Comparative Contract Law

1

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

2

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:

[email protected]

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

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

11

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


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


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



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



The history behind freedom of contract in the Republic of China will not be addressed. 39


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


Journal of Asian Law (1999) 1-34, page 8. 43


Mondaq – China – Going to China 45

Lu, Xiaohe – Developing business ethics in China, p. 63 46


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. 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



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


IACCM – In tough economic times, contracting excellence offers relief – Volume 2, no 2, December

2008/2009 63


Closer to common law 65




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



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


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


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


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


UNIDROIT Principles of International Commercial Contracts: A Brief Comparison, p. 6f 112


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


Lookofsky, Joseph – Køb, Dansk indenlandsk købsret, 3 Udgave, 2008 – Page 233 117


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


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




CCL Article 53 (2) 127


Lookofsky, Joseph – Køb, Dansk indenlandsk købsret, 3. udgave, 2008, p. 174 129

Fang, Tony – p. 127 130


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


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






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


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



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


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



Yanming Huang, section 3.2 and 5. 160


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


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, 8.135

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



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. 114 – written contracts are from a legal perspective, of course, mandatory to protect

themselves in case of breach of contract. 182


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. 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




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



Mondaq – China: News in Chinese Contract Law from 17 June 2009 194


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




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



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


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



Mondaq – China – News in Chinese Contract Law 215

Bing Ling, 5.091 – This is in consistence with Bing Ling’s assumption. 216


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



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


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



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



Lando, Ole – Kontrakts retten I Kina, p. 41 247



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




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


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


Kritzer, Albert H. - International Contract Manual - § 51:43 264


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


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


Katz, Paul R – Divine Justice – Religion and the development of Chinese legal culture, p. 1 and


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


CCL Article 128 276


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


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


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

http://www.jonesday.com/pgeorgiou

http://www.icchkcbc.org/

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

http://www.cisg.law.pace.edu/cisg/biblio/jacobs1.html

http://www.rieti.go.jp/en/special/02021901/

http://www.brons.dk/

http://www.cisg.law.pace.edu/cisg/biblio/carlsen.html#fn39

http://www.hanyilaw.com/cn/pdf/Han%20Yi%20Monthly%20Newsletter%20on%20China%20Regulatory%20Updates%20(June%202009).pdf

http://www.hanyilaw.com/cn/pdf/Han%20Yi%20Monthly%20Newsletter%20on%20China%20Regulatory%20Updates%20(June%202009).pdf

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”


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

http://www.cisg.law.pace.edu/cisg/biblio/takawira.html

http://www.economicexpert.com/a/Civil:law:legal:system.htm

http://www.ebalawyers.com.au/system/files/download/o104/SIN164.pdf

http://www.freshfields.com/publications/pdfs/2006/16296.pdf

http://www.productliabilitylawblog.com/2010/01/gas_pedal_defect_prompts_toyot_1.html

http://www.productliabilitylawblog.com/2010/01/gas_pedal_defect_prompts_toyot_1.html

http://www.jonesday.com/pgeorgiou

http://www.jonesday.com/the-perils-of-bad-contract-drafting-the-irony-of-dispute-resolving-provisions-becoming-the-cause-of-dispute-02-15-2006/

http://www.jonesday.com/the-perils-of-bad-contract-drafting-the-irony-of-dispute-resolving-provisions-becoming-the-cause-of-dispute-02-15-2006/


http://www.chinasunbow.com/NewsEvents/China%20Watch-Contact%20Disputes%20Trial.pdf

http://www.chinasunbow.com/NewsEvents/China%20Watch-Contact%20Disputes%20Trial.pdf

http://www.chinalawblog.com/2010/02/arbitration_in_your_china_cont.html#comment-347304

http://www.chinalawblog.com/2010/02/arbitration_in_your_china_cont.html#comment-347304

http://www.herbertsmith.com/NR/rdonlyres/DA0D3938-5EA6-4968-8F6D-B1A4DED280DF/3630/NovembernewsletterspecialarbitrationeditionAMENDED.pdf

http://www.herbertsmith.com/NR/rdonlyres/DA0D3938-5EA6-4968-8F6D-B1A4DED280DF/3630/NovembernewsletterspecialarbitrationeditionAMENDED.pdf

http://www.iaccm.com/userfiles/file/CE_2_2_press_C(2).pdf

http://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

http://www.mondaq.com/article.asp?articleid=96812





http://www.internationallawoffice.com/newsletters/detail.aspx?g=c50d1926-cd37-4d58-b7a1-8cb0570c490f&redir=1

http://www.internationallawoffice.com/newsletters/detail.aspx?g=c50d1926-cd37-4d58-b7a1-8cb0570c490f&redir=1

http://www.jura.au.dk/fileadmin/site_files/filer_jura/dokumenter/forskning/rettid/2009/afh15-2009.pdf

http://www.jura.au.dk/fileadmin/site_files/filer_jura/dokumenter/forskning/rettid/2009/afh15-2009.pdf

http://www.reedsmith.com/_db/_documents/0804crit.pdf

http://www.skrlf.com/UploadFiles/Periodical/633875005225781250.pdf

http://www.springerlink.com/content/pv3974qh16n0w3r1/

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

http://www.buslaw.mq.edu.au/docs/publications/past_editions/volume_3/21_Zeller.pdf

http://www.cisg.law.pace.edu/cisg/biblio/shen1.html

http://www.iaccm.com/articles/2008top10/

http://www.reuters.com/article/idUSTRE6100KS20100201

http://www.voldgiftsforeningen.dk/Default.aspx?ID=107

http://aff.whu.edu.cn/cisgchina/en/news_view.asp?newsid=108

http://www.cisg.law.pace.edu/cisg/biblio/gotanda2.html

http://ssrn.com/abstract=990001

http://www.unidroit.org/english/publications/review/articles/2000-3-zhang-e.pdf

http://www.novexcn.com/contract_law_99.html

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.

http://definitions.uslegal.com/m/mandatory/

http://quotationsbook.com/quote/39135/

http://www.cisg.law.pace.edu/cisg/biblio/blase2.html

http://en.wikipedia.org/wiki/Legal_culture

Documents

Comparative Contract Law