초록이웃나라중국에서는 1999년 10월 1일부터中華人民共和國合同法 (the Uniform Contract Law of the

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1 *1) Professor 특집중국법제소개 Review of Uniform Contract Law of the People s Republic of China at the United States Legal Point of View (comparison to U.C.C. and other international laws) Hyeri Lee1) * 초록이웃나라중국에서는 1999년 10월 1일부터中華人民共和國合同法 (the Uniform Contract Law of the People s Republic of China, the UCL, 이하 합동법 이라고한다 ) 이시행되어중국인의사회생활에중요한영향을미치고있다. 본논문은합동법의주요내용을소개하고, 미국통일상법전 (Uniform Commercial Code, 이하 UCC 라고한다 ) 이나 국제물품에관한유엔협약 (United Nations Convention on Contracts for the International Sale of Goods, 이하 CISG 라고한다 ) 등과비교검토하여합동법이극복해야할문제점을살펴보는것을목표로한다. 우선, 계약의성립 (Offer and Acceptance, Consideration, Legality of Contract, Statute of Frauds) 과계약의이행및불이행 (Performance and Nonperformance) 에있어서당사자의항변권을 UCC, CISG 및 UNIDROIT 원칙 ( 國際商事契約原則 2004, International Institute for the Unification of Private Law) 등과비교하여설명하였다. 합동법은계약의성립과정에서청약과승낙의개념을도입하였는데, 이는 CISG와유사하다. 합동법에서는 UCC 중약관의충돌 (battle of the forms) 에관한규정과흡사한규정도찾아볼수있다. 합동법은 UCC와마찬가지로이행기이전의계약해제가계약위반임을명시적으로규정하고있으나, 위약자의이행이실질적이행 (substantial performance) 에해당하는지여부를결정함에있어 UCC는경제적관점에치중하는반면합동법은계약의성격과당사자들간의관계에중점을둔다. 한편, UCC는전자문서를이용한계약을인정하지않는데반해합동법은이를인정하고있는데, 이는정보화시대에부응하려는노력이라할수있다. 다음으로는합동법의세가지기본원리를검토하였다. 먼저, 자유계약의원칙과관련하여아직많은부분에서사회주의시장경제의모습을발견할수있음을지적하였고, 이어신의성실의원칙과무역장려의원칙을차례대로살펴보았다. 합동법상무역장려의원칙이명시적으로규정되어있지는않으나, 구체적인조항들을살펴보면계약체결과정의많은부분에서개인과기업에게자유로운결정권을주는등무역장려의원칙이충분히구현되어있다. 그러나합동법은기존의중국민법과일치하지않은부분이있어문제점이지적되고있다. 또한, 합동법에따르면손해배상액을약정할수있는데, 당사자가이행지체에관하여위약금을약정한경우위약자는위약금을지급하여야할뿐아니라본래의채무도이행하여야하는점에서비난의대상이되고있다. 이러한문제점들이있지만합동법은 CISG 와 UCC의규정을본받아이전의중국법내지대륙법체계와는다른특징을이루었다. 합동법은중국의경제를세계화에맞추어유동적으로변화할수있게만드는법률적장치가될것임이분명하다. at Law(Dongguk University), New York State Attorney. 70 인권과정의 Vol. 376

2 Review of Uniform Contract Law of the People's Republic of China at the United States Legal Point of View(comparison to U.C.C. and other international laws) Ⅰ. Introduction 1) On March 15, 1999, the Uniform Contract Law of the People s Republic of China(hereinafter UCL ) 2) was adopted by the Second Session of the Ninth National People s Congress(NPC) and scheduled to take effect on October 1, The UCL provides general provisions(entitled Zongze in Chapters 1-8 in the UCL) regarding to governing all types of contractual relationships 3), as well as particular provisions(entitled Fenze in Chapters 9-23) for further regulation of 15 particular categories of contracts, respectively. There are three major principles, namely, those of freedom of contract( Hetong Ziyou ), good faith( Chengxin ), and the fostering of transactions( Guli Jiaoyi ), that have been conscientiously followed by the law s drafter s. 4) The UCL aims to achieve many goals. In order to move towards a market-oriented economy and to integrate with the world economy, the UCL abolishes the differential treatment between civil contracts and economic contracts and between domestic economic contracts and foreign economic contracts. The UCL is based on experience from the spheres of Chinese economic and judicial practice as well as relevant experience from other countries. The Contract Law also attempts to substantially enlarge the contractual freedom of the parties. Restrictions on freedom of contract must be clearly justified. Moreover, the law has taken into account different values in contract law. These values include economic efficiency and social justice. Technically speaking, this UCL is relatively detailed and is more operational than any past versions. This article consists of five sections including this introduction. Section II will explore the comparing the characteristics of the UCL to the Uniform Commercial Code of United States(hereinafter UCC ) and other international standards such as United Nations Convention on Contracts for the International Sale of Goods(hereinafter CISG ). Section III will examine three major principles of UCL. Section IV will discuss the problems existing in the UCL. Conclusions follow in Section V. Ⅱ. Characteristics of UCL 5) A. Offer and Acceptance The UCL requires an offer and acceptance to form a contract; 6) for Chinese contract law 1) Wang Liming, Fundamental Principles of China s Contract Law, 13 CLMJAL 1, see 1~2. 2) Zhonghua Renmin Gongheguo Hetong Fa [Uniform Contract Law of the People s Republic of China] [hereinafter UCL]. For the full text of the Contract Law, as well as an English translation thereof, see CCH, China Laws for Foreign Business - Business Regulation, Vol. 1,P5~650. 3) The few exceptions are contracts or agreements involving the parties civil status or relationship, such as marriage, adoption and guardianship, which are to be governed by other relevant laws. See Contract Law, supra note 1, art. 2. 4) For a discussion of the Contract Law s drafting process, see Professor Jiang Ping, Drafting the Uniform Contract Law in China, 10 Colum. J. Asian L. 245, 245 (1996). 5) The Mountains Are High and the Emperor Is Far Away : Sanctity of Contract In China, 40 Am. Bus. L.J. 459, See 465~472. 6) UCL supra 2 art. 13 (1999). 인권과정의 2007 년 12 월 71

