DOI 10.1007/s11463-005-0002-1

RESEARCH ARTICLE

HAN Shiyuan

Liabilities in Contract Law of China: Their Mechanismand Points in Dispute

# Higher Education Press and Springer-Verlag 2006

Abstract: China is drafting its first Civil Code now, and the Chinese laws have seen anexpansion of contractual obligations and a new structure of contractual liabilities. This paperexpounds this trend through the perspective of contract liabilities. It mainly analyses theanticipatory breach, the enforced performance, damages, payments stipulated by the contract,the statutory rights to termination, the unification of guarantee liabilities for defects andliabilities for breach of contract, and makes the conclusion that China Contract Law CCL willbe put into the future Chinese Civil Code, with some necessary technical changes andamendments.

Keywords: Liabilities, Contract Law of China, damage, enforcement

Introduction

The main civil legislation in China

The main part of the legal system of P.R. China is formulated during 1980s and 1990s.Though there is still no formal civil code of P.R. China, the main parts of civil law have beenin existence in China, and they include:

1. General Principles of the Civil Law (Adopted on 12 April 1986, and effective as of 1January 1987; here after GPCL);

2. Law of Guaranty (Adopted on 30 June 1995, and effective as of 1 October 1995);3. Law of Contract (Adopted on 15 March 1999, and effective as of 1 October 1999; here

after CCL);4. Law of Marriage (Adopted on 10 September 1980, and amended on 28 April 2001);5. Law of Adoption (Adopted on 29 December 1991);6. Law of Succession (Adopted on 10 April 1985).

Besides, there are a lot of Acts by the State Department of P.R. China and JudicialInterpretations by the Supreme Court of P.R. China.

HAN Shiyuan ())Law School, Tsinghua University, ChinaE-mail: lawhsy@mail.tsinghua.edu.cn

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New trends of civil legislation in China

The drafting of law of property and the amendment of constitution law

It is aimed that China has a perfect legal system compliant with market economy and rule oflaw by the end of year 2010. Now there is no formal civil code in P.R. China, so in March of1998, the legislative organ of China (National Peoples Congress) invited nine civil lawscholars and experts to set up a working group to prepare for the drafting of Civil Code ofChina. As the programs of the working group, a new contract law should be adopted in 1999,a property law should be adopted in 4 or 5 years, and by the end of 2010, there should be aformal civil code of China.

According to the programs, Professor Huixing Liang (Professor of Law, Law Institute,Chinese Academy of Social Sciences) was consigned in charge of preparing and submitting adraft of Property Law. And a draft of Property Law by the Professor Liangs group wasaccomplished in October 1999. It is composed of 12 chapters of 435 articles.1 But the draft isthought has not pay enough attention on State Property and Property of CollectiveOrganizations of the Working Masses by the legislative organ of China. As a result, ProfessorLiming Wang (Professor of Law, Law School, Chinese People University) was consigned incharge of preparing and submitting another draft of Property Law. Professor Wang and hisgroup accomplished their draft in December 2000.2 The Legal Work Commission of theStanding Committee of the National Peoples Congress prepared a new draft on the base of theabove two drafts in January 2002. Now the new draft is in the course of inquiring opinions andsuggestions.

On 14 March 2004 the Constitution Law of P.R. China has been amended. Theexpropriation system has been improved (art. 10) and the protection of private property hasbeen emphasized (art. 13).

The amendment of law of marriage

Law of Marriage of P.R. China 1980 has been applied for more than 20 years since it wasenacted. And the society has changed sharply during the past 20 years. In order to adapt to thechanged society, the Law was amended and adopted on 28 April 2001. The contents of theLaw include: Chapter I, General Provisions; Chapter II, Marriage; Chapter III, FamilyRelationship; Chapter IV, Divorce; Chapter V, Methods for Help and Legal Liabilities; andChapter VI, Supplementary Provisions. There are some important improvements in the newLaw ofMarriage, including new provisions on void marriage and voidable marriage (arts. 1012), manipulable standards of divorce (art. 32), and the right for party without fault in divorceclaiming compensation (art. 46). The Law of Marriage will be one Book of the future ChineseCivil Code.

1 As a publication in Chinese, Huixing Liang etc., A propositional draft of Chinese property law: its articles,notes, comments and comparative law,(2000), Social Sciences Documents Publishing House.2 As a publication in Chinese, Liming Wang ed., A propositional draft and its illustrations of Chinese propertylaw, (2001), China Legal System Publishing House.

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The drafting of Chinese civil code

According to the design of Professor Huixing Liang and his drafting group,3 the futureChinese Civil Code should be composed of seven Books, which includes:

Book One: General Provisions;Book Two: Law of Property;Book Three: Law of Obligation in General;Book Four: Law of Contracts;Book Five: Law of Torts;Book Six: Law of Marriage and Family Relationship;Book Seven: Law of Succession.

A drafting group, which is composed by more than 20 Chinese scholars and in charged byProfessor Liang, had finished its drafting work of Chinese Civil Code. And as a finalachievement, a text composed of 1,924 articles has been published.4

The Legal Work Commission of the Standing Committee of the National PeoplesCongress also prepared a new draft of civil law in December 2002 (here after the Draft2002). The Draft 2002 is composed with nine books, namely:

Book One: General Provisions;Book Two: Law of Property;Book Three: Law of Contract;Book Four: Law of Personality;Book Five: Law of Marriage;Book Six: Law of Adoption;Book Seven: Law of Succession;Book Eight: Law of Torts;Book Nine: Law of Application of Law in Civil Relations with Foreigners.

Now the new draft is also in the course of inquiring opinions and suggestions.

The expansion of contractual obligations and a new structure of contractual liabilitiesin Chinese laws

The expansion of contractual obligations

In former Chinese contract law theories, it had been thought that contractual obligationsmeant obligations agreed by the parties (Leistungspflicht). But in the past 10 years, theories oncontractual obligations in Chinese civil law science developed a lot. And this profits fromtheory receptions of foreign cases and theories.5

3 The author is also a member of the drafting group, in charge of the drafting of Liabilities for Breach of Contractof Book Four.4 As a publication in Chinese, see Huixing Liang ed., A propositional draft of Chinesecivil code, (2003), LawPress, China.5 See Tze-chien Wang, Studies on civil law theories and cases, Vol. 4, (1991), Taiwan; Jiafu Wang ed., Law ofObligation, (1991, Guangxing Zhang), Law Press, China, pp.143150.

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Now in Chinese law, good faith and fair dealing (Treu und Glauben) becomes the mostimportant general principle (GPCL art. 4; CCL art. 6), and it must be followed by the partiesof a contract while exercise a right or perform an obligation. Correspondingly, the contents ofcontractual obligations, influenced by the civil law theories of Germany and Taiwan, isthought no longer limited to what the parties agreed upon. The parties shall observe theprinciple of good faith and fair dealing, and fulfill the obligations of notification, assistanceand confidentiality in accordance with the nature and purpose of the contract and tradepractices (CCL art. 60 par. 2). These kinds of obligations are called ancillary obligations(Nebenpflicht).

Now ancillary obligation theory has taken its root both in legal theories and legislationsof China. Besides, there are articles on pre-contractual obligations (arts. 42 and 43) and post-contractual obligations (art. 92) in CCL, and contractual obligations are expended further.

Generally laying down ancillary obligations, pre-contractual obligations and post-contractual obligations in a statute, perhaps China is the first one in doing so in civil lawcountries. As these kinds of rules are almost in case laws in other civil law countries.6

A new structure of contractual liabilities

In Chinese civil law theories, the concept of contractual liability is a point in dispute.7 In thispaper, contractual liability presupposes the existence of contractual obligations (include thosekind of obligations provided by CCL). Corresponding with the above expansion ofcontractual obligations, there is a phenomenon in CCL of expansion of contractual liabilities.The phenomenon in CCL is somewhat similar with what Japanese scholars called expansionof contractual obligations (keiyaku sekinin no kakutyou),8 but there are still somedifferences. For example, as the German case law theory of Contract with Effects Protectinga Third Party, although there are some introductions about it in China, but some Chinesescholars emphasized the doctrine of privity of contract. According to their viewpoints, as ageneral rule, a contract cannot confer rights arising from it on a third person.9 CCL confirmsthe doctrine (as can be reflected indirectly from art. 121). On the other hand, some otherarticles permit a third person having some rights arising from contract. For example,according to art. 234, if the lessee dies within the lease term of a leased house, the persons wholive together with the deceased may lease the house according to the original lease contract.

In this paper, contractual liability refers mainly to liability for Culpa in contrahendo,liability for breach of contract and liability for breach of post-contractual obligations (post-contract fault), as being expressed in Figure 1.

