Chinese Contract Law - Essay Example

? Chinese Contract Law The Chinese contract law came to effect in January 2008. It has been one of the most controversial laws. The law was produced from lengthy deliberations between the foreign, domestic and state players. This paper seeks to show the impact of Chinese contract law on foreigners. China has been known for cheap labor, and many investors had flocked the country. The introduction of the new contract law is seen as a major threat to doing business in China. There was a growing need to address social security and protecting laborers. China views this as a way of enhancing political stability. Labor and business interest groups have been the most affected by the contact law. Many businesses have been forced to close as the cost of production increased. History and role of contract law Contracts are perceived to be the backbone of any market economy. China adopted a contract law in 1999. The law was divided into general and specific provisions. Besides, the contract law had supplementary provisions. The Chinese borrowed heavily from UNIDROIT principles. The laws had been drafted to cover a wide scope of contract issues. However, the Chinese needed a superior law that would sustain the economic growth. This led to enactment of another contract law in 2008. Contractual relationships are the essence of business transactions. Many countries agree that one of the keys of economic development is contact enforceability (Chow 2002). The usage of credit and capital is critical to the mechanism of market economy (Glinow & Teagarden 1988). Contracts are enforceable in a court of law, and this secures the possibility of credit sales. Weber argues that rationalization is one of the major characteristics of the modern society. Tasks are completed through broken down processes. The specialized rules are accessed in terms of the exact figures. Through this, future events are managed in a rational way. The process enables large-scale transactions to be conducted (Kitch 1980). A telling example is modern accounting. Accounts are broken down in balance sheets. This is followed by profit and loss accounts. The financial status of a business can be explained in terms of assets and liabilities (Zhang 2006). This explains when contract law is viewed as influential when it comes to economic and infrastructural development. China is no longer a place where cheap knock off products are developed (Jespersen & Skjoett-Larsen 2003). Although the practice of producing counterfeits continues, the quality of modern counterfeits is improved tremendously. The Chinese contact law puts immense emphasis on the clarity of contracts. Article 12 stipulates and describes what the contents of a written contract should be. Advantages of contract law China is nearly meeting the international standards when it comes to contractual legislation. The contract law has eliminated ambiguities when it comes to guidelines on entering into contractual agreements in China. Therefore, the outcome of foreign business contracts is predictable. Benefits The major provision of that gives credible interpretation to Chinese contact law is article 125. The contractual obligations can be supplemented through the provisions of the law (Yongping & Weidi 2008). This occurs when something vital fails to be captured in a contract. Some of those sources include the provision of laws, principle of good faith and transaction usage (Yongping & Weidi 2008). Articles 5 and 6 are firm on the concepts of good faith and fairness. These are some of the benefits of the Chinese contract laws to the foreigners (Jespersen & Skjoett-Larsen 2003). There is an intentional move by the Chinese contract law to create a conducive environment for the foreigners. However, some of the provisions of the new law have an impact on the profitability of the foreign businesses. The article 92 of the Chinese contract law governs post contractual duties between the involved parties. The article suggests an employee is expected to act in a reasonable way in the community. Employees are also bound and committed to the principal of good reliance plus levelheadedness (Jespersen & Skjoett-Larsen 2003). This assures the foreign investors that the culture of law and responsibility is entrenched (Chow 2002). In a case of Jinchang ceramic factory against Ceramics institute group was a compelling example (Zhang 2006). The court articulated that the defendant was unfair to use the trade secrets of the plaintiff. The court found that it amounted to unfair competition (Zhang & Huang 2000). Important articles According to article 4 of the Chinese contract law, the government has the right to intervene in contracts. Articles 3 to 7 of the contract law spell the basic principles. The parties have the right to enter in contracts voluntarily. All parties are free to determine its contents. This is a significant benefit to foreigners in People’s Republic of China. The Chinese government has faced many challenges with regard to the contract law. Employers and employees have been reluctant to sign contracts (Jespersen & Skjoett-Larsen 2003). The Chinese government has aimed at protecting laborers and solving the challenges in the labor market. Most of the challenges revolve around fundamental respect to the plight of the employees like the payment of overtime, wages and social insurance. The law is being opposed vehemently by foreign businesses like General Electric, Wal-Mart and Google. The lobbying by these companies has put the Chinese government under intense pressure. One of the Chinese leaders, on a visit to Washington, admitted there may be concessions. The Chinese government opted to start an international campaign targeting the support for the adoption of the contract law. The law was adopted in a form that protects the rights of the Chinese laborers because of this counter-pressure (Weizuo 2008). The contract law is an effective means of establishing social protection system. This is a scheme to ensure political and economic stability in China. The government has been promoting the rule of law as a way of safeguarding the interests and rights of employees. The government of China insists that even the rights of international businesses have been considered. The international community views China as a prominent global player. This is profoundly influenced by its economic growth and population size. The United States and Germany were influential in drafting the contract law of the Chinese government (Yongping & Weidi 2008). The contract law has tremendously influenced