26 Chinese Contract Law

What seems important in understanding Chinese contract law is the concept of obligatio (also translated as obligations). As noted, bearing Roman law tradition, the obligatio represented a particular legal relationship where one person is obligated to the other either because of contractual obligation or other legal acts or under the provisions of law such as torts or unjust enrichment. Unlike the term “obligation” in the common law sense, the obligatio contains both legal rights where the obligee (creditor) has valid claim against obligor (debtor) and obligations where the obligor (debtor) is liable for what he owes to the obligee (creditor).4 Based on this notion, when the term obligatio is used in the Civil Code, it is defined to refer to the specified relationship of rights and obligations between the parties concerned.5

1. Concept of Contract

Although the concept of Qi Yue (agreement) was used in China for many centuries, it was never clearly defined.6 In the meantime, the term obligatio (not in its modern sense) was used interchangeably to mean contractual obligation, and it was mostly referred to monetary obligation under which the debtor was responsible for paying the creditor.7 A Qi Yue (agreement), once made, commonly implied a legal relationship under which an obligation was created.8

4 See id. at pp. 13–14.

5Under Article 84 of the 1986 Civil Code, obligatio is a specified relationship of rights of obligation created by the contractual agreement or provisions of law between the parties, where the party enjoying the rights is the obligee and the party bearing obligations is obligor, and the obligee is entitled to ask the obligor to perform according the contract or the provisions of law. An English translation of the Civil Code is available at http://www.qis.net/chinalaw/prclaw27.htm. This definition however was criticized as being incomplete because certain legal acts other than making a contract may also cause the obligatio to be created, e.g. the reward advertisement which is a unilateral act. Therefore, some suggest to define the obligatio as the relationship of rights and obligations under which specified performance is requested between the specified parties arising from legal acts or the direct provisions of law. See Wang Liming, the Proposed Draft of the Civil Code of China and Legislative Reasons – Contracts, 12 (Law Press, 2004).

6During 1955 and 1956, the drafters of the proposed civil code once tried to define Qi Yue as “an agreement made between two or more people in order to create, modify or terminate the obligatio relation of right and liability”. In the meantime, however, many suggested not to have this definition included in the draft. See He Qinghua, et al, An Overview of Civil Code Drafts of New China, Volume I, 175 (Law Press, 2003).

7 See Wang Jiafu, Civil Law Obligatio, 16 (Law Press, 1991).

8See Zhang Jifan, Evolution of the Chinese Legal Civilization, 287 (China University of Political Science and Law Press, 1999).

1.1. Confucianism Tradition

The law of contract in ancient China took the form of rules of Qi Yue (agreement), which governed the substance of Qi Yue, its making-process and enforcement. In more than 2000 years of Chinese history, the rules of Qi Yue, though different from dynasty to dynasty, had three characteristics in common. First of all, most of the rules in their formality were customs or common usages complied as norms. Secondly, the rules were patriarchal in nature and focused primarily on obligations without specifying rights. The idea was that in any of the dynasties, the whole country was like a family where the emperor who was deemed as the son of heaven was the head of the family and everyone else was the family member subject to the absolute control of the emperor.9 Thirdly, the punishment for breach of agreement or violation of obligation was harsh, and mostly was punitive as provided in the penal law.10

In a broader sense, one of the major distinctions in the traditional Chinese legal system is that the laws or rules were structured on a comprehensive and monolithic model where both civil and criminal rules were combined together.11 Although there is an ongoing debate among Chinese scholars on whether civil law and criminal law were distinguishable in the traditional Chinese legal system,12 the commonly accepted notion is that the criminal law served as the backbone of the entire legal system.13 For that reason, in Chinese legal history, the word “law” was normally interpreted to mean “penalty” or “punishment” (Xing).14

With regard to the enforcement of contractual obligation, it relied more on moral standards than on legal requirements. In other words, the contractual obligation was enforceable because the parties to the agreement were morally bound by what they had promised to each other. A common phenomenon in the Chinese legal history was that the law was to a great extent interwoven with the philosophy of Confucianism as well as the feudal ethic rules.15 What the Confucian philosophers advocated strongly was moral means and virtues.

