Junwei Fu^*

(2009) Oxford U Comparative L Forum 5 at ouclf.law.ox.ac.uk | How to cite this article

Abstract

One of the remarkable differences in contract law between legal systems in the European Union and China is the definition and status of contractual freedom. Historically, contractual freedom has not been commonly recognized in China, and social ethics had played a greater role in its civil law. In contrast, in European legal systems, freedom have been accepted as a core element in private law, with social elements having been commonly ignored, particularly during the time of 18^th and 19^th century. However, in modern times, China has started to accept the concept of freedom in its civil law, and the consideration of social elements has been diminished gradually since the late 1990s. On the contrary, in Europe, mainly due to the correction of market failures, social elements have increasingly been considered in order to maintain the substantive justice of contract, and contractual freedom as unfettered ideology has diminished since the late 19^th century. It could be thus reasonable to say the modern social values between the east and west have been converging progressively.

Table of contents

• Introduction
• 1. Fundamental principles of Chinese contract law
  • 1.1 Voluntariness
  • 1.2 Socio-economic valuation
• 2. Fundamental principles of PECL and DCFR
  • 2.1 Freedom of contract
  • 2.2 Good faith
  • 2.3 Fair dealing
• 3. Conclusion
• Endnotes

Introduction

With the rapid development of economic interaction between the EU and China, private law concerning the social and economic relations between citizens provides the basic rules which govern economic transactions, property rights and compensation for wrongs.¹ At the heart of private law are the rules governing contracts,² which make a profound impact on business transactions based on the assumption that “contracts are an important economic institution to allow the exchange of goods and services, which, in turn, allows an efficient allocation of these goods and services”.³ Contract law is arguably held to be the most dynamic area of private law.⁴
The Chinese Uniform Contract Law (hereafter referred to as CLC), which was drafted mainly by Chinese academic jurists between 1993 and 1999, was adopted by the National Congress of the People’s Republic of China to replace the previous three contract laws from the 1980s – the Economic Contract Law, the Technology Contract Law and the Foreign Economic Contract Law.⁵ The CLC is designed to reflect the contemporary Chinese social and economic life.⁶ On the one hand, it mirrors current market and globalisation developments, and on the other it reveals the limited freedom which is endowed in Chinese social life. The tensions between the imperatives of state control and individual freedom are arguably mirrored in the CLC.
During recent decades, convergence in private law has brought a new legal culture to the European society. Directives from the council and parliament, and the case law from the European Court of Justice serve as the legal basis for the Europeanisation of contract law. Work undertaken by a variety of scholarly groups, including those working on the Gandolfi Code, Trento Common Core project, Ius Commune Research School, etc., has stressed the convergence in European contract law.⁷ Among these scholarly outcomes, the Principles of European Contract Law (hereafter referred to as PECL), a “product of work carried out by the [Lando] Commission”,⁸ attempt to reflect the “common core of solutions to problems of contract law” and “assist the European courts and legislatures concerned to ensure the fruitful development of contract law on a Union-wide basis”,⁹ has received “a favourable reception in (at least) academic circles”.¹⁰ Not only could the PECL represent the characteristics of modern European contract laws, but it is also expected to serve as a foundation for the future European Civil Code. Its successor, the Study Group on the European Civil Code has adopted most of the provisions in the part of law of obligations in the Draft Common Frame of Reference (hereafter referred to as DCFR) which it has elaborated together with the Research Group on Existing EC Private Law (Acquis Group).¹¹
In this article, fundamental principles are understood as abstractions from various contractual doctrines which guide the explanations for the whole contract law. Not only do they represent the essence and spirit of law, but they are also the guiding principles for the drafting, interpretation and implementation of the law.¹² Furthermore, the principles could in practice served for guiding or informing, or even as the legal basis for the resolution of various contractual disputes.¹³ This article therefore attempts to examine the fundamental principles in the CLC and the PECL in order to reveal some main features and social value orientations of both contract laws. The core research question of whether the underlying social values from both sides have converged will be answered after the analysis.

1. Fundamental principles of Chinese contract law

Like many other laws, the CLC contains some certain fundamental principles which represent the underlying policies on the basis of which the legislation is formulated, and which influence the law throughout.¹⁴ Although the CLC transplants many terms and provisions of Western origin, significant fundamental concepts in Western laws often carry a different meaning in Chinese law.¹⁵ This part therefore attempts to discuss the fundamental principles in the CLC to reveal its own characteristics.
The following characterises the fundamental principles in the CLC:

1. Not only do the fundamental principles guide the rules of implementation, but they can also reflect the spirit as well as value orientation of the contract law. They are determined by the social and economic life, and guide all stages of a contract.
2. Fundamental principles are uncertain, because they did not refer to the concrete rights and obligations of parties, with the effect that the contractual parties cannot predict the precise consequences which these principles will have on their rights.
3. Fundamental principles are mandatory rules. The contractual parties cannot exclude the application of fundamental principles in their contracts. Fundamental principles are part of mandatory statutory law which provides legitimacy to the judgment of a court.
4. Fundamental principles serve for the interpretation of law and may apply to specific cases where the law fails to govern specific rules.¹⁶

Although the principles of equal legal status between parties, of fairness, of respect for social ethics and morality, of obedience of law and regulations are often regarded as fundamental of the CLC,¹⁷ some scholars hold the view that “contract law is primarily influenced by three major principles, namely, freedom of contract, good faith and fostering transactions”.¹⁸ Others such as Jiang Ping have argued that the designing of the CLC is based on the principles of uniformity, freedom of contract, protecting the interests of creditors and functionalism.¹⁹ Some others also believe the fundamental principles of the CLC are equality, voluntariness, fairness, exchange of equivalent values, good faith, and complying with the laws and policies of the state.²⁰ By combining these viewpoints with the guiding principles²¹ as well as the purpose of the contract law, namely “protecting the lawful rights and interests of the contractual parties, safeguarding social and economic order and promoting socialist modernization”,²² the author in this article believes the fundamental principles of the CLC could be analyzed as involving voluntary contract and socio-economic valuation.

1.1 Voluntariness

The wording of Art. 4 CLC implies that “voluntariness” is to be used rather than “freedom of contract”.²³ One should remember that “freedom of contract” has not been accepted in China until recently, in spite of the fact that since the beginning of 20^th century, Chinese contract theory has been derived from Continental European and Common law system. The reasons for this reluctance are as follows:
Firstly, freedom of contract, to a large extent, represents the concept of “individual” or “liberty”. Most scholars agree that Chinese legal history and the spirit of modern law are influenced by Confucianism. However, Confucianism has no room for the development of liberty or individualism.²⁴ Hence, it is reasonable to say Confucianism is largely averse against “freedom of contract”.
Secondly, since the establishment of the People’s Republic of China in 1949, the economy has been strictly centrally planned, with the effect that it was impossible for individuals or business entities to have free access to the market. The economic plan and mandatory policies were playing an essential role at that time. Accordingly, it was impossible to recognize “freedom of contract” as a fundamental principle under a system of centrally planned economy.
Last but not least, freedom of contract had long been criticized in China as a capitalist concept, which any socialist system must avoid.²⁵ In China, it was for long believed that the “ideology of individualism” marks the main difference between capitalism and socialism. This belief continues to influences minds even in China today. This is why the CLC uses the notion of “voluntariness” rather than that of “freedom of contract” in the context of contract formation, reflecting the transformation from a centrally planned economy to a market economy, and considering the purpose of developing a socialist market economy.
Basically, the principle of “voluntariness” contains two elements which are: (1) the rights of contractual parties to enter into a contract voluntarily and within the limits of law; (2) the prohibition on others to interfere with the contract illegally. Admittedly, it is often believed in Chinese academic circles that “voluntariness” is the same as “freedom of contract”. However, the following will reveal the considerable differences which exist between these two notions.
First of all, as concerns the content, “freedom of contract” recognizes the autonomy of individuals to enter into a binding agreement, to choose the other contracting party, to determine the terms and contents of the agreement, to modify or terminate the contract by mutual consent, and to choose the form of a contract.²⁶ By contrast, “voluntariness” is much narrower and essentially limited to the autonomy to enter into a contract.²⁷ And while “freedom of contract” governs every stage of the contracting process, “voluntariness” relates only to the initial stage of contract formation, giving parties a narrower power to determine their affairs through agreements.
Secondly, as concerns the essence, some scholars have argued that “freedom of contract” focuses on maximum economic efficiency, promotes the parties’ ability to exercise their full creative potential, and establishes appropriate business relationships that possess all the specific nuances required in such a relationship.²⁸ “Voluntariness”, by contrast, is subject to government intervention.²⁹
Lastly, as concerns the background, “freedom of contract” was historically derived from the consensus contract in Roman law, and became the cornerstone of modern contract law after the French civil Code was adopted in 1804.³⁰ It represents the essence of a market economy, while “voluntariness”, which has been derived from the General Principles of the Civil Law of the People’s Republic of China (hereafter referred to as GPCL) in 1986³¹, reflects the planned economy or the transition from the planned economy to the market economy.³²
It is interesting to note that when the redrafting process for contract law began in 1993, an intensive debate arose over whether freedom of contract should be incorporated as a general principle. Some scholars held the view that, although the ideology had been rapidly developed during the time of classical contract law and in the 20^th century, many states have strengthened their intervention in contracts, with the effect that this principle has gradually declined. So in Chinese contract law, the incorporation of necessary limitations to the contractual freedom must be included in order to maintain the public interest and to protect the weaker parties.³³ This viewpoint, however, was criticized by most of the scholars who insisted that although many developed nations have indeed strengthened the intervention in the contracts, the principle of freedom of contract still remains as fundamental. Considering the long Chinese history of intense centralized planning, the elimination of autonomy and intensive interference from the government in private law matters, an expansion of contractual freedom rather than further restrictions are what is needed by the markets.³⁴ So in the first drafting proposal in January 1995, freedom of contract was stated as a general principle, namely that “the parties shall have the freedom of contract within the boundary of law and no unit, organization, or individual shall unlawfully interfere with”.³⁵ This provision, however, was revised into “the parties shall have the right equally and voluntarily to make contract according to law. None of the parties shall impose its own will on the other and no unit or individual shall unlawfully interfere with the parties’ right” on May 14, 1997.³⁶ Later on August 20, 1998, the provision was changed again as “a party is entitled to enter into a contract voluntarily under the law, and no entity or individual may unlawfully interfere with such right”, which was adopted in 1999.³⁷
The history of this drafting process reveals that although “voluntariness” replaced contractual freedom, the basic notion of freedom of contract has been widely accepted amongst academics. The concept of “voluntariness” embodies the core essence of freedom of contract, which endows the contractual party with the autonomy and freedom to decide on the transactions they entered into, and contributes to bring about efficient allocation of social and economic resources. However, due to the influence of Confucianism and a history of centrally planned economy, it is necessary for the state to exercise the intervention measures to ensure that contracts are sufficiently fair and equal, and also that the parties’ interests are not detrimental to the welfare of the state and society. Therefore, the CLC also imposes limitations on freedom of contract to prevent its abuses and for the state to regulate the economy as well as to maintain public order.³⁸

