The influence of the Unidroit Principles on the contract book of the Chinese Civil Code: process and examples^†

Abstract

One of the main purposes of the Unidroit Principles of International Commercial Contracts (UPICC) is to serve as a source of inspiration and legal reference for domestic legislators. The evolution of China’s contract law system has been a gradual process, shaped by local characteristics and informed by the experiences of other legal systems. In this process, the UPICC have always been an important source of reference. This article introduces the stages of development of China’s contract law system after the reform and opening-up and shows the impact of the UPICC according to Chinese contact law’s developments over different time periods. It also illustrates examples in the latest Contract Book of the Civil Code that refers to, and incorporates, the rules of the UPICC and cases where the Contract Book to some extent still differs from the relevant provisions of the UPICC, which shows that China’s references to the UPICC are more in the form of consistency with basic concepts and similarities to some specific provisions but that it has not yet shown a systematic and large-scale incorporation or transplantation.

I. Introduction

The Unidroit Principles of International Commercial Contracts (UPICC) are widely regarded as one of the most important legislative achievements of Unidroit. Ever since the publication of the first edition of the UPICC in 1994, Unidroit has continuously enriched and improved the content of the UPICC by publishing three revised and supplemented editions in 2004, 2010, and 2016 respectively. This is important for the UPICC to continue to play an influential role in international commercial transactions and in the development of contract law in many countries and regions. Since the beginning of China’s reform and opening-up in 1978, China’s contract law system has resumed the process of its formulation and has continued to develop, attaching importance to referencing and borrowing from relevant legislative experiences in other jurisdictions as well as from the UPICC at the international level. In 2020, China’s Civil Code came into force. The Contract Book had been substantially expanded and improved on the basis of the previously free-standing Contract Law. The relevant contents of the UPICC also continue to have a positive referential influence.

This article will first introduce the stages of development of China’s contract law system since the reform and opening-up and show the impact of the UPICC on the development of China’s contract law system over different time periods. Then, the article will focus on some of the new situations in the Contract Book of the Civil Code that refer to and incorporate the rules of the UPICC by illustrating specific instances. At the same time, it will explain the situations where the rules of the UPICC have not been adopted so as to better understand the impact of the UPICC on China’s contract law system and the development of China’s contract law. Overall, the development of China’s contract law system is a gradual process that takes into account local characteristics and draws on the experience of other jurisdictions and for which the UPICC have always been an important reference source. By integrating international rules, China’s contract law system has become more compatible with global practices, thereby improving the legal framework supporting international trade and commerce.

II. The evolution of contract laws in China

Before 1978, for decades after the founding of the People’s Republic of China, Chinese contract law and practice were based on the theory that plans were the basis of, and foundation for, concluding contracts, where contracts were the means and concrete forms for realizing plans.¹ During the planned economy era, contracts were also used, but mainly to implement various plans. There was also no specific national legislation on contracts. From the late 1970s, China began to promote reform and opening-up, gradually transforming its economy from a traditional planned economy to a market economy. In the process of transition to a market economy, contracts, as a basic tool for market transactions, began to play a more important role in China’s economy and society.

1. The early development and coexistence of contract-related laws

With the changing of the economic model from planned economy to a market economy and the increasing demand for market-based transactions, specific legislation on contracts became an urgent necessity in China. In 1981, the National People’s Congress (NPC) promulgated the Economic Contract Law (ECL) of China. This law was not extensive in content, but it was a milestone: more than 30 years after the founding of People’s Republic of China, China finally had a formal contract law enacted by the supreme legislature (the NPC) to govern contractual activities between equal private parties. Due to the lack of experience at that time in dealing with foreign commercial contracts, the ECL applied only to commercial contracts between domestic parties.

Recognizing the growing need to regulate the contractual relations of international business transactions, in March 1985, the NPC enacted the Foreign Economic Contract Law (FECL). As its name suggests, the FECL was designed to regulate contractual relationships between foreign and Chinese entities. Therefore, in the process of drafting the FECL, attention was paid to the contract laws of other jurisdictions so as to align the draft law with international standards. The promulgation of the FECL has facilitated economic exchanges between China and foreign entities and has brought Chinese contract law more in line with some global contract practices. In addition, the third contract-related law, the Technology Contract Law (TCL), was enacted by the NPC in 1987 to regulate the transfer of technology. The reason for this was that the only two provisions in the ECL on technology contracts were unable to deal with many of the issues raised by the rapid development of the technology market in China in the mid-1980s and the characteristics of technology transactions.

