Post on 30-Nov-2014
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Master Thesis
Comparative Contract Law
- A proactive approach to management of differences in contract law and
business culture between Denmark and the People’s Republic of China.
By Tim Kristensen – Cand.Merc.Jur
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About the author
Tim R. W. Kristensen has written this presentation as the final master thesis on the
study programme MSc in Business Administration and Business Law at Aarhus School
of Business (ASB), Aarhus University in the period April 1st to September 1
st 2010. In
connection with this thesis he has participated in the TNC Negotiation Challenge 2010
to get firsthand experience in cross cultural negotiations.
The content of this thesis may be copied and reproduced with proper attribution of
authorship.
Counsellor: Réne Franz Henschel
Co-Counsellor: Matthew J. Elsmore
The author would welcome any feedback and can be contacted by email:
timkri@hotmail.com
Aarhus, August 30, 2010
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Table of Content
1 - Introduction ................................................................................................................. 5
1.1 Thesis Statement ..................................................................................................... 6
1.2 Delimitation ............................................................................................................ 6
1.3 Method and theory .................................................................................................. 7
1.3.1 Abbreviations .................................................................................................. 8
1.4 Composition ........................................................................................................... 8
2 – Legal dogmatism, the Chinese legal system and cultural considerations................. 10
2.1 Contract fundamentals in the Chinese and Danish legal system .......................... 12
2.1.1 CISG .............................................................................................................. 17
2.2 General Cultural Considerations .......................................................................... 17
2.3 Introduction to the importance of handling contract clauses ................................ 20
3 - Limitation of Liability and Exemption clauses. ........................................................ 22
3.1 Limitation of liability clauses. .............................................................................. 23
3.2 Exemption clauses. ............................................................................................... 25
3.3 Limitation of liability in standard terms. .............................................................. 27
3.4 Additional Remarks and Critical Observations. ................................................... 28
3.4.1 Consequential and/or Unforeseeable Damages. ............................................ 28
3.5 Cultural Challenges. ............................................................................................. 29
3.6 Summary. .............................................................................................................. 30
4 - Penalty Clauses. ........................................................................................................ 32
4.1 Breach of Contract ................................................................................................ 32
4.1.1 The CISG. ...................................................................................................... 35
4.1.2 Specific Performance. .................................................................................... 36
4.1.3 Damages. ....................................................................................................... 37
4.2 Different failures to perform................................................................................. 38
4.3 Cultural Challenges. ............................................................................................. 39
4
4.4 Summary. .............................................................................................................. 40
5 - Hardship Clauses ....................................................................................................... 42
5.1 Change of circumstances ...................................................................................... 44
5.1.1 Changes of circumstances related to the parties ............................................ 48
5.2 Cultural Challenges .............................................................................................. 48
5.3 Summary ............................................................................................................... 49
6 - Venue Clauses ........................................................................................................... 51
6.1 Choice of law ........................................................................................................ 51
6.1.1 The CISG and its challenges in China ........................................................... 53
6.2 Jurisdiction ........................................................................................................... 53
6.3 Dispute resolution. ................................................................................................ 55
6.3.1 Negotiation & Mediation ............................................................................... 56
6.3.2 Arbitration ..................................................................................................... 56
6.3.3 Litigation. ...................................................................................................... 58
6.4 Cultural Challenges .............................................................................................. 58
6.5 Summary ............................................................................................................... 60
7 - Conclusion ................................................................................................................. 62
7.1 Bullet points from my research ............................................................................ 63
7.2 What makes a difference in interpretation? .......................................................... 64
7.3 Future perspective................................................................................................. 69
8 - Bibliography .............................................................................................................. 70
8.1 Books .................................................................................................................... 70
8.2 Homepages and articles ........................................................................................ 71
8.3 Others ................................................................................................................... 74
8.4 Readings not directly referred to .......................................................................... 75
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1 - Introduction
Soon after, the Communist Party came to power in 1949 Western businesses withdrew
from China and remained absent for the next 30 years. During most of that time, only
commodity sellers and traders did business there. It was not until the Sino-Foreign
Equity Joint Venture Law of 1979 that Western businesses in any numbers started to
negotiate in China1. Trading in China was, however, restricted and it was not until 1999
that Western businesses could enjoy the benefits of a market orientated law that is
technically improved to better protect contractual rights, emphasize freedom of
contracting, and restrict government interference.
Today, it is a well known fact that China is not a homogeneous country but a nation
with many facets. This makes it a country with wide possibilities to do business. China
is a country with a more developed and balanced industry than many developing
countries and it have a population that counts for more than 1.3 billion people. It is a
very attractive country for the West because we can take advantage of scale economy
with cheap manufacturing costs. This has led companies to do business in China, but
many of them have also suffered miserable in the process of contracting.
One party gives an offer, the other an acceptance, the terms and conditions of the
contract are negotiated, and we have an agreement. A business relationship can be
described that simple, or can it?
The world is said to have become smaller due to globalization as the predominant
concept. It causes a very complex structure where competition across borders forces
each company to be awaken and always stay one step ahead. Globalization happens due
to choices of that people want better and cheaper products. In any case, benefits from
globalization are due to how well markets function. Well-functioning markets require
and inspire a certain attitude towards agreements that can be identified as “contract
cultures”. A contract culture exists when all parties to an agreement are predictably
treated as equals whenever there is a legal dispute or a need for interpretation of the
1 Blackman, Carolyn – Negotiating China – Case studies and strategies
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conditions behind the pact2. China is in a development where a contract culture is born.
It can be argued that, exposure to contracts has impacts on cultures since it imposes
greater accountability on businesses as well as governments. The difference between
Denmark’s and China’s contract culture is intriguing. Will we expect the same from a
contract? Relationships? Does the government have different visions on contract
enforcement? Fulfillment? Interpretation? What can we expect to be accountable for? Is
culture a determining factor? These are questions that many companies have not taken
the time to answer because they want quick earnings in China. How relevant are these
questions, in any case?
1.1 Thesis Statement
The anomaly in this thesis is to study comparative contract law between Denmark and
China. There is a presumption that cultural traditions and differences between two
nations have an influence on interpretation, the genesis of the law, successful
negotiation and contract drafting. Until now there have been few studies on this. The
purpose of this study is precisely to investigate whether this culture clash is a
determining factor in the successful performance of contracts. This analysis is intriguing
because it is well known that a proactive approach to contracting can avoid unnecessary
risks, costs, waste of time and disputes. This thesis will analyse how these challenges
can be overcome by taking the necessary precautions under the negotiation, the design
and performance of the contract.
1.2 Delimitation
This thesis will only handle civil law and the challenges concerning business to business
contracts. I will only address Chinese mainland law and excludes Hong Kong law
which is largely the same as English law. I chose four contract clauses, due to the page
limitation. I based my choice on a list of the top ten most negotiated clauses in China. I
chose to include Venue clauses because the choice of venue has a significant impact for
foreigners doing business in China. This thesis will not enumerate what the Chinese
contract law prescribe but will look into specific contract areas.
I focused on those areas of the law that raises the most questions and are the most
prominent ones to understand for foreigners and especially Danish companies dealing
with Chinese. The text does not claim to deal with all issues of Chinese law and will
2 Global Envision - Globalization and “contract culture” - http://www.globalenvision.org/library/8/715
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only perfunctory deal with generally principles of contract drafting. For this reason, is it
advised to seek advice from a legal counsel, to fully, comprehend the law.
1.3 Method and theory My thesis is written as a macro comparison which processes the legal systems structure,
how legal rules arise and are implemented, how they become written law and the way
laws are used and interpreted. I write about business customs and the role it has in
courts, how judges work and how sentences are designated. I research whether or not
courts and citizens follow the rules as it plays a decisive role in the interpretation. It is a
de lege lata “the law as it exists” method of analysis.
The way I analyze my thesis is through an analytical method where I look at each
problem in both legal systems and compare them. My analysis is both dynamic (looks at
the development) and static (looks at how the law is today). Additionally, I use two
different legal, scientific methods in my analysis; Legal history, which deals with, the
laws different functions under changing political, economical, social, religious and other
cultural factors, contemporary with an insight in the legal relevance to a society's entire
state and development. Legal sociology, which seeks to, find the societal reasons to
different legal rules and legal institutions and seeks to describe the implications in the
society of the legal regulation. The legal sociology’s job is not to describe every rule in
detail but to prove general outlines of some rules.3
Culture is defined and represented in four basic problem areas (Hofstede). They are
power distance (from small to large), collectivism versus individualism, femininity
versus masculinity, and uncertainty avoidance (from weak to strong)4. I recognize that
law itself is part of a country’s culture as it is a broadly defined term.
I based my thesis on well known literature without own collection of empirical data. I
use the information gathered from books and in combination, the law and cultural data
will represent an innovative and analytical thesis living up to the standards of a
scientific research. I presume that the reader has comprehensive knowledge about
Danish contract law and drafting of International commercial contacts as I refer to
provisions without explaining the extend of them.
3 Evald, Jens & Schaumberg-Müller, Sten – Retsfilosofi, retsvidenskab & retskildelære and Lando, Ole –
Kort indføring i komparativ ret 4 Chinese Culture and Management – The importance of cultural dimension when doing business in
China. p. 183
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Unless indicated otherwise, all “Articles” cited in this paper refer to articles of the new
Contract Law of the People’s Republic of China of October 15, 1999.
1.3.1 Abbreviations
B2B – Business to business.
CCL – Chinese Contract Law.
China - The People’s Republic of China
CIETAC - China International Economic and Trade Arbitration Commission
CISG – United Nations Convention on Contracts for the International Sale of Goods
Comparative law - Comparison of legal institutions, systems, traditions and legal
families5.
UNIDROIT - International Institute for the Unification of Private Law
1.4 Composition
Chapter two is the beginning of the thesis. First you are introduced to legal dogmatism,
which introduces how, legal systems arise, evolve and how judges get their inspiration
when interpreting contracts. Subsequently fundamentals of the legal system in Denmark
and China give you extensive knowledge before preceding the individual clauses.
Analysis of general cultural differences gives you insight in the bigger picture of China
before approaching cultural related aspects of the individual contract clauses. Finally, an
introduction of the importance of a proactive approach to contracting prepares you to
proceed to the body of the theses.
In Chapter three, you will read about the most important contract clause in China;
Limitation of liability and exemption clauses. You will get knowledge about when and
what makes these clauses enforceable and get introduced to two principles that identify
your liability and can be used to limit and exempt your liability. The most common
limitation of liability clause is identified and carried out in an analysis. A crucial
difference between Denmark and China in the interpretation of Specific Performance is
discussed with suggestions. You will read about the only statutory exemption in China,
how the validity of this clause is contested, and what makes them void. Standard clauses
5 Gonzáles, Roseann Dueñas et al, Fundamentals of court interpretation – Theory, Policy and Practice,
1991, p. 143
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are discussed, and an interpretation difference is identified that might challenge its
enforcement if not observed. Finally, two cultural traits that challenge the drafting of
these clauses are identified.
In Chapter four, you will read about Penalty clauses. You are introduced to where the
spirit of the statutory rules comes from, their validity and the way of estimation.
Liquidated damages are analysed, a rule of thumb is identified and similarities
discussed. The full compensation approach is interpreted, and a significant difference
from Denmark is found in remediation. Surprising differences from the West in
interpretation of the CISG are in short discussed. Finally, different failures to perform
and its consequences are discussed followed by a cultural analysis which includes
challenges and suggestions at the negotiation table.
In Chapter five, you will read about Hardship clauses. You are introduced to different
reasons why hardship clauses are agreed upon followed by the legal regulation in China,
CISG and the UNIDROIT principles. Followed is an in-deep analysis on the basis of
new Court interpretation not even updated by the biggest authors in this area. This
analysis begins with current case law followed by five points of new interpretation, and
in conclusion, the Chinese rules are compared to Danish and international procedure.
Traditionally, analysis of cultural traits that have an impact on negotiation and
interpretation of the rules are carried out. Here, you will find two cultural traits and
conditions that will both challenge the contract and explain the clause popularity.
In Chapter six, you will become acquainted with the most important contract clause in
International contracts: The Venue clause. You will comprehend the importance of
venue clauses and acquire knowledge about choice of law which includes critical
information about the CISG followed by the rules of jurisdiction. Subsequently dispute
resolutions are discussed which contains critical, cultural traits and facts that could
mean the difference between success and failure. In conclusion, additional cultural
challenges are analysed.
Chapter seven is the conclusion of the thesis which will bring all the discoveries, new
interpretation, controversial discussions and crucial differences between Denmark and
China together. The thesis statement will be answered, and I will put the matter into
perspective with examples from my discoveries.
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2 – Legal dogmatism, the Chinese legal system and
cultural considerations.
To answer, the anomaly of this thesis, it is crucial to have a scientific stable foundation.
The purpose of this chapter is to introduce the reader to sociology and historical
development of the Chinese legal system to build a solid foundation to provide the final
conclusion. What we want to know is why there is a difference in the way Danish and
Chinese courts interpret provisions.
The meaning of the word “interpretation” is that it is a certain conception of a text,
situation, experience or similar, which may vary from person to person. This means that
there is room for varieties which can come from culture, scientific research, societal or
social circumstances because it is not possible to give an objective description of the
reality, hereunder the legal reality. All concepts and phenomenon’s open up for
interpretation and thereby include subjective results because it is conditional on ways of
looking at life and societal views.
Legal texts are written with different words that can have several meanings or be
ambiguous. For example, try clearly to describe the meaning of unreasonable. Before
one can interpret legal rules, one has to know the conditions and considerations behind
the legal system which can be ordinary or special points of view. For example in a
country, they tried to convince people to take a pill combating malaria by sending out a
brochure. First showing a picture of a sick man, then a picture of him taking a pill and
finally a picture of him being healthy. What they forgot is that people in this country
read from the right to left. Differences in societies can lead to different interpretations
because people look at things in different ways. Differences can also occur if the rules
are not interpreted by using concrete application of the legal rules. In such case,
outcomes are coincidence which may occur among others for historically reasons6.
6 Evald, Jens & Schaumberg-Müller, Sten – Retsfilosofi, retsvidenskab & retskildelære, 2004. P. 215f
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Legal systems can survive many places and does not need to have any connection to the
people, any particular period or place. German law is an example of this and has been
received in countries like Paraguay, Japan and China even thought there are big cultural
differences (Watson, 1974)7. The reason why countries use other countries legal
systems as inspiration is because these other legal systems have been tested in practice
by its use and should, therefore, work in other countries too. Since the first laws were
made, the law makers have compared and used what they believed was better in their
own legal system, often from neighbors. German laws influence on Nordic law is, for
example, big. The Danish Sale of Goods Act from 1906 and the Contracts Act from
1917 have big similarities with the equivalent rules in BGB (German civil law book).
The argument for the rules to be different is that we do not take things from foreign
legal systems that are inappropriate for our state of law. We have avoided Germany’s
heavy conceptual universe and detailed legislature8. From this argument is it implied
that legal rules are not universal.
It has been argued by Fuller (1978) that, truly, to understand the foreign law text we
have to look at the meaning and choice of the words because it is determined by its
cultural background9. This is because courts generally do not use foreign court practice.
The reason is that it would be too comprehensive to seek information about how foreign
courts interpret provisions or cases10
.
Similarities and differences in two legal systems interpretation might be explained by
the legal connection to culture. Law and the thereby connected concepts can either be
universal or local11
. Two legal jurisdictions may have the same rules that they interpret
the same way because there are universal human needs that we comply after.
Additionally there are local differences that can explain a different interpretation. A
German businessman might expect timely delivery different than his Italian business
partner. The judges programming of his mind will recognise this because of where he
comes from and his level of education.
Many juridical authors have spread messages that had an influence in many countries.
One of the leading authors, Carl Friedrich Von Savigny, said that the law has grown
7 Peter de Cruz – Comparative law in a changing world, 2nd edition. P. 217
8 Lando, Ole – Kort indføring i komparativ ret, p. 170f
9 Peter de Cruz – Comparative law in a changing world, 2nd edition. P. 217
10 Evald, Jens & Schaumberg-Müller, Sten – Retsfilosofi, retsvidenskab & retskildelære, 2004. P. 343
11 Evald, Jens & Schaumberg-Müller, Sten – Retsfilosofi, retsvidenskab & retskildelære, 2004. P. 193f
12
organically from the people and that it must be the people’s common practice that one
should follow. Jean Portalis had some thoughts about how law books and laws should
be written and used. He rejected the wording of the law and said that the judges using a
law or following case law will always be influenced by value conceptions found in the
society he lives in and that it should be that way. Law and fairness cannot be divided,
and judges should have a possibility to develop a practice of fairness. These teachings
had a strong influence in the Western world. The German author Windsheid invented
the teachings about failing requisite (forudsætningslæren) which Danish courts later
started to use. Authors use each other’s knowledge to support their thesis and, thereby,
show that there are different ways to interpret things. The Danish author, Henry Ussing,
did this and his works have an influence on interpretation of Danish cases i.e. foreign
interpretation have an influence on Danish case law12
.
2.1 Contract fundamentals in the Chinese and Danish legal system
Before you enter into a contract with your Chinese partner, you should become familiar
with the Chinese legal system and its laws that will affect your contractual arrangement.
In China, the legal system is generally based on the same civil law principles as in
Denmark. In civil law, the concept of obligatio is crucial to understand, which refers to
the specified relationship of rights and obligations between the parties concerned13
.
