Master Thesis

Comparative Contract Law - A proactive approach to management of differences in contract law and business culture between Denmark and the People’s Republic of China. By Tim Kristensen – Cand.Merc.Jur

1

About the author Tim R. W. Kristensen has written this presentation as the final master thesis on the study programme MSc in Business Administration and Business Law at Aarhus School of Business (ASB), Aarhus University in the period April 1st to September 1st 2010. In connection with this thesis he has participated in the TNC Negotiation Challenge 2010 to get firsthand experience in cross cultural negotiations. The content of this thesis may be copied and reproduced with proper attribution of authorship. Counsellor: Réne Franz Henschel Co-Counsellor: Matthew J. Elsmore

The author would welcome any feedback and can be contacted by email: [email protected]

Aarhus, August 30, 2010

2

Table of Content 1 - Introduction ................................................................................................................. 5 1.1 Thesis Statement ..................................................................................................... 6 1.2 Delimitation ............................................................................................................ 6 1.3 Method and theory .................................................................................................. 7 1.3.1 Abbreviations .................................................................................................. 8 1.4 Composition ........................................................................................................... 8 2 – Legal dogmatism, the Chinese legal system and cultural considerations................. 10 2.1 Contract fundamentals in the Chinese and Danish legal system .......................... 12 2.1.1 CISG .............................................................................................................. 17 2.2 General Cultural Considerations .......................................................................... 17 2.3 Introduction to the importance of handling contract clauses ................................ 20 3 - Limitation of Liability and Exemption clauses. ........................................................ 22 3.1 Limitation of liability clauses. .............................................................................. 23 3.2 Exemption clauses. ............................................................................................... 25 3.3 Limitation of liability in standard terms. .............................................................. 27 3.4 Additional Remarks and Critical Observations. ................................................... 28 3.4.1 Consequential and/or Unforeseeable Damages. ............................................ 28 3.5 Cultural Challenges. ............................................................................................. 29 3.6 Summary. .............................................................................................................. 30 4 - Penalty Clauses. ........................................................................................................ 32 4.1 Breach of Contract ................................................................................................ 32 4.1.1 The CISG. ...................................................................................................... 35 4.1.2 Specific Performance. .................................................................................... 36 4.1.3 Damages. ....................................................................................................... 37 4.2 Different failures to perform................................................................................. 38 4.3 Cultural Challenges. ............................................................................................. 39

3

4.4 Summary. .............................................................................................................. 40 5 - Hardship Clauses ....................................................................................................... 42 5.1 Change of circumstances ...................................................................................... 44 5.1.1 Changes of circumstances related to the parties ............................................ 48 5.2 Cultural Challenges .............................................................................................. 48 5.3 Summary............................................................................................................... 49 6 - Venue Clauses ........................................................................................................... 51 6.1 Choice of law ........................................................................................................ 51 6.1.1 The CISG and its challenges in China ........................................................... 53 6.2 Jurisdiction ........................................................................................................... 53 6.3 Dispute resolution. ................................................................................................ 55 6.3.1 Negotiation & Mediation ............................................................................... 56 6.3.2 Arbitration ..................................................................................................... 56 6.3.3 Litigation. ...................................................................................................... 58 6.4 Cultural Challenges .............................................................................................. 58 6.5 Summary............................................................................................................... 60 7 - Conclusion................................................................................................................. 62 7.1 Bullet points from my research ............................................................................ 63 7.2 What makes a difference in interpretation? .......................................................... 64 7.3 Future perspective................................................................................................. 69 8 - Bibliography .............................................................................................................. 70 8.1 Books .................................................................................................................... 70 8.2 Homepages and articles ........................................................................................ 71 8.3 Others ................................................................................................................... 74 8.4 Readings not directly referred to .......................................................................... 75

4

1

- Introduction

Soon after, the Communist Party came to power in 1949 Western businesses withdrew from China and remained absent for the next 30 years. During most of that time, only commodity sellers and traders did business there. It was not until the Sino-Foreign Equity Joint Venture Law of 1979 that Western businesses in any numbers started to negotiate in China1. Trading in China was, however, restricted and it was not until 1999 that Western businesses could enjoy the benefits of a market orientated law that is technically improved to better protect contractual rights, emphasize freedom of contracting, and restrict government interference. Today, it is a well known fact that China is not a homogeneous country but a nation with many facets. This makes it a country with wide possibilities to do business. China is a country with a more developed and balanced industry than many developing countries and it have a population that counts for more than 1.3 billion people. It is a very attractive country for the West because we can take advantage of scale economy with cheap manufacturing costs. This has led companies to do business in China, but many of them have also suffered miserable in the process of contracting. One party gives an offer, the other an acceptance, the terms and conditions of the contract are negotiated, and we have an agreement. A business relationship can be described that simple, or can it? The world is said to have become smaller due to globalization as the predominant concept. It causes a very complex structure where competition across borders forces each company to be awaken and always stay one step ahead. Globalization happens due to choices of that people want better and cheaper products. In any case, benefits from globalization are due to how well markets function. Well-functioning markets require and inspire a certain attitude towards agreements that can be identified as “contract cultures”. A contract culture exists when all parties to an agreement are predictably treated as equals whenever there is a legal dispute or a need for interpretation of the

1

5

Blackman, Carolyn – Negotiating China – Case studies and strategies

conditions behind the pact2. China is in a development where a contract culture is born. It can be argued that, exposure to contracts has impacts on cultures since it imposes greater accountability on businesses as well as governments. The difference between Denmark’s and China’s contract culture is intriguing. Will we expect the same from a contract? Relationships? Does the government have different visions on contract enforcement? Fulfillment? Interpretation? What can we expect to be accountable for? Is culture a determining factor? These are questions that many companies have not taken the time to answer because they want quick earnings in China. How relevant are these questions, in any case?

1.1 Thesis Statement The anomaly in this thesis is to study comparative contract law between Denmark and China. There is a presumption that cultural traditions and differences between two nations have an influence on interpretation, the genesis of the law, successful negotiation and contract drafting. Until now there have been few studies on this. The purpose of this study is precisely to investigate whether this culture clash is a determining factor in the successful performance of contracts. This analysis is intriguing because it is well known that a proactive approach to contracting can avoid unnecessary risks, costs, waste of time and disputes. This thesis will analyse how these challenges can be overcome by taking the necessary precautions under the negotiation, the design and performance of the contract.

1.2 Delimitation This thesis will only handle civil law and the challenges concerning business to business contracts. I will only address Chinese mainland law and excludes Hong Kong law which is largely the same as English law. I chose four contract clauses, due to the page limitation. I based my choice on a list of the top ten most negotiated clauses in China. I chose to include Venue clauses because the choice of venue has a significant impact for foreigners doing business in China. This thesis will not enumerate what the Chinese contract law prescribe but will look into specific contract areas. I focused on those areas of the law that raises the most questions and are the most prominent ones to understand for foreigners and especially Danish companies dealing with Chinese. The text does not claim to deal with all issues of Chinese law and will

2

6

Global Envision - Globalization and “contract culture” - http://www.globalenvision.org/library/8/715

only perfunctory deal with generally principles of contract drafting. For this reason, is it advised to seek advice from a legal counsel, to fully, comprehend the law.

1.3 Method and theory My thesis is written as a macro comparison which processes the legal systems structure, how legal rules arise and are implemented, how they become written law and the way laws are used and interpreted. I write about business customs and the role it has in courts, how judges work and how sentences are designated. I research whether or not courts and citizens follow the rules as it plays a decisive role in the interpretation. It is a de lege lata “the law as it exists” method of analysis. The way I analyze my thesis is through an analytical method where I look at each problem in both legal systems and compare them. My analysis is both dynamic (looks at the development) and static (looks at how the law is today). Additionally, I use two different legal, scientific methods in my analysis; Legal history, which deals with, the laws different functions under changing political, economical, social, religious and other cultural factors, contemporary with an insight in the legal relevance to a society's entire state and development. Legal sociology, which seeks to, find the societal reasons to different legal rules and legal institutions and seeks to describe the implications in the society of the legal regulation. The legal sociology’s job is not to describe every rule in detail but to prove general outlines of some rules.3 Culture is defined and represented in four basic problem areas (Hofstede). They are power distance (from small to large), collectivism versus individualism, femininity versus masculinity, and uncertainty avoidance (from weak to strong)4. I recognize that law itself is part of a country’s culture as it is a broadly defined term. I based my thesis on well known literature without own collection of empirical data. I use the information gathered from books and in combination, the law and cultural data will represent an innovative and analytical thesis living up to the standards of a scientific research. I presume that the reader has comprehensive knowledge about Danish contract law and drafting of International commercial contacts as I refer to provisions without explaining the extend of them. 3

Evald, Jens & Schaumberg-Müller, Sten – Retsfilosofi, retsvidenskab & retskildelære and Lando, Ole – Kort indføring i komparativ ret 4 Chinese Culture and Management – The importance of cultural dimension when doing business in China. p. 183

7

Unless indicated otherwise, all “Articles” cited in this paper refer to articles of the new Contract Law of the People’s Republic of China of October 15, 1999. 1.3.1 Abbreviations B2B – Business to business. CCL – Chinese Contract Law. China - The People’s Republic of China CIETAC - China International Economic and Trade Arbitration Commission CISG – United Nations Convention on Contracts for the International Sale of Goods Comparative law - Comparison of legal institutions, systems, traditions and legal families5. UNIDROIT - International Institute for the Unification of Private Law

1.4 Composition Chapter two is the beginning of the thesis. First you are introduced to legal dogmatism, which introduces how, legal systems arise, evolve and how judges get their inspiration when interpreting contracts. Subsequently fundamentals of the legal system in Denmark and China give you extensive knowledge before preceding the individual clauses. Analysis of general cultural differences gives you insight in the bigger picture of China before approaching cultural related aspects of the individual contract clauses. Finally, an introduction of the importance of a proactive approach to contracting prepares you to proceed to the body of the theses. In Chapter three, you will read about the most important contract clause in China; Limitation of liability and exemption clauses. You will get knowledge about when and what makes these clauses enforceable and get introduced to two principles that identify your liability and can be used to limit and exempt your liability. The most common limitation of liability clause is identified and carried out in an analysis. A crucial difference between Denmark and China in the interpretation of Specific Performance is discussed with suggestions. You will read about the only statutory exemption in China, how the validity of this clause is contested, and what makes them void. Standard clauses 5

Gonzáles, Roseann Dueñas et al, Fundamentals of court interpretation – Theory, Policy and Practice, 1991, p. 143

8

are discussed, and an interpretation difference is identified that might challenge its enforcement if not observed. Finally, two cultural traits that challenge the drafting of these clauses are identified. In Chapter four, you will read about Penalty clauses. You are introduced to where the spirit of the statutory rules comes from, their validity and the way of estimation. Liquidated damages are analysed, a rule of thumb is identified and similarities discussed. The full compensation approach is interpreted, and a significant difference from Denmark is found in remediation. Surprising differences from the West in interpretation of the CISG are in short discussed. Finally, different failures to perform and its consequences are discussed followed by a cultural analysis which includes challenges and suggestions at the negotiation table. In Chapter five, you will read about Hardship clauses. You are introduced to different reasons why hardship clauses are agreed upon followed by the legal regulation in China, CISG and the UNIDROIT principles. Followed is an in-deep analysis on the basis of new Court interpretation not even updated by the biggest authors in this area. This analysis begins with current case law followed by five points of new interpretation, and in conclusion, the Chinese rules are compared to Danish and international procedure. Traditionally, analysis of cultural traits that have an impact on negotiation and interpretation of the rules are carried out. Here, you will find two cultural traits and conditions that will both challenge the contract and explain the clause popularity. In Chapter six, you will become acquainted with the most important contract clause in International contracts: The Venue clause. You will comprehend the importance of venue clauses and acquire knowledge about choice of law which includes critical information about the CISG followed by the rules of jurisdiction. Subsequently dispute resolutions are discussed which contains critical, cultural traits and facts that could mean the difference between success and failure. In conclusion, additional cultural challenges are analysed. Chapter seven is the conclusion of the thesis which will bring all the discoveries, new interpretation, controversial discussions and crucial differences between Denmark and China together. The thesis statement will be answered, and I will put the matter into perspective with examples from my discoveries.

9

2

– Legal dogmatism, the Chinese legal system and

cultural considerations. To answer, the anomaly of this thesis, it is crucial to have a scientific stable foundation. The purpose of this chapter is to introduce the reader to sociology and historical development of the Chinese legal system to build a solid foundation to provide the final conclusion. What we want to know is why there is a difference in the way Danish and Chinese courts interpret provisions. The meaning of the word “interpretation” is that it is a certain conception of a text, situation, experience or similar, which may vary from person to person. This means that there is room for varieties which can come from culture, scientific research, societal or social circumstances because it is not possible to give an objective description of the reality, hereunder the legal reality. All concepts and phenomenon’s open up for interpretation and thereby include subjective results because it is conditional on ways of looking at life and societal views. Legal texts are written with different words that can have several meanings or be ambiguous. For example, try clearly to describe the meaning of unreasonable. Before one can interpret legal rules, one has to know the conditions and considerations behind the legal system which can be ordinary or special points of view. For example in a country, they tried to convince people to take a pill combating malaria by sending out a brochure. First showing a picture of a sick man, then a picture of him taking a pill and finally a picture of him being healthy. What they forgot is that people in this country read from the right to left. Differences in societies can lead to different interpretations because people look at things in different ways. Differences can also occur if the rules are not interpreted by using concrete application of the legal rules. In such case, outcomes are coincidence which may occur among others for historically reasons6.

6

10

Evald, Jens & Schaumberg-Müller, Sten – Retsfilosofi, retsvidenskab & retskildelære, 2004. P. 215f

Legal systems can survive many places and does not need to have any connection to the people, any particular period or place. German law is an example of this and has been received in countries like Paraguay, Japan and China even thought there are big cultural differences (Watson, 1974)7. The reason why countries use other countries legal systems as inspiration is because these other legal systems have been tested in practice by its use and should, therefore, work in other countries too. Since the first laws were made, the law makers have compared and used what they believed was better in their own legal system, often from neighbors. German laws influence on Nordic law is, for example, big. The Danish Sale of Goods Act from 1906 and the Contracts Act from 1917 have big similarities with the equivalent rules in BGB (German civil law book). The argument for the rules to be different is that we do not take things from foreign legal systems that are inappropriate for our state of law. We have avoided Germany’s heavy conceptual universe and detailed legislature8. From this argument is it implied that legal rules are not universal. It has been argued by Fuller (1978) that, truly, to understand the foreign law text we have to look at the meaning and choice of the words because it is determined by its cultural background9. This is because courts generally do not use foreign court practice. The reason is that it would be too comprehensive to seek information about how foreign courts interpret provisions or cases10. Similarities and differences in two legal systems interpretation might be explained by the legal connection to culture. Law and the thereby connected concepts can either be universal or local11. Two legal jurisdictions may have the same rules that they interpret the same way because there are universal human needs that we comply after. Additionally there are local differences that can explain a different interpretation. A German businessman might expect timely delivery different than his Italian business partner. The judges programming of his mind will recognise this because of where he comes from and his level of education. Many juridical authors have spread messages that had an influence in many countries. One of the leading authors, Carl Friedrich Von Savigny, said that the law has grown 7

Peter de Cruz – Comparative law in a changing world, 2nd edition. P. 217 Lando, Ole – Kort indføring i komparativ ret, p. 170f 9 Peter de Cruz – Comparative law in a changing world, 2nd edition. P. 217 10 Evald, Jens & Schaumberg-Müller, Sten – Retsfilosofi, retsvidenskab & retskildelære, 2004. P. 343 11 Evald, Jens & Schaumberg-Müller, Sten – Retsfilosofi, retsvidenskab & retskildelære, 2004. P. 193f 8

11

organically from the people and that it must be the people’s common practice that one should follow. Jean Portalis had some thoughts about how law books and laws should be written and used. He rejected the wording of the law and said that the judges using a law or following case law will always be influenced by value conceptions found in the society he lives in and that it should be that way. Law and fairness cannot be divided, and judges should have a possibility to develop a practice of fairness. These teachings had a strong influence in the Western world. The German author Windsheid invented the teachings about failing requisite (forudsætningslæren) which Danish courts later started to use. Authors use each other’s knowledge to support their thesis and, thereby, show that there are different ways to interpret things. The Danish author, Henry Ussing, did this and his works have an influence on interpretation of Danish cases i.e. foreign interpretation have an influence on Danish case law12.

2.1 Contract fundamentals in the Chinese and Danish legal system Before you enter into a contract with your Chinese partner, you should become familiar with the Chinese legal system and its laws that will affect your contractual arrangement. In China, the legal system is generally based on the same civil law principles as in Denmark. In civil law, the concept of obligatio is crucial to understand, which refers to the specified relationship of rights and obligations between the parties concerned13. In China, Germanic civil law is mixed with socialist law whereas, in Denmark, we go under the characteristics of the Scandinavian14 subgroup/family15. Germany was a rising power in the past 19th century while many Asian nations introduced civil law. China remarked German law as strong and dominant. This is the reason why the German Civil Code has been the legal basis of China16. China is considered as a system with customary, tribal laws with a philosophical, and religious or traditional system which serves this specific ethnic group17. It is now in modernization where the rule of law replaces the rule of man.