6 Greece Civil Code only has a provision on pre-contractual duty. When the Act on the Reform of the Law ofObligations (Schuldrechtsreformgesetz) of Germany entered into force on 1 January 2002, it should be noticedthat the appended 241(2) provides duties arising out of the obligation, namely an obligation may requireeach party to have regard to the other partys rights, legally protected interests and other interests.7 As one viewpoint, contractual liability means liability for breach of contract. See Jianyuan Cui, Studies oncontractual liabilities, (1992) Jilin University Publishing House, p.8. As to another viewpoint, contractualliability means liabilities in contract law. See Liming Wang, On liabilities for breach of contract, (1996),Chinese Politic and Law University Publishing House, p.26.8 See Kenzo Miyamoto, Obligation of care for safety and the expansion of contractual liabilities, (1993),Tokyo, Japan, p.5.9 Liming Wang, Studies on civil and commercial law, vol.3, (1999), Law Press China, p.429.

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Breach of contract and its liabilities

Breach of contract Chapter Seven of CCL is named Liability for Breach of Contract (arts.107122). In Chinese laws, breach of contract means a party fails to perform itsobligations under the contract or fails to perform them as contracted (CCL art. 107; GPCLart. 111). On one hand, contractual obligations, as has been pointed above, is not confinedto Leistungspflicht, it also includes ancillary obligations (CCL art. 60 par. 2). A breach ofancillary obligations may also amount a breach of contract, and may entail liabilities forbreach of contract. On the other hand, breach of contract concerns only to the object aspectof ones act or omission, and does not care about whether or not the act or omission excused.10

As to the types of breach of contract, there are a lot of disputes between Chinese scholars.Before the enactment of CCL, the main dispute concerns on whether anticipatory breachmay be a kind of breach in Chinese law or not. CCL confirms that anticipatory breach is a typeof breach of contract (arts. 108, 94 sent. 2).Now the types of breach of contract may be divided into two categories, namely

anticipatory breach and actual breach. And anticipatory breach, as can be read out from CCLart. 108, includes explicitly expressing its intention not to perform its obligations under thecontract (anticipatory renunciation of contract) and indicating by act its intention not toperform its obligations under the contract (anticipatory disablement of performance). Actualbreach, as can be read out from CCL art. 107, denotes failing to perform its obligations underthe contract and failing to perform its obligations as contracted. Failure to perform anobligation may be interpreted as including disablement of performance, delay ofperformance and refusal to perform, the essential characteristic of them (as opposed toanticipatory breach) is that they occur after the time due for performance. Failure to performan obligation as contracted may be interpreted as defective performance. Where the per-

Fig. 1

10 Breach of contract in CCL should be distinguished from the words in the common law sense. In thecommon law sense, a breach of contract is meant a non-performance that is not excused, e.g. under the rules asto frustration. See G. H. Treitel, The Law of Contract (1995), p.746. So a breach of contract in CCL resembles anon-performance of a contract in Principles of European Contract Law (PECL).

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formance of contract by the obligor needs cooperation by the obligee, the obligees refuse ordelay to cooperate may also amount a breach of contract, as being expressed in Figure 2.

Liabilities for breach of contract A liability for breach of contract is a kind of adverse legalresult that one party should bear because of its breach. According to CCL, as a general rule,the breaching party shall bear the liability for breach of contract by continuing to perform theobligations, taking remedial measures, or compensating for losses (art. 107). And there is norequirement of fault on the side of breaching party by art. 107. It is called Strict LiabilityPrinciple. So it can be generally speaking that an obligor cannot be exempted of liability forbreach just by proving that it has no fault for the breach. The only excuse that can be found inChapter Seven of CCL is force majeure, laid down in arts. 117 and 118. In this aspect, CCLlearned a lot from United Nations Convention on Contracts for the International Sale ofGoods (here after CISG) and UNIDROIT Principles of International Commercial Contracts(here after PICC). In former Chinese laws, as in other Civil Law countries, liabilities forbreach of contract is generally a kind of faulty liability, the breaching partys fault is pre-supposed, and it is the breaching partys burden to prove that it has no fault for the breaching.During the drafting of CCL, it was a sharp point in dispute whether to adopt the StrictLiability Principle or not.11 By adopting the Strict Liability Principle, CCL is thought topursue a kind of accommodation with the UN convention (CISG) and model laws (PICC andPECL).12

Fig. 2

11 As viewpoints against the adoption of strict liability principle, see Shiyuan Han, Studies on damages forbreach of contract, (doctor degree treatise, 1997, Graduate School, Chinese Academy of Social Sciences; as abook with the same title published by Law Press China in 1999); Jianyuan Cui, Strict liability? or fault liability?in Civil and Commercial Law Review, vol.11, Law Press China 1999. As those approve for the adoption ofstrict liability principle, see Huixing Liang, From fault liability to strict liability, in Civil and CommercialLaw Review, vol.8, Law Press China 1997.12 It should be noted that CCL also has some provisions can be read as fault liability, for example art. 406 par. 1.Whether arts. 374 and 394 may be read as fault liability or not, there are different viewpoints in China. As it tome, these two articles should also be read as fault liability.

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It should be noted that the concept of liability for breach of contract used by CCL doesnot has the same meaning with liability for non-performance of obligation used bytraditional civil law theories. As guarantee liability has been unified with liability for breachof contract in CCL (arts. 111 and 155). It should also be noted that breach of contract usedby CCL has some differences with non-conformity of contract used by CISG. Especially inthe aspect of corresponding liabilities, liability for breach of contract in CCL may includeconsequential damages (as art. 112 may have such interpretation). While in CISG, liabilityof the seller for death or personal injury caused by the goods to any person is out of theConventions sphere of application (CISG art. 5). So when a breach of contract causespersonal injury or damage to property (other than the very thing contracted for), the injuredparty may claim compensation in a contract action according to CCL.As to the types of liabilities for breach of contract in CCL, there are enforced performance

(arts. 109, 110 etc.), damages (art. 113) and payments stipulated by the contract (art. 114).And as a remedy for breach of contract, a party who is aggrieved by the other partys failure toperform contract may terminate the contract (arts. 93, 94 etc.). It should be noted that it is afreedom of the aggrieved party to choose a specific relief or a substitutionary one or acombination of the two if possible, as there is no mandatory sequence of the remedies forbreach of contract in CCL.

Pre-contractual obligations and liability for culpa in contrahendo

With a lot of reference to foreign civil law theories and the provisions in PICC (arts. 2.15 and2.16) and PECL (arts. 2:301 and 2:302), CCL makes a resemble provision (arts. 42 and 43).And these provisions are interpreted as pre-contractual obligations and the liability for culpain contrahendo. Besides, art. 58 of CCL on effects of a void contract also includes someeffects of the liability for culpa in contrahendo.

Post-contractual obligations and post-contractual liability

CCLmakes a provision on post-contractual obligations (art. 92), according to which, even thecontractual relationship is over, the parties shall perform obligations of notification, assistanceand confidentiality in light of good faith and fair dealing and in accordance with tradepractices. As to effects of breach of post-contractual obligation, there is no provision in CCL.In scholastic interpretation, it should be treated by liabilities for breach of contract. But post-contractual liability should not be treated as strict liability, it is a kind of fault liability.

Liabilities for culpa in contrahendo

Introduction

The theory of culpa in contrahendo, which is first presented by German scholar Rudolf vonJhering in 1861 and is developed by German cases, has its influences in China. The influence

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is started by scholastic introductions about the theory.13 Some provisions of GPCL may beinterpreted as partly on the effects of culpa in contrahendo (art. 61). Arts. 42 and 43 of CCL,with a lot of reference to PICC and PECL, are much perfect provisions on pre-contractualobligations and liabilities for culpa in contrahendo.

A lot of discussions on the theory of culpa in contrahendo have been made in China. Themain questions raised from the discussions include the scope of the theories application, thescope of damages for culpa in contrahendo, etc. As to the legal basis for the liability, also thereare several kinds of theories raised by German theories and cases, there is not so muchdivergence in China. In a generally accepted theory in China, a party should negotiate withdue care in accordance with good faith and fair dealing, otherwise there will be a culpa incontrahendo.14

Key elements for the liabilities (when may it be applied?)

As it has been generally accepted, if one party claims liabilities for culpa in contrahendo, thefollowing requirements should be fulfilled. First, the parties contact each other with the aim ofa contract. Second, one party breaches a pre-contractual obligation. Third, the party breachinga pre-contractual obligation has fault for the matter. Fourth, there are some losses occurred.And in Chinese law, there is no requirement that the other party must with a pair of clean hand.The party at fault shall compensate the other party for the loss caused by the fault. If bothparties have faults, they shall bear their respective responsibilities (GPCL art. 61 par. 1; CCLart. 58). It may be viewed as a kind of contributory negligence.

The extend of its application

According to whether the aimed contract validly formed or not, culpa in contrahendomay bedivided into three types, namely type I the aimed contract not formed, type II the aimedcontract void, and type III the aimed contract valid. The problem of type III was first raisedand discussed in 1896 by a German Scholar named F. Leonhard. In 1910, Leonhard advocatedhis theory for the second time. A German court accepted Leonhards theory in a case on 26April 1912. From that time on, it has become a general viewpoint in Germany and Japan thatculpa in contrahendo may be claimed even the aimed contract is valid.15 Unfortunately, thethird type of culpa in contrahendo has not been accepted by the general civil law theory ofChina, also there are some different viewpoints on the question. So it is still a point in disputein China.