In China, Germanic civil law is mixed with socialist law whereas, in Denmark, we go
under the characteristics of the Scandinavian14
subgroup/family15
. Germany was a rising
power in the past 19th century while many Asian nations introduced civil law. China
remarked German law as strong and dominant. This is the reason why the German Civil
Code has been the legal basis of China16
. China is considered as a system with
customary, tribal laws with a philosophical, and religious or traditional system which
serves this specific ethnic group17
. It is now in modernization where the rule of law
replaces the rule of man.
12
Lando, Ole – Kort indføring i komparativ ret, p. 171f 13
Zhang, Mo – Chinese contract law – theory and practice, p. 26 14
Denmark, Finland, Iceland, Norway and Sweden 15
Gonzáles, Roseann Dueñas et al, Fundamentals of court interpretation – Theory, Policy and Practice,
1991, p. 143 16
Economic Expert 17
Gonzáles, Roseann Dueñas et al, Fundamentals of court interpretation – Theory, Policy and Practice,
1991, p. 143f – Not so widely adopted that it can serve a legal family.
13
Part of the law that prescribes state management of the economy also known as the state
plan is still maintained in China. However, the new liberal law has essentially adopted a
Western system with its terminology, method and juridical values. Chinese law makers
meant that a modern industry and service society had to include Western values to work
efficient. They did not believe they could do this without using Western values in their
laws. You could then ask yourself why they used the continental European structure and
not the Angelo-American structure. They believed that the German rules had the best
chances of succeeding because it’s very systematically with fixed rules and not in
practice developed rules as Common law18
.
Rapid economic development has contributed to the change of China’s domestic
legislation. Separate pieces of legislation on domestic and international contracts was
replaced by one law; The Contract Law of the People’s Republic of China (CCL)19
. The
fusion of the Economic Contract Law, Technology Contract Law and the Foreign-
Related Economic Contract Law show China’s commitment to a more open and widen
view of international trade.
The new Contract Law reflects contractual exploration and demand taking place in real
life. Made in collaboration with an academic circle it reflects international and foreign
experience in comparison with foreign contract law and international, uniform laws.
The CISG has profoundly influenced the evolution of Chinese domestic contract law
and still does20
. The CISG is together with the UNIDROIT principles the main
reference of the CCL21
. This gives us an indication of where the spirit of the Contract
Law largely comes from. Many Articles of the CCL, in particular those, in the chapter
on General Provisions, are similar in spirit to the UNIDROIT Principles22
. Also,
Chinese Courts use UNIDROIT principles as guidelines (particular in lower courts) but
are though not binding under the Chinese legal framework23
. Case law is not regarded
18
Lando, Ole – Kort indføring i komparativ ret, p. 152f 19
Xiao, Yongping & Long, Weidi - Selected Topics on the Application of the CISG in China – 1.1.2
Indirect Application 20
Xiao, Yongping & Long, Weidi - Selected Topics on the Application of the CISG in China – section 1.
INTRODUCTION + The Application of the CISG in the Current PRC Law and CIETAC Arbitration
Practice by Fan Yang section 1.3 21
Xiao, Yongping & Long, Weidi - Selected Topics on the Application of the CISG in China – note 5 22
Zhang Yuqing & Huang Danhan - The New Contract Law in the People’s Republic of China and the
UNIDROIT Principles of International Commercial Contracts: A Brief Comparison 23
UNILEX – China case – date: 00.00.2002 by Henan Luoyang Jianxi District People’s Court
14
as a genuine source of law in China, but the Supreme Court’s decisions have, where
known, great guiding significance24
.
The contractual relations between two parties are generally regulated through the
CCL25
. In Denmark, we have the Contracts Act (Aftaleloven), which applies to all
property types of contracts and regulates the signing of contracts. The law of Sales of
Goods (købeloven) supports the interpretation of contracts by regulating the rights of
costumers in relation to retail or other sellers of goods and services26
. In this area, the
CCL generally deals with the same issues in terms of the service content in contracts.
In China, the exchange of an offer and acceptance conclude contracts (Article 13).
Pursuant to the Danish Contract Law Article 1, 1st period, are offers and responses to
offers binding to the submitter i.e. an offer is a promise. Over 20 Articles of the new
Contract Law relate to offer and acceptance and closely follow the provisions contained
in the UNIDROIT Principles as well as in CISG27
. The principles of offer and
acceptance are close to those in the Danish Contracts Act28
. However, in practice there
is a cultural difference. Your Chinese partner might verbally respond to a lot of offers
without taking them seriously29
so in practice relying on an offer as in Denmark is less
desirable. The reason being that the words Yes and No is not always understood the
same way as in Western Culture30
.
The reason why we have long contracts is that we want to deviate from the statutory
law31
which often opens up for interpretation. The purpose of interpretation rules is to
have guides. Previously did the courts in China in practice often treat contracts whose
contents were unclear or ambiguous as invalid, thus causing many transactions to be
24
Lando, Ole – Kort indføring i komparativ ret, p. 154 25
Chen, Jianfu - Chinese Law – Context and transformation, Brill, 2007 – Chapter 12, page 449 – When
the law came into force on 1st October 1999, the three pillars (old contract laws) ECL, FECL and LTC
were simultaneously repealed. 26
Bryde Andersen, Mads et al. Lærebog i obligationsret I, Ydelsen Beføjelser, 2 Udgave. Side 19 –
Among other supplementary laws are the law of debt letters (Gældsbrevsloven) and the insurance contract
law (Forsikringsaftaleloven) to support the interpretation of contracts. 27
Zhang Yuqing & Huang Danhan - The New Contract Law in the People’s Republic of China and the
UNIDROIT Principles of International Commercial Contracts: A Brief Comparison, p. 4 28
Kritzer, Albert H. - International Contract Manual– Chapter § 51:3 29
This is my own linkage of law and culturally analysis. The culturally postulate comes from reading
different books and a statement from Michael Pedersen under the course “Drafting commercial contracts
in 2010” 30
Fang, Tony – p. 3 31
Statutory law refers to something that is not required, and you can therefore deviate from it. Mandatory
refers to something that is required, and not optional or subject to discretion. In legal construction of
statutes, mandatory requirements of law are typically found by the use of words such as "will" and
"shall".
15
eliminated32. A system of contract interpretation was missing with the three former laws
being silent in this area. However, the CCL stresses a lot of emphasis on clear contracts.
Article 12 gives the parties freedom to determine the contents of a contract and
enumerates general provisions on what clauses a contract should contain.
Somewhat, a system is created with standards for contract interpretation, and the judge's
discretion is appropriately restrained. Similar to Danish contract law33
, China now
interpret contracts by their prevalent meanings that disfavor the contracting party that
designed the contract in case of uncertainty (Article 41) and have guidance for
ambiguous contracts (Article 62 and 63)34
. Although, the CCL Article 125 is the only
true provision concerning contract interpretation contrary to the UNIDROIT Principles
which pay much attention to the interpretation of contracts, providing a whole series of
general rules in Chapter four35
.
A contract may in China just as in Denmark be in writing, oral and any other form36
contrary to the former three contract laws. This new approach was inspired by
UNIDROIT principles37
.
The freedom of contracting is an essential element in understanding contracting, and
what limitations there are, when drafting clauses addressed in this thesis38
. Generally
said; the differences between two legal systems are to be found in the freedom of
contracting. In UNIDROIT39
, Denmark and the West40
, we say that the freedom of
contracting expresses the Contracting Parties' common intentions41
. China also use the
term common intentions but excluded the principles of freedom of contracting, pursuant
to the CCL Article 4. The right to contracting is something the government has given
the parties, but will revoke or limit at its discretion. The freedom of contract as
32
Liming, Wang and Chuanxi, Xu - Fundamental Principles of China's Contract Law – 13 Columbia
Journal of Asian Law (1999) 1-34, page 16 33
Andersen, Lenart lynge – Aftaler of mellemmænd, 4 Udgave, p. 385 (koncipistreglen) 34
Liming, Wang and Chuanxi, Xu - Fundamental Principles of China’s Contract Law – 13 Columbia
Journal of Asian Law (1999) 1-34, page 17 35
Zhang Yuqing & Huang Danhan - The New Contract Law in the People’s Republic of China and the
UNIDROIT Principles of International Commercial Contracts: A Brief Comparison, p. 10 36
PRC contract law Article 10 and Andersen, Lenart lynge – Aftaler of mellemmænd, 4 Udgave, p. 90.
Notice that certain contracts are required to be written in both jurisdictions. 37
Zhang Yuqing & Huang Danhan - The New Contract Law in the People’s Republic of China and the
UNIDROIT Principles of International Commercial Contracts: A Brief Comparison, p. 4 38
The history behind freedom of contract in the Republic of China will not be addressed. 39
Zhang Yuqing & Huang Danhan - The New Contract Law in the People’s Republic of China and the
UNIDROIT Principles of International Commercial Contracts: A Brief Comparison, p. 2f 40
Lando, Ole – Kontrakts retten I Kina – p. 48 41
Andersen, Lenart lynge – Aftaler of mellemmænd, 4 Udgave, p. 22
16
embodied by the Contract Law is, therefore, relative but not absolute42
. Additionally
foreign investors are limited in contracts about joint ventures, transfer of technology,
offshore exploitation of oil, assignment of patent rights and import of pharmaceutical
products. The legal Author Mo Zhang does for this reason call the Chinese freedom of
contracting a bird in a cage43
.
During the past ten to fifteen years, China's adoption of laws supporting commercial
transactions has been dramatic. By many estimations, China now possesses a reasonably
adequate base of commercial law. The real challenge facing China in this area, however,
stems from its still-evolving ability effectively to enforce its laws44
. However, the
Chinese government realized that contracts are a component of the modern economy,
and confidence for effective enforcement of contracts is essential for an economy
running smoothly. Ethics, with the exception of Law, is one of the most crucial
components in ensuring enforcement of contracts. Contract ethics are the moral
standards which both sides must be respected during contract negotiations, during
execution and subsequently45
. In China, the contracting partners shall live up to the
principles of fairness (CCL Art. 5) and good faith (CCL Art. 6) when they exercise their
rights and fulfil their duties46
. This principle is what we in Denmark and the West call
sound business practice and aims at unfair terms of the contract47
. As in Denmark,
sound business practice is not a principle that can displace specific provisions that may
lead to another result. It is a principle used to interpret an obscure contract and plays a
pivotal role in the completion of contracts48
. The CCL Article 60 provides that the
parties shall meet their obligations under the agreement which implies an obligation for
Specific Performance49
, however, with limitations50
.
42
Liming, Wang and Chuanxi, Xu - Fundamental Principles of China’s Contract Law – 13 Columbia
Journal of Asian Law (1999) 1-34, page 8. 43
Lando, Ole – Kontrakts retten I Kina – p. 48 44
Mondaq – China – Going to China 45
Lu, Xiaohe – Developing business ethics in China, p. 63 46
Lando, Ole – Kontrakts retten I Kina – p. 49 47
This principle can be found in the Danish contract law Article 36 and a similar provision in the CCL
Article 39. 48
Lando, Ole – Kontrakts retten I Kina – p. 50 49
Lando, Ole – Kontrakts retten I Kina – p. 81 50
Lando, Ole – Kontrakts retten I Kina – p. 146 – Limitations is mentioned in Article 110.
17
2.1.1 CISG
Often named as a convention, the CISG is a treaty that both Denmark and China have
ratified51
. If the court then finds that the CISG contains provisions differing from those
in the China’s domestic legislations, the provisions of the CISG shall prevail52
. Pursuant
to Article 1 of the CISG it shall apply between Denmark and China. China has declared
that they only will apply CISG when both parties are domiciled in a country that has
acceded CISG53
. CISG will, therefore, be used when doing business with moveable
goods (løsørekøb), unless the parties have agreed themselves out of it, often with the
clause; CISG excluded. Denmark has excluded part II of CISG; Formation of the
contract. The convention applies only to purchase agreements and the seller and buyer’s
rights and obligations under the agreement. It does not apply in particular to the validity
of the contract or any part of the agreement or by custom54
. Validity and formation are
left to domestic law55
. You should, therefore, still consider the choice of law in
contracts. CISG Article 7(1) prescribes uniform application of its provisions. History
shows that member states have used each other’s case law to interpret the rules. This
means that China should interpret the rules the same way as we do56
.
2.2 General Cultural Considerations
Understanding culture is about understanding the truth and beliefs of others. Once you
learn a new paradigm, you can no longer hold to the older belief as your truth. If you
force their truth, it will force you. The truth is what we as individuals want the truth to
be; the nature we were born from. What you have to worry about is showing a lack of
respect towards your counterparty. Understanding is key.
The Chinese culture is molded by three philosophical traditions – Confucianism,
Taoism and Buddhism. Briefly, Confucianism deals with human relationship, Taoism
deals with a life in harmony with nature, and Buddhism deals with people’s immortal
world57
. Confucianism has a big influence on the Chinese way of thinking overall and in
negotiations. There are six values of Confucianism, which is moral cultivation,
51
Dansk Erhverv 52
The Application of the CISG in the Current PRC Law and CIETAC Arbitration Practice by Fan Yang
section 1.70 and 1.73 53 Brons 54
CISG Article 4 55
THE CHALLENGE OF A UNIFORM APPLICATION OF THE CISG – COMMON PROBLEMS
AND THEIR SOLUTIONS BY BRUNO ZELLER – page 317 (9) 56
Lando, Ole – Kort indføring i komparativ ret, p. 177 57
Fang, Tony – p. 26
18
importance of interpersonal relationships, family orientation, respect for age and
hierarchy, avoidance of conflict and need for harmony and last but not least the concept
of face58
. There are many positive things about Confucianism (people’s lifelong
learning, commitment and self-regulating behaviour) but the unfortunate thing is that it
has resulted in more than 2000 years of lack in the legal framework with people having
the feeling of social insecurity59
. This lack has a great influence on interpretation,
negotiation and drafting of contracts as we will see later.
Getting to an agreement of an offer is easy. The difficult part is getting to an agreement
that both parties understand. Needless to say, having an understanding of your
counterparty’s agenda is the reason why you met in the first place; to do profitable
business. Written words and contracts will not meet this paradox, but the spoken words
will get you along the way to an understanding of your counterparty’s agenda. Your
intentions cannot be so easily implied because you herald from different legal systems
and by no doubt utilize dissimilar business practices. For this reason, it is essential for
your international contract to spell out in definite terms the rights and obligations of
each party. You should write the provisions to reflect the culture of the Chinese party,
while at the same time keeping in mind your own requirements. Such drafting requires
that you have an understanding of Chinese culture and the extent to which it differs
from your own60
.
When you choose to trade, then you are admitting to your Chinese partner that he has
value. In negotiations, the more you know and the less the next man knows the more
power you have. When you establish your negotiation, you have to construct your paths,
so all roads lead to yourself. Your costumer (contracting partner) actually schools you
in proper ways to be exploited. When you know what your costumer (contracting
partner) wants, you know what you can take and more importantly; what you should be
observant about. That is why it is so important to know your trading partners before you
trade, because they have home advantage. Needless to say, you are powerless without
cultural knowledge.
Cultured in the Chinese bureaucracy, Chinese negotiators fear taking risks and making
mistakes, show indecision, avoid taking responsibility, and have no final say. For a
58
Fang, Tony – p. 29 59
Fang, Tony – p. 148 60
Shippey, Karla, C - Short Course in International Contracts, p. 3
19
Chinese negotiator, the rewards for a good performance are minimal, whereas the
penalties for making mistakes are great61
. For this reason, Chinese negotiators are
always suspicious. If your contracting partner sees someone that might negotiate better
contracts, he will return and throw this back in your face. You meet his offer, add to it
and tighten your grip. But dropping prices is not the answer to winning business; selling
value is the answer62
. They seek approval that this contract is sufficient. To address this
state, showing a similar well performed contract, will sometimes give this approval and
will miraculously break deadlocked negotiations63
. Chinese people have, therefore, an
attitude towards wording a contract64
which reflects the Chinese need to escape from
bureaucratic punishment65
.
Chinese people are, for these reasons said to be the toughest negotiators in the world
with mixed personalities making it even harder to negotiate66
and have they mixed
feelings towards foreigners, torn between distrust and fascination of our knowledge67
.
Accordingly to Confucianism they believe that people must keep their words and will
draw borderlines of those they trust and those they do not68
. They have, therefore,
created a spider’s web of relationships (guanxi) which is one of the most prominent
cultural traits of Chinese people. They use Guanxi to seek background information
about potential partners, prices and terms of payment. Foreign business people must, to
succeed in the Chinese market, rely on friendships or close, personal relationships
(guanxi), which usually takes time and patience to build69
. Chinese tend to expect and
desire a level of personal relationship with their counterparties that are viewed as
unnecessary in the West70
.
The Chinese trust is more an interpersonal trust than organizational. Chinese do
business with you, not with your company and will often feel offended when Western
people start negotiations by spelling out contract terms. Chinese generally have a non-
legalistic approach before and after negotiations where the relationships and trust is
61
Fang, Tony – p. 105 62
IACCM – In tough economic times, contracting excellence offers relief – Volume 2, no 2, December
2008/2009 63
Fang, Tony – p. 105 64
Closer to common law 65
Fang, Tony – p. 53 66
Fang, Tony – p. 21 67
Fang, Tony – p. 50 68
Fang, Tony – p. 109f 69
Fang, Tony – p. 118f 70
Fang, Tony – p. 126f
20
more important than the contract71
. They believe that law alone does not solve problems
and people’s behaviour must be influenced by their own use of self-regulating moral
mechanisms (e.g., face and shame)72
. Trust building relationships is, therefore,
something foreigners should appreciate, especially in China, because businesses are
subject to fraud to a much higher degree than in the West.
