Studies on Issues of the General Principles of Contract Law
Author: 郑云瑞; Source:chinalawinfo.com
In the past 30 years the economic and legal systemsin China have undergone momentous changes. In concomitance with economicdevelopments, the contract law experienced a process of gradual developmentfrom the three formercontract lawsin the 1980s to the unified contract lawat the end of the 20th century. The newly promulgated contract law hasabsorbed successful legislative experiences and reflected international trendsand developments in contract law. It unifies trade regulations, ensures tradesecurity , encourages commerce and attempts to satisfy the development needs ofthe market economy to the maximum extent.
Preface
32 years after the establishment of the PRC, we promulgatedthe first contract law: The Economic Contract law of the People's Republic ofChina (hereinafter referred to as "Economic Contract Law").
[1] efore this event, it is not that contract law did not exist in China as it appeared in the form of custom andadministrative regulations.
[2] he Foreign Economic Contract Law of the People's Republic of China(hereinafter referred to as "Foreign Economic Contract Law")
[3] nd the Technology Contract Law of the People's Republic of China (hereinafterreferred to as "Technology Contract Law")
[4] ere successively promulgated after the promulgation of the Economic ContractLaw. During the times of economic transformation, thosethree formercontract law
[5] ad great effect in protecting interests of parties concerned, maintainingorder in commerce and developing the market economy. However, after entering intothe 1990s, the three formercontract law could no longer adapt to the need forlegal reforms as required by social life. With the penetration of reforms, opendoor policy and the establishment of the market economy system, there weredemands for the market transaction regulations to be unified, legal regulationsand old civil law theories that reflected essential and special traits of thecommand economy system were neededto be abolished, common regulations reflecting the objective principles of themodern market economy are to be adopted, We have learned from thethe successful legislative experience,case law and theories of developedcountries and areas t. This is so that in the premise of giving considerationto economic efficiency as with social justice, and trade security as withtransactional convenience , fulfil theunification, modernization, and as far as possible, the operatability of thelaw of contract. Nineteenyears after the promulgation of the first contractlaw, China promulgated the Contract Law of the People's Republic of China(hereinafter referred to as "Contract Law") on the 15th of March,1999, which took effect on the 1st of Octoberin the same year.
[6] part from this, in order to assist all levels of courts in understandingand applying the Contract Law, theSupreme People's Court promulgated the Construction of Certain IssuesConcerning the Application of The Contract Law of the People's Republic ofChina (One) (hereinafter referred to as "Construction of Contract Law").
[7] his article undertakes a preliminary comparative analysis on three aspects ofthe general principles of Contract's Law.
I. Takingeffect of Contracts
The contract system of the formation of the contractand the contract system of the taking effect of the contract are closelyrelated. The formation of the contractrefers to the meeting of minds.
[8] rom looking at the manner of the formation of the contract, the mode of a contract'sformation is via offer and acceptance.
[9] o matter what specific form the formation of the contract takes, it needs toundergo the two stages of offer and acceptance. This is the basic procedure forcontract formation and it is also the general modus operandi for internationalcontract formation. In fact, the process of offer and acceptance is the processof the meeting of minds of the contracting parties. The conclusion of theprocess of offer and acceptance indicates the unanimous accord of the interestsof the parties, thus declaring the formation of the contract. Before thepromulgation of the Contract Law, China's civil law, three former contract law,and relevant contract laws and administrative regulations, lack the stipulatedrequirement of offer and acceptance. Under many situations, the lack of asystem of offer and acceptance results in difficulty of determining whether ornot the contract is formed, and may cause an originally formed contract to beadjudged as not formed. The requirement in contract law of the system of offerand acceptance may result in a more concrete standard in contract formation.Not only will this result in contractual parties engaged in commerce havingremedies to resort to, but also result in the courts having definite and clearestablished principles when dealing with contractual disputes, having betterdemarcation of the parties' responsibilities, correctly judging the contract'sformation, sufficiently safeguarding the party rights, encouraging commerce,and promoting economic development. Therefore, offer and acceptance are of vastsignificance in the formation of the contract.
The taking effect of thecontract refers to an already formed contract producing a binding force in lawbetween the parties. The taking effect of the contract refers to theaffirmative evaluation of the already formed contract by the national law.The formation of the contract is aquestion of fact and is a matter between the contracting parties, however, thetaking effect of the contract involves value judgments. Whether or not acontract takes effect not only depends on whether the expressed intentions werecommon and true, but it also depends on whether or not the parties possess thecorresponding civil capacities, whether or not the contract's conduct orcontent harms third parties, state, or public interests, and whether or not theform of the contract corresponds to the mandatory provisions in law.
The difference between theformation of the contract and the taking effect of the contract is not clearlyexpressed in the Economic Contract Law. Similarly, in the General Principles ofthe Civil Code and the Foreign Economic Contract Law, it is also in an obscureand vague state. An example is that besides Article 6 of the Economic ContractLaw which regulates that "economic contracts formed in accordance to theoperation of law possess binding force in law", no other provisions refer tothe question of the taking effect of the contract. Hereon, the question of thetaking effect of the contract is concealed. However, after looking at Article62 of the Civil Code which states, "Conditional civil juristic acts come intoeffect when it conforms to the conditions", the difference between formationand taking effect starts to show in civil juristic acts. Nevertheless, whetherit is due to the insufficiency of theoretical proof or due to a mistake inlegislative technique, this important problem merely shows up preliminarily inthe general principles of civil law and the demarcation of boundaries has notbeen further clarified. Therefore, this caused some contract laws to defineapproval from authorities as an essential element in the formation of acontract, while others define the abovementioned approval as one of theessential conditions in the taking effect of a contract. This contradiction andconflict between different contract laws is scarcely unexpected.
Not only does this problemexist in China's contract legislation, it also causes a great deal of confusionin judicial practice and jurisprudential study. "The contract law academehas more emphasis on the study of thetaking effect of a contract all the time; however it neglects the study of theformation of a contract.Some civiltreatises mix the issues of a contract's formation with taking effect, andquite a number of treatises just equate the essential conditions of the takingeffect of the contract with that of the formation of the contract. With suchinterconnectedness, judgements of contracts being ineffective can be foundeverywhere in the judicial practice, while examples on judgments of a contractnot being formed are extremely rare.
[10]
According to civil lawtheory, the essential conditions of the taking effect of a juristic act referto "juristic acts that are already established, essential matters that makesthe abovementioned acts completed effectively".
[11] he essential conditions of the taking effect of a contract can be divided intonormal conditions and special conditions. The former can be applicable tovarious juristic acts, the latter is only applicable to certain specialjuristic acts. The contents of the normal conditions for taking effect includefour main areas:
[12]
1)The parties should possess the corresponding legalcapacity and capacity to act when concluding a contract;
2)The expressed intentions of the parties are true;
3)The contract does not contravene the law or publicinterests; and
4)The contents of the contract must be definite,possible, legal and appropriate.
[13]
Viacomparisons, it could be seen that the conditions of a contract and theconditions of the contract's taking effect is a sort of "external-internal"relationship. As long as the parties have a meeting of minds, thecontract is formed. This is an external representation. However, only whenparties who have fulfilled specific conditions make representation that fulfilsspecial requirements would the formed contract have legal effect. These typesof conditions are is what is legally required by the taking effect of thecontract; they are the "essence". Therefore, contracts that are already formedneed not necessarily have legal effect, while a contract that has come intoeffect must already be formed. The setting up of two equally importantstandards of conditions for formation and conditions for taking effect toregulate juristic acts is to give effect to legislative intent. On one hand,the parties make offers and acceptances with the aim to create the contract,therefore, the law does not make many regulations with regards to the formationof the contract, its largest extent being to satisfy the expectations ofparties and to conform to the principle of the autonomy of parties' will; onthe other hand, due to certain trends of social values, recognition in law of acontract should necessarily be strictly regulated in order to prevent contractsthat seem harmless on the face of it, but whose actual contents are harmful,from taking effect.
The system of approval and registration of contractsis closely related to a contract's formation and taking effect. According tolaws and legal regulations, some require the relevant government department'sapproval or the registration of formalities. With regards to the legal effectof such approval or registration, is it a matter of the formation of thecontract or a matter of the taking effect of a contract? The Contract Law doesnot resolve this question. From China's past contract law legislation, it canbe seen that there are completely different legislative attitudes towards thelegal effects of act of approval or registration. In the Foreign EconomicContract Law, the act of approval is prescribed as a condition for theformation of a contract. Article 7 of the abovementioned law states,"whencontracts that should be approved by the country are given approval, thecontracts are regarded as formed". The Technology Contract Law also prescribesacts of registration as conditions for the formation of a contract sinceArticle 10 states, "(contracts) that require approval from the relevantauthorities according to state law are formed from the date of approval".However, two months after the promulgation of the Foreign Economic Law, in May,1985, the State Council released the Technology Introduction Contract GoverningRegulation of which Section 20 prescribes that technology introduction contracts"come into effect on the date of approval". Before which, in January, 1982, theState Council released the Foreign Cooperative Exploitation of Ocean Crude OilResources Regulation where Section 6 also prescribes that contracts for crudeoil come into effect when given approval. Hereon, approval becomes a conditionfor the taking effect of a contract. In other words, state laws prescribe actsof approval and registration as conditions for the formation of the contractwhile the State Council's regulations determine these as conditions for thetaking effect of a contract.
