Party Autonomy
Virtually almost all modern private international laws and international conventions recognize that,in international situations,the parties are free to determine the law applicable to the merits of the dispute,which is referred to as the principle of party autonomy.Premised on the freedom of contract,party autonomy in essence grants the parties the freedom to decide through their agreement the law applicable to the contract.The fundamental ground supporting this principle is that since a contract involves all voluntary obligations and the contractual parties have the right to choose whether or not they will be bound,they should also have the right to choose the law by which they will abide.
This principle is also accepted by Chinese law,as the GPCL,the Contract Act as well as the Conflicts Act give contracting parties the freedom to choose the law to govern their rights and duties.
Article 145 of the GPCL provides as follows:
The parties to a contract involving foreign interests may choose the law applicable to settlement of their contractual disputes,except as otherwise stipulated by law.
If the parties to a contract involving foreign interests have not made a choice,the law of the country to which the contract is most closely connected shall be applied.
Moreover,Article 126 of the Contract Act stipulates that:
The parties to a contract involving foreign interests may choose the law applicable to the settlement of their contract disputes,except as otherwise stipulated by law.If the parties to a contract involving foreign interests have not made a choice,the law of the country to which the contract is most closely connected shall be applied.
The contracts for Chinese-foreign equity joint ventures,for Chinese- foreign contractual joint ventures and for Chinese-foreign cooperative exploration and development of natural resources to be performed within the territory of the People’s Republic of China shall apply the laws of the People’s Republic of China.
Furthermore,Article 41 of the Conflicts Act states that:
The parties may by agreement choose the law applicable to their contract.In the absence of parties’ choice,the law of the habitual residence of the party whose performance obligation can be the best to embody the essential characteristics of the contract,or other law which is mostly connected with the contract shall apply.
A careful reading of these three pieces of legislation will reveal some important information.First,the main theme of these three provisions is the same which empowers the contracting parties to select the governing law at will as long as the exception clause is not triggered.Second,all the provisions uphold most-significant-relationship principle in the absence of party autonomy.Third,Article 126 of the Contract Act stipulates detailed statutory restrictions.Last but not least,Article 41 of the Conflicts Act puts the principle of closest connection and the characteristic performance test on an equal footing.The following discussion centers around these three provisions supplemented by the analysis of the relevant articles in “Provisions by Supreme Court.”
2.1 Scope of Party Autonomy
There is no doubt that Article 145 of the GPCL,Article 126 of the Contract Act as well as Article 41 of the Conflicts Act uphold part autonomy; however,there are several related issues which merit our analysis.The first issue is the scope of party autonomy.This issue actually consists of three specific issues: First,can the party choose the law that has no material relation with contract? Second,does the law chosen by the parties include the conflict of laws rules? Third,what issues should be governed by the law chosen by the parties?
Historically,in order for the parties’ choice of law to be valid under the private international law of contract,the chosen law had to have an objective connection with the substance of the contract.In other words,the parties could not choose a law having no connection with the dispute.[3]In contemporary private international law,that approach has generally been abandoned.The emphasis today is on the need to allow the parties to choose a neutral law,i.e.,a law which has no connection with either the parties or the subject-matter of the contract.
Thus,for example,Swedish law is often chosen,because of Sweden’s neutrality,to govern contracts between Chinese state-owned-enterprises and western corporations.Swiss law is sometimes chosen for similar reasons.In fact,parties have various reasons for choosing neutral laws,although that choice is frequently based on considerations which are more political than legal.Nevertheless,prior to reaching agreement,the parties will sometimes conduct a comparative law analysis.Another approach,which is more intuitive but probably more appropriate than a choice based solely on political considerations,is for each party to attempt to impose an applicable law drawn from a legal system similar to that party’s own.9
Whatever the parties’ reasons may be,choice of a law which is objectively unconnected with the contract is undoubtedly valid in most legal systems.This is certainly the case under Article 145 of the GPCL,Article 126 of the Contract Act and Article 41 of the Conflicts Act.Therefore,Chinese courts usually do not require the applicable law chosen to have any material connection with the contract in judicial practice.In Far East (China) Flour Co.Ltd.v.Liberia Meizi Shipping Company,10 the choice of law provision in the bill of lading specified the Carriage of Goods by Sea Act of 1936 (US).11 In the proceedings,both parties agreed to resolve the dispute between them according to that Act.Consequently,the People’s Court applied the American legislation.In Shanghai Zhenghua Port Machinery Co.Ltd.v.Universal Parcel Services (USA),12 the People’s Court applied the Warsaw Convention as designated on the back cover of the relevant transportation document.In Yuehai Electronic Co.Ltd v.China Merchants Warehouse & Transportation Co,13 the bill of lading identified the Hague Rules as governing the rights and obligations of the parties.The Supreme People’s Court accepted the effect of this provision and rendered its judgment according to the Hague Rules.As can be seen from these cases,parties may choose to apply Chinese law,foreign law,or even international treaties and customary international law to the resolution of their contractual disputes.The chosen law is not required to have any material connection with the contractual dispute.14