In conclusion, the typically Western negotiation setting are result oriented, the final goal
is important, time is money, the negotiation process is limited, we are fact-oriented, and
efficiency is critical whereas in China they are process oriented, the way is a goal, good
things take time, the negotiation process is continuous, they are relationship oriented,
and mutual consensus is important73
.
Cultural differences, history74
and the governments mentality form legal systems75
. One
of the most influential conceptual underpinnings of Chinese ideology of justice is the
beliefs in the inevitability of retribution which means to restore or give back76
. This
ideology imbues the contract law too which we will see later.
2.3 Introduction to the importance of handling contract clauses
Generally said, contract clauses can be described as a list of terms and conditions placed
in a contract that govern liabilities and obligations. Since the legal systems differ all
over the world, these terms and conditions can have a significant difference in the legal
power they have. The contract clauses that I have chosen to go through does partly have
their popularity in the nature of the contract law itself. The Chinese contract law
enumerates a list of the content in contracts that the parties in general should agree on
pursuant to CCL Article 12. This list is not mandatory but suggested, and parties have
the freedom to choose what clauses to include.
Understanding how to protect themselves against various responsibilities in contracts is
a universal skill. It is quite another thing to understand how other countries interpret
different contract clauses compared to your own jurisdiction. The law may stipulate
similar thing, but practice gives insight in interpretation of the law, why some clauses
71
Fang, Tony – p. 53 72
Fang, Tony – p. 85 73
Lytras, Miltiadis D. - International Journal of Chinese Culture and Management –Volume 1, No. 2,
2008, p. 203 74
Chen, Jianfu - Chinese Law – Context and transformation, Brill, 2007 – Chapter 12, page 444 75
Katz, Paul R – Divine Justice – Taylor and Francis, 2008 – Page 1 76
Katz, Paul R – Divine Justice – Taylor and Francis, 2008 – Page 4
21
are used and others avoided. If we draft and negotiate contracts in China as we do in
Denmark, we run substantial risks of offending our Chinese partner, decreasing value
and the contract might involve a much higher risk than we interpreted in the first place.
Contract management is one of the ways to handle this by looking at all aspects of the
contract. However, Contract management is often driven by a narrow perspective to
risk, in the matter of increasing value and decreasing risk. These perspectives result in
terms and conditions that protect against certain types of risk but take no account of the
counter-risks that they generate. Terms and conditions (contract clauses) can drive the
behavior of your counterparties by them not offering the best solutions and might burn
bridges to other business opportunities. Additionally it is shown that clauses as
liquidated damages are directly linked to a loss of openness and collaboration. As a
result, far from protecting against risk, they can create a risk if not used appropriately.
Evidence shows that companies can gain from improved collaboration with key trading
partners77
. These facts are especially true in China where the relationship is very
important. As we will see can cultural differences increase these risks if not taken
seriously.
77
IACCM – In tough economic times, contracting excellence offers relief – Volume 2, no 2, December
2008/2009
22
3 - Limitation of Liability and Exemption clauses.
Accordingly to the top ten most negotiated terms in 200778
limitation of liability was the
most negotiated term in Asia. The importance of clauses limiting or excluding liability
does not have to be demonstrated. The company who sells its products or services runs
serious risks if these products prove faulty or if the performance is unsatisfactory. The
consequences can be fatal for a company who do not have knowledge about the foreign
legal principles that govern indemnification. The warranties and liabilities are likely to
result in heavy debts that may well exceed the expected profit from the contract79
. A
good example of the importance of having a clause limiting or excluding liability is the
Toyota gas pedal case80
. Seven million vehicles had to be recalled because of an
unsatisfactory performance of the gas pedals. The purchase cost for such a gas pedal is
$15 each but the cost of changing them costs Toyota billions of dollars of market
value81
.
The advantages of having a clause that takes care of this are that the obligor can discard
certain risks, make them foreseeable and bearable or sometimes it is required to make
the insurance risk bearable or even possible to have insurance. It may also benefit the
other party in the form of price reduction82
because the risk is weighted to alter the
equilibrium of interests between the parties83
.
An exemption clause aims at suppressing any liability or any obligation of warranty of
the relevant party contrary limitation clauses which limits the scope or the consequences
of such liability or obligation. Limitation clauses do contrary to liquidated damages
clauses put a ceiling to the maximum payment where the last mentioned stipulates a
lump sum84
.
78
The Top Ten Most Negotiated Terms in 2007 79
Fontaine, Marcel et al. – Drafting International Contracts – An analysis of contract clauses, page 351 80
Gas Pedal Defect Prompts Toyota Recall of Another 2.3 Million Vehicles in US 81
Toyota details safety fix, damage claims mount 82
Fontaine, Marcel et al. – Drafting International Contracts – An analysis of contract clauses, page 351 83
Bing Ling 4.058 84
Fontaine, Marcel et al. – Drafting International Contracts – An analysis of contract clauses, page 354f
23
Limitation of liability happens indirectly in the other areas of contract drafting I am
working with such as force majeure, hardship clauses, indemnification and liquidated
damages in penalty clauses etc. This chapter will work specifically with the limits of
limitation of liability clauses, what makes them valid and how Chinese courts interpret
them.
3.1 Limitation of liability clauses.
Limitation of liability clauses may be classified into two categories. Here, we have
contracts dealing with effects of liability and warranties or where the conditions
surrounding the contract are affected85
. We draft limitation of liability clauses to avoid
being fully liable under statutory law. The contracting parties can be liable pre-
contractually, during the performance and post-performance.
The parties can agree on exemption or limitation of liability clauses subject to special
statutory regulation and in the nature of freedom of contracting86
. This may be
liquidated damages which provide higher compensation (limited), or it may be more
extensive opportunity to rescind contracts than the law prescribes. It can also be a
deprivation that takes away a protest, offsetting, limit the other parties right to trade
with others or an arbitration clause that removes the possibility for trial etc.87
.
A contract that has not been concluded and a contract that has not entered into effect are
both unenforceable and create no contractual rights or obligations. Concluded contracts,
makes it possible for the parties to conduct contractual claims against each other; even
when the principal of the contract is ineffective but void or voidable contracts may not
have binding effect. The conclusion of the contract is relevant to determine the
limitation period during which the contract may be rescinded. It will also have an effect
on the interpretation of unconscionability, price clauses and foreseeability of loss
resulting from the breach88
. Pre-contractually liability may arise whether the
defendant’s fault causes failure of formation89
or failure of effectiveness90
.
85
Fontaine, Marcel et al. – Drafting International Contracts – An analysis of contract clauses, page 360f 86
Bing Ling, 8.056 + 8.130. Danish contracts freedom of contracting pursuant to Sales of Goods Act
Article 1 (1). 87
Lando, Ole – Kontrakts retten I Kina – p. 61f 88
Bing Ling, 3.003 89
Bing Ling, 3.003 – Failure of formation is usually failure to reach consent between the parties. A party
will be liable (culpa in contrahendo) under the negotiation if three conditions are met. Further info in PRC
contract law Art. 42. 90
Bing Ling 3.003 – Failure of effectiveness may involve violation of law
24
The traditional doctrine of pacta sunt servanda (agreements must be kept) is a
foundation of the Chinese system where a party who fails to perform a contract shall be
liable for breach. Consequently, there is a strict liability principle (See also; Hardship –
Chapter 5) which means the risk for non-performance caused by events for which
neither party is responsible (except force majeure) is assumed by the non-performing
party91
. This strict liability rule is similar in many ways to the Danish rule in the Sales
of Goods Act Article 2492
.
In China, if one of the parties of the contract is not performing its obligations well or
not accordingly to the contracts terms, the plaintiff has to show that there is a breach of
contract (onus probandi), and it must be resolved according to remedial measures or
compensation of losses93
.
Breached contracts, entitle the injured party damages equal to the loss caused by the
breach (See further details; Penalty Clauses – Chapter 4). However, damages are limited
by a so-called “foreseeability test” where damages shall not exceed what should and
could be foreseen by the breaching party with respect to the loss94
. Foreseeability can,
therefore, be used to limit liability. However, if the other party assumes certain risks,
the non-performing party is not liable unless caused by an act or omission by himself95
or if a party rely on non-performance by the other party96
. If the buyer accepts certain
risks, it will not affect his right to hold the seller liable if he delivers non-conforming
performance pursuant to Article 149.
The Chinese rules are similar to Danish practice where the parties must disclose all
material facts (oplysningspligt) and loyalty responsibility (loyalitetsforpligtigelse). The
Danish rule in the Sales of Goods Act Article 24 also includes a “foreseeability test”97
.
In practice, the crucial difference between Denmark and China is that they frequently
91
Bing Ling – 8.058 – Pursuant to Article 107 92
See also Lookofsky, Joseph – Køb, Dansk indenlandsk købsret, 3. udgave, 2008, p. 168. The Chinese
system does not differ between genus and species and courts may order the breaching party Specific
Performance pursuant to Article 107. Specific Performance is rarely used in Denmark. Both Danish and
Chinese system follows full liability principle. 93
Zhang, Mo - Freedom of contract with Chinese legal characteristics: A closer look at Chinas new
contract law. 94
Kritzer, Albert H. - International Contract Manual– Chapter § 51:14 95
CISG Article 66 96
Bing Ling, 8.060 - Similar to the rules of CISG article 80 and UNIDROIT Principles Article 7.1.2 –
Contributory conduct of the aggrieved party. The aggrieved party have by its own act or omission
contributed to the loss resulting from the non-performance and shall thereby be held liable. 97
See my Chapter 3.4.1.
25
demand Specific Performance in the enforcement of these rules. In Denmark, we will
order performance or alternative the buyer will just order somewhere else and claim
damages98
.
If the parties agree on a liquidated damages clause, it cannot be effective as a limitation
of liability clause too. The reason is that if the parties agree on a liquidated damages
clause there will be no hurdles, for any of the parties to seek court or arbitration and
have it lowered or increased to represent the true loss. The purpose of a liquidated
damage clause is, therefore, in the true nature vanished and cannot be effective as a
limitation of liability clause. However, the parties can agree that damage shall be a
maximum for compensation99
.
Chinas primary remedy is Specific Performance100
, but none of its available remedies
are mandatory101
. Specific Performance can lead to extensive losses because it is among
other requirements only refused when it leads to excessively high costs. Specific
Performance can in the nature of freedom of contracting be agreed out of and thereby be
effective as a limitation of liability clause. However, it may be preferable in some
contracts to ensure Specific Performance.
3.2 Exemption clauses.
The effect of exemption clauses is to exempt the obligor in cases where the law would
normally find him liable. The parties of a contract can determine when to exempt their
liability due to the freedom of contracting, and within the scope of the general
provisions i.e. fairness and good faith. Exemption clauses are not as frequent as limiting
clauses. They are not so easily accepted at the negotiation stage of the contract102
, and
furthermore their validity may be contested accordingly to CCL Article 54 (1) (2)103
.
The only real legal exemption that can be found in the CCL is force majeure. Article
117 exempt liabilities for breach of contract in part or wholly in the light of effects of
force majeure. Force majeure is, therefore, a legal ground to dissolve a contract. There
are two exceptions to this rule; “where the law provides otherwise” and the other is that
98
See further details in my Chapter 4 – Penalty Clauses. 99
Lando, Ole – Kontrakts retten I Kina – page 159. See also Chapter 4 - Penalty clauses. 100
See Chapter 4 – Penalty Clauses. 101
The Remedy of Requiring Performance under the CISG and the Relevance of Domestic Rules
[particularly in the context of China-related sales transactions], part B – 2. Concurrent Availability of
Specific Performance and Other Remedies. 102
Fontaine, Marcel et al. – Drafting International Contracts – An analysis of contract clauses, page 358 103
If a term is evidently unfair it can be set aside. Similar to Danish Agreements Act Article 36
26
force majeure cannot exempt a party already in breach. If, the parties agree on limiting
liability in different situations already provided by law the clause is regarded as a
supplement to the legal exemption104
. Force majeure is pursuant to Sales of Goods Act
Article 24 also a legal ground in Denmark to exempt liability.
Exemption clauses must like all other contract terms, comply with the principles of
good faith and fairness105
. Quite narrowly is the concept of good faith is interpreted as
follows: it applies only if the term is both obviously unfair and a result from one party
taking advantage of the other’s weak bargaining position or inexperience during the
contractual negotiations106
. This means that when concluding a contract the exemption
clause must be shown that it is part of the contract. The clause might be void if it
deprives the other party major rights107
, set aside if evidently unfair108
and even though
it can be implied from the usage of the transaction preferred is an expressed
agreement109
. In Denmark, exemption clauses that deprive the other party fundamental
rights are generally nullified or void, pursuant to the Danish Contracts Act Article 36.
See furthermore Chapter 3.3.
The Chinese contract law Article 53 mention exemption clauses that are void. These
clauses are exemption clauses that exempt liability for property loss (either intentionally
or as a result of gross negligence) or personal injury caused to the other party. The legal
consequence is accordingly to Article 56 that the contracts have no legal binding force
ab initio. If the contract is partially void and the validity of the other party is not
affected thereby, the other part shall remain valid. Exemption of liability in case of
gross negligence is also null and void in Danish law pursuant to Sales of Goods Act
Article 53 and Liability for Damages Act Article 1 (erstatningsansvarsloven) mandatory
rules on personal injury cannot be exempted. A different meaning of “gross negligence”
between Denmark and China has not been able to be provided. Its application is
104
Zhang, Mo – Chinese Contract Law: Theory and Practice, p. 313f. This rule applies all areas and could
for example also seen in hardship clauses where the rules are strict. 105
Bing Ling 4.057 106
EXCLUSION AND LIMITATION OF LIABILITY CLAUSES CHINA (MAINLAND AND HONG
KONG) by Graeme Johnston 107
Pursuant to the UNIDROIT Principles Art 7.1.6, In regard to the purpose of the contract. 108
Under CCL, Article 54 (1)(2) 109
Bing Ling 4.056
27
essentially left to the appreciation of the individual court which has a major source of
uncertainty in practice110
.
3.3 Limitation of liability in standard terms.
When doing business in this busy world it is often easy to use standard terms. The use
of standard terms does, as in Denmark have strict rules in the area of limitation of
liability and exemption. The rules are similar to Articles 2.19, 2.20, 2.21 and 2.22 of the
UNIDROIT Principles111
. Pursuant to CCL Article 39 (2) is standard terms “contract
provisions which were prepared in advance by a party for repeated use, and which are
not negotiated with the other party in the course of concluding the contract”. Pursuant
to Article 39 (1) shall the one who uses standard terms in a reasonable way draw the
other's attention to conditions which limit or exclude his responsibility and he must, on
the other party's request explain what these terms mean. The terms shall live up to the
principle of sound business practice. If these obligations are not met, the conditions are
unenforceable. Pursuant to Article 40 it is not permitted, unilaterally, to impose the
other party an increased responsibility or deprive the other important rights. This rule is
similar to the Danish Contracts Act Article 36112
. If, a term is evidently unfair it can be
set aside pursuant to Article 54(1)(2)113
. The rule only means that if you do impose the
other party to unilaterally responsibility or deprive important rights you have to explain
them in accordance to Article 39 (1).
Additionally, the new Supreme Court’s interpretation of May 13 2009 suggest choosing
a conspicuous color, a bigger font size or another graphic marker to ensure that the
limitation of liability clause stands out from the rest of the terms114
. The interpretation
also clarifies an obligation of the party who supplies standard terms to explain them
upon the other party’s request. The burden of proof for the provision of the requested
explanation is placed on the party who supplies the terms. The other party must,
therefore, know about and understand the limitation of liability clause. If a dispute
arises on interpretation of any clause in the standardized agreement, common
understanding shall be adopted, but in case of two or more interpretations, the less
110 EXCLUSION AND LIMITATION OF LIABILITY CLAUSES CHINA (MAINLAND AND HONG
KONG) by Graeme Johnston 111
Zhang Yuqing & Huang Danhan - The New Contract Law in the People’s Republic of China and the
UNIDROIT Principles of International Commercial Contracts: A Brief Comparison, p. 6f 112
Lando, Ole – Kontrakts retten I Kina – p. 63 113
Bing Ling, 4.058 114
Mondaq: News In Chinese Contract Law of June 17 2009
28
favorable for the agreement-provider will be adopted115
. This is similar to the Danish
rules of “koncipistreglen”116
.
These Chinese rules seem similar to the Danish consumer rules (The Contracts Act,
Article 38b) where the burden of proof stands on the writer of the term. Accordingly to
Bing Ling, the principle of good faith may require the other party to give an explanation
even without request117
and as I see it this is correct because the party supplying the
terms have the burden of proof if not provided, accordingly to the new interpretation. In
a business to business setting, the Chinese rules seem stricter than the Danish where
notice and clear formulations of the limitation of liability standard terms usually are
enough118
. Danish companies can often just print the standard terms on the back of the
contract or refer to them sometimes without handing them out. In China, this does
accordingly to the interpretation not seem to be enough119
. Both China and Denmark do
look at the business setting, strength and knowledge of the parties, but Chinese rules
still seem stricter as they do not presume a party to be as knowledgeable.
3.4 Additional Remarks and Critical Observations.
The parties may assume the risk respectively at different times so that the risk passes
from one party to the other upon the occurrence of specified events. The rules of
passage of risks are largely based on the CISG where the risk passes from the seller to
the buyer upon delivery pursuant to CCL Article 142 and CISG Article 69 (1)120
which
is similar to the Danish Sale of Goods Act Article 17 (1). The parties can in the freedom
of contracting agree on different passage of risk than the statutory law prescribes.