the cost of production in china. This is causing businesses to close down. According to federation of Hong Kong industries, 10 per cent of the Hong Kong businesses closed down by the end of the year 2008. This amounted to approximately 7,000 jobs. According to a wall street journal, shoe companies in Pearl River delta are contemplating closing business. Over 200 Taiwanese businesses have been closed down as the cost of production continues to impact on revenues. South Korean companies moved from many parts in China. This international community views this as an indirect aim of the Chinese government. China aims at reducing enterprises that are viewed as pollutants (Weizuo 2008). Therefore, the new contract law in china is not seen to be friendly to the foreigners. The Chinese government insists foreign direct investments are welcome (Friedman & Posner 1991). China aims at improving service delivery through the introduction of the contract law. According to Adams & Ko, Chinese government encourages foreign investment in value added industrial sectors. This reveals that rise in the production cost by propagated by the Chinese contract law is in line with the plans of the Chinese government. The Chinese government is shielding the low end industrial sector from foreign interference indirectly (Weizuo 2008). The contract law discourages unfair competition. This means that patents and trade secrets are taken with utmost seriousness, which protects investors from being, exploited (Wilson 1995). Investors appreciate the sense of order and restoration of legal sanity in the Chinese labor market (Chow 2002). It is much easier for a foreign investor to seek legal redress with the new law than with the previous law. One of the greatest political gains of the Chinese contract laws in the protection of trading secrets (Fontaine & Ly 2006). This happens when an employee switches to a rival company (Yongping & Weidi 2008). The principle of good faith and integrity is upheld in the new laws. Companies cannot just lay off workers. According to article 67, both parties are expected to give priority to the other. This encourages respect when it comes to performance. This means one party has the right to accept or reject a deal by the other party. Article 9 suggests that getting into a contract shall cause the parties to get into places of civil rights and responsibilities. The parties shall get equal legal status and are expected to comply with the administrative requirements in china (Friedman & Posner 1991). Article 7 warns against impairing public interest through a disruption of contracts. The Chinese contract law says a contract can be terminated when the contract is rescinded. Article 91 spells that obligee can relieve the obligor of the duties and responsibilities. In that case, termination can be conducted through mutual undertaking. Challenges The international community is feeling the impact of the contract law. According to Habel and Schcher, the Chinese government is keen on integrating the informal laborers into the existing social workers. The challenge of the migrant workers has a reason to revamp the contract laws (Fosbrook & Laing 2008). However, some are of the view that the move could compromise the national security of the Chinese government. The contract law was only going to protect the interests of laborers when implemented. Many small and medium enterprises in China operate illegally (Fontaine & Ly 2006). Corruption in Chinese government has been a substantial impediment in the implementation of the contract law. The new contract law demands that employees must have a contract within the first month of being employed (Weizuo 2008). Exporting companies that depend on seasonal orders is faced with extreme uncertainties (Friedman & Posner 1991). They depend on seasonal orders. This kept this operational cost low and did not have to provide retirement contributions and other social benefits (Yongping & Weidi 2008). Foreign companies have been coerced to go to the drawing broad. Many others are relocating to Asian countries with improved labor laws. The contract law demands protection of the employee rights and the expense of foreign business (Fosbrook & Laing 2008). An employee cannot be dismissed through downsizing. After the release of contract law implementation guidelines, the foreign businesses have been held with a higher level of compliance compared to local companies. According to Zhang Yin, one of the wealthiest Chinese women, pushing the government to alter the law has proved futile. The government of China ruled out amending the contract law. According to Sun Baoshu, the minister in charge of Labor, the government is focusing on the contract law implementation. Limitation The contract law relates in a contradictory way to other provisions. According to the American chamber of commerce’s report on china business, unclear regulations and inconsistency were cited among leading impediments in the implementation of the Chinese contract law. However, the report observed that second and third-tier cities have increased government support to attract foreign companies (Weizuo 2008). This has caused foreign companies to shift operations to these Chinese cities. However, the challenge of inconsistent interpretation of law is common in the second tier companies (Fosbrook & Laing 2008). Article 1.7 of the UNIDROIT demands that, all parties act in good faith when it comes to the international trade. The essential rules of the Chinese contract law and UNIDROIT are the same. The effectiveness of the contracts is emphasized by the two laws when it comes to the establishment and termination of contracts. In both cases, conclusion in writing is not emphasized. Writing is viewed as a form of communication (Zhang & Huang 2000). A contract agreement may be concluded orally in the presence of witnesses. The new law imposes restrictions. The Chinese contract law contains many provisions on performance contract with are similar to UNIDROIT rules (Weizuo 2008). According to article 60, unlike the previous contract laws that demanded parties to be diligent in fulfilling their roles, there is the emphasis of good faith. The contract law argues parties to apply the context of the contract laws in confidentiality and purpose or usage. This is perceived to be a progressive step in the Chinese contract law (Zhang & Huang 2000). Article 61 gives the parties room to agree on supplementary terms through consensus and consultation. In case, a disagreement persists, the clause may assist (Fosbrook & Laing 2008). Foreign