Zhang Xiaoyang - Chinese Civil Law For Business (2013)

CHINESE
BUSINESS
LAW
‘Unlike the heavily theoretical approach adopted in many other textbooks on this SERIES
subject, Dr Zhang’s insightful business-oriented treatment of the Chinese civil law will
be a source of delight for business people, students and teachers alike. Well structured,
accessible and informative, this is a much needed text for a large and wide audience.’ CHINESE
— Walter Lee, Gallant Y T Ho & Co, solicitors BUSINESS LAW
Chinese Civil Law for Business

‘This lucid, systematic and comprehensive guide is an excellent primer for those who SERIES
wish to acquire an understanding of Chinese civil law for business purposes. The many
examples throughout its chapters serve as concrete case studies of the application of
business law in contemporary China.’
— Lusina Ho, The University of Hong Kong
This book offers clear and comprehensive coverage of civil law in China as it pertains to
business. It takes a practical approach and is heavy on examples that are based on actual
legal cases that have occurred in China. Using these examples, the author illustrates how
civil law plays out in real-life situations.
The first two chapters describe the development and general principles of civil law in
China, and this is followed by chapters on property rights law, the law of contract and tort
liability law. China does not yet have a single civil code, and its civil law regime is made up
of a complicated patchwork and hierarchy of laws and statutes. This book systematically
gathers the relevant articles from these diverse sources under its chapter topics, explaining
any differences among applicable laws and pointing out which take precedent.
The book offers fresh translations of the relevant legal texts. This should be a welcome
addition to the field as there are few official English translations of these laws, and the
unofficial ones vary greatly. The author provides explanations that make these sometimes
difficult texts easily accessible.
Business people, students and scholars will all benefit greatly from this book. Readers
will be repaid with an understanding of civil law that will make them more adept in any
consideration of business in China and in any business dealing there. They will also gain a
fuller picture of China’s economic systems (particularly its property system), the rationale
Zhang Xiaoyang
Chinese Civil Law
for Business
behind these systems, and the policy orientations that will steer their future development.
Zhang Xiaoyang
Chinese Civil Law
for Business
Zhang Xiaoyang
Open University of Hong Kong Press
The Open University of Hong Kong
30 Good Shepherd Street
Ho Man Tin, Kowloon
Hong Kong
Fax: (852) 2396 5009
Email: ouhkpress@ouhk.edu.hk
Website: http://www.ouhk.edu.hk/OUHKpress.htm
© The Open University of Hong Kong, 2013
All rights reserved. No part of this material may be reproduced

in any form or by any means without permission in writing from
the publisher and all individual copyright holders.
ISBN: 978-962-7707-93-6 (Paperback)

ISBN: 978-962-7707-94-3 (Hardback)
Printed in Hong Kong
This book is printed on environmentally friendly paper.

Contents
Foreword v
Preface vii
About the author ix
Chapter 1 An introduction to civil law 1

Introduction 1
Law and legal systems 3
The structural components of civil law 21
The nature of civil law 22
Fundamental civil law doctrines 24
Summary 27
Practice questions 28
Chapter 2 General principles of civil law 30

Introduction 30
Civil rights 31
Civil subjects: Natural persons 37
Civil subjects: Legal persons 51
Things 55
Juristic acts 57
Agency 71
The limitation of actions 80
Summary 85
Chapter 3 The Property Rights Law 89

Introduction 89
The promulgation of the Property Rights Law 90
The three cardinal principles of the Property Rights Law 104
The formation and alteration of property rights 112
Ownership 127
Usufructuary rights 162
Property rights relating to security 174
Summary 188
Chapter 4 The law of contract 193

Introduction 193
The contract law regime 195
The formation of a contract 196
The validity of a contract 218
Performing a contract 226
The alteration and the assignment of a contract 241
Discharging a contract 249
Liability for breach of contract 254
Summary 263
Chapter 5 The Tort Liability Law 269

Introduction 269
The Tort Liability Law regime 272
Three basic principles for establishing tort liability 273
Essential elements for establishing a tort case 287
The burden of proof 292
Joint, separate and several tort liability 294
Tort remedy 301
Exemption from and mitigation of liability in tort 306
Summary 315
References 321
Index 326
Foreword
Over the past couple of decades, China has rapidly developed and transformed
itself, particularly in its economic and legal systems. China’s economy
continues to boom and people around the world are attempting to enter the
Chinese market or to put their business dealings there on a firmer footing.
Doing business in any country requires an understanding of the laws of that
country, and China is no exception.
In order to meet the growing market demand for information about Chinese
business law, especially since China joined the WTO in 2001, the business
school of the Open University of Hong Kong has introduced a series of
Chinese business law courses and programmes. This book is based on one
of the courses in our Master of Laws in Chinese Business Law programme,
which was developed by Chinese business law experts from mainland China
and Hong Kong as well as senior academics and instructional designers
within the university. The book, like the course and programme it evolved out
of, focuses on the practical implications of China’s laws and its legal system
for doing business in China. It does not focus on the law for its own sake; nor
does it take a theoretical approach to the subject.
Over the years, we have found that there are very few Chinese business law
books available in the market, particularly books that are written in English
and that have a business focus. Our major targeted readers are business people
— those doing business or intending to do business with or in China, and
who for that purpose want to know more about Chinese business law — as
well as students. We hope that this book can help to fill a gap through both its
timeliness and its approach.
This book is the first in our Chinese Business Law book series. We have
chosen to start with Chinese civil law because, in our view, it is a very
vi Foreword
important building block for Chinese business law as a whole. Later books in
the series will cover such topics as intellectual property law in China, which
has received tremendous interest from the West. We welcome comments and
suggestions from readers of this book so that we can improve future editions
as well as later books in the series.
Y K Ip
Dean and Professor
Lee Shau Kee School of
Business and Administration
The Open University of Hong Kong
Preface
Many business leaders from overseas who have come to work in China or
who are planning to tap into the Chinese market are keen to learn about
Chinese law. However, they usually concentrate on laws that deal with more
pragmatic topics such as foreign-invested enterprises, import and export
procedures, debt and equity financing, foreign exchange control, taxation, etc.
They seem not to realize that those laws are inextricably linked with Chinese
civil law.
According to China’s General Principles of Civil Law, civil law governs

property relations and personal relations between persons of equal status,
including between individual citizens, between legal persons, and between
individual citizens and legal persons. Civil law can be seen as a basic law that
applies to all major aspects of social life, including economic activity. Civil
law forms the basis for virtually all business-related laws and regulations in
China. It is an indispensable stepping stone on the way to an understanding
of the more specific rules and regulatory policies that relate to doing
business in China. In addition, a good knowledge of civil law reveals a fuller
picture of China’s economic systems, particularly its property system, the
rationale behind them, and the policy orientations that will steer their future
development.
Most books on the subject of civil law are heavily theoretical. This book
will not follow suit. First, it strongly emphasizes topics which are related to
business and which foreign businesspeople are more likely to find useful,
such as property rights law, law of contract, and tort liability law. In addition,
practical examples are included.
This book is the outcome of the work of many people. I would like to express
my sincere thanks to Professor Ip Yiu-keung, Dean of the Lee Shau Kee
viii Preface
School of Business and Administration of the Open University of Hong Kong

(OUHK), for his leadership and tremendous support and encouragement,
without which this project could not have been completed so smoothly. My
heartfelt thanks go to my colleagues Ms Shi Xuemei and Dr Candy Liu, whose
comments on the draft version were most helpful. I am also deeply indebted
to colleagues in the OUHK’s Educational Technology and Publishing Unit,
namely Ms Linda Chow, Dr Eva Tsang, Ms Caroline Leung, Ms Kawin Chan,
and Mr Tim Maraun, for their marvellous organizational and implementation
work during the design, editing and publishing process — special appreciation
is given to Caroline and Tim for their valuable contributions.
This book is based on the course materials for the OUHK course Principles
and Practices of Chinese Civil Law, which is part the University’s Master of
Laws in Chinese Business Law programme. The contributions of Walter Lee,
Jenny Chung and Dr Xie Hongfei, the developers of earlier versions of the
course materials, are gratefully acknowledged.
While this book is no doubt the product of a collective endeavour, all errors

and omissions are solely my responsibility.
Zhang Xiaoyang

About the author
Zhang Xiaoyang is an associate professor in

the Lee Shau Kee School of Business and
Administration at the Open University of
Hong Kong (OUHK). He holds a PhD from
the Law School of Strathclyde University in
the United Kingdom. His current research
interests focus on Chinese business law,
international economic law and regulatory
regimes. He was responsible for architecting
the key frameworks and principal themes of
the OUHK’s innovative, business-oriented
e-learning programmme Master of Laws
in Chinese Business Law. Dr Zhang previously held a number of positions
with multinational and Chinese conglomerates, and has both international and
China business experience. Examples of his many published papers in law
journals include ‘Contemplating privatisation of China’s rural land ownership’
in Amicus Curiae (Journal of the Society for Advanced Legal Studies);
‘Eliminating privileges enjoyed by foreign investors in China: Rationality
and ramifications under a unified tax code’ in Deakin Law Review (Deakin
University); ‘Intended model and consequences of launching domestic
projects with overseas loans: Reflections on Chinese legal perspectives of
project finance’ in Journal of International Commercial Law (Ashgate);
‘Arena of real estate investment in China: Game rules for foreign investors’
in International Trade and Business Law Annual (Cavendish); and ‘More
involvement in real business: Assessing China’s FIE holding companies’ in
Journal of Business Law (Sweet & Maxwell).
Chapter 1
An introduction to civil law
Introduction
Our lives are inextricably linked to civil law. The transactions people are a
part of in life may give rise to the formation of contracts, changes in property
ownership or the assumption of liabilities. People involved in estate planning
may have to deal with complex issues in connection with marriage and
inheritance. All these matters fall within the sphere of civil law.
But what is civil law? The Collins Dictionary of Law (Stewart and Burgess
1996, 68) lists a number of definitions. These include ‘the domestic law of
any particular nation,’ ‘the law of ancient Rome,’ ‘law or legal systems based
on Roman law,’ ‘law that is not criminal law’ and ‘law that is not military
law.’
In this book, ‘civil law’ generally refers to one branch of law or a law code
in a civil law system. It is composed of principles, rules and regulations that
govern property relations and personal relations, with respect to the rights
and duties of persons who carry out activities of their own accord on an equal
footing, subject to no interference by any state power.
The civil law system and the common law system are the two best-known
legal systems in the world. The term ‘civil law’ as one branch of law or a law
code is widely employed in civil law systems. Laws in a civil law system are
principally derived from various law codes in the form of statutes (legislation).
By comparison, laws in a common law system come from binding judicial
precedents (case law), alongside statutes. Conventionally, a common law
system does not attach great importance to a systematic demarcation of
branches of law. Thus a codified civil law may not be found in a common law
system. However, the main substance of civil law does exist in a common law
2 An introduction to civil law
system. Other than being contained in a civil code, it can be found in different
areas of law covering specific subject matter.
On the whole, Chinese law can be viewed as having virtually the same
characteristics as those of a civil law system, in terms of the essential forms of
law and general categorization of law.
The origins of civil law systems can be traced back to Roman law, which
served as a basis for the subsequent development of civil law systems in
other places around the globe. In light of Roman law, all law can be divided
into two categories: public law and private law. Examples of public law can
be cited from constitutional law, criminal law and administrative law; and
examples of private law can be found in the fields of civil law and business
or commercial law. In essence, civil law provides building blocks for private
law, which most closely impacts business transactions and social dealings in
everyday life. In this sense, civil law can be seen as the foundation of business
law.
In Article 2 of China’s General Principles of Civil Law (a representative

Chinese statute on civil law), ‘civil law’ is described as the law governing
property relations and personal relations forged between civil subjects (i.e.
persons) of equal status, including such relations between citizens (i.e. natural
persons), between legal persons, or between citizens and legal persons.
While civil law systems in different areas of the world may differ to a certain
degree due to evolution and adaptation, the fundamental doctrines and
structure of civil law are largely universal in civil law systems. On the whole,
the contemporary civil law framework is supported by essential components,
such as the General Principles of Civil Law, the law of property (the Chinese
terminology is ‘property rights law’), the law of contract, the law of tort (also
known as ‘tort liability law’), family law, the law of succession, as well as
some important concepts in connection with obligations (e.g. negotiorum
gestio and unjust enrichment).
However, as this book is business-oriented, it will not cover some civil law
topics such as family law and the law of succession.
This first chapter discusses law and legal systems in a general sense before
turning to the more specialized area of civil law.
Law and legal systems

This section introduces some basic information about law and legal systems,
in particular the Chinese legal system.
The characteristics of law

What is law? This is not an easy question to answer. In fact, there is no
standard description of law, because the meaning and spirit of law is
understood from different perspectives and for different purposes by different
people at different times.
For instance, according to natural law theorists, law is ‘a set of moral norms’
and is associated with ‘justice and right, accessible to reason, which can be
used as standards to judge the exercise of human power’ (Waldron 2005,
181), while law is positioned in Marxist theory as ‘an instrument of class
domination used by a ruling class to maintain and advance its interests’
(McCoubrey and White 1993, 109).
In Osborn’s Concise Law Dictionary (Woodley 2005, 238), an entry for ‘law’
reads as follows:
A law is an obligatory rule of conduct. The commands of him or them

that have coercive power (Hobbes). A law is a rule of conduct imposed
and enforced by the Sovereign (Austin). But the law is the body of
principles recognized and applied by the State in the administration of
justice (Salmond). Blackstone, however, maintained that a rule of law
made on a pre-existing custom exists as positive law apart from the
legislator or judge.
As this book concerns Chinese law, it is essential to begin by considering how

law is perceived in prevailing Chinese jurisprudence, which closely follows
Marxist theory.
According to the prevailing view in Chinese academia,1 law is created by the

state at a certain point in human history; it is enforceable by state machines
1 See, e.g. B Y Li 2001, 31–35, 49–53 and 91–94; Shen 2001, 27–31 and 38–39; and M H Wang
2005, 23–30, 35, 206–10 and 241–43.
such as judicial organs, and the police and military forces; it represents a
set of norms governing human conduct (not human thought); but it governs
important human conduct only, and not trifles. The following discussion is
based on this view.
Law: Governing human conduct with state compulsion

Law is created by the state at a certain point in human history. It cannot be in
place until certain conditions are fulfilled. Those conditions include: sovereign
states coming into being, adjudication systems being available, and a sense
of rights and duties becoming rooted in the human mind. Law is developed
for the purpose of constructing an effective regime under which society can
be kept in good order. It is enforced by the state using state machines such as
judicial organs, and the police and military forces.
The evolution of law is an outcome of the complex interaction of economic,

political, cultural and philosophical factors. A legal system’s soundness
relies on how economic fruition is achieved at various levels in society, and
its success depends on whether the state is able to render abiding protection
and respect for the rights and duties of its citizens (especially relating to the
protection of the assets of private individuals).
In essence, the law charts a course for human conduct. The cardinal rights and
duties of human beings are encapsulated in the law, which in turn provides a
mechanism for safeguarding those rights and duties.
By formulating a series of bottom-line norms, law governs human conduct.

But law does not govern human thought. In other words, people can be
punished by law for what they have done, but not for what they have thought.
So, if Jack hates Jill and kills her, Jack will be charged with murder. However,
if Jack hates Jill but does not take action, Jack will not face a charge.
Law, moral teaching and religious doctrine can all be categorized as norms
employed to guide human conduct. Although the law may embrace elements
of morality and religion to various degrees, moral teaching or religious
doctrine are no substitute for law and have no binding force in a court of
law. Only law can be enforced by relying on state compulsion through state
machines like judicial organs, and the police and military forces. In other
words, only law can generate a compulsive force for governing human
behaviour. For example, although Catholic churches are strongly against
abortion, a Catholic woman who chooses to have an abortion does not break
the law.
The legitimacy and authority of law comes from its rationality. Rationality
can be acquired from classroom theory or practical experience. The rationality
of law is to a large extent derived from practical experience. Law reveals the
collective rationality of humankind. In a democratic society, such collective
rationality is usually a result of a democratic process (e.g. the establishment
of a legislature through universal suffrage). Without the rationality of law,
legal civilization and justice could not be achieved in the modern world (and
people might, for example, still face Medieval-style ‘trial by ordeal,’ which
used torture, such as trial by water, to judge guilt or innocence in the name of
God’s will).
Law: Governing important human conduct only

A legal proverb says ‘the law does not concern itself with trivial matters’ (de
minimis non curat lex). This is true in today’s complex society: given the
limited legislative and judicial resources available to the state, law can only
focus on tackling matters that are of great significance to the well-being of the
people and society.
For the parties involved, taking court action is both expensive and time-
consuming, and, worse still, casts a shadow over human relations. Averting
unnecessary legal action is held in particularly high regard by the Chinese,
who are inclined towards maintaining good relations with other people
and find this a key to achieving success in business transactions and social
dealings. There are some far less drastic ways of settling disagreements
or disputes than bringing a case to court, e.g. conciliation, negotiation and
arbitration.
The goals of law

The goals of law can be viewed as justice, rights and order. These contribute
to the ultimate goals of peace, freedom and happiness.
Justice
Justice is the main goal of law. Without a legal system operated on the basis
of justice, people’s freedom and happiness can be arbitrarily interfered with or
sabotaged. However, maintaining justice is not easy. For example, in a rapidly
growing society, upholding justice to contain imbalances in wealth and power
may come at a cost to general economic gain.
The notion of ‘justice’ is in fact relative and constantly changes. It is defined

based on the specific morality, customs and behaviour that prevail in a given
society at a certain time.
The early desire for justice in China is suggested by the ancient Chinese
character for ‘law,’ which is composed of the symbols for water, flow and
unicorn. The character implies that people are equal and law, like a unicorn,
amounts to justice and righteousness. Even though justice may have different
meanings in different places and at different times, this Chinese character
suggests characteristics that most legal systems require to fairly regulate
interpersonal relationships and maintain social order.
Rights
Most people are aware that law penalizes criminals. Another significant
goal of law is to protect citizens’ rights. In Western culture, the relationship
between law and rights is frequently recognized.
In China, the earliest codification of Chinese law was the Fa jing (the Classic
of Law), written by Li Kui in around 400 BC. It seems to present law as a tool
for the state to combat crime rather than to protect people’s rights.
In contemporary jurisprudence around the world, law recognizes and

safeguards the rights of individuals. For example, constitutional law
prescribes the basic rights of citizens, while civil law works out the various
personal rights and property rights of natural persons and legal persons.
The following case occurred in China in 2001 (Xie and Xie 2009; F Zhang
2004). The Ministry of Railways decided to raise the price of rail tickets by
20% to 30% during the Chinese New Year holidays. A certain Mr Qiao argued
that the price increase was unlawful. He asked the court to have the decision
of the Ministry of Railways overturned. Although Mr Qiao eventually lost the
case, his courageousness in trying to safeguard his rights sets a good example
for other citizens who may not be used to challenging government decisions.
Since this case, public consultation has become a precondition for major price
increases by government departments.
China nowadays is making apparent strides towards the goals of respecting

citizens’ rights and abiding by the rule of law.
Order
Another goal of law is order. Law attempts to safeguard the interests of the
existing social hierarchy and people of all persuasions. It tends to give way to
reform only if it can be ensured that the whole society will benefit. Therefore,
law tends to be conservative, evolve slowly, minimize undesirable change,
and respect the wisdom of tradition and precedent. This partly explains the
doctrine of precedent that is applied in common law systems.
Take the prohibition on begging in public places imposed by local

administrations in some Chinese cities. Many beggars complain that this
deprives them of their habitual right to beg and that the prohibition should
be lifted so that they can survive. Should the beggars’ claim be supported?
Perhaps it is difficult to provide a clear-cut answer without considering the
specific context, but on the whole, it is important that a balance be sought
between imposing rules to maintain order and respecting tradition or custom.
Although the law does not prescribe any right to beggars, the prohibition
against begging in public places could negate beggars’ right to make a living.
This might give rise to charges of disregarding the needs of vulnerable people.
Here is another example. In a case that took place in Qing dynasty China, a
young man and a young woman disputed the nature of their relationship.2 The
man claimed that the woman was his child bride (his de jure wife when she
was a minor; his de facto wife when she reached majority). The man claimed
that after reaching majority the woman suddenly backed out, trying to marry
another man. According to the woman, she and the young man had the same
2 The case is described in literary Chinese in the work Yue wei cao tang bi ji [Fantastic Tales by Ji
Xiaolan], Vol. 10, by Ji Xiaolan. The English title is borrowed from Sun Haichen’s translation.
biological parents, and he had forced her to marry him. As no evidence was
available to ascertain their true identities, a decision made either way could
be erroneous. The most cautious way to settle this dispute would be to assume
that there was no marriage between them so as to avoid the risk of allowing
a brother to marry his sister. People must not be given any chance to act in a
manner that could potentially be morally unacceptable and transgress social
ethics.
It should be noted that law is not monolithic. Judges should avoid being
rigid and getting bogged down in the literal expression and interpretation of
law. Instead, they should look at the root of law, and balance the interests of
all relevant parties in order to achieve equity, social cohesion and harmony.
This can help to tackle social contradictions or at least to prevent them from
spiralling out of control.
Common law and civil law systems

The common law and civil law systems are not the only legal systems.
For example, there are religious legal systems (most notably Islamic law),
pluralistic legal systems that combine attributes of more than one legal system
(e.g. in Israel, Scotland and South Africa), and the ideologically distinctive
socialist legal system based on the model of the former Soviet Union.
However, on the whole, the common law and civil law systems are the most
representative.
The common law system

The origin of the term ‘common law’ lies in early sources of English law. The
development of the common law system into a rather complete and centrally
administered system began in England in the eleventh century, after the
Norman Conquest.
A striking feature of a common law system is the binding effect of judicial

precedents. This is the doctrine of precedent or stare decisis. This means that
a decision by a court in one case ought to be made in the same way in a future
case if the material facts of the two cases are identical. A lower court is bound
by the decision made by a higher court, but not vice versa.
The accumulation of case decisions leads to the formation of laws that are
deemed to be created by judges (this is where the term ‘case law’ comes
from). In a common law system, case law is a main source of law, alongside
written enactments in the form of legislation (statutes) and treaties. It is
not exaggerating to say that case law has been woven into the fabric of
common law systems, which prioritize the achievement of justice and flexible
application of legal doctrines over rigidly following the literal interpretation
of written laws.
While areas of law exist in a common law system, they are not categorized as
systematically as in a civil law system, where branches of law are clearly and
logically structured.
Common law systems are currently adopted in many jurisdictions, in

particular in Commonwealth countries and former British territories, e.g.
England, Wales, Northern Ireland, the United States (except Louisiana),
Canada (except Quebec), Brunei, Hong Kong, India, Malaysia, Pakistan,
Singapore, Australia and New Zealand.
The civil law system

The legal system of civil law (also known as ‘Continental European Law’)
is strongly influenced by Roman law. Unlike in a common law system, the
doctrine of precedent does not apply in a civil law system. The primary
source of law in a civil law system is law codes in the form of various
statutory laws on specific subject matter. Neither the decisions of judges nor
the interpretations of statutory laws made by judges form a source of law in a
civil law system.
Most civil law jurisdictions attach great importance to systematically

classifying various statutory laws into specified branches of law, e.g.
constitutional law, civil law, commercial law, administrative law, criminal
law, criminal litigation law, civil litigation law, etc. These statutory laws,
supplemented by other forms of legislation that are legally enforceable, such
as rules, regulations, decrees, orders, etc., lay down the foundation of a civil
law system in a logical and well-defined manner.
A civil code, among statutory laws, occupies the most prominent position
in civil law systems. Civil law as an independent law code emerged as a
result of economic development in Continental Europe. The key substance of

contemporary civil law mainly originated in Roman law. Roman law spanned
more than one thousand years, from the Twelve Tables (the earliest Roman
law code) of the fifth century BC to the Corpus Juris Civilis (a complete
collection of Roman law) in the sixth century. The Corpus Juris Civilis laid
the foundation for law in most Continental European jurisdictions.
In the nineteenth and twentieth centuries, the creation of civil codes

progressed rapidly worldwide. In Continental Europe, a wave of civil codes
were promulgated in many countries, e.g. the French Civil Code, the Austrian
Civil Code, the Portuguese Civil Code, the Spanish Civil Code, the German
Civil Code, the Swiss Civil Code, etc. Among these, the French Civil Code
and the German Civil Code are seen as most instrumental. They have had a
far-reaching influence on the dissemination and growth of the civil law mode
in Europe and beyond. Since this first wave, fresh civil codes or amendments
have appeared in places like Italy, the province of Quebec in Canada, the
Netherlands, Russia, Kazakhstan, Turkmenistan, Kyrgyzstan, Vietnam,
Mongolia, etc.
Civil law systems currently operate in many countries and regions in Europe,
Asia, Africa and Latin America. Typical examples in Continental Europe are
some ‘Latin countries’ like France, Belgium, Portugal, Spain and Italy, which
were strongly influenced by the French Civil Code; and certain ‘Germanic
countries’ such as Germany, Austria, Switzerland and the Netherlands, which
were significantly influenced by the German Civil Code. In Asia, three
Chinese jurisdictions (i.e. the mainland, Macau and Taiwan) adopted civil law
systems.
Civil law and common law systems differ in the main in their philosophical
pursuits. Civil law places a strong emphasis on logicality, rationalism and
the systemization of laws which are envisaged to be predictable, transparent
and stable. Judgements are made on the basis of what written law says and
the court’s interpretation of written law. A common law system, while not
loosening its grip on justice and fairness, seeks a flexible approach to tackling
practical problems. In doing so, it maintains an empirical and utilitarian
approach, and is inclined to be unburdened by existing rules when coming
across complex or unprecedented circumstances.
However, it should be noted that the differences between civil law and
common law have narrowed in recent years. As economic globalization
accelerates, people have begun to share similar views here and there relating
to legal reasoning, legal techniques or sources of law, and have also started to
mull over the likelihood of globalization in legal fields.
The categorization of law in civil law systems

A unique feature of civil law systems, including Chinese law, is that law is
divided into categories. While these may vary, normally law can be classified
into basic law and non-basic law, general law and special law, substantive
law and procedural law, national law and international law, and on a more
essential level public law and private law.
It should be borne in mind that the significance of some categorizations might

be no more than academic.
Basic law / Non-basic law

Law can be categorized into basic law and non-basic law.
Constitutional law is the basic law of the state, and has supremacy in terms
of status and binding force over all other laws (including not only the laws
promulgated at the national level, but also other official documents that have
legally binding effect issued in various forms such as rules, regulations,
decrees, circulars, orders, etc.). The essential political, economic and legal
systems of the state must be forged in compliance with the constitution.
All laws other than the constitution are viewed as non-basic laws, and
they are subject to the governance of the constitution. The promulgation
and application of non-basic laws should not at any time contravene the
constitution.
General law / Special law

Law can be categorized into general law and special law.
‘General law’ refers to legal provisions of a general nature that are applied
to all persons, regardless of subject matter or geographical location. Taking
Chinese law as an example, laws such as the General Principles of Civil Law,
the Criminal Law, the Civil Litigation Law, and the Criminal Litigation Law
can all be placed in the domain of general law.
Special law is created to have applicability only in special situations, in terms

of specified persons, subject matter or geographical location. The following
examples are again taken from Chinese law: the Law on Protection of Minors
and the Law on Protection of Disabled Persons solely apply to some specified
groups of people; the Basic Law of the Hong Kong Special Administrative
Region exclusively applies to Hong Kong; the application of the Law on
Regional National Autonomy is limited to autonomous regions of minority
nationalities; and the Contract Law applies to a specific aspect of civil law
regarding contracts.
As a special law is designed to address specific problems on top of a general

law, in principle a special law takes precedence over a general law.
Substantive law / Procedural law

Law can be categorized into substantive law and procedural law.
‘Substantive law’ refers to a set of rules and principles contained in each

major branch of law that governs the material rights and obligations of
subjects to which the law in question applies. For example, in a general sense,
civil law, criminal law, company law, contract law, the law of property, the
law of tort, etc., can be categorized as substantive law.
‘Procedural law’ refers to a set of rules that governs the forms and procedures
of litigation in connection with both dispute resolution under civil law and
prosecution under criminal law. In this sense, civil litigation law, criminal
litigation law, administrative litigation law, and law of arbitration, for
instance, can be taken as kinds of procedural law.
It is important to ensure the achievement of justice in both substantive and

procedural matters.
National law / International law

Law can be categorized into national law and international law.
‘National law’ (also known as ‘municipal law’ or ‘domestic law’) normally

refers to the internal law operative in an individual sovereign state.
In a narrow sense, international law means public international law

only. Public international law exists in the form of international treaties,
conventions and agreements; and internationally accepted standards and
customs. It governs the relations among sovereign states and international
organizations, with respect to issues such as crime-fighting, war, diplomacy,
judicial cooperation, human rights, delimitation of coastlines, environmental
protection, etc.
In a broad sense, international law includes public international law and

private international law.
Private international law is also known as ‘rules of conflict of laws.’ The

sources of law in private international law consist of national laws in the
main, and some international conventions and customs. Private international
law determines the applicability of a national law that will govern a specific
cross-border civil and/or commercial matter in connection with natural and
legal persons other than states and international organizations. Specifically it
regulates matters such as in which jurisdiction a case with cross-border factors
is eligible for being heard and adjudicated, what national law governs the
rights and duties of the persons in a dispute if foreign elements are involved
in the case, and whether judgments rendered by foreign courts or overseas
arbitral awards can be recognized and enforced in another jurisdiction.
International law is proliferating in this period of globalization. With more

and more international cooperation at various levels, it is arguable whether the
traditional division between public international law and private international
law will continue to be meaningful, when in many cases involvement of
private persons as well as states and perhaps international organizations may
need to be concurrently called for.
Public law / Private law

Law can be categorized into public law and private law.
In civil law systems public law and private law (an invention of Roman law)
are seen as two essential limbs of law. From a historical standpoint, public
law is normally viewed as a set of rules for state politics, whereas private law
is for civil society; thus civil law is synonymous with private law.
Theoretically, public law regulates relations between the state (and its affiliates
which are entitled to exercise certain state powers) and persons or organizations
that have no state power. So power and obedience form the basis of public law.
Constitutional law, criminal law, administrative law and tax law are examples
of public law.
Civil law is supposed to govern the relations between equal subjects, i.e.
between natural persons and/or legal persons having no power and obedience
relations. In this respect, company law, partnership law and contract law are
examples of private law.
In a civil law system, the division between public law and private law plays
an important part in constructing appropriate institutions as regards a number
of issues, for example, resorting to the means of assistance or sanction, opting
for courts to hear and handle certain types of cases and determining the
propriety of legal procedures.
Traditionally, there have been two theories regarding the relations between
public law and private law.
One is the public law priority theory. According to this theory, private law
gives way to public law, in the sense that public power governs all aspects
of life and social relations; the state can withhold the rights granted to
individuals, and it can do so on the ground that personal interests need to be
sacrificed for the sake of the interests of society.
The other is the private law priority theory. In this theory, the purpose of
creating public law is to protect individuals’ private rights; private rights are
deemed to be sacrosanct and inviolable; in a civilized society, deprivation
without legitimacy of people’s private rights is strictly prohibited.
In practice, there has been increasing interchange between the application

of public law and that of private law, which overlap on many occasions. The
traditional view on private law is being adjusted amid the widespread slight
shift in most mature economies in the world from advocating a laissez-faire
approach towards being more like welfare states. On the other hand, private
law doctrines (e.g. respect for freedom and equality and abiding by contracts)
have exerted an ever greater influence on the substance of public law, leading
to public law being privatized in certain places.
An overview of the Chinese legal system

Historically, Chinese legal culture has been quite influential in Asia. It seems
that ancient Chinese law did not have the categories of civil law and criminal
law. Criminal sanctions were emphasized and little attention was paid to
protecting individuals’ civil rights. Moreover, legal philosophy conceded
that individuals were not equal before the law, and different laws applied to
different people principally depending on social position.
Chinese legal philosophy was strongly influenced by Confucianism, which

advocated ‘ruling by custom, by virtue and by people.’ Another influential
school was Legalism. It upheld the use of strict laws and harsh punishments
to control society.
After the Opium Wars in the nineteenth century, the Chinese legal system
started to be significantly influenced by Western jurisprudence. In the early
twentieth century (i.e. in the late Qing dynasty), the Chinese government
organized the drafting of a series of law codes based on German law. In
1911 the Draft Civil Code of the Great Qing was created; however, it was
not implemented because the Qing dynasty was overthrown during the 1911
Xinhai Revolution.
Later on, when the government of the Republic of China (controlled by the
Kuomintang) took power in China, the law codes of the country were further
developed into Six Codes, which were systematically constructed in the fields
of constitutional law, civil law, commercial law, criminal law, civil litigation
law and criminal litigation law. The key components of a Civil Code were
promulgated in 1929 and 1930.
With the founding of the People’s Republic of China by the Chinese Communist
Party in 1949, the existing legal system was abolished on the mainland. A
socialist legal system was quickly set up in the 1950s and 1960s. At that time,
the fledging Chinese legal system was tremendously influenced by the USSR:
state power and public ownership played a prominent role in all spheres of life.
During the Cultural Revolution in China from 1966 to 1976 there was a
breakdown in the legal regime and legal development came to a standstill.
China started to implement a policy of economic reform and opening-up

in the late 1970s. From the early 1990s a socialist market economy was
developed by giving up the planned economy that had been in place for
over four decades. The change in the economic landscape fuelled all-round
development of China’s legal system. This accelerated after China’s accession
to the World Trade Organization in 2001.
Today, a relatively complete legal system exists that accommodates China’s

political and economic objectives. It is based on civil law systems, and
in particular the German system. It has also absorbed some common law
philosophies (especially in business law fields) in order to comply with
international practice.
The current legal framework

China’s legal framework exists within the context of the powers vested in
various state organs. According to the Constitutional Law, the National
People’s Congress (NPC) is the highest state power. Along with its Standing
Committee, it exercises the state’s legislative power (Articles 57 and 58).
The Chinese president and vice president are elected by the NPC (Article
79, paragraph 1). The State Council has the greatest executive power and is
the highest executive body (Article 85). The people’s courts, among which
the Supreme People’s Court is the highest, constitute China’s judicial bodies
(Article 123; Article 127, paragraph 1). The people’s procuratorates oversee
the enforcement of law, with the Supreme People’s Procuratorate at the
highest level (Article 129; Article 132, paragraph 1). The Central Military
Commission leads China’s armed forces, and its chairman is accountable to
the NPC and its Standing Committee (Article 93, paragraph 1; Article 94).
China’s legal system is characterized by the enactment and application of

statutes that govern all aspects of life. In 2000, the Law on Legislation was
promulgated providing a general framework under which the fundamental
principles and procedures of legislation are provided in detail. The Law
on Legislation was enacted according to the Constitutional Law, which
has supreme legal force over all other sources of law. Apart from the
Constitutional Law, there are other sources of legislation in a broad sense. In
terms of supremacy and precedence, these are as follows:
1 the Constitutional Law
2 laws at the national level

3 administrative regulations of the State Council
4 local regulations on the provincial and municipal levels and self-

governing regulations of autonomous regions of minority nationalities
5 rules issued by the State Council’s departments/committees and various

local governments.
Items 2 to 5 above can be made, amended or annulled pursuant to the Law on

Legislation (Law on Legislation, Articles 1, 2 and 78).
According to the Law on Legislation, the power of legislation at the national

level is solely vested in the NPC and its Standing Committee (Article 7,
paragraph 1). Enactment and amendment of laws on the national level with
respect to civil and criminal matters, state organizations, etc. fall within the
scope of legislation of the NPC (Article 7, paragraph 2). Enactment and
amendment of laws on the national level not within the scope of legislation
of the NPC is carried out by its Standing Committee (Article 7, paragraph
3). Its Standing Committee is also empowered to revise laws made by the
NPC when the NPC is not in session (Article 7, paragraph 3). Moreover, the
power of interpreting laws belongs to the Standing Committee (Article 42,
paragraph 1).
The administrative regulations that apply to the whole country are issued
by the State Council pursuant to the Constitutional Law and the laws
promulgated at the national level (Law on Legislation, Article 56, paragraph 1).
The people’s congresses of provinces, autonomous regions and municipalities

that are under the direct governance of the central government can formulate
local regulations of their own that apply to their jurisdictions only, given that
those local regulations do not contravene the Constitutional Law, the general
laws issued at the national level or the administrative regulations that apply to
the whole country issued by the State Council (Law on Legislation, Article 63,
paragraph 1). The autonomous regions of minority nationalities can formulate
self-governing regulations by taking into account the uniqueness of the political,
economic and cultural attributes of their localities. These self-governing
regulations exclusively apply to the autonomous regions that formulate them.
These regions can adapt the laws promulgated at the national level and the
administrative regulations issued by the State Council applying to the whole
country to accommodate local conditions (Article 66; Article 81, paragraph 1).
The State Council’s departments (including the various ministries and

committees/commissions, the People’s Bank of China, the Auditing
Department, and the administrative organizations directly affiliated with the
State Council) can formulate their own rules (Law on Legislation, Article 71,
paragraph 1). Local governments can do so as well (Article 73, paragraph 1).
As to supremacy and precedence, the Law on Legislation sets out a number

of principles. Firstly, the Constitutional Law is given the status of supremacy,
so all other laws promulgated on the national level, the administrative
regulations issued by the State Council, the local regulations on the provincial
and municipal levels and the self-governing regulations of autonomous
regions of minority nationalities, and the rules issued by the State Council’s
departments/committees and various local governments, shall not contravene
the Constitutional Law (Law on Legislation, Article 78). Secondly, the laws
promulgated on the national level take precedence over the administrative
regulations issued by the State Council, the local regulations on the provincial
and municipal levels, and the rules issued by the State Council’s departments
or committees and various local governments (Article 79, paragraph 1). Thirdly,
the administrative regulations issued by the State Council are superior to the
local regulations on the provincial and municipal levels, and the rules issued
by the State Council’s departments/committees and various local governments
(Article 79, paragraph 2). Fourthly, the local regulations on the provincial and
municipal levels prevail over the rules formulated by local governments on the
same or lower level (Article 80, paragraph 1). And fifthly, the rules issued by the
State Council’s departments/committees hierarchically have the same binding
force as the rules formulated by various local governments (Article 82).
As to the relationship between general law and special law as well as

between new law and old law, the Law on Legislation contains the following
prescriptions regarding laws promulgated on the national level, administrative
regulations issued by the State Council, local regulations at the provincial
and municipal levels and self-governing regulations of autonomous regions
of minority nationalities, and rules issued by the State Council’s departments/
committees and various local governments: if there is any difference between
the general provisions and the special provisions formulated by the same
lawmaker, the special provisions will prevail; if there is any discrepancy
between the new provisions and the old provisions formulated by the same
lawmaker, the new provisions will prevail (Article 83).
The Law on Legislation also provides that law is non-retrospective, unless

allowing retrospective effect is for the special circumstance of better
safeguarding the rights and interests of citizens, legal persons and other
organizations (Article 84). This is important because in principle people
are allowed to do anything that is currently not prohibited by law. If laws
are retrospective, acts before the promulgation of a law may be punished
retrospectively, giving rise to dire and unfair pitfalls.
Branches of law in Chinese jurisprudence

Academia in China has an inclination towards organizing laws into
branches. While there is no standard list of branches, the following ten
branches, which can be found in many textbooks written by Chinese
scholars (Yan 2003, 59–65; Ge 2007, 150–54; W X Zhang 1999, 81–84),
can serve as a reference:
1 Constitutional law, including laws such as the Constitutional Law, and

constitutional documents like the Organic Law of National People’s
Congress, Organic Law of State Council, Organic Laws of Local
People’s Congresses and Governments at Various Levels, Organic Law
of People’s Courts, Organic Law of People’s Procuratorates, Electoral
Law of National People’s Congress and Local People’s Congresses at
Various Levels, Nationality Law, Law on National Flag, Law on Regional
Autonomy of Minority Nationalities, etc.
2 Civil and commercial law, including laws such as the General Principles
of Civil Law, Contract Law, Property Rights Law, Tort Liability Law,
Copyright Law, Patent Law, Trademark Law, Marriage Law, Law of
Succession, Law of Adoption, Company Law, Sino-Foreign Equity
Joint Venture Enterprise Law, Sino-Foreign Cooperative Joint Venture
Enterprise Law, Wholly Foreign-Owned Enterprise Law, Securities Law,
Maritime Law, Law on Negotiable Instruments, Law of Trusts, Insurance
Law, Bankruptcy Law, etc.
3 Criminal law, including the Criminal Law.
4 Administrative law, including laws such as the Law on Administrative

Penalty, Law on Administrative Supervision, Law on Administrative
Reconsideration, Law on Administrative Permission, Law on State

Compensation, Customs Law, etc.
5 Litigation and non-litigation procedural law, including laws such as the

Civil Litigation Law, Criminal Litigation Law, Administrative Litigation
Law, Arbitration Law, etc.
6 Economic law, including laws such as the Tax Law, Law on Commercial
Banks, Law on Product Quality, Anti-Unfair Competition Law, Anti-
Monopoly Law, Foreign Trade Law, etc.
7 Labour law, including laws such as the Labour Law, Employment

Contract Law, Employment Promotion Law, Trade Union Law, etc.
8 Laws on science, education, culture and health, including laws such as the
Law on Progress of Science and Technology, Education Law, Compulsory
Education Law, Higher Education Law, Vocational Educational Law,
Law on Protection of Culture Heritage, Archives Law, Pharmaceutical
Administrative Law, Food Hygiene Law, etc.
9 Resources and environmental protection law, including laws such as the

Land Administration Law, Water Law, Forest Law, Fishery Law, Mineral
Resources Law, Law on Water and Soil Conservation, Environmental
Protection Law, Law on the Protection of Wildlife, etc.
10 Military law, including laws such as the National Defence Law, Military
Service Law, Garrison Law of the Hong Kong Special Administrative
Region, Garrison Law of the Macao Special Administrative Region, etc.
From the founding of the People’s Republic of China in 1949 up to the end
of 2010, in terms of the laws that are still in effect, the National People’s
Congress and its Standing Committee enacted 236 statutes, the State Council
issued around 690 administrative regulations, and local people’s congresses
at various levels and their standing committees released about 8,600 local
regulations (Xinhua 2011).
This concludes the overview of law and legal systems, including the Chinese
legal system. The next section moves on to the main theme of this book: civil
law.
The structural components of civil law 21
The structural components of civil law

The Chinese legal system basically follows the practice of Continental
European jurisdictions where civil law systems prevail. In most places where
a civil law system is adopted, civil law is deemed as a cornerstone of private
law, and it normally exists as a codified branch of law in the form of a civil
code.
The French Civil Code (1804) and the German Civil Code (1896) stand out
as the most influential models. The German Civil Code was enacted almost a
century later than the French Civil Code, and its authors learned from earlier
work in the civil law field. The German Civil Code is considered to have a
more systematic and logical structure and more explicit and precise legal
wording than any earlier civil codes.
A major difference between the French Civil Code and the German Civil
Code is the absence of a single chapter on general principles in the French
Civil Code. From a theoretical point of view, the German model is generally
composed of three major elements, i.e. general principles of civil law, laws on
persons and laws on things.
The general principles of civil law manifest some basic ingredients of civil
law in connection with both persons and things. They relate to civil rights,
civil subjects (including natural persons and legal persons), things, juristic
acts, agency and limitations of actions.
‘Laws on persons’ generally refers to family law and the law of succession.
Laws on things can be classified into the law of property and the law of
obligations. The law of property (i.e. property rights law) focuses on issues
such as ownership, usufructuary rights, security rights and possession.
The law of obligations governs the creation and discharge of obligations,
contracts, torts and some other important concepts relating to obligations such
as negotiorum gestio and unjust enrichment.
Civil law in China

The German model strongly influenced Chinese law in the field of civil law.
Since the founding of the People’s Republic of China, there have been three
major attempts to construct a civil code, in 1954, 1962 and 1979, but none
succeeded, and China has yet to promulgate a civil code.
In the absence of a civil code, the National People’s Congress approved

passage of the General Principles of Civil Law in 1986, which was
promulgated as a kind of tentative civil code laying down the foundation of
legal regulations in connection with civil matters. At that time the civil law
regime in China was still in its initial stages of development. Since then a
civil law framework has been gradually developed.
Although China does not yet have a civil code, laws on many civil matters (in
the wider sense, including commercial matters) can now be found in many
single statutes, including the General Principles of Civil Law, Contract Law,
Land Administration Law, Urban Real Estate Administration Law, Farmland
Contracting Law, Property Rights Law, Tort Liability Law, Sino-Foreign
Equity Joint Venture Enterprise Law, Sino-Foreign Cooperative Joint Venture
Enterprise Law, Wholly Foreign-Owned Enterprise Law, Company Law,
Partnership Law, Patent Law, Trademark Law, Copyright Law, Marriage Law,
Adoption Law, Law of Succession, etc. Moreover, various administrative
regulations and rules governing civil matters have been issued by the State
Council and local legislatures and governments, which, in conjunction with
the relevant judicial interpretations of the Supreme People’s Court and the
relevant international treaties, agreements and customs in the fields of civil
law, also constitute important sources of law under China’s civil law regime.
A prospective Chinese civil code, if released in the future, is quite likely to be

based on the German model.
The nature of civil law

In a modern society, various relationships are formed in everyday life arising
from business transactions and social dealings. Such relationships can be
boiled down to two general types. The first is a relationship established on
an equal basis, in terms of legal status, between private individuals, between
private individuals and organizations, or between different organizations,
no matter whether the parties involved are natural persons or legal persons
(regardless of whether or not any party involved is a government department
or government agency vested with state power). The other is a relationship
The nature of civil law 23
forged on an unequal basis, in terms of legal status, between private individuals/

organizations without any state power and government departments/agencies
vested with state power.
As an illustration, when somebody buys food at a supermarket, the

transaction gives rise to a contractual relationship between the person and
the supermarket on the basis that the person’s legal status and that of the
supermarket are equal. However, when a person pays personal tax to the
government, the person’s relationship with the government is compulsorily
formed for the purpose of fulfilling the tax obligations that are imposed on the
person by the government. In this circumstance the person’s relationship with
the government is not forged on an equal basis.
Civil law concerns the first kind of relationship only, i.e. the relationship
established on an equal basis in terms of legal status.
Pursuant to China’s General Principles of Civil Law, ‘civil law’ is defined

as governing property relations and personal relations between parties (i.e.
persons) of equal status, including such relations between citizens (i.e. natural
persons), between legal persons, or between citizens and legal persons (Article
2). The parties when engaged in civil activities are of equal status (Article 3).
Here, property relations are mainly in connection with proprietary rights and
creditors’ rights. The former are regulated by the law of property (i.e. property
rights law), and the latter by the law of obligations (e.g. the law of contract).
Personal relations are based on individuality and the formation of derivative
identity. ‘Individuality’ refers to the civil rights vested in each individual (such
as the portrait right, the right to reputation, etc.). The formation of derivative
identity can be illustrated in relationships arising from marriage, child-bearing
and adoption.
Then, what is the relationship between civil law and business activities? Here
is an example. John Li and Samuel Wang formed a partnership in Beijing
for running a food business. As their business grew rapidly, they decided
to turn the partnership into a limited liability company. The business of the
company was very successful, attracting more and more customers. However,
some customers, after signing contracts, defaulted on their payments to the
company.
This example illustrates that business activities can always be subject to

regulation under a civil law framework: the establishment of a partnership is
governed by the Partnership Law; converting the partnership into a limited
liability company requires going through the procedures and meeting the
requirements of incorporation which are prescribed by the Company Law;
selling products to customers gives rise to contractual relationships subject
to the Contract Law; default of payment leads to a breach of contract, the
consequence of which is also provided in the Contract Law. The Partnership
Law, the Company Law and the Contract Law are all within the domain of
civil law.
In a nutshell, as opposed to constitutional law, which is the cornerstone of

public law, civil law is fundamental to private law. Civil law is a substantive
law directing human conduct in civil activities. It is not punitive. It is most
commonly enforced by relying on monetary compensation.
Fundamental civil law doctrines

There are a few fundamental doctrines of civil law that guide conduct in civil
activities and serve as a yardstick for the court to determine civil wrongs.
Strict adherence to these doctrines facilitates business transactions and social
dealings, and the protection of citizens’ rights.
These doctrines are private law autonomy, equality, fairness and impartiality,
good faith, and good public order and social customs.
Private law autonomy

The doctrine of private law autonomy emphasizes the importance of
respecting the free will of individuals as regards the formation of a civil law
relationship. Essentially, people are free. Given that no prohibition or restriction
is imposed by law, people can do what they want at will. For example, they
are free to dispose of assets, to make post-death arrangements for estates, to
set up businesses by incorporation, or, as more commonly encountered, to
enter into contracts.
The freedom to make a contract is particularly meaningful, because

contractual relationships are formed in everyday life. Such freedom permeates
Fundamental civil law doctrines 25
each and every phase of contract establishment and implementation. So in this

sense, it can be further divided into the freedom to enter into a contract, the
freedom to choose with whom to make a contract, and the freedom to decide
the content and the form of a contract.
The doctrine of private law autonomy applies to all private law relationships.
The rationale is that business transactions and social dealings are made
according to individuals’ free will. Such free will should not be unreasonably
interfered with by the state, which would slow down or hinder the efficiency
of civil activities. In light of the doctrine of private law autonomy, the
doctrine of the sanctity of private rights is derived, which further emphasizes
the supremacy of people’s civil rights and the necessity of protecting those
rights from interference by the state.
Private law autonomy is a driving force behind an efficient market economy

and the safeguarding of private rights and wealth from arbitrary interference
by the state. However, excessive autonomy may exacerbate social injustice
by increasing the uneven distribution of wealth and bargaining power.
To alleviate this problem, the state must create certain standards to limit
exploitation of private law autonomy. Many countries have done this
through sound social welfare systems and other means of caring for the
disadvantaged.
The doctrine of private law autonomy can be found in Article 4 of the General
Principles of Civil Law, which mentions voluntariness as a basis on which
civil activities are conducted.
Equality
The core of the doctrine of equality is that all persons in civil activities are
of equal status and no person is allowed to impose his will on other persons.
Nevertheless, the equality concerned is limited to opportunities only, and does
not embrace results.
In other words, civil law attempts to offer a level playing field as a starting
point on which all persons can compete equally. But it cannot guarantee that
business transactions and social dealings will bring about equality in final
outcomes. The result of competition is likely to be different for each person.
The doctrine of equality is advocated in the General Principles of Civil Law,

which provides that civil subjects when engaged in civil acts are of equal status
(Article 3) and all citizens’ capacity to exercise civil rights is equal (Article 10).
Fairness and impartiality

The doctrine of fairness and impartiality can be understood from the
standpoint of carrying out civil activities in a fair and unbiased way. In order
to achieve such fairness and impartiality, the resolution of problems arising
from civil activities must be based on facts and be in accordance with the law.
Resolution should be detached from the influence of authorities or powers or
the blindness of rigidly adhering to rules and regulations.
Essentially, the pursuit of fairness and impartiality stems from a desire

for justice. This is common to every society, although such justice can be
construed and interpreted in various ways by different people, in different
places and at different times.
The doctrine of fairness and impartiality can be found in Article 4 of the

General Principles of Civil Law which requires that civil activities be carried
out in a fair fashion and comply with the principle of equal price. However,
this principle cannot be narrowly interpreted. For example, somebody may
want to pay $100,000 for a jacket previously worn by a retired football
superstar. Whether others think this is a fair price or not does not affect the
validity of the transaction, which is supposed to be effected according to the
buyer’s free will.
Good faith
According to one online legal dictionary, ‘good faith’ (bona fide in Latin)
refers to ‘honesty; a sincere intention to deal fairly with others’ or ‘a
sincere belief or motive without any malice or the desire to defraud others’
(TheFreeDictionary).
The core of the doctrine of good faith is the honesty based on which business
transactions and social dealings are conducted. It is in the context of this
doctrine that judges construe the law, especially when legal vacua require the
interpretation of the law pursuant to the spirit of good faith.
Summary 27
The doctrine of good faith is covered in Article 4 of the General Principles

of Civil Law, which requires people to follow the principle of honesty and
credibility in civil activities.
Good public order and social customs

The doctrine of good public order and social customs denotes a legal
requirement that the nature of a civil act must be commensurate with
mainstream moral and ethical standards in a society. This refers to the
moral and ethical standards generally acknowledged and accepted under the
prevailing ideology advocated in a society.
In Chinese society, this doctrine mainly relates to issues like managing society
in the spirit of the rule of law, safeguarding human rights, taking care of
vulnerable people, etc. Like the doctrine of good faith, judges often use this
legal principle as a yardstick to determine parties’ rights and obligations when
adjudicating disputes. They do so with a view to upholding mainstream moral
and ethical standards for the sake of the interests of the majority.
Under Article 7 of the General Principles of Civil Law, in civil activities

people need to observe social ethics, and not injure public interest, damage
economic plans of the state or distort the order of economic activities. This
provision is a means of advocating good public order and social customs.
Summary
In China and in the wider world there is no standard description of law. Law
is understood by Chinese academia as being created by the state at a certain
point in human history, and being enforceable by state machines. Law governs
important human conduct only.
Common law and civil law are the two major legal systems in the world.
China’s law regime bears the distinctive features of a civil law system. Chinese
law can be categorized into ten general branches of law: constitutional law;
civil and commercial law; criminal law; administrative law; litigation and
non-litigation procedure law; economic law; labour law; laws on science,
education, culture and health; resources and environmental protection law;
and military law.
China has not yet promulgated its civil code. However, there is a civil law
framework in China, which is composed of single statutes on many civil
matters (in the wider sense, including commercial matters), along with various
administrative regulations and rules issued by the State Council and local
jurisdictions, the relevant judicial interpretations of the Supreme People’s
Court, as well as the relevant international treaties or agreements and customs.
Under Chinese law, the role of civil law is understood as governing the property
relations and personal relations between civil subjects of equal status.
The fundamental civil law doctrines include private law autonomy, equality,
fairness and impartiality, good faith, and good public order and social customs.
Practice questions
1 Mrs Wang, an entrepreneur, has chronic liver disease and receives
frequent treatment by Dr Li. Last month, Dr Li told Mrs Wang that he was
a 10% shareholder in a promising pharmaceutical company, and willing to
sell her a part of his stake in the company for RMB 1 million. This price
was much higher than the market value of the shares. Mrs Wang agreed.
Shortly thereafter, the value of the shares dropped sharply, so Mrs Wang
suffered a huge loss.
‘In accordance with the doctrine of private law autonomy, the stake
transfer between Dr Li and Mrs Wang was a valid transaction.’ Is this a
reasonable view?
2 Huang is the founder of a company, ABC. He is a shareholder of ABC,

holding a 70% stake in the company. ABC and Huang have entered into
an employment contract, according to which Huang is paid a monthly
salary for his service as the company’s chief executive officer.
Huang recently applied to join ABC’s employee health insurance scheme,

but the insurer turned down his application on the ground that ABC is his
company and he cannot be counted as an employee.
Discuss.
3 TT is an insurance company in Shenzhen. According to the latest statistics

released by Shenzhen TV, more than half of drivers given breath-tests last
month were drink-driving at night.
Yang is a manager at TT. He proposes that the company design a new kind
of insurance covering all drink-driving accidents. He believes launching
such insurance perfectly conforms to the spirit of freedom of contract,
because whether customers buy it is entirely up to them.
Is Yang’s proposal reasonable?
Guidelines for answers

1 In principle, people should be free to determine with whom to enter
into contracts and to choose the terms and conditions of their contracts,
providing that nothing contravenes law. The key point in this case is
whether under the doctor–patient relationship Mrs Wang voluntarily
transacted without succumbing to any duress and undue influence.
2 A company is an independent legal entity separate from its shareholders

personally. In theory, there should be nothing wrong with Huang being
employed by his company. Unless his employment contract was entered
as a sham, in light of the doctrine of fairness and impartiality his status as
the major shareholder of ABC should not affect his eligibility for joining
the company’s employee health insurance scheme.
3 Pursuing private law autonomy and freedom of contract must not

contravene the doctrine of good public order and social customs that
disallows any act from violating the law or deviating from mainstream
moral and ethical standards. Drink-driving is an offence punishable under
the law. Offering insurance that covers drink-driving accidents is no
different from encouraging drink-driving, and will harm public security.
Chapter 2
General principles of civil law
Introduction
As noted in Chapter 1, Chinese civil law governs property relations and personal
relations between civil subjects of equal status. It is basically structured on the
German model, under which civil law is generally composed of three major
elements: general principles of civil law, laws on things and laws on persons.
The general principles of civil law are of relevance to both persons and things,
and relate to civil rights, civil subjects (including natural persons and legal
persons), things, juristic acts, agency and limitation of actions, which are the
topics of this chapter.
Laws on things can be classified into the law of property and the law of
obligations. The law of property (i.e. property rights law) focuses on issues in
connection with immovable property and movable property, such as ownership,
usufructuary rights, security rights and possession. The law of obligations
principally relates to the creation and discharge of obligations, contracts, torts
and some important concepts like negotiorum gestio and unjust enrichment.
Laws on persons chiefly comprise family law and the law of succession.
China has not yet promulgated a civil code. At present, the Chinese civil law
regime relies on scores of single statutes mostly in the form of laws governing
specific civil matters (in the wider sense, including commercial matters),
such as the General Principles of Civil Law (hereinafter referred to as the
‘GPCL’),1 Contract Law, Property Rights Law, Tort Liability Law, Marriage
1 The GPLC (in Chinese) can be found at: http://news.xinhuanet.com/legal/2003-01/21/content_

5679530.htm. There is no official English version. The author uses his own English translation
in this book. Another English translation is available at: http://www.npc.gov.cn/englishnpc/
Law/2007-12/12/content_1383941.htm.
Civil rights 31
Law, Adoption Law, Law of Succession, etc. The components of the civil law
framework also include a slew of administrative regulations and rules issued
by the State Council and local jurisdictions; relevant judicial interpretations
of the Supreme People’s Court; and relevant international treaties, agreements
and customs.
Civil rights
In property relations and personal relations between civil subjects of equal
status, a civil subject, whether a natural person or a legal person, is vested by
civil law with certain rights, which allow the civil subject in everyday life to
do something, not to do something, or to gain entitlement to oppose other civil
subjects doing something. Such rights can be generally perceived as civil rights.
The definition of ‘civil rights’

Civil rights are derived from the law. They are legally enforceable and
protected by the law. However, it is difficult to define ‘civil rights.’ Doctrines
about civil rights stem from the civil law jurisdictions that occupy a
predominant position in Continental Europe. But even in those jurisdictions,
there is no standard definition of ‘civil rights.’
While ‘civil rights’ appears to be an abstract legal term, civil rights, in

essence, describe what one can do, while civil obligations indicate what one
must do. For average citizens, enjoying rights and fulfilling obligations are
two sides of the same coin. It is impossible to enjoy rights without fulfilling
obligations. Nor is it likely that one would be asked to only fulfil obligations
without being given any rights to enjoy. For example, in many places people
have the right to enjoy free or affordable public schools, hospitals and
libraries. On the other hand, it is virtually an ineluctable obligation to pay tax
to the government.
Within the scope of civil law, people possess civil rights that entitle them to
do whatever they desire to do, given that no prohibition against or restriction
on doing so has been imposed by the law. Hence, no person or organization
(including the government) is allowed to restrain people’s freedom of
exercising their civil rights.
32 General principles of civil law
For example, if the law does not stipulate that people need to pay estate tax or
inheritance tax, tax will not be levied when the property of a deceased family
member is transferred to them. The government is not in a position to request
people to pay estate tax or inheritance tax without a sound legal basis. In
other words, the right of enjoying tax holidays in this regard is subject to no
intervention by the government.
Similarly, a university cannot decline a hepatitis B carrier’s application for

admission if the law does not expressly provide that a person with such
a health status is not allowed to be admitted as a university student. So a
hepatitis B carrier’s right to become a university student cannot be denied on
the basis that he has this illness.
However, freely enjoying civil rights does not mean that exercising civil rights
will not be subject to any restriction at all. The government may intervene in
certain circumstances by employing its public power to block the exercise of
civil rights if such power is granted by the law in order to prevent civil rights
from being excessively or abusively exercised.
On the whole, exercising civil rights in China shall accord with Article 51 of
China’s Constitutional Law,2 which stipulates that a person when enjoying
his freedom and exercising his rights must not infringe on the interests of
the state, the society or the collective, or on the lawful freedom and rights of
other persons. Moreover, civil rights should be exercised in compliance with
the fundamental civil law doctrines covered in Chapter 1, such as good faith,
good public order and social customs, etc.
Take the following example. Professor Li, President of Golden Sunshine

University in Shanghai, is strongly against full-time university students
getting married before they finish their studies. He believes that getting
married and having a baby will adversely affect a student’s university life and
is also morally inappropriate at such a young age, even though most university
students may have statutorily reached majority. The university recently
released a notice to all its students advising them that ‘it is the university’s
2 China’s Constitutional Law (in Chinese) can be found at: http://www.gov.cn/gongbao/

content/2004/content_62714.htm. There is no official English version of this law. The author uses
his own English translation in this book. Another English translation is available at: http://www
.npc.gov.cn/englishnpc/Law/2007-12/05/content_1381903.htm.
Civil rights 33
new policy that any student who gets married before graduation will be
immediately dismissed from the university.’ Is the university in a position
to dismiss a student if the student fails to abide by this notice? The answer
is that university policy cannot override the law. Since no legal prohibition
is imposed on the right of university students to get married, dismissing a
student under such scenario is against the law.
How are civil rights categorized in China?

Chinese academia tends to categorize concepts, perhaps out of the need to
construct theoretical frameworks that appear well-structured and systematic.
It is open for discussion whether such categorizations are reasonable or
important; nevertheless, it is useful to have a basic understanding of the
rationale behind them.
In Chinese jurisprudence, civil rights are generally categorized into property

rights and non-property rights based on the subject matter embodied in
the rights. However, from the angle of achieving different objectives by
exercising civil rights, there is another method of categorization in which civil
rights are categorized under the right of dominion, right of claim, right of
formation or right of defence.
Property rights and non-property rights

Categorizing civil rights into property rights and non-property rights seems
to be the most practical method and the easiest to apprehend as it focuses on
subject matter.
Property rights
‘Property rights’ refers to those civil rights that normally have an economic
value. This means they can usually be measured in monetary terms. They
have nothing to do with a person’s personality or personal identity. Rights
on visible and physical assets, rights exercisable by creditors and rights over
invisible property (e.g. intellectual property) can all be considered property
rights.
Non-property rights
‘Non-property rights’ refers to those civil rights that normally are
indistinguishable from rights of personality and rights of personal identity.
Rights of personality subsist in a person’s own self, and can be expressed in

various forms, such as the right to life and health, the right to a name, the right
to reputation, the right to public esteem, the portrait right, etc.
Rights of personal identity are built on specific personal relationships, such

as the right of parents over their children who have not reached majority, the
right of spouses and the right of family members arising from the relationships
formed on the basis of descent, marriage, adoption, etc.
In general, property rights have an economic value, whereas non-property

rights do not. But this is not always the case. A property right may exist over a
confidential private letter which may not be measurable in monetary terms but
could be highly valued by its author and/or the person it was addressed to. In
contrast, as a kind of non-property right, the portrait right of a celebrity will
most likely carry an economic value; if it is infringed, the right holder can
claim for damages which are economically measurable.
The rights of dominion, claim, formation and defence

The categories of right of dominion, right of claim, right of formation and
right of defence aim at exhibiting the nature of civil rights from the standpoint
of pursuing different objectives. Such categorization is in fact more of
an academic necessity than of practical relevance, so it may appear too
theoretical and perhaps less accessible to readers.
The right of dominion

The literal meaning of ‘right of dominion’ is a kind of civil right which
allows a specific person to control the subject matter embodied in the right
exclusively, freely and independently.
Rights on visible and physical property in a general sense, rights over

intellectual property, rights of personality, rights of personal identity, etc., can
all be viewed as rights of dominion.
Civil rights 35
The right of dominion is exercisable entirely at the discretion of a person who

is entitled to such right. He can freely exercise such right in an independent
fashion, and is not required to seek consent from any other person on earth
for doing so. In this sense, the right of dominion is of an exclusive nature.
However, its exclusivity must be publicized in a certain manner (e.g. by
registration) in order to tell the public at large that such right exists and
to prevent any infringement and interference that may cause injury to the
exclusive enjoyment of the right.
The right of claim

‘Right of claim’ refers to the right of a person to request another person to do
something or not to do something.
The right exercisable by a creditor over a debt due to him might be given as
an example of the right of claim. It can be deduced from this example that
the right of claim relates to specific persons only, rather than to the public at
large. A creditor is entitled to exercise his right of claim for a debt, but his
claim can only be made against his debtor. The subject matter with respect to
the creditor’s right of claim is in the debtor’s possession. The objective sought
after by the creditor cannot be achieved by exercising such right of claim
if the debtor does not favourably respond to his claim. When this happens,
taking court action will be an option for the creditor.
Sometimes it may not be easy to distinguish between the right of claim and
the right of dominion. Say T finished writing a novel last month. What kind of
right does T have over this novel: the right of claim or the right of dominion?
T owns the copyright over his novel, which can be deemed as a kind of right
of dominion because T’s such right is exclusive and is exercisable against
the whole world rather than any specific person, and as T can freely and
independently fight against any infringement of his copyright. The right of
claim, on the other hand, is exercisable between specific persons only.
The right of formation

In the spirit of private law autonomy, the formation and variation of a legal
relationship shall only be carried out after the parties which establish such
relationship reach consensus on doing so.
‘Right of formation,’ however, refers to the right granted by the law, which is
exercisable by one party under exceptional circumstances to alter or revoke
an established legal relationship unilaterally according to his own will. The
rights of revoking, discharging or ratifying a contract can be viewed as rights
of formation.
The right of defence

The right of defence can be taken as the counterpart of the right of claim.
The sine qua non (which roughly means the ‘indispensable ingredient’) of
exercising the right of defence by one person is the exercise of the right of
claim by another person against him. In order to assert his right of defence,
the former has to admit in the first instance that the latter is entitled to exercise
his right of claim. If the former denies the latter’s right of claim, the former
will not be in a position to exercise his right of defence accordingly.
Say Alan makes a claim against Betty for RMB 20,000 that he lent her and
that she failed to pay him back on time. If Betty refuses to repay Alan on
the ground that he never lent her such money, she is exercising her right of
denial, but not her right of defence, because she does not accept Alan’s claim
that she owes him money. However, if Betty argues that she was supposed
to repay Alan RMB 18,000 (rather than RMB 20,000), she is exercising her
right of defence since she admits she owes Alan some money, but disputes the
amount.
Here is an example that covers the various rights discussed above. Great
Land has its own plants and the patents for its products. It entered into
a contract with Golden Sunshine for purchasing raw materials. The raw
materials delivered by Golden Sunshine were intolerably defective, but
Golden Sunshine refused to replace the goods. Earlier, under another contract,
Great Land sold its products to Silver Moonlight and it delivered the goods
on time. Four years had passed since the deadline for making payment, but
Silver Moonlight had not paid Great Land. What types of civil rights if any
does each of these companies have and can each of them exercise? The
answer is that Great Land is entitled to exercise its property rights over the
movable and immovable property in its plant, as well as the patents, which
are its intellectual property. These can be deemed rights of dominion. After
Great Land and Golden Sunshine entered into a contract for purchasing
raw materials, each party could exercise its right of claim against the other,
requesting the other party to fulfil its contractual obligations. Since Golden
Sunshine refused to replace the defective goods it delivered to Great Land,
Golden Sunshine was in breach, and Great Land was entitled to rescind
the contract unilaterally, which could be manifested by exercising its right
of formation. Great Land is in a position to exercise its right of claim by
requesting Silver Moonlight to make the overdue payment immediately. In
response to Great Land’s claim, Silver Moonlight may exercise its right of
defence by refusing to pay on the ground that Great Land made its claim after
a prescribed time limit.
Civil subjects: Natural persons

Civil law governs property relations and personal relations between
civil subjects of equal status. Civil subjects embrace natural persons (i.e.
real human beings) as well as legal persons (e.g. corporations). In some
circumstances, the state may act as a civil subject, and it does so usually by
appearing in its capacity as a government agency.
A civil subject is perceived to be in possession of an independent legal

personality separate from others. Such legal personality is seen in a civil
subject’s capacity (i.e. civil capacity), which decides whether and to what
extent that civil subject is able to successfully establish property relations and
personal relations with other civil subjects.
Civil capacity can be divided into the capacity to be a holder of civil rights
(i.e. the capacity for civil rights) and the capacity to perform civil acts which
generate legal effects (i.e. the capacity for civil conduct). These two kinds of
civil capacity apply to both natural persons and legal persons.
The civil capacity of a natural person

The term ‘natural person,’ which most frequently appears in private law, does
not exactly mean ‘citizen,’ which is a term usually employed in the context
of public law or international law. The scope of ‘natural person’ is wider than
‘citizen.’ For example, natural persons living in China may include Chinese
citizens, citizens of other states and persons with no citizenship (i.e. stateless
persons).
A natural person’s civil capacity determines whether he is able to act and

interact with other natural persons or legal persons with a view to forging
property relations and personal relations between them, and if so, on what
scale. This capacity, as mentioned above, includes the capacity for civil rights
and the capacity for civil conduct.
The capacity for civil rights

A natural person’s entitlement to enjoy civil rights and fulfil civil obligations
has to be ascertained by the appropriateness and sufficiency of his capacity for
civil rights.
In China, the GPCL provides that natural persons have the capacity for civil
rights from birth until death, and that they enjoy civil rights and fulfil civil
obligations, as stipulated in Article 9 of the GPCL. Hence, it can be seen that
a natural person’s capacity for civil rights basically has nothing to do with his
age. However, certain kinds of capacity for civil rights are subject to reaching
a specific age. For example, a person needs to reach a statutorily prescribed
age in order to be qualified for getting married. Also, a fetus may under
special circumstances be granted a certain capacity for civil rights, say, the
entitlement to be given a share of an estate for the purpose of succession.
Consider the following case. T is a 15-year-old high-school student in

Shanghai. He participated in the Writing Contest for Young Authors, and his
novelette Wind was awarded the Rising Star Book Prize. Great Land Press,
a publisher in Shanghai, sponsored the contest. It included Wind in its book
series in new literature, which received a highly favourable response from
readers countrywide. T’s father requested that Great Land Press pay T a
royalty. Great Land Press refused, countering that ‘at T’s age his novel
is not copyrighted.’ This argument is groundless. T’s capacity for civil
rights (including copyright) starts from his birth. As the author, T owns the
copyright and is entitled to a royalty from Great Land Press for the use of
his novel.
The GPCL (Article 10) states that all natural persons are equal in their
capacity for civil rights. This equality, it should be noted, is historically recent,
and is attributable to contemporary political movements around the world
seeking civilization, democracy and human dignity in unequal societies.
The contents and the scope of a natural person’s capacity for civil rights are
granted by the law. In this sense, nobody is in a position to give up or transfer
to other persons his capacity for civil rights. Nor is any person’s capacity for
civil rights susceptible to restriction or deprivation imposed by other persons.
The capacity for civil rights entitles a natural person to enjoy all sorts of civil
rights allowed by the law, even including those rights that may appear to be
abstract but objectively exist in substance, no matter whether or not they will
be actually enjoyed.
The capacity for civil conduct

A natural person’s performance of civil acts must be commensurate with (not
in excess of) his civil rights. In addition, in order for those acts to produce
legal effects, he must have the proper capacity for civil conduct. That is to say,
he must have the ability to independently enjoy civil rights and independently
fulfil civil obligations (including assuming civil responsibilities).
A natural person’s capacity for civil conduct, along with his capacity for civil
rights, completes his civil capacity, which enables him to enjoy civil rights
and assume civil obligations to such an extent that a legally effective civil act
can be successfully performed by him.
A natural person’s capacity for civil conduct is recognized by the law; thus it
cannot be restricted or revoked in any circumstance, unless doing so is allowed
by the law and in strict compliance with the procedures stipulated in the law.
Under Chinese law this capacity is classified based on age, intellectual ability
and mental health into three major types: full capacity, limited capacity and no
capacity. Differentiating one type from another aims at conferring on mature
and sensible adults the full capacity to perform civil acts, and in the meantime
protecting the lawful rights of minors and mentally disordered people through
appropriate means.
Full capacity for civil conduct

A natural person who attains a statutory minimum age with appropriate
intellectual ability is normally bestowed by the law with full capacity for civil
conduct. A natural person with full capacity for civil conduct is supposed to
be fully competent to independently carry out any sort of lawful activities.
In China, according to the GPCL (Article 11, paragraph 1), a natural person
aged 18 or above is viewed as an adult and deemed to be a person with full
capacity for civil conduct able to independently carry out civil activities.
Here, the age of 18 is the dividing line between minority and majority, and
adulthood is used as the threshold for a natural person to gain entitlement to
full capacity for civil conduct.
The GPCL (Article 11, paragraph 2) further mentions that a natural person
below the age of 18 but attaining the age of 16 will be deemed to be a person
with full capacity for civil conduct if that person relies on what he earns from
his work as the main source of income for making a living. This provision
makes it possible, in a country with a sizable population competing for limited
jobs, for a minor reaching the age of 16 who is in urgent need of money to
support himself or his family to work legally.
Limited capacity for civil conduct

Some natural persons are viewed as persons with limited capacity for civil
conduct, and they can only independently carry out civil activities on a scale
commensurate with their age, intellectual ability and mental health.
In China, according to the GPCL (Article 12, paragraph 1), a minor aged ten
or above is a person with limited capacity for civil conduct, and is only able
to carry out those civil activities that are appropriate in terms of his age and
intellectual ability, other than which shall be carried out by his agent ad litem
on his behalf or carried out by himself with the consent of his agent ad litem.
The GPCL (Article 13, paragraph 2) also provides that a mentally disordered
person who is unable to fully account for his own conduct is a person with
limited capacity for civil conduct, and only able to carry out those civil
activities that are appropriate in terms of his mental health. Other civil
activities shall be carried out by his agent ad litem on his behalf or carried out
by himself with the consent of his agent ad litem.
No capacity for civil conduct

Some natural persons have no capacity at all for civil conduct. They normally
include minors below a statutorily prescribed age as well as those mentally
disordered people who are unable to recognize and understand what they have
done.
In China, a minor under the age of ten, or a mentally disordered person who
is totally unable to account for his conduct, is deemed as a person with no
capacity for civil conduct under the GPCL, and such person’s civil activities
can only be allowed to be carried out by his agent ad litem on his behalf
(Article 12, paragraph 2; Article 13, paragraph 1).
However, some acts performed by such a minor (e.g. receiving small gifts,
buying a can of Coke, etc.) can be accepted as effective and legally binding,
given that those acts are of a very simple nature and purely for the benefit of
the minor without any condition attached to performing the acts.
Judicial declaration of capacity for civil conduct

A mechanism exists in China under which the court can make a judicial
declaration about a mentally disordered person’s capacity for civil conduct,
according to the status of his mental health.
According to the GPCL (Article 19, paragraph 1), a person or persons

whose personal interests are linked with or affected by a mentally disordered
person’s capacity for civil conduct may apply to the court for having that
mentally disordered person declared as a person with no capacity or limited
capacity for civil conduct.
And according to the extent of the mentally disordered person’s recovery,

on the application made by a person or persons whose personal interests
are linked with or affected by this person who has been declared to be with
no capacity or limited capacity for civil conduct, or on the application
submitted by this person himself, the court may declare this person as a person
with limited capacity or full capacity for civil conduct (GPCL, Article 19,
paragraph 2).
Guardianship
Countless people have no capacity or only limited capacity for civil conduct.
These people may face problems in effectively carrying out civil activities in
order to meet their everyday needs.
In China, the solution to this problem is to employ a guardianship system.