3.4.1 Consequential and/or Unforeseeable Damages.
Consequential damage is injury or harm that does not ensue directly and immediately
from the act of a party, but only from some of the results of such act121
. A claimant
bears the burden of providing the facts in support of its claim of consequential
damages122
. Damages shall, as said, not exceed what could and should have been
115
Kritzer, Albert H. - International Contract Manual– Chapter § 51:8 116
Lookofsky, Joseph – Køb, Dansk indenlandsk købsret, 3 Udgave, 2008 – Page 233 117
Bing Ling, 3.079 118
Beauty Box case – Standard terms handed out but never mentioned. Not valid. 119
Lookofsky, Joseph – Køb, Dansk indenlandsk købsret, 3 Udgave, 2008 – Chapter 9 120
Bing Ling, 8.058 121
Legal dictionary. 122
Bing Ling, 8.098
29
foreseen by the breaching party with respect to the loss123
measured like what a
defaulting party or a reasonable person would have foreseen when concluding the
contract (Inspired by UNIDROIT principles Article 3.5). The “foreseeability test” does
not include special circumstances unless the defaulting party knew or ought to have
known about this. The courts will look at the nature or type of a particular loss, rather
than its precise extent124
. This approach was inspired by the UNIDROIT principles
Article 7.4.4. The Chinese contract law recognise the conclusion of the contract as being
the critical time so that a party can insert exemption clauses or take out insurance125
. A
contract that disclaims or limits the responsibility for intentional or grossly negligent
injury on property is ineffective126
. It is in principle allowed, if the contract is not
obviously unreasonable, to exclude or limit the liability for slight negligence127
. The
Danish rule in the Sales of Goods Act Article 24 is similar to the Chinese and require
unpredictable circumstances of qualified/extraordinary character to exempt liability in a
situation128
.
3.5 Cultural Challenges.
In Confucian terms, guanxi (relationships) is reciprocal in nature. Therefore, “equality
and mutual benefit” is essential for the Chinese that see the relationship not only as pure
business but also as a friendship. China’s joint venture law has even reiterated the word
guanxi which shows this importance, and it may be one of the most read phrases in
Chinese business contracts. Chinese negotiators love to see this phrase worded in all
business contracts and do not want to accept terms that are not reciprocal129
. This
cultural difference may challenge negotiations about limitation of liability and
exemption clauses. That said, most Chinese contract drafters are well aware of the
advantages of avoiding precise written commitments as to their part in an agreement,
and of inserting precise commitments for the foreigner, thus limiting their own
liability130
.
Chinese people generally believe that parties should be equally liable, but when there is
a big difference between the party’s strength they might change their prospect. The
123
Kritzer, Albert H. - International Contract Manual– Chapter § 51:14 124
Bing Ling, 8.098 125
Bing Ling, 8.098 126
CCL Article 53 (2) 127
Lando, Ole – Kontrakts retten I Kina – p. 76 128
Lookofsky, Joseph – Køb, Dansk indenlandsk købsret, 3. udgave, 2008, p. 174 129
Fang, Tony – p. 127 130
Fang, Tony – p. 53
30
Chinese are fully convinced that it is only fair for the richer party to bear the heavier
burden. They use the advantage that a weaker party has to extract favors from the
strong, without losing in dignity (Pye, 1986)131
. This can be a challenge for the foreign
negotiator but can be used as an advantage just like the Chinese.
3.6 Summary.
The parties can in the nature of freedom of contracting agree on limitation of liability
and exemption clauses. When drafting these clauses the enforcement is the single most
important element.
In case of breach of contract, the burden of proof is on the plaintiff to prove its losses.
The general rule in China is that agreements must be kept and they do as in Denmark
have a strict liability principle which means that the non-performing party is always
assumed to have caused the loss. However, there is a “foreseeability test” which limits
the non-performing party to what he should and could have foreseen at the time of
conclusion of the contract. The individual contract and the party’s knowledge and
relationship are up for interpretation in this assessment. Contracts involving carriage of
cargo have the same rules as Denmark concerning the passage of risk but can be agreed
otherwise.
A pure liquidated damage clause cannot be used as a limitation of liability clause
because the amount of the penalty can be changed if “significantly higher than the loss”.
Chinas extensive use Specific Performance may draw the attention of the Danish
contract drafter as it can increase the risk of the contract as it is only refused when it
leads to excessively high costs.
Force Majeure is the only legal exemption of liability in the Contract Law, other than
that there is freedom of contracting to agree on such clauses but they must meet the
criteria of fairness and good faith similar to the Danish rules. Exemption of liability on
personal injury and gross negligent damages on property is, however, not possible in
both countries.
China has similar rules to the UNIDROIT principles and Danish when drafting these
clauses in standard documents. However, my analysis shows that the Chinese rules
131
Fang, Tony – p. 50
31
seem stricter because they in a B2B setting lie closer to the Danish Consumer rules. In
practice, this is very important knowledge in the enforcement of standard documents.
Culturally are the challenge to negotiate these clauses that Chinese people believe in
reciprocal relationships and equal contracts. Chinese people do, however, have an
understanding of the importance of these clauses and will try to limit their own liability
which derives from their desire to save face in a potential dispute.
32
4 - Penalty Clauses.
A Penalty clause can generally be defined as one stipulating payment of a sum of
money in the event of non-performance of a contractual obligation, with a purpose
either of pure indemnification or of deterrence132
. The remedy of damages may be based
on statutory provisions or arise from the agreement of the parties133
. Indemnification
and liquidated damages were respectively the second and fourth most negotiated terms
in Asia in 2007 making penalty clauses a particularly important topic in this matter134
.
4.1 Breach of Contract
The concept of “non-performance” is illustrated in Chapter 7 of the UNIDROIT
Principles and regarded as “breach of contract” in Chinese legal thinking. Some of the
rules set forth in Chapter 7 of the CCL Articles 108-112, 114 and 118-120 closely
resemble those set forth in Chapter 7 of the UNIDROIT Principles. This is particular
with regards to non-performance of monetary and non-monetary obligations,
anticipatory non-performance, cure and replacement of defective performance, right to
damages, agreed payment for nonperformance, force majeure, mitigation of harm, and
harm due in part to an aggrieved party135
.
China permits liquidated damages in contracts pursuant to CCL Article 114. Liquidated
damages clauses does pursuant to Article 108, become operational once a party
expresses by words or acts not to perform the contract regardless of whether the period
for performance has expired. It is up to the parties whether or not they want to agree
upon a liquidated damages clause for insufficient, late or other non-performance136
.
The penalty can be set to a fixed amount of money or as a way of calculating the
amount for example such as a weekly or monthly sum until fulfillment of the obligation
132
Fontaine, Marcel et al. – Drafting International Contracts – An analysis of contract clauses, page 300 133
Bing Ling, 8.094 134
The Top Ten Most Negotiated Terms in 2007 135
Zhang Yuqing & Huang Danhan - The New Contract Law in the People’s Republic of China and the
UNIDROIT Principles of International Commercial Contracts: A Brief Comparison, p. 8 136
Lando, Ole – Kontrakts retten I Kina – page 158
33
has happened137
. It may be based, on liquidated damages, a calculation of the expected
loss size (indemnification) or as common law calls a “penalty” where you seek pure
deterrence138
of the debtor to fulfill his contract139
. Punitive damages are indeed not
permitted in commercial contracts because of the nature of CCL Article 113 (1) where
the amount of damages shall be equal to the losses140
. In Scandinavia, there is no
tradition for punitive damages141
even though they do occur in practice to a small
extend.
The amount of liquidated damages can be increased or reduced by the People’s Court or
arbitration if “significantly higher than the loss”142
. Readjustment of damages should be
done upon request by a party to a case and are generally not enforced
(tvangsfuldbyrdelse) by the Courts when the amount of the penalty is unrelated to the
damages incurred.
The Supreme People’s Court has in new court practice (April 24, 2009) clarified that
"significantly higher" in effect means 30 percent higher than actual losses. Liquidated
damages clauses are agreed to relieve the benefitting party from the obligation to prove
its actual losses or in situations where losses are hard to determine. But, even the parties
have agreed upon an amount of liquidated damages a party can still plead that it is too
high or low. The hassle the parties have originally sought to avoid will have to be faced,
and the actual losses will have to be determined. However, “provided that an owner's
liquidated damages are less than 30 percent higher than its actual losses, such
liquidated damages should stand, even though they are greater than the actual losses
suffered”143
. A party may, therefore, lose or gain up to a 30 percent from the contract if
the amount is agreed or calculated incorrectly. The People’s Court doesn’t intervene in
this 30 percent threshold because that’s the limit they regard as “significantly” or
“excessively” higher or lower.
137
An Arbitrator's Powers and Duties Under Art 114 of Chinese Contract Law in Awarding Damages in
China in Respect of a Dispute Under a Contract Governed by CISG by Marcus S Jacobs, QC and
Yanming Huang, section 3.3 138
Deterrence is not allowed in common law. Deterrence means that you frighten the other party to
perform. 139
Lando, Ole – Kontrakts retten I Kina – page 159 and CCL Article 114. 140
Bing Ling, 8.123 – Punitive damages exist due to consumer rights in China. I will not go further into
this. 141
Springerlink – Punitive damages in Scandinavia. 142
Reedsmith 143
Mondaq - China: China's Supreme People's Court Issues Clarification and Interpretation of the
Contract Law on 29 March 2010
34
In a Chinese case, a party had performed a substantial part of the contract (time) and
terminated the contract which stipulated liquidated damages. Damages were lowered
with the argument that the other party did perform most of the agreed144
. The Court
lowered the damages significantly seemingly without regard for the actual loss because
it was lowered equal to the months performed145
. In Denmark, we do also lower the
damages, for example, in U 2004.2894 H (3 mio. To 350.000), U 2000.1237 V (50.000
to 25.000) and U 1985.600 H (150.000 to 100.000) but a clear threshold haven’t been
found in my research. The Chinese rules have similarities with the UNIDROIT
principles Article 7.4.13, PECL (Principles of European contract law) 9:509146
and what
we follow in Denmark.
In Article 107, is it recognized by its wording that the Contract Law accords substantial
respect for a non-breaching party's freedom to choose the form of remedy where the
other party breaches. It allows the non-breaching party to choose the form of remedy,
including liquidated damages, damages, as well as Specific Performance (excepting
special situations where the law recognizes that Specific Performance is impossible)147
.
The CCL is not designed to punish but to find the best way to compensate the losses
from each part. This means that the damages paid are low and only more or less
compensates the actual loss. An agreement about liquidated damages can be made, and
the Courts will generally follow it even if it doesn’t correspond to the damages
determined by law. Liquidated damages agreements are to be deemed valid unless they
are unduly high or low and can, therefore, have a punitive effect. This approach doesn’t
open up for large latitude for agreements because the law has a compensatory nature.
That a party breaches its obligations accordingly to a contract, is not tantamount to, that
he must pay compensation to the injured party for the consequent loss. Such an
obligation to pay depends on whether there is a basis for compensation148
.
Compensation is also different from legal systems both in options and the way of
calculating. Article 113 provides that “Where a party failed to perform or rendered
non-conforming performance, thereby causing loss to the other party, the amount of
144
Bing Ling, 8.134 – Lu Qizheng v Lu Chaoxi 1991. 145
My own analysis. Three year contract where 21 months were performed. Liquidated damages were
lowered from 5000 yuan to 1500. 146
Lando, Ole – Kontrakts retten I Kina – page 159 147
Liming, Wang and Chuanxi, Xu - Fundamental Principles of China’s Contract Law – 13 Columbia
Journal of Asian Law (1999) 1-34, page 8. See these cases in CCL Article 110. 148
Bryde Andersen, Mads et al. Lærebog i obligationsret I, Ydelsen Beføjelser, 2 Udgave. Side 236
35
damages payable shall be equivalent to the other party's loss resulting from the breach,
including any benefit that may be accrued from performance of the contract, provided
that the amount shall not exceed the likely loss resulting from the breach which was
foreseen or should have been foreseen by the breaching party at the time of conclusion
of the contract.”. Based on the wording, the Chinese contract law seems to stress that
the suffering party shall be fully compensated. However, even the similarities the
Chinese contract law does not go as far as the UNIDROIT principles149
. The Chinese
contract law does not touch upon issues such as future harm, loss of chance and non-
pecuniary150
harm. However, when the amount of damages cannot be established with a
sufficient degree of certainty, it is left to the discretion of the court151
.
In Denmark, we do generally follow the full compensation approach too152
to a high
degree as the UNIDROIT principles153
also with future harm, loss of chance154
and non-
pecuniary damages155
as part of the calculation. Here, the plaintiff is entitled to
expectation interests156
or alternatively negative contractual interests157
who in some
cases will give different results in the assessment of damages.
4.1.1 The CISG.
In international contracts The CISG often applies depending on the circumstances.
Damages have been the most sought out remedies offered by the CISG in China entitled
under Articles 74 to 77. Chinese courts may interpret the CISG differently than we are
used to in Denmark and the West making the legal standpoint uncertain.
This happened in the case Mealey’s International Arbitration Report, 20(5) (2005)158
where they came to the conclusion that “the CISG intentionally does not deal with
liquidated damages and penalty clauses”. The framers of the Convention agreed that
“the validity and application of such clauses were to be dealt with in terms of the
149
Articles 7.4.2 (Full compensation), 7.4.3 (Certainty of harm), 7.4.4 (Foreseeability of harm), 7.4.5
(Proof of harm in case of replacement transaction), 7.4.6 (Proof of harm by current price) 150
Physical suffering or emotional distress 151
Zhang Yuqing & Huang Danhan - The New Contract Law in the People’s Republic of China and the
UNIDROIT Principles of International Commercial Contracts: A Brief Comparison, p. 10 152
Lookofsky, Joseph – Køb, Dansk indenlandsk købsret, 2 Udgave, 2008 – Page 200 153
Bryde Andersen, Mads et al. Lærebog i obligationsret I, Ydelsen Beføjelser, 2 Udgave. Side 385 154
Bryde Andersen, Mads et al. Lærebog i obligationsret I, Ydelsen Beføjelser, 2 Udgave. Side 264f 155
Koziol, Helmut, Wilcox, Vanessa - Punitive damages: common law and civil law perspectives 156
Sales of Goods Act Article 30 – Positiv opfyldelsesinteresse 157
Law of obligations ordinary principles. 158
THE CHALLENGE OF A UNIFORM APPLICATION OF THE CISG – COMMON PROBLEMS
AND THEIR SOLUTIONS BY BRUNO ZELLER – page 315 (7)
36
applicable legal system due to widely divergent approaches in the different legal
systems”159
. However, the Chinese took it a step further and concluded that “If there is
a penalty clause (and this would include a provision for liquidated damages) in a
contract to which CISG applies, this constitutes an opting out under Article 6 of Articles
74-76 of the Convention”. Accordingly to this, interpretation of Penalty clauses should
happen accordingly to domestic law or applicable to the contract.
The case has been criticized for being faulty with the argument “So far there is no
impediment to adopt the penalty clause within the ambit of the CISG and, therefore,
there is no need to invoke Article 6”160
. However, the CISG does not provide a basis for
a raise or reduction of contractual penalty but full compensation, so this will happen in
accordance to the jurisdiction.
Moreover, uncertainties also occur in other instances where courts or arbitrations
calculate damages with no reference to the law or differently than the CISG prescribe161
.
This was the case in a decision where Chinese Courts ruled that a party could get
interest from the date due to claim of payment where CISG interpret from the date
goods are at the buyer’s disposal. The full compensation approach was, therefore, not
followed. The issue about interest rates is not touched upon CISG but up to the
applicable law. Here, there have been cases where reference is made to the rate adopted
by the banks of China, even though the interest creditor is from a foreign country i.e.
not necessary giving the foreigner full compensation.
4.1.2 Specific Performance.
In China, the basic remedy is Specific Performance, which culturally has, its nature
from the time where the Chinese people were undergoing the state plan162
. In Denmark,
the basic remedy is an order to fulfill the contract with indemnification as a
consequence if still in breach163
. Specific Performance under CCL Article 109 follows
the position of the CISG Articles 46 and 62 and UNIDROIT principles Articles 7.2.1
and 7.2.2. Specific Performance means that the courts “force” a party to fulfill a specific
159
An Arbitrator's Powers and Duties Under Art 114 of Chinese Contract Law in Awarding Damages in
China in Respect of a Dispute Under a Contract Governed by CISG by Marcus S Jacobs, QC and
Yanming Huang, section 3.2 and 5. 160
THE CHALLENGE OF A UNIFORM APPLICATION OF THE CISG – COMMON PROBLEMS
AND THEIR SOLUTIONS BY BRUNO ZELLER – page 315-317 (7-9) 161
Xiao, Yongping & Long, Weidi - Selected Topics on the Application of the CISG in China – Section 3
- Damages 162
Bing Ling, 8.065 163
Departing from mere compromise - Section 3.1 Specific Performance under civil jurisdictions
37
act. The state will sanction the breaching party until performance occurs164
. Normally,
Specific Performance is a remedy used by courts when no other remedy (such as
money) will adequately compensate the other party. It is normally only used in cases
where the product or service is unique but in China they use Specific Performance as
their primary remedy165
. Specific Performance is a rare remedy in Denmark, Germany,
France and under the CISG166
.