The Contract Law distinguishes the formation and thetaking effect of the contract, but does not distinguishthe legal effects of approval andregistration.
[14] ccording to Article 44 of the Contract Law, there will be on problems if lawsor regulations clearly state that approval or registration is a condition forthe contract to take effect. However, if when laws and regulations onlyprescribe the need for approval or registration procedures, and do notprescribe whether the procedures are conditions for the formation of thecontract or conditions for the taking effect of the contract, how do weascertain the legal effects of approval or registration? Looking at thearticles regarding the formation of a contract in contract law, questions thatdo not involve that of approval orregistration seems to reflect the inclination to view approval and registrationas conditions to the taking effect of the contract and not to the formation ofthe contract. However, due to the ambiguity of this article, it cannot removethe possibility that future laws and regulations would follow the precedence inthe foreign economic contract law and the technology contract law in decidingthat approval or registration goes towards the conditions for the formation ofa contract. However, the judicial construction by the Supreme People's Courtaffirmed that acts of approval and registration go towards the conditions forthe taking effect of the contract.
[15]
According to the general principles of civil law, theessential condition for the formation of contract is the mutual consent of bothparties, as such there is no need for approvals and registration as a basis forthe formation of contract. A contract is the result of an agreement between theparties and is the embodiment of the principle of freedom of contract. As longas both parties adhere to the contractually stipulated regulations on offer andacceptance, and the terms of contract are consistent with the fundamentalprovisions, or alternatively if the contract conforms to the circumstancesprovided by articles such as article 37 of the Contract Law, then the contractis established. It is thus clear that the formation of a contract is a matterpurely within the scope of the parties, and is unrelated to the law, the stateagencies or even third parties.
The same, however, cannot be said for the takingeffect of the contract as that is where a contract acquires its legalenforceability, and therefore, it is not merely the intentions of the parties.It certainly includes the State will, the state's adjudication andacceptability of the acts of the parties. Thus it is impossible that the lawshould vest legal enforceability in a contract that clearly violates legalrequirements. Both the requirement of approval and registration are forms ofcontractual intervention by either the State will or external factors. Therequirement of approval is a reflection of an administrative act of the Statewill, the purpose being to interpose on the private lives of individualsthrough the power of the State. At the same time, it allows for contractualrelations that are in accordance to the interests of the party and which alsoare in keeping with the State and public interests. Registration is a specialprocedure handled by a statutory body and its purpose is to allow the legalrelations between the specific parties to gain the effect of fairness andcredence that is publicly recognized. The requirements of approval and registrationdo not entirely constitute the essential conditions to the formation of acontract, rather, they are used to determine whether the contractual objectivesof the anticipated contract can be realized by the State mandate, therebyachieving the expected civil legal result. This is, in fact, the issue that thesystem which governs the coming into effect of a contract has to address.
II. Performanceof Contract
Theperformance of a contract is where an obligor performs his contractualobligation and the obligee realizes his contractual claim, therebyextinguishing the relationship between obligatory right and liability.
[16] ith regards to the issue of contractual performance, Contract Law widely draws reference from foreign contract lawsystems. For example, it draws reference from regulations such as the right todemur when adversely affected,
[17] nd the right to demur for a subsequent performance
[18] nd specific performance etc.
[19]
Before the promulgation of the Contract Law, a severe gap in Chinese contract law existed withregards to the preservation of obligatory rights.
[20] ven though judicial interpretation refers to the obligee's right ofsubrogation, it is merely restricted to the procedure of civil action and doesnot involve the substantive law at all.
[21] n order to remedy the legislative gap, ContractLaw provides for the system of preservation of contractual claim, moreprecisely, it provides for the system of the obligee's right of subrogation andrights of rescission.
[22] n obligee's claim or right to rescind, through the use of the obligor's assetsas a guarantee and the objective of the system of preservation of obligatoryright is founded upon the circumstances where the inappropriate dissipation ofthe obligor's assets results in the obligee's inability to realize his claim.The system of the obligee's right of subrogation is mainly to give due regardto the obligor's nonfeasance, whereas the obligee's right to rescission is togive due regard to the positive acts of the obligor. The systems of anobligee's rights to subrogation and rescission are a breakthrough with regardsto the principle of the 'relativity of contract'. In the conventional contractlaw, the legislative foundation for such systems is founded on the guarantee tothe realization of obligatory rights.
A. Rightof Subrogation (dai wei quan)
The right of subrogation refers to where an obligor,in delaying his exercise of his proprietary right against a third party,jeopardizes the realization of the obligee's contractual claim. In order toprotect the realization of his claim, The obligee can, by way of using his ownname in place of the obligor, exercise his proprietary right.
[23] or instance, Company B owes Company A RMB1,000,000 in debt which is due on 12thOct 2001, Company C owes Company B RMB800,000 in debt which is due 10thOct 2001. On or after 12th Oct 2001, Company B has neither repaidCompany A its due obligation nor has it instituted a lawsuit or by way ofarbitration take positive measures against Company C for the repayment of thedebt in question. As such, according to the system of the right of subrogation,Company A can use its own name in place of Company B demand that Company Cdischarge its obligation that was due.
1.The constitutive conditions of an obligee's rightof subrogation are:
[24] irstly, as between the obligee and obligor, there must be an existing legallybinding relation of contractual right and obligation. Due to the fact that anobligee's right of subrogation is an accessory right, created out of the needto protect an obligee's claim, then if between the obligee, who exercises hisright of subrogation, and the obligor, there is no existing legally binding,valid and affirmative contractual relation of rights and obligation, theobligee would lack the basis for his exercise of his right of subrogation.Secondly, the obligor must have been delayed in the performance of hisobligation and had been indolent in exercising his due claim against hissub-obligor. This means that the obligor neither performs his contractual obligationthat is due to the obligee nor does he, by way of lawsuits or arbitration, takeactive measures to the monetary claim that is due to him against hissub-obligor. First and foremost, regardless of whether it is the obligee'scontractual claim against the obligor, or whether it is the obligor'scontractual claim against the sub-obligor, both should be contractual claimsthat are due. The obligor must have not performed his obligation to the obligeethat is already due, nor must he have initiated his rights to his claim againsthis sub-obligor.
[25] Also anessential condition is that the obligor's inactivity must have caused damage tothe obligee.
[26] Butjudging from the actual provisions of Contract Law, it seems that the obligor'sdelay in performance is not a necessary condition, however, from a reasonableperspective, Contract Law should rely on the obligor's delay in performance asa constitutive condition for the exercise of the right to subrogation and thisshould be restricted to where the obligee has suffered damage from the delay inperformance of his due claim. In the Construction of Contract Law, it isfurther affirmed that that the obligor's delay in performance should be aconstitutive condition for the right of subrogation,
[27] nd this explanation is favorable to the striking of an equilibrium of thebeneficial relationship between the obligee and obligor.
[28] 建议将该注删除,内容太长）In addition, when exercising his right against the sub-obligor, the obligormust do so by way of either filing a lawsuit against the sub-obligor or byarbitration. Lastly, the obligor's entitlement against the sub-obligor mustinvolve a monetary payment or a claim of debt.
[29] hirdly, the obligor's conduct must have caused damage to the due obligation ofthe obligee. The obligor's indolence in the performance of the obligee's dueobligation and his nonclaim for the due creditor's rights must have caused theobligee's due claim to be unrealized.
[30] ourthly, the obligor's obligation is not exclusive to the obligor's personalrights.
[31] s the interest of the object of subrogation, not only is it restricted to theobligor's claim against the sub-obligor, it must also not be a personal rightbelonging exclusively to the obligor.
[32]
2.The method of exercising the right of subrogationby the obligee.
[33] It isclearly stipulated in the Contract Lawthat the obligee's exercise of his right of subrogation can be carried out byway of legal actions.