12

Lando, Ole – Kort indføring i komparativ ret, p. 171f Zhang, Mo – Chinese contract law – theory and practice, p. 26 14 Denmark, Finland, Iceland, Norway and Sweden 15 Gonzáles, Roseann Dueñas et al, Fundamentals of court interpretation – Theory, Policy and Practice, 1991, p. 143 16 Economic Expert 17 Gonzáles, Roseann Dueñas et al, Fundamentals of court interpretation – Theory, Policy and Practice, 1991, p. 143f – Not so widely adopted that it can serve a legal family. 13

12

Part of the law that prescribes state management of the economy also known as the state plan is still maintained in China. However, the new liberal law has essentially adopted a Western system with its terminology, method and juridical values. Chinese law makers meant that a modern industry and service society had to include Western values to work efficient. They did not believe they could do this without using Western values in their laws. You could then ask yourself why they used the continental European structure and not the Angelo-American structure. They believed that the German rules had the best chances of succeeding because it’s very systematically with fixed rules and not in practice developed rules as Common law18. Rapid economic development has contributed to the change of China’s domestic legislation. Separate pieces of legislation on domestic and international contracts was replaced by one law; The Contract Law of the People’s Republic of China (CCL)19. The fusion of the Economic Contract Law, Technology Contract Law and the ForeignRelated Economic Contract Law show China’s commitment to a more open and widen view of international trade. The new Contract Law reflects contractual exploration and demand taking place in real life. Made in collaboration with an academic circle it reflects international and foreign experience in comparison with foreign contract law and international, uniform laws. The CISG has profoundly influenced the evolution of Chinese domestic contract law and still does20. The CISG is together with the UNIDROIT principles the main reference of the CCL21. This gives us an indication of where the spirit of the Contract Law largely comes from. Many Articles of the CCL, in particular those, in the chapter on General Provisions, are similar in spirit to the UNIDROIT Principles22. Also, Chinese Courts use UNIDROIT principles as guidelines (particular in lower courts) but are though not binding under the Chinese legal framework23. Case law is not regarded

18

Lando, Ole – Kort indføring i komparativ ret, p. 152f Xiao, Yongping & Long, Weidi - Selected Topics on the Application of the CISG in China – 1.1.2 Indirect Application 20 Xiao, Yongping & Long, Weidi - Selected Topics on the Application of the CISG in China – section 1. INTRODUCTION + The Application of the CISG in the Current PRC Law and CIETAC Arbitration Practice by Fan Yang section 1.3 21 Xiao, Yongping & Long, Weidi - Selected Topics on the Application of the CISG in China – note 5 22 Zhang Yuqing & Huang Danhan - The New Contract Law in the People’s Republic of China and the UNIDROIT Principles of International Commercial Contracts: A Brief Comparison 23 UNILEX – China case – date: 00.00.2002 by Henan Luoyang Jianxi District People’s Court 19

13

as a genuine source of law in China, but the Supreme Court’s decisions have, where known, great guiding significance24. The contractual relations between two parties are generally regulated through the CCL25. In Denmark, we have the Contracts Act (Aftaleloven), which applies to all property types of contracts and regulates the signing of contracts. The law of Sales of Goods (købeloven) supports the interpretation of contracts by regulating the rights of costumers in relation to retail or other sellers of goods and services26. In this area, the CCL generally deals with the same issues in terms of the service content in contracts. In China, the exchange of an offer and acceptance conclude contracts (Article 13). Pursuant to the Danish Contract Law Article 1, 1st period, are offers and responses to offers binding to the submitter i.e. an offer is a promise. Over 20 Articles of the new Contract Law relate to offer and acceptance and closely follow the provisions contained in the UNIDROIT Principles as well as in CISG27. The principles of offer and acceptance are close to those in the Danish Contracts Act28. However, in practice there is a cultural difference. Your Chinese partner might verbally respond to a lot of offers without taking them seriously29 so in practice relying on an offer as in Denmark is less desirable. The reason being that the words Yes and No is not always understood the same way as in Western Culture30. The reason why we have long contracts is that we want to deviate from the statutory law31 which often opens up for interpretation. The purpose of interpretation rules is to have guides. Previously did the courts in China in practice often treat contracts whose contents were unclear or ambiguous as invalid, thus causing many transactions to be 24

Lando, Ole – Kort indføring i komparativ ret, p. 154 Chen, Jianfu - Chinese Law – Context and transformation, Brill, 2007 – Chapter 12, page 449 – When the law came into force on 1st October 1999, the three pillars (old contract laws) ECL, FECL and LTC were simultaneously repealed. 26 Bryde Andersen, Mads et al. Lærebog i obligationsret I, Ydelsen Beføjelser, 2 Udgave. Side 19 – Among other supplementary laws are the law of debt letters (Gældsbrevsloven) and the insurance contract law (Forsikringsaftaleloven) to support the interpretation of contracts. 27 Zhang Yuqing & Huang Danhan - The New Contract Law in the People’s Republic of China and the UNIDROIT Principles of International Commercial Contracts: A Brief Comparison, p. 4 28 Kritzer, Albert H. - International Contract Manual– Chapter § 51:3 29 This is my own linkage of law and culturally analysis. The culturally postulate comes from reading different books and a statement from Michael Pedersen under the course “Drafting commercial contracts in 2010” 30 Fang, Tony – p. 3 31 Statutory law refers to something that is not required, and you can therefore deviate from it. Mandatory refers to something that is required, and not optional or subject to discretion. In legal construction of statutes, mandatory requirements of law are typically found by the use of words such as "will" and "shall". 25

14

eliminated32. A system of contract interpretation was missing with the three former laws being silent in this area. However, the CCL stresses a lot of emphasis on clear contracts. Article 12 gives the parties freedom to determine the contents of a contract and enumerates general provisions on what clauses a contract should contain. Somewhat, a system is created with standards for contract interpretation, and the judge's discretion is appropriately restrained. Similar to Danish contract law33, China now interpret contracts by their prevalent meanings that disfavor the contracting party that designed the contract in case of uncertainty (Article 41) and have guidance for ambiguous contracts (Article 62 and 63)34. Although, the CCL Article 125 is the only true provision concerning contract interpretation contrary to the UNIDROIT Principles which pay much attention to the interpretation of contracts, providing a whole series of general rules in Chapter four35. A contract may in China just as in Denmark be in writing, oral and any other form36 contrary to the former three contract laws. This new approach was inspired by UNIDROIT principles37. The freedom of contracting is an essential element in understanding contracting, and what limitations there are, when drafting clauses addressed in this thesis38. Generally said; the differences between two legal systems are to be found in the freedom of contracting. In UNIDROIT39, Denmark and the West40, we say that the freedom of contracting expresses the Contracting Parties' common intentions41. China also use the term common intentions but excluded the principles of freedom of contracting, pursuant to the CCL Article 4. The right to contracting is something the government has given the parties, but will revoke or limit at its discretion. The freedom of contract as 32

Liming, Wang and Chuanxi, Xu - Fundamental Principles of China's Contract Law – 13 Columbia Journal of Asian Law (1999) 1-34, page 16 33 Andersen, Lenart lynge – Aftaler of mellemmænd, 4 Udgave, p. 385 (koncipistreglen) 34 Liming, Wang and Chuanxi, Xu - Fundamental Principles of China’s Contract Law – 13 Columbia Journal of Asian Law (1999) 1-34, page 17 35 Zhang Yuqing & Huang Danhan - The New Contract Law in the People’s Republic of China and the UNIDROIT Principles of International Commercial Contracts: A Brief Comparison, p. 10 36 PRC contract law Article 10 and Andersen, Lenart lynge – Aftaler of mellemmænd, 4 Udgave, p. 90. Notice that certain contracts are required to be written in both jurisdictions. 37 Zhang Yuqing & Huang Danhan - The New Contract Law in the People’s Republic of China and the UNIDROIT Principles of International Commercial Contracts: A Brief Comparison, p. 4 38 The history behind freedom of contract in the Republic of China will not be addressed. 39 Zhang Yuqing & Huang Danhan - The New Contract Law in the People’s Republic of China and the UNIDROIT Principles of International Commercial Contracts: A Brief Comparison, p. 2f 40 Lando, Ole – Kontrakts retten I Kina – p. 48 41 Andersen, Lenart lynge – Aftaler of mellemmænd, 4 Udgave, p. 22

15

embodied by the Contract Law is, therefore, relative but not absolute42. Additionally foreign investors are limited in contracts about joint ventures, transfer of technology, offshore exploitation of oil, assignment of patent rights and import of pharmaceutical products. The legal Author Mo Zhang does for this reason call the Chinese freedom of contracting a bird in a cage43. During the past ten to fifteen years, China's adoption of laws supporting commercial transactions has been dramatic. By many estimations, China now possesses a reasonably adequate base of commercial law. The real challenge facing China in this area, however, stems from its still-evolving ability effectively to enforce its laws44. However, the Chinese government realized that contracts are a component of the modern economy, and confidence for effective enforcement of contracts is essential for an economy running smoothly. Ethics, with the exception of Law, is one of the most crucial components in ensuring enforcement of contracts. Contract ethics are the moral standards which both sides must be respected during contract negotiations, during execution and subsequently45. In China, the contracting partners shall live up to the principles of fairness (CCL Art. 5) and good faith (CCL Art. 6) when they exercise their rights and fulfil their duties46. This principle is what we in Denmark and the West call sound business practice and aims at unfair terms of the contract47. As in Denmark, sound business practice is not a principle that can displace specific provisions that may lead to another result. It is a principle used to interpret an obscure contract and plays a pivotal role in the completion of contracts48. The CCL Article 60 provides that the parties shall meet their obligations under the agreement which implies an obligation for Specific Performance49, however, with limitations50.

42

Liming, Wang and Chuanxi, Xu - Fundamental Principles of China’s Contract Law – 13 Columbia Journal of Asian Law (1999) 1-34, page 8. 43 Lando, Ole – Kontrakts retten I Kina – p. 48 44 Mondaq – China – Going to China 45 Lu, Xiaohe – Developing business ethics in China, p. 63 46 Lando, Ole – Kontrakts retten I Kina – p. 49 47 This principle can be found in the Danish contract law Article 36 and a similar provision in the CCL Article 39. 48 Lando, Ole – Kontrakts retten I Kina – p. 50 49 Lando, Ole – Kontrakts retten I Kina – p. 81 50 Lando, Ole – Kontrakts retten I Kina – p. 146 – Limitations is mentioned in Article 110.

16

2.1.1 CISG Often named as a convention, the CISG is a treaty that both Denmark and China have ratified51. If the court then finds that the CISG contains provisions differing from those in the China’s domestic legislations, the provisions of the CISG shall prevail52. Pursuant to Article 1 of the CISG it shall apply between Denmark and China. China has declared that they only will apply CISG when both parties are domiciled in a country that has acceded CISG53. CISG will, therefore, be used when doing business with moveable goods (løsørekøb), unless the parties have agreed themselves out of it, often with the clause; CISG excluded. Denmark has excluded part II of CISG; Formation of the contract. The convention applies only to purchase agreements and the seller and buyer’s rights and obligations under the agreement. It does not apply in particular to the validity of the contract or any part of the agreement or by custom54. Validity and formation are left to domestic law55. You should, therefore, still consider the choice of law in contracts. CISG Article 7(1) prescribes uniform application of its provisions. History shows that member states have used each other’s case law to interpret the rules. This means that China should interpret the rules the same way as we do56.

2.2 General Cultural Considerations Understanding culture is about understanding the truth and beliefs of others. Once you learn a new paradigm, you can no longer hold to the older belief as your truth. If you force their truth, it will force you. The truth is what we as individuals want the truth to be; the nature we were born from. What you have to worry about is showing a lack of respect towards your counterparty. Understanding is key. The Chinese culture is molded by three philosophical traditions – Confucianism, Taoism and Buddhism. Briefly, Confucianism deals with human relationship, Taoism deals with a life in harmony with nature, and Buddhism deals with people’s immortal world57. Confucianism has a big influence on the Chinese way of thinking overall and in negotiations. There are six values of Confucianism, which is moral cultivation, 51

Dansk Erhverv The Application of the CISG in the Current PRC Law and CIETAC Arbitration Practice by Fan Yang section 1.70 and 1.73 53 Brons 54 CISG Article 4 55 THE CHALLENGE OF A UNIFORM APPLICATION OF THE CISG – COMMON PROBLEMS AND THEIR SOLUTIONS BY BRUNO ZELLER – page 317 (9) 56 Lando, Ole – Kort indføring i komparativ ret, p. 177 57 Fang, Tony – p. 26 52

17

importance of interpersonal relationships, family orientation, respect for age and hierarchy, avoidance of conflict and need for harmony and last but not least the concept of face58. There are many positive things about Confucianism (people’s lifelong learning, commitment and self-regulating behaviour) but the unfortunate thing is that it has resulted in more than 2000 years of lack in the legal framework with people having the feeling of social insecurity59. This lack has a great influence on interpretation, negotiation and drafting of contracts as we will see later. Getting to an agreement of an offer is easy. The difficult part is getting to an agreement that both parties understand. Needless to say, having an understanding of your counterparty’s agenda is the reason why you met in the first place; to do profitable business. Written words and contracts will not meet this paradox, but the spoken words will get you along the way to an understanding of your counterparty’s agenda. Your intentions cannot be so easily implied because you herald from different legal systems and by no doubt utilize dissimilar business practices. For this reason, it is essential for your international contract to spell out in definite terms the rights and obligations of each party. You should write the provisions to reflect the culture of the Chinese party, while at the same time keeping in mind your own requirements. Such drafting requires that you have an understanding of Chinese culture and the extent to which it differs from your own60. When you choose to trade, then you are admitting to your Chinese partner that he has value. In negotiations, the more you know and the less the next man knows the more power you have. When you establish your negotiation, you have to construct your paths, so all roads lead to yourself. Your costumer (contracting partner) actually schools you in proper ways to be exploited. When you know what your costumer (contracting partner) wants, you know what you can take and more importantly; what you should be observant about. That is why it is so important to know your trading partners before you trade, because they have home advantage. Needless to say, you are powerless without cultural knowledge. Cultured in the Chinese bureaucracy, Chinese negotiators fear taking risks and making mistakes, show indecision, avoid taking responsibility, and have no final say. For a 58

Fang, Tony – p. 29 Fang, Tony – p. 148 60 Shippey, Karla, C - Short Course in International Contracts, p. 3 59

18

Chinese negotiator, the rewards for a good performance are minimal, whereas the penalties for making mistakes are great61. For this reason, Chinese negotiators are always suspicious. If your contracting partner sees someone that might negotiate better contracts, he will return and throw this back in your face. You meet his offer, add to it and tighten your grip. But dropping prices is not the answer to winning business; selling value is the answer62. They seek approval that this contract is sufficient. To address this state, showing a similar well performed contract, will sometimes give this approval and will miraculously break deadlocked negotiations63. Chinese people have, therefore, an attitude towards wording a contract64 which reflects the Chinese need to escape from bureaucratic punishment65. Chinese people are, for these reasons said to be the toughest negotiators in the world with mixed personalities making it even harder to negotiate66 and have they mixed feelings towards foreigners, torn between distrust and fascination of our knowledge67. Accordingly to Confucianism they believe that people must keep their words and will draw borderlines of those they trust and those they do not68. They have, therefore, created a spider’s web of relationships (guanxi) which is one of the most prominent cultural traits of Chinese people. They use Guanxi to seek background information about potential partners, prices and terms of payment. Foreign business people must, to succeed in the Chinese market, rely on friendships or close, personal relationships (guanxi), which usually takes time and patience to build69. Chinese tend to expect and desire a level of personal relationship with their counterparties that are viewed as unnecessary in the West70. The Chinese trust is more an interpersonal trust than organizational. Chinese do business with you, not with your company and will often feel offended when Western people start negotiations by spelling out contract terms. Chinese generally have a nonlegalistic approach before and after negotiations where the relationships and trust is 61

Fang, Tony – p. 105 IACCM – In tough economic times, contracting excellence offers relief – Volume 2, no 2, December 2008/2009 63 Fang, Tony – p. 105 64 Closer to common law 65 Fang, Tony – p. 53 66 Fang, Tony – p. 21 67 Fang, Tony – p. 50 68 Fang, Tony – p. 109f 69 Fang, Tony – p. 118f 70 Fang, Tony – p. 126f 62

19

more important than the contract71. They believe that law alone does not solve problems and people’s behaviour must be influenced by their own use of self-regulating moral mechanisms (e.g., face and shame)72. Trust building relationships is, therefore, something foreigners should appreciate, especially in China, because businesses are subject to fraud to a much higher degree than in the West. In conclusion, the typically Western negotiation setting are result oriented, the final goal is important, time is money, the negotiation process is limited, we are fact-oriented, and efficiency is critical whereas in China they are process oriented, the way is a goal, good things take time, the negotiation process is continuous, they are relationship oriented, and mutual consensus is important73. Cultural differences, history74 and the governments mentality form legal systems75. One of the most influential conceptual underpinnings of Chinese ideology of justice is the beliefs in the inevitability of retribution which means to restore or give back 76. This ideology imbues the contract law too which we will see later.