Danish Contract Law stipulates that a party whose contractual rights have been violated
may choose between Specific Performance and damages. However, when it comes to
enforcement, the Code of Procedure greatly restricts the number of cases for which
Specific Performance will be enforced by the legal system. If, the other party continues
to be in breach a bailiff can take over the case but will only in a specified class of cases
be able to do more than converting the claim into money. The result is that parties very
rarely seek Specific Performance and the courts even more rarely grant it167
.
This is a big difference between Denmark and China where Specific Performance as
said earlier is their primary remedy. The limitations of the use of Specific Performance
in the CCL can be found under Article 110. Specific Performance is not used when
performance is impossible in law or fact, when the case is not suitable for Specific
Performance or the costs would be excessively high or if the party does not require
performance in a reasonable time. As said earlier can the non-breaching party freely
choose the form of remedy pursuant to Article 107, which means that, damages can also
be paid but traditionally the parties choose Specific Performance since it’s their basic
remedy168
. If the breaching party has paid liquidated damages, Specific Performance
can only be chosen in case of late performance169
.
4.1.3 Damages.
I have chosen because of the page limit not to go into further details about all kinds of
damages such as remedial measures (quality of performance), punitive damages and
164
Bing Ling 8.065 165
Y. Gotanda, John - Recovering Lost Profits in International Disputes 166
Lando, Henrik and Rose, Caspar - On the enforcement of Specific Performance in Civil Law countries,
p. 1 – China use Specific Performance despite our knowledge that Chinese Contract Law was inspired by
German and French Law. 167
Lando, Henrik and Rose, Caspar - On the enforcement of Specific Performance in Civil Law countries,
p. 3f. 168
Bing Ling, 8.084 169
Bing Ling, 8.135
38
earnest money. I refer to Mo Zhang – Chinese Contract Law – Chapter X and Bing
Ling.
4.2 Different failures to perform.
Pursuant to CCL Article 94 can a party under certain circumstances dissolve a contract
because of the other party’s non-performance. This article is very broad formulated and
covers all circumstances provided by law, but in particular force majeure, indication of
non-performance and delay.
Termination of contracts does not prejudice the aggrieved party’s right to claim
damages170
. This is a statutory rule regulating the relationship between the parties, when
nothing is agreed between the parties171
. Also, any liquidated damage clause agreed
between the parties will survive termination of the contract172
as it largely serves the
same purpose as damages173
. This is consistent with Danish law where the non-
breaching party can claim at least negative contractual interests (negativ
kontraktsinteresse) and in some cases expectation interests (positive
kontraktsinteresse)174
.
Delay in performance can be granted with termination of the contract, as a result, if
main obligations in the contract haven’t been performed within a reasonable time after
receiving demand for performance and in a case where the purpose of the contract is
frustrated. Termination of contracts can also be agreed upon (Article 93). This might
seem naturally in Western culture, but in the former China under the state plan this was
not the case.
New in Chinese law practice is that penalties may be agreed upon delay in performance.
Under such circumstance, if any party fails to perform the contract in time, he must pay
the penalty to the other party175
. When a penalty is enacted as compensation for delay,
the defaulting party should fulfil his obligation anyway, in accordance to the contract176
.
170
Ling, Bing – Contract law in China – 7.048, p. 360 171
Pursuant to CCL Article 97 and a number of specific provisions in the CCL. 172
The position is also adopted in juridical practice. 173
Bing, Ling - 7.049, p. 361 174
Andersen, Lenart lynge – Aftaler of mellemmænd, 4 Udgave, p. 113f 175
An Arbitrator's Powers and Duties Under Art 114 of Chinese Contract Law in Awarding Damages in
China in Respect of a Dispute Under a Contract Governed by CISG by Marcus S Jacobs, QC and
Yanming Huang, section 3.3 176
Lando, Ole – Kontrakts retten I Kina – page 158
39
If, there is no agreement in these matters penalties will only be provoked as a result of
termination of the contract (Article 97).
4.3 Cultural Challenges.
Penalty clauses are used to relieve a party not in breach of having to prove their damage
and in some cases to stipulate when a penalty shall be granted. That said Chinese people
generally keep their commitments. Victor Li (1980) finds that “even during the serious
economic disruptions of the Great Leap Forward and Cultural Revolution, foreign
debts were paid on schedule and trade contracts were generally carried out” by the
Chinese177
. However, China has during the years seen numerous cases of companies
that do not pay their debt and fraud, so that should be kept in mind when negotiating
contracts178
.
Being new in China one will have to reaffirm ones definition of what it means to keep a
commitment. Contracts are up for renegotiation during performance, and if you do not
understand Chinese way of thinking, trust can be lost and commitments will not be kept.
This is bitter experience from many European companies179
.
The Chinese generally take a non-legalistic approach to negotiations. They look more
for a commitment to working together to solve problems than for a watertight legal
package and will, therefore, try to avoid legal settlements about non-performance of
contracts180
. From a practical point of view, one can negotiate a deal with the Chinese
most effectively where there is enough trust between the parties, and a verbal agreement
is as good as a written contract181
. This is the reason why many Western companies fail
in China; because they want a fast deal without building trust first.
The reason is that law in Chinese culture, had always been equated with lack of trust,
trouble, coercion, and tyranny and was treated as a less effective means of affecting
behavior182
. This perspective still lives to some degree with a belief in Confucianism
where self-regulating moral mechanisms is preferred. The Chinese tend to feel
embarrassed and insulted when confronted with clauses spelling out the penalties or
177
Fang, Tony – p. 114 178
Non-payment of contractors – Pinsent Masons of May 22 2006. 179
Analyzing beyond personal experience - Article 180
Fang, Tony – p. 49 181
Fang, Tony – p. 114 – written contracts are from a legal perspective, of course, mandatory to protect
themselves in case of breach of contract. 182
Fang, Tony – p. 111
40
remedies as the Chinese partner cannot make good on its commitments183
. On the other
hand, the Chinese know that records are vital and are, therefore, meticulous about
legalistic documentation that could be used to protect themselves from potential
criticism in the future184
. This can be explained in the concept of face. Their way of
behaving obstinately, asking questions a hundred times, doing their homework
carefully, and writing down everything is to save face. Chinese people do though realize
that they can be protected when something is not included in the written record. They
will try to take advantage of avoiding precise written commitments as to their part in an
agreement, and inserting precise commitments for the foreigner185
.
Culturally as I analyze it, Specific Performance is used in a higher degree because
Chinese people believe in Guanxi (relationships), which can be related, to intuitu
personae i.e. you trade with the man and pure money relationships are not as common.
Also, Specific Performance was mandatory under the state plan.
4.4 Summary.
Penalty clauses are permitted in the Chinese legal system which can have the form of
liquidated damages, indemnification or deterrence all though without a punitive effect.
The UNIDROIT principles among others made their mark on the Chinese contract law
making the rules similar but with some essential differences.
Similar to Danish law and the UNIDROIT principles shall the courts lower the
liquidated damages paid if “significantly higher than the loss” which the Chinese
Supreme Court now interpret as a 30 percent threshold.
If, the parties haven’t agreed upon indemnification, the law adds substantial respect for
a non-breaching party's freedom to choose the form of remedy. Specific Performance is
used as their main remedy for non-performance being a significant difference from
Denmark. Chinese courts thereby seem stricter in contract fulfilment than Danish
courts.
The Chinese Contract Law is build upon a compensatory nature, but with some
differences in the interpretation leaving out some issues but follows a full compensation
perspective.
183
Fang, Tony – p. 114 184
Fang, Tony – p. 49 185
Fang, Tony – p. 53 + 56
41
Uncertain interpretation of the CISG occurs and this can be explained due to lack of
experience of Chinese courts making it challenging to draft contracts regulated by
CISG.
Chinese people are generally grateful to perform contracts but will challenge by
expecting re-negotiation over the full course of performance. During the negotiation
stage, they generally have a non-legalistic approach to contracts where trust is essential.
They tend to feel embarrassed and insulted when confronted with clauses spelling out
the penalties or remedies but do contrary understand the importance.
42
5 - Hardship Clauses
When party’s enters a contract they often bind each other under the prevailing
circumstances from the time of executing the contract. The agreed terms and conditions
may change under different circumstances that make it less or entirely uneconomical
advantageous for one of the parties. Breaching a contract can be costly and the parties
may therefore have a desire to agree about the circumstances, under which secession
from a contract are allowed.
Change in circumstances may occur for various reasons but the most common is that the
goods to be delivered have lost their marketability, because of changes in technology,
the market is inaccessible, for political reasons, legal reasons, strong inflation, crises, or
that the agreed prices no longer corresponds to market prices. Changes in circumstances
especially occur in long term contracts186
. Price, charge and price changes was the third
most negotiated terms in Asia in 2007187
which definitely will show true in the
following analysis.
There is no legal term for “hardship” or “change of circumstances” under Chinese laws
and regulations, nor does it provide any express legislative rules in this area188
. The
CISG is silent in this area too, however, there is a provision in the CISG Article 79 that
gives a party rights under the circumstances of impediment. The provision is strict and
requires a party to be in breach of contract because the burdensome on one of the parties
are too high to perform the contract. This burdensome shall be understood as both to
economic and physical impediments and where performance is rendered impossible189
.
There is no indication on how strict or how big a change in the market has to be before a
party can be excused on the basis of Article 79190
.
186
Fontaine, Marcel et al. – Drafting International Contracts – An analysis of contract clauses, p. 453f 187
The Top Ten Most Negotiated Terms in 2007 188
Zhang Yuqing & Huang Danhan - The New Contract Law in the People’s Republic of China and the
UNIDROIT Principles of International Commercial Contracts: A Brief Comparison, p. 11 189
Nouva Fucinati S.p.A v. Fondmetall International A.B - Issued by Tribunale Civile di Monza on the
14th
of January 1993. Reported in UNILEX. 190
Carlsen, Anja - Can the Hardship Provisions in the UNIDROIT Principles Be Applied When the CISG
is the Governing Law?, Section IV, D.
43
The principles of UNIDROIT Section 6.2 provide specific provisions dealing with
hardship. This section applies to hardship in situations where the balance between the
two sides of the contract has become out of proportion because of severe changes in the
market after the conclusion of the contract that fundamentally have altered the
equilibrium of the contract. Here normal economic risks are not regarded as hardship
but circumstances where developments in the market lie far beyond normal economic
development. Changes in prices of 50% or more are regarded as a fundamental
alteration of the equilibrium of the contract191
.
When the new contract law was drafted a provision on “change of circumstances” was
included giving the burdened party the right to renegotiate and in failure, to request the
court to modify or terminate the contract. The provision were inspired by the
UNIDROIT principles but were later dropped. Concern that the judges would get a too
great discretionary power and that it would create uncertainty and ambiguity in its
interpretation and application changed their minds192
. But recent (24 April 2009)
interpretation by the PRC Supreme Court (The so called Interpretation II) gives a
standpoint of where this issue is going193
. The concept of frustration has been
introduced where this possibility previously only had been discussed in Articles 94
(5)194
and 117 of the Contract Law and Article 4 of the General Principles of Civil
Law195
. Commentators to this new court interpretation view it as specially dealing with
those kinds of circumstances caused by the present global financial crisis (2010)196
.
However, the Supreme Court interprets a financial crisis as being a developing and not
“sudden change”. See further details about frustration in Chapter 5.1 below.
There is to a certain extent freedom of contracting in China and the parties can in
practice agree on a hardship clause197
. The conditions this clause can be agreed upon
must like all clauses live up to the general provisions i.e. good faith and fairness.
191
Carlsen, Anja - Can the Hardship Provisions in the UNIDROIT Principles Be Applied When the CISG
is the Governing Law?, Section III 192
Zhang Yuqing & Huang Danhan - The New Contract Law in the People’s Republic of China and the
UNIDROIT Principles of International Commercial Contracts: A Brief Comparison, p. 11 193
Mondaq – China: News in Chinese Contract Law from 17 June 2009 194
Lando, Ole – Kontrakts retten I Kina – p. 121 195
Article 4: In civil activities, the principles of voluntariness, fairness, making compensation for equal
value, honesty and credibility shall be observed. 196
Shanghai Kai-Rong Law Firm by Jin Yu-Lai and H. Zhang, Bill - China Legal Watch – July 28, 2009 197
H. Zhang, Bill - China Legal Watch – July 28, 2009
44
Hardship clauses imply due to re-negotiation a modification of the original contract.
Chapter 5 of the CCL provides provisions on the modification of contracts. Hereunder,
Article 77 provides that a contract can be amended if the parties have so agreed. The
same principle that applies to the conclusion, form validity, interpretation, content, etc.
also applies to agreements about changing the contract. It is also assumed that contracts
can be changed due to acts from the parties and accepted in case of passivity. Article 77
can therefore be said to recognize hardship clauses because it applies where the parties
haven’t agreed about changing the contract but also in an agreement about what
circumstances that entitle a party to change the contract i.e. a hardship clause198
. There
are also special statutory rules that gives a party a right to rescind a contract in case of
change of circumstances, for example in transfer of technology contracts, where both
parties can rescind if the technology get published by a third party199
.
When there is hardship accordingly to the parties’ agreement, they shall negotiate about
a change or rescind of the contract. If a party refuses to negotiate or interrupt this, courts
may see this as being against sound business practice and may lead to liability for the
potential losses. Failure of the parties to reach an agreement in a reasonable time
constitutes that the court can terminate the contract at a date or on terms determined by
the court. The court might also change the terms of the contract with the purpose of
getting to a reasonable distribution of the loss or gain that may have arisen as a result of
the change of circumstances200
.
5.1 Change of circumstances
The concept of rebus sic stantibus akin to frustration allow contracts to become
inapplicable in case of fundamental change of circumstances. This concept has been
discussed since the first draftings of contract laws in China but never actually
incorporated in the law. The traditional doctrine of pacta sunt servanda201
(agreements
must be kept) has largely been maintained. However, there have previously been some
rare instances where court practice proves that change of circumstances will be
considered. In Wu Han Gas Company vs. Chongqin Testing Instruments Factory (1989)
198
Lando, Ole – Kontrakts retten I Kina – p. 105f 199
Lando, Ole – Kontrakts retten I Kina – p. 121 200
Lando, Ole – Kontrakts retten I Kina – p. 143 201
Pursuant to CCL Article 8 (1)
45
an approximately 40 % price increase constituted in rebus sic stantibus because of
unforeseeable circumstances after the drafting of the contract (The state adjusted
aluminum prices)202
. In the case Beijing Big Dragon Mechanical Engineering Co. Ltd.
V. Beijing Kaibor Padding Company Inc (2003) was a 22 % price increase for some
work done was enough to constitute “change of circumstances” (unforeseeable nature
conditions under the ground)203
. The Chinese government might also have recognized
that changes in the governmental policy is a reason for hardship204
, pursuant to Kun
Ming Teng Si Lin Trade Company, Ltd v. China Unicom, Inc. Yun Nan Branch (2005).
In this case a party plead that a change in the governmental policy was a reason to
rescind the contract but the case was refused with the comment that there was no change
but only a preparation of the policy.
Accordingly to the new interpretation by the PRC Supreme’s court (24 April 2009) five
points must be met to constitute a change of circumstances205
:
1. A substantial change of circumstances occurs after the contract is concluded;
2. The change of circumstances is unforeseeable when the contract is concluded;
3. The change of circumstances is not caused by force majeure;
4. The change of circumstances is not a commercial or business risk; and
5. It is obviously unfair to a party, or the purpose of the contract would be
frustrated, if the parties continued to perform the contract.
Accordingly to Interpretation II the People’s courts shall consider the surroundings of
the parties. Firstly, if the change of circumstance doesn’t appear before the contract was
concluded the doctrine doesn’t apply. However, if a party entered into a contract
without knowing this change of circumstance, he may seek relief pursuant to Article
54(1)(1) on the ground of significant misconception206
.
When reviewing “unforeseeable circumstances”, People’s courts shall consider the time
when the contract were formed, the situation under which the parties have suffered
losses and the willingness to assume certain risks. These certain risks are assumed to be
202
Zhang, Mo – Freedom of contract with Chinese legal characteristics: A closer look at Chinas new
contract law, p. 260 203
Lando, Ole – Kontrakts retten I Kina – p. 144 204
Lando, Ole – Kontrakts retten I Kina – p. 144 205
Mondaq - China: China's Supreme People's Court Issues Clarification and Interpretation of the
Contract Law on 29 March 2010 206
Bing Ling, 5.089 - This stand point was assumed by Bing Ling before the new interpretation.
46
known by the parties in some industries. For instance in contracts subject to petroleum,
coke (fuel), non-ferrous metal and financial investment products such as stocks and
futures207
. The issue is whether a reasonable person in the position of the disadvantaged
party would take into account the change of circumstances at the time the contract was
concluded. The aluminum case above may still have value in today’s interpretation even
it appears on the industry list. The reason is that changes in government fixed prices are
generally less foreseeable than changes in the open market208
. If the parties have
provided for the consequences of change of circumstances a case is not unforeseeable
anymore. Hereby meant, that if the parties change the contract because of a
circumstance and a major changes later occur it’s not unforeseeable anymore.
The change of circumstance may not be related to a commercial or business risk. These
risks refer to business activities such as un-dramatic change of supply and demand and
price fluctuations. The change of circumstances refers to non-market risks which were
not predictable when the contract were formed. Hereunder, the People’s Courts shall
consider the factors in specific cases such as; whether the type of risk is, in the general
social opinion, unpredictable, the extent of risk has so far exceeded the normal
reasonable prediction, the risk is preventable and controllable, the nature of the
transactions is for high profits with high risks, and further consider the actual market
situations209
.
