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for a contract to be valid, and it is not even an element in the contract making process.
On the other hand, since the verification gives the AIC and the RGA the power to review the substance of the contract (namely the contents), it then may cause uncertainty about effectiveness of the contract because the contract may be found irregular, for which the validity of the contract might be challenged. The question is whether the contract shall take effect upon the parties’ signature (assume no government approval is required) or it will not really come into force until it is verified. Moreover, it is unclear what the parties’ remedies would be if the AIC and the RGA make mistakes in the verification.
A derivative function of the administrative supervision is the administrative mediation of the contract disputes. The mediation could be conducted by the AIC or by the superior authority of the parties involved. Most cases in which an administrative mediation is called involve the disputes between state-owned enterprises, particularly when the State purchasing orders are at issue. Also as indicated, the administrative supervision may end up with sanctions against the party or parties for their wrongdoing. The sanctions generally include warning, fine, confiscation of illegal gains, expropriation of part or all of goods and/or deposit, as well as revocation of business license.
3.4. Government Approval and Other Special Requirements
For certain kinds of contracts in China, government approval is required or other special requirements must be met before the contracts become effective. Approval is the mechanism through which the contracts are under the screening of the government authorities, and it normally consists of two steps, namely review (examination) and approval. During the review, the reviewing authority will look into the contents and formality of the contract and see if they are in compliance with applicable laws and regulations. The approval will depend on the favorable result of the review. Therefore, the review is actually the basis for approval. In other words, no approval will be granted if a contract fails to pass the review.
At present, there are a number of contracts for which the government approval must be obtained. The most striking example is the contract involving foreign investments such as joint venture contract. In accordance with Article 3 of Law of the People’s Republic of China on Chinese-Foreign Equity Joint Ventures (as revised in 1990), the joint venture agreement, contract and articles of association shall be subject to review and approval by the state competent department in charge of foreign economic relations and trade. Similarly, under the Law of the People’s Republic of China on Chinese-Foreign Contractual Joint Venture Law (1988), agreement and contract reached by the parties to the joint venture will not take effect until they are reviewed and approved by competent authorities.
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In addition, according to Regulations on Administration of Contract for Introduction of Technology (1985), contract entered into by and between recipient and supplier for introduction of technology shall be submitted for review and approval to the MOC or any other agency authorized by the MOC. The requirements of government review and approval also apply to contracts concerning exploitation of offshore petroleum resources in cooperation with foreign enterprises, transfer of patent right by Chinese enterprise or individual, first time import of pharmaceutics, as well as transfer of right of land use.
It is necessary to note that if the review and approval are required, a contract will not have effect unless and until the approval is obtained. Under Article 44 of the Contract Law, the contract subject to approval as provided by laws or regulations shall become effective upon approval. According to the Supreme People’s Court, any contract for which the State approval is required shall be invalid without obtaining the approval.40
In addition, if a contract is subject to government review and approval, the requirement of review and approval are extended to the modification and assignment of the contract. It is provided in Articles 77 and 87 of the Contract Law that if the government approval is required for a contract, modification or assignment of such contract will equally require an approval from the approving authority or other designated authority in order for the modification or assignment to become valid and enforceable.
Moreover, for certain type of contract, an approval is also needed when the contract is to be terminated. For example, under Article 14 of the ChineseForeign Equity Joint Venture Law (as amended 2001), in case of heavy losses, failure of a party to perform its obligation under the contract and the article of association, or force majeure etc., the parties to the joint venture may terminate the contract by agreement, but the agreement for termination of the contract shall be submitted to the approving authorities for approval.
Other special requirements for a contract to be valid include registration, filing, as well as filing and recording. Registration refers to the process of registering contract or agreement with authorized government agencies before the contract or agreement takes effect. For example, under Article 10 of the Patent Law of China, transfer of patent application right or patent right shall be made thought a written contract, and the contract shall take effect only after the contract is registered with, and announced to the public, by the competent patent bureau. Registration also applies to contracts concerning Chinese-foreign
40See Supreme People’s Court “Answers to Several Questions Concerning Application of Foreign Economic Contract Law” (October 19, 1987), and Supreme People’s Court “Opinions on Questions Regarding Implementation of Economic Contract Law” (September 17, 1984).
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joint exploration of China’s mineral resources.41 For any of these contracts, the Chinese contractual party must register it with relevant registration authority after the contract is signed.
Filing is required when the parties enter into a license agreement for trademark use under the trademark law and regulations. A filing with approving authority is also needed when the parties terminate the foreign contract that has been approved by the government. Additionally, contracts in relation to private dwelling house rentals shall be filed with local real estate administration authority, and contracts for hiring of temporary works need to be filed with local labor department.
Filing and recording apply to contracts that involve real estate. According to the Law of Real Estate Administration, contracts for sale of real property shall be filed with and recorded at the real estate administration department of county level or higher. Without filing and recording, a real property contract will have no any effect, even though the contract has been agreed upon and executed by the parties.
41 See Provisional Methods of Registration and Administration of Mineral Resources Exploration.
Chapter III
Enforceability of Contracts
As discussed, a contract in China refers to an agreement made by the parties, which is deemed to be something more than just a promise. The Contract Law, therefore, is purposed to enforce the agreement, and the focus is on the voluntary undertakings of the two parties who make the contract, not simply on the promise made by one party or the other. From this point of view, the Contract Law premises the contract on the mutual assent of the parties.
