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Understanding contracts
The differences between Chinese and UK contract law
Businesses, quite understandably, usually prefer their contracts to be governed by their own law and courts. The choice of law clause deals with this. However, when working abroad, and another legal system is proposed, you need to know what you are dealing with. It might be thought that contract law is the same worldwide – after all, a deal is a deal – but significant differences exist.
The basic principles of Chinese contract law are codified (the PRC Contract Law) and are equality, freedom to enter into a contract without duress or interference, fairness and good faith.
In the UK (and most common law jurisdictions), the basic principles are freedom of contract and binding force. These principles are not contained in legislation but have instead developed through case law over many centuries.
Although neither set of basic principles is completely alien to the other, the relative value placed on them in China and the UK is different.
Freedom and binding force
Freedom of contract means that parties to a contract can agree any terms they wish, however unusual or unfair they may appear. The only real exception to this is the Unfair Contract Terms Act and some consumer protection legislation.
The courts always try to give effect to the terms that the parties have agreed. Where there is doubt as to these terms, the court will look to find what the parties intended; it will not impose its own view or rewrite a contract.
The principle of binding force underpins that of freedom of contract. In the UK, the general rule is that when you enter into a contract, you are bound to comply with its terms even if you consider them unfair. In China, however, although parties are also generally free to contract on whatever terms they wish and their agreement is binding, they are also subject to the more fundamental principles of good faith and fairness.
Fairness and good faith
The PRC Contract Law states that “the parties shall abide by the principle of fairness in defining the rights and obligations of each party”. Courts or arbitration institutions are empowered to modify or revoke a contract which was obviously unfair at the time it was made.
In addition, Chinese contract law states that “the parties must act in accordance with the principle of good faith in exercising and performing their obligations” – from negotiation of the contract to its termination.
Parties must not only fulfil their promises and not act fraudulently but also take account of social, moral and commercial norms, balance their interests with the other side and co-operate with them.
UK law, on the other hand, does not have a generally applicable duty of good faith. Parties must not act fraudulently and there must be no duress involved in the procuring of an agreement, but, beyond that, neither side is obliged to concern itself with the interests of the other.
In general, no distinction is made between a deliberate breach of contract committed in bad faith, and an innocent one. Each carries the same consequences.
Relationship development
UK firms may be surprised to find that their Chinese counterparts appear to consider a contract merely as a starting point: a set of terms to be adapted to cope with changing circumstances, rather than a rigid, binding agreement. They should be aware that this philosophy is reflected in basic principles of Chinese law and may find sympathy with judges or arbitrators.
A nation’s law has forever been guided by that nation’s politics and culture. From a practical point of view it would be dangerous for UK firms to assume that they can draw on their business experience in the UK. They must learn about the culture of the country they want to do business with.
And if that is going to take too long, they can always take the short cut of seeking professional advice!
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