According to art. 42 sent. 2 of CCL, if one party conceals intentionally important factsrelated to the conclusion of the contract or providing false information, and thus causes loss tothe other party, the party shall compensate for the loss. Though there is no word on whetherthe contract validly formed or not in art. 42 sent. 2, as it seems to me, it has left a space for suchinterpretation. So the third type of culpa in contrahendomay exist in Chinese law. And it mayinclude situations where: (1) one party breaching its pre-contractual obligation to inform

13 Tze-chien Wang, Studies on civil law theories and cases, Vol. 1, (1975), Taiwan.14 See Jiafu Wang ed., Law of obligation, (1991), Law Press China, p.339.15 SeeKenzoMiyamoto,Obligation of care for safety and the expansion of contractual liabilities, (1993), p.58.

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(CCL art. 42 sent. 2); (2) a voidable contract being modified (CCL art. 54); and (3) a voidablecontract becoming valid because the party who has the right to make the contract void lossesits right (CCL art. 55).

Effects

Damages

As to a claim for damages because of culpa in contrahendo, there are two main questions.First, does what the aggrieved party may claim include expectation interest or just relianceinterest? Second, if it is reliance interest, whether it shall not exceed the amount of expectationinterest?

In the general civil law theory of China, damages for culpa in contrahendo is limited toreliance interest, and not includes expectation interest. This is in accordance with the startingpoint of not admitting the third type culpa in contrahendo.

According to German law, damages for reliance interest shall not exceed the amount ofexpectation interest.16 In Chinese law, there is no provision on this matter. And the Chinesescholastic viewpoints diverge very much. Someone thinks that reliance interest should not belimited by expectation, and all actual losses should be compensated.17 Others think thatdamages for reliance interest should not exceed the amount of expectation interest.18 As to thescope of damages for reliance interest, it is thought that the rule of foreseeability should beapplied.19 Of course, if the other partys body or property is harmed because of ones failure toperform its obligation to protect the other, what the party guilty of the harm shouldcompensate is called perfectibility interest or maintenance interest, and it should not belimited by expectation interest.

Is a right to termination possible?

As we have seen, the third type of culpa in contrahendo has not been accepted by the generalcivil law theory of China. So according to this kind of theory, it is illogical for a right totermination as to culpa in contrahendo. As a contrast, some Japanese scholars advocate that,as a measure to protect consumers, a right to termination should be one kind of effect of culpain contrahendo.20 Following the development of market economy in China, this kind ofissues will be increased. As a response, the consumer may claim that the contract is voidedbecause of deceit. Whether or not there should be a right to termination for the consumer isstill a question needing further research.

16 BGB arts.122, 179 and the former art. 307. As an English discussion on this topic, See Fuller & Perdue, Thereliance interest in contract damages, (pt.1), 46 Yale L. J. 52, 7580.17 See Jianyuan Cui, On liability for culpa in contrahendo, in Social Sciences Journal of Jilin University, No.3of 1992.18 See Guangxing Zhang, Law of obligation in general, (1997), Law Press China, p.56.19 See Huixing Liang, Civil law, (1988), Sichuan Renmin Publishing House, p.144.20 See Zentaro Kitagawa, Studies on contractual liabilities, (1963), Yuhikaku, Japan, p.287; Junichi Honda,On the Theori of Culpa in Contrahendo, in Modern Contract Law Series, vol.1, (1983), Yuhikaku, Japan,p.207; Kenzo Miyamoto, Obligation of care for safety and the expansion of contractual liabilities, (1993),Tokyo, Japan, p.63.

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Anticipatory breach

Introduction

Before the time due for performance, it may happen that the obligor expressly refuse toperform the contract, or it may become clear that the obligor, though does not refuse toperform, will be unable to perform the contract on the time due for performance. How to copewith this kind of obstacles of performance is so important a topic that it has attracted a lot ofdiscussion between Chinese scholars before the enactment of CCL. The viewpoints may bedivided into two categories. One category insisted that Chinese contract law should followGerman law on this point, which means the remedy is to suspend performance as stipulated byart. 321 of BGB (defense of insecurity). The other category suggested that Common Lawsrule of anticipatory breach of contract is much better than the German rule. As art. 321 ofBGB only gives the other party a right to refuse to perform,21 while the Common Law rulegives the other party a further protection by permitting it seeking damages or other remedieseven before the time due for performance.22 CCL adopts this suggestion (arts. 108 and 94sent. 2). But it also has an article on defense of insecurity (CCL art. 68).

When may call it an anticipatory breach?

According to art. 108 of CCL, there are two types of situations that can amount an anticipatoryof breach. The first one is that a party explicitly expresses its intention not to perform itsobligation, and it may be called anticipatory renunciation. The second type is that a partyindicates by act its intention not to perform its obligation, and it may be called anticipatorydisablement. Whether or not there is an anticipatory breach should be discussed separately.

Where there is an anticipatory renunciation, the obligors intention is clear and the futureperformance is not expectable. So it may be recognized as an anticipatory breach directly.

As to the second type of situation, the obligor does not expressly refuse to perform itsobligation, so it may not be recognized as an anticipatory breach promptly. Here it isnecessary for the obligee to take some measures to make the matter clear. According to art. 68par. 1 of CCL, the party which ought to perform first may suspend its performance if it hasexact evidence to prove that the other party falls under any of the following situations: (1)business operations seriously deteriorating; (2) diverting properties and withdrawing capitalto evade debts; (3) falling into business discredit; or (4) other situations showing inability orpossible inability to perform its obligations. Where the party suspend its performance inaccordance with art. 68 of CCL, it shall promptly notify the other party of the suspension. Theparty shall resume its performance when the other party provides a guarantee. The party thathas suspended its performance may terminate the contract if the other party has failed toregain its capability to perform and to provide a guarantee within a reasonable period of time(CCL art. 69). Here the termination of contract premises that the other party falls into a kind ofanticipatory breach.

21 This is the former rule of art. 321 of BGB. It should be noted that the new art. 321 par. 2 permit the partyrequired to perform first a right to termination.22 See Shiyuan Han & Jianyuan Cui, Anticipatory breach and Chinese contract law, in CASS Journal of Law,No.3 of 1993.

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Remedies for anticipatory breach

According to art. 108 of CCL, the obligee may demand that the obligor who anticipatorilybreached the contract bear the liabilities for its breach even before the expiration of the periodof performance. It is interpreted that the liabilities may include payments stipulated by thecontract, damages, enforced performance, etc.

If it is before the expiration of the period of performance that the obligee sued the obligor,judge should consider the benefits, which the obligor may derive from the period ofperformance. As to damages, a reasonable interest should be deducted. As to enforcedperformance, the liability should be carried out until it is time due for performance. As topayments stipulated by the contract, whether a reasonable interest should be deducted shouldbe decided in accordance with the nature of the stipulated payments.

Enforced performance

Introduction

Enforced performance is a terminology used from a point of liability. From a point right, thesame content may be called a claim for performance.23 CCL distinguishes the obligation topay a sum of money (pecuniary obligation, art. 109) and other obligations (non-pecuniaryobligation, art. 110), accordingly there are two kinds of claim for performance. As to theclaim for performance of a pecuniary obligation, most countries have a similar practice. Sohere our concern will be focused on the claim for performance of a non-pecuniary obligation.

Restrictions on the availability of enforced performance

Restrictions on the availability of enforced performance may be sought at the second half partof art. 110 of CCL. According to its provisions, there are three kinds of situations where thecreditor cannot claim for enforced performance, namely (1) the performance is legally orpractically impossible; (2) the subject-matter of the obligation is unsuitable for a enforcedperformance or costs too much for the performance; or (3) the creditor does not claim for theperformance within a reasonable period of time. Moreover, Chinese law adopted the rule ofmitigation (GPCL art. 114; CCL art. 119). Accordingly, when the rule of mitigation should beapplied, the creditors right to claim enforced performance would be excluded. Although CCLhas no article on the problem of change of circumstances, the principle of change ofcircumstances is accepted by Chinese jurisdictions.24 So if the principle of change ofcircumstances should be applied, the creditors right to claim enforced performance wouldbe circumscribed.

23 A claim for performancemay be used in different ways. First, it may mean the obligee may ask the obligorto perform the contract. Second, it may mean the obligee may sue for enforced performance. Here enforcedperformance equals the second meaning of a claim for performance.24 See Shiyuan Han, Change of circumstances: the civil law approach and a Chinese response, in PekingUniversity Law Journal, Vol.12, No.4 (2000) pp.435455.

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Types of enforced performance

In Chinese law, two kinds of enforced performance may be recognized. First, if the debtorfailed thoroughly or partially to perform its obligation, the creditor may claim theperformance of the obligation, and the terminology used by Chinese law is continuing toperform the obligations (CCL art. 107). As the aim is to make the debtor to perform itsoriginal obligation, so it may be called a claim to performance of original obligation. Second,if the quality fails to meet the agreed requirements, the creditor may claim a cure for thedefects in the subject-matter of the contract by repairing, replacing or redoing (CCL art. 111),and the terminology used by Chinese law is taking remedial measures (CCL art. 107; GPCLart.111).25 As the aim is to make the debtor to cure the defects in the subject-matter, so it maybe called a claim to performance of obligation to cure.