Together, the ECL, the FECL, and the TCL formed the ‘three pillars’ of China’s contract law system in the period from the mid-1980s to the 1990s. In addition to these three contract-related laws, the General Principles of Civil Law enacted in 1986 and some other subsequent laws—such as the Maritime Law, the Insurance Law, the Railway Law, the Copyright Law, the Bill of Exchange Law, and so on—also contain special provisions on contracts.

2. Further unification and adoption of a single contract law

The implementation of the three contract-related laws played a significant role in facilitating transactions during that period. However, with the further development of China’s reform and opening-up, especially the further development of the market economy and the increase in international economic and trade activities, the problems of the contract law system gradually emerged.² Therefore, the formulation of a unified contract law gradually became an urgent task for improving China’s contract law system.

From approximately 1993, after gaining considerable experience with its three existing contract-related laws, the NPC decided to draft a unified contract law. It is noteworthy that a clear requirement for the drafting of this contract law was ‘to draw on the successful experience of the legislation and case law doctrines of developed countries and regions with market economies, to adopt as far as possible common rules that reflect the rules of a modern market economy, and to harmonise Chinese law with international conventions and practices’.³ However, the formulation of a unified new contract law was not an easy task as there were many differences on certain overarching issues and technical difficulties. For example, with regard to the reference to and incorporation of relevant international conventions and foreign contract laws, a major disagreement at the time was whether the focus should be on adapting the contract laws of civil law countries or those of common law countries to Chinese needs in order to maintain the advanced nature of the new contract law and to promote the market economy.

The adoption and publication of the UPICC in 1994 was very timely, at least in the context of the ongoing development of Chinese contract law. However, the UPICC did not attract much attention in China immediately after its promulgation. One reason was that although China had joined Unidroit in 1986 and was aware of the progress of the UPICC, the participation of Chinese scholars in the UPICC Working Group was still limited. Another reason may be the language barrier. In 1996, the Chinese version of the 1994 UPICC was published,⁴ and it immediately became an important reference in the ongoing legislative process for a unified contract law. In 1999, the NPC enacted the Contract Law of China (CCL [1999]), a free-standing law governing all contractual relationships in China, which represented a comprehensive effort to modernize China’s legal framework for contracts and incorporated international principles and practices.

Generally speaking, the CCL (1999) took into account both China and foreign countries and adopted rules that are common to all countries, without borrowing or imitating the national system of any country. This evidences the openness and the strongly international character of the Chinese contract law system, as many articles and studies have shown.⁵ The UPICC (1994) had a direct impact on certain provisions of the CCL (1999), including (but not limited to) the scope of the law, basic principles, the effectiveness of contracts, the form of contracts, and the conclusion of contracts—offer and acceptance, standard terms, negotiation in bad faith and duty of confidentiality, the performance of contracts, liability for breach of contract, and so on. This was evidenced by the book Interpretation of the Contract Law of the People’s Republic of China,⁶ authored by the Legislative Affairs Commission of the Standing Committee of the NPC, which was responsible for drafting the CCL (1999). Although this book was not an official interpretation on the CCL (1999) from the NPC, it reflected the perspectives of the drafting experts and served as a valuable reference resource. Notably, it contained a number of references to UPICC articles. There was, however, no comprehensive or consistent transplantation of the UPICC’s rules. On the one hand, the PICC influenced only a part of the provisions of the CCL (1999) in what can best be described as a ‘cherry-picking process’.⁷ On the other hand, there is no lack of differences between the two legal instruments due to the specific Chinese characteristics of the CCL (1999) and the different legal convictions of the Chinese legislator.