When the courts find that there is evidence for a change of circumstance it shall guide
the parties to negotiate and alter the contracts and meditate in case of failure of
negotiation. The negotiation shall lead to a reasonable and fairly balance between the
parties. The goal is not to disturb the normal market transaction. To further secure this,
the Supreme People’s court has provided strict rules that require the people’s courts to
report the use of “change of circumstances” to higher courts for an additional review210
.
If a party refuses to perform the contract and the “change if circumstance” principle
doesn’t apply it will lead to a wrongful act. When a party fails to perform a contract it
will be deemed as culpa in contrahendo (fault in contract conclusion). The relevant
people’s court may order the responsible party to effectuate relevant formalities and
207
H. Zhang, Bill - China Legal Watch – July 28, 2009, p. 2f 208
Bing Ling, 5.089 209
H. Zhang, Bill - China Legal Watch – July 28, 2009, p. 3 210
H. Zhang, Bill - China Legal Watch – July 28, 2009, p. 3
47
compensate the other party for actual losses incurred there from211
. This rule is similar
to most countries and in accordance to the Danish Sale of Goods Act, Articles 25 and
30212
. The people’s court may demand Specific Performance of the contract. A party
can demand the other party to pay the price or other fees pursuant to Art. 109 and
consistent to the CISG Article 62 and UNIDROIT principles Art. 7.2.1. In cases other
than money guilt the other party can demand performance unless performance is
actually or legally impossible, if the obligation is not suitable for performance or the
cost of complying would be too high or lastly if the creditor doesn’t in a reasonable time
demand performance. The purpose of the rule about too high costs is to avoid waste of
resources and not in cases where the other party made an unfavorable transaction213
.
Taking all this into consideration, the Chinese approach to change of circumstances can,
therefore, be interpreted to be somewhere between the CISG and UNIDROIT approach.
The courts refuse to modify contract terms even in case of dramatic change of
commodity prices which is seen as a commercial or business risk214
. The change of
circumstance may be limited to situations involving change in economic policy and
large scale economic conditions only215
. Lack of court practice also indicates this
tendency. However, argued by Bing Ling some earlier juridical practice draws an
approach close to UNIDROIT216
but the new interpretation seems to tightening up the
doctrine a little bit.
Danish rules on change of circumstances217
do compared to Chinese seem stricter
because we are closer to the CISG rules than the gentler rules in the UNIDROIT
principles218
. We consider even extraordinary price changes as predictable in the sense
of law. Even after wartime general price and cost increases of 4-5 times will not
constitute an exemption of liability219
. In specific cases with sudden changes this limit is
lower. In the case ND 1976.650 Nordic Arbitration should a seller accept a cost increase
of 100 %, UfR 1915.380 was a price increase of almost 100 % not enough to lower it220
.
211
China Regulatory Updates – Han Yi Law Offices, p. 6 212
Lando, Ole – Kontrakts retten I Kina – p. 123 213
Lando, Ole – Kontrakts retten I Kina – p. 146f 214
Mondaq – China – News in Chinese Contract Law 215
Bing Ling, 5.091 – This is in consistence with Bing Ling’s assumption. 216
Bing Ling, 5.091 217
Sales of Goods Act Article 24. 218
Lookofsky, Joseph – Køb, Dansk indenlandsk købsret, 3. udgave, 2008, p. 176f 219
Nørager-Nielsen m.fl. - Købeloven med kommentarer, 3. udgave, 2008, p. 412 + 410 cases. 220
Nørager-Nielsen m.fl. - Købeloven med kommentarer, 3. udgave, 2008, p. 414
48
A few cases the limit was lower but the nature of the party’s relationship was
considered.
5.1.1 Changes of circumstances related to the parties
Under Article 76 of the contract law, after a contract becomes effective, the parties may
not refuse to perform the obligations of the contract because of the change of title or
name of the parties, or change of legal representative or person-in-charge of the parties.
However, the other party shall be informed by these changes to make it easy for the
obligor to perform the obligations. This provision makes sure that parties can’t evade
contract obligations by changing the company or business settings221
. A contract
concluded in intuitu personae (the person who assigns the contract thinks that the
personal relationship is very important to the contract) is though recognized in China.
The Chinese people’s courts will not demand Specific Performance pursuant to Art. 119
if the personal relationship is very important and the other party will not receive the
service222
. The opposite is interpreted pursuant to Art. 76 in contracts concluded intuitu
pecuniae (pure money contract where relationship is not important).
5.2 Cultural Challenges
Change of circumstances gives rise only to a party’s right to request re-negotiation223
.
However, the Chinese do not view the signing of a contract as the end of negotiation;
they attach great importance to long-term relationships and will not hesitate to suggest
adjustments immediately on the heels of an agreement224
. Chinese feel totally
comfortable trying to negotiate and renegotiate and interpret and reinterpret policies,
regulations, and agreements as conditions change. Hendryx (1986) warns that
negotiating the contract is not a real problem; the real problem start after one signs the
contract225
.
Chinese people generally believe in relationships and mutual benefit and have an
indifference to profit (Confucian way of living). However, the old guanxi where
relationships meant everything getting less important and moves towards a tendency of
221
Zhang, Mo – Chinese Contract Law: Theory and Practice, p. 227 222
Lando, Ole – Kontrakts retten I Kina – p. 147 223
Bing Ling, 5.093 224
Fang, Tony – p. 51 - (Frankenstein, 1986; Pye, 1982) 225
Fang, Tony – p. 53f
49
Chinese people that are much more plated with money and utilitarian characteristics226
.
The Chinese have gained a wide reputation for their screwed money-making and
money-saving capacities; they can calculate money and bargain about price to the
extremes227
. It is also reported (Schnepp et al., 1990) that the Chinese frequently reopen
negotiations to press out additional profit.
The Chinese propensity to renegotiate also has much to do with face; the Chinese
negotiators want to look “good”228
. In other words bargaining is a way of life in Chinese
bureaucracy. The Chinese approach confronts with the Western culture. We believe that
contracts are the end of negotiation and that is why it’s difficult to do business in China.
If we are not open to re-negotiation we run the risk offending our Chinese partner. We
believe we have negotiated a hardship clause to have certainty of the contractual
situation which might correlate with the Chinese way of doing business.
Hardship clauses are very important in today’s China because reforms are the key force
behind the changing facade of contemporary China. “The most difficult problem in
negotiating with China is that things cannot be planned in advance. You get change,
change, and change”. China has the desire to modernize and to grow and that’s why
things changes all the time229
. With new reforms all the time a contract runs a risk of
being unenforceable or difficult to perform like concluded.
5.3 Summary
China does as most legal systems not have statutory provisions that tell what a hardship
situation is. This means that the parties will have to agree on a definition. The freedom
of contracting gives wide possibilities to agree on hardship situations just as any other
country.
However, if the party’s happens not to agree on such clauses the discretion of the court
will define this term. The new interpretation sets up strict rules that the courts have to
consider in possible hardship situations. Finally the Supreme Court will have to accept
the lower courts trial.
226
Lytras, Miltiadis D. - International Journal of Chinese Culture and Management –Volume 1, No. 2,
2008 227
Fang, Tony – p. 131 228
Fang, Tony – p. 148 229
Fang, Tony – p. 96
50
The Danish and Chinese rules are both stringently enforced but Danish court practice
shows that we are closer to follow the CISG rules making the Danish rules stricter than
the Chinese.
Chinese people do in their nature expect re-negotiation of contracts during performance
and will try to change the prices all the time. The nature of a Hardship clause may,
therefore, at times seem trivial to them as they see contracting as being a fluidly process
with personal relationships and mutual benefits. That said, they will try to squeeze every
penny out of a contract to increase their profit and as being some of the world’s
toughest negotiators the Danish or Western company should definitely have something
on paper that state their rights. If, the Hardship situation is to their advantage it will be
exceedingly difficult to claim money back from them again to make the contract
equitable. The law does as in Denmark give little help without clauses spelling this out.
51
6 - Venue Clauses
The term venue clause refers to the choice of applicable law, jurisdiction or dispute
resolution. The general principle is that there is freedom to choose these matters. This
provision can end up being the most important part of your contract230
since it may form
the basis for how the process of solving the problems encountered precursor itself.
Effective enforcement of contracts is everybody’s concern when doing business in a
foreign country. The availability and effectiveness of dispute resolution forms a critical
component of contract enforcement.
Effective contract enforcement should be viewed on a broader systematic basis, as part
of the overall contractual arrangement and its context. This perspective encompasses the
contract's legal environment, including the availability of traditional dispute-resolution
mechanisms, but also includes contract-specific considerations, such as the structure of
performance established under the contract. Further, it must take into account the
broader relationship between the parties and the market visibility and reputation of the
provider. In jurisdictions with reasonable predictability it is easier to make a risk profile
of the contract. Enforceability still offers particular challenges in China where the rule
of man, recently, was embraced by the rule of law. Nonetheless, the establishment of
effective, predictable enforcement mechanisms represents a relatively new endeavor in
the China231
.
This chapter will give the most important knowledge about choice of law, jurisdiction,
which of negotiation, mediation, arbitration or litigation is more appropriate in the
circumstances232
and general dispute resolution knowledge. What can you expect from
the juridical system culturally and technically given the drafted contract clause?
6.1 Choice of law
The applicable rules governing the choice of law is important because foreign cases are
often handled differently from domestic ones.
230
Harris, Dan - Arbitration In Your China Contract. Adult Supervision Required. 231
Mondaq - China: Effective Enforcement of Contract Rights in Chinese Sourcing Contracts 232
These are the four possible dispute resolutions pursuant to CCL Article 128
52
Courts must apply the "principle of proximate connections" in determining which
nation's law governs a disputed contract provision. This principle requires the court to
determine which country's law has the strongest proximate connection with the subject
matter of the contract233
. In China the choice of law becomes a matter when the case
becomes or is marked as “foreign”. The term “foreign” is interchangeably to
“International”234
. A contract is international when at least one person is not Chinese or
a Chinese legal person, the subject matter of the contract is in a foreign country235
or the
conclusion or performance of the contract is made in a foreign country236
. The
importance lies in the fact that if the case falls within the category of “foreign” a special
set of rules and provisions would apply because in Chinese law, foreign cases are
treated and handled in part differently from domestic ones (see later about choice of
jurisdiction)237
.
Accordingly to CCL Article 126 the applicable rules governing the choice of law in the
contract is the following238
; “Parties to a foreign related contract may select the
applicable law for resolution of a contractual dispute, except otherwise provided by
law. Where parties to the foreign related contract failed to select the applicable law, the
contract shall be governed by the law of the country with the closest connection
thereto”. The main rule is that there is freedom of contracting in the choice of law
except otherwise provided by law. The court will accept this, unless the choice
contradicts with mandatory rules. If the parties have not made it clear, the choice of law
should be seen from the circumstances of the transaction. The contract shall be
governed by the law of the country with the closest connection thereto239
. These
mandatory rules will not apply if the parties agree on choice of law240
.
233
Mondaq - China: China´s Supreme Court Broadens Mandatory Application Of PRC Laws To Foreign-
Related Contractual Disputes 234
Zhang, Mo – Choice of law in contracts: A Chinese approach, p. 296f – This denotation is important to
know because in some countries it could be referred to as another, region, state, provinces or
municipalities etc. 235
Item to be sold or purchased is located outside China 236
Zhang, Mo – Choice of law in contracts: A Chinese approach, p. 297 237
Zhang, Mo – Choice of law in contracts: A Chinese approach, p. 297 238
Zhang, Mo – Choice of law in contracts: A Chinese approach, p. 290 239
Drafting commercial contracts, lecture 12, 2010 - The choice of law rules often goes to the sellers
place as being the characteristic feature of the contract 240
Lando, Ole – Kontrakts retten I Kina, p. 173
53
6.1.1 The CISG and its challenges in China
In foreign related cases the CISG often become the applicable law governing the
contract see chapter 2.1.1. Although the CISG outlines when it applies, the Chinese
Courts often interpret Article 1 differently than we do in the West. Furthermore, the
whole process of getting to a court order can oftentimes be obscure.
Chinese courts and tribunals often have an inclination to consider the application of
Chinese domestic law as a preliminary step before applying the CISG. The consequence
of this has been that CISG in some cases only applied in the absence of relevant
provisions of Chinese domestic law, or where the stipulations of Chinese domestic law
were obscure. The CISG, therefore, becomes a gap-filler for Chinese Domestic law. In
other cases the applicability of the CISG was ignored where the requirements of Art. 1
(1) (a) were fulfilled even the parties had no intent to exclude the CISG. In other cases
the CISG was applied even it shouldn’t because the courts overlooked important facts
and provisions like Articles 2 and 3241
. This of course implies that CISG cases in China
are more affected by domestic interpretation and the outcome of the case becomes
obscure compared to a CISG case in the West. The validity of a “choice of CISG
clause” in Chinese courts has, therefore, been up to speculation. Even though, there is
more freedom to opt in to the CISG in CIETAC arbitrations242
.
The smart contract drafter will try to pass through these issues by writing which law
applies in the contact. However, Chinese courts might make reasoning against the
dominant opinion in Western courts. A reference to the law of a contracting state does
not itself amount to an exclusion of CISG in China243
. They interpret CISG as being a
part of the national legal system of the contracting state and therefore not excluded if
the parties write that “Chinese Law” applies. The contract drafter should additionally
write that CISG is excluded in this case.
6.2 Jurisdiction
Jurisdiction clauses determine which court decides a case, which in this matter can be
either in China, Denmark or in some cases a third country.
241
Xiao, Yongping & Long, Weidi - Selected Topics on the Application of the CISG in China – Section
1.1.3f 242
Xiao, Yongping & Long, Weidi - Selected Topics on the Application of the CISG in China – Section
2.2 for further details 243
Xiao, Yongping & Long, Weidi - Selected Topics on the Application of the CISG in China
54
China has only had a judicial system that will hear and resolve commercial disputes
since 1979. Commercial litigation in China raises a number of significant concerns
because the tradition of resolving commercial disputes in the juridical system is quite
new. These concerns go beyond standard concerns of litigation in more established
judicial environments, including inefficiency, cost and time244
. We have already seen
some of these concerns above where the courts and CIETAC feel more confident
dealing with domestic law than CISG because of lack of experience. Among these
concerns, the juridical qualification in many parts of the country is low, judges are
inexperienced245
, inadequate educated and poorly paid246
. These concerns should
obviously make Danish companies re-think their choice of jurisdiction and dispute
resolution.
The Chinese Courts capability in the absence of a valid jurisdiction covenant provides
pursuant to the Civil Procedural Law Article 243 as follows:
“In disputes about contracts, or other property rights can a case against a defendant
who have no registered office in the People's Republic of China, be filed by a Chinese
People’s Court if the contract were concluded or to be performed in China, the subject
matter is located in China, the defendant has a property, which can be, distressed or the
defendant have a representative body in China. The case is filed by the Court at the
place where the contract is concluded or to be fulfilled where the subject is located,
where the defendant's assets are located, where an unlawful, damaging activity is
carried out or at the representative organs place of residence”247
.
Here, the “choice of law” rules about place of contracting and performance applies, see
chapter 6.1.
Pursuant to the European convicting regulation can lawsuits against persons with place
of residence in the European Union (Denmark) be filed at the place of the defendant’s
residence and contractual agreements cases at the place of performance or where the
enterprise is placed as defined in Article 5 (1)248
. Both Denmark and China have joined
244
Mondaq - China: Effective Enforcement of Contract Rights in Chinese Sourcing Contracts 245
Mondaq - China: Effective Enforcement of Contract Rights in Chinese Sourcing Contracts 246
Lando, Ole – Kontrakts retten I Kina, p. 41 247
Lando, Ole – Kontrakts retten I Kina, p. 180 248
Lando, Ole – Kontrakts retten I Kina, p. 180
55
the Haager-promulgation convention of 15. November 1965 and follows these
proceedings249
.
A clause dealing with choice of jurisdiction is not worth the paper it’s written on if it’s
not enforceable. A contract between a Chinese provider and a Danish costumer may
provide that the law of a national jurisdiction other than China will govern the contract,
and that any disputes under the contract will be resolved through proceedings conducted
outside China. In such a valid contractual arrangement, there are though limitations.
Issues concerning intellectual property ownership, labour laws, land ownership,
insolvency and enforcement of foreign judgements or awards etc. remain subject to
Chinese law and will be judged by Chinese courts250
pursuant to the Civil Procedural
Law Articles 34 and 246251
.
Courts in China are also far more likely to enforce a foreign arbitral award252
than to
uphold the judgement of a foreign court253
. China do not uphold decisions from foreign
courts comparable to Denmark, RPL § 223254
.
6.3 Dispute resolution.
The most effective way of handling dispute resolution is to make a dispute resolution
strategy. Such strategy should aim at minimizing the likelihood of disputes and
avoidance of high-risk situations. The whole contractual arrangement should be
considered, because, no matter how sophisticated the contract is, dispute resolution
activities are ultimately distracting, costly and non-productive255
. But disputes do
happen and sentencing or termination of the contract may be the last solution.