2.3 Introduction to the importance of handling contract clauses Generally said, contract clauses can be described as a list of terms and conditions placed in a contract that govern liabilities and obligations. Since the legal systems differ all over the world, these terms and conditions can have a significant difference in the legal power they have. The contract clauses that I have chosen to go through does partly have their popularity in the nature of the contract law itself. The Chinese contract law enumerates a list of the content in contracts that the parties in general should agree on pursuant to CCL Article 12. This list is not mandatory but suggested, and parties have the freedom to choose what clauses to include. Understanding how to protect themselves against various responsibilities in contracts is a universal skill. It is quite another thing to understand how other countries interpret different contract clauses compared to your own jurisdiction. The law may stipulate similar thing, but practice gives insight in interpretation of the law, why some clauses

71

Fang, Tony – p. 53 Fang, Tony – p. 85 73 Lytras, Miltiadis D. - International Journal of Chinese Culture and Management –Volume 1, No. 2, 2008, p. 203 74 Chen, Jianfu - Chinese Law – Context and transformation, Brill, 2007 – Chapter 12, page 444 75 Katz, Paul R – Divine Justice – Taylor and Francis, 2008 – Page 1 76 Katz, Paul R – Divine Justice – Taylor and Francis, 2008 – Page 4 72

20

are used and others avoided. If we draft and negotiate contracts in China as we do in Denmark, we run substantial risks of offending our Chinese partner, decreasing value and the contract might involve a much higher risk than we interpreted in the first place. Contract management is one of the ways to handle this by looking at all aspects of the contract. However, Contract management is often driven by a narrow perspective to risk, in the matter of increasing value and decreasing risk. These perspectives result in terms and conditions that protect against certain types of risk but take no account of the counter-risks that they generate. Terms and conditions (contract clauses) can drive the behavior of your counterparties by them not offering the best solutions and might burn bridges to other business opportunities. Additionally it is shown that clauses as liquidated damages are directly linked to a loss of openness and collaboration. As a result, far from protecting against risk, they can create a risk if not used appropriately. Evidence shows that companies can gain from improved collaboration with key trading partners77. These facts are especially true in China where the relationship is very important. As we will see can cultural differences increase these risks if not taken seriously.

77

IACCM – In tough economic times, contracting excellence offers relief – Volume 2, no 2, December 2008/2009

21

3

- Limitation of Liability and Exemption clauses.

Accordingly to the top ten most negotiated terms in 200778 limitation of liability was the most negotiated term in Asia. The importance of clauses limiting or excluding liability does not have to be demonstrated. The company who sells its products or services runs serious risks if these products prove faulty or if the performance is unsatisfactory. The consequences can be fatal for a company who do not have knowledge about the foreign legal principles that govern indemnification. The warranties and liabilities are likely to result in heavy debts that may well exceed the expected profit from the contract79. A good example of the importance of having a clause limiting or excluding liability is the Toyota gas pedal case80. Seven million vehicles had to be recalled because of an unsatisfactory performance of the gas pedals. The purchase cost for such a gas pedal is $15 each but the cost of changing them costs Toyota billions of dollars of market value81. The advantages of having a clause that takes care of this are that the obligor can discard certain risks, make them foreseeable and bearable or sometimes it is required to make the insurance risk bearable or even possible to have insurance. It may also benefit the other party in the form of price reduction82 because the risk is weighted to alter the equilibrium of interests between the parties83. An exemption clause aims at suppressing any liability or any obligation of warranty of the relevant party contrary limitation clauses which limits the scope or the consequences of such liability or obligation. Limitation clauses do contrary to liquidated damages clauses put a ceiling to the maximum payment where the last mentioned stipulates a lump sum84.

78

The Top Ten Most Negotiated Terms in 2007 Fontaine, Marcel et al. – Drafting International Contracts – An analysis of contract clauses, page 351 80 Gas Pedal Defect Prompts Toyota Recall of Another 2.3 Million Vehicles in US 81 Toyota details safety fix, damage claims mount 82 Fontaine, Marcel et al. – Drafting International Contracts – An analysis of contract clauses, page 351 83 Bing Ling 4.058 84 Fontaine, Marcel et al. – Drafting International Contracts – An analysis of contract clauses, page 354f 79

22

Limitation of liability happens indirectly in the other areas of contract drafting I am working with such as force majeure, hardship clauses, indemnification and liquidated damages in penalty clauses etc. This chapter will work specifically with the limits of limitation of liability clauses, what makes them valid and how Chinese courts interpret them.

3.1 Limitation of liability clauses. Limitation of liability clauses may be classified into two categories. Here, we have contracts dealing with effects of liability and warranties or where the conditions surrounding the contract are affected85. We draft limitation of liability clauses to avoid being fully liable under statutory law. The contracting parties can be liable precontractually, during the performance and post-performance. The parties can agree on exemption or limitation of liability clauses subject to special statutory regulation and in the nature of freedom of contracting86. This may be liquidated damages which provide higher compensation (limited), or it may be more extensive opportunity to rescind contracts than the law prescribes. It can also be a deprivation that takes away a protest, offsetting, limit the other parties right to trade with others or an arbitration clause that removes the possibility for trial etc.87. A contract that has not been concluded and a contract that has not entered into effect are both unenforceable and create no contractual rights or obligations. Concluded contracts, makes it possible for the parties to conduct contractual claims against each other; even when the principal of the contract is ineffective but void or voidable contracts may not have binding effect. The conclusion of the contract is relevant to determine the limitation period during which the contract may be rescinded. It will also have an effect on the interpretation of unconscionability, price clauses and foreseeability of loss resulting from the breach88. Pre-contractually liability may arise whether the defendant’s fault causes failure of formation89 or failure of effectiveness90.

85

Fontaine, Marcel et al. – Drafting International Contracts – An analysis of contract clauses, page 360f Bing Ling, 8.056 + 8.130. Danish contracts freedom of contracting pursuant to Sales of Goods Act Article 1 (1). 87 Lando, Ole – Kontrakts retten I Kina – p. 61f 88 Bing Ling, 3.003 89 Bing Ling, 3.003 – Failure of formation is usually failure to reach consent between the parties. A party will be liable (culpa in contrahendo) under the negotiation if three conditions are met. Further info in PRC contract law Art. 42. 90 Bing Ling 3.003 – Failure of effectiveness may involve violation of law 86

23

The traditional doctrine of pacta sunt servanda (agreements must be kept) is a foundation of the Chinese system where a party who fails to perform a contract shall be liable for breach. Consequently, there is a strict liability principle (See also; Hardship – Chapter 5) which means the risk for non-performance caused by events for which neither party is responsible (except force majeure) is assumed by the non-performing party91. This strict liability rule is similar in many ways to the Danish rule in the Sales of Goods Act Article 2492. In China, if one of the parties of the contract is not performing its obligations well or not accordingly to the contracts terms, the plaintiff has to show that there is a breach of contract (onus probandi), and it must be resolved according to remedial measures or compensation of losses93. Breached contracts, entitle the injured party damages equal to the loss caused by the breach (See further details; Penalty Clauses – Chapter 4). However, damages are limited by a so-called “foreseeability test” where damages shall not exceed what should and could be foreseen by the breaching party with respect to the loss94. Foreseeability can, therefore, be used to limit liability. However, if the other party assumes certain risks, the non-performing party is not liable unless caused by an act or omission by himself95 or if a party rely on non-performance by the other party96. If the buyer accepts certain risks, it will not affect his right to hold the seller liable if he delivers non-conforming performance pursuant to Article 149. The Chinese rules are similar to Danish practice where the parties must disclose all material facts (oplysningspligt) and loyalty responsibility (loyalitetsforpligtigelse). The Danish rule in the Sales of Goods Act Article 24 also includes a “foreseeability test” 97. In practice, the crucial difference between Denmark and China is that they frequently

91

Bing Ling – 8.058 – Pursuant to Article 107 See also Lookofsky, Joseph – Køb, Dansk indenlandsk købsret, 3. udgave, 2008, p. 168. The Chinese system does not differ between genus and species and courts may order the breaching party Specific Performance pursuant to Article 107. Specific Performance is rarely used in Denmark. Both Danish and Chinese system follows full liability principle. 93 Zhang, Mo - Freedom of contract with Chinese legal characteristics: A closer look at Chinas new contract law. 94 Kritzer, Albert H. - International Contract Manual– Chapter § 51:14 95 CISG Article 66 96 Bing Ling, 8.060 - Similar to the rules of CISG article 80 and UNIDROIT Principles Article 7.1.2 – Contributory conduct of the aggrieved party. The aggrieved party have by its own act or omission contributed to the loss resulting from the non-performance and shall thereby be held liable. 97 See my Chapter 3.4.1. 92

24

demand Specific Performance in the enforcement of these rules. In Denmark, we will order performance or alternative the buyer will just order somewhere else and claim damages98. If the parties agree on a liquidated damages clause, it cannot be effective as a limitation of liability clause too. The reason is that if the parties agree on a liquidated damages clause there will be no hurdles, for any of the parties to seek court or arbitration and have it lowered or increased to represent the true loss. The purpose of a liquidated damage clause is, therefore, in the true nature vanished and cannot be effective as a limitation of liability clause. However, the parties can agree that damage shall be a maximum for compensation99. Chinas primary remedy is Specific Performance100, but none of its available remedies are mandatory101. Specific Performance can lead to extensive losses because it is among other requirements only refused when it leads to excessively high costs. Specific Performance can in the nature of freedom of contracting be agreed out of and thereby be effective as a limitation of liability clause. However, it may be preferable in some contracts to ensure Specific Performance.

3.2 Exemption clauses. The effect of exemption clauses is to exempt the obligor in cases where the law would normally find him liable. The parties of a contract can determine when to exempt their liability due to the freedom of contracting, and within the scope of the general provisions i.e. fairness and good faith. Exemption clauses are not as frequent as limiting clauses. They are not so easily accepted at the negotiation stage of the contract 102, and furthermore their validity may be contested accordingly to CCL Article 54 (1) (2)103. The only real legal exemption that can be found in the CCL is force majeure. Article 117 exempt liabilities for breach of contract in part or wholly in the light of effects of force majeure. Force majeure is, therefore, a legal ground to dissolve a contract. There are two exceptions to this rule; “where the law provides otherwise” and the other is that 98

See further details in my Chapter 4 – Penalty Clauses. Lando, Ole – Kontrakts retten I Kina – page 159. See also Chapter 4 - Penalty clauses. 100 See Chapter 4 – Penalty Clauses. 101 The Remedy of Requiring Performance under the CISG and the Relevance of Domestic Rules [particularly in the context of China-related sales transactions], part B – 2. Concurrent Availability of Specific Performance and Other Remedies. 102 Fontaine, Marcel et al. – Drafting International Contracts – An analysis of contract clauses, page 358 103 If a term is evidently unfair it can be set aside. Similar to Danish Agreements Act Article 36 99

25

force majeure cannot exempt a party already in breach. If, the parties agree on limiting liability in different situations already provided by law the clause is regarded as a supplement to the legal exemption104. Force majeure is pursuant to Sales of Goods Act Article 24 also a legal ground in Denmark to exempt liability. Exemption clauses must like all other contract terms, comply with the principles of good faith and fairness105. Quite narrowly is the concept of good faith is interpreted as follows: it applies only if the term is both obviously unfair and a result from one party taking advantage of the other’s weak bargaining position or inexperience during the contractual negotiations106. This means that when concluding a contract the exemption clause must be shown that it is part of the contract. The clause might be void if it deprives the other party major rights107, set aside if evidently unfair108 and even though it can be implied from the usage of the transaction preferred is an expressed agreement109. In Denmark, exemption clauses that deprive the other party fundamental rights are generally nullified or void, pursuant to the Danish Contracts Act Article 36. See furthermore Chapter 3.3. The Chinese contract law Article 53 mention exemption clauses that are void. These clauses are exemption clauses that exempt liability for property loss (either intentionally or as a result of gross negligence) or personal injury caused to the other party. The legal consequence is accordingly to Article 56 that the contracts have no legal binding force ab initio. If the contract is partially void and the validity of the other party is not affected thereby, the other part shall remain valid. Exemption of liability in case of gross negligence is also null and void in Danish law pursuant to Sales of Goods Act Article 53 and Liability for Damages Act Article 1 (erstatningsansvarsloven) mandatory rules on personal injury cannot be exempted. A different meaning of “gross negligence” between Denmark and China has not been able to be provided. Its application is

104

Zhang, Mo – Chinese Contract Law: Theory and Practice, p. 313f. This rule applies all areas and could for example also seen in hardship clauses where the rules are strict. 105 Bing Ling 4.057 106 EXCLUSION AND LIMITATION OF LIABILITY CLAUSES CHINA (MAINLAND AND HONG KONG) by Graeme Johnston 107 Pursuant to the UNIDROIT Principles Art 7.1.6, In regard to the purpose of the contract. 108 Under CCL, Article 54 (1)(2) 109 Bing Ling 4.056

26

essentially left to the appreciation of the individual court which has a major source of uncertainty in practice110.

3.3 Limitation of liability in standard terms. When doing business in this busy world it is often easy to use standard terms. The use of standard terms does, as in Denmark have strict rules in the area of limitation of liability and exemption. The rules are similar to Articles 2.19, 2.20, 2.21 and 2.22 of the UNIDROIT Principles111. Pursuant to CCL Article 39 (2) is standard terms “contract provisions which were prepared in advance by a party for repeated use, and which are not negotiated with the other party in the course of concluding the contract”. Pursuant to Article 39 (1) shall the one who uses standard terms in a reasonable way draw the other's attention to conditions which limit or exclude his responsibility and he must, on the other party's request explain what these terms mean. The terms shall live up to the principle of sound business practice. If these obligations are not met, the conditions are unenforceable. Pursuant to Article 40 it is not permitted, unilaterally, to impose the other party an increased responsibility or deprive the other important rights. This rule is similar to the Danish Contracts Act Article 36112. If, a term is evidently unfair it can be set aside pursuant to Article 54(1)(2)113. The rule only means that if you do impose the other party to unilaterally responsibility or deprive important rights you have to explain them in accordance to Article 39 (1). Additionally, the new Supreme Court’s interpretation of May 13 2009 suggest choosing a conspicuous color, a bigger font size or another graphic marker to ensure that the limitation of liability clause stands out from the rest of the terms114. The interpretation also clarifies an obligation of the party who supplies standard terms to explain them upon the other party’s request. The burden of proof for the provision of the requested explanation is placed on the party who supplies the terms. The other party must, therefore, know about and understand the limitation of liability clause. If a dispute arises on interpretation of any clause in the standardized agreement, common understanding shall be adopted, but in case of two or more interpretations, the less

110

EXCLUSION AND LIMITATION OF LIABILITY CLAUSES CHINA (MAINLAND AND HONG KONG) by Graeme Johnston 111 Zhang Yuqing & Huang Danhan - The New Contract Law in the People’s Republic of China and the UNIDROIT Principles of International Commercial Contracts: A Brief Comparison, p. 6f 112 Lando, Ole – Kontrakts retten I Kina – p. 63 113 Bing Ling, 4.058 114 Mondaq: News In Chinese Contract Law of June 17 2009

27

favorable for the agreement-provider will be adopted115. This is similar to the Danish rules of “koncipistreglen”116. These Chinese rules seem similar to the Danish consumer rules (The Contracts Act, Article 38b) where the burden of proof stands on the writer of the term. Accordingly to Bing Ling, the principle of good faith may require the other party to give an explanation even without request117 and as I see it this is correct because the party supplying the terms have the burden of proof if not provided, accordingly to the new interpretation. In a business to business setting, the Chinese rules seem stricter than the Danish where notice and clear formulations of the limitation of liability standard terms usually are enough118. Danish companies can often just print the standard terms on the back of the contract or refer to them sometimes without handing them out. In China, this does accordingly to the interpretation not seem to be enough119. Both China and Denmark do look at the business setting, strength and knowledge of the parties, but Chinese rules still seem stricter as they do not presume a party to be as knowledgeable.