[34] he reasons for legal actions in the exercise of right of subrogation are: Firstly,it is only through adjudication that it can be ensured that those obligees whoexercise their rights of subrogation can obtain a benefit, and that thebenefits are reasonably distributed among the obligees.Secondly, the exerciseof right of subrogation by way of adjudication can effectively prevent certainobligees from abusing their right of subrogation and thereby avoiding confusioncaused by civil circulation. Thirdly, it is effective in preventing disputesfrom arising, by providing that the only method to exercise the right ofsubrogation is by way of legal action. It can help prevent the conflict betweenthe obligees who use the prescribed method to institute their right ofsubrogation and those obligees who resort to direct measures. In addition, itcan effectively resolve the conflicts between the obligee and the obligor, andissues relating to the sub-obligor which are caused by the exercise of theright of subrogation.
3.Issues on the validity of the right of subrogation.The validity of the right of subrogation involves the obligor, the third partyand the obligee himself. With regards to the obligor, once the obligee hasstarted exercising his right of subrogation and had notified the obligor ofsuch, the obligor is not to jeopardize the obligee's disposition of hisinterest in the exercise of his right of subrogation, nor is he to abandon,absolve or assign or conduct himself in a manner that would erode the validityof the exercise of the right of subrogation. The benefit of validity in civillaw that is created by the obligee's exercise of right of subrogation should godirectly to the obligee. As to third parties, the obligee's exercise of hisright of subrogation is equivalent to the obligor's exercise of his claimagainst them. At the same time, after having exercised the right of subrogationand notifying the obligor, the right of defence against the obligor that thethird party acquired as, can now be used to counter the oblige. Such defencesinclude the act of God and that the action beingtime-barred（已过诉讼时效）. As tothe obligee, the necessary expenses expended as a result of the exercise of theright of subrogation can be claimed by way of restitution against the obligor.Upon the reversion of the entitlement of the obligor, the obligee can make use ofthe proceeds from the realization of the assets to discharge his own claim.When the sub-obligor has performed his obligation to discharge himself from theobligor's claim, and that the obligor still has claims from other obligees, theobligee who exercised his right of subrogation and the other obligees' claimsare on par with all other claims and the obligees are all on the same standing.The obligee who exercised his right of subrogation would not have priority overthe other obligees in his claim.
The Contract Law does not provide for the validity ofthe right to subrogation but the Constructionof Contract Law remedied this inadequacy of the law of contract. Firstly, withregards to the validity on the obligor, once the obligee institutes a legal actionagainst the sub-obligor to establish his right of subrogation, and with thecourt having heard and affirmed the right, the right of subrogation is thenestablished. The sub-obligor will have to discharge his obligation to theobligee, then the corresponding claim and obligation between the obligee andobligor, the obligee and sub-obligor, will be extinguished.
[35] egardless of whether the obligor is himself exercising his right of claim orthe oblige is exercising his right to subrogation, its effect on thesub-obligor and on the obligor's claim against the sub-obligor, does not haveany impact on the legal status or interest of the sub-obligor. As such, asub-obligor can make use of whatever right of defence that he is entitled touse against the obligor to subsequently counter against the claim of theobligee.
[36]
Lastly, with respect to the validity of the obligee'sclaim, he cannot when enforcing his subrogration right, request for an amountthat exceeds the monetary scope of the obligor's liability. The obligor mustbear the necessary costs for the obligee's enforcement of subrogration rights.
[37]
The regime of the right to subrograte is concernedwith balancing the interests of both obligee and obligor, and with protectingthe autonomy of will and the principle of good faith. The original rationale inestablishing the regime for subrogration rights is to protect obligations,stabilize obligatory relationships, insist on the principle of who should claimand who should gain, benefit the obligee when he protects his obligationactively, simplify the procedure for protecting obligations, and raise theefficiency level for protecting obligations. In establishing the regime forsubrogration rights, an important aim of China's Contract Law is to solveChina's real and rampant problem of "Three-way debts".Whether this regime can in fact fulfilthis goal relies on the correct interpretation by academics. Modern experiencesfrom foreign jurisprudence and doctrines also need to be absorbed, togetherwith the use of judicial practice, to give this regime real spirit.
B.Right of Rescission (che xiao quan)The right of rescission refers to the obligee's rightto ask the Court for rescission where the obligor has acted to the prejudice ofhis obligation. Compared to the subrogation right of the obligee under theregime for preservation of obligatory rights, the effect of rescission isstronger, because when the obligee subrogates to enforce the obligor's presentright, his influence is minor, whether to the obligor or the sub-obligor.However, when he rescinds the obligor's conduct to recall property subject tothe liability, the damage he causes to an established legal relationshipcreates a major impact. Thus, theoretically, the conditions for enforcingrescission should be restricted strictly to avoid ruining the safety oftransactions. However, Contract Law stipulates that the right of rescission ismerely limited to three situations where the obligor's conduct is prejudicialto the obligation, such as where the obligor renounces obligations that aredue, and where he transfers property to third parties gratuitously or at pricesthat are so low as to be obviously unreasonable.
[38] or example, Company A owes Company B a debt of RMB500,000 and due to poormanagement, only a BMW is left of the company's asset. Company A sells the BMWthat is worth RMB600,000 to a friend, C, for RMB200,000. According to theregime for rescission of rights, Company B has the right to recall the BMW fromC because Company A's conduct, in dealing with the BMW, has directly harmed therights of Company B, and has led to its inability to realise the obligation.However, if Company A has sufficient assets to repay the obligation that isowed to Company B, A's disposal of the BMW is valid and Company B cannot makeuse of the regime of rescission to recall the BMW from C.
The following are elements for rescission by theobligee: Firstly, the obligee must have an effective obligation against theobligor. The existence of an effective obligation against the obligor forms theprerequisite and foundation to the obligee enforcing his right of rescission,and the aim of such a right should generally be the payment of property.
[39] econdly, the obligor must have performed certain acts to dispose of property.When the obligor disposes property, Contract Law restricts the rescissibilityof such acts to where the obligor renounces his obligatory rights and where hetransfers property to third parties gratuitously, or at prices that are so lowas to be obviously unreasonable.
[40] hirdly, the obligor's acts must be prejudicial to the obligation. As theobligor's act leads to a decrease of his financial ability to discharge hisobligation and a disability to satisfy its demands, such prejudice to itsrealisation forms an important criterion for determining the obligee'srescissionary right. In setting up a regime for rescission, contract law aimsto ensure total discharge of the obligor's obligation by preserving theproperty that is subject to liability, reflecting an inclination of moderncivil law towards strengthening contractual reliance to protect the obligee'sinterest.
[41] ourthly, malice is not a condition for rescission of gratuitous conduct, thatis, rescission can be enforced both with and without malice. However, malice isa condition for rescission of conduct that provides consideration. 移到上一段With respect to conduct that provides consideration,such as the obligor transferring property at such low prices that are obviouslyunreasonable, both the obligor and third party must possess malice. Theobligor's malice is the condition for establishing rescission, while theenriched party's malice is the condition for enforcing rescission.
[42]
The obligee's right to rescind destroys the legalrelationship between the obligor and the third party. A long-term failure toenforce the rescissionary right places the relationship between the obligor andthe third party in a long-term unstable state, and is disadvantageous towardsprotecting the interests of the obligor and the third party. Thus, Contract Lawstipulates that the right to rescind is extinguished if such right is notenforced one year from the date on which the obligee knows or ought to know ofthe matter subject to rescission, or within five years from the date on whichthe obligor performs the relevant act.
[43] he Supreme People's Court interprets the period for rescission of contract asan "unchangeable period" (bu bian qi jian),
[44] here the rules for limitation of action - suspension, discontinuance orextension - are not applicable.
[45]
The obligee must enforce the recessionary right inhis own name and bring an action in the People's Court to seek rescission ofthe obligor's unjust disposal of the property. In addition, the scope forenforcement of this right is limited to the extent of the obligee's obligation.With regards to the scope for enforcing recessionary rights, basically, twoviews exist: when numerous rights are prejudiced by the conduct of the sameobligor, the first view deems that each obligee has the right to sue forrescission, the scope of their claim being limited only by the sphere ofprotection for each individual obligatory right.
[46] he other view opines that since enforcement of rescission aims to protect theproperties of all parties, the scope of this enforcement is not limited toprotecting the value of the rights that the obligee enforces, but should extendto the protection of all the rights of all the obligees.
[47] owever, the judicial constructionof the Supreme People'sCourt has limited the scope for enforcing subrogration rights to each obligee'sextent of protection of his right.
[48]
C.Right to Demur when Adversely Affected (buan kang bian quan)
[49] fter the formation of a bilateralcontract, if the party who is obliged to perform first has concrete proof thatthe other party cannot, or has the possibility of being unable to, perform hiscontractual obligations, he can exercise his right to demur when adverselyaffected. This refers to the right, as seen in the above situation, to rejectperforming one's contractual obligations first before the other party performsor provides a guarantee.