The claim to performance of obligation to cure should also apply the restrictions laiddown on the availability of enforced performance by art. 110 of CCL, and what worthy adiscussion is, whether there should be any other restrictions on the claim to performance ofobligation to cure. What CCL requested is in accordance with the nature of the subject-matter and the degree of the loss, choose in a reasonable manner to demand that... So if thesubject-matter of a contract of sale belongs to generic goods that fails to meet the agreedrequirements of quality, and if the costs of repair exceeds the worth of the goods, the sellershould be permitted to replace the goods. If the buyer insists on repair, it will be unreasonable.

Methods of enforcement

The methods of enforcing a judgment for performance in modern laws include directenforcement, vicarious performance and indirect enforcement. In Japanese law, directenforcement and vicarious performance can be found in art. 414 of Japanese Civil Code(here after JCC); and indirect enforcement can be found in art. 172 of Japanese CivilExecution Law (here after JCEL). In CCL, enforced performance means direct enforce-ment; but in civil procedural law, there are methods of direct enforcement, vicariousperformance and indirect enforcement.

In Chinese law, the method of enforcing a judgment for performance depends on the natureof the obligation upon which the judgment is based.

If the obligation is to pay money, to deliver property or negotiable instruments, or to evictfrom a building or a plot of land (as is called the obligation to give), Civil Procedure Law ofthe Peoples Republic of China (here after CCPL) permits direct enforcement (arts. 221223, 227229). In addition, according to The Regulations on Some Problems of Execution byPeoples Court (A Trying Version, 1998) adopted by the Supreme Court of P.R. China, thereare special provisions on the execution of delivering property or carrying out an action. Theattracting matter is that direct enforcementmay apply to an obligation to carry out an action(art. 60 of the Regulations).

25 It should be noted that taking remedial measures used by art. 107 of CCL refers to the remedies in art. 111,e.g. the party suffering the loss may, with reference to the nature of the subject-matter and the degree of loss,choose in a reasonable manner to demand that the other party bear the liability for breach of contract in suchform as repair, replacement, redoing, return of the subject-matter, reduction in payment or remuneration, etc.Among the remedies, repair, replacement and redoing belong to claim to performance. Here it is named a claimto performance of obligation to cure.

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Where the person subjected to execution fails to perform acts specified in a judgment orwritten order or any other legal document according to the execution notice, the court maycarry out compulsory execution or entrust the task to a relevant unit or other persons, and theperson subjected to execution shall bear the expenses thus incurred (CCPL art. 231). So theobligation to do an act, if it can be performed vicariously, may be enforced by vicariousperformance. This method of execution is available, for example, for the enforcement ofjudgments directing performance of a contract to build, or to heat or light premises, or tooperate a lift. It is available even in respect of services if they require no special bodily ormental skills.26 In German law and Japanese law, where the judgment requires the debtor tomake a declaration of will (for example an entry in a land register) the judgment is self-executing in the sense that the declaration is regarded as made as soon as the judgment hasbecome final and conclusive (German Civil Procedure Code art. 894; JCC art. 414 par. 2,JCEL art. 171). In Chinese law, as to the same problem, the court may issue a notice forassistance in execution to the relevant units (for example a land register), for whom it is a dutyto comply with the notice for assistance (CCPL art. 230).

As to indirect enforcement, a relevant provision can be found in art. 232 of CCPL.According to art. 232, if the person subjected to execution fails to fulfill his obligations withrespect to pecuniary payment within the period specified by a judgment or written order orany other legal document, he shall pay double interest on the debt for the belated payment. Ifthe person subjected to execution fails to fulfill his other obligations within the periodspecified in the judgment or written order or any other legal document, he shall pay a chargefor the dilatory fulfillment. So the judgment for an act which cannot be vicariously performed,or the judgment ordering the debtor to forbear or suffer something, may be carried out inaccordance with art. 232 of CCPL.

Whether there should be a sequence of application for direct enforcement, vicariousperformance and indirect enforcement is not very clear in China. The manner to cope with theproblem is somewhat flexible. In one hand, the creditor may be free in choosing. In the otherhand, the court may select a reasonable method in accordance with rules of law and thecommon consciousness of fairness.

Damages

Introduction

The general provision on damages in CCL is art. 113. Besides, art. 112 may be used to dealwith consequential damages. Compared with former Chinese laws, CCL has some progresseson damages. For example, it is clear that lost gains may be claimed if it is foreseeable by thebreaching party at the time of the conclusion of the contract. So if a person who buys rawmaterials for manufacturing purposes, both actual loss (not getting the goods bargained for)and lost gains (profits that can be earned from using the goods in the process of manufacture)may be claimed by the buyer. Moreover, CCL adopted foreseeablity as a general rule, and theaggrieved party in a contract action may claim consequential damages.

26 G. H. Treitel, Remedies for breach of contract, (1988), Oxford: Clarendon Press, p.54.

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Availability of damages

In an action claiming damages for breach of a contract, a Chinese court will check the case byfour factors, namely whether there is a breach, whether the plaintiff suffered any damage orloss, whether the breach is the causation of the damage, and whether the defendant has areason for exemption.

Breach of contract

First, there should be a breach of contract, namely a party fails to perform its obligationsunder the contract or does not perform its obligations as contracted(CCL arts. 113 and 112).As being previously pointed out, no only breach of Leistungspflicht, but also breach ofancillary obligations, may constitute a breach of contract. Thought CCL distinguishes fails toperform the obligations and does not perform obligations as contracted, their effects arenot affected by the distinction.

Damage

The damage or loss caused by a breach is mainly on the aggrieved partys property, butsometime a breach may also cause the aggrieved party mental suffering. Before the enactmentof CCL, Chinese law had no provision on whether this kind of non-pecuniary loss may becompensated in a contract action. Scholars viewpoints on the problem diverged sharply. Theformer general theory gives a negative answer.27 Those who gave a positive answer belongedto minority.28 But in practice, some special cases were raised in China. In these cases, the filmsent for wash and print was lost by the photo-shop; the bone ash was lost by a funeral home towhich it was consigned; a girl expecting an improvement of her looks was left with adisfigurement by the fault of a beauty shop. In each of these cases, there is a kind of non-pecuniary loss, and there is a contract between the parties. So it is necessary to re-raise and re-think whether non-pecuniary loss can be claimed in a contract action. My viewpoint on theproblem is that the court should approve the aggrieved party claim for non-pecuniary losseven in a contract action.29 If we look at the problem from comparative laws, we can see thatmany law systems permit non-pecuniary loss in a contract action. Especially, PICC and PECLboth state that the loss for which damages are recoverable includes non-pecuniary loss.30 NowCCL has left a space for such kind of interpretation (art. 112).

27 See Huixing Liang,Civil law, (1988), p.420; JiafuWang ed., Law of obligation, (1991), p.247; LimingWang,On liabilities for breach of contract, (1996), Chinese Politics and Law University Press, p.400.28 See Jianyuan Cui, Studies on contractual liabilities, (1992), p.197.29 See Shiyuan Han, Non-pecuniary loss and contractual liability, in Legal Science, no.6 1998; Shiyuan Han,Studies on damages for breach of contract, (1999), Law Press China, pp.3747.30 PICC art.7.4.2 par.2; PECL art.9:501 par.(2) sent.(a).

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Causation

Nowadays in China, the mighty theory on problems of causation adopts a bifurcatedapproach, namely distinguishing cause in fact and cause in law. In determining whether adefendant should bear a liability of damages, the judge must decide whether there is a cause infact between the act of the defendant and the loss of the plaintiff. Here a cause in fact, as ispopularly accepted, is a relationship of conditio sine qua non, and it may be tested by the butfor test.31

Reasons for exemption

Though reasons for exemption may be determined by the parties in their contract, as is knownas exemption clauses, the only reason for exemption that can be found in General Provisionsof CCL is a force majeure (art. 117). Since CCL adopted the Strict Liability Principle, thescope of reasons for exemption becomes even more important than ever. But insofar as theprovisions of CCL are concerned, we can say that the strict liability in CCL is stricter thanthe strict liability in Common Law. Because there is a principle named Frustration ofContract in Common Law, and its scope is much bigger than the scope of force majeure.32

Scope of damages

According to art. 113 par. 1 of CCL, where a party fails to perform its obligations under thecontract or does not perform its obligations as contracted and thus causes losses to the otherparty, the damages shall consist of a sum equal to the loss actually caused by the breach,including the gains that should be obtained had the contract been performed, but may notexceed the loss which the party in breach foresaw or ought to have foreseen at the time of theconclusion of the contract as a possible consequence of the breach of contract. Here as amethod of limiting damages, CCL, instead of following the German theory of AdequateCausal Relationship, adopted the Rule of Foreseeability.