3.4 Additional Remarks and Critical Observations. The parties may assume the risk respectively at different times so that the risk passes from one party to the other upon the occurrence of specified events. The rules of passage of risks are largely based on the CISG where the risk passes from the seller to the buyer upon delivery pursuant to CCL Article 142 and CISG Article 69 (1) 120 which is similar to the Danish Sale of Goods Act Article 17 (1). The parties can in the freedom of contracting agree on different passage of risk than the statutory law prescribes. 3.4.1 Consequential and/or Unforeseeable Damages. Consequential damage is injury or harm that does not ensue directly and immediately from the act of a party, but only from some of the results of such act 121. A claimant bears the burden of providing the facts in support of its claim of consequential damages122. Damages shall, as said, not exceed what could and should have been

115

Kritzer, Albert H. - International Contract Manual– Chapter § 51:8 Lookofsky, Joseph – Køb, Dansk indenlandsk købsret, 3 Udgave, 2008 – Page 233 117 Bing Ling, 3.079 118 Beauty Box case – Standard terms handed out but never mentioned. Not valid. 119 Lookofsky, Joseph – Køb, Dansk indenlandsk købsret, 3 Udgave, 2008 – Chapter 9 120 Bing Ling, 8.058 121 Legal dictionary. 122 Bing Ling, 8.098 116

28

foreseen by the breaching party with respect to the loss 123 measured like what a defaulting party or a reasonable person would have foreseen when concluding the contract (Inspired by UNIDROIT principles Article 3.5). The “foreseeability test” does not include special circumstances unless the defaulting party knew or ought to have known about this. The courts will look at the nature or type of a particular loss, rather than its precise extent124. This approach was inspired by the UNIDROIT principles Article 7.4.4. The Chinese contract law recognise the conclusion of the contract as being the critical time so that a party can insert exemption clauses or take out insurance125. A contract that disclaims or limits the responsibility for intentional or grossly negligent injury on property is ineffective126. It is in principle allowed, if the contract is not obviously unreasonable, to exclude or limit the liability for slight negligence127. The Danish rule in the Sales of Goods Act Article 24 is similar to the Chinese and require unpredictable circumstances of qualified/extraordinary character to exempt liability in a situation128.

3.5 Cultural Challenges. In Confucian terms, guanxi (relationships) is reciprocal in nature. Therefore, “equality and mutual benefit” is essential for the Chinese that see the relationship not only as pure business but also as a friendship. China’s joint venture law has even reiterated the word guanxi which shows this importance, and it may be one of the most read phrases in Chinese business contracts. Chinese negotiators love to see this phrase worded in all business contracts and do not want to accept terms that are not reciprocal129. This cultural difference may challenge negotiations about limitation of liability and exemption clauses. That said, most Chinese contract drafters are well aware of the advantages of avoiding precise written commitments as to their part in an agreement, and of inserting precise commitments for the foreigner, thus limiting their own liability130. Chinese people generally believe that parties should be equally liable, but when there is a big difference between the party’s strength they might change their prospect. The 123

Kritzer, Albert H. - International Contract Manual– Chapter § 51:14 Bing Ling, 8.098 125 Bing Ling, 8.098 126 CCL Article 53 (2) 127 Lando, Ole – Kontrakts retten I Kina – p. 76 128 Lookofsky, Joseph – Køb, Dansk indenlandsk købsret, 3. udgave, 2008, p. 174 129 Fang, Tony – p. 127 130 Fang, Tony – p. 53 124

29

Chinese are fully convinced that it is only fair for the richer party to bear the heavier burden. They use the advantage that a weaker party has to extract favors from the strong, without losing in dignity (Pye, 1986)131. This can be a challenge for the foreign negotiator but can be used as an advantage just like the Chinese.

3.6 Summary. The parties can in the nature of freedom of contracting agree on limitation of liability and exemption clauses. When drafting these clauses the enforcement is the single most important element. In case of breach of contract, the burden of proof is on the plaintiff to prove its losses. The general rule in China is that agreements must be kept and they do as in Denmark have a strict liability principle which means that the non-performing party is always assumed to have caused the loss. However, there is a “foreseeability test” which limits the non-performing party to what he should and could have foreseen at the time of conclusion of the contract. The individual contract and the party’s knowledge and relationship are up for interpretation in this assessment. Contracts involving carriage of cargo have the same rules as Denmark concerning the passage of risk but can be agreed otherwise. A pure liquidated damage clause cannot be used as a limitation of liability clause because the amount of the penalty can be changed if “significantly higher than the loss”. Chinas extensive use Specific Performance may draw the attention of the Danish contract drafter as it can increase the risk of the contract as it is only refused when it leads to excessively high costs. Force Majeure is the only legal exemption of liability in the Contract Law, other than that there is freedom of contracting to agree on such clauses but they must meet the criteria of fairness and good faith similar to the Danish rules. Exemption of liability on personal injury and gross negligent damages on property is, however, not possible in both countries. China has similar rules to the UNIDROIT principles and Danish when drafting these clauses in standard documents. However, my analysis shows that the Chinese rules

131

30

Fang, Tony – p. 50

seem stricter because they in a B2B setting lie closer to the Danish Consumer rules. In practice, this is very important knowledge in the enforcement of standard documents. Culturally are the challenge to negotiate these clauses that Chinese people believe in reciprocal relationships and equal contracts. Chinese people do, however, have an understanding of the importance of these clauses and will try to limit their own liability which derives from their desire to save face in a potential dispute.

31

4

- Penalty Clauses.

A Penalty clause can generally be defined as one stipulating payment of a sum of money in the event of non-performance of a contractual obligation, with a purpose either of pure indemnification or of deterrence132. The remedy of damages may be based on statutory provisions or arise from the agreement of the parties133. Indemnification and liquidated damages were respectively the second and fourth most negotiated terms in Asia in 2007 making penalty clauses a particularly important topic in this matter134.

4.1 Breach of Contract The concept of “non-performance” is illustrated in Chapter 7 of the UNIDROIT Principles and regarded as “breach of contract” in Chinese legal thinking. Some of the rules set forth in Chapter 7 of the CCL Articles 108-112, 114 and 118-120 closely resemble those set forth in Chapter 7 of the UNIDROIT Principles. This is particular with regards to non-performance of monetary and non-monetary obligations, anticipatory non-performance, cure and replacement of defective performance, right to damages, agreed payment for nonperformance, force majeure, mitigation of harm, and harm due in part to an aggrieved party135. China permits liquidated damages in contracts pursuant to CCL Article 114. Liquidated damages clauses does pursuant to Article 108, become operational once a party expresses by words or acts not to perform the contract regardless of whether the period for performance has expired. It is up to the parties whether or not they want to agree upon a liquidated damages clause for insufficient, late or other non-performance136. The penalty can be set to a fixed amount of money or as a way of calculating the amount for example such as a weekly or monthly sum until fulfillment of the obligation

132

Fontaine, Marcel et al. – Drafting International Contracts – An analysis of contract clauses, page 300 Bing Ling, 8.094 134 The Top Ten Most Negotiated Terms in 2007 135 Zhang Yuqing & Huang Danhan - The New Contract Law in the People’s Republic of China and the UNIDROIT Principles of International Commercial Contracts: A Brief Comparison, p. 8 136 Lando, Ole – Kontrakts retten I Kina – page 158 133

32

has happened137. It may be based, on liquidated damages, a calculation of the expected loss size (indemnification) or as common law calls a “penalty” where you seek pure deterrence138 of the debtor to fulfill his contract139. Punitive damages are indeed not permitted in commercial contracts because of the nature of CCL Article 113 (1) where the amount of damages shall be equal to the losses140. In Scandinavia, there is no tradition for punitive damages141 even though they do occur in practice to a small extend. The amount of liquidated damages can be increased or reduced by the People’s Court or arbitration if “significantly higher than the loss”142. Readjustment of damages should be done upon request by a party to a case and are generally not enforced (tvangsfuldbyrdelse) by the Courts when the amount of the penalty is unrelated to the damages incurred. The Supreme People’s Court has in new court practice (April 24, 2009) clarified that "significantly higher" in effect means 30 percent higher than actual losses. Liquidated damages clauses are agreed to relieve the benefitting party from the obligation to prove its actual losses or in situations where losses are hard to determine. But, even the parties have agreed upon an amount of liquidated damages a party can still plead that it is too high or low. The hassle the parties have originally sought to avoid will have to be faced, and the actual losses will have to be determined. However, “provided that an owner's liquidated damages are less than 30 percent higher than its actual losses, such liquidated damages should stand, even though they are greater than the actual losses suffered”143. A party may, therefore, lose or gain up to a 30 percent from the contract if the amount is agreed or calculated incorrectly. The People’s Court doesn’t intervene in this 30 percent threshold because that’s the limit they regard as “significantly” or “excessively” higher or lower.

137

An Arbitrator's Powers and Duties Under Art 114 of Chinese Contract Law in Awarding Damages in China in Respect of a Dispute Under a Contract Governed by CISG by Marcus S Jacobs, QC and Yanming Huang, section 3.3 138 Deterrence is not allowed in common law. Deterrence means that you frighten the other party to perform. 139 Lando, Ole – Kontrakts retten I Kina – page 159 and CCL Article 114. 140 Bing Ling, 8.123 – Punitive damages exist due to consumer rights in China. I will not go further into this. 141 Springerlink – Punitive damages in Scandinavia. 142 Reedsmith 143 Mondaq - China: China's Supreme People's Court Issues Clarification and Interpretation of the Contract Law on 29 March 2010

33

In a Chinese case, a party had performed a substantial part of the contract (time) and terminated the contract which stipulated liquidated damages. Damages were lowered with the argument that the other party did perform most of the agreed 144. The Court lowered the damages significantly seemingly without regard for the actual loss because it was lowered equal to the months performed145. In Denmark, we do also lower the damages, for example, in U 2004.2894 H (3 mio. To 350.000), U 2000.1237 V (50.000 to 25.000) and U 1985.600 H (150.000 to 100.000) but a clear threshold haven’t been found in my research. The Chinese rules have similarities with the UNIDROIT principles Article 7.4.13, PECL (Principles of European contract law) 9:509146 and what we follow in Denmark. In Article 107, is it recognized by its wording that the Contract Law accords substantial respect for a non-breaching party's freedom to choose the form of remedy where the other party breaches. It allows the non-breaching party to choose the form of remedy, including liquidated damages, damages, as well as Specific Performance (excepting special situations where the law recognizes that Specific Performance is impossible)147. The CCL is not designed to punish but to find the best way to compensate the losses from each part. This means that the damages paid are low and only more or less compensates the actual loss. An agreement about liquidated damages can be made, and the Courts will generally follow it even if it doesn’t correspond to the damages determined by law. Liquidated damages agreements are to be deemed valid unless they are unduly high or low and can, therefore, have a punitive effect. This approach doesn’t open up for large latitude for agreements because the law has a compensatory nature. That a party breaches its obligations accordingly to a contract, is not tantamount to, that he must pay compensation to the injured party for the consequent loss. Such an obligation to pay depends on whether there is a basis for compensation148. Compensation is also different from legal systems both in options and the way of calculating. Article 113 provides that “Where a party failed to perform or rendered non-conforming performance, thereby causing loss to the other party, the amount of 144

Bing Ling, 8.134 – Lu Qizheng v Lu Chaoxi 1991. My own analysis. Three year contract where 21 months were performed. Liquidated damages were lowered from 5000 yuan to 1500. 146 Lando, Ole – Kontrakts retten I Kina – page 159 147 Liming, Wang and Chuanxi, Xu - Fundamental Principles of China’s Contract Law – 13 Columbia Journal of Asian Law (1999) 1-34, page 8. See these cases in CCL Article 110. 148 Bryde Andersen, Mads et al. Lærebog i obligationsret I, Ydelsen Beføjelser, 2 Udgave. Side 236 145

34

damages payable shall be equivalent to the other party's loss resulting from the breach, including any benefit that may be accrued from performance of the contract, provided that the amount shall not exceed the likely loss resulting from the breach which was foreseen or should have been foreseen by the breaching party at the time of conclusion of the contract.”. Based on the wording, the Chinese contract law seems to stress that the suffering party shall be fully compensated. However, even the similarities the Chinese contract law does not go as far as the UNIDROIT principles149. The Chinese contract law does not touch upon issues such as future harm, loss of chance and nonpecuniary150 harm. However, when the amount of damages cannot be established with a sufficient degree of certainty, it is left to the discretion of the court151. In Denmark, we do generally follow the full compensation approach too152 to a high degree as the UNIDROIT principles153 also with future harm, loss of chance154 and nonpecuniary damages155 as part of the calculation. Here, the plaintiff is entitled to expectation interests156 or alternatively negative contractual interests157 who in some cases will give different results in the assessment of damages. 4.1.1 The CISG. In international contracts The CISG often applies depending on the circumstances. Damages have been the most sought out remedies offered by the CISG in China entitled under Articles 74 to 77. Chinese courts may interpret the CISG differently than we are used to in Denmark and the West making the legal standpoint uncertain. This happened in the case Mealey’s International Arbitration Report, 20(5) (2005)158 where they came to the conclusion that “the CISG intentionally does not deal with liquidated damages and penalty clauses”. The framers of the Convention agreed that “the validity and application of such clauses were to be dealt with in terms of the

149

Articles 7.4.2 (Full compensation), 7.4.3 (Certainty of harm), 7.4.4 (Foreseeability of harm), 7.4.5 (Proof of harm in case of replacement transaction), 7.4.6 (Proof of harm by current price) 150 Physical suffering or emotional distress 151 Zhang Yuqing & Huang Danhan - The New Contract Law in the People’s Republic of China and the UNIDROIT Principles of International Commercial Contracts: A Brief Comparison, p. 10 152 Lookofsky, Joseph – Køb, Dansk indenlandsk købsret, 2 Udgave, 2008 – Page 200 153 Bryde Andersen, Mads et al. Lærebog i obligationsret I, Ydelsen Beføjelser, 2 Udgave. Side 385 154 Bryde Andersen, Mads et al. Lærebog i obligationsret I, Ydelsen Beføjelser, 2 Udgave. Side 264f 155 Koziol, Helmut, Wilcox, Vanessa - Punitive damages: common law and civil law perspectives 156 Sales of Goods Act Article 30 – Positiv opfyldelsesinteresse 157 Law of obligations ordinary principles. 158 THE CHALLENGE OF A UNIFORM APPLICATION OF THE CISG – COMMON PROBLEMS AND THEIR SOLUTIONS BY BRUNO ZELLER – page 315 (7)

35

applicable legal system due to widely divergent approaches in the different legal systems”159. However, the Chinese took it a step further and concluded that “If there is a penalty clause (and this would include a provision for liquidated damages) in a contract to which CISG applies, this constitutes an opting out under Article 6 of Articles 74-76 of the Convention”. Accordingly to this, interpretation of Penalty clauses should happen accordingly to domestic law or applicable to the contract. The case has been criticized for being faulty with the argument “So far there is no impediment to adopt the penalty clause within the ambit of the CISG and, therefore, there is no need to invoke Article 6”160. However, the CISG does not provide a basis for a raise or reduction of contractual penalty but full compensation, so this will happen in accordance to the jurisdiction. Moreover, uncertainties also occur in other instances where courts or arbitrations calculate damages with no reference to the law or differently than the CISG prescribe161. This was the case in a decision where Chinese Courts ruled that a party could get interest from the date due to claim of payment where CISG interpret from the date goods are at the buyer’s disposal. The full compensation approach was, therefore, not followed. The issue about interest rates is not touched upon CISG but up to the applicable law. Here, there have been cases where reference is made to the rate adopted by the banks of China, even though the interest creditor is from a foreign country i.e. not necessary giving the foreigner full compensation. 4.1.2 Specific Performance. In China, the basic remedy is Specific Performance, which culturally has, its nature from the time where the Chinese people were undergoing the state plan162. In Denmark, the basic remedy is an order to fulfill the contract with indemnification as a consequence if still in breach163. Specific Performance under CCL Article 109 follows the position of the CISG Articles 46 and 62 and UNIDROIT principles Articles 7.2.1 and 7.2.2. Specific Performance means that the courts “force” a party to fulfill a specific 159

An Arbitrator's Powers and Duties Under Art 114 of Chinese Contract Law in Awarding Damages in China in Respect of a Dispute Under a Contract Governed by CISG by Marcus S Jacobs, QC and Yanming Huang, section 3.2 and 5. 160 THE CHALLENGE OF A UNIFORM APPLICATION OF THE CISG – COMMON PROBLEMS AND THEIR SOLUTIONS BY BRUNO ZELLER – page 315-317 (7-9) 161 Xiao, Yongping & Long, Weidi - Selected Topics on the Application of the CISG in China – Section 3 - Damages 162 Bing Ling, 8.065 163 Departing from mere compromise - Section 3.1 Specific Performance under civil jurisdictions

36

act. The state will sanction the breaching party until performance occurs 164. Normally, Specific Performance is a remedy used by courts when no other remedy (such as money) will adequately compensate the other party. It is normally only used in cases where the product or service is unique but in China they use Specific Performance as their primary remedy165. Specific Performance is a rare remedy in Denmark, Germany, France and under the CISG166. Danish Contract Law stipulates that a party whose contractual rights have been violated may choose between Specific Performance and damages. However, when it comes to enforcement, the Code of Procedure greatly restricts the number of cases for which Specific Performance will be enforced by the legal system. If, the other party continues to be in breach a bailiff can take over the case but will only in a specified class of cases be able to do more than converting the claim into money. The result is that parties very rarely seek Specific Performance and the courts even more rarely grant it167. This is a big difference between Denmark and China where Specific Performance as said earlier is their primary remedy. The limitations of the use of Specific Performance in the CCL can be found under Article 110. Specific Performance is not used when performance is impossible in law or fact, when the case is not suitable for Specific Performance or the costs would be excessively high or if the party does not require performance in a reasonable time. As said earlier can the non-breaching party freely choose the form of remedy pursuant to Article 107, which means that, damages can also be paid but traditionally the parties choose Specific Performance since it’s their basic remedy168. If the breaching party has paid liquidated damages, Specific Performance can only be chosen in case of late performance169. 4.1.3 Damages. I have chosen because of the page limit not to go into further details about all kinds of damages such as remedial measures (quality of performance), punitive damages and

164

Bing Ling 8.065 Y. Gotanda, John - Recovering Lost Profits in International Disputes 166 Lando, Henrik and Rose, Caspar - On the enforcement of Specific Performance in Civil Law countries, p. 1 – China use Specific Performance despite our knowledge that Chinese Contract Law was inspired by German and French Law. 167 Lando, Henrik and Rose, Caspar - On the enforcement of Specific Performance in Civil Law countries, p. 3f. 168 Bing Ling, 8.084 169 Bing Ling, 8.135 165

37

earnest money. I refer to Mo Zhang – Chinese Contract Law – Chapter X and Bing Ling.

