vol.2

	Distinctive Features of China's New Contract Law

Woo Lee
Attorney, Chinese Section, Legal Affairs, Yokogawa Electric, Inc.

On March 15, 1999, the Second Conference of the Ninth National People's Congress of the People's Republic of China adopted the People's Republic of China Contract Law (hereafter referred to as the New Contract Law). It is scheduled to go into effect beginning October 1, 1999. At that time, the current Economic Contract Law, enacted in 1981 and revised in 1993, the Liaison Economic Contract Law, enacted 1985 and the Technical Contract Law, enacted in 1987 will all be abolished (Article 428 of the New Contract Law). The New Contract Law is divided into general and detailed provisions, and with its twenty-four chapters and 428 articles, it is considered exceptionally extensive for China.

1.The Necessity of Enacting the New Contract Law

There are several problems with the existing laws in terms of governing contracts. First, even though the three contractual laws noted above have protected the legal rights and profits of the parties concerned, maintained economic balance and performed an important role in accelerating development in economic, technology and external import-export relations, as the open-market policy has expanded, with the globalization of corporations and the expansion of export-import related fields, these three contract laws cannot meet the demands of a market economy under the Chinese socialist regime.

The biggest problem with these existing laws is that they lack the basic provisions necessary when applying and consenting to concluding a contract. Besides lacking detailed provisions, provisions exist which contradict those in the General Rules Section of the Civil Law. Additionally, these contract laws apply differently to different fields of law, creating conflicts when they overlap. But at the same time, for some issues, no provisions have been made in any of the three laws. For instance, if a foreigner rents a house from a Chinese, and a dispute develops between the two, under existing contractual laws, they would be unable to clearly define which law would be most applicable in this case.

Second, in recent years, China has seen the illicit use of contracts to inflict losses and to deceive the government, organizations and individuals. Furthermore, as the market economy expands under the current socialist structure, new types of contract businesses, such as agents and brokers, which in the past did not exist. As a result, it has become necessary to govern the market by a more unified and complete modern contractual law system.

2.Distinctive Features of the New Contract Law

In order to compare the present three contract laws, and other laws related to contracts, regulations and their interpretation, the main distinctive features of the New Contract Law are described below

Expansion of the Scope in Application
Under the current three contract laws, only the Technical Contract Law applies to individuals. Under the New Contract Law, individuals, corporations (juridical persons) and any other organization can be the party of concern. Additionally, except in cases of economic contracts, marriage, adoption and parental authority, the New Contract Law will apply to all civil contracts and obligation-related contracts. (Article 2).

Furthermore, if the contract does not fall within the clearly stipulated rules of this law or other laws, the provisions stipulated in the "General Rule's Section of this law would apply. It is also permissible to refer to the detailed rules of this law or any other law which most closely applies to the case on hand." (Article 124)
Contract Responsibilities Expanded for Contracting Parties
According to the New Contract Law, the parties of concern under the contract are obligated to fulfill their commitment. Whether the contract is in process of execution or termination, the principle of good faith must apply. In some cases, depending on the nature of the contract, the parties must abide by the customs of the trade in such matters as notification, cooperation and being sworn to secrecy. They are legally obligated to assume all responsibilities stipulated by law (Articles 60 and 92). Additionally, during negotiations, if one party leaks secrets, the other party may ask for compensatory damages (Article 43).
Curtailing the Scope When Nullifying a Contract
Under existing contract related laws and through their interpretation, conditions under which a contract can be nullified are far too extensive. There have been many cases in which a judge has nullified a contract when he should not have. This has impaired the process of the normal course of business, which has been subject of much criticism by foreigners. Therefore, under the New Contract Law, the number of conditions in which the nullification of a contract is permitted has been reduced from the existing provisions (Article 52). At the same time, provisions have been made for an apparent agency [representing under false pretenses] (Article 49) as well as provisions to restrict ultra vires activities [ exceeding one's authority] (Article 50) to protect the concerned parties. Furthermore, if there are defects in the contract, such as missing or unclear provisions, the New Contract Law now contains provisions for supplementary consultation for clarification as well as standards for interpreting unclear provisions of a contract (Articles 61 and 62). All these provisions have contributed to reducing the number of nullification cases.
Contract Performance Secure System
Compared to current contract laws, which lack provisions to secure contract performance secure, the New Contract Law recognizes the right to defend during simultaneous performance (Article 66), the right to defend after performance (Article 67), the right of defense for insecurity (Articles 68 and 69), the right of creditor representation (Article 73) and the right to cancel a fraudulent contract (Article 74). Finally, China has put in place an system for guaranteeing contract performance.
The Anglo-American Advance Warning System for Contract Violation
The New Contract Law is expected to play a pivotal role in dealing with the so-called "triangle debt default" (see note below*) which has became a serious problem in China. To accomplish this, it was decided to adopt the Anglo-American Advance Warning System for Contract Violation. This system clearly stipulates that "when a party of concern makes a clear indication of non-performance of a contract, or when non-performance has been expressed by an action or actions, the other party can, even before the expiration of the performance period, demand that the other party to take responsibility for violation of the contract.
Strengthening Consumer Protection
To provide further protection for consumers, the New Contract Law includes a standardized contract form (Articles 39, 40 and 41). Since this standardized provision is to be used repeatedly, it has been prepared as a form. At the time a contract is concluded, these standardized provisions are generally accepted as a matter of course without discussion.. However, if the provider of the standardized form exempts himself from the responsibility so as to place excessive responsibility on the other party, or excludes critical rights for the other party, any or all of these actions may be used as grounds for nullification of the contract. Thus, the New Contract Law places importance on the protection of consumer rights.
Recognition of Electronic Data in the Contract
In accordance with increased use of global electronic commerce, the New Contract Law recognizes the use of electronic data in contracts (Articles 11, 16, 26, 33 and 34).

In conclusion, the New Contractual Law is based on the review and compilation of the three existing contractual laws and has taken into consideration international norms and the Western contractual system in order to deal with China's market economy. Compared to other laws in force in China, the standards in compiling the New Contractual Law in China were high, in terms of coverage and textural provisions. Now the high caliber New Contractual Law is completed, it will be most interesting to see what happens in the future as this law is applied.

* "Triangle debt default"
refers to a defaulted debt arising out of a scheme where multiple corporations mutually default on their payments for merchandise.

Woo Lee

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