If we compare art. 113 par. 1 of CCL with its corresponding part of Japanese law (JCC art.416), we may find there are some characteristics of CCL that differs from Japanese law. First,there is no distinction between general loss and special loss in CCL, and the rule offoreseeability applies to all kinds of losses. Second, in CCL it is by the time of the conclusionof the contract and not by the time of the breach of the contract that the rule offoreseeability is applied. Third, in CCL it is by the party in breach and not both parties thatthe rule of foreseeability is applied. Although art. 416 of JCC is learned from Common Lawand French law, but since ProfessorWagatsuma, the general theory of Japan interprets art. 416of JCC by the German theory of Adequate Causal Relationship. This is a typical example of adual structure of the Code Reception and Theory Reception in Japan.33 Of course, it is

31 See Shiyuan Han, Studies on damages for breach of contract, (1999), pp.147159; Jianyuan Cui ed., Law ofcontract, (2000, 2nd ed.), Law Press China, pp.285288.32 See G. H. Treitel, The Law of contract (9th ed. 1995), pp.778810.33 See Zentaro Kitagawa, The history and theory of Japanese legal science, (1968), Nipon Hyoulonshia Press.

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noticeable that there are some new theories on the interpretation of art. 416 of JCC raised inthese years.34 The advocators of the new theories insist that the interpretation of art. 416 ofJCC should go back to its fountainhead (namely Common Law and French law). I think theevolution of the interpretation of art. 416 of JCC will be a good lesson for Chinese civil law.

Elements for reducing damages

Contributory negligence

Contributory Negligence, as an important rule for reducing damages, had been formulated inseveral drafts of CCL, but it is finally replaced by an article on Both Parties in Breach.

GPCL has an article on Both Parties in Breach (art. 113). CCL lays down the rule oncemore, namely where both parties breach the contract, they shall bear their respectiveliabilities accordingly (art. 120).Whether or not can there be a legal concept of Both Partiesin Breach had been a point in dispute in China.35 Nowadays it appears that, in some specialcases, there may be a situation of both parties in breach. As it is a natural reasoning that forboth parties to bear their respective liabilities accordingly, so there will be no problem even ifthere is no provision on the issue in contract law. Moreover, a provision on Both Parties inBreach is very rare in comparative law. So in the draft of Civil Code of China, it is necessaryto replace the art. 120 of CCL by a rule on Contributory Negligence.

If we make a comparison between Contributory Negligence and Both Parties in Breach,we can find that, it is only one party that has loss in a case of Contributory Negligence. Itscharacteristic is that the aggrieved party also has a fault for or has contributed to theoccurrence of the loss. While in a case of Both Parties in Breach, both parties of a reciprocalcontract failed in the performance of their obligations, and it is possible for them to cause eachother a loss. Its characteristic is that there are two breaches and two pieces of loss. SoContributory Negligence and Both Parties in Breach are not the same matter.

As there is no special article in CCL on contributory negligence, it is a gap in law. In orderto fill the gap in CCL, it is suggested that art. 131 of GPCL, an article on contributorynegligence for torts, should be extended by interpretation to cover contract cases. As to thedrafting of Civil Code of China, it is still a question whether to formulate contributorynegligence in one article or like JCC to dispart it in two articles.36

34 See Yoshio Hirai, A theory of law of compensation, (1971), Tokyo University Press; Minori Ishida, A re-construction of law of compensation, (1977), Tokyo University Press.35 See Huixing Liang, Studies on civil law theories, cases and legislation, (1993), Chinese Politics and LawUniversity Press, p.82; Liming Wang, On the defence of concurrent performance in a reciprocal contract, inCivil and commercial law review, vol.3, (1995), Law Press China, p.27. As a Common Law account on theissue, see G. H. Treitel, The law of contract, (9th ed. 1995), pp.736737.36 In JCC, art.418 is on contributory negligence in a contract case, while art. 722 is on contributory negligencein a tort case.

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Mitigation

The Rule of Mitigation of Damage was first created by an English case more that 320 yearsago.37 In Civil Law countries, the same rule is either not in existence or treated as a part of therule of contributory negligence. But in Chinese law, it is an independent rule (GPCL art. 114;CCL art. 119 par. 1). According to the rule, the aggrieved party should take appropriatemeasures to prevent the increase of the loss; if it fails to do so, it may not claim damages forthe increased loss.

Insofar as Mitigation is an independent rule, then what is the relation between Mitigationand Contributory Negligence? As to the avoidable loss, it may be said that the aggrieved partyhas a fault for it. In this sense, Mitigation may be looked as a kind of Contributory Negligence.But when it comes to the effects of the two rules, there is a notable difference. The mechanismof Mitigation is all or nothing, while the mechanism of modern Contributory Negligence isto distribute the losses by the comparison of negligence, contribution or causation of the bothsides. So strictly speaking, they are not the same. Just as a Common Law scholar has pointedout, the plaintiffs duty to mitigate occurs after the breach, while the plaintiffs contributorynegligence occurs before or at the same time with the occur of loss. The key-point fact to makethe distinction is time.38 The same is true in Chinese law.

Enrichment accompanying losses

If the aggrieved party also got some benefits from the other partys breach, the amount ofdamages it can obtain should be its loss minus its gain. This rule is called EnrichmentAccompanying Losses(compensatio lucri cum damno). Though CCL and GPCL, just likeJapanese law and many other countries law, do not have an article on the rule, it is followedby Chinese Jurisdictions. Now it is generally accepted that the future Civil Code of Chinashould have an article on the rule.

Payments stipulated by the contract

Introductions

A contract may contain a stipulation providing for the payment of a fixed amount of money bythe debtor in the event of his default. Such a clause is called a penalty clause in China.39 Andrules on penalty clauses are laid down in art. 114 of CCL.

In civil law theories of China, penalty has been divided into two categories, namelycompensatory penalty and punitive penalty. The former is a kind of preliminary damages,

37 Vertue v. Bird (1677). See Farnsworth, Farnsworth on contracts (1990) vol. III, p.219.38 See Harvin D. Pitch, Damages for breach of contract (1985), p. 150.39 As to the terminology, it should be noted that in this paper such expressions as penalty clause would beused in the Civil Law sense (of a valid provision). While in Common Law, there is a distinction betweenpenalty clauses and liquidated damages clauses, the former is normally invalid and the later is prima facievalid. See G. H. Treitel, Remedies for breach of contract, (1988), p.208. This difference in terminology givesrise to some awkwardness in preparing this paper.

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which aims to fix in advance the damages payable in the event of default. The later may beclaimed together with performance or damages. Art. 114 of CCL is mainly on compensatorypenalty. But as a deduction of the freedom of contract, punitive penalty is also permitted byCCL. So it can be said that CCL takes compensatory penalty as a general rule and punitivepenalty as an exception. It also should be noted that compensatory penalty in CCL, not likeart. 340 par. 2 of BGB,40 is not as a minimum sum of damages, but somewhat as the upperlimit of recovery except it is increased by a court or an arbitration institution.

When may a penalty clause be applied?

First, there should be a principal obligation. The obligation raised by a penalty clause isaccessory to the obligation to perform the principal obligation. As an accessory obligation, itpremises the existence of a principal obligation.

Second, there should be a breach that the penalty clause aimed.Third, should there be a fault on the part of a debtor? Now it has become a point in

dispute in China. On one hand, so far as the Strict Liability Principle is adopted, it seemsratiocination that there should be no requirement of fault on the part of the debtor for theapplication of a penalty clause. On the other hand, it is suggested that there still should be arequirement of fault on the part of the debtor for the application of a penalty clause even CCLadopted Strict Liability Principle.41 As to my viewpoint, different kinds of situations shouldbe distinguished. If the parties agreed that there should be a fault on the part of the debtor,the agreement should be followed. If it is in a situation of fault liability as laid down in theSpecial Part of CCL or other special laws, a fault on the part of the debtor should berequired. If it is in a case of punitive penalty, as its purposes is to provide a means of pressureon the debtor so as to coerce him into performing his principal undertaking, and it alsorepresents a punishment on the fault of debtor if there is a failure of performance, so it isreasonable to require a fault on the side of debtor. In a situation of compensatory penalty, solong as there are no exceptions as stated above, a fault on the part of the debtor should not berequired. Because its nature is a kind of preliminary damages, and its purpose is tocompensate for the loss caused by the debtors breach of contract.42

Fourth, should there be a requirement to prove the existence of a loss? In a case of punitivepenalty, as its nature is not a kind of preliminary damages, so for its application there is noneed for a requirement of the occurrence of loss.43 But when it comes to a case ofcompensatory penalty, there are some conflicts of viewpoints. Since compensatory penalty isa kind of preliminary damages, so it is naturally thought that there should be a loss, even it isnot required to prove the amounts of the loss, at least it should be required to prove itsexistence. But since one of the main purposes of a penalty clause is to avoid the trouble toprove the existence of loss, so it is generally accepted in China that there is no requirement forthe plaintiff to prove the existence of loss while applying a penalty clause.