4.2 Different failures to perform. Pursuant to CCL Article 94 can a party under certain circumstances dissolve a contract because of the other party’s non-performance. This article is very broad formulated and covers all circumstances provided by law, but in particular force majeure, indication of non-performance and delay. Termination of contracts does not prejudice the aggrieved party’s right to claim damages170. This is a statutory rule regulating the relationship between the parties, when nothing is agreed between the parties171. Also, any liquidated damage clause agreed between the parties will survive termination of the contract172 as it largely serves the same purpose as damages173. This is consistent with Danish law where the nonbreaching party can claim at least negative contractual interests (negativ kontraktsinteresse)

and

in

some

cases

expectation

interests

(positive

kontraktsinteresse)174. Delay in performance can be granted with termination of the contract, as a result, if main obligations in the contract haven’t been performed within a reasonable time after receiving demand for performance and in a case where the purpose of the contract is frustrated. Termination of contracts can also be agreed upon (Article 93). This might seem naturally in Western culture, but in the former China under the state plan this was not the case. New in Chinese law practice is that penalties may be agreed upon delay in performance. Under such circumstance, if any party fails to perform the contract in time, he must pay the penalty to the other party175. When a penalty is enacted as compensation for delay, the defaulting party should fulfil his obligation anyway, in accordance to the contract176.

170

Ling, Bing – Contract law in China – 7.048, p. 360 Pursuant to CCL Article 97 and a number of specific provisions in the CCL. 172 The position is also adopted in juridical practice. 173 Bing, Ling - 7.049, p. 361 174 Andersen, Lenart lynge – Aftaler of mellemmænd, 4 Udgave, p. 113f 175 An Arbitrator's Powers and Duties Under Art 114 of Chinese Contract Law in Awarding Damages in China in Respect of a Dispute Under a Contract Governed by CISG by Marcus S Jacobs, QC and Yanming Huang, section 3.3 176 Lando, Ole – Kontrakts retten I Kina – page 158 171

38

If, there is no agreement in these matters penalties will only be provoked as a result of termination of the contract (Article 97).

4.3 Cultural Challenges. Penalty clauses are used to relieve a party not in breach of having to prove their damage and in some cases to stipulate when a penalty shall be granted. That said Chinese people generally keep their commitments. Victor Li (1980) finds that “even during the serious economic disruptions of the Great Leap Forward and Cultural Revolution, foreign debts were paid on schedule and trade contracts were generally carried out” by the Chinese177. However, China has during the years seen numerous cases of companies that do not pay their debt and fraud, so that should be kept in mind when negotiating contracts178. Being new in China one will have to reaffirm ones definition of what it means to keep a commitment. Contracts are up for renegotiation during performance, and if you do not understand Chinese way of thinking, trust can be lost and commitments will not be kept. This is bitter experience from many European companies179. The Chinese generally take a non-legalistic approach to negotiations. They look more for a commitment to working together to solve problems than for a watertight legal package and will, therefore, try to avoid legal settlements about non-performance of contracts180. From a practical point of view, one can negotiate a deal with the Chinese most effectively where there is enough trust between the parties, and a verbal agreement is as good as a written contract181. This is the reason why many Western companies fail in China; because they want a fast deal without building trust first. The reason is that law in Chinese culture, had always been equated with lack of trust, trouble, coercion, and tyranny and was treated as a less effective means of affecting behavior182. This perspective still lives to some degree with a belief in Confucianism where self-regulating moral mechanisms is preferred. The Chinese tend to feel embarrassed and insulted when confronted with clauses spelling out the penalties or

177

Fang, Tony – p. 114 Non-payment of contractors – Pinsent Masons of May 22 2006. 179 Analyzing beyond personal experience - Article 180 Fang, Tony – p. 49 181 Fang, Tony – p. 114 – written contracts are from a legal perspective, of course, mandatory to protect themselves in case of breach of contract. 182 Fang, Tony – p. 111 178

39

remedies as the Chinese partner cannot make good on its commitments183. On the other hand, the Chinese know that records are vital and are, therefore, meticulous about legalistic documentation that could be used to protect themselves from potential criticism in the future184. This can be explained in the concept of face. Their way of behaving obstinately, asking questions a hundred times, doing their homework carefully, and writing down everything is to save face. Chinese people do though realize that they can be protected when something is not included in the written record. They will try to take advantage of avoiding precise written commitments as to their part in an agreement, and inserting precise commitments for the foreigner185. Culturally as I analyze it, Specific Performance is used in a higher degree because Chinese people believe in Guanxi (relationships), which can be related, to intuitu personae i.e. you trade with the man and pure money relationships are not as common. Also, Specific Performance was mandatory under the state plan.

4.4 Summary. Penalty clauses are permitted in the Chinese legal system which can have the form of liquidated damages, indemnification or deterrence all though without a punitive effect. The UNIDROIT principles among others made their mark on the Chinese contract law making the rules similar but with some essential differences. Similar to Danish law and the UNIDROIT principles shall the courts lower the liquidated damages paid if “significantly higher than the loss” which the Chinese Supreme Court now interpret as a 30 percent threshold. If, the parties haven’t agreed upon indemnification, the law adds substantial respect for a non-breaching party's freedom to choose the form of remedy. Specific Performance is used as their main remedy for non-performance being a significant difference from Denmark. Chinese courts thereby seem stricter in contract fulfilment than Danish courts. The Chinese Contract Law is build upon a compensatory nature, but with some differences in the interpretation leaving out some issues but follows a full compensation perspective. 183

Fang, Tony – p. 114 Fang, Tony – p. 49 185 Fang, Tony – p. 53 + 56 184

40

Uncertain interpretation of the CISG occurs and this can be explained due to lack of experience of Chinese courts making it challenging to draft contracts regulated by CISG. Chinese people are generally grateful to perform contracts but will challenge by expecting re-negotiation over the full course of performance. During the negotiation stage, they generally have a non-legalistic approach to contracts where trust is essential. They tend to feel embarrassed and insulted when confronted with clauses spelling out the penalties or remedies but do contrary understand the importance.

41

5

- Hardship Clauses

When party’s enters a contract they often bind each other under the prevailing circumstances from the time of executing the contract. The agreed terms and conditions may change under different circumstances that make it less or entirely uneconomical advantageous for one of the parties. Breaching a contract can be costly and the parties may therefore have a desire to agree about the circumstances, under which secession from a contract are allowed. Change in circumstances may occur for various reasons but the most common is that the goods to be delivered have lost their marketability, because of changes in technology, the market is inaccessible, for political reasons, legal reasons, strong inflation, crises, or that the agreed prices no longer corresponds to market prices. Changes in circumstances especially occur in long term contracts186. Price, charge and price changes was the third most negotiated terms in Asia in 2007187 which definitely will show true in the following analysis. There is no legal term for “hardship” or “change of circumstances” under Chinese laws and regulations, nor does it provide any express legislative rules in this area 188. The CISG is silent in this area too, however, there is a provision in the CISG Article 79 that gives a party rights under the circumstances of impediment. The provision is strict and requires a party to be in breach of contract because the burdensome on one of the parties are too high to perform the contract. This burdensome shall be understood as both to economic and physical impediments and where performance is rendered impossible189. There is no indication on how strict or how big a change in the market has to be before a party can be excused on the basis of Article 79190.

186

Fontaine, Marcel et al. – Drafting International Contracts – An analysis of contract clauses, p. 453f The Top Ten Most Negotiated Terms in 2007 188 Zhang Yuqing & Huang Danhan - The New Contract Law in the People’s Republic of China and the UNIDROIT Principles of International Commercial Contracts: A Brief Comparison, p. 11 189 Nouva Fucinati S.p.A v. Fondmetall International A.B - Issued by Tribunale Civile di Monza on the 14th of January 1993. Reported in UNILEX. 190 Carlsen, Anja - Can the Hardship Provisions in the UNIDROIT Principles Be Applied When the CISG is the Governing Law?, Section IV, D. 187

42

The principles of UNIDROIT Section 6.2 provide specific provisions dealing with hardship. This section applies to hardship in situations where the balance between the two sides of the contract has become out of proportion because of severe changes in the market after the conclusion of the contract that fundamentally have altered the equilibrium of the contract. Here normal economic risks are not regarded as hardship but circumstances where developments in the market lie far beyond normal economic development. Changes in prices of 50% or more are regarded as a fundamental alteration of the equilibrium of the contract191. When the new contract law was drafted a provision on “change of circumstances” was included giving the burdened party the right to renegotiate and in failure, to request the court to modify or terminate the contract. The provision were inspired by the UNIDROIT principles but were later dropped. Concern that the judges would get a too great discretionary power and that it would create uncertainty and ambiguity in its interpretation and application changed their minds192. But recent (24 April 2009) interpretation by the PRC Supreme Court (The so called Interpretation II) gives a standpoint of where this issue is going193. The concept of frustration has been introduced where this possibility previously only had been discussed in Articles 94 (5)194 and 117 of the Contract Law and Article 4 of the General Principles of Civil Law195. Commentators to this new court interpretation view it as specially dealing with those kinds of circumstances caused by the present global financial crisis (2010)196. However, the Supreme Court interprets a financial crisis as being a developing and not “sudden change”. See further details about frustration in Chapter 5.1 below. There is to a certain extent freedom of contracting in China and the parties can in practice agree on a hardship clause197. The conditions this clause can be agreed upon must like all clauses live up to the general provisions i.e. good faith and fairness.

191

Carlsen, Anja - Can the Hardship Provisions in the UNIDROIT Principles Be Applied When the CISG is the Governing Law?, Section III 192 Zhang Yuqing & Huang Danhan - The New Contract Law in the People’s Republic of China and the UNIDROIT Principles of International Commercial Contracts: A Brief Comparison, p. 11 193 Mondaq – China: News in Chinese Contract Law from 17 June 2009 194 Lando, Ole – Kontrakts retten I Kina – p. 121 195 Article 4: In civil activities, the principles of voluntariness, fairness, making compensation for equal value, honesty and credibility shall be observed. 196 Shanghai Kai-Rong Law Firm by Jin Yu-Lai and H. Zhang, Bill - China Legal Watch – July 28, 2009 197 H. Zhang, Bill - China Legal Watch – July 28, 2009

43

Hardship clauses imply due to re-negotiation a modification of the original contract. Chapter 5 of the CCL provides provisions on the modification of contracts. Hereunder, Article 77 provides that a contract can be amended if the parties have so agreed. The same principle that applies to the conclusion, form validity, interpretation, content, etc. also applies to agreements about changing the contract. It is also assumed that contracts can be changed due to acts from the parties and accepted in case of passivity. Article 77 can therefore be said to recognize hardship clauses because it applies where the parties haven’t agreed about changing the contract but also in an agreement about what circumstances that entitle a party to change the contract i.e. a hardship clause 198. There are also special statutory rules that gives a party a right to rescind a contract in case of change of circumstances, for example in transfer of technology contracts, where both parties can rescind if the technology get published by a third party199. When there is hardship accordingly to the parties’ agreement, they shall negotiate about a change or rescind of the contract. If a party refuses to negotiate or interrupt this, courts may see this as being against sound business practice and may lead to liability for the potential losses. Failure of the parties to reach an agreement in a reasonable time constitutes that the court can terminate the contract at a date or on terms determined by the court. The court might also change the terms of the contract with the purpose of getting to a reasonable distribution of the loss or gain that may have arisen as a result of the change of circumstances200.

5.1 Change of circumstances The concept of rebus sic stantibus akin to frustration allow contracts to become inapplicable in case of fundamental change of circumstances. This concept has been discussed since the first draftings of contract laws in China but never actually incorporated in the law. The traditional doctrine of pacta sunt servanda201 (agreements must be kept) has largely been maintained. However, there have previously been some rare instances where court practice proves that change of circumstances will be considered. In Wu Han Gas Company vs. Chongqin Testing Instruments Factory (1989)

198

Lando, Ole – Kontrakts retten I Kina – p. 105f Lando, Ole – Kontrakts retten I Kina – p. 121 200 Lando, Ole – Kontrakts retten I Kina – p. 143 201 Pursuant to CCL Article 8 (1) 199

44

an approximately 40 % price increase constituted in rebus sic stantibus because of unforeseeable circumstances after the drafting of the contract (The state adjusted aluminum prices)202. In the case Beijing Big Dragon Mechanical Engineering Co. Ltd. V. Beijing Kaibor Padding Company Inc (2003) was a 22 % price increase for some work done was enough to constitute “change of circumstances” (unforeseeable nature conditions under the ground)203. The Chinese government might also have recognized that changes in the governmental policy is a reason for hardship204, pursuant to Kun Ming Teng Si Lin Trade Company, Ltd v. China Unicom, Inc. Yun Nan Branch (2005). In this case a party plead that a change in the governmental policy was a reason to rescind the contract but the case was refused with the comment that there was no change but only a preparation of the policy. Accordingly to the new interpretation by the PRC Supreme’s court (24 April 2009) five points must be met to constitute a change of circumstances205: 1. A substantial change of circumstances occurs after the contract is concluded; 2. The change of circumstances is unforeseeable when the contract is concluded; 3. The change of circumstances is not caused by force majeure; 4. The change of circumstances is not a commercial or business risk; and 5. It is obviously unfair to a party, or the purpose of the contract would be frustrated, if the parties continued to perform the contract. Accordingly to Interpretation II the People’s courts shall consider the surroundings of the parties. Firstly, if the change of circumstance doesn’t appear before the contract was concluded the doctrine doesn’t apply. However, if a party entered into a contract without knowing this change of circumstance, he may seek relief pursuant to Article 54(1)(1) on the ground of significant misconception206. When reviewing “unforeseeable circumstances”, People’s courts shall consider the time when the contract were formed, the situation under which the parties have suffered losses and the willingness to assume certain risks. These certain risks are assumed to be 202

Zhang, Mo – Freedom of contract with Chinese legal characteristics: A closer look at Chinas new contract law, p. 260 203 Lando, Ole – Kontrakts retten I Kina – p. 144 204 Lando, Ole – Kontrakts retten I Kina – p. 144 205 Mondaq - China: China's Supreme People's Court Issues Clarification and Interpretation of the Contract Law on 29 March 2010 206 Bing Ling, 5.089 - This stand point was assumed by Bing Ling before the new interpretation.