With regard to the question whether the law chosen by the parties to a contract may include the conflict rules,neither Article 145 of the GPCL,nor Article 126 of the Contract Act,nor Article 41 of the Conflicts Act provides definite answer.However,as both “Provisions by Supreme Court” and the Conflicts Act choose to reject renvoi entirely,conflict-of-law rules are,undoubtedly,excluded.15
As to the question that what issues should be governed by the law chosen by the parties,both Article 145 of the GPCL and Article 126 of the Contract Act define the scope as covering the parties’ “contract disputes.” This seems quite self-explanatory,but it is in fact problematic because disputes in contract law can be very broad in terms of range.This question is also answered by “Provisions by Supreme Court,” as Article 2 provides:“the ‘contractual disputes’ as referred to in these Provisions shall include the disputes over the conclusion,effect,performance,alteration,assignment and termination of a contract,and liability for breach of contract,etc.”16
The scope of party autonomy under the above provision appears quite extensive but there are two areas that do not seem to fall within its scope.One area is the capacity of the parties to make a contract.Many scholars argue that the principle of party autonomy does not apply to the determination of law governing issues such as party’s capacity to enter into a contract,because contractual capacity is essentially the capacity for civil conduct and shall be determined by lex patriae,namely the law of the place of nationality or domicile of the person17.Another justification for this approach lies in the fact that a party’s capacity to contract is a question that logically arises before and independent of that of choice of the law governing the contract.It is therefore understandable that this issue should be governed by different laws.
The other area involves the formality of contract.The dominant doctrine is that the law where the contract was made governs the formality of a contract.[4]There is a belief that the Contract Act has special requirements for formality which must be met for a contract made in China.Pursuant to Article 10 of the Contract Act,a contract may be made in written,oral or other forms,but if writing is required by law or agreed upon by the parties,the contract must be made in writing.More importantly,for certain contracts,government approval or registration is also required.[5]Therefore,the question as to compliance with formality requirements would affect the validity of the contract concluded in China,and such requirements cannot be avoided by choosing a foreign law as governing law.In this respect,due concern should be given to international contracts for sale of goods,since when joining the CISG,China made a reservation concerning Article 11,under which writing is not required for a contract for sale of goods.[6]The reason why China made such a reservation was that the then Chinese Foreign Economic Contract Law required all foreign economic contracts shall be made in writing.18 However,this reservation is not valid today,insofar as China withdrew it in 2013.
2.2 Means of Party Autonomy
This issue concerns whether the parties’ choice of applicable law should be express only or both express and tacit choice are permitted.Though neither Article 145 of the GPCL nor Article 126 of the Contract Act,nor Article 41 of the Conflicts Act imposes any restrictions; however,“Provisions by Supreme Court” stipulated clearly that “the parties concerned shall choose or alter the choice of the law applicable to contractual disputes in an explicit manner.”19 That is to say,the parties’ intention regarding the governing law of their contract may not be assumed through interpretation of the terms of the contract or by looking at an established course of dealing between the parties.For example,an arbitration agreement or the choice of forum clause made by the parties may not be used to infer the intent of the parties with regard to the governing law.Nonetheless,it should be noted that article 4(2) of “Provisions by Supreme Court” provides a flexible stipulation:
Where the parties concerned fail to choose the law applicable to contractual disputes but both parties invoke the law of the same country or region and neither party has raised any objection to the application of law,it shall be regarded as that the parties concerned have chosen the law applicable to contractual disputes.
Some scholars believe that this provision virtually is a kind of recognition of tacit choice of law; while others insist that the means of choice in the provision remains to be an express one.
2.3 The Timing of the Parties’ Choice of Law
It is universally established that the parties can choose the applicable law not only at the time of signing the contract but also at any time before or after the dispute has arisen.The drafting of a submission agreement or terms of reference may provide an opportunity for the parties to reach an agreement on this issue.In addition,concurring written submissions by the parties concerning the applicable law would be equally binding on the judges or arbitrators.This view is widely accepted in comparative law,20 including Chinese law.As a matter of fact,“Provisions by Supreme Court” provides even more flexible arrangement,as Article 4,Paragraph 1 provides as follows:
Where the parties concerned have compromised to choose or alter the choice of the law applicable to contractual disputes through consultation before the conclusion of the argument in the court of first instance,the People’s Court shall grant an approval in this regard.