In case of termination, discharge, rescission or invalidity of the contract because of
some incidence between the parties, the rule of severance will apply. Accordingly to
CCL Article, 57 will the validity of arbitration clauses, choice of forum clauses, choice
249
Lando, Ole – Kontrakts retten I Kina, p. 181 250
Mondaq - China: Effective Enforcement of Contract Rights in Chinese Sourcing Contracts 251
Lando, Ole – Kontrakts retten I Kina, p. 181 252
Voldgiftsforeningen - China is a member of the New York Convention and their courts are therefore
obliged to recognize and enforce arbitral awards of Denmark and signatory countries. 253
Mondaq - China: Effective Enforcement of Contract Rights in Chinese Sourcing Contracts 254
Pilgaard Andersen, Anders - A comparative study in recognition of foreign-country judgments in
Denmark and the United States of America., p. 43 255
Mondaq - China: Effective Enforcement of Contract Rights in Chinese Sourcing Contracts
56
of law clauses and clauses that choose an inspection body or other fact-finding
institution not be affected256
.
6.3.1 Negotiation & Mediation
The advantages of dispute resolution through negotiation are obvious. At most, the
settlement of the dispute will be resolved in a friendly way and the business relationship
remains unaffected. Negotiation is the most cost effective and time saving platform but
requires satisfactory compromises from both parties. Negotiation is not mandatory; in
other words, parties may choose other means257
.
Mediation is used where the parties could not reach a settlement themselves but are
willing to have their disputes heard by a third party. The mediator has the role of
making proposals for the parties in dispute. Mediation can be done in different ways,
namely as civil mediation (non-juridical), administrative mediation, mediation in
arbitration or juridical mediation. Due to the non-binding effect of the first two
mentioned and risk of local bias is it not preferable in international cases258
. Mediation
in arbitration is conducted before an award is made, but not required, and has the same
binding effect as an arbitrational award if mediation is successful. Juridical mediation is
made by the court and required at any stage, if possible before the judgement is
rendered.
6.3.2 Arbitration
There are around 200 arbitration commissions in China, which dealt with over 65,000
cases in 2008. When you consider, doing business in China you have to make some
considerations when thinking about arbitration. There are three types of arbitration
recognised in China; domestic arbitration, foreign-related arbitration and foreign
arbitration. The difference between these can be significant.
The validity of your venue clause under Chinese law is essentially similar to those
requirements encountered in the UNCITRAL Model Law on Arbitration, but there are
essential differences259
. Under Chinese law, a valid arbitration agreement must
expressly designate an arbitration commission. This is different to international
256
Bing Ling - 4.091, p. 203 257
Zhang, Mo – Chinese contract law – theory and practice, p. 349f 258
Zhang, Mo – Chinese contract law – theory and practice, p. 349f 259
Herbert Smith, p. 2 and Freshfields Bruckhaus Deringer, p. 1 – Interpretation from 8. September 2006
57
standards where reference to arbitration is enough without any specific institution260
.
The validity of an arbitration agreement is determined by either arbitration commission
or The People’s Courts contrary to international practice where this happens in the
arbitral tribunal.
The law governing the validity of the arbitration agreement ground on the place of
arbitration. If the chosen arbitration is to be in Hong Kong, this will be the arbitration to
decide this matter. It is internationally accepted that solely national parties can arbitrate
outside their country, but this is still not possible for Chinese people261
. This can turn
into an important matter if you are to be considered not “foreign”.
The procedure of finding the relation of the contract is the same as the choice of law
(See chapter 6.1). If, the case is deemed to be “not foreign related” it will go under the
domestic classification which offers fewer options. A case might be classified as
domestic (Chinese person) if you have an administration department or warehouse etc.
considered as a Chinese-formed entities. Surprisingly to many foreign companies, this
includes FIE’s (Foreign Investment Enterprises) and WFOE’s (Wholly Foreign Fund
Enterprises). A consequence is that Chinese courts have better possibilities of denying
enforcement of the award. From a Danish company’s perspective this defeats the entire
objective of arbitration262
. The reason is that China has signed the New York
convention which means that an arbitrational award made in any of the 135 member
states are generally enforceable in China only limited by procedural grounds for non-
enforcement263
. However, China has in some cases breached the convention by not
acknowledging foreign cases without a reason which leaves international concern264
.
Another important issue and a difference to the UNICITRAL rules is, as said, that
domestic considered cases in China are not granted to choose an arbitration institution
outside China, pursuant to CCL Article 128 (2). Additionally, where the place of
arbitration is mainland China, Chinese law requires the arbitration to be conducted by
an arbitration institution265
. The place of arbitration determines the law which governs
260
Freshfields Bruckhaus Deringer, p. 1 - the arbitration agreement will not be invalid if the arbitration
institution can be ascertained under the applicable arbitration rules. 261
Freshfields Bruckhaus Deringer, p. 2 262
Mondaq - China: Effective Enforcement of Contract Rights in Chinese Sourcing Contracts 263
Kritzer, Albert H. - International Contract Manual - § 51:43 264
Lando, Ole – Kontrakts retten I Kina – p. 182f 265
Herbert Smith, p. 2
58
the arbitration and the courts which supervise the arbitration i.e. providing relief in
support of the arbitration and considering whether to set aside an arbitration award.
One of the main commissions for conducting foreign-related arbitrations in China is
CIETAC266
. Despite its size and modernization of its procedures in recent years, it is
still viewed with concern by the international business community. The concerns
involve issues regarding transparency of arbitrator compensation and even the
possibility of improper influence and pressure brought on the arbitrators267
.
6.3.3 Litigation.
In China the court system is in a hierarchy like Denmark. The people’s courts are as
follows with the first mentioned as the highest institution: Supreme People’s Courts,
The Higher People’s Courts, The Intermediate People’s Courts and the Basic People’s
Courts. Alternatively the parties can choose Arbitration. Litigation in court is available
only if there is no arbitration agreement or the arbitration agreement is invalid. Once the
parties agree to have arbitration, they will be bound by the arbitrational award and no
litigation is allowed concerning the same disputes268
.
The general rule is that access to lawsuit will be statute-barred (forældelse) in two years
contrary to Danish law where its three years269
.
6.4 Cultural Challenges
Previously the law have been a tool for the state to silence dissenters and the word
“law” was in Chinese history interpreted to mean “penalty” or “punishment” which
made the legal system less used270
. In fact, litigation has historically and is still by many
viewed as humiliating for the parties involved271
. But now an increasing number of
Chinese do turn to courts to seek justice, but many prefer to dodge the legal system,
relying instead on private mediation272
, bargaining and arbitration. The reason for this is
266
China International Economic Trade Arbitration Commission 267
Mondaq - China: Effective Enforcement of Contract Rights in Chinese Sourcing Contracts 268
Zhang, Mo – Chinese Contract Law – theory and practice, p. 59 – Pursuant to Arbitration Law of
China (1994). 269
Lando, Ole – Kontrakts retten I Kina – p. 129. Pursuant to the General Principles of Civil Rights,
Article 135 and the Danish Forældelsesloven, Article 3 (unless prejudice to other provisions). 270
Zhang, Mo – Chinese contract law – theory and practice, p. 27 271
Mondaq - China: Effective Enforcement of Contract Rights in Chinese Sourcing Contracts 272
Katz, Paul R – Divine Justice – Religion and the development of Chinese legal culture, p. 1 and
Lando, Ole – Kontrakts retten I Kina, p. 32
59
that corruption and misuse of power among the judiciary273
is one of China’s biggest
problems274
.
The Chinese cultural traditions have an impact on the smart choice of dispute resolution
given our earlier analysis. Preliminary to other dispute resolutions are mediation in the
local society and committees often used and proclaimed by the government275
.
Mediation does not bind the parties and cannot lay the foundations of a later litigation in
court but can reconcile the parties. Mediation is although not recommended to
foreigners doing business in China276
because of the danger of local bias277
.
The most effective mechanism by far in resolving international dispute is international
arbitration. The reason for this is because you can take away the home court advantage
on either side of the transaction which also makes the clause more likely to be agreed
upon278
. Yet another reason is that it is widely believed in China that you can achieve
better results by arbitration than courts. The reason for this is that arbitration is more in
harmony with Chinese culture since it aligns with Confucianism, allowing to saving
face279
. This is a very important facet even in the interpretation of legal issues280
. As we
understand interpretation of contracts it should only be dependent on the language and
intentions281
. The court interpreter should not have a role as an anthropologist, a
linguist282
or a psychologist283
. This shows that culture may have an impact on legal
issues in China.
Depending on the context of the transaction, there are times where litigation may be
preferable to arbitration, for instance in IP or trade secret cases.
273
The Chinese civil procedure law from 1991, Article 44, is trying to turn against these issues. 274
Lando, Ole – Kontrakts retten I Kina, p. 41 275
CCL Article 128 276
Lando, Ole – Kontrakts retten I Kina, p. 32 277
The local mediators inclination to support his own citizens. 278 Harris, Dan - Arbitration In Your China Contract. Adult Supervision Required. 279
See chapter 2.2 for more information about the significance of the Confucian ethics. 280
Lando, Ole – Kontrakts retten I Kina, p. 37 281
In Denmark and traditional civil law we do look at the intentions between the parties contrary to
common law. 282
Anthropologists are social scientists who study the origin and physical, cultural, and social
development of human beings. A linguist is a student of language and origin. 283
Gonzáles, Roseann Dueñas et al, Fundamentals of court interpretation – Theory, Policy and Practice,
1991, p. 502f and p. 143f.
60
It is in several sources recommended284
to choose arbitration to take place in Hong
Kong285
instead of Mainland China if possible due to the quality and process286
of the
arbitration287
. However, Chinese people usually insist on having the arbitration within
Mainland China while foreign parties would like to choose a third country288
.
6.5 Summary
A solid venue clause is very important for the company who seeks certainty about its
legal position in a later dispute. Without a venue clause and certain knowledge the
contract can be unenforceable in wholly and part if the contract provisions contradicts
with national law.
My analysis shows that without an agreement the mandatory rules takes over but will
often cause challenges and high uncertainty. The choice of jurisdiction and law will be
chosen from the nature of the transaction similar to international rules. That said,
juridical qualification in many parts of the country is low, judges are inexperienced,
inadequate educated and poorly paid they are corrupt and misuse their power. Using the
Court system in China is, therefore, not preferred which especially are seen in CISG
adjudications.
Danish companies too should write the applied and excluded law in the contract to
lower the risk of mixture of rules. I advice the use of arbitration because is the most
used form of dispute resolution in international contracts and it is especially preferred in
China comparatively. Arbitration outside China is suggested due to international
concerns, higher quality and they are usually enforceable in Mainland China.
When conducting dispute resolution means, following the grandfather clause is natural.
Chinese partners will often propose the use of mediation in alignment of Confucian life
style but is not suggested used by foreigners due to local bias. Chinese people especially
284
Harris, Dan - Arbitration In Your China Contract. Adult Supervision Required and Georgiou, Phillip -
The Perils of Bad Contract Drafting: The Irony of Dispute-Resolving Provisions Becoming the Cause of
Dispute, February 2006, etc. 285
Zhang, Mo – Choice of law in contracts: A Chinese approach, p. 298 – China has a unitary legal
system, but the unitary system only affects the mainland; it excludes Hong Kong and Macao despite the
fact these two regions became part of China in 1997 and 1999 respectively. 286
If you choose Chinese arbitration you should call for language to be English and require as many
arbitrators as possible to come from outside China. 287
Hong Kong and Singapore is recognized to be hubs for international dispute resolution.
http://www.icchkcbc.org/ 288
Kritzer, Albert H. - International Contract Manual- § 51:44
61
prefer to solve any dispute through negotiation rather than arbitration and especially
Courts to keep guanxi (relationships).
62
7 - Conclusion
My vision with this thesis is to illustrate challenges regarding management of
differences in contract law and business culture between Denmark and China with
emphasis on a proactive approach.
Accordingly, I wanted to establish a foundation that was useful for companies reading
my thesis and, therefore, chose four of the most interesting contract clauses. The reader
did not only get juridical knowledge about specific differences between Denmark and
China for the chosen contract clauses but also applicable tools that work along with
other contract provisions.
Throughout this thesis, I have tried to give the reader an overview of where the spirit of
the new Chinese contract law of March 15, 1999 comes from. Chinese contract law is
inspired by French law, the German Civil Code is the legal basis and the CISG and
UNIDROIT principles are the foundation of the law. The reader that recognizes these
legislations is ahead in understanding Chinese contract law. However, having an
understanding of the law is not equal that companies will have success when drafting
contracts.
I wanted to illustrate this presumption by analyzing Chinese culture. This analysis
looked at differences from Western countries and what challenges companies can
anticipate meeting when negotiating contract provisions. This is necessary to know not
to offend your Chinese partner and because the performance of the contract is more
important than words on a paper. This will also indicate if culture has an effect on the
genesis of the law and it will give clues to why a provision in two countries can be the
same but the interpretation is different.
Comparative contract law can be many things - Comparison of legal institutions,
systems, traditions and legal families. Due to its complex and substantial area with
freedom of contracting to draft an extensive amount of contract provisions I chose some
of the most controversial areas and looked at court interpretation of specific provisions.
What I wanted to study was the presumption that cultural traditions and differences
63
between two nations have an influence on interpretation, the genesis of the law,
successful negotiation and contract drafting.
7.1 Bullet points from my research
Provided is the differences and similarities between Denmark and China:
Limitation of liability Clauses
Both countries believe that agreements must be kept and enforce this with a
strict liability principle which means that the non-performing party is always
assumed to have caused the loss. A foreseeability test support this assumed loss
and regulates it dependent on the circumstances.
Liquidated damages clauses are regulated if “significantly higher than the loss”
and will, therefore, have little value as a limitation of liability clause in China.
Force majeure is the only legal exemption of liability. Freedom of contracting
lets parties agree other exemptions if meeting the criteria of fairness and good
faith. In both countries, personal injury and gross negligent damages cannot be
exempted.
China’s rules on standard documents are stricter than Denmark’s because they
interpret the use of them closer to our consumer rules than B2B settings.
Chinese people do in their culture not like limitation of liability clauses. They
believe in reciprocal relationships and equal contracts but use it themselves as a
tool to save face in later disputes.
Penalty Clauses
Penalty clauses are permitted in both countries and can have the form of
liquidated damages, indemnification or deterrence without a punitive effect.
Liquidated damages shall be lowered if “significantly higher than the loss”
which is interpreted as a 30 % threshold. The rules are similar to UNIDROIT,
PECL and Danish rules, but we do not have a threshold.
China has an extensive use of Specific Performance making the enforcement
stricter than Danish rules.
A full compensation approach is applied but Chinese courts leave out ways of
measuring damages different from us leaving it to the discretion of the court.
64
A contract where CISG is the applied law is not interpreted properly because
Chinese courts do not use the provisions properly or mix their own law with the
rules.
Chinese people have mixed feelings towards penalty clauses because they prefer
re-negotiation contrary to pre-defined penalties if the contract is not followed.
Hardship Clauses
Both countries do not have any statutory provisions regulating Hardship
situations. An agreement between the parties is possible.
Both countries have strict rules when interpreting a possible Hardship situation.
Danish rules seem stricter than Chinese as our court practice lies closer to CISG
rules whereas Chinese are closer to the UNIDROIT principles.
In Chinese business culture re-negotiating is normal practice and agreeing on a
Hardship clause may, therefore, seem trivial to them.
Venue Clauses
Juridical qualification in many parts of China is low, judges are inexperienced,
inadequate educated and poorly paid, and there are problems with corruption and
misuse of their power.
Chinese people prefer arbitration contrary to Courts due to cultural aspects. This
is advised to foreigners doing business in China for this reason and the above.
Chinese people treat foreigners and their own people differently in the choice of
venue. Chinese shall in non-foreign related contracts, if they choose venue
mention a specific court. This is not the case in foreign-related contracts because
of international regulation.
7.2 What makes a difference in interpretation?
I have found rules that look the same but are interpreted differently. This can have many
reasons but to answer this we have to look at the legal problems from its birth up to the
judge’s sentence. We want to know if the difference can be accommodated within legal
methods or if there is other powers intervening.
The problem is, for example, changing circumstances (Hardship). The problems are that
some parties enter a contract under some circumstances that later changes so much that
one of the parties would never have agreed the contract if he knew this. We have a legal
65
problem that the court has to solve. The legal rules sets as the legal consequences and
the party that could not foresee this change of circumstances gets some relief from the
situation he ended up in. We now have a concept that we can use; we talk about change
of circumstances.
Instead of just looking at the concept we have to look at the problems in the society that
created the legal rule. If China, does not consider a problem we cannot say that they just
don’t have that in their legal system. We have to look at what they do instead. In the
case of change of circumstances, I went through the whole court interpretation of the
rule. I included what they did prior to the new interpretation which was to consider the
case from a point of view of good faith. The term is though very fluidly and needed
more fixed rules. The new interpretation is how they believe things are done to protect
their own social and economic interests.
Comparing Chinese and Danish rules we can conclude which country has the best
protection. In the case of change of circumstances, it depends on which side of the table
you are sitting at. One may find that contracts should be kept as agreed, and others
believe in some kind of relief.
To see the full picture of rules in the two countries we also have to look at if there are
rules that support the particular provision to protect the parties against getting into the
situation they got into. Here, we should look at the formalities of contracts, if the
contract has to be written, confirmation and the contract provider’s obligations to
inform the other party about the consequences of signing the contract. As it is now the
foreseeability of the change of circumstances, have an influence in the interpretation. I
covered which situations and what thresholds there are for giving parties relief from the
contract.
From all this information, I could conclude that there was a difference between
Denmark and China and what country had the strictest rules, which was Denmark. My
analysis did not only look at the rules of change of circumstances but also the problems
considered in the interpretation and the analysis became functional. We can hereafter
say that it was a problem in the society that we were seeking to solve.