45

known by the parties in some industries. For instance in contracts subject to petroleum, coke (fuel), non-ferrous metal and financial investment products such as stocks and futures207. The issue is whether a reasonable person in the position of the disadvantaged party would take into account the change of circumstances at the time the contract was concluded. The aluminum case above may still have value in today’s interpretation even it appears on the industry list. The reason is that changes in government fixed prices are generally less foreseeable than changes in the open market208. If the parties have provided for the consequences of change of circumstances a case is not unforeseeable anymore. Hereby meant, that if the parties change the contract because of a circumstance and a major changes later occur it’s not unforeseeable anymore. The change of circumstance may not be related to a commercial or business risk. These risks refer to business activities such as un-dramatic change of supply and demand and price fluctuations. The change of circumstances refers to non-market risks which were not predictable when the contract were formed. Hereunder, the People’s Courts shall consider the factors in specific cases such as; whether the type of risk is, in the general social opinion, unpredictable, the extent of risk has so far exceeded the normal reasonable prediction, the risk is preventable and controllable, the nature of the transactions is for high profits with high risks, and further consider the actual market situations209. When the courts find that there is evidence for a change of circumstance it shall guide the parties to negotiate and alter the contracts and meditate in case of failure of negotiation. The negotiation shall lead to a reasonable and fairly balance between the parties. The goal is not to disturb the normal market transaction. To further secure this, the Supreme People’s court has provided strict rules that require the people’s courts to report the use of “change of circumstances” to higher courts for an additional review210. If a party refuses to perform the contract and the “change if circumstance” principle doesn’t apply it will lead to a wrongful act. When a party fails to perform a contract it will be deemed as culpa in contrahendo (fault in contract conclusion). The relevant people’s court may order the responsible party to effectuate relevant formalities and

207

H. Zhang, Bill - China Legal Watch – July 28, 2009, p. 2f Bing Ling, 5.089 209 H. Zhang, Bill - China Legal Watch – July 28, 2009, p. 3 210 H. Zhang, Bill - China Legal Watch – July 28, 2009, p. 3 208

46

compensate the other party for actual losses incurred there from211. This rule is similar to most countries and in accordance to the Danish Sale of Goods Act, Articles 25 and 30212. The people’s court may demand Specific Performance of the contract. A party can demand the other party to pay the price or other fees pursuant to Art. 109 and consistent to the CISG Article 62 and UNIDROIT principles Art. 7.2.1. In cases other than money guilt the other party can demand performance unless performance is actually or legally impossible, if the obligation is not suitable for performance or the cost of complying would be too high or lastly if the creditor doesn’t in a reasonable time demand performance. The purpose of the rule about too high costs is to avoid waste of resources and not in cases where the other party made an unfavorable transaction213. Taking all this into consideration, the Chinese approach to change of circumstances can, therefore, be interpreted to be somewhere between the CISG and UNIDROIT approach. The courts refuse to modify contract terms even in case of dramatic change of commodity prices which is seen as a commercial or business risk214. The change of circumstance may be limited to situations involving change in economic policy and large scale economic conditions only215. Lack of court practice also indicates this tendency. However, argued by Bing Ling some earlier juridical practice draws an approach close to UNIDROIT216 but the new interpretation seems to tightening up the doctrine a little bit. Danish rules on change of circumstances217 do compared to Chinese seem stricter because we are closer to the CISG rules than the gentler rules in the UNIDROIT principles218. We consider even extraordinary price changes as predictable in the sense of law. Even after wartime general price and cost increases of 4-5 times will not constitute an exemption of liability219. In specific cases with sudden changes this limit is lower. In the case ND 1976.650 Nordic Arbitration should a seller accept a cost increase of 100 %, UfR 1915.380 was a price increase of almost 100 % not enough to lower it220.

211

China Regulatory Updates – Han Yi Law Offices, p. 6 Lando, Ole – Kontrakts retten I Kina – p. 123 213 Lando, Ole – Kontrakts retten I Kina – p. 146f 214 Mondaq – China – News in Chinese Contract Law 215 Bing Ling, 5.091 – This is in consistence with Bing Ling’s assumption. 216 Bing Ling, 5.091 217 Sales of Goods Act Article 24. 218 Lookofsky, Joseph – Køb, Dansk indenlandsk købsret, 3. udgave, 2008, p. 176f 219 Nørager-Nielsen m.fl. - Købeloven med kommentarer, 3. udgave, 2008, p. 412 + 410 cases. 220 Nørager-Nielsen m.fl. - Købeloven med kommentarer, 3. udgave, 2008, p. 414 212

47

A few cases the limit was lower but the nature of the party’s relationship was considered. 5.1.1 Changes of circumstances related to the parties Under Article 76 of the contract law, after a contract becomes effective, the parties may not refuse to perform the obligations of the contract because of the change of title or name of the parties, or change of legal representative or person-in-charge of the parties. However, the other party shall be informed by these changes to make it easy for the obligor to perform the obligations. This provision makes sure that parties can’t evade contract obligations by changing the company or business settings 221. A contract concluded in intuitu personae (the person who assigns the contract thinks that the personal relationship is very important to the contract) is though recognized in China. The Chinese people’s courts will not demand Specific Performance pursuant to Art. 119 if the personal relationship is very important and the other party will not receive the service222. The opposite is interpreted pursuant to Art. 76 in contracts concluded intuitu pecuniae (pure money contract where relationship is not important).

5.2 Cultural Challenges Change of circumstances gives rise only to a party’s right to request re-negotiation223. However, the Chinese do not view the signing of a contract as the end of negotiation; they attach great importance to long-term relationships and will not hesitate to suggest adjustments immediately on the heels of an agreement224. Chinese feel totally comfortable trying to negotiate and renegotiate and interpret and reinterpret policies, regulations, and agreements as conditions change. Hendryx (1986) warns that negotiating the contract is not a real problem; the real problem start after one signs the contract225. Chinese people generally believe in relationships and mutual benefit and have an indifference to profit (Confucian way of living). However, the old guanxi where relationships meant everything getting less important and moves towards a tendency of

221

Zhang, Mo – Chinese Contract Law: Theory and Practice, p. 227 Lando, Ole – Kontrakts retten I Kina – p. 147 223 Bing Ling, 5.093 224 Fang, Tony – p. 51 - (Frankenstein, 1986; Pye, 1982) 225 Fang, Tony – p. 53f 222

48

Chinese people that are much more plated with money and utilitarian characteristics226. The Chinese have gained a wide reputation for their screwed money-making and money-saving capacities; they can calculate money and bargain about price to the extremes227. It is also reported (Schnepp et al., 1990) that the Chinese frequently reopen negotiations to press out additional profit. The Chinese propensity to renegotiate also has much to do with face; the Chinese negotiators want to look “good”228. In other words bargaining is a way of life in Chinese bureaucracy. The Chinese approach confronts with the Western culture. We believe that contracts are the end of negotiation and that is why it’s difficult to do business in China. If we are not open to re-negotiation we run the risk offending our Chinese partner. We believe we have negotiated a hardship clause to have certainty of the contractual situation which might correlate with the Chinese way of doing business. Hardship clauses are very important in today’s China because reforms are the key force behind the changing facade of contemporary China. “The most difficult problem in negotiating with China is that things cannot be planned in advance. You get change, change, and change”. China has the desire to modernize and to grow and that’s why things changes all the time229. With new reforms all the time a contract runs a risk of being unenforceable or difficult to perform like concluded.

5.3 Summary China does as most legal systems not have statutory provisions that tell what a hardship situation is. This means that the parties will have to agree on a definition. The freedom of contracting gives wide possibilities to agree on hardship situations just as any other country. However, if the party’s happens not to agree on such clauses the discretion of the court will define this term. The new interpretation sets up strict rules that the courts have to consider in possible hardship situations. Finally the Supreme Court will have to accept the lower courts trial. 226

Lytras, Miltiadis D. - International Journal of Chinese Culture and Management –Volume 1, No. 2, 2008 227 Fang, Tony – p. 131 228 Fang, Tony – p. 148 229 Fang, Tony – p. 96

49

The Danish and Chinese rules are both stringently enforced but Danish court practice shows that we are closer to follow the CISG rules making the Danish rules stricter than the Chinese. Chinese people do in their nature expect re-negotiation of contracts during performance and will try to change the prices all the time. The nature of a Hardship clause may, therefore, at times seem trivial to them as they see contracting as being a fluidly process with personal relationships and mutual benefits. That said, they will try to squeeze every penny out of a contract to increase their profit and as being some of the world’s toughest negotiators the Danish or Western company should definitely have something on paper that state their rights. If, the Hardship situation is to their advantage it will be exceedingly difficult to claim money back from them again to make the contract equitable. The law does as in Denmark give little help without clauses spelling this out.

50

6

- Venue Clauses

The term venue clause refers to the choice of applicable law, jurisdiction or dispute resolution. The general principle is that there is freedom to choose these matters. This provision can end up being the most important part of your contract230 since it may form the basis for how the process of solving the problems encountered precursor itself. Effective enforcement of contracts is everybody’s concern when doing business in a foreign country. The availability and effectiveness of dispute resolution forms a critical component of contract enforcement. Effective contract enforcement should be viewed on a broader systematic basis, as part of the overall contractual arrangement and its context. This perspective encompasses the contract's legal environment, including the availability of traditional dispute-resolution mechanisms, but also includes contract-specific considerations, such as the structure of performance established under the contract. Further, it must take into account the broader relationship between the parties and the market visibility and reputation of the provider. In jurisdictions with reasonable predictability it is easier to make a risk profile of the contract. Enforceability still offers particular challenges in China where the rule of man, recently, was embraced by the rule of law. Nonetheless, the establishment of effective, predictable enforcement mechanisms represents a relatively new endeavor in the China231. This chapter will give the most important knowledge about choice of law, jurisdiction, which of negotiation, mediation, arbitration or litigation is more appropriate in the circumstances232 and general dispute resolution knowledge. What can you expect from the juridical system culturally and technically given the drafted contract clause?

6.1 Choice of law The applicable rules governing the choice of law is important because foreign cases are often handled differently from domestic ones.

230

Harris, Dan - Arbitration In Your China Contract. Adult Supervision Required. Mondaq - China: Effective Enforcement of Contract Rights in Chinese Sourcing Contracts 232 These are the four possible dispute resolutions pursuant to CCL Article 128 231

51

Courts must apply the "principle of proximate connections" in determining which nation's law governs a disputed contract provision. This principle requires the court to determine which country's law has the strongest proximate connection with the subject matter of the contract233. In China the choice of law becomes a matter when the case becomes or is marked as “foreign”. The term “foreign” is interchangeably to “International”234. A contract is international when at least one person is not Chinese or a Chinese legal person, the subject matter of the contract is in a foreign country235 or the conclusion or performance of the contract is made in a foreign country236. The importance lies in the fact that if the case falls within the category of “foreign” a special set of rules and provisions would apply because in Chinese law, foreign cases are treated and handled in part differently from domestic ones (see later about choice of jurisdiction)237. Accordingly to CCL Article 126 the applicable rules governing the choice of law in the contract is the following238; “Parties to a foreign related contract may select the applicable law for resolution of a contractual dispute, except otherwise provided by law. Where parties to the foreign related contract failed to select the applicable law, the contract shall be governed by the law of the country with the closest connection thereto”. The main rule is that there is freedom of contracting in the choice of law except otherwise provided by law. The court will accept this, unless the choice contradicts with mandatory rules. If the parties have not made it clear, the choice of law should be seen from the circumstances of the transaction. The contract shall be governed by the law of the country with the closest connection thereto239. These mandatory rules will not apply if the parties agree on choice of law240.

233

Mondaq - China: China´s Supreme Court Broadens Mandatory Application Of PRC Laws To ForeignRelated Contractual Disputes 234 Zhang, Mo – Choice of law in contracts: A Chinese approach, p. 296f – This denotation is important to know because in some countries it could be referred to as another, region, state, provinces or municipalities etc. 235 Item to be sold or purchased is located outside China 236 Zhang, Mo – Choice of law in contracts: A Chinese approach, p. 297 237 Zhang, Mo – Choice of law in contracts: A Chinese approach, p. 297 238 Zhang, Mo – Choice of law in contracts: A Chinese approach, p. 290 239 Drafting commercial contracts, lecture 12, 2010 - The choice of law rules often goes to the sellers place as being the characteristic feature of the contract 240 Lando, Ole – Kontrakts retten I Kina, p. 173

52

6.1.1 The CISG and its challenges in China In foreign related cases the CISG often become the applicable law governing the contract see chapter 2.1.1. Although the CISG outlines when it applies, the Chinese Courts often interpret Article 1 differently than we do in the West. Furthermore, the whole process of getting to a court order can oftentimes be obscure. Chinese courts and tribunals often have an inclination to consider the application of Chinese domestic law as a preliminary step before applying the CISG. The consequence of this has been that CISG in some cases only applied in the absence of relevant provisions of Chinese domestic law, or where the stipulations of Chinese domestic law were obscure. The CISG, therefore, becomes a gap-filler for Chinese Domestic law. In other cases the applicability of the CISG was ignored where the requirements of Art. 1 (1) (a) were fulfilled even the parties had no intent to exclude the CISG. In other cases the CISG was applied even it shouldn’t because the courts overlooked important facts and provisions like Articles 2 and 3241. This of course implies that CISG cases in China are more affected by domestic interpretation and the outcome of the case becomes obscure compared to a CISG case in the West. The validity of a “choice of CISG clause” in Chinese courts has, therefore, been up to speculation. Even though, there is more freedom to opt in to the CISG in CIETAC arbitrations242. The smart contract drafter will try to pass through these issues by writing which law applies in the contact. However, Chinese courts might make reasoning against the dominant opinion in Western courts. A reference to the law of a contracting state does not itself amount to an exclusion of CISG in China243. They interpret CISG as being a part of the national legal system of the contracting state and therefore not excluded if the parties write that “Chinese Law” applies. The contract drafter should additionally write that CISG is excluded in this case.

6.2 Jurisdiction Jurisdiction clauses determine which court decides a case, which in this matter can be either in China, Denmark or in some cases a third country.

241

Xiao, Yongping & Long, Weidi - Selected Topics on the Application of the CISG in China – Section 1.1.3f 242 Xiao, Yongping & Long, Weidi - Selected Topics on the Application of the CISG in China – Section 2.2 for further details 243 Xiao, Yongping & Long, Weidi - Selected Topics on the Application of the CISG in China

53

China has only had a judicial system that will hear and resolve commercial disputes since 1979. Commercial litigation in China raises a number of significant concerns because the tradition of resolving commercial disputes in the juridical system is quite new. These concerns go beyond standard concerns of litigation in more established judicial environments, including inefficiency, cost and time244. We have already seen some of these concerns above where the courts and CIETAC feel more confident dealing with domestic law than CISG because of lack of experience. Among these concerns, the juridical qualification in many parts of the country is low, judges are inexperienced245, inadequate educated and poorly paid246. These concerns should obviously make Danish companies re-think their choice of jurisdiction and dispute resolution. The Chinese Courts capability in the absence of a valid jurisdiction covenant provides pursuant to the Civil Procedural Law Article 243 as follows: “In disputes about contracts, or other property rights can a case against a defendant who have no registered office in the People's Republic of China, be filed by a Chinese People’s Court if the contract were concluded or to be performed in China, the subject matter is located in China, the defendant has a property, which can be, distressed or the defendant have a representative body in China. The case is filed by the Court at the place where the contract is concluded or to be fulfilled where the subject is located, where the defendant's assets are located, where an unlawful, damaging activity is carried out or at the representative organs place of residence”247. Here, the “choice of law” rules about place of contracting and performance applies, see chapter 6.1. Pursuant to the European convicting regulation can lawsuits against persons with place of residence in the European Union (Denmark) be filed at the place of the defendant’s residence and contractual agreements cases at the place of performance or where the enterprise is placed as defined in Article 5 (1)248. Both Denmark and China have joined

244

Mondaq - China: Effective Enforcement of Contract Rights in Chinese Sourcing Contracts Mondaq - China: Effective Enforcement of Contract Rights in Chinese Sourcing Contracts 246 Lando, Ole – Kontrakts retten I Kina, p. 41 247 Lando, Ole – Kontrakts retten I Kina, p. 180 248 Lando, Ole – Kontrakts retten I Kina, p. 180 245

54

the Haager-promulgation convention of 15. November 1965 and follows these proceedings249. A clause dealing with choice of jurisdiction is not worth the paper it’s written on if it’s not enforceable. A contract between a Chinese provider and a Danish costumer may provide that the law of a national jurisdiction other than China will govern the contract, and that any disputes under the contract will be resolved through proceedings conducted outside China. In such a valid contractual arrangement, there are though limitations. Issues concerning intellectual property ownership, labour laws, land ownership, insolvency and enforcement of foreign judgements or awards etc. remain subject to Chinese law and will be judged by Chinese courts250 pursuant to the Civil Procedural Law Articles 34 and 246251. Courts in China are also far more likely to enforce a foreign arbitral award252 than to uphold the judgement of a foreign court253. China do not uphold decisions from foreign courts comparable to Denmark, RPL § 223254.