1.2 Socio-economic valuation

“Socio-economic” literally means involving social and economic factors. It is frequently used for areas of law which are closely connected to social issues, such as labour law. The present article use it to describe Chinese contract law. It has been demonstrated above that the CLC reveals strong Chinese characteristics, even though it transplants numerous concepts and provisions from western norms and international treaties. As law is generally embedded in culture, contract law reflects the social life of a particular people. In the case of Chinese contract law, the present author believes that certain characteristics have evolved from traditional social ethics and from the current economic situation. In the following part, several fundamental principles in the CLC which are the result of such a socio-economic valuation will be analyzed.
1.2.1 Traditional social ethics
When performing obligations and rights under a contract, parties must adhere to the generally accepted moral, social and commercial standards. “Confucianism made a practical importance to the Chinese traditional ethics, for twenty-five centuries it has been the life and spirit of the dragon kingdom”.³⁹ Even nowadays, Confucianism deeply influences the moral and social ethics of society. This part therefore attempts to analyze the principles of fairness, good faith and public interests from the roots of Confucianism.
A. Fairness
The principle of fairness requires equality in the value of the respective obligations between the contractual parties and reasonableness in allocation of risks, of which the function is primarily to prevent the stronger party from abusing its bargaining power and from imposing unconscionable terms on the weaker party. The fairness has its root in the idea that “the relation between the contractual parties shall be maintained to the extent that the rights and obligations are reasonably and justly allocated and shared”,⁴⁰ which, according to the opinion of the author, is consistent with the concept of righteousness (yi) of Confucianism. From some current arguments, the Confucian idea of righteousness (yi) is similar to the notion of “justice” in the west.⁴¹ As pointed out by John Rawls, justice is the same as fairness,⁴² and it is reasonable to say that the concept of righteousness (yi) in Confucianism, to some extent, also bears resemblance to the western notion of “fairness”. In Confucianism, righteousness (yi) focuses principally on what is right or fitting which depends on the reasonable judgment. ⁴³ It may be construed as “reasoned judgment concerning the right thing to do in particular exigencies”,⁴⁴ or be construed as “the oughtness of a situation which focuses mainly on the right act as appropriate to the particular situation that a moral agent confronts”.⁴⁵ But nevertheless, the virtue of righteousness (yi) constitutes the fundamental principle of morality, as it forms the necessary component to a virtuous life and “restrains the inclinations towards material goods and desires of pleasure and comfort”.⁴⁶
Righteousness (yi) is a guiding principle for all human relations⁴⁷ and it is always trying to achieve a situation in which both sides are satisfied.⁴⁸ Under the influence of righteousness (yi) in Confucianism, both the GPCL and the CLC have placed the concept of “fairness” as a fundamental principle. As stated in the GPCL, “fairness and making equal compensation should be obeyed”.⁴⁹ And the CLC requires the contractual parties to “abide the principle of fairness in defining the rights and obligations of each party”.⁵⁰
In general, fairness mainly concerns the contents of contract. It is purposed to achieve a balance in the rights and obligations between the parties,⁵¹ and its function plays an essential role in Chinese contract law. The essence of fairness is to realize the “social justice” in the society, which is the spirit of the CLC. It is even reasonable to say the achievement of “social justice” is the animating force of Chinese law.⁵²
Since the notion of “fairness” is difficult to define, it has been left to the courts to apply on a case by case basis. In judicial practices, two rules are commonly used for determining whether “fairness” has been achieved. The first is the “fair distribution of rights and obligation” rule,⁵³ under which a party is required to afford the other party rights which are proportionate to the rights which this party has or claims to have under the contract. The issue concerning the remedies for invalid contracts, for instance, requires the party at fault to indemnify the other for its final loss sustained. If both parties are at fault, then both have to afford their liabilities respectively.⁵⁴ The other rule is “reasonable and just allocation of risk”.⁵⁵ In business transactions, there are many unpredictable risks which can materialize at any time. The principle of “fairness” requires the contractual parties to share the risks equally and justly. Taking the case of “force majeure”, for instance, both parties have to share the risks and damages fairly and justly accordingly to the circumstances and performance of both parties.⁵⁶
There is therefore no doubt to say “fairness” is a fundamental principle in the CLC which origins from the righteousness (yi) of Confucianism.
B. Good faith
There is an express provision in the CLC which requires the parties to “conduct themselves honorably, to perform their duties in a responsible way, to avoid abusing their rights, to follow the law and common business practice”.⁵⁷ The principle, according to the opinion of the author, is rooted in the concept of benevolence (ren), the most primary virtue of Confucianism. Ren could also be construed as goodness or faithfulness.⁵⁸ The golden rule from Confucius could be used to explain the essential meaning of Benevolence (ren) which is “Do not do to others what you do not want them to do to you (ji suo bu yu, wu shi yu ren)”.
It is believed that “Confucius is nothing more or less than the way that he as a particular person chose to live his life”, of which the goal is to “achieve the harmony and enjoyment for oneself and others through acting appropriately in those roles and relationships that constitute one”.⁵⁹ In order to achieve this harmony, the concept of benevolence (ren) plays an important role. Not only does it recognize the personal character as a consequence of cultivating one’s relationships with others, but it is also fostered to deepen the relationship which takes on the responsibility and obligations of communal living and life.⁶⁰ Based on the essential concept, man who achieves the standards of gentleman (junzi⁶¹), which consists of trustworthiness and credibility as well as reliability, is considered to be the ideal sage. Confucius expected that all the human virtues – filial piety, fraternal love, loyalty and truthfulness – would be obtained to achieve the appropriate relationships between persons.⁶²
Benevolence (ren) is not only rooted in everyday conduct, but also is an essential moral obligation for the commercial business in China. The standard is applied in particular cases depending primarily on the nature of the contract and other surrounding circumstances. By tracing the principle of good faith, the GPCL recognized this traditional morality and business ethics in 1986 to require “honesty and credibility should be observed in the civil activities”,⁶³ which has been succeeded by the provision in the CLC whereby “the parties shall abide by the principle of good faith in prescribing their rights and obligations”.⁶⁴
However, similar to fairness, good faith has not been defined in the CLC either. It is most commonly construed as honesty and trustworthiness. Three functions of the principle of good faith in the CLC could be distinguished:
First of all, it is a basic principle to balance the interests between the parties, and between the parties and society. As pointed out above, benevolence (ren) aims to harmonize the relationships between persons, and advocates people to be honest and responsible to the others. So in the CLC, the doctrines of pre-contractual liability, ancillary duties and post-contractual liability are incorporated,⁶⁵ which require the parties to obey the principle in every stage of the contract.
Secondly, the principle of good faith requires the parties to keep their words. As advocated by Confucianism, benevolence or faithfulness (ren) which is matching one’s words with one’s deeds, and failure to deliver on a promise is thus a failure of morality.⁶⁶ The CLC therefore requires the parties to abide by contract. Even if the contract is deficient in some way, the contractual parties still have to endeavor to cure the defects and try their utmost to perform their obligations.⁶⁷
Lastly, while tremendous social and economic changes are occurring in China, many laws and regulations are not suitable to the current economic situations. The principle of good faith, however, could fill the legal vacuum and help to interpret contracts and laws to achieve the necessary balance of interests between the parties.⁶⁸
In many civil law countries, the principle of good faith has since the 1970ies been considered as the highest guiding principle for the law of obligations. In China, it is also a significant important principle both because of the traditional ethics and current economic situations. Some scholars even illustrate good faith in the CLC into more detailed aspects as follows:⁶⁹

1. Before a contract is concluded, especially during the negotiations for an agreement, the parties have a duty to treat each other, and to cooperate to make the contract, in a good and faithful manner.
2. After concluding the contract, the parties should take all the necessary steps to prepare and cooperate for the performance of contract.
3. While the contract is being performed, parties should assist each other and faithfully notify each other of relevant events.
4. After the contract has been performed, the parties have under an obligation to keep confidential the business secrets which they have obtained from each other during the contract period.
5. When a dispute arises which is related to the contract terms, the parties must interpret them in a truly fair and reasonable way which respects the mutual benefits.