In Chinese contract literature, attempt has been made to draw a line between promise and contract albeit similarities between these two. In one respect, a contract represents social institution of agreement making, while a promise is seen as a social institution of a more informal kind. In other respect, a contract, once made, is backed by the coercive power of the state. A promise, however, is supported by moral argument and the enforceability of it is based on “an artificial virtue” or morality.1
To say that a contract is an agreement should not imply that every agreement could be enforced as a contract. Take a closer look at the definition of contract in the Contract Law, it is not difficult to conclude that a contract shall contain at least two requirements: first, it is a voluntary undertaking by parties of equal status, and second, it is purposed to create, modify or terminate relations of
1See, T. M. Scanlon, Promises and Contracts, from Peter Benson, The Theory of Contract Law, 86–117 (Cambridge University Press) (2001).
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civil rights and obligations. Therefore, for an agreement to be enforced as a contract, the agreement must meet these requirements. To be more specific, the agreement shall not involve any improper activity such as criminal offences and shall not be used to serve any illegal purpose. In addition, for purposes of the Contract Law, the agreement shall not be the one that deals with relationship concerning personal status such as marriage, adoption or guardianship.2
With regard to the enforceability of a contract, Article 8 specifically provides that when a contract is established in accordance with the law, it shall be legally binding on the parties. Article 8 further provides that the parties shall perform their perspective obligations in accordance with the terms of the contract and neither party may unilaterally modify or rescind the contract without the other party’s consent. It is stressed under Article 8 that the contract established according to law shall be under the protection of law.
For an agreement to be enforceable, there are several factors that are addressed in the Contract Law. First of all, an agreement is enforceable if it is made by mutual assent of the parties. As noted, the mutuality between the parties is considered as the essence of a contract in China. Under the Contract Law, it is required that a contract be made on the basis of equality and voluntariness. Article 13 of the Contract Law explicitly provides that the parties shall conclude a contract in the form of an offer and acceptance. Article 25 further provides that a contract is concluded when the acceptance becomes effective. It is important to bear in mind that in China to be enforceable a contract need not be supported by consideration.
Secondly, an agreement may be enforced if one party has performed its principal contractual obligations and the other party has accepted the performance. The doctrine of performance of principal obligations is adopted in the Contract Law to apply to the situation where there is defect in contract formality. In accordance with the Contract Law, in order for a contract to be valid, the required formality must be observed. Under Article 10, a contract may be formed in written, oral or other forms. If the laws and administrative regulations require a contract to be concluded in written form, or the parties agree to use written form, the contract shall be made in writing. Article 32 provides that if the contract is made in writing, it shall be concluded when both parties sign or affix a seal on it. However, according to Articles 36 and 37, if a contract is not made in writing as required by law, regulation or the parties, nor is the written form singed or affixed with a seal, but one party has performed its principal obligations and the other party has accepted the performance, the contract shall be deemed concluded and enforceable.
2 Under Article 2 of the Contract Law, agreements involving marriage, adoption and guardianship shall apply the provisions of other laws.
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Thirdly, an agreement may become enforceable if one party reasonably relies on the other party’s words or conduct and changes its position accordingly. Although the concept of “promissory estoppel” does no exist in Chinese contract law tradition, the approach of reasonable reliance has been incorporated into the Contract Law. Under Article 19 (2), an offer may not be revoked, if the offeree has reasons to rely on the offer as being irrevocable and has made preparation for the fulfillment of the contract.3 Thus, in this situation, if the offeree accepts the offer, a contract then is concluded regardless of the offeror’s intention or action to revoke the offer, provided that all other requirements for a contract to be valid have been met. Obviously, as provided in Article 19 (2), the reasonable reliance test requires two key elements: (a) reasonable belief and (b) performance preparation.
However, with regard to the questions such as why a contract shall be enforced and which agreement shall be enforceable and which will not, the great emphasis is on the validity of contract and principles set forth in the Contract Law. Validity of contract deals with the legal effect of a contract concluded by the parties. Because an agreement is enforceable only if it is made in accordance with the law, the Contract Law is primarily concerned with what agreement the law will enforce or recognize as creating, modifying or terminating civil rights and obligations.
Therefore, for a contract to be binding, it must be legally valid. In this regard, unlike the previous contract legislations, the Contract Law differentiates the contract that is formed from the contract that is valid under the law. According to Chinese contract scholars, conclusion of a contract does not necessarily mean that the contract becomes valid because the validity may be affected by other factors such as conditions for a contract to take effect. Also the validity of contract would affect the formation of a contract, which will be further discussed in the relevant chapter of this book.
The basic principles that govern contract are provided in the General Provisions of the Contract Law. These principles are deemed to serve as the foundations of the contract law legislation and as the guidance for the application of the Contract Law. In addition, the principles are generally used as the benchmark that determines the rules of bargaining in making a contract and the standard by which the terms of a contract are to be interpreted.4 It is
3Interestingly, Article 19 (2) at first glance looks similar to § 87 (2) of Restatement (Second) of Contracts. But the latter has a clear focus on offeror while the former is concerned about offeree. § 87 (2) provides: “An offer which the offeror should reasonably expect to induce action or forbearance of a substantial character on the part of the offeree before acceptance and which does induce such action or forbearance is binding as an option contract to the extent necessary to avoid injustice.”
4 See Wang Liming, Study on Contract Law, Vol. I, 137–139 (People’s University Press, 2002).