6.3 Dispute resolution. The most effective way of handling dispute resolution is to make a dispute resolution strategy. Such strategy should aim at minimizing the likelihood of disputes and avoidance of high-risk situations. The whole contractual arrangement should be considered, because, no matter how sophisticated the contract is, dispute resolution activities are ultimately distracting, costly and non-productive255. But disputes do happen and sentencing or termination of the contract may be the last solution. In case of termination, discharge, rescission or invalidity of the contract because of some incidence between the parties, the rule of severance will apply. Accordingly to CCL Article, 57 will the validity of arbitration clauses, choice of forum clauses, choice

249

Lando, Ole – Kontrakts retten I Kina, p. 181 Mondaq - China: Effective Enforcement of Contract Rights in Chinese Sourcing Contracts 251 Lando, Ole – Kontrakts retten I Kina, p. 181 252 Voldgiftsforeningen - China is a member of the New York Convention and their courts are therefore obliged to recognize and enforce arbitral awards of Denmark and signatory countries. 253 Mondaq - China: Effective Enforcement of Contract Rights in Chinese Sourcing Contracts 254 Pilgaard Andersen, Anders - A comparative study in recognition of foreign-country judgments in Denmark and the United States of America., p. 43 255 Mondaq - China: Effective Enforcement of Contract Rights in Chinese Sourcing Contracts 250

55

of law clauses and clauses that choose an inspection body or other fact-finding institution not be affected256. 6.3.1 Negotiation & Mediation The advantages of dispute resolution through negotiation are obvious. At most, the settlement of the dispute will be resolved in a friendly way and the business relationship remains unaffected. Negotiation is the most cost effective and time saving platform but requires satisfactory compromises from both parties. Negotiation is not mandatory; in other words, parties may choose other means257. Mediation is used where the parties could not reach a settlement themselves but are willing to have their disputes heard by a third party. The mediator has the role of making proposals for the parties in dispute. Mediation can be done in different ways, namely as civil mediation (non-juridical), administrative mediation, mediation in arbitration or juridical mediation. Due to the non-binding effect of the first two mentioned and risk of local bias is it not preferable in international cases 258. Mediation in arbitration is conducted before an award is made, but not required, and has the same binding effect as an arbitrational award if mediation is successful. Juridical mediation is made by the court and required at any stage, if possible before the judgement is rendered. 6.3.2 Arbitration There are around 200 arbitration commissions in China, which dealt with over 65,000 cases in 2008. When you consider, doing business in China you have to make some considerations when thinking about arbitration. There are three types of arbitration recognised in China; domestic arbitration, foreign-related arbitration and foreign arbitration. The difference between these can be significant. The validity of your venue clause under Chinese law is essentially similar to those requirements encountered in the UNCITRAL Model Law on Arbitration, but there are essential differences259. Under Chinese law, a valid arbitration agreement must expressly designate an arbitration commission. This is different to international

256

Bing Ling - 4.091, p. 203 Zhang, Mo – Chinese contract law – theory and practice, p. 349f 258 Zhang, Mo – Chinese contract law – theory and practice, p. 349f 259 Herbert Smith, p. 2 and Freshfields Bruckhaus Deringer, p. 1 – Interpretation from 8. September 2006 257

56

standards where reference to arbitration is enough without any specific institution260. The validity of an arbitration agreement is determined by either arbitration commission or The People’s Courts contrary to international practice where this happens in the arbitral tribunal. The law governing the validity of the arbitration agreement ground on the place of arbitration. If the chosen arbitration is to be in Hong Kong, this will be the arbitration to decide this matter. It is internationally accepted that solely national parties can arbitrate outside their country, but this is still not possible for Chinese people 261. This can turn into an important matter if you are to be considered not “foreign”. The procedure of finding the relation of the contract is the same as the choice of law (See chapter 6.1). If, the case is deemed to be “not foreign related” it will go under the domestic classification which offers fewer options. A case might be classified as domestic (Chinese person) if you have an administration department or warehouse etc. considered as a Chinese-formed entities. Surprisingly to many foreign companies, this includes FIE’s (Foreign Investment Enterprises) and WFOE’s (Wholly Foreign Fund Enterprises). A consequence is that Chinese courts have better possibilities of denying enforcement of the award. From a Danish company’s perspective this defeats the entire objective of arbitration262. The reason is that China has signed the New York convention which means that an arbitrational award made in any of the 135 member states are generally enforceable in China only limited by procedural grounds for nonenforcement263. However, China has in some cases breached the convention by not acknowledging foreign cases without a reason which leaves international concern264. Another important issue and a difference to the UNICITRAL rules is, as said, that domestic considered cases in China are not granted to choose an arbitration institution outside China, pursuant to CCL Article 128 (2). Additionally, where the place of arbitration is mainland China, Chinese law requires the arbitration to be conducted by an arbitration institution265. The place of arbitration determines the law which governs

260

Freshfields Bruckhaus Deringer, p. 1 - the arbitration agreement will not be invalid if the arbitration institution can be ascertained under the applicable arbitration rules. 261 Freshfields Bruckhaus Deringer, p. 2 262 Mondaq - China: Effective Enforcement of Contract Rights in Chinese Sourcing Contracts 263 Kritzer, Albert H. - International Contract Manual - § 51:43 264 Lando, Ole – Kontrakts retten I Kina – p. 182f 265 Herbert Smith, p. 2

57

the arbitration and the courts which supervise the arbitration i.e. providing relief in support of the arbitration and considering whether to set aside an arbitration award. One of the main commissions for conducting foreign-related arbitrations in China is CIETAC266. Despite its size and modernization of its procedures in recent years, it is still viewed with concern by the international business community. The concerns involve issues regarding transparency of arbitrator compensation and even the possibility of improper influence and pressure brought on the arbitrators267. 6.3.3 Litigation. In China the court system is in a hierarchy like Denmark. The people’s courts are as follows with the first mentioned as the highest institution: Supreme People’s Courts, The Higher People’s Courts, The Intermediate People’s Courts and the Basic People’s Courts. Alternatively the parties can choose Arbitration. Litigation in court is available only if there is no arbitration agreement or the arbitration agreement is invalid. Once the parties agree to have arbitration, they will be bound by the arbitrational award and no litigation is allowed concerning the same disputes268. The general rule is that access to lawsuit will be statute-barred (forældelse) in two years contrary to Danish law where its three years269.

6.4 Cultural Challenges Previously the law have been a tool for the state to silence dissenters and the word “law” was in Chinese history interpreted to mean “penalty” or “punishment” which made the legal system less used270. In fact, litigation has historically and is still by many viewed as humiliating for the parties involved271. But now an increasing number of Chinese do turn to courts to seek justice, but many prefer to dodge the legal system, relying instead on private mediation272, bargaining and arbitration. The reason for this is

266

China International Economic Trade Arbitration Commission Mondaq - China: Effective Enforcement of Contract Rights in Chinese Sourcing Contracts 268 Zhang, Mo – Chinese Contract Law – theory and practice, p. 59 – Pursuant to Arbitration Law of China (1994). 269 Lando, Ole – Kontrakts retten I Kina – p. 129. Pursuant to the General Principles of Civil Rights, Article 135 and the Danish Forældelsesloven, Article 3 (unless prejudice to other provisions). 270 Zhang, Mo – Chinese contract law – theory and practice, p. 27 271 Mondaq - China: Effective Enforcement of Contract Rights in Chinese Sourcing Contracts 272 Katz, Paul R – Divine Justice – Religion and the development of Chinese legal culture, p. 1 and Lando, Ole – Kontrakts retten I Kina, p. 32 267

58

that corruption and misuse of power among the judiciary273 is one of China’s biggest problems274. The Chinese cultural traditions have an impact on the smart choice of dispute resolution given our earlier analysis. Preliminary to other dispute resolutions are mediation in the local society and committees often used and proclaimed by the government275. Mediation does not bind the parties and cannot lay the foundations of a later litigation in court but can reconcile the parties. Mediation is although not recommended to foreigners doing business in China276 because of the danger of local bias277. The most effective mechanism by far in resolving international dispute is international arbitration. The reason for this is because you can take away the home court advantage on either side of the transaction which also makes the clause more likely to be agreed upon278. Yet another reason is that it is widely believed in China that you can achieve better results by arbitration than courts. The reason for this is that arbitration is more in harmony with Chinese culture since it aligns with Confucianism, allowing to saving face279. This is a very important facet even in the interpretation of legal issues280. As we understand interpretation of contracts it should only be dependent on the language and intentions281. The court interpreter should not have a role as an anthropologist, a linguist282 or a psychologist283. This shows that culture may have an impact on legal issues in China. Depending on the context of the transaction, there are times where litigation may be preferable to arbitration, for instance in IP or trade secret cases.

273

The Chinese civil procedure law from 1991, Article 44, is trying to turn against these issues. Lando, Ole – Kontrakts retten I Kina, p. 41 275 CCL Article 128 276 Lando, Ole – Kontrakts retten I Kina, p. 32 277 The local mediators inclination to support his own citizens. 278 Harris, Dan - Arbitration In Your China Contract. Adult Supervision Required. 279 See chapter 2.2 for more information about the significance of the Confucian ethics. 280 Lando, Ole – Kontrakts retten I Kina, p. 37 281 In Denmark and traditional civil law we do look at the intentions between the parties contrary to common law. 282 Anthropologists are social scientists who study the origin and physical, cultural, and social development of human beings. A linguist is a student of language and origin. 283 Gonzáles, Roseann Dueñas et al, Fundamentals of court interpretation – Theory, Policy and Practice, 1991, p. 502f and p. 143f. 274

59

It is in several sources recommended284 to choose arbitration to take place in Hong Kong285 instead of Mainland China if possible due to the quality and process286 of the arbitration287. However, Chinese people usually insist on having the arbitration within Mainland China while foreign parties would like to choose a third country288.

6.5 Summary A solid venue clause is very important for the company who seeks certainty about its legal position in a later dispute. Without a venue clause and certain knowledge the contract can be unenforceable in wholly and part if the contract provisions contradicts with national law. My analysis shows that without an agreement the mandatory rules takes over but will often cause challenges and high uncertainty. The choice of jurisdiction and law will be chosen from the nature of the transaction similar to international rules. That said, juridical qualification in many parts of the country is low, judges are inexperienced, inadequate educated and poorly paid they are corrupt and misuse their power. Using the Court system in China is, therefore, not preferred which especially are seen in CISG adjudications. Danish companies too should write the applied and excluded law in the contract to lower the risk of mixture of rules. I advice the use of arbitration because is the most used form of dispute resolution in international contracts and it is especially preferred in China comparatively. Arbitration outside China is suggested due to international concerns, higher quality and they are usually enforceable in Mainland China. When conducting dispute resolution means, following the grandfather clause is natural. Chinese partners will often propose the use of mediation in alignment of Confucian life style but is not suggested used by foreigners due to local bias. Chinese people especially

284

Harris, Dan - Arbitration In Your China Contract. Adult Supervision Required and Georgiou, Phillip The Perils of Bad Contract Drafting: The Irony of Dispute-Resolving Provisions Becoming the Cause of Dispute, February 2006, etc. 285 Zhang, Mo – Choice of law in contracts: A Chinese approach, p. 298 – China has a unitary legal system, but the unitary system only affects the mainland; it excludes Hong Kong and Macao despite the fact these two regions became part of China in 1997 and 1999 respectively. 286 If you choose Chinese arbitration you should call for language to be English and require as many arbitrators as possible to come from outside China. 287 Hong Kong and Singapore is recognized to be hubs for international dispute resolution. http://www.icchkcbc.org/ 288 Kritzer, Albert H. - International Contract Manual- § 51:44

60

prefer to solve any dispute through negotiation rather than arbitration and especially Courts to keep guanxi (relationships).

61

7

- Conclusion

My vision with this thesis is to illustrate challenges regarding management of differences in contract law and business culture between Denmark and China with emphasis on a proactive approach. Accordingly, I wanted to establish a foundation that was useful for companies reading my thesis and, therefore, chose four of the most interesting contract clauses. The reader did not only get juridical knowledge about specific differences between Denmark and China for the chosen contract clauses but also applicable tools that work along with other contract provisions. Throughout this thesis, I have tried to give the reader an overview of where the spirit of the new Chinese contract law of March 15, 1999 comes from. Chinese contract law is inspired by French law, the German Civil Code is the legal basis and the CISG and UNIDROIT principles are the foundation of the law. The reader that recognizes these legislations is ahead in understanding Chinese contract law. However, having an understanding of the law is not equal that companies will have success when drafting contracts. I wanted to illustrate this presumption by analyzing Chinese culture. This analysis looked at differences from Western countries and what challenges companies can anticipate meeting when negotiating contract provisions. This is necessary to know not to offend your Chinese partner and because the performance of the contract is more important than words on a paper. This will also indicate if culture has an effect on the genesis of the law and it will give clues to why a provision in two countries can be the same but the interpretation is different. Comparative contract law can be many things - Comparison of legal institutions, systems, traditions and legal families. Due to its complex and substantial area with freedom of contracting to draft an extensive amount of contract provisions I chose some of the most controversial areas and looked at court interpretation of specific provisions. What I wanted to study was the presumption that cultural traditions and differences

62

between two nations have an influence on interpretation, the genesis of the law, successful negotiation and contract drafting.

7.1 Bullet points from my research Provided is the differences and similarities between Denmark and China: Limitation of liability Clauses 

Both countries believe that agreements must be kept and enforce this with a strict liability principle which means that the non-performing party is always assumed to have caused the loss. A foreseeability test support this assumed loss and regulates it dependent on the circumstances.



Liquidated damages clauses are regulated if “significantly higher than the loss” and will, therefore, have little value as a limitation of liability clause in China.



Force majeure is the only legal exemption of liability. Freedom of contracting lets parties agree other exemptions if meeting the criteria of fairness and good faith. In both countries, personal injury and gross negligent damages cannot be exempted.



China’s rules on standard documents are stricter than Denmark’s because they interpret the use of them closer to our consumer rules than B2B settings.



Chinese people do in their culture not like limitation of liability clauses. They believe in reciprocal relationships and equal contracts but use it themselves as a tool to save face in later disputes.

Penalty Clauses 

Penalty clauses are permitted in both countries and can have the form of liquidated damages, indemnification or deterrence without a punitive effect.



Liquidated damages shall be lowered if “significantly higher than the loss” which is interpreted as a 30 % threshold. The rules are similar to UNIDROIT, PECL and Danish rules, but we do not have a threshold.



China has an extensive use of Specific Performance making the enforcement stricter than Danish rules.



A full compensation approach is applied but Chinese courts leave out ways of measuring damages different from us leaving it to the discretion of the court.

63



A contract where CISG is the applied law is not interpreted properly because Chinese courts do not use the provisions properly or mix their own law with the rules.



Chinese people have mixed feelings towards penalty clauses because they prefer re-negotiation contrary to pre-defined penalties if the contract is not followed.

Hardship Clauses 

Both countries do not have any statutory provisions regulating Hardship situations. An agreement between the parties is possible.



Both countries have strict rules when interpreting a possible Hardship situation. Danish rules seem stricter than Chinese as our court practice lies closer to CISG rules whereas Chinese are closer to the UNIDROIT principles.



In Chinese business culture re-negotiating is normal practice and agreeing on a Hardship clause may, therefore, seem trivial to them.

Venue Clauses 

Juridical qualification in many parts of China is low, judges are inexperienced, inadequate educated and poorly paid, and there are problems with corruption and misuse of their power.



Chinese people prefer arbitration contrary to Courts due to cultural aspects. This is advised to foreigners doing business in China for this reason and the above.



Chinese people treat foreigners and their own people differently in the choice of venue. Chinese shall in non-foreign related contracts, if they choose venue mention a specific court. This is not the case in foreign-related contracts because of international regulation.