businesses stand a chance to gain from some of these provisions if they are implemented to the core. The contract law recognizes that a contract not represented in writing many end up in controversy (Friedman & Posner 1991). The contract law in china is flexible to allow writing in case need arises. Case studies A Singapore company verses a Chinese company A Singapore company visited China severally to deliberate on a ceramics factory. The company was the plaintiff while the Chinese government was the defendant. The companies signed a contract on sales and purchases. The defendant would supply the plaintiff with tiles according to the specifications. However, upon the delivery, it turned out that most of the tiles where damaged. The old Chinese contract laws did not have specific provisions on quality inspection. The new contract laws clear these disputes. According to international laws, contracts should include quality inspection procedures. It was later found out the Singapore Company erred and therefore had its claims dismissed. The court found that the specific provisions of quality assurance were missing. A luxurious Hotel case: CIETAC’s commission A Shenzhen group organization signed a contract with an international company based in Hong Kong. The contract dealt with contraction and management of the hotel, (a quality hotel in Shenzhen). The international company was responsible for management of the hotel. The Chinese company was charged with the responsibility constructing hotel. However, the authorities prevailed upon the Chinese company to annul the contract with the Hong Kong Company. A CIETAC commission and tribunal listening to the case held that the contract was nullified. This was according to the existing Chinese law. The Chinese company bore the ultimate responsibility for the nullification. The Hong Kong Company which had embarked on an aggressive advertising campaign was compensated by Shenzhen Company. Recommendations The contract law of china needs a robust method of implementation that is not perceived to be uneven or insensitive to the foreign investors. In the past, the laws have been applied selectively with many small and medium enterprises operating illegally. The foreign companies should be show the same level of compliance with the domestic companies. The contract law of china seems to have clauses that are extremely harsh to the foreign companies. Some of the legal loopholes demand favors the locals. Workers can fail to work for more than one year but still claim salary. Foreign companies that operate of temporary basis are being coerced to use performance contracts and enroll their workers through social security. Some of the controversial clauses and articles need to be discussed with stake holders with the aim of sticking and amicable balance. China should also demonstrate flexibility and clear channels of amending the articles that and against the employers plight. Local investors’ advice should be sought to that effect. It is recommended that china retains it competitive advantage when it comes to cheap labor. This should not happen at the expense of employees. The government should move to control the mass exodus by the foreign companies citing increasing hostile business recommendations. China should seek to identify the steps that propelled the economy to leading stats globally. One was the availability of cheap labor. The Chinese economy has gained heavily from world’s leading multinationals. The Chinese government should not lose the foreign investors casually in the name of a labor contract law. Besides, china should appreciate its global role and factor in international concerns when drafting sensitive laws that touch on international trade. Conclusion The Chinese contract law has been improving over the years. China in consultation with United States of America, Germany and other bodies drafted a contract law. The law was to restore sanity in the social and economic system in China, as she braces for political stability and sustainable economic growth. The labor laws are supposed to ensure there is harmony and coherence in the Chinese labor market. The Chinese government is appealing to migrants to the part of the social system. This is after realization that the government loses billions to business is illegal. The Chinese government shows a strong resolve and commitment to protect employees and employers through the use of contract law. The rights of the employees are accessible. Many articles in the Chinese contract law reveal that employers are required to treat employers with respect as the law demands. The employees have easy access to avenues offer legal redress with ease. However, the benefits to the foreigners need to be given time, and the chance to air their concerns. This shall be a decisive step averting the mass departure from the Chinese market by American, South Korean, Taiwan and other investors. The production cost needs to addressed to maintain an international advantage. Fortunately, the contract law gives hints on the expected conduct of the parties involved in the agreement. Superficially, the Chinese government should give incentives to encourage high end for being the business that improve the technological and security levels in china. The contract law needs a particularly strong implementation policy that shall ensure the full benefits if the law are achieved. International practice should be harmonized with the local policies of the Chinese contract law. The law requires performance contract to be signed and deposited with the relevant labor authorities. The Chinese contract law may not be appealing to all; however, it reveals the willingness of China to determine the welfare of the employees and employers for the sake of even economic growth. References Chow, D.C.K. 2002. A primer on foreign investment enterprises and protection of Intellectual property in China. The Hague: Kluwer Law International. Fontaine, M., & Ly, F. de 2006. Drafting international contracts: an analysis of contract Clauses. New York: Transnational Publishers. Fosbrook, D., & Laing, A.C. 2008. The A-Z of contract clauses. London: Sweet & Maxwell. Friedman, D.D., Landes, W.M., & Posner, R.A. 1991. Some economics of trade secret Law. The Journal of Economic Perspectives, 5, 61-72. Glinow, M.A. Von, & Teagarden, M.B. 1988. The transfer of Human Resources Management technology in Sino-US cooperative ventures: Problems and solutions. Human Resource Management, 27, 201-229. Jespersen, B., & Skjoett-Larsen, T. 2003. 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