driven by local interests. Therefore it would not be surprised that a contract violating local law or regulations is deemed void locally because of the concern for the local interests.

4. Voidable Contracts

It must be kept in mind that under the Contract Law, a contract will be void if there is a fraud or duress that has caused harm to the State interest. If, however, no State interest is involved, the fraud or duress will only render the contract voidable. Once again, the underlying premise is the supremacy of the State interest in Chinese economy. As far as the contract is concerned, the major difference between void contract and voidable contract is that when a contract is void, it will take no effect without any action of the parties, but if a contract is voidable, the party seeking to avoid the contract must make a request.

In accordance with Article 54 of the Contract Law, if a contract is concluded by a party against the other party’s true intention through the use of fraud, coercion or exploitation of the other party’s unfavorable position, the injured party shall have the right to request the people’s court or an arbitration body to modify or rescind the contract. Article 54 also provides that a party shall have the right to modify or rescind a contract if the contract (a) is concluded as a result of a material misunderstanding or (b) is obviously unfair at the time of contract.

Thus, the provisions of the Contract Law implicate that a contract is voidable in China under any of the following five situations: fraud, duress, exploitation of other party’s precarious position, material misunderstanding or obvious unfairness. It is important to recapitulate that a contact is voidable for fraud or duress only if it causes no harm to the State interest, or otherwise it will be void.

According to the Contract Law, for a contract that is voidable, the injured party may have two alternatives: to modify the contract or to rescind contract. In either case, the injured party must make a request. Although a court or arbitration body may under the request of injured party rescind or modify a contract, the contract may not be rescinded if the injured requests for modification. The rationale is that a contract is the product of the free will of the parties and their voluntary and meaningful choice in deciding their contractual rights and obligations ought to be respected as much as possible.

But in order to prevent abuse of the right to rescind a contract on the ground of voidalbleness, the Contract Law in particular singles out two circumstances under which the right to request for a rescission of the contact will be extinguished. The first one is the one-year time limitation. Article 55 of the Contract Law requires that the party having the right to rescind the contract exercise the right within one year from the day he knows or ought to know the

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causes for rescission.57 A failure to comply with the one-year time limitation will extinguish the right to rescind. The other one is the waiver of the right. Under Article 55 of the Contract Law, the right to rescind a contract will also be exterminated when the party who has the right to rescind explicitly expresses or acts to waive the right after he knows the causes to rescind.58

4.1. Exploitation of the Other Party’s Precarious Position

In the context of the Contract Law, the exploitation of other party’s precarious position means to take advantage of the other who is in a difficult situation (e.g. in an urgent need or a desperate situation) in order to seek unjustified benefits or make an unfair deal. According to the Supreme People’s Court, it shall be deemed as taking advantage of the other’s difficult situation if a party with a purpose to seek illicit benefits compels the other party who is in difficulty to make a manifestation against his true will, whereby the other party’s interest is seriously impaired.59

The prevention of a party from exploiting the other who is in difficulty is based on the notion that taking advantage of the other’s precarious position would vitiate consent to a contract and seriously undermine voluntary choice of the parties. In 1986 when the Civil Code was adopted, the legislators took the position that a contract made by taking advantage of the other party’s difficulty was void, and this position was fully reflected in Article 58 of the Civil Code. It was then argued, however, that it would be overly restrictive and arbitrary to make void a contract resulting from a party’s taking advantage of the other’s difficulty because pursuant to the idea that a contract is mainly a matter between the parties it would be more appropriate to allow the injured party to decide how to proceed with such contract. Consequently, the Contract Law alters the provision of the Civil Code and makes the contract voidable if made by taking advantage of the other’s difficult situation.

But, the question is how to define the difficulty or difficult situation. Under the Supreme People’s Court interpretation, the difficulty may refer to an urgent need or a desperate situation. A general view in China is that the exploitation of the other’s unfavorable position is something that would not possibly happen under a normal circumstance and therefore need to be determined objectively. For this purpose, a four-factor test is advanced and accepted by many.

The first factor is the fact of difficult situation facing the other party. Because of existence of the difficult situation, a party has the opportunity to take advantage of the other and to push through a deal that the other party would

57See the Contract Law, art. 55.

58See id.