9 See Wang Chengguang, An Emerging Legal System, a chapter in Zhang Xianchu, “Introduction to Chinese Law”, 4–8 (Sweet & Maxwell Asia, 1997).

10See Wang Jiafu, supra note 7 at p. 17.

11See Wang Chengguang, supra note 9 at p. 5.

12In general, the traditional Chinese legal system in 2000 years of Chinese history as characterized as “combination of all kinds of laws into one scheme and no separation between civil and criminal laws.” The criticism is that the general notion was misleading and the traditional Chinese legal system should in fact be addressed as “coexistence of all laws and differentiation of civil law from criminal one.” See Zhang Jinfan, supra note 7 at pp. 7–8.

13See Wang Chengguang, supra note 9 at 6.

14See Xin Chuying, Chinese Legal System and Current Legal Reform, 313 (Law Press, 1999).

15See Wang Chengguang, supra note 9 at 7.

28 Chinese Contract Law

One of the virtues was about promise honoring. Under the doctrine of Confucianism, “a promise, once made, shall worth thousand ounces of gold”. Therefore, a violation of agreement would be deemed as a violation of virtue and moral standard, for which a punishment shall be imposed.16

1.2. Civil Law Influence

The modern Chinese legal system is strongly marked with the civil law tradition. Historically, China was a closed and self-sufficient country and the “Great China” used to be taken as the shining glory in many dynasties and little attention was ever paid to any of other countries in the world. Perhaps because of the indulgence in this glory, the emperors, though in different dynasty, were inured to living in the dream that they were the center of the world and whoever came to see them must show sincere respect on bended knees. But unfortunately, this glory did not fence off the breeze that blew into China from the west.

In the recent Chinese history, there were two times at which the nation opened the door to the outside world. The first time was 1840 when the Opium War brought foreign invaders into the Chinese territory, and the door of China was forced to open. The “extraterritoriality” established for western countries on the Chinese soil under the “unequal treaties” gave the foreign forces the opportunity to administer “western justice” in their respective “foreign port” or “sphere of influence” within China.17 The second time was 1979 when China was driven by necessity to revive its economy, and the nation’s door was opened to the west at it own initiative. The 1979 opening-door policy not only made China prosperous through the economic reform, but also helped China gain the membership in the WTO.

As early as in late Qing Dynasty (1644–1911), the influence from the west began to affect the nation. At that time, in order to find the “cure” to make the ailing country strong again, a call for reform in political and legal systems became appealing in the Forbidden City. Advocated by the reformers, Emperor Guangxu in 1902 issued an “Imperial Edict” ordering to revise and amend existing laws (the Great Qing Codes) through the means of taking foreign laws as guidance. For purposes of the reform, the Emperor appointed jurists Shen Jiaben and Wu Tingfang the commissioners of legal revision.18

16See Wang Jiafu, supra note 7 at p. 17.

17See Jerome A. Cohen, Forward in “The Rule of Law, Perspectives from the Pacific Rim”, Published by the Mansfield Center for Pacific Affairs (2000).

18See Wang Jiafu, supra note 7 at pp. 17–18. Also in 1904, Emperor Guangxu issued an edict to Prince Tsa Tchen, which stated: “the development of commercial relations, the encouragement to industry have always been the primary duty of the Government, and must be

Several years late, in 1907, the Office of Legal Revision was established and its main responsibilities were legal revision and law drafting. The Office of Legal Revision consisted of returned Chinese students studying abroad in Japan, Europe and US. A striking example demonstrating the reformers’ efforts to “learn from the west” was that the Office of Legal Revision hired a Japanese jurist as advisor to help work on law drafting for the imperial government. In December 1910, the first draft of Civil Code was complete and it was finalized in 1911. However, the first draft did not become the law due to the fall of the Qing Dynasty in 1911.