The way a society problem gets solved depends on the surroundings in the society that
did lead to the problem. My discussion of legal history and the laws emergence gave us
66
an idea of how many inner and outer powers that influenced the drafting of the law.
Interpretation of provisions is effected by where they have their inspiration from.
Differences in the society and legal emergence between two countries can, therefore,
explain a difference in the interpretation. We can ask ourselves why we have stricter or
looser rules in Denmark than China in interpretation of a provision if it cannot be
explained in the legal rules wording. The linguistic meaning of words is an explanation
because the way lawyers and judges interpret words comes from their programming and
beliefs. People’s choice of words changes from what culture they come from and they
have different feelings attached to words and situations. Courts have to consider this to
give an accurate picture of the experience in their judgments. An excellent example is
the Danish Marketing Law § 1 which has changed tolerance levels of what is acceptable
marketing.
One of the words I talked about that Chinese people do not like to use is the word “No”.
Chinese have different feelings attached to that word than we do. Chinese people may
then have stronger emotions attached to provisions that use the word “Not”. A Chinese
judge is no different and may interpret a situation differently from the choice of words
itself. Law makers also know the importance of words which, for example, was seen in
the changing of the Danish Marketing Law § 1 from a negative into a positive and more
uplifting wording. How people understand and react to the law in practice is also a
determining factor. Some provisions are ignored, and others are used more or less.
When China “copy” German law they may have the same wording but with different
emotional intensity attached to it. There is, for example, freedom to choose the form of
remedy and Chinese use Specific Performance as their primary remedy. The feelings
attached to that freedom can make a difference as they put more significance in personal
relationships.
History and deep rooted culture are a determining factor in interpretation. We have
something we can call core beliefs. Core beliefs are beliefs about everything in our
lives; beliefs about our identities, money, time, people, work and life itself etc. A core
belief can be that “contracts shall be kept” or good faith. To those core beliefs we have
supporting beliefs. These supporting beliefs can be other provisions that support the
belief, business cultural factors, sound business practice, government policy and
reforms and historical factors that thereby strengthen the core belief. Dependent on what
67
these supporting beliefs are they can make courts interpret provisions strictly or less
strict. When a core belief gets strong enough, it gets conditioned and become legal
practice or statutory law. This is what we can call legal politics. It is a dynamic process
under constant change and dependent on the problems in the society some rules die
others survive and new are formed. When China wrote their laws they chose to add
some provisions and leave others out dependent on what they believe their society are
ready for.
Beliefs emerge from asking questions. Questions turn into answers that may become
beliefs. It is the quality of questions that create the quality of the outcome. The kind of
questions people ask is the result of how they interpret the reality. One can then ask
himself why courts in Germany would interpret that “reasonable” delivery time is one
week while and Italian court would interpret the same situation to be three weeks. The
answer is relativity. Albert Einstein once said “When a man sits with a pretty girl for an
hour, it seems like a minute. But let him sit on a hot stove for a minute -- then it is
longer than any hour. That is relativity!”289
Differences in cultures will make courts
interpret situations relatively differently, and it should be that way. Courts job is to get
to the closest result that mirrors the reality between the parties. The German
businessman’s reality is fast moving business. Cultural factors is a part of reality and
thereby interpretation. This also means that some factors in interpretation only become
289
Quotations book
Legal politics
Law
Deep rooted culture and
business culture
History
Government policy and
reforms
68
cultural factors because we use that terminology. Two Italian businessmen choosing
Germany as their jurisdiction should expect the same result as in an Italian court.
Interpretation is simply an imagination of their reality and the stress they put on time
differs from cases. A generalization that its culture is, therefore, only possible to give in
that case because it’s part of lawyers routine to consider these factors.
Cultural elements to consider are the values and attitudes that bind the system together
and the place of the legal system in the culture or society as a whole. I analyzed many of
the cultural differences between Denmark and China and some of these can explain a
difference in the interpretation. I did, for example, find that Chinese people do spend
more time negotiating contracts than Western. If contracts are negotiated in more dept
one, could interpret that the parties discuss more facts and thereby should foresee more
circumstances. Teachings in books and the societal circumstances can lead the parties
focus to different issue areas and courts will thereby interpret that parties should have
considered these concerns. Danish Hardship practice shows that we now have a whole
list of circumstances that the parties should be knowledgeable about. These
circumstances derive from business practice developed in our specific culture. It can be
argued that the general contract drafter is better educated in Denmark than the third
country China and, therefore, expected by courts to foresee more facts before signing
the contract. This leads to stricter rules because both countries by default believe in the
concept that contracts shall be kept. Both countries do though look at the individual
parties, but the general picture will demonstrate that their rules are less strict. To correct
these biases economical and social interests of the government and arguments used
against the parties will have to be analyzed too. Here, I can quote myself “It is the
quality of questions that create the quality of the outcome.” To explain this, we would
have to go deeper into an analysis of social conditions in both countries.
The European way of solving legal problems is largely rule based and rational where the
Japanese way is concrete and intuitive. Adjudications are more emotional than Western.
Japanese let oneself heard though a healthy sense of justice as part of their law. The
Western ideas of juridical logics and consequences are not part of the Japanese
mentality. Japanese law inspired Chinese, and we see cases where courts do not use
logics but look at the relationships and what seems fair without reference to the law.
There are crucial differences among political ideologies and attitudes that characterize
legal systems. China is a collectivist country whereas Denmark is an individualistic
69
country where each person’s right plays a big role290
. A cultural trait like this can lead
courts to make more emotional judgements that consider both parties continuing
relationship after the judgement. In my example, this can be one of the many factors
supporting a lower threshold in, for example, Hardship situations.
My figure shows that there are many factors that play a role in how courts interpret
things. One legal rule cannot be analyzed alone without looking supporting provisions,
government policies, reforms and history. These factors together will give a picture of
how courts should interpret provisions from an objective point of view. I saw
differences which can be explained from cultural differences. This is valuable
knowledge for a lawyer drafting contracts because he will see the large picture when
reading the law and what provisions that support each other. The fact that the black
letters in the law does not have the same meaning as we have is a cultural difference.
The presumption that cultural traditions and differences between two nations have an
influence on interpretation, the genesis of the law, successful negotiation and contract
drafting is positive answered.
7.3 Future perspective
China is in fast development and new reforms are coming out on a regular basis. China
is educating more lawyers to develop the country so a better quality of interpretations
can be expected in the future. Because the law is new, interpretation guidelines are
needed to create more certainty. For China to have more trust, higher courts have to
control lower courts passing of sentences as there seem to be high uncertainty,
corruption and misuse of power that leads to wrongful sentences. Danish companies
doing business in China can only try seeking certainty by drafting longer contracts with
interpretation clauses and use arbitration outside mainland China.
290
Lando, Ole – Kort indføring i komparativ ret, p. 185f
70
8 - Bibliography
In alphabetic order
8.1 Books
Andersen, Lenart lynge – Aftaler of mellemmænd, 4 Udgave. ISBN: 8761902365
Bing Ling, Contract Law in China, Hong Kong, Sweet and Maxwell Asia, 2002. ISBN:
962661059X
Blackman, Carolyn – Negotiating China – Case studies and strategies
Bryde Andersen, Mads et al. Lærebog i obligationsret I, Ydelsen Beføjelser, 2 Udgave.
ISBN 978-87-619-1224-4
Chen, Jianfu - Chinese Law – Context and transformation, Brill, 2007 – ISBN 978-9-
004-16504-5
Evald, Jens & Schaumberg-Müller, Sten – Retsfilosofi, retsvidenskab & retskildelære
Fang, Tony – Chinese Business Negotiation Style. ISBN: 0761915753 0761915761
Fontaine, Marcel et al. – Drafting International Contracts – An analysis of contract
clauses. ISBN: 9004176799
Gonzáles, Roseann Dueñas et al, Fundamentals of court interpretation – Theory, Policy
and Practice, Carolina academic press, 1991. ISBN: 0-89089-414-0.
Katz, Paul R – Divine Justice – Religion and the development of Chinese legal culture -
Taylor and Francis, 2008 – ISBN 978-0-415-44345-6
Koziol, Helmut, Wilcox, Vanessa - Punitive damages: common law and civil law
perspectives. ISBN: 3211922105 (I found it through Google Books)
Kritzer, Albert H. - International Contract Manual. ISBN: 9780314979407
9780314964366
Lando, Ole – Kort indføring i komparativ ret. ISBN: 9788757416640
71
Lando, Ole – Kontrakts retten I Kina. ISBN: 9788757416565
Lookofsky, Joseph m.fl. – Køb – Dansk indenlandsk købsret – 3. Udgave, 2008. ISBN:
9788757415155
Lu, Xiaohe – Developing business ethics in China. ISBN: 1403972532
Nørager-Nielsen m.fl. - Købeloven med kommentarer, 3. udgave, 2008. ISBN:
9788761921338
Peter de Cruz – Comparative law in a changing world, 2nd edition. ISBN: 185941432X
Shippey, Karla, C - Short Course in International Contracts - World Trade Press, 2009
Zhang, Mo – Chinese contract law – theory and practice, BRILL 2006, ISBN: 978-9-
004-15041-6
Zhang, Mo - Freedom of contract with Chinese legal characteristics: A closer look at
Chinas new contract law.
8.2 Homepages and articles
An Arbitrator's Powers and Duties Under Art 114 of Chinese Contract Law in
Awarding Damages in China in Respect of a Dispute Under a Contract Governed
by CISG by Marcus S Jacobs, QC and Yanming Huang
http://www.cisg.law.pace.edu/cisg/biblio/jacobs1.html
Analyzing beyond personal experience –
http://www.rieti.go.jp/en/special/02021901/
Brons
www.brons.dk
Carlsen, Anja - Can the Hardship Provisions in the UNIDROIT Principles Be
Applied When the CISG is the Governing Law?
http://www.cisg.law.pace.edu/cisg/biblio/carlsen.html#fn39
China Regulatory Updates – Han Yi Law Offices
http://www.hanyilaw.com/cn/pdf/Han%20Yi%20Monthly%20Newsletter%20on%20Ch
ina%20Regulatory%20Updates%20(June%202009).pdf
Dansk Erhverv
http://www.danskerhverv.dk/Raadgivning/Erhvervsjura/Koebeloven/Sider/BtB.aspx
72
Departing from mere compromise: Reformulating the remedy of Specific
Performance under the Convention on the International Sale of Goods (CISG) in
line with the Convention's underlying goals by Admire Takawira of November 2007
http://www.cisg.law.pace.edu/cisg/biblio/takawira.html
Economic Expert
http://www.economicexpert.com/a/Civil:law:legal:system.htm
EXCLUSION AND LIMITATION OF LIABILITY CLAUSES CHINA
(MAINLAND AND HONG KONG) by Graeme Johnston
http://www.ebalawyers.com.au/system/files/download/o104/SIN164.pdf
Freshfields Bruckhaus Deringer – PRC arbitration law – CLARIFICATION
FROM THE PRC SUPREME PEOPLE’S COURT – September 2006
http://www.freshfields.com/publications/pdfs/2006/16296.pdf
Gas Pedal Defect Prompts Toyota Recall of Another 2.3 Million Vehicles in US
http://www.productliabilitylawblog.com/2010/01/gas_pedal_defect_prompts_toyot_1.ht
ml
Georgiou, Phillip - The Perils of Bad Contract Drafting: The Irony of Dispute-
Resolving Provisions Becoming the Cause of Dispute, February 2006
http://www.jonesday.com/the-perils-of-bad-contract-drafting-the-irony-of-dispute-
resolving-provisions-becoming-the-cause-of-dispute-02-15-2006/
Global Envision - Globalization and “contract culture”
http://www.globalenvision.org/library/8/715
H. Zhang, Bill - China Legal Watch – July 28, 2009
http://www.Chinasunbow.com/NewsEvents/China%20Watch-
Contact%20Disputes%20Trial.pdf
Harris, Dan - Arbitration In Your China Contract. Adult Supervision Required.
http://www.Chinalawblog.com/2010/02/arbitration_in_your_China_cont.html#comment
-347304
Herbert Smith – China Dispute Newsletter
http://www.herbertsmith.com/NR/rdonlyres/DA0D3938-5EA6-4968-8F6D-
B1A4DED280DF/3630/NovembernewsletterspecialarbitrationeditionAMENDED.pdf
IACCM – In tough economic times, contracting excellence offers relief – Volume 2,
no 2, December 2008/2009
http://www.iaccm.com/userfiles/file/CE_2_2_press_C(2).pdf
Lando, Henrik and Rose, Caspar - On the enforcement of Specific Performance in
Civil Law countries - International Review of Law and Economics - Volume 24,
Issue 4, December 2004, Pages 473-487.
www.sciencedirect.com
73
Liming, Wang and Chuanxi, Xu - Fundamental Principles of China’s Contract
Law – 13 Columbia Journal of Asian Law (1999) 1-34
Lytras, Miltiadis D. - International Journal of Chinese Culture and Management –
Volume 1, No. 2, 2008
Mondaq
http://www.mondaq.com/article.asp?articleid=96812 – China – Going to China - , 26
March 2010 by Master, Geofrey L.
http://www.mondaq.com/article.asp?articleid=96830 - China: Effective Enforcement of
Contract Rights in Chinese Sourcing Contracts
http://www.mondaq.com/article.asp?articleid=97006 - China: China's Supreme People's
Court Issues Clarification and Interpretation of the Contract Law on 29 March 2010
http://www.mondaq.com/article.asp?articleid=81324 China: News in Chinese Contract
Law from 17 June 2009
http://www.mondaq.com/article.asp?articleid=51342 China: China´s Supreme Court
Broadens Mandatory Application Of PRC Laws To Foreign-Related Contractual
Disputes
Non-payment of contractors – Pinsent Masons of May 22 2006.
http://www.internationallawoffice.com/newsletters/detail.aspx?g=c50d1926-cd37-4d58-
b7a1-8cb0570c490f&redir=1
Pilgaard Andersen, Anders - A comparative study in recognition of foreign-
country judgments in Denmark and the United States of America.
http://www.jura.au.dk/fileadmin/site_files/filer_jura/dokumenter/forskning/rettid/2009/a
fh15-2009.pdf
Reedsmith
http://www.reedsmith.com/_db/_documents/0804crit.pdf
Shanghai Kai-Rong Law Firm by Jin Yu-Lai
http://www.skrlf.com/UploadFiles/Periodical/633875005225781250.pdf
Springerlink – Punitive damages in Scandinavia.
http://www.springerlink.com/content/pv3974qh16n0w3r1/
The Application of the CISG in the Current PRC Law and CIETAC Arbitration
Practice by Fan Yang
http://www.cisg.law.pace.edu/cisg/biblio/yang2.html#2
74
THE CHALLENGE OF A UNIFORM APPLICATION OF THE CISG –
COMMON PROBLEMS AND THEIR SOLUTIONS BY BRUNO ZELLER
http://www.buslaw.mq.edu.au/docs/publications/past_editions/volume_3/21_Zeller.pdf
The Remedy of Requiring Performance under the CISG and the Relevance of
Domestic Rules [particularly in the context of China-related sales transactions]
http://www.cisg.law.pace.edu/cisg/biblio/shen1.html
The Top Ten Most Negotiated Terms in 2007 –
http://www.iaccm.com/articles/2008top10/
Toyota details safety fix, damage claims mount
http://www.reuters.com/article/idUSTRE6100KS20100201
Voldgiftsforeningen
http://www.voldgiftsforeningen.dk/Default.aspx?ID=107
Xiao, Yongping & Long, Weidi - Selected Topics on the Application of the CISG in
China - Reproduced with permission of 20 Pace International Law Review (Spring
2008) 61-103
http://aff.whu.edu.cn/cisgChina/en/news_view.asp?newsid=108
Y. Gotanda, John - Recovering Lost Profits in International Disputes
http://www.cisg.law.pace.edu/cisg/biblio/gotanda2.html
Zhang, Mo – Choice of law in contracts: A Chinese approach. Northwestern
Journal of International Law & Business, Vol. 26, 2006.
http://ssrn.com/abstract=990001
Zhang Yuqing & Huang Danhan - The New Contract Law in the People’s
Republic of China and the UNIDROIT Principles of International Commercial
Contracts: A Brief Comparison
http://www.unidroit.org/english/publications/review/articles/2000-3-zhang-e.pdf
8.3 Others
Chinese Contract Law (CCL)
http://www.novexcn.com/contract_law_99.html
CISG Law
Danish Contract Law
Danish Sales of Goods Law
Definition of Mandatory law
75
http://definitions.uslegal.com/m/mandatory/
Quotations book
http://quotationsbook.com/quote/39135/
UNIDROIT Principles
UNILEX
8.4 Readings not directly referred to
CISG and China – An intercontinental exchange by Friedrich Blasé
http://www.cisg.law.pace.edu/cisg/biblio/blase2.html
Ferraro, Gary P. – The Cultural Dimensions of Business – Fifth Edition
Lewicki, Roy J. – Essentials of Negotiation
Lubman, Stanley - Looking for law in China
Pissler, Von Knut Benjamin – Das neue chinesische Vertragsrecht im Spiegel des
Handbuches von Bing Ling
Sun, Von Xianzhong – Die Rezeption der westlichen Zivilrechstswissenshaft und
ihre Auswirkung im modernen China.
Wikipedia
http://en.wikipedia.org/wiki/Legal_culture
All homepages and articles were last visited 29 Aug. 2010.