Custom «Contract Law in Early China» Essay Paper

Establishing the rule of law in China has become a priority for leaders in the post-Maoist era. Their efforts have been directed towards changing the Maoist’s period disregard of law and lawyers especially the highly misguiding Cultural Revolution, which decimated the legal system existing at that time[1]. The current system has promoted the rule of law to the extent of amending the constitution in 1999. This was an important step to show that the Chinese Communist Party was ready to embrace the law in governing the country[2].

The expectation of China’s entry to the World Trade Organization corresponded with the country’s reform efforts. This happened because one important requirement of WTO is an impartial, uniform and reasonable internal legal system. The establishment of the rule of law in China therefore coincided with the recognition that being in good terms with the international community was a requirement of economic modernization[3]. In addition, the advocacy of an improved legal system to enforce new laws was expected to develop an indigenous market economy with Chinese aspects which seemed to be the combination that was coming up in socialist one party-government and commercial markets.

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The Democratic and Republican leaders in the U.S. increasingly named promotion of the rule of law, as a necessity in their normal trade relations with China. According to them, increased trade with China was a way of encouraging the rule of law both within China and outside its borders. It was in response to pressures that the PRC revised the patent and other intellectual property laws[4]. With the entry of china into WTO 2001, its economy and legal system have gained notice from the world in the recent years. This made a big event in the world economy because of the country’s big population and infinite domestic market. China also started to welcome globalization and the relations of market-economy countries[5].

Contract Law in Ancient China

Ancient China’s legal system was based on morals and emphasized on the good of the society. To discuss Chinese contract law, it's vital to know that the principles underlying ancient Chinese legal systems and the changes that have taken place over time. The Ancient Chinese legal system advanced through the principles of Confucianism and legalism along with the morals and culture of Ancient Chinese[6]. Early Chinese law was keen on the unequal status of people which resulted into the principle of legalized inequality. The treatment of individuals was differentiated depending on their ranking, specific circumstances and relationship between the offender and the victim[7]. According to Mao, this ensured that the natural order was respected for the harmony of the world. Consequently, there was no any distinct legal profession in China’s traditional legal system. Litigation was discouraged in resolving disputes and regarded law a “regrettable social necessity” which was only employed when mediation failed to maintain social harmony. Mediators were used to solve problems and those who did so at a charge were referred to as litigation tricksters with no reputation[8].

Legalism

Legalism on the other hand was based on the premise that humans were predisposed to wrongdoing and evil. This led to the belief that codes were necessary and punishments were required in order to maintain law and order in the society[9]. When China first integrated these principles in their legal system, focus was placed on the ruler as the advisor and guide who was above the law. As the legal system in China evolved, respect for the people remained a fundamental principle for the law and ensured that people understood the traditions. The other important aspect of ancient China’s legal system was the lack of separation between criminal and civil law.

Mao Tse-tung’ Communism

Mao Tse-tung’s view of China was one basic socio-legal unit. The principles of this form of the legal system were underpinned by Marxist theory of the fundamental relationship between the supra-structure and the infrastructure of a society[10]. This communist period was characterized by turmoil in the legal system and the effects of the global war were also felt in China. The remaining traditional concepts were thrown into an even greater flux. The communists believed in ruling by decree rather than law, and the ruling party exercised control over the creation of state organs. Law schools were not important and legal professionals were very few[11].

The legacy of Maoism did not provide any constitutional foundation to the country, and the Cultural Revolution threw the nation into an even more devastating legal state. Mao did not embrace law or a legal system, since he felt they would “dam up the free flow of the revolution”. According to Mao, law was oppressive and could only be treated as a political tool. According to communists, the rule of the individual was better than the rule of law. Some of these ideas still influence the Chinese Communist Party, and they therefore exert a strong influence on contemporary legal and judicial practice.

Reforms in China’s Legal System

The post-Mao leadership recognized the need for stable legislations for a market economy. From the experience of the Soviet Union, it is practically impossible to sustain a modern economy through centralized models of planned development. For markets to prevail, basic legal protection rights to property and contracts is a requirement. Markets also require the recognition of the legal personality of business entities as well as other commercial laws. According to Lon Fuller, the establishment of property and contracts as institutions is necessary for market economies. He also argued that a legal system must appreciate “the rigidities of properties and contracts” using the right means so that the society can benefit from its resources through the government. Other contemporary economists have also shared the premise that legal protection of property and contract rights is a requirement for economic development[12].

It is against this basis that the post-Mao Chinese governments have strongly embraced the view that strong laws are a prerequisite for their economic markets. Consequently, the country has adopted numerous national statutes relating to the commercial regulation in the last few decades. The country adopted legislation on domestic and foreign commercial transaction in early 1980s. A copyright law drafted in 1979 was passed into law in 1990. Still in the 1990s, the government passed Company law to regulate private, collective and state enterprises. The first law for the establishment of the bond market was introduced in 1998, together with the adoption of the first national Securities Law[13].

Since the announcement of the ‘open door policy’ in the 1970s, reforms have been witnessed in every corner of the country including education, bureaucracy, economy, legal system as well as the people’s views. These reforms came with enormous changes to the country and as a result, one of the outcomes of these reforms China had to adopt some features from both common laws and civil laws from other countries. This adoption has resulted into distinctively unique hybrid legal culture in the country.

Contract Law

China has been a trading nation for centuries but did not have any laws governing the area of contract until 1981 when the National People’s Congress passed the first legislation passing the Economic Law of PRC.  Before that, only a few regulations and ordinances existed and they seemed to be running the country’s economy sufficiently when the government was the only body planning the country’s economy[14]. The planned economy failed to promote equal entities in trade and commerce, the government had the power to decide supply and demand; and the entire economy was self reliance. Therefore, there was no need to establish contract law at that period of time.