The following conditions establishthe right to demur when adversely affected:
[50] irstly, both parties in a bilateral contract must have mutual paymentobligations. The right to demur when adversely affected can only take effect ina bilateral contract, just like the right to demur for concurrent performance (tong shi lü xing kang bian quan).Secondly, there must be a chronological order for performance of the contract,whereby one party performs first while the other performs later. If there is nochronological order in the parties' performance, then the right to demur forconcurrent performance may arise instead of the right to demur when adverselyaffected. Thirdly, the party who should first perform the contract must haveconcrete evidence to prove that the party who should perform later has lost, ormay lose, the ability to perform after the formation of the contract. Thisinvolves three elements: (1) the later-performing party loses or may lose hisability. (2) The later-performing party loses or may lose his ability toperform his obligations after formation of the contract.
[51] 3) The first-performing party bears the burden of proving the facts. Inasserting his right to demur when adversely affected, the first-performingparty must have concrete proof that the other party has lost or may lose theability to discharge the contractual obligations, he cannot rely on his ownsubjective speculations.
In enforcing the right to demurwhen adversely affected, the first-performing party can suspend hisperformance, but he should inform the other party and give a reasonable timelimit for the latter to recover his ability to perform or to provide a suitableguarantee. The act of suspending performance is lawful and does not amount tobreach of contract. If the party who should perform later is unable to providea guarantee or recover his ability to perform within the reasonable time limit,and still requests the other party to perform, this first-performing party canreject to perform. If the later-performing party is able to provide a guaranteeor recover his ability to perform within the reasonable time limit, thefirst-performing party should continue his performance of the contract.
[52] his fully reflects the temporary nature (yishi kang bian quan) of the right to demur when adversely affected.
However, the right to demur whenadversely affected in Contract Law clashes with the provisions in Article 94,section 2 of the same statute.
[53] s Contract Law did not stipulate clearly the conditions under which the latterprovision is applicable, it thus applies to both situations of concurrentperformance and sequential performance. When one party expresses clearly thathe will not perform his obligation, the other party can use Article 94, section2 to enjoy directly his right to repudiate the contract. However, when a partyshows evidently with his conduct, that he will not perform the main obligation,his conduct can be interpreted as an expression of non-performance of theobligation; or the loss, or probable loss, of his ability to perform theobligation. In the former situation, the other party can repudiate the contractdirectly; but in the latter situation, the other party can only enjoy the rightto demur when adversely affected. He can suspend his performance of thecontract and request the opposite party to provide a performance guarantee, buthe has no right to repudiate the contract directly. The emergence of twodifferent operative methods in the same statute has led to a contradiction inthe application of the law. If the first-performing party is allowed to electto apply Article 94, section 2 of Contract Law, the likelihood of situationswhere he abuses the right to repudiate the contract is high. The substance ofthe regime for the right to demur when adversely affected - protection of thelegal interests of the later-performing party -will thus deteriorate and prejudice theexpectancy interest of the later-performing party.
[54]
D. The right to demur for concurrentperformance (tong shi lü xing kang bian quan)
The right to demur for concurrentperformance refers to both contracting parties performing the obligations owedto each other at the same time. The request for this right can be rejectedprior to the performance by the requesting party or during the performance ifit is not according to the stipulations agreed upon
[55]
The following conditions establishthe right to demur for concurrent performance - Firstly, the parties have to bemutually obligated by virtue of a bilateral contract. This right springs fromthe principle of fairness derived from the mutually dependent nature (qian lian xing) of a bilateral contract.Therefore, this is not applicable to unilateral contracts and bilateralcontracts which are not complete or genuine. The mutual obligations of theparties must be borne out of one single contract. The right will not arise ifthe mutual obligations are borne out of 2 or more contracts even if the partiesshare an intimate relationship in reality. These obligations must be oweddirectly to each other. There must also be a connection between the obligationsthemselves
[56] For example, if A sold a car to B and bought RMB500,000 worth of raw materialsfrom B, two separate contracts are formed.A cannot refuse to hand over the car simply because B has not passed him theraw materials. This is because there is no connection between the hand over ofthe raw material and the hand over of the car. Secondly, It istime for both partiestoperform their obligations at the same time. This is to fulfill the aim of theright to demur for concurrent performance, which is to ensure that both partiescan enjoy the benefits of completion of performance at the same time. If thenature of the contract is such that the date of completion for both obligationsare different, or that it is stipulated within the contract as such, thefirst-performing party cannot impose this right when the other party has notcompleted the performance of his obligation. Thirdly, the other party must havefailed to perform his obligation or perform it out of accordance with theagreed stipulations. To request for the right to demur for concurrentperformance, the requesting party must have already fulfilled its ownobligation owed to the other party. This fulfillment has to be in accordancewith the agreed stipulations within the contract. If the performance of oneparty is delayed, partially flawed or in any way contrary to the contract, canthe other party apply for the right? If a party who has not completed theperformance of its obligations, requests the other party to fulfill hisobligation, can the latter party use the right to demur for concurrentperformance?
[57] ccording to Contract Law, one party has the right to reject the request forfulfillment of obligations if the requesting party did not comply with thestipulations agreed upon during performance
[58] Fourthly, the obligations must be such that they are capable of beingperformed. If the obligations are no longer capable of being performed, thepurpose of the right to demur for concurrent performance - that of realizingboth obligations at the same time - will not be met. Consequently, no problemsrelating to this right will arise. As such, the contract shall be dischargedaccording to the relevant legal provisions.
The advantages of the right to demurfor concurrent performance are a balance of interests between the parties,protection of their rights, preservation of normal transaction order, enhancement of the co-operation between parties, guaranteefor the performance of the contract and protection of the legal interests ofthe parties
[59] The legal basis of this right is the mutuallydependent nature of bilateral contracts, whereby the existence of the parties'obligations and benefits are dependent on each other and that cause and effectare mutually reliant. This dependency is reflected in three areas. Firstly, in the formation of contract, where two opposingobligations, with mutually dependent conditions, arise from the same contract.When one obligation can no longer stand, the other obligation will similarly berendered ineffective. Secondly,thisdependency is also shown when the performance of one's obligations isconditional upon another's. Therefore, if one party fails to perform, theperformance by the other party will inevitably be affected. Finally, in theexistence and continuation of dependency, the problem of liability arises if,without the fault of either party, the contract is rendered incapable ofperformance.
[60] he pre-requisite to effect this right lies in the consequences brought aboutby dependency.
E. The Right to Demur For Later Performance (hou lü xing kang pian quan)
In a situation whereby thefirst-performing party fails to perform, due either to delays or serious flaws(in his performance), the other party can refuse to perform hiscounter-obligation in order to protect his interest. This is the right to demurfor later performance. Of course, this system can only operate in accordancewith the terms of the contract or legal provisions. This right belongs to theclass of suspended rights (yan qi kangbian quan) and can only prevent the opposing party from exercising hisright of claim on a temporary basis; it is not a permanent right (yong jiu kang bian quan), Once the earlier party fulfills its obligations, this rightextinguishes and the latter has to fulfill its obligation. The earlier party isto be held responsible for the breach of the contract, either by delayed ornon-substantial (incomplete) performance.
The theory of China's law of contract only includesregulations concerning the right to demur for concurrent performance and theright to demur when adversely affected. It does not provide for regulationspertaining to the right to demur for later performance. The system of the rightto demur for later performance is established after Contract Law adopted therelevant regulations in the International Commercial Contract Rules
[61] This has great impact on both theoretical discussions and practicalapplications. The doctrine helps to distinguish the problem arising from breachof contract by one party and that arising from both parties by demarcating theparties' responsibilities. It is commonplace in judicial practice that oneparty breaches the contract first, leading to the other party to terminateperformance in order to protect his legal interest. In such a situation, thecourt will normally rule that both parties are in breach and subsequently, bothwill be held responsible. This is not only unfair to the latter party, it isalso too lenient in dealing with the former party's act of breach. This iswhere the right to demur for later performance steps in. It clearly reflectsthe right --obligationrelationship between the parties involved --where one party's breach leads to the termination of performance by another,helping to identify the nature of the parties' conduct and responsibilitiesarising from the breach.
The requirements for the right areas follows - firstly, the contracthas to be a bilateral one and there must be in existence a casual relationshipbetween the obligations of both parties. Unilateral contracts such as donationcontracts will not lead to problems relating to the right. Secondly, there mustbe a chronological order for the performance of obligation. This order can bedetermined by regular course of dealing, such as the payment of hotel fees onlyafter staying and the purchase of tickets prior to boarding a plane or train.Thirdly, the latter party can only request for this right if the other partyfails to perform or performs contrary to the contract. For example, if it isstipulated in the contract that payments will only be made upon delivery, thebuyer can refuse to make the payments prior to the delivery of goods.