3 특집 / 중국법제소개 this is a newly introduced and it has been considered as an important change. 7) The UCL defines offer similarly to the UCC 8) and the other western contract law 9) : An offer is a party s manifestation of intention to enter into a contract with the other party, which shall comply with the following: (i) Its terms are specific and definite; (ii) It indicates that upon acceptance by the offeree, the offeror will be bound thereby. 10) As in the common law tradition, price lists, advertisements, bids, and announcements of auction are not offers, only invitations to make offers. 11) According to the CISG, it defines proposals not addressed to one or more specific persons as mere invitations to make offers. 12) It appears that the UCL is more similar to the UCC, because the UCC permits contracts for the sale of goods to be made in any manner to show agreement. On the other hand, the CISG adopts a more formal analysis of contracting behavior, 13) since CISG determines intent from an objective analysis of what a reasonable person would have intended. 14) The UCL requires that the terms of a contract shall be stated by the parties and generally include: the names and domiciles of the parties, subject matter, quantity, quality, price or remuneration, time, place and method of performance, liabilities for breach of contract, and the method of dispute resolutio n. 15) When the parties do not state a relevant term, there are gap filling provisions that can be used in order to enforce the contract. 16) They are very similar to provisions in the UCC. 17) For example, if quality was not clearly stated, then the state standard or the industry standard will be applied. If the price is omitted, the prevailing market price will be applied. The UCL has no mandatory terms for a contract, unlike the UCC, which requires a quantity term, 18) and the CISG, which requires an indication of the goods and an express or implicit provision for determining quantity and price. 19) In this aspect the offer and acceptance rules of the UCL are consistent with those of the 7) Ming-Jer Chen, Inside Chinese Business 181 (2001), note 18, at ) Uniform Commercial Code (2001) [hereinafter UCC]. Copyright by the American Law Institute and National Conference of Commissioners on Uniform State Laws. UCC <section> (2001) defines contract and agreement; <section> defines acceptance. 9) Conference on Contracts for the International Sale of Goods 178, U.N. Doc. A/Conf.97/19 (entered into force on Jan. 1, 1988) [hereinafter CISG] note 8, art ) UCL art. 14 (1999). 11) UCL art. 15 (1999). 12) CISG (1988), supra note 9, art. 14(2). 13) Virginia G. Maurer, The United Nations Convention on Contracts for the International Sale of Goods, 15 Syracuse J. Int l L. & Com. 361, 366 (1989). note 32, at ) CISG (1988), supra note 9, art ) UCL art. 12 (1999). 16) UCL art. 62 (1999). 17) UCC <section><section> 2-305, 2-308, (2001). 18) UCC <section> (2001). 19) CISG (1988), supra note 8, art. 14(1). 72 인권과정의 Vol. 376

4 Review of Uniform Contract Law of the People's Republic of China at the United States Legal Point of View(comparison to U.C.C. and other international laws) CISG. 20) An offer may be withdrawn if the revocation reaches the offeree before or at the same time as the offer. 21) Neither the UCL nor the CISG have provisions resembling the UCC s firm offer rule. 22) Both the UCL and the CISG provide that if there is a time period set for acceptance or an indication that the offer is irrevocable, then it is irrevocable, 23) and that an offer is irrevocable if the offeree has reasonable grounds to believe the offer is irrevocable. 24) The effective times for offer and acceptance must be considered carefully. Under the UCL, like the CISG, both offers and acceptances become effective when they come under the control of the recipient. 25) The common law mailbox rule is not followed. Some interesting comparisons and potential conflicts can arise because of these conflicting rules. 26) Technically there is no mirror image requirement in the UCL. Offers are effectively accepted when additional terms do not materially alter the offer. The wording in the UCL is very similar to the UCC battle of the forms. 27) Both the UCL and the CISG provide that an acceptance that does not materially alter the offer will be effective and create a binding contract. 28) However, in contrast to the UCC, both the UCL and the CISG specifically define what will constitute a material change. The UCL stipulates that a change in the subject matter, quantity, quality, price or remuneration, time, place and method of performance, liabilities for breach of contract or method of dispute resolution constitute material change and create a new offer. 29) The CISG has a very similar list of material alterations. 30) So, even though "technically" there is no mirror image requirement, in effect the terms of the acceptance should closely reflect those in the offer because a material alteration to the offer will constitute a counteroffer. 31) B. Consideration Although in the common law world, consideration is fundamental in the formation of a contract, in accordance with the civil law tradition there is no reference to it in Chinese contract law 32) or in the CISG. 33) One can 20) CISG, supra note 8, art ) UCL art. 17 (1999); CISG (1988), supra note 8, art ) UCC <section> (2001). 23) UCL art. 17 (1999); CISG (1988), supra note 8, art. 16(2)(a). 24) UCL art. 19(2) (1999); CISG, supra note 8, art. 16 (2) (b). 25) UCL art. 26 (1999). 26) See Chen, supra note 18, at ) UCC <section> (2001). 28) UCL arts 30 (1999) ; CISG, supra note 8, art ) UCL art. 30 (1999). 30) CISG, supra note 8, art. 19. The list of material alterations includes payment, quality, quantity, price, time and place of delivery, extent of one party s liability to the other, and settlement of dispute under the contract. 31) UCL art. 31 (1999) ; CISG, supra note 8, art ) harles D. Paglee, Contract Law in China : Drafting a Uniform Contract Law, (last modified, May, 1998). 인권과정의 2007 년 12 월 73

