Chinese contract law and the economic reform - Essay Example

?Chinese contract law and the economic reform Introduction This paper seeks to look at the relationship between contract law and economic reform in China. To achieve this, the paper first looks at how Confucian values influenced the ancient China and even today's China. Then it views the PRC law system before 1978 and after 1978 by citing relevant examples and statistics. Further, the paper delves into how China’s previous contract laws had many contradictions and failed to meet the needs of China’s developing market economy. It then looks at why China needs a good legal system for economic reform, why a legal system is important for economic reform and what the relationship between them is. Lastly, the paper looks at why Chinese people still do not have confidence for china's law system and how the government has attempted to address the problem. Influence of Confucianism in Ancient and Present China Confucianism which means ‘The School of the Scholars,’ is the cornerstone of traditional Chinese based on the traditional culture of the Xia, Shang and Zhou Dynasties. It is attributed to K’ung Fu Tzu (Confucius in English) was born in 551 BCE in the state of Lu (modern day Shantung Province). He became the most influential and respected philosopher in Chinese history and his discourses were written by his disciples in the Analects.1 Confucianism combines a political theory and a theory of human nature, resulting in a prescriptive doctrine or way (dao). The political theory is based on the idea that the legitimate ruler derives authority from heaven's command, or the mandate of heaven, and is responsible for the peoples' well-being and for peace and order in the empire. In terms of human nature, humans are essentially social animals whose ways of interaction are shaped by convention or ritual (li), which prescribe proper behavior for a given situation. Good government is one that values hierarchy, group orientation, and respect for age and tradition. He also argued that societal order and harmony can be achieved if everyone understood their rank in society and were taught the proper behaviors of their rank.2 His teachings spread and was accepted across China and by around 100BC, the Han Dynasty declared Confucianism to be China’s official state philosophy. During the Tang Dynasty, however, it lost its official sanction but over the last two millennia, Confucianism has remained the dominant orthodoxy in Chinese society. It thus affected everything in China; education, government, public and private attitudes and, etiquette.3 His writings deal primarily with individual morality and ethics, and the proper exercise of political power by the rulers. Confucian ethical teachings include such values as: Li (includes ritual, propriety, etiquette); Hsiao (love within the family: love of parents for their children and of children for their parents); Yi (righteousness); Xin (honesty and trustworthiness); Jen (benevolence, humaneness towards others; the highest Confucian virtue); and Chung (loyalty to the state). His vision centered on respect children show to their parents; the high regard given elders and lawful authority figures; and an appreciation for learning, protocol and ceremony.4 Confucianism has influenced the Chinese attitude toward life, set the patterns of living and standards of social value, and provided the background for Chinese political theories and institutions. Confucianism promotes collective interests and community welfare through emphasis of the educational or remolding process in serving the common good of the society. This concept is still upheld in China to date as seen in the government’s attempts to serve the people and reduce the big gap between first tier cities and lower tier cities.5 Confucianism also projects the concept of harmony which states that oneself must live in harmony with everything around him and stay free of guilt or sin. In order to create harmony people should use what create order and harmony amongst all things by using all the knowledge the world could offer. The Chinese Government is using the past experience of other countries and social systems in order to drive the country to reach such harmony. For instance China learned from Soviet Union’s communism party which opened to free market during perestroika leading the country to disaster. Therefore, China avoided the mistakes and the transition to the new free market system was driven always with the main objective to keep harmony in China.6 Further, China still applies the concept of “face” as envisioned by Confucianism. To “lose face” means to lose honour and respect with others and no Chinese wishes to be put in that position. “Keeping face” means embarrassment has been avoided and the Chinese will try their best to avoid a person loosing face. To not protect a person from loosing face is the height of bad manners as a person must show respect for another and not embarrass or allow any demeaning of a person in front of others. Therefore, most Chinese companies in order to keep face agree with all business issues discussed which might create a lot of misunderstandings because they will not necessarily do what is proposed and agreed in the negotiation.7 The PRC Legal System before and after 1978 China’s legal history is divided into categories of traditional China and modern China. Traditional China legal history and structure is