Both the right to demur for later performance and theright to demur when adversely affected occur during the course of performanceand are aimed at protecting a party's rights from being infringed. However, theright to demur when adversely affected can only be used by the earlier partywhile the right to demur for later performance is for the exclusive use of thelater party. The right to demur when adversely affected operates on the basisthat there is a risk that there will be no performance while the right to demurfor later performance is applicable only when the breach has already beenobjectively established. For the right to demur when adversely affected, theparty needs to notify the other party so as to give the latter a chance toadduce evidence or provide a guarantee. For the right to demur for laterperformance, there is no such need as the opposing party has already committeda breach, therefore, a pleading can be filed immediately.
The later-perfor, ming partyhas to take notice of the temporal nature of the right to demur for laterperformance. Once the first-performing party fulfils his obligation, this rightwill extinguish and the later-performing party will also have to fulfil hisobligation. Otherwise, his actions may constitute a breach. The establishmentof this right completes and enhances the system for the right to demur whenadversely affected by balancing the interests of the parties and pushingfairness and justice to a higher notch.
III. Liabilities in Contract Law
The liabilitiesin contract law refers mainly topre-contractual obligation, liability for breach of contract andpost-contractual obligation
[62] This extension of liabilities results in parties being burdened by all threekinds of obligations. However, this extension in Chinese law of contract isinevitable in the face of rapid development, leading to the adoption of thesystem and regulations which are used by many other countries in the world.
A. The extension of contractual obligations
[63]
In traditional theory relating tocontract law, the responsibility taken on by the parties is solely thatstipulated by the parties (also known as the obligation to pay). However, inmodern times, the emphasis has shifted to the realization of obligatory rights.In order to ensure this, contractualobligation is no longer restricted to whathas beenagreed upon in the contract as it now includes incidental obligation. Thisobligation is based on honesty and regular course of dealing, which requiresparties to do the necessary preparations to ensure the realization ofobligatory rights. Care must be taken too, to ensure protection of one's rightssuch as body, health and wealth throughout the whole contractual process. Byincorporating such theories, regulations regarding intentional obligations,such as the requirements of notice, aid and confidentiality are introduced intoChinese contract law
[64] Regulations pertaining to pre-contractual
[65] nd post-contractual obligations
[66] re also introduced, thereby extending the scopes of Chinese contract law.
1.Pre-contractualObligation
From thetraditional view of civil law, parties will only take on obligations after theconclusion of the contract. This is so even if parties have startednegotiating. It is thought that if obligations are imposed while negotiating,it will severely interfere the freedom of negotiation. However, the modernapproach in civil law is that even if the contract is not concluded, there isstill an existing obligation if mutual reliance between the parties springsfrom mutual interaction and negotiation. Pre-contractual obligation comes aboutat the stage of negotiation, whereby one party causes the other to be relianton it and as a result suffer damages (whether intentionally or negligently).The former will be liable for the damages caused and the negligence in themaking of the contract
[67]
The liability for contractual negligencein the making of the contract is based upon pre-contractual obligation which isin turn derived from the principles of honesty and trust. According to thetraditional approach, prior to this negligence, a party can only make use ofthe law of infringement and not the law of contract. However, the contractualrelationship is one that is based on trust, and this legal relationship betweenthe parties arises when the parties concerned enter into negotiations with theintention of making a contract. When this happens, the relationship changesfrom an ordinary to a special one, and as a result, a special trustrelationship is formed. The nature and strength of this kind of relationshipgoes further than most obligations required in tort law and is relativelycloser to that of contract.
The conditions constituting liability for negligencein making a contract are: When the parties liaise with each other with theintention of entering into a contract and one party violates thepre-contractual obligations, the liability of the occurrence of damages will beattributed to the party who violates the pre- contractual obligations.Furthermore, Chinese law does not require the opposite party to be non-negligent. If the opposite party is also negligent in the occurrence of damage,then "each will bear the corresponding liability".
On the question of liability for negligence in makinga contract and the liability to compensate for damages, it is quitecontroversial that the injured party may request that the performance interestor reliance interest be used. The commonly held view is that the damages fornegligence in making the contract is based on the principle of relianceinterest, while the damages for performance interest is not recognized. As towhether the damages for reliance interest can exceed that based on the principleof performance interest, there are views saying no
[68] nd views that say yes.
[69] ith regards to damages for reliance interest, some academics claim that therule of foreseeability can be suitably used to limit such damages.
[70]
2.Post-ContractualLiability
Post-contractual liability is theliability arising from the violation ofpost- contractual obligations refers to certain obligations with regards to anact or omission when the contract has ended, that the parties will still bearin special circumstances, in accordance to the principle of good faith. This isto preserve the personal and proprietary interests of the opposite party and ifin violating the said obligations one should bear the corresponding liability.After the contract has ended, it is not as though the parties no longer haveany relationship. The parties should abide by the principle of good faith andcarry out the obligations of notification, providing assistance andconfidentiality, etc. in accordance to the customary practice.
[71] f one has obtained the other party's technical secrets, marketing channelsetc. through the contractual relationship, it should be kept confidential.After the termination of an employment contract, when one party goes to workfor the competitor of the original unit, he should not use the technicalsecrets etc. of the original unit on his own accord. Another example is thatwhen there are technical problems in the operation of the supplied machinefacilities, the supplier should provide the buyer with technical support andassist in overcoming difficulties. These are the requirements of the principleof good faith.
Post-contractual liability is a form of contractualliability that was not provided for in the previous three separate law ofcontract. Contract Law only stipulates post-contractual obligations, but doesnot provide for post-contractual liabilities. Article 92 of the Contract Lawstipulates:"When the rights and obligations of the contract has been ended, theparties should abide by the principle of good faith and carry out theobligations of notification, providing assistance, confidentiality, etc. inaccordance to the customary practice." However, after this section, there is nocorresponding section on the liability for violating post- contractual obligations.This is a gap in enacting the law. However, one should not infer from this andconclude that the Chinese law does not include post-contractual liability aspart of contractual liability. First, stipulating obligations imply that thereis liability. It should also be understood that in not performing the post-contractual obligations, one would incur post-contractual liability. Second, inproviding for a section on "Liability for the breach of contract" in Part 7,after stipulating post-contractual obligations in Part 6, it should beunderstood that the sections on liability for the breach of contract can beused to regulate the behaviour for violating post-contractual obligations.Therefore, it is justifiable to treat post- contractual liability as constitutingpart of the liability for contracts in China.
The main elements constituting post-contractualliability, from the time it occurs, should be such that when the performance ofthe contract has ended, one party did not carry out the obligations ofnotification, providing assistance, confidentiality, etc, and the aforesaidconduct causes damage to the other party, and there is a causal link betweenthe behaviour and the resulting damage. Furthermore, to constitutepost-contractual liability, the wrong-doer must be objectively at fault. Therecan be no compensationsif there isno fault. Of course, in proving that the party is at fault, fault deductionshould be used. If the wrong-doer is asked to prove that there is fault, it ismost likely that there will be no fault.
B. The Principle of Attributing Liability in theBreach of a Contract
With regards to the principle of attributingliability in contract liability in China, before the enactment of Contract Law,there are the following three views in the Chinese academe :
[72]
First, the principle of attributing contractualliability is based on the principle of fault liability. This view of monism ofthe principle of attributing contractual liability is widely acknowledged bythe academe. The obligor is at fault for not carrying out his obligations andthis is a pre- requisite condition for bearing liability for the breach ofcontract.
[73] Due tothe special nature of contractual liability, the monism of the principle ofattributing liability and the principle of fault liability in contractualliability is the principle of fault deduction.
[74] econd, the principle of the objective attribution of liability and theprinciple of non-fault liability, and not the principle of fault liability,should be used for contractual liability. As long as the obligor violates theobligations that was agreed upon in the contract, it does not matter whetherthere is objectively no fault. He still has to bear the civil liability.
[75] hird, contractual liability and the principle of attributing liability shouldbe based on dualism, and not on a single principle of attributing liability.Other than the dual principles of attributing liability in contractualliability and the principles of fault and non-fault liability, the contract lawin China also has an existing system of the dual implementation of theprinciples of fault and non-fault liability.
[76] owever, there are different opinions on the limits of the principles of faultand non-fault liability when they each adjust.
[77]
After the enactment of Contract Law, academe feltthat Contract Law stipulates non-fault liability and strict liability.
[78] trict liability has obvious and easily identifiable advantages.
[79] irstly, the plaintiff need only prove to the court the fact that the defendantdid not carry out his contractual obligations. The plaintiff is not required toprove that the defendant was at fault. Strict liability also does not requirethe defendant to prove that he was not at fault for not performing. Thus, thedifficulty of proving whether there is fault is done away with and judgment isalso facilitated. It is also beneficial to the litigations . Secondly, there isa direct relationship between the liability of non- performance and breach ofcontract as there is a causal link between the both of them. Strict liabilityhelps in ensuring that the parties treat the contract seriously and it alsoadds to the gravity of the contract. The tendency of the party in breach to tryand argue that that there was no fault, hoping to escape liability and to avoidbeing under the principle of fault liability helps in strengthening the spiritof responsibility and the legal awareness of the parties.