59See Supreme People’s Court, Opinions, supra note 9.

otherwise not accept. The second factor involves the action of exploitation. There must be some conduct or certain words through which a party compels the other party to make an involuntary choice against the latter’s true intention. As a factual matter, the action of exploitation is a two-sided issue. On the one hand, the exploitation is in fact undertaken, and on the other hand, the exploitation ultimately results in the other party’s surrender of his free will. The third factor concerns deliberateness of exploitation. The party taking advantage of the other knows that the other party is in a difficult situation and deliberately makes the other party to have no choice but to accept a deal against his will. Thus, the exploitation may not be found if the other party has alternatives despite the difficulties he has encountered. The forth factor is the damage to the other party, which means the terms and conditions the party has to accept to his disadvantage. It is true that the exploitation may benefit the exploiting party, but what is important is whether the other party has suffered damages as a result of the exploitation.

From the viewpoint of Chinese contract law scholars, the urgent need means an imminent want for something to live through the difficulty, which includes both economic need (e.g. money) and want for living (e.g. service). The desperate situation concerns not only the economic constraints but also the hardship in life, health or reputation. It is then clear that the economic compulsion or pressure is recognized in China as the ground to make a contract voidable under the category of exploitation of the other’s unfavorable position. Although there are similarities between exploitation and duress (e.g. lack of meaningful and voluntary choice), the major difference is that duress involves illegal threat or wrongful coercion, while in exploitation the exploiting party engages in no illegal or wrongful conduct but taking advantage of the other.

4.2. Material Misunderstanding

It is interesting to note that in China the term “misunderstanding” rather than “mistake” is used as a legal reason for which a contract becomes voidable. Many insist that “misunderstanding” is a concept different from “mistake” because misunderstanding deals with the contract itself while the mistake has to do with the fact on which the contract is based. The main point is that the existence of the mistake does not impede the parties from reaching the consent on the contract.60 Opponents argue that misunderstanding actually means

60According to Professor Wang Liming, misunderstanding differs from mistake in several aspects: (a) the concept of mistake has a broader coverage than that of misunderstanding;

(b) mutual mistake shall make a contract void, but misunderstanding will only render the contract voidable; (c) mistake may be a unilateral or mutual mistake for which there will be a different consequence while misunderstanding contains no such distinction. See Wang Liming, supra note 7 at pp. 683–684.

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the mistake that is made by the parties in making the contract and because the result would be the same, those two terms should be deemed as the same though they are named differently.

Despite the arguments, there seems to have no practical significance to specifically draw a line between misunderstanding and mistake. Actually in many people’s courts the misunderstanding is generally referred to mean mistake. In a recurring fact pattern, the people’s courts prefer to define the misunderstanding as the mistake that the parties make in cognizance of factual elements of the contract.61 Also, in the drafting of the Contract Law, misunderstanding was interpreted as the situation where the parties made mistake or had no knowledge about the incompatibility (or imparity) between their intentions and actual facts or outcomes.62 A more direct interpretation is to characterize misunderstanding as the term equivalent to the mistake commonly used in western contract law theory.

There are three factors that are regarded important to constitute a misunderstanding. The three factor are: (a) an error in expression of intention; (b) negligence causing the error; and (c) causation between the contract and the erroneous expression of intention. Under Article 54 of the Contract Law, however, a contract is voidable for misunderstanding only if the misunderstanding is material. The materiality requirement set forth in the Contract Law derives from Article 59 of the 1986 Civil Code. In Article 59 it is provided that a party shall have the right to request a people’s court or an arbitration body to alter or rescind a civil act if the act is conducted with a material misunderstanding of the contents of the act.63 But Article 54 of the Contract Law emphasizes that to render a contract voidable there should exits material misunderstanding during the formation of a contract.64

But, neither the Civil Code nor the Contract Law contains any provision as to what misunderstanding would amount to be material. Attempting to resolve this matter, the Supreme People’s Court has provided sort of guidance for the people’s courts to follow in their practice. In the opinion of the Supreme People’s Court, the misunderstanding is material when a party misunderstood the nature of conduct, the other party, and the type, quality, specification and quantity of the objects in question, which results in a consequence contradictory to his true intention and causes him relatively serious losses. Obviously the Supreme People’s Court tried to solve the materiality issue through its

61See Li Guoguang, supra note 28 at pp. 231–232.

62See Sun Lihai, supra note 33 at p. 152.

63See the 1986 Civil Code, art. 59.

64See the Contract Law, art. 54.