default legal rule.)
[7] Glendon, Gordon, Osakwe, Comparative Legal Traditions, 2d. p. 397 (WestGroup 1998); Preamble to the Constitution of the PRC, (December14, 1982, as amended March 15, 2000).
[8] Civil Code of the Republic of China, May 23, 1929 (effective from October 10, 1929). The Code includes General Principles, Rights in Rem, Obligations, Domestic Relation. This Civil Code, with numerous revision, is still presently applicable in Taiwan (Republic of China).
[9] One of the principal drafters, Dr.WANG Chung-hui, studied law in both Japan and the United States. His doctorate dissertation was the English translation of 1896 German Civil Code. Anyone with an understanding of the pure legal-science characteristic and the complex internal uniformity throughout the whole Civil Code will appreciate the extraordinary efforts required by such a project. This unusual dissertation at once proved to be a big success: Wang’s translation has been one of the most widely used and cited English versions of German Civil Code throughout the world. Wang himself was a nationalist revolutionist and became the first Minister of Foreign Affairs of Republic of China in 1912, later became the Minister of Justice, and subsequently again Minister of Foreign Affairs throughout 1920’s and 1930’s. Interestingly, similar to Napoleon Bonaparte’s comment on Waterloo and French Civil Code, realizing the Japanese invasion into China (1931) was within Wang’s term at Ministry of Foreign Affairs, Dr.Wang himself was proud of his contribution to Chinese Civil Code and that class-of-art work piece of English translation.
[10] Internet page from the Official Website of NPC (last modified March 1, 2001; visited May 4, 2001) <http://www.peopledaily.com.cn/zgrdxw/zlk/qgrdhy.html>
[11] Of course the real “parliament supremacy” in China is heavily compromised by the omnipotent Chinese Communist Party (CCP). From a political view, it is party supremacy applied in China. Inside the formal national and legal system itself, even CCP leaders themselves acknowledge the supremacy of NPC. Deng Xiaoping’s famous words are: “The party should also follow the laws of our nation… it’s not the party’s work to draft the law, we should have to use NPC to transform the party policy into the national law.” For detailed discussion and an excellent study on NPC’s role in contemporary Chinese politics and the dynamic process of its legislation drafting work, see, Michael Dowdle, The Constitutional Development and Operations of the National People’s Congress, 11 Colum. J. Asian L. 1 (Spring 1997). Another example of the most recent research on NPC’s legislation work is Alford, Liebman, Clean Air, Clear Processes? The Struggle over Air Pollution Law in the People's Republic of China, 52 Hastings L. J. 703 (2001). Professor William P. Alford is a renowned scholar in both ancient and modern Chinese laws, also contemporary Chinese politics. The article uses environmental law as a background to focus on the legislative revision process, and exemplifies how the competing and adversial interests of different governmental bodies and groups are addressed, compromised and represented in the final version of the Air Pollution Prevention and Control Law (2000).
[12] Interpretation on Several Questions on Application of Contract Law (I), Supreme People’s Court, December 19, 1999. There has not been a second part issued yet.
[13] The first one is Economic Contract Law, December 13, 1981 (effective from July 1, 1982). The other two contract laws are Foreign Economic Contract Law, March 21, 1985 (effective from July 1, 1985) and Technology Contract Law, June 23, 1987 (effective from November 1, 1987). All three were expressly abrogated by the 1999 Contract Law and China no longer discriminates contract between domestic and foreign, technology-related or not. China is also a signatory to 1980 UNCISG.
[14] Contract Law of PRC, March 15, 1999 (effective from October 1, 1999).
