Chapter One |
47 |
|
|
co-exists with private and other ownership; (2) the distribution system in the socialist market economy is the one containing multiple distribution forms with a focus on the socialist distribution principle of “from each according to his ability to each according to his work”; and (3) the ultimate goal of the socialist market economy is to achieve common wealth.78
Nevertheless, adoption of the socialist market economy necessarily demanded to change the way that business used to be operated and managed in China. A significant change was obviously the shift of the business decisionmaking function from planning authority to individual entity or private person. Consequently, although the state plan still played a role in the nation’s economy, contract-based transactions became the major components of the economy. Contracts then replaced state plan and became the basic legal device in engaging business activities.
It is true that in the early phrase of the economic reform, contracts were specially named as economic contracts in order to stress certain relationship between contracts and implementation of state plan. But, ever since the contracts reemerged as a major means in dealing with business affairs, “equality” and “mutual benefit” between the parties have been widely recognized as the basic norms in making a contract. In this sense the “equal status” (meaning equal footing) of the parties to a contact was being hailed as critical to the contract making. It would then require that the will of the parties to a contract be respected.79
Therefore, it is fair to say that though the exact meaning of the socialist market economy requires further debates the contracts undoubtedly have evolved to be the primary player in Chinese economy because it has become the Chinese legislative belief that contract law is the basic legal framework of market economy.80 However, as discussed below, the state plan to certain extent still remains influential in the process of making contracts.
3. Contracts and State Plan
As being the case, at the early stage of modern Chinese contract law legislation, there was a strong preference to the implementation of the State plan. The major reason was the attempt to differentiate the kind of market economy
78See Ding Bangkai, supra note 74 at p. 7.
79The “equal status” is provided as basic principle in both the GPCL and Contract Law. Article 3 of the GPCL provides that parties to a civil activity shall have equal status. Under Article 3 of the Contract Law, the parties to a contract shall have equal legal status and no party may impose its will on the other party.
80See Hu Kangsheng, Explanation to the Contract Law (Draft) of the People’s Republic of China, published in Selection of Legislative Materials of Contract Law of the People’s Republic of China, See Sun Lihai, supra note 63 at pp. 3–7.
48 Chinese Contract Law
that China was supposed to adopt from the free market economy that existed in many west countries. It was believed that the contracts should become a useful tool to help implement the State plan because all business activities ought to be under the control of the State plan.
Thus, in 1981 Economic Contract Law, contracts were deemed to be subject to the primacy of the State plan. Article 4 of the Economic Contract Law explicitly provided that making economic contracts should meet the requirements of the State plan. And Article 7 further provided that an economic contract should be null and void if it violated the state plan. Clearly, under the 1981 Economic Contract Law, no contract may become obstacle to the State plan because a stated purpose of the 1981 Economic Contract Law was to ensure the implementation of the State plan.81
The State plan in China is normally divided into mandatory State plan and directory State plan (or State guidance plan). The mandatory State plan refers to the pan that must be carried on and it is the device that the state uses to directly manage the nation’s economy. Therefore, the mandatory State plan is being implemented through an “administrative order” of the state planning authority. The directory State plan serves as the guidance for the enterprises to conduct their businesses, and the enterprises are allowed to maintain certain flexibility to make their business plan according to their business need.
Generally, the state plan during the course of implementation is operated in the form of quota. In accordance with 1981 Economic Contract Law, for business transactions concerning products and items within the scope of mandatory State plan, the economic contracts must be made under the quota provided by the State. If the parties to an economic contract could not reach consent, the matter should be handled by their superior authority. If the business transactions involved the products or items falling into the category of the directory State plan, the economic contracts may be concluded according to the reality of the entities concerned with reference to the State quota.
When the Civil Code was adopted in 1986, an effort was made to separate contracts from State plan to the extent that parties are being given more power to make business decisions on their own. Despite the fact that the Civil Code prohibits any civil activity from undermining state economy plan, it does not require that contracts be made under the State plan. Accordingly, the 1981 Economic Contract Law was amended in 1993, and major changes were the elimination of preference to the state plan. In Article 1 of the amended Economic Contract Law, a stated purpose of the contract law was changed
81 See 1981 Economic Contract Law of China, art. 1.
Chapter One |
49 |
|
|
from “ensuring the implementation of State plan” to “ensuring a sound development of the socialist market economy”.82
The Contract Law is said to have departed further from the planned economy tradition and to be more market oriented than previous contract legislation. First of all, the Contract Law further strengthens the principle of “equal status” by emphasizing that no party may impose its will on the other. The purpose underlining the “equal status” principle is to ensure that a contract is the result of the free will of the parties to the contract. Secondly, the Contract Law for the first time does no use the term “State plan” in the contract law legislation, and instead the term “State mandatory task or State purchase order” is used to refer to the State mandate in the making of contracts. Third, the Contract Law specifies the contracting party to include natural person, legal person, or other organization, and therefore marks an end of the preclusion of individuals (natural person) from making contacts.83
Under Article 38 of the Contract Law, in case the State issues a mandatory task or a state purchasing order based on necessity, the relevant legal persons or other organizations shall conclude contracts between them in accordance with the rights and obligations as stipulated by the relevant laws and administrative regulations. Article 38 is only the provision in the Contract Law where the state plan is addressed, and the contract concluded under Article 38 is also called “State mandatory task contract” or “State purchasing order contract”. What could be inferred from Article 38 is that in the socialist market economy that China is undertaking, the impact of the State plan on contracts still exists.