5 특집 / 중국법제소개 argue that consideration is impliedly required, on grounds that subject matter, quantities, quality and price are essential exchange terms. Consideration can also be implied from the provision that requires that each party must perform its own obligations as agreed upon in the contract. 34) C. Legality of Contract The UCL s Article 7 on legality has caused some concern for Western legal professionals. Article 7 reads: In concluding or performing a contract, the parties shall abide by the relevant laws and administrative regulations, as well as observe social ethics, and may not disrupt social and economic order or harm the public interests. 38) In the UCL, the term invalid contract is used to cover both the common law concepts of void and voidable contracts. As under the common law, contracts that are the result of fraud, mistake, coercion, lack of capacity, or duress may be modified or rescinded. 35) When there is fraud and coercion that damages the interests of the State, then the contract is per se void. 36) Additionally, contracts that are formed as a malicious conspiracy to harm the interest of the state, contracts that have illegitimate purposes that are concealed under the guise of legitimate acts(such as gambling contracts) and contracts for the sale of ammunition are also classified as invalid. 37) Again, in this instance the word invalid means void. This section could be read to be quite consistent with Western contract law. U.S. laws also provide that contracts are illegal if they violate public policy. 39) However, the meaning of the terms public policy, social ethics, and public interests are all open to interpretation, so contract parties on both sides may find them problematic. The void contract will be discussed further under void and voidable contract. D. Statute of Frauds Consistent with the CISG 40) and most civil law countries, the UCL specifies that A contract may be made in a writing, in an oral conversation, as well as in any other form. 41) It must be evidenced by a writing only when 33) Rob Schultz, Rolling Contract Formation Under the UN Convention on Contracts for the International Sale of Goods, 35 Cornell Int l L.J. 263, 278(2002); Maria del Pilar Perales Viscasillas, The Formation of Contracts & the Principles of European Contract Law, 13 Pace Int l L. Rev. 371, 374 (2001). 34) UCL art. 8 (1999); Zimmerman, supra note 19, at ) UCL art. 52 (1999). 36) UCL art. 52(1)-(2) (1999). 37) UCL art. 52 (1999). 38) UCL art. 7 (1999). 39) Restatement (Second) of Contracts<section><section> 178, 208; UCC <section> (2001). 40) CISG, supra note 8, art. 11 provides that a contract may be proved by any means, including witnesses. 41) UCL art. 10 (1999). 74 인권과정의 Vol. 376

6 Review of Uniform Contract Law of the People's Republic of China at the United States Legal Point of View(comparison to U.C.C. and other international laws) required by a relevant law or administrative regulation or when the parties have so agree d. 42) The UCL defines writing as a memorandum of contract, letter or electronic message,(including telegram, telex, facsimile, electronic data exchange and electronic mail), which is capable of expressing its contents in a tangible form. 43) Although the UCC does not yet recognize it, 44) the UCL specifically allows parties to contract by the use of electronic data. Unlike the UCC, 45) the UCL does not require a contract for goods valued over a specific amount to be in writing. E. Performance and Nonperformance 46) U.S. contract law normally incorporates the principle of pacta sunt servanda( agreements are to be observed ) or simply, a deal is a deal. 47) Parties can obligate themselves by contract to specific performance obligations or alternatively limit their liability under certain events, for example, through the addition of force majeure clauses, 48) but otherwise the duty is clear. If such limitation is not expressly made in the contract, the parties are either bound to the contract or must rely on one of the court derived limitations, such as mistake or changed circumstances. 49) The UCL also adopts pacta sunt servanda as one of its fundamental principles. 50) The provisions covering contract performance largely echo many of the corresponding rules in the UNIDROIT 51) Principles. 52) Article 107 of the UCL sets out the general rule on liability for breaches, stating that if a party fails to perform its obligations under a contract, or rendered non-conforming performance, it shall bear the liabilities for breach of contract by specific performance, cure of the non-conforming performance or payment of damages. 53) (a) Substantial Performance Under U.S. law, full performance of a duty always operates as a discharge of that duty, but nonperformance does not always constitute a breach. 54) This is so because performance may not yet be due because the required time has not yet arrived, or because a condition may 42) UCL art. 10 (1999). 43) UCL art. 11 (1999). 44) See Chen, supra note 18, at ) UCC <section> (2001). 46) John H. Matheson, Convergence, Culture and Contract Law in China, 15 Minn. J. Int l L. 329, see 355~ ) Waukesha Foundry v. Indus. Energy, 91 F.3d 1002, 1011 (7th Cir. 1996); Farnsworth, supra note 119, at ) E. Allan Farnsworth, Contracts 489 (4th ed. 2004) 119, at ) Id. 50) See UCL, art. 8 (P.R.C.); Bing Ling, supra note 46, at ) International Institute for the Unification of Private Law: UNIDROIT 52) Zhang Yuqing & Huang Danhan, The New Contract Law in the People s Republic of China and the UNIDROIT Principles of International Commercial Contracts: A Brief Comparison(2001) (stating that many articles in the UCL are similar in spirit to the UNIDROIT Principles ). supra note ) UCL, art. 107 (P.R.C.). 54) Restatement (Second) of Contracts <section> 235 (1981) 인권과정의 2007 년 12 월 75