[15] For background discussion of the UCL, See generally, WANG Liming, XU Chuanxi, Fundamental Principles of China’s Contract Law, 13 Columbia J. Asian L. 1 (Spring 1999). Professor Wang is a major drafter of UCL and Dr.Xu is currently a practising attorney at Paul, Weiss, Rifkind, Wharton & Garrison (New York Branch); WANG Liming (translated by Keith Hand), An Inquiry into Several Difficult Problems in Enacting China’s Uniform Contract Law, 8 Pac. Rim L. & Pol’y J. 351 (1999); ZHONG Jianhua, YU Guanghua, China’s Uniform Contract Law: Progress and Problems, 17 UCLA Pac. Basin. L. J. 1 (1999).
[16] Art.8:1, Contract Law of the PRC. It is my own English translation, not the official one. There is no conspicuous Chinese rule that which body (inside or outside the government) may provide a foreign translation of Chinese laws as having official effect.
[17] Here I caution to add “self” before the word “interest” (actually deleted the word after typing it). Naturally, when speaking Chinese, people just refer to such an act, even without a glimpse of thought, as “driven by the maximization of self-interest”. However, the basic point taken by American proponents (such as Judge Posner) in arguing for efficient breach is that it is not merely the maximization of self-interest, rather it is a maximization of the economic interest of all the related parties “as a whole”. At least the plaintiff who gets monetary compensation is not worse off in proponents’ eyes, and the society as a whole benefits from the efficient breach. However, the Chinese will always consider this to be, and only be, maximization of self-interest. Richard Posner’s book of Economic Analysis of Law has been translated into Chinese and became popular among younger Chinese jurists and law students. When I took my English-American Civil & Commercial Law class in Peking University in 1997, the young lecturer who was very good in Chinese (both Mainland and Taiwan) civil law and contract law used Posner’s example (found in the book) in teaching the common law “foreseeability” rule (Hadley v. Baxendale). Not at any point in the discussion of contract law did the lecturer even mention, lest favor, any “efficient breach” theory (which was also included in the same book). That was the reason this theory gave me a legal “cultural shock” in my first contract law class here in the United States. (Last year, that young lecturer was sent by PKU Law School to enroll in Cambridge University to get advanced knowledge in English law, maybe he was also shocked as his former student was in US.)
[18] Marriage is not a contract under Chinese law. It is maybe because of the communist sanctification of personal freedom from exploitation and slavery that “everyone is free by oneself” and the denouncement of the notion of “contract” itself as a “tool used by the capitalist”. The first idea is originally sponsored by European Enlightment thinkers, English Abolitionist and French Revolution, but the second part finds no appearance outside Marxism. It is unacceptable for a true communist to think that by betrothing his daughter to the son of a fellow comrade, the two youths and revolutionary families are entering into a contract. The example in personam obligation is not subject to specific performance under Chinese laws are: actress performing a role in a movie, painter drawing a picture under the commission of his client.
[19] In Chinese legal treatises and textbooks, “specific performance” has been used as the caption under which the “continuation of performance” is discussed. In Chinese terminology, the common law rule of “specific performance” is translated as TeBie LvXing, word-by-word translated into English as “special performance”. Chinese treatises just use TeBie LvXing in discussion of continuation of performance as well.
[20] Not objective difficulty or non-achievement at all, or the court will not order specific performance because that indeed is a punishment for the injured party �C she does not get monetary compensation and the breacher is actually unable to make a specific performance.
[21] Till now, China still publishes five-year-plan (Woo Nian Jee Hwa) as a prospectus for the grand PRC Co. Ltd. There has been even more ambitious plan of “ten-year-scheme” (Shih Nian Gwei Hwa)! Today no one genuinely believes that the predetermined plan will match the actual future demand. Even worse, the doubt and disbelief on the official data of annual GDP, which is computed after the end of a fiscal year rather than predetermined, are so profound all over China and the world that a prudent analyst or cautious investor must try hard to make out her own version. See, Enter the Dragon, 358 Economist 8212, p.23 (March 10-16, 2001) and Phillip Day, China's Rosy Economic Data Could Use Investor Scrutiny, Asian Wall St. J. (April 20, 2001). I here provide an authorized on-line copy of AWSJ article <http://wsj.clickability.com/r/r?t=E&clickMap=viewThis&etMailToID=1803560891>
[22] The prohibition was even against selling the eggs, which were produced by the hen kept by the farmer himself, in the bazaar. It was permitted to keep your hen but you could not sell the eggs to others. The punishment was to confiscate, at least, the eggs, if not traced back to the productive hen. The farmer would be forced to submissively hear the reprimand from the local commune officials and his neighbors, face to face. It was called “to cut off the capitalist tail”!