characterized in some of the following ways: feudalism, imperialism, and rule under emperors. Legal codes existed in traditional China, with the oldest surviving code being the Tang code promulgated in the seventh century AD. The Tang code constituted the foundation for the later developed codes of the Song, Yuan, Ming and Qing dynasties. These codes and statutes of law regulated matters that would be considered under criminal law under the modern legal approach. Further, there was no jurisprudential distinction between criminal and civil law, as penal sanctions occasionally applied to acts that would be covered by civil law today. Disputes between individuals (civil) dealing with family matters or land were generally settled through mediation. Such informal resolutions were conducted by respected leaders or elders in the villages who applied customary rules and concepts of morality to reach harmony between disgruntled individuals.8 In traditional China the emperor was vested with the executive, legislative and judicial powers. While the laws created by the emperor were binding on all of his subjects, the same law did not bind the emperor. As the supreme judicial power, the emperor could determine the guilt of accused individuals, dictate the penal sentence, or modify the judgments given by lower judicial authorities.9 Attempts to modernize the legal system were instituted by the Qing Empire in early twentieth century. It became apparent that some aspects of the legal system, such as the harshness of criminal procedure and the lack of commercial law rendered China’s law primitive in comparison to legal systems of other nations. One initiative started in 1904 was the creation of a Law Reform Bureau in 1904, instilled with the task of translating foreign codes and drafting new laws. Another move in the modernization direction was the promulgation of an Imperial Constitutional Outline in 1908. However, before any of the drafted laws were implemented, in 1911 the Qing empire was overthrown. Nevertheless, the successive governments adopted some laws that were partially based on the draft laws of the Qing reform movement.10 The Communist Party of China (CPC) was established July 1, 1921 and shortly after there was a politically tumultuous period referred to as the “New Democratic Revolution” encompassed three important struggles that the CPC engaged in. This period included Second Revolutionary Civil War (1927-37), the War of Resistance Against Japan (1937-45), and the Third Revolutionary Civil War (1945-49). In 1949 the CPC founded the People’s Republic of China (PRC).11 Between 1954 and 1978, there was not very much effort within the People's Republic of China (PRC) to create a legal system. The then government believed that creating a legal system would restrict the power of the Communist Party of China and create elites which would ultimately harm the socialist revolution. This policy was changed in 1979 when the PRC formed an increasingly sophisticated civil legal system. However, Hong Kong retained the common law system and Macau adopted a civil law system based on Portuguese doctrines.12 The sources of law of PRC include the 1982 Constitution of the People’s Republic of China (Zhonghua Renmin Gongheguo Xianfa); National People’s Congress (NPC) statutory law and other legislative enactments; international treaties; and case law. The constitution is the highest source of law in the country and it establishes the framework of the government, in addition to codifying the general principles of government and society and listing the fundamental rights and duties of the people of China. Three prior constitutions from 1954, 1975 and 1978 partially contribute to composition of the current Constitution. Law which is to have general impact is enacted by the NPC or its Standing Committee which also enacts regulations, decisions and resolutions. The State Council enacts administrative regulations and together with its ministries or commissions makes rules. PRC legislature automatically incorporates international law as part of PRC law. Their case law does not have a precedential value but lower people’s courts judges often attempt to follow the interpretations of the laws decided by the Supreme People’s Courts.13 PRC enacted some legislation after 1978. For instance, in 1986 the NPC adopted the General Principles of Civil Law of the People’s Republic of China, which helped clarify the scope of the civil law. The first codification of the provisional Civil Procedure Law of the PRC was passed in 1982 which was replaced through the enactment of the Law of Civil Procedure by the NPC in 1991. The Criminal Law Code and the Law of Criminal Procedure were first in 1979. The Law of Administrative Litigation, passed in 1989 by the NPC allows citizens, legal persons and organizations to bring legal challenges against certain administrative action.14 Previous Contract Laws vis-a-vis Meeting the Needs of China’s Developing Market Economy: Contradictions and Failures On March 15, 1999, the Contract Law of the People's Republic of China was adopted by the Second Session of the Ninth National People's Congress (NPC). It unifies and improves upon China's three previous contract laws, namely, the Economic Contract Law, the Foreign Economic Contract Law, and the Technology Contract Law. The Contract Law establishes a more advanced, systematic, and comprehensive contract law to better suit the particular needs of China's