7 특집 / 중국법제소개 not yet have occurred. The duty may have also been otherwise discharged by such grounds as subsequent agreement of the parties, impracticability of performance, or frustration of purpose. 55) When performance is due, however, any nonperformance is a breach, no matter how insubstantial. 56) UCL makes liability for nonperformance an obligation that is inherent in the binding nature of contracts. 57) Article 60 of the UCL mandates full performance according to the contract, lest a party be liable for breach under Article ) Article 107 adopts a strict liability principle, making breach the only essential element for contract liability. 59) This strict liability approach removes the need to find fault in the non-performing party, which is required under the civil law tradition for liability for nonperformance of obligations; this approach was present in some Pre-1999 Contract Laws. 60) Article 107 also provides the non-breaching party with the freedom to choose various remedies for the breach, essentially abandoning the [t]raditional mandatory rule of specific performance. 61) The UCL identifies circumstances by which duties may be discharged and contracts terminated without liability. A duty is discharged when (1) the obligations were performed in accordance with the contract ; (2) the contract was terminated ; (3) the obligations were set off against each other; (4) the obligor placed the subject matter in escrow in accordance with the law ; (5) the obligee released the obligor from performance; (6) both the obligee s rights and the obligor s obligations were assumed by one party ; and (7) any other discharging circumstance provided by law or proscribed by the parties occurred. 62) Articles 92 through 94 further provide parties with rights to terminate a contract without performing their obligations. (b) Substantial Performance under U.S. Contract Law 55) Farnsworth, supra note 48, at ) Restatement (Second) of Contrats <section> 235 (1981). 57) Bing Ling, Contract Law in China 16 (2002); see also Wei Luo, Wei Luo, The Contract Law of the People s Republic of China vii(1999), at viii (noting that the Contract Law repealed the Economic Contract Law, the Foreign Economic Contract law, and the Technology Contract Law). at ) The term full was added late in the drafting process in order to emphasize the duty of complete performance. Pitman B. Potter, Contract Law, in Doing Business In China I-6.2.1, n.49 (Freshfields Bruckhaus Deringer s China Business Group ed., 2004) at I ) Bing Ling, supra note 57, at 382. This follows the practice of several of China s Pre-1999 Contract Laws. Id. at 382 n.23. In contrast, however, the ECL had required proof of: (i) breach; (ii) property damage; (iii) fault; and (iv) a causal link between the breach and the damage. Id. at 382 n ) See id. at 399~405; cf. ames C. Hitchingham, Stepping Up to the Needs of the International Market Place : An Analysis of the 1999 Uniform Contract Law of the People s Republic of China, 1 Asian-Pac. L. & Pol y J. 8 : 4 (2000), at 17~19 ( [T]he law does not provide a standard of proof for an injured party to justify termination... [and] if an aggrieved party in good faith terminates a contract but is without proper cause, the aggrieved party is liable because fault based negligence is no longer an issue. ). 61) See Wang Liming & Xu Chuanxi, Fundamental Principles of China s Contract Law, 13 Colum. J. Asian L. 1, 3 (1999). at ) UCL, art. 91 (P.R.C.). 76 인권과정의 Vol. 376

8 Review of Uniform Contract Law of the People's Republic of China at the United States Legal Point of View(comparison to U.C.C. and other international laws) Common law courts developed the doctrine of substantial performance, whereby if one party s performance is a constructive condition of the other party s duty, only substantial performance is required before that party can recover under the contract. 63) The aim of the doctrine is to prevent forfeiture and, accordingly, the doctrine considers the benefit received by the injured party. 64) The doctrine is primarily applied to service contracts, particularly to construction contracts. 65) It also has limitations, especially in contracts for the sale of goods, which adopt a perfect tender rule. 66) Under U.S. law, a major factor determining if substantial performance can be applied is the extent to which the injured party can adequately be compensated in damages. 67) That is, if the breach is substantial and damages are uncertain or insufficient to pay for correction, a court is unlikely to find substantial performance. 68) An additional factor courts consider is whether the performance can be returned to and salvaged by the breaching party; if the breaching party can salvage the returned performance a court is less likely to find substantial performance. 69) Finally, if a party s breach was willful, courts have generally determined that the performance cannot be considered substantial. 70) (c) Substantial and Partial Performance under the UCL Under Chinese law, the extent to which a party s partial performance can allow it to recover under the contract is governed by rules covering fundamental breach. 71) Chinese law looks to the following factors in considering whether a breach was fundamental: (1) the intended purpose of the contract; (2) the importance of the unperformed obligation; 72) (3) the extent of nonperformance; 73) (4) the consequence of nonperformance; 74) (5) the 63) See id. 64) Id. 65) See U.C.C. <section> (2004). The perfect tender rule is not without criticism as it provides a buyer a right to reject goods without being harmed by the breach, and the seller might be stuck with perishable or specially manufactured rejected goods. See Farnsworth, supra note 48, at 552(explaining buyer rights under the perfect tender rule) ; see also CISG, arts. 49(1)(a), 64(1)(a) (a party may avoid a contract and become free from further duties if the other party commits a fundamental breach) ; UNIDROIT Principles supra note 51, art (1) (allowing a party to terminate a contract where the other party s nonperformance is fundamental ). 66) Farnsworth, supra note 48, at ) Id. 68) Id. 69) Id. 70) Bing Ling, supra note 57, at ) Id. at 340. If the parties intended a particular purpose, a breach that frustrates that purpose may be found to be fundamental. Id. For example, in Yining Int l Travel Agency v. Yili Great Wall Enter. Co., the court upheld a purchaser s termination of a contract that called for the delivery of standard residential flats when the construction company breached the contract by turning over luxury flats. Id. 72) Id. Different breaches are obviously of different value in terms of the obligations they break, and this will be highly dependent on the nature of the contract. See id. at 인권과정의 2007 년 12 월 77