Under this system, guardians are appointed for looking after those persons
who have no capacity or only have limited capacity for civil conduct, with a
view to helping them carry out civil activities in order to have their interests
and needs suitably satisfied in a timely manner. In practice, the system
of guardianship plays an important role in helping minors and mentally
disordered people.
Under the GPCL, for a natural person who has no capacity or only has limited
capacity for civil conduct, his guardian will be his agent ad litem (Article 14).
The duties of a guardian

According to the Supreme People’s Court’s Opinions on Some Issues Regarding
Implementation of the General Principles of Civil Law of the People’s Republic
of China (hereinafter referred to as ‘The Supreme People’s Court’s Opinions on
the GPCL’) (Articles 10 and 22), a guardian’s responsibility towards a minor
or a mentally disordered person who is the ward of the guardian normally
includes the following: taking care of the ward’s health; looking after the
ward’s daily life; managing and protecting the ward’s property; supervising
and directing the ward’s conduct; carrying out civil activities on the ward’s
behalf; acting in lawsuits on behalf of the ward; and assuming liabilities for
any loss or injury caused by the ward to other persons.
The GPCL (Article 18, paragraph 1) stresses that a guardian shall fulfil the
duty of guardianship by safeguarding the lawful rights and interests of his
ward pertinent to personal, property-related and other relevant aspects, and
the guardian shall not dispose of the ward’s property unless doing so is for the
benefit of the ward.
Under the GPCL (Article 18, paragraph 3), if a guardian does not fulfil his
duty or his act injures the lawful rights and interests of his ward, he will be
held responsible; if a guardian causes a loss to his ward’s property, he will be
liable to compensate the loss incurred; the court may disqualify a guardian
from carrying out guardianship according to the circumstances.
For example, R, a seven-year-old boy, has lived with his guardian Yang (his
late father’s best friend) since his parents died in a car accident a couple of
years ago. R inherited a house from his parents. Yang sold the house and used
the proceeds to invest. The investment failed badly. Yang is thus liable to
compensate R for any loss incurred due to his failed investment and the sale
of the house. As Yang has breached his duty, he could be disqualified from
continuing to act as R’s guardian.
As the system of guardianship is of a remedial nature aimed at making up

the ward’s deficiencies, the guardianship will cease once the ward attains or
regains his full capacity for civil conduct. That is to say, after a minor reaches
majority or a mentally disordered person becomes capable, the guardianship
will no longer be necessary. Moreover, the guardianship will come to an end
if the guardian passes away or no longer possesses the ability to fulfil the duty
required in the guardianship.
As persons with no capacity or limited capacity for civil conduct are normally
minors and mentally disordered people, the system of guardianship is
correspondingly designed for these two types of persons, giving rise to two
types of guardians accordingly: guardians for minors and guardians for mental
patients.
Guardians for minors

Once a child is born, a guardianship arises between the child and his parents.
The GPCL (Article 16, paragraph 1) provides that a minor’s parents are his
guardians.
The GPCL (Article 16, paragraph 2) provides that if the parents of a minor
pass away or lack the required competence to be his guardians, a person
from one of the following categories who has the required competence may
act as his guardian: paternal or maternal grandparent; elder brother or sister;
or a relative or friend who has a close relationship with the minor and who
is willing to assume the duty of guardianship, subject to certain forms of
administrative approval.
In light of the GPCL (Article 16, paragraph 4), if none of the above persons
is available to be the guardian, the relevant administrative power from
the government will intervene in providing the minor with the required
guardianship.
Guardians for mental patients

Similarly, according to the GPCL (Article 17, paragraph 1), a mental patient’s
guardian can be a person chosen from among the following categories who
has the required competence: spouse; adult child; close relative; or a relative
or friend who has a close relationship with the mental patient and who
is willing to assume the duty of guardianship, subject to certain forms of
administrative approval.
Under the GPCL (Article 17, paragraph 3), if none of the above persons
is available to be the guardian, the relevant administrative power from the
government will intervene in providing the mental patient with the required
guardianship.
A judicial declaration of missing status or death

There are cases in which a person lends a large amount of money to a close
friend who promises to repay it shortly but then the friend disappears without
any trace. Can the money be recovered? In the context of civil law, there is a
likelihood that the money can be claimed back fully or partially by resorting
to a judicial declaration of missing status or death.
A court can make a judicial declaration that a person who disappeared

a specific number of years earlier as prescribed by the law and whose
whereabouts are still unknown is missing or dead. Once a judicial declaration
like this is obtained, the legal position of the person in question regarding
his personal relations with other persons (e.g. marriage) may need to be
varied. His legal position in connection with his property may also need to be
modified or revoked.
A judicial declaration of missing status

In the circumstance that a person’s whereabouts have been unknown for
no less than two years and it is not known if he is still alive, the GPCL
(Article 20, paragraph 1) allows any other person whose personal interests
are linked with or affected by the person who has disappeared to apply to the
court for a judicial declaration that the person in question is missing. When it
is said that ‘a person’s whereabouts have been unknown,’ this means no one
has known where he is since he left his last known place of residence (Supreme
People’s Court’s Opinions on the GPCL, Article 26).
The two-year period will be counted from the date before which he left his
last known place of residence (Supreme People’s Court’s Opinions on the
GPCL, Article 28, paragraph 1). If the disappearance happens during wartime,
the two-year period will be counted from the date on which the war ends
(GPCL, Article 20, paragraph 2).
According to the Supreme People’s Court’s Opinions on the GPCL

(Article 24), the person who can apply to the court for such a judicial
declaration of missing status may come from one of the following categories
in terms of the relationship with the person who has disappeared: (1) spouse;
(2) parent; (3) child; (4) sibling; (5) grandparent; (6) grandparent-in-law;
(7) grandchild; (8) grandchild-in-law; or (9) other person who has established
a relationship, in terms of enjoying civil rights and assuming civil obligations,
with the person who has disappeared.
If the court accepts the application, it will issue a proclamation for searching
for the person who has disappeared. If after issuing the proclamation a
specific period of time lapses and the person still cannot be located, the court
will support the application and declare that the person in question is missing.
According to the Supreme People’s Court’s Opinions on the GPCL (Article 34,
paragraph 2), the period of proclamation required for judicially declaring a
missing person is six months, whereas that prescribed by the Civil Litigation
Law (Article 168, paragraph 1) is only three months. While the two laws
are contradictory on this point, it can be generally presumed that one should
follow the Civil Litigation Law, because the Supreme People’s Court’s
Opinions on the GPCL was released earlier than the Civil Litigation Law, and
more importantly, the latter as a statute promulgated by the National People’s
Congress apparently has greater binding force.
However, judicially declaring a person missing does not mean that the missing
person is dead. So such declaration will not bring about changes to the
missing person’s personal relations with other persons. Judicially declaring a
person missing will only lead to the missing person’s property being placed in
the custody of any of the following persons who has a close relationship with
him: spouse, parent, adult child, relative or friend; if there is any dispute over
the custody or if none of the above persons is available or able to carry out
such custody, the property of the missing person will be placed in the custody
of a person nominated by the court (GPCL, Article 21, paragraph 1).
If, after a person is judicially declared missing, the person reappears or his
whereabouts are discovered, the court will be in a position to revoke the
declaration (GPCL, Article 22).
A judicial declaration of death

According to the GPCL (Article 23, paragraph 1), in the event that a person’s
whereabouts have been unknown for no less than four years (or if a person’s
disappearance is known to be attributable to an accident and his whereabouts
have been unknown for no less than two years since the accident happened)
and no one knows where he is and whether he is still alive, any other person
whose personal interests are linked with or affected by the person who has
disappeared may apply to the court for a judicial declaration that the person in
question is dead. Here, as in the case of declaring a person missing, the term ‘a
person’s whereabouts have been unknown’ means no one has known where he
is since he left his last known place of residence (Supreme People’s Court’s
Opinions on the GPCL, Article 26).
The four-year period will be counted from the date before which he left his
last known place of residence (Supreme People’s Court’s Opinions on the
GPCL, Article 28, paragraph 1). If the disappearance happens during wartime,
the four-year period will be counted from the date on which the war ends
(GPCL, Article 23, paragraph 2).

(Article 25, paragraph 1), the person who can apply to the court for such
judicial declaration of death may come from the categories below in this order
of priority, in terms of the relationship with the person who has disappeared:
(1) spouse; (2) parent or child; (3) sibling, grandparent, grandparent-in-law,
grandchild or grandchild-in-law; or (4) other person who has established a
relationship, in terms of enjoying civil rights and assuming civil obligations,
with the person who has disappeared.
Similar to what happens with an application for a judicial declaration of

missing status, if the court accepts an application for a judicial declaration
of death, it will issue a proclamation for searching for the person who has
disappeared. If after issuing the proclamation a specific period of time lapses
and there is still no trace of the person who has disappeared so that the court
is unable to ascertain whether he is alive, the court will support the application
and declare that the person in question is dead.
According to the Civil Litigation Law (Article 168, paragraph 1), the period
of proclamation required for judicially declaring a person dead is one year (or
three months if the person’s disappearance is known to have been caused by
an accident and it can be affirmed that his survival is unlikely).
It should be noted that filing an application for a judicial declaration of a

person’s death with the court does not need to be preceded by applying for
a judicial declaration of his missing status. However, if one person applies
for a judicial declaration of missing status whereas another person on the
same level in terms of order of priority as shown above applies for a judicial
declaration of death, the application for a judicial declaration of death will
prevail (Supreme People’s Court’s Opinions on the GPCL, Article 29).
A judicial declaration of death has important legal implications identical to

those in the event of natural death. A person judicially declared dead will
cease to be a civil subject and his capacity for civil rights and civil conduct
will be terminated at the same time. His marriage will dissolve naturally.
Any legal relation entered by him with other persons, in terms of enjoying
civil rights and assuming civil obligations, will be subject to alteration
or extinction. And his estate will be treated as a legacy and dealt with in
accordance with the law of succession.
Nonetheless, it is not uncommon for a person judicially declared dead to

reappear or be found alive after the declaration has been made by the court. If
this happens, the court will be in a position to revoke the declaration (GPCL,
Article 24, paragraph 1).
Revocation of a judicial declaration of death may lead to complex

consequences that tremendously impact the property relations and/or personal
relations in connection with the person in question as well as other persons
whose personal interests hinge on the life and death status of the person in
question.
Also, once the declaration is cancelled, the person judicially declared dead will
be able to have his capacity for civil rights reinstated. In addition, any civil act
performed by the person in question during the time he was judicially declared
dead will be taken as valid, given that he had capacity for civil conduct to
competently carry out civil activities (GPCL, Article 24, paragraph 2).
With regard to personal relations, once the declaration is vacated, any

modified or revoked personal relationship in connection with the person
judicially declared dead, if the modification or revocation is generated due
to the judicial declaration of his death, will be restored automatically, unless
automatic restoration has become impossible because of an irreversible
change of circumstances (e.g. his spouse has remarried after the annulment of
the marriage with him). According to the Supreme People’s Court’s Opinions
on the GPCL (Article 37), if the spouse of the person judicially declared dead
is yet to remarry, their annulled marriage will be restored automatically from
the date on which the order of revoking the declaration of death is made by
the court; but if the spouse has remarried, no matter what subsequently has
happened in this new marriage, the former marriage cannot be automatically
restored. That is to say, even if his spouse marries somebody else and then
divorces, the former marriage cannot be restored automatically. If the couple
wants to revive their relationship as husband and wife, they must register a
new marriage. Also, if his child has been adopted by somebody else after the
declaration of his death is made, once the declaration is lifted by the court, he
will not be in a position to declare the adoption invalid unilaterally; the person
who adopts the child and the child himself must both agree to give up this
adoption (Supreme People’s Court’s Opinions on the GPCL, Article 38).
Once the declaration of death is cancelled, the person concerned will be

entitled to request the return of his property if the ownership of the property
has been passed to somebody else due to this declaration of death; if the
property no longer exists, he shall be appropriately compensated by the person
to whom the ownership of the property has been transferred (GPCL, Article 25).
Rights of personality
As mentioned before, civil rights can be classified into property rights and
non-property rights in terms of the subject matter to which the civil rights
relate.
‘Non-property rights’ normally refers to personal rights, which can be divided

into rights of personality and rights of personal identity.
As opposed to rights of personal identity derived from specific identity

relationships (e.g. the right of parents over their children who have not
reached majority, the right of spouses and the right of family members arising
from relationships formed on the basis of descent, marriage, adoption, etc.),
rights of personality are natural-born and exclusive. Natural persons own
rights of personality from the date of their birth. Rights of personality in the
eyes of civil law are no less important than property rights.
Theoretically speaking, rights of personality can be further categorized into

general rights of personality and special rights of personality.
General rights of personality

The term ‘general rights of personality’ may appear quite abstract, and it may
be difficult to arrive at an accurate definition of them.
The GPCL (Article 101) establishes the legal basis of respecting general rights
of personality by providing that the human dignity of citizens is protected by
the law. In this context, general rights of personality can be conceptualized as
human beings’ basic rights of enjoying independence, liberty and dignity in a
general sense. They are not about any particular right, interest or benefit; they
play the role of laying out theoretical foundations on which specific rights of
personality in a more concrete sense can be framed by legislators and legal
scholars.
Special rights of personality

The GPCL prescribes a number of special rights of personality, including
the right to life and health (Article 98), the right to a name (Article 99), the
portrait right (Article 100), the right to reputation (Article 101), the right to
public esteem (Article 102) and the right of voluntary marriage (Article 103).
The remainder of this section offers a closer look at the right to a name, the
portrait right and the right to reputation.
A natural person’s ‘right to a name’ refers to his right to decide, use or

change his name. It prevents unauthorized or inappropriate use of his name
by other persons without his permission. The right to a name covers not only
official names that are recorded in personal identity documents, but also
aliases, stage names and pen names (not including nicknames or pet names).
The unauthorized or inappropriate use of a person’s name may lead to an

infringement of his right to his name, and if this happens, the wrongdoer will
be liable to compensate the victim. However, an infringement of the right to a
name may sometimes be easily mixed up with an infringement of the right to
reputation.
Say Bruce and Sam are not on good terms. In order to sabotage Sam’s
reputation, Bruce usurped Sam’s name to place an advertisement in
‘Rendezvous’ (an online dating lounge) which said that ‘Sam wants to find
a lifelong partner.’ In fact, Sam is married and well known as a perfect
family man. But in this case, although Bruce used Sam’s name without his
permission, it might be appropriate to establish that what Bruce did actually
injured Sam’s right to his reputation more than his right to his name.
The original purpose of granting a natural person the portrait right was to
prevent others from using the person’s portrait for a commercial purpose
without the person’s permission. However, it could be debated that the right of
portrait should be extended to prohibit unauthorized use of a person’s portrait
even for an apparently non-commercial purpose.
A person’s right to reputation concerns how his character and moral conduct
are perceived by the public. His right to his reputation could be injured if an
unfavourable comment or information in relation to his character and moral
conduct is disseminated to the public, having a negative impact on his image
and reputation in society. A person’s right of privacy is not expressly contained
in Chinese law. An infringement of a person’s right of privacy is usually dealt
with in the same way as an infringement of his right to his reputation. Here
is an example. ABC is a hospital specializing in treating sexually transmitted
diseases. In the newsletter released by ABC last month, a short research article
contained the photo of G, who was listed as a patient who contracted such a
disease. The newsletter is a publication widely circulated in the country. Some
of G’s friends recognized him. G filed a lawsuit against ABC for infringing his
right of privacy. Contracting a sexually transmitted disease is deemed to be
disgraceful in China. Even though releasing the article in the newsletter could
be purely for research purposes, ABC can still be held liable for infringing G’s
right of privacy. G would succeed in his action against ABC.
Civil subjects: Legal persons

Civil subjects include not only natural persons but also legal persons.
The definition of ‘legal person’

A legal person (e.g. a limited liability company) is usually established
according to the law by a natural person or a number of natural persons.
The natural persons who set up a legal person make contributions to the
capitalization of the legal person at the stage when the legal person is born
and may continue to do so afterwards. However, in terms of personality, the
legal person thus established is a separate legal entity distinct from the natural
persons who initiate its formation and inject capital into it.
The GPCL (Article 36, paragraph 1) defines ‘legal person’ as an organization

that has the capacity for civil rights and the capacity for civil conduct, and is
able to independently enjoy civil rights and assume civil obligations according
to the law. In this context, a legal person is characterized by its independent
personality as a separate legal entity.
That is to say, a legal person is an entity with independent civil capacity. It

has a personality of its own, based on which it enjoys civil rights and assumes
civil obligations. It can own property, enter into contracts and sue other
persons in its own name and right.
Here is an example. Ma, a real estate tycoon in Beijing, is a major shareholder

of ABC, a company incorporated three years ago for the purpose of providing
logistics services to some of his family’s businesses. Ma sent his wife and
two sons to ABC as its board members. Last month, ABC was going into
bankruptcy. XYZ Bank asked Ma to pay back the money borrowed by ABC.
Ma refused to do so, on the ground that the money was not borrowed by him
personally but by ABC, which is a separate legal entity.
There could be a misunderstanding that liabilities assumed by a legal person

(e.g. a limited liability company) are limited. As a matter of fact, a legal
person needs to fulfil its liabilities within the scope of all its property to
an unlimited extent, until it becomes insolvent (i.e. until its assets are not
sufficient to meet its debt obligations), after which it will have no alternative
but to be wound up, given that no other person is willing to purchase
it. Limited liability does not apply to the legal person itself, but to the
shareholders or persons who have made capital contributions to the legal
person. Different from the legal person, the capital contributors’ losses, in any
circumstance, will not surpass their capital contributions made to the legal
person. Their maximum liability for the legal person is predetermined, and
thus can be deemed to be limited in this special sense.
Types of legal person

Under the GPCL, legal persons are classified into two major types: legal
persons as profit-making enterprises; and legal persons basically of a non-
profit-making nature, including government agencies, non-profit-making
organizations, associations and institutions.
In terms of the ownership’s indigenous or overseas nature, the GPCL

(Article 41) enumerates profit-making enterprises as including suitably
qualified enterprises with domestic ownership only (i.e. state-owned and
collective-owned domestic enterprises) and suitably qualified foreign-invested
enterprises (i.e. Sino-foreign equity joint ventures, Sino-foreign cooperative
joint ventures and wholly foreign-owned enterprises). Such a profit-making
enterprise will assume civil responsibility for the activities carried out in the
course of employment by its employees (including its statutory representative)
(Article 43). Regardless of the nature of the enterprise’s ownership (whether
it is a state-owned enterprise, a collective-owned enterprise or a foreign-
invested enterprise), the enterprise will be required to use all its assets to
fulfil its civil liabilities arising from the activities carried out in the course of
employment by its employees (Article 48).
A government agency with independent operational funds can be deemed to

be a legal person on the date of its establishment; any other non-profit-making
organization, association or institution may achieve its status as a legal person
either automatically on the date of its formation if there is no need for it to go
through any formality of registering as a legal person, or after it completes the
required registration procedures to become a legal person (GPCL, Article 50).
A profit-making enterprise may, in conjunction with a non-profit-making

organization, form a new legal person who has independent civil capacity
(GPCL, Article 51).
Apart from the types of legal person described in the GPCL, there are
other ways of categorizing legal persons from the standpoint of academic
discussion, such as classifying them into public legal persons and private legal
persons, corporations and foundations, profit-making legal persons and legal
persons for public interest and welfare, etc.
The establishment of a legal person

A natural person acquires his legal personality after he is born. Unlike a
natural person, an organization’s legal personality is not natural-born. An
organization can only acquire a legal personality by means of having itself
established as a legal person in compliance with the requirements and
formalities provided in the law.
Under the GPCL (Article 37), a legal person shall have the following
attributes: (1) it is lawfully set up; (2) it has the necessary assets or operational
funds; (3) it has a name, administrative and management structures, and
operational premises; and (4) it is able to bear civil liability independently.
Different types of legal person may adopt different forms of internal

management. A company may opt for its internal management to include
general shareholder’s meetings, a board of directors and a supervisory board.
A charity established as a non-profit, charitable trust normally may have no
general shareholder’s meetings, no board of directors and no supervisory
board; instead, it may use a general assembly of members as its governing
body, along with a council as the assembly’s executive arm.
Regardless of the form of internal management, a legal person shall appoint

a natural person (usually from its senior management team) as its statutory
representative. The statutory representative will be officially documented as
the person representing the legal person to exercise its rights in accordance
with the law and the legal person’s constitutional documents (GPCL,
Article 38). The chairman of the board of directors of a company can be
appointed as the company’s statutory representative. If so, his decisions made
on behalf of the company bind the company, which means the company is
not in a position to deny the validity of his acts on the ground of his lack of
authority, unless he acts in a manner exceeding his authority.
The civil capacity of a legal person

As in the case of a natural person, a legal person needs to have appropriate civil
capacity in order to carry out civil activities. Again, similar to a natural person’s
civil capacity, a legal person’s civil capacity embraces the capacity for civil
rights (the capacity for being a holder of civil rights) and the capacity for civil
conduct (the capacity to perform civil acts which generate legal effects).
The GPCL (Article 36, paragraphs 1 and 2) provides that a legal person is an
organization that has the capacity for civil rights and the capacity for civil
conduct, and is able to independently enjoy civil rights and assume civil
obligations in line with the law; a legal person’s capacity for civil rights and
capacity for civil conduct commences from the time the legal person is validly
formed, and comes to an end when the legal person ceases to exist.
The main difference between a legal person’s civil capacity for civil rights and
a natural person’s is that the former could be restrained by the law and by its
constitutional documents (e.g. the memorandum of association of a company
that confines the company’s business to specific areas). A natural person’s
civil capacity for civil rights is virtually subject to no such restriction. A
legal person’s capacity for civil rights commences on its establishment and
is extinguished when it ceases to exist. A natural person’s capacity for civil
rights begins after he is born and fades away when he dies. Legal persons’
civil rights may not be the same as those enjoyed by natural persons. Some
civil rights (e.g. the rights in connection with marriage or succession) are
exclusive to natural persons, and do not apply to legal persons.
Unlike a natural person, whose capacity for civil conduct can be ascertained
pursuant to the law, a legal person’s capacity for civil conduct is largely
governed by its constitutional documents. Such capacity to some extent
illustrates the legal person’s ability to assume liability for its acts. The legal
person will be liable for any wrong committed by its statutory representative
and its employees in the course of employment. Either an action or inaction
may give rise to committing a wrong. Take the following example. Fast
Mover is a removal company that provides house moving services. Li hired
Fast Mover to move the contents of his home. Fast Mover sent two staff, S
and T, to help Li. When they packed Li’s effects, S broke an expensive vase
and T damaged a valuable calligraphy work. Fast Mover as their employer
shall bear the liability and compensate Mr Li for the loss incurred by S and T.
Things 55
S and T will not personally be liable to make compensation, given that their
wrong was committed inadvertently.
Things
The term ‘civil objects’ is opposed to ‘civil subjects.’ ‘Civil subjects’ refers to
persons. ‘Civil objects’ may refer to things.
The definition of ‘things’

There are innumerable things in the world, but not all are ‘things’ as defined
in civil law (e.g. the sun, the moon, the sea, the sky, etc. are not). In civil
law, ‘things’ only refers to material objects that can be controlled by human
beings.
The features of a thing in civil law can be summarized as follows:
• It is a material object for human beings to control, so that in the process

of exercising such control, people’s civil rights can be enjoyed and their
civil obligations fulfilled.
• It exists in a discernible form (e.g. in a solid, liquid or gaseous state).
• It is at people’s disposal.
The term ‘thing’ originates in civil law jurisdictions in Continental Europe.

The common law does not have an equivalent for this terminology. Perhaps
the closest is ‘property.’ But strictly speaking, ‘property’ does not carry the
same meaning as that of ‘thing’ as comprehended in civil law jurisdictions.
From an academic point of view, things can be classified into different types,
such as movable things and immovable things; principal things and accessory
things; things in commerce and things out of commerce; specific things and
genus things; and single things, conjugate things and collective things.
Categorizing things into movable things and immovable things (i.e. movable
property and immovable property) is more of practical significance.
‘Immovable things’ normally refers to land and permanent structures affixed
to land. All other things are movable things (also known as ‘chattels’).
The transfer of an immovable thing (e.g. a house) could be relatively complex.

It will not become effectively completed without successfully going through a
relevant registration process for that purpose (Property Rights Law, Article 9).
Mere physical delivery will not suffice.
Transfer of a movable thing (e.g. a bottle of beer) could be much simpler. It

will become valid after its physical delivery is completed (Property Rights
Law, Article 23).
Critical/Non-critical components of things

In the eyes of civil law, things are formed on the basis of critical components
and non-critical components.
Critical components are the essential ingredients of a thing, without which it

may lose its entire value. For example, a book’s critical components could be
some of its key pages. If the book is missing any such page, the whole book
may become useless.
In contrast, non-critical components are those ingredients of a thing which

are far less important, and if removed, would not materially affect the
thing’s usefulness. For example, removing a car stereo from a car will have
no adverse impact on the car’s engine, so the car can still perform its key
function.
The difference between things and fruits

Of close relevance to the concept of ‘things’ is the concept of ‘fruits,’ which
was also coined in the civil law jurisdictions in Continental Europe. ‘Fruits’
refers to a yield that is generated from a thing but is a separate thing in its own
right.
Sometimes it is difficult to tell things and fruits apart. For example, ripe
apples on an apple tree cannot be counted as fruits, as they have not yet
dropped (‘separated’) from the tree. Chickens that have been hatched from
eggs cannot be counted as fruits either. Eggs no longer exist once they become
chickens. When the thing that produces the fruits ceases to exist, there is no
basis on which to establish the resulting thing as fruits.
Juristic acts 57
Fruits can be divided into two types: natural fruits and legal fruits. Natural
fruits are the yields that are naturally generated (e.g. oranges dropped from
an orange tree, a tiger’s offspring). ‘Legal fruits’ refers to those yields that
are derived from the formation of certain forms of legal relationship (e.g.
rental income arising from lease agreements or interest income from a savings
account).
Natural fruits belong to the owner of the thing from which such fruits are
produced; however, in the event that there is concurrently a usufructuary right
holder on top of the owner of the thing from which such fruits are derived,
the fruits will belong to the usufructuary right holder (unless otherwise
agreed). According to the Property Rights Law (Article 116, paragraph 1), a
usufructuary right is the right of one person to use and benefit from a thing
which is owned by another person.
How the ownership of legal fruits is acquired will depend on whether the
relevant parties are in agreement as to whom the fruits belong to; if there
is such an agreement, the agreement will be followed; if there is no such
agreement, the ownership of the fruits will be decided by adhering to
customary rules, pursuant to the Property Rights Law (Article 116, paragraph 2).
Juristic acts
On the whole, civil subjects (i.e. persons), civil objects (e.g. things), together
with juristic acts, comprise the key ingredients of a civil law framework for
governing property relations and personal relations between civil subjects of
equal status.
Countless juristic acts happen in everyday life (e.g. entering into a contract
or leaving property to somebody in a will). However, it is difficult to give a
precise definition of ‘juristic act,’ which is an abstract concept.
The definition of ‘juristic act’

While juristic acts are an essential constituent of a civil law framework, the
term ‘juristic act’ is not used in the GPCL. The GPCL uses a slightly different
term, ‘civil juristic act’ (Chapter IV, Section 1), which is presumed to more or
less mean the same thing.
‘Civil juristic acts’ under the GPCL (Article 54) are defined as legitimate acts
performed by citizens or legal persons for the purpose of creating, altering
or ending civil rights and civil obligations. Here, civil juristic acts include
legitimate acts only.
In contrast, ‘juristic acts’ normally refer to all kinds of acts, embracing

both legitimate and illegitimate ones. Accordingly, juristic acts can be
described simply as acts (not necessarily legitimate acts) performed by civil
subjects with a view to creating, varying or terminating civil rights and civil
obligations. Performing a juristic act is a genuine expression of the actor’s
intent.
Whether a juristic act eventually produces legal effects will depend on two
conditions: whether such an act can be generated in the first place, and after it
is generated whether it can be validated. Different criteria have to be satisfied
in order to successfully generate and validate the act respectively.
Criteria for generating a juristic act

In principle, successfully generating a juristic act requires three ingredients:
an actor (i.e. the civil subject performing the act); a genuine expression
of the actor’s intent; and an object as a goal to be satisfied in the act (e.g.
renting an apartment or house is the object of entering into a residential lease
agreement).
In normal circumstances, a juristic act can be counted as having been

successfully generated if these three elements are all in place. However,
in some cases, the law will impose various statutory requirements to be
fulfilled on forging certain legal relations between civil subjects, so these
three ingredients will not be sufficient to successfully generate a juristic act.
For example, the transfer of land use rights cannot be completed by simply
entering into a contract. The government’s approval needs to be sought for
such transfer in the first place, followed by a series of rather complex and
cumbersome notarization and registration formalities. Another example can
be cited from the Contract Law. The Contract Law (Article 367) views a
storage contract as having been established only when the subject matter
to be stored has been handed over to the storage facility. So the parties to a
storage contract will have to make sure that the goods have been delivered to
Juristic acts 59
the storage facility on time, otherwise they will not be bound by the contract
because it will not be deemed as having come into force.
A genuine expression of the actor’s intent plays a pivotal part in successfully

generating a juristic act. Such expression is allowed to be made in various
forms. According to the GPCL (Article 56), a civil juristic act can be
performed in writing, orally or in other forms without any restriction, unless
a certain medium is specifically required to be employed as stipulated by the
law. That is to say, in normal circumstances, people are free to choose the
method of expressing their true intent for performing a juristic act, whether
it is an explicit verbal or written expression, or an implicit expression by
conduct.
An implicit expression of the actor’s intent by conduct means that the

intention of performing a juristic act is not manifested by words orally or in
writing, but deduced tacitly from what he has done. For example, John as a
tenant was in a residential lease agreement with Alan. After the agreement
expired, no new agreement was entered into between the two either verbally
or in writing. John continued to occupy the house previously rented to him
by Alan. He went on paying his monthly rent to Alan, and Alan accepted his
payments. The conduct of John and Alan implies that their previous lease
agreement has been tacitly renewed, and they would be bound by the new
agreement formed in this way.
In some circumstances, people will not be able to freely choose the method of
expressing their intent for performing juristic acts. This happens when the law
intervenes by requiring them to express their intent in a prescribed fashion.
Criteria for validating a juristic act

Successfully generating a juristic act is only half of the process towards the
act eventually producing legal effects. Some other conditions have to be met
to make the act become legally valid.
According to the GPCL (Article 55), in order to constitute a valid civil juristic
act, the following conditions have to be met: (1) the actor has the required
capacity for civil conduct; (2) there has been a genuine expression of the
actor’s intent; and (3) the act is not in violation of the law or against public
interest.
That is to say, whether a successfully generated juristic act can further be

validated will depend on the appropriateness of the actor’s capacity for civil
conduct, the genuineness of his intent and the legitimacy of the act.
Appropriate capacity for civil conduct

In order to constitute a legally valid juristic act, the first condition to be satisfied
is that the actor must possess the appropriate capacity for civil conduct. As
mentioned earlier, there are three major types of capacity for civil conduct that
may apply to natural persons — full capacity, limited capacity and no capacity
— in terms of a person’s age, intellectual ability and mental health.
A natural person with full capacity for civil conduct is supposed to be able to
independently perform a juristic act.
A natural person with limited capacity for civil conduct will only be able
to perform a juristic act on a scale commensurate with his age, intellectual
ability and mental health. His agent ad litem will on his behalf carry out any
activity the performance of which will be in excess of his capacity.
A legal person’s capacity for civil conduct will be restricted by its consti-
tutional documents.
Genuineness of intent
In order to constitute a legally valid juristic act, the second condition to
be satisfied is that the actor must have genuinely expressed his intent. His
expression of intent must be made out of his true willingness, and on an
entirely voluntary basis not affected by any unacceptable element such as
deceit, duress or undue influence.
The actor’s genuine expression of intent is at the core of a juristic act’s

achieving legal effectiveness in creating, varying or terminating civil rights
and civil obligations.
When further interpretation of an expression of intent is required in order

to figure out the precise meaning the actor desires to manifest, different
approaches of interpretation may need to be taken according to circumstances.
This may be a literal interpretation, an interpretation based on the objective to
be achieved or on social customs, etc.
Juristic acts 61
Lawfulness
In order to constitute a legally valid juristic act, the third condition to be
satisfied is that the act itself must be lawful. The act must not violate the law
or contravene public interest or mainstream ethics advocated in society.
In light of the doctrine of private law autonomy, provided that no prohibition

or restriction is imposed by the law, people can perform whatever civil acts
they like.
In this respect, legal norms can be viewed as falling into two main
categories. One category, including, for example, the Contract Law, in most
circumstances provides non-mandatory guidelines only. The other category,
including the Property Rights Law, the Tort Liability Law, the Family Law,
the Law of Succession, etc., contains many provisions of a restrictive and
prohibitive nature that are mandatory and must be strictly obeyed.
The validity of a juristic act

Based on the above analysis, it can be seen that not all juristic acts are legally
valid. Juristic acts can be categorized into four major types: valid juristic
acts, void juristic acts, voidable juristic acts and juristic acts with undecided
validity.
Needless to say, the concept of a ‘valid juristic act’ can be understood as

easily as its literal expression. The following sections will elaborate on the
characteristics of void juristic acts, voidable juristic acts and juristic acts with
undecided validity respectively.
Void juristic acts

‘Void juristic acts’ refers to those acts that have no legal force. For example,
entering into a contract for purchasing illegal drugs is a void juristic act. It is
unlawful, is not enforceable and has no binding effect.
The characteristics of a void juristic act

There are a number of points to bear in mind regarding the characteristics of a
void juristic act.
Firstly, a void juristic act is absolutely void, and cannot be validated by any
means. The act is not invalidated by any person, and its voidness is due to the
operation of law. Whether the actor is aware of such voidness or whether such
nullity is confirmed by the court or an arbitral tribunal is not essential, and
will not affect the act’s invalidity.
Secondly, as described by the GPCL (Article 58, paragraph 2), a void civil act
has no legal effect from the onset of performing the act. The Contract Law
(Article 56) provides also that a void contract has never had legal force.
Thirdly, if an act is only partially void, the other part of the act unaffected will
not be taken as null and void (GPCL, Article 60). In the case of a contract
which is partially invalid, the validity of the other part of the contract will not
be affected (Contract Law, Article 56).
And fourthly, according to the GPCL (Article 61, paragraph 1), in the event
of a void civil act, the party who gains by acquiring certain property due
to performing such act shall return the property to the party from whom
the property is acquired; the former shall compensate the latter for any loss
suffered by the latter as a result of the act; if both parties are at fault, each
party shall be liable for shouldering its own responsibility arising from the
act. Similarly, in light of the Contract Law (Article 58), in the case of a
void contract, any property acquired due to such contract shall be returned;
if it is not possible to return the property, the party at fault shall provide
reimbursement of an appropriate amount; the party at fault shall compensate
the injured party for any loss suffered due to such contract; if both parties
are at fault, each party shall be liable for assuming its own responsibility in
connection with the contract.
Major grounds of voidness

Usually a juristic act is void due to one of the following reasons: lack of
appropriate capacity for civil conduct, performing the act against true
willingness or violating the law or public interest.
Lack of appropriate capacity for civil conduct

Lack of appropriate capacity for civil conduct may give rise to a juristic act
becoming void. This mainly relates to natural persons (as civil subjects) who
have no capacity for civil conduct or only have limited capacity for civil conduct.
Juristic acts 63
Under the GPCL (Article 58, paragraph 1(1) and (2)), a civil act performed
by a natural person who has no or only limited capacity for civil conduct and
is, according to the law, not in a position to independently perform such act,
is null and void. Take the following example. T, a 16 year-old high school
student, looks much older than his real age. On his way home from school,
he bought ten lottery tickets at the Social Welfare Lottery Centre, and nobody
recognized that he was still a minor. T won a jackpot of RMB 100,000.
According to the regulations issued by the Social Welfare Lottery Centre, any
person who purchases social welfare lottery tickets must be over the age of
18. Hence, T’s purchase of lottery tickets is a void act. The Social Welfare
Lottery Centre did not need to give him the prize money.
There are exceptions to this rule. If such a person performs the act purely for
his own personal benefit on a unilateral basis (e.g. accepting gifts, bequests,
endowments, gratuities, etc.) or a minor carries out some reasonable activities
in everyday life with a reasonably marginal amount of money involved (e.g.
buying some stationery, sweets or soft drinks), the act is not void.
Performing the act against true willingness

A juristic act may become void if the actor performs the act not out of his
genuine willingness but as a result of being misled or compelled to do so for
fear of the threat of force. Deceit or duress or their equivalents are usually the
reasons that an act is performed against an actor’s true willingness.
Under the Supreme People’s Court’s Opinions on the GPCL (Article 68),
deceit is deemed as a dishonest act of one party who wilfully misrepresents
the truth to or conceals the truth from another party, leading to the latter being
induced to do something which he would not do if the truth were disclosed
to him or not concealed from him. According to the GPCL (Article 58,
paragraph 1(3)), a civil act performed not in line with the actor’s true intent
due to deceit is void. In this respect, the Contract Law operates in a slightly
different way. According to the Contract Law (Article 52, paragraph 1), a
contract will be void if it is made due to deceit causing damage to the interest
of the country.
Pursuant to the Supreme People’s Court’s Opinions on the GPCL

(Article 69), duress is understood as an act of one party who forces another
party to do something which he would not do if he were not forced to do so
by the former, who threatens to cause harm to the life and health, honour,
reputation, property, etc. of the latter or of the latter’s family members or
friends if the latter is uncooperative in this matter. How the GPCL and the
Contract Law legislate can be compared in a slightly different way regarding
the voidness of a civil act induced by duress. According to the GPCL
(Article 58, paragraph 1(3)), a civil act performed under duress against the
actor’s true intent is void. The Contract Law (Article 52, paragraph 1) points
out that a contract will be void if it is made under duress causing damage to
the interests of the country.
Here is an example. XYZ Bank received an application from ABC, a

company, for borrowing RMB 500,000. The application was jointly signed by
ABC’s two directors, Robert Li and Mary Tang, who are authorized to apply
for loans on behalf of the company. XYZ Bank granted the loan to ABC. But
it soon discovered that Mary Tang never agreed to lodge this loan application;
her signature was forged by Robert Li. Thus the application did not reflect
the company’s intention. The loan granted to ABC can be withdrawn by XYZ
Bank.
Violating the law or public interest

A juristic act will be void if it contravenes the law or public interest. The
GPCL (Article 58, paragraph 1(4) to (7)) lists the following acts which
in essence can all be deemed to be violating the law or public interest, as
void civil acts: maliciously conspiring to cause damage to the interests of
the country, collectives or individuals; violating the law or public interest;
entering contracts for carrying out economic activities not in line with the plan
made by the country; and acting under the disguise of a legitimate appearance
by concealing an illegitimate purpose.
Here when it is said that a juristic act will be void if it contravenes the law,
law not only covers a statute promulgated at the national level, but also an
administrative regulation issued by the State Council, a local regulation
issued on the provincial or municipal level, a self-governing regulation of
an autonomous region of minority nationalities, or a rule issued by the State
Council’s departments/committees or by a local government. Saying that a
juristic act will be void if it violates public interest stresses the importance of
adhering to the civil law doctrine of good public order and social customs,
covered in Chapter 1.
Juristic acts 65
Voidable juristic acts

A void juristic act is invalid from the start, as if it had never been performed.
A related but different juristic act is the voidable juristic act, the validity of
which is tainted with defects but is tenable unless the act is set aside by the
court or an arbitration tribunal. Before it is set aside, it is still a valid act; but
once it is set aside, it will be counted as invalid from the outset.
According to the GPCL (Article 59, paragraph 1), a relevant party is entitled
to request the court or an arbitration tribunal to set aside a civil act in the
event that the person who performs the act is significantly mistaken about the
fact relating to his act or the act is an apparently unjust one. A civil act that is
set aside will be deemed to be void from the onset (Article 59, paragraph 2).
In light of the Contract Law (Article 54, paragraph 1), a party to a contract is
entitled to request the court or an arbitration tribunal to set aside a contract in
the event that entering the contract was due to a significant misunderstanding
or was apparently unjust conduct. A contract that is set aside will be deemed
as never having had any legal effect (Article 56).
There are two major types of juristic acts which are usually considered
voidable juristic acts under Chinese law: a juristic act materially misconceived
and a juristic act apparently contrary to fairness.
A juristic act materially misconceived

A ‘juristic act materially misconceived’ is defined under the Supreme People’s
Court’s Opinions on the GPCL (Article 71) as an act against the actor’s true
intent that caused him to suffer a relatively heavy loss, since the actor is
significantly mistaken as to the nature of his act, the identity of the other party,
the type, quality, specification and quantity of the subject matter; etc.
Certain elements are required for an act to constitute a juristic act materially
misconceived. First, the actor undertakes the act under a significant
misconception attributable to his own error. Second, there is a causal
relationship between the misconception and the act. The act is then performed
under such misconception giving rise to an outcome incongruous with the
actor’s true intent. And third, the act causes the actor to suffer a relatively
heavy loss.
Take the following example. A classical piano was displayed for sale in ABC,
a piano store in Shenzhen. The price was RMB 100,000. Huang collects
musical instruments and is in particular interested in old German pianos.
Li, the manager of ABC, told Huang that this piano was a well-established
German brand called Schneider and that it was made in Germany about 50
years ago. Huang bought the piano. But one of his friends well-versed in
piano making suspected that the piano was not made in Germany because the
materials used appeared to be far less than 50 years old. Huang asked ABC to
confirm if the piano was a real Schneider piano. Yu, the general manager of
ABC, admitted that Li’s statement was not entirely true because the piano was
a Schneider-style piano made in Dongguan (in Guangdong) five years ago.
But Yu maintained that what Li said represented his personal opinion only, not
that of ABC. He told Huang that Li had left ABC. Huang fumed that he had
been misled by Li. He wanted to return the piano to ABC for a full refund.
Yu refused to refund Huang’s money, contending that what Huang bought
was a quality piano comparable with any original German one. Under such a
scenario, Huang may consider applying to the court or an arbitration tribunal
to set aside the contract of sale on the ground of having performed an act
materially misconceived.
A juristic act apparently contrary to fairness

A ‘juristic act apparently contrary to fairness’ is defined under the Supreme
People’s Court’s Opinions on the GPCL (Article 72) as an act performed by
one party who takes advantage of his status or the other party’s inexperience,
leading to the rights they enjoy and the obligations they assume towards each
other being positioned in a way that overtly deviates from the principle of
fairness and exchange at an equal value.
Certain elements are required for an act to constitute a juristic act apparently
contrary to fairness. Firstly, one party gains by utilizing his advantageous
political, economic or social position, or by taking advantage of the other
party’s inexperience, with a view to forcing the latter to perform the act.
Secondly, performing the act leads to the former unjustly acquiring benefits at
the expense of the latter. And thirdly, there is a causal relationship between the
outcome of the act and the exploitation of the former’s advantageous position
over the latter or the latter’s inexperience.
Juristic acts 67
The Contract Law contains some provisions governing a juristic act that is
apparently contrary to fairness. According to Article 54, paragraph 2, where a
contract is entered into due to deceit or induced by duress or is made by taking
advantage of a party’s plight, the injured party who enters into the contract
not in line with his true intent is entitled to apply to the court or an arbitration
tribunal for having the contract set aside. Article 52(1) also provides that a
contract will be void if it is made due to deceit or induced by duress causing
damage to the interests of the country.
The GPCL (Article 58, paragraph 1(3)) also lists as a void civil act an act
performed due to deceit or induced by duress or on the basis of taking
advantage of a party’s plight resulting in untrue expression of a party’s intent.
However, unlike the Contract Law, the GPCL does not mention whether
causing damage to the interests of the country is among the prerequisites for
constituting a void civil act.
Say Mrs Yang, in her eighties, is partially paralysed and being looked after
by her maid, May. May’s husband recently lost his job; the couple is now
in financial difficulty in paying off their home mortgage. Great Land Bank,
their mortgage lender, asked them to find somebody who could provide it
with a guarantee of their debts, otherwise their house would go back to Great
Land Bank and be sold at auction. On May’s request, Mrs Yang agreed to
provide such a guarantee to Great Land Bank. The guarantee created under
this context can be set aside if it can be established that Mrs Yang provided
the guarantee involuntarily, because as an old lady whose life entirely relies
on the help of the maid she could be quite vulnerable to any undue influence
exerted by May.
Also under the Contract Law, a party to a contract who acts against the
principle of fairness to enter into the contract may assume liability to make
compensation to the other party who is injured by such act. According to the
Contract Law (Article 42), one party to a contract shall be liable for making
compensation to the other party for the loss incurred by his act of entering into
the contract in one of the following circumstances: (1) maliciously negotiating
the contract under the disguise of intending to forge a contractual relationship;
(2) wilfully concealing material facts relating to entering the contract from
or giving false information to the other party; or (3) performing an act (other
than the above) that contravenes the doctrine of good faith.
The time limit on rescission of a voidable juristic act

The Supreme People’s Court’s Opinions on the GPCL (Article 73, paragraph
2) and the Contract Law (Article 55(1)) both impose a time limit of one year
on having a voidable juristic act rescinded. Any application filed with the
court or an arbitration tribunal after the time limit lapses will not be able to be
supported by the court or an arbitration tribunal. The Contract Law (Article
55(2)) also provides that where a party to a contract has the right to revoke
the contract but explicitly indicates or implies by conduct that it has given up
such right, the right of that party to set aside the contract will be extinguished
accordingly.
Under the GPCL (Article 61, paragraph 1), after a voidable juristic act is set
aside, the party who gains by acquiring certain property due to performing
such act shall return the property to the party from whom the property is
acquired; the former shall compensate the latter for any loss suffered by the
latter because of the act; if both parties are at fault, each party shall be liable
to shoulder its own responsibility in connection with the act.
According to the Contract Law (Article 58), after a contract is set aside, any
property acquired due to such contract shall be returned; if it is not possible
to return the property, the party at fault shall provide reimbursement of an
appropriate amount; the party at fault shall compensate the injured party for
any loss suffered due to such contract; if both parties are at fault, each party
shall be liable for assuming its own responsibility in connection with the
contract.
Juristic acts with undecided validity

Another type of juristic act is a juristic act with undecided validity. Literally,
this refers to an act with pending validity. The act does not produce any legal
effect at the present moment. And normally whether the act will produce legal
effect depends on if it can eventually be ratified or accepted by a particular
party; in other words, if it cannot be ratified or accepted subsequently, the act
will continue to have no legal force.
Such acts can usually be classified into two types: an act of a person with
limited capacity for civil conduct and an unauthorized act.
Juristic acts 69
An act of a person with limited civil capacity

‘Person with limited capacity for civil conduct’ usually refers to a minor
aged ten or above, or a mentally disordered person who is unable to account
for his conduct; and that such a person is only able to carry out those civil
activities that are commensurate with his age, intellectual ability and mental
health (GPCL, Article 12, paragraph 1; Article 13, paragraph 2). The GPCL
(Article 58, paragraph 1(2)) particularly mentions that a civil act performed by
a person who according to the law has limited capacity for civil conduct only
and is unable to independently perform such act, is null and void. Such act
shall be carried out by his agent ad litem on his behalf or by himself with the
consent of his agent ad litem (Article 12, paragraph 1; Article 13, paragraph 2).
However, although a civil act performed by a person who according to the

law has limited capacity for civil conduct only and is unable to independently
perform such act is an invalid act in the eyes of the GPCL, the Contract Law
views a contract entered into by a person with limited civil capacity as a
contract, the validity of which is undecided; the validity of such a contract
depends on whether the contract can eventually be ratified by the agent ad
litem of the person in question.
In light of the GPCL (Article 14), the guardian of a person who has limited
capacity for civil conduct only is taken as such person’s agent ad litem.
Pursuant to the Contract Law (Article 47, paragraph 1), a contract entered
by a person with limited capacity for civil conduct may become valid after
the contract is ratified by his agent ad litem; a contract entered into by a
person with limited capacity for civil conduct will be deemed to be valid and
require no ratification of his agent ad litem if the contract serves a purpose of
purely benefiting the person in question or if entering such contract appears
commensurate with the age, intellectual ability and mental health of the
person in question.
As opposed to a person with limited capacity for civil conduct as one party to
the contract, the other party to the contract may chase the agent ad litem of the
former to ratify the contract within a one month of the contract being made;
the inaction of the agent ad litem of the former will be viewed as declining to
ratify the contract; and before the contract is ratified, the latter, if he enters the
contract in good faith, will be entitled to revoke the contract (Contract Law,
Article 47, paragraph 2). Here, ‘in good faith’ refers to a situation where the
latter, when entering into the contract, is entirely ignorant of the truth that the
person with whom he is establishing a contractual relationship is a person
who has limited capacity for civil conduct only.
An unauthorized act
An unauthorized act, as a juristic act with undecided validity, may become
valid if in the case of agency it can be ratified by the principal, or in the event
of other unauthorized acts the actor can subsequently secure the authorization
which he has not obtained before.
An unauthorized act may commonly be discovered amidst those activities

relating to agency. For example, an agent may perform outside the scope
of authority granted to him by his principal; a person may continue to carry
out the work as the agent of a principal in the eyes of outsiders even though
their agency relationship is no longer in force; a person may purport to be the
agent of a principal and may carry out the work as such agent in the name of
the principal, when in fact he has no real authority to do so because no such
agency relationship exists between the two.
According to the GPCL (Article 66, paragraph 1), where a person purports to
be the agent of a principal to carry out activities under the disguise of their
non-existent agency relationship, or an agent performs exceeding the scope
of authority given to him by his principal, or a person continues to work
on behalf of the principal as the agent even though his agency relationship
with the principal has terminated, the principal will not be liable for the
act performed by the person in question, unless the principal ratifies the
act; where the principle notices such irregularity but does not show his
objection, the principal’s such inaction will be viewed as his acceptance of the
unauthorized act performed.
In light of the Contract Law (Article 48, paragraph 1), if a contract is entered
into on behalf of a principal by a person who, with no real authority, pretends
to be the agent of that principal, or by an agent who performs outside the
scope of authority given to him by his principal, or by a person who continues
to work as the agent of his principal in the eyes of outsiders even though their
agency relationship is no longer in force, the contract will have no binding
effect on the principal unless the principal ratifies the contract. The other
party to the contract may chase the principal to ratify the contract within
Agency 71
one month from the contract being made; the inaction of the principal will
be taken as refusing to ratify the contract; before the contract is ratified, the
other party, who enters the contract in good faith, is entitled to set aside the
contract (Contract Law, Article 48, paragraph 2). Here, ‘in good faith’ denotes
that the other party to the contract when entering the contract knows nothing
about the truth that the counterpart with whom he is entering into the contract
is a person who has no real authority, or is an agent acting in excess of his
authority, or is a person who continues to act as an agent even though his
agency relationship with his principal is no longer effective.
Regarding such unauthorized acts, the Contract Law (Article 51) provides
in a more general sense that where a person who is not authorized to deal
with the property of another person has done so by entering a contract, if the
contract can be ratified by the latter or the former can subsequently acquire
the authorization from the latter to deal with the latter’s property, the contract
will be deemed to be valid.
Agency
‘Agency’ is another highly important concept in civil law. Agency
relationships can be found here and there in everyday life, especially in
economic and business activities.
If someone wants to sell or buy a house, she may appoint a real estate broker
to be her agent for the purpose of securing a buyer or locating a house that
meets her expectations. If she wants to book a hotel for a few days’ vacation
overseas, she may use a travel agent to find the best offer instead of directly
calling each hotel by herself. She as the principal empowers the agent to act
on her behalf within a specific scope of authority with a view to fulfilling a
particular objective.
Then what does agency mean in a legal sense?
The meaning of ‘agency’

In commerce, agency as a kind of relationship is initially between two
persons, one (the agent) authorized by the other (the principal) to bring
the principal into a legal relationship with a third party with a view to the
formation of a contractual relationship that binds the principal and the third
party.
For example, as a potential passenger, a person will be targeted as a third

party in the eyes of airlines and travel agencies. An airline could play the
role as the principal which empowers a travel agency to act as its agent. The
travel agency’s task is to find an opportunity so that a person can become
a passenger of that airline by purchasing its tickets, which leads to the
formation of a contractual relationship between that person and the airline. By
successfully bringing that person and the airline together, the reward received
by the travel agency is the commission or the agency fee paid by the airline
according to the contract made between the airline and the travel agency
regarding their agency relationship.
It should be noted that in practice, it may not be the third party that negotiates
and enters into a contract with the principal directly. On the majority of
occasions, it is the agent who negotiates and enters into a contract on behalf
of the principal, and most likely directly in the name of the principal, with the
third party, although the principal will eventually be bound by what its agent
does.
However, the agent is not a messenger or an intermediary whose duty is

merely to find a business opportunity and report it to his principal. The
principal and the agent should be viewed as two separate entities. In this
sense, the agent is entitled to make a decision freely and independently on
how to negotiate and whether to enter into a contract with the third party,
given that he acts within the scope of his actual authority given by the
principal. He does not need to consult his principal in each individual case as
regards performing his duty as the agent, provided that he does not exceed his
authority.
In general, the creation and maintenance of an agency relationship in an

economic activity may involve three parties (i.e. the principal, the agent and
the third party), and give rise to the formation of two contractual relationships,
one between the principal and the agent as an agency relationship, and the
other between the principal and the third party, who are bound by the contract
made with the third party by the agent on behalf of the principal.
Agency 73
The scope of agency

The above theory is basically postulated from the standpoint that an agency
relationship is in the context of commerce, which is perhaps of the greatest
relevance to understanding the application of this concept in everyday
life. Nonetheless, from a more encompassing but less business orientated
perspective, agency relationships may be involved in more than just
contractual relationships. An agency relationship can also be created where
the agent is empowered by the principal to carry out activities of a non-
business nature, e.g. performing the duty of guardianship over minors or
mentally disordered people, filing a lawsuit on behalf of the principal, etc.
Pursuant to the GPCL (Article 63, paragraphs 1 and 2), a citizen or a legal
person is allowed to perform a civil juristic act through an agent, who
performs the act in the name of the person who authorizes him to do so, but
not in excess of his authority, and the person who authorizes him to do so will
bear civil liability for the agent’s act.
However, agency cannot be applied in all circumstances. The GPCL (Article 63,
paragraph 3) provides that a person shall not appoint an agent to perform a civil
juristic act on his behalf if according to the law or an agreement the act ought to
be performed by that person himself. For example, for security reasons a person
must complete airport check-in procedures entirely by himself. Also if a world-
class violinist has committed under a contract to perform concerts around the
world, he cannot delegate his duty of performance to another person by means
of agency since because of his pedigree he cannot be replaced; otherwise
he is in breach of his contract. In this regard, the Supreme People’s Court’s
Opinions on the GPCL (Article 78) holds the view that where according to the
law or an agreement a person is supposed to personally perform a civil act but
he fails to do so and the act is actually performed by somebody else, the act
thus performed will be null and void. This further substantiates the stance that
agency cannot be employed in an unrestrained way.
Another thing to bear in mind is that although it is reasonable to assume that

in an ordinary economic activity the agent enters into a contract on behalf of
and in the name of the principal with the third party whereas the principal is
bound by such contract, this does not mean that a contract cannot be made
between the agent and the third party directly in the name of the agent as one
party to the contract.
The Contract Law (Article 402) provides that if the agent within the scope of
his authority enters into a contract in his own name with the third party who
at the time of making the contract is aware of the agency relationship between
the agent and his principal, the contract shall directly bind the principal and
the third party, unless there is conclusive evidence proving that the contract
binds the agent and the third party only. This stipulation shows that whether
the contract is made by the agent in his own name is an issue that could be a
mere formality. Given that an agency relationship exists and the third party
notices it, the principal will be bound by the contract, no matter whether the
contract is made in the name of the principal or the agent. However, if the
third party has no idea about the existence of an agency relationship when
entering into a contract with the agent, the contract will bind the agent and the
third party; but even in such circumstance the principal will be the ultimate
party who will bear the consequences of the agent’s action with respect to
entering and performing this contract.
Types of agency under Chinese law

The GPCL (Article 64, paragraph 1) enumerates agency as including agency
by entrustment, agency by operation of law and agency by designation.
In an agency by entrustment, the agent exercises his power in accordance with

the authorization given by the principal; in an agency by operation of law, the
agent exercises his power of agency in the light of the law; and in an agency
by designation, the agent exercises his power in line with the order of the
court or the relevant authority which designates who the agent will be (GPCL,
Agency by entrustment
Entrustment is the most common way of creating an agency relationship
between the principal and the agent, in particular in economic activities.
Normally there will be an agency agreement between the principal and the
agent for establishing their agency relationship. So the agent is appointed in
writing under this contract. However, entering into an agency agreement in
writing is not mandatory, so the agent can also be verbally appointed (GPCL,
Agency 75
The GPCL (Article 69(1) to (5)) lists five relevant instances in which agency
by entrustment will cease to exist: (1) the term of the agency expires, or the
agency work is completed; (2) the principal cancels his authorization given to
the agent, or the agent quits; (3) the agent dies; (4) the agent loses his capacity
for civil conduct; or (5) the principal’s or the agent’s status as a legal person
ceases to be effective.
Agency by operation of law

‘Agency by operation of law’ refers to an agency relationship which is
created irrespective of whether there is any intent to establish such agency
relationship, but due to the law under specific circumstances.
An agency relationship forged between a person with no capacity or with

limited capacity for civil conduct and his agent ad litem is a typical example.
No matter whether establishment of such agency relationship is in line with
anyone’s intent, such agency relationship must be forged due to the instruction
of the law, for the purpose of protecting the legitimate interests of a special
group of persons who without their agent ad litem will not be able to look
after themselves or at least not to the degree to which ordinary people do.
The GPCL (Article 70(1), (2), (3) and (5)) indicates four relevant scenarios in
which an agency by designation will cease to exist: (1) the principal acquires
or recovers his capacity for civil conduct; (2) the principal or the agent dies;
(3) the agent loses his capacity for civil conduct; or (4) the guardianship
arising from the agency is terminated due to other reasons.
Agency by designation
‘Agency by designation’ refers to an agency relationship which arises on the
basis of complying with an order made by the court or a relevant authority
(usually the government) as regards designating the agent by the court or the
relevant authority.
This normally happens in the circumstance that a person is not able to perform
a civil act himself and needs to be represented by the agent to perform such
act on his behalf, but he is not able to appoint such agent. So in a litigation
process, the court may appoint an agent for a litigant who is required to
be represented by the agent for litigation purposes but is unable to appoint
such agent by himself. Also, the court may appoint an agent for a judicially
declared missing person with a view that the agent will take custody of the
property of the missing person.
The GPCL (Article 70(1) to (5)) points out five circumstances in which
an agency by designation will cease to exist: (1) the principal acquires or
recovers his capacity for civil conduct; (2) the principal or the agent dies;
(3) the agent loses his capacity for civil conduct; (4) the court or the relevant
authority that has designated the agent cancels such designation; or (5) the
guardianship arising from the agency is terminated due to other reasons.
The authority of an agent

An agent acts on behalf of his principal to deal with a third party, leading to the
formation of a legal relationship between his principal and the third party. He
is able to do so because he is given authority by his principal. Such authority is
usually not unlimited, so the agent shall not act in excess of his authority.
Even within the scope of the principal’s empowerment, the agent will be
bound by fulfilling his obligations carefully and in good faith and avoiding
any conflict of interest for the principal’s benefit. Failure to do so will incur
civil liability to be assumed by the agent.
The GPCL (Article 66, paragraphs 2 to 3) provides that an agent shall be

liable for the damage caused to his principal due to his failure to fulfil the
obligations as the agent; where the principal’s interests are injured by the act
of the agent in collusion with the third party, the agent and the third party
shall be held jointly and severally liable for the loss suffered by the principal.
When it is said that the agent and the third party shall be held jointly and
severally liable for the loss suffered by the principal, this means the liability
of the agent and the third party is undivided and mutual on an equal share
basis, e.g. if the agent lacks sufficient assets to recoup the principal for the
loss, the shortfall will have to be filled by the third party.
While an agent is supposed to act strictly in line with his principal’s

instructions, in practice it is not uncommon to encounter a so-called ‘agent’
who in fact has no real authority, or acts in excess of his authority, or does
not discontinue to work on behalf of the principal as the agent even though
his agency relationship with the principal has come to an end. However, a
Agency 77
deal brought about under any of these circumstances may eventually produce
binding force on the principal if the principal opts for ratification.
Under the GPCL (Article 66, paragraph 1), where a person pretends to be the
agent of a principal to carry out activities, or an agent performs exceeding the
scope of authority given to him by his principal, or a person continues to work
on behalf of the principal as the agent even though his agency relationship
with the principal has come to an end, the principal will not be liable for the
act performed by the person in question, unless the principal ratifies the act;
where anyone notices that someone else is acting on his behalf but does not
express his objection, his inaction will be viewed as his acceptance of the
unauthorized act performed.
If the principal subsequently ratifies the transaction, the consequences arising

from the transaction will legally bind the principal. However, the principal is
not committed to exercise his right of ratification. If the principal chooses not
to ratify the transaction, the consequences arising from the transaction will not
bind the principal; in such circumstance, if the agent’s act incurs damage to
the principal and/or the third party, the agent will be liable for compensation.
There is another possibility, that the third party knows that the so-called ‘agent’
purports to act on behalf of the principal but has no real authority, or he acts
exceeding his principal’s instructions, or he continues to transact on behalf
of the principal after cessation of their agency relationship. If this happens,
according to the GPCL (Article 66, paragraph 4), if the transaction entered
into between the agent and the third party causes injury to another person, the
agent and the third party shall be held jointly and severally liable for the loss
suffered by that person.
Ostensible authority
An argument can be made that a third party cannot be expected to know
everything that happens between an agent and his principal (e.g. whether the
agent has broken or surpassed his principal’s instructions). Moreover, it would
be unrealistic for the third party to cast doubt on each and every occasion
regarding whether the agent has real authority, when in the eyes of the third
party the agent is doing what he appears to have the right to do. It is under
this context that the concept ‘ostensible authority’ (also known as ‘apparent
authority’) is derived.
The term ‘ostensible authority’ refers to the authority that is seemingly held
by an agent, who a bona fide third party believes has real authority to act on
behalf of the principal but in fact has no real authority, or acts in excess of his
authority, or whose agency relationship with the principal has expired at this
point in time.
A key element contained in ostensible authority is that the third party is

totally ignorant of the agent’s lack of authority and has acted by relying on
the appearance of the authority shown by the agent. And the third party’s such
reliance must be genuine and in good faith. In the event that the existence
of an ostensible authority can be established, for the purpose of protecting
the interest of the bona fide third party, the principal cannot be allowed to
deny that the agent has such authority, and will have to be bound by the act
performed by the agent under such ostensible authority.
Here is an example. Mr Tang went to a post office in Shanghai to send an

urgent parcel by courier to his business partner in the US. A clerk named Jane
helped him. She told Mr Tang that the parcel would arrive at the designated
place in the US within three working days. But it took three weeks for Mr
Tang’s business partner to receive the parcel because Jane carried out the
handling procedures incorrectly, with the result that Mr Tang and his business
partner missed a good business opportunity and also suffered large financial
losses. In fact, Jane was just a trainee; she was not allowed to contact
customers in the post office independently. However, Mr Tang relied on Jane’s
ostensible authority to transact with the post office in good faith. He shall be
entitled to claim compensation from the post office for a reasonable amount
of the loss suffered arising from this transaction.
The GPCL does not use the term ‘ostensible authority.’ But it does describe a
situation in connection with ostensible authority by implying that where the
principal is aware that a person is pretending to be his agent, or his agent is
exceeding the scope of authority, or his previous agent is continuing to work
on his behalf as his agent after their agency relationship has come to an end,
if the principal does not show his objection, the principal’s inaction will be
viewed as his acceptance (Article 66, paragraph 1). Or, to put it differently, if
the principal does not object to such irregularity, his silence will be taken as
concurrence.
Agency 79
Sub-delegation of authority
In principle, since an agency relationship is based on the personal trust
between the principal and the agent, the agent shall fulfil his obligations
personally and not delegate the authority received from his principal to
somebody else.
However, in exceptional circumstances, the agent can wholly or partially

delegate his authority given by his principal to another person who will then
become a sub-agent performing the agent’s duties on behalf of the principal (not
on behalf of the agent who delegates the authority to him).
According to the GPCL (Article 68), in the event that the agent needs to sub-
delegate his authority to another person for the sake of satisfying the interests
of the principal, he shall seek the principal’s consent in the first instance; if
the agent does not seek the principal’s consent beforehand, he shall inform
the principal in a timely manner about this sub-delegation of authority; if the
principal does not concur with this sub-delegation of authority, the agent shall
be personally liable for what the sub-agent has done, except in an emergency
situation where the sub-delegation has to be carried out in order to protect the
interests of the principal from being injured imminently.
In this respect, the Supreme People’s Court’s Opinions on the GPCL

(Article 80) exemplifies such emergency situations as those in which the agent
is not able to fulfil his obligations due to special circumstances such as sudden
illness, breakdown of communications with the principal, etc., and indicates
that under such circumstances the agent is not able to contact the principal,
and will leave the principal’s interests at risk of being jeopardized or further
injured if he does not timely entrust another person to work as the agent by
sub-delegating his authority to that person.
After the sub-delegation of authority is effected, the sub-agent cannot act

in excess of the agent’s authority. In terms of an agency relationship, the
legal relationship between the principal and the agent remains unchanged.
The legal position of the sub-agent dictates that he acts as the agent of the
principal, not the agent of the agent who delegates authority to him. What the
sub-agent does binds the principal only. The agent will not be bound by what
the sub-agent does in the course of fulfilling the agent’s obligations within the
authority sub-delegated to the sub-agent by the agent.
The limitation of actions

In 1987, T borrowed RMB 30,000 from R, and promised in writing to pay
back this loan within two years. R did not chase T for the debt. When T
passed away in 2008, he had still not repaid any money to R. On T’s death, his
property passed to his wife, G. In 2010, R got into financial difficulty. R asked
G to pay back the money he had lent to T. G refused on the ground that she
knew nothing about it. R threatened to bring G to court to recover the money.
If R now files a lawsuit over this debt, will the court support his claim?
This story raises the important civil law concept of the ‘limitation of actions.’
The definition of ‘limitation of actions’

The term ‘limitation of actions’ describes the effects of the passage of an
appropriate time period prescribed by the law (i.e. the limitation period) for
bringing court actions, with a core proposition that if a person intends to
make a legal claim, he must make it during the limitation period. Bringing
legal proceedings after the limitation period elapses will lead to a legal claim
becoming stale.
That is to say, where a person intends to take legal action (say, to recover a
debt, or to claim compensation for breach of a contract or tort of negligence),
he must commence legal proceedings within the limitation period. A court
action brought after the limitation period expires will be defeated by the
court. However, a limitation period to be applied in a case is not proactively
activated by the court during the litigation process, but has to be pleaded by a
litigant. This is the rule of the limitation of actions.
If a claimant fails to make his claim by bringing court action within the
limitation period, applying the rule of the limitation of actions will deny him
the possibility of winning the lawsuit if he commences court action after
the expiry of the limitation period. Cutting off a stale claim is based on the
rationale that it makes no sense to settle a dispute after a significantly lengthy
period has passed since the cause of action arose. For an event that happened
a significantly long time ago, it could prove difficult or impossible to find
essential evidence relevant to the case. People’s memories may also have
faded since the event. In this sense, it is better to leave the case as it is, with a
view to keeping stable the current social order and landscape, and preventing
limited judicial resources from being unnecessarily expended.
However, the expiry of a limitation period only has the effect of extinguishing
a claimant’s chance to win his court case. Applying a limitation period will
not deprive a person of his right to take legal action to make a claim after
passage of the limitation period. If a person takes legal action to make a claim
after the limitation period has expired, what will usually happen is that on
the defendant’s request for applying the rule of the limitation of actions, the
court will examine whether a limitation period applies to the case. If it does,
the court will make sure that the limitation period has expired. If so, the court
will dismiss the case by not supporting the claim. This process may appear
unnecessarily formal, but it highlights the difference between the effect of
failing to make a legal claim during the limitation period and the procedural
nature of making a legal claim that is allowed at any time without being
subject to any limit imposed.
Limitation periods
The GPCL sets out a number of limitation periods that are of different lengths
and apply to different circumstances.
Firstly, the GPCL (Article 135) provides that unless the law otherwise
stipulates, the limitation period in connection with taking court action for
seeking protection of relevant civil rights by the court is two years.
Secondly, the GPCL (Article 136) prescribes a one-year limitation period

for making a claim for compensation or a remedy in any of the following
circumstances: (1) personal injury; (2) selling defective goods, the quality
of which is not up to the standard, but without giving any notice to
buyers beforehand; (3) procrastinating or defaulting on rental payment; or
(4) incurrence of loss of one’s property, or infliction of damage to one’s
property, which is in the custody of somebody else.
And thirdly, the GPCL (Article 137) indicates that a limitation period is
calculated from the date on which a prospective claimant discovers or ought to
discover that his rights have been infringed; the court will not protect his rights
if twenty years have passed since the date on which the cause of action accrued;
under special circumstances, the court may extend the limitation period.
From the above provisions in the GPCL, a conclusion can roughly be arrived
at that a limitation period applied to general cases is two years, and will
not exceed twenty years at most. However, an indistinct area that warrants
clarification is under what circumstances a limitation period in excess of two
years will be applicable, whether there is any specific cause of action that
entitles a claimant to the twenty-year limitation period, why and under what
particular criteria the court may extend the limitation period, etc. The GPCL
appears silent on these questions.
In addition, the Contract Law (Article 129) specifically applies a four-year

limitation period to two types of contract: contracts for the international
sale of goods and contracts for the import and export of technology. No
justification is provided under the Contract Law why these two types of
contract are entitled to a four-year limitation period, whereas other types of
contract seem not to be. Moreover, it is difficult to accurately define what
kind of contract can be determined to be a contract for the international sale
of goods, or a contract for the import and export of technology. Nowadays,
the effect of globalization makes it less difficult to remove the conventional
demarcation line that partitions transactions into two distinct camps: domestic
and international. Moreover, international trade at the present time is no
longer exclusively earmarked as trade in goods, trade in services and trade
in technology, as they can be mingled together in many transactions which
are significantly more complex than traditional cross-border dealings. Hence,
deliberately differentiating contracts for import and export of technology from
other contracts of international trade may appear of far less significance.