82The 1981 Economic Contract Law of China was amended on September 2, 1993. An English translation of the Economic Contract Law (1993) is available at http://www.qip.net/chinalaw/prclaw19.htm.
83In 1981 Economic Contact Law, the contract was defined as an agreement determining mutual relationship of rights and obligations between the legal persons in order to realize certain economic goals. In 1993 when the Economic Contract Law was amended, it was provided that the Economic Contract Law applies to contracts entered between legal persons who are equal civil parties, other economic organizations, self-employed workers or traders and rural households operating on contract for the purpose of realizing certain economic goals and clarifying each other’s rights and obligations. It was clear that under the Economic Contract Law, natural person were not eligible for being the parties to a contract. See id. Although the Technology Contract Law that was adopted in 1987 applied to contracts made between legal persons, between legal persons and citizens, and between citizens, which establish civil rights and obligations in technical development, technology transfer, technical consultancy and technical service, it excluded the contracts in which one party is a foreign enterprise, other foreign organization or foreign individuals. An English translation is available at http://www.qip.net/chinalaw/prclaw21.htm.
50 Chinese Contract Law
However, it should be noted that with the development of the market economy, the State plan seems to be playing less and less active role in China.84 An important aspect is that the State has been shifting its planning authority from the micro control to the macro control of the nation’s economy, and has been relying more on economic and legal means to manage the economy. In contract area, the much of the focus of the State has been on the State owned or controlled enterprises.85 Under Article 38, the “State mandatory task contract” or “State purchasing order contract” only applies to “relevant legal persons or other organizations”. Most of such relevant legal persons are the State owned or controlled enterprises.
84For example, the number of the state-owned or controlled enterprises has been declining over the years. In 1998, the state-owned or controlled enterprises were 238,000. By the end of 2003, the number decreased to about 150,000. As of October 2004, the state owned industrial enterprises were 31,500, only about 15% of total industrial enterprises in the country. See the State-owned Assets Supervision and Administration Commission of the State Council, available at http://www.sasac.gov.cn/gzjg/qygg/200412010040.htm. Take Beijing for example, by July 2005, of a total of 1,015,751 enterprises in the area of Beijing, some 819505 are private or individually owned enterprises. See Economy Daily, September 15, 2005 at page 9. Also in Liaoning Province, foreign investors are now allowed to take full control of all State-owned enterprises in the province except coal mine industries. See China Daily, September 16, 2005, at page 1.
85State controlled enterprises are referred to these publicly held companies where the State owns majority shares. Under the Company Law of China (adopted December 29, 1993, effective July 1, 1994 and amended December 25, 1999), the companies in China take two different forms: company with limited liability and company limited by shares (or stock company). A State own enterprise may be structured as a limited liability company (wholly State owned) or a company limited by share. In the latter case, the State is a shareholder in the company.
Chapter II
Freedom of Contract in Chinese Concept
It has been well held in western countries that it is in the public interest to accord individuals broad powers to determine their affairs through agreement reached by themselves.1 This is the premise on which the freedom of contract stands. Derived from the theory of free economy, the freedom of contract has become the corner stone of the modern contract law and the most important principle in contract system ever since the French Civil Code was adopted in 1804.2 To be more explicit, in an open market economy, it is essential that businessmen or entities have right to decide freely to whom they will offer their goods or services and by whom they wish to be supplied, as well as freely to agree on the terms of individual transactions.3
Unfortunately however, the concept of freedom of contract was not accepted in China until recent years though much of the Chinese contract theory has its intellectual parentage from the civil law (or continental law),
1 Farnsworth, Contracts (3rd Ed), 321–322 (Aspen Law & Business, 1999).
2The idea of freedom of contract was originated from Adam Smith’s theory of free economy where individuals were regarded as the best judge of their own affair. Inspired by free market incentives, classic contract law theory saw contract as the convergence of the wills of the contracting parties, which was later interpreted as the “meeting of minds”. See generally, Peter Linzer, A Contracts Anthology (2nd ed), (Anderson Publishing Co., 1995).