9 특집 / 중국법제소개 likelihood of cure; 75) (6) the personal nature of the contract; 76) (7) the willfulness of breach; 77) and (8) the possibility and desirability of further performance. 78) The UCL generally allows a party to reject less than complete performance of an obligation, but leaves the door open for a very wide exception. Article 72 states that a creditor may reject the debtor s partial performance, except where such partial performance does not harm the creditor s interests. 79) It should be noted that this provision refers to partial performance of an obligation rather than partial performance of the entire contract. 80) Article 72 discusses a failure to perform an obligation in the agreed quantity and assumes that performance of that obligation is divisible. 81) Article 72 s right to reject partial performance gives the non-breaching party a right to demand full performance of the obligation at one time. 82) Although the partial performance will generally constitute a breach of contract and will therefore affect the creditor s interest, the exception that the creditor may not reject partial performance when its interest is not harmed compares the creditor s interest in accepting the partial performance with its interest in refusing the partial performance and insisting on full performance. 83) If the creditor s interests are not harmed by accepting partial performance, good faith requires it do so lest it be liable for default in acceptance. 84) Article 72 states that any additional expense incurred by the creditor due to the obligor s partial performance shall be borne by the debtor and the creditor is entitled to the related compensation whether it accepts or rejects the partial performance. 85) 73) Bing Ling, supra note 55, at 341. Again, this is dependent on the nature of the contract, as a fundamental breach of some contracts may be anything less than full performance. See id. 74) Id. The extent of detriment to the aggrieved party is an important factor, and the foreseeability of the consequences to the defaulting party may play a role in determining whether a breach is fundamental. See id. ; cf. CISG, supra note 9, art ) Bing Ling, supra note 57, at 342. If the defaulting party is able to cure the breach, it is by definition not impossible to accomplish the purpose of the contract, and it is possible that a non-fundamental breach will be come a fundamental one if the defaulting party does not take action to cure the breach in time. See id. 76) Id. If the contract involves personal confidence between the parties, a breach that compromises such confidence is likely to be fundamental. Id. This has particular relevance in insurance contracts. Id. 77) Id. The more willful, intentionally or grossly negligent the breach, the more likely it is to be found fundamental by Chinese courts. Bing Ling, supra note 57, at ) Id. at 343. If further performance is not possible due to the breach, the contract must be terminated ; and even if further performance is possible, if the aggrieved party cannot obtain its expected interest from the contract, it may also be entitled to terminate the contract. See id. 79) UCL, art. 72 (P.R.C.). 80) Id. ; see also Bing Ling, supra note 57, at ) See Bing Ling, supra note 57, at ) Id. ; cf. U.C.C. <section> (2004). 83) Id. ; cf. U.C.C. <section> (2004). 84) Bing Ling, supra note 57, at ) Id. at 241, 인권과정의 Vol. 376

10 Review of Uniform Contract Law of the People's Republic of China at the United States Legal Point of View(comparison to U.C.C. and other international laws) Chapter 9 of the UCL sets out special rules with regard to partial performance of sales contracts that are similar to those followed in many civil law jurisdictions. 86) Article 164 provides that where there are principal things and accessory things, a fundamental nonperformance with regard to the principal thing will make the accessory thing worthless, and the aggrieved party can terminate the contract with respect to the accessory thing. 87) However, if the breach is with respect to the accessory thing, the same would not apply to the principal thing. Article 165 states the general rule that if the subject matter can be separated without frustrating the purpose of the contract, the aggrieved party can only reject the performance that is defective. 88) Article 166 deals with installment contracts, stating: Where the seller is to deliver the subject matter in installments, if the seller s failure to deliver or non-conforming delivery of one installment frustrates the purpose of the contract in respect of such installment, the buyer may terminate the portion of the contract in respect thereof. If the seller s failure to deliver or non-conforming delivery of one installment frustrates the purpose of the contract in respect of all subsequent installments notwithstanding their delivery, the buyer may terminate the portion of the contract in respect of such installment as well as any subsequent installment. If the buyer is to terminate the portion of the contract in respect of a particular installment which is interdependent with all other installments, it may terminate the contract in respect of all delivered and undelivered installments. 89) (d) Comparison of Substantial Performance under U.S. and Chinese Contract Law In comparing the factors that U.S. and Chinese courts consider in determining whether a breaching party s performance amounted to substantial performance, U.S. law places much more importance on the economic value involved(both in terms of whether damages can adequately compensate the aggrieved party for its losses and in terms of whether the breaching party can salvage its performance). 90) Chinese law, on the other hand, looks far more into the nature of the contract, the nature and effect of the breach, and the relationship between the parties. 91) The laws of both countries view willful breaches negatively. 92) 86) Bing Ling, supra note 57, at ; see UCL, arts (P.R.C.). 87) UCL, art. 164 (P.R.C.); see also Bing Ling, supra note 57, at ) UCL, art. 165 (P.R.C.); see Bing Ling, supra note 57, at Article 165 differs from CISG, supra note 9, art. 51(2), in that under the UCL if the defaulting party to the contract prejudices the remaining party, both the seller and buyer are entitled to terminate the contract. See id. at Compare CISG, supra note 9, art. 52, and UCL, art. 165 (P.R.C.). 89) UCL, art. 166 (P.R.C.). 90) See supra notes 64~66 and accompanying text. 91) See supra notes 68~75 and accompanying text. 92) See supra notes 67, 75 and accompanying text. 인권과정의 2007 년 12 월 79