transitional economy.15 The Contract Law was necessitated by major problems with the previous contract laws such as the problematic notion of economic contract; the contradictions and redundancies among the Previous Contract Laws; and the lack of basic contract rules in the Previous Contract Laws. The previous contract laws, especially the Economic Contract Law and the Foreign Economic Contract Law, espoused a problematic notion of contract, that of "economic contract". With the promulgation of the Economic Contract Law in 1981, the concept was officially adopted by the Chinese legislature having originated from the former Soviet Union (USSR). There was a distinction between economic and non-economic contracts with the division of economic courts (jingji ting) and civil courts (minshi ting) within each of China's people's court handling the contracts respectively.16 The division of economic and civil contracts and of their respective sets of rules, was inherently dubious and failed to meet the needs of China's developing market economy. A market economy calls for a uniform market, one that is open on equal terms to all types of enterprises, organizations, and individuals. However, the three previous contract laws applied only to economic contracts, which by definition existed only between legal persons, not natural individuals. On the other hand, civil contracts were between natural individuals only. The dichotomy between economic and civil contracts was thus unfavorable to developing a uniform market in China and to providing a uniform contract law to all types of parties and transactions. Further, there were many contradictions and redundancies among the previous contract laws. For instance, modeled more closely on Western contract laws, the Foreign Economic Contract Law accorded the contracting parties greater freedom of contract than did the Economic Contract Law. The Revised Economic Contract Law created some additional discrepancies among the previous contract laws. For example, Article 27 of the Economic Contract Law provided that only where performance of an economic contract was rendered unnecessary by one party's breach, might the other party terminate the contract. To accord greater respect for a party's right of termination upon the other party's breach, the Revised Economic Contract Law abandoned this provision. However, the Technology Contract Law still followed Article 27 of the Economic Contract Law in stipulating that a party could only terminate a technology contract where its performance was rendered unnecessary or impossible by the other party's breach.[19] Thus there existed an obvious contradiction between the Revised Economic Contract Law, on the one hand, and the Technology Contract Law, on the other.17 As they contradicted and duplicated one another, the previous contract laws also failed to cover certain common situations. For instance, the Economic Contract Law governed economic contracts only, leaving non-economic contracts to be governed by no particular statute. In addition, with the Foreign Economic Contract Law governing economic contracts involving foreign parties and the Economic Contract Law governing domestic contracts only, there was no legal basis for deciding disputes concerning non-economic contracts involving foreign parties. Similarly, because the Technology Contract Law applied to domestic technology contracts only and the Foreign Economic Contract Law did not apply to technology contracts involving foreign parties, foreign-related technology contracts were left outside the realm of the former contract laws.18 There also existed inconsistencies between the three contract laws, on the one hand, and the General Principles of Civil Law ("GPCL"), on the other. For instance, the GPCL stipulates that, "civil acts should follow the principles of voluntariness, fairness, equal compensation, and good faith." By contrast, Article 5 of the Economic Contract Law provided that, "in forming economic contracts, [parties] must follow the principles of equality and mutual benefit, consultation and agreement, and equal compensation," whereas Article 3 of the Foreign Economic Contract Law provided that, "contract formation should follow the principles of equality and mutual benefit, and consultation and agreement." Neither of the two contract laws mentioned the principle of good faith, as does the GPCL.19 There was lack of basic contract rules in the Previous Contract Laws such as those of offer and acceptance. The new law thus cured the defect through the production of several major laws and regulations in the field of contract. Before then, such crucial issues as what constitutes an offer or acceptance, what distinguishes an offer from an invitation to deal, and so on, were left to the discretion by individual judges. This created much discrepancy and many similar problems in practice. Further, the previous contract laws lacked any legal rules on pre-contractual liabilities.20 Good Law System for Economic Reform: the Need, Importance and Relationship Thereof Past economic reform of the state sector in China consisted mainly of privatization, of agriculture and of small and medium-size state enterprises, leaving large state enterprises in the control of the state. Current reform consists of making state-owned enterprises and banks more efficient and functioning like private enterprises, and gradual privatization of some large state enterprises. Bureaucrats