(Article 153), where a claimant takes a civil action after the applicable
limitation period expires, the court shall take up the case, and after making
sure there is no ground for suspending, terminating or extending the limitation
period, the court will reject the claim.
In the case cited above, since the limitation period has elapsed, R will lose his
right to win the lawsuit if he takes court action for recovering the money he
lent to T. However, R’s right to take legal action will not be affected. He can
still file a lawsuit for debt repayment against G (T’s wife). His case will be
accepted by the court. But most likely the action will eventually be defeated,
because if the court cannot establish any ground for suspending, terminating
or extending the limitation period, it will flatly decline to support the claim.
The rule of the limitation of actions does not apply to all civil actions of any
nature. In the main, it applies to dealing with creditor/debtor relationships
in the fields of the law of obligations, such as contractual obligations, tort
victims’ compensation, etc. It does not apply to the protection of civil rights
in relation to personal rights (i.e. rights of personality and rights of personal
identity). That is to say, protection of the right to life and health, the right to a
name, the portrait right, the right to reputation, the right to public esteem, the
right of voluntary marriage, etc. will not be subject to the rule of the limitation
of actions. Those personal rights will always be under the protection of the
law and enforceable no matter how much time has passed. Moreover, the rule
of the limitation of actions does not apply to circumstances relating to damage
caused to property that belongs to the state, given that the property in question
has not been delegated by the state to individuals or legal persons to manage
(Supreme People’s Court’s Opinions on the GPCL, Article 170).
While a limitation period imposes a strict time limit within which a claimant
must commence legal proceedings in order to win his case by having his right
enforced by the court, an expiry of the limitation period will make the claim
become stale, but not the claimant’s right. If after the limitation period elapses
the claimant’s counterpart volunteers to fulfil an overdue obligation in favour
of the claimant, fulfilling such obligation by the claimant’s counterpart under
this circumstance will be cut off from any impact rendered by the previous
limitation period (GPCL, Article 138); that is to say, performing the unfulfilled
obligations anew will have nothing to do with the previous limitation period.
However, where the claimant’s counterpart volunteers to fulfil an overdue

obligation in favour of the claimant after the limitation period expires but
later on goes back on his word alleging that the limitation period has expired,
such refusal to fulfil his obligation anew based on the alleged reason will not
be accepted by the court (Supreme People’s Court’s Opinions on the GPCL,
Article 171).
The limitation of actions: Suspension, termination and

extension
The effects of the limitation of actions can be modified in some circumstances
by means of suspension, termination or extension.
Suspension
The GPCL (Article 139) admits that the effects of the limitation of actions
can be suspended if within the last six months of a limitation period during
its running the claimant is not able to exercise his right of making a claim due
to force majeure or other impediments; the effects of the limitation of actions
shall resume on the day when the cause of suspension ceases to exist.
Here, ‘other impediments’ under the Supreme People’s Court’s Opinions on

the GPCL are asserted to be circumstances where the rights of a person who
has no capacity or limited capacity for civil conduct are violated, he has no
agent ad litem to act on his behalf, or his agent ad litem is no longer entitled
to act on his behalf, or his agent ad litem dies, or his agent ad litem loses
capacity for civil conduct (Article 172).
Termination
Under the GPCL (Article 140), the effects of the limitation of actions can
be terminated if during the limitation period’s running one of the relevant
parties makes a claim, or commences legal proceedings, or agrees to fulfil
his obligations by accepting the claim made by the other party; when such
termination happens, the limitation period starts to be calculated anew.
That is to say, the time that has passed during the old limitation period’s
running will not be counted if such termination occurs, so it will not be
included in the new limitation period. The termination may happen at any
stage during the limitation period’s running. And no limit is imposed on the
time of such termination.
In this respect, the Supreme People’s Court’s Opinions on the GPCL

(Article 173, paragraph 1) provides that where such termination is triggered
by a claimant who makes his claim or his counterpart who agrees to fulfil his
obligation, if during the new limitation period’s running the claimant makes
his claim again or his counterpart agrees to fulfil his obligations again, this can
be deemed to be the occurrence of another termination. In this circumstance,
the limitation period has to begin again.
Based on the above, it is easy to identify the different roles played by

suspension and termination in modifying the effects of the limitation of
actions. Firstly, suspension only applies to the last six months of a limitation
Summary 85
period during its running, but termination can happen at any time. Secondly,
the cause of suspension is beyond control, but termination can be triggered
by taking an action of one’s own accord. And thirdly, after each termination,
the limitation period needs to begin again, but suspension will not negate the
ongoing limitation period and will only temporarily stop its running, which
can be resumed once the cause of suspension is no longer effective.
Extension
The GPCL (Article 137) allows the court to extend the limitation period under
special circumstances.
Such extension only applies when the limitation period has expired but the
court believes it is necessary to have the time limit prolonged by a certain
amount. It cannot be applied when the limitation period has not come to
an end. The law does not expound in a concrete way about under what
circumstances the court may at its discretion grant such extension and whether
there is any ceiling imposed on exercising such right.
From a theoretical standpoint, it can be generally assumed that the court will
only grant such extension when doing so can be justified as upholding social
justice and fairness (social justice and fairness can, however, be subject to a
broad interpretation).
Summary
A civil subject (a natural person or legal person) has civil rights under the law
to do something, not to do something, or to oppose other civil subjects doing
something. The civil capacity of a natural person or legal person includes the
capacity for civil rights and the capacity for civil conduct.
‘Natural person’ refers to a real human being. A natural person may have full
capacity, limited capacity or no capacity for civil conduct, depending on his
age, intellectual ability and mental health.
A guardian can be appointed for looking after those persons who have no
capacity or limited capacity for civil conduct (i.e. minors and mentally
disordered people).
Where a person’s whereabouts have been unknown for quite a long time
and no one knows whether he is still alive, the court will be in a position to
declare such person missing or dead according to the circumstances.
A legal person is a separate legal entity from those persons who establish it. It
is an entity with independent personality and civil capacity based on which it
enjoys civil rights and assumes civil obligations.
Juristic acts are classified into four types: valid juristic acts, void juristic acts,
voidable juristic acts and juristic acts with undecided validity.
Agency can be created by entrustment, by operation of law and by

designation. An agent shall not act in excess of the authority given by his
principal. He must fulfil his obligations in good faith.
The rule of the limitation of actions dictates that where a person intends to
take court action in order to make a claim, he must do so within a time period
prescribed by the law (i.e. the limitation period).
Practice questions
1 Alan Wang intended to borrow some money from Bill Li. He invited Bill
for a drink at a pub. Bill agreed to lend Alan RMB 10,000. The money
was given to him on the spot. Neither one mentioned when the money
was to be paid back.
On their way home from the pub, Alan and Bill were approached by
three robbers. Alan tucked the borrowed money into Bill’s pocket and ran
away. Bill was robbed of this RMB 10,000. Alan was relieved that he had
avoided losing the RMB 10,000 as he had repaid Bill at the right time.
Did Alan successfully fulfil his obligation to pay back the money
borrowed from Bill?
2 G borrowed RMB 300,000 from S. He promised to pay back the money

within six months.
G’s business failed, and he was unable to repay the money. G left home;
nobody knew where he had gone. One year after G disappeared, S applied
to the court for having G declared missing so that the debt could be repaid
from G’s property placed in the custody of G’s family members.
Can S successfully obtain such a judicial declaration?
3 In 1995, T, an engineer in Beijing, went on a business trip to Shenzhen

and disappeared there. In 2005, on the application of T’s wife, B, the court
in Beijing declared T dead. In 2007, B married Z.
In 2012, T reappeared. He requested that the court cancel the declaration

of his death and declare that B’s marriage with Z had ceased to be valid.
Discuss.
4 Yang is a director of a private company, Grand Fortune. He often enters

into contracts with outside parties on behalf of the company. Last week,
he hired a Bentley chauffeured car for Grand Fortune from XYZ, a firm
that offers prestige car hire services.
Yang drove the car to go sightseeing with his two relatives.
Today Grand Fortune received a bill from XYZ and was asked to pay a
RMB 100,000 car-rental fee. Grand Fortune refused to pay, on the ground
that Yang hired the car without obtaining prior permission from the
company.
Discuss.
5 Candy borrowed RMB 50,000 from Sandy in 2005. She promised to pay
back the money before the end of 2006. Candy failed to keep her promise,
but Sandy did not chase her for the money.
In early 2012, Sandy was in financial difficulty. She asked Candy to pay
back the money immediately. Candy promised to repay the money in four
instalments.
After the first instalment, Candy refused to pay back the remaining
amount, on the ground that the first instalment was made purely as a
courtesy to Sandy, since with the passage of a sufficiently long period of
time her obligation to pay this debt had ceased.
Discuss whether Sandy could recover the remaining amount of money

that Candy owed her.

1 A debtor should act in the best interests of his creditor. Alan did not pay
back the money in good faith. He passed the risk to Bill to avoid a loss
from robbery. This cannot release him from his debt obligation towards
Bill.
2 Only when two years have passed will it become possible to have a
person judicially declared missing. As there is an unsettled debt, S could
apply to the court for such a judicial declaration, but not at this point in
time.
3 The court could cancel the declaration of T’s death. But even though the
declaration is vacated, it would not be possible for the previous marriage
between T and B to be restored; B’s marriage with Z continues to be
valid.
4 An agency relationship exists between a company and its directors who

may have authority to act on behalf of the company. But a director must
act in the best interests of the company. Yang breached his duty. He is
liable to pay the car-rental fee personally.
5 Since after the limitation period expired Candy agreed to pay back the
money, if she failed to fulfil her promise again on the ground of the expiry
of the limitation period, such refusal would not be accepted by the court.
Chapter 3
The Property Rights Law
Introduction
Guan Zhong, a politician during the Spring and Autumn Period in ancient
China, believed that ‘ethics and social order presuppose economic well-
being.’ Mencius, the renowned ancient Chinese philosopher and an interpreter
of Confucianism in the Warring States Period, held the view that ‘only people
who can have their own property have the capacity to behave to high moral
standards.’ These sayings suggest the importance of private property in the
eyes of these sages, and their view that a system of private ownership is
essential to social order.
This chapter will focus on the law of property in China, where the law is
known as the Property Rights Law. Despite being a key ingredient in China’s
civil law framework, the Property Rights Law was promulgated later than
many other laws in China and more than fifty years after the founding of the
People’s Republic of China. This is largely because the Chinese Communist
Party had sought to establish a socialist society and ultimately a communist
society, in which social assets would be in public ownership.
In the late 1970s, however, China adopted a policy of economic reform

and opening-up, which would give rise to a radical transformation of the
country’s socioeconomic landscape. In the early 1990s, China abandoned
its development strategy that was based on a centrally controlled planned
economy, and adopted a new strategy to move towards a free-market economy
with socialist characteristics. This has brought an unprecedented growth in
wealth in the country and necessitated the legalization and systemization of
the protection of private assets. As a result, Article 13, paragraph 1 of the
90 The Property Rights Law
Constitutional Law (revised in 2004) made it clear that legitimate private

assets are ‘inviolable.’ The enactment of the Property Rights Law in 2007
reinforced this mandate, and can be viewed as a milestone of pragmatism in
the development of China’s legal framework within which both public and
private assets are envisaged to be safeguarded equally.
This chapter discusses the main features of property rights and analyses how
the Property Rights Law is structured, why it is needed in China and how the
three cardinal principles advocated under the law should be understood and
applied. It then focuses on several key areas of the law: the formation and
alteration of property rights; ownership; usufructuary rights; and property
rights relating to security.
The promulgation of the Property Rights Law

This section examines how the Property Rights Law was promulgated in
China. The first question that needs to be addressed is: what exactly are
property rights?
The definition of ‘property rights’

The term ‘property’ under the Property Rights Law covers ‘immovable
property’ and ‘movable property’ (Article 2, paragraph 2).
By Article 2, paragraph 3 , a ‘property right’ is viewed as the right over

specific property entitling the right holder to directly and exclusively control
the property in question; such right may refer to ownership, usufructuary
rights or property rights relating to security.
The exclusive nature of a property right lies in the right holder’s eligibility
to monopolize the property to such an extent that his property right is
enforceable against anyone in the world (other than himself).
For example, the statement ‘I have a luxury watch worth RMB 500,000’
displays my ownership of this watch: I am entitled to exercise my exclusive
property right over the watch entirely at my discretion. I can decide whether
I want to wear it myself or give it to a friend as a gift. No one is allowed to

interfere in how I use the watch or the way I dispose of it (if I am willing to
do so).
Sun (2008, 9) gives a good description of the features of a property right using
the idea of ‘three specifics’: ‘a specific right over a specific property held by a
specific person.’
As noted in Chapter 2, laws on things under the conventional civil law regime
include the law of property (i.e. the Property Rights Law) and the law of
obligations. As opposed to the term ‘property right’ used under the law of
property, the right is called the ‘obligee’s right’ (more commonly known as
the ‘creditor’s right’) in the law of obligations.
The obligee’s right is closely connected with the obligations that arise from
the established property relations as identified in the General Principles of
Civil Law (GPCL), Chapter 5, Section 2. In light of Article 84, paragraph 1
of the GPCL, obligations are understood as emanating from a relationship
created between two parties, with the party who is entitled to enjoy rights as
the obligee (the creditor) and his counterparty who has to fulfil obligations as
the obligor (the debtor). According to Article 84, paragraph 2 of the GPCL,
the obligee has the right to request the obligor to fulfil the latter’s obligations
in line with a contract or pursuant to the law.
However, unlike a property right, which is of an exclusive nature and can be

defended against claims made by anyone (other than the right holder) over
such right, the obligee’s right can only be enforced against the obligor (i.e. his
debtor) and not against anyone else. For example, the statement ‘T owes G
RMB 500,000’ illustrates the obligee’s right held by G over T: only G as the
obligee (the creditor) is entitled to seek repayment of that RMB 500,000 from
T; and, by the same token, only T as the obligor (the debtor) has to fulfil his
obligation of repaying G.
This illustrates the main difference between a property right under the law of
property (i.e. under the Property Rights Law) and the obligee’s right under the
law of obligations.
The structure of the Property Rights Law

In March 2007, the National People’s Congress passed the Property Rights
Law, which became effective in China on 1 October 2007.1
The Property Rights Law comprises five parts. General provisions are
contained in Part 1, and specific provisions in Parts 2 to 5.
Part 1, ‘General provisions,’ includes the following topics: cardinal principles;

the creation, modification, transfer and termination of property rights
(registration of immovable property, delivery of movable property, and
other rules); and the protection of property rights. The rules derived from
the general provisions contained in Part 1 apply to the specific provisions
included in Parts 2 to 5.
The title of Part 2 is ‘Ownership,’ and it includes the following topics: general
rules; state ownership, collective ownership and private ownership; ownership
in a condominium; a neighbouring relationship; co-ownership; and special
rules on acquiring ownership.
The title of Part 3 is ‘Usufructuary rights,’ and it includes the following topics:
general rules; the right to use contracted farmland; the right to use land for
construction purposes; the rural household’s right to use land for residential
purposes; and easement.
The title of Part 4 is ‘Property rights relating to security,’ and it includes the
following topics: general rules; mortgages (ordinary mortgages and maximum
mortgages); pledges (pledges of movable property and pledges of right); and
liens.
The title of Part 5 is ‘Possession,’ which refers to the situation in which a

property (either immovable or movable) is physically kept by a person who
temporarily or permanently controls it.
1 A Chinese version of the Property Rights Law can be found at: http://www.gov.cn/flfg/2007-
03/19/content_554452.htm. There is no official English version of the Property Rights Law at
present. English translations can be found in various sources, where the translations differ. The
author uses his own English translation in this book.
The English translation at the following website can also be used as a reference: http://www
.lehmanlaw.com/fileadmin/lehmanlaw_com/laws___regulations/Propoerty_Rights_Law_of_the_
PRC__LLX__03162007.pdf.
Under Article 2, paragraph 1, the Property Rights Law positions itself as a

set of legal regulations governing the ‘attribution and utilization of property.’
The attribution of property, which is established by the ownership of property,
is the core, based on which the utilization of property relies on some other
kinds of property rights like usufructuary rights and property rights relating to
security (in connection with mortgages, pledges or liens).
While ownership, usufructuary rights and property rights relating to security

all fall within the scope of property rights, possession (as the main theme in
Part 5 of the Property Rights Law) is not a property right, but refers to a
situation in which a property is physically occupied by a person, which is a
status that protects against any unauthorized or illegitimate occupancy of that
property.2
The passage of the Property Rights Law

There was fierce debate in China about whether the Property Rights Law
was needed. It took over 13 years from the first draft to final ratification for
the law to be passed, longer than for any other law in China, and drafts were
deliberated at the Standing Committee of the National People’s Congress and
the National People’s Congress eight times in total (Wei 2008, 491–92).
The official view in China on the promulgation of the law can be identified in
the following extract from the speech ‘Explanation on China’s Draft Property
Rights Law’ delivered by Wang Zhaoguo, vice-chairman of the Standing
Committee of the National People’s Congress, at the Fifth Session of the
Tenth National People’s Congress in 2007 (Xinhua 2007b):
The property law is a basic civil law that serves to regulate property
relationships and adjust civil relationships stemming from attribution
and the use of things, and it involves defining the property of the State,
the collective, individual and other obligees and protecting property.
2 By Article 245 of the Property Rights Law, where the legitimately possessed property (either
immovable or movable property) is illegally seized or impaired, the possessor will be entitled to claim
for the return of the property within one year after the seizure, or for the elimination of the impairment;
and will be eligible to seek compensation for any loss incurred due to such seizure or impairment.
China’s General Principles of the Civil Law, Land Administration

Law, Law on the Administration of the Urban Real Estate, Law on
Land Contract in Rural Areas, Guarantee Law, etc., include not a
few provisions on property, which have played an important role in
economic and social development. As the reform deepens, the opening-
up extends and the socialist economy, politics, culture and society
moves forward, in order to meet the requirements of materializing in an
all-round way the scientific concept of development and building of a
socialist harmonious society, it is necessary to enact a property law, in
accordance with the Constitution and on the basis of experience gained
through practice, to stipulate for questions of a general character in the
property system and questions in real life calling for urgent regulation,
thus further defining the attribution of things to avoid disputes, bring into
full play the usefulness of things, protect the property of the obligees
and improve the Chinese-style socialist property system.
Enacting the property law is necessitated by the need to uphold the basic
socialist economic system. Keeping public ownership dominant and
having the economic sectors of diverse forms of ownership develop side-
by-side constitute the basic socialist economic system of the State in the
primary stage of socialism. Enactment of the property law will serve to
define the scope of State-owned property and collective-owned property
and the exercise of State ownership and collective ownership and
strengthen protection of State-owned and collective-owned property, and
will be conducive to consolidating and developing the economic sector
of public ownership; and it will serve to define the scope of private
property and protect private property in accordance with law, which will
be conducive to encouraging, supporting and guiding the development
of the economic sector of non-public ownership.
Enacting the property law is necessitated by the need to regulate the

order of the socialist market economy. Clear-cut definition of property
and fair competition are the basic requirements for developing the
socialist market economy. Enactment of the property law will serve
to confirm the attribution of things, specify the contents of ownership.
Usufruct and security rights, ensure the equal legal status of the various
market subjects and their right to development and protect the property
of the obligees in accordance with law — all this will play an important
role in developing the socialist market economy.
Enacting the property law is necessitated by the need to safeguard the

immediate interests of the people. As the reform and opening-up and the
economy develop, people’s living standards have improved in general,
and they urgently require effective protection of their own lawful
property accumulated through hard work, of the right to land contractual
management they enjoy in accordance with law, and of their other
lawful rights and interests. Enactment of the property law will serve to
define and protect private ownership, condominium right, right to land
contractual management and house-site-use right, for the purpose of
protecting the immediate interests of the people, stimulating their vigour
to create wealth and promoting social harmony.
Enacting the property law is necessitated by the goal of establishing

a Chinese-style socialist legal system by 2010. Property law is an
important component part of the civil code, playing the role of a prop in
the Chinese-style socialist legal system. Enactment of the property law
provides an important step taken within the term of the current National
People’s Congress for giving a basic shape to the Chinese-style socialist
legal system.
Wang Zhaoguo’s speech was delivered just before the law was to be submitted
to the National People’s Congress for final deliberation and voting at that
session. The speech reveals legislators’ desire to draft an official piece of
legislation titled the ‘property law’ as a crucial step in improving the national
economic system by making it more responsive to the rapidly changing
domestic and international environments.
In this connection, the Property Rights Law is supposed to cover a range of

property-related matters, concentrating on property ownership and utilization,
with a view to protecting the property rights of all civil subjects on a level
playing field and galvanizing people’s creativity with a more transparent
regime for assuring property rights.
It is in this context that the Property Rights Law was finally passed at that
session of the National People’s Congress.
A legal framework for the protection of property was in fact already in place
prior to the promulgation of the Property Rights Law, though not in the form
of a single statute.3 The prevailing Constitution (promulgated in 1982, with the

latest revisions made in 2004) and the GPCL (enacted in 1986) both contain
provisions which can be used as general guidelines for understanding the key
substance embodied in a legal framework for the protection of property.
The protection of property under the Constitutional Law

The Constitutional Law stipulates that China is ‘a socialist country under the
leadership of the working class on the basis of an alliance between workers
and peasants, implementing the people’s democratic dictatorship’ (Article 1,
paragraph 1). It further provides in Article 1, paragraph 2 that the socialist
system is China’s basic system.
It is under this kind of political system that the Constitution provides

overarching direction on important property-related issues such as the essence
of China’s socialist economic system, specific types of economy in terms of
ownership characteristics, ownership of land and natural resources, protection
of public and private property, etc.
The essence of China’s socialist economic system

Under Article 6, paragraph 1 of the Constitutional Law, the essence of China’s
socialist economic system is described as ‘socialist public ownership of
the means of production’ which serves as ‘the basis of a socialist economic
system’; and two types of such socialist public ownership are mentioned: ‘all
people’s ownership’ and ‘collective ownership by labourers.’
According to Article 7 of the Constitutional Law, the term ‘all people’s

ownership’ has the same meaning as ‘state ownership,’ and economic
activities carried out by organizations under state ownership occupy a
dominant position in China’s national economy.
3 Jiang Ping of China University of Political Science and Law (whose views are presented in Zeng,
Xia and Zhang 2007) has stated that ‘the Property Rights Law is not the sole statute relating
to China’s property system’; ‘it is tailored to protect rights over visible property, and does not
mention the protection of rights over other kinds of property such as the protection of the obligee’s
right, intellectual property rights, or the shareholders’ right’; ‘what the Property Rights Law says
is not totally new vis-à-vis other enactments preceding the Property Rights Law.’
Another type of public ownership is ‘collective ownership by labourers’ (also

simply known as ‘collective ownership’), which applies to organizations of
such nature in both rural and urban areas. Hence, economic organizations in
collective ownership are called ‘economic organizations under rural collective
ownership by labourers’ or ‘economic organizations under urban collective
ownership by labourers’ respectively.
By Article 8, paragraph 1, the Constitutional Law views the economic

activities generated by means of cooperatives in rural areas in connection
with ‘production, sale, credit, consumption, etc.’ as falling into the domain
of economic activities carried out by economic organizations under the rural
collective ownership by labourers. Under the same paragraph, a member of
such organization (i.e. a peasant) can utilize the land distributed to him for
his own production and profit-making purposes based on a contract made
between the organization and the member for using the distributed land.
Under Article 8, paragraph 2, the economic activities generated by means

of cooperatives in urban areas in the fields of ‘handicraft, manufacturing,
construction, transportation, trade, services, etc.’ are included in the economic
activities carried out by economic organizations under urban collective
ownership by labourers.
Apart from earmarking state ownership and collective ownership by labourers

as the two constituents of socialist public ownership, the Constitutional Law
also indicates the legitimacy of non-public ownership that is allowed to co-
exist with socialist public ownership under China’s socialist economic system.
The economic activities generated from economic organizations under non-
public ownership (e.g. private ownership) are asserted to be ‘an important
constituent of the socialist market economy’ (Article 11, paragraph 1).
While economic activities carried out by state-owned organizations (i.e. under

all people’s ownership) are supposed to play the most influential role in the
Chinese economy, under Article 8, paragraph 3 and Article 11, paragraph 2,
the legitimate rights and interests of economic organizations under rural and
urban collective ownership by labourers as well as under private ownership
are also protected by the law.
With various kinds of property ownership available, China’s basic economic

system is portrayed by the Constitutional Law (Article 6, paragraph 2) as
a regime where public ownership is in the leading position and other kinds
of property ownership of a non-public nature are allowed to exist alongside
public ownership.
Ownership of land and ownership of natural resources

There are two kinds of land ownership under the Constitutional Law: state
ownership and collective ownership. Under Article 10, paragraph 1, land in
urban areas is owned by the state. According to Article 10, paragraph 2, land
in rural areas or located on the outskirts of cities is owned by collectives,
except in circumstances where the law specifically prescribes that such
land is owned by the state. Land in China may be subject to expropriation
or requisition by the state if the state needs to do so in the public interest;
and if this happens, the state will make compensation for carrying out such
expropriation or requisition (Article 10, paragraph 3). In light of Article 10,
paragraph 4, land ownership in China is not allowed to be assigned from its
current owner (i.e. the state or collectives) to any person or entity other than
the state or collectives; but land use rights can be transferred so that persons
or entities other than the state or collectives can acquire land use rights.
Ownership of natural resources under the Constitutional Law is also classified

as state ownership or collective ownership. Pursuant to Article 9, paragraph 1,
natural resources such as mineral reserves, water, forests, mountains, prairies,
wilderness, shoals, etc. are owned by the state; but forests, mountains,
wilderness, shoals, etc. that are prescribed by the law as belonging to
collectives are owned by collectives.
Protection of public and private property

The Constitutional Law renders protection to public property owned by the
state or collectives as well as to private property owned by individuals.
The law emphasizes the importance of protecting public property against

infringement. Article 12 stipulates: ‘The socialist public property is sacred
and inviolable. The state protects socialist public property. No organization or
individual is allowed to encroach on or damage the property that belongs to
the state or collectives.’
But Article 13, paragraphs 1 and 2 also make clear that private property
legitimately owned by individuals is ‘inviolable,’ and individuals are entitled
to the state’s protection of their private property and of their inheritance of
such private property. However, according to Article 13, paragraph 3, the
state may expropriate or requisition private property if it needs to do so in the
public interest; if this happens, the state will make compensation to victims
who suffer from such expropriation or requisition.
The protection of property under the GPCL

The GPCL Chapter 5 ‘Civil rights,’ Section 1 ‘Property ownership and related
property rights’ contains some provisions on the protection of property owned
by the state, collectives and individuals.
A product of the 1980s, the GPCL has not been amended since its
promulgation, unlike the Constitutional Law, which was revised in 2004. The
GPCL is therefore full of terminology that reflects that era. Although some of
this terminology may appear outdated and no longer of great relevance to life
today, the principles established under the GPCL are still useful and continue
to direct individuals and organizations of various kinds on safeguarding
their legitimate rights and on assuming corresponding obligations under the
framework of civil law.
Property ownership
The GPCL, first of all, states what ‘property ownership’ means, defining it as ‘a
property owner’s right to possess, use, gain from and dispose of his property’
(Article 71).
It further states under Article 72, paragraph 1 that property ownership shall
not be acquired in any manner that contravenes the law. Moreover, Article 72,
paragraph 2 provides that: ‘For property ownership obtained in accordance
with a contract or in other legitimate fashions, completion of the property’s
acquisition is counted from the time when the property concerned is delivered,
unless the law provides otherwise or the relevant parties are in agreement in a
different way.’
The protection of property owned by the state, collectives, individuals

and social organizations
In comparison with the Constitutional Law, the protection of property owned
by the state, collectives and individuals is elaborated on in a more descriptive
way under the GPCL.
Regarding property owned by the state, Article 73 provides: ‘The property

owned by the state belongs to all the people. It is sacred and inviolable against
any encroachment, plunderage, misappropriation, unauthorized retention, or
sabotage by organizations or individuals.’
As to the property owned by collectives, Article 74, paragraph 1 states:

‘The property owned by collectives of labourers belongs to the labourers
collectively, and such property may include (1) land, forests, mountains,
prairies, wilderness, etc. which belong to collectives according to what the law
stipulates; (2) any property that belongs to collective economic organizations;
(3) buildings, reservoirs, farm irrigation facilities, and facilities that are
owned by collectives and used for the purpose of carrying out activities in the
fields of education, science, culture, healthcare, sports, etc.; and (4) any other
kinds of property owned by collectives.’ Article 74, paragraph 3 provides: ‘No
organization or individual is allowed to encroach upon, plunder, retain without
authorization, sabotage, or illegitimately seize, detain, freeze or confiscate any
property owned by collectives.’
Apart from the protection of property owned by the state and collectives, the
GPCL also makes clear under Article 75, paragraph 1 that the personal assets
of citizens are also protected by the law. It enumerates such assets as including
‘citizens’ legitimate income, housing, savings, daily-use items, cultural relics,
books and reading materials, trees, livestock, and the means of production
allowed by the law to be owned by individuals, as well as any other legitimate
assets.’ Article 75, paragraph 2 further provides: ‘No organization or
individual is allowed to encroach upon, plunder, retain without authorization,
sabotage, or illegitimately seize, detain, freeze or confiscate any property that
is legitimately owned by individuals.’
There are few words in the GPCL about the protection of property owned
by social organizations. Article 77 has a single sentence: ‘Legitimate assets
belonging to social organizations (including religious organizations) are

protected by the law.’
Ownership of land
On the basis of the Constitutional Law, the GPCL points out in Article 80,
paragraph 1 that organizations in all people’s ownership or collective
ownership are eligible to use the land owned by the state, and their such use
of the state’s land and any gain from it are protected by the law. However,
that same paragraph points out that users of the state’s land have to honour
the obligations of ‘managing, protecting and reasonably utilizing the land.’ In
light of Article 80, paragraph 3, land ownership is ‘not allowed to be bought
or sold, rented out, mortgaged, or illegitimately transferred through other
means.’
Regarding rural land, the GPCL indicates under Article 74, paragraph 2 that
while such land is in theory owned by all peasants collectively in each village,
it is in practice controlled and administered by rural collective organizations
at the village level or by villagers’ committees (a kind of self-regulating
organization of villagers in China’s rural areas). By Article 80, paragraph 2,
individual peasants have the right to enter into contracts with rural collectives
for using the land owned by rural collectives or using the land that is owned
by the state but is under the control of rural collectives.
Ownership of natural resources

Following the Constitutional Law, the GPCL states in Article 81, paragraph
1 that organizations in all people’s ownership or collective ownership
are entitled to use natural resources such as forests, mountains, prairies,
wilderness, shoals, water, etc. that are owned by the state; their use and any
gain from it are protected by the law. Nonetheless, in the course of using
natural resources, users will have to satisfy their obligations of ‘managing,
protecting and reasonably utilizing the natural resources concerned,’ according
to Article 81, paragraph 1.
Pursuant to Article 81, paragraph 3, individuals and collectives may

by establishing contractual relationships enable themselves to use the
forests, mountains, prairies, wilderness, shoals, and water that are owned
by collectives or that are owned by the state but are under the control of
collectives.
Article 81, paragraph 4 indicates that mineral reserves and water that are
owned by the state, as well as those forests, mountains, wilderness and shoals
that are prescribed by the law as belonging to collectives are ‘not allowed to
be bought or sold, rented out, mortgaged, or illegitimately transferred through
other means.’
Ownership of buried/hidden property

According to Article 79, paragraph 1 of the GPCL, any buried/hidden property
the owner of which cannot be identified will be counted as belonging to the
state.
Relations between neighbours

Whether people live in cities, towns or the remote countryside, they will have
neighbours. The GPCL under Article 83 advocates a spirit of cooperation and
requires provision of mutual convenience in neighbourhood relations when
tackling practical problems such as the supply of water, drainage, passage,
ventilation, lighting, etc.
Also under Article 83, if any party is causing hindrances or damage to a

neighbour, he must stop doing so, remove such hindrances, and compensate
his neighbour for any injury caused.
The Property Rights Law: An attempt to address practical

issues
The above discussion demonstrates that the Constitutional Law, by revealing
the essentials of a socialist economic system, provides the basic principles
that are the foundation of China’s property regime. The GPCL prescribes rules
in a more descriptive way relating to the substance contained in the regime.
Apart from the Constitutional Law and the GPCL, there are other laws pre-
dating the Property Rights Law which govern property rights, though the
term ‘property rights’ does not appear in them. These laws, which created a
series of technical directives in special fields, include the Guarantee Law of
19954, the Land Administration Law of 1986 (most recently revised in 2004)5,
the Urban Real Estate Administration Law of 1994 (revised in 2007)6, the
Farmland Contracting Law of 20027, etc.
The legal landscape relating to the protection of property rights before the
formation of the Property Rights Law thus comprises a collection of legal
guidelines introduced under different laws rather than a single statute tailored
to address property rights.
One might raise the following questions: Does China really need the Property
Rights Law in addition to those relevant laws already in force? What special
purposes is the Property Rights Law supposed to serve against the backdrop
of current social and economic vagaries in China?
Firstly, in tune with the Continental civil law tradition, a property rights law
is a key building block in a civil law regime. In this sense, China’s Property
Rights Law is an important step towards developing a Chinese civil law
system faithful to the conventional civil law paradigm.
Secondly, China had flourished economically since its reform and opening-
up initiatives in the late 1970s. Asset ownership and distribution has changed
tremendously in the country. A failure to keep pace with such change left many
legal vacuums, and explicit definitions, interpretations and directions were lacking
for many issues, in particular regarding the ownership and utilization of property.
4 A Chinese version of the Guarantee Law can be found at: http://news.xinhuanet.com/legal/2003-

01/21/content_700658.htm. There is no official English version of the Guarantee Law. A
recommended English translation can be found at: http://np.china-embassy.org/eng/EconomyTrade/
zchfl/t167703.htm.
5 A Chinese version of the Land Administration Law can be found at: http://news.xinhuanet.com/
zhengfu/2004-08/30/content_1925451.htm. There is no official English version of the Land
Administration Law. A recommended English translation can be found at: http://www.fdi.gov.cn/
pub/FDI_EN/Laws/GeneralLawsandRegulations/BasicLaws/P020060620320252818532.pdf. The
author uses his own English translation in this book.
6 A Chinese version of the Urban Real Estate Administration Law can be found at: http://house.
people.com.cn/GB/6195717.html. There is no official English version of the Urban Real Estate
Administration Law. A recommended English translation can be found at: http://www.npc.gov.cn/
englishnpc/Law/2009-02/20/content_1471592.htm.
7 A Chinese version of the Farmland Contracting Law can be found at: http://www.china.com.cn/
chinese/PI-c/196651.htm. There is no official English version of the Farmland Contracting Law.
A recommended English translation can be found at: http://www.gov.cn/english/2005-10/09/
content_179389.htm. The author uses his own English translation in this book.
The following examples are cited to illustrate some of these uncertainties:
• How can the legitimate interests of people who are affected by land
expropriation, housing demolition and relocation be safeguarded against
infringement arising from the arbitrary exercise of public power?
• Considering that the tenure of the right to use land for construction
purposes in urban areas is only 70 years, will a current land user lose
his entitlement to use the land 70 years later? Say a person has bought a
house in Shanghai. Will that person no longer be able to occupy the house
after the 70-year tenure expires?
• Where a peasant has made a contract with the rural collective in his
locality for using a piece of collectively owned farmland to carry out his
own agricultural production, after such contract comes to an end, will
he be able to continue using the farmland, or will he have to surrender
it to the collective with a result that he will have no land to support his
family’s livelihood?
• More and more urban people are living in high-rise condominiums. Do

those homeowners also have ownership over the public facilities in the
condominiums, e.g. passageways, lawns, elevators and parking lots?
• In the waves of mergers and acquisitions involving state-owned

enterprises, how can it be ensured that assets of those enterprises will not
be lost or illegally seized by senior management?
The Property Rights Law attempts to address these and other practical issues.
The three cardinal principles of the Property

Rights Law
Generally speaking, the Property Rights Law is designed to deal with the
formation and alteration of property rights in connection with immovable and
movable property. Three cardinal principles are advocated in the law, namely,
the principle of the equal protection of property rights, the principle of the
legality of property rights, and the principle of public notice and the good-
faith acquisition of property rights.
The equal protection of property rights

The principle of the equal protection of property rights has two layers of
connotation.
Firstly, property rights are protected under the law.
Some general principles on the protection of property rights are set forth in
Chapter 3 of the Property Rights Law as follows.
Where there is a disagreement over the attribution or content of a property right,

the relevant parties are entitled to ask to have their rights verified (Article 33).
In the case of unauthorized possession of immovable or movable property,

the right holder is entitled to ask the illegal possessor to return the possessed
property to him (Article 34).
Where a property right is (or is likely to be) encumbered, the right holder is
entitled to ask to have the encumbrance removed or have any danger cleared
(Article 35).
If the immovable or movable property is damaged by somebody else, its right

holder is entitled to ask to have the damaged property mended, recreated,
replaced or restituted (Article 36).
In the event of violating a property right leading to damage caused to the

right holder, the right holder is entitled to claim compensation for the damage
against the wrongdoer or to ask the wrongdoer to bear other civil liabilities
(Article 37).
Where a property right is injured, apart from bearing civil liability, the
wrongdoer may also have to assume administrative liability if his act has been
in violation of any administrative regulation, or he may face a criminal charge
if his wrongdoing has constituted a crime (Article 38, paragraph 2).
By Article 32, a property right holder, if his property right is violated, may
choose to have his grievance redressed by means of ‘reconciliation, mediation,
arbitration or litigation.’
The second layer of connotation of the principle of the equal protection of

property rights is that property rights held by different civil subjects (e.g. the
state, collectives and individuals) are equally protected under the law.
The basis of this theory is found in Articles 3 and 4.
Article 3 provides that: ‘In the preliminary development stage of socialism,

the state adheres to operating under a basic economic system where the
economy led by public ownership is dominant and the economies taking
diversified forms of ownership jointly grow. The state consolidates and
develops the economy led by public ownership. And it also encourages,
supports and directs the economies controlled under non-public ownership.
Running a socialist market economy, the state safeguards the equalitarian
legal status and right of development of all players in the market.’
Under Article 4, property rights of the state, collectives and individuals are
protected by the law, and no organization or person is allowed to violate such
property rights.
Articles 3 and 4 can be easily construed to mean that the property rights of the
state, collectives and individuals are protected equally, and no one is entitled
to privileged protection.
However, such equality as depicted under the principle of the equal protection
of property rights does not appear to unerringly dovetail with the conventional
socialist dogma that stresses the uncompromised supremacy of the rights and
interests of the state and collectives, to which individuals’ rights and interests
must succumb. The inviolability of socialist public assets are articulated in
both the Constitutional Law and the GPCL, seemingly suggesting the uneven
entitlement of the state, collectives and individuals to asset protection under
the law. This has sparked fierce debate on the propriety of constructing and
applying the Property Rights Law in socialist China.8
The legality of property rights

Article 5 of the Property Rights Law provides that: ‘The types and contents of
property rights are laid out in the law.’
Article 5 illustrates the essence of the principle of the legality of property

rights: the types and contents of property rights are prescribed by law and are
8 The most renowned contender is Gong Xiantian of Peking University. Gong’s key arguments are
covered in Sui (2007).
not allowed to be created by means of reaching an agreement between any

parties based on their willingness and preference.
The conventional civil law doctrine of private law autonomy contradicts the
principle of the legality of property rights, and cannot apply to governing
property rights. Unlike making contracts, which fully respects the free will of
the contracting parties in terms of who enters into the contracts, the method of
making the contracts and the adoption of contract terms, the types of property
rights and their contents must strictly follow what the law sets out, so they are
non-negotiable and non-alterable.
That is to say, not only the types of property rights are fixed as prescribed by
the law, so are the contents of property rights, i.e. those in connection with the
creation, modification, transfer and termination of property rights.
Of course, in different societies with different political, economic and cultural

characteristics, the types and contents of property rights prescribed by law
may differ.
Take the following example. During the Cultural Revolution in China,

spanning from 1966 to 1976, houses as private assets owned by individuals
were viewed as a gain from exploitation of the proletariat by the bourgeoisie.
Therefore, private houses owned by individuals were a symbol of class
exploitation. Mr Liu, a retired entrepreneur, is an owner of ten large private
houses in Beijing. In 1967, under family pressure, he donated all these houses
to the government to show that he was completely parting with private assets
and joining the proletariat. The government subsequently rented out the
houses out as public assets. With the end of the Cultural Revolution and the
country’s return to normal political and social life, the government started
to return private houses which were confiscated or unwillingly donated to
the government during the Cultural Revolution to their original owners.
The government gave back Mr Liu’s houses to his only daughter, Miss Liu
(both Mr Liu and his wife were deceased). The houses at that time were fully
occupied by public housing tenants who had lived there for a long time. Most
of them chose to move out immediately, or enter into lease agreements with
Miss Liu for their continued occupancy. However, one occupant, Mrs Huang,
who has lived there as a public housing tenant for more than thirty years,
refused to move out or make a lease agreement with Miss Liu. She argues
that as an unemployed old lady she has nowhere to go and no money to rent a
dwelling. This deadlock is yet to be broken today. So one may wonder if there
is any way that Miss Liu’s property right over the house occupied by Mrs
Huang can be effectively enforced. In fact, Miss Liu’s ownership of the house
is protected under the law. Mrs Huang’s occupancy of the house as a public
housing tenant was formed in a special historical circumstance, which could
not negate Miss Liu’s entitlement to having the house returned to her. Mrs
Huang’s continued occupancy violates Miss Liu’s legitimate property right
over the house. Mrs Huang should move out or enter into a lease agreement
with Miss Liu. Miss Liu may consider taking court action in order to recover
the house from Mrs Huang. As an unemployed old lady, Mrs Huang may
have nowhere to go or no money to rent a house. However, tackling this
problem, which ought to be the responsibility of the government’s social
welfare department, should not constitute a bar to Miss Liu’s enjoyment and
realization of her property right over the house.
Public notice and the good-faith acquisition of property

rights
The principle of public notice and the good-faith acquisition of property
rights can be further divided into two separable but co-related doctrines: the
principle of public notice of property rights and the principle of the good-faith
acquisition of property rights.
The principle of public notice of property rights

Under the principle of public notice of property rights, the formation or
alteration of property rights (such as the creation, modification, transfer or
termination of property rights) must be made known to the public in a specific
manner as prescribed by the law, to the effect that anyone can be assumed
to have noticed such formation or alteration of the property rights before
becoming involved in any relevant transaction.
Article 6 of the Property Rights Law contains the key information relevant
to the public notice of property rights. Pursuant to Article 6, the creation,
modification, transfer or termination of property rights over immovable
property must be registered in order to take effect, whereas the creation or
transfer of property rights over movable property can be deemed as coming
into force once delivery of the property concerned is made and it does not
need to be registered. In practice, delivery of movable property takes the form

of possession of that movable property.
In light of Article 16, the government registration authority maintains a

register of immovable property as evidence of the attribution and content of
a property right. That is to say, the formation or alteration of a property right
of immovable property (e.g. a house), but not movable property (e.g. a book),
can be identified by checking this register at the registry.
The formation or alteration of a property right over movable property is

supposed to be made known to the public through physical delivery of that
property, based on which the public takes it that the property right belongs to
the current possessor of that property.
The principle of the good-faith acquisition of property rights

Under the principle of the good-faith acquisition of property rights, where a
person transacts in order to acquire a property right by relying on the property
right’s open status, if such open status is not a genuine representation, given
that he acts in good faith (i.e. he does not know or has no reason to know
that such open status is not genuine), the transaction completed will be taken
as valid and binding, and he can successfully acquire the property right as a
result of that transaction.
The principle of the good-faith acquisition of property rights is expressed in

Article 106, paragraphs 1 and 2 of the Property Rights Law.
By Article 106, paragraph 1, where a person who has no right to transfer the
immovable or movable property transfers the property in question to another
person, the property’s right holder is entitled to have the property returned
to him; but unless the law provides otherwise, the transferee can acquire
ownership of the immovable or movable property transferred if the transfer
can meet the following conditions: (1) the transferee acts in good faith;
(2) the transfer price is reasonable; (3) the immovable or movable property
after being transferred has been registered if such registration is required
by the law, or has been delivered to the transferee if no such registration is
required by the law.
Article 106, paragraph 2 further states that where the transferee acquires
ownership of the property as described in the preceding paragraph (i.e.
Article 106, paragraph 1), the property’s original right holder is entitled to
claim compensation for the loss against the transferor who has no right to
make such transfer.
Applying the principle of the good-faith acquisition of property rights aims at

ensuring that the interests of a bona fide purchaser can be fairly protected, so
even though he transacts with a seller who is not entitled to sell what he buys,
he will not be deprived of his ownership over the property which he obtains in
good faith.
For example, T, who is domiciled overseas, leased his house in Shanghai

to G. By bribing an officer in charge of the government’s register on real
estate transactions, G discreetly had the house owner’s name recorded at the
register changed from T to G, and then sold the house to C. C knew nothing
about who the true house owner was, and transacted with G relying on the
information provided by the register. In this circumstance, if the house was
sold to C at a reasonable price and registration of transferring ownership in
the house to C was completed, C as a bona fide purchaser (i.e. a person who
purchased the house in good faith) could successfully acquire ownership of
the house. His entitlement to owning T’s house would not be denied under the
principle of the good-faith acquisition of property rights.
However, the principle of the good-faith acquisition of property rights will not
apply if that person does not act in good faith in the course of acquiring the
property right. In the above example, if before purchasing the house from G,
C clearly understood that G was not the true owner of the house and had no
right to sell it, then the transaction between G and C would not be allowed to
take effect; so C eventually would not be able to become owner of the house
through this deal.
Here is another example. T and G entered into a contract with the following
terms: ‘T sells his house to G for RMB 300,000; G pays T RMB 150,000
within a week after the contract is made; T delivers the house to G on the
day when he receives this RMB 150,000; the balance is to be paid to T by G
within two months after the house is delivered to G.’ Strictly following the
contract terms, G paid RMB 150,000 to T, and T delivered the house to G,
both on schedule. However, they did not carry out a pre-notice registration at
the government registration authority in order that any potential buyer would
notice the property right over this house. After G moved into the house,
C told T that he was willing to buy the house for RMB 350,000. Thus, T
and C entered into a contract, according to which T sold the house to C for
RMB 350,000. On the same day, C made a full payment to T. They also
completed the registration of this transaction at the government registration
authority. As a consequence, C was registered as the new owner of the house.
C showed to G an official registration paper proving C’s ownership over
the house. He asked G to move out of the house within two weeks. G was
dumbfounded. He had no doubt that he had legitimately become the owner of
the house. G thought that C’s request was ridiculous. How would this problem
be resolved? One has to remember that the transfer of a property right over
immovable property (e.g. a house) has to be registered in order to take effect.
Entering into a contract and fulfilling the required contractual obligations is
not enough. In the current circumstances, C successfully acquired ownership
of the house by registering his deal with T. G should move out, although he
could recover the RMB 150,000 he paid to T, and make a compensation claim
against T for any loss incurred due to T’s breach of the contract.
The Property Rights Law: No panacea

The promulgation of the Property Rights Law was an important move in
China’s historical and social evolution. The political philosophy pursued by
Sun Yat-sen, the forerunner of China’s democratic revolution, was known as
the Three Principles of the People: People’s Nationalism, People’s Democracy
and People’s Livelihood. While national independence and a decent livelihood
for people have been achieved, the goal of setting greater store by people’s
legitimate civil rights on the basis of democracy and justice has not yet been
attained. The promulgation of the Property Rights Law is a bold step in this
direction. Adding this distinctive new element to the Chinese civil law regime
can contribute to the development of China’s general legal system.
However, the Property Rights Law is not a panacea for all problems. It sets
out a series of legal directions on property ownership and utilization in more
detail than the Constitutional Law or the GPCL do, and is a single statute
exclusively focusing on property rights. However, it still lacks the depth and
technical fineness required to facilitate effective implementation of the legal
principles and regulations prescribed by it. Moreover, it is no substitute for the
more technical laws already in force that are of relevance to property rights.
Hence, unless a series of detailed implementation rules for the Property Rights
Law is issued, the role of the law may become less significant. Moreover,
even when such rules become available, whether they can ultimately be
enforced along with the provisions set out in the Property Rights Law with the
expected effect is not an issue that the Property Rights Law itself can handle.
This is a problem that often needs to be confronted when enforcing laws in
China.
The formation and alteration of property rights

In many textbooks on the Property Rights Law authored by Chinese scholars,
a term in Chinese which means literally ‘a change in property rights’ is used
as a chapter title (e.g. Liang and Chen 2007, 66–105; L M Wang, Yin and
Cheng 2007b, 70–135). In fact, the term is more accurately interpreted as
the ‘formation and alteration of property rights,’ which denotes the creation,
modification, transfer and termination of property rights.
The creation of a property right refers to bringing into existence a property

right over immovable or movable property that did not exist before. For
example, with a mortgage established over a house which is used as a secured
asset for a loan application, the property right of the lending bank is created.
In the event that the borrower fails to pay back the loan, the lending bank
is entitled to exercise its property right to have its loan repaid out of the
proceeds from selling the mortgaged house.
The modification of a property right refers to making a change to the contents

of a property right in existence with the right holder remaining unchanged.
For example, the tenure of an acquired land use right may need to be extended
in response to a change in circumstances.
The transfer of a property right denotes having a property right assigned from
the original property right holder to another person. For example, A sells his
house to B, leading to ownership of A’s house being transferred to B.
The termination of a property right is the cessation of an existing property

right. For example, with the tenure of a land use right coming to an end, the
property right concerned (i.e. the land use right) ceases to exist.
Key ingredients in the formation and alteration of property

rights
On the surface, the formation and alteration of property rights are activated
by the formation of a contract by relevant parties for the purpose of creating,
modifying, transferring or terminating a property right. However, the
formation or alteration of the property right is actually only accomplished
when registration is completed for the formation or alteration of the property
right in the case of immovable property, or when the property itself is
delivered in the case of movable property. In other words, there are two key
ingredients in the formation and alteration of a property right: making a
contract and giving public notice.
These two key ingredients constitute the main substance embodied in the
principle of distinction. In accordance with this principle, establishing a
contractual relationship, which is viewed as a juristic act under the law of
obligations, ought to be distinguished from the effect of the formation or
alteration of property rights as prescribed under the Property Rights Law,
although their final goal is the same, i.e. to realize effective formation or
alteration of property rights.
In commerce, for example, a purchase or sale contract must be entered into

to buy or sell a house. But this merely opens the way to a possible change in
the house’s ownership. Only after such transaction is appropriately registered
at the government registration authority will the house’s ownership be
effectively transferred from the seller to the buyer. Similarly, merely entering
into a mortgage contract will not be sufficient for a mortgage to take effect.
To take effect, the mortgage deal must subsequently be registered at the
government registration authority.
On the other hand, under the principle of distinction, failing to give proper
public notice will not affect the validity of the contract. The contractual
relationship established will not be denied, and non-performance or
unsatisfactory performance of the contract will lead to assumption of liability
for breach of contract in an ordinary sense.
The principle of distinction has its basis in the provisions of the Property
Rights Law.
Article 14 states: ‘The creation, modification, transfer or termination of a

property right over immovable property, if it is required by the law to be
registered, will start to take effect after it has been documented in the register
of immovable property.’
Article 15 provides: ‘A contract made between the relevant parties for

creating, modifying, transferring or terminating a property right over
immovable property will come into force on its formation, unless the law
provides otherwise or the relevant parties have agreed differently; the
contract’s validity will not be affected if the required registration is not made.’
Furthermore, Article 23 provides that the creation or transfer of a property

right over movable property will start to take effect on such property’s
delivery.
Methods for the formation and alteration of property rights

In Chapter 2, a juristic act was conceptualized as an act of a civil subject that
gives rise to the creation, variation or termination of his civil rights and civil
obligations. The formation and alteration of property rights in China generally
take place in two ways: based on juristic acts or not based on juristic acts.
The formation and alteration of property rights based on juristic acts

The most common method used for the formation or alteration of property
rights is that based on juristic acts. In this method, the prerequisite for the
formation or alteration of property rights is the carrying out of a relevant
juristic act. An act of entering into a contract aimed at creating, modifying,
transferring or terminating a property right is a typical example of such a
juristic act.
However, successful completion of the process of formation or alteration

of a property right requires subsequently giving public notice about such
juristic act, as illustrated by registration of the act in the case of immovable
property or delivery of the property in the case of movable property, so that
the formation or alteration of a property right can come into force.
There is an exception to this rule: the formation or alteration of a property

right in connection with the right to use contracted farmland, an easement
or mortgaged movable property does not need to satisfy the requirement of

giving public notice; merely appropriately performing a relevant juristic act
(e.g. entering into a contract) will suffice for the formation or alteration of the
property right to take effect. In this respect, according to the provisions of the
Property Rights Law, the right to use contracted farmland is viewed as being
created when the contract for creating such right comes into effect (Article
127, paragraph 1); an easement is viewed as being created when the contract
for creating such easement becomes effective (Article 158); a property right
over mortgaged movable property is viewed as being created when the
contract for creating such mortgage comes into force (Article 188).
The formation and alteration of property rights not based on juristic

acts
Another method used for the formation and alteration of property rights is that
not based on a juristic act. This method is far less common than the method
based on a juristic act.
Under the method not based on a juristic act, the process of the formation
or alteration of a property right does not start from performing a juristic act.
Instead, the formation or alteration of a property right is directly accomplished
by the operation of the law. This usually happens when the formation or
alteration of a property right is a result of following a decision made by the
government, or a court’s judgment or an arbitral award.
There is no need to have the formation or alteration of property rights not

based on juristic act made known to the public in order for it to take effect.
However, if after the formation or alteration of a property right using this
method is accomplished the property right is further altered, then the rule
of giving public notice will apply to this further change, and public notice
must be made by means of registration in the case of immovable property or
delivery in the case of movable property.
The provisions contained in Section 3 of Chapter 2 of the Property Rights

Law relate to the method of the formation and alteration of property rights not
based on juristic acts.
According to Article 28, in the event that the creation, modification, transfer
or termination of a property right is a result of following a court’s judgment,
or an arbitral award or a decision made by the government for carrying out

the expropriation of the property, the resultant formation or alteration of the
property right will come into force when the court’s judgment or the arbitral
award or the decision of the government on carrying out expropriation
becomes effective (Article 28).
By Article 29, where a property right is acquired as a result of inheritance

or bequeathal, such acquisition will become effective when the relevant
inheritance or bequeathal comes into force.
Under Article 30, if a property right is established or extinguished as a

consequence of carrying out legitimate house construction or dismantlement,
the creation or termination of the property right will be deemed to be effective
when such activity is accomplished.
Pursuant to Article 31, after a property right over immovable property is

acquired in a way described in Articles 28 to 30, any further alteration of the
property right will need to be registered; otherwise such further alteration
cannot come into force.
For example, John Chen brought to court a dispute between him and Robert
Wang on the ownership of a house, which according to the record at the
government’s real estate registration authority belonged to Robert. Eventually,
it was held by the court that the house belonged to John. Although at the time
the judgment was issued the record at the government’s real estate registration
authority had not been changed, this would not have any impact on the fact that
John had already become the legal owner of the house. Based on this judgment,
John is entitled to have the owner’s name changed from Robert Wang to his
own name. However, before the record is updated, John is not in a position to
sell the house to somebody else or apply for a loan secured by the house.
Public notice of the formation and alteration of property rights

As mentioned earlier, giving public notice of the formation or alteration of the
property right for immovable property requires carrying out registration of the
formation or alteration, while for movable property it requires delivery of the
property.
Take the following example. In 1995, Grand Sunshine (a state-owned

enterprise) purchased ten luxury flats from a real estate developer. It then
offered to sell the flats to members of its senior management team at an

unreasonably favourable price as part of their benefits package. Huang, then
finance director of Grand Sunshine, bought such a flat. In the flat’s ownership
certificate issued by the government registration authority, it is stated that
‘Huang is the owner of this flat and is entitled to sell, mortgage or bequeath
the flat given that Grand Sunshine holds a pre-emptive right to buy it in the
event that Huang sells it.’ In 2012, Huang was fired by Grand Sunshine due
to misconduct in the course of employment. On the day Huang left Grand
Sunshine, Grand Sunshine’s Head of Human Resources asked Huang to
return his flat to Grand Sunshine on the ground that ‘as we are no longer in
an employment relationship, you will not be eligible to continue occupying
this flat.’ Would Huang be deprived of his ownership of the flat after being
dismissed by Grand Sunshine? The answer is no. Huang legally acquired
the flat’s ownership certificate; this indicates that the flat purchased has been
properly registered at the government registration authority. The dismissal
will have no impact on Huang’s ownership of the house.
The formation and alteration of property rights over

immovable property
Immovable property (such as land or houses) is usually viewed as a high-
value asset. So any change made to the related property right has to be treated
cautiously. Such prudence is evident in the Property Rights Law, which
establishes a registration system for coping with the formation and alteration
of property rights over immovable property. Any such formation or alteration
must be registered to be legally recognized as coming into force.
In light of Article 9, paragraph 1 of the Property Rights Law, the creation,

modification, transfer or termination of property rights over immovable
property will be valid only after it is lawfully registered; it will not be valid if
it is not registered.
According to Article 14 of the Property Rights Law, the creation, modification,

transfer or termination of property rights over immovable property comes into
force from the moment it is recorded in the register of immovable property.
Here, the register of immovable property refers to a list of records maintained
at the government registration authority, which under Article 16 is used as
evidence of the attribution and content of property rights.
For example, T sold his house to G. G thinks he is now owner of the house
as he has made full payment to T. In fact, G is not correct, because the
house’s ownership can only be officially transferred to G after the transaction
between T and G is appropriately registered at the government registration
authority.
There is an exception to the requirement that the formation or alteration

of property rights over immovable property needs to be registered in order
to come into force. The exception applies to the formation or alteration of
property rights in connection with the right to use contracted farmland, an
easement, or relating to the formation or alteration of property rights not
based on a juristic act. Also, Article 9, paragraph 2 of the Property Rights Law
provides that the state’s ownership of natural resources does not need to be
registered.
Establishing a uniform registration system of immovable property

Article 10 of the Property Rights Law states the following: ‘Immovable
property’s registration shall be carried out at the registration authority in
charge of the place where the immovable property concerned is located. The
state operates a uniform registration system. The law and administration
regulations set out the scope of this uniform registration system, the
registration authority, and the procedures for carrying out the registration.’
Article 10 obviously suggests an objective of running a uniform registration

system of immovable property on a countrywide basis. However, it only
establishes some general principles. The Property Rights Law does not
include detailed implementation guidelines that could be relied on in the
course of operating this uniform registration system.
• Registration authorities
In practice, the registration of immovable property at the present time is

operated under the different regimes in China.
In terms of legal guidelines that govern the registration of immovable

property, the laws promulgated prior to the enactment of the Property
Rights Law, such as the Land Administration Law, the Urban Real
Estate Administration Law, the Guarantee Law, etc., are also relevant;
administrative rules and policies of various government departments at

the ministerial level, e.g. the Ministry of Land and Resources and the
former Ministry of Construction (now known as the Ministry of Housing
and Urban-Rural Development), play an important role too.
At the operational level, the government departments responsible for

land administration, real estate administration, forestry administration,
and in the fields of the post office and railway, now each run their own
registration systems that apply to the registration of the immovable
property that belongs to the state-owned enterprises or administrative
entities exclusively under their administrative control. This situation of
multi-authority registration suggests it will be difficult to develop and
run a uniform registration system at present. This is because establishing
a single-authority registration framework would sacrifice the vested
interests of those registration authorities who may benefit from current
multi-authority registration.
Legislators must have been fully appreciative of the current difficulty

in running a fully-fledged uniform registration system of immovable
property. Therefore, a compromise is made under Article 246 allowing the
formation of local regulations on the registration of immovable property
that as tentative measures apply to local jurisdictions, before laws and
administrative regulations can provide for detailed directions that apply
to the whole country on the scope of a uniform registration system of
immovable property, the registration authority, and the procedures for
carrying out such registration.
Interestingly, the compromise made under Article 246 relates to the

‘formation of local regulations’ only. The Property Rights Law does not
mention whether the prevailing framework of multi-authority registration
should be abolished or retained.
• Registration documents
Under the Property Rights Law, the principal registration documents

relating to the registration of immovable property include registers of
immovable property and ownership certificates of immovable property.
By Article 16, registers of immovable property are maintained at the

government registration authority evidencing ownership and the content
of property rights over immovable property. They are a collection of

records of registered property rights (e.g. ownership) over the immovable
property geographically located within a certain region. They form
part of the official archives that are open for public inspection and kept
permanently.
Ownership certificates of immovable property are issued to the owners

by the government registration authority. According to Article 17, such a
certificate is a proof of ownership over immovable property; however, if
any information shown in the certificate differs from the data entered into
the register, what is recorded in the register will prevail, unless there is
evidence proving that an error has been committed in the register.
• The way forward
Although it is unclear how long the current situation will continue, a way
ahead might be plotted with reference to the directions established under
the Property Rights Law.
Firstly, it is necessary to promulgate a statute exclusively on the

registration of immovable property, accompanied by the formation of
its detailed implementation rules. Such statute supported by detailed
implementation rules will replace all relevant provisions contained in the
prevailing laws, rules, regulations and policies, and constitute the sole
component of legal guidelines on the registration of immovable property.
Secondly, the framework of multi-authority registration must be scrapped,

giving way to a uniform registration system under a single registration
authority. The court would be a good choice for taking on the role of this
single registration authority (H C Zhu, ‘It should be the People’s Court ...’).
A statutory government agency empowered with exclusive authority over
the registration of immovable property is another option.
Thirdly, under a uniform registration system, ownership certificates of

immovable property must also be uniform. It is difficult to generate such
uniformity from the current framework of multi-authority registration
under which ownership certificates can be fabricated differently in
terms of style and content. This incongruity may seriously weaken the
authoritativeness which ownership certificates should represent, and must
be rectified by the operation of a uniform registration system.
Correction of registered particulars

The Property Rights Law permits making a correction to any particular that is
wrongly recorded in the register of immovable property.
According to Article 19, paragraph 1, an affected party who claims that a

registered particular in the register of immovable property is erroneous can
apply to the government registration authority for having the error corrected;
if the right holder over the underlying property recorded in the register
expresses his consent in writing to making such correction, or the claim
can be proved to be true with evidence, then the government registration
authority can go ahead with making the correction to that registered particular
accordingly.
For example, Alan Wang and his wife, Betty Liu, are both high income
professionals. They bought a house and jointly contributed to what they
paid for the house, under an understanding that the house is their common
property. Due to the negligence of a clerical officer at the government
registration authority, Alan was registered as sole owner of the house, without
having Betty’s name entered into the register. Betty applied to the government
registration authority for making a correction to this registered particular
on the ground that she and Alan are joint owners. Can Betty have herself
registered as a joint owner? Based on the Property Rights Law (Article 19,
paragraph 1), if Alan consents in writing to Betty’s request, or Betty’s claim
can be proved to be true by sound evidence demonstrating that the house is
the couple’s common property, the government registration authority should
make the correction accordingly by recording Betty as a joint owner of the
house side by side with Alan.
Registration of dissent
In principle, a wrongly registered particular can be rectified. However, in light
of Article 19, paragraph 1 of the Property Rights Law, the precondition must
be met that the original registered right holder agrees that the government
registration authority can go ahead with the correction or the claimed
incorrectness of the registered particular can be proven. Otherwise, the
rectification will be blocked.
However, in this situation a mechanism established under the Property

Rights Law can be used which enables registering dissent in advance so that
such disagreement over the property right in question can become public
information in the form of a record in the register of immovable property
and constitute a constructive notice to any person who after knowing there
is a dispute over the property right concerned is then supposed to exercise
adequate carefulness when contemplating a transaction involving that
property.
Under Article 19, paragraph 2, if the registered right holder does not agree
to let the government registration authority rectify a particular in the register
of immovable property which is claimed to be wrongfully registered, the
affected party may apply to the government registration authority for having
his dissent registered. A normal caveat applies under this mechanism of
registration of dissent: the registered dissent warns any person who may
have an interest in the property concerned in the future that there is now an
unsettled disagreement over the property right of this immovable property,
and he must be careful when deciding whether to proceed further.
Also according to Article 19, paragraph 2, if a registrant of his dissent intends

to settle the dispute by taking legal action, he must start legal proceedings
within 15 days after the dissent is registered; otherwise the registration of his
dissent will lose its effectiveness.
For example, Peter Yu intends to sell his house in Shanghai to his friend,
Andrew Yang. A record in the register of immovable property illustrates
that Peter is the owner of this house. However, Alice Yu (Peter Yu’s cousin)
claims that the house belongs to her. Peter denies Alice’s claim. Alice decides
to settle the dispute by litigation. Before starting to take court action, Alice
had the dispute registered at the government registration authority. Although
Andrew is very fond of this house, when he detected the dissent registered, he
decided not to buy the house from Peter. At last, Alice won her court case. She
then sold the house to her friend, Richard.
Pre-notice registration
In real estate transactions, it is not uncommon in the market in China for
a real estate developer, after selling a property to one purchaser, to sell the
same property again to another purchaser and after that to a third and a fourth
purchaser in an attempt to get the best deal. In order to stem this multiple-sale
problem, the Property Rights Law introduces a pre-notice registration system.
A pre-notice registration system is described under Article 20, paragraph 1

as follows: In order to ensure realization of a property right in the future, the
relevant parties after entering into a sale and purchase agreement relating to a
house or other types of immovable property may according to their agreement
apply to the registration authority for a pre-notice registration of their
transaction. Without obtaining the consent of its right holders, any further
disposal of the immovable property concerned after a pre-notice registration is
made will not give rise to the effectiveness of any new formation or alteration
of a property right over this immovable property.
For example, Remote Dream is a residential high-rise in Shanghai still under

construction. Its developer is ABC. Wang entered into a contract with ABC to
purchase a flat in Remote Dream. Under such a pre-sale contract, Wang could
enjoy a massive discount off the price of buying the same flat for immediate
delivery; ABC could use the proceeds of the pre-sale to further finance this
property development project. In order to prevent ABC from subsequently
selling this flat to another person for a better price, Wang immediately made
a pre-notice registration of his transaction with ABC at the government
registration authority. Three months later, ABC sold this flat to Li. Li did not
realize that the pre-notice registration made by Wang would debar him from
acquiring the flat’s ownership.
Under Article 20, paragraph 2, after pre-notice registration, if the property

right over the immovable property transacted fails to be registered within
three months of the time it can be registered, the pre-notice registration made
will lapse. This provision reminds property right holders that pre-notice
registration is no substitute for official registration of their property right.
The registration authority’s conduct

The government registration authority is in charge of the registration of any
formation or alteration of the property rights of immovable property. To
prevent it from inappropriately exercising or abusing its administrative power,
the Property Rights Law sets out some provisions that govern the conduct
required of the government registration authority.
• Main duties of the government registration authority
In light of Article 12, paragraph 1(1) to (4), the main duties performed
by the government registration authority entail checking and examining
the proofs of ownership and rights and other necessary materials that are
provided by applicants; questioning applicants on relevant particulars to
be registered; timely carrying out the registration of relevant particulars
in accordance with facts; and other duties prescribed by the laws and
administrative regulations.
• Liability for incorrect registration
The government registration authority may have to bear liability for

incorrect registration that is caused by the errors made by it or attributable
to registrants.
Article 21 stipulates that: ‘Where an applicant for the registration of

property rights provides false application materials causing damage to
another person, he shall be liable for compensating the injured person for
any loss or injury suffered. In the event that any registered particular is
incorrect causing damage to any person, the registration authority shall
make compensation to the injured person; and after making compensation,
the registration authority will have recourse for its loss against the person
whose act gives rise to this incorrect registration.’
• Restrictions on estimation, annual review and levy of fees
Under the Property Rights Law, the government registration authority

is put into a kind of straightjacket in connection with the estimation,
annual review and levy of fees regarding registered immovable property.
Those restrictions are designed to set up a firewall against any attempt at
utilizing the provision of the registration service for private gain.
According to Article 13, the government registration authority is not

in a position to demand that the value of the immovable property to be
registered is to be estimated by it.
Also under Article 13, the government registration authority is not

allowed to have any immovable property that has been registered
re-registered under the guise of carrying out an annual review.
In light of Article 22, the registration fee is charged on the basis of each
piece of immovable property, rather than in terms of the immovable
property’s size, volume or price.
The formation and alteration of property rights over

movable property
As opposed to the case of immovable property, to satisfy the requirement of
public notice, the formation and alteration of property rights over movable
property do not need to be registered and all that is required is completing
delivery of the property. Here, the term ‘delivery’ indicates moving the
property in question from the physical possession of one person to the
physical possession of another person who consequently becomes owner of
that property.
The principle that delivery is the means of giving public notice pertinent to the
formation or alteration of property rights over movable property is established
under Article 23 of the Property Rights Law. Under Article 23, the creation or
transfer of property rights over movable property is normally deemed to start
to take effect when the delivery of the property is accomplished.
The delivery of the movable property can take the following different forms
under different circumstances: actual delivery, summary delivery, substituted
delivery, and delivery with the transferor’s continued possession.
Actual delivery
Actual delivery falls into the category of delivery mostly commonly
encountered in everyday life. For example, T sold his bicycle to G. After G
paid T, T left the bicycle to G. The ‘delivery’ was completed, and the bicycle’s
ownership was transferred from T to G. Such transfer started to be in force
when T handed over his bicycle to G.
Summary delivery
Summary delivery can be construed as a kind of automatic handover of
property rights by one person to another, in the circumstance that the property
is already in the legitimate possession of the latter prior to this handover. It is
carried out in an instant way with no occurrence of physical delivery as the
property is already under the control of its prospective owner or user.
Summary delivery is recognized by the Property Rights Law under Article