11 특집 / 중국법제소개 The discussion of the China Contract Law s treatment of partial performance of obligations and contracts is illustrative here because substantial performance is a common law doctrine designed to prevent forfeiture and intended to allow a party to recover under a contract provided that its performance is substantial. Article 72 of the UCL looks to avoid forfeiture of the contract by having the aggrieved party accept partial performance unless its interests are hurt. And similarly, the provisions in Chapter 9 of the UCL place an importance on the principal rather than the ancillary parts of sales contracts. F. Defenses Excusing Non-Performance (a) Force Majeure 93) Prior to 1989, very little, if any, attention was given by the Chinese to the notion of force majeure among contracts with foreign parties. 94) This lack of attention is attributable to several factors. First, the role of law was never given great weight in Chinese society; the various Chinese rulers dismissed law as being inevitably imperfect and even as a harmful effort by mortal beings to govern society. 95) Second, private commercial practices did not achieve a comparable level of development in China. 96) Thus, force majeure, like other commercial law doctrines, did not develop because China lacked the incentive to expand international trade relations. 97) The concept of force majeure, as it has developed in China, follows the French choice of words, which connotes a superior or irresistible force. 98) The Chinese use the phrase bu ke kang li, which literally means not possible, resist force or more suitably, irresistible force. 99) Such provisions have been incorporated in all of China s three main contract laws. 100) However, in addition to the 93) Force Majeure, China & the CISG: Is China s New Contract Law a Step in the Right Direction?, 2 San Diego Int l L.J. 173, see 177~ ) The Law of the People s Republic of China on Economic Contracts Involving Foreign Interest (commonly referred to as the Foreign Economic Contract Law of the People s Republic of China), adopted Mar. 21, 1985 at the 10th Sess. of the Standing Committee of the 6th National People s Congress, effective July 1, 1985, translated in 1 China Law for Foreign Business ch. III[hereinafter FECL]. 95) Lester Ross, Force Majeure and Related Doctrines of Excuse in Contract Law of the People s Republic of China, 5 J. Chinese L. 58 (1991)at ) See id. During the Qing Dynasty (1644~1911), various Chinese emperors rejected commercial intercourse with the West, believing that China s tightly controlled economy had nothing to gain from international trade. It was this belief and policy that contributed to the British and French invasion of China and the Opium Wars which forced the Chinese emperor to open several port cities of China to international trade. See Milton W. Meyer, China: A Concise History 394 (1994). 97) See Ross, supra note 93, at ) See id. 99) See id. 100) The three main contract laws of China are the Economic Contract Law of the People s Republic of China (ECL), supra note 12, the Law of the People s Republic of China on Economic Contracts Involving Foreign Interest (FECL) and the Technology Contract Law of the People s Republic of China (TCL). See Daniel Rubenstein, Legal and Institutional Uncertainties in the Domestic Contract Law of the People s Republic of China, 42 McGill L.J. 495, 497 n 인권과정의 Vol. 376

12 Review of Uniform Contract Law of the People's Republic of China at the United States Legal Point of View(comparison to U.C.C. and other international laws) specific governing contract law, one must also look towards the basic concepts of contract law as outlined by the General Principles of the Civil Law of the People s Republic of China(General Principles). 101) The General Principles promulgate the basic principles in all civil law, including contract law, while the Economic Contract Law, the Foreign Economic Contract Law(hereinafter FECL ), and the Technology Contract Law set forth the substantive standards for contracts in those respective fields. 102) The applicable articles of the General Principles outline the excuses for nonperformance that derive out of a force majeure event. The General Principles state: Citizens and legal persons that breach a contract or that do not perform other responsibilities shall bear civil liability thereof...[u]nless otherwise stipulated by the law, no civil liability shall be borne for the inability to perform a contract or for harm caused to others due to force majeure ) Force majeure is then further defined by Article 153 of the General Principles as relating to any event that is unforeseeable, unavoidable, and insurmountable. 104) Article 153 thereby creates a three-prong subjective test for a force majeure defense 105) (i.e.., unforeseeable, unavoidable, and insurmountable). 106) This is a rather difficult test to apply, since the General Principles do not enumerate the various conditions that could define what is unavoidable, unforeseeable, and insurmountable. 107) However, in Chinese contract practice, these three prongs generally refer to natural events of unavoidable force that could not have arisen from any human intervention(i.e. flood, fire, storm, earthquake, and other natural disasters). 108) On the other hand, the reach of force majeure has expanded in most countries, with the exception of China, as the result of consensual bargaining and through the evolution of judicial doctrine and statutory language. 109) Force majeure now refers to natural events as well as such calamities as war, civil strife, and government unrest, which stem from human causes. 110) Some ourts have even gone as far as allowing 101) The General Principles of the Civil Law of the People s Republic of China, adopted by the 4th Sess. of the 6th National People s Congress on April 12, 1986, effective Jan , reprinted in 4 China L. Reporter 91 (1987)[hereinafter General Principles]. 102) See Ping Jiang, Drafting the Uniform Contract Law in China, Lecture Delivered at the Center for Chinese Legal Studies, Columbia Law School, in 10 Colum. J. Asian L. 245 (1996). The General Principles provide the necessary backbone for the Chinese legal system. General Principles, supra note 26. They act as a general filler for times when questions arise under the specific laws governing a certain area. Id. Although the General Principles provide general guidance as to how laws operate, it is always necessary to review the specific regulations in a certain area. Id. 103) General Principles, supra note 26, arts ) Id. 105) See Ross, supra note 93, at ) See id. These three prongs are viewed as being bu neng or not able or inability conditions that require the non-performing party to have an inability to fulfill their contractual obligations due to outside forces. See id. 107) See id. 108) See Henry Zheng, China s Civil and Commercial Law 68 (1988). 109) See Ross, supra note 93, at 61. 인권과정의 2007 년 12 월 81