managing state assets and the selling of assets take advantage of such power to benefit themselves, including embezzlement of public funds and taking bribes from citizens needing their help, as can be found in state enterprises, state-owned commercial banks and in government projects. Reducing the size of the government sector is a basic solution to the corruption problem in China while attention should be paid in the privatization process which can involve corruption. If all Chinese are inclined to follow the rules as specified by law, much of the behavior of corruption will disappear. Corruption is one example of illegal behavior which also includes the violation of intellectual property right, patent laws, tax evasion by tax payers and harassment by tax and other officials.21 Rule of law should prevail to enhance personal freedom and democracy which is essential in economic reform. A well-functioning legal system in a market economy should have a supply of market-friendly laws, adequate institutions to supplement and enforce them and a demand for these laws from the market participants. However, weak legal systems become harbors of violent and white collar crime, corruption, unpredictable judicial institutions and lack of rule of law enforcement leading to informal legal processes may fill gaps and permit some markets to function.22 Lack of Public Confidence for China's Legal System: Government Reactions China’s phenomenal economic development and correspondingly rapid social changes have dramatically increased pressures on courts to cope with problems that other government agencies have failed to resolve. This is especially true in the countryside, where village, township and county officials have too often lost the confidence of the people, but it is also true in the cities. Further, the courts and other petitioning systems are inadequate and ill-equipped. The central and provincial governments have not been creative in establishing new institutions to handle complex challenges such as those that have arisen over land use transfers.23 Thus, aggrieved citizens who are reluctant to run the risks of public protests or undergo the futility of formal petitioning naturally turn to the courts. The government has tried to address the issues by strengthening the judiciary in many ways. For instance, the numbers of judges, prosecutors and legal specialists has been increased throughout central and local governments and legislatures and state-owned and private enterprises. Further, the number of law schools, has been increased and hired thousands of able law professors whose scholarship is now prolific and increasingly impressive. Large- and medium-sized cities have their own arbitration commissions, as well as China’s international arbitration commission, to offer as alternatives to the courts. A nationwide network of lay mediation committees has also been resurrected. Additionally, legal aid organizations of various types have begun to flourish.24 Conclusion The values and principles of Confucianism have continued to influence most of the aspects of the Chinese people’s life since about 100 B.C. to date. Before 1978, China based its legal system on codes and there was no distinction between civil and criminal law with contract law matters being solved through mediation. This changed in 1979 when the PRC formed an increasingly sophisticated civil legal system where Hong Kong retained the common law system and Macau adopted a civil law system based on Portuguese doctrines. In 1986 the NPC adopted the General Principles of Civil Law of the People’s Republic of China and in 1999, the Contract Law of the People's Republic of China was adopted to unify and improve upon China's three previous contract laws, namely, the Economic Contract Law, the Foreign Economic Contract Law, and the Technology Contract Law. A good legal system is therefore vital in ensuring economic system and there the Chinese government has made attempts to reforms its legal system to boost public confidence in it. Bibliography Ai YongMing, ‘Why did the Attempt to Modernise the Legal System in Late Qing China Fail? A Sino-Japanese Comparative Study’ Bond Law Review, Vol.16 Issue 1, Soochow University Albert H.Y. Chen, ‘Toward a Legal Enlightenment: Discussion in Contemporary China on the Rule of Law’ Chen, F. (2001). ‘The New Era of Chinese Contract Law: History, Development and a Comparative Analysis.’ Journal of International Law. China Reform Foundation (editor and publisher), ‘The Road of China toward Market Economy’, China Financial and Economic Press, 1996. Dr. Grace Li, ‘The PRC Contact Law and Its Unique Notion of Subrogation.’ Journal of International Commercial Law and Technology, Vol. 4, Issue 1 (2009) Fan Gang and Xin Chunying, ‘The Role of Law and Legal Institutions in Asian Economic Development: The Case of China. Patterns of Change in the Legal System and Socio-Economy. Development Discussion Paper No.664 (1998). Harvard Institute for International Development Kreise, S. (2006). ‘Convergence, Culture and Contract Law in China.’ Minnesota Journal of International Law Vol, 15. Xu Mengzhou and Zhou Ke, editors, ‘The Legal Adjustment of Market Economy in China’, The Law Publisher, 1993. Yang Weiyi Yang Yifan and Chen Hanfeng, ‘Legal History of the People’s Republic of Chuna’, Hei Long Jiang People’s Press, 1997. Zhang Weiying, ‘China’s Gradual Reform: A Historical perspective’, Working Paper, Oxford, 1994. Read More