The first draft of Civil Code contained five parts – general principles, rights of obligatio, property rights, domestic relations, and inheritance. Distinctively, the draft was primarily based on the German and Japanese law models and the first three parts were actually drafted by the Japanese jurist in the Office of Legal Revision.19 Although the first draft never became the law, many of its provisions were used by the Nationalist Government after it was formed until 1925 when the second draft of Civil Code was made. The second draft essentially followed blueprint of the first draft and kept the civil law tradition unchanged. Part II of the second draft was named Obligatio which contained 4 chapters and 521 articles in total. Unfortunately, the second draft had the same fate as the first one and was never promulgated because of the political chaos.20

The first codified Law of Obligatio in China was adopted in 1930 as part of the Civil Code of the Republic of China (1930 Civil Code). The drafters of the 1930 Civil Code followed the 1925 draft and took into consideration the comments from members of the drafting committee and advisers. In addition to its German and Japanese origins, the 1930 Civil Code had a number of intakes from the codes in other major European countries such as France and Italy. As a combination of the essences of then existing civil statutes and the Chinese reality, the 1930 Civil Code had five parts that were entitled “General Principles”, Obligatio, “Right of Things” (Property), “Family” and

carefully attended to. We hereby order that Tsai Tchen, Yuan Chih Kai and Wu Ting Fang be commissioned to compile a commercial code which will constitute the rule to be observed in commercial transactions”. See Joseph An-Pao Wang, China Studies, Studies in Chinese Government and Law, Civil Code of the Republic of China, x–xi (Kelly and Walsh, Ltd.) (1930), reprinted by University Publications of America, Inc. (1976).

19The Japanese jurist was Mr. Y.M. Matsuoka. See id. at p. 18. During that reform period, with an anxiousness to follow Japan’s experience in emerging from the old feudalism into a modern country, hundreds of Chinese in search of new knowledge went to Japan to study and a significant number of them went to Japanese law schools. At that time, Japan had completed its civil and commercial codification, which was modeled primarily on the German codes. See Joseph En-pao Wang, supra note 18 at p. xi.

20See id. at p. 19.

30 Chinese Contract Law

“Successions”.21 Under the 1930 Civil Code, the sources that would cause obligatio to occur included Qi Yue (agreement), conferring of authority of agency, management of affairs without mandate (negotiorum gestio), unjust enrichment and torts.22

Interestingly, the five parts of the 1930 Civil Code took effect at different times. Part I was adopted on May 23, 1929, and was effective on October 10, 1929. Parts II and III were promulgated in November 1929 and came into force on May 30, 1930. Parts IV and V were enacted by the end of 1930.23 Consistent with the Chinese tradition, the 1930 Civil Code still used the term Qi Yue (agreement) other than Hetong (contract). According to Article 153 of the 1930 Civil Code, “a Qi Yue (agreement) is made when the parties had reciprocally declared either expressly or tacitly their concording intention.”24 However, the 1930 Civil Code did not define the term Qi Yue, nor did it state the nature of the Qi Yue reached by the parties, i.e. the purpose that a Qi Yue would serve and the legal basis on which the Qi Yue would be enforced.

As noted, the 1930 Civil Code, along with other laws adopted by the Nationalist Government, was abandoned in 1949 by the Communist Government of China. The abandonment, however, did not change the civil law tradition of the Chinese legal system inherited from the decades-long influence of civil law literature. In addition, during 1950s, China was driven to establish its legal system on the model of former Soviet Union. Although the law in the era of Soviet Union was labeled as socialist law, it historically had a strong French influence,25 which further embedded Chinese legal system in the civil law tradition.

A sharp difference between Chinese legal system and the legal system in common law countries is the legal authority of precedent. In common law countries, courts decisions are the major legal sources and the precedent could be used as the legal ground on which the court judgments stand. In China, the black letter rule dominates every corner of the legal proceedings, and statutes are the primary legal authoritative sources. Take contract law for example, in the United States, contract law is basically common law, embodied in court decisions, while in China contract law is the statute adopted by its national legislative body.

21In Joseph An-Pao Wang’s book, the obligatio was translated as “obligations” and “property rights” as “rights over things.”

22See id. at pp. 45–57. Note that the term “unjust enrichment” was translated as “undue enrichment”, and “torts” as “wrongful acts”.

23See id. at pp. xiv–xv.

24See the 1930 Civil Code (English Translation), id. at p. 45.

25For general information, see John Henry Merryman, The Civil Law Tradition (2nd Ed, Stanford University Press, 1985).