25, which admits that if the prospective property right holder is already in
possession of that movable property before the creation or transfer of that
property right is completed, then the formation or alteration of that property

right in favour of this prospective property right holder will start to come
into force when the act of creating or transferring that property right is
accomplished.
For example, John Wang leased his computer to Peter Liu. Two days before
the lease came to an end, John and Peter entered into a new contract,
according to which John would immediately sell this computer to Peter. Since
John’s computer happened to be in Peter’s possession when the contract to
sell the computer was created, no physical delivery needed to be made and so
Peter legitimately obtained ownership of the computer.
Substituted delivery
The scenario to which substituted delivery relates is a special one. In such a
scenario, actual delivery of the movable property is replaced by assigning to
the person, to whom the property is supposed to be delivered, the entitlement
to claim for the return of the property to him. In this sense, physical delivery
is substituted by assigning legal entitlement.
For example, Steven Chen is owner of a valuable Italian violin. He leased this
violin to Janet Li, a young violinist, for three months, in order that Janet could
use the violin at the forthcoming international violinist competition. Then
Steven sold this violin to Mr Lei. Since the violin is now in Janet’s possession,
Steven could not deliver the violin to Mr Lei before the lease comes to an end.
Instead, he assigned to Mr Lei the entitlement to ask Janet to return the violin
to him. So on the day the lease expires, Janet should return the violin to Mr
Lei, not to Steven.
Article 26 of the Property Rights Law describes the situation in which

substituted delivery may happen: where a third party is in legitimate
possession of the movable property prior to the property right over this
movable property being created or transferred, the person who has an
obligation to deliver the movable property concerned to its prospective
property right holder may fulfil his obligation by assigning to the prospective
property right holder the entitlement to request the third party to return to him
the movable property in question.
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Delivery with the transferor’s continued possession

Delivery with the transferor’s continued possession is described under
Article 27 of the Property Rights Law as follows: If when the property right
over the movable property is transferred the transferor and the transferee
further agree to let the transferor continue his possession of the movable
property in question after the transfer is completed, the transfer of the property
right will be counted as coming into force when this agreement becomes
effective.
Such a delivery of movable property usually involves a new legal relationship

established between the transferor and the transferee on top of the legal
relationship between them pertinent to the transfer of the property right.
For example, George Yan sold his piano to Linda Wang. In the meantime,
he made an agreement with Linda according to which Linda would lease the
piano back to him so he would not have to deliver the piano to its new owner
(i.e. Linda) but could continue to possess and use it. Under this arrangement,
George gains from the proceeds of the sale; he continues his possession and
employment of the piano by paying Linda a rental; Linda becomes owner of
the piano; she also secures a rental income from George.
Ownership
The previous section focused on the general provisions in the Property Rights
Law. This and subsequent sections will concentrate on specific types of
property rights, the first being ownership.
The special characteristics of the property ownership

system in China
Article 39 of the Property Rights Law defines ‘ownership’ as ‘the right of a
person to possess, utilize, gain from and dispose of the immovable or movable
property that belongs to him.’
Article 40 further provides that: ‘A property owner is entitled to create the

usufructuary right and the property right relating to security over his immovable
or movable property. Exercising the usufructuary right or the property right
relating to security shall not injure the interests of the property owner.’
As a perpetual right that entitles a property owner to enjoy the property

himself or put the property into other uses in whatever legitimate way as he
likes, the concept of ‘ownership’ adopted in China is not significantly different
in substance from that as understood in most other jurisdictions in the world.
However, the Chinese property ownership system operates on the basis of

three categories of ownership: state ownership, collective ownership and
private ownership. This special feature means that the Chinese property
ownership system is unique in many respects.
Since the founding of the People’s Republic of China in 1949, the Chinese
property ownership system has undergone considerable change in both
political and economic dimensions.
The historical development of the property ownership system:

An example
Before the People’s Republic of China was founded, Luo Daxing was a
tobacco tycoon in Shenyang (a large industrial city in northeast China). In
the late 1940s, the Chinese Communist Party took power in Shenyang after
defeating the Kuomintang army in the civil war. Unlike his younger brother
who had fled to Hong Kong, Luo Daxing decided to stay in Shenyang to
continue his tobacco business. For the better part of the 1950s, there was no
substantial change in Luo Daxing’s life. His private assets were well protected
by the government. And his quality and standard of living was no lower than
before. He was held in high regard by the government because of his standing
among local entrepreneurs, so he was appointed a member of the Chinese
People’s Political Consultative Conference.
Li Dabao is Luo Daxing’s cousin and lives in a small village not far away
from Shenyang. In the early 1950s, land reform swept across rural areas
climaxing in the confiscation of farmland from landlords and its redistribution
to poor peasants. As Li Dabao had inherited quite a lot of farmland from
his father, he was classified by the government as a landlord, a label of
condemnation. He was deprived of his farmland, and one piece of the land
was assigned to Wang Yiqiang, the poorest peasant in the village. Witnessing
the evaporation of his family’s wealth, Li Dabao’s adult son, Li Xiaobao, was
disheartened. He left home for Shenyang where he made a living by running a
small grocery store.
Ownership 129
In 1956, encouraged by government officials, friends and family members,

Luo Daxing reluctantly participated in the exercise of converting his private
business into a public-private joint venture enterprise. This joint venture,
known as Bright Road Tobacco Factory, was jointly held by Luo Daxing and
the government. Luo Daxing was on the payroll as deputy manager of the
factory, rather than in full control of the enterprise as its boss. As a major
equity holder of this joint venture, he received a fixed annual dividend paid
by the government, in proportion to his shares in the factory at the rate of 5%
according to the government’s policy on dealing with public-private joint
venture enterprises. In effect, he was in a state of semi-retirement no longer
able to exert any significant influence on the management of the factory.
The factory was fully controlled by a party secretary, a retired army officer
seconded by the government. Starting from 1966, the fixed annual dividend
ceased to be paid to Luo Daxing. He retired in the capacity of an ordinary
employee and lived on a state pension. In the late 1960s, Bright Road Tobacco
Factory became a fully state-owned enterprise.
Throughout the 1950s, Wang Yiqiang, who was allocated a piece of farmland
in the early 1950s as a beneficiary of the land reform, played a leading role
in his village in the agricultural collectivization movement advocated by the
government. This movement firstly took the organizational form of a ‘mutual
aid group,’ then a ‘cooperative’ and finally resulted in the establishment of
‘the people’s commune’ across the country. Peasants joined the people’s
commune by contributing their farmland and livestock, which became the
collective property of the commune. In the late 1950s, people’s communes
were widely set up in rural areas. The old system of private land ownership
was replaced by a socialist rural land system of public ownership in the form
of collectivization. Under this new system, agricultural planning, production
and allocation were centrally controlled by leaders of the people’s commune.
As members of the people’s commune, peasants carried out agricultural
production according to instructions from leaders of the people’s commune.
They were not allowed to carry out any private business in their spare time.
Agricultural products were sold to the government at a price below value
in order to amass capital for swift industrialization in urban areas. This, of
course, was at the cost of farmers’ quality of life.
In 1958, Li Xiaobao’s small grocery store, after being combined with other
grocery stores in the town, was converted into an enterprise in collective
ownership, namely Sunshine Department Store. Li Xiaobao’s wife was then

a worker at the Bright Road Tobacco Factory. Later on as an employee of a
state-owned enterprise, she was well covered by social welfare (e.g. housing,
medical care, pensions, etc.). Although she had a low wage, she basically had
nothing to worry about. Li Xiaobao’s wage and social welfare package was
more or less on the same level as his wife’s. The only difference was that as
an employee of a collective enterprise, his pay came not from the government,
but from the income generated by the collective enterprise itself.
In 1966, the Cultural Revolution started. In 1967, most of Luo Daxing’s

valuable private assets (in particular, his private houses) were confiscated by
Bright Road Tobacco Factory. The houses were used as the factory cadre’s
dormitories.
In 1968, Li Xiaobao’s son, Li Xiang, after graduating from a technical school,

joined Bright Road Tobacco Factory as a plumber.
In the late 1970s, economic reform unfolded in China, with rural reform as
the bellwether. The rural reform to some extent fell back on the old private
production mode. Although rural land still belonged to rural collectives,
a new rural land management system called the ‘rural household contract
responsibility system’ was widely adopted in the country. Under this system,
farmers and rural collectives (as deputies of the government) enter into
contracts under which farmers on behalf of a family obtain a piece of rural
land from rural collectives for their private use and gain. Farmers no longer
work for the people’s commune. They carry out agricultural production for
two purposes: supplying the required agricultural products to the government
and keeping the remainder for themselves. The rural reform has proven to
be a success. It significantly galvanizes the initiatives of farmers who gain
considerably from the relaxation of the mode of agricultural production and
distribution. With the rural reform in full swing, people’s communes receded
into history. Meanwhile, township or village enterprises run by farmers started
to play an important part in China’s rural economy. Wang Yiqiang’s grandson,
Wang Xiaoliang, prospered as owner of a large village enterprise engaged
in manufacturing various kinds of furniture and exporting the furniture to
overseas markets.
In the early 1980s, Luo Daxing’s private houses, which were seized by Bright
Road Tobacco Factory during the Cultural Revolution, were returned to Luo
Ownership 131
Daxing’s adult children. As Luo Daxing was deceased, his children inherited
these private assets.
In the early 1990s, Luo Xiaoxing, son of Luo Daxing’s younger brother, who
escaped to Hong Kong in the late 1940s, returned to his hometown, Shenyang,
as a foreign investor. By taking advantage of the tax and other favourable
measures granted by the Chinese government to foreign direct investors, he
partnered with a local state-owned enterprise to set up a Sino-foreign equity
joint venture enterprise in Shenyang manufacturing pharmaceutical products.
With the success of China’s economic reform in rural areas, enterprise reform
in urban areas (especially in relation to state-owned enterprises) was put on
the agenda. In the mid-1990s, Bright Road Tobacco Factory, after merging
with other local factories in the same line, was converted into a share-holding
company, Bright Road Tobacco Group, in which the state is still the largest
equity holder, but capitalization has been diversified including contributions
from both indigenous and overseas sources. The management of the old
Bright Road Tobacco Factory stepped down, and most of its old workers were
laid off. Li Xiang was forced to retire from the newly established Bright Road
Tobacco Group on a poor redundancy package, under which he could hardly
make ends meet.
In 2001, Sunshine Department Store was on the brink of bankruptcy. Wang

Xiaoliang, then a highly successful nouveau riche, by injecting his capital into
Sunshine Department Store acquired full control of this collective enterprise.
And then by merging Sunshine Department Store with some other local
department stores, restaurants and retail outlets, he consolidated the assets
of those businesses, based on which a new shareholding private enterprise,
Grand River Catering Group, was incorporated, in which Wang Xiaoliang is
the largest stakeholder. Previous employees of Sunshine Department Store
lost their superannuation privileges. They had to enter into new employment
contracts with Grand River Catering Group on a yearly renewal basis, or they
would have to accept an early retirement payoff.
China’s economic system under the Constitutional Law:

Historical development
The contours of the historical development of China’s economic system
from the founding of the People’s Republic of China in 1949 until now are
captured in some measure by the above example. From a legal point of view,
at different times during this development China’s economic system was
described slightly differently in constitutional law.
Up to now, four constitutions have been enacted, in 1954, 1975, 1978

and 1982, apart from the Common Principles (a constitutional document
promulgated in 1949 as a kind of interim constitution for China during the
period from the founding of the People’s Republic of China until 1954).9
The Common Principles: China’s first constitutional document

The Common Principles could be viewed as China’s first constitutional
document. It was passed at the First Plenary Session of the Chinese People’s
Political Consultative Conference on 29 September 1949, just a couple of
days before the founding of the People’s Republic of China on 1 October.10
The Chinese Communist Party, having overthrown the old society, would
shortly start to play its new role developing and administering a new society.
The Common Principles sets out some general directions for development for
this young republic emerging from the ruins of three years of civil war.
The ‘Preamble’ of the Common Principles highlights ‘people’s democratism’

as the political basis of founding a new China, and describes the nature of the
forthcoming regime as the ‘people’s democratic dictatorship.’
For the purpose of enforcing the people’s democratic dictatorship, Article 3

in the Common Principles sets out a number of objectives, such as seizing
bureaucratic capital for use by the state, replacing a feudal and semi-feudal
rural land ownership system with a peasants’ land ownership system, and
protecting public and private assets.
By Articles 28 to 31 of the Common Principles, the following four types

of ownership were permitted: state economy, cooperative economy, private
economy, and national capitalist economy in the form of cooperation between
national capital and private capital.
9 For a brief history of Chinese constitutions, see G B Zhu (1999).

10 The Chinese version of the Common Principles can be found at: http://news.xinhuanet.com/
ziliao/2004-12/07/content_2304465.htm. An English translation does not seem to be available at
present. The author uses his own English translation in this book.
Ownership 133
The 1954 Constitutional Law

Considering the tentative nature of the Common Principles, which was in
fact adopted as a constitutional document rather than an official constitution,
the 1954 Constitutional Law is the first official constitution of the People’s
Republic of China.11
After years of efforts to recover from an economy wrecked by the civil war
of the second half of the 1940s, as well as the Korean War in the early 1950s,
the acceleration towards a socialist society was put on the country’s agenda. It
was in this context that the 1954 Constitution was created.
Under Article 4, a general goal set by the 1954 Constitutional Law for the
country is to ‘ensure the gradual elimination of any exploitation system
and the development of a socialist society through accomplishing socialist
industrialization and socialist transformation.’
Regarding ownership of property, Article 5 uses only the term ‘ownership of

the means of production,’12 and enumerates the major types of such ownership
as state ownership, collective ownership, individual labourer’s ownership, and
capitalist’s ownership.
These types of ownership are not equal in importance under the 1954
Constitutional Law.
Pursuant to Article 6, paragraph 1, priority is given to the development of the

state-owned economy (i.e. the economy owned by all Chinese people), which
‘is the leading force in the national economy and constitutes the material base
of the country for realizing the socialist transformation.’
According to Article 8, paragraph 1, rural land ownership of the peasants

is protected. However, Article 8, paragraph 3 points out that the state
implements a policy of restricting and gradually eradicating any economy of
affluent farmers.
11 The Chinese version of the 1954 Constitutional Law can be found at: http://law.lawtime.cn/
d656694661788.html. An English translation does not seem to be available at present. The author
uses his own English translation in this book.
12 ‘Means of production’ usually refers to items for use in production, such as land, factories,
machinery, equipment, tools, raw materials, etc.
Any industry or commerce of a capitalist nature is a target of socialist

transformation. By Article 10, paragraph 2, the state adopts a policy of
utilization, restriction and transformation for any industry or commerce
of a capitalist nature, and will gradually replace capitalist ownership with
ownership by all Chinese people.
Under the 1954 Constitutional Law, private assets are protected by the state.
Under Article 11 and Article 12, the state protects any citizen’s ‘legitimate
income, savings, houses and ownership of various basic living items’ and ‘right
of inheritance over private assets.’

The 1975 Constitution is the second Chinese constitution.13 At that time the
Cultural Revolution was nearing its end.
Under Article 1, China is described as ‘a socialist country led by the Chinese

Communist Party under the proletarian dictatorship based on the alliance
between workers and peasants.’
By Article 5, paragraph 1, there are two main kinds of ownership of the

means of production in China: socialist all people’s ownership and socialist
collective ownership by labourers.
According to Article 5, paragraph 2, individuals are allowed to be self-

employed in their own business, but they will be asked to eventually embark
on the road of socialist collectivization by working together as a community.
The state economy (i.e. the economy in all people’s ownership) is emphasized
in Article 6, paragraph 1 as ‘the leading force in the national economy.’ The
people’s commune in the countryside is positioned as an organization in
collective ownership (Article 7, paragraph 2).
The 1975 Constitutional Law repeats the provision in the 1954 Constitutional
Law that the state protects any citizen’s ‘legitimate income, savings, houses
13 The Chinese version of the 1975 Constitutional Law can be found at: http://www.chinalawedu
.com/news/1200/21752/21753/2006/2/ma5362191254162260024560-0.htm. An English translation
does not seem to be available at present. The author uses his own English translation in this book.
Ownership 135
and ownership of various basic living items’ and ‘right of inheritance over
private assets’ (Article 9, paragraph 2).

The 1978 Constitutional Law is the third Chinese constitution. 14 It was
promulgated two years after the Cultural Revolution ended. In terms of
the aspects of the 1975 Constitutional Law mentioned above there was no
substantial change in substance in the 1978 Constitutional Law.

The 1982 Constitutional Law is the fourth Chinese constitution. It was
enacted a few years after the policy of economic reform and opening-up was
launched. The 1982 Constitutional Law underwent four revisions, in 1988,
1993, 1999 and 2004.15
Under the revised 1982 Constitutional Law, the ‘socialist public ownership
of the means of production’ (i.e. ‘all people’s ownership’ and ‘collective
ownership by labourers’) is emphasized as the ‘basis of China’s socialist
economic system’ (Article 6, paragraph 1).
Different from the previous three constitutions, the revised 1982

Constitutional Law, while still supporting the economy in socialist public
ownership as a dominant force within the country’s basic economic
framework, also embraces the development of the economies in other kinds of
ownership (other than public ownership) side by side with development of the
economy in public ownership (Article 6, paragraph 2).
The revised 1982 Constitutional Law specifically indicates in Article 11,

paragraph 1 that the economies other than the public ownership economy
constitute an important part of China’s socialist economy.
While the sacredness and inviolability of socialist public property is stressed

in the 1982 Constitutional Law (Article 12, paragraph 1), it also solemnly
14 The Chinese version of the 1978 Constitutional Law can be found at: http://china.findlaw.cn/fagui/
gj/21/14.html. An English translation does not seem to be available at present.
15 The English translation of the 1982 Constitutional Law at the following website is a good
reference: http://www.npc.gov.cn/englishnpc/Law/2007-12/05/content_1381903.htm. The author
states in Article 13, paragraph 1 that ‘legitimately owned private property that
belongs to individuals is inviolable.’
Current developments
After 30-odd years of reform and opening-up in China, the substance
of various economies under different types of ownership has changed
considerably. The state-owned economy is still in a dominant position in the
national economy, but in terms of strategic significance and effectiveness
rather than the scale and quantity of state-owned enterprises.
At present, the state-owned enterprises that constitute the backbone of China’s

national economy can be roughly divided into two types: ones that are directly
controlled by the central government, and ones that are controlled by local
governments. The former are under the umbrella of the State-owned Assets
Supervision and Administration Commission under the State Council; and the
latter are managed by the State-owned Assets Supervision and Administration
Commission in various local jurisdictions. Most state-owned enterprises under
direct control of the central government are giant conglomerates, which now
number 116 (SASAC, ‘List of state-owned enterprises’).
On the other hand, in 2009 the non-public ownership economies generated

more than one-third of total GDP, registered 50% of the fixed asset investment
for the whole society, and also became a main source of employment
opportunities (Ministry of Industry and Information Technology of the PRC
2009). Many enterprises under the ownership of all people or the collective
ownership by labourers are no longer such in the orthodox sense, but have
gradually evolved into companies limited by shares with diverse sources of
capital such as the state, indigenous private entrepreneurs, overseas investors
or a combination of these.
Regarding co-development of the economies under these different kinds of

ownership, China’s former President Hu Jintao said the following in his report
delivered at the Seventeenth National Congress of the Chinese Communist
Party in 2007 in his capacity as General Secretary of the Central Committee
of the Chinese Communist Party:
We need to uphold and improve the basic economic system in which

public ownership is dominant and different economic sectors develop
Ownership 137
side by side, unwaveringly consolidate and develop the public sector

of the economy, unswervingly encourage, support and guide the
development of the non-public sector, ensure the equal protection of
property rights, and create a new situation in which all economic sectors
compete on an equal footing and reinforce each other. (Xinhua 2007c)
A clear message conveyed in the above talk is the strategic importance of the
development of the Chinese economy under a system of multiple types of
ownership.
At present, an enterprise established in China might adopt one of the

following types of business vehicle: limited liability company, company
limited by shares, foreign investment enterprise (Sino-foreign equity joint
venture enterprise, Sino-foreign cooperative joint venture enterprise, or wholly
foreign-owned enterprise), enterprise in all people’s ownership, enterprise in
collective ownership, partnership, or sole trader (i.e. sole proprietorship).
As China’s economic system is developing in more conformity with

international norms, it is likely that in the future the types of business vehicle
allowed in China may be gradually restricted to focus on the following
mainstream business vehicles common in other countries with market
economies: limited liability company, company limited by shares, partnership,
and sole trader.
State ownership, collective ownership and private

ownership
Against the special background of China’s economic system, under the
Property Rights Law property ownership is classified into state ownership,
collective ownership and private ownership.
State ownership
The state plays different roles under public law and private law. Under public
law, the state is endowed with public power which it exercises in the context
of the Constitutional Law. Meanwhile, the state is a civil subject under private
law, enjoying and exercising civil rights (including property rights such as
ownership) and bearing civil obligations. In this respect, the state’s civil acts,
as well as the civil acts of other civil subjects (e.g. natural persons or juristic
persons) are governed by the rules and regulations established in the civil law
regime (including the Property Rights Law).
The Property Rights Law provides for the scope of the property that is owned
by the state, and also points out which party exercises a right over state-owned
property on behalf of the state.
Property owned by the state

Under the Property Rights Law, Article 45, paragraph 1 conceptualizes the
property owned by the state as follows: ‘The property prescribed under the
law as the property owned by the state belongs to the state, i.e. it is in all
people’s ownership.’
On the basis of this conceptualization, Articles 46 to 52 of the Property Rights

Law enumerate the following types of property of which the state holds
ownership: mineral reserves, water, and sea areas; land in urban areas, and
the land in rural areas and on the outskirts of cities that belongs to the state
according to what the law prescribes; natural resources like forests, mountains,
prairies, wilderness, shoals, etc. (not including those that belong to collectives
according to what the law prescribes); those resources of wild animals and
plants that belong to the state according to what the law prescribes; wireless
spectrum resources; those cultural relics that belongs to the state in line with
what the law prescribes; national defence resources; and infrastructure like
railways, roads, electric power facilities, telecommunications facilities, gas
pipes, etc., that belongs to the state according to what the law prescribes.
Article 41 of the Property Rights Law excludes any organization or individual

from acquiring ownership of the immovable or movable property that must be
under state ownership as prescribed by the law.
The above provisions are designed to safeguard the country’s economic

lifeline. Apart from these specific kinds of property that must be owned by
the state, in a broad sense other kinds of property may also fall into the state’s
ownership, although this may not be compulsory.
Exercising rights over state-owned property

According to Article 45, paragraph 2 of the Property Rights Law, in principle
the State Council is empowered to exercise rights over state-owned property
on behalf of the state. In practice, the state’s assets are divided between and
Ownership 139
managed by the State Council representing the central government and local
administrations representing various local governments at different levels.
As the state’s assets in reality exist on the balance sheets of various

government departments and government-funded public bodies that directly
control them, it is those government departments and government-funded
public bodies that exercise the right over state-owned property in the course of
operation. As described in Articles 53 and 54, they have the right to possess,
utilize and legitimately dispose of the state-owned property that is under their
direct control.
Under Article 55 of the Property Rights Law, for those enterprises funded by
the state, the State Council and local governments will represent the state to
fulfil obligations and enjoy rights and interests as their funders. In practice,
since China’s fiscal system is operated under the central government’s
management and local governments’ management in parallel, capital
contributions made by the government to the enterprises funded by the
state embrace the funding given by the central government and the funding
provided by local governments respectively. However, regardless of where
the funding comes from, the assets funded in such a way are all viewed as
belonging to the state. In this sense, local governments as funders are only
entitled to the rights and interest as capital contributors, but are not eligible to
hold ownership of those enterprises’ assets.
According to Article 67 of the Property Rights Law, the state is allowed to

contribute capital for establishing limited liability companies, companies
limited by shares and other types of enterprises, and thereby holds entitlement
to capital gains, important decision-making powers and the appointment of
the management in those enterprises. In light of Article 68, paragraph 1 of
the Property Rights Law, the enterprises formed in this way have the right to
possess, utilize, earn from and disposal of their immovable or movable property.
Currently, protecting state-owned property from illegal loss is a serious

issue. The Property Rights Law, Article 56 states that: ‘State-owned
property is protected by the law, barred from encroachment, plunderage,
misappropriation, unauthorized retention or sabotage committed by any
organization or individual.’ Under Article 57, any person who causes loss of
the state’s assets due to abuse of power, gross negligence or by illegitimate
means will have to bear legal liability for this.
Collective ownership
The term ‘collective ownership’ is an abbreviation of ‘collective ownership
by labourers,’ which is another important type of ownership within China’s
economic system. In any organization under collective ownership (taking
the form of either a rural collective or an urban collective), labourers as a
community (not as private individuals) can collectively possess, utilize, earn
from and dispose of the property that belongs to this collective.
Public ownership of the means of production as the basis of China’s socialist

economic system comprises all people’s ownership and collective ownership.
Collective ownership can be found in both urban and rural areas. Therefore
collectives as a kind of organization (i.e. collectively owned economic
organizations, or more simply ‘collective economic organizations’) can be
established both in the countryside and in cities.
The Property Rights Law describes what is meant by immovable or movable

property that is owned by collectives, and who can exercise rights over
collectively owned property on behalf of a collective.
Property owned by collectives

Under Article 58 of the Property Rights Law, the immovable or movable
property that belongs to collectives encompasses the land, forests, mountains,
prairies, wilderness and shoals that belong to collectives according to what the
law prescribes; the buildings, production facilities, and farmland and reservoir
facilities that belong to collectives; the facilities relating to education, science,
healthcare, sports, etc. that belong to collectives; and any other immovable or
movable property that belongs to collectives.
Hence, aside from property that can only be owned by the state, the property
that can belong to collectives includes all kinds of property.
Exercising rights over collectively owned property

It is important first to gain some general understanding of China’s local
governance at various administrative levels, as this suggests how rural and
urban collective organizations are administered.
Pursuant to Article 30 of the Constitutional Law, China is administratively

divided into ‘provinces, autonomous regions, and municipalities that are under
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the direct leadership of the central government’; provinces and autonomous

regions are further divided into administrative regions at the levels of
‘autonomous prefectures, counties, autonomous counties, and cities’; below
the administrative regions at the levels of counties and autonomous counties
are ‘townships, townships of various minority nationalities, and towns’;
municipalities that are under the direct leadership of the central government
and large cities govern ‘districts and counties’; autonomous prefectures
govern ‘counties, autonomous counties, and cities’; autonomous regions,
autonomous prefectures and autonomous counties refer to those places that
are largely ‘self-governed’ by minority nationalities.
Article 1 and Article 5, paragraph 1 of the Organic Law on Local People’s

Congresses and Governments at Various Levels16 state that local people’s
congresses and local governments established at the level of ‘townships,
townships of minority nationalities and towns in rural areas’ and of ‘cities
(without districts) and districts that are subject to the jurisdiction of cities,’
represent the lowest level of local governance.
Also, it is revealed in Article 2 of the Organic Law on Urban Residents’

Committees 17 that urban residents’ committees play a role in cities as
‘self-governing mass organizations at the grass root level,’ to which
local governments ‘provide guidance.’ Moreover, according to Article 2,
paragraph 1 and Article 4, paragraph 1 of the Organic Law on Villagers’
Committees 18, villagers’ committees established in rural areas are also
characterized as ‘self-governing mass organizations at the grass root level,’
to which local governments ‘provide guidance.’ Although literally the
government only provides ‘advice’ to residents’ committees set up in cities
and villagers’ committees established in the countryside, in practice ‘advice’
16 The English translation of the Organic Law on Local People’s Congresses and Governments at
Various Levels released on the following website can be used as a reference: http://www.npc
.gov.cn/englishnpc/Law/2007-12/13/content_1384085.htm. The author uses his own English
translation in this book.
17 The English translation of the Organic Law on Urban Residents’ Committees released on the
following website can be used as a reference: http://www.npc.gov.cn/englishnpc/Law/2007-12/12/
18 The English translation of the Organic Law on Villagers’ Committees released on the following
website can be used as a reference: http://www.npc.gov.cn/englishnpc/Law/2007-12/11/
should be construed as ‘instructions’ that are expressed in an indirect way. The

government conveys general directions via urban residents’ committees and
rural villagers’ committees to various collective organizations in cities and the
countryside, with a view that these organizations are able to operate correctly
by virtue of laws and government policies.
The Property Rights Law does not directly show which organization
represents collectives to exercise rights over collectively owned property.
However, it does embody some provisions that suggest an answer.
Article 59 of the Property Rights Law provides that: ‘The peasants’

collectively owned immovable or movable property belongs to members
of that community collectively. The following matters shall be decided by
members of that community collectively pursuant to legally prescribed
procedures: (1) land contracting plans, and issues on contracting land to
any organization or individual outside that community; (2) a swap of the
contracted land among individual peasants who have contracted the land from
collectives; (3) the method of utilizing and allocating relevant fees like land
compensation fee, etc.; (4) issues such as the alteration of ownership of any
enterprise funded by collectives; and (5) other issues required by the law.’
Article 60 of the Property Rights Law provides that: ‘As regards collectively
owned land, forests, mountains, prairies, wilderness, shoals, etc., exercising
rights over their ownership shall be carried out as follows: (1) if the property
belongs to peasants of a village collectively, the rural collective economic
organization at the village level or the villagers’ committee will represent
the collective to exercise such right; (2) if the property belongs to two or
more than two collectives of peasants in a village, the collective economic
organizations concerned in the village or the villagers’ representative teams
concerned in the village will represent the collectives to exercise such right;
and (3) if the property belongs to a township or a town collectively, the
collective economic organization at the township level or at the town level
will represent the collective to exercise such right.’
Article 61 of the Property Rights Law states that: ‘For the immovable or
movable property that belongs to a collective in urban areas, that collective
has the right to possess, utilize, earn from and dispose of the property in line
with laws and administrative regulations.’
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According to Article 62 of the Property Rights Law, a collective economic

organization, or a villagers’ committee, or a villagers’ representative team has
an obligation to show their members the status of the property owned by the
collective.
Based on the above provisions of the Property Rights Law, it can be roughly
concluded that in principle a collective itself is vested with the rights over its
property, and these rights are exercised by a kind of management team formed
within the collective.
In order to protect the legitimate interests of members of collectives from

injury, the Property Rights Law points out in Article 63 that: ‘Collectively
owned property is protected by the law against encroachment, plunderage,
unauthorized retention and sabotage by any organization or individual. If a
decision made by a collective economic organization or a villager’s committee
or its leader injures any legitimate interests of members of collectives, the
injured member(s) may ask the people’s court to set aside such decision.’
Like the state, under Article 67 of the Property Rights Law, a collective is
permitted to contribute capital for establishing limited liability companies,
companies limited by shares and other types of enterprises, and thereby
become entitled to capital gains, important decision-making powers and
the appointment of the management in those enterprises. According to
Article 68, paragraph 1 of the Property Rights Law, such enterprises have the
right to possess, utilize, earn from and dispose of their immovable or movable
property.
Private ownership
In the past, the term ‘private ownership’ was not used in Chinese law, which
used the term ‘individual ownership’ to mean the same thing. The Property
Rights Law now explicitly adopts the term ‘private ownership.’ This sends a
clear signal that protection of private assets is unreservedly recognized by the
law.
However, the Property Rights Law does not set out many provisions in this
respect. Under three provisions, the Property Rights Law indicates that a private
individual is entitled to hold ownership of immovable or movable property
such as his legitimate income, houses, living items, production tools and raw
materials (Article 64); an individual’s legitimate savings, investments and
proceeds from such investments, as well as the right of inheritance and other
legitimate interests are protected by the law (Article 65); and individuals’
legitimate assets are protected by the law against encroachment, plunderage
and sabotage (Article 66).
Although literally the Property Rights Law does not explicitly stipulate who is
entitled to exercise his right over private assets, it can be logically established
that private property owners are entitled to exercise their exclusive right over
their legitimate private assets, and they can thereby possess, utilize, earn from
and dispose of their private assets freely without being subject to any outside
intervention.
Like state and collective organizations, under Article 67 of the Property

Rights Law an individual is allowed to contribute capital for establishing
limited liability companies, companies limited by shares and other types of
enterprises, and thereby become entitled to capital gains, important decision-
making powers and the appointment of the management in those enterprises.
According to Article 68, paragraph 1 of the Property Rights Law, such
enterprises have the right to possess, utilize, earn from and dispose of their
immovable and movable property.
The expropriation and requisition of property

The forced or unfair expropriation of property has posed a serious social
problem in China. In order to provide some guidance on rectifying this
irregularity, the Property Rights Law has designed a general framework for
regulating the expropriation and the requisition of property (actions allowed
under exceptional circumstances).
The expropriation of property

The expropriation of property aims at permanently taking away ownership
and/or usage rights of immovable property (such as land or houses). Articles
42 and 43 of the Property Rights Law provide for some general principles
governing the expropriation of property, with an emphasis on appropriate
compensation made to victims who suffer from such expropriation.
Article 42 provides that: ‘In the public interest, collectively owned land,
houses and other kinds of immovable property owned by organizations
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or private individuals can be expropriated in accordance with prescribed

authorities and procedures under the law. For expropriated land owned by
collectives, full compensation shall be made in terms of land compensation
fees, subsidies for resettlement, compensation fees for fixtures on the land
and growing crops that have not been harvested, etc.; social security fees
shall be paid to peasants whose land is expropriated so as to safeguard their
legitimate interests and ensure that their normal life can be carried on. For
the expropriated houses and other kinds of immovable property owned by
organizations or private individuals, the legitimate interests of the affected
organizations or private individuals shall be safeguarded, and according to
the law they shall be paid compensation for demolition of their property. For
expropriated private houses, house owners shall be compensated to the extent
that they will be able to live in new houses no worse than the expropriated
ones. No organization or individual is allowed to embezzle, misappropriate,
retain without authorization, withhold, or deliberately delay payment of
compensation fees for the expropriation.’
Article 43 provides that: ‘Special protection is given by the state to farmland

which is strictly restricted from being converted into a construction site
in order that the state controls land resources employed for construction
purposes. The expropriation of collectively owned land not in line with
prescribed authorities and procedures under the law is not permitted.’
From the above provisions it can be seen that although ownership is supposed
to be an exclusive right of property owners over their property, owners
may be dispossessed of their property in the exceptional circumstance of
expropriation on the ground of satisfying public interest.
Interestingly, the Property Rights Law seems to be silent on two critical issues
in this respect. The first issue is: who is an ‘expropriator’? Expropriation is no
business dealing. The property owner’s consent does not need to be obtained
and the property owner does not need to be consulted in advance. The spirit of
private law autonomy advocated as a conventional civil law doctrine does not
pertain to expropriation. Although theoretically the government should be the
expropriator, the above two articles do not include the words ‘government’ or
‘state,’ leaving the identity of the expropriator to be confirmed.
The second issue is: how should ‘public interest’ be defined, and who is
responsible for making sure that post-expropriation use of the property
genuinely serves public interest? Regrettably no answer to this question can

be found from the above two provisions either. Literally ‘public interest’ ought
to be the interest of all members of a society. In this sense, activities such as
construction of public transportation facilities, national defence facilities, and
social welfare infrastructure that are non-profit making (e.g. public hospitals
or public schools that provide free or low-fee services to the public) can
be deemed as serving public interest. In reality, however, ‘public interest’
lacks explicit legal definition, and illegitimate activities carried out under
the guise of ‘satisfying public interest’ are unbridled in many places. There
are numerous examples in the field of real estate development. Developers
acquire land that is expropriated by forced demolition in the name of carrying
out non-profit-making social welfare projects. It turns out these projects do
not exist, and developers use the expropriated land for commercial property
development to gain excessive profit.
While the Property Rights Law does not clearly address these two issues,
they are less serious than the issue of compensation to expropriatees (i.e.
organizations or private individuals whose property is expropriated). The
Property Rights Law does not provide for any specific standards to be applied
in determining the amount of compensation to be paid to expropriatees.
Nor does it set any criteria as regards a bottom line or ceiling for such
compensation.
Currently, local governments usually hammer out their own rules for
making compensation to expropriatees, so rules may differ from one place
to another. Land use fees paid by real estate developers in order to acquire
a piece of urban land for property development constitute an important
source of income for local governments in China. A brisk real estate market
can boost growth in other economic sectors, and local governments try to
produce bullish economic data as an indicator of their good performance. In
land expropriation (particularly involving the demolition of private houses),
effectively balancing public interest and the interest of expropriatees is a big
challenge. Compensation has become a sensitive issue that often leads to
serious disputes that spark social anger.
For example, in 2004, Huang Zhenyun, a senior citizen in Beijing not satisfied
with the compensation offered, bravely fended off construction workers who
came to demolish his house by erecting a Chinese national flag and exhibiting
a copy of the Chinese Constitutional Law in front of the house as a symbol
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of his stance towards safeguarding private rights (Bao 2004). Another well-
known incident took place in Chongqing, a large city in southwest China
(Xinhua 2007a). In 2004, a real estate developer acquired the land use right
to carry out property development in an area within which a couple, Yang
and Wu, had a two-storey house. The developer planned to demolish the old
houses in the area in order to build new ones. Yang and Wu refused to let
the construction workers pull down their house because the compensation
package offered by the developer was far below their expectation. Yang
and Wu’s house was the only one unscathed among the ruins of demolished
houses. They stayed in the house with no water or electricity supply for about
three years until finally the developer and the couple reached consensus on the
amount of compensation after countless rounds of negotiation.
In order to ease the mounting tension that poses an ever greater threat to
social stability, the State Council issued a legal guideline in this regard on
21 January 2011, namely the Decree on the Expropriation of Houses over
State-owned Land and Compensation.19 Under this decree, an expropriatee
is entitled to compensation covering the value of the expropriated house(s),
the loss incurred due to the required relocation, and the loss caused from
having to suspend production and business (Article 17, paragraph 1). The
decree makes clear that the amount of compensation for an expropriated
house shall not be lower than the house’s prevailing market price on the date
when the public notice of carrying out this expropriation is issued (Article 19,
paragraph 1). Furthermore, pursuant to Article 21, paragraph 1 of the decree,
an expropriatee can opt for compensation in cash or by means of an ownership
swap, taking the form of being allocated another house to his satisfaction.
The most serious issues in cases of compensation to expropriatees in rural

areas are the reasonableness of the compensation paid to peasants for
expropriated farmland and whether they ultimately receive full compensation.
These two issues are related. Facing an increasingly strong demand for land,
in principle China has to ensure a minimum of 104 million hectares of land
for cultivation (Q Wang 2011). The land owned by collectives in China (i.e.
the land in rural areas) cannot be traded in the market unless it is expropriated
19 The Chinese version of this decree can be found at: http://www.gov.cn/zwgk/2011-01/21/

content_1790111.htm. An English translation does not seem to be available at present. The author
in the first place thus becoming land no longer belonging to collectives. Only
after such expropriation is complete can rural land previously owned by
collectives be transferred to real estate developers on payment of land use
fees for use in profit-making property development. In order to acquire a land
use right, real estate developers have to pay land use fees to the government.
In practice, there could be a sharp discrepancy between the land use fees
received by the government from real estate developers for acquiring land
use rights and the compensation paid to peasant expropriatees. What is even
worse is that affected peasants may not receive full compensation. This is
because the government pays compensation via rural collectives rather than
directly to peasant expropriatees, and some of the funds might be retained.
Here is an example. City B recently won the right to host an important

international sports event. This has boosted City B’s plans to enlarge and
renovate its public facilities by building new stadiums, gymnasiums, and most
noticeably, a high-speed rail line. Many houses will be demolished to make
way for this rail line. Mr Chen’s house is one of these. Mr Chen used to work
for a state-owned enterprise, Golden Sunshine. The 120 square metre house
he currently lives in was sold to him by Golden Sunshine ten years ago for a
low price of RMB 50,000 as a subsidized home to a state employee. Now Mr
Chen has retired, and Golden Sunshine has been dissolved. The government
authority of City B informed Mr Chen yesterday that the amount of
compensation to be given to him for the expropriation would be RMB 50,000,
and he must find somewhere else to live within three months from this notice.
Mr Chen refused to move out of his home, saying that the compensation was
outrageously low. He asked the government to compensate him for an amount
in cash not lower than RMB 4,500,000, which is the house’s current market
value. Alternatively, he would be willing to accept a house of the same size
in a convenient location in exchange for his current home. Both his request
for compensation in cash and in kind were turned down by the government
authority of City B.
Does Mr Chen have the right to claim an appropriate compensation package?

By Article 42 of the Property Rights Law, in the public interest, houses owned
by private individuals can be expropriated, and the house owners affected
will be compensated for the expropriation. In reality, it may not be easy to run
an effective mechanism in China that ensures that expropriation in the name
of serving public interest is not arbitrary. In the context of legal guidance
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released by the State Council in 2011, i.e. the Decree on the Expropriation
of Houses over State-owned Land and Compensation, an expropriatee is
entitled to compensation covering the value of the expropriated house(s), the
loss incurred due to the required relocation, and the loss caused from having
to suspend production and business (Article 17, paragraph 1). The amount of
compensation for an expropriated house shall not be lower than the house’s
prevailing market price (Article 19, paragraph 1). And an expropriatee has
the right to choose to be compensated in cash or to be allocated another house
to his satisfaction (Article 21, paragraph 1). Therefore, Mr Chen is entitled
to claim for a compensation package in cash in line with the house’s current
market price. He may also choose to be compensated in kind, i.e. to be
allocated a house of the same size that can attain his wish and satisfaction.
The requisition of property

There are some similarities between the expropriation and requisition of
property. Firstly, both the expropriation and requisition of property result
in the dispossession of the property from its owner or from any person/
organization currently in possession of the property as permitted by its owner.
Secondly, both the expropriation and requisition of property are epitomized
by taking away property on compulsion with no need to obtain the consent
of the property’s owner or the property’s current user. And thirdly, both
the expropriation and requisition of property are carried out in the name of
satisfying the public interest.
However, the requisition of property also has some unique features. Unlike
the expropriation of property, which focuses on immovable property, the
requisition of property can apply to both immovable property and movable
property. While what is taken away in the case of expropriation is the
property’s ownership, in the case of requisition of property it is the property’s
right of use; in other words, the property is supposed to be returned to its
original owner or user once the requisition is no longer necessary. Moreover,
unlike the expropriation of property, which in theory can be carried out in
non-emergency circumstances, the requisition of property is far less common
because it only applies when massive natural disasters or wars occur, resulting
in an urgent need to requisition property to deal with these disasters or to
provide support to the army.
The principles of the requisition of property are basically contained in Article

44 of the Property Rights Law. Article 44 provides that: ‘For the purpose of
meeting urgent needs such as the elimination of imminent danger, disaster
relief, etc., the immovable or movable property of any organization or
private individual can be requisitioned in accordance with the prescribed
authorities and procedures under the law. The requisitioned immovable or
movable property after the purpose of the requisition has been satisfied shall
be returned to the original source from which it is requisitioned. Where the
requisitioned immovable or movable property is no longer able to be returned
due to damage inflicted on it or its loss, compensation shall be made.’
Just as there are murky areas in the expropriation of property, there is

ambiguity with respect to the following questions in the requisition of
property: whether the government or the state is supposed to be the party
exclusively entitled to exercise the right of requisition; how the term ‘public
interest’ should be interpreted in the course of requisition; and who will be
responsible for making sure that the requisitioned property is really used in
the public interest. No clear answers to these questions can be found in the
Property Rights Law.
However, as the requisition of property occurs far less frequently, it has not
generated as many disputes or confrontations as has the expropriation of
property.
Ownership in a condominium building

A growing imbalance between population and amount of land is restricting
the quality of life in China’s urban areas. Detached dwellings that were
quite common a couple of decades ago are quickly disappearing. High-rise
residential buildings are becoming the norm in large and medium-sized cities.
These ‘condominium buildings’ are usually located in a gated community and

are multi-unit dwellings composed of all units of housing privately owned
by individuals along with some common areas (such as roads, corridors,
stairs, entrances, roofs, exterior walls, elevators, public gardens, parking lots,
bars, cafeterias, swimming pools, tennis courts, etc.) that all residents in the
building are eligible to use (subject to payment according to circumstances).
Ownership 151
In response to the complexity of ownership issues brought about by the rapid

development of condominium buildings in cities, the Property Rights Law
sets out some general principles with a view to ascertaining various kinds of
ownership that may relate to a condominium buildings, especially with regard
to common areas.
According to Article 70, a condominium building’s ownership can be divided

into two categories: the ownership over the ‘exclusive parts for residential
or commercial purposes that are owned by their owners,’ and the ownership
over the ‘common areas outside the exclusive parts that are jointly owned and
managed by the (aforesaid) owners.’ That is to say, someone who purchases
a unit in a condominium building has exclusive ownership of that unit, and
along with all other unit owners has joint ownership over the common areas
in the building of which that unit is a part. Also, the person in conjunction
with other unit owners as a community is entitled to manage the public affairs
that are of relevance to all residents in the building.
Hence property owners in a condominium building generally have the

following rights: they have an exclusive right over their own property; they
hold co-ownership over the common areas in the condominium building; and
they have the right to manage the assets under their co-ownership as well as
the public affairs in connection with the condominium building.
Exclusive rights over private property

Article 71 of the Property Rights Law defines a property owner’s exclusive
right over his private property in a condominium building as ‘an owner’s
right to possess, utilize, earn from and dispose of the part in a condominium
building that is exclusively owned by him.’ It bans such an owner, when
exercising his exclusive right over his private property, from ‘posing any
threat to the safety of the building or causing damage to the legitimate
interests of other owners.’
According to Article 77 of the Property Rights Law, in principle an owner

shall not use his residential dwelling as an office for the purpose of carrying
out business. However, Article 77 does not explicitly outlaw such conversion,
but merely says that if the owner wants to do so, other property owners who
might be affected by his action should concur with what he plans to do. It
can therefore be construed from Article 77 that provided other owners do not
oppose it, a residential dwelling in a condominium building can be used as an
office.
In fact, it is not unusual for residential dwellings to be used as offices,

classrooms, hair salons, grocery stores, etc. Owners rarely consult neighbours
before converting their residential units into offices.
Co-ownership of common areas

In theory, co-ownership over property can be exercised on the basis of
different proportions respectively applied to each owner (Property Rights
Law, Article 94), or on an entirely joint basis without any divided proportions
(Property Rights Law, Article 95). Although the Property Rights Law does
not expressly provide for the manner in which co-ownership over common
areas in a condominium building is exercised, it can be inferred that the said
co-ownership over common areas in a condominium building refers to the
former, i.e. property owners in a condominium building jointly own those
common areas on the basis of different proportions applied to each owner.
Regarding the issue of co-ownership over common areas in a condominium

building, Article 72 of the Property Rights Law stipulates that: ‘A property
owner in a condominium building enjoys rights and assumes obligations
with respect to the condominium building’s common areas; he is not allowed
to give up his rights or to fail to fulfil his obligations. In the event that he
transfers his dwelling which is of a residential or business nature to somebody
else, his right of co-ownership and co-management over the common areas
will be transferred together.’
Under Article 80, apportionment of expenses and proceeds arising from a

condominium building and its ancillary facilities will follow the property
owners’ agreement (if any); otherwise it will be decided in relation to the floor
area of each property owner’s exclusive unit to the entire construction area of
the building.
Generally speaking, corridors, stairs, entrances, roofs, exterior walls,

elevators, etc. in a condominium building are under co-ownership of the
property owners in the building.
Ownership of catering and sporting facilities in the gated community where

Ownership 153
a condominium building is located is reliant on the facts of each individual

case. If they occupy a site that specifically belongs to the common areas in the
building as previously designed and the government city planning authority
has approved such design beforehand, they may be deemed as co-owned by
the property owners in the condominium building; otherwise they can be
deemed as under private ownership.
In reality, many controversies arise in connection with ownership of

commonly accessible roads, public gardens, and parking lots within a
condominium building. Parking lots deserve particular attention.
Parking lots refer to both open air parking spaces as well as underground
garages. In this regard, Article 74, paragraph 1 of the Property Rights Law
states that: ‘Parking spaces and garages, if the design of which has been
incorporated into a condominium building’s construction plan for vehicle
parking, should first of all be used to meet property owners’ requirements.’
Article 74, paragraph 2 of the Property Rights Law is a vague provision. It
says that ownership of such parking spaces and garages depends on how the
relevant parties decide by means of sale, or lease or giving as a gift. Literally
it can be construed that parking lots in a condominium building do not belong
to property owners but from the very start are under sole ownership of the
developer; the developer is free to sell or lease any parking space to anyone
by whatever means; if any property owner wants to use a parking space built
in the condominium building, he will have to purchase it or rent it from the
developer, and perhaps as a property owner he may have the pre-emptive right
to do so.
Article 74, paragraph 3 of the Property Rights Law illustrates a circumstance

in which parking lots built on the roads or other sites commonly owned by
property owners in a condominium building are under the co-ownership of
property owners. Such parking lots normally refer to open air parking spaces
designated on the publicly accessible roads within the gated community where
a condominium building is located, but do not include any underground garage.
According to Article 73 of the Property Rights Law, some public facilities

within the gated community where a condominium building is located, such
as publicly accessible roads and public gardens, are under co-ownership of the
property owners in the building.
Property owners’ joint management

In the context of the Property Rights Law, property owners in a condominium
building jointly manage those co-owned common areas as well as any public
affairs related to the people living in the building and in the gated community.
Property owners’ right of joint management to some extent ensures the self-
regulating feature the Property Rights Law envisages for a condominium
building’s operation and administration in everyday life.
The Property Rights Law requires that some important management issues in
a condominium building shall be decided by all property owners. Article 76
lists the following issues, the resolution of which requires ‘the consent of the
property owners whose property in aggregate amounts to more than half the
total areas in a condominium building and who account for more than half
the total property owners in the building’: formulating and amending rules on
convening property owners’ assembly meetings; formulating and modifying
rules on managing the building and its facilities; election of property owners’
committees or change of such committees’ members; engaging and dismissing
any firm or administrator that provides management service to the building;
and other issues of material importance in connection with the property
owners’ right of co-ownership and joint management.
Article 76 also provides that settling the following issues would require ‘the
consent of the property owners whose property in aggregate amounts to more
than two thirds of the total areas in a condominium building and who account
for more than two thirds of the total property owners in the building’: raising
funds to cover maintenance costs of the building and its facilities, and using
such funds accordingly; and changing or rebuilding any part of the building
and its facilities. Regarding the daily operation and administration of a
condominium building, under Article 81, paragraph 1, property owners may
choose to carry out the management themselves, or hire an outside firm to
provide such management services.
Property owners normally should exercise their right of joint management

through convening a property owners’ assembly meeting or a property
owners’ committee meeting. Under Article 75, paragraph 1, such a property
owners’ assembly or a property owners’ committee can be established by
Ownership 155
property owners themselves. It is supposed to function as a management body

on behalf of all the property owners in a condominium building.
Decisions made at a property owners’ assembly meeting or a property owners’

committee meeting have a binding effect on all the property owners in a
condominium building (Article 78, paragraph 1).
Disputes between the property owners in a condominium building are

common. The Property Law provides for procedures intended to facilitate the
effective settlement of such problems. According to Article 83, paragraph 1,
a property owners’ assembly or a property owners’ committee is empowered
to intervene in order to rectify any infringement committed by one property
owner that may injure the interests of another property owner by requesting
the wrongdoer to stop what he is doing or to pay the victim for his loss (if
any).
Nevertheless, property owners do not have to blindly abide by what a property

owners’ assembly or a property owners’ committee has decided. If a property
owner feels aggrieved believing that implementing such decision will injure
his legitimate interest, he may apply to the court for having the decision set
aside (Article 83, paragraph 2).
It is interesting to note that the Property Rights Law is silent on whether a

property owners’ assembly or a property owners’ committee possesses a legal
personality capable of independently exercising civil rights and fulfilling
civil obligations. Such uncertainty may easily provoke disputes over whether
a property owners’ assembly or a property owners’ committee is entitled to
participate in lawsuits on behalf of property owners.
A neighbouring relationship
Neighbours, i.e. those in adjacent properties, might affect each other through
their behaviour, if, for instance, one poses an impediment to the other’s air
ventilation or daytime lighting, or discharges pollutants, or does not provide
the other with required assistance or convenience.
The concept of a ‘neighbouring relationship’ arose in this context. It refers

to a relationship between property owners or occupiers of neighbouring
properties. These parties are obliged to provide each other with the required
minimum degree of convenience.
As an example, assume there are two pieces of land: A and B. A is encircled

by B, so no one can enter A without passing through B. In this example, A
neighbours B, and any party in connection with A and B will be viewed as
having a neighbouring relationship. A will be far less useful if B’s owner or
current occupier disallows any other person to pass through B in order to
enter A. So letting people pass through B for the purpose of entering A is
the required minimum degree of convenience that B’s owner or B’s current
occupier should provide to outsiders.
A neighbouring relationship itself is not a property right, but it is of close

relevance to the property right enjoyed relating to the adjacent immovable
property. In the context of a neighbouring relationship, providing neighbours
with the required minimum degree of convenience is a statutory obligation
prescribed under the law.
There are some provisions on neighbouring relationships in Chapter 7 of the

Property Rights Law.
Regarding the cardinal principles to be adhered to when handling a neigh-

bouring relationship, Article 84 highlights them as ‘providing convenience
for production and livelihood,’ ‘pursuing solidarity and mutual aid’ and
‘achieving fairness and reasonableness.’
As to the circumstances in which providing the convenience envisaged in

a neighbouring relationship is required, Articles 86 to 88 of the Property
Rights Law enumerate the following scenarios: using and draining water;
road passage; construction or repair of buildings; installation of the required
electric wires and cables, water pipes, heating and gas pipelines; etc.
Articles 89 to 92 of the Property Rights Law require avoidance of causing

hindrance to neighbours in a neighbouring relationship and illustrate the
likely occurrence of such hindrance in circumstances such as obstructing
air ventilation, daytime lighting and sunshine; getting rid of solid wastes;
producing atmospheric pollutants, water pollutants, noise, light, and electronic
magnetic radiation; dredging; constructing buildings; using and draining
water, utilizing road passage, and installing pipelines; etc.
Ownership 157
However, it should be noted that in a neighbouring relationship, neighbours

are only required to provide to each other the required minimum degree
of convenience, and a higher degree of convenience cannot be statutorily
enforced. Seeking a higher degree of convenience requires the establishment
of an easement between the two neighbouring parties. An easement is a kind
of usufructuary right. The two neighbouring parties may enter into a contract
in order to establish an easement, which, in light of this contract, entitles
one party to the contract to utilize the property of the other party in certain
respects, with a view to accomplishing an enhancement of the attractiveness
or usefulness of the former party’s property. Article 156, paragraph 1 of the
Property Rights Law provides that: ‘A right holder of an easement is entitled
to have his immovable property better utilized by using another person’s
immovable property according to a contract made between them.’
The following example illustrates the benefits of establishing an easement.

Sunshine is a continuing education school. Its small campus adjoins Great
Land House, an office building belonging to Great Land Research Institute.
Sunshine has only one entrance, from which it is a 15 minute walk to the
nearest bus station. Many of Sunshine’s teachers and students have requested
opening another entrance that is significantly closer to the bus station.
However, to take this new route, walkers must pass through Great Land
House. Therefore, Sunshine entered into an agreement with Great Land
Research Institute for the purpose of establishing an easement. According
to the agreement, Great Land Research Institute allows Sunshine’s staff and
students to pass through Great Land House at any time during office hours; in
return, Sunshine pays an annual fee of RMB 10,000 to Great Land Research
Institute for this convenience.
The consequences of the bona fide acquisition of property

and dealing with found property
Normally property ownership can be acquired based on a contractual
relationship, or by donation, bequeath, inheritance, etc. However, there are
some special circumstances under which property ownership can be acquired
in a different way.
Example 3.1
T bought 100 packs of Marlboro cigarettes. He temporarily deposited the
cigarettes in G’s house. C (G’s friend) was in urgent need of cigarettes. G
sold these cigarettes to C, who had no idea that G was not in a position to
sell them. C and his friends smoked all the cigarettes. Did C legitimately
become owner of these cigarettes?
Example 3.2
Huang lost his diamond ring. The diamond ring was found by Tang, who
sold it to Yang. Could Yang become owner of the diamond ring in this
situation?
The above examples are related to the rules on the consequences of bona fide
acquisition of property and on how to deal with found property that might be
lost by somebody else. Chapter 9 of the Property Rights Law, entitled ‘Special
rules on acquiring ownership,’ sets out some provisions in these respects.
Bona fide acquisition of property

The Property Rights Law makes bona fide acquisition of property available
and acceptable, with a consequence that a buyer may become owner of the
property he purchased in good faith. It provides an opportunity to innocent
buyers, who do not know that the sellers they are transacting with in fact do
not possess ownership of the goods they are selling, to eventually acquire
ownership of the goods sold in this way. In other words, the bona fide
acquisition system established under the Property Rights Law is in favour of
buyers in good faith.
Here, the term ‘good faith’ does not carry any moral dimension. It simply
means that the buyer does not know (or under normal circumstances cannot be
expected to know) that the seller is in fact short of ownership over the property
being sold. Conversely, ‘bad faith’ indicates that the buyer knows (or under
normal circumstances can be expected to know) that the seller is not entitled to
sell that property over which he does not have ownership; in this case, the bona
fide acquisition system operates against a buyer in bad faith, and the buyer will
be denied entitlement to ownership of the property bought by him.
Ownership 159
The substance of bona fide acquisition is described in Article 106,

paragraph 1 of the Property Rights Law as follows: Where the immovable
or movable property is transferred by a person to somebody else while the
former has no right to make such transfer, the property’s owner is entitled to
have the transferred property recovered; unless the law provides otherwise,
the transferee can acquire ownership of the transferred immovable or movable
property in the circumstances as below: (1) the transferee is in good faith
when the immovable or movable property is transferred to him; (2) the
transfer is made at a reasonable price; and (3) the transferred property has
been registered if according to the law transferring such property has to be
registered, or has been delivered to the transferee if such transfer does not
need to be registered.
The rationale behind which a buyer in good faith can be allowed to obtain a
good title to the property sold to him by somebody who is not eligible to sell
it lies in upholding a spirit of encouraging transactions. In the dynamic, fast-
growing economic society of today, it is unrealistic to expect that each and
every buyer can detect a likely pitfall in connection with what he is buying or
has carried out a due diligence exercise to make sure that the seller does have
ownership of what he is selling. Appropriate implementation of the bona fide
acquisition system can be conducive to reducing unnecessary transaction costs
and treating innocent buyers fairly.
After the transfer of the property is completed in the manner accepted under
the bona fide acquisition system, the original owner of the property can seek
compensation against the person who has made such illegitimate transfer for
the loss (Property Rights Law, Article 106, paragraph 2).
In Example 3.1 above, C had no idea that G was not in a position to sell the
cigarettes to him. In the event that C paid a reasonable price, his purchase
would amount to obtaining a good title to these cigarettes. T could seek
compensation against G (but not against C).
Dealing with found property

The Property Rights Law also provides for how to handle the unclaimed
property lost by somebody after finding it. Article 109 requires that such
property should be returned to its owner, and to do so the finder should try to
inform its owner to collect it or pass it to the police in the first instance.
That is to say, it depends on whether the identity or contact details of the

property’s owner can be identified by the finder. If they can, the finder should
immediately notify the property’s owner of what he has found. If they cannot,
the finder will be obliged to hand over the found property to the police as
quickly as he can, rather than keeping the property himself.
In Example 3.2 above, Tang found the diamond ring lost by Huang. If Tang
was not able to identify to whom the diamond rings belongs, he should
quickly hand it over to the police.
Looking after found property voluntarily

Before the finder hands over found property to its owner or to the police, there
may be a short period of time within which he volunteers to look after the
found property. Although the finder has no legal or contractual obligation to
do so, if he chooses to do so, during this period he should try to prevent the
found property from being damaged, destroyed or lost, otherwise he may have
to recoup such loss in favour of the owner.
For example, Mr Wang found a lost dog. Before he is able to locate the dog’s
owner, Mr Wang may voluntarily take care of the dog for its safety and health.
The dog’s owner will be required to reimburse Mr Wang for any reasonable
expenses incurred for looking after the dog. Mr Wang ought to ensure that the
dog is well cared for. He may be liable for any injury caused to the dog during
the period the dog is under his care.
In this regard, Article 93 of the GPCL provides that: ‘Where a person provides
his management or services with a view to preventing another person’s
interest from injury although he is under no legal or contractual obligation to
do so, he will be entitled to the beneficiary’s reimbursement of any necessary
expenses incurred by him for so doing.’
In this regard, the Property Rights Law imposes an obligation on the finder
requiring him to take reasonable care of the found property before the
property can be safely returned to its owner. By Article 111, the finder shall
carefully look after the lost property, and may have to bear civil liabilities
for the property’s loss or damage attributable to his deliberate fault or gross
negligence during the time the property is kept by him. In light of Article 112,
paragraph 1, the owner or the right holder of the lost property shall reimburse
Ownership 161
the finder for any necessary expenses incurred in the course of looking after
the property.
Under Article 112, paragraph 2 of the Property Rights Law, where the owner
or the right holder of the lost property has promised a reward to anyone who
can help to find the lost property, he shall not go back on the promise after the
lost property is returned to him. However, by Article 112, paragraph 3, in the
case of the found property being illegitimately misappropriated by the finder,
the finder will lose his entitlement to claim for the reimbursement of any
necessary expenses incurred for looking after the property against the owner
or the right holder of the property, and also be deprived of his eligibility to
request the owner or the right holder of the property to stick to his promise to
reward the finder.
According to Article 110 of the Property Rights Law, where the finder hands
over the found property to the police, the police shall in a timely manner
issue public notice inviting the property’s owner to make a claim to the lost
property. If the property has been unclaimed after a passage of six months
since the public notice is issued, it will become the state’s asset (Article 113).
Bona fide acquisition of found property

In Example 3.2 above, Tang found the diamond ring lost by Huang and sold it
to Yang. If Yang had no idea that Tang as the seller was not the diamond ring’s
owner and was not in a position to sell it, could Yang thereby legitimately
become owner of the diamond ring after he bought it from Tang?
This raises a question of whether a further transaction involving the found

property could lead to a buyer in good faith lawfully becoming the property’s
new owner.
Under Article 107 of the Property Rights Law, the lost property’s owner is
entitled to have the lost property recovered; where the lost property is in the
possession of a person to whom the property is transferred by another person
who has no right to transfer the property, the lost property’s owner can request
the person who has no right to transfer the property to compensate him for
the loss; within two years of him becoming aware of to whom the property
has been transferred, the lost property’s owner is in a position to request
the transferee to return the property; where the property is acquired by the
transferee through auction or from a dealer who is in a position to sell such

property, the lost property’s owner at the time of requesting the transferee
to return the property shall reimburse the transferee the money expended
for purchasing the property, and the lost property’s owner can claim for
reimbursement (given to the transferee) against the person who has no right
to dispose of the property (but has done so giving rise to the transfer of the
property).
In Example 3.2 above, Huang may have two options. He may seek compen-
sation against Tang for the loss. Alternatively, within two years of finding
out the diamond ring has been sold to Yang, he may request Yang to return
the diamond ring. Nevertheless, in the event that Yang bought the diamond
ring not directly from Tang, but through auction or from a professional dealer
(e.g. a jeweller or a pawnbroker) to which Tang sold the diamond ring, if
Huang is able to claim back the diamond ring from Yang, he will have to
reimburse Yang for what Yang paid for the ring. Then Huang can ask Tang to
compensate him for the amount of money reimbursed to Yang.
Usufructuary rights
A usufructuary right, as a kind of property right, is in essence a usage
right. Article 117 of the Property Rights Law defines a ‘usufructuary right’
as ‘a right to legitimately possess, utilize and gain from another person’s
immovable or movable property.’
Part 3 of the Property Rights Law is devoted to usufructuary rights. It under-

lines the importance of property’s utilizability, which offers opportunities
for people to benefit by using property not in their ownership, and for
property owners to benefit by allowing their property to be used by others.
The formation of usufructuary rights allows for the utilization of unused or
idle property, which relieves pressure on scarce resources in the face of rapid
population growth. This is most apparent in the case of land.
Unlike a property owner, a usufructuary right holder is only entitled to use

the property over which his usufructuary right is established. He is not in a
position to dispose of the property through any transaction (such as sale or
lease) without the consent of the property owner. Moreover, a usufructuary
right, in theory, is not perpetual. It has a fixed duration that distinguishes it

from ownership.
Part 3 of the Property Rights Law covers the following topics relating to
usufructuary rights: general rules; the right to use contracted farmland; the
right to use land for construction purposes; the rural household’s right to use
land for residential purposes; and easement.
The right to use land for construction purposes is mainly relevant to urban
areas, whereas the right to use contracted farmland and a rural household’s
right to use land for residential purposes are both exclusively relevant to rural
land.
General rules on usufructuary rights

The general rules on usufructuary rights set forth in the Property Rights Law
are found in Chapter 10.
Under Article 121, the Property Rights Law emphasizes a usufructuary

right holder’s entitlement to compensation in the case that the property over
which his usufructuary right is created is expropriated or requisitioned with a
consequence that his usufructuary right is thereby extinguished or adversely
affected.
In addition to conceptualizing the term ‘usufructuary right’ under Article 117

as ‘a right to legitimately possess, utilize and gain from another person’s
immovable or movable property,’ the Property Rights Law specifically
mentions usufructuary rights over natural resources.
According to Article 118, usufructuary rights may be created over the natural
resources that belong to the state or collectives or that belong to the state but
are being used by collectives, in order to ‘possess, utilize and gain from’ such
natural resources. Such a system of using natural resources is implemented on
a paid basis (Article 119).
Articles 122 and 123 further mention that the following kinds of legitimately
obtained usage right over natural resources are protected by the law: the right
to use sea areas, the right to prospect mines, the right to water, and the right to
carry out aquaculture and fishing activities in water and shoals.
The right to use land for construction purposes

The right to use land for construction purposes, on most occasions, is of
relevance to land in urban areas.
Main features
It is implausible to grasp the main features of the right to use land for
construction purposes without having a basic understanding of the principle
established in Chinese Constitutional Law of dividing land into two
categories: land belonging to the state and land owned by collectives.
According to Article 10, paragraphs 1 and 2 of the Constitutional Law, the

land in urban areas is owned by the state, and the land in rural areas as well as
on the outskirts of cities is owned by collectives.
Article 135 of the Property Rights Law defines the right to use land for
construction purposes as ‘the right to legitimately possess, utilize and gain
from the land owned by the state,’ and points out that the right holder is ‘entitled
to utilize such land to erect buildings, structures and other auxiliary facilities.’
Nowadays, the right to use land for construction purposes is most closely
connected to real estate development in cities. A developer intending to carry
out property development on a specific site must acquire a usage right over
that piece of land before setting foot on the land to start business. However,
the right to use land for construction purposes is not totally irrelevant to rural
areas. While Article 135 confines the scope of the land mentioned in the right
to use land for construction purposes to ‘the land owned by the state,’ it does
not exclude what is provided under Article 43 of the Land Administration
Law, which lists three main circumstances under which the right to use land
for construction purposes may apply to rural areas when the land owned by
rural collectives has to be used: developing dwellings in rural areas, setting up
and running township and village enterprises, and establishing public welfare
facilities in villages.
Regarding the scope of the right to use land for construction purposes,
Article 136 of the Property Rights Law permits that its coverage may relate to
the land surface, or the part above or beneath the land. In other words, the
right can be created separately over the land surface, the part above the land or
the part beneath the land, so that the piece of land can be put to greatest use.
By Article 142, once the right to use land for construction purposes over a
piece of land is acquired, in principle ownership of any building, structure or
its auxiliary facilities built on the land by the right holder will belong to the
right holder, unless evidence proves otherwise.
Although the land and the buildings, structures and their auxiliary facilities
erected on it should be viewed as separate entities, under the Property Rights
Law, any formation or alteration relating to the right to use land for construction
purposes over a piece of land will also affect the property right over the
buildings, structures or auxiliary facilities built on the land; and vice versa.
In this respect, by Article 146, in the event that the right to use land for
construction purposes is transferred, swapped, contributed as capital or given
as a gift, the property right over any building, structure or auxiliary facilities
constructed on the land in question will simultaneously be changed in the same
way. Similarly, under Article 147, where any building, structure or auxiliary
facilities constructed on a piece of land is transferred, swapped, contributed as
capital or given as a gift, the right to use land for construction purposes created
over the land in question will simultaneously be changed in the same way.
The right to use land for construction purposes will not be deemed to be
valid before it is registered. Under Article 139, the right to use land for
construction purposes is validly established at the time of its registration with
the registration authority. In practice, after the required registration procedures
are completed, the registration authority will issue an official certificate to the
right holder authenticating his right to use land for construction purposes over
that piece of land. With this certificate in hand, the right holder can carry out
any construction or development on the land free from legal obstacles.
According to Article 145, in the circumstance that the registered right to use
land for construction purposes is transferred, swapped, contributed as capital
or given as a gift, an application shall be made to the registration authority for
changing the current registration.
Methods of creating the right

According to Article 137, paragraph 1 of the Property Rights Law, there are
two main methods of creating the right to use land for construction purposes
over a piece of land: by assignment or by allocation.
By assignment
Creating the right to use land for construction purposes by assignment refers
to the method of acquiring such right from the government (on most occasions
through bidding) on payment of a land use fee. In essence, it is a way of
acquiring the right to use land for construction purposes on a competitive
basis. This is the way that most real estate developers acquire land for
property development in cities and is the principal approach for acquiring land
in China.
According to Article 138, paragraph 1 of the Property Rights Law, assignment

can be completed by taking various concrete forms such as tender, auction,
agreement, etc.
Article 137, paragraph 2 of the Property Rights Law requires that the
assignment of land to be used for the following purposes be completed under
a public bidding approach such as tender or auction: ‘the land to be used for
the purpose of carrying out profit-making activities in the fields of industry,
commerce, tourism, entertainment, or constructing residential buildings.’
It also requires that the assignment be completed under a public bidding
approach such as tender or auction ‘if there are two or more persons intending
to acquire such right over the same piece of land.’
By allocation
Creating the right to use land for construction purposes by allocation refers
to the method of acquiring such right as a result of being allocated by the
government a land use right over a piece of land (in most cases free of
charge).
Currently, free allocation of a land use right by the government is relatively

rare. It was done more often in the era of the planned economy with the
land allocated to government departments, state-owned enterprises or public
organizations through administrative decrees.
The Property Rights Law imposes a strict restriction on creating the right to
use land for construction purposes by means of allocation (Property Rights
Law, Article 137, paragraph 3).
In practice, a land use right acquired by allocation cannot be traded in the

market in normal circumstances, as opposed to that acquired by means of
assignment.
Renewal of land use rights

Neither with the right to use land for construction purposes acquired by
assignment nor with that obtained by allocation will the right holder be
entitled to an indefinite use of the land. That is to say, the duration of the land
use right is not unlimited, and there is a fixed time prescribed on using the
land granted. After the fixed period, the question of renewal of land use rights
arises.
Tenure of land use rights

In 1990, the State Council issued a document, entitled the Interim Regulations
on the Assignment and Allocation of Usage Right over State-owned Land in
Urban Areas.20 Article 12 of this document sets out a series of rules on the
length of tenure for using different types of land, including ‘70 years for land
for residential purposes; 50 years for land for industrial purpose; 50 years
for land for the purposes of carrying out activities in the fields of education,
science and technology, culture, health care and sports; 40 years for land for
the purposes of carrying out activities in the fields of commerce, tourism and
entertainment; and 50 years for land for a combination of these purposes or
other purposes.’
In the context of Article 12, a question can be raised about whether the
tenure can be renewed or extended on its expiry date. If the answer is no, a
house owner may lose ownership of his house after the passage of 70 years.
If the answer is yes, then it needs to be ascertained whether the renewal is
automatic, or subject to further review and approval with a possibility that the
renewal is not totally ensured.
Different types of land