40 BGB art.340 par.2 states that where the creditor claims compensation for non-performance, he is entitled tothe penalty as a minimum sum, and that a claim for further damages is not excluded.41 See Jianyuan Cui ed. Law of contract, (2000, 2nd ed.), p.320.42 See Shiyuan Han, Some theoretic issues about the penal clause, inCASS Journal of Law, No. 4 of 2003, p.20.43 See Shangkuan Shi, Law of obligations: general provisions, (1954), Taiwan, p.499.

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The relation between penalty and damages

The relation between penalty and damages turns on the distinction of penalty.

Punitive penalty and damages

Punitive penalty is not a kind of preliminary damages, so in addition to claiming punitivepenalty, the creditor may still claim the performance of the primary obligation or its damages.

Compensatory penalty and damages

Penalty as a maximum sum In CCL, compensatory penalty is prima facie a preliminarymaximum sum of damages; it is the upper limit of recovery. So generally speaking, thecreditor may claim compensation for its actual losses within the upper limit of recovery. Butthere is an exception for the general rule as laid down by art. 114 par. 2 sent. 1 of CCL,according to which, where the stipulated penalty is lower than the loss caused by the breach,the party concerned may apply to a court or an arbitration institution for an increase. Theprovision involves a perennial conflict between certainty and justice. A lot of questions maybe raised, such as when may a court or an arbitration institution increases the amount of apenalty? How to distinguish a penalty clause and a clause limiting one partys liability (a kindof exemption clause)? So art. 114 par. 2 still needs a further interpretation. As to the relationbetween compensatory penalty and damages, it should be discussed separately.If the compensatory penalty and the damages aim the same damage, the party who suffered

the damage should not get double compensation for the same damage. So only one remedycan be applied. And because compensatory penalty is an agreement of the parties, it takespriority of damages.If the compensatory penalty and the damages aim different losses or damage, there will be

no conflict between the compensatory penalty and the damages. The party who suffered thelosses may claim the both.

Penalty as a minimum sum As to a penalty as a minimum sum of damages,44 there is noprovision in CCL, but it is free for the parties to agree upon this kind of penalty clauses.Because the penalty is a preliminary minimum sum of damages, so the aggrieved party maystill claim damages for any other loss not covered by the penalty.

Penalty clauses, a claim for performance and a right to termination

As it has been generally accepted, a creditors claim for performance is not excluded by thepresence of a penalty clause.45 The same conclusion may be got by an interpretation of art.107 of CCL. And the same is true with a creditors right to termination.

44 See BGB art. 340 par. 22; Swiss Code of Obligations art. 161.45 See JCC art. 420 par. 2.

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If the creditor terminated the contract because of a non-performance by the debtor, apenalty clause in the contract may not be affected by the termination. As art. 98 of CCL laysdown that, the ending of rights and obligations under a contract shall not affect the validity ofits clauses regarding settlement and liquidation.

The increase, reduction or exemption of a penalty

In CCL, penalty clauses are not always enforced literally; the enforcement of them maysubject to reduction or increase according to art. 114 par. 2 of the Law. As the drafters of theLaw believe that, as preliminary damages, even the compensatory penalty should not beconformed to the loss in amount, there should not be a great disparity between the two.Otherwise, it will be contrary to fairness, and it also will be possible for one party to press andexploit the other by penalty clauses. Whether or not a court or an arbitration institution, on anapplication made by the debtor who proves that there is no loss caused to the creditor, mayexempt a penalty is not so clear in CCL. The Problems need a further research.

Statutory rights to termination

Introduction

As a remedy for breach of contract, termination of contract may release the party not in breachfrom his contractual obligations. In CCL, termination includes termination by a statutoryright (art. 94), termination by a contractual right (art. 93 par. 2) and termination by anagreement (art. 93 par. 1). Besides, CCL has general provisions on the time limit forexercise of a right to termination (art. 95), the method for exercise of a right to termination(art. 96) and effects of termination (art. 97). The general rules on termination of contract inGeneral Provisions of CCL (arts. 9397) apply to all kinds of contracts, no matter theperformance of a contract is only of one time or of a continuing one. Hereinafter the statutoryrights to termination in CCL would be mainly described and analyzed.

When does a party get a statutory rights to termination?

There are two kinds of statutory rights to termination in CCL. One kind of them may apply toall kinds of contracts, so it is called a general statutory right to termination. The other kindonly applies to a special kind of contract, so it is called a special statutory right to termination.46

The main concern of this paper is on the general statutory right to termination. According toart. 94 of CCL, the general statutory rights to termination may be raised both by an objectivecause and by a breach of contract. Here the statutory rights to termination raised by a breachwill be analyzed firstly.

46 Such as arts. 148, 224, 231, 253, 259 and 268 in CCL.

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No requirement of fault

The original purpose of termination of contract is to release the creditor from his unperformedcontractual obligations, so there is no need to require a fault on the side of breaching party forthe other partys exercise of a right to termination. This point has been make certain since thefirst draft of CCL in 1994, and it has been preserved by CCL. In this aspect, CCL hassurpassed its corresponding part in many other Civil Law systems.

Breach of contract (non-performance of contract)

In the first draft of CCL, statutory rights to termination are laid down in six articles inaccordance with a kind of traditional civil law analyzing frame, namely according to patternsof nonperformance such as impossibility, delay, refuse to perform, defective performance,partial performance and nonperformance of ancillary obligations. This kind of formulationwas thought too tedious to be accepted, so they were replaced by one article since the thirddraft of CCL, and some of ingredient from art. 25 of CISG (fundamental breach) wasintroduced.47 The change gave CCL a fateful impact and buried a seed that would cause adivergent interpretation about art. 94 of CCL. By one kind of opinion, art. 94 of CCL shouldbe interpreted by a theory of fundamental breach. But in accordance with the original idea ofthe drafter of the part of Termination of CCL, art. 94, especially sents. 2 and 3, should beinterpreted by the traditional civil law analyzing frame as mentioned above.48

Refuse to perform Before the period of performance expires, if a party clearly indicates byword or by act that it will not perform its main obligations, the other party may terminate thecontract (art. 94 sent. 2). The provision learnt a lot from rules of anticipatory breach fromCommon Law. It is noticeable that the mere indication not to perform by the debtor, no matterby word or by act, may entitle the creditor to terminate the contract. Whether a Nachfristshould be required becomes a point of dispute in China.49

Doubtlessly, the situations laid down in art. 68 of CCL (the defense of insecurity) mayoverlaps with the situation of a debtor indicating not to perform by its act in art. 94 sent. 2.While according to art. 69, where a party suspends its performance in accordance with theprovisions of Article of 68 of the Law, it shall promptly notify the other party of thesuspension. The party shall resume its performance when the other party provides a guarantee.The party that has suspended its performance may terminate the contract if the other party hasfailed to regain its capability to perform the contract and to provide a guarantee within areasonable period of time. It is clear that the termination of contract in this kind of situationrequires a notice and a Nachfrist (as used in art. 69 a reasonable period of time). In myopinion, in the situation of a debtor indicating not to perform by its act in art. 94 sent. 2, thereshould be a requirement for Nachfrist so as to overcome the divergence between art. 69 andart. 94 sent. 22.

47 As a piece of Japanese material on this change during the drafting of CCL, see Weirong Qian, The statutoryrights to termination in Chinese contract law, in NBL No.699 (2000.10.15), p.62.48 The drafting work of the Termination of Contract part of CCLs first draft was in charged by ProfessorJianyuan Cui. The first draft of this paper had been read by Professor Cui, and the author wishes to thankProfessor Cui for his helpful comments on this part.49 See Jianyuan Cui ed. Law of contract, (2000, 2nd ed.), p.203.

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Delay in performance As a general rule, where a party delays in performance of its mainobligations, the other party should notice and set a Nachfrist. If the debtor still fails toperform after the Nachfrist, the creditor may terminate the contract (art. 94 sent. 3 of CCL).But where a contract under which the obligations of at lease one party have to be performed ator within a stipulated time (the so-called Fixgeschft in German law), there is norequirement of Nachfrist. If the debtor delayed, the creditor may terminate the contractdirectly (art. 94 sent. 4 of CCL).

Impossibility of performance As it is still generally accepted in China, the initial impossibilityof performance is a reason of invalidity of a contract,50 while an incidental impossibility ofperformance is a reason for termination of a contract.51 Where the incidental impossibility ofperformance is caused by a force majeure, the parties may terminate their contract (art. 94sent. 1 of CCL). Any other incidental impossibility of performance, no matter there is a faulton the side of the debtor or not, may be treated as a breach of contract. Because the purpose ofthe contract cannot be achieved, the creditor may terminate the contract accordingly (art. 94sent. 4 of CCL).

Imperfect performance In a generally accepted theory in Japan, if the imperfect performanceis still possible for cure, it may be treated as a delay in performance of the obligation, forwhich the time of performance is not of the essence of the contract (namely not as aFixgeschft). If it becomes impossible or meaningless to cure, it may be treated as animpossibility of performance, and the creditor may terminate the contract.52 In the first draftof CCL, there is a similar treatment. Now according to CCL, an imperfect performance maybe treated as one of other kind of breach. And if thus causes the purpose of the contractcannot be achieved, the creditor may terminate the contract (art. 94 sent. 4).