3. Continuous improvement and an updated Contract Book in the Civil Code

In 2014, China decided to ‘strengthen the legal regime of the market and codify the civil code’.⁸ This was a milestone in the development of China’s civil law system. The legislative process for the Civil Code officially began in 2015, with the NPC commissioning five Chinese academic institutions to conduct research and to provide drafting assistance. A ‘two-step’ legislative plan was adopted to accomplish the legislative task: the first step involved drafting the general principles of the Civil Code, and the second step focused on developing the various books of the Civil Code, including the Contract Book. As a result of tremendous work, the NPC adopted the General Principles of the Civil Code of China in 2017, marking the completion of the first step of the legislative plan. The process culminated on 28 May 2020, when the full text of the Civil Code was adopted by the NPC, integrating and codifying the entire body of civil law, including contract law. This is the first law in the legislative history of the new China to be called a ‘code’.

The Contract Book occupies a central position within the Civil Code, its importance being reflected in three dimensions. First, it contains the largest number of articles, totaling 526 out of the 1,260 articles of the entire Civil Code. This extensive coverage underscores its comprehensive treatment of complex theoretical and practical issues. Second, the Contract Book is the one most frequently used in court and arbitration proceedings. In court and arbitration practice, there are far more contract cases than other civil cases, underlining their practical importance in resolving disputes and facilitating business transactions. Third, the Contract Book represents the most substantial revision of the previous CCL (1999), introducing 136 new articles, deleting 37 obsolete provisions, and amending 153 existing articles.⁹

In general, the Contract Book of the Civil Code builds on the foundation laid by the CCL (1999) and makes comprehensive amendments and improvements to address new challenges in contract law. It synthesizes China’s established legislative, administrative, and judicial experience and academic research results, giving it distinct Chinese characteristics. At the same time, it has considered and integrated useful elements from relevant international conventions and model laws (including the UPICC), as well as experiences from both civil law and common law systems,¹⁰ so that the Contract Book of the Civil Code is generally in line with international legislative trends and international trade practices and has distinctive characteristics of the time. By integrating international best practices and drawing on insights from different legal traditions, the Contract Book not only meets domestic economic needs but also contributes to the harmonization of global legal standards in contractual matters.

III. The UPICC and the contract book of the Civil Code: example analysis

As can be seen from the above introduction, since the promulgation of the UPICC in 1994 and the publication of the Chinese translation in 1996, the UPICC has been used as an important reference in the continued development and improvement of Chinese contract law. In this sense, the influence of the UPICC on China’s contract law system is a continuous and gradual process. It began during the formulation of the CCL (1999) and continued 20 years later, with the drafting of the Contract Book of the 2020 Civil Code of China. Similarly, in the process of drafting the Contract Book of the Civil Code of China, references to the UPICC were not in the form of complete incorporations or transplantations but rather through selective references and adaptations of individual provisions or rules. Since a considerable number of references to the UPICC were made during the formulation of the CCL (1999) and the Contract Book of the Civil Code is based on the CCL (1999), the references to the UPICC in the Contract Book are limited in number.

Meanwhile, it is noteworthy that a number of UPICC rules that were not included and referenced in the CCL (1999) were subsequently introduced and adapted in the Contract Book of the Civil Code, strongly demonstrating the continuing value of the UPICC and its impact on Chinese contract law. Of course, there are cases where the Contract Book of the Civil Code still differs to some extent from the relevant provisions of the UPICC, indicating that the Chinese legislator still maintains a certain degree of independence when referring to the laws of other jurisdictions and international documents. This is illustrated by some examples below.

Example 1: modification of the rules relating to the initial impossibility of the contract

Article 3.1.3 of the UPICC (2016) deals with the validity of contracts in cases of initial impossibility. In particular, paragraph (2) of this article addresses the situation of lack of legal title or power and provides that ‘the mere fact that at the time of the conclusion of the contract a party was not entitled to dispose of the assets to which the contract relates does not affect the validity of the contract’. As explained in the commentary, some legal systems declare a contract of sale concluded in such circumstances to be void. However, as in the case of initial impossibility, and for even more compelling reasons, paragraph (2) of this article considers such a contract to be valid.¹¹