[80] Contractual liability is used as an important measure to guarantee therealization of the obligations and the performance of the liabilities. The maineffectiveness lies in its compensatory nature and that the assured obligee canget or may get compensation from the obligor's property for all the damagesincurred as a result of the non- performance of the liability. At the sametime, contractual liability also has the function of guarding againstnon-performance of liability. There is no doubt that replacing the originalresulting liability with the principle of fault liability is an improvement. However,its effectiveness is not complete. The biggest shortcoming in contract law isthat it provides the contract breaker with relatively more opportunities toescape liability and it makes it more difficult for the obligee to obtainrelief. The principle of strict liability gets rid of the main elements offault, limits the ground of pleading and makes it easier to establishliability. From this, the obligee can obtain relief and it also maximizes theembodiment of the compensatory function of contractual liability. Furthermore,strict liability is more satisfactory to the innate quality of liability forthe breach of contract. There is a difference in the inherent quality ofliability for infringement and liability for breach of contract. The logic forabiding by the former is that since the conflict of rights commonly exists, theoccurrence of damage is unavoidable. The law in requiring the person whoseconduct was infringing to bear the liability, and the occurrence of the damageshould not be the pre- condition. The attribution of liability is such thatthere should be reasons other than the fact that there was damage. Theattribution of liability is fault. Due to the existence of fault, it makespursuing most infringement liability more reasonable and persuasive. Liabilityfor the breach of contract is different as it arises from contractualobligations. The innate quality is that it comes from the agreement of bothparties and is not imposed by law. The law upholds the binding force of thecontract, pursuing the liability for breach of contract when there is non-performance, but it is only carrying out the intention of the parties.Therefore, liability for breach of contract is relatively stricter, and shouldbe stricter than most liability for infringement.
Fault does not constitute the main element in orderto establish strict liability. One should bear the liability for violating acontract. Comparing that liability with fault liability in such a situation, itis very strict, but this does not mean that there is no possibility of anyexemptions from liability under the system of strict liability. Even if it is astrict liability, it is not absolute and there are possibilities of exceptionsof the liability. The possibility of this kind of exceptions refers to that ifthe defendant proves the grounds for the exoneration from liability. Under thesystem of strict liability, force majeureis a direct stipulation of the ground for an exemption from liability. Once youprove that there is force majeure,you are exempted from liability. However, under the system of fault deductionor fault liability, force majeure isused as evidence for proving that one party has no fault. Once you prove force majeure under the system of strictliability, you will be exempted from liability because it is stipulated as anexception to strict liability by the law. Forcemajeure is the same under the two systems, the only difference is in thetechnique of applying it. Under the system of strict liability, if the partieshave stipulated an exemption clause and agreed on a clause that limitsliability, in principle, these clauses are still valid. In reality, there isnot much difference between strict liability and fault deduction liability.Strict liability is however, not equivalent to absolute non- fault liability.
ConclusionFrom the time the decision of theNational People's Congress to begin enacting a uniform law of contract forChina in October 1993 was made to the time of enactment of the contract law,the time taken was six years. The draft of the Contract Law differs from theprevious enactments of other laws in that it fully utilized the functions ofthe academics. The academics actively participated in the drafting exercise ofthis Contract Law. Furthermore, judges also participated in this legislativeexercise of the law of contract. Therefore, Contract Law not only reflects thestandard of research and theories in China's contract law, it has absorbed anddrawn reference from the principles and systems of market economy's commonpractices. It is also a reflection that China's judicial practice has arelatively adaptable nature. The general principles of Contract Law are theessence of contract law and have an important status in contract law. Thegeneral principles of Contract Law stipulates the basic principles and thebasic systems of the formation and taking effect of contract, the performanceof the contract, the liability of the contract, etc. Before unifying thecontract law, China's enactment of contract laws and judicial practice did notseparate the systems of formation and taking effect of the contract. It shouldbe an improvement that the Contract Law separates the systems of formation andtaking effect of the contract. Looking at comprehensive problems of a contract,the system of the right of rescission and the right of subrogation may providea system of security for the obligee to realise his obligatory rights and italso sets the foundation for the system of a good market order. During theperformance of the contract, there are all sorts of regimes for the rights todemur, it covers the different stages of the performance of the contract as awhole, balancing the relationship in the interests between the parties,embodying the rationale of fairness and justice in law. The development ofliability in contract law also reflects the legalisation of moral principles.It does not matter if it is pre-contractual liability or post-contractualliability; all it embodies is the principle of good faith in contract law. Theprinciple of attributing liability in contractual liability reflects the commontrend in the development of contract law in this area.
However, the law of contract in China has not reacheda level of perfection. Like the general principles of contract law, all kindsof problems still exist, and it awaits further research in academic theory andjudicial practice to supplement and bring it to a higher level.
【注释】
[1]hengyunrui， S. J. D., Associate Professor of Law,East China University of Law & Politics.
[1] The Economic Contract Law was promulgated on the13th of December, 1981, came into effect on the 1st ofJuly, 1982, and on 9th September 1993, the Bill of Amendment waspassed by the Legislature.
[2]See Guiguo Wang, Wang's Business Law of China, Butterworths Asia, (1999, 3rded) at page 45.
[3]The Foreign Economic Contract Law waspromulgated on the 21st of March, 1985, and came into effect on the1st of July in the same year.
[4]The Technology Contract law was promulgated onthe 23rd of June, 1987, and came into effect on the 1st of Novemberin the same year.
[5]The three contract law regulates different subjects. The Economic Contract Lawapplies to contracts concluded between Chinese legal persons, while the Foreign Economic Contract Law applies tocontracts between Chinese legal persons and foreign legal persons,organisations or individuals. The Technology Contract Law applies to contractsthat involve the object of technologicaldevelopment, transfer, information, and service as between Chinese legalpersons, between Chinese legal persons and individuals, and betweenindividuals. However, technology contracts signed between foreign legalpersons, other organizations or individuals and Chinese parties are governed byregulations of the Foreign Economic Contract Law instead of those of theTechnology Contract Law.
[6]The Contract Law comprises of 3 parts: thegeneral principles, specific provisions and supplementary provisions. It totals428 articles. The law declares the abolishment of the Economic Contract Law,the Foreign Economic Contract Law and the Technology Contract Law. It ended thephrase of coexistence between the 3 former contract laws and unified thecontract law regulations.
[7]On the 1st of December, 1999, duringthe 1090th meeting of the Supreme People's Court Tribunal, theContract Law Construction (Legal Interpretation
[1999] No. 19) was passed. Thelegal construction was put in force by a proclamation on the 29thDecember, 1999. It contains seven parts and total 30 provisions. It mainly regulatesthe sphere of applicability of contract law, limitation of actions andeffectiveness of contracts. The two kinds of rights: the right of subrogationand the right to rescind serve as measures to protect obligee rights.
[8]See also Zhao Xu Dong, Lun He Tong De Fa Lu Yue Shu Li Ji He Tong De Cheng Li Yu Sheng Xiao:Discussion On the Legal Binding Force And Effectiveness Of Contracts And theFormation And Taking Effect Of Contracts, Chinese Law 2000, Vol. 1.
[9]Article 13, Contract Law
[10]Wang Jia Fu (Main Editor), Zhong Guo Min Fa Xue · Min Fa Zhai Quan:Chinese Civil Law Study · Civil LawCreditor Rights, Law Press, 1991, at page 314.
[11]Shi Shang Kuan, Min Fa Zong Lun: Civil Law Pandect, China University of Politicsand Law Press, 2000, at page 324.
[12]Article 55, General Principles of CivilLaw
[13]Supra,note 26, Shi Shang Kuan, at page 326-34.
[14]Article 44 of Contract Law states, "According tothe abovementioned regulation, law and administrative regulations should handletaking effect procedures relating to approval and registration."
[15]Article 9, Construction of Contract Law
[16]See also Xie Huai Shi et. el., Hetong Fa Yuanli: Principles of Contract Law , Law Press, 2000, at page 143.
[17]Article 68 and 69, Contract Law
[18]Article 67, Contract Law
[19]Article 110, Contract Law
[20]For a detailed discussion on the issue ofpreservation of contract: see also Wang Li Ming, Cui Jian Yuan; Hetong Fa Xinlun · Zongze: New Theory on Contract Law · General Rules,China University of Politics and Law Press, December 1996 ed., at page 375 -402.