A re-examination of fundamental breach of contract

Not every breach can justify a right to termination. The seriousness of a breach (default orother failure in performance) must be considered while deciding whether there is a right totermination or not. This is a natural request of the principle of pacta sunt servanda. So CCLdescribes that what the debtor fails to perform should be the main obligations (as used byart. 94 sents. 2 and 3). According to Chinese scholars interpretation, the failure inperformance of other obligations (such as an ancillary obligation), generally speaking, is notenough to justify a right to terminate a contract. But if as a result of a failure in performance ofan ancillary obligation, the purpose of the contract is frustrated,53 or the relationship ofreliance between the parties as a basis of the contract is ruined,54 the creditor may terminatethe contract.

50 Thought it has been suspected, and it is noticeable that both Article 3.3 of PICC and Article 4:102 of PECL donot take an initial impossibility as a reason of invalidity of contract.51 See Jianyuan Cui ed. Law of contract, (2000, 2nd ed.), p.204.52 See SakaeWagatsuma, Law of obligations: special provisions, Vol. One (1954), Iwanami Book Store, p.174;Hiroshi Mizumoto, Law of contracts, (1995), Yuhikaku, p.97; Yasuhiro Fujioka etc., Civil Law IV, (2nd ed.,1998), Yukikaku, p.45.53 See Jianyuan Cui ed. Contract law theories and cases, vol.1, (1999), Jilin University Press, p.433.54 See Shiyuan Han, On fundamental breach of contract, in Social Sciences Journal of Jilin University, no.4 of1999.

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Fundamental breach is a concept originated from English Common Law, and it has beenaccepted by CISG (art. 25). The former Law on Economic Contracts Involving ForeignInterest of P.R. China, with a reference to art. 25 of CISG, takes fundamental breach as a causefor the right to termination (art. 29). But there is an important difference between the two. Theformer Chinese law does not take the foreseeablity as a part of a fundamental breach. Thestandpoint is accepted by art. 94 sent. 4 of CCL. Now some scholars suspect the standpoint.55

And it is noticeable that art. 8:103 of PECL also require the foreseeablity. The issue needs afurther research in China. And art. 94 of CCL should be interpreted with the traditional civillaw analyzing frame.

Force majeure and termination of contract

In Chinese law, where the purpose of the contract cannot be attained because of force majeure,the parties may terminate the contract (art. 94 sent. 1 of CCL). Where force majeure, as a kindof objective cause, causes an incidental impossibility of performance, the contract should beextinguished. But the manner of its extinguishments may be different in different legalsystems. Both in German law and Japanese law, by adopting the theory of the synallagmaticnature of a reciprocal contract, the contract is treated as automatically extinguished. And therisk is generally born by the debtor. According to PECL, if a party is excused under Article8:108 through an impediment which is total and permanent, the contract is terminatedautomatically and without notice at the time the impediment arises (art. 9:303 par. 4).While inChinese law, the contract is terminated by the parties. It is said that, because of the procedureof termination, the parties may communicate each other, and this may help them to cooperateto take remedial measures.56 And the bear of risk and force majeure are not mutuallyexclusive.57 It should be noted that China is not the only one, according to PICC article 7.1.7(force majeure) sentence 4, force majeure does not prevent a party from exercising a right toterminate the contract or to withhold performance or request interest on money due.

But there is still something needs re-examining. As according to art. 118 of CCL, where aparty is unable to perform the contract due to force majeure, it shall notify the other party intime so as to reduce losses possibly incurred to the other party, and shall provide evidencethereof within a reasonable period of time. Here the debtor has a duty to inform the creditor.So it becomes questionable whether it still necessary to extinguish the contract by the exerciseof a right of termination. As the purpose of the contract has become impossible to be achieved,if the law gives the parties a right to terminate, in the other side, it may be said that the lawgives the parties a right to hold a contract (namely by not exercising the right to termination).But there is no meaning to hold a contract the purpose of which becomes impossible to beachieved, why not to make the contract extinguished by automatic termination?

55 SeeWeirong Qian, The statutory rights to termination in Chinese contract law, in NBLNo.699 (2000.10.15).56 See Jianyuan Cui ed. Contract law theories and cases, vol.1, (1999), p.434.57 Some scholar thought that the relation between termination in case of force majeure (art.94 sent.1) and thebear of risk (art. 142) in CCL is not easy to illustrate. See Jie Xu, Chinese contract law, (the second part,translated byWeirong Qian), inHogaku Shirin (Review of Law and Political Sciences, Hosei University), no. 4of vol. 97 (March 2000), foot note 81.

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Partial termination

There is no general rule on partial termination in General Provisions of CCL. The problem isleft to Specific Provisions, such as in Sales (arts. 164166 of CCL). Besides, where the qualityfails to meet the agreed requirements, one of the remedies for the debtor is return of thesubject-matter according to art. 111 of CCL. By interpretation, it may include partialtermination. As to the remedy of discount in payment or remuneration in art. 111, whether itis a kind of damages (for example where the seller delivers second-rate wine instead of theagreed first-rate wine) or a result of partial termination (for example where part of goodssupplied fails to reach the agreed quality and becomes useless to the buyer while other goodshas no problem) still needs a further interpretation.

Effects of termination

A general provision on effects of termination is laid down in art. 97 of CCL. According to art.97, where a contract is terminated, for those not yet performed, the performance shall cease.For those already performed, the party concerned may, in accordance with the degree ofperformance and the nature of the contract, claim their restoration to the original position ortaking other remedial measures, and may claim damages.

Termination and retrospective effect

As it is popularly known, there are Direct Effect theory, Indirect Effect theory andCompromise Theory on the effects of termination. In China, whether termination has aretrospective effect is a point of dispute. In the preponderant view, termination of contract hasa retrospective effect in principle (a kind of Direct Effect theory), but when it comes to acontract with a continuing nature in its performance, there is an exception.58 This is almost thesame with Japanese general theory and case law. But in China, there are other viewpoints; oneof them insists that contract that is terminated should be extinguished only for the future (aCompromise Theory).59

But since the drafters of Termination in CCL referred a lot to CISG, PICC and PECL, whilethe UNConvention and the model laws do not admit a retrospective effect of termination, so itstill needs a further research whether or not to interpret art. 97 of CCL in accordance a premiseof retrospective effect of termination.

Restitution

Chinese law does not accept the German theory of abstrakte Natur der dinglichenGeschfte, so where termination of contract has a retrospective effect, rights revertautomatically. If a corporeal object was transferred according to the contract, as a result of

58 See Jianyuan Cui ed. Contract law theories and cases, vol. 1, (1999), p.438.59 See Huixing Liang, Civil law, (1988), p.314.

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termination of the contract, the original owner of the corporeal object may claim restitution ofthe corporeal object. And the restitutionary claim is a kind of proprietary claim, which isstronger than a claim for the return of unjustified enrichment. Where restitution in kind isimpossible, the creditor may claim the debtor to take other remedial measures. And thismeans, as situations may be, the return of unjustified enrichment, or the pay of preliminarydamages.60

Where termination of contract does not has a retrospective effect, namely where theperformance of the contract would last for some time, the part of contract before thetermination is still valid, the restitutory claim is a kind of claim for the return of unjustifiedenrichment.61

Damages

Where a contract is terminated because of one partys breach, the party not in breach mayclaim damages. According to the preponderant view in China, the damages may include thelosses caused by the non-performance (namely the expectation interest) and some incidentallosses (such as the costs of restoration).62 A few scholars in China insist that the damagesshould be for the reliance interest.63

The unification of guarantee liabilities for defects and liabilities for breach of contract

Introduction

CCL lays down its rules on guarantee liabilities for defects in Chapter IX Sales (arts. 150158). As it is known generally, the nature of guarantee liabilities for defects is a point ofdispute both in German civil law theories and in that of Japan. The viewpoints may be dividedinto two schools, namely the Doctrine of Liability Imposed by Law and the Doctrine ofLiability for Non-performance of Obligations. The viewpoint of the drafter of CCL as to thisproblem belongs to that of Doctrine of Liability for Non-performance of Obligations.64

This viewpoint has affected CCL deeply. Besides, CCL adopts the Strict Liability Principle,this lessens the original differences between guarantee liabilities for defects and liabilities forbreach of contract. So in China, it may be said that CCL has unified guarantee liabilities fordefects and liabilities for breach of contract.

60 According to art.98 of CCL, the termination of a contract does not affect the validity of its clauses regardingsettlement and liquidation.61 See Jianyuan Cui, Law of contract, (2nd ed., 2000), p.211.62 See Jiafu Wang ed. Law of obligation, (1991), p.383.63 Liming Wang, On liabilities for breach of contract, (1996), p.556.64 See Huixing Liang, Studies on civil law theories, cases and legislation, (1993), p.148.