The Property Rights Law provides a general answer to the question of whether
the tenure of land use right can be renewed. It does so by differentiating two
categories of land: land used for constructing residential houses and land used
for purposes other than constructing residential houses.
20 The Chinese version of the Interim Regulations on the Assignment and Allocation of Usage
Right over State-owned Land in Urban Areas can be found on the following website: http://www
.law-lib.com/law/law_view.asp?id=6611. An English translation does not seem to be available at
present. The author uses his own English translation in this book.
• Land used for constructing residential houses
According to Article 149, paragraph 1, the right to use land for

construction purposes created over land that is used for constructing
residential houses can be automatically renewed on its expiry date.
That is to say, if a person buys an apartment, that person’s ownership

over that apartment reliant on using the land on which the apartment
is constructed will be automatically renewed on the expiry date of the
established land use right (usually 70 years). In this sense, the person does
not need to worry about losing ownership of the apartment when the land
use right expires.
However, the Property Rights Law does not specify the maximum length
of a new tenure allowed after the renewal is made. Nor does it clearly
point out whether making the renewal will require paying land use fees
again to the government in the same way as when the land user initially
acquired this land use right.
• Land used for purposes other than constructing residential houses
Regarding the right to use land for construction purposes created over the
land that is used for purposes other than constructing residential houses,
the Property Rights Law does not explicitly provide whether renewal is
guaranteed.
In this regard, Article 149, paragraph 2 provides that: ‘Renewing the right
to use land for construction purposes created over the land that is used
for purposes other than constructing residential houses is governed by the
law. The attribution of the houses and other immovable property on the
land in question shall be subject to any agreement made on this matter;
where no such agreement is reached or such agreement is reached but
not in a clear way, the attribution shall be subject to what the laws and
administrative regulations prescribe.’
That is to say, the renewal will not be automatically granted to a land user
once the duration of its land use right expires. Whether such right can be
renewed will be very much up to an existing contractual understanding
on this issue. If the parties concerned at a certain point in time have
expressed their willingness to continue using the land after the current
tenure of land use right expires and such expression has been officially
displayed taking the form of a binding contract, then renewing the land
use right will not be hindered unless the government wants to expropriate
the land in question at the time.
Article 148 states that where the government wants to expropriate the
land before the current tenure of land use right comes to an end, the right
holder affected will be compensated and be given back the land use fee
paid to the government.
The right to use contracted farmland and a rural

household’s right to use land for residential purposes
The usufructuary right in connection with using rural land in China
specifically refers to two kinds of such right: the right to use contracted
farmland, and a rural household’s right to use land for residential purposes.
The right to use contracted farmland entitles peasants to use the land that
belongs to rural collectives and is acquired from rural collectives based on
contracts made between peasants and rural collectives enabling peasants to
carry out production over the land on a fixed tenure basis.
The rural household’s right to use land for residential purposes bestows on
peasants eligibility to obtain a piece of land in their rural hometown. They
can construct houses on the land in order that every rural household may have
somewhere to live.
Land usage in rural areas

The land in China’s rural areas (no matter whether it is used as contracted
farmland or land for residential purposes) is owned by rural collectives, not
by individual peasants. Peasants do not hold legal title to the land and are only
entitled to acquire the usufructuary right (i.e. the usage right) over the land
from rural collectives. Such land use right principally covers the right to use
contracted farmland and the rural household’s right to use land for residential
purposes.
Regarding the concrete form of the rural land’s collective ownership, Article 10
of the Land Administration Law provides that: ‘Where the collectively owned
rural land is under the ownership of a collective of peasants at the village level
in line with the law, the land in question will be managed and administered
by the village’s collective economic organization or the villagers’ committee;
if the land is under the ownership of more than one collective of peasants at
the village level, it will be managed and administered by each such collective
or by a team of villagers; in the event that the land belongs to a collective of
peasants at the township or town level, it will be managed and administered
by the township’s or the town’s rural collective economic organization.’
By Article 11, paragraph 1 of the Land Administration Law, ownership of

rural collectively owned land can be identified and ascertained at county-level
government departments, which carry out land registration and issue land
certificates from which the land’s ownership can be ascertained. According
to Article 13 of the Land Administration Law, ownership and usage rights of
any legitimately registered rural land are protected under the law. In principle,
a land use right over rural land is barred from being traded, or assigned or
rented out for construction purposes of no relevance to agriculture (Land
Administration Law, Article 63).
It is against the background of this land use model in rural areas that
exercising the right to use contracted farmland and the rural household’s right
to use land for residential purposes is unveiled and controlled. Establishing
this idiosyncratic land use system was an epochal achievement in China’s
economic reform, which started with testing the water by overhauling the
land use system in rural areas. The collective ownership of rural land is a
legacy of the 1950s when collectivization swept the countryside aiming at
amassing capital for industrializing China’s cities. While such ownership
has been legalized, allowing the establishment of the right to use contracted
farmland and the rural household’s right to use land for residential purposes
can be deemed as a tolerable compromise that does not pierce the firewall
erected between private ownership and collective ownership of land in the
countryside.
The past three decades of economic reform have resulted in a drastic

transformation of rural life in China. Although the change on the whole
has been positive, the disparity between the life of peasants and that of
urban residents in terms of social privileges and welfare benefits is not only
frighteningly large but also has a tendency to widen further. Moreover, with
inadequate knowledge of science and technology, Chinese peasants are facing
a tough stress-test in the form of fierce international competition with China’s

gradual integration into the international arena. In this context, it remains to
be seen whether the current rural land use system is sustainable.
The right to use contracted farmland

The right to use contracted farmland is derived from a land contracting system
the operation of which commenced in Chinese rural areas in the late 1970s
and flourished in the 1980s with the withdrawal of the people’s communes in
the countryside. Such right is created on the basis of contracts between rural
collectives that own the rural land and peasants who use the land. According
to Article 12 of the Farmland Contracting Law, the entity that represents the
rural collective of all peasants in a village to enter into such contracts with
individual peasants refers to the collective economic organization at the
village level or the villagers’ committee.
With the right to use contracted farmland in hand, peasants are able to carry
out agricultural production over the land contracted from rural collectives.
After they sell a certain amount of harvest to the government as a kind of
obligation, the residual agricultural products can be kept for their own use for
consumption or further trading. In this way, peasants’ initiatives in agricultural
production are stimulated, whereas collective ownership of rural land remains
intact.
Regarding the application for exercising the right to use contracted farmland
in the Chinese countryside, Article 124, paragraph 2 of the Property Rights
Law provides that: ‘A farmland contracting management system applies to the
cultivated land, forest land, grass land and other kinds of land for agricultural
use that is owned by collectives of peasants or is owned by the state but
employed by collectives of peasants according to the law.’ By Article 125,
such a right holder is ‘entitled to possess, utilize and gain from the cultivated
land, forest land, grassland, etc. that has been contracted by him according to
the law, and to engage in production in cultivation and plantation, forestry,
husbandry, etc.’
In order to enable peasants to use the land on a long-term basis, Article 126,
paragraph 1 of the Property Rights Law prescribes a lengthy tenure for various
kinds of contracted farmland, e.g. 30 years for cultivated land, 30 to 50 years
for grass land, and 30 to 70 years for forest land. According to Article 126,
paragraph 2, such tenure can be renewed or extended after it elapses. Thus,

any concern over the prospect of continuing to use the land after the tenure
expires can basically be removed.
Article 131 of the Property Rights Law states that in normal circumstances
rural collectives cannot withdraw the contracted land within the current
tenure of the established right to use contracted farmland. Pursuant to Article
128, the right holder (i.e. the peasant who has contracted the farmland from
the rural collective) is allowed to sub-contract the land in question, or swap
or transfer his land use right, but he is not allowed to use the land for non-
agricultural purposes unless doing so can be legitimately approved.
If the contracted land is expropriated, the right holder will be compensated

(Property Rights Law, Article 132).
A rural household’s right to use land for residential purposes

A rural household’s right to use land for residential purposes is another
important category of usufructuary rights that specially applies to rural land
in China. It refers to a land use right granted to peasants who are allocated
a piece of land over which such right is established and can use the land
to construct their dwellings. Despite the fact that such land is under the
ownership of rural collectives, the land use right created over it is exclusively
enjoyed by the right holder (i.e. the rural household), whose interests
pertaining to the land are protected against infringement.
According to Article 152 of the Property Rights Law, such a right holder is
entitled to occupy and utilize the land allocated to it, and the household can
build its house and auxiliary facilities on the land for residential purposes.
A rural household’s right to use land for residential purposes bears a strong
social welfare characteristic, as peasants are eligible to be granted this
land use right free of charge so that they can have a place to live in their
hometown. Even in the event of loss of such land caused by force majeure
events (e.g. natural disasters), according to Article 154 of the Property Rights
Law, a household can be allocated land again as compensation.
It should be noted that such land is granted to a rural household rather than
an individual. Under Article 62, paragraph 1 of the Land Administration Law,
each rural household is entitled to be allocated one piece of land only for
residential purposes. In other words, a household with many members has no

substantial advantage over a single-person household. In either case, no more
than one piece of land for residential purposes will be allocated.
A rural household’s right to use land for residential purposes as a kind of

usufructuary right is strongly tied to peasants’ status as rural residents. China’s
‘hukou’ system (i.e. a government-run system for residency allocation,
recording and permits) clearly divides Chinese citizens into two categories:
holders of urban residency permits and holders of rural residency permits.
Only holders of rural residency permits (commonly known as ‘peasants’) are
entitled to the rural household’s right to use land for residential purposes. In
practice, if an urban resident bought a house built on rural land, he would not
be able to obtain any official certificate from the government ascertaining his
ownership over the house. In this regard, the State Council issued a regulation
in 1999, namely the ‘Notice on strengthening management over land transfers
and banning speculative land trading issued by the Secretarial Department of
the State Council.’21 Under this regulation, peasant’s dwellings on rural land
cannot be sold to urban residents, and urban residents are also not allowed to
build residences on rural land.
The Property Rights Law is silent on whether a rural household’s right to use
land for residential purposes can be further traded (say, perhaps, firstly among
peasants and then extended to encompass urban residents). The uncertainty
and opacity surrounding this issue makes it difficult to speculate on the
likelihood of such a development.
Here is an example. Andy Lau, a retired Hong Kong civil servant, is tapping
into the mainland market to start a second career. In conjunction with a
couple of partners, he opened a medical-instrument manufacturing plant in
Guangzhou. Since the business requires him to stay on the mainland most
of the time, he bought a big flat in Panyu (on the outskirts of Guangzhou),
and all his family members have moved there. Andy paid a very large land
use fee to get the piece of land on which his manufacturing plant is being
constructed. The flat he purchased also cost him a fortune. But until one of his
21 The Chinese version of this regulation can be found on the following website: http://www
.chinabaike.com/law/zy/xz/bgt/1335961.html. An English translation does not seem to be
available at present.
close friends recently told him, Andy hadn’t realized that land use rights and
land ownership are two different things in China; no private land ownership
is allowed; and all land use rights will expire after a certain number of years.
Andy is worried that he might lose his manufacturing plant and his flat after
the current land use rights come to an end. Should Andy be concerned?
Land use rights are separated from land ownership in China, where private
individuals or organizations can have land use rights, but not (unlike the state
or collectives) land ownership. Under Article 12 of the Interim Regulations
on Assignment and Allocation of Usage Right over State-owned Land in
Urban Areas issued by the State Council, the length of time for using land for
residential purposes is 70 years and that for industrial purposes is 50 years.
However, this does not mean the right holder will lose his entitlement to
continue using the land after the current tenure comes to an end. Regarding
whether the tenure of an urban land use right can be renewed, the Property
Rights Law divides the land into two categories: land used for constructing
residential houses, and land used for the purpose other than constructing
residential houses. Article 149, paragraph 1 clearly points out that the right to
use the land that is used for constructing residential houses is automatically
renewed on its expiry date. The Property Rights Law does not explicitly
indicate that the right to use the land that is used for purposes other than
constructing residential houses is automatically renewed after the present right
expires; but it can be inferred from Article 149, paragraph 2 that in practice
renewal should not be a problem, although it cannot be absolutely ensured.
Therefore, Andy does not have to worry that he will lose ownership over his
flat or his plant after the current tenure of the land use right expires in 70 or
50 years. Nevertheless, if Andy’s flat is built on land that belongs to a rural
collective, then he will not be eligible for the ownership of the flat because
only Chinese rural residents can become owners of residential houses that are
constructed on rural land.
Property rights relating to security

The epicentre of Part 4 in the Property Rights Law is the property right
relating to security. Here, the term ‘security’ carries the same meaning as
‘guarantee.’
A guarantee is quite common in commerce. For example, T applies to ABC

Bank for a loan of RMB 1 million. His application is turned down by ABC
Bank because ABC Bank is not satisfied with T’s ability to repay the loan
after estimating his current creditworthiness. However, ABC Bank agrees
to reconsider the case if T can find a person to provide ABC Bank with an
appropriate guarantee to support T’s application. As G is willing to use his
house (worth around RMB 2 million) as collateral for T’s bank loan, ABC
Bank approves T’s application and grants him the loan. Here, G’s secured
house plays a crucial role in the success of T’s loan application. This is
because if T defaults in repayment of his loan, ABC Bank can rely on G’s
secured house to have T’s debt settled.
The property right underlined in Part 4 of the Property Rights Law is the
result of the creation of such security. In practice, the property right holder
who has a security interest is usually a creditor who expects his debtor to
fulfil debt obligations on time. If his debtor fails to do so, the creditor can
exercise his property right based on a guarantee created over the property that
is provided to the creditor to secure the debtor’s debt payment.
In this respect, by Article 170 of the Property Rights Law, a property right
holder who has a security interest is entitled to be paid out of the proceeds of
selling the secured property on a priority basis if his debtor fails to honour
the debt obligation that falls due. Under such provision, the entitlement of
a property right holder who has a security interest can be construed from
two perspectives: firstly, when exercising his right, he is entitled to have
the secured property sold in the first place; and secondly, he is entitled to be
paid on a priority basis from the proceeds garnered from selling the secured
property.
However, it should be noted that if a debtor fails to fulfil his debt obligation,
his creditor will not be in a position to directly foreclose the secured property
and become that property’s owner. The creditor can only have the secured
property sold and then try to get paid out of the proceeds. In practice, a
property right holder relating to security needs to apply to the court for an
order for having the secured property sold (say by auction) as well as for the
enforcement of such order.
Making payment to that creditor is prioritized but not guaranteed, because the
same debtor may concurrently have different creditors, so his assets available
for paying off these debts could be quite limited. If this is the case, the
property right holder relating to security (i.e. the creditor) will have priority in
being paid over unsecured creditors, in the event that they all rely on the same
sale proceeds.
Going back to the above example, if T defaults in repayment of his bank loan,
ABC Bank as a property right holder over the secured house provided by
G can exercise its right by applying to the court for an order for having the
house sold by auction. If a court order can be obtained and enforced, ABC
Bank will be given priority in being paid out of the proceeds of the sale. In
the event there is no other creditor waiting to be paid relating to this secured
house, ABC Bank can ultimately have T’s debt fully settled.
General provisions regarding a property right relating to

security
The Property Rights Law sets out some general provisions that are used to
govern a property right relating to security.
Article 173 describes the scope of guarantee under a property right relating to
security as ‘embracing an entitlement to the principal creditor’s right and the
interests accrued thereof, damages for breach of contract, compensation for
injuries, and reimbursement of expenditures incurred in the course of looking
after the secured asset and realizing a property right relating to security.’
A property right relating to security is of a subordinate nature. It is predicated

on a principal contractual relationship already in force between a creditor and
his debtor. The subordinate character of a property right relating to security
is illustrated under Article 172, paragraph 1, which points out that a contract
of guarantee is subordinate to a relevant principal contract under which a
creditor’s rights and his debtor’s obligations are established, with the validity
of the contract of guarantee subject to the validity of that principal contract.
In the above example, ABC Bank’s property right over G’s secured house
is subordinate to ABC Bank’s entitlement to repayment of T’s bank loan as
T’s creditor. Without this contractual relationship between ABC Bank and T
(as the creditor and the debtor respectively), there will be no basis for ABC
Bank to have its property right relating to security over G’s house created and
exercised.
According to Article 81 of the Contract Law, in the event that a creditor

assigns his creditor’s rights to a third party, any of his rights subordinate to
his creditor’s rights will be deemed to be assigned together. That is to say,
assignment of a creditor’s rights depicted in his contract with the debtor
regarding their creditor–debtor relationship gives rise to a simultaneous
assignment of any other rights subordinate to the creditor’s such principal
rights. Among the creditor’s subordinate rights, a property right relating to
security can be one of them.
In the above example, if ABC Bank assigns its creditor’s right over payment
of T’s debt to XYZ Bank (a creditor to which ABC Bank owes outstanding
debts), ABC Bank’s property right relating to security over G’s house will be
deemed to be assigned to XYZ Bank also. After the assignment is completed,
if T fails to fulfil his debt obligation in favour of ABC Bank, XYZ Bank (as
the right holder over the secured house) is entitled to apply to the court for
an order to have the house sold; and if the court grants such an order and the
sale is carried out, XYZ Bank can have priority in getting paid out of the sale
proceeds.
However, assigning a debtor’s obligations to a third party will lead to a

different consequence. According to Article 175 of the Property Rights Law,
where the creditor agrees to the debtor’s whole or partial assignment of his
debt obligations to a third party, the guarantor who has provided security to
the debtor’s fulfilment of his debt obligations will no longer need to honour
his obligation of guarantee unless he consents in writing to continue doing so
after such assignment.
In the above example, if later on T and C enter into an agreement under which
T assigns his debt obligation to C who will pay ABC Bank for T’s debt, the
obligation of guarantee imposed on G who uses his house as collateral for
T’s loan will be released. Unless G expresses in writing his willingness to
continue fulfilling his obligation of guarantee after such assignment, C’s
default in repayment of the loan will no longer have anything to do with G.
Regarding the extinction of a property right relating to security, Article 177

lists four major scenarios under which such right will come to an end,
including the creditor’s right no longer in force, the property right relating to
security having been successfully exercised, the creditor having given up his
property right relating to security, and other circumstances prescribed by the
law. In any of these scenarios, a property right relating to security established

will cease to be effective.
Mortgages, pledges and liens

For a property right relating to security, the Property Rights Law focuses on
three specific forms of security: mortgages, pledges and liens.
Example 3.3
Steven Li enters a contract with Andy Wang. Under the contract, Andy
lends RMB 200,000 to Steven who uses his car (worth RMB 300,000)
as a security for payment of his debt. The arrangement of this security
is registered at the government registration authority. Steven uses the
borrowed money to carry out his private business. Meanwhile, he is still
in possession of the car secured and drives it to see customers.
Example 3.4
Janet Sun intends to borrow RMB 200,000 from Vanessa Liu. Janet
delivers her car (worth RMB 300,000) to Vanessa as a security for
payment of her debt so that Vanessa will not worry that Janet will not be
able to repay the loan. She agrees that Vanessa may sell the car and use
the sale proceeds to offset the debt if she defaults in repayment. Under
this arrangement, Vanessa lends the money to Janet. Before repaying the
loan, Janet will no longer be able to use her car, which is kept by Vanessa
as a security until the debt is fully settled.
Example 3.5
T has his car repaired at ABC Garage which charges T RMB 10,000 for
this service. T pays ABC Garage RMB 5,000 only, promising to settle
the remaining RMB 5,000 in the following week. The manager of ABC
Garage insists on ABC Garage retaining the car until T pays off the
balance.
The three examples above relate to a mortgage, a pledge and a lien

respectively.
Mortgages
Chapter 16 of the Property Rights Law focuses on issues in connection with a
mortgage.
A mortgage can be understood as a debtor’s act of using (or arranging a

third party to use) his or a third party’s property as a security for fulfilment
of his debt obligations in favour of his creditor. The creditor can sell the
secured property and get paid from the proceeds on a priority basis if the
debtor fails to honour his debt obligations. However, the secured property is
still physically in possession of the debtor or the third party who provides it
as guarantee; the creditor only holds an entitlement to exercise the right to
realize the secured property in the case of the debtor’s default in meeting his
debt obligations. This understanding is derived from Article 179, paragraph 1.
Pursuant to Article 179, paragraph 2, the debtor or the third party who gives
the creditor his security for fulfilment of the debtor’s obligations is known
as the ‘mortgagor,’ the creditor who is entitled to exercise his right to realize
the secured property in the event of the debtor’s default in honouring his debt
obligations is known as the ‘mortgagee,’ and the secured property is termed as
the ‘mortgaged property’ (i.e. the security).
According to Article 185, paragraph 1, a mortgage contract needs to be made

in writing.
And under Article 186, the mortgagee is not permitted to be in agreement with
the mortgagor with a view that the mortgaged property will become the property
of the mortgagee in the event that the debtor fails to fulfil his debt obligations.
In other words, the debtor’s default in payment of his debt will not lead to the
mortgagee becoming the owner of the mortgaged property. The mortgagee can
only expect to recoup his losses by selling the mortgaged property and then
having the debt offset from the proceeds of the sale on a priority basis.
In Example 3.3 above, Steven is the mortgagor, using his car as the mortgaged
property for payment of his debt in favour of Andy who lends money to
Steven under a mortgage arrangement as the mortgagee. Andy does not
physically possess the car secured. Only when Steven defaults in meeting his
debt obligation will Andy be in a position to exercise his right over the car by
selling it, with a view to having the debt offset from the proceeds of the sale
on a priority basis.
What kinds of property can be mortgaged?

Article 180, paragraph 1 of the Property Rights Law describes some kinds
of property that can be used as mortgaged property: (1) buildings and other
fixtures on the land; (2) the right to use land for construction purposes;
(3) the right to use contracted farmland like barren land, etc., that is
acquired by means of invitation to tender, auction, public consultation, etc.;
(4) equipment for production, raw materials, semi-finished goods, and
products; (5) buildings, ships and air carriers that currently are under
construction; (6) transportation vehicles; (7) any other kinds of property not
barred from being mortgaged in light of laws and administrative regulations.
Article 184 sets out the following kinds of property that are not allowed to
be used as mortgaged property: (1) land ownership; (2) land use right over
collectively owned land; (3) facilities used for education, healthcare and
other social welfare purposes that are in possession of those public bodies or
social organizations which operate aimed at providing public welfare such as
schools, kindergartens, hospitals, etc.; (4) any kind of property, the ownership
or usage right of which is unclear or under dispute; (5) any kind of property
that has been sealed off, seized, or under official surveillance and control,
due to enforcement of law; (6) any other kinds of property barred from being
mortgaged according to laws and administrative regulations.
Registration of a mortgage
For those kinds of property that can be used as mortgaged property, the
Property Rights Law requires any such mortgage of immovable property to
be registered in order that the mortgage can come into force. The Property
Rights Law does not require the registration of any such mortgage of
movable property. The mortgage of movable property that is not registered
will not be denied its legal force, but it cannot be used as a defence against
any claim over the property in question made by a bona fide third party. In
other words, in order to constitute a valid defence against any claim over the
movable property mortgaged, the mortgage must be registered, albeit the non-
registration will not affect the validity of the mortgage itself.
In this respect, Article 187 indicates that the mortgage created over buildings
and other fixtures on the land, the right to use land for construction purposes,
or the right to use contracted farmland like barren land, etc., that is acquired by
means of invitation to tender, auction, open consultation, etc. shall be registered.
Article 188 points out that a mortgage created over equipment for production,
raw materials, semi-finished goods, and products, transportation vehicles,
or ships and air carriers that currently are under construction will start to
take effect when the mortgage contract is made; and such mortgage, if
not registered, cannot be used as a defence to contest any claim over the
mortgaged property made by a bona fide third party.
In practice, different government authorities are responsible for the

registration of a mortgage relating to different types of mortgaged property.
For example, a mortgage over a land use right needs to be registered with
the Bureau of Land and Resources; a mortgage over vehicles with the Public
Security and Traffic Management Bureau; a mortgage over ships with the
Ship Classification and Registration Authority; a mortgage over civil air
carriers with the Civil Aviation Authority; a mortgage over ordinary movable
property with the Administration for Industry and Commerce; etc.
Mortgages and leases relating to the same property

Article 229 of the Contract Law provides that any change in the ownership
of a leased object that happens during the term of the lease will not affect the
lease’s validity. This means that the lease prevails over the sale or purchase of
the leased object.
However, if the mortgaged property is at the same time under a lease, will the
mortgage prevail over the lease? The answer depends on the circumstances.
Article 190 of the Property Rights Law provides that: ‘Where the property
has been leased before the mortgage contract pertinent to the property is
made, the mortgage created will not affect the prior lease. In the event that the
mortgaged property is leased after this mortgage is created, the lease cannot
be used to contest any claim arising from the mortgage if the mortgage has
been registered.’
That is to say, where the interests arising from a mortgage and a lease
concurrently exist over the same property, the mortgage will give way to the
lease if the lease is created prior to the mortgage.
If the mortgage is established earlier than the lease, whether the mortgage will
surrender to the lease depends on if the mortgage has been registered. If the
mortgage has not been registered, the lease will prevail over the mortgage.
However, if the mortgage has been registered, the mortgage will prevail over
the lease, and at a certain point in time when the mortgagee exercises his right
over the mortgaged property by selling it in order to have the debt paid off
from the sale proceeds, the lease may need to be terminated so as to give way
to realizing the interests arising from the mortgage; if this happens, the lessee
will not be in a position to deter the mortgagee from so doing and may only
seek compensation against the lessor.
Sequence of payment between mortgagees

If the same property has been mortgaged in favour of different creditors, what
is the sequence of being paid amongst these mortgagees when the mortgaged
property is sold for counterbalancing the debts owed to them?
Article 199 of the Property Law provides an answer to this question. It says
that: ‘In the case of the same property mortgaged in favour of more than one
mortgagee, when the proceeds derived from having the mortgaged property
auctioned or sold are used to pay off the debts, such payment shall be made in
accordance with the following rules: (1) such payment will be made based on
the order of registration if the mortgage has been registered, or in proportion
to the debts owed to different creditors when the order of registration
cannot be differentiated; (2) the mortgagee in a registered mortgage will be
prioritized to be paid over the one in an unregistered mortgage; (3) if the
mortgage is not registered, such payment will be made in proportion to the
debts owed to different creditors.’
Take the following example. In January, Sun and Xu entered into a contract,
according to which Xu loaned Sun RMB 400,000 secured by a mortgage
on Sun’s private house. In April, Sun rented this house out to Li on a two-
year lease. In August, Sun’s debt payment came due, but he was not able to
pay off the loan. Sun’s house was thus sold in order that Xu’s loan could be
repaid from the sale proceeds. Fang, who had bought Sun’s house, intended
to have the house immediately refurbished as he planned to use the house
as a restaurant. Should Li move out? In principle, where the mortgage is
established prior to the lease, whether the mortgage prevails over the lease
depends on if the mortgage has been registered. If the mortgage had been
registered, Li would have to move out as his right over the lease as a tenant
must give way to Xu’s right over the loan secured on Sun’s house. Under
this circumstance, Li may seek compensation against Sun. However, if the
mortgage had not been registered, Li would not have to move out as his right
over the lease would take priority over Xu’s right to sell the house for loan
repayment.
Pledges
Chapter 17 of the Property Rights Law consists of two sections each of which
focuses on one of two types of pledges: a pledge of movable property and a
pledge of right.
A pledge of movable property

A pledge of movable property is described under Article 208, paragraph 1
of the Property Rights Law with respect to the following scenario: where
in order to secure fulfilment of a debt obligation the debtor or a third party
deposits his movable property with the creditor as security for the creditor to
physically keep in the event of the debtor failing to fulfil his debt obligation
when it falls due or in the event of the occurrence of a circumstance as agreed
upon between the relevant parties under which the pledged property can be
realized, the creditor will be entitled to be paid out of the proceeds of realizing
the pledged property on a priority basis.
By Article 208, paragraph 2, among the relationships in connection with a

pledge of movable property, the debtor or the third party is the ‘pledgor,’ the
creditor is the ‘pledgee,’ and the secured movable property is the ‘pledged
property.’
In Example 3.4 above, Janet (the borrower) deposited her car with Vanessa
(the lender) as security for the loan. As the pledgee, Vanessa temporarily took
possession of Janet’s car, and could have the car realized to get paid from the
proceeds of such realization if Janet eventually defaulted in fulfilment of her
debt obligation.
Under Article 210, paragraph 1 of the Property Rights Law, in order to create
the pledgee’s right over the pledged property, a pledge contract needs to be
made in written form.
A pledge becomes effective as of the time when the movable property to be

secured is physically delivered to the creditor (Property Rights Law, Article
212). Once the debtor fulfils his debt obligation and the pledged property is
returned to him, the pledge will no longer be in force.
According to Article 215, paragraph 1 of the Property Rights Law, the pledgee
is under an obligation to appropriately keep and look after the pledged
property; and in the event that the pledged property is damaged or lost due to
the pledgee’s impropriety in keeping and looking after the pledged property,
the pledgee will be liable for making compensation. Also, under Article 214 of
the Property Rights Law, the pledgee will be liable for making compensation
if the pledgee, without obtaining the pledgor’s consent, uses or disposes of the
pledged property thus causing damage to the pledgor.
A pledge of right
Different from a pledge of movable property, under a pledge of right what is
secured through the deposit with the creditor is not a kind of movable property
but the debtor’s or a third party’s certain disposable right over the property that
can be assigned by the debtor or the third party to somebody else as a pledge.
Article 223 of the Property Rights Law exhibits the types of right that can
be pledged, including those over the following kinds of property: (1) bill
of exchange, cheque, promissory note; (2) bond, certificate of deposit;
(3) warehouse receipt, bill of lading; (4) transferrable unit trust or equity;
(5) transferable registered intellectual property right like trademark, patent,
copyright, etc.; (6) accounts receivable; (7) any other property right that can
be pledged according to laws and administrative regulations.
According to Article 224, Article 226, paragraph 1, Article 227, paragraph 1

and Article 228, paragraph 1, in order to create a pledge of right, the pledge
contract is in principle required to be made in writing.
A pledge of right will start to take effect subject to different conditions

imposed on different types of such right.
According to Article 224, where a pledge of right is created on the basis of

securing the right over a bill of exchange, cheque, promissory note, bond,
certificate of deposit, warehouse receipt, or bill of lading, it will start to take
effect when proof of such right is delivered to the pledgee.
Pursuant to Article 226, paragraph 1, where a pledge of right is created on the

basis of securing the right over a unit trust or equity that has been registered
with the securities registration and clearing authority, it will start to take effect
when the registration of the pledge is made with the securities registration and
clearing authority; where a pledge of right is created on the basis of securing

the right over an equity other than that which has been registered with the
securities registration and clearing authority, it will start to take effect when
the registration of the pledge is made with the administration authority for
industry and commerce.
According to Article 227, paragraph 1, where a pledge of right is created

on the basis of securing the right over registered intellectual property like
a trademark, patent, copyright, etc., it will start to be effective when the
registration of the pledge is made with the relevant authority in charge of
registered intellectual property.
Under Article 228, paragraph 1, where a pledge of right is created on the

basis of securing the right over accounts receivable, it will start to be effective
when the registration of the pledge is made with the relevant credit reference
authority.
Moreover, according to Article 229, the provisions contained in Section

1 (entitled ‘A pledge of movable property’) of Chapter 17 ‘Pledge’ in
the Property Rights Law, will apply to governing a pledge of right also,
unless there is a provision different from what is provided in Section 2 that
exclusively applies to a pledge of right.
Pledges and mortgages

There are two major differences between a pledge and a mortgage. The first
lies in who keeps the secured property. The pledged property is delivered to
the pledgee who then physically keeps that property. The mortgagee does
not physically keep the mortgaged property and only holds his entitlement to
realize the mortgaged property under appropriate circumstances. The second
is the type of property over which a pledge or a mortgage can be created. In
general, movable property or the right over movable property can be pledged;
but immovable property cannot be pledged. Both immovable and movable
property as well as the right over such property (e.g. the right to use land for
construction purposes) can be mortgaged.
Liens
A lien can be understood under Article 230, paragraph 1 of the Property
Rights Law in connection with the following scenario: where a debtor fails to
fulfil his debt obligation that comes due, his creditor may retain his movable
property which is already in the creditor’s legitimate possession, and is
entitled to be paid off out of the proceeds of realizing the possessed movable
property on a priority basis.
That is to say, for a debtor’s movable property which for some reason is in
the possession of his creditor and which the creditor has yet to return to the
debtor, if the debtor fails to pay off his debt, the creditor can continue to
possess that property until the debtor can honour his debt obligation, if the
debtor can do so without an unreasonably long delay. Alternatively, if the debt
payment appears unlikely, the creditor may sell that property to get paid from
the sale proceeds.
In this situation, the creditor becomes the ‘lien holder,’ and the movable
property retained by the creditor is viewed as the ‘property under lien’ (Property
Rights Law, Article 230, paragraph 2).
In Example 3.5 above, T has his car repaired at ABC Garage. Until T makes
full payment for the repairs, ABC Garage is entitled to retain the car. In this
circumstance, T’s car becomes the property under lien, with ABC Garage as
the lien holder. If T unreasonably delays his payment, ABC Garage can sell
the car in order to get paid from the proceeds of the sale.
According to Article 231 of the Property Rights Law, placing a lien on

movable property shall be based on the same legal relationship established
between the debtor and the creditor in connection with that property. In
Example 3.5, such legal relationship exists between T and ABC Garage for
repairing the car. The lien is based on this legal relationship.
Here is another example. Wang and Jiang have established two legal
relationships. One such relationship relates to a lease under which Jiang
rents his classical piano to Wang. The other such relationship arises from a
loan granted by Wang to Jiang. Now the term of the lease comes to an end;
in the meantime, Wang is due to be repaid for the loan. Jiang fails to make
payment on the loan. Wang thus decides not to return the piano to Jiang unless
Jiang can fulfil his debt obligation. However, Wang’s retention of Jiang’s
piano would not constitute a lien as Wang’s act and Jiang’s default in loan
repayment are not based on the same legal relationship.
Nevertheless, also according to Article 231, placing a lien on movable

property in relation to the debtor and the creditor which both are enterprises
does not need to be based on the same legal relationship between them in
connection with that property.
Another point that deserves special mention is that even if the debtor fails to
pay his debt, the lien holder is not allowed to immediately exercise his right to
realize the lien. The Property Rights Law requires the lien holder to give the
debtor a grace period, and only when after the grace period elapses the debtor
has still not fulfilled his debt obligation may the lien holder sell the property
placed under lien. In this respect, Article 236, paragraph 1 provides that: ‘The
lien holder and the debtor shall reach consensus on a period of time within
which the debt payment must be made after placing the lien on the property;
in the event of no such consensus being reached or the period of time agreed
being inexplicit, the lien holder shall give the debtor such a period of time
of more than two months, unless the property under lien is perishable. If
after such a period of time passes the debtor has still not fulfilled his debt
obligation, the lien holder and the debtor may agree on having the debt offset
by the property under lien in cash terms; or the lien holder may get paid out
of the proceeds of disposing of the property under lien by sale or auction on a
priority basis.’
Under Article 238, after the property under lien is converted into cash or is
disposed of by sale or auction, any part of the proceeds in excess of the debt
shall belong to the debtor, where any part of the proceeds insufficient to offset
the debt shall be made up by the debtor.
Moreover, according to Article 239, for the movable property on which a lien
is placed, if that property has already been mortgaged or pledged, then the
lien holder shall be entitled to be prioritized in being paid out of the proceeds
derived from disposing of the property in question.
Also, the Property Rights Law allows prior exclusion of any movable property
from being placed under lien by law or by agreement. In this regard, Article
232 provides: ‘Any movable property that is not allowed to be placed under
lien according to the law or to an agreement made by the relevant parties will
not be subject to being placed under lien.’
Summary
The Property Rights Law is designed to deal with the formation and alteration
of property rights in connection with immovable and movable property. A
property right may refer to ownership, usufructuary rights and property rights
relating to security.
Three cardinal principles are advocated under the Property Rights Law:
the principle of the equal protection of property rights, the principle of the
legality of property rights, and the principle of public notice and the good-
faith acquisition of property rights.
Property ownership in China is classified into state ownership, collective

ownership, and private ownership. The expropriation or the requisition of
private or collective assets is permitted under special circumstances for the
sake of satisfying public interest. Appropriate compensation will be made to
victims who suffer from the expropriation or the requisition of their property.
A usufructuary right is a usage right (not ownership). A usufructuary right

holder is only entitled to use the property, but is not in a position to dispose of
it. The right to use land for construction purposes, the right to use contracted
farmland, a rural household’s right to use land for residential purposes, and
easement are types of usufructuary right in the Property Rights Law.
The term ‘security’ embodied in a property right relating to security basically

has the same meaning as ‘guarantee.’ The Property Rights Law concentrates
on three specific forms of security: mortgages, pledges and liens.
Practice questions
1 Rainbow Village is located in a remote rural area in southern China. The
village is surrounded by three small mountains that abound in limestone,
an important raw material in cement and steel making. For generations the
importance of this mineral resource had not been noticed by the villagers,
let alone outsiders.
Yang is Rainbow Village’s newly elected head. He promised to bring

prosperity to the village during his tenure of office. In order to attain this
goal, Yang organized the villagers to excavate limestone, which is then

sold to giant steel conglomerates and building material manufacturers.
In the course of excavation, a piece of inscribed ancient bronzeware was

discovered. Yang thought this relic must be of great commercial value.
He therefore kept it for himself and decided to sell it to an antique shop
someday.
The police interviewed Yang recently, telling him that he cannot have
private ownership over an unearthed relic, and Rainbow Village’s
excavation and sale of limestone is an illegal activity.
Yang argued that (i) under his leadership Rainbow Village is prospering
through labour, (ii) both the excavated limestone and the discovered
bronzeware have now become private property, and (iii) the right of
private property is protected by law.
Are Yang’s arguments sound?
2 T sold his house to G. As T said he lost his identity card, G had to

postpone the registration of this transaction at the government registration
authority. A week later, T mysteriously disappeared.
ABC Bank asked G to move out of the house. It told G that T borrowed
a large sum of money from ABC Bank and the loan was secured against
this house. As T failed to pay back the loan, ABC Bank would exercise its
right to sell the house at a property auction in order that the proceeds of
the sale could be used to repay the money lent to T.
Discuss.
3 Song is a peasant from Moonlight Village in Hunan. Over the past

twenty years, he has been living in Shenzhen with his family, firstly as a
construction worker and now as a foreman.
Last year, Song pulled down his old house in Moonlight Village. On
the site of his old house, he constructed a villa-style house and sold it
to Professor Wang, an urban resident enthusiastic about living in the
countryside. The villagers’ committee of Moonlight Village did not
oppose Wang’s purchase.
Early this year, the government started an exercise of expropriating

some land in Moonlight Village, including the land on which the house
bought by Wang is located. Wang is concerned that the house will soon
be demolished. He is thinking of claiming for compensation against the
government.
Will the government compensate Wang for any loss incurred due to the
expropriation of the land?
4 Wang is a sole trader selling cooked food products in G County. On the

morning of 1 August, Wang sent some live ducks to Spring Song Food
Processing Plant (‘Spring Song’), with a view that Spring Song would
process the ducks into vacuum-packaged food products. He was charged
RMB 5,000 for this service, and the cooked ducks were to be ready for
collection on 4 August.
On the afternoon of 1 August, Wang asked Lin (a tailor) to make a light

jacket for him. Wang and Lin agreed that ‘Wang will provide the required
material for Lin to make the jacket; Lin will charge Wang RMB 1,000 for
this tailoring service; the jacket will be ready on 20 August.’
Neither the RMB 5,000 nor the RMB 1,000 mentioned above had yet
been paid. A rumour circulated that the government tax administration
would shortly investigate an allegation that Wang was dodging tax. For
fear of being arrested, Wang fled G County on 2 August. No one knew his
whereabouts.
On 4 August, Wang did not show up at Spring Song to collect the cooked
ducks. Spring Song tried many times to contact Wang by various means,
but all in vain. Since the quality of the cooked ducks could only be
maintained for a maximum of 30 days, Spring Song sold the cooked
ducks to XYZ Shopping Mall for RMB 15,000.
On 20 August, Wang did not collect his jacket. Lin got hold of Wang on
his mobile phone, knowing that Wang was hiding somewhere quite far
away from G County. Wang assured Lin that he would collect the jacket
in the next few days but there was no trace of him during the following
months. On 1 December, Lin sold the jacket for RMB 800 to his cousin.
Discuss if Spring Song or Lin has done anything wrong.

5 Miss Chang found a lost cat in her garden. The cat was suffering from
vomiting and diarrhea, so she brought the cat to see a veterinarian. The
veterinarian effectively treated the cat, and charged Miss Chang a medical
fee of RMB 2,000.
On the way home, the cat suddenly ran away from Miss Chang into the
opposite lane and was killed by a motorcycle going at high-speed.
Mr Lin is the cat’s owner. He thinks Miss Chang is liable for the cat’s
death as the accident happened when the cat was under her care. Mr Lin
asked Miss Chang to pay him RMB 10,000 for his loss.
Miss Chang refused to pay. She asked Mr Lin to reimburse her the
medical fee of RMB 2,000 charged by the veterinarian.
Should Miss Chang pay Mr Lin RMB 10,000, should Mr Lin reimburse
Miss Chang RMB 2,000, or both?

1 The limestone is a state-owned asset, and is not allowed to be bought or
sold under the law. It is also unlawful for Yang to keep the bronzeware for
himself because under the law an unearthed relic is an asset of the state.
2 Since the transaction between T and G was not registered, T is still owner
of the house. ABC Bank is entitled to sell the house to have the loan
repaid. G should move out of the house, but can recover what he paid to T
and may seek compensation against T for any loss.
3 A rural household’s right to use land for residential purposes is exclusively

enjoyed by rural residents. Wang holds no good title to the house and is
not in a position to be compensated by the government for demolition of
the house due to land expropriation.
4 Spring Song did nothing wrong by selling the cooked ducks to XYZ
Shopping Mall; but out of the RMB 15,000 sale proceeds, it should return
RMB 10,000 to Wang. Lin did nothing wrong either by selling the jacket
under lien to his cousin; Wang should make up to Lin the shortfall of
RMB 200.
5 Mr Lin as the beneficiary should reimburse Miss Chang any reasonable

medical expense incurred. If the cat’s death is due to Miss Chang’s
negligence, she may have to compensate Mr Lin for the loss; otherwise
she does not need to pay anything to Mr Lin.
Chapter 4
The law of contract
Introduction
An important part of the civil law framework, the law of contract can be
viewed as one of the laws of greatest relevance to daily life, and particularly
to economic and trade activities. A competent individual, or an organization
that is lawfully run, will almost inescapably have to deal with various
contracts, and on many occasions become a party to a contract and be bound
by the legal force of the contractual relationship thereby established.
The earliest contract law in contemporary China emerged as a component of

the Book on Obligations (i.e. the law of obligations), which was part of the
Civil Code of the Republic of China, implemented in 1930 when the country
was under the government of the Republic of China (see e.g. Ling 2002, 10;
M Zhang 2006, 29–30). After the People’s Republic of China was established
in 1949, the government issued some regulations on administering contract
activities, but official legislation in the area of contract law was not put into
place until the 1980s (see e.g. Ling 2002, 11–12).
During the 1980s, three laws pertaining to contracts were enacted in China:
the Law of Economic Contract (1981), the Law of Economic Contract with
Overseas Elements Involved (1985) and the Law of Technology Contract
(1987). China was then in the early stages of carrying out its policy of
economic reform and opening-up but vastly short of experience in handling
market-related legal issues. These three laws were instrumental in filling
legal vacuums in order to kick-start the country’s economic resurrection
and subsequently spur an economic takeoff. They provided some general
answers to legal questions arising from international trade and foreign direct
investment that faced the country, which for a protracted period had little
contact with mainstream international economies. These three laws were
194 The law of contract
an achievement, even though they had to be concurrently in force to cover

different categories of contracts (L M Wang and Cui 2000, 89–90).
In 1999, a uniform contract law entitled the ‘Contract Law of the People’s
Republic of China’ (hereinafter the ‘Contract Law’) was promulgated in
China.1 As a piece of legislation intended to be applied universally to all kinds
of contracts, the Contract Law displaced the three laws from the 1980s. The
law, in a sense, ushered in a new era during which the contract law regime
could be developed on a common, unified ground.
A few provisions from Chapter 1 ‘General Provisions’ of the 1999 Contract

Law give some sense of the law. Articles 3 to 8 contain the following
provisions respectively:
• ‘The legal status of the parties to a contract is equal, and neither party is
allowed to force his own wishes upon the other party.’
• ‘The parties are entitled to voluntarily enter into a contract under the law,
not subject to any organization or individual’s illegitimate intervention.’
• ‘The parties shall have each other’s rights and obligations established
under the doctrine of fairness and impartiality.’
• ‘The parties shall abide by the doctrine of good faith when exercising
rights and performing obligations.’
• ‘When forming or performing a contract, the parties shall observe the

laws and administrative regulations, pay obeisance to public morality, and
stay away from having social economic order destabilized or undermining
public interest in society.’
• ‘A contract legitimately entered legally binds the parties to it. The parties
shall perform their own obligations in accordance with what they have
agreed, and are not permitted to arbitrarily alter or discharge the contract.
A lawfully formed contract is protected by the law.’
1 The full text of the Contract Law (in Chinese) can be found on the following website: http://
www.gov.cn/banshi/2005-07/11/content_13695.htm. English translations can be found in various
sources, where the translations differ. The author uses his own English translation in this book. An
English translation on the following website can also be used as a reference: http://www.fdi.gov
.cn/pub/FDI_EN/Laws/law_en_info.jsp?docid=50943.
The contract law regime 195
The above provisions convey the spirit of the essential doctrines of contract
law, namely, the core doctrine of the freedom of contract, along with the
doctrines of equality and voluntariness, fairness and impartiality, good faith,
lawfulness, and strict adherence to contract terms.2 These doctrines were
implemented to encourage an environment in which the economy could
flourish and in the meantime business transactions could be carried out in a
reasonably orderly way.
In terms of basic principles, key concepts and legal reasoning, the current
contract law regime in China is to some extent comparable to the contract
law frameworks in many other countries. This is because the 1999 Contract
Law is informed by contract law models in both civil law and common law
jurisdictions elsewhere and by the framework of international business law
largely represented by international conventions, agreements and customs, for
example, the United Nations Convention on Contracts for the International
Sale of Goods (CISG) and some model laws of the United Nations
Commission on International Trade Law (UNCITRAL) (M Zhang 2006, 11–
13).
For these reasons, the Chinese contract law regime has common ground with
international laws, and has fewer distinctively Chinese characteristics than
some other Chinese laws, such as the Property Rights Law covered in the
previous chapter.
The contract law regime

The Contract Law has three parts: the ‘General Part,’ the ‘Specific Part’ and
the ‘Supplementary Part.’ It is divided into 428 articles in 23 chapters.
The ‘General Part,’ Chapters 1–8, provides a set of norms applying to all
kinds of contracts. It has chapters on general provisions, the formation of
a contract, the validity of a contract, performing a contract, the alteration
and the assignment of a contract, the termination of contractual rights and
obligations, liability for breach of contract, and miscellaneous provisions.
2 The doctrine of strict adherence to contract terms is also known as the doctrine of pacta sunt
servanda (a Latin phrase meaning ‘agreements must be kept’).
The ‘Specific Part,’ Chapters 9–23, does not apply to all kinds of contracts,
and is tailored to 15 specific types of contract which make up its chapters:
sales contract; contract for supply and use of electricity, water, gas and heat;
contract for gift; contract for borrowing money; lease contract; financial
leasing contract; contract for contractors work; contract for building
engineering services; contract of carriage; contract for transaction over
technology; deposit contract; contract for warehousing services; contract of
mandate; brokerage contract; and intermediation contract.
This chapter focuses on the ‘General Part’ of the Contract Law. It looks at
the legal issues surrounding a contract, from its formation through to its
discharge, delving into the fundamentals of the formation of a contract, the
validity of a contract, performing a contract, the alteration and the assignment
of a contract, discharging a contract, and liability for breach of contract.
It must be emphasized that the main component of the Chinese contract law
regime is the Contract Law, but the regime also includes relevant provisions
of other laws and a handful of judicial interpretations issued by China’s
Supreme People’s Court. Examples are some provisions contained in the
General Principles of Civil Law, and two judicial interpretations made by the
Supreme People’s Court, namely, the Supreme People’s Court’s Interpretation
on Some Questions Relating to the Contract Law of the People’s Republic
of China (I) issued in 19993 and (II) issued in 20094, hereinafter called the
‘Supreme People’s Court’s Interpretation on the Contract Law’ (I) and (II).
The formation of a contract

The formation of a contract is the normal starting point for the study of the
law of contract. However, it is essential to understand first what a contract is.
3 The full text of the Supreme People’s Court’s Interpretation on the Contract Law
(I) (in Chinese) can be found on the following website: http://wenku.baidu.com/
view/320011ec102de2bd96058830.html. No English translation has been identified in any online
source.
4 The full text of the Supreme People’s Court’s Interpretation on the Contract Law (II) (in Chinese)
can be found on the following website: http://www.chinacourt.org/flwk/show.php?file_id=135559.
No English translation has been identified in any online source.
A contract usually takes the form of an agreement (L M Wang and Cui 2000, 4).
However, not every agreement amounts to a contract. Generally, an agreement
must be assessed to determine if it will give rise to the formation of a legal
relationship that produces a legally binding effect on the parties involved and
if the court will be in a position to enforce it in the event that the agreement
is not observed. If this is the case, the agreement will amount to a contract. If
it is not the case, e.g. in the case of a social arrangement between friends or
a domestic arrangement between family members, the agreement will not be
deemed to be a contract binding any party, and failing to fulfil the agreement
will not invoke the court’s intervention.
Below are two agreements that are different in ways that affect their
enforceability in a court.
• T invited G to have dinner at the Mandarin Hotel at 8 pm. G accepted the

invitation. Hence an agreement was deemed to be reached on this matter
between T and G. G arrived at the Mandarin Hotel on time, but T did not
show up the whole evening. Thus T failed to fulfil the agreement.
• G and T entered into an agreement under which G lent RMB 1 million

to T on the condition that T would repay the loan to G within half a year.
But after half a year, T refused to repay the money and gave no reason or
justification.
The first is a common agreement in daily life for the purpose of socializing,
so it does not give rise to the formation of a legal relationship and cannot
be enforced in a court. The second agreement, on the other hand, can be
enforced in a court because it is not merely for the purpose of socializing, but
constitutes a serious promise giving rise to a legal relationship between T and
G which has a binding force on both parties. T’s failure to fulfil his promise
would lead to him facing legal consequences.
Under the Contract Law, a contract is defined as an agreement between

natural persons, legal persons or other organizations, who are civil subjects of
equal status, with a view to establishing, altering or terminating a relationship
pertinent to civil rights and civil obligations (Article 2, paragraph 1). By this
definition, a contract can be viewed as establishing the mutuality of intent of
contracting parties who fully and commonly recognize and accept the terms
of the contract (L M Wang and Cui 2000, 120).
Generally, a contract can only be enforced by one party to the contract against
the other party to the contract, and not against anyone outside of the contract.
This is the key feature of an important doctrine called ‘privity of contract.’ By
this doctrine, where one party to a contract has committed a breach causing
an injury to the other party to the contract, the injured party can only claim
damages against the contracting party in default and not against any third
party who is not a party to the contract (even if the third party has a parental
relationship with the defaulting party by financially controlling it).
The Contract Law only applies to contracts pertaining to property relations.

It does not apply to agreements in connection with personal relations such as
marriage, adoption, guardianship, etc., which, as the Contract Law points out,
are governed by other laws (Article 2, paragraph 2).
According to the Contract Law, the parties to a contract at the time of entering
into the contract shall possess appropriate capacity for civil rights and for civil
conduct (Article 9). That is to say, any contracting party must be competent:
he must be a person with full capacity for civil conduct as stipulated in the
General Principles of Civil Law (Article 11, paragraph 1). The validity of a
contract entered into by any person without full capacity for civil conduct
may be thwarted by his incompetence, and whether such a contract can
legitimately be allowed to be performed will depend on the circumstances in
each individual case.
The formation of a contract in general takes the form of making an offer and
accepting the offer (Contract Law, Article 13). Indeed, offer and acceptance
are the two indispensable steps in creating a contract.
In contrast to the common law, the element of ‘consideration’ is not essential

under Chinese law for entering into a contract. ‘Consideration,’ under
common law, refers to anything of value promised to another when making
a contract. This may include money, physical objects, services, promised
actions, abstinence from a future action and so on. This is not necessary under
Chinese law.
Offer and acceptance

As offer and acceptance are the two indispensable steps in forming a contract,
it is important to have a proper understanding of what constitutes an offer and
an acceptance, and when they take effect.
What is an offer?
Offers take place virtually every day of people’s lives.
Example 4.1
ABC (a vocational school) intended to buy 50 floor standing air-
conditioners. It made an enquiry about the selling price with XYZ (an air-
conditioner vendor). In response, XYZ sent the following fax to ABC:
‘RMB 2,000 per piece (floor standing air-conditioners), cash on delivery,
delivery to be made within a week, quotation valid for ten days.’
In this example, the fax sent to ABC (a prospective buyer) can be viewed
as an offer made by XYZ, which put forward some conditions of a
proposed transaction in the hope that ABC would accept these conditions
thus giving rise to the formation of a purchase contract between ABC and
XYZ. In this scenario, XYZ as the party making the offer is known as
the ‘offeror’; ABC as the party to whom XYZ’s offer is made is known
as the ‘offeree.’ In trade activities, an offer is also commonly termed as a
‘quotation.’
In contrast to the above example, on many occasions one may not be aware
that one has in effect made an offer by one’s conduct, even though there has
been no communication in writing.
Example 4.2
Say, in a supermarket Dan picks up a tub of ice cream that he wants to
buy and waits in a checkout lane for the cashier to take payment. Dan’s
act constitutes an offer made by him to the supermarket. Dan as the
offeror expresses his wish to the supermarket to buy the box of ice cream
at the price set by it. The cashier representing the supermarket as the
offeree in theory may turn down Dan’s offer by refusing to sell the ice
cream to him, albeit in reality this hardly ever happens.
Example 4.3
Dan hails a taxi and asks to be taken to the railway station. His act can
be deemed to be an offer made by him (to purchase a ride) to the taxi
driver himself (if he’s a sole trader running his own taxi business) or to
the taxi company for which the taxi driver is working as an employee.
The taxi driver may refuse to drive Dan; and such refusal may not be an
uncommon phenomenon.
Under the Contract Law an offer is one party’s expression of his intent to
enter into a contract with another party; such expression of intent must meet
certain requirements: (1) its contents are concrete and certain; (2) it declares
that once it is accepted by the offeree, the offeror will instantly be bound by
what he has expressed (Article 14).
That is to say, an offer is made by one party (the offeror) to another party (the
offeree); it states the conditions the offeror proposes to the offeree. An offer
expresses the offeror’s clear wish to be bound by these conditions given that
the offer is accepted by the offeree.
For Example 4.1, it can be concluded under Article 14 of the Contract Law
that the quotation is an offer made by XYZ indicating XYZ’s intent to enter
into a contract with ABC to sell air-conditioners to ABC. Once ABC as
the offeree accepts the quotation, XYZ as the offeror will be bound by the
quotation leading to the immediate establishment of a contractual relationship
between ABC and XYZ on the basis of the quotation’s contents.
Offers have some general attributes:
• Firstly, an offer as an expression of intent made by one party to enter into

a contract with another party must be made by a specific person (i.e. the
offeror).
• Secondly, depending on circumstances, the offeree can be a specific

person, or a number of specific persons, or the public at large. In
Example 4.1, XYZ made its offer to ABC; but if XYZ concurrently
provided the same quotation to TT (another prospective buyer), then
XYZ’s offer would be viewed as being made not exclusively to ABC but
to two specific prospective buyers. As another example, say that in order
to find his missing dog, Wang advertised in a local newspaper promising

to pay a reward of RMB 5,000 to anyone who could return the dog; such
an advertisement could be deemed an offer to the general public.
• Thirdly, an offer must exhibit the offeror’s clear intent to enter into
a contract with the offeree. Stating facts, providing information, or
exchanging information or opinions will not be counted as making an
offer. Following on from Example 4.1, assume that XYZ gave a different
reply to ABC’s enquiry: ‘We produce high-quality air-conditioners with
the market demand far surpassing our capacity of supply.’ This is not an
offer because XYZ is merely stating facts without explicitly indicating
its intent to enter into a contract with ABC. If XYZ replied ‘We already
have a huge number of orders, but we will see whether a solution can be
worked out if you do not mind being charged a higher price,’ this also
cannot be counted as an offer, as XYZ is exchanging opinions with ABC
without clearly showing its intent to establish a contractual relationship.
• Fourthly, the contents of an offer must be concrete and certain, from

which clear and workable terms to be incorporated in a prospective
contract can easily be identified, so that once the offeree fully accepts
those terms as they stand, a contract will instantly come into being
between the offeror and the offeree.
Referring again to Example 4.1, if ABC does not make an enquiry with XYZ,
but instead happens to receive a catalogue and price list from XYZ in the
mail, should this be taken as an offer or an invitation to treat from XYZ?
An ‘invitation to treat’ refers to an invitation to make an offer (e.g. ‘I invite

you to make an offer to me’). Accepting an invitation to treat will not result
in the formation of a contract, but only leads to the likelihood of obtaining
an offer. So an invitation to treat is not an offer, but it may be mistaken as an
offer due to its wording or the way it is made.
Under the Contract Law, an invitation to treat is the expression of intent of a

person in anticipation of another person making an offer to him; a mailed price
list or catalogue, an auction announcement, an invitation to bid, a prospectus
inviting investors to purchase shares or a commercial advertisement can each
be viewed as an invitation to treat (Article 15, paragraph 1). Therefore, XYZ
mailing a catalogue to ABC is an invitation to treat.
It should be noted that although a commercial advertisement is normally an

invitation to treat, if an advertisement contains relatively detailed conditions
of a proposed transaction and the party who placed the advertisement intends
to be legally bound by those conditions once anyone accepts them, then
it can be an offer in effect. In this regard, the Contract Law provides that
a commercial advertisement is deemed to be an offer if its contents fit the
attributes of an offer (Article 15, paragraph 2).
In practice, it may not be easy to judge whether an advertisement is an offer

or an invitation to treat. It depends on the circumstances. Sometimes, the
habit of trade may need to be taken into account when making a judgment
(i.e. whether in a specific circumstance an advertisement counts as an offer in
terms of common trade practices).
Say there are two advertisements. Advertisement 1 is shown below.
Used car for sale!

Model: Audi A4
Year: 2008
Kilometres: 30,000
Colour: Black
Location: Beijing
Payment: Immediate sale, cash on delivery
Price: RMB 100,000
Figure 4.1 Advertisement 1
Assume Advertisement 2 is identical to Advertisement 1, except that for the

price it gives ‘Negotiable’ rather than a specific amount of money. Which
advertisement is an offer and which is an invitation to treat?
An offer is defined under the Contract Law as one party’s expression of his
intent to enter into a contract with another party; such expression of intent
must meet certain requirements: (1) its contents are concrete and certain; (2) it
declares that once it is accepted by the offeree, the offeror will instantly be
bound by what he has expressed (Article 14).
The contents of Advertisement 1 and Advertisement 2 are both quite detailed

and clear, and they cover some main conditions of a proposed transaction.
However, as the price is pending in Advertisement 2, the party placing the

advertisement does not intend to be legally bound by the listed conditions.
Therefore, Advertisement 1 is an offer, whereas Advertisement 2 is an
invitation to treat.
Here is another example. Twinkle Star (a real estate developer) advertised its
high-rise housing project, Golden Sunshine Apartment Block, in the Shenzhen
Daily. The advertisement claimed that ‘Golden Sunshine Apartment Block
(under construction) is a new condominium located in the heart of Shenzhen,
within five minutes’ walking distance to convenient public transportation and
shopping facilities; amenities in this housing complex include a swimming
pool, spa, sauna, tennis court, gymnasium, cafeteria, supermarket, etc.; all
dwellings are to be delivered to buyers within a year; the current selling price
is RMB 30,000 per square meter (valid for 30 days).’ Miss Lin was attracted
by the advertisement and bought a small flat. After moving in, she was
furious to find that the complex had none of the amenities mentioned in the
advertisement, and that public transportation and shopping facilities were not
within easy reach. In response to the challenge raised by Miss Lin, Twinkle
Star countered that ‘The advertisement is only an invitation to treat, so the
information in it is for reference only and carries no force of law.’ Miss Lin
intends to file a lawsuit against Twinkle Star for breach of contract. In fact, it
is quite likely that Miss Lin will succeed if she goes to court. In Article 3 of
‘An explanation concerning adjudicating disputes arising from transactions of
buying and selling commercial real estate’, issued by the Supreme People’s
Court in 2003, an advertisement placed to promote the sale of real estate is an
invitation to treat; however, if the illustration and promise made by the seller
as regards the properties to be sold and their relevant facilities are detailed and
explicit, thus exerting a material impact on the selling prices of the houses and
on entering into contracts to buy them, such an advertisement shall be viewed
as an offer, and the illustration and promise made in it shall be an integral part
of the contract, even though they may not be literally incorporated into the
contract terms, contravening which will lead to a breach of contract. In this
scenario, Twinkle Star is in breach.
When does an offer become effective?

The Contract Law provides that an offer starts to take effect from the moment
it reaches the offeree (Article 16, paragraph 1).
However, the Contract Law does not clarify the meaning of ‘the offer reaches
the offeree.’ Does it mean when the offer arrives at the offeree’s habitual or
registered residence, regardless of whether the offeree notices the arrival of
the offer? Or does it mean when the offeree receives the offer in person, or at
least notices the arrival of the offer or is made aware of it by another person?
Controversy may also arise when the communication between the offeror
and the offeree is carried out using modern information technology, e.g.
email or fax. When the Contract Law was passed, state-of-the-art information
technology was not yet in wide use in China, and the law scarcely mentions
it. It only mentions in one place that where a contract takes the form of
electronic data messages, if the recipient has designated a specific system to
receive electronic data messages, the time when a message from the sender
enters such system will be deemed to be the time of the message reaching the
recipient; if such system has not been designated, the time an electronic data
message from the sender first enters any of the recipient’s systems will be taken
as the time of the message reaching the recipient (Article 16, paragraph 2). This
provision of the 1990s does not offer clear-cut legal guidance. A conservative
way of dealing with the resulting uncertainty is for the offeree, after receiving
the offer by email or fax, to reply to the offeror in writing to confirm receipt
of the offer, indicating the date and if possible the time of receipt.
After an offeree accepts an offer and the offer becomes effective, the offeror
is bound by the offer, and he is committed to a contractual relationship
instantly established between the offeree and himself on the basis of the offer.
Acceptance of the offer is the right of the offeree. The offeree can choose
to accept the offer or not to accept the offer. But the offeror cannot refuse to
recognize the offeree’s valid acceptance of the offer.
Given that an offer still has binding force, the offeree can accept the offer
at any time. However, in normal circumstances, an offer’s binding force
will not last forever. Article 20 of the Contract Law indicates the following
circumstances under any of which an offer will lapse:
• where a notice of turning down the offer reaches the offeror;
• where the offeror lawfully revokes the offer;
• where the offeree fails to accept the offer upon expiration of the offer’s
acceptance period; or
• where the offeree makes a substantive modification to the offer’s contents.
Going back to Example 4.1, XYZ made an offer by fax to sell air-conditioners
to ABC, and the quotation was valid for ten days. Once ABC confirms
receipt of the fax, XYZ is then bound by the offer and will be committed to a
contractual relationship with ABC if ABC accepts the offer within ten days of
receiving the fax. However, if ABC notifies XYZ that it does not wish to take
up the offer, or fails to accept the offer within ten days, the offer will lapse.
Equally, if ABC modifies the offer substantively, such as changing the price or
requesting delivery within four days, the offer will also lapse. The offer will
also lapse if XYZ lawfully revokes the offer.
Withdrawal of an offer
The Contract Law provides that an offer can be withdrawn, given that the
notice of withdrawing the offer reaches the offeree before or at the same time
the offer reaches the offeree (Article 17). If the notice of withdrawing the offer
reaches the offeree after the offer, the offer will continue to bind the offeror.
Revocation of an offer
A revocation of an offer, unlike a withdrawal of an offer, relates to an offer
that is already in force, i.e., usually one that has reached the offeree, but has
not yet been accepted by the offeree. The Contract Law provides that an offer
can be revoked, but the notice of revoking an offer must be able to reach the
offeree before the offeree accepts the offer (Article 18).
The Contract Law mentions two circumstances under either of which

revoking an offer will not be permitted: (1) ‘where the offeror has set the
time for acceptance or has expressly indicated that the offer is irrevocable’
and (2) ‘where the offeree has reasons to believe that the offer is irrevocable
and has already done some preparation work for performing the contract’
(Article 19).
What is an acceptance?
Apart from making an offer, the subsequent step needed to form a contract is
to accept the offer. Without acceptance of an offer, no contractual relationship
is entered into even if the offer is in force.
Acceptance of an offer is the offeree’s affirmed willingness to enter into

a contract with the offeror based on the offer. Under the Contract Law, an
acceptance is an expression of the offeree’s consent to an offer (Article 21). In
normal circumstances, once the offeree accepts the offer, a contract based on
the contents of the offer will instantly be formed between the offeror and the
offeree who will be bound by this contractual relationship.
Returning to the previous examples:
• In Example 4.1, in response to ABC’s enquiry about the price of air-

conditioners, XYZ provided a quotation to ABC. If ABC accepts this
quotation within ten days (as required by XYZ), this would mean that
ABC took XYZ’s offer, with the consequence that a contract was formed
between ABC and XYZ on the basis of the quotation. ABC and XYZ
would thus be bound by that contract under which XYZ would sell air-
conditioners to ABC at the price and under the conditions stipulated in the
contract.
• In Example 4.2 Dan wants to buy a tub of ice cream in a supermarket

and waits in a checkout lane to pay the cashier. If the cashier accepts his
payment, it means that the supermarket accepts Dan’s offer to purchase
the ice cream at the price set by it, leading to the simultaneous formation
of a contract between the supermarket and Dan, under which they transact
over the tub of ice cream.
• In Example 4.3 Dan wants to take a taxi to the railway station. If the taxi
driver does not refuse Dan, it means the driver (or his company) accepts
Dan’s offer to purchase his (or its) transportation service. Thus a contract
is reached between Dan and the driver (or the company): they are bound
by the contract under which the driver (or the company) is committed
to drive Dan to his destination; and after the driver’s (or the company’s)
commitment is fulfilled, it will be Dan’s obligation to pay him (or the
company) the fare.
An acceptance has a number of features.
Firstly, the offeree’s acceptance of an offer has the effect of having the offer
come to an end and completing the formation of a contract between the
offeror and the offeree based on the offer.
Secondly, an acceptance must be communicated to the offeror in a timely

manner within the offer’s acceptance period. Under the Contract Law, an
acceptance shall reach the offeror within the time limit prescribed in the
offer (Article 23, paragraph 1). To calculate the acceptance period, the
Contract Law provides that where an offer is made by post or by telegram,
the acceptance period will be calculated from the date of the letter or the date
on which the telegram is transmitted; if the letter is not dated, the acceptance
period will be counted from the date indicated by the postmark; if an offer
is made by instant communications like telephone, facsimile, etc., the
acceptance period will commence from the time the offer reaches the offeree
(Article 24).
Where no acceptance period is prescribed in an offer, to determine whether an

acceptance has been validly received by the offeror, the following rules need
to be considered:
• where an offer is made in conversation, unless the parties have agreed

otherwise, the acceptance shall be made instantly; and
• if an offer is made in a form other than conversation, the acceptance shall

reach the offeror within a reasonable time (Article 23, paragraph 2).
The Contract Law also sets out how to handle a situation where an offer
is accepted by the offeree or an acceptance reaches the offeror after the
acceptance period expires. Where the offeree accepts an offer after the
acceptance period expires, unless the offeror has confirmed with the offeree in
a timely manner that the offeree’s acceptance is valid, the offeree’s acceptance
will be viewed as a new offer (Article 28). Where the offeree accepts an offer
within the acceptance period and in normal circumstances such an acceptance
could reach the offeror in time but for some reason the acceptance reaches
the offeror after the acceptance period expires, then such acceptance will be
deemed to be valid unless the offeror has informed the offeree in a timely
manner that such acceptance is not accepted because of its arrival after the
acceptance period lapses (Article 29). It can be seen that Article 29 to a certain
degree encourages transactions and fosters a spirit of economic activity.
Thirdly, in principle, an acceptance must demonstrate that the offeree

unequivocally and unconditionally embraces the offer. If the offeree’s
acceptance reveals a change to the original offer, the acceptance may not be
taken as a valid acceptance but as a new offer (or ‘counter-offer’). Whether an

acceptance can still be treated as valid if it deviates from the offer depends on
whether the change to the offer is substantive or not.
Under the Contract Law, the contents of an acceptance shall be consistent

with those of an offer; the offeree’s acceptance will be deemed to be a new
offer if it has made a substantive change to the contents of the offer; a change
made to the subject matter, quantity, quality, price or remuneration, time for
performance, place of performance, way of performance, liability for breach
of contract, and methods of dispute settlement, etc. in relation to the proposed
contract will be viewed as a substantive change made to the contents of the
offer (Article 30). If a change made to the original offer by the acceptance is
non-substantive, then such acceptance will be taken as valid and the contents
of the contract thus formed will be subject to the contents of the acceptance,
unless the offeror opposes such a change made by the acceptance in a timely
manner or the offeror has expressly indicated in the offer that no change is
allowed to be made by the acceptance to what is originally said in the offer
(Article 31). Hence, an acceptance that brings about a substantive change
to the original offer will be deemed not to be a valid acceptance; however,
if the contents of the original offer are merely immaterially altered by the
acceptance, such non-substantive alteration will not exert any adverse impact
on the validity of the acceptance.
Fourthly, under the Contract Law, an acceptance shall be made by giving

notice to the offeror, except where such acceptance is allowed to be made
by conduct in accordance with a habit of trade or with the offer (Article 22).
The term ‘a habit of trade’ is defined under the Supreme People’s Court’s
Interpretation on the Contract Law (II) as the practice commonly adopted in a
territory where the transaction takes place or the practice commonly adopted
in a field or a business line (known to the transacting party when entering
the contract), or as a habitual practice carried out by the transacting parties
(Article 7).
The offeree is entitled to choose to accept or not to accept an offer. The

offeree’s lack of response to an offer does not amount to accepting the offer,
and will not give rise to the formation of a contractual relationship between
the offeror and the offeree.
When does an acceptance become effective?