[23] Even if a farmer moved from village to the city and planned to live with his relatives, the family of relatives also lived on their own fixed supply quota, and it was impossible for them to get extra supply for the move-in farmer. The employees of state-owned-enterprises (SOEs) may travel within the nation on business, but they had to use the “national universal food stamp”, which was issued by Ministry of Food and attributed to each SOEs on annual quota, to buy food at another city. Even on the railroad during the travel, the railway also required the passenger to produce stamp to buy food. (Food mainly included rice, bread, sugar and other primary agriculture products but not covered water, beverage, alcohol or cigarettes.)
[24] Something besides the quota of rice, meat, cooking oil and TV… after the end of complete central planned economy period and thanks to the atheist communist government, the employees now still get free condoms from SOEs. Of course you have to tell the doctor at working-unit clinic of your “night plan” before you are given the necessary amount of “equipment” (present corporate tax law exempts income tax for contraceptive products manufacturers).
[25] Art.11, Economic Contract Law. Five years after its promulgation, the Ministry of Commerce published a special regulation applicable to contracts made by SOEs and governmental entites. It also applied to contracts for state directive plans or government procurement transactions. Tentative Regulation of Administration of Contracts made by Commerical Departments, Ministry of Commerce, September 1, 1987. (For Chinese version, click this hyperlink, the underlying URL is extremely long that to use it as a functional citation is nearly impossible.)
[26] The idea was gradually shaped by Deng Xiaoping since 1982. It finally came into the platform of Chinese Communist Party in 1992 after Deng delivered a series of important and groundbreaking speeches and comments during his famous “south tour” to Shanghai and southern cities in province of GuangDong.
[27] A habitual practice is that before an important legislation is to become effective, the Supreme People’s Court will issue directive to lower courts and urge them to study well the new law and fully understand its meaning and policy. If not because the central government itself also realized the slack of local judges, such directives would not have been repeatedly issued in recent decade whenever a new law was published.
[28] American legal professionals may fully appreciate the meaning of this term by recalling the reason to establish federal jurisdiction over civil cases.
[29] See, Donald Clarke, Dispute Resolution in China, 5 J. Chinese L. 245, p.257, n.40. (I translated this law review article into Chinese upon Prof.Clarke’s request and keep a copy for myself) Clarke even found Deng Xiaoping himself had also indicated the same worry about the competence of Chinese judiciary. See, Collections of Deng Xiaoping 1975―1982, p.227 (People’s Press, 1983, Beijing).
[30] Generalissimo Chi’ang Kai-shek, the President of Republic of China, once proposed a famous indoctrination listing “twelve fundamentalities”. The first is loyalty and bravery (Chung Yung) for the country, and the fourth is trustworthiness (Hsin Yee) for one’s career. See, http://www.president.gov.tw/1_roc_intro/xpresident/img/b08b.jpg As late as 1990’s, it is still a frequent subject for Taiwanese students to write essays.
[31] Jun Tze Yee Yan, Sih Ma Nan Chuei. “Sih Ma” is “speedy horse”, here Achilles.
[32] Chung Her Tung, Show Hsin Yung.