13 특집 / 중국법제소개 a state-owned enterprise to declare force majeure, even when their breach was caused by a change in policy by the very government which controls them. 111) (b) Repudiation -- The Other Party s Non-Performance 112) The UCL, in Article 68, allows a party to suspend its performance if it has conclusive evidence the other party may or will lose its ability to perform. 113) The UCL represents a break with the FECL by allowing for termination if there is evidence of a clear repudiation by the other side. 114) Article 108 states: Where one party expressly states or indicates by its conduct that it will not perform its obligations under a contract, the other party may hold it liable for breach of contract before the time of performance. 115) According to the Pre-1999 Contract Laws, when a breach was caused by the higher authority of a contracting party, the defaulting party was liable for damages. 116) The UCL has abolished that concept. Instead, the UCL provides that even where a breach is caused by a third party, the contracting party concerned is still liable for the breach. 117) Thereafter, however, the innocent party can resolve the matter with the third party that has caused the breach. To replace the higher authority with the third party is apparently the result of the development of the Chinese economy from a planned to a market economic system. At the same time, it shows that the Chinese law drafters have become more skillful and mature, for third party includes both the higher authority and other persons and entities. (c) Void and Voidable Contracts 118) The contract entered into by the parties may be deemed void or voidable under certain circumstances as provided by the Contract Law. 119) Under Article 52 of the Contract Law, a contract shall be null and void if (1) it is concluded by fraud or coercion of one party to harm the State interest; (2) malicious collusion is employed to damage the State, collective or third party interests; (3) an illegitimate purpose is concealed under the guise of legitimate means; (4) public interests are to be damaged; or (5) the mandatory provisions of laws and administrative regulations are 110) See id. 111) See id. Such events are becoming increasingly less relevant in China as more and more of the State-owned enterprises are becoming privately owned. However, the Chinese government still maintains ownership and control over many areas of industry such as transportation, oil and other mineral rights, communications and real property. See id. 112) John H. Matheson, supra note 46, 15 MNJIL 329, 361~ ) UCL, art. 68 (P.R.C.). 114) Id. art. 94(2). 115) Id. art ) Bing Ling, supra note 57, at ) See id. 118) 14 Temp. Int l & Comp. L.J ) The Contract Law of the People s Republic of China, art. 52, at 43 (Wei Luo trans., 1999) [hereinafter Contract Law]. 82 인권과정의 Vol. 376

14 Review of Uniform Contract Law of the People's Republic of China at the United States Legal Point of View(comparison to U.C.C. and other international laws) violated. 120) Article 53 of the Contract Law further provides that the disclaimer clauses in the contract shall be null and void if they are aimed at avoiding liability by (1) causing personal injury to the other party; or (2) causing property damages to the other party as a result of deliberate intent or gross fault. 121) Voidable contracts include those that are concluded as a result of material misunderstanding or are manifestly unfair at the time of contract formation. In these situations, a contracting party has the right to request a court or an arbitration body to modify or revoke the contract. 122) It is important to note that the Contract Law divides contract fraud or coercion into two different categories: fraud or coercion causing harm to the State interest and fraud or coercion affecting a contracting party. 123) As noted above, in the former case, the contract shall be null and void. However, under Article 54 of the Contract Law, the contract is voidable if one party against the other party s true intentions concludes the contract through fraud or coercion. 124) Under this circumstance, the fate of the contract is at the hands of the injured party who has the right to make a request of modification or revocation to the competent court or arbitration body. 125) The revocation right of the injured party may be extinguished by lapse of time or waiver. In accordance with Article 55, the time period for exercising the revocation right is one year from the date when the injured party knows or ought to know the causes to revoke. The injured party may waive the revocation right either expressly or through its own conduct. 126) Under Article 56, a contract that is null and void or revoked shall have no binding effect from the very beginning. 127) If part of a contract is null and void without affecting the validity of the other parts, the rest of the contract shall still be valid. Article 57 provides that nullification, revocation, or termination of a contract shall not affect the validity of the 120) See id. 121) For many decades in China, a contract was viewed as (1) a device for making the economic plan concrete; (2) the essential basis of the state economic plan; (3) a means for making the state economic plan accurate; and (4) an essential complement to the state economic plan. William C. Jones, Basic Principles of Civil Law in China (M.E. Sharpe Inc.) (1989). In addition, Article 11 of the 1985 Economic Contract Law of China provided that when the State issues mandatory plans to enterprises based on necessity, the relevant enterprises shall enter into contracts accordingly based on their rights and obligations as provided by laws and administrative regulations. See, ECL, supra note 3, art ) Contract Law supra note 112, art. 38, at ) See generally id. arts. 17~18, 31, at 36, 39; United Nations Convention On Contracts For The International Sale of Goods [UNCCISG], Vienna 1989, v June 1989~2000. See also UNCITRAL s website (last visited Sept. 17, 2000) 124) UCL, art. 11, at ) A contract is voidable if it is concluded by one party s taking advantage of other party s unfavorable position. It is further provided that when a party requests for modification of the contract, the court or arbitration body may not revoke the contract. Id. 126) See id. art. 55 at ) See id. art. 56 at 45. 인권과정의 2007 년 12 월 83

