Understanding China, One Blog at a Time

An American in China

Chinese Contracts

Posted by w_thames_the_d on February 16, 2011

Really good excerpt about Chinese contract formation.

excerpt from here:

the 1999 UCL, whilst creating a new level of sophistication in Chinese contract law, was feared to “create problems because some of its terms and approaches do not fit the reality of Chinese business and legal practices. ” Furthermore, the UCL adopted concepts which were seemingly similar to those found in other contract law jurisdictions, but which in reality had different meanings in the context of the UCL. For example, terms such as ‘offer’ and ‘acceptance’ are used (Articles 13, 14 and 21), but associated concepts in common law such as ‘consideration’ are not used, which could lead to confusion. The 1999 UCL also uses concepts such as ‘fairness’ (Article 5) and ‘good faith’ (Article 6) which are open-ended and offer little further guidance as to their application. Thus, this “reliance on open-ended terms derived from foreign models is likely to undermine efficiency in the short run and give more discretion to Chinese courts and bureaucrats. ” In general, the 1999 UCL provides great flexibility in dealing with various contractual issues such as frustration and termination. However, “this very flexibility… will create challenges for the legal system and some uncertainty for parties because of vague or inconsistent standards. ”16 The effect of this was that contractual parties in China had to draft the terms of their contracts very carefully in order to avoid potential disputes. Indeed, such vague legislative provisions may seem alien to some foreign investors, but it could be argued that such vagueness also played an important role by giving judges the power to construe the law in the best way in an emerging commercial environment. On the other hand, this ignores the powerful argument that “the inherent problem with vagueness is that it leads to inconsistency and may serve as a vehicle for corruption. ”17

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