[33] As evidenced by television commercials, printed advertisements and product looseleaves produced and disseminated by such rewarded businesses in Chinese market. Beginning from 2000, SAIC required any online dealer must apply for internet-based transaction (B2B, B2C) approval from the Beijing AIC, the qualified dealer must also place a special icon and the approval license number in its main page of the website. Any website without the icon or license number is forbidden to participate in online B2B, B2C transaction. The hyperlink associated with the icon even will lead the web-browser to an encrypted web page so as to assure the consumer that the license is not fake and the icon is not fraudulently placed in the web page! Temporary Regulations on Administration of Business Transaction Websites, SAIC, September 1, 2000. It supersedes two prior regualations issued by Beijing AIC (March 28 and May 18, 2000). The old practice thus finds revival in the age of Internet. The approval standard is supposed to be associated with the credbility evaluation though the regulation does not explicitly require so.
[34] Decision concerning Rectification and Standardization of Market Economy Order, State Council, May 8, 2001. Chinese version (last modified unknown)<http://www.law-lib.com/law/law_view.asp?id=15292>
[35] Ibid., Arts.17 and 18.
[36] Joseph M. Perillo, Misreading Oliver Wendell Holmes on efficient breach and tortious interference, 68 Fordham L. Rev. 1085, 1093-1094 (2000)
[37] Most of China Economy Not State-owned, International Finance Corp. Says, ChinaOnline (published and last modified October 26, 2000, now taken off from free-view server and available upon payment.) <http://www.chinaonline.com/topstories/001026/1/B200102534.asp>
[38] An efficient breach judgment made in an advanced market, which is based on rule of law, may provide increase of the total gain of the society. Where the rule of law is not well available such as in China, policy preference should be given to the elimination of “uncertainty”, which is an inherent by-product of efficient breach no matter in an advanced or developing market. An alert reader may doubt whether the local court will dutifully enforce the current Chinese contract law as not to let such powerful local producer (Seller A) escape from the law’s prohibition against breach (no matter whether efficient or not) and order a specific performance for the injured Buyer B. However, compared with the administration, discretion of the judiciary is limited. Being against breach of contract is also a very important principle in Chinese contract law. A corrupt local judge may only adjust the damages but is unable to act boldly against the clear legal text. If B brings A to the court before A-C transaction is performed, it is hard for the judge to think of a seemingly fair way not to order specific performance for B but to let A deliver the very same products to C at the same time. The only possible resolution is the crooked judge blindly declaring A-B contract as void or voidable at A’s choice. However, by such a judgment, Buyer B will lose everything it is entitled to. That is not the result of the “efficient breach” argued by American jurists -- Buyer B should have at least not to be worse off, which necessarily requires acknowledgement of the validity of A-B contract in the first instance.
[39] C must pay more than B would have paid to A. By dissolution of A-B contract and supporting A-C contract, the proponent of efficient breach theory believes everyone is better-off: B has no loss, C gets what it is eager to acquire by paying a higher price, A is better off than honoring its contract with B because in the end A will keep the “extra money”( offer of C minus compensation to B minus production cost).
[40] As explianed by the following paragraph, a double performance may happen where the court supports validity of both contracts before A performs any one of them, may also happen where A has already performed its obligation owed to C under that “more efficient” contract. In both situations, B’s expectation for real performance is protected by the contract law.
[41] It is exactly a foundation relied by American opponents’ criticism of the theory of efficient breach that the cost for finding substitutes is placed upon the injured buyer rather than the defaulting seller, see note 36, supra.
[42] It is a dreamed-of reputation acknowledged by other market players, not the reward from the supervising SAIC who issues the certificate, because a crook is actually not a crook if it is unable to buy a certificate from local SAIC.
[43] Under both English and American Common Law, the sale of real estate does not have monetary damages as compensation. Traditionally the courts in England and the United States have routinely ordered specific performance. The underlying reason is: land is unique and not substitutable, there is no way to redress the injured party other than specific performance.
[44] To use an inadequate but easier-to-understand analogy, Chinese advantage is knowledge of “insider dealing” while the foreign advantage is making responsive investment decision in the shares market.