3 See comments on Article 1.1 of UNIDROIT Principles.
52 Chinese Contract Law
especially the German and French laws. Even in the early 1980s when China had determined to revitalize its economy by introducing western experiences into the nation, the freedom of contract remained precluded due to the concern about the influence of the “capitalist ideology” as well as the unwanted impacts on the state plans. This concern was clearly reflected in the 1981 Economic Contract Law where no freedom of contract was provided.4
There are a number of factors that would contribute to China’s denial of, or resistance to, freedom of contract. First, under the scheme of the centrally planned economy, it was impossible for individuals or business entities to have a free access to the market. Every business sector was strictly tied with the State’s economic plan, and development of economy was not driven by market force but by the central government through pre-determined plans.5 Second, because the State plan was the major player in China’s economy, freedom of contract barely had any room in the economy. Therefore, it was inconceivable that anyone at that time in China would think of having right to freely enter into a contract with others. Third, the freedom of contract had long been criticized in China as a capitalist concept – an “enemy” to the socialist system.
The two-decade reform that was aimed at making China economically strong in one respect helped decentralize the economic structure of the nation and in the other respect made it possible for the enterprise and private person to have more power in business decision making process. As a result, the outcry for less government interference in commercial activities grew so significantly that the need for party autonomy in business transactions became imminent. In response, the government and its agencies were called to refrain themselves from making decisions for the business entities. As far as contracts were concerned, much of the power to make them was then rested with the parties.
The Contract Law expressly grants to the contracting parties the right to enter into contract voluntarily, and prohibits any unlawful interference. The most noteworthy provision in the Contract Law is Article 4, which is widely
4When the Economic Contract Law was amended 12 years later in 1993, a progress made toward the freedom of contract was to provide that in concluding an economic contract, the parties must implement the principles of equality and mutual benefit, and achieving agreement thought negotiation. No party shall impose its will on the other party and no unit or individual may unlawfully interfere. See Economic Contract Law (1993), art. 5. An English translation of the Economic Contract Law is available at http://www.qip.net/chinalaw/prclaw19.htm.
5This type of economy was modeled after the former Soviet Union, and also described as “bird-cage economy”, which was advocated by late Chinese vice premier Chen Yun. Mr. Chen was in charge of the nation’s economy for decades except for the period of Cultural Revolution.
Chapter Two |
53 |
|
|
acclaimed by the Chinese legislator as having adopted the principle of “party autonomy” in contract.6 Under Article 4, the parties to a contract shall have the right to voluntarily enter into a contract in accordance with the law, and no unit or individual may unlawfully interfere. This provision is said to represent a dramatic change in favor of freedom of contract in China’s contract legislation.
When the drafting of the Contract Law started in 1993, there was a strong voice from legal scholars and some legislators that the freedom of contract should be incorporated as a general principle into the Contract Law. As a matter of fact, in the first draft of the Contract Law in January 1995, the freedom of contract was provided as a general principle of the Contract Law. It stated that “the parties shall have the freedom of contract within the boundary of law and no unit, organization, or individual shall unlawfully interfere with.”7 However, this provision was completely rephrased in the 1997 draft that was released on May 14, 1997. The changed provision read: “the parties shall have the right equally and voluntarily to make contract according to law. None of the parties shall impose its own will on the other and no unit or individual shall unlawfully interfere with the parties’ right.”8 One year later, this provision was changed again in the 1998 draft (August 20, 1998), which was adopted in 1999 as the current provision of the Contract Law.9
Interestingly, in almost all published materials offering explanation of the Contract Law, the principle of “making contract voluntarily” is interpreted to mean that the parties have freedom to make contract in accordance with law.10
6Sun Lihai, et al, A Practical Explanation to the Contract Law, 22–24 (Industry and Commerce Press, 1999) (here in after referred to as Exlanation).
7See the Introduction to the Contract of Law of China and its Major Drafts, edited by the Civil Law Office, the Legal Affairs Committee of the Standing Committee of the National People’s Congress, 8–18 (Law Press, 2000).
8 id. at p. 113.
9 id. at p. 173.
10See, inter alia, Jiang Ping et al, A Detailed Explanation of the Contract Law of China, (China University of Political Science & Law Press, 1999); Yang Lixin et al, Implementation and Application of the Contract Law of China, (Jilin People’s Publishing House, 1999); Liu Wenhua et al, Detailed Explanation and Typical Cases of the New Contract Law, (Word Books Press, Co., 1999); Sun Lihai et al, A Practical Explanation of the Contract Law, (Industry and Commerce Publishing House, 1999); Research and Economic Law Offices of the General Office of the Standing Committee of NPC,
Explanation and Practical Guidance of the Contract Law of China, (China Democracy and Legality Press, 1999); Research Office of the General Office of the Standing Committee of NPC, A practical Guidance of the Contract Law of China, (Huawen Publishing House, 1999); Zhao Xudong et al, Interpretation of Terms and Phrases related to the Contract Law, (the People’s Court Publishing House, 1999).