By the Contract Law, an acceptance takes effect when the notice of acceptance
reaches the offeror; and if giving such notice is not required, an acceptance
will come into force when an act of acceptance is completed in line with a
habit of trade or with what is said in the offer (Article 26, paragraph 1). The
contract is formed when the acceptance comes into force (Article 25). That is
to say, normally from the moment the notice of acceptance reaches the offeror,
a contract will be deemed to have been created between the offeror and the
offeree.
To affirm the arrival time of an acceptance if a contract is made by means

of instantaneous electronic communications, by Article 26, paragraph 2,
Article 16, paragraph 2 will apply, i.e. where a contract takes the form of
electronic data messages, if the recipient has designated a specific system to
receive electronic data messages, the time an electronic data message from
the sender enters such specific system will be deemed to be the time of the
message reaching the recipient; if such system has not been designated,
the time an electronic data message from the sender first enters any of the
recipient’s systems will be taken as the time of the message reaching the
recipient.
Withdrawal of an acceptance
Pursuant to the Contract Law, an acceptance already made can be withdrawn
under the precondition that the notice of withdrawing the acceptance is able
to reach the offeror before or at the same time the notice of accepting the offer
reaches the offeror (Article 27).
That is to say, the offeree can withdraw his acceptance of the offer, given that
the acceptance has not become effective. Therefore, the offeree’s withdrawal
of his acceptance will be denied by the law unless the offeror receives the
offeree’s notice of withdrawing the acceptance before or at the same time he
receives the offeree’s notice of accepting the offer.
Although an acceptance can be withdrawn under certain conditions, an

acceptance that has come into force cannot be revoked. Once the acceptance
reaches the offeror, a contractual relationship will instantly be entered binding
the offeror and the offeree as the contracting parties. The contracting parties
will have to perform the contract strictly in compliance with the contract, and
any contracting party’s failure to do so will lead to him becoming a defaulting
party liable for breach of contract.
In daily life, one may come across cases where one has to judge whether a
contractual relationship has been established. One needs to consider if the
invitation and acceptance have become effective.
Here is an example. Wang has some stamps that were issued in the 1960s.
On 12 March, she placed an advertisement in the Beijing Daily to sell a set
of such stamps priced at RMB 50,000. Zhou has a passion for collecting
old stamps. On 14 March, he called Wang telling her that he was willing to
purchase these stamps, but for only RMB 30,000. Wang, while not liking
Zhou’s suggestion, orally agreed to consider it and to give him a final reply
within the coming couple of days. On 16 March, Wang sent an email to
Zhou: ‘My bottom line is RMB 40,000. Please confirm if this is acceptable
to you on or before the end of March.’ The deadline passed, but Wang still
did not receive any feedback from Zhou. On 6 April, Wang sold the stamps
to her neighbour, Chang. On 7 April, Wang got Zhou’s email message: ‘I am
sorry I have been away for a couple of weeks. I just came back from a tour in
Korea where I could not check my emails. I confirm that your bottom line is
acceptable to me.’ Wang told Zhou regrettably that since he did not respond
before the deadline, she had sold the stamps to somebody else. Zhou said that
Wang had committed a breach of contract. Wang denied she was in breach,
believing that she had not entered into any contractual relationship with Zhou
on this matter. Wang is correct. According to Article 20 of the Contract Law,
an offer will lapse where the offeree fails to accept the offer upon expiration
of the offer’s acceptance period. When Zhou accepted Wang’s new offer, the
offer had expired.
Does a contract have to take a particular form?

In principle, a contract does not need to take a particular form, unless the law
prescribes a particular form for a specific circumstance or the contracting
parties have agreed in advance on a particular form. In the light of the
Contract Law, the contracting parties may enter into a contract in either
written, oral or other forms; if a contract has to be made in writing as required
under the law or administrative regulation, the written form shall be adopted;
and if the contracting parties have reached a consensus beforehand that

their contract is to be made in writing, then the written form shall be used
(Article 10).
Article 10 to some degree illustrates the spirit of the doctrine of the freedom
of contract, in light of which the parties to a prospective contract have liberty
to choose the form of a contract (e.g. verbal or written), unless the law
requires that in a given circumstance a particular form be taken (e.g. a written
form).
The term ‘written form’ is defined under the Contract Law as a form in which
the contents can be tangibly displayed, such as a written contract, a letter or an
electronic data message (telegram, telex, facsimile, electronic data exchange
or email message) (Article 11). If the contracting parties have agreed in
advance to enter into a written contract, such a contract will be deemed to be
entered into when it is signed or the seals are stamped on it by the contracting
parties (Article 32).
Under the Contract Law, if a contract needs to be made in writing as required

by the law or administrative regulation or as per what the parties to a
prospective contract have agreed in advance, but no such written form has
been employed, whereas one contracting party has in effect fulfilled his main
contractual obligations, then if the other contracting party accepts such status,
it will be deemed that a contract has been made between them (Article 36).
Moreover, for entering into a written contract, if prior to signing or having the
seals stamped on the contract one contracting party has performed his main
contractual obligations and the other contracting party accepts such status,
then the contract will be taken as having been entered into (Article 37).
The Contract Law makes scant mention of oral contracts. In reality, unless
the law requires that under a certain scenario a contract be made in writing,
a contract can be made orally, and it will be as legally enforceable as one in
writing. Compared with a written contract, an oral contract can ostensibly be
produced more quickly and conveniently. However, with an oral contract solid
evidence is often lacking as to what consensus the contracting parties reached.
This is particularly a problem when evidence is needed to settle disputes
between the contracting parties over contract details. So, it is wise to enter
into a contract in written form for a formal deal or commitment.
From Article 10, aside from being made in written form or oral form, a
contract may also be made in ‘other forms.’ Under the Supreme People’s
Court’s Interpretation on the Contract Law (II), this term can be construed as
‘by conduct.’ The Supreme People’s Court’s Interpretation on the Contract
Law (II) refers to such ‘other forms’ and describes them as a circumstance in
connection with the formation of a contract under which while the contract is
not entered either orally or in writing the contracting parties’ intent to enter
into the contract can be inferred from their civil conduct (Article 2).
Also, under the Supreme People’s Court’s Interpretation on the Contract Law
(II), a written contract would be established if the contracting parties choose
to ‘sign’ it with thumbprints instead of signing in pen or stamping their seals
on it (Article 5). This means that a written contract signed with thumbprints
cannot be denied legal effect on the ground that it is not signed or stamped.
When and where is a contract deemed to be created?

The place and time at which a contract is created may affect whether the
contract is effective or not.
When is a contract deemed to be created?

In principle a contract is deemed to be created at the moment of an effective
acceptance of the offer, whether the contract is made orally, in writing or by
conduct. For a contract made in written form, the Contract Law sets out some
provisions as to when the contract is deemed to be created.
Firstly, the time of signing a written contract or having the seals stamped on
it is viewed as the time the contract is created between the contracting parties
(Article 32).
Moreover, where the contracting parties enter into a contract in the form of
letters or electronic data messages, before the contract becomes effective the
contracting parties may decide to employ the form of a written confirmation
certifying that the contract has been made, and the contract is deemed to take
effect at the moment such written confirmation is made (Article 33).
In practice, if the time of signing or having the seals stamped on the contract
by the two contracting parties is not on the same date (e.g. the two contracting
parties are in two different cities), the time of the last signing or stamping will
be counted as the time the contract is made (G X Zhu 2008, 86).
Where is a contract deemed to be created?

Under the Contract Law, the place where the acceptance takes effect is where
the contract is made. For a contract in the form of an electronic data message,
the recipient’s main place of business is the place where the contract is made,
and if the recipient has no main place of business then the place of his habitual
residence is the place where the contract is made; but if the contracting parties
have agreed on a place different from what is prescribed above, then the
contracting parties’ agreement will prevail (Article 34).
For a written contract, the place where the contracting parties sign or have
their seals stamped on the contract is taken as the place where the contract is
created (Contract Law, Article 35).
If the contract is signed or stamped in two different places at different times,

pursuant to the Supreme People’s Court’s Interpretation on the Contract Law
(II), unless the two parties have agreed otherwise, the place of the last signing
or stamping is deemed to be the place where the contract is entered into
(Article 4).
The terms of a contract

Usually, the terms of a contract are based on mutual consent. Such terms are
known as ‘general terms.’ For some types of contracts, however, the terms are
not mutually negotiated and are more one-sided. These are known as ‘standard
contractual terms.’
The general terms of a contract

A contract’s contents are normally terms or clauses. The contracting parties’
rights and obligations can be understood from the terms of the contract, which
state their entitlements and commitments to do something as well as the
limitations imposed on each of them from doing something. Under the doctrine
of the freedom of contract, as long as laws, government policies and mainstream
social ethics are not contravened, the contracting parties have full freedom to
decide what kinds of contractual terms are incorporated into their contract.
Under the Contract Law, the contents of a contract can be determined by the
contracting parties; the terms of a relatively formal contract may be in relation
to contracting parties’ titles or names and domiciles; subject matter; quantity;
quality; price or remuneration; time for performance, place of performance
and ways for performance; liability for breach of contract; approach to settling
disputes; etc. (Article 12). In practice, the coverage can be narrower or wider
subject to the contracting parties’ decision.
Below is an example of the kind of sales contract commonly used in exporting

when doing business in China.
Sales Contract
No. :
Signed at:
Date:
Seller:
Address:
Tel:
Fax:
E-mail:
Buyer:
Address:
Tel:
Fax:
E-mail:
The undersigned Seller and Buyer have agreed to close the following
transactions according to the terms and conditions set forth as below:
1 Name, Specifications and Quality of Commodity:
2 Quantity:
3 Unit Price and Terms of Delivery:
(The terms FOB, CFR, or CIF shall be subject to the International

Rules for the Interpretation of Trade Terms (INCOTERMS 2000)
provided by International Chamber of Commerce (ICC) unless
otherwise stipulated herein.)
4 Total Amount:
5 More or Less:
6 Time of Shipment:
Within days after receipt of L/C allowing transhipment and

partial shipment.
7 Terms of Payment:
By Confirmed, Irrevocable, Transferable and Divisible L/C to be

available by sight draft to reach the Seller before and to
remain valid for negotiation in China until after the Time
of Shipment. The L/C must specify that transshipment and partial
shipments are allowed.
The Buyer shall establish a Letter of Credit before the above-

stipulated time, failing which, the Seller shall have the right to rescind
this Contract upon the arrival of the notice at Buyer or to accept
whole or part of this Contract non fulfilled by the Buyer, or to lodge a
claim for the direct losses sustained, if any.
8 Packing:
9 Insurance:
Covering Risks for 110% of Invoice Value to be

effected by the .
10 Quality/Quantity discrepancy:
In case of quality discrepancy, claim should be filed by the Buyer

within 30 days after the arrival of the goods at port of destination,
while for quantity discrepancy, claim should be filed by the Buyer
within 15 days after the arrival of the goods at port of destination. It
is understood that the Seller shall not be liable for any discrepancy of
the goods shipped due to causes for which the Insurance Company,
Shipping Company, other Transportation Organization or Post Office
are liable.
11 The Seller shall not be held responsible for failure or delay in delivery
of the entire lot or a portion of the goods under this Sales Contract
in consequence of any Force Majeure incidents which might occur.
Force Majeure as referred to in this contract means unforeseeable,
unavoidable and insurmountable objective conditions.
12 Dispute Resolution:
Any dispute arising from or in connection with this Contract shall

be submitted to China International Economic and Trade Arbitration
Commission for arbitration which shall be trialed in the city of
and conducted in accordance with the Commission’s arbitration rules
in effect at the time of applying for arbitration. The arbitral award is
final and binding upon both parties.
13 Notices:
All notice shall be written in and served to both parties by fax,

email or courier according to the following addresses. If any changes
of the addresses occur, one party shall inform the other party of the
change of address within days after the change.
14 This Contract is executed in two counterparts each in Chinese and

English, each of which shall be deemed equally authentic. This
Contract is in copies effective since being signed/sealed by
both parties.
The Seller: The Buyer:
Figure 4.2 An example of a sales contract used in China for exporting

Source: Jiangsu Chamber of Commerce for Import and Export Firms 2007
Standard contractual terms and limitations on the use of exemption

clauses
Some types of contracts are more or less the same in each case, so standard
contractual terms can be used rather than negotiating terms with each
individual client.
In fact, most of the terms used in an insurance contract, e.g. health insurance,
life insurance and auto insurance, are not the result of negotiation with the
insurance company. They are unilaterally devised by the company. Such
an insurance contract can be considered to be a standard form contract. An
insurance company might create standard contractual terms that are in its own
interest, leaving buyers with no room to bargain over the terms and having to
‘take it or leave it.’
Standard contractual terms were traditionally more widely employed in

transactions over services in fields such as insurance, banking and finance,
transportation, telecommunications, tourism, etc. However, nowadays it is
no exaggeration to say that people are confronted in virtually every corner of
life with standard contractual terms. Do such terms violate the doctrine of the
freedom of contract? How can the rights of the other party be fairly protected?
An important issue is how to prevent the party providing a standard contract
from gaining unfair advantage.
Under the Contract Law, standard contractual terms are interpreted as the
contractual terms unilaterally constructed for repeated use by a contracting
party beforehand without consulting his counterparty on those terms at the
time of entering the contract (Article 39, paragraph 2).
A contracting party supplying unilaterally constructed standard contractual

terms must ensure that the terms are fair to all contracting parties. He also
has an obligation to remind the other contractual party of these terms and to
explain their meaning and the consequences of their implementation.
In this regard, the Contract Law points out that where a contract is made
using standard terms, the party supplying the standard terms should under the
doctrine of fairness and impartiality be sure to have the rights and obligations
of each contracting party clearly set out, take reasonable steps to alert his
counterparty to any clause by which his liability can be exempted or curtailed,
and upon his counterparty’s request explain the meaning of that clause to his
counterparty (Article 39, paragraph 1).
Under the Supreme People’s Court’s Interpretation on the Contract Law (II), if
the contracting party supplying the standard contractual terms in the contract
has used in the contract some specifically distinguishable letters, symbols or
styles to draw his counterparty’s attention to any clause relying on which his
liability can be waived or curtailed and has provided an explanation of the

meaning of that clause to his counterparty on the counterparty’s request at the
time of entering the contract, then the requirement to ‘take reasonable steps
to alert his counterparty to any clause by which his liability can be exempted
or curtailed’ is deemed to have been satisfied; however, the burden of proof
that he has fulfilled his obligation of reminding his counterparty falls on the
shoulders of the contracting party supplying the standard terms (Article 6).
Also, according to the Supreme People’s Court’s Interpretation on the Contract

Law (II), if a contracting party supplying the standard contractual terms used
in the contract fails to take reasonable steps to remind his counterparty of and
to explain any clause under which his liability can be waived or curtailed, his
counterparty may apply to the court for having that clause set aside, and if this
happens the court should uphold the revocation (Article 9).
In the light of the Contract Law, any standard contractual term designed for
the purpose of enabling a contracting party to be exempted from liability,
or exacerbating his counterparty’s liability, or denying the principal rights
enjoyed by his counterparty, will be an invalid term; and if a standard
contractual term is aimed at enabling a contracting party to be exempted
from liability for causing personal injury or for property loss due to his
deliberateness or gross negligence, such standard term will also be an invalid
one (Article 40).
A standard contractual term does not necessarily have standard interpretations.

It is quite likely that a standard term will be construed by different people in
different ways. The Contract Law stipulates that in the case of a dispute over
the understanding of a standard term, such term shall be interpreted as it is
usually understood; if there are no less than two interpretations of a standard
term, the interpretation not in favour of the contracting party supplying the
standard terms shall be adopted; and if a standard term does not dovetail
with a non-standard term in the contract, the non-standard term shall prevail
(Article 41).
The validity of a contract

Once the steps of offer and acceptance are completed, normally a contract
is established. However, this does not mean that such contract is necessarily
a valid contract having legally binding force. To put it another way, the
formation of a contract does not guarantee that the contract will take effect.
In reality, many contracts do automatically take effect once they are

established because they meet the requirements of a valid contract. However,
many contracts formed have defects that may lead to different consequences.
Some contracts, though entered into formally, are invalid contracts (i.e.
void contracts) and have no legal force from the outset. Other contracts are
voidable contracts: they are valid at present but can be revoked due to their
inherent defects. Still other contracts are termed ‘contracts with undecided
validity’; they cannot come into force because their validity is yet to be
decided due to their deficiencies; at present they have not produced any legal
effect, and whether they can become effective depends on whether a relevant
party opts to affirm their validity or their deficiencies no longer exist.
The essentials of a valid contract

Regarding the essentials of a valid contract, both the General Principles of
Civil Law and the Contract Law set out some provisions.
Under the General Principles of Civil Law, three conditions have to be met for
a civil juristic act to be valid: (1) the actor has the required capacity for civil
conduct; (2) there is a genuine expression of the actor’s intent; and (3) the
act is not in violation of the law or against public interest (Article 55). These
three conditions can also be taken as the essential requirements for forming a
valid contract.
Some contracts are subject to approval or registration requirements before

they can come into force. Pursuant to the Contract Law, if according to
the law or administrative regulation a contract’s effectiveness is subject to
completion of the relevant approval or registration procedures, then such
statutory requirement must be met (Article 44).
Contracting parties may by agreement establish a condition that must be

fulfilled in order that their contract can come into force, so their contract will
become effective only when such condition is met (Contract Law, Article 45,
paragraph 1). Contracting parties may also agree on an effective date of their
contract (not necessarily the date on which the contract is formed) (Contract
Law, Article 46).
Some enterprises attempt to tap into an area outside of the business line
specified in their business licences (e.g. a cafeteria may want to engage in
the freight forwarding business). It is possible for a contract made under
such circumstances to be recognized as having legal force. According to
the Supreme People’s Court’s Interpretation on the Contract Law (I), the
court normally will not hold such a contract invalid, unless entering into the
contract is in violation of the law that bans the carrying out of such business
or contravenes the government policy of restricting or solely controlling the
carrying out of such business (Article 10).
Assume that the business licence issued to XYZ (a private enterprise) by the
Administration for Industry and Commerce in Beijing documents XYZ’s
business scope as covering only the food business. Attracted by the lucrative
steel business, XYZ recently entered into a number of contracts pertaining to
buying and selling steel and profited greatly from these transactions. Although
selling and buying steel is not within XYZ’s business scope, the contracts
thus entered into by XYZ will not be held void by the court unless special
permission is statutorily required for engaging in the steel business and XYZ
happens to lack such permission.
A void contract
A void contract refers to a contract which seemingly has been created but
actually does not have any legal force. Since a void contract is not valid as of
its creation. It never has any legal force and thus is not binding on any party
to it at any time.
The Contract Law lists five circumstances under any of which a contract
made is void: (1) entering into a contract by deceit or duress to undermine
national interest; (2) maliciously colluding in undermining the interests of
the state, a collective or a third party; (3) concealing an unlawful objective
under the disguise of a legitimate form; (4) impairing public interest; and
(5) contravening mandatory provisions of laws or administrative regulations
(Article 52). Here the term ‘mandatory provisions’ used in the last
circumstance is interpreted under the Supreme People’s Court’s Interpretation
on the Contract Law (II) as those mandatory provisions specifically on ‘the
validity of a contract’ (Article 14).
A void contract does not produce a legally binding effect from the outset;
however, if only part of a contract is invalid, then the invalid part will not
affect the remaining valid part of the contract (Contract Law, Article 56).
Also, the invalidity of a contract does not affect the validity of any term or
clause that independently exists in the contract that is specifically pertinent to
the settlement of disputes in relation to this contract (Article 57).
In the event of a void contract, any property gained as a result of executing

such contract shall be returned; and if the return of the property is not feasible
or becomes no longer necessary, corresponding compensation shall be made
in cash terms instead (Contract Law, Article 58). Also under the circumstance
of a void contract, if a party to the contract has committed a fault causing
damage to the other contracting party, he will be liable for his counterparty’s
loss; but if both parties have been at fault, then each will be held responsible
for the outcome caused by each party’s own fault (Article 58).
A voidable contract
A voidable contract refers to a contract which is tainted with a defect but has
come into force as a valid contract. Its defect may (but will not necessarily)
give rise to its revocation subsequently. In other words, due to the existence
of a defect, the contract currently in force can be revoked at a certain point
in time by a contracting party who is entitled to exercise his right to rescind
the contract, provided that he decides to do so. However, if he decides not to
revoke the contract, then its validity will not cease even though the defect is
not eradicated.
In practice, a voidable contract in the main relates to a contract, the formation

of which disobeys a contracting party’s true intent. Although such a contract
has come into force, since its formation does not represent the contracting
party’s genuine willingness, it becomes a revocable contract, the validity
of which has not been denied presently but which faces the risk of being
cancelled at the discretion of a contracting party.
Pursuant to the Contract Law, for a contract made under a material

misconception or in an apparently unfair manner, the injured contracting
party is entitled to apply to the court or to an arbitral body for revoking the
contract (Article 54, paragraph 1). Also, in the event of a contract made due
to deceit or duress or by taking advantage of a contracting party’s plight, the
injured contracting party who enters into such contract at odds with his true
intent is entitled to apply to the court or to an arbitral body for revoking the
contract (Article 54, paragraph 2). However, if the injured contracting party
merely applies to the court or to an arbitral body for modifying (rather than
revoking) the contract, then the court or the arbitral body concerned can only
consider the demand for modification and will not be in a position to revoke
the contract (Article 54, paragraph 3).
A contract that has been revoked is deemed to have no legally binding effect
from the start (Contract Law, Article 56). However, even if a contract is
revoked, the revocation does not affect the validity of any term or clause that
independently exists in the contract specifically relating to the settlement of
disputes in connection with this contract (Contract Law, Article 57).
Under Article 58 of the Contract Law, once a contract is revoked, any

property gained as a result of executing the contract shall be returned; and if
the return of the property is not feasible or becomes no longer necessary, then
the compensation shall be made in cash terms. After a voidable contract in
force is revoked, if a contracting party has committed a fault injuring the other
contracting party, he will be liable for his counterparty’s loss; if both parties
have been at fault, then each will be liable for the result arising from each
party’s own fault (Article 58).
The validity of a contracting party’s right to revoke the contract does not last
forever. It may end at a certain point in time under specified circumstances.
In this regard, the Contract Law lists two circumstances under either of
which the validity of a contracting party’s right to revoke the contract will
cease: (1) if a contracting party who has the right to revoke the contract has
not exercised such right for a year, since he knows or ought to have known
what has happened that may lead to revocation of the contract; and (2) if a
contracting party who has the right to revoke the contract, after knowing what
has happened that may lead to revocation of the contract, expressly indicates
that he has given up such right, or he has given up such right by his conduct
(Article 55).
Here is an example. Bright Star is a shop selling Chinese paintings and

calligraphy works. T saw a Li Ming painting, ‘Three Horses,’ displayed in
Bright Star priced at RMB 50,000. Li Ming (who is deceased) is one of the
most noted painters in China, famed for his paintings of horses. The manager
of Bright Star assured T that this was a genuine painting by Li Ming. T
bought the painting, but later discovered that it was painted by another Li
Ming, an unknown young painter with the same name. T never had any
interest in buying any of this unknown Li Ming’s paintings. T wanted to
return the painting to Bright Star for a refund. Bright Star refused to refund
T’s money, arguing that the painting T bought from Bright Star was not a
bogus work so Bright Star did nothing wrong in this transaction. What advice
should one give to T? T’s true intent is to buy a painting by Li Ming (the
deceased famous painter). Thus the deal between Bright Star and T could be
deemed to have been accomplished under a material misconception (i.e., they
formed a voidable contract). The Contract Law provides that for a contract
made under a material misconception or in an apparently unfair manner,
the injured contracting party is entitled to apply to the court or to an arbitral
body for revoking the contract (Article 54, paragraph 1). Therefore, if the
dispute between T and Bright Star could not be resolved by negotiation or
consultation in an amicable way, T may consider applying to an arbitral body
or to the court for revoking the contract, so that his money would be refunded
after returning the painting to Bright Star. Of course, if T decides not to take
any action, the deal remains valid.
A contract with undecided validity

A contract with undecided validity refers to a contract that seems to have been
made on the face of it but in fact has yet to come into force, subject to whether
a third person (other than the contracting party) can ratify or admit its validity
or whether the contracting party originally without authority to enter into such
contract can subsequently gain the required authority. If the third party does
not ratify or admit its validity or the contracting party lacking authority cannot
later on acquire the required authority, the contract will still not be able to
produce any legal effect.
In the eyes of the Contract Law, a contract with undecided validity mainly
relates to a contract entered into by a person with limited capacity for civil
conduct, or a contract made without proper authorization of agency, or a
contract formed under the circumstance of having no right to transact other
people’s property.
A contract entered into by a person with limited capacity for civil

conduct
Under the General Principles of Civil Law, a minor aged ten or above or
a mentally disordered person who is not able to fully account for his own
conduct is a person with limited capacity for civil conduct, and normally
his civil activities can only be carried out by his agent ad litem on his behalf
or by himself with the consent of his agent ad litem (Article 12; Article 13,
paragraph 2).
Under the Contract Law, a contract entered into by a person with limited
capacity for civil conduct can only become effective after it is ratified by his
agent ad litem; however, a contract entered into by such a person under which
he purely enjoys rights, or a contract entered into by him that is level with
his age, intellectual ability and mental health, can be deemed to be effective
from the start with no need to be ratified by his agent ad litem; in the case of
his agent ad litem being silent on this matter, it can be taken that the agent
ad litem refuses to ratify the contract; before the contract is ratified, his
counterparty who has acted in good faith has the right to revoke the contract,
and the revocation shall be made by means of having him informed (Article 47).
By the Supreme People’s Court’s Interpretation on the Contract Law (II),

where a person with limited capacity for civil conduct enters into a contract
and his agent ad litem ratifies the contract, the ratification will start to take
effect when the expression of ratifying the contract made by his agent ad litem
reaches him (Article 11).
A contract made without proper authorization of agency

Under the Contract Law, a relevant party may authorize his agent to enter into
contracts on his behalf (Article 9, paragraph 2). However, a contract made by
a so-called ‘agent’ without proper authorization of agency cannot acquire any
legal force unless it is ratified by the principal.
In this regard, the Contract Law provides that a contract made by a person in
the name of a principal under the circumstances that as a matter of fact he has
no authorization of agency, or he acts in excess of his authority of agency, or
his authority of agency has ended, will not be able to bind the principal if the
principal does not ratify it, but will lead the person in question to face legal
consequences; his principal can be urged to ratify the contract within a month,
and his principal’s silence on this matter will be taken as a refusal to ratify it;
his principal’s ratification shall be made by means of having him informed
(Article 48).
By the Supreme People’s Court’s Interpretation on the Contract Law (II),

where a contract is made in the name of a principal by a person purporting
to be that principal’s agent who in effect is not, given that the principal has
started performing his obligations set out in the contract, such performance
will be deemed to be the principal’s ratification of the contract (Article 12).
A bona fide third party, which refers to a party to a contract made by a so-
called ‘agent’ without proper authorization of agency, is protected under the
Contract Law. If the counterparty in the contract has a good reason to believe
that that person in question has authority of agency, then that person’s act
as the agent will be deemed to be valid and the contract thus formed will be
binding (Contract Law, Article 49). In this circumstance, by the Supreme
People’s Court’s Interpretation on the Contract Law (II), the principal can
claim compensation against the person who purports to be his agent but in
effect has no appropriate authorization of agency for his loss incurred due to
the unauthorized act of agency (Article 13).
Another common case is when the deputy of an organization (say, a director

or head of a company) enters into contracts on behalf of that organization
in excess of the authority given him by the organization. Given that his
counterparty in the contract does not know or has no reason to know that
he is acting beyond his authority, the contract is valid and binding on the
contracting parties (Contract Law, Article 50). That is to say, the contract
made will bind the organization.
A contract formed under the circumstance of having no right to

transact other people’s property
‘A contract formed under the circumstance of having no right to transact other
people’s property’ is not uncommon in everyday life.
Assume that T and G entered into a lease agreement under which T leased a
house from G. At the time of signing the lease agreement, T knew nothing
about the fact that the house is actually not owned by G but by G’s brother, C,
and G has no right to rent out the house to T. This lease agreement can thus be
viewed as ‘a contract with undecided validity’ and can further be categorized
as ‘a contract formed under the circumstance of having no right to transact
other people’s property.’ Whether this lease agreement can take effect depends
on whether C ratifies the agreement or whether G later on can be given the
authority (in other words, G can be empowered) to rent out the house that
belongs to C.
Under the Contract Law, such a contract will only become effective if the
property’s real right holder ratifies the contract or the person in question can
later on acquire the right to legitimately transact that property (Article 51).
Performing a contract
After a contract is formed and takes effect, performing the contract becomes
essential. Whether the desires of the contracting parties can be fulfilled
depends on whether they can fully and successfully perform the contractual
obligations set out in the contract.
Assume that T enters into a contract with G to buy 50 tons of fertilizer. As

the seller, G should firstly get the fertilizer ready in line with the quality
and quantity standards set out in the contract, and then send the fertilizer
to T as per the time and place of delivery stipulated in the contract: this is
how G is expected to fulfil his contractual obligations. As the buyer, T, after
making sure G has satisfactorily delivered the fertilizer in compliance with
the contract, should promptly make payment to G by following the payment
clause in the contract: this is how T ought to fulfil his contractual obligations.
In establishing this contractual relationship, T wants a supply of fertilizer,
whereas G wants revenue. But only when both T and G fully and successfully
fulfil their contractual obligations can their aims be realized.
In many cases, however, contracts are not performed as smoothly as expected.

Continuing the example above, what should be done in the following
examples?
Example 4.4
T and G agreed on the type, quantity, price, etc. in the contract. G
delivered the fertilizer on time to T, but T found the quality to be
unsatisfactory, and so refused to pay. G insisted that he had performed
the contract, and the contract had not stipulated the quality, so T refusing
to pay is a breach of contract. On the other hand, T said that G had not
performed the contract satisfactorily, so G had broken the contract first.
Example 4.5
After T and G made the contract, orders for the same product increased
and G found it hard to meet demand. Hence T and G agreed that as a
way of executing the contract, G would commission another fertilizer
manufacturing company, K, to produce the fertilizer required by T; K
would strictly comply with what was stated in the relevant contract
clauses agreed between T and G. However, K failed to produce and
deliver the goods to T.
In many Chinese books on contract law, the following four doctrines are
often advocated as the norms to be implemented with respect to performing
a contract: the doctrine of full performance, the doctrine of good faith, the
doctrine of economic efficiency, and the doctrine of allowing performance to
deviate from contract terms due to a major change in circumstances. These
doctrines guide the performance of contracts so that it is consistent with the
spirit of contract law.
The Contract Law provides that the contracting parties shall fully perform
their obligations as per what they have agreed (Article 60, paragraph 1).
This is what is advocated under the doctrine of full performance, which may
also be termed ‘the doctrine of proper performance,’ ‘the doctrine of correct
performance’ or ‘the doctrine of full and proper performance’ (L M Wang and
Cui 2000, 319; Cui 2000, 101; C L Wang 2002, 68; Guo 2007, 102; Qu, Liu
and Yan 2006, 52).
The doctrine of good faith can be easily understood literally. It is mentioned

in the Contract Law, which says that the contracting parties shall follow the
doctrine of good faith to perform their obligations of notification, assistance
and keeping confidentiality, etc., in the light of the contract’s nature

and objectives as well as in accordance with habits of trade (Article 60,
paragraph 2). Based on such provision, some scholars further put forward
‘the doctrine of providing mutual assistance and cooperation to perform a
contract,’ which requires the contracting parties to cooperate and help each
other in the spirit of the doctrine of good faith (L M Wang and Cui 2000, 320;
Cui 2000, 101–2; Qu, Liu and Yan 2006, 53).
The doctrine of economic efficiency emphasizes the importance of performing

a contract aimed toward the best economic yields, by keeping in mind any
likely outcome due to an interaction between cost and benefit that occurs
when the contract is performed (L M Wang and Cui 2000, 320–21; Cui 2000,
102; Guo 2007, 104). Similarly, the Contract Law provides that where one
party to a contract is in breach, the innocent party shall take appropriate
measures to curb the loss suffered; failure to take such measures thus giving
rise to an enlargement of the loss will deny the innocent party from claiming
for damages over the enlarged part of the loss; the party in default will have
to bear any reasonable expenses incurred by the innocent party in curbing the
enlargement of the loss suffered (Article 119). The Contract Law also points
out that with the two parties to a contract in a relationship of obligee and
obligor, the obligee can refuse to let the obligor fulfil the obligor’s contractual
obligations ahead of schedule, except when the obligor’s fulfilment ahead of
schedule will cause no damage to the interest of the obligee; the obligor has
to shoulder any extra expenses arising from his early performance of such
kind (Article 71). Moreover, the Contract Law stipulates that the obligee can
refuse to let the obligor partially perform the obligor’s obligations, except
when the obligor’s partial performance will do no harm to the interest of the
obligee; the obligor has to bear any extra expenses generated from his partial
performance of such kind (Article 72).
The doctrine of allowing performance to deviate from the contract terms

due to a major change in circumstances is an exception to the doctrine of
full performance. Under the former doctrine, if, after a contract comes into
force, a contracting party encounters an unpredictable circumstance totally
beyond control and continuing to perform the contract by strictly abiding by
the contract under such circumstance will gravely undermine the interest of
the contracting party, making the realization of the goal pursued under the
contract impossible, then the contracting party can be allowed to perform
the contract by not exactly following what was agreed in the contract or to
entirely discharge the contract (L M Wang and Cui 2000, 321–23; Cui 2000,
102–5; C L Wang 2002, 72–73; Guo 2007, 104–7).
These doctrines can be applied to the examples above. In Example 4.4, if the
quality is very bad, G may be breaching the doctrine of good faith, so T’s
refusal to pay is reasonable. In Example 4.5, if K cannot deliver the goods,
according to the doctrine of full performance, G should bear the responsibility.
The following provides concrete guidelines for handling some common

problems in performing contracts.
Performing a contract is the main theme in Chapter 4 of the Contract Law.

That chapter covers some provisions in connection with the following
issues that deserve special attention due to their material significance in the
performance of a contract: supplementing a contract and comprehending
contract terms; the performance of a contract involving a third party; a
contracting party’s right to turn down the demand for his performance
of contractual obligations; and the right of subrogation and the right of
revocation.
Supplementing a contract and comprehending contract

terms
In performing contracts, it is not uncommon for problems to arise due to
unexpected events or the ambiguity of contract terms. If contract clauses
provide no clues on how to tackle these problems, the contract will have to be
supplemented or interpreted. In Example 4.4 above, for example, the contract
terms on the expected quality of fertilizer might need to be supplemented or
interpreted to settle the dispute.
The Contract Law includes provisions regarding how to supplement a

contract and interpret a contract term that is unclear. Under the Contract Law,
after a contract comes into force, if it is found that the contracting parties
have yet to reach an agreement on any contract clause relating to quality,
price or remuneration, place of performance, etc., or their agreement is not
clear enough, then they may supplement the contract by making a further
agreement; and if no such further agreement can be made, the lacunas shall be
filled in the light of the relevant contract terms as they stand or by following
habits of trade (Article 61).
That is to say, if no further agreement can be made, the parties can try to carry
out an interpretation by relying on the contract terms or by resorting to the
prevalent habits of trade relevant to their case. However, if an uncertainty
in the contract cannot be removed through these means, the parties can try
to apply the rules prescribed under the Contract Law regarding clarifying
ambiguity in the following areas:
• for ambiguity over quality standards, following the relevant standards set
by the state and industry, or following an accepted common standard or a
specific standard that fits well into realizing the contract’s objective
• for ambiguity over price or remuneration, following the relevant market

price that applies to the place of performing the contract at the time the
contract is made, or adopting the price set or directed by the government
if the law requires doing so
• for ambiguity over the place of performing the contract, taking the place
in which the party to whom monetary payment is made is located as such
place if the contract relates to making monetary payment, or taking the
place in which the immovable property is located as such place if the
contract relates to delivery of immovable property, or taking the place in
which the party who has to perform obligations is located as such place if
the contract relates to matters other than the former two
• for ambiguity over the time of performing the contract, the rule of
determining such time being that the obligor may perform obligations at
any time; the obligee may also request the obligor to perform obligations
at any time whereas the obligor should be given an appropriate amount of
time to prepare for carrying out the performance
• for ambiguity over the way of performing the contract, adopting a way
that can facilitate realization of the contract’s objective
• for ambiguity over which party should shoulder the expense incurred in
performing the contract, taking the party who has to perform obligations
as the one who will bear such cost (Article 62).
The performance of a contract involving a third party

The performance of a contract involving a third party usually relates to one
of two kinds of contracts: a contract performed in favour of a third party, or a
contract performed by a third party.
A contract performed in favour of a third party

In a contract performed in favour of a third party, the two parties agree to an
arrangement under which one contracting party will perform his contractual
obligations in favour of a third party outside of the contract (i.e. the third
party is not a party to this contract). In other words, it is this third party (not
the other contracting party) who will benefit from that contracting party’s
performance of contractual obligations.
The Contract Law provides that under the circumstance that one contracting
party as the obligor will perform his obligations in favour of a third party in
the light of what the two contracting parties have agreed, if he fails to perform
his obligations in favour of the third party accordingly or his performance
fails to comply with what has been agreed, then he shall be held liable to the
other contracting party (the obligee) for breach of contract (Article 64).
Assume that ABC (a trading house) enters into a contract with XYZ (a steel
products manufacturing company) to purchase rolled steel coil from XYZ.
According to their agreement, after XYZ makes delivery ABC will send its
payment that ought to be made to XYZ, to another company, TT, to which
XYZ owes a debt. While TT can urge ABC to make its payment, if ABC fails
to send the payment to TT or ABC pays TT less than the full amount due,
ABC will not be liable to TT for breach of contract; ABC will be liable to
XYZ for breach of contract.
A contract performed by a third party

In a contract performed by a third party, the two parties agree that a third party
outside of the contract will perform the contractual obligations that ought to
be performed by a contracting party.
Regarding a contract performed by a third party, the Contract Law points

out that where according to what the two contracting parties have agreed
the contractual obligations of one contracting party (the obligor) will not be
performed by himself but will be performed by a third party outside of the

contract, in the event that the third party fails to perform accordingly or the
third party’s performance does not match what has been agreed, then the
contracting party concerned (the obligor) shall be held liable to the other
contracting party (the obligee) for breach of contract (Article 65).
In Example 4.5 above, T and G agreed that G would commission another

fertilizer manufacturing company, K, to produce the fertilizer required by T;
K would strictly comply with what was stated in the contract clauses agreed
between T and G. So if K fails to produce and deliver the goods to T in
contravention of the quality standards or the time stipulated in the contract, it
will be G (rather than K) that becomes liable to T for breach of contract and
making up the loss suffered by T.
A contracting party’s right to turn down the demand for his

performance of contractual obligations
Performing a contract can be seen as a process of exercising contractual rights
and fulfilling contractual obligations. In normal circumstances, a contracting
party’s exercise of his contractual rights will always be accompanied by his
fulfilment of contractual obligations, whereas a contracting party’s fulfilment
of contractual obligations will definitely lead to his enjoyment of certain
contractual rights. From the standpoint of exercising contractual rights and
assuming contractual obligations, in the process of performing a contract, one
contracting party that exercises the right (the obligee) may demand the other
contracting party that needs to fulfil the obligation (the obligor) to perform the
obligation pursuant to the contract. In this sense, the obligor should endeavour
to fully and correctly fulfil his contractual obligations in a timely fashion.
In the meantime, in order to protect the obligor’s interests, the law vests
him with the right to turn down the obligee’s demand for the obligor’s
performance of contractual obligations when such demand can give rise to
damage to the obligor’s interests. Nevertheless, exercising this right can only
result in the obligor’s temporary pause in performing the contract. It cannot
terminate the contract, nor release the obligor from fulfilling his contractual
obligations. Once any factor that may cause damage to the obligor’s interests
no longer exists, the obligor will need to perform his contractual obligations
as agreed in the contract.
A contracting party’s role automatically switches from obligor to obligee or

vice versa depending on if he is exercising his contractual rights or performing
his contractual obligations.
The obligor (as one contracting party) may usually exercise his right to turn
down the demand made by the obligee (as the other contracting party) for
performing contractual obligations in three scenarios:
• where the two contracting parties are supposed to start performing their
contractual obligations at the same time;
• where one contracting party’s performance is supposed to precede the

performance of the other contracting party but the former fails to perform
his contractual obligations or his performance is not satisfactory; or
• where one contracting party’s performance is supposed to precede the

performance of the other contracting party but the former has grave
concerns about the likelihood of the latter’s non-performance or about the
latter’s performance not being up to expectations.
Regarding the first scenario , the Contract Law provides that where the two
contracting parties have obligations to fulfil towards each other and there is no
particular sequence for their performance, they shall perform at the same time;
one party has the right to decline to satisfy his counterparty’s demand for his
performance before his counterparty performs; one party has the right to turn
down his counterparty’s demand for his performance if his counterparty’s
performance fails to comply with what they have agreed (Article 66).
The refusal of performance described in this scenario may quite often occur
in transactions involving cash on delivery (i.e. the buyer pays the seller when
the seller physically delivers to him the goods purchased). For example, say
that T orders some chicken sandwiches from ABC (a lunch box company),
but ABC delivers to him tuna sandwiches. Obviously, ABC has not performed
its contractual obligations. Under this circumstance, T can refuse to pay ABC
until the sandwiches are replaced (in other words, T can turn down ABC’s
demand for performing his contractual obligations until ABC rectifies its own
performance).
Regarding the second scenario, under the Contract Law, where the two
contracting parties have obligations to perform towards each other and there
is a particular sequence of their performance, in the event that the party who
should perform first fails to perform, the party who is the next to perform
has the right to decline the former’s demand for the latter’s performance;
if the party who should perform first has performed but the performance is
not in conformity with their agreement, the party who is the next to perform
has the right to turn down the former’s demand for the latter’s performance
accordingly (Article 67). This provision protects the interests of the party who
is supposed to perform after his counterparty’s performance.
Here is an example of this second scenario. ABC Hotel sent a fax to Wang
confirming his executive room booking and a room rate of RMB 2,000 per
night. After checking in, Wang discovered that he had been given a standard
room. ABC Hotel explained that ‘all executive rooms have been requisitioned
to cater for an important international conference; this standard room has been
significantly refurbished according to the executive room standard.’ However,
the actual discrepancy was apparent. When Wang checked out, ABC Hotel
wanted to charge him RMB 2,000 per night rather than RMB 600 (the price
for a standard room), on the ground that ‘your payment should be made as
per the fax.’ Wang refused to pay the bill, insisting that he should be charged
for a standard room. Example 4.4 above, is also an example of this second
scenario.
As to the third scenario, the Contract Law states that the contracting party
who ought to perform first may suspend his performance if there is sound
evidence that his counterparty’s business has seriously deteriorated, or his
counterparty has diverted assets or has discreetly removed funds in order to
dodge fulfilling debt obligations, or his counterparty’s business reputation has
been damaged, or his counterparty has lost or is likely to lose the capacity to
fulfil debt obligations (Article 68, paragraph 1). Suspension of performing
contractual obligations under any of these instances will not give rise to
breach of contract. However, the suspension would only be temporary, and
must be lifted once circumstances change.
Pursuant to the Contract Law, the contracting party who suspends his
performance under the circumstance described above shall inform his
counterparty in a timely manner about his decision to suspend his perfor-
mance; if his counterparty can furnish a proper performance guarantee,
he shall resume the performance of his contractual obligations; if his

counterparty is not able to regain the capability to perform the contract within
a reasonable time and cannot provide an appropriate performance guarantee
either, then he will be allowed to discharge the contract (Article 69).
There must be sound evidence to support the claim that the contracting
party who is the next to perform will fail to perform or will not have the
required capability to perform. The burden of proof falls on the shoulders
of the contracting party who suspends his performance. If he suspends his
performance without sound evidence to support the claim, he will face the
consequence of being held liable for breach of contract (Contract Law, Article
68, paragraph 2).
Here is an example of this third scenario. Starlight is a giant shipping

enterprise well known for transporting iron ore year round, from South
American mines to steel makers in China. To enlarge its fleet, Starlight needs
to order some new vessels. For this purpose, it applied to ABC Bank for a
bank loan. ABC Bank granted the loan to Starlight. But before ABC Bank
gave Starlight the loan as per the schedule, a severe riot broke out in the
mines which entirely halted production. As a result, Starlight had nothing to
transport at that moment. It was unclear how long the riot would continue and
how seriously it might impact Starlight’s cash flow and its ability to repay its
loan. ABC Bank decided to temporarily withdraw the loan. Starlight accused
ABC Bank of breaching the contract.
In this example, a contractual relationship was established between Starlight

and ABC Bank, under which ABC Bank is committed to furnish Starlight
with a loan and Starlight in turn has to repay ABC Bank for the loan. In light
of Article 68, paragraph 1 of the Contract Law, ABC Bank may suspend the
performance of the contract if there is sound evidence proving that Starlight’s
business has seriously deteriorated or it has lost its ability to repay the loan
due to the riot. The suspension under such circumstance would be temporary,
and is not a breach of contract. However, if ABC Bank suspends the
performance of the contract not on sound ground, it will be liable for breach
of contract (Article 68, paragraph 2). Also, once circumstances at the mines
improve, ABC Bank needs to resume performing the contract (i.e. give the
loan to Starlight).
The right of subrogation and the right of revocation

Look at the following examples, which represent situations that are quite
common in daily life.
Example 4.6
T borrows RMB 200,000 from G, promising to repay G within six
months. After six months, T defaults on repayment, claiming that his
dire financial situation is temporarily preventing him from fulfilling his
debt obligation. G obtains information from a reliable source that B owes
T RMB 300,000, a long overdue debt, and that T has not chased B for
repayment. B’s failure to fulfil his debt obligation towards T is indirectly
but seriously impeding T’s capability to repay his debt to G. In other
words, if B had repaid T the RMB 300,000, most likely T would have
been able to perform his debt obligation in favour of G.
Example 4.7
Wang owes Li RMB 500,000 but defaults on repayment on the ground
that he has no ability to pay it back at present. Li recently discovered that
Wang is the owner of a house valued at RMB 500,000. Li also learned
that Wang has just given the house as a gift to his cousin, Song, in order
to avert a possible seizure of his house for setting off the debt.
In the above examples, in the course of performing a contract, it is likely that

due to the debtor’s inaction an increase in his assets cannot be materialized
or the debtor is deliberately diminishing or transferring his assets to dodge
repayment of his debt. If this happens, the creditor may exercise his right of
subrogation or his right of revocation, depending on the circumstances.
Exercising the right of subrogation

In exercising his right of subrogation, a creditor faces two established
contractual relationships: one between his debtor and himself (the creditor)
and one between his debtor and his debtor’s debtor.
Under the first contractual relationship, the debtor is supposed to perform the
debt obligation fully and in a timely manner. Under the second relationship
(i.e. between the debtor and the debtor’s debtor), the debtor should ensure
that his debtor’s debt obligation can be fulfilled on time in order that his own
financial conditions can be improved, which is conducive to strengthening
his capability to perform his debt obligation in favour of his creditor in the
first contractual relationship. However, if he does not, with a consequence
that there is no improvement in his financial conditions, encumbering his
performance of debt obligation towards his creditor, then his creditor can step
in to make a claim over the debt owed to the debtor by the debtor’s debtor. In
other words, the creditor can try to exercise his right of subrogation.
The Contract Law sets out under what conditions and by what means a
creditor’s right of subrogation can be exercised. Where the debtor’s inertia
to exercise his right as a creditor to make a claim for a debt owed to him that
comes due has caused damage to his creditor, his creditor may petition the
court to allow his creditor to take over from him and exercise in his creditor’s
name the right to make a claim for that debt, unless the claim to be made
by him as a creditor is of an exclusive and personal character (Article 73,
paragraph 1).
In this context, the Supreme People’s Court’s Interpretation on the Contract

Law (I) summarizes the following four points as the conditions to be met in
order that a creditor can exercise the right of subrogation:
• the creditor must have a legitimate claim against the debtor;
• an injury must have been caused to the interest of the creditor due to the
debtor’s inertia to pursue a claim as a creditor over a debt that comes due;
• the debtor must have a claim against his own debtor over a debt that
comes due; and
• the claim to be made by the debtor as a creditor against his own debtor is
not of an exclusive and personal nature (Article 11).
Regarding the meaning of a claim that is of an exclusive and personal

nature, the Supreme People’s Court’s Interpretation on the Contract
Law (I) explains that it refers to a claim for being paid based on established
relationships pertinent to raising non-adult children, supporting dependents
or heirs, or a claim for remuneration for services, retirement payment,
pension, compensation to the family of the deceased, relocation allowance,
life insurance benefit and compensation for personal injury (Article 12). A
creditor’s exercise of his right of subrogation does not apply to any claim of
such kind.
For the meaning of ‘where the debtor’s inertia to exercise his right as a
creditor to make a claim for a debt owed to him that comes due has caused
damage to his creditor,’ the Supreme People’s Court’s Interpretation on the
Contract Law (I) construes it as a circumstance under which a debtor fails
to fulfil his due debt obligation towards his creditor and also fails to make
a claim against his own debtor over a due monetary debt by litigation or
arbitration, resulting in his inability to fulfil his debt obligation towards his
creditor (Article 13, paragraph 1). Also, if a debtor’s debtor does not think that
his creditor (i.e. the debtor) is inactive in pursuing a claim against him over a
debt due, he (the debtor’s debtor) should shoulder the burden of proof on this
(Article 13, paragraph 2).
A creditor’s exercise of his right of subrogation can only be carried out by

bringing court proceedings. In such an action, the creditor who files the
lawsuit is the plaintiff, his debtor’s debtor is the defendant, and his debtor can
be viewed as a third party (Supreme People’s Court’s Interpretation on the
Contract Law (I), Article 16, paragraph 1). Jurisdiction over such a case must
be exercised by a court that governs the territory where the defendant (i.e. the
debtor’s debtor) is located (Article 14). In practice, the territory where the
defendant is located means a specific region the domain of which covers the
place of the defendant’s residence or the defendant’s main place of business.
If the creditor succeeds in the action, the debtor’s debtor (the defendant) shall
perform the debt repayment obligation in favour of the creditor (the plaintiff),
rather than towards the debtor to whom the defendant’s debt is owed
(Article 20).
Under the Contract Law, any repayment the creditor receives arising from his
exercise of the right of subrogation shall not exceed the amount of the debt
his debtor owes him (Article 73, paragraph 2). If the creditor who intends
to exercise his right of subrogation claims for an amount that surpasses
the amount of the debt his debtor owes him or exceeds the amount his
debtor’s debtor owes his debtor, the court will not support the excessive part
claimed (Supreme People’s Court’s Interpretation on the Contract Law (I),
Article 21).
In such a lawsuit, a defence of the defendant (i.e. the debtor’s debtor) against
his own creditor (i.e. the debtor, the third party in this case) can be raised
against the plaintiff (i.e. the creditor) (Supreme People’s Court’s Interpretation
on the Contract Law (I), Article 18, paragraph 1).
In Example 4.6 above, T defaults on repayment, but G finds out that if it were
not for the fact that T is owed an overdue debt by B, T would have been able
to repay G. Can G exercise his right of subrogation to protect his right? If so,
who is the plaintiff and who is the defendant? If the creditor succeeds in the
action, what will be the result? In this example, a creditor–debtor relationship
exists between G and T and between T and B also. If B can fulfil his debt
repayment obligation towards T, this may enhance T’s capability to repay his
debt owed to G. T as a debtor is now unable to repay the loan to G. But as a
creditor T has not taken any action (e.g. by means of negotiation, conciliation,
arbitration or litigation) to pursue B’s repayment of the money owed to him.
In this circumstance, G may bring a court action as the plaintiff against B (the
defendant) for exercising his right of subrogation, with a view to being able to
take over T’s right as a creditor against B so that B could be forced to fulfil the
debt obligation directly in favour of G (not T). Under Article 73, paragraph 2,
any repayment the creditor receives arising from his exercise of the right of
subrogation shall not exceed the amount of the debt his debtor owes him. The
final result would therefore be that B would have to pay RMB 200,000 (not
the full RMB 300,000 that he owes T) to G.
Exercising the right of revocation

In a special context and if certain criteria can be met, a creditor is entitled to
exercise the right of revocation. Regarding the conditions and means by which
a creditor can exercise his right of revocation, the Contract Law provides that
where a debtor’s abandonment of his right to make a claim for a debt that
comes due or a debtor’s gratis transfer of his assets has caused damage to his
creditor, his creditor may petition the court to revoke what he has done; if a
debtor transfers his assets at an obviously unreasonably low price thus causing
damage to his creditor and the transferee is aware of this, then his creditor
may petition the court to revoke what he has done (Article 74, paragraph 1).
In contrast to exercising the right of subrogation in the context of a debtor’s

inaction, exercising the right of revocation is in response to a debtor’s
deliberate act due to which his creditor’s claim for a debt due to be repaid
by him is impeded from fulfilment. This is the reason that the Contract Law
provides a solution to this problem as described above.
The wording ‘a debtor’s abandonment of his right to make a claim for a

debt that comes due’ and ‘the debtor’s gratis transfer of his assets’ are not
difficult to comprehend in their literal meanings. Regarding the issue of a
debtor’s transfer of his assets at an obviously unreasonably low price, the
Supreme People’s Court’s Interpretation on the Contract Law (II) provides
that the court judges whether it is such an obviously unreasonably low price,
to some extent, by reference to the guided price set by the governmental
pricing authority or the prevailing market price (Article 19, paragraph 1). To
elaborate, the yardstick employed is fixed at 70% of the guided price set by
the governmental pricing authority or 70% of the prevailing market price,
and if the debtor transfers his assets at a price lower than this benchmark then
the price can be branded as an obviously unreasonably low price (Article 19,
paragraph 2).
Similar to exercising the right of subrogation, a creditor’s exercise of his right

of revocation can only be carried out through taking court action. Pursuant
to Article 24 of the Supreme People’s Court’s Interpretation on the Contract
Law (I), in such a lawsuit, the creditor who initiates the litigation is the
plaintiff, his debtor is the defendant, whereas the party to whom the debtor’s
assets are transferred (either gratuitously or at an obviously unreasonably low
price) or the party who benefits from the debtor’s abandonment of the right to
make a claim for a debt that comes due is treated as a third party. The creditor
brings the lawsuit with a view to applying to the court for cancelling the
debtor’s act of giving up his right to make a claim over a debt that comes due
or for annulling the debtor’s act of deliberately transferring his assets either
gratuitously or at an obviously unreasonably low price.
According to the Supreme People’s Court’s Interpretation on the Contract

Law (I), jurisdiction over a case of such kind must be exercised by a court
that governs the territory where the defendant (i.e. the debtor) is located
(Article 23). Such territory usually refers to a specific area whose scope
embraces the place of the defendant’s residence or the defendant’s main place
of business.
In Example 4.7, Wang’s house can be used to pay back the debt he owes Li if
he does not have enough money to fulfil his debt obligation towards Li. Wang
gives the house to his cousin, Song, as a gift, intending to dodge repaying his
debt. Under this circumstance, Li may file a lawsuit against Wang petitioning
the court to set aside this gratuitous transfer of ownership of Wang’s house to
Song.
In practice, if the creditor as the plaintiff wins the case, he can then exercise
his right of revocation with the result that the debtor’s act is cancelled; and if
this happens, according to the Supreme People’s Court’s Interpretation on the
Contract Law (I), the debtor’s act revoked is deemed to have no legal effect
from the start (Article 25, paragraph 1).
Also it should be noted that in the case of a creditor exercising his right of
revocation, any repayment he receives will be capped at the amount of the
debt his debtor owes him (Contract Law, Article 74, paragraph 2). To put it
another way, the creditor is not in a position to be repaid in excess of the debt
owed to him.
The alteration and the assignment of a contract

Under what circumstances can a contract be altered? Besides making
alterations based on mutual consensus, can one party make the alteration on
his or her own? The alteration and the assignment of a contract are the main
themes of Chapter 5 of the Contract Law.
The alteration of a contract

The term ‘alteration of a contract’ refers to a likely change in the contents
of a contract, not in the parties to a contract. Such alteration happens after a
contract takes effect but before its performance is completed. Once a contract
is altered, the parties to the contract must carry out their performance of the
contract in line with the altered contract; nevertheless, the validity of any
part of the contract that has been performed prior to the alteration will not be
denied.
Assume that T and G enter into a contract under which G sells building
materials to T. The contract clause stipulates that G makes delivery to T in
October. Later on, T and G reach a consensus that the date of delivery be
postponed to December. Such alteration varies what the contract originally

provides for, but it does not give rise to any change in the parties to this
contract. This is an example of the alteration of a contract.
Chapter 5 of the Contract Law focuses on the circumstance where the

alteration is initiated by the contracting parties because they are in agreement
to change the contents of their contract after the contract comes into force.
The chapter says that the contracting parties can alter their contract after they
come to a consensus to do so (Article 77, paragraph 1).
If there is a statutory requirement that the alteration of a contract is subject to

government approval and/or government registration, then such requirement
must be complied with (Contract Law, Article 77, paragraph 2). Only
after acquiring the required government approval and/or completing the
government registration can the alteration become effective.
Say to establish a Sino-foreign equity joint venture enterprise in China,

the Chinese and foreign investors first have to enter into a joint venture
agreement. The agreement can only become effective after it is approved by
the relevant government authority (e.g. the Ministry of Commerce, or the
Commission of Commerce in a local jurisdiction, depending on the volume
of the investment). By the same token, any change to this agreement must
also be approved by the relevant government authority in order to take effect.
Under the Implementation Rules of the Sino-Foreign Equity Joint Venture
Enterprise Law, a joint venture agreement will come into force only after it is
approved by the government authority, and the same requirement applies to
making a change to such agreement (Article 14).
Although the ‘alteration of a contract’ mentioned in Chapter 5 of the

Contract Law specifically refers to an alteration made due to the contracting
parties’ mutual intent to do so, a contract can also be altered under other
circumstances, which are mentioned in other chapters of the Contract Law.
Under Chapter 3 of the Contract Law, for a contract made under a material
misconception or entered into under apparently unfair circumstances, the
innocent party is entitled to apply to the court or to an arbitral body for
altering the contract (Article 54, paragraph 1). In the event of a contract made
due to deceit or duress or by taking advantage of a contracting party’s plight,
the innocent party entering into the contract at odds with his true intent is
entitled to apply to the court or to an arbitral body for altering the contract
Under Chapter 7 of the Contract Law, in the event of a circumstance of force

majeure which makes the performance of a contract impossible, normally
the relevant contracting party can partially or even wholly be relieved from
his contractual obligations to be performed (Article 117, paragraph 1). In
other words, under a circumstance of force majeure, a contracting party may
unilaterally alter the contract (e.g. ceasing the performance of the contract, or
performing the contract in a way different from what the contract stipulates)
in order to effectively deal with the emergency situation, and such unilateral
alteration of the contract can be acceptable under the law. A circumstance of
force majeure is defined under the Contract Law as ‘an objective circumstance
which is unpredictable, unavoidable and insurmountable’ (Article 117,
paragraph 2).
Here is an example. An airplane flying from Guangzhou to Shanghai,

before approaching the territory of Shanghai, got the news that the weather
in Shanghai was not suitable for landing. The captain decided to land the
airplane in Nanjing (a city not far from Shanghai). While the captain on behalf
of the airline unilaterally made a decision to divert the airplane to Nanjing
thus altering what the airline and passengers originally agreed, such alteration
was acceptable under such exceptional circumstances, and so did not require
passengers’ prior consent.
It deserves a special mention that the alteration of a contract means making a

change to part of the contents of a contract, rather than materially altering a
contract. An example of a material alteration might be converting a contract
under which rice is supposed to be transacted into one aimed at buying or
selling steel. However, how to draw a dividing line between a material and a
non-material alteration of a contract is a topic of debate in academic circles
(L M Wang and Cui 2000, 400–401).
The assignment of a contract

The term ‘assignment of a contract’ denotes a contracting party’s act of
entering into an agreement with a third party outside of the contract (i.e. with
someone who is not a contracting party to the contract) for the purpose of
transferring his contractual rights and/or his contractual obligations, either

wholly or partially, to that third party. The contracting party who makes the
transfer is known as the ‘assignor’ and the third party as the ‘assignee.’
The nature of assigning a contract

Assigning a contract in this way does not give rise to an alteration of the
contract terms, i.e. the contracting parties’ rights and obligations. However, it
adds a new contracting party to the contract, altering the relationships between
parties.
Say T enters into a contract with G to borrow RMB 100,000 from G, resulting
in the creation of a creditor–debtor relationship between them. The two
contracting parties are entitled to their contractual rights and in the meantime
have to assume their respective contractual obligations. T has the right to
obtain the RMB 100,000 from G but is under obligation to pay back the
loan to G at a certain point in time as agreed between them; G is committed
to provide this RMB 100,000 to T, and on the other hand, he has a legal
claim for this debt of RMB 100,000 owed to him by T. Assume that later
on G assigns his right to make a claim over repayment of this debt against
T entirely to another person, B. The assignment results in no change to the
terms of the original contract between T and G, but alters the composition of
the contracting parties. T is still the debtor, but B becomes the creditor. On the
other hand, if G merely partially assigns his right to B to make a claim over
repayment of the debt against T, then G and B will be the creditors who have
a claim over T’s repayment of his debt in proportion to their respective rights
as agreed by G and B.
As the example shows, after the assignor in his capacity as an obligee assigns
his contractual rights to the third party (the assignee), the assignee becomes an
obligee under the contract obtaining the rights assigned to him. In the case of
assigning all the assignor’s contractual rights, the assignee will become a new
obligee under the contract and completely take the place of the assignor. If the
assignor assigns only part of his contractual rights, the assignee will merely
be added as a new obligee in parallel with the assignor, who will continue to
be an obligee but with fewer contractual rights.
On the other hand, if the assignor in his capacity as an obligor assigns

his contractual obligations to the third party (the assignee), the assignee
will emerge as an obligor under the contract taking over the contractual
obligations assigned to him. If it is an assignment of all the assignor’s
contractual obligations, the assignee will completely take the place of the
assignor, becoming a new contracting party. If the assignor assigns only a part
of his contractual obligations to the assignee, the assignee will become a new
obligor alongside the assignor, who will continue to be an obligor but with
fewer contractual obligations, so that the two will jointly fulfil the contractual
obligations in the ratio agreed between them.
Whether it is an assignment of contractual rights or obligations, the contract

must be valid. Assigning any rights or obligations pertaining to a contract that
is void carries no legal force.
Moreover, if there is a statutory requirement that assigning a certain

contractual right or obligation is subject to government approval and/
or government registration, such requirement must be met otherwise the
assignment cannot take effect (Contract Law, Article 87). For instance, the
Sino-Foreign Cooperative Joint Venture Enterprise Law provides that if one
side in such a joint venture intends to assign its whole or partial rights or
obligations stipulated in the joint venture agreement, it must have the other
side’s consent and also obtain the relevant government approval (Article 10).
Three scenarios
These are the possible scenarios in assigning a contract:
• assigning a party’s contractual rights only;
• assigning only a party’s contractual obligations; or
• assigning a party’s contractual rights together with his contractual

obligations.
In the first scenario, an obligee under a contract (the assignor) transfers all
or part of his contractual rights to a third party outside of the contract (the
assignee), based on what the assignor and the assignee have agreed for such
purpose.
In this regard, the Contract Law stipulates that an obligee may assign all or
part of his contractual rights to a third party, except where: (1) the assignment
cannot be made due to the nature of the contract; (2) the assignment cannot
be made according to what the contracting parties have agreed; or (3) the
assignment cannot be made in light of what the law sets out (Article 79).
Based on these circumstances, what kinds of contract cannot be assigned to

others? The rationale behind circumstances 2 or 3 should be self-evident.
However, circumstance 1 is more difficult to understand. In practice, it is
normally the uniqueness of its contracting party that sets such a contract
apart. For example, the obligations contained in a performance contract made
with a celebrity singer cannot be assigned to a third party due to the singer’s
irreplaceable pedigree and box-office value (L M Wang and Cui 2000, 418).
In assigning contractual rights, the obligee (the assignor) must inform the
obligor about this assignment in the first instance, albeit the obligor’s consent
to this assignment is not required. According to the Contract Law, the obligor
shall be notified of the obligee’s assignment of contractual rights; without
such notification, the assignment will not produce a binding effect on the
obligor (Article 80, paragraph 1). The obligor’s prior consent is not required,
and a notification will suffice for the assignment to have a binding force on
the obligor.
After the assignment of contractual rights comes into force, any defence that
is likely to be raised by the obligor against the obligee can be raised by the
obligor against the assignee as the new obligee (Contract Law, Article 82).
If when the obligor is notified of the obligee’s assignment of contractual rights

(enforceable against the obligor), the assignee also needs to fulfil an obligation
in favour of the obligor and the assignee’s fulfilment of this obligation is to
precede the obligor’s fulfilment of the obligation relating to the obligee’s right
assigned, or the two obligations ought to be fulfilled at the same time, then the
obligor may make a claim to the assignee for having the fulfilment of these
two obligations counterbalanced between him and the assignee (Contract
Law, Article 83).
In the second scenario listed above, an obligor under a contract (the assignor)
transfers all or part of his contractual obligations to a third party outside of the
contract (the assignee), by following what the assignor and the assignee have
agreed for such purpose.
Different from assigning contractual rights, according to the Contract Law,

the obligee’s consent is required if the obligor intends to assign his contractual
obligations wholly or partially to a third party (Article 84).
If the obligee is not agreeable to the assignment, then the assignment cannot
go ahead. This is because changing the obligor may significantly impact the
fulfilment of obligations towards the obligee, due to differences between
people’s financial standing, creditworthiness and capacity to perform
obligations. Only when the obligee is satisfied with the prospective assignee’s
financial condition, credit status and ability to perform the obligations to be
assigned will it be fair to the obligee if the proposed assignment is allowed to
happen.
In contrast, assigning rights by the obligee appears less controlled under

the Contract Law as it can come into force without the obligor’s consent,
provided that the obligor is notified of the assignment. This is because as the
right holder the obligee has total freedom to handle his own rights in a way
that he believes will be in his best interests.
After the assignment of contractual obligations becomes effective, any

defence that is likely to be raised by the original obligor against the obligee
can be raised by the assignee as the new obligor against the obligee (Contract
Law, Article 85).
Finally, there is the third scenario: assigning a party’s contractual rights

together with his contractual obligations. Since a contracting party under
a contract usually has both contractual rights to enjoy and contractual
obligations to perform, it is common for a party (the assignor) to assign his
contractual rights together with his contractual obligations concurrently to a
third party (the assignee).
The Contract Law provides that a contracting party, upon his counterparty’s
consent, may assign his contractual rights together with his contractual
obligations to a third party (Article 88).
The provisions set out by the Contract Law that separately apply to assigning
contractual rights by the obligee and to assigning contractual obligations by
the obligor govern assigning a party’s contractual rights together with his
contractual obligations (Article 89). That is to say, a party’s assignment of
rights can come into force without his obligor’s consent in advance, whereas
his assignment of obligations is subject to the obligee’s agreement.
The assignor’s assignment of his contractual rights together with his

contractual obligations can be initiated by an agreement made for such
purpose between the assignor and the assignee based on their free will and by
virtue of their mutual intent.
Assignment can also automatically occur under specific circumstances

prescribed by the law, most notably associated with corporate restructuring
activities like mergers and acquisitions and split-ups. According to the
Contract Law, after entering into a contract, if one contracting party
merges with another entity, the newly formed legal person or organization
will succeed to that party’s exercise of contractual rights and fulfilment
of contractual obligations; if one contracting party is split into more than
one entity, unless the two contracting parties have agreed otherwise, the
legal persons or organizations that are newly created due to the split-up
will succeed to that party’s exercise of contractual rights and fulfilment
of contractual obligations by jointly and severally enjoying the rights and
fulfilling the obligations (Article 90).
Provisions contained in China’s Company Law5 also need to be noted. The

Company Law provides that in the case of a merger, any credit or debt of the
companies merged shall be inherited by the company that has acquired other
companies in the merger or by a newly formed company that has absorbed
all the merged companies (Article 175). In a split-up the debts undertaken
by a company before its split-up will be assumed jointly and severally by
the separate companies it has split into, unless prior to the split-up it has
otherwise agreed with the creditor as regards the way of repaying the debts
(Article 177).
5 The English translation of the Company Law on the following website can be used as a reference:
http://www.law-bridge.net/english/LAW/20064/0221042566163.html. The author uses his own
translation in this book.
Discharging a contract
Once a contract is created and comes into force, the best outcome for the
parties to the contract is each party’s smooth and successful completion of
performing the contract.
Say T enters into a contract with G to purchase 100 tons of rice from G. The
contract stipulates that G will deliver the rice to T within a month of signing
the contract; and T will make payment to G within a week of receiving G’s
delivery. If T and G both perform the contract by strictly and fully living up to
the contract, the contract will be deemed to have been successfully performed,
amounting to the contractual rights and contractual obligations of T and G
coming to an end respectively.
However, life is unpredictable. Many contracts fail to be performed at all, or

fail to be performed on time, or fail to be performed in conformance with the
contract, thus giving rise to unsuccessful performance, including contracts
being discharged, i.e. terminated.
Once a contract is discharged, the legal force the contract carries will
accordingly be terminated, and the contractual rights and obligations of
the parties to the contract will cease to exist. In this sense, discharge of a
contract is a form in which contractual rights and obligations come to an end,
though it is not the sole form. The Contract Law enumerates the following
circumstances under any of which contractual rights and obligations will
come to an end: (1) where the contractual obligations have been fulfilled
as per what has been agreed; (2) where the contract has been discharged;
(3) where the contracting parties’ obligations have been counterbalanced;
(4) where the obligor has placed the subject matter in escrow according to the
law; (5) where the obligor’s obligations have been exempted by the obligee;
(6) where all the contractual rights and obligations belong to the same
party; and (7) any other circumstance prescribed by the law or agreed by the
contracting parties, under which contractual rights and obligations will come
to an end (Article 91).
Discharging a validly established contractual relationship is not rare and may

exert a significant impact on the interests of contracting parties. Therefore,
it is necessary to establish a clear understanding of the prerequisites under
which a contract may be discharged.
Under the Contract Law, discharging a contract can be done in two major
ways: by agreement and under the circumstances prescribed by the law.
Discharging a contract by agreement

Under the Contract Law, Article 93, discharging a contract by agreement
can further be classified into two types: discharging a contract as a result of
mutual discussion and discharging a contract by exercising a predetermined
contract termination right.
Discharging a contract as a result of mutual discussion