7.2 What makes a difference in interpretation? I have found rules that look the same but are interpreted differently. This can have many reasons but to answer this we have to look at the legal problems from its birth up to the judge’s sentence. We want to know if the difference can be accommodated within legal methods or if there is other powers intervening. The problem is, for example, changing circumstances (Hardship). The problems are that some parties enter a contract under some circumstances that later changes so much that one of the parties would never have agreed the contract if he knew this. We have a legal

64

problem that the court has to solve. The legal rules sets as the legal consequences and the party that could not foresee this change of circumstances gets some relief from the situation he ended up in. We now have a concept that we can use; we talk about change of circumstances. Instead of just looking at the concept we have to look at the problems in the society that created the legal rule. If China, does not consider a problem we cannot say that they just don’t have that in their legal system. We have to look at what they do instead. In the case of change of circumstances, I went through the whole court interpretation of the rule. I included what they did prior to the new interpretation which was to consider the case from a point of view of good faith. The term is though very fluidly and needed more fixed rules. The new interpretation is how they believe things are done to protect their own social and economic interests. Comparing Chinese and Danish rules we can conclude which country has the best protection. In the case of change of circumstances, it depends on which side of the table you are sitting at. One may find that contracts should be kept as agreed, and others believe in some kind of relief. To see the full picture of rules in the two countries we also have to look at if there are rules that support the particular provision to protect the parties against getting into the situation they got into. Here, we should look at the formalities of contracts, if the contract has to be written, confirmation and the contract provider’s obligations to inform the other party about the consequences of signing the contract. As it is now the foreseeability of the change of circumstances, have an influence in the interpretation. I covered which situations and what thresholds there are for giving parties relief from the contract. From all this information, I could conclude that there was a difference between Denmark and China and what country had the strictest rules, which was Denmark. My analysis did not only look at the rules of change of circumstances but also the problems considered in the interpretation and the analysis became functional. We can hereafter say that it was a problem in the society that we were seeking to solve. The way a society problem gets solved depends on the surroundings in the society that did lead to the problem. My discussion of legal history and the laws emergence gave us

65

an idea of how many inner and outer powers that influenced the drafting of the law. Interpretation of provisions is effected by where they have their inspiration from. Differences in the society and legal emergence between two countries can, therefore, explain a difference in the interpretation. We can ask ourselves why we have stricter or looser rules in Denmark than China in interpretation of a provision if it cannot be explained in the legal rules wording. The linguistic meaning of words is an explanation because the way lawyers and judges interpret words comes from their programming and beliefs. People’s choice of words changes from what culture they come from and they have different feelings attached to words and situations. Courts have to consider this to give an accurate picture of the experience in their judgments. An excellent example is the Danish Marketing Law § 1 which has changed tolerance levels of what is acceptable marketing. One of the words I talked about that Chinese people do not like to use is the word “No”. Chinese have different feelings attached to that word than we do. Chinese people may then have stronger emotions attached to provisions that use the word “Not”. A Chinese judge is no different and may interpret a situation differently from the choice of words itself. Law makers also know the importance of words which, for example, was seen in the changing of the Danish Marketing Law § 1 from a negative into a positive and more uplifting wording. How people understand and react to the law in practice is also a determining factor. Some provisions are ignored, and others are used more or less. When China “copy” German law they may have the same wording but with different emotional intensity attached to it. There is, for example, freedom to choose the form of remedy and Chinese use Specific Performance as their primary remedy. The feelings attached to that freedom can make a difference as they put more significance in personal relationships. History and deep rooted culture are a determining factor in interpretation. We have something we can call core beliefs. Core beliefs are beliefs about everything in our lives; beliefs about our identities, money, time, people, work and life itself etc. A core belief can be that “contracts shall be kept” or good faith. To those core beliefs we have supporting beliefs. These supporting beliefs can be other provisions that support the belief, business cultural factors, sound business practice, government policy and reforms and historical factors that thereby strengthen the core belief. Dependent on what

66

these supporting beliefs are they can make courts interpret provisions strictly or less strict. When a core belief gets strong enough, it gets conditioned and become legal practice or statutory law. This is what we can call legal politics. It is a dynamic process under constant change and dependent on the problems in the society some rules die others survive and new are formed. When China wrote their laws they chose to add some provisions and leave others out dependent on what they believe their society are ready for.

Legal politics

Government policy and reforms

History

Law

Deep rooted culture and business culture

Beliefs emerge from asking questions. Questions turn into answers that may become beliefs. It is the quality of questions that create the quality of the outcome. The kind of questions people ask is the result of how they interpret the reality. One can then ask himself why courts in Germany would interpret that “reasonable” delivery time is one week while and Italian court would interpret the same situation to be three weeks. The answer is relativity. Albert Einstein once said “When a man sits with a pretty girl for an hour, it seems like a minute. But let him sit on a hot stove for a minute -- then it is longer than any hour. That is relativity!”289 Differences in cultures will make courts interpret situations relatively differently, and it should be that way. Courts job is to get to the closest result that mirrors the reality between the parties. The German businessman’s reality is fast moving business. Cultural factors is a part of reality and thereby interpretation. This also means that some factors in interpretation only become 289

67

Quotations book

cultural factors because we use that terminology. Two Italian businessmen choosing Germany as their jurisdiction should expect the same result as in an Italian court. Interpretation is simply an imagination of their reality and the stress they put on time differs from cases. A generalization that its culture is, therefore, only possible to give in that case because it’s part of lawyers routine to consider these factors. Cultural elements to consider are the values and attitudes that bind the system together and the place of the legal system in the culture or society as a whole. I analyzed many of the cultural differences between Denmark and China and some of these can explain a difference in the interpretation. I did, for example, find that Chinese people do spend more time negotiating contracts than Western. If contracts are negotiated in more dept one, could interpret that the parties discuss more facts and thereby should foresee more circumstances. Teachings in books and the societal circumstances can lead the parties focus to different issue areas and courts will thereby interpret that parties should have considered these concerns. Danish Hardship practice shows that we now have a whole list of circumstances that the parties should be knowledgeable about. These circumstances derive from business practice developed in our specific culture. It can be argued that the general contract drafter is better educated in Denmark than the third country China and, therefore, expected by courts to foresee more facts before signing the contract. This leads to stricter rules because both countries by default believe in the concept that contracts shall be kept. Both countries do though look at the individual parties, but the general picture will demonstrate that their rules are less strict. To correct these biases economical and social interests of the government and arguments used against the parties will have to be analyzed too. Here, I can quote myself “It is the quality of questions that create the quality of the outcome.” To explain this, we would have to go deeper into an analysis of social conditions in both countries. The European way of solving legal problems is largely rule based and rational where the Japanese way is concrete and intuitive. Adjudications are more emotional than Western. Japanese let oneself heard though a healthy sense of justice as part of their law. The Western ideas of juridical logics and consequences are not part of the Japanese mentality. Japanese law inspired Chinese, and we see cases where courts do not use logics but look at the relationships and what seems fair without reference to the law. There are crucial differences among political ideologies and attitudes that characterize legal systems. China is a collectivist country whereas Denmark is an individualistic

68

country where each person’s right plays a big role290. A cultural trait like this can lead courts to make more emotional judgements that consider both parties continuing relationship after the judgement. In my example, this can be one of the many factors supporting a lower threshold in, for example, Hardship situations. My figure shows that there are many factors that play a role in how courts interpret things. One legal rule cannot be analyzed alone without looking supporting provisions, government policies, reforms and history. These factors together will give a picture of how courts should interpret provisions from an objective point of view. I saw differences which can be explained from cultural differences. This is valuable knowledge for a lawyer drafting contracts because he will see the large picture when reading the law and what provisions that support each other. The fact that the black letters in the law does not have the same meaning as we have is a cultural difference. The presumption that cultural traditions and differences between two nations have an influence on interpretation, the genesis of the law, successful negotiation and contract drafting is positive answered.

7.3 Future perspective China is in fast development and new reforms are coming out on a regular basis. China is educating more lawyers to develop the country so a better quality of interpretations can be expected in the future. Because the law is new, interpretation guidelines are needed to create more certainty. For China to have more trust, higher courts have to control lower courts passing of sentences as there seem to be high uncertainty, corruption and misuse of power that leads to wrongful sentences. Danish companies doing business in China can only try seeking certainty by drafting longer contracts with interpretation clauses and use arbitration outside mainland China.

290

69

Lando, Ole – Kort indføring i komparativ ret, p. 185f

8

- Bibliography

In alphabetic order

8.1 Books Andersen, Lenart lynge – Aftaler of mellemmænd, 4 Udgave. ISBN: 8761902365 Bing Ling, Contract Law in China, Hong Kong, Sweet and Maxwell Asia, 2002. ISBN: 962661059X Blackman, Carolyn – Negotiating China – Case studies and strategies Bryde Andersen, Mads et al. Lærebog i obligationsret I, Ydelsen Beføjelser, 2 Udgave. ISBN 978-87-619-1224-4 Chen, Jianfu - Chinese Law – Context and transformation, Brill, 2007 – ISBN 978-9004-16504-5 Evald, Jens & Schaumberg-Müller, Sten – Retsfilosofi, retsvidenskab & retskildelære Fang, Tony – Chinese Business Negotiation Style. ISBN: 0761915753 0761915761 Fontaine, Marcel et al. – Drafting International Contracts – An analysis of contract clauses. ISBN: 9004176799 Gonzáles, Roseann Dueñas et al, Fundamentals of court interpretation – Theory, Policy and Practice, Carolina academic press, 1991. ISBN: 0-89089-414-0. Katz, Paul R – Divine Justice – Religion and the development of Chinese legal culture Taylor and Francis, 2008 – ISBN 978-0-415-44345-6 Koziol, Helmut, Wilcox, Vanessa - Punitive damages: common law and civil law perspectives. ISBN: 3211922105 (I found it through Google Books) Kritzer, Albert H. - International Contract Manual. ISBN: 9780314979407 9780314964366 Lando, Ole – Kort indføring i komparativ ret. ISBN: 9788757416640

70

Lando, Ole – Kontrakts retten I Kina. ISBN: 9788757416565 Lookofsky, Joseph m.fl. – Køb – Dansk indenlandsk købsret – 3. Udgave, 2008. ISBN: 9788757415155 Lu, Xiaohe – Developing business ethics in China. ISBN: 1403972532 Nørager-Nielsen m.fl. - Købeloven med kommentarer, 3. udgave, 2008. ISBN: 9788761921338 Peter de Cruz – Comparative law in a changing world, 2nd edition. ISBN: 185941432X Shippey, Karla, C - Short Course in International Contracts - World Trade Press, 2009 Zhang, Mo – Chinese contract law – theory and practice, BRILL 2006, ISBN: 978-9004-15041-6 Zhang, Mo - Freedom of contract with Chinese legal characteristics: A closer look at Chinas new contract law.

8.2 Homepages and articles An Arbitrator's Powers and Duties Under Art 114 of Chinese Contract Law in Awarding Damages in China in Respect of a Dispute Under a Contract Governed by CISG by Marcus S Jacobs, QC and Yanming Huang http://www.cisg.law.pace.edu/cisg/biblio/jacobs1.html Analyzing beyond personal experience – http://www.rieti.go.jp/en/special/02021901/ Brons www.brons.dk Carlsen, Anja - Can the Hardship Provisions in the UNIDROIT Principles Be Applied When the CISG is the Governing Law? http://www.cisg.law.pace.edu/cisg/biblio/carlsen.html#fn39 China Regulatory Updates – Han Yi Law Offices http://www.hanyilaw.com/cn/pdf/Han%20Yi%20Monthly%20Newsletter%20on%20Ch ina%20Regulatory%20Updates%20(June%202009).pdf

Dansk Erhverv http://www.danskerhverv.dk/Raadgivning/Erhvervsjura/Koebeloven/Sider/BtB.aspx

71

Departing from mere compromise: Reformulating the remedy of Specific Performance under the Convention on the International Sale of Goods (CISG) in line with the Convention's underlying goals by Admire Takawira of November 2007 http://www.cisg.law.pace.edu/cisg/biblio/takawira.html Economic Expert http://www.economicexpert.com/a/Civil:law:legal:system.htm EXCLUSION AND LIMITATION OF LIABILITY CLAUSES CHINA (MAINLAND AND HONG KONG) by Graeme Johnston http://www.ebalawyers.com.au/system/files/download/o104/SIN164.pdf Freshfields Bruckhaus Deringer – PRC arbitration law – CLARIFICATION FROM THE PRC SUPREME PEOPLE’S COURT – September 2006 http://www.freshfields.com/publications/pdfs/2006/16296.pdf Gas Pedal Defect Prompts Toyota Recall of Another 2.3 Million Vehicles in US http://www.productliabilitylawblog.com/2010/01/gas_pedal_defect_prompts_toyot_1.ht ml Georgiou, Phillip - The Perils of Bad Contract Drafting: The Irony of DisputeResolving Provisions Becoming the Cause of Dispute, February 2006 http://www.jonesday.com/the-perils-of-bad-contract-drafting-the-irony-of-disputeresolving-provisions-becoming-the-cause-of-dispute-02-15-2006/ Global Envision - Globalization and “contract culture” http://www.globalenvision.org/library/8/715 H. Zhang, Bill - China Legal Watch – July 28, 2009 http://www.Chinasunbow.com/NewsEvents/China%20WatchContact%20Disputes%20Trial.pdf Harris, Dan - Arbitration In Your China Contract. Adult Supervision Required. http://www.Chinalawblog.com/2010/02/arbitration_in_your_China_cont.html#comment -347304 Herbert Smith – China Dispute Newsletter http://www.herbertsmith.com/NR/rdonlyres/DA0D3938-5EA6-4968-8F6DB1A4DED280DF/3630/NovembernewsletterspecialarbitrationeditionAMENDED.pdf IACCM – In tough economic times, contracting excellence offers relief – Volume 2, no 2, December 2008/2009 http://www.iaccm.com/userfiles/file/CE_2_2_press_C(2).pdf Lando, Henrik and Rose, Caspar - On the enforcement of Specific Performance in Civil Law countries - International Review of Law and Economics - Volume 24, Issue 4, December 2004, Pages 473-487. www.sciencedirect.com

72

Liming, Wang and Chuanxi, Xu - Fundamental Principles of China’s Contract Law – 13 Columbia Journal of Asian Law (1999) 1-34 Lytras, Miltiadis D. - International Journal of Chinese Culture and Management – Volume 1, No. 2, 2008 Mondaq http://www.mondaq.com/article.asp?articleid=96812 – China – Going to China - , 26 March 2010 by Master, Geofrey L. http://www.mondaq.com/article.asp?articleid=96830 - China: Effective Enforcement of Contract Rights in Chinese Sourcing Contracts http://www.mondaq.com/article.asp?articleid=97006 - China: China's Supreme People's Court Issues Clarification and Interpretation of the Contract Law on 29 March 2010 http://www.mondaq.com/article.asp?articleid=81324 China: News in Chinese Contract Law from 17 June 2009 http://www.mondaq.com/article.asp?articleid=51342 China: China´s Supreme Court Broadens Mandatory Application Of PRC Laws To Foreign-Related Contractual Disputes Non-payment of contractors – Pinsent Masons of May 22 2006. http://www.internationallawoffice.com/newsletters/detail.aspx?g=c50d1926-cd37-4d58b7a1-8cb0570c490f&redir=1 Pilgaard Andersen, Anders - A comparative study in recognition of foreigncountry judgments in Denmark and the United States of America. http://www.jura.au.dk/fileadmin/site_files/filer_jura/dokumenter/forskning/rettid/2009/a fh15-2009.pdf Reedsmith http://www.reedsmith.com/_db/_documents/0804crit.pdf Shanghai Kai-Rong Law Firm by Jin Yu-Lai http://www.skrlf.com/UploadFiles/Periodical/633875005225781250.pdf Springerlink – Punitive damages in Scandinavia. http://www.springerlink.com/content/pv3974qh16n0w3r1/ The Application of the CISG in the Current PRC Law and CIETAC Arbitration Practice by Fan Yang http://www.cisg.law.pace.edu/cisg/biblio/yang2.html#2

73

THE CHALLENGE OF A UNIFORM APPLICATION OF THE CISG – COMMON PROBLEMS AND THEIR SOLUTIONS BY BRUNO ZELLER http://www.buslaw.mq.edu.au/docs/publications/past_editions/volume_3/21_Zeller.pdf The Remedy of Requiring Performance under the CISG and the Relevance of Domestic Rules [particularly in the context of China-related sales transactions] http://www.cisg.law.pace.edu/cisg/biblio/shen1.html The Top Ten Most Negotiated Terms in 2007 – http://www.iaccm.com/articles/2008top10/ Toyota details safety fix, damage claims mount http://www.reuters.com/article/idUSTRE6100KS20100201 Voldgiftsforeningen http://www.voldgiftsforeningen.dk/Default.aspx?ID=107 Xiao, Yongping & Long, Weidi - Selected Topics on the Application of the CISG in China - Reproduced with permission of 20 Pace International Law Review (Spring 2008) 61-103 http://aff.whu.edu.cn/cisgChina/en/news_view.asp?newsid=108 Y. Gotanda, John - Recovering Lost Profits in International Disputes http://www.cisg.law.pace.edu/cisg/biblio/gotanda2.html Zhang, Mo – Choice of law in contracts: A Chinese approach. Northwestern Journal of International Law & Business, Vol. 26, 2006. http://ssrn.com/abstract=990001 Zhang Yuqing & Huang Danhan - The New Contract Law in the People’s Republic of China and the UNIDROIT Principles of International Commercial Contracts: A Brief Comparison http://www.unidroit.org/english/publications/review/articles/2000-3-zhang-e.pdf

8.3 Others Chinese Contract Law (CCL) http://www.novexcn.com/contract_law_99.html CISG Law Danish Contract Law Danish Sales of Goods Law Definition of Mandatory law

74

http://definitions.uslegal.com/m/mandatory/ Quotations book http://quotationsbook.com/quote/39135/

UNIDROIT Principles UNILEX

8.4 Readings not directly referred to CISG and China – An intercontinental exchange by Friedrich Blasé http://www.cisg.law.pace.edu/cisg/biblio/blase2.html Ferraro, Gary P. – The Cultural Dimensions of Business – Fifth Edition Lewicki, Roy J. – Essentials of Negotiation Lubman, Stanley - Looking for law in China Pissler, Von Knut Benjamin – Das neue chinesische Vertragsrecht im Spiegel des Handbuches von Bing Ling Sun, Von Xianzhong – Die Rezeption der westlichen Zivilrechstswissenshaft und ihre Auswirkung im modernen China. Wikipedia http://en.wikipedia.org/wiki/Legal_culture

All homepages and articles were last visited 29 Aug. 2010.

75