It is worth mentioning that in the first draft of the CLC, two additional provisions served to confirm and respect for the status of good faith, namely: 1. the principle of good faith could be relied on directly in a judgment when there was a vacuum in the law or the application of a particular provision would be detrimental to social justice;⁷⁰ 2. the lower courts must refer the case to the Supreme Court for a preliminary ruling, as approval from the Supreme Court is required if the lower courts resort directly to the principle of good faith.⁷¹ Eventually, however, these two provisions were deleted. It was feared that they would give too much discretionary power to judges in a context of problematic judicial independence and might even encourage judicial corruption. Nevertheless, this background reflects that the principle of good faith has been widely respected in the CLC.
C. Public interest
In most legal systems, public interest is just considered to be a limitation to the contractual parties’ freedom. In the CLC, however, it is a fundamental principle to realize the interests of the state and society. In western legal systems, the boundary of public interest is always defined in a narrow way in order to respect the will and freedom of the parties, whilst in China the definition of public interest should be construed in a broad way to reflect the idea that the socio-economic order and state mandatory planning as well as the state policy are vehicles formaintaining and realizing the interests of the state.
Public interest is always used together with the concept of social ethics. The term of “social public interest” has been adopted in both the GPCL and the CLC. Generally, it is understood to include the concept of social morals and public order. A civil conduct⁷² shall be invalid if violating the public interest. Some scholars would see all of the following as violating the social public order: (a) damage to national interests, (b) hampering family relations, (c) violation of sexual morals, (d) violation or infringement of human rights or human dignity, (e) restriction of economic or business activities, (f) violation of fair competition, (g) illegal gambling, (h) infringement of consumer interests, (i) violation of labour protection, (j) seeking usurious profits.⁷³ According to the traditional culture, obedience to the public interest is a kind of morality to citizens. “Familial loyalty, ancestor worship, respect for elders and the family as a fundamental basis for an ideal government” are the core principles advocated by Confucius.⁷⁴ In the family, the father has absolutely power over his wife and children. Being respectful towards elders is seen as good morality which promotes a harmonious family relationship. The family, rather than the individual, is regarded as the most basic and fundamental unit of society.⁷⁵ Confucianism advocated that we are living in the web of a big family – the state. In this big family, we have to be loyal to each other, which means that citizens should obey the ruler, and individual interests must bow towards state interests. The three cardinal principles advocated by Confucianism, which should be observed in order to maintain the stability of the country, are: “ruler over subject, father over son and husband over wife”.⁷⁶ Under the influence, it is acceptable that in Chinese contract law, public interest is prior to the individual interests, and it is also understandable that policy and state mandatory plan as well as the socio-economic order are essential vehicles to limit the individuals’ freedom to maintain and realize the public interest.
Since the establishment of the Republic of China in 1949 until 1980s, policy rather than law has been essential for maintaining the order and interests of the state. Even nowadays, it is reasonable to say that policy plays a significant role in society. However, it is unclear if there was any difference between state policy and party policy in Chinese law. In the words of Wang Hanbin, vice-chairman of the standing committee of National People’s Congress, the role of law in China is to establish “a legal system with Chinese characteristics”.⁷⁷ It is also argued by some scholars that the policy of the Chinese Communist Party could dominate these Chinese characteristics.⁷⁸ The economic policies of the Chinese Communist Party, which include but are not limited to the socio-economic order and state mandatory plans, are mainly designed to accommodate the situation for the interests of the state or for the majority of its citizens.
It is generally accepted that policy is a supplementary source of law. In current China with its dramatic changes of the social and economic situation, policy can react flexible to these changes and can thus be a useful tool for the government to take measures in an area where the law is unclear.⁷⁹ However, two aspects make this use of policy somewhat problematic. The first is that policy is difficult to predict, so that it can make contracts uncertain.⁸⁰ Parties will require certain rules in order to predict their risks and interests before concluding the contract. And more unpredicted and uncertain elements would be caused by the policy to the consequences of civil conduct. The second aspect concerns transparency. Generally speaking, most governmental policies in China take the form of internal documents, or are contained in speeches of political leaders. Sometimes, they are not openly accessible to the public.⁸¹ Nevertheless, in practice, these policies would be considered by the judges, and sometimes treated as ranking above the law. Even after the adoption of the GPCL, the People’s Court frequently applied government policy to civil laws.⁸²
The requirement of observing the public interest was incorporated into the GPCL in 1986. Article 6 GPCL required that civil activities must be in compliance with state policies, and Article 7 stipulated that civil activities must respect social ethics and must not harm the public interest, undermine state economic plans or disrupt the socio-economic order. One could, of course, argue that these provisions are simply the consequence of the centrally planned economy in 1980s. But the CLC was designed in the late last century. It attempts to reflect social life and economic changes at the turn of the 21^st century, in particular China’ change towards a market economy. And yet, several provisions still serve to strengthen the status of public interests. For example, Article 7 CLC requires parties to abide by administrative regulations as well as social ethics, and not to not disrupt the socio-economic order or harm public interests. One can therefore say that the domination of the state over private autonomy is mainly resulted from the traditional ethics, and Confucianism still dominates modern Chinese society and social life.
It is interesting to note that the role of Administration of Industry and Commerce (hereinafter called AIC) was debated during the drafting of the CLC. In the previous three contract laws in 1980s, the AIC had a broad power to supervise that contracts were not detrimental to the public interest. They could even invalidate a contract which they believed to be harmful to the state or society. But with the development of the rule of law, some scholars argued that the power of administration should be curbed, and that only courts should be allowed to declare a contract void. So the drafting committee decided to give no such power to the administration. However, the AIC argued as follows in favour of it retaining the power to supervise contracts:⁸³

1. Chinese state-owned enterprises frequently failed to take responsible care of state assets, causing enormous losses in recent years. Their business operation should be supervised for the protection of state assets.
2. Chinese enterprises are often poorly managed. Their lack of self-discipline and self-protection often causes unnecessary losses, which requires the AIC to supervise.
3. The courts do not have sufficient resources to deal with all the problems, and judicial remedies do not compensate for loss of state interests.

Therefore, Article 127 CLC eventually stipulated that the “AIC shall be responsible for monitoring and dealing with any illegal act which harms to the state interests and public interest in accordance with the laws and regulations.” However, this provision is too vague. While it endows the AIC with the right to supervise contracts, it fails to spell out in which way and in which areas the AIC can supervise contracts. This lacuna remains to be closed.
1.2.2 Current economic situation
Modern Chinese contract law is not only influenced by Confucianism, but also inspired by the current economic situation. China has opened its doors to the world and is willing to integrate into an international market. In consequence, some concepts and provisions have to be transplanted from other legal systems in order to diminish the obstacles for the cross-border transactions. There can be no doubt that the CLC is also influenced by this current economic situation. The following will attempt to analyze two fundamental principles of the CLC which result from the current economic situation, namely equality and promotion of business transactions.
A. Equality
Inequality between certain groups of persons was advocated by Confucianism, such as father having absolutely power over his wife and children, the emperor having absolute power over his citizens. Women should respect men, younger persons should respect elders, and only the oldest son would succeed to the authority of the family, etc. These strict hierarchy and descent-lines are part of morality (Li), which was consistent with the needs of a ruler in a feudal state. So, to some extent, this is the reason why Confucianism has been the official philosophical thought and teaching since the Han Dynasty (206BC -220AD). Under the priority of this philosophy and public interests, it was really difficult for a private company during the 1980ies to be treated equally with a state owned enterprise. It is particularly true that the government has a clear preference to protect the state-owned enterprises because their interests were directly involved. Due to the fact that judicial power is not independent in China, it is understandable why equality was not respected in the previous contract laws and practice in the 1980ies.
However, with the development of the economy and with China knocking on the door of the World Trade Organisation, all parties that are willing to enter into the contract are to be treated equally. It is true to say that the market calls for equality between the contractual parties. The principle of equality has therefore been incorporated into the CLC as a fundamental principle. It includes three aspects:⁸⁴
The first is equal capacity. In the previous economic contract law, only legal persons had the right to conclude what was referred to as the “economic contract”, a contract which is established for economic purposes. But in fact, all parties in a market require the same capacity to contract and it is reasonable for them who were involved to have an economic purpose. So the CLC endowed all the parties, including natural persons, legal persons, and other organizations with the same capacity to enter into a contract.⁸⁵
The second is equal legal standing. All the parties are required to negotiate and conclude the contract voluntarily. But in practice, many large scaled companies or monopolies could conclude contracts without negotiation with other parties or could use their superior bargaining position for concluding unequal contracts. This was frequently observed for consumer contracts. So in order to maintain the equal legal standings of all parties and to ensure that contracts are based on true consent and manifest mutual benefits, the CLC provides that a party to a contract can require the court or arbitration tribunal to amend or rescind the contract if it was apparently unreasonable at the time of concluding.⁸⁶ The party who supplied the standard terms has to be given more responsibility to inform about the contract.⁸⁷
The last requirement is equal treatment. As stated above, in the past, private companies were treated differently from state-owned companies, both during formation of the contract was concluded and after disputes arose. The principle of equality requires not only equal legal status of the parties before a contract is made, but also equal treatment once disputes arise after the conclusion of a contract. In current China with its remaining socialist orientation, there are still many state-owned companies. If courts or arbitration tribunals treat state-owned companies better in the adjudication of disputes, parties would be very reluctant to enter into contracts with state-owned companies, which in turn would be harmful to the economy development. So the courts or arbitration tribunals are required to treat all the parties equally without considering the owner and status.
Therefore, equality, an underlying principle in the CLC, is required at every stage of the contract from the negotiation to disputes resolution. It serves as a logical premise which reflects the notion of autonomy and freedom that contractual parties in a free market could compete and co-operate on an equal footing.⁸⁸
B. Promoting business transactions
Like many other countries at the time, ancient China implemented a policy of “emphasize agriculture while restraining commerce”, a policy which is rooted in the legal culture. When the central planning of economy introduced after the establishment of the People’s Republic of China in 1949 was gradually replaced and the CLC drafted, most members of the drafting committee argued that contract law should set out the fundamental legal rules which govern market transactions. It was believed that the promotion of business transactions had been ignored in China for such a long time that it should be incorporated in the new unified contract law in order to accelerate economic development.⁸⁹
According to some scholars, there are three aims for the promotion of business transactions in the CLC.⁹⁰ The first is to promote the development of a market economy, under which “contractual relationships constitute the most basic legal relationships” and “a fundamental objective of contract law must be to foster and encourage the transactions”.⁹¹
The second is that the promotion of business transactions contributes to increased efficiency and social wealth. “This is not only because different entities and individuals can satisfy their needs for different goods or services and their desire to increase their wealth only through the transactions, but also because only through freely-negotiated transactions can resources be distributed optimally and utilized most efficiency”.⁹² In most societies, the market serves as the principal mechanism for the production and distribution of wealth,⁹³ and contract law is to facilitate efficient exchange and repair market failures. The CLC thus attempts to contribute to the creation of social wealth,⁹⁴ by promoting efficient transactions.
The last aim is to protect the freedom of contract. Promoting business transactions is consistent with the wills of the parties, and it encourages people to negotiate freely for the contract according to their wills. So most scholars advocated that the principle of promoting business transactions should be incorporated into the CLC.
Promoting business transactions is also a guiding principle for drafting. It has found its way into the CLC in at least the following aspects:

1. Formation of contract. Previous contract laws operated without the notions of offer and acceptance. The CLC, however, adopts offer and acceptance as elements of contract formation under the principle of promoting business transaction, on the ground that they make business transactions more convenient and efficiency. Previous contract laws used chiefly formal elements, such as signatures, for establishing a contract. In contrast, the CLC allows contracts to be established by conduct, namely performance.
2. Invalid contracts. In the GPCL, seven situations can invalidate civil activities.⁹⁵ Their scope was too wide. Invalidity was used for contract termination to a degree which was harmful to the economic development. This was remedied in the CLC. For some of the situations in which the GPCL envisaged invalidity, the CLC provides that certain terms are amended or the contract rescinded instead of invalidated, if the contract was entered into by fraud or duress, or by taking advantage of the other party.⁹⁶ It is interesting to note that the CLC also distinguishes between “invalid contracts” and “contracts with pending validity”. For instance, a contract concluded by an agent without any authority, or who exceeded his authority, or whose authority had lapsed, would be valid after the ratification by the principal.⁹⁷
3. Interpretation of contract. Previous contract laws lacked rules on interpretation. In practice, contracts were generally held to be invalid when their content was too vague. The CLC adopts a rule of interpretation which allows such contracts to stand, thus making business transactions more predictable and certain.⁹⁸

It is worth mentioning that business transactions must be legal and must not be harmful to public interests. The CLC encourages only lawful transactions, which means that the transactions must be voluntary, within the law and regulations, and must reflect the true intentions of the parties.

2. Fundamental principles of PECL and DCFR

In recent years, private law Europeanisation has been an intensively discussed topic.⁹⁹ The words “unification”, “harmonization” and “convergence” have often been used to distinguish various levels of Europeanisation. While the concept of “unification” indicates a complete integration of legal concepts and rules as well as cultures, the word “convergence” reveals a more natural way for the integration compared with the term “harmonization”, which suggests a more active process through the unification.¹⁰⁰ The present author therefore prefers to speak of “convergence” rather than “harmonization” or “unification”.
In the process of private law Europeanisation, the European Union has made use of treaties, regulations, directives and recommendations.¹⁰¹ The case law from the European Court of Justice, the academic debate as well as educational projects have also contributed to the process of convergence. Amongst the available instruments, directives in particular have served to achieve a substantial level of integration among the laws of member states, especially in the area of consumer law. Some observers believe that such regulation has contributed to the smooth operation of the internal market, having removed many obstacles to free movement of person, good, service and capital which resulted from differences between national laws.¹⁰² However, there is ample evidence within the academic debate and political actions by the EU to demonstrate that the present EC contract law rules, which form part of the acquis communautaire, are not satisfactory.¹⁰³ This is mainly due to the following reasons:
Firstly, European legislation has, even when seen over the last decades, only touched a very small area of the huge ocean of private law. Most of the directives, for instance, concerning various individual aspects of consumer protection.¹⁰⁴ But for a true Europeanisation of private law, a higher degree of general principles and a broader scope of areas would have to converge. It is worth noting that when Europeans speak of “private law”, they mostly mean the law of obligations, and sometimes include family law, other consumer law, labour law etc. ¹⁰⁵ But it is undeniable that contract law is an essential and significant part of any such convergence.
Secondly, the legal instruments adopted by the European Union are not without flaws. The directives are often non-consistent and sometimes hinder rather than promote convergence. ¹⁰⁶ Norms used in the directives are often rather vague, and notions employed by one directive cannot be transferred to others. Taking the notion of “damage”, for example, the European Court of Justice held that the definition in the Package Travel Directive cannot be applied to the Product Liability Directive, with the result that different definitions of “damage” operate for different sectors of law.¹⁰⁷ Furthermore, directives frequently adopt no more than a minimum level of protection of weaker parties, leaving intact higher levels of protection in many member states, and a corresponding diversity between the domestic laws.
Thirdly, problems arising from the enforcement of the instruments cause as problems to the process of convergence. It is generally accepted that transposition is needed for implementation.¹⁰⁸ However, national courts often find it difficult to apply the abstract notion adopted in the directives to given cases. For example, the notion of “good faith” which is employed i.a. by the Unfair Terms Directive will be more difficult to apply by lawyers from legal systems based on common law,¹⁰⁹ which can impair the effect of directives.
Therefore, although what has been done over the last decades has indeed promoted the Europeanisation of private law, a higher level of contract law convergence is still required for persons, goods, services and capital to move freely within the European Union.
Several working groups and international model laws have contributed to the process of Europeanisation of private law. The UN Convention for the International Sale of Goods (CISG) in particular has to some extent inspired the work on PECL.¹¹⁰ However, PECL is more concerned with presenting the common core of contract law in Europe, while the CISG seeks to establish common rules for sales contracts at the international level.
The work on PECL began in 1982, when an independent body of experts, the “Commission on European Contract Law” headed by Professor Ole Lando and comprising 20-25 members from all the EU member states, started to work on a European contract law.¹¹¹ The members mostly consisted of academics and the odd practicing lawyer. They were not selected by any government and did not represent their countries officially. In 1995 Part One of PECL, dealing with performance, non-performance and remedies, was published. Subsequently Parts One and Two, which cover the core rules of contract, formation, authority of agents, validity, interpretation, contents, performance, non-performance and remedies were published in 1999, followed by Part Three in 2003, which covers plurality of parties, assignment of claims, substitution of new debt, transfer of contract, set-off, prescription, illegality, conditions and capitalization of interest.¹¹²
Mention should also be made of the work of Professor Gandolfi on his Code of Contract Law. ¹¹³ In contrast to PECL, the Gandolfi Code was drafted by a single person, and the drafting language was French rather than English.¹¹⁴
The Study Group on a European Civil Code, a network of academic lawyers headed by Professor von Bar),¹¹⁵ has made an enormous contribution to this convergence with their “Principles of European Law”, which, on the basis of PECL, extend to the entire law of obligations and some aspects of property law.
Mention has been made above of the Research Group on the Existing EC Private Law (Acquis Group), whose Acquis Principles restate the existing contract law as currently found in EC directives and regulations, and judgments of the European Court of Justice. Study Group and Acquis Group have jointly produced the recently published Draft Common Frame of Reference of European Private Law, which also goes well beyond the area covered by PECL and include specific contracts, torts, unjust enrichment, negotiorum gestio and securities in movable property.¹¹⁶
The PECL and the DCFR can serve various needs:¹¹⁷
Firstly, economic needs. The core essence of private law Europeanisation in fact is for the ideal of “a single market”. A converging contract law can encourage market transactions, whereas differences in contract law structure and terminology, fundamental concepts, classifications, and legal policies can be seen as inimical to the efficient functioning of a single market. Standard contracts can exemplify the issue of European private law convergence. Different member states have adopted different levels of control of standard terms based on different notions of protection against unfair terms. A business which wishes to operate across the European Union must draft standard contracts in many versions, which raises costs considerably. Contract law convergence could overcome these obstacles and contribute to a smooth functioning of the single market. EC legislation in the area of contract law has gone some way to removing obstacles from the free movement of persons, goods and services by way of convergance of contract laws.
Secondly, political needs. Since 1989, the European Parliament has twice¹¹⁸ taken the initiative to begin work on a European civil code. Under the Dutch presidency of EU, in 1997 a conference on a European Civil Code was held in Scheveningen in the Netherlands. Although the conference did not advocated the drafting of a European Code to bind all the member states, it was at this meeting that Christian von Bar began to set up the Study Group for a European Civil Code.¹¹⁹ In 1999 the Tampere European Council called for an overall study on the need to approximate member state’s legislation in civil matters in order to eliminate obstacles to the smooth functioning of civil proceedings.¹²⁰ Later, on July 11, 2001 the Commission published a communication¹²¹ to Council and Parliament to request responses from academic and practising, lawyers, legislators, stakeholders, etc., to investigate whether the diversity of contract law caused a problem for business transactions and how to prepare for the legislation. Four options were presented in the communication: 1. no community action, leaving the problem to the market; 2. the development of non-binding principles of European contract law; 3. improvement and consolidation of the existing private law; 4. wide-ranging legislative actions.¹²² During 2001 and 2002 the Commission received about 180 responses from both academics and practitioners. The Commission responded to these contributions in February 2003 with its Action Plan¹²³ and reaffirmed partly in the 2004 Follow-Up Communication. According to the Action Plan, the following three strategies are highly desirable: to improve the coherence and consistence of the EC acquis in the field of contract law,¹²⁴ to promote the elaboration of the EU-wide standard contract terms,¹²⁵ and further reflection on the need and value of a horizontal optional instrument respectively.¹²⁶ The publication of PECL between 1995 and 2003 should be seen in this context; the DCFR, which was handed over to the European Union and the general public at the end of 2008, is intended to serve as draft for a Common Frame of Reference to be adopted by the European legislator.
Thirdly, judicial needs. Not only the legal systems as such, but also methods of law finding and terminology differ greatly among the EU member states. In order to prepare a European civil code, it is necessary to have a common language for the future discussion. PECL provides some common principles and terminologies and can serve as a basis for future convergence. Most parts of the PECL have, with some modifications, found their way into the DCFR.
It is therefore reasonable to say the PECL and DCFR are the foundation of European contract law harmonization, and indicate the common core of contract laws in Europe. There are several characteristics for the fundamental principles in PECL and DCFR:

1. They are shared by most of the legal systems of Europe and are evidenced in most of the European national contract laws.
2. Fundamental principles are the leading rules of PECL and DCFR. They are used to guide the drafting and interpretation of all the provisions of contract law.
3. They are mandatory rules which cannot be excluded by the parties in their contract.
4. PECL and DCFR reflect modern contract law. Their fundamental principles reveal some features of modern contract law and manifest the valuation of modern society.
5. Fundamental principles are required in all stages of a contract. They are required in the formation, performance, the exercise of the rights of the parties, and the enforcement of their duties.

The general, binding principles of PECL include freedom of contract, good faith and fair dealing, duty to co-operate, duty of care, as well as reasonableness.¹²⁷ However, the duty to co-operate and the duty of care, in the opinion of the author, are the more specific reflections of good faith and fair dealing, which means they just make the principles of good faith and fair dealing more concrete. The same can be said for reasonableness, namely that it is also a concrete expression of fair dealing. This part therefore attempts to describe the three fundamental principles evidenced in PECL and DCFR, which are freedom of contract, good faith, and fair dealing.

2.1 Freedom of contract

Like most national legal systems in Europe, PECL acknowledges the right of both legal and natural persons to decide with whom they will make contracts and to determine their contents.¹²⁸ The idea of freedom reveals that individuals should be given the choice whether to enter into the contract, and implies that individuals can also choose freely the provisions of their contract.¹²⁹ “It sees in the general license to enter binding contracts an enhancement of freedom since this facility permits the new forms of co-operative endeavors which last over a period of time”.¹³⁰
There are two concepts which are closely connected with contractual freedom, the first of which implies that the contract is based on mutual assent.¹³¹ However, it does not mean the parties have indeed agreed in their innermost minds, or that they really agreed at all or at least intended to agree. Mutual assent is measured only by the words and other conduct of the parties, which could lead a reasonable person to assume they have agreed. This is a kind of objective test. The second concept manifests and is the result of the idea of free choice, which should not be intervened in by the government or other external interference.¹³²
Freedom of contract is rooted in the will theory of classical contract law from the eighteenth and nineteenth centuries. Since the establishment of classical contract law, the essential purpose of the law of contract has become the one that focused upon the free choices of individuals.¹³³ Freedom of contract, which is the essence of the will theory, attracted both civil and common lawyers in the nineteenth century.¹³⁴ Before this time, lawyers focused on the discussion of contract law in terms of promise rather than the consensus and wills of the contract. Only around 1800 did lawyers and judges begin to focus on the will or consensus of the contracting parties. As express by Morton J. Horwitz, “modern contract law is fundamentally a creature of the nineteenth century”.¹³⁵
As reflected in the theory, contracts are entered into by the will or consent of the parties. Their contractual liability stems from their meeting of minds. The commitments are enforceable because of the “will” of the promisor to choose to be bound by his commitment, and he cannot complain about force being used against him as he “intended that such force could be used when [he] made the commitment”.¹³⁶
It is pervasive to say that freedom of contract as a fundamental principle in contract law had been rapidly developed in the 19^th century and reached its highest level in the 1870s. In modern accounts of contract law, we still cannot ignore that the foundation of traditional concepts of contract law was based on the idea of facilitating free choice. It is an essential tool to understand the market relations and legitimating legal decisions. Some scholars have argued that modern private law convergence could be regarded to serve two reasons: one is to the functioning of integrated market while the other is to construct a European citizen.¹³⁷ For the second reason, the private law Europeanisation, which is to establish what the relation between the individuals in Europe, should be mainly concerning the definition of contractual freedom and its limitations.¹³⁸
PECL subscribes to freedom of contract, as is evidenced in Article 1:102, whereby parties are free to enter into contracts and to determine their contents. It is one of the cardinal principles of PECL. Not only was it a convenient way to understand the economic virtues of the free market system as the contract law governs the rules for the exchange of wealth produced and allocated by the market, but it also manifests the legitimacy of state in that the power of the state is limited in order to maximise, respecting and even enforce the liberty of citizens. Traditionally, the vague notions of “public policy” or “good morals” have been used as limitations to party autonomy. But the importance and value as well as standards employed are rather vague and uninformative.¹³⁹ Since the 20^th century, when protection of weaker parties and of fundamental rights began to play a greater role, various limitation have been imposed on that freedom. While PECL acknowledges freedom of contract, it also states that the freedom is restricted by the requirements of good faith and fair dealing, and also by mandatory rules, which include national, supranational and international rules.¹⁴⁰
The notion of freedom of contract is, however, also closely associated with the development of a single free market.¹⁴¹ It encourages the free choice of contractual parties which undoubtedly accelerates the development of a single market to make it possible for the citizens and undertakings to engage in the economic and other activities throughout the European Union under the same conditions. In the past several decades, the establishment of a single market has been considered as a political issue for the EU countries. One could even say that all EU legislation serves to promote and maintain an efficient and competitive single market. While contract law is rather a complex regulatory code designed to channel, encourage and shape the market transactions, the work of European contract law convergence serves and provides for the development of a single market.
The DCFR adopts the same approach as PECL and recognizes freedom of contract as a fundamental principle of contract law. As stated in the Introduction to the DCFR, “as a rule, natural and legal persons should be free to decide whether or not to contract and with whom to contract. They should also be free to agree on the terms of their contract. This basic idea is recognized in the DCFR.”¹⁴²
However, in modern contract law, the meaning of “freedom” has changed somewhat when compared to that prevailing at the time of classical contract law. Nowadays, social elements have been widely included in order to maintain justice within a society, for instance, to protect the consumers in the contract, to protect small and medium-sized enterprises (SMEs) etc. The notion of social justice therefore is understood as a significant element which limits contractual freedom.
Finally, when compared with the CLC, contractual parties are endowed with more freedom in PECL, which is revealed by the principle of freedom of contract. The CLC, rather than acknowledging freedom of contract, uses instead the expression “contract voluntariness”. As has been shown above, contract voluntariness is within the scope of freedom of contract. The latter acknowledges the freedom to choose the contractual parties, to conclude and determine the contents of contract, whereas contract voluntariness only grants the freedom to choose the contractual parties and conclude the contract.

