The lack of and needs for interests-balance system in the CCL

4.2.1 The lack of interests-balance system in the CCL

“Balance of interests is one of the basic ideas and principles of law…both excessive and insufficient protection for the individual’s interests conflict with the requirements of the

modern society” (Gao, 2006, pp. 86-87). The idea of the balance of interests applies not only to the relationship in which one party has a weaker bargaining position than the other, such as labor or consumer contract, but also to the relationship between the aggrieved party and the breaching party. A Chinese scholar, Professor Qu, stated that: “balancing the interests of different individuals is a fundamental principle of legislation, as well as that of application of law… civil law would lose its way if interests-balancing was abandoned” (Qu, 2002, p. 38).

Urges to balance the interests of different parties were particularly vocal during the drafting of the Chinese Labor Contract Law and the Chinese Tort Law. For instance, the drafters of the Labor Contract Law had a tendency to overprotect the interests of laborers. Although compared with commercial contract, there is a general recognition that the labor party has an unequal bargaining power and that there needs to be special protection against exploitation, such

“special protection” should have restrictions and the “idea and purpose of labor law should be

‘to promote equality through inequality’.” (Feng, 2006, p. 25) During the drafting of the Chinese Tort Law, it has been pointed out that the populist emotions flowed out and the

protection of the aggrieved party has been partially emphasized (Zhao, 2010), while the protection of the freedom of individuals has been largely ignored. Similarly, there have been calls to pay more attention to the balance of interests between the infringer and the aggrieved party (Zhang, 2009). By contrast, in the context of the Chinese Contract Law, Chinese jurists seem to rarely question whether the