Apparently,under the above provision,the parties are granted the freedom to choose or change the law not only before and after the dispute but also before the conclusion of the argument in the court of first instance,which is a very flexible arrangement.According to the explanations given by the judges of the Supreme People’s Court,this flexible approach is in conformity with the judicial practice,as it is often the case that the parties alter the law that they previously chose after the court hears the case,or they come to reach the agreement on the applicable law after the stage of argument in the court of first instance.This,apparently,is a reasonable explanation; however,we suggest that there should be two limitations for the change of the choice of law,i.e.,the change should neither contravene the principle of bona fides[7],nor adversely affect the rights of the third party.(https://www.daowen.com)
2.4 Restrictions on Party Autonomy
Modern views of freedom of contract recognize that party autonomy is not absolute which has a number of statutory restrictions.The imposition of restrictions upon the parties in their choice of law is a necessary device to safeguard the legislative and judicial interests of the state involved.In one respect,by limiting the parties’ freedom of choice,the country will make sure that application of foreign law will not be made at the expense of a forum’s interests.In the other respect,for certain types of matters to which the application of the mandatory law of the forum cannot be excluded by a contractual term,the limitations on the parties’ choice will certainly serve this need.Of course,the degree of the restriction varies from country to country.21 Under current Chinese law,there are currently three major areas in which party autonomy is not permitted.
First,some special categories of contracts shall be governed by Chinese law exclusively,thus excluding the principle of party autonomy.As mentioned above,under Article 126 of the Contract Act,there are three kinds of contracts that fall within this special category,which are the contracts for Chinese-foreign equity joint ventures,for Chinese-foreign contractual joint ventures and for Chinese-foreign cooperative exploration and development of natural resources to be performed within the territory of China.Promulgated in 2007,“Provisions by Supreme Court” reiterates these three kinds of contract,and goes on to add six more kinds,as Article 8 provides as follows:
The laws of the People’s Republic of China shall apply to the following contracts which are performed within the territory of the People’s Republic of China:
(1) contracts for Chinese-foreign equity joint ventures;
(2) contracts for Chinese-foreign contractual joint ventures;
(3) contracts for Chinese-foreign cooperative exploration and development of natural resources;
(4) contracts for transfer of shares of Chinese-foreign equity joint ventures,Chinese-foreign contractual joint ventures and wholly foreign-owned enterprises;
(5) contracts for contracting operation of Chinese-foreign equity joint ventures or Chinese- foreign contractual joint ventures established within the territory of the People’s Republic of China by foreign natural persons,legal persons or other organizations;
(6) contracts for purchase of equity of shareholders of non-foreign-invested enterprises within the territory of the People’s Republic of China by foreign natural persons,legal persons or other organizations;
(7) contracts for subscription of the capital increase of non-foreign-invested limited liability companies or companies limited by shares within the territory of the People’s Republic of China by foreign natural persons,legal persons or other organizations;
(8) contracts for purchase of assets of non-foreign-invested enterprises within the territory of the People’s Republic of China by foreign natural persons,legal persons or other organizations; and
(9) other contracts to which the laws of the People’s Republic of China shall apply under the provisions of the laws and administrative regulations of the People’s Republic of China.
According to the interpretation offered by the Supreme People’s Court,after China’s accession to the WTO,disputes arising out of the above listed contracts are increasing by leaps and bounds,and under the relevant Chinese laws and administrative rules,those kinds of contracts should be submitted to the relevant government departments for approval before they come into effect.Within such a setting,allowing the parties to choose applicable law freely would run the risk of defeating the relevant procedure for examination and approval.Thus,for those contracts,the choice of a governing law other than Chinese law by the parties will be invalid and unenforceable.
Second,party autonomy must not be contrary to the public order of the forum.As we know,the doctrine of public order reservation is universally accepted,and China,as other countries,espouses it both in legislation and judicial practice.Therefore,if the application of foreign law which has been chosen by the parties is found incompatible with Chinese public order,the application will be excluded and the parties’ choice will be invalidated.As a result,Chinese law will usually be applied instead.
Third,choice of law submitted to the court will be scrutinized to exclude evasion of law.As Article 6 of “Provisions by Supreme Court” provides that “the evasion of mandatory provisions of laws or administrative regulations of the People’s Republic of China by a party concerned shall have no effect in respect of the application of foreign laws,and the law of the People’s Republic of China shall apply to such contractual disputes.” This limitation on party autonomy is also reflected in “Guidelines of the Supreme People’s Court on Implementing the General Principles of Civil Law of the People’s Republic of China,” as Article 194 stipulates that:“[T]he litigant’s act to evade the compulsory or prohibitory legal norms of this country shall not take effect to apply to the foreign laws.”