2.2 Good faith

As Aristotle pointed out: “if good faith has been taken away, all intercourse among men ceases to exist“.¹⁴³
Good faith has been considered as vitally important ingredient in modern contract law. “The draftsmen of the PECL appear to have regarded it as part of the common core of European contract law”.¹⁴⁴ However, as the notion is closely connected with the cultural diversity of the communities and has been regarded as injecting moral notions into law, the meaning of good faith differs considerably according to different scholars. Some academics, such as Professor Powers, define good faith as “an expectation of each party to a contract that the other will honestly and fairly perform his duties under the contract in a manner that is acceptable in the trade community”.¹⁴⁵
Not only are there many ways in which good faith can be defined, but these have also varied considerably over time. In Roman law, good faith or bona fides was always “associated with trustworthiness, conscientiousness and honorable conduct”.¹⁴⁶ Cicero gave a complete definition of good faith: “These words, good faith, have a very broad meaning. They express all the honest sentiments of a good conscience, without requiring a scrupulousness which could turn selflessness into sacrifice; the law banishes from contracts ruses and clever maneuvers, dishonest dealings, fraudulent calculations, dissimulations and perfidious simulations, and malice, which under the guise of prudence and skill, takes advantages of credulity, simplicity and ignorance”.¹⁴⁷ However, the medieval jurists spoke of good faith in contract law as the description of three types of conduct expected by the parties:¹⁴⁸
Firstly, keeping one’s word. According to the medieval jurists, one must keep his words as a matter of faith, equity and the ius gentium. The term of pacta sunt servanda is the reflection of this notion.
Secondly, a party to a contract must not take advantage of the other by misleading that party, or by use of unequal bargaining power.
Thirdly, both parties must fulfil such obligations that an honest person could be expected to, even if they were not expressed in the contract.
The jurist Baldus associated good faith with equity and conscience.¹⁴⁹ The requirement of good faith he gave was: “no one should be enriched at another’s expense”.¹⁵⁰ He argued that the judge should take account of good faith in a contract for two purposes: the first is to know whether contracts are binding, and the second is to know what the parties’ obligations are and whether they have been fulfilled.¹⁵¹ From the interpretation and analysis, the essence or substantive element of good faith is “just and honest conduct”.
In most civil legal systems, good faith was recognized as an overriding principle in making and carrying out the contracts.¹⁵² It requires the contractual parties to act reasonably and extends the obligations under a contract. For example, contractual parties owe each other a pre-contractual duty to negotiate fairly and honestly. However, there is a distinction between subjective good faith and objective good faith. The first one is always regarded as a subjective state of mind while the latter is normally considered as a norm for the conduct of parties. In common law systems, historically, good faith was not given legal recognition.¹⁵³ However, in many cases, the implied term “reasonable expectations of honest people”, which is perhaps the closest substitute in common law that has been found for the notion of good faith in civil legal system,¹⁵⁴ has been used to establish the same standard of good faith in particular circumstances.¹⁵⁵
PECL establishes good faith as a basic principle running through the Principles from the formation to the enforcement of contract.¹⁵⁶ Roughly speaking, the notion of good faith has at least three functions in PECL:¹⁵⁷

1. Interpretative: as circumstances often change considerably in practice and there are always some ambiguities in the contract, good faith is thus regarded as a yardstick for the interpretation to protect the justified expectation of contractual parties. It is an efficient way to implement the “spirit of bargain” and to recognize the minimum principles of fairness and honesty.
2. Supplementary: as the contractual parties cannot express all the circumstances in the contract, good faith is therefore considered as a implied term to supplement the contract in determining the nature and scope of justified expectations.
3. Restrictive: good faith also has a restrictive function that when a rule binding upon the parties does not apply to the extent, or in a given circumstance that it would be unacceptable to a reasonableness person, then the judges can apply this principle to restrict the scope of bargaining.

The notion of good faith can be linked to many PECL rules, such as those which acknowledge pre-contractual liability, ancillary duties, and post-contractual liability. These have been deduced, to a large extent, from the notion of good faith. A similar observation can be made about the DCFR.¹⁵⁸ It can thus be said that good faith, the recognition of moral rights [as above] in the law, is acting as an overarching principle of modern contract law.
In China, however, good faith originates from the moral standard of Confucianism. It was used to maintain the hierarchy order of the society and has been rooted in Chinese culture, whereas in European contract law good faith helped commercial development, as the bona fides are closely associated with commercial elements. Nowadays, in both the EU and China, the spirit of good faith has been integrated into the society and closely associates with the commercial practice. Both contract laws therefore recognize it as an overarching principle.

2.3 Fair dealing

Good faith and fair dealing are always combined into one notion and are often considered as a single rule in the PECL. It has been argued by some scholars that the reason for this combination is to make it less irritable to the English legal community, as good faith is not widely accepted by English lawyers.¹⁵⁹ However, are they indeed the same? Before answering this question, it would be interesting to start with the interpretation of these words from the Oxford English Dictionary: “Fair” is defined as “equitably, honestly, impartially, just; according to rule”¹⁶⁰, while “dealing” means “acting (in some specified way) towards others”.¹⁶¹ It is surely true that “fair dealing” means to show just, honorable behavior towards others, whereas in the definition of “good faith”, the notions of “just” and “honest” are always present. So it is reasonable to say good faith is a kind of subjective test to the just and honesty behavior, while fair dealing is the objective one. The first one focuses on the minds of the parties, whereas the latter emphasizes their conduct.¹⁶²
The concept of fair dealing is to a certain extent linked to the notion of fairness. Some scholars even argue that the notion of fair dealing is a typical translation of fairness from the Anglo-American world,¹⁶³ and that the terms “fair dealing” and fairness are closely related. The present article will consider “fair dealing” and “fairness” as one and the same notion.
The principle of fairness has played an essential role in the process of European contract law convergence. Since the second half of the 1980s, the EC has adopted numerous directives which aim to protect the interests of consumers. The first directive, commonly referred to as Doorstep Selling Directive, was adopted in 1985,¹⁶⁴ and then followed by the Consumer Credit Directive in 1987,¹⁶⁵ the Unfair Contract Terms Directive in 1993,¹⁶⁶ the Timeshare Directive in 1994,¹⁶⁷ the Distance Selling Directive in 1997,¹⁶⁸ the Injunctions Directive in 1998,¹⁶⁹ the Consumer Guarantees Directive in 1999¹⁷⁰ and the Distance Selling of Financial Services Directive in 2002¹⁷¹. The main purpose of these directives is to improve the protection of consumers or weaker parties in the member states, with improving the functioning of the internal market as an additional aim.¹⁷²
Nowadays it is widely accepted that “in order to achieve distributive justice, [we] must impose standards of fairness in contracts”.¹⁷³ It is generally held that modern contract law has been shifting from the procedural fairness, which ensures there is no undue influence, to the substantive fairness, which concerns a fair outcome. The traditional view, whereby the main purpose of contract law is to enforce the contract instead of ensuring the fairness of contract, has been criticized in recent years.¹⁷⁴ PECL therefore acknowledges the doctrine of fair dealing as one of the overarching rules in the Principles, which is required at all stages of a contract. It includes both procedural and substantive fairness:

1. Substantive fairness: PECL provides that unfair terms which have not been individually negotiated are invalid.¹⁷⁵ A term which has not been individually negotiated is considered unfair if it causes a significant imbalance between the parties. This provision extends the scope of application of the general clause of the EC directive on the Unfair Terms in Consumer Contracts (1993).¹⁷⁶ Another example for substantive fairness in PECL, also in line with the laws of most EU member states, is the doctrine of change of circumstances, which is used to correct any injustice which results from an imbalance caused by supervening events. The acknowledgement of these doctrines reflects the shift from the classical fairness concept to the modern notion.
2. Procedural fairness: in line with classical contract law, PECL employs notions of fairness to scrutinize the process of bargaining. It ensures that contracts are not unfair as a result of procedural impropriety during the negotiation procedure through the doctrines of fraud, misrepresentation, duress and undue influence.

The emphasis on the substantive justice in the PECL reveals that the weaker party protection has been considered as part of internal market philosophy in current Europe. For a long time, the aim of internal market philosophy was to improve, simplify and promote the cross-border trade and competition within the European Union. However, nowadays the weaker party protection has been gradually absorbed into this internal market philosophy.

3. Conclusion

For economic and political purposes, China has transplanted a large range of norms and terms from western contract law. The current Chinese law is not consistent with its own legal history. One can observe a break at the beginning of the 20^th century, when China started to transplant underlying norms from the west. At first sight, one could gain the impression that Chinese contract law no longer differs significantly from European contract law. However, law is influenced by the culture, history and society in which it is embedded. Contract laws in both China and Europe are thus rooted in their own legal history and culture. Seemingly identical concepts thus take different meanings in different systems. When compared with Europe, Chinese Confucianism and its particular legal history determine that the contractual autonomy should be more limited, particularly in relation to the public interest. In contrast with China, party autonomy has been more respected in Europe since the Roman times. These historic and cultural roots of modern contract laws account for considerable differences until today.
Indeed, a comparison of fundamental principles which underlie contract laws in China and in Europe reveal significant differences in party autonomy. It is reasonable to say the freedom in China is much more limited by public interest when compared with Europe. Moreover, the vague term of “public interest” in China has be given a wide scope which includes not only the interest of the state, but also the interest of the ruling political party.
Another interesting difference which emerges from a comparison of fundamental principles of contract law is that in China, for a long time, contract law was chiefly used to achieve substantive justice among the society, whereas procedural justice was always ignored. In contrast, in Europe, the emphasis was long on procedural justice as main contractual tool for maintaining justice in a society. Traditionally, “justice” in contract law was thus mostly related to issues of “substantive fairness” in China, whilst in Europe, it mostly concerned “procedural fairness”. However, modern Chinese society has witnessed a transformation from state oriented to the individual oriented, and procedural justice has consequently been advocated for protecting the interests of individuals. On the contrary, European societies have transforming from being chiefly individual oriented to being increasingly society oriented, so that more prominence has been given to notions of substantive justice. So while the departing points for the notion of “justice” have differed considerably between China and Europe, we are currently witnessing a convergence of social values which will ultimately also lead to a convergence between Chinese and European contract laws.

Endnotes

* Junwei Fu, Doctoral Candidate, Tilburg University School of Law, the Netherlands; currently Visiting Scholar at Washington University School of Law, USA.

1 Study Group on Social Justice in European Private Law, Social Justice in European Contract Law: A Manifesto, European Law Journal vol. 10 (2004) 654.