However, it was against this background that the National People’s Congress passed the Economic Contracts Law of PRC. Moreover, the NPC made two other important laws to govern some special contracts such as technology transaction contracts and contracts with foreign interests. These laws were the Law of the PRC on Technology Contracts and the Law of the Economic Contracts Involving Foreign interests. The international trend of globalization and the development of the domestic economy required the nation to open up its market and make laws in the area of contract. Other elements also added this necessity such as the overlapping of these laws and the inconsistency of the three pieces of legislation. In response to these issues, the State Council made a decision to carry out substantial reforms on the law governing the contract area. Following this initiative, the PRC enacted the Uniform Contracts Law (UCL). The UCLs purpose was to protect the rights and interests of parties to contracts upholding the socio-economic order and developing the socialist modernization[15]. This was seen as an important tool for China then, because of its prospects to join WTO. This law also invalidated to other three laws. The UCL gives contract parties more flexibility and freedom in their relations than the previous enactments. It also showed the willingness of China to open up its legal system to other nations and to receive positive input from foreign laws.

The PRC Contract Law

The first unified contract law came into effect in 1999. Other national laws were passed around this time, including an Insurance Law, Arbitration Law, an Audit Law, an Advertising Law, a Chartered Accountant Law and a Law against Improper Competition. The new contract law shows the willingness of China to establish legal institutions that support market rather than a planned economy[16]. UCL is structurally divided into three parts- General Provisions, Specific Provisions and Supplementary Provisions. This new Contract Law borrowed extensively on the UNIDROIT principles of International Commercial Contracts. The modern contract law in China can be found in the UCL, the Chinese Civil Code, and various PRC’s judicial interpretations by the Supreme Court. Other special structures also exist such as administrative rules, regulations, guidelines and ordinances. In some instances, these sources are very important and powerful laws for dealing with individual cases.

The general provisions consist of many contract essentials, including contract formation, its effectiveness, modifications, performance and termination. These provisions apply in all contracts. On the other hand, the specific provisions take care of some special contracts, such as the financial leasing contract, contracts for sale of products, contract for sale of technology related goods and other specific contracts. Despite the cultural, political and economic conditions in PRC, the provisions of the law are very familiar with others in common law, such as upholding confidentiality before formalizing a contract.

The Law of PRC on Chinese foreign Equity Joint Ventures (2001) contains many contract related articles, which include articles 2, 14 and 15. According to article 14, in case of large losses or inability to perform their obligations under the contract or articles of association, the parties to the contract may terminate the contract through an agreement. This is subject to approval by the state’s department responsible for industry and commerce administration. If the losses incurred were as a result of a breach of contract, the responsible part will be in charge for the loss burden. On the other hand, article 94 of the UCL states that the parties may terminate the contract without the approval of the authorities under certain circumstances, such as force majeure. This involvement of legal authorities was not there in the early Chinese legal system[17].

The similarity between UCL and UNIDROIT principles is a distinct characteristic of China’s contract law. Such an example is the application of UCL’s general provisions, where the two documents have a broad approach to what contracts should be governed by the rules[18]. The two documents are also similar in their preamble, where they state that the rules therein do not only apply to the supply or exchange of goods and/or services, but also cover other commercial transactions, such as investments agreements and professional services contracts and other transactions[19].

The two documents also have other similar principles, for example, regarding the form of the contract, the UNIDROIT principles stipulate that a particular form of evidence is not required in the contracts, statements or any other act in the principles[20]. Prove may be provided by any means, including using witnesses. Similarly, the UCL, article 10 states that the contract parties may conclude their contract through any form such as writing and orally among other forms. China has therefore made great advancements in contract law in the form of UCL, considering that the old PRC contract law system only recognized written agreements. However, the UCL is also consistent with the old Common Law by recognizing oral contract. Therefore, the UCL system can be viewed as a positive advancement by closely linking the country with the international contract practices[21].

Another commonly existing feature between the UCL and UNIDROIT Principles is the interesting ‘offer and acceptance Rule.’ The rule is also found in the United Nations Convention on Contracts for the International Sale of Goods (CISG)[22]. The rule specifies that conclusion of a contract is either done by accepting an offer or by the parties conduct that sufficiently indicates agreement and that the parties shall take the form of offer and acceptance in making a contract[23]. This means that the rule of offer and acceptance makes a valid conclusion of contract under the two documents. It is therefore fair to say that the international trading system has been making efforts in its rules to simplify and standardize contract formation and its terms. This is contrary to traditional common law, which needed an element of consideration for contract formation[24].

Changes in China’s Legal System

The shift of Chinese legal system has shifted significantly from class status to a qualified presumption of equality. The principle of legal equality is enshrined in basic legislation such as the general principles of equal rights, which gives all natural persons an equal right, the contract law gives all parties equal rights, and the Administrative Litigation Law gives citizens a right to sue administrative agencies. However, the transition has not been complete, since even with PRC Laws and Constitution, human rights principles are not fully implemented[25].

Legal profession has also improved over time, and legal training institutions continue to grow. The field remains one of the most competitive academic disciplines in the nation, driven by the need to improve the professional quality of the judicial system. Though the country still utilizes the services of mediators in commune matters, other civil matters are solved through the legal system[26].

Contract law in China has transformed from the early principles of Confucianism to Civil and International law following the influence of other countries. As observed above, focus of the law has shifted from individuals to the state. In simple terms, the current PRC contract Law contained in the UCL is clear, straight forward and reader friendly. The Law is very similar with other international laws in commercial contract, such as the UNIDROIT Principles and the CISG. The law also contains features with principles from common law such as party’s autonomy.