In contrast, the CCL (1999) took a different view from the UPICC. First, the CCL (1999) did not explicitly incorporate an article or a rule similar with paragraph (2) of Article 3.1.3 of the UPICC (2016) or the rule ‘impossibilium nulla obligation est’ in Roman law. Second, Article 51 of the CCL (1999) provides that ‘where a person without the right of disposal disposes of another’s property, upon ratification by the obligee or if the person without the right of disposal obtains the right of disposal after making the contract, the contract shall be effective’. According to Article 51, the effectiveness of a disposal without title depends on the decision of the holder of the right to ratify or reject it, rendering the contract’s effectiveness uncertain. Since the implementation of the CCL (1999), Article 51 has caused considerable controversy in both theory and practice. As an exception, if the unauthorized disposer later acquires the right to dispose of the property, the disposal is considered retroactively valid. This framework effectively makes the validity of the contract entirely dependent on the ratification of the right holder or the subsequent acquisition of the right of disposal by the unauthorized disposer. In substance, this approach continues to prioritize the protection of the security of ownership, while inadequately addressing the maintenance of transactional security. In particular, if the right holder discovers the unauthorized disposal and declares its intention to refuse ratification, the contract is definitively void. Even if the disposer subsequently acquires the right to dispose, the contract cannot be reinstated. Against this backdrop, the Supreme People’s Court of China issued a judicial interpretation in 2012, stating that the contract is not invalid if the seller did not have the right of ownership or disposal over the subject matter at the time of contract formation.¹² This was an important legal clarification.

In the process of drafting the Contract Book of the Civil Code, many experts suggested deleting Article 51 and referring to the UPICC by recognizing the validity of the contract from the outset. The drafters of the Civil Code finally accepted this opinion, did not include Article 51 of the CCL (1999) and adopted an approach similar to that of Article 3.1.3(2) of the UPICC. Article 597 of the Civil Code stipulates that ‘if the ownership of a subject matter is unable to be transferred due to the fact that the seller fails to obtain the right of disposal thereof, the buyer may rescind the contract and request the seller to bear default liability’. This amendment secures the owner’s title to the object, protects the buyer’s rights and interests, demonstrates the binding nature of the contract for the parties, and is conducive to promoting the value of good faith, maintaining transaction security, optimizing the business environment, and facilitating the conduct of transactions. It is said that this amendment is also in line with the international development trend,¹³ which mainly refers to the UPICC.

Example 2: adoption of the rules concerning hardship

Articles 6.2.1 to 6.2.3 of the UPICC (2016) use the term ‘hardship’, which is widely recognized in practice, to detail the rules on changed circumstances. These articles are divided into three paragraphs dealing with the prerequisites, definition, and effects of hardship, making them a quintessential representation of this legal concept. Such a situation is known in some jurisdictions as ‘changed circumstances’. During the drafting of the CCL (1999), there was considerable controversy as to whether provisions on changed circumstances should be included. As a result, the final version of the Contract Law omitted the hardship doctrine that had been included in the draft. In the following years, the failure of the CCL (1999) to provide for a ‘change in circumstances’ rule was gradually seen as a legal omission.¹⁴ In response to the 2008 financial crisis, the Supreme People’s Court recognized the need to address this issue in judicial practice. As a result, in 2009, Article 26 of the Interpretation II of the Supreme People’s Court on Several Issues Concerning the Application of Contract Law (Interpretation II of the 1999 Contract Law) explicitly recognized the hardship doctrine, although the CCL (1999) did not provide a clear rationale for it.

The drafting of the Contract Book of the Civil Code provided an opportunity to address this issue. In order to meet the needs of evolving practice and to adequately protect the interests of the party adversely affected, the Contracts Book of the Civil Code, based on judicial experience and international practice, formally codified the doctrine of changed circumstances in Article 533, which reads as follows:

(1) After a contract is formed, where a fundamental condition upon which the contract is concluded is significantly changed which is unforeseeable by the parties upon conclusion of the contract and which is not one of the commercial risks, if continuing performance of the contract is obviously unfair to one of the parties, the party that is adversely affected may re-negotiate with the other party; where agreement cannot be reached within a reasonable period of time, the parties may request the people’s court or an arbitration institution to rectify or rescind the contract. (2) The people’s court or an arbitration institution shall, taking account of the actual circumstances of the case, rectify or rescind the contract in compliance with the principle of fairness.