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Guarantee for defects in right

In general

According to the provisions of CCL, the seller has the obligation to guarantee that no thirdparty shall claim rights against the buyer over the subject-matter delivered unless the lawprovides otherwise (art. 150). If the buyer is aware or ought to be aware that a third party has aright over the subject-matter while entering into the contract, the seller shall not assume theobligations stipulated in Article 150 of the Law (art. 151).Where a buyer has clear evidence toprove that a third party may probably claim a right over the subject-matter, the buyer maysuspend the payment therefor, except in the case that the seller has provided an appropriateguarantee (art. 152).

As to the liability of guarantee for defects in right, CCL lays down no special provision.According to a relative interpretation, where a seller fails to perform its guarantee obligationfor defects in right, and fails to get rid of the defects in right of the subject-matter, the buyermay treat it as a kind of non-performance of obligations and claim the seller to bear liabilitiesfor breach of contract.65

Ownership

CCL lays down the sellers obligation of guarantee. One of its purposes is to make the relationof rights and obligations between the parties clear. As to the problem of ownership, it is left tothe Law of Property to deal with.

Unauthorized disposition and guarantee for defects in right

According to an influential viewpoint, there are four kinds of main situations where a thirdparty may claim a right over the subject-matter of a sale, namely (1) a sale of a thing of another(unauthorized disposition); (2) a sale of a co-owned thing without the agreement of other co-owners; (3) a sale of a thing mortgaged; and (4) a sale of a thing leased. In its opinion, the firstsituation of unauthorized disposition belongs to the law provides otherwise in art. 150.The contract of sale in this situation should apply art. 51 of CCL,66 and it has nothing to dowith the issue of guarantee for defects in right.67 It should be noted that some scepticism hasbeen expressed with regard to the above interpretation in China.68

While in Japanese Civil Code, where the subject-matter of a sale belongs to a third party,the seller bears an obligation to get the right and to transfer it to the buyer (art. 560 of JCC). Sofar as the thing of the third party exists, it should not be treated as an initial impossibility.

65 See Kangsheng Hu ed., A paraphrase of contract law of P.R. China, (1999), Law Press China, p.231.66 CCL art. 51 reads as follows: Where a person without a right of disposal disposes of anothers property, uponratification by the owner of if the person without the right of disposal obtains the right of disposal after theconclusion of the contract, the contract shall be valid.67 See Huixing Liang, How to understand article 51 of CCL, on Peoples Court Daily, January 8, 2000.68 See Shiyuan Han,Unauthorized disposition and validity of contract, on Peoples Court Daily, November 23,1999.

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Accordingly the contract of sale is valid ab initio, if the seller fails to get and transfer the right,he would bear liabilities for guarantee.69 In this point, perhaps Chinese theory should learnfrom Japanese law.

Guarantee for defects in things

In general

According to the provisions of CCL, the seller shall deliver the subject-matter in accordancewith the agreed quality requirements. Where the seller provides quality specifications of thesubject-matter, the subject-matter delivered shall conform to the specified qualityrequirements (art. 153). Where the subject-matter delivered by the seller fails to meet thequality requirements, the buyer may demand that the seller bear the liability for breach ofcontract pursuant to the provisions of Article 111 of the Law (art. 155). CCL, following CISGand PICC, does not make a distinction between generic goods and specific goods. And it issaid that art. 111 of CCL not only applies to goods (no matter a generic one or a specific one),but also to services.70

The arising of a liability of guarantee for defects in things

For guarantee for defects in things, there is no exception in CCL, which like art. 151 in a caseof guarantee for defects in right. And it is ambiguous whether or not there is a requirement forunawareness and no blame on the side of the buyer. While in Japanese law, for the arising of aliability of guarantee for defects in things, there is a requirement for unawareness and noblame on the side of the buyer. This point deserves Chinese legal interpretations following.

Legal effects of guarantee for defects in things

According to art. 155 of CCL, the legal effect of guarantee for defects in things is for the sellerto bear the liability for breach of contract pursuant to the provisions of art. 111. The remediesfor the buyer may include a claim for cure (namely repair, replacement or redoing), a claim forprice reduction (namely discount in payment or remuneration), a right to termination (namelyreturn of the subject-matter), and a claim of damages. Where there is a penalty clause, thebuyer may also claim the payment stipulated by the contract. As to the nature and the scope ofdamages in case of guarantee for defects in things, there is a debate between the theory ofcompensating for the reliance interest and the theory of compensating for the expectationinterest in Japan.71 The answer to the same question would be compensating for theexpectation interest as in China.

69 See SakaeWagatsuma, Law of obligations: special provisions, Vol. Two (1957), Iwanami Book Store, p.276;Younosuke Inamoto etc., Civil law text book 5: contracts, (1978) Yuhikaku, p.121.70 I have inquired Professor Huixing Liang, who was an important member of the Drafting Committee of CCL,on this matter, and he gave me such an answer by e-mail. Here I wish to express my thankfulness to ProfessorLiang for his help.71 See Hiroshi Mizumoto, Law of contracts, (1995), Yuhikaku, p.167.

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Conclusions

Liabilities in Chinese Contract Law should be a title of a book, as there are so manyproblems that the topic may include. As the purpose of this paper, the author just makes adescription of the main points of the topic, and shows the main problems that Chinese scholarsare concerning with.

CCL is a new law enacted in China by the end of the 20th century. There are a lot of newprovisions in the law, such as it adopts the Strict Liability Principle, it has unified theliabilities for guarantee of defects with liabilities for breach of contract.

CCL is a product of comparative law method. Both Civil Law and Common Lawmay findtheir influences in CCL, for example, CCL borrows anticipatory breach of contract fromCommon Law, while its provisions on penalty clause and enforced performance bear astriking character of Civil Law. And CCL also refers a lot to CISG, PICC and PECL. So afterthe enacting of the law, how to interpret and apply the law becomes a pressing problem.

Now the legislative organ of China is drafting a Chinese Civil Code. And CCL will be putinto the future Chinese Civil Code, with some necessary technical changes and amendments.

Contract Law of the Peoples Republic of China (CCL) 1999 Re-translated by Shiyuan Han(with a reference to Contract Law of the Peoples Republic of China, Law China 1999)

Art. 42 In the course of negotiations, the party that falls under any of the following situations,causing thus losses to the other party, is liable for the losses.

(1) entering into or continuing negotiations with no real intention of reaching an agreementwith the other party;

(2) concealing intentionally important facts related to the conclusion of the contract orproviding false information; or

(3) taking any other act contrary to the principle of good faith and fair dealing.

Art. 43 Neither party may disclose or inappropriately use business secrets obtained in thecourse of negotiations whether or not a contract is subsequently concluded. The party thatdiscloses or inappropriately use the said business secrets causing thus loss to the other partyshall compensate for the loss.

Art. 60 The parties shall fulfill fully their respective obligations as contracted.The parties shall observe the principle of good faith and fair dealing and fulfill the

obligations of notification, assistance and confidentiality in accordance with the nature andpurpose of the contract and trade practices.

Art. 68 The party, which ought to perform its obligations first, may suspend its performance ifit has exact evidence to prove that the other party falls under any of the following situations:

(1) business operations seriously deteriorating;(2) diverting properties and withdrawing capital to evade debts;(3) falling into business discredit; or(4) other situations showing inability or possible inability to perform its obligations.

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Where a party suspends its performance without exact evidence, it shall bear the liabilityfor breach of contract.

Art. 69Where the party suspend its performance in accordance with Article 68 of this Law, itshall promptly notify the other party of the suspension. The party shall resume its performancewhen the other party provides a guarantee. The party that has suspended its performance mayterminate the contract if the other party has failed to regain its capability to perform and toprovide a guarantee within a reasonable period of time.

Art. 92 After the ending of rights and obligations under a contract, the parties shall performthe obligations of notification, assistance and confidentiality in light of the principle of goodfaith and fair dealing and in accordance with trade practices.

Art. 93 The parties may terminate the contract upon an agreement.The parties may stipulate the conditions for termination of the contract by one party. When

the conditions for termination of the contract mature, the party with the right to terminationmay terminate the contract.

Art. 94 The parties may terminate the contract under any of the following situations:

(1) the purpose of the contract cannot be achieved because of force majeure;(2) before the period of performance expires, one party clearly indicates by word or by act that

it will not perform the main obligations;(3) one party delays in performance of the main obligations and still fails to perform them

within a reasonable period of time after being urged;(4) one party delays in performance of obligations or commits other kinds of breach and thus

makes the purpose of the contract unable to be achieved; or(5) any other situations as provided for by law.

Art. 95 If a time limit for exercising the right to termination is provided for by laws or byagreement of the parties, and the party concerned does not exercise such right at the expirationof the time limit, such right shall vanish.If no time limit for exercising the right to dissolve is provided for by laws or by agreement

of the parties, but the party concerned does not exercise such right within a reasonable periodof time after being urged by the other party, such right shall vanish.

Art. 96 When a party declares the termination of the contract in accordance with theprovisions of Paragraph 2 of Article 93 and Article 94 of this Law, the party shall notify theother party. The contract shall be terminated when the notice reaches the other party. Ifthe other party has objection, it may apply to a peoples court or an arbitration institution todetermine the validity of the dissolution of the contract.Where provisions of laws and administrative regulations require the dissolution of a

contract to