Where the parties to a contract after mutual discussion agree to discharge the
contract, the contract can be discharged accordingly (Contract Law, Article
93, paragraph 1). Discharging a contract in this circumstance illustrates the
respect shown to the contracting parties’ exercise of their free will that is
encouraged under the doctrine of freedom of contract.
Here is an example. ABC (a trading firm) enters into a contract with XYZ (a
fertilizer producer) to purchase 100 tons of fertilizer from XYZ. Before XYZ
starts to prepare the delivery, ABC is informed that TT (another fertilizer
producer) can supply it with the same fertilizer at a much lower price.
ABC therefore talks to XYZ to see if XYZ will agree to have their contract
cancelled so that ABC can buy the fertilizer from TT instead. XYZ is rarely
short of orders, so it does not oppose terminating the contract. The contract
between ABC and XYZ is therefore amicably discharged.
Discharging a contract by exercising a predetermined contract

termination right
Under the Contract Law, the parties to a contract can be in agreement
beforehand on the conditions under which a contracting party has the right to
discharge the contract (Article 93, paragraph 2).
Here is an example. Twinkle Star (a shipping company) places an order

with AA Shipyard in January for purchasing from AA Shipyard, a Capesize
bulk carrier, to be delivered in July. Their contract stipulates that if within a
month’s time after the contract is made the selling price in the market of the
steel plates to be used in this shipbuilding project rises more than 30% over
that at the time of entering the contract, AA Shipyard will have a right to
opt for unilaterally terminating the contract with no need to obtain Twinkle
Star’s agreement. This stipulation thus vests AA Shipyard with a contract
termination right. Once this termination right is exercised by AA Shipyard,
the contract will be discharged, amounting to an end of all the rights and
obligations embodied in the contract.
Discharging a contract by exercising a predetermined contract termination

right should be distinguished from the circumstance described in the Contract
Law (Article 45, paragraph 1) regarding a contract attached with a condition
the accomplishment of which gives rise to annulment of the contract’s
validity. In the latter case, once such predetermined condition is satisfied,
the contract automatically comes to an end, while in the former case, the
contract’s life only ceases if the party who has the contract termination right
opts to exercise his right. In the example above, even if the price has gone up
by more than 30% within the time set, given that AA Shipyard decides not to
exercise its right to terminate the contract, the contract will not be discharged
and its binding force will be unaffected.
If a contracting party decides to exercise his contract termination right, he

must inform the other party to the contract about his decision to discharge the
contract; the discharge will take effect when such notification arrives with the
other party to the contract (Contract Law, Article 96, paragraph 1). In other
words, if a party fails to notify the other party of his decision to discharge the
contract, then the discharge cannot come into force. If the other party after
receiving the notification dissents on the discharge, he may petition the court
or an arbitral body to adjudicate the effectiveness of the termination (Article 96,
paragraph 1). If there is a statutory requirement that such discharge be subject
to government approval and/or government registration, this mandatory
requirement must be complied with (Article 96, paragraph 2).
A contracting party who is entitled to exercise a predetermined contract

termination right may lose this entitlement if he does not exercise his right
in time. In this respect, the Contract Law provides that where by virtue of
the law or what the contracting parties have agreed there is a time limit set
for exercising the contract termination right, the right’s validity will cease if
at the end of the time limit the contracting party has not exercised the right;
where there is nothing stipulated in the law or the contracting parties have
not been in any agreement as regards setting a time limit for exercising the
contract termination right, then the right’s validity will cease if the contracting
party who is entitled to exercise the right does not exercise the right within
a reasonable period of time after being urged by his counterparty to exercise
the right (Article 95). The law does not define ‘reasonable period of time.’ It
should depend on the facts and circumstances in each individual case.
Discharging a contract under the circumstances prescribed

by the law
The Contract Law enumerates some specific circumstances, under any of
which a contracting party is entitled to unilaterally discharge a contract. Since
discharging a contract under any of these circumstances is not a result of the
contracting parties having reached a consensus on this matter but is prescribed
by the law and is thus mandatory, the consent of any contracting party is not
required and no contracting party needs to be consulted. The Contract Law,
Article 94 provides that a contracting party can discharge a contract in any of
the following circumstances:
• where the goals the contract pursues cannot be realized due to force
majeure;
• where before the time for performance arrives a contracting party

indicates expressly or by his conduct that he will not perform his primary
contractual obligations;
• where a contracting party delays performing his primary contractual

obligations, and although being urged to carry out the performance still
does not start to perform after a reasonable time passes;
• where a contracting party delays performing contractual obligations or

has done something else amounting to breach of contract, with the result
that the goals the contract pursues become unrealizable; and
• other circumstances prescribed by the law.
If a contracting party puts forward a demand in the context of any of the above
circumstances for discharging a contract, he must notify his counterparty
of this demand, and the contract is deemed to be discharged when such
notification reaches his counterparty (Article 96, paragraph 1). Without giving
such notification, the discharge cannot come into force. Moreover, if the party
who has been notified of such demand for discharging the contract does not
consent to the discharge, then he may petition the court or an arbitral body
to adjudicate the effectiveness of the discharge (Article 96, paragraph 1). If
the law requires that discharging a contract in this way be further subject to
government approval and/or government registration, the requirement must be
observed (Article 96, paragraph 2).
Here is an example demonstrating the discharging of a contract under

circumstances prescribed by the law. Mount Lake (a trading house) ordered
100 wooden chairs from Red Rain (a shop that sells antique Chinese
furniture). They agreed that Mount Lake would make full payment to Red
Rain within three days after completion of the delivery of these chairs. Red
Rain made the delivery on time. But Mount Lake failed to make any payment
to Red Rain by the due date, claiming that it had fallen into unexpected
financial hardship and so was unable to pay. It asked Red Rain to grant it a
30-day grace period. After the grace period, Red Rain still did not receive
any payment from Mount Lake. Red Rain kept on chasing Mount Lake for
payment, but Mount Lake made various excuses. Red Rain feared that Mount
Rain would never pay.
Under the Contract Law, a contract can be discharged if a contracting party

delays in performing his primary contractual obligations, and although being
urged to do so, still does not start to perform after a reasonable time passes
(Article 94). Mount Lake failed to fulfil its payment obligation on time and
even after the grace period. Under this circumstance, Red Rain may inform
Mount Lake that the contract is terminated and demand Mount Lake to
return the goods delivered. If Mount Lake feels aggrieved, it may, pursuant
to the Contract Law (Article 96, paragraph 1), express its opposition against
the termination of the contract, and petition the court or an arbitral body to
adjudicate the effectiveness of the termination.
The effect of discharging a contract

No matter in what way a contract is discharged, the effect is the same:
permanent cessation of the contract, with the result that any contractual right
or contractual obligation in connection with the contract is no longer in force.
The Contract Law gives a detailed exposition of the effect of discharging a

contract. It provides that after a contract is discharged, any part of the contract
not yet performed will cease to be performed; for any part of the contract
that has already been performed, according to circumstances and in light
of the nature of the contract, the relevant contracting party may try to have
it restored to its original state or demand for other remedial measures to be
taken, and is entitled to claim compensation for his loss (Article 97).
After a contract is discharged, although it has thus given rise to ending all the
contractual rights and contractual obligations, the validity of any settlement
clause or liquidation clause contained in the contract will not be affected
(Contract Law, Article 98). Any such clause will continue to be in force after
the contract is terminated.
Liability for breach of contract

It is not uncommon to see valid contracts being breached as one or more party
fails to honour the contractual obligations. Scores of contracts are formed
and then either entirely fail to be fulfilled or are performed incongruously or
unsatisfactorily.
Assume that T enters into a contract with G to sell 100 bags of fertilizer to
G. The required quality standards are stipulated in the contract, which also
provides that the fertilizer is to be delivered to G within ten days after the
contract is signed. If after one month passes T still has not made delivery with
no legitimate reason or justification, T is deemed to be in default (i.e. he has
committed a breach of contract). If T makes delivery on time but the fertilizer
delivered is not up to the agreed quality standards, then T is deemed to be in
breach also.
If a party is in breach of contract, he as a party in default is liable to shoulder

the legal responsibility for committing the breach towards the non-breaching
party.
Incurring liability for breach of contract

Under the Contract Law, a contracting party who fails to fulfil his contractual
obligations or performs his contractual obligations not in a contractually
agreed way shall bear liability for committing a breach of contract by means
of continuing to perform the contract, taking remedial measures, paying
damages, etc. (Article 107). If a contracting party has explicitly shown or
indicated by his conduct that he will not fulfil his contractual obligations,
the other party to the contract may before the time of performance expires
demand him to bear liability for breach of contract (Article 108). However, it
is unclear why the Contract Law in this place underlines the condition ‘before
the time of performance expires,’ as the non-breaching party should not be
restrained from claiming against the defaulting party for breach of contract
even after the time of performance lapses.
While a defaulting party has to bear liability for breach of contract, such
liability is normally remedial rather than punitive in nature. Bearing such
liability is to compensate in monetary terms the non-breaching party for any
loss suffered arising from the breach. However, bearing liability for breach
of contract in the context of the law of contract will not encompass making
compensation for the infliction of mental distress suffered by the non-
breaching party, as mental distress belongs to the area of the law of tort rather
than the law of contract.
Under certain circumstances, a party committing a breach of contract may

be exempted from his liability. In addition, there is more than one remedy
available for breach of contract under the Contract Law.
Exemption from liability for breach of contract

Normally a party committing a breach of contract will be liable for his failure
to honour contractual obligations. However, he may be exempted from
such liability under a circumstance of exemption stipulated by the law or
contractually agreed between him and his counterparty.
Statutory exemption from liability for breach of contract

Statutory exemption from liability for breach of contract usually refers to
exemption because of a force majeure. However, a force majeure will not
necessarily constitute a sufficient reason.
Under the Contract Law, a contracting party who is unable to perform a

contract for reasons of force majeure can be partially or entirely exempted
from being liable for breach of contract, except if the law provides otherwise;
if his late performance of the contract precedes the occurrence of the force
majeure event, then his liability for breach of contract cannot be exempted
If a contracting party is unable to perform the contract because of a force

majeure, he shall inform the other contracting party about this in a timely
manner so as to alleviate the loss that may be caused to the other contracting
party, and also produce evidence of such force majeure within a reasonable
time (Contract Law, Article 118).
Contractually agreed exemption from liability for breach of contract

Besides statutory exemption from liability for breach of contract, if the
contracting parties have agreed beforehand on any specific circumstance
under which a party finding himself unable to fulfil his contractual obligations
or failing to perform the contract unsatisfactorily can be exempted from
liability for breach of contract, the defaulting party may have a chance to be
relieved from his liability for the breach committed. The burden of bearing
liability for breach of contract is offloaded in this way under the doctrine of
the freedom of contract.
However, what the contracting parties have agreed must not contravene the law;
nor can it deviate from mainstream ethics or undermine public interest. The
Contract Law states that where a standard contractual term is devised for the
purpose of enabling a contracting party to be exempted from becoming liable
for causing personal injury or for sustaining property loss due to his deliberate
fault or gross negligence, such standard term has no validity (Article 53).
Remedies
Remedies available for breach of contract under the Contract Law mainly
include continuing to perform a contract, taking remedial measures, paying
liquidated damages, and paying damages.
Continuing to perform a contract

In principle a contracting party after committing a breach of contract cannot
be exempted from going on to fulfil his existing contractual obligations. To
put it differently, the contractual obligations of a party in default will not

come to an end due to his breach, and he is still under obligation to perform
the contract.
Under the Contract Law, Article 109 applies to continuing to perform a

contract to fulfil monetary obligations. It provides that if a contracting party
has not paid as per price or remuneration, his counterparty may request him to
pay.
Also under the Contract Law, if a contracting party fails to perform his
non-monetary obligations or his performance of non-monetary obligations
does not conform to what the parties to the contract have agreed, then his
counterparty may demand him to start the performance of the contract or
to perform the contract in compliance with what the contract stipulates
(Article 110). That is to say, his obligations to perform the contract will not
evaporate as a consequence of his default. Note that this only applies to non-
monetary obligations.
Also, there are certain circumstances prescribed under the Contract Law
under which this requirement will not apply, including where the performance
is not acceptable by law or not plausible in practical terms; where the subject
matter relating to the obligation is not suitable for mandatorily carrying out
the performance, or it is too costly to carry out the performance with such
subject matter; and where after passage of a reasonable period the obligee has
not demanded the obligor to perform the obligation (Article 110).
Taking remedial measures

Requiring a defaulting party to take remedial measures as a kind of remedy
for breach of contract is mainly in an attempt to compensate a non-breaching
party who suffers a loss due to a quality defect pertaining to the subject matter
of the contract.
The Contract Law indicates that liability for breach of contract has to be
borne by the defaulting party in accordance with what the contracting parties
have agreed, if the quality pertinent to the subject matter of the contract is
not up to the contractually agreed standard; but if the contracting parties
are not in any agreement on this matter, or their agreement on this matter
is not clear enough and remains so after an attempt is made to affirm the
meaning as per Article 61 of the Contract Law, the non-breaching party may
demand the defaulting party to assume liability for breach of contract by
repairing, replacing, remaking or returning the good, or reducing the price or
remuneration (Article 111). By Article 61 of the Contract Law, after a contract
comes into force, if it is found that the contracting parties have yet to reach an
agreement on any contract clause relating to quality, price or remuneration,
place of performance, etc., or their agreement is not clear enough, then they
may supplement the contract by entering a further agreement; and if no such
further agreement can be made, the lacunas shall be filled in the light of the
relevant contract terms as they stand or by following habits of trade.
If due to the nature of the subject matter of the contract, taking such remedial
measures is not feasible, then the non-breaching party may request the
defaulting party to bear the liability for breach of contract in other forms (such
as continuing to perform the contract, or paying damages). Even if taking
remedial measures is a viable choice, the non-breaching party may, in the
meantime when he demands the defaulting party to take remedial measures,
also request the defaulting party to additionally provide other forms of remedy
(such as continuing to perform the contract or paying damages).
Paying liquidated damages

Paying liquidated damages is a kind of remedy provided by a contracting
party who is in default to his counterparty (i.e. the non-breaching party) who
suffers a loss due to the default. Here, ‘liquidated damages’ refers to a specific
sum of money fixed by the two contracting parties in advance (usually at the
time of entering the contract), payable to the non-breaching party in the event
of a breach.
Regarding paying liquidated damages, the Contract Law provides that the
parties to a contract may agree that when one party is in default he shall pay
a certain amount of liquidated damages to the other party in the light of the
circumstances of the breach, and may also agree on the way of calculating the
amount of compensation for the loss incurred by the breach; in the event of
the agreed amount of liquidated damages being lower than the amount of the
actual loss, the party affected may petition the court or an arbitral body for
incrementing the amount of liquidated damages to be paid; in the case of the
agreed amount of liquidated damages being apparently higher than the amount
of the actual loss, the party affected may petition the court or an arbitral body
for properly decreasing the amount of liquidated damages to be paid; where

the liquidated damages are set to apply to the late performance of the contract,
the defaulting party, after paying the liquidated damages to the non-breaching
party, will still need to go on to perform his obligations (Article 114).
It is quite common that liquidated damages are mixed up with deposits.

Regarding deposits, the Contract Law points out that the parties may in
the light of the Guarantee Law agree that one party provides a deposit to
his counterparty as a guarantee ensuring that the latter’s claim over the
obligations to be performed by the former can be fulfilled, and after the
obligations are performed by the former, the deposit will automatically
become a part of the contract price or be got back by the former; the party
providing the deposit will not be entitled to get the deposit back if he fails to
perform his obligations; the party receiving the deposit will return to the party
giving the guarantee, twice the amount of the deposit if the party to whom the
guarantee is provided fails to perform his obligations (Article 115).
If there is an agreement reached between the contracting parties on liquidated

damages as well as on deposits, if a breach of contract occurs later on, the
non-breaching party may choose to use either the agreed liquidated damages
or the agreed deposit as a remedy provided by the defaulting party for his
breach of contract (Contract Law, Article 116).
Paying damages
Paying damages is a main form of remedy for breach of contract. The term
‘damages’ has a more general sense than ‘liquidated damages,’ and denotes
a sum of financial compensation given to the non-breaching party under the
circumstance of breach of contract. Such sum is not fixed by the contracting
parties in advance, but keeps pace with the actual loss incurred.
The Contract Law provides that if one party defaults by failing to perform his
contractual obligations or not carrying out the performance in line with the
contract, after obligations are fulfilled or after remedial measures are taken, he
will have to pay damages to the non-breaching party for any other loss not yet
made up (Article 112).
It should be noted that if the contracting parties have mutually decided in

advance that paying a predetermined sum of liquidated damages to the non-
breaching party is the remedy to be used under the circumstance of breach of

contract, then paying liquidated damages as a remedy will prevail over paying
damages, as a way of respecting the contracting parties’ common willingness
under the doctrine of the freedom of contract. Only under the circumstance
that the contracting parties make no agreement beforehand on paying
liquidated damages may paying damages be used as a remedy for the breach.
Also, two norms have to be abided by in relation to paying damages as a

remedy for breach of contract: reasonable prediction and fulfilling the duty to
attenuate loss.
Reasonable prediction
The norm of reasonable prediction relates to the fact that a defaulting
party’s liability for the loss suffered by a non-breaching party due to breach
of contract is confined to a scale that can reasonably be foreseen by the
defaulting party when entering into the contract, so the defaulting party does
not need to pay damages for any loss surpassing such scale.
The essence of reasonable prediction can be found in the Contract Law, which
says that if one contracting party fails to perform his contractual obligations or
his performance does not conform to what has been agreed between the two
contracting parties thus causing the other contracting party to incur a loss, the
amount of damages paid by him to his counterparty shall be equivalent to the
loss due to this breach of contract, including the gains that could have been
received if the contract had been performed but not exceeding the amount
of the loss likely to arise from breach of contract that could be or ought to
be foreseen by him (the party in default) at the time of entering the contract
So, the damages paid by the defaulting party include the compensation for the
actual loss directly incurred due to the breach as well as for the predictable
loss of any foreseeable gain by the non-breaching party if there were no
breach. When the contract is made, the parties are presumed to be able to
predict any likely loss in the event of breach of contract and to pre-estimate
the extent of such loss. The party in default is not liable for any loss that
cannot be reasonably forecasted.
Here is an example. TT is a company providing repair services for kitchen

equipment. Two weeks ago, ABC (a bakery) sent TT four ovens to repair.
The two sides agreed that this repair work would be completed within three
days at most because they both understood that any single day’s delay would
lead to a loss of RMB 10,000 revenue for ABC. However, TT took five
days to fix these ovens. ABC thus claimed damages against TT for a loss of
RMB 20,000. Should TT pay such damages to ABC? In normal circumstances,
the answer is yes. TT should pay damages to ABC because RMB 20,000 is the
amount reasonably predicted for the two days’ revenue that ABC could have
generated if the repair work had been completed on time.
The Contract Law mentions an exception to this norm of reasonable

prediction. It says that a supplier of goods or services will be liable for
compensating consumers if consumers suffer a loss due to that supplier’s
deceitful behaviour, in the context of the provision set out in the Law on
Protection of Consumers’ Rights and Interests6 (Article 113, paragraph 2). This
specific provision refers to Article 49 of the Law on Protection of Consumers’
Rights and Interests, which indicates that a supplier of goods or services who
commits a deceit when selling goods or services to a consumer shall augment
the compensation made to the consumer for the loss suffered, and the amount
of the increased compensation shall be equivalent to doubling the value of what
the consumer has paid for the good purchased or the service garnered from that
supplier. It can be seen that if this provision under the Law on Protection of
Consumers’ Rights and Interests is applied, the recoupment will be of a punitive
nature to a certain degree, rather than purely compensatory.
Fulfilling the duty to attenuate loss

If a breach of contract occurs, while the defaulting party is liable for making
compensation to the non-breaching party who suffers a loss arising from
the breach, the non-breaching party, in the meantime, also needs to actively
mitigate the loss by taking appropriate measures in order to contain the
loss from further enlargement. This is the substance of the second norm of
fulfilling the duty to attenuate loss.
6 The full title of the Law on Protection of Consumers’ Rights and Interests is ‘the Law of the
People’s Republic of China on Protection of Consumers’ Rights and Interests.’ Its full text (in
English) can be found on the following website: http://www.lehmanlaw.com/resource-centre/laws-
and-regulations/consumer-protection/law-of-the-peoples-republic-of-china-on-protection-of-the-
rights-and-interests-of-the-consumers-1994.html.
In this respect, the Contract Law points out that after a party commits a breach
of contract, the other party (the non-breaching party) shall take appropriate
measures to prevent enlargement of the loss, and failing to do so will deny
the non-breaching party’s claim for being compensated for any enlarged
part of the loss arising from his inaction; the party in default shall bear any
reasonable expense incurred by the non-breaching party in order to mitigate
the enlargement of the loss (Article 119).
The non-breaching party’s fulfilment of such kind of duty can be perceived as

an application of the doctrine of fairness and impartiality in the circumstance
of the breach of contract. Similar advocacy is also discerned in the General
Principles of Civil Law, which provides that if a contracting party suffers a
loss due to the other contracting party’s breach of contract, that injured party
shall take timely measures to curb any increase in the loss, otherwise he will
not be entitled to claim for compensation over any enlarged part of the loss
due to his failure to do so (Article 114).
Here is an example. ABC (a seafood wholesaler) bought a ton of frozen trout

from XYZ (a fish farm). XYZ failed to make delivery on time. This led ABC
to bear liability for its default on supplying frozen trout to its customers
on time. These customers are the restaurants that placed orders with ABC
for supply of this batch of frozen trout within a predetermined time frame.
ABC made a claim for damages against XYZ, as due to XYZ’s breach ABC
suffered a loss by having to make compensation to its customers. But XYZ
refused to admit its breach, arguing that ABC and XYZ interpreted the date
of delivery differently. ABC insisted on not accepting XYZ’s late delivery
unless XYZ paid damages to it. XYZ did not agree. It left the frozen trout
delivered to ABC in an open yard outside ABC’s storage building, claiming
that the transaction was completed and that XYZ was relieved of any pending
responsibility. After a whole day’s exposure to the sun and heat, most of the
frozen trout became unacceptable for eating. Here, ABC failed to perform
its duty to attenuate the loss by placing the trout received in its cold storage
warehouse while finding a way to settle its squabble with XYZ, resulting in an
enlargement of the loss. Because of this, ABC would not be entitled to make
a claim against XYZ for any part of the loss arising from its failure to quickly
take an appropriate measure to contain the loss.
Summary 263
Summary
The contract law regime in China is represented by the principal statute of the
Contract Law enacted in 1999 and also embraces constituents that take the
forms of judicial interpretations issued by the Supreme People’s Court and
relevant provisions contained in other laws.
Offer and acceptance are the two indispensable steps in establishing a

contractual relationship. An effective acceptance of a valid offer instantly
gives rise to the creation of a contract. The formation of a contract does not
guarantee that such contract is necessarily a valid one having legally binding
force. Whether a contract is valid depends on if it can satisfy all the essential
requirements for creating a valid contract. Many contracts have defects in
terms of validity leading to various consequences: some are void contracts
having no legal force at all from the beginning; some are voidable contracts
that are valid at present but their validity is revocable; some are termed
‘contracts with undecided validity,’ and a contract of such kind is not in
force currently and whether it can subsequently become effective depends on
whether a relevant party chooses to affirm its validity or its deficiencies can
be removed.
Whether a contract can successfully be performed in accordance with what

the contracting parties have agreed in the contract is a key to fulfilment of the
contract’s objectives.
Altering a contract means making a change to the contents of a contract

partially rather than entirely. It does not give rise to any change in the
contracting parties. In this sense, it is not a material change made to a
contract. Assigning a contract refers to a contracting party’s act of entering
into an agreement with a third party (who is not a party to the contract) aimed
at transferring his contractual rights and/or his contractual obligations, either
wholly or partially, to that third party. Assigning a contract does not give rise
to the alteration of any predetermined contract terms, but it leads to a change
in the composition of the contracting parties.
Before completing the performance of a contract, it is possible that the

contract may be discharged for certain reasons. A party in default bears
liability for his breach of contract. The main remedies available for breach of
contract include continuing to perform a contract, taking remedial measures,
paying liquidated damages, and paying damages. Paying damages is a main

form of remedy for breach of contract, for which two norms need to be
followed: reasonable prediction and fulfilling the duty to attenuate loss.
Practice questions
1 A roll of film got stuck in Mrs Luo’s camera when she was travelling in
South Africa last month. After returning to Shanghai, she took the camera
to ABC Camera Shop (‘ABC’) and asked ABC to get the film out and
develop it.
Mrs Luo pre-paid ABC RMB 500 for this service. Mrs Luo found the
following clause printed on the back of the receipt issued by ABC: ‘In
the event that your film is damaged in the course of being developed, our
compensation will only be in a reasonable range.’ Mr Ma, the manager
of ABC, further handwrote a line beside this clause: ‘ABC assumes no
responsibility for any damage or loss that may result from removing and
developing this film.’
The next day Mrs Luo came to collect the photos. Mr Ma told her it took
him a whole afternoon to remove the film from the camera but the film
was exposed in the process of removal: no part of it could be saved. He
refunded Miss Luo the RMB 500 paid.
Mrs Luo asked for more compensation, including the cost of her airplane
tickets and some of her travel expenses for her trip to South Africa.
Mr Ma argued that ABC was under no obligation to pay her any

compensation other than the RMB 500 refunded, as he had indicated on
the receipt that ‘ABC assumes no responsibility for any damage or loss
that may result from removing and developing this film.’
Mrs Luo countered that the line handwritten by him had no binding force
since it was not in line with the standard clause printed on the back of the
receipt.
Whose argument is sound?

2 In 2011, Li (the insured) bought a life insurance policy from Great Land
Insurance Ltd (‘Great Land’) (the insurer). At the time of applying
to Great Land for purchasing this policy, Li was asked to complete a
medical questionnaire as part of the Insurance Proposal, the contents
of which were unilaterally supplied by Great Land. One question in the
questionnaire was: ‘Have you ever been diagnosed with any form of heart
disease?’ Li’s answer to the question was no. In fact, Li had been told by
his doctor many years previously that he had congenital heart disease.
In February 2012, Li died of a sudden heart attack when he was on

vacation on Hainan Island. As the sole beneficiary named on this life
insurance policy, Li’s wife submitted a claim to Great Land for the death
benefit.
Li’s wife received a letter from Great Land which said: ‘After careful
investigation, we now understand that your husband wilfully concealed
his history of heart disease when he was asked to answer a pertinent
question contained in the Insurance Proposal while applying for his life
insurance policy. Since the Insurance Proposal constitutes an integral part
of the insurance contract later on formed between your husband and Great
Land, such contract is now deemed to be invalid from the start. Hence
your life insurance claim cannot be entertained.’
Li’s wife strongly dissented. In her view, Great Land’s refusal to pay the
death benefit is totally groundless.
Advise Li’s wife.
3 Two months ago, Golden Sunshine (a furniture shop) sold a piece of

antique furniture to a trading house, Silver Moonlight, for RMB 100,000.
Golden Sunshine delivered the furniture to Silver Moonlight on time.
But Silver Moonlight defaulted on payment after the deadline for making
payment to Golden Sunshine lapsed.
Last week, Golden Sunshine informed Silver Moonlight that Golden

Sunshine had assigned its right to make a claim for repayment of this
RMB 100,000 against Silver Moonlight to ABC Bank. Silver Moonlight
received a letter from ABC bank yesterday, in which ABC Bank
demanded Silver Moonlight to make this RMB 100,000 payment to ABC
Bank within the coming ten days, otherwise ABC Bank would take court
action against Silver Moonlight.
Silver Moonlight made the following statements to Golden Sunshine:

‘(1) Silver Moonlight’s pending payment to Golden Sunshine has nothing
to do with ABC Bank; (2) Golden Sunshine’s assignment of its right to
make a claim for this RMB 100,000 debt to ABC Bank is void, as Silver
Moonlight is not agreeable to this transaction; and (3) after performing
a quality inspection, Silver Moonlight discovered that the furniture
delivered does not meet the standard stipulated in the sales contract; thus
no payment will be made to Golden Sunshine until the quality problem is
addressed.’
Comment on Silver Moonlight’s arguments.
4 City G Post Office purchased a letter-sorting machine from a machine

supplier, Green Forrest. Their contract stipulates: ‘Payment will be
made in two instalments, with the first 60% made within a week after
the contract is entered and the remaining 40% made after the machine is
installed and operates error free.’
City G Post Office made the first payment. Green Forrest completed the
installation of the machine. The machine operated properly most of the
time, but a stoppage problem was discovered on some occasions. Green
Forrest was not able to detect the cause.
Green Forrest chased City G Post Office for the second payment.
Meanwhile, it promised to tackle the stoppage problem. City G Post
Office started to wonder about Green Forrest’s ability to fix the problem.
It intended to terminate the contract by returning the machine to Green
Forrest in return for a refund of its first payment. Green Forrest disagreed.
Is there any legal basis on which the contract made between City G Post
Office and Green Forrest can be terminated?
5 On 15 May, Ma (a businessman in Shenzhen, Guangdong Province)

entered into a contract with Huang (a fruit wholesaler in Zhangzhou,
Fujian Province). Under the contract, Huang would sell a batch of lychees
to Ma for RMB 40,000; Huang would have to deliver the lychees to Ma
in Shenzhen before 30 May, otherwise he would be liable to pay Ma

RMB 20,000 in liquidated damages.
On 20 May, Huang made a contract with a trucking company, Fast Speed,

which would transport the lychees from Zhangzhou to Shenzhen and pass
them on to Ma no later than 30 May.
Due to internal mismanagement, Fast Speed did not start to perform the
job until 10 June. After the trucks left Zhangzhou, they were stranded on
the highway for three days due to an unexpected typhoon. By the time the
trucks arrived in Shenzhen on 14 June, about one fourth of the lychees
had rotted.
Ma demanded Huang to pay the RMB 20,000 liquidated damages. Huang

refused to do so, on the ground that only one fourth of the lychees were
damaged, the value of which was far below the amount of RMB 20,000
being 50% of the total contract price.
Huang made a claim for damages against Fast Speed. He asked for a
RMB 70,000 compensation package, including RMB 40,000 for the
mental stress caused to him due to this incident, along with his loss of
another fruit purchase order worth RMB 30,000 which Ma previously
agreed to give him but had now withdrawn. Fast Speed maintained this
was a force majeure event and Fast Speed did not commit any breach.
Discuss.

1 Mr Ma used his handwritten line as a non-standard term. Under the
Contract Law, if a standard term does not dovetail with a non-standard
term, the non-standard term shall prevail. Hence ABC does not need to
make compensation to Mrs Luo except for refunding her RMB 500.
2 Some points need to be further investigated: whether Li’s concealment of

his history of illness from Great Land is due to deceit or negligence, the
relationship if any between his death and his congenital heart disease, and
if what Li did led to the contract becoming void or only voidable.
3 The assignment will have a binding effect on Silver Moonlight after

Golden Sunshine has duly informed it about the transaction. Silver
Moonlight’s consent is not required. Any defence shall be raised by Silver
Moonlight directly against ABC Bank, not Golden Sunshine.
4 It must be assessed if a contract termination right has been predetermined

by the post office and its machine supplier, or their contract is attached
with any condition on annulling it, and whether what happened in the case
squared with a circumstance prescribed by the law under which a contract
can be discharged (with respect to ‘quality’ under Article 148).
5 Fast Speed was already in breach before it encountered bad weather.

But it is not liable for mental stress under the law of contract; losing a
future order is also too remote to be reasonably foreseen. If Huang thinks
the amount of liquidated damages far surpasses the actual loss, he may
petition to an arbitral body or the court for reducing the amount.
Chapter 5
The Tort Liability Law
Introduction
The principles of civil law illustrate that people enjoy civil rights. However,
those rights may be infringed by others, as shown in the following examples:
• Wang incidentally knocked over his vase of flowers from the balcony on
the second floor, hitting a passer-by outside his house.
• A cooking gas cylinder in an eatery’s kitchen suddenly exploded. All three

of the customers there were seriously wounded.
• Lin got food poisoning after eating some canned corned beef, as the
preservative used in the beef far exceeded the permissible level.
• Li often worked at home using a notebook computer provided by his

employer. Li quit his job recently, but he did not intend to return the
computer.
• TT Hospital never tests blood donors for hepatitis B before they give
blood. Huang acquired hepatitis B due to a recent blood transfusion at TT.
What do the above examples have in common? In each, the relevant parties
have suffered injury or damage, amounting to an infringement of their legitimate
civil rights and interests, i.e. their personal rights and interests or their rights
and interests pertinent to property. Such infringement is commonplace in daily
life as these rights can be at risk at any time due to another person’s actions or
inaction, whether deliberate or not. It is important to know how a victim can be
rescued and compensated for loss if such infringement occurs.
On these questions, tort liability law (or simply ‘tort law’ or ‘the law of tort’),
which is an important part of the civil law regime in a civil law jurisdiction,
provides certain legal guidelines.
270 The Tort Liability Law
The Longman Dictionary of Law defines ‘tort’ as follows: ‘A civil wrong

independent of contract. Liability in tort arises from breach of a duty
primarily fixed by law which is towards others generally, breach of which is
redressable by a claim for unliquidated damages, affording some measure of
compensation’ (Curzon and Richards 2007, 579).
Similarly, a tort is described by the Free Online Dictionary as ‘damage, injury,

or a wrongful act done wilfully, negligently, or in circumstances involving
strict liability, but not involving breach of contract, for which a civil suit
can be brought’; and as ‘a civil wrong arising from an act or failure to act,
independently of any contract, for which an action for personal injury or
property damages may be brought.’
Tort law in contemporary China can be traced back to the Book on

Obligations (i.e. the law of obligations) under the Civil Code implemented in
1930 by the Republic of China (L M Wang 2004, 141–42; Ma and Yu 1998,
997).
From the founding of the People’s Republic of China in 1949 until the
promulgation of the General Principles of Civil Law in 1986, legal provisions
on tort were few and far between in China. Tort issues were basically handled
by relying on the theoretical foundations laid down in the 1950s, which
were constructed by translating and transplanting tort law doctrines from the
former Soviet Union (Yang 2010, 5). The relevant provisions in the General
Principles of Civil Law of 1986 (namely in Chapter 6) as well as some
subsequent laws and some judicial interpretations of the Supreme People’s
Court can be viewed as having tentatively created piecemeal the legal basis
for establishing tort liability and determining tort remedies.
This was the situation until 26 December 2009, when the National People’s
Congress passed the Tort Liability Law of the People’s Republic of China
(hereinafter called the ‘Tort Liability Law’)1, which came into effect on 1 July
2010.
1 The full text of the Tort Liability Law (in Chinese) can be found on the following website: http://
www.gov.cn/flfg/2009-12/26/content_1497435.htm. There are not many English translations.
The author uses his own English translation in this chapter. An English translation on the
following website can also serve as a reference: http://www.procedurallaw.cn/english/law/201001/
t20100110_300173.html.
Introduction 271
From the above one can understand that for quite some years prior to the
enactment of the Tort Liability Law, China had already had a legal mechanism
aimed at protecting civil rights against illegitimate infringement. Quite a few
laws relating to tort issues in certain specialized fields were in force before
the promulgation of the Tort Liability Law, e.g. the State Compensation Law,
the Product Liability Law, the Road Traffic Safety Law, the Environmental
Protection Law, the Marine Environmental Protection Law, the Law on
Prevention and Rectification of Water Pollution, the Law on Prevention
and Rectification of Air Pollution, the Food Safety Law, the Postal Law, the
Marriage Law, the Patent Law, the Trademark Law, the Law on Protection of
Consumers’ Rights and Interests and the Anti-Unfair Competition Law.
These laws, forming a kind of ‘special law,’ together with the part of the
General Principles of Civil Law that was a kind of ‘general law’ pertaining
to tort, significantly contributed to the formation of a mechanism for
discerning a legal basis for regulating tortious acts and tort liability in both
substantive law and procedural law. Moreover, some judicial interpretations
by the Supreme People’s Court regarding tortious acts and tort liability can
be viewed as part of China’s current tort law framework, e.g. the Supreme
People’s Court’s Opinions on Some Issues Regarding Implementation of
the General Principles of Civil Law of the People’s Republic of China, the
Interpretation of the Supreme People’s Court on Some Issues Regarding
Establishment of Liability and Compensation for Mental Distress Arising
from Torts, the Interpretation of the Supreme People’s Court on Some Issues
Regarding Application of Law in Cases of Compensation for Personal
Injury, the Supreme People’s Court’s Answers to Some Questions in Cases
Concerning the Right to Reputation, and Some Provisions Issued by the
Supreme People’s Court on Evidence in Civil Litigation, etc. (Yang 2010, 6,
45–51, 70 and 82; L M Wang 2004, 143–45).
Absorbing the relevant cardinal principles advocated under the General

Principles of Civil Law, the Tort Liability Law has become a leading statute
on tort in China. It further consolidated Chinese tort law and boosted the
overall development of China’s civil law regime (Yang 2010, 3–6).
The Tort Liability Law regime

The purpose of the Tort Liability Law, as explained under the law itself, is to
safeguard civil subjects’ legitimate rights and interests, affirm the attribution
of tort liability, prevent and sanction tortious acts, and promote social
harmony and stability (Article 1).
Under the Tort Liability Law, an infringement upon civil rights and interests
will give rise to assumption of tort liability (Article 2, paragraph 1). Here,
the term ‘civil rights and interests’ is defined by the Tort Liability Law
as covering various kinds of property or personal rights such as the right
to life, right to health, right to a name, right to reputation, right to public
esteem, portrait right, right of privacy, right of voluntary marriage, right to
guardianship, right of ownership, usufructuary right, property right relating
to security, copyright, patent right, exclusive right to use a trademark, right of
discovery, shareholders right, inheritance right, etc. (Article 2, paragraph 2).
An infringed party is entitled to a claim against the wrongdoer for the latter’s
assumption of tort liability (Tort Liability Law, Article 3).
The Tort Liability Law includes 92 articles in 12 chapters: ‘General

Provisions’ (Chapter 1), ‘Establishment and Assumption of Tort Liability’
(Chapter 2), ‘Exemption from and Mitigation of Tort Liability’ (Chapter
3), ‘Special Provisions on Alleged Wrongdoers’ (Chapter 4), ‘Product
Liability’ (Chapter 5), ‘Liability for Motor Vehicle Accidents’ (Chapter 6),
‘Liability for Medical Malpractice’ (Chapter 7), ‘Liability for Environmental
Contamination’ (Chapter 8), ‘Liability for High-risk Activities’ (Chapter
9), ‘Liability for Damage Caused by Animals’ (Chapter 10), ‘Liability for
Damage Caused by Objects’ (Chapter 11) and ‘Miscellaneous Provisions’
(Chapter 12).
A dual approach was employed in designing the Tort Liability Law. The
law hammers out some general provisions that apply to all kinds of tortious
liability. It then expounds a number of special types of tort liability significant
for specific areas and professions in China (Yang 2010, 7).
It deserves mention that under the Tort Liability Law, a party who has
committed a tort may, at the time of becoming liable in tort, concurrently face
administrative liability or criminal liability arising from the tort committed
(Article 4, paragraph 1). For example, manufacturing or selling fake alcohol
will not only lead the wrongdoer to face tort liability for creating serious
health risks, but also give rise to a criminal prosecution against him.
In the event that a wrongdoer has to bear both tort liability and administrative
liability or criminal liability, if his personal assets are not sufficient to fulfil all
the liabilities incurred, he will have to use his personal assets to satisfy his tort
liability in the first instance (Tort Liability Law, Article 4, paragraph 2).
Another point that needs to be mentioned regards a tort issue that is provided
for differently in the Tort Liability Law than in a law promulgated before the
Tort Liability Law. In this situation, the Tort Liability Law points out that for
a tort liability issue, if any other law provides otherwise, what is said in that
law will prevail (Article 5). This confirms the custom that what is prescribed
concerning a tort issue in laws other than the Tort Liability Law (mostly
those concerning tort in certain specialized fields) will normally prevail over
what the Tort Liability Law sets out on that issue. So, if on a certain liability
issue the Road Traffic Safety Law does not tally with the Tort Liability Law,
what is said in the Road Traffic Safety Law will normally prevail. However,
according to Yang (2010, 52), this practice is not absolute. If the special law
is not in compliance with the cardinal principles and objectives of the Tort
Liability Law, it will not prevail over the Tort Liability Law.
The above lists the main areas covered by the Tort Liability Law. The next
section outlines the main principles for establishing tort liability. These
principles form the basis of the Tort Liability Law, and it is important to
understand them before discussing the remedies for tort and the exemption
from and mitigation of liability.
Three basic principles for establishing tort liability

Implementing the Tort Liability Law alongside other legal provisions in the
general tort law regime more effectively safeguards people’s civil rights.
If any of a person’s civil rights (i.e. personal rights or rights pertinent to
property) are infringed, the wrongdoer (i.e. the tortfeasor) will become liable
in tort to the victim for the injury or damage caused.
Assume ABC Pharmaceuticals uses the photos of Miss Wang (one of

the most famous movie stars in the country) on the labels of its products
without permission. Miss Wang’s portrait right has thus been violated by
ABC Pharmaceuticals, which will have to bear tort liability by providing
appropriate remedies to Miss Wang, such as ceasing to use the photos,
apologizing to her, paying damages, etc.
Tort liability arises from the occurrence of a tort that leads to the formation of
a relationship between the wrongdoer and the victim in connection with the
relevant right and obligation. The right belongs to the victim, enabling him to
claim against the wrongdoer for bearing tort liability, and the obligation falls
on the wrongdoer, who has to assume tort liability towards the victim. Given
that there is a tort, a relationship will exist between the wrongdoer and the
victim, whether the two parties like it or not.
A tort relationship is different from a contractual relationship. The rights and

obligations established under a contract entirely depend on the consensus and
willingness of the two parties to the contract (G Z Li 1998, 169). But a tort
relationship does not derive from the two parties’ agreement; it automatically
comes into existence due to the operation of law based on the damage incurred.
Assume that T and G have signed a contract under which G will sell a car to
T for $30,000. T has paid, but G has not delivered the car to T, hoping to sell
it to someone else at a higher price. Does G’s act constitute an infringement
upon T’s property right? Is he liable in tort to T? The answer is no. This
example relates to breach of contract, not infringement upon property right.
G is liable for breach of a duty imposed by the contractual relationship
voluntarily established between T and G; but G does not assume tort liability.
In cases of violations of civil rights, some basic principles need to be followed

in order to establish whether tort liability arises, and if so, to whom the
liability should be attributed. The Tort Liability Law contains stipulations that
express the essence of three basic principles for establishing tort liability: the
fault liability principle, the constructive fault liability principle and the non-
fault liability principle.
It should be noted that in many books published before the Tort Liability Law
was promulgated, some Chinese scholars argued that the basic principles for
establishing tort liability should also include ‘the principle of fair allocation
of liability.’ Their argument was based on the General Principles of Civil
Law and the Supreme People’s Court’s Opinions on Some Issues Regarding
Implementation of the General Principles of Civil Law. For example, under

Article 132 of the General Principles of Civil Law, if none of the relevant
parties has been at fault for the damage, the civil responsibility shall be
shared among the parties according to the circumstances. Under Article
157 of the Supreme People’s Court’s Opinions on Some Issues Regarding
Implementation of the General Principles of Civil Law, if none of the parties
has been at fault for the damage but one party has been injured in the course
of carrying out activities for his counterparty’s benefit or for their mutual
benefit, then the injured party can demand his counterparty or the beneficiary
to provide him with a certain amount of economic compensation.
The essence of the fault liability principle, the constructive fault liability
principle, and the non-fault liability principle can be clearly discerned in
Articles 6 and 7 of the Tort Liability Law. Nonetheless, this does not mean
that a consensus has been reached in academia on the general principles
for establishing tort liability. Article 24 of the Tort Liability Law resembles
Article 132 of the General Principles of Civil Law, stating that where neither
the victim nor the tortfeasor has been at fault for the damage, the two sides
will share liability according to the actual circumstances. Whether the
principle of fair allocation of liability can be viewed as a basic principle for
establishing tort liability is debatable, although in practice such debate will
not affect the handling of tort-related issues.
The following three examples, which take place at the fictional ABC Hospital in
Shenzhen, help explain the three basic principles for establishing tort liability.
Example 5.1
Wang suffered from acute gastric ulcers. He had to undergo surgery to
remove about one fourth of his stomach. During the operation, his doctor
wrongly removed an extra half due to gross negligence.
Example 5.2
Liu had an endoscopic examination of his stomach. He was concerned
when he saw that the endoscope was not thoroughly cleaned and
disinfected after it was used in different patients. Shortly afterwards he
was found to have contracted hepatitis. Liu believed that the hepatitis
virus passed to him from the endoscope during the test.
Example 5.3
Huang, a researcher in the hospital’s molecular biology laboratory, was
recently diagnosed with leukemia. He had been unaware of his long-
term exposure to a hazardous level of radioactive isotopes leaking in the
laboratory that the hospital failed to detect and control.
In these examples, would ABC Hospital be held liable in tort to pay

compensation to Wang, Liu and Huang for their losses?
In order to effectively deal with the above three examples, it is necessary

to have an understanding of the three basic principles mentioned above for
establishing tort liability.
The fault liability principle

The Tort Liability Law provides that a person will be liable in tort if another
person’s civil rights and interests have been infringed due to his fault (Article 6,
paragraph 1). This captures the essence of the fault liability principle, i.e. that
a fault must be committed for tort liability to come into existence.
Similar passages can be found in the General Principles of Civil Law, which
provides that a citizen or a legal person will face civil liability if the property
of the state or a collective has been infringed due to the fault of that citizen
or that legal person, or if another person has been personally injured or his
property has been damaged due to the fault of that citizen or that legal person
From the above provisions it can be seen that the fault liability principle
emphasizes that a precondition to establishing that a person is liable in tort
is the existence of fault, i.e. that person must have been at fault and it is that
fault that led to the infringement of another person’s civil rights and interests.
If a person has not been at fault, even if it is his act or his object that has given
rise to injury to another person’s civil rights and interests, he will not be held
liable in tort (Yang 2010, 61).
Here is an example. ABC is a medical equipment manufacturer. It holds a

patent on a special technique used in manufacturing endoscopes. Without
ABC’s permission, XYZ (another medical equipment manufacturer) discreetly
used this patented technique to produce its own endoscopes, which sold quite
well. What XYZ did obviously violated ABC’s patent right. Since XYZ was
at fault, it would be held liable in tort towards ABC.
Following on from the above example, TT Hospital purchased quite a lot of

XYZ’s endoscopes. ABC alleged that TT Hospital also infringed its patent
right. Could ABC’s allegation against TT Hospital be established? It depends
on the facts of the case. If before ABC made the allegation TT Hospital had
no idea that it had purchased endoscopes that infringed ABC’s patent right,
then since TT Hospital was acting in good faith (i.e. it was at no fault as
regards the event of XYZ’s violation of ABC’s patent right), it would not be
held liable in tort under the fault liability principle.
In a circumstance under which tort liability ought to be established in light

of the fault liability principle, the onus of proof of the fault will be put on the
victim. If the victim intends to claim against the alleged wrongdoer for tort
liability, he must prove that the alleged wrongdoer has been at fault; if the
victim is not able to prove this or he cannot find sufficient evidence to support
his claim, the alleged wrongdoer will not be held liable in tort (Yang 2010,
61; L M Wang and Yang 1996, 33; Ma and Yu 1998, 1006).
The fault liability principle generally applies to affirming tortious liability

that arises from ordinary tort cases. To put it another way, as a basic principle
for establishing tort liability, the fault liability principle should be adopted in
all ordinary tort cases, unless the law provides otherwise that another basic
principle for establishing tort liability (e.g. the constructive fault liability
principle or the non-fault liability principle) is to be applied in order to
establish tort liability relating to a specific scenario prescribed by the law (Yang
2010, 61).
Among the provisions in the Tort Liability Law, some concrete instances can
be identified in which the fault liability principle must be applied, e.g. when a
manager of a public place or an organizer of an activity that involves a large
number of people fails to fulfil his duty to ensure safety; in the event of a
traffic accident between motor vehicles; in the case of medical malpractice;
etc.
The Tort Liability Law provides that where a manager of a public place (like
a hotel, department store, bank, transport station, recreational facility, etc.) or
an organizer of an activity that involves a large number of people fails to fulfil

his duty to ensure safety with the result that someone sustains an injury and/or
damage, then the manager or the organizer in question shall be held liable in
tort (Article 37, paragraph 1).
In a traffic accident between motor vehicles, the Tort Liability Law provides
that the relevant provisions contained in the Road Traffic Safety Law
shall be applied as regards bearing liability for compensation (Article 48).
In accordance with the Road Traffic Safety Law (revised in 2011), in a
traffic accident between motor vehicles, the party at fault shall be liable
for compensation, and if all the parties are at fault, then after the insurance
company has paid its part, they shall all be liable for compensation with
respect to any shortfall in proportion to the magnitude of the fault committed
by each of them (Article 76, paragraph 1, part 1).
In the instance of medical malpractice, the Tort Liability Law indicates that
when a patient is injured in the course of medical treatment, the relevant
medical institution as the healthcare provider shall be liable for compensation
to the patient if the medical institution or its medical staff has been at fault
when providing medical treatment to that patient (Article 54).
In Example 5.1 above, Wang’s gastrectomy was supposed to remove one-

fourth of his stomach. Due to the doctor’s error, three fourths of Wang’s
stomach was removed, unnecessarily exacerbating his health problem. Under
Article 54 of the Tort Liability Law, this can be categorized as an ordinary tort
case where the fault liability principle shall be applied in order to establish
the liability. Wang as the victim has to shoulder the burden of proof, though it
would not be difficult for him to prove that his doctor had been at fault. Thus
ABC Hospital would be held liable and have to compensate Wang for his
injury.
The constructive fault liability principle

The Tort Liability Law stipulates that where a conclusion can be made by
interpretation under the law that a person has been at fault for a tort, if that
person cannot prove that he has not been at fault for the tort, then he shall be
liable for the tort (Article 6, paragraph 2). This provision captures the essence
of the constructive fault liability principle, i.e. there must be a fault committed
in order to establish the existence of tort liability to be borne, but the existence
of the fault does not need to be proved because the assertion that there is such
a fault can be made by the court’s interpretation under the law.
On the point that a person must have been at fault for his tort liability to be
established, the fault liability principle and the constructive fault liability
principle are virtually the same, i.e. even though his act or his object has
caused damage to another person’s civil rights and interests, given that no
fault is attributable to him, he will not become liable in tort.
The difference between these two principles lies in the following three areas:
• Firstly, to establish tort liability in light of the constructive fault liability

principle, the victim will not be required to prove that the wrongdoer has
been at fault, and the assertion that the wrongdoer has been at fault can
be made by the court which forms this conclusion based on the result of
interpreting the law in the context of the relevant facts.
• Secondly, in the course of establishing tort liability under the constructive

fault liability principle, if the alleged wrongdoer wishes to overturn the
assertion that he has been at fault and it is his fault that has led to the tort,
he will have to prove that he has not been at fault (i.e. the burden of proof
of no fault will fall on the alleged wrongdoer; if the alleged wrongdoer
is not able to prove this or he is not able to provide sufficiently strong
evidence to support his denial of the allegation, then the assertion that he
has been at fault will be upheld).
• Thirdly, while the fault liability principle is applied to ordinary tort cases
with a view to establishing tort liability, the constructive fault liability
principle applies only to certain specifically prescribed tortious acts and
scenarios, albeit for the same purpose of establishing tort liability.
The provisions in the Tort Liability Law below give a sense of the specifically
prescribed tortious acts and scenarios to which the constructive fault liability
principle applies:
• Where a person who has no capacity for civil conduct suffers a personal
injury during the time he studies or lives in a kindergarten, a school or
an educational institution, the kindergarten, the school or the educational
institution in question shall be liable in tort to the injured person, but it
will not be liable if it is able to prove that it has fulfilled its obligations
relating to education and proper management. (Article 38)
• In the case of a patient being injured in the course of treatment, the

medical institution which treats him will be constructively held to be at
fault under one of the following circumstances: (1) where it has violated
any of the laws, administrative rules, regulations, or codes of practice
pertaining to diagnosis and treatment; (2) where it has deliberately
concealed or refused to provide the patient’s medical records that are
related to a dispute arising between it and the patient; (3) where it has
forged, tampered with, or destroyed the patient’s medical records.
(Article 58)
• Where a person is illegitimately in possession of high-risk material

giving rise to an injury or damage sustained by someone, the person
who illegitimately possesses the material shall be liable in tort. The
owner of the material, or the person who is responsible for keeping the
material, shall be jointly and severally liable in tort with the person who
illegitimately possesses the material, if he is not able to prove that he has
fulfilled his obligation of taking great care to prevent such material from
being illegitimately possessed by somebody else. (Article 75)
• A zoo shall be liable in tort to anyone for his injury or damage caused
by its animals; but it does not need to bear such tort liability if it is able
to prove that it has fulfilled its duty of proper animal management.
(Article 81)
• Where an object flies in the air or falls down from a building, a structure,
a facility, or from anything placed or suspended therein, causing someone
to suffer an injury or damage, if the object’s owner, manager or user is
not able to prove that he has not been at fault in the accident, then he
shall be liable in tort. If another party is also responsible for the injury or
damage caused, the object’s owner, manager or user, after compensating
the victim, may seek recovery from that party of the compensation paid
which should be paid by that party. (Article 85)
• Where a group of stacked objects collapses causing someone an injury or

damage, the person who stacked the objects shall be liable in tort if he is
not able to prove that he has not been at fault in the accident. (Article 88)
• Where a tree breaks causing someone to sustain an injury or damage, the

owner or the manager of the tree shall be liable in tort if he is not able to
prove that he has not been at fault in the accident. (Article 90)
• Where someone’s injury or damage is attributable to an underground

facility such as a manhole, the manager of such facility shall be liable in
tort if he is not able to prove that he has not been at fault in the accident.
(Article 91, paragraph 2)
The constructive fault liability principle applies to Example 5.2 above. Due to
the complexity and technicality of medical science, it is hard for the victim to
substantiate his claim that the medical institution which treats him has been at
fault; carrying the burden of proof can be a costly, lengthy process involving a
lot of hearings, expert testimony, etc. However, where the fault of the medical
institution is so apparent that even an ordinary person without medical
knowledge can spot it, then it is generally accepted that the victim is not
required to shoulder the burden of proof; the fault of the medical institution
can be directly declared by relying on judicial interpretation. Pursuant to
Article 58 of the Tort Liability Law, where a patient has been injured in the
course of treatment, the medical institution in which he receives treatment will
be constructively held to be at fault in the event that the medical institution
has violated any of the laws, administrative rules, regulations, or codes of
practice pertaining to diagnosis and treatment. Using an endoscope that is not
thoroughly cleaned and disinfected in different patients obviously does not
comply with the established code of practice. Liu does not carry the burden
of proof to substantiate his claim that ABC Hospital is at fault; and ABC
Hospital has to compensate Liu for his suffering accordingly. ABC Hospital
may deny the claim; but to succeed in doing so it has to shoulder the burden
of proof, verifying that the hospital is not at fault as it has strictly performed
all the required cleansing and disinfecting procedures.
Here is another example. Idle Mansion is a three-storey house. The first to the
top floors are occupied by the Zhao, Qian and Sun families respectively. All
three families have quite a lot of vases of flowers on their balconies. Last week
a vase of flowers fell from one of the balconies hitting Li, a passer-by who
happened to stop for a rest in front of Idle Mansion. Li was seriously injured.
However, it was difficult to judge from which balcony the vase of flowers fell.
As none of the families admitted the vase was theirs, Li demanded Zhao, Qian
and Sun to jointly bear liability. Sun strongly disagreed, arguing that he had
recently erected an iron fence for his balcony for the purpose of preventing
his vases of flowers from falling off, so this accident definitely had nothing
to do with him. Could Li receive compensation for his injury, and if so, from
whom?
In the case of an object falling down from a building causing a personal injury,
under Article 85 of the Tort Liability Law the constructive fault liability
principle should be applied. In the above case, either Zhao, Qian or Sun is the
tortfeasor, since the vase must have come from one of their balconies. In the
event of not being able to affirm who the tortfeasor was, Zhao, Qian and Sun
would be held jointly liable for Li’s injury. The essence of the constructive
fault liability principle is displayed under the Tort Liability Law saying that
where it can be interpreted from the law that a person has been at fault for a
tort, if that person cannot prove that he has not been at fault, he shall be held
liable in tort (Article 6, paragraph 2). Hence, no burden is on Li to prove
the existence of the fault of the tortfeasor; the existence of the fault can be
deduced by employing a constructive approach. If Sun intends to be cleared
of his liability for Li’s injury, he will have to prove that he has not been at
fault in this accident; he may substantiate his claim by showing that he took
sufficient measures beforehand to prevent his vases of flowers from falling
down.
Here is another example that is also of interest. Andy Wang is a nine-year-

old primary school student. His school recently organized a tour to Clear
Water Mountain. Clear Water Mountain is famous for its beautiful landscape
and also for its monkeys, which unexpectedly jump out at tourists every now
and then. The head teacher warned all the students about the following things
before they departed: ‘(1) don’t provoke the monkeys; (2) don’t wear red
clothes as monkeys may get restless when seeing red and may attack anyone
wearing red.’ One of the students, Andy, has a habit of provoking and hitting
small animals. Before arriving at the foot of Clear Water Mountain, Andy
deliberately put on one of his favourite red sports shirts. His teacher did not
stop him. Halfway up the mountain, a large monkey appeared and started to
chase tourists for food. Andy was excited to see it, and tried to use a stick to
beat the monkey. The monkey bit Andy.
Andy’s father claimed for compensation against the school for his son’s
monkey bite. The school refused to make such compensation, countering
that it had not been at fault in this accident. Since the injury was incurred
in the course of hiking up the mountain, the school suggested that Andy’s
father directly lodge his claim against Clear Water Mountain Development
Company, the official organization responsible for managing the tourism use
of Clear Water Mountain.
Clear Water Mountain Development Company also rejected Andy’s father’s

request for compensation. It asserted that a lot of signs had been erected on
the mountain warning tourists not to provoke the monkeys.
Is anyone liable for Andy’s injury? In this case, Clear Water Mountain
Development Company could hardly be held liable for committing negligence
as it has appropriately warned tourists not to provoke monkeys. Nine-year-old
Andy has no capacity for civil conduct. His injury was incurred in an outing
organized by the school. Andy’s father may try to seek compensation against
the school on the ground that it did not properly fulfil its obligations of taking
good care of its student during his school time (in light of the Tort Liability
Law, Article 38).
The non-fault liability principle

Under the Tort Liability Law, if any civil rights and interests are injured by
a person in a given circumstance, provided that the law prescribes that tort
liability has to be borne under such circumstance, whether the person has been
at fault or not, he shall be liable in tort (Article 7). This stipulation expresses
the goal pursued under the non-fault liability principle.
The non-fault liability principle cannot be applied to ordinary tort cases. It

only applies to torts that occur in specific circumstances prescribed by the law.
The principle stresses that, providing there is a tortious consequence in one of
those circumstances, the relevant party must bear tort liability, regardless of
whether he has or has not been at fault (either intentional fault or unintentional
fault) for the tort.
Those circumstances mainly pertain to: (1) the tort liability to be assumed
by a guardian for any injury or damage caused by a person under his
guardianship who has no or only limited capacity for civil conduct; (2) the
tort liability to be borne by an employer for any injury or damage caused
by his employee in the course of employment; (3) in cases of a triangle
relationship in which a staffing agency hires personnel to work for its clients,
the tort liability to be borne by such a client to which a person employed by

the staffing agency is dispatched to work, for any injury or damage caused
by that person during the time he works for the client; (4) in the context of
carrying out a labour service transaction, the tort liability to be borne by the
service receiver for any injury or damage caused by the service provider in
the course of providing his service; (5) the tort liability relating to product
defects; (6) the tort liability arising from a traffic accident between a motor
vehicle and a non-motorized vehicle or a pedestrian, that is to be assumed by
the person who drives the motor vehicle; (7) the tort liability with respect to
environmental contamination; (8) the tort liability arising from carrying out
high-risk activities; (9) the tort liability due to damage caused by animals;
(10) the tort liability to be borne by the state government or its employees
for any damage incurred in the course of performing public duties; and
(11) the tort liability pertinent to injuries or damage caused by objects in
certain aspects.
The following provisions set out in the relevant laws deserve special notice:
• Under Article 32 of the Tort Liability Law, where a person who has no or
only limited capacity for civil conduct has caused an injury or damage to
somebody, that person’s guardian shall be liable in tort.
• Pursuant to Article 34, paragraph 1 of of the Tort Liability Law, where an

employee causes an injury or damage to somebody in the course of his
employment, his employer shall be liable in tort.
• By Article 34, paragraph 2 of the Tort Liability Law, where a staffing

agency dispatches a person employed by it to work for its client and the
person dispatched causes an injury or damage to somebody during the
time he works for that client, the client in question shall be liable in tort.
• In light of Article 35 of the Tort Liability Law, where there is a labour

service transaction and the service provider causes an injury or damage to
somebody in the course of providing the service, the service receiver shall
be liable in tort.
• According to Article 41 of the Tort Liability and Article 122 of the

General Principles of Civil Law, where an injury or damage is caused due
to a defect in a product, the product’s producer shall be liable in tort to the
victim who suffers from using the defective product.
• By Article 48 of the Tort Liability Law, in the case of a traffic accident

between a motor vehicle and a non-motorized vehicle or a pedestrian,
the method of establishing and assuming liability for compensation shall
follow the Road Traffic Safety Law. Under Article 76, paragraph 1, part 2
of the Road Traffic Safety Law (revised in 2011), in the circumstance of
a traffic accident between a motor vehicle and a non-motorized vehicle
or a pedestrian, where the party driving the non-motorized vehicle or the
pedestrian is not at fault, the party driving the motor vehicle shall be liable
for compensation; if there is evidence proving that the party driving the
non-motorized vehicle or the pedestrian is also at fault, then the liability
for compensation to be borne by the party driving the motor vehicle shall
be lessened to an appropriate extent based on the seriousness of such
fault; in the circumstance that the party driving the motor vehicle is not at
fault, he will have to bear liability for compensation capped at 10%.
• Article 65 of the Tort Liability Law and Article 124 of the General
Principles of Civil Law respectively set out the tort liability to be assumed
for damage caused due to environmental contamination.
• Article 69 of the Tort Liability Law and Article 123 of the General
Principles of Civil Law set out the tort liability to be assumed for damage
caused because of carrying out high-risk activities.
• Articles 78 to 80 and Article 82 of the Tort Liability Law and Article 127
of the General Principles of Civil Law respectively set out the tort liability
to be assumed by owners or keepers of animals for damage caused by
these animals.
• Article 121 of the General Principles of Civil Law sets out the tort liability
to be assumed by the state government or its employees for any injury or
damage incurred in the course of performing public duties. Article 121
says that governmental bodies or their employees shall bear civil liability
if in the course of performing public duties they infringe upon any
legitimate rights and interests of individual citizens or legal persons.
• The relevant provisions can be found in the Tort Liability Law and the
General Principles of Civil Law as regards tort liability that arises from
injuries or damage caused by objects under certain circumstances. By
Article 86, paragraph 1 of the Tort Liability Law, where someone sustains
an injury or damage due to the collapse of a building, the developer and

the building constructor shall be jointly and severally liable in tort. Under
Article 89 of the Tort Liability Law, where someone sustains an injury or
damage due to objects piled, fallen down or left behind obstructing public
passages, the relevant organization or person responsible for those objects
shall be liable in tort. Under Article 91, paragraph 1 of the Tort Liability
Law and Article 125 of the General Principles of Civil Law, where the
injury or damage someone sustained is attributable to a builder’s digging
up, repairing or installing underground facilities in public places or on
public roads without placing any apparent warning sign or taking safety
measures, the builder shall be liable in tort.
When using the non-fault liability principle to establish tort liability, no one
(neither the alleged wrongdoer nor the victim) is required to prove that the
alleged wrongdoer has been at fault, and the alleged wrongdoer must bear
tort liability in all cases whether he is at fault or not; if the alleged wrongdoer
intends to be exempted from his tort liability, he will have to prove that a
certain factor exists entitling him to be exempted from bearing tort liability
(e.g. force majeure, the victim’s deliberate attempt at instigating the damage
or injury, a grave error committed by the victim, a third party’s mistake, etc.)
(G Z Li 1998, 134).
It can be seen that establishing tort liability under the non-fault liability
principle differs from doing so under the constructive fault liability principle
described earlier. When establishing tort liability using the constructive
fault liability principle, if the alleged wrongdoer intends to be released from
bearing tort liability, he will have to prove that he is not at fault in the tort.
But where the non-fault liability principle is applied, he only has to prove that
there is a sound ground for being released from bearing liability.
Of course, in this regard the dividing line between the non-fault liability
principle and the fault liability principle is even neater. In the case of the fault
liability principle, the victim has to shoulder the burden of proof in making a
case against the alleged wrongdoer; if the victim fails to do so, no tort liability
can be established against the alleged wrongdoer.
Example 5.3 above falls within the scope of the special circumstances
prescribed by the law of environmental contamination or high-risk activities
to which the non-fault liability principle applies. Neither Huang nor ABC
Hospital is required to carry the burden of proof to substantiate that ABC

Hospital is at fault in the radioactive isotopes leak. It can be said that ABC
Hospital’s breach of its general duty of protecting against occupational
radiation led to this incident. Hence ABC Hospital will be held liable whether
it has committed any specific error or not; it will have to compensate Huang
for any illness closely related to his exposure to excessive isotope radiation.
Essential elements for establishing a tort case

The fault liability principle, the constructive fault liability principle, and the
non-fault liability principle place increasingly less of a burden of proof on
the victim in a tort (i.e. the infringed party), from a relatively heavy burden
to no burden at all, showing increasing protection of the victim’s rights and
interests.
These three principles can be divided into two categories based on the
element of fault. The first category includes the fault liability principle and
the constructive fault liability principle, in which an alleged wrongdoer will
be liable in tort only if he is at fault. The other category includes the non-fault
liability principle, in which the alleged wrongdoer will be held liable whether
or not he committed any fault.
So fault is an element that is required to establish tort liability in light of the

fault liability principle and the constructive fault liability principle. There are
three other elements that are also required: illegitimacy, the fact of damage
and causation. These three, unlike the element of fault, are also required to
establish tort liability in light of the non-fault liability principle.
In all cases, the above four elements can be applied to figure out if a tortious
act has been constituted, and, if it has, how the relevant tort liability ought to
be borne in terms of appropriately compensating the victim.
Illegitimacy
The element of illegitimacy can be broadly construed as embracing both
the illegitimacy of an action that may give rise to the occurrence of a tort,
as well as the illegitimacy of inaction that may cause a tortious effect. Here,
the meaning of ‘illegitimacy’ can be widened to cover both unlawfulness
due to violation of law, and unacceptability because of contravention of the

conventional civil law doctrine of good public order and social customs
(G Z Li 1998, 173; Zhu and Xu 2002, 448).
Here are some examples:
• Wang spread a false rumour that Li had embezzled a large amount of

public funds, leading to Li’s reputation being seriously smeared. The
illegitimacy of what Wang did is obvious.
• Yang was admitted into ABC Hospital last week due to acute liver disease.
Initially he had been in a relatively stable condition after being treated
in the emergency department. But his condition suddenly deteriorated
yesterday morning. Dr Lin, the physician in charge of Yang in the
hospital, did not take immediate rescue measures because he wanted to go
to an international conference to make a keynote speech. Several hours’
delay in the attempt to rescue Yang led to his death. The illegitimacy of
Dr Lin’s inaction can be established as he failed to faithfully perform his
duty as a doctor towards his patient.
• Without a demolition permit from the government, XYZ (a real estate

development company) demolished Mr Huang’s private dwellings with a
view to occupying the land to build a new property development. XYZ’s
action clearly violates the law.
• Luo has a great deal of animosity towards his neighbour, Zhao. At the
opening ceremony of Zhao’s new restaurant, Luo all of a sudden appeared
in full mourning dress and loudly played funeral songs to deliberately
annoy Zhao and other attendants. Most of Zhao’s friends and clientele are
quite superstitious. They felt this was not a good omen. Many of them
stopped patronizing Zhao’s restaurant and the restaurant’s sales dipped.
Although it appears that what Luo did is not against the law, it should also
be deemed illegitimate because it goes against the spirit of the doctrine of
good public order and social customs.
The fact of damage

The existence of the fact of damage is also mandatory for establishing a
tort case. The mere possibility of an injury or damage being inflicted or
the deduction that an injury or damage will be inflicted before the actual
occurrence of the injury or damage (i.e. with no fact of damage) will not
amount to a tortious act and does not lead to any liability in tort. Only when
the fact of damage can be affirmed will can a tort case be established, for
which relevant liability needs to be borne.
In light of Articles 16, 19 and 22 of the Tort Liability Law, the fact of damage
can be divided into three types: the fact of personal injury, the fact of property
damage and the fact of mental distress. This is because personal injury,
property damage and mental distress are common.
Say a lorry hit a cyclist because the lorry driver did not properly follow the
rules of the road. This accident caused personal injury to the cyclist, and also
inflicted property damage as his bicycle was crushed by the lorry.
Here’s another example. John Huang and Rachel Chen had been in a
relationship for two years. A couple of months ago, Rachel told John that
she had decided to leave him. John was furious. He sent harassing instant
messages to Rachel almost every day. Rachel claimed that she was suffering
from psychological damage as John’s actions caused her mental distress that
seriously affected her personal life.
The two required elements to establish tort liability discussed above (i.e.
illegitimacy and the fact of damage) are relatively simple, and it is easy to
judge their existence. The other two required elements (causation and fault),
introduced below, are more complicated: many factors must be considered to
decide whether these elements exist.
Causation
Causation is another element required to establish a tort case. It refers to the
existence of a causal link between the alleged wrongdoer’s act or an object in
his possession and the fact of the damage that has occurred (Ma and Yu 1998,
1033).
A causal link is often not difficult to establish. For example, John and Jack
both wanted the same seat on a bus. Their quarrel developed into a physical
confrontation culminating in John’s face being badly battered by Jack. Clearly
what Jack did led to John’s personal injury. A clear causal link exists between
the two.
However, some cases are more complex. Disputes often arise regarding which
party involved in a case should be held liable in tort for the factual injury or
damage. Say a building contractor failed to follow the required building codes
when repairing the roof of Wang’s bungalow, leading to a sudden collapse
of the roof. Wang was trapped in the debris unable to move. A police rescue
team arrived and tried to pull him out. Wang’s right leg was stuck in bricks.
It was broken when Wang was forcefully pulled out. Should a causal link be
established between Wang’s leg injury and the act of the building contractor,
or the act of the rescue team?
The acts of the building contractor and the rescue team are the specific acts
performed by the building workers and the rescue team members respectively.
The prima facie evidence shows that it is the act of the rescue team that
directly caused the fracture of Wang’s right leg; therefore, a causal link can
be established between Wang’s leg injury and the act of the rescue team,
and the rescue team shall be liable in tort for Wang’s loss. Nonetheless, the
rescue team may argue that if the building contractor had acted in compliance
with the building codes, the roof would not have collapsed and Wang would
not have been trapped in the debris, so there would be no subsequent rescue
action. In their view, there is a substantive causal link between Wang’s leg
injury and the act of the building contractor; the building contractor is the
root cause of the tragedy, so the building contractor should bear tort liability
towards Wang.
The above argument has some merits. It should be noted that ‘causation’
does not necessarily mean a causal relationship discerned on the face of
the evidence; more accurately in a legal sense it denotes a cause-and-effect
relationship from the perspective of ascertaining to whom tort liability
should ultimately be attributed. To establish such a cause-and-effect
relationship, we’ve got to consider many factors, not only those on the face
of the evidence.
In the above example, the act of the rescue team (i.e. forcefully pulling
Wang out) is no doubt the direct reason for Wang’s leg injury. However, to
accurately establish to which party the liability ought to be attributed, many
other factors must be considered, e.g. whether Wang’s leg injury has been
caused by the negligence of the rescue team and whether forcefully pulling
Wang out was necessary (i.e. whether the rescue team could have reasonably
foreseen the occurrence of Wang’s leg injury). These factors may significantly
impact the attribution of final liability. By considering these factors, an
effective estimate can be made about whether it is the building contractor or
the rescue team which ought to be liable for Wang’s leg injury, or whether
both are liable and should be deemed as joint tortfeasors.
Whether the alleged wrongdoer is able to reasonably foresee the injurious

consequences arising out of a tortious act deserves particular attention.
Here is another example. Alan Tang is fond of scaring people by wearing a

ghost mask and suddenly jumping out. He did the same thing yesterday to Mrs
Yuan. The fright caused Mrs Yuan to have a heart attack on the spot, and she
passed away after being put into an ambulance. Under normal circumstances,
it would be difficult to establish that what Alan Tang did and Mrs Yuan’s death
have any cause and effect relationship in a legal sense, because frightening
people in this fashion should not result in a loss of life. However, if Alan Tang
knows in advance that Mrs Yuan has heart disease and is easily scared (i.e.
if Alan can reasonably foresee the injurious consequences of his act), then a
causal link could be well established between his act and Mrs Yuan’s death
and he would be held liable.
Fault
In order to establish an ordinary tort case, the element of fault must exist. But
it is not required in a case for which the non-fault liability principle needs to
be applied.
The term ‘fault’ embraces many kinds of fault, either committed deliberately,
or unintentionally due to negligence. In many instances, the law clearly
stipulates the particular kind of fault required to establish a specific tort case.
However, if the law does not expressly stipulate this, then the court will
have to judge whether a fault has been committed in a particular case. The
court will take into account an array of relevant facts, such as the alleged
wrongdoer’s capacity for civil conduct, his psychological status, his
professional background and seniority, etc.
The burden of proof

The previous section discussed the elements required for establishing tort
liability. Who is to shoulder the burden of proof for each of these elements?
This section discusses the burden of proof for cases implementing the fault
liability principle, the constructive fault liability principle and the non-fault
liability principle respectively.
Ordinary tort cases

An ordinary tort case refers to a tort case in which the fault liability principle
must be implemented to affirm and attribute tort liability.
There are four key elements required (illegitimacy, the fact of damage,
causation and fault) to establish an ordinary tort case, and the burden of proof
falls on the victim who has to prove the existence of all four elements with a
view to imposing tort liability on the alleged wrongdoer. This is a rule under
the Civil Litigation Law which establishes the principle that the burden of
proof is on the party who makes the claim, as well as the relevant judicial
interpretation issued by the Supreme People’s Court.
According to the Civil Litigation Law, the party who makes the claim
bears the onus to prove his case by providing evidence (Article 64,
paragraph 1). Pursuant to Article 2 of the Supreme People’s Court’s
Provisions on Evidence in Civil Litigation (released in 2001), the plaintiff
initiating a lawsuit is obliged to provide evidence to prove the facts based on
which the lawsuit is lodged; the defendant has a duty to produce evidence
if he wants to refute the plaintiff’s claim; the party on whom the burden of
proof falls will have to bear adverse consequences if that party is not able to
produce any evidence or the evidence provided by him is not strong enough
to support his claim.
In a tort-related case, if the victim is not able to produce sound evidence to

prove the existence of the required four elements, liability will not be able to
be established, and the victim’s claim against the alleged wrongdoer for tort
remedy will not be able to be supported by the court.
The burden of proof 293
Special tort cases