In applying the principle of ‘changes in circumstances’, Article 533 has introduced an obligation for the parties to re-negotiate, requiring that consultations be held within a reasonable period of time before requesting modification or termination if the negotiations fail, which was recognized to be the result of drawing on the foreign and international legislative experience, particularly from Article 6.2.3 of the UPICC.¹⁵

Example 3: updating rules on the assignment or transfer of rights under a contract

Parties to a contract may stipulate that a creditor’s rights are not assignable. The effectiveness of such a provision against an assignee who breaches this prohibition has been the subject of divergent views. Article 9.1.9 of the UPICC (2016) provides:

(1) The assignment of a right to the payment of a monetary sum is effective notwithstanding an agreement between the assignor and the obligor limiting or prohibiting such an assignment. However, the assignor may be liable to the obligor for breach of contract. (2) The assignment of a right to other performance is ineffective if it is contrary to an agreement between the assignor and the obligor limiting or prohibiting the assignment. Nevertheless, the assignment is effective if the assignee, at the time of the assignment, neither knew nor ought to have known of the agreement. The assignor may then be liable to the obligor for breach of contract.

Thus, according to Article 9.1.9, such an assignment remains valid, and the assignee can acquire the rights of the creditor, while the debtor can only claim breach of contract against the assignor. However, the CCL (1999) did not follow the UPICC methodology. Article 79 of the CCL (1999) provides that:

A creditor may transfer its rights under a contract in whole or part to a third party, except in any of the following circumstances: (1) the transfer is not allowed according to the nature of the contract; (2) the transfer is not allowed according to the agreement between the parties; or (3) the transfer is not allowed according to the provisions of laws.

In practice, this provision leads to the invalidity of the assignment in the event of an unauthorized transfer, leaving the rights of the assignee unprotected.

Given that the assignment of monetary claims has a minimal impact on the debtor and that facilitating the transfer of monetary claims helps to improve the liquidity of capitals and therefore may have significant value, it has become more accepted in China that encouraging the assignment of monetary claims might, to a certain extent, facilitate financing and promote economic development. Therefore, adopting the methodology of Article 9.1.9 of the UPICC (2016), the Chinese drafters appropriately added a second paragraph to Article 545 of the Civil Code (2020), which replaced the original Article 79 of the CCL (1999). Article 545.2 reads: ‘Where the parties agree that a non-pecuniary claim may not be assigned, such an agreement may not be asserted against a bona fide third person. Where the parties agree that a pecuniary claim may not be assigned, such an agreement may not be asserted against a third person.’ The new provision distinguishes between pecuniary and non-pecuniary claims and assigns different legal effects to prohibitions of assignment. For non-monetary claims, it further distinguishes between bona fide and mala fide assignees, stipulating that the prohibition on assignment is ineffective against bona fide third parties who acquire creditor rights. In the case of monetary claims, the prohibition has no effect against third parties, and the rights of third-party assignees remain valid.

Example 4: selective adoption of rules related with compensation

A. Rules on full compensation

Article 7.4.2 of the UPICC (2016) incorporates the doctrine of full compensation, stating:

(1) The aggrieved party is entitled to full compensation for harm sustained as a result of the non-performance. Such harm includes both any loss which it suffered and any gain of which it was deprived, taking into account any gain to the aggrieved party resulting from its avoidance of cost or harm. (2) Such harm may be non-pecuniary and includes, for instance, physical suffering or emotional distress.

Article 7.4.3 further clarifies the scope of harm, which includes:

(1) Compensation is due only for harm, including future harm, that is established with a reasonable degree of certainty. (2) Compensation may be due for the loss of a chance in proportion to the probability of its occurrence. (3) Where the amount of damages cannot be established with a sufficient degree of certainty, the assessment is at the discretion of the court.

The CCL (1999), in Article 113, provides:

[I]f either party fails to perform its obligations under the contract or does not perform its obligations as contracted and thus causes losses to the other party, the amount of compensation for the loss shall be equivalent to the loss actually caused by the breach of contract and shall include the profit obtainable after the performance of the contract, but shall not exceed the sum of the loss that might be caused by a breach of contract and has been anticipated or ought to be anticipated by the breaching party in the making of the contract.

This provision covers ‘the profit to be made after performance’ but does not specify the principle of ‘full compensation’. Nor does it provide specific rules for the compensation of ‘obtainable profits’. In Chinese judicial practice, there is a lack of uniform standards for calculating lost profits, resulting in courts either imposing excessive liabilities on the breaching party or failing to provide adequate relief to the non-breaching party. As a result, the ‘lost profits’ remedy has not been very functional in Chinese contract practice.