2 Ibidem.

3 Martijn. W. Hesselink & Gerard. J. P. de Vries, Principles of European Contract Law (Kluwer 2001) 80.

4 Stefan Grundmann, An Academic Green Paper on European Contract Law (Kluwer 2002) 1-15.

5 Liming Wang, Fundamental Principles of China’s Contract Law, Columbia Journal of Asian Law (1999) 2.

6 Huixing Liang, zhong guo he tong fa qi cao guo cheng zhong de zheng lun dian [The Debates over the Drafting of Chinese Contract Law], fa xue [Jurisprudence] vol. 2 (1996) 13-14.

7 Jan Smits, The Future of European Contract Law: on Diversity and the Temptation of Elegance, paper presented at the conference Towards a European Ius Commune in Legal Education and Research (2001) 3-4.

8 Ole Lando & Hugh Beale, Principles of European Contract Law: Parts I and II (Kluwer 2000) xxi.

9 Ibidem xxii.

10 Smits (note 7) 4.

11 Principles, Definitions and Model Rules of European Private Law. Draft Common Frame of Reference (Outline Edition), prepared by the Study Group on a European Civil Code and the Research Group on EC Private Law (Acquis Group) (2009); see also Christian Twigg-Flesner, The Europeanisation of Contract Law (Routledge-Cavendish 2008) 13-15.

12 Wang (note 5) 9.

13 Ibidem.

14 Guodong Xu, min fa ji ben yuan ze jie shi[Interpretation of Fundamental Principles of Civil Law], (China University of Political Science and Law Press 1992) 8-15.

15 Haflidi Larusson & Davis J. Sharp, West Meets East: The New Chinese Contract Law, Ivey Business Journal (1999) 67.

16 Bing Ling, Contract Law in China (Sweet & Maxwell Asia 2002) 39-54.

17 Feng Chen, The New Era of Chinese Contract Law: History, Development and A Comparative Analysis, Brooklyn Journal of International Law vol. 27 (2001) 169.

18 Wang (note 5) 2.

19 Ping Jiang, Drafting the Uniform Contract Law in China, Columbia Journal of Asian Law (1996) 245-255.

20 Zhao Yuhong, Law of Contract, Wang Guiguo & John Mo, Chinese Law (kluwer 1999) 227-228.

21 The guiding principles for the drafting are: 1. Considering the situations of reforming and the door-opening policy, developing socialist market economy, establishing the uniform and integrating into the international market, the legislation should conclude our own legal experience and learn widely from other developed countries in order to be consistent with the international treaties and custom laws, and reflect the same rules of modern economy market; 2. For presenting the principles of party autonomy in order to protect the freedom of contract within the law, public order and social ethics, the legislation should not limit the freedom of contract without serious proper reason; 3. Considering the era characteristics of law making and implementing, the legislation should be suitable to the requirements after the success of the socialist economy market, also shall be suitable to the transforming from the centrally planned economy to the market economy; 4. The values of the contract law are: economic efficiency, social justice, convenience and security transaction. The legislation should focus on the development of productivity and social interests, protecting the interests of consumer and employee, safeguarding the social order of economy market. It should reflect the simply and rapid characteristic of modern market economy and convenience transaction as well as the form and procedure for the transaction security; 5. The provisions should be operational and the expression should be simple and exact. From: Guangxing Zhang, zhong hua ren min guo he guo he tong fa de qi cao [Drafting Contract Law of People’s Republic of China], fa xue yan jiu [Chinese Journal of Law] vol. 5 (1995) 4-7.

22 Article 1 the CLC.

23 Article 4, the CLC: a party is entitled to enter into contract voluntary under the law, and no entity or individual may unlawfully interfere with such right.

24 Chaibong Hahm, Confucianism and the Concept of Liberty, Asia Europe Journal (Springer-Verlag 2006) abstract.

25 Mo Zhang, Chinese Contract Law Theory and Practice (Martinus Njihoff Publishers 2006) 242.

26 Ping Jiang, lun xin he tong fa zhong de he tong zi you yuan ze yu cheng shi xing yong yuan ze [The Principles of Freedom of Contract and Good faith in New Contract Law], zheng fa lun tan [Politics and Law Forum] vol. 1 (1999) 3-5.

27 Ibidem.

28 Zhang (note 25) 246.

29 Ibidem.

30 Ibidem 241.

31 Article 4 of GPCL (Adopted at the Fourth Session of the Sixth National Congress of People’s Republic of China on 12 April, 1986): in civil activities, the principles of voluntariness, fairness, making compensation for equal value, honesty and credibility shall be observed.

32 Jiang (note 19).

33 Jiang (note 26).

34 Ibidem.

35 The Introduction to the Contract of Law of China and its Major Drafts, edited by the Civil Law Office, the Legal Affairs Committee of the Standing Committee of the National People’s Congress, (China Law Press 2000) 8-18

36 Zhang (note 25).

37 Ibidem.

38 Ling (note 16) 40-41.

39 Keijiro Nakamura, The History and Spirit of Chinese Ethics, International Journal of Ethics vol. 8 (1987) 86-87.

40 Zhang (note 25) 74.

41 Jiadong Zheng, on the Confucian Idea of, the full text is available at: http://bic.cass.cn/english/InfoShow/Arcitle_Show_Conference_Show.asp?ID=342&Title=&strNavigation=Home-%3EForum&BigClassID=4&SmallClassID=9 (last assessed in Oct. 2007).

42 John Rawls, A Theory of Justice, Belknap Press of Harvard University (1999).

43 A.S. Cua, Yi (l) and Li: Rightness and Rites, Antonio S. Cua, Encyclopedia of Chinese Philosophy, (Routledge 2003) 842.

44 Ibidem.

45 A.S.Cua, Junzi (Chun-tzu): The Moral Person, Ibidem 333.

46 A.S. Cua, Yi (l) and Li: Rightness and Rites, Ibidem 842.

47 Sam Dragga, Ethical Intercultural Technical Communication: Looking through the Lens of Confucian Ethics, Technical Communication Quarterly vol. 8 (1999) 369.

48 Quanyu Huang & Richard S. Andrulis & Tong Chen, A Guide to Successful Business Relations with the Chinese: Opening the Great Wall’s Gate, New York: International Business (1994) 192-193.

49 Article 4, the GPCL.

50 Article 5, the CLC.

51 Zhang (note 25) 74.

52 Philip C.C. Huang, Civil Justice in China: Representation and Practice in the Qing (Stanford University Press 1996) 5-9.

53 Zhang (note 25) 73-76.

54 Article 58, CLC.

55 Zhang (note 25) 73-76.

56 Article 107-122, CLC.

57 Wang (note 5) 15.

58 Sam Dragga (note 47) 367.

59 Pei-jung Fu, Confucianism: Constructs of Classical Thought, Cua (note 43) 67.

60 Ibidem 68.

61 Junzi has been translated as superior man, noble man, gentleman, etc. In this paper, the author translated into gentleman.

62 Pei-jung Fu, Confucianism: Constructs of Classical Thought, Cua (note 43) 65.

63 Article 4, the GPCL.

64 Article 5, the CLC.

65 Jiang (note 26) 8-12.

66 Dragga (note 47) 371.

67 Article 119, the CLC: where a party breached the contract, the other party shall take the appropriate measures to prevent further loss, where the other party sustained further loss due to its failure to take the appropriate measures; it may not claim damages for such further loss.

68 Wang (note 5) 15-17.

69 Ping Jiang, zhong hua ren min gong he guo he tong fa jing jie [A Detailed Explanation of Contract Law] (China university of Political Science and Law Press 1999) 6-8.

70 Huixing Liang, guan yu zhong guo tong yi he tong fa cao an di san gao [The Third Draft of Chinese Contract Law], jin ji fa zhi [Economics and law] vol. 2 (1997) 49.

71 Ibidem.

72 Article 54, the GPCL: a civil conduct shall be the lawful act of a citizen or legal person to establish, change or terminate civil rights and obligations.

73 Huixing Liang, shi chang jing ji yu gong xu liang shu yuan ze [Market Economy and the Principles of Public Order and Good Morals], min shang fa lun cong [Civil and Commercial Law Review] vol. 1 (1999) 57.

74 Axel Hagedorn, Cultural Characteristics in the Chinese Contract Law: A Multidisciplinary Approach, final thesis from Free University of Amsterdam (1996) 72.

75 Hahm (note 24) 487.

76 Zhang (note 25) 54.

77 Hanbin Wang, NPC Creates Good Legal Environment for Reform and Opening-up, Interview with Wang Hanbin, vice-chairman of the Standing Committee of the NPC, China Law vol. 1 (1995) 57-60.

78 Axel Hogedorn, Cultural Characteristics in the Chinese Contract Law: A Multidisciplinary Approach, final thesis from Free University of Amsterdam (1996) 17-18.

79 Zhang (note 25) 82.

80 Ibidem.

81 Ibidem.

82 Ling (note 16) 37.

83 Ibidem 48.

84 Liming Wang, he tong fa yan jiu [Study in contract law], People’s University Publisher vol. 1 (2002) 25-60.

85 Article 2, the CLC.

86 Article 54, the CLC.

87 Article 41, the CLC.

88 Ling (note 16) 41-42.

89 Lixing Yang & Shaofeng Zhang, On A Few Problems in Making Laws of Unified Contract-comments on the Problems Deserving Attention in Making of Unified Contract Discussed in the Annual Meeting of Civil Law and Economic Law Research Society of China Law Science Society and Hainan Academic Seminar, Law of Hebei vol. 3 (1996) 3.