A special tort case refers to a tort case in which the constructive fault liability
principle or the non-fault liability principle must be implemented to affirm
and attribute the relevant tort liability.
In tort-related cases to which the constructive fault liability principle must be

applied, the criteria for assessing whether a tortious act has been constituted
are virtually the same as the criteria used to establish an ordinary tort case
where the fault liability principle needs to be applied, i.e. all four elements of
illegitimacy, the fact of damage, causation and fault must exist. The victim is
required to bear the burden of proof. However, the victim only needs to prove
the existence of three elements: illegitimacy, the fact of damage and causation.
The existence of fault does not need to be proved because a conclusion in the
affirmative can be deduced by the court on the basis of the relevant facts and
interpreting the law. If the alleged wrongdoer wants to overturn the conclusion
that he has been at fault, he needs to prove that he has not been at fault.
In a tort-related case to which the non-fault liability principle must be

applied, the criteria to be used for estimating whether a tortious act has been
constituted differ from those applied to establish a tort case in light of the fault
liability principle or the constructive fault liability principle. To establish a tort
case under the non-fault liability principle, only three of the four elements are
required: illegitimacy, the fact of damage and causation. Likewise, the burden
of proof is on the victim to prove the existence of these three elements. No
one needs to prove that the alleged wrongdoer has been at fault, because fault
is not essential when establishing a tort case based on the non-fault liability
principle.
The alleged wrongdoer

It deserves mentioning that while the burden of proof for the existence of
the elements required for establishing tort liability lies with the victim and in
principle the alleged wrongdoer does not have to do anything in this regard,
if the alleged wrongdoer attempts to escape liability or to have liability
exempted, they will have to shoulder the burden of proof to show what they
want.
In certain litigation cases, the alleged wrongdoer may defend himself by

relying on Article 4, paragraph 1 of the Supreme People’s Court’s Provisions
on Evidence in Civil Litigation as follows: (1) in a patent infringement
dispute, the burden of proof is on the producer to show that its way of
production differs from the patented method; (2) in a tort case where damage
is caused due to carrying out high-risk activities, the tortfeasor bears the
burden of proof to indicate that the damage is attributable to the victim’s
deliberateness; (3) in a tort case where damage is caused due to environmental
contamination, the burden of proof lies with the tortfeasor to demonstrate
the existence of a special circumstance under which his liability can be
exempted or that there is no causal link between what he did and the damage
caused; (4) in a tort case where an object flies in the air or falls down from
a building, a facility or from anything placed or suspended therein incurring
an injury or damage, the object’s owner or manager shoulders the burden
of proof to illustrate that he has not been at fault in this event; (5) in a tort
case where an animal causes an injury or damage, the owner or keeper of
the animal bears the burden of proof to affirm that the victim or a third party
has been at fault in the incident; (6) in a tort case where an injury or damage
is caused by a defective product, the burden of proof falls on its producer to
show that a special circumstance prescribed by law exists under which the
liability to be assumed can be exempted; (7) in a tort case involving several
persons’ dangerous conduct, any such person bears the burden of proof to
disprove the causation between his act and the damage caused; (8) in a tort
case in connection with medical malpractice, the burden of proof lies with the
relevant medical institution to display that there is no causal link between the
treatment provided and the damage caused and no medical malpractice was
committed.
Joint, separate and several tort liability

In a tort committed by one wrongdoer, he or she of course will bear full
liability. However, many cases of tort involve more than one wrongdoer. In
such cases, how should the liability be shared? Here are some examples.
Example 5.4
Huang is a lecturer in the Department of Mathematics at ABC University.
He and his department head, Professor Liu, are not on good terms as he
is strongly opposed to Professor Liu’s bureaucracy. A vacancy recently
arose for an associate professor in mathematics at ABC University.
Huang applied for this position. As a member of the selection panel,
Professor Liu made a lot of unfavourable comments on Huang’s academic
performance, and such comments in a large measure influenced the
selection panel’s final decision that Huang would not be recommended as
a candidate. Huang hatched a plan for revenge. On a rainy night, Huang’s
two cousins, Chen and Gao, stabbed the tyres of Professor Liu’s car
which was left in the university’s car park, while Huang kept guard beside
them.
Example 5.5
Wang bought a puppy from a pet shop for RMB 20,000. One night last
week, Wang took his dog out for a walk. Li and Yang were riding their
motorcycles on the footpath. Seeing the dog, Li was not able to apply the
emergency brake in time. His motorcycle knocked the dog down. As Yang
was following closely behind Li, his motorcycle hit the dog, too. The dog
died. (Li and Yang do not know each other.)
Example 5.6
The scenario is basically the same as Example 5.5 except that Li and
Yang are good friends. They were riding motorcycles together with four
other friends and when they went down a slope, one of them was not able
to apply the emergency brake in time. Some of the motorcycles crashed
together and Wang’s dog was hit and eventually died.
These examples will be referred to in the following discussion. They relate to

three possible scenarios that are recognized under tort law: liability for jointly
committing a tort, liability for separately committing a tort leading to one final
result of damage, and tort liability for several persons’ dangerous conduct.
Liability for jointly committing a tort

Say Wang and Li opened a fast food eatery. To reduce costs, they made
burgers using cheap ground beef that had been contaminated with mad cow
disease. Many customers developed a brain-wasting illness after eating the
burgers. Wang and Li are deemed to be joint tortfeasors. They are jointly
liable for the damage done to their customers’ health. Similarly, in Example 5.4,
what Huang, Chen and Gao did amounted to jointly committing a tort.
A tort jointly committed involves at least two wrongdoers who have wilfully
committed the tort together and are thus joint tortfeasors. In real life there are
many instances in which a tort is jointly committed.
Normally, the elements required to establish a tort jointly committed by more

than one wrongdoer are the same as those applying to a tort committed by
a single person, i.e. illegitimacy, the fact of damage, causation and fault.
However, to establish a case in a tort jointly committed by more than one
wrongdoer, a precondition is that the wrongdoers must have intentionally and
commonly made their decision beforehand to commit the tort. That is to say,
they are conspirators. Without the existence of such conspiracy, a tort will
not be counted as a tort jointly committed by more than one wrongdoer in the
sense described above. Once a tort can be affirmed as a tort jointly committed
by more than one wrongdoer, it becomes immaterial how the actual work
of committing the tort was done by the wrongdoers, what role each of them
played, and whether all of them personally took part in the operation.
The legal consequences that the joint tortfeasors in a tort will face are
exhibited in the Tort Liability Law. By Article 8, where two or more persons
have jointly committed a tort, they shall be jointly and severally liable for
the tort. A similar provision can be found under Article 130 of the General
Principles of Civil Law, which points out that if two or more persons have
jointly committed a tort, they shall be jointly and severally liable for what
they did.
The Tort Liability Law under Articles 13 and 14 explains what the term ‘jointly
and severally liable’ means. Pursuant to Article 13, where a number of persons
are held jointly and severally liable by law for a tort, the victim is entitled to
demand some of them or all of them to bear all the tort liability. And in light
of Article 14, it can further be understood that the wrongdoers who are jointly
and severally liable for a tort shall each shoulder the burden of compensating
the victim in terms of the magnitude of their respective responsibilities
determined; if their respective responsibilities cannot be determined, then they
will have to evenly share the tort liability that is to be borne together; if one of
the wrongdoers has paid the victim compensation exceeding the amount he is
liable to pay, he is entitled to recover the surplus part from other wrongdoers
who are jointly and severally liable with him in the tort.
In Example 5.4 above, Huang, Chen and Gao as joint tortfeasors are jointly
and severally liable to Professor Liu for the damage caused to Professor Liu’s
property. As the victim, Professor Liu is entitled to demand any one or any
two of the three wrongdoers to compensate him for the whole loss. He can
also choose to simultaneously request all three wrongdoers to compensate him
for the damage to his property. Assume that Professor Liu now approaches
Chen and demands that he bear all liability and Chen has complied with
Professor Liu’s request. Under this circumstance, Chen has paid more than he
needs to pay because the tort liability shall be borne by Huang, Chen and Gao
together (either evenly or as per their respective responsibilities determined);
thus Chen can demand Huang and Gao to recoup him for the part of the
payment that ought to be shouldered by Huang and Gao.
According to Article 14 of the Tort Liability Law, in a tort jointly committed

by more than one wrongdoer, if it is not possible to ascertain the joint
tortfeasors’ respective responsibilities, those tortfeasors shall evenly share
the tort liability. However, if it is possible to affirm the extent to which
each tortfeasor can be held liable for the tort, the court will be responsible
for making sure, in the course of deciding the case, of the actual amount of
compensation each tortfeasor has to pay (L M Wang 2010, 64).
The term ‘jointly and severally liable’ can be defined following the rule
established under the General Principles of Civil Law from the standpoint
of dealing with a creditor–debtor relationship. Pursuant to Article 87 of
that law, where there are two or more creditors, or two or more debtors, in
a creditor–debtor relationship, any one of these creditors who is entitled
to the entire creditors’ rights on a joint and several basis in light of what is
prescribed by law or due to their prior agreement, can demand the debtor(s)
to fulfil the required debt obligations; and any one of these debtors who are
jointly and severally liable to the creditor(s) for the debts in light of the law or
due to their prior agreement, is under an obligation to pay back all the debts,
and if one of the debtors has done so, he is entitled to request other debtors to
reimburse him for the part of the debt obligations he has performed for them.
Also, according to Article 9 of the Tort Liability Law, if A abets B to infringe

upon C’s legitimate rights and interests, A can be adjudicated as a joint
tortfeasor or a sole tortfeasor (depending on the circumstances) who will
partially or wholly bear the liability arising from the tortious act committed
by B. In the event of abetting a person who has no capacity for civil conduct
(e.g. a minor) or a person who has limited capacity for civil conduct only
(e.g. a mentally disordered man) to commit a tort, there is a likelihood that
the abettor will be held solely liable for the tort damage incurred. Article 9
provides that if a person abets or aids another person to commit a tortious act,
he and the actor shall be jointly and severally liable for the tort; if a person
abets or aids another person who has no or only limited capacity for civil
conduct to commit a tortious act, the former shall be liable for the tort; in the
case of a tort committed by a person who has no or only limited capacity for
civil conduct, if his guardian fails to fulfil the necessary guardianship duties
with respect to this matter, the guardian shall be held responsible to some
degree for the tort. Regarding the responsibility to be assumed by the guardian
in the case of a tort committed by a person under his guardianship, whether
the guardian will be held wholly liable or only partially liable for the tort will
depend on the extent of his failure to accomplish his guardianship duties.
Take the following example. Xue and Huang live next door to one another on
the ground floor of a condominium. They often quarrel over the use of public
space in the corridor. Xue intends to ‘teach Huang a good lesson’ by giving
him a beating, but he feels reluctant to do it himself. Xue starts to frequently
complain in front of his son, Xiaoming, that he is being bullied by Huang but
feels too weak to defend himself. Xiaoming is furious. He decides to imitate
his kung-fu heroes and uphold justice by taking revenge on Huang for his
father’s grievances.
One evening, Xiaoming invites a group of friends to play football outside the
condominium where he lives. Huang happens to be in his kitchen preparing
dinner at the time. Xiaoming accurately and forcefully kicks the ball through
Huang’s window. The window is smashed. Huang is badly cut by the flying
glass. Huang believes Xue must have abetted Xiaoming and that this is a
deliberate act. But both Huang and Xiaoming firmly deny Huang’s allegation.
Can anyone be held liable for Huang’s injury? In this case, Xue abetted
his fourteen-year-old son (i.e. a person who has limited capacity for civil
conduct) to attack Huang, leading to the latter’s personal injury and property
damage. Under the Tort Liability Law, Xue as the abettor is liable for the
tort committed. The Supreme People’s Court’s Opinions on Some Issues
Regarding Implementation of the General Principles of Civil Law of the
People’s Republic of China provides that a person who abets or aids another
person who has limited capacity for civil conduct to commit a tortious act is
deemed to be a joint tortfeasor, and shall bear the principal civil liability in the
event (Article 148, paragraph 3).
Liability for separately committing a tort leading to one final

result of damage
The Tort Liability Law also sets out the relevant provisions regarding
establishing and assuming liability for a tort separately committed by more
than one wrongdoer leading to one final result of damage caused to the same
victim. In this kind of tort, unlike in a tort jointly committed, there is no
conspiracy between the wrongdoers prior to the tort. It is purely a coincidence
that what each of them did separately eventually led to the same outcome of
damage suffered by the same victim.
As to how liability is borne for such a tort, the Tort Liability Law provides
that where two or more persons have separately carried out tortious acts
resulting in the same damage, they shall be jointly and severally liable for
the damage caused (Article 11). The same law further indicates that where
two or more persons have separately carried out tortious acts resulting in the
same damage, if their respective responsibilities can be determined, they shall
bear the liability in accordance with their respective responsibilities; if their
respective responsibilities cannot be determined, they shall evenly share the
liability to be assumed by them (Article 12).
Thus, the way liability is assumed for separately committing a tort leading to
one final result of damage is similar to the case of jointly committing a tort.
In Example 5.5 above, Li was not able to apply the emergency brake in time
and knocked down Wang’s dog, and Yang’s motorcycle also hit the dog. The
dog died. Li’s and Yang’s acts led to the death of the dog. It is both an accident
and a coincidence that the dog got hit twice. Li and Yang did not know
each other, and did not conspire to hit the dog. If Li and Yang’s respective
responsibilities in this accident can be determined, they will have to pay
compensation to Wang in accordance with their respective responsibilities. If
their respective responsibilities cannot be determined, then they will need to
pay compensation to Wang on the basis of each assuming 50% liability. Also,
since either Li’s or Yang’s conduct could directly lead to the dog’s outright
death, Li and Yang shall be held jointly and severally liable to Wang for the
loss; in this connection, Wang may demand either Li or Yang or both to make
up for his loss.
Tort liability for several persons’ dangerous conduct

Another kind of tort liability arises when several persons engage in dangerous
conduct at the same time, and as a result endanger another person’s personal
safety or damage that person’s property. In a tort case like this, it is unlikely
that the culprit can be identified: it may be the conduct of one of those persons
that gives rise to the injury or damage, or it may be the conduct of some or all
those persons.
This awkward situation can be addressed by relying on the Tort Liability Law.
By Article 10, where two or more persons have done something that could
endanger the personal safety and/or damage the property of another person,
resulting in that person sustaining an injury or that person’s property being
damaged, if the actual tortfeasor(s) can be discovered, he (they) shall be held
liable; if he (they) cannot be discovered, all the persons responsible for the
relevant danger will jointly and severally bear liability for the loss suffered by
the victim.
Generally speaking, the way tort liability is assumed in this case is not very
different from liability for jointly committing a tort and liability for separately
committing a tort leading to one final result of damage. The most distinctive
feature of how tort liability is assumed for several persons’ dangerous conduct
is the difficulty in identifying the real wrongdoer. Another feature worth
noting is that the persons who do something dangerous are not involved in a
conspiracy to do so.
Say Alan, Bob and Clement used slingshots to shoot birds in a competition for
Tort remedy 301
the best score. Dora (a passer-by) incidentally walked past and got hit in her
left eye. She became permanently blind in that eye. Under this circumstance,
it could be difficult to determine who caused the injury. Since what each of
them did could endanger the safety of passers-by, Alan, Bob and Clement
would be held jointly and severally liable to Dora for her loss, unless any of
them could prove that he was not the cause.
Think back to Example 5.6. Li and Yang, together with four other friends,
were riding motorcycles down a slope when one of them was unable to
apply the brake in time. Some of the motorcycles crashed together and hit
Wang’s dog, killing it. In this case, all the motorcyclists were engaging in the
dangerous act of riding down the slope. It is hard to ascertain which of the
motorcyclists in the confusion of the crash was actually responsible for the
death of Wang’s dog. Hence, all of them would be held jointly and severally
liable for the dog’s death.
Having now discussed in detail how to establish tort liability, the next section
focuses on the remedies available for tort.
Tort remedy
In accordance with the Tort Liability Law, tort liability is borne mainly by:
(1) discontinuing infringement; (2) clearing away impediments;
(3) eradicating dangers; (4) returning assets; (5) restoring assets to their
original state; (6) compensating for losses; (7) making an apology; and
(8) removing bad effects and reviving reputation (Article 15). Any of these
approaches can be taken singly, or adopted in combination with one another,
as a remedy to be obtained by the victim in a tort (Article 15).
Among these tort remedies, compensating for losses basically means

providing monetary compensation. As this is the most usual form of tort
remedy, this section discusses it in greater depth.
The Tort Liability Law considers how a victim can claim compensation for
different kinds of losses in torts: (1) making a personal injury compensation
claim; (2) making a property damage compensation claim; and (3) making a
compensation claim for mental distress.
A personal injury compensation claim

With regard to making a personal injury compensation claim, the Tort
Liability Law provides that where a personal injury has been caused in a
tort, the tortfeasor shall compensate the injured party for any reasonable
expenses incurred in the course of receiving treatment and rehabilitation, such
as medical expenses, caretaking expenses, transportation fees, etc., and for
the losses of earnings due to the injured party’s unavailability to work. If the
injury has left the injured party physically handicapped, the tortfeasor shall
compensate the injured party for the costs of using disabled aid equipment
and be responsible for paying him disability benefits. If the injury has led to
the death of the injured party, the tortfeasor shall provide compensation for
his funeral costs and bear the burden of paying death benefits (Article 16).
In the event of the same tort leading to the death of more than one person,
the Tort Liability Law allows for paying the same amount of death benefits to
each victim (Article 17).
The Tort Liability Law also accepts that any close family member of the
deceased victim in a tort is entitled to lodge a claim against the tortfeasor for
bearing tort liability (Article 18, paragraph 1).
If there is a person who has paid any reasonable expenses for the deceased
injured party, such as medical expenses, funeral costs, etc., that person is
entitled to claim a reimbursement for the expenses paid against the tortfeasor
(Tort Liability Law, Article 18, paragraph 2).
A property damage compensation claim

Regarding making a property damage compensation claim, compensation has
to comply with the principle of full compensation. In light of this principle,
the tortfeasor will have to provide full compensation to the victim for any
actual loss of his property which is caused in the tort. Such losses include
not only direct losses in the form of diminution of the property’s value or
destruction of the property itself, but also indirect losses of any reasonable
benefits that are readily obtainable by the victim in the circumstance of no
such tort (Yang 2010, 143–44; Ma and Yu 1998, 1065–66).
Tort remedy 303
Under the Tort Liability Law, the market price of the property prevailing
when the damage is done to the property in a tort can be viewed as the basis
for evaluating the loss of property; however, other standards may also be used
to estimate the loss of the property (Article 19).
In some instances, a person who sustains a personal injury in a tort may at

the same time also suffer a loss of his property. In this connection, the Tort
Liability Law provides that where sustaining a personal injury in a tort leads
to a loss of the injured party’s property, the injured party shall be compensated
for the loss. If the loss cannot be ascertained whereas the tortfeasor has
gained some benefits in the tort, the tortfeasor shall provide compensation
to the injured party on the basis of such benefits. If such benefits are not
able to be assessed and no consensus can be reached between the tortfeasor
and the injured party on the amount of compensation to be provided, with
a result that a lawsuit is filed accordingly, the court will decide the amount
of compensation to be paid by taking into account the actual circumstances
(Article 20).
According to Article 117, paragraphs 1 and 2 of the General Principles of

Civil Law, in the case of infringing upon an asset of the state, a collective or a
private individual, an attempt shall be made in the first place to return the asset
to its right holder or to restore the asset to its original state. Hence, returning
the infringed asset to its right holder or restoring it to its original state should
normally be deemed to be a precondition to be met before resorting to the tort
remedy of providing monetary compensation.
A compensation claim for mental distress

With regard to making a compensation claim for mental distress, the Tort
Liability Law indicates that if an infringement upon a person’s personal rights
and interests has led him to suffer from severe mental distress, that person
is entitled to make a compensation claim for mental distress against the
wrongdoer (Article 22).
While the exact wording of ‘making a compensation claim for mental distress’
cannot be found in the General Principles of Civil Law, in light of Article 120,
paragraph 1, if any citizen’s right to a name, his portrait right, his right to
reputation, or his right to public esteem is infringed, he can pursue a claim
for discontinuing the infringement, for reviving his reputation, for removing
the bad effects or for being given an apology; and he is also entitled to claim
compensation for his losses. In judicial practice, this provision is often taken
as a legal basis for making a compensation claim for mental distress under the
context of the General Principles of Civil Law.
In 2001, the Supreme People’s Court issued and started to implement a

judicial interpretation, namely the Supreme People’s Court’s Explanation on
Some Issues Regarding How to Determine Liability for Compensating for
Mental Distress.2 Making a compensation claim for mental distress is the
main theme of this Explanation.
By Article 1 of this Explanation, if a natural person’s personal right is

unlawfully violated, such as his right to life, his right to health, his right to
his own body, his right to a name, his portrait right, his right to reputation,
his right to public esteem, his right to human dignity, his right to personal
liberty, etc., he can file a lawsuit in court claiming compensation for mental
distress caused by such infringement, and the court should accept the case.
Where a person’s privacy or other personal interest is encroached upon due
to an act that is committed in violation of public interest or in contravention
of public and social morality, the victim can also take court action claiming
compensation for mental distress against the wrongdoer, and the court should
accept the case.
Under Article 3 of this Explanation, any close family member of a deceased

person can bring a court action claiming compensation for mental distress
against the wrongdoer who has committed any of the following of tortious
acts: (1) infringing upon the deceased person’s name, portrait, reputation or
honour by means of insulting, slandering (libelling), degrading or demonizing
the deceased person, or using any method in violation of public interest or in
contravention of public and social morality; (2) illicitly divulging or utilizing
the deceased person’s privacy, or intruding on the deceased person’s privacy
by any other means that is in violation of public interest or in contravention of
public and social morality; (3) illegally utilizing or impairing the body or the
2 A Chinese version of the Supreme People’s Court’s Explanation on Some Issues Regarding
How to Determine Liability for Compensating for Mental Distress can be found on the
following website: http://www.chinalawedu.com/news/1200/21829/21830/21846/2006/3/
do203011205718360026993-0.htm.
Tort remedy 305
bones of the deceased person, or causing damage to the body or the bones of
the deceased person by any other means that is in violation of public interest
or in contravention of public and social morality.
Also, according to Article 4 of this Explanation, if a specific memento having

certain personal symbolic meaning is permanently destroyed or damaged as a
result of a tortious act committed, its owner is entitled to claim compensation
for mental distress by filing a lawsuit against the tortfeasor.
However, in light of this explanation, there are some circumstances under

which the court will not accept a lawsuit filed for the purpose of claiming
compensation for mental distress, e.g. where a legal person or any other
organization, rather than a natural person, makes a claim for mental distress
on the ground that its personal right is violated (Article 5); where in a
previous lawsuit for tort a relevant party did not claim compensation for
mental distress but after that lawsuit ends he brings a new lawsuit claiming
compensation for mental distress based on the same fact of damage as that in
the previous tort suit (Article 6); and where the mental distress sustained in a
tort did not give rise to serious consequences (Article 8, paragraph 1). Special
attention needs to be paid to Article 8, paragraph 1: whether the court will
accept a lawsuit filed for the purpose of claiming compensation for mental
distress depends upon if the mental distress sustained in a tort gives rise to
serious consequences.
Take the following scenario. ABC is a well-established company in City

G. T is the founder of ABC. Apart from being the major shareholder of the
company, T is also the chairman of the board of directors of ABC, overseeing
the company’s daily operations. With a strong and sometimes rather stubborn
disposition, T is quite clumsy at dealing with the media. During recent years
in particular he has not been on good terms with Great Wave Economic News,
a popular newspaper in City G. It had tried hard to seek sponsorship from
ABC; but because of T’s dissent, its efforts were in vain.
Two months ago, Great Wave Economic News reported that T was detained by
the police due to the allegation that ABC was found to be engaged in massive
oil smuggling. In fact, T was not detained, and while a rumour had been
widely circulated for a long time that ABC amassed its large fortune through
illegal means such as smuggling petroleum products, no evidence had so far
been found to substantiate the rumour.
T claimed that the report released by Great Wave Economic News was a
heavy blow to the reputation of the company and himself personally. He
decided to arrange for ABC and himself to file lawsuits respectively against
Great Wave Economic News for compensation, on the ground that both the
company and T had been severely traumatized due to the mental distress
caused by what Great Wave Economic News falsely reported.
Could the intended lawsuits succeed? Although to a large extent ABC is under
T’s control, from a legal standpoint ABC and T are viewed as two separate
entities independent from one another. If ABC lodges a lawsuit against Great
Wave Economic News for mental distress, the claim will not succeed. This is
because according to Article 5 of the Supreme People’s Court’s Explanation
on Some Issues Regarding How to Determine Liability for Compensating
for Mental Distress, a legal person cannot make a claim for mental distress.
If T personally takes court action for his own compensation, it is quite likely
his lawsuit will also fail, as the report issued by Great Wave Economic News
seems not to have had a severe negative effect on him. By Article 22 of the
Tort Liability Law, if anyone’s personal rights and interests are infringed with
a consequence that he suffers severe mental distress, he can make a claim
for mental distress compensation. However, in light of the Supreme People’s
Court’s Explanation on Some Issues Regarding How to Determine Liability
for Compensating for Mental Distress, the court will not accept such a
compensation lawsuit for mental distress if there are no serious consequences
Exemption from and mitigation of liability in tort

Illegitimacy is normally one of the elements required to establish a tort case.
But under certain special circumstances, even though an illegitimate act
has resulted in the occurrence of the fact of damage, the liability that ought
to be borne by the tortfeasor may be reduced or the tortfeasor may even be
exempted from liability.
These special circumstances can generally be described as relating to the

following: the victim’s fault, the victim’s deliberateness, the wrongful act of
a third party, force majeure, self-defence, taking an emergency action to avert
danger, the victim’s prior consent, and carrying out official duties.
A tortfeasor may try to defend himself by pointing to the existence of one of

these circumstances, with a view to having his tort liability reduced or being
exempted from his tort liability.
The victim’s fault

In a tort incident, if the victim is deemed to be at fault also, the tortfeasor will
have a good reason to argue that his liability should be mitigated.
Say T, driving his Honda CRV, made a U-turn near a theatre where U-turns
are not allowed. T’s car thus hit G, a pedestrian who happened to run through
a red light there. While T caused an injury to G, as G was also at fault in this
tort accident (G did not observe the traffic light), T’s liability for G’s loss
could be reduced to an extent.
In this respect, the Tort Liability Law provides that if the injury or damage
caused in a tort is also attributable to the victim’s fault, the liability to be
borne by the tortfeasor may be mitigated (Article 26). The General Principles
of Civil Law, Article 131 presents the same view.
Under the Supreme People’s Court’s Explanation on Some Issues Regarding

How to Determine Liability for Compensating for Mental Distress, where the
victim’s fault has contributed to the occurrence and consequences of the injury
or damage caused in a tort, the tortfeasor’s liability for making compensation
for mental distress can be alleviated or removed depending on the magnitude
of the fault committed by the victim (Article 11).
The victim’s deliberateness

The term ‘the victim’s deliberateness’ relates to a situation where a tort
incident occurs as a result of deliberate efforts by the victim to bring about
his personal injury or damage to his property in the tort, which is normally
unknown to other people. A typical example is a suicide committed for
insurance money.
Say Fang’s wife needs to undergo an urgent kidney transplant, but the Fang
family does not have enough money to pay for the operation. As Fang bought
a life insurance policy a couple of months ago, he decided to commit suicide
so that his wife as the beneficiary of the insurance policy could use the
insurance benefits to pay for her surgery. Fang did so by suddenly jumping
out in front of an oncoming car. Fang was hit by the car and died on the spot.
The car was driven by Li. Under normal circumstances Li does not need to
bear liability for Fang’s death. This is because Fang’s goal was to kill himself,
a deliberate act.
As to the occurrence of a tort attributable to the victim’s deliberate conduct,

the Tort Liability Law provides that if the injury or damage in a tort is
deliberately caused by the victim, the party causing the injury or damage
shall not be held liable for the loss (Article 27). Such torts are often related to
road traffic accidents. The Road Traffic Safety Law sets out a provision in its
Article 76, paragraph 2, stating that if the loss incurred in a traffic accident is
intentionally caused by a non-motorist or a pedestrian, the motorist involved
will not need to bear any responsibility for the loss.
However, using this defence may only work when the party who caused the
injury or damage is not at fault in the tort. If the party is also at fault, he will
still be liable for the loss; but he can have his liability mitigated to some
extent in light of Article 26 of the Tort Liability Law. In the above example,
if at the moment when Fang jumped out in front of Li’s car, Li was drunk
driving, Li would still be liable for Fang’s death because of Li’s grave fault;
but Li’s liability could be reduced to a certain degree.
The wrongful act of a third party

Under the Tort Liability Law, if the injury or damage in a tort is due to a third
party, that third party shall be liable for the tort (Article 28). That is to say, if
the property damage or personal injury sustained by the victim is not due to
the party who seemingly directly caused the injury or damage, but is entirely
attributable to what has been done by a third party (other than the party who
seemingly directly caused the injury or damage to the victim), then the third
party will be liable for the property damage or personal injury incurred in the
tort; the party who seemingly has directly caused the injury or damage will be
released from bearing the liability under such circumstance.
Say ABC, a milk product manufacturer, illegally added melamine to all

its dairy products. Yang’s infant boy was found to have kidney stones
after being fed by his kindergarten powdered milk supplied by ABC. Yang
intended to take legal action against the kindergarten for his boy’s injury.
The kindergarten argued that it knew nothing about the tainted milk powder
beforehand. Under this circumstance, unless evidence proves otherwise, the
innocent kindergarten will not be held liable for the injury sustained by Yang’s
boy; the liability should be borne by ABC (as the third party) to compensate
for all the losses incurred.
What needs to be emphasized is that exempting the party who seemingly has
directly caused the injury or damage in a tort from bearing liability in the
circumstance of the wrongful act of a third party is done on the premise that
in essence the injury or damage incurred is solely and entirely attributable to
the wrongful act committed by the third party. If the party who seemingly has
directly caused the injury or damage has also committed a wrongful act that
contributes to the occurrence of the tort, then he cannot be exempted from
bearing the liability; however, his liability can be alleviated on a certain scale,
and he will have to bear liability in conjunction with the third party as per
their respective responsibilities.
Assume that Liu was seriously injured in a car accident due to Wang’s
negligent driving. Liu was rushed to ABC Hospital for an emergency surgery.
Due to negligence, the surgeon-in-chief gave Liu the wrong medication. A few
hours later Liu died. Can Wang defend himself based on the wrongful act of
a third party? While ABC Hospital has to take responsibility for the mistake,
the wrong committed by it may not constitute the sole reason for Liu’s death.
Liu’s injury was caused by Wang’s wrongful act in the first place, otherwise
Liu would not have been sent to the hospital. Thus generally speaking both
Wang and ABC Hospital shall be held liable. However, if when Liu was sent
to ABC Hospital he was already in a state of brain death, then even though
ABC Hospital committed an error in the course of the surgery, the effect of
that error on Liu’s death would be immaterial and could not be counted as the
key reason for Liu’s death; and in this case, it is quite likely that Wang would
become wholly liable for Liu’s death and he would not be able to have his
liability reduced by relying on the wrongful act of a third party.
Force majeure
The term ‘force majeure’ is defined under Article 153 of the General
Principles of Civil Law as an objective circumstance which is unpredictable,
unavoidable and insurmountable. If any injury or damage is caused due to a

force majeure event, no one will be held liable for it (General Principles of
Civil Law, Article 107; Tort Liability Law, Article 29).
Sudden natural disasters (e.g. earthquakes and tsunamis), disease outbreaks

(e.g. SARS), wars, unexpected riots and unrest, etc. are force majeure events
common in everyday life. Any of these circumstances can be used as a reason
to request exemption from or mitigation of the tort liability to be borne. But
a precondition has to be met: the force majeure event must be the sole reason
for the occurrence of the tort in question.
Say ABC (a rice wholesaler) commissioned XYZ (a shipping company)

to transport a consignment of its rice from the port of Ningbo to Xiamen.
When the ship entered the sea territory of Xiamen, a tsunami suddenly swept
away the ship, which hit a huge rock and started to sink. The crew survived,
but the rice could not be saved. Shall XYZ be liable for ABC’s loss? The
answer depends on the circumstances. If XYZ had not received any tsunami
forecast before or during the voyage, the occurrence of the tsunami could be
deemed to be a force majeure event, due to which XYZ would not be liable
to compensate ABC for the loss of its rice. However, if XYZ was also at fault
in this incident (e.g. it knew in advance that there would be a tsunami but
insisted on commencing the voyage; or due to negligence the crew did not
take any measures to protect the cargo), then XYZ would be liable for ABC’s
loss; but it might be able to have its liability reduced to some extent.
Self-defence
In reality the term ‘self-defence’ is more often used in a scenario in which one is
forced to exercise one’s right of self-defence to stop criminals from threatening
one’s life. For example, say a group of criminal suspects refused to be arrested
and they fired shots at the police. If, in order to protect his life, a police officer
shot dead one of the criminal suspects, this police officer would not be liable
for the death caused by him. This is because under the Criminal Law if a person
takes action to stop an ongoing illicit encroachment upon the state or the public
interest, or upon the personal rights, the property rights or other rights of either
himself or another person, thus causing an injury to the offender, what he has
done will be deemed to be an exercise of his right of defence and he will bear
no criminal liability for the injury (Article 20, paragraph 1).
Exercising the right of self-defence may also be necessary in a civil law setting
when one has to immediately do something to prevent one’s rights and
interests from being violated due to man-made causes. Either under Article 128
of the General Principles of Civil Law or by Article 30 of the Tort Liability
Law, it is accepted that anyone who has appropriately exercised his right of self-
defence shall not be held liable for the injury or damage caused by him.
Here is another example. Huang works as a junior associate for an accounting

firm. Li is his immediate supervisor. Jealous of Huang’s talents, Li kept
creating hurdles to Huang’s career advancement. Huang could no longer
tolerate Li’s conduct and decided to get back at Li. One night, Huang waited
in ambush somewhere near Li’s home. As Li passed by, Huang suddenly
jumped out and tried to hit Li with an iron rod. Huang had not realized that Li
used to be a martial arts instructor. Li deftly avoided Huang’s first attack, and
with one quick move forcibly pushed Huang to the ground. Huang struggled
but was subdued by Li. In the tussle, Huang’s arm was twisted by Li, and
Huang’s expensive mobile phone fell out of his pocket and broke into pieces
on the ground. Since what Li did could be viewed as an act of self-defence, Li
would bear no criminal liability for his conduct, and he would also not be held
civilly liable for Huang’s personal injury and property damage.
The right of self-defence can be used to avoid tort liability for a loss. But this
right must be prudently exercised, not exercised to an extent that far surpasses
what is needed to fend off danger.3 Regarding the fair use of self-defence,
either by Article 128 of the General Principles of Civil Law or under Article
30 of the Tort Liability Law, it is prescribed that if a person exercises his right
of self-defence in excess of a necessary limit, causing unnecessary injury or
damage, he shall be liable for the injury or damage on an appropriate scale.
In the above example, if after Huang was subdued, Li continued to thrash

him, leading to Huang suffering a head injury requiring hospitalization, then
obviously Li’s exercise of his right of self-defence far exceeded the appropriate
limit, and Li would be liable for the head injury sustained by Huang.4
3 The Criminal Law, Article 20, paragraph 2 also mentions the requirement of keeping an act of
self-defence within a necessary limit, exceeding which will lead to the party claiming self-defence
bearing certain criminal liability.
4 In this circumstance, Li may also be held criminally liable for what he did.
Taking an emergency action to avert danger

Apart from the ground of self-defence, exemption from or mitigation of tort
liability can also be sought on the ground of taking an emergency action
to avert danger. On the surface, these two grounds seem similar; the main
purpose is the same, i.e. to avoid or stop any present or imminent substantial
safety hazard.
However, the right of self-defence is exercised to avoid man-made harm,

while an emergency action is exercised in response to a threat that may not be
man-made. Taking an emergency action may cause certain damage; but that
damage, compared with the far more significant damage that might be caused
by the danger, is an unavoidable price that must be paid.
Under Article 129 of the General Principles of Civil Law and Article 31 of
the Tort Liability Law, where taking an emergency action to avoid a danger
causes any loss, the liability for the loss shall be borne by the person who
caused that danger.
Take this example. Liu is a third-year undergraduate student at ABC

University. He lives in a dorm on campus. According to the University’s
regulations, using gas cookers is strictly forbidden in any dorm room. Liu
ignored the regulation and cooked congee on a gas cooker in his room. He
then locked the door and went out shopping without turning off the cooker.
Wang is a freshman living next door to Liu. He detected a strong smoke smell
coming from Liu’s room. Wang used tools to break the door lock, rushed into
Liu’s room and put out the rapidly growing fire. A potentially fatal crisis was
defused, notwithstanding the fact that the broken door had to be replaced and
Liu’s new computer was damaged by the water poured by Wang on the fire.
What Wang did amounts to an emergency action to contain the fire that could
have endangered lives and property in adjacent rooms; thus he was not liable
for the losses incurred in connection with the broken door and Liu’s computer.
Liu, who caused the danger, shall be responsible for the damage caused to the
door.
Where an emergency action is taken to avoid a natural peril, by virtue of

Article 129 of the General Principles of Civil Law and Article 31 of the Tort
Liability Law, the person taking the emergency action will not be held liable
in tort, or will need to bear liability on an appropriate scale only for the loss.
Say a ship owned and operated by ABC (a shipping company) was wrecked
in an unexpected hurricane sailing towards a port while carrying the cargo
of XYZ (the consignor). To reduce the weight in order to slow down the
sinking of the ship, the crew decided to throw about two-thirds of the cargo
into the sea. This worked. Before the ship fully sank, a rescue team arrived,
and the whole crew (along with the remaining cargo) was saved. Although the
emergency action taken by the crew resulted in the loss of a large of proportion
of XYZ’s cargo, ABC shall not be liable for the loss as the crew took action to
cope with a potentially deadly situation caused by a natural peril.
Like an action taken under the right of defence, an emergency action to avert
danger is also subject to the fair use requirement. According to Article 129 of
the General Principles of Civil Law and Article 31 of the Tort Liability Law,
where taking an emergency action is in excess of a reasonable limit or the
action taken is inappropriate giving rise to an injury or damage, the person
taking the emergency action will to a certain extent be held liable for the loss.
The victim’s prior consent

If prior to the occurrence of a tort incident the person who later on becomes
the victim has expressed his consent to accept the injury or damage that he
clearly realizes may be sustained by him in a likely tort, after the tort really
happens the tortfeasor can use the victim’s prior consent as a defence to seek
exemption from his tort liability.
The prior consent must be of an entirely voluntary nature, based on the

condition that the victim-to-be is fully aware of the prospect that he may
suffer an injury or damage by what is to be done by another person, but he
allows that person to go ahead with the action and accepts that if such injury
or damage happens, that person will not be liable in tort for his loss; the
consent should be made free from any type of undue pressure or coercion; and
consenting must not contravene any law or err from the civil law doctrine of
good public order and social customs (Yang 2004, 212–14).
Say T and G are professional wrestlers. In a match between the two, after
several rounds, T all of a sudden wrestled G down to the ground, with a
result that G’s left wrist was broken. As a professional wrestler, G must have
been fully aware of the likelihood of a physical injury occurring in a match.
Agreeing to participate in a match already exhibited G’s willingness to take

the risk and accept possible injury. Hence T would not be held liable for G’s
injury.
Here is another example. Mrs Wang’s family lives in the remote hilly
countryside. She now works as a housemaid for Mr Gao’s family in City B.
Before her current employment contract came to an end, Mrs Wang begged
Mr Gao to renew the contract as she badly needed this job to support her
family. Mr Gao agreed, but subject to the following two conditions: (1) during
the contract period Mrs Wang is not allowed to take any leave and she has to
work on public holidays; (2) Mrs Wang may be asked to take care of a patient
who has a contagious disease; and if she is infected with the disease because
of it, Mr Gao as her employer will not be liable to compensate her for any
injury. Mrs Wang unhappily accepted the two conditions.
She began looking after Mr Gao’s aunt who was suffering from acute
hepatitis. Mrs Wang had to work long hours and was not able to get enough
sleep. This eventually led to her collapse after being infected with hepatitis.
Mrs Wang asks Mr Gao to provide her with compensation for the injury
sustained. Can Mr Gao use the victim’s prior consent to the two conditions as
a defence to seek exemption from his tort liability?
In this case, Mr Gao would be liable for Mrs Wang’s injury. He imposed two
unreasonable conditions on Mrs Wang, whose consent to them was not truly
voluntary. The substance of these two conditions clearly violates the law as
regards the contents of exemption clauses devised in a contract (see Contract
Law, Article 53), and also deviates from the spirit of the civil law doctrine of
good public order and social customs. Hence, Mr Gao would be responsible
for Mrs Wang’s illness and would have to provide her with compensation.
Carrying out official duties

If a tortious injury or damage is caused in the course of carrying out official
duties, given that such a loss is unavoidable and it is a price that must be
paid, then no tort liability has to be borne. In practice, either a public servant
or a non-government employee, provided that he causes a tortious injury or
damage that is unavoidable in the course of performing his official duty, will
not be held liable in tort (L M Wang and Yang 1996, 77–78).
Summary 315
Assume that to rescue a number of hostages who were kidnapped in an

airplane, a special forces operation team staged a series of fierce attacks,
eventually leaving the airplane bullet riddled. No one in the team would
be liable for the damage caused to the airplane as such damage is hardly
avoidable during a rescue operation.
Also, say because of severe diabetic complications, Huang had to have

his right foot amputated. Dr Li carried out the surgery. The operation was
successful. Huang’s loss of his foot would not lead to Dr Li bearing any
liability in tort, as it occurred as part of the professional duties carried out by
Dr Li as a surgeon in order to save Huang’s life.
Seeking exemption from tort liability on the ground of carrying out official
duties cannot be successful if the following precondition is not met: what has
been done in the course of carrying out official duties must be reasonable,
and indispensable to fulfilling such official duties. Otherwise any person who
causes damage when carrying out his official duties will still face the prospect
of bearing liability for the losses caused.
Summary
The Tort Liability Law, along with the relevant provisions contained in
the General Principles of Civil Law, in the laws concerning torts in certain
specialized fields, and in those judicial interpretations of the Supreme
People’s Court relating to tortious acts, governs torts in the country. Three
basic principles can be detected in the Tort Liability Law for establishing tort
liability: the fault liability principle, the constructive fault liability principle
and the non-fault liability principle.
To establish a tort case in an ordinary sense, the following four elements

should normally be in place: illegitimacy, the fact of damage, causation and
fault. Where the fault liability principle or the constructive fault liability
principle needs to be applied in order to establish and attribute tort liability,
these four elements must all exist. However, where the non-fault liability
principle needs to be applied to establish a tort case, the element of fault can
be dispensed with.
The Tort Liability Law prescribes the rules on how tort liability is assumed in
terms of liability for jointly committing a tort, for separately committing a tort
leading to one final result of damage sustained by the same victim, and for
several persons’ dangerous conduct.
There are a number of tort remedies available under the Tort Liability Law,
including: (1) discontinuing infringement; (2) clearing away impediments;
(3) eradicating dangers; (4) returning assets; (5) restoring assets to their
original state; (6) compensating for losses; (7) making an apology; and
(8) removing bad effects and reviving reputation.
Of these, compensating for losses (i.e. providing monetary compensation) is

the most usual remedy. The Tort Liability Law stipulates how a victim can
claim compensation for different kinds of losses in torts: making a personal
injury compensation claim, making a property damage compensation claim,
or making a compensation claim for mental distress.
In certain circumstances, tort liability might be mitigated or the alleged

wrongdoer exempted from liability. The circumstances where it is possible to
have tort liability reduced or be exempted from liability can be categorized
according to the following reasons: the victim’s fault, the victim’s
deliberateness, the wrongful act of a third party, force majeure, self-defence,
taking an emergency action to avert danger, the victim’s prior consent, and
carrying out official duties.
Practice questions
1 Hu is an accountant in a very poorly paid job. In order to get some more
money, he procures sports shirts, and after working hours goes to ABC
University to sell them to students.
A noticeable big placard has been erected in front of the main gate of
ABC University, informing people that vendors are prohibited from
selling any item on campus without the university’s permission. Hu
ignored the warning.
On a Friday night two months ago, Hu went to ABC University trying

to tout a new batch of sports shirts. Beneath a path leading to student
housing, there is an underground waste water system. The system had
been repaired by a university maintenance worker that day. After finishing

the work, the maintenance worker forgot to put the manhole cover back
on. Hu slipped into the opening and broke two bones in his right leg.
Hu had to take one-month of sick leave, and so missed the internal

promotion examination organized by the company he works for; he was
also unable to escort his son to join a group tour to Hainan Island (they
had pre-paid the tour fees to the travel agency and the fees were non-
refundable).
Hu filed a claim against ABC University for compensating him for the
losses incurred in the accident, including the loss of a pay increase due to
missing the internal promotion examination as well as the loss of the non-
refundable tour fees paid to the travel agency.
Would Hu’s compensation claim be successful?
2 After attending a friend’s wedding banquet, Yang had an awful headache,

uncontrollable diarrhea and severe vomiting. He was diagnosed as having
gotten food poisoning from the following three kinds of food consumed at
the banquet: steamed buns (tainted with chemicals), fake Maotai (produced
from denatured alcohol), and expired yogurt. They were manufactured
and supplied by ABC Food Plant, XYZ Beverage Plant and TT Dairy
Plant respectively.
Yang ate a lot at the banquet. It was difficult to ascertain which of these
three items caused him to fall ill. The banquet’s organizer was totally
innocent; he had no idea of the danger posed by these items.
Under such circumstances, is there any remedy available to Yang?
3 a Mr Lin is a multimillionaire well known for having been a poor

peasant who became an entrepreneur and philanthropist through many
years of hard work. Cai, a journalist, has often asserted that he was
one of Mr Lin’s closest friends and he knew many of the secrets of Mr
Lin’s success that Mr Lin never disclosed to the public.
Mr Lin passed away two years ago. Cai recently wrote and published a
monograph about Mr Lin’s life and career. General readers can easily
figure out from what is implied in the book that Mr Lin’s success was
largely achieved by bribing government officials and carrying out

illegal activities orchestrated by an underworld gang.
Mr Lin’s widow, Mrs Lin, protested. She was furious that Mr Lin’s
good public reputation and image were totally ruined by Cai’s book.
She intends to take legal action against Cai seeking compensation for
her mental distress.
Cai believes the court will not accept such a lawsuit as Mr Lin has
been dead for years.
Will Mrs Lin’s court action succeed? Explain.
b The motorcycle driven by Zhao collided with a cyclist, Qian. Qian was
injured, but the injury was not serious. Zhao and Qian disputed over
who was liable: Qian accused Zhao of failing to obey traffic lights;
Zhao countered that Qian unlawfully rode his bicycle on the sidewalk.
A lawsuit was filed by Qian, who eventually won his case against
Zhao by being compensated for all the medical expenses he incurred
due to this traffic accident.
A month later, Qian decided to start another proceeding against Zhao.

This time he wanted to make a claim for mental distress compensation
on the ground that ‘the psychological trauma from this accident still
haunts him.’
Will Qian win again? Explain.
4 T as a sole trader runs a galvanizing plant in County D (a rural area in

North China). The plant produces a lot of poisonous waste water every
day that flows into the drainage system managed by the local government
of County D.
A few days ago, something went wrong with the drainage system with
a consequence that the waste water changed direction and flew into
G’s freshwater pond in which G breeds abalone. The pond was badly
poisoned; 90% of the abalone died. G supplies abalone to many five-star
hotels and seafood restaurants. The loss this time cost him a fortune.
G made a compensation claim against T.

T argued that the waste water flowed into G’s pond because of the
problem with the drainage system, which had nothing to do with his
galvanizing plant. He further pointed out that G built this pond by illegally
encroaching on another peasant’s rice field, so no liability had to be borne
by T.
Should T be held liable for G’s loss? Discuss.
5 Mr Chen, a widower in his eighties, occasionally suffers from senile

dementia. When his mental illness erupts, he does not recognize people,
nor does he know what he is doing. Mr Chen currently lives with Chen
Daming, his only son, who looks after him.
On Saturday last week, Mr Chen and Chen Daming visited Sun, their
remote relative, to see Sun’s new home. While Chen Daming and Sun
were discussing the decoration of Sun’s two-storey detached villa, Mr
Chen quietly went out to the balcony on the second floor to look around.
His elbow knocked over a flower pot, which fell over the balcony and hit
Wang who was walking past Sun’s house.
As Wang was seriously injured by the flower pot, he tried to launch a

compensation claim against Sun.
Sun declined to compensate Wang for his injury, arguing that he did not
knock over the flower pot.
Advise Wang of any rights he may have to claim compensation for his
injury, and also discuss the validity of Sun’s argument.

1 The liability of ABC University can be mitigated as Hu was also at
fault. It shall compensate Hu for his medical expenses. The loss of a pay
increase and the tour fees could not be reasonably foreseen; it is highly
unlikely that Hu would succeed in his claim over these.
2 The actions of ABC, XYZ or TT could all lead to Yang’s injury. As it

cannot be ascertained which food is the main cause, these three ought to
compensate Yang by sharing the liability in the same proportion.
3 a A natural person’s personal rights will still be protected under the law
even after he dies. If Mrs Lin is severely psychologically injured due
to Mr Lin’s reputation being tarnished by Cai’s book, she may go to
court making a claim against Cai for compensation for her mental
distress.
b Normally the court will not accept Qian’s lawsuit this time as he is
going to court again claiming compensation for mental distress based
on the same damage.
4 Under the non-fault liability principle, T is liable for compensating G

because of such contamination. Neither the drainage problem nor the so-
called encroachment upon another peasant’s rice field may constitute a
valid ground on which T’s liability can be exempted.
5 Mr Chen shall be deemed a person with no capacity or only limited

capacity for civil conduct. If Sun is able to successfully prove that he
has not been at fault, he can be cleared of liability. Then as Mr Chen’s
guardian, Chen Daming is liable for paying Wang compensation for his
injury.
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Index
administrative law, 2 paying damages, 259–60; duty

Adoption Law, 31 to attenuate loss, 261–62;
agency, 70, 71–79, 86 reasonable prediction, 260–61
applicability, 73 Bright Road Tobacco Company. See Luo
authority of an agent, 76–77; liability, Daxing (case study)
75–77 burden of proof, 218, 235, 238, 278–81,
definition, 71–72 286, 287
ostensible, 77–78 ordinary tort cases, 292
scope, 73–74 special tort cases, 293; the alleged
sub-delegation of authority and, wrongdoer, 293–94
types under Chinese law, 74–76; by business law, 2, 16, 195. See also
designation, 75–76; by operation commercial law
of law, 75 business vehicles, 137
Anti-Unfair Competition Law, 271
attribution, 93, 94, 105, 109, 118, 168, characteristics of law, 3–8
272, 291 China’s Company Law, 19, 22, 24, 248
China’s Constitution. See Constitution
‘bad faith’ concept, 158–59 China’s Constitutional Law, 11, 16–19
basic law. See constitutional law passim, 32, 90, 96–102 passim, 106,
Book on Obligations, 193, 270 111, 131, 132, 133, 135, 140, 146, 16
breach of contract, 24, 113, 176, 195, of 1954, 133–34
196, 203, 208, 210, 214, 227, 231–35 of 1975, 135
passim, 252, 263–64, 270, 274 of 1982, 135–36
incurring liability, 254–55 China’s General Principles of Civil Law.
liability exemptions, 255–56 See General Principles of Civil Law
remedies, 256–62 Chinese Communist Party, 89, 132
continuing performance, 256–57 Seventeenth National Congress
deposits, 259 (2007), 136–37
liquidated damages, 258–59 Chinese legal system
remedial measures, 257–58 branches, 19–20
Index 327
components, 15 historical development, 9–10

current legal framework, 16–19 See also non-property rights; property
history, 15–16 rights
Chinese People’s Political Consultative Civil Litigation Law, 9, 12, 15, 20, 45,
Conference, 128, 132 47, 292
First Plenary Session (1949), 132 civil objects. See civil subjects: things
civil capacity, 37–39, 51, 52, 85, 86 civil rights, 15, 21, 23, 25, 26, 30,
for civil conduct, 39, 198; full 31–37, 45–48 passim, 51, 54, 55, 60,
capacity, 39–40, 60; limited 81, 83, 85, 86, 99, 111, 114, 137, 155,
capacity, 40, 60; no capacity, 197, 198, 269, 271–74, 276
40–41, 60 capacity for, 38–39
for civil rights, 38–39, 198 categorization of, 33
for natural conduct, 39 definition, 31–33
full capacity for civil conduct, 39–40 contrast with civil obligations, 31
in natural versus legal persons, 54 under GPCL, 99
civil conduct, judicial declaration for, 41 civil subjects, 2, 21, 26, 28, 30, 31,
limited capacity, 69–70 37–57, 85, 95, 105, 137, 197, 272
of a natural person, 37–38 legal persons, 51–55, 86; civil
See also juristic acts capacity, 54–55; establishment of,
civil code, 2, 9, 10, 21, 22, 28, 30, 95, 53; types, 52–53
195 natural persons, 37–50, 85
under the Qing, 15 things, 55–57; classification of,
in the Republic of China, 193, 270 55; critical and non-critical
civil conduct, 37, 38, 39–41 components of, 56; definition,
civil juristic act. See juristic act 55–56; distinction from fruits,
civil law 56–57
and private law, 14 See also civil capacity; civil objects
definition: general, 1; in General collective ownership, 92, 94, 96, 97, 98,
Principles of Civil Law, 23 101, 133–37 passim, 140–43, 169,
distinction from common law, 1, 11 170, 171, 188
doctrines: good public order and social common law systems, 1, 8–9
customs, 288 Common Principles, 132, 133
nature of, 22–24 company law. See China’s Company Law
structural components, 21–24 Constitution, 94, 96
See also private law constitutional law, 2, 6, 9, 11, 14, 15, 19,
civil law regime, 22, 30, 91, 103, 111, 24, 27, 132
138, 269, 271 See also basic law, public law;
civil law system, 1, 2, 9, 14, 21, 27, 103 protection of property
catagorization of law in, 11–14 Constitutional Law. See China’s
distinction from common law, 10–11 Constitutional Law
328 Index
contracts, 1, 12, 14, 21, 23, 24, 27, 30, involving a third party, 231–32
51, 64, 82, 87, 101, 107, 130, 131, right of revocation , 239–41
169, 171, 193–96 passim, 198, 203, right of subrogation, 236–39
211, 213, 216, , 220, 224–27 passim, right to decline demand for
229, 231, 249, 254, 263 performance, 232–35
contract formation, 196–98 rights, 233
contract law, 12, 14, 193 rules on clarifying ambiguity, 230
Contract Law, 12, 19, 20, 22–24 passim, supplement, 229–30
30, 58, 63–71 passim, 74, 82, 177, creditor’s right. See obligee’s right
181, 194–268, 314 criminal law, 2
alteration, 241–43
assignment, 243–48 economic development under
consideration, 198 Constitutional Law, 131–37
contract formation, 196 Environmental Protection Law, 271
contractual terms, 213–18 equality
discharge, 249–54; by agreement, doctrine, 25–26
250–52; by exercising a in General Principles of Civil Law, 26
predetermined termination right, estate tax, 32
250–52; by mutual decision, 250; ‘Explanation on China’s Draft Property
effects, 253–54; obligations, 253; Rights Law’, 93–95
under legal prescriptions, 252–53 See also Wang Zhaoguo
general provisions, 194–95 expropriation of property, 144–49, 150
invitation to treat, 201 compensation, 146
offer and acceptance, 198–210 Decree on the Expropriation of
regime, 195–96 Houses over State-owned Land
scope, 198 and Compensation, 147
undecided validity, 223–26; improper farmland, 145
authorization of agency, 224–25; Huang Zhenyun (case study). See
limited capacity, 224 Huang Zhenyun
voidable contracts, 221–23; right to
modify, 222; right to revoke, 222; fairness and impartiality
without right to transfer other doctrine, 26
people’s property, 225–26 in General Principles of Civil Law, 26
Contract Law of the People’s Republic Farmland Contracting Law of 2002, 103,
of China. See Contract Law 170
contract performance, 226–41 Food Safety Law, 271
Chinese doctrines: allowing force majeure, 84, 172, 216, 243, 252,
performance deviation, 228–29; 255, 256, 267, 286, 306, 309–10, 316
economic efficiency, 228; good formation and alteration, 112–14
faith, 227–28; actual delivery, 125
comprehending terms, 230 authority’s conduct, 123–24
Index 329
correction of particulars, 121 good public order and social customs

creating a uniform system, 118–20 doctrine, 27
dissent, 121–22 in General Principles of Civil Law, 27
immovable property, 117–26 GPCL. See General Principles of Civil Law
pre-notice of, 122–24 Guan Zhong, 89
public notice, 114 guarantee (concept), 174–75
methods, 114–17 Guarantee Law, 94, 102–3, 118, 259
summary, 125–26 guardianship, 41–44, 73, 75, 76, 85, 198,
substituted, 126–27 272, 283, 298
with transferor’s continued duties, 42–43
possession, 127 for mental patients, 43–44
principle of distinction, 113–14 for minors, 43
See also property rights
forms of legal systems, 8 Hu Jintao, 136
French Civil Code, 21 ‘hukou’ system, 173
fruits Huang Zhenyun (case study), 146–47
as a term in civil law jurisdiction,
56–57 Implementation Rules of the Sino-Foreign
natural, 57 Equity Joint Venture Enterprise Law,
legal, 57 242
fundamental civil law doctrines, 24–27 individuality, definition of, 23
inheritance tax, 32
general law, 11–12 Interim Regulations on the Assignment
in Law on Legislation, 18–19 and Allocation of Usage Rights over
General Principles of Civil Law (GPCL), State-owned Land in Urban Areas,
vii, 2, 22, 24, 26, 30, 38, 40–59 167, 172
passim, 62–70, 73–76 passim, 78, 79, international law, 11, 12–13
82–85 passim, 90, 91, 94, 96, 99–102, public, 13
106, 111, 196, 198, 224, 262, 270, private, 13
271, 274, 275, 276, 284, 285, 286,
296, 297, 304, 309, 311, 312, 313 judicial declarations, 87, 88
German Civil Code, 21, 30 of death, 46–48
goals of law, 5–8 of missing status, 44–46
justice, 6 and personal relations, 48
rights, 6–7 revocation, 47–48
order, 7–8 See also civil conduct
‘good faith’ concept juristic acts, 21, 30, 57–71, 86, 114–15
doctrine, 26–27 definition, 57–58
in contracts, 69 generation, 58–59
in General Principles of Civil Law, 27 undecided validity of, 68; act of person
in Property Rights Law, 158–59 with limited civil capacity, 69
330 Index
an unauthorized act, 70–71 legal persons. See civil subjects: legal

validation, 59–60; appropriate persons
capacity for civil conduct, 60; Li Dabao. See Luo Daxing
genuineness of intent, 60–61; liens, 92, 93, 178, 185–87
lawfulness, 61 limitation of actions, 80–85, 86
void juristic acts, 61–64; definition, 80–81
characteristics, 61–62; major extension, 85
grounds, 62–64 limitation periods, 81–83; stale claim,
voidable juristic acts, 65–68; 80
materially misconceived, 65–66; suspension, 84
contrary to fairness, 66–67; termination, 84–85
rescission, 66 Luo Daxing (case study), 128–31
Kuomintang, 15, 128 malpractice: medical, 278

Marine Environmental Protection Law,
Land Administration Law of 1986, 94, 271
103, 169, 170, 172 Marriage Law, 19, 22, 30–31, 271
Law of contract. See law of obligations Mencius, 89
Law of Economic Contract, 193 missing status
Law of Economic Contract with judicial declaration, 44–46
Overseas Element Involved, 193 and property, 45–46
law of obligations (i.e. law of contract), mortgages, 92, 93, 179–183, 185
21, 23, 30, 83, 91, 113, 193, 270 Mr Qiao vs. the Ministry of Railways, 6–7
law of property. See property rights law national law, 12–13
Law of Succession, 31
Law of Technology Contract, 193 natural persons. See civil subjects: natural
Law on Land Contract in Rural Areas, 94 persons
Law on Legislation National People’s Congress, 16, 19, 20,
administrative regulations, 17 22, 45, 93, 94, 95, 270
supremacy and precedent, 18 Standing Committee, 93
Law on the Administration of the Urban natural person, 31, 37–41, 42, 49, 50, 51,
Real Estate, 94 53, 54, 60, 63, 305
Law on Prevention and Rectification of non-basic law, 11
Air Pollution, 271 non-juristic acts, 115–16
Law on Prevention and Rectification of non-property rights, 33, 34, 48–49
Water Pollution, 271 See also rights of personality, rights of
Law on Protection of Consumers’ Rights personal identity
and Interests, 261, 271
laws on persons, 21, 30 obligee, 91, 93, 94, 228, 231, 232, 234,
laws on things, 21, 30, 91 245, 246, 247–49 passim, 251; right, 90
Index 331
Organic Law on Local People’s ‘people’s ownership’. See state

Congresses and Governments at ownership
Various Levels, 141 People’s Republic of China, 15, 20, 21,
Organic Law on Urban Residents’ 42, 89, 128, 131, 132, 192–94, 196,
Committees, 141–42 261, 270, 271, 299
ownership performing a contract. See contract
in a condominium building, 104, performance
150–55 personal rights and interests, 269
in the Common Principles possession, 92
in GPCL: of buried or hidden Postal Law, 271
property, 102; relations between private law, 13, 14, 24
neighbours, 102 private law autonomy, 24–25, 61
joint, 154–55 procedural law, 12
of buried or hidden property, 102 property law, 94
of land, 96, 98–99, 101, 170 property ownership, 1, 95, 97–99, 111,
of natural resources, 101–2 127, 128, 137, 145, 157
See also Luo Daxing; ownership in definition in the GPCL, 99
Property Rights Law property relations, definition of, 23
ownership in Property Rights Law property rights, 33, 48
bona fide acquisition, 158–159 contrast with obligee’s rights, 91
classification of ownership; collective, definition, 90
140–43; private, 143–44; state, See also formation and alteration;
137–38 ‘three specifics’
‘collective’, 97, 98 property rights law, 2, 12, 21, 22, 23, 30,
exercising rights over property, 89, 91
138–39, 140–43 Property Rights Law, 19, 30, 56, 57, 61,
land ownership, 98, 101 89–192, 195
natural resources, 98, 101 cardinal principles, 104–11; bona
‘neighboring relationship’ concept, fide acquisition, 161–62; equal
155–57; disputes, 155; easements, protection, 105–6; legality, 106–7
157 dealing with found property, 159–62
parking spaces and garages, 153 definition of ‘property rights’, 90–91
‘people’s ownership’, 96 definitions of ownership, 96–98
public, 97 draft law, 93
‘socialist public’, 97 good faith acquisition principle,
special characteristics, 127–28 109–11
state, 96 mortgages, 178–83; and leases
‘state public’, 98 relating to the same property,
181–82; eligible properties, 180;
Partnership Law, 14, 22, 24 payment sequence between,
Patent Law, 19, 22, 271 182–83; registration, 180–81
332 Index
passage, 93–96 distinction from expropriation, 149

pledges: and mortgages, 185; liens, right of claim, 35
185–87; of moveable property, right of defence, 36–37
183–84; of right, 184–85 right of dominion, 34–35
practical issues, 102–4 rights of formation, 35–36
public notice principle, 108–9, rights of personal identity, 34
116–17 rights of personality, 34, 48–50
purpose, 93–95 general, 49
relating to security, 174–78; general special, 49–50; portrait right, 50;
provisions, 176–78. See also right to a name, 49–50; right to a
guarantee reputation, 50
structure, 92–93 Road Traffic Safety Law, 271, 273, 278,
See also obligee’s rights; ownership 285, 308
in Property Rights Law; possession Roman law, 1, 2, 9, 10, 13
privity of contract, 198
Product Liability Law, 271 security
protection of property, 96–99 in Property Rights Law, 92, 174
and relations between neighbors, 102 See also guarantee
owned by state, collectives, socialist public property, 98
individuals and social Soviet Union, 270
organizations, 100–101 special law, 12
under Chinese socialist system, 96–98 stale claim, 80. See also limitation of
under GPCL, 99–102 actions: definition
See also ownership: of buried or State Compensation Council, 22, 31, 64,
hidden property; of land; of natural 172, 174
resources State Compensation Law, 271
public law, 2, 11, 13–14, 24, 37, 137 state ownership (definition under
See also constitutional law Constitutional Law), 96
public law priority theory, 14 statutory law, 9
public ownership. See under ownership substantive law, 12
Sun, X Z, 91
Qing dynasty, 7–8 Sun Yat-sen, 111
Draft Code of 1911, 15 Sunshine Department Store. See Luo
Daxing (case study)
real estate development, 164 Supreme People’s Court, 22, 31, 196,
Republic of China, 5, 20, 21, 42, 89, 270, 271
128, 131, 132, 193, 196, 261, 270, Interpretation on the Contract Law (I),
271, 299 237–38, 240, 241
requisition of property, 98, 99, 144, Interpretation on the Contract Law
149–50, 163, 150, 234 (II), 224, 25, 240
Index 333
Interpretation on Some Question separate, 299–300

Relating to Contract Law of the several, 300–301
People’s Republic of China, 196 wrongful act of a third party, 308–9
Opinions on Some Issues Regarding Tort Liability Law, 30, 270, 275
Implementation of the General Tort Liability Law Regime
Principles of Civil Law, 271, constructive fault liability principle,
274–75 278
Interpretation of the Supreme People’s scope of rights, 272
Court on Some Issues Regarding structure, 272–73
Establishment of Liability and traffic safety, 278
Compensation for Mental Distress tort remedy, 301–6
Arising from Torts, 271 claim for compensation, 302–3
‘three specifics’, 91
things, 57 Trade Law, 271
critical and non–critical components
of, 56 United Nations Commission
definition, 55–56 on International Trade Law
differences with fruits, 56–57 (UNCITRAL), 195
See also civil objects; civil subjects: United Nations Convention on Contracts
things for the International Sale of Goods
Three Principles of the People, 111 (CISG), 195
tort Urban Real Estate Administration Law
definition, 270 of 1994, 103
relationship, 273 usufructory rights
tort cases: causation, 289–91, 296; farms: land use rights, 169–72, 174;
elements, 287–91; fact of damage, residence use rights, 172–74
288–89, 296; fault, 291, 296; in Property Rights Law, 92, 162–74;
illegitimacy, 287–88, 296 by assignment, 166; by allocation,
See also burden of proof 166–67; for construction purposes,
tort liability 164–65; general rules, 163; land
constructive fault liability principle, use rights, 164–65; main features,
278–83 164–65; methods of creation, 165;
establishing viability, 273–87 renewal, 167–69; tenure of land
exemption and mitigation, 306–15 use rights, 167
fault liability principle, 276–78 utilization of property, 93, 103
force majeure. See force majeure
joint, 296–99 Wang Yiqiang, 128–29
non-fault liability principle, 283–87 Wang Xiaoliang, 130
principle of fair allocation of liability, Wang Zhaoguo, 93–95
274–76
CHINESE
BUSINESS
LAW
‘Unlike the heavily theoretical approach adopted in many other textbooks on this SERIES
subject, Dr Zhang’s insightful business-oriented treatment of the Chinese civil law will
be a source of delight for business people, students and teachers alike. Well structured,
accessible and informative, this is a much needed text for a large and wide audience.’ CHINESE
— Walter Lee, Gallant Y T Ho & Co, solicitors BUSINESS LAW
Chinese Civil Law for Business

‘This lucid, systematic and comprehensive guide is an excellent primer for those who SERIES
wish to acquire an understanding of Chinese civil law for business purposes. The many
examples throughout its chapters serve as concrete case studies of the application of
business law in contemporary China.’
— Lusina Ho, The University of Hong Kong
This book offers clear and comprehensive coverage of civil law in China as it pertains to
business. It takes a practical approach and is heavy on examples that are based on actual
legal cases that have occurred in China. Using these examples, the author illustrates how
civil law plays out in real-life situations.
The first two chapters describe the development and general principles of civil law in
China, and this is followed by chapters on property rights law, the law of contract and tort
liability law. China does not yet have a single civil code, and its civil law regime is made up
of a complicated patchwork and hierarchy of laws and statutes. This book systematically
gathers the relevant articles from these diverse sources under its chapter topics, explaining
any differences among applicable laws and pointing out which take precedent.
The book offers fresh translations of the relevant legal texts. This should be a welcome
addition to the field as there are few official English translations of these laws, and the
unofficial ones vary greatly. The author provides explanations that make these sometimes
difficult texts easily accessible.
Business people, students and scholars will all benefit greatly from this book. Readers
will be repaid with an understanding of civil law that will make them more adept in any
consideration of business in China and in any business dealing there. They will also gain a
fuller picture of China’s economic systems (particularly its property system), the rationale
Zhang Xiaoyang
Chinese Civil Law
for Business
behind these systems, and the policy orientations that will steer their future development.
Zhang Xiaoyang

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CHINESE

Chinese Civil Law for Business

© The Open University of Hong Kong, 2013

All rights reserved. No part of this material may be reproduced

ISBN: 978-962-7707-93-6 (Paperback)

Printed in Hong Kong

This book is printed on environmentally friendly paper.

About the author ix

Chapter 1 An introduction to civil law 1

Chapter 2 General principles of civil law 30

Chapter 3 The Property Rights Law 89

Chapter 4 The law of contract 193

Chapter 5 The Tort Liability Law 269

According to China’s General Principles of Civil Law, civil law governs

School of Business and Administration of the Open University of Hong Kong

While this book is no doubt the product of a collective endeavour, all errors

Zhang Xiaoyang is an associate professor in

An introduction to civil law

In Article 2 of China’s General Principles of Civil Law (a representative

Law and legal systems

The characteristics of law

A law is an obligatory rule of conduct. The commands of him or them

As this book concerns Chinese law, it is essential to begin by considering how

According to the prevailing view in Chinese academia,1 law is created by the

Law: Governing human conduct with state compulsion

The evolution of law is an outcome of the complex interaction of economic,

By formulating a series of bottom-line norms, law governs human conduct.

Law: Governing important human conduct only

The goals of law

The notion of ‘justice’ is in fact relative and constantly changes. It is defined

In contemporary jurisprudence around the world, law recognizes and

China nowadays is making apparent strides towards the goals of respecting

Take the prohibition on begging in public places imposed by local

Common law and civil law systems

The common law system

A striking feature of a common law system is the binding effect of judicial

Common law systems are currently adopted in many jurisdictions, in

The civil law system

Most civil law jurisdictions attach great importance to systematically

result of economic development in Continental Europe. The key substance of

In the nineteenth and twentieth centuries, the creation of civil codes

The categorization of law in civil law systems

It should be borne in mind that the significance of some categorizations might

Basic law / Non-basic law

General law / Special law

Special law is created to have applicability only in special situations, in terms

As a special law is designed to address specific problems on top of a general

Substantive law / Procedural law

‘Substantive law’ refers to a set of rules and principles contained in each

It is important to ensure the achievement of justice in both substantive and

National law / International law

‘National law’ (also known as ‘municipal law’ or ‘domestic law’) normally

In a narrow sense, international law means public international law

In a broad sense, international law includes public international law and

Private international law is also known as ‘rules of conflict of laws.’ The

International law is proliferating in this period of globalization. With more

Public law / Private law

In practice, there has been increasing interchange between the application

An overview of the Chinese legal system

Chinese legal philosophy was strongly influenced by Confucianism, which

China started to implement a policy of economic reform and opening-up

Today, a relatively complete legal system exists that accommodates China’s

The current legal framework