[21]In the Supreme People's Court, Guanyu Shiyong (Zhonghua Renmin Gonghe GuoMinshi Susong Fa) Ruogan Wenti De Yijian: Concerning the Application of ThePeople's Republic of Chian's Civil Procedural Law - Questions and Opinionas stipulated in article 300, is the theory of basic compliance to theobligee's right of subrogation but the major limitation of the provision liesin the fact that its usage is confined merely to the enforcement process ofcivil litigation, causing its legal functionality to be severely compromised.As such, the significance of the system of an obligee's rights of subrogationis certainly not absolute or complete.
When the Supreme People's Court enactedthe Guanyu Guanche Zhixing (ZhonghuaRenmin Gonghe Huo Minfa Tongze) Ruogan Wenti De Yijian (Shixing): AboutThorough Enforcement
[The General Rules of People's Republic Of China CivilLaw]] Questions and Opinion (Trial Implementation), according to theprinciple of obligee's right to rescission, art.130 provides that: 'where adonor who for the purpose of evading his legal duty to perform his obligation,triesto grant his assets to othersto dissipate it, such granting of assets will be void if an interested partyalleges his claim. Unfortunately, this article merely provides forcircumstances where the obligor tries to escape his obligation and it isrestricted to only the conduct involving gratuitous transfer of property. Itsscope of application being very narrow, it thus cannot constitute a completesystem of the obligee's right to rescission. As such, before the promulgationof Contract Law, in the Chinese Civil Law did not have a complete system forthe preservation of an obligatory right.
[22]Article 73-75, Contract Law
[23]See also Li Yong Jun, Hetong Fa Yuanli: Principles of Contract Law, People's Republic of China GonganUniversity Press, 1999, at page 401. Cui Jian Yuan, Han Shi Yuan, Hetong Fa Zhong De Zhaiquan Ren Daiwei QuanZhidu: The System of the Obligee'sRight To Rescission In The Law of Contract published in Zhongguo Faxue:China'sJurisprudence, 1999, 3rd ed.
[24]In the understanding the constitutiveelements of the obligee's right to subrogation, it is important to note that abalance should be struck between the two target values of safeguarding thesecurity of transactions and respecting the freedom of intentions of theparties. In other words, even if the obligor does not take positive action tocarry out his obligation so much so that it impedes the realization of theobligee's claim, the obligee can nevertheless easily invoke his right ofsubrogation as he pleases, which can be detrimental to the interests of theobligor and the third party. If the mandatory effect of the claim is allowed toenlarge indefinitely, not only will it cause the principle of relativity ofcontract to collapse, it will also cause the obligor to be enslaved to theoblige as a result of the existence of the contractual relation. As can be seenfrom the provisions of Construction of Contract Law, articles 11, 12 and 13,the Supreme People's Court has severely confined the conditions of theapplication of rights of subrogation.
[25]Article13 ofConstruction of Contract Law hasdefinitively determined that the obligor's delay in performance (includingobligor's non-performance of his due obligation to the obligee) as an importantconstructive condition for the right of subrogation. The legislations in mostcivil law countries basically consider a delay in performance as an importantcondition for deriving the right to subrogation.
[26]Article 73, Contract Law
[27]Article 11, section 2, Construction ofContract Law,
[28]Before the obligor actually is in delayof performance, it is difficult to anticipate whether an obligee's rights canbe realized. Under circumstances like these, to allow the obligee to exercisehis right of subrogation would be a gross interference of the obligor'saffairs. The law will not unduly subject the obligor to the enslavement of theobligee, so that the obligor would be totally under the control of the obligee,merely because the obligor has an obligation towards the obligee. Thisemphasizes the fact that the law no doubthas provided for the protection of theobligee's interests, but on the other hand, it had neglected the obligor'sfreedom of conduct. The law should thus strike a balance of tension between thetwo and such balance is known as the 'period of delay of performance'. Beforethe expiration of the period of performance for the discharge of theobligation, the obligor possesses freedom of economic conduct, he could performhis obligation at his will or find other means to discharge his obligation.During this time, the obligee cannot willfully interfere with the conduct ofthe obligor until the expiration of the period of performance. If however, theobligor continues in non-performance of his obligation and even delays in hisperformance, and having no financial means to discharge his obligation therebycausing the obligee's claim to be unrealizable, at this point thenit would not do to continue tovehemently argue for the value of the 'obligor's economic freedom'. Rather, oneshould argue for the protection of obligatory rights from the perspective ofthe 'protection of the obligee's interests' and thereby accord the obligee withthe right to subrogation.
[29]The reason for limiting the purportedobligatory right to the monetary obligation is to ease the application of thenew system of right to subrogation and also to raise the efficiency oflawsuits. This is because the sub-obligor's obligation to the obligor is viathe delivery of goods and providing of services, and does not involve paymentof cash. This will in turn cause problems and trivialities in litigation. Onthe whole, it creates more complications and even causes situations where thereis a supervening impossibility of performance, thus the reason for obligatoryright in a monetary claim.
[30]The specific criterion for judgment isgenerally that based on an obligor's inability to repay. If an obligor has astrong financial capacity, even if he does not duly perform his obligation andeven delays in performing his obligation, thereby causing a reduction in thetotal assets, he will not endanger the realization of the obligee's right. Thisis as long as the obligor's assets is still sufficient to discharge hisobligatory right to the obligee and the obligee is left to exercise his rightof subrogation by petitioning to the court to impose a mandatory enforcement onthe obligor.
[31]Article 11, section 4 and article 12,Construction of Contract Law
[32]Generally speaking, there are four typesof rights that belong exclusively to the obligor: First, non-proprietaryrights. This mainly refers to rights relating to the personal status as anindividual, for example, guardianship right, right to petition for divorce,right to claim of legitimate children, etc. second, for the purpose ofprotecting the intangible benefits of property of the obligee. For example, therecognition of inheritance, bequeathal, or rights to abandonment, right tomaintenance, right to petition for the compensation for damages due to theinfringement, impairment of one' life, health, reputation, freedom etc. third,the right not to alienate. This mainly refers to the obligatory rights arisingfrom fiduciary relations or relationship or special status or that areintimate, right to abstention etc. fourth, right not to be detained. Forexample, remuneration for labour, pension moneys, retirement moneys, reliefmoneys and pension for the disabled etc.
[33]With regards to the exercise of therights to subrogation, in each country's legislation and the practice realm,there exist 2 types of methods, litigation and direct measure of enforcement.The Japanese civil law prescribes that one can discharge a monetary claim bythe method of litigation or arbitration or to protect the right of admittancevia direct measure. Chinese Taiwan local civil law has yet to expressly providefor it and in reality, the obligee is free to choose from either of the twomethods.
[34]Article 73 section 1, Contract Law
[35]Article 20, Construction of Contract Law
[36]Article 18, section 1, Construction ofContract Law
[37]Article 74, Contract Law
[38]Article 74, Contract Law
[39]With regards to whether the redemptionperiod must be exceeded before the right of rescission can be enforced, thelegislation and doctrines of different countries have given differentinterpretations. German civil law stipulates that the time period forperformance of the obligation must be exceeded, while common teachings inFrance and Japan considerthat theobligatory right need not have exceeded its time limit to enforce rescissionrights. In China, Contract Law and judicial interpretation of the SupremePeople's Court have not set down legislation with regards to this question.
[40]Article 74, Contract Law
[41]Rescission aims to restore the propertyof the obligor that is subject to liability and not to safeguard his ability tohand over specific subject-matter. Thus, as long as the obligor's transfer ofthe specific subject-matter leads to a decrease in property and the lack ofrepayment ability, or it prejudices the obligatory right, the obligee canenforce his right of rescission; in other words, there is no question about therescissionary right itself.
[42]See Shi Shang Kuang, Zai Fa Zong Lun:The Pandect on the Law of Obligation, China University of Politics and LawPress, 1999 edition, at page 473, for the civil procedural law in China on whoasserts the claim and who adduces the evidence. The obligor bears the burden ofproof in showing that the transfer of property was reasonable.
[43]Article 75, Contract Law
[44]Article 8, Contract Law
[45]With regards to the nature of thisperiod, the civil codes of each country reveals different judicial attitudes,some stipulate it as limitation of action, while some as removal of repulsion (chu chi qi jian).
[46]See Yang Li Xin, Guan Yu He Tong FaZhong De Zhai De Bao Quan Wen Ti: In Relation to the Question of Protection ofObligations in Contract Law, taken from Fa Xue Qian Yan: The ForwardPosition of the Law, 2nd edition, at page 28.
[47]See Wang Jia Fu, Ibid, at note 24,at page 186.
[48]Article 25, Construction of Contract Law
[49]The right to demur in law is the right ofresistance (dui kang quan) to impedethe opposite party from enforcing his right. The standard is based either onthe effect of enforcing the right to demur, or on the postponement of theeffect of the opposite party's right to demur. The legal right to demur iscategorized as permanent (extinguished) right to demur or delayed (temporary)right to demur. The former is represented by the right to demur that arisesupon the expiration of a prescription, while the latter is represented by theright to demur for concurrent performance and the right to demur when adverselyaffected.