90 Wang (note 5) 23-33.

91 Ibidem.

92 Ibidem.

93 Hugh Collins, The Law of Contract (LexisNexis 2003) 1-5.

94 Martijn. W. Hesselink & Gerard. J. P. de Vries, Principles of European Contract Law (Kluwer 2001) 80.

95 Article 58, the GPCL: civil acts in the following categories shall be null and void: (1) those performed by a person without capacity for civil conduct; (2) those that according to law may not be independently performed by a person with limited capacity for civil conduct; (3) those performed by a person against his true intentions as a result of cheating, coercion or exploitation of his unfavorable position by the other party; (4) those that performed through malicious collusion are detrimental to the interest of the state, collection or third party; (5) those that violate the law or public interest; (economic contracts that violate the state’s mandatory plans; (6) those that performed under the guise of legitimate acts conceal illegitimate purposes.

96 Article 54, the CLC.

97 Ibidem.

98 Huixing Liang, he tong de jie shi gui ze [The Interpretation Rule of Contracts], min shang fa lun cong [Civil and Commercial Law Review] vol 6 (1997) 539-545.

99 Mark van Hoecke, The Harmonisation of Private Law in Europe: Some Misunderstandings, Mark van Hoecke & Francois Ost, The Harmonisation of European Private Law (Oxford 2000) 1.

100 Ibidem 2-3.

101 Ewoud Hondius, European Private Law – Survey 2000-2002, European Review of Private Law (2002) 865.

102 Arthur Hartkamp, Perspectives for the Development of a European Civil Law, The paper was presented to the Trento Conference of July 15 (1999) 2-3.

103 Brigitta Lurger, The Future of European Contract Law between Freedom of contract, Social Justice, and Market Rationality, European Review of Contract Law vol. 5 (2005) 443.

104 Ibidem, p. 2.

105 Duncan Kennedy, Thoughts on Coherence, Social Values and National Tradition in Private Law, Martijn W. Hesselink, The Politics of a European Civil Code, Kluwer Law International (2006) 9.

106 Jan Smits, The Future of European Contract Law: On Diversity and the Temptation of Elegance, The paper was presented at the Conference Towards a European Ius Commune in Legal Education and Research, Maastricht Faculty of Law, 25-26 October (2001) 4.

107 Simone Leitner Case, Case C-168/00, [2002] ECR I-2631.

108 Ewoud Hondius, European Private Law – Survey 2000-2002, European Review of Private Law (2002) 865.

109 Jens Karsten & Ali R. Sinai, The Action Plan on European Contract Law: Perspectives for the Future of European Contract Law and EC Consumer Law, Journal of Consumer Policy vol. 26 (2003) 160.

110 Arthur Hartkamp, Perspectives for the Development of a European Civil Law, The paper was presented to the Trento Conference of July 15 (1999) 3-4.

111 Twigg-Flesner (note 11) 13-14.

112 Ibidem.

113 Giuseppe Gandolfi (Ed.), Code Europe’en des Contracts – Avant-projet, Giuffre'(Milan 2001).

114 Ewoud Hondius, European Private Law – Survey 2000-2002, European Review of Private Law (2002) 870-871.

115 Christian v. Bar, The Contribution of the Study Group on a European Civil Code to the European Convention (2002) 1.

116 Draft Common Frame of Reference (note 11).

117 Junwei Fu, ou meng ming fa dian cao an zhi shu ping [Commentaries on the DCFR], min shang fa lun cong [civil and commercial law review] vol. 43 (2009) 447-500.

118 O.J. EC 1989 C 158/400, O.J. EC 1994 C 205/518.

119 Ewoud Hondius, European Private Law – Survey 2000-2002, European Review of Private Law (2002) 870.

120 SI (1999) 800, the full text is available at: http://www.dpt.gov.tr/abigm/abtb/Zirveler/1999%20Tampere%2015-16%20Ekim.pdf (last assessed in Feb. 2008).

121 European Commission Communication on European Contract Law Com (2001) 398, October 2001, the full text is available at:
http://ec.europa.eu/consumers/cons_int/safe_shop/fair_bus_pract/cont_law/cont_law_02_en.pdf (last assessed in Feb. 2008).

122 Ibidem.

123 A More Coherent European Contract Law An Action Plan, COM (2003) 68 final, 12 Feb. 2003, the full text is available at: http://www.isda.org/c_and_a/pdf/com_2003_68_en.pdf (last visited in Feb. 2008).

124 Ibidem 15-20.

125 Ibidem 21-23.

126 Ibidem 23-25.

127 Chapter 1: General Provisions, the PECL.

128 Lando & Beale (note 8) 99.

129 Collins (note 93) 25.

130 Ibidem.

131 P.S. Atiyah, An Introduction to the Law of Contract (Clarendon Press 1995) 5-48.

132 Ibidem.

133 Collins (note 93) 6-7.

134 James Gordley, The Enforceability of Promise in European Contract Law (Cambridge University Press 2001) 16.

135 Morton J. Horwitz, the Historical Foundations of Modern Contract Law, Harvard Law Review vol. 87 (1974) 917.

136 Randy E. Barnett, A Consent Theory of Contract, Columbia Law Review (1986) 269-275.

137 Maria Rosaria Marella, The Old and the New Limits to Freedom of Contract in Europe, European Review of Contract Law vol. 2 (2006) 257-258.

138 Ibidem.

139 George A. Bermann, Party Autonomy: Constitutional and International Law Limits in Comparative Perspectative (Juris Publishing 2002) 1-3.

140 Ulrich Schroeter, Freedom of Contract: Comparison between Provisions of the CISG (article 6) and Counterpart Provisions of the PECL, The Vindobona Journal of International Commercial Law and Arbitration vol. 6 (2002) 262.

141 P.S. Atiyah, The Rise and Fall of Freedom of Contract (Clarendon Press 1979) 398.

142 Principles, Definitions and Model Rules of European Private Law: Draft Common Frame of Reference (DCFR), Outline Edition (2009) 18.

143 Cited by William Tetley, Good Faith in Contract Particularly in the Contracts of Arbitration and Chartering, the text is available at: http://www.mcgill.ca/files/maritimelaw/goodfaith.pdf (last assessed in March 2008).

144 Reinhard Zimmermann & Simon Whittaker, Good Faith in European Contract Law (Cambridge University Press 2000) xiii.

145 P.J. Powers, Defining the Indefinable: Good Faith and the United Nations Convention on the Contracts for the International Sale of Goods, Journal of Law and Commerce vol. 18 (1999) 333.

146 H.A. Rommen, The Natural Law, A Study in Legal and Social History and Philosophy, St. Louis: B. Herder Book Co, translated by Thomas R. Hanley (1947) 117.

147 De Off, 3, 17. Quoted by Association Henri Capitant des Amis de la, Societe de Legislation Comparee, European Contract Law: Materials for a Common Frame of Reference: Terminology, Guiding Principles, Model Rules (European Law Publisher 2008) 152.

148 James Gordley, Good Faith in Contract in the Medieval ius commune, Zimmermann & Whittaker (note 144) 93-106.

149 Ibidem 108.

150 Ibidem.

151 Ibidem 109.

152 Art. 1134 Section 3 French Civil Code; 242 German Civil Code; Article 2 Swiss Civil Cde; Article 1175 & 1375 Italian Civil Cde; Article 762, Section 2, Portuguese Civil Code; Article 288 Greek Civil Code; Article 6:2 & 6:248 Dutch Civil Code

153 Atiyah (note 131) 213.

154 Tetley (note 143) 28.

155 Ibidem.

156 Lando & Beale (note 8) 114.

157 E.Allan Farnsworth, Duties of Good Faith and Fair Dealing under the Unidroit Principles, Relevant International Conventions, and National Laws, the text is available at: http://www.mcgill.ca/files/maritimelaw/goodfaith.pdf (last assessed in Dec. 2007).

158 Artice 1:103, Book I, the DCFR (2009).

159 Marjorie Hoch, Is Fair Dealing A Workable Concept for European Contract Law, Global Jurist Topics vol. 5 (2005) 17-18.

160 Oxford English Dictionary: www.oed.com.

161 Ibidem.

162 Lando & Beale (note 8) 112-116.

163 G.P. Fletcher, Comparative Law as A Subversive Discipline, American Journal of Comparative law (1998) 5-40.

164 Directive 85/5777/EEC of 20 Dec. 1985 to protect the consumer in respect of contracts negotiated away from business premises.

165 Directive 87/102/EEC of 22 Dec. 1986 for the approximation of the laws, regulations and administrative provisions of the Member States concerning consumer credit.

166 Directive 93/13EEC of 5 April 1993 on unfair terms in consumer contracts.

167 Directive 94/47/EEC of 26 Oct. 1994 on the protection of purchasers in respect of certain aspects of contracts relating to the purchase of the right to use immovable properties on a timeshare basis.

168 Directive 97/7/EC of 20 May 1997 on protection of consumers in respect of distance contracts.

169 Directive 98/27/EC of 25 May 1998 on injunctions for the protection of consumers’ interests.

170 Directive 1999/44/EC of 25 May 1999 on certain aspects of the sale of consumer goods and associated guarantees.

171 Directive 2002/65/EC of 23 Sep. 2002 concerning the distance marketing of consumer financial services.

172 Brigitta Lurger, The “Social” Side of Contract Law and the New Principles of Regard and Fairness, Arthur S. Harkamp etc., Towards a European Civil Code (kluwer 2004) 272.

173 Ibidem.

174 Hoch (note 160) 32-33.

175 Article 4: 110, the PECL.

176 Lando & Beale (note 8) 266.

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