15 특집 / 중국법제소개 dispute settlement clause that is independent from other clauses in the contract. 128) G. Remedies for Breach 129) the cost of specific performance is excessively high, or the obligee fails to demand performance within a reasonable time after breach. 132) If one party does not perform its contractual obligations or performs its contractual obligations in a manner not in accordance with the agreement, the other party has the right to demand the party in breach to perform such obligations, to take remedial Government Procurement, or to compensate him for damages incurred. 130) Where one of the parties expressly states or indicates by its action that it will not perform its contractual obligations, the nonbreaching party may hold the other party liable for anticipatory breach of contract prior to the expiration of the time limit for performance. 131) When a party fails to perform a nonmonetary obligation, or fails to perform in accordance with the contract, the nonbreaching party may petition the People s Court or an arbitration tribunal for specific performance. The remedy of specific performance is not available in situations where performance cannot be rendered in law or in fact, the subject matter is unavailable on the market, The Uniform Contract Law provides that the amount of damages for breach of contract are equivalent to the nonbreaching party s loss resulting from the breach, including the benefit that may be derived from the performance of the contract, provided that the amount does not exceed the damages that are foreseen or should have been foreseen by the party in breach at the time of entering into the contrac t. 133) Where a business engages in fraudulent activities while providing goods or services to a consumer, it shall be liable for damages in accordance with the Consumer Protection La w. 134) Moreover, the Uniform Contract Law provides that an injured party may elect to pursue either contract or tort damages to the extent allowed under Chinese law. 135) If the quality is not as agreed upon, responsibility for the breach should be assumed in the manner agreed by the parties. If nothing has been agreed to with regard to the breach, or the agreement is not clear, the 128) See id. art. 57 at ) James M. Zimmerman, Michael Burke, Xiaohu, People s Republic of China, Ma34 Int l Law. 883 see 893~ ) See Uniform Contract Law, arts. 107 and 109., 131) See id. art ) See id. art ) See id. art This rule is consistent with the Economic Contract Law (article 33), the Foreign Economic Contract Law (article 18), and the Civil Law (article 112). 134) See UCL, art See Law of the People s Republic of China on the Protection of the Rights and Interests of Consumers, art. 35, [[Business Regulation] China L. Foreign Bus. (CCH) <paragraph> (Oct. 31, 1993) [[hereinafter Consumer Protection Law]. 135) UCL, art 인권과정의 Vol. 376

16 Review of Uniform Contract Law of the People's Republic of China at the United States Legal Point of View(comparison to U.C.C. and other international laws) party that has been harmed can, according to the nature of the object and the amount of the damage, make a reasonable choice of whether to request repair, exchange, a remake, a return, a reduction in price, or a reduction in remuneration. 136) Additionally, if the quality is not as agreed upon and results in additional damage, compensation for the loss can be requested. The parties to a contract may agree to liquidated damages or a method of calculating damages as a result of a breach. 137) The agreed cost of the breach is regarded as compensation for the damage caused, but if the amount agreed upon for the cost of the breach is lower than the damage that is produced, a party can request the People s Court or an arbitration tribunal to increase the damage award. If the agreed upon liquidated damages are considerably higher than the damage caused, a party can petition the People s Court or an arbitration tribunal to make an appropriate reduction. In the event of a force majeure event, the obligations of the parties may be partially or wholly avoided. The Uniform Contract Law defines force majeure as any objective circumstance that cannot be foreseen, avoided or overcome. 138) A party that cannot perform a contract due to force majeure is required to notify the other party promptly in order to reduce the possible loss to the other party, and, in addition, shall, within a reasonable time, provide evidence of such event of force majeure. 139) A nonbreaching party is required to take appropriate Government Procurement to prevent the loss from increasing and thereby mitigate its losses. If a nonbreaching party does not take appropriate steps to prevent further loss or damage, it is barred by law from demanding damages for the loss for failure to mitigate. 140) An injured party may recover all expenses incurred to mitigate its losses. If both parties are in breach, each is responsible for its respective obligations and damages will be apportioned accordingly. 141) Ⅲ. Fundamental Principles of the New Law 142) The basic principles in the new Contract Law constituted the most important issues that would be addressed in the drafting work. According to the Draft, the basic principles of the Contract Law are identified as equity, voluntariness, fairness, honesty and good faith, 136) See id. art ) See id. arts. 114 and ) Id. art The original draft of the Uniform Contract Law failed to include a definition of force majeure as an unforeseeable event. 139) See id. art ) See id. arts. 112 and 119. This rule is consistent with the Foreign Economic Contract Law (article 22) and the Civil Law (article 115). 141) See Uniform Contract Law, art ) Liming Wang, China s Proposed Uniform Contract Code, 31 St. Mary s L.J. 7, see 10~14 인권과정의 2007 년 12 월 85