[50]Article 68, Contract Law. The applicableconditions for the right to demur when adversely affected, that is stipulatedby the law of contract in China, has rather significant differences from therules of other civil law countries, that is, it is more lenient, having adoptedthe related regulations in the "United Nations Convention on International Saleof Goods".
[51]Two different legislations exist in variouscivil law countries with regards to when the property of the later-performingparty has to decrease evidently The first is an obvious decrease in propertyafter the formation of the contract, the second is a decrease already at thetime the contract is formed, such as Rule 165 in Austria's Civil Code.
[52]Article 69, Contract Law
[53]Article 94 of Contract Law stipulates: aparty can repudiate a contract when one of the following situations occur: ......(2) Before the time period for performance ends, one party expresses clearly,or shows evidently with his conduct, that he will not perform the mainobligation; ......
[54]See Wang Li Ming, Yu Qi Wei Yue Zhi Du De Ruo Gan Wen Ti: The Regime for ProspectiveBreach of Contract - Some Questions, Law Press, 1999 edition.
[55]rticle 66, Contract Law
[56]See Su Jun Xiong, He TongYuan Ze Ji Qi Shi Yong: The Principles Of Contract Law and Its Application,San Ming Bookshop, at page 111.
[57]If performance by one partyis partial or flawed or unsuitable for performance, the other party still canfile for pleading. No problems relating to pleading will arise if one party hasalready embarked on proper performance. Wang Ji Fu, supra n 24, page 403.
[58]If one party requests forperformance without notifying the other party that it has already fulfilled itsobligation, the latter (the accused party) will be disadvantaged in the eventthat the performance does not comply with the contract, such that it isdelayed, unsuitable or flawed etc. This is unfair to the accused party whichwill not get to enjoy the requesting party's performance, or it can only enjoyperformance which is contrary to the contract. Wang Li Ming, Wei Yue Ze RenLun: Responsibility arising from breach of contract, ChinaUniversity of Politics & Law Press, Revised Edition for year 2000, at page267.
[59]ee Wang Ze Qian, Ming FaJue Shuo Yu Pan Lie Yan Jiu: Research On Civil Doctrine And Case Studies,Volume 5, China University of Politics & Law Press, Edition for year 1997,page 146.
[60]See Wang Li Ming and Yao JianYuan, supra, note 36, at page335-336.
[61]In both the German Civil Codeand Japanese Civil Code, there are no regulations relating to the right todemur for later performance.
[62]Pre-contractual obligationrelates to the start of negotiation to just before the completion of contract.The period relating to liability for breach of contract is from the timethe contract comes into effect, till thecompletion of it. Post-contractual obligation refers to any incidentalobligations, even though the contract has been completed and the contractualrelationship extinguished. Therefore, pre-contractual obligation occurs priorto the existence of the contract, post-contractual obligation occurs after thecompletion of the contract while the liability for the breach of contract is inthe middle of these two.
[63]The argument for extention ofcontractual obligation can also be found in the common law contract law, seeRobert A. Hillman, The Richness of Contract Law, Kluwer AcademicPublishers, 1997, at page 23-32.
[64]Article 60, Section 2, Contract Law
[65]Article 42 and 43, Contract Law
[66]Article 92, Contract Law
[67]Liability for negligence inthe making of a contract was suggested by the German scholar Yelin anddeveloped by German case law. This has profound impact on China. Article 61 ofCivil Rules states, "When a civil action is deemed to be ineffective orrejected, the party which has derived property due to this action will have toreturn it to the damaged party. This will be akin to damages given by theliable party to compensate the loss suffered by the other party. As both sidesare at fault, they should bear their respective responsibilities." Article 16of Economic Contract Law reflects the same principles in the case of acommercial contract. Therefore, academics suggest that the regulations in bothCivil Rules and Economic Contract Law include this liability for negligence inthe making of a contract. Zhou Da You and Duan Xian Yi, He Tong Ze Ren Zi DuChuang Xin Tan Suo: New Explorations into the system of ContractualObligations, in Tan Suo: Exploration, 1999, Volume 6.
Certain articles in ContractLaw such as Articles 42 and 43 adopted regulations from PICC and PECL, refiningthe regulations relating to pre-contractual obligations and liability fornegligence in the making of a contract.
[68]See Chui Jian Yuan, Di Yue Shang Guo Shi Ze Ren Lun: Doctrine of Liability for Negligencein Making a Contract, University of JilinSocial Science School Paper, 1992, Volume 3.
[69]See Zhang Guang Xing, Zhai Fa Zhong Lun: General Doctrine of theLaw of Obligations, Law Press, 1997, at page 56.
[70]See Liang Hui Xing, Min Fa: Civil Law, Sze Chuan People's Press, 1988, at page 144.
[71]For most cases, incidental obligationsarise from and are based on the principle of good faith and it is present atvarious stages of the contract; from when the parties negotiate and concludethe contract to the time the rights and obligations of the contract are carriedout etc. The parties should bear the main incidental obligations of providingassistance, notification, confidentiality, etc of the contract.
[72]See Wang Li Ming, Wei Yue Ze Ren Lun: Liabilityin Breach of Contract, China University of Politics and Law Press,1996, at page 54.
[73]See Xie Bang Yu, Min Shi Ze Ren: CivilLiability, Law Press, 1991, at page 107.
[74]See Wang Jia Fu, He Tong Fa: Contract Law, China SocialSciences Press, 1986, at page 481.
[75]See Jin Xiao, "Guo Cuo" Bing Fei WeiYue Ze Ren De Yao Jian: "Fault" is not the main element of liability for breachof contract, Learning Law, 1987, Volume 3.
[76]See Chui Jian Yuan, supra, note 79, at page 73.
[77]See Wang Li Ming, Chui Jian Yuan, supra, note 36, at page 54.
[78]See Liang Hui Xing, Cong Guo Cuo ZeRen DaoYan Ge Ze Ren: From non- fault liability to strict liability, takenfrom Min Shang Fa Lun Cong: Theories ofCivil and Commercial Law, Chapter 8, Law Press, 1997, at page 4 - 5. ChuiJian Yuan, Yan Ge Ze Ren? Guo Cuo Ze Ren?: Strict Liability? Fault Liability? ,taken from Min Shang Fa Lun Cong:Theories of Civil and Commercial Law, Chapter 11, Law Press, 1997, at page190 - 197.
[79]Strict liability is the direction of thedevelopment in contract law. Two major legal systems have adopted differentprinciples in attributing liability with regards to breach of contract. TheChinese legal system has adopted the principle of fault liability with regardsto most contractual liability while theCommon Law system has adopted theprinciple of strict liability.
Article 114 of the France Civil Codestates: "Whenever the obligor cannot prove that the reason for not carrying outthe obligations arises because the responsibility should not be attributed tothe individual, even if the individual is bona fide, the obligor should, ifnecessary, pay the compensatory damages for not performing or delaying theperformance of the obligations." Article 275 of the German Civil Code states:"The obligor should bear liability for negligence, whether intentional or not,unless otherwise provided." Even if in the recently amended Taiwan CivilObligations, the principle of fault liability for contractual liability isaffirmed. Article 220 of the German Civil Code stipulates: "The obligor shouldbear liability for his negligent conduct, whether intentional or not."
Looking at the relevant internationalconventions, the United Nations Convention on International Sale of Goods andthe Unidroit Principles of International Commercial Contracts both adopted theprinciple of strict liability. Article 108 of the Principles of EuropeanContract Law provides: "If the non- performing party proves that the non-performance is caused by an obstacle that cannot be controlled, one cannotreasonably expect him to be able to foresee the said obstacle at the time thecontract was made, or to avoid or overcome the obstacle or its consequences,then he should be forgiven for not performing." If the United NationsConvention on International Sale of Goods is said to have adopted the principleof strict liability because of the influence of the Anglo- American Law, thenthe Unidroit Principles of International Commercial Contracts and thePrinciples of European Contract Law in adopting the principle of strict liability,should be regarded as the consensus reached by the leading respected academicsof two major legal systems after much debate, and reflects the common trend inthe development of contract law.
From the perspective of the relevantlegislature of China, the General Principles of Civil Law and the ForeignEconomic Law has adopted the principle of strict liability, but the EconomicContract Law adopts the principle of fault liability.
[80] See Chui Jian Yuan, Hai Xia Liang An He Tong Ze Ren Zhi Du De Bi Jiao Yan Jiu: The Comparative Research of the Regime ofContractual Liability in China and Taiwan, Student Paper ofUniversity of Qinghua, 2000, Volume 2.