During the process of drafting the Contract Book of the Civil Code, it was suggested that the specific rules on compensation for ‘lost profit’ should be further improved, based on the experience of judicial practice and taking into account Article 7.4.3 of the UPICC. Article 584 of the Civil Code states:

[W]here a party fails to perform the contractual obligation or the performance does not conform to the agreement so that the other party suffers losses, the amount of compensation shall be equivalent to the losses caused by the breach of contract, including the benefits expected to be obtained had the contract been performed, except that it may not exceed such losses that the breaching party foresees or should have foreseen at the time of conclusion of the contract.

Compared to Article 113 of the CCL (1999), the Contracts Book of the Civil Code did not make any substantive changes on this issue and did not clearly reflect the doctrine of full compensation.

To address this issue in judicial practice, it should be noted that Article 60 of the Interpretation of the Supreme People’s Court of China on Several Issues Concerning the Application of the General Principles of the Contract Book of the Civil Code, issued on 4 December 2023, introduces a ‘substitute transaction rule’ as a method for calculating lost profits.¹⁶ The substitute transaction rule allows the creditor, in the event of a material breach by the debtor, to contract with another party to obtain the same thing as under the original contract. If the price of the substitute contract is less favourable to the creditor than the price of the original contract, the creditor may recover the difference from the debtor as damages. The inclusion of the substitute transaction rule as a method of calculating lost profits is in line with the trend in contract law, as Article 7.4.5 and Article 7.4.6 of the UPICC (2016) also contain provisions for this rule.¹⁷

B. Rules on non-pecuniary compensation

Article 7.4.2 of the UPICC (2016) allows for non-pecuniary compensation by stating: ‘(2) Such harm may be non-pecuniary and includes, for instance, physical suffering or emotional distress.’ Non-pecuniary harm may include pain and suffering, loss of certain amenities of life, aesthetic prejudice, and so on, as well as harm resulting from attacks on honour or reputation. In fact, there has always been a longstanding debate in China, both in theory and in judicial practice, regarding whether damages can be awarded in contract disputes for non-pecuniary/moral damages suffered by a party as a result of the other party’s breach of contract, and whether moral damages can be included in liability for breach of contract. During the drafting of the CCL (1999), the question of whether non-pecuniary damages for breach of contract should be provided for in contract law was discussed, and in the end the CCL (1999) did not clearly state or allow non-pecuniary damages for breach of contract.

A similar situation occurred during the legislative process of the Contract Book. Following discussions and debates, Article 584 of the Civil Code of 2020 still does not explicitly provide for non-pecuniary damages. Therefore, under Chinese contract law, non-pecuniary damages are, in principle, not available for a simple breach of contract, which seems to be a deviation from the UPICC (2016). However, this does not mean that non-pecuniary damages are not available under the Civil Code. In fact, Article 996, an article in the Personality Rights Book other than the Contract Book of the Civil Code, provides that the injured party can claim non-pecuniary damages for breach of contract and tort simultaneously.¹⁸

IV. Concluding remarks

Since their inception, the UPICC have received considerable attention from the international community. Although they are not legally binding, they represent an international instrument conceived, formulated, and published under the auspices of an intergovernmental organization. The suitability of the UPICC as a model for domestic legal reform has been amply demonstrated in practice. In the process of establishing and improving its own contract law system, particularly in the drafting of the 1999 Contract Law and the Contract Book of the Civil Code, China has often referred to international conventions, model laws, and the contract laws of other relevant countries or regions. It is safe to say that the UPICC, with their own persuasive power, have attracted great attention from legislators, judges, and scholars in China and have had a positive impact on the development of Chinese contract law. Meanwhile, China’s reference to the UPICC is more in the form of consistency in basic concepts and in similarities in some specific provisions, but not in systematic and large-scale incorporation or transplantation. This approach may be in line with the practice of many other countries and regions. Looking ahead, the UPICC, as a progressive international effort to unify private law, will continue to positively impact the development of China’s contract law and adjudication. It is hoped that China’s continuing research on contract law and its legislative and judicial practice on commercial contracts will make a positive contribution to the development of the UPICC and other international uniform private law in the future.

Footnotes