Fourth,under most codes of modern private international law,the parties changing the governing law of their contract cannot invoke the change against the third party if that would prejudice his interest.22 Thus,where the contract is for the benefit of a third party,the rights of that third party will not be adversely affected.Similarly,where the governing law of a debt is changed by agreement between the creditor and the debtor,they cannot invoke change against the guarantor of the debt if that would weaken his position.However,current Chinese law does not contain such a restriction so far.Therefore,it is the author’s hope that future legislation should reflect this restriction.
Last but not least,some special categories of contracts,including consumer contracts and employment contracts,are subject to special conflict rules.Prior to the Conflicts Act of 2010,23 Chinese private international law did not contain conflict rules for consumer contracts and employment contracts; therefore,the introduction of special rules to such contracts is particularly noteworthy.
The special choice-of-law rules for consumer contracts are provided by Article 42 of the Conflicts Act which states that:
Consumer contracts shall be governed by the law of the place in which the consumer is habitually resident; if consumer chooses to apply the law where goods and services are provided,or if the business party does not engage in any soliciting activities in the place in which the consumer is habitually resident,the law of the place where goods and services are provided shall apply.
Under the above provision,consumer contracts,principally,shall be governed by the law of the place in which the consumer is habitually resident.The rationale is that the consumer will normally expect to be protected under the law of his habitual residence in the absence of choice of law.
However,the consumer may choose the law where goods and services are provided; and in the absence of such choice,consumer contracts shall also be governed by the law where goods and services are provided,if the business party does not engage in any soliciting activities in the place in which the consumer is habitually resident.The reason underlying such arrangement is that the consumer will normally choose the law where goods and services are provided when such law is more beneficial to him/her; therefore,permitting consumer’s such choice reflects the consideration of protecting the weaker party; in case the business party does not engage in any soliciting activities in the place in which the consumer is habitually resident,a consumer is referred to as an “active consumer,” rather than a “passive consumer.” The consumers in this context are not eligible for the protections under the law of the country of their habitual residence.
It is established that employment contracts,like consumer contracts,need special treatment for the purpose of determining the applicable law,as the weaker party,i.e.,employees should be protected whose status are similar to that of consumers in consumer contracts.24 This is especially true in the case of China,as the country has always been criticized for the poor protection of the interests of employees,especially the migrant workers.[8]The insertion of special conflict rules for employment contracts in China’s first Conflicts Act is believed to be part of the country’s efforts to build a legal system which ensures that the legitimate interests of workers are better protected.
As a principle,under Article 43 of the Conflicts Act,an employment contract shall be governed by the law where the employee carried out his work (locus laboris); when it is difficult to ascertain the place where the employee performed his work,the employment contract shall be governed by the law of the principal place of the business of the employer.A placement arrangement may be governed by the law of the place where the employee was dispatched.
Apparently,the first two paragraphs of Article 43 bear considerable resemblance to those of Article 121 of the Swiss Private International Law Act; however,Paragraph 3 exhibits distinctive Chinese characteristics,which is worthy of discussion.24
A placement arrangement in the Chinese context usually involves three parties: “staffing firm”,“employee” and,“accepting unit.” Under the Act on Employment Contracts,a staffing firm is the employer which shall perform an employer’s obligations toward its employees; the employment contract between a staffing firm and an employee to be placed shall specify the matters such as the unit with which the employee will be placed,the term of his/her placement,his/her position,etc.Staffing firms shall pay labor compensation on a monthly basis.During periods when there is no work for employees to be placed,the staffing firm shall pay such employees compensation on a monthly basis at the minimum wage rate prescribed by the People’s Government of the place where the staffing firm is located.When placing employees,staffing firms shall enter into staffing agreements with the units that accept the employees (“accepting units”).Staffing firms shall inform the employees placed of the content of the placement agreements.25
From the above provisions,it follows that a placement arrangement consists of an employment contract between the staffing firm and the employee,and a placement contract between that staffing firm and the accepting unit.As the relationship between the employer,i.e.,the staffing firm,and the employee is somewhat different from that in an ordinary employment contract,and the place where the employee was dispatched usually has a close connection with the disputes between the employer and the employee,Paragraph 3 of Article 43 provides an alternative connecting factor: the place where the employee was dispatched.Though such provision is reasonable in this respect,the expression of this paragraph is not accurate,insofar as “a placement arrangement” consists two different contracts,i.e.,the employment contract between the staffing firm and the employee,and the placement contract between the staffing firm and the accepting unit; and judging from the legislative intent,one can conclude that only the first contract falls under Article 43(3); whereas the second is but an ordinary contract which does not need special treatment,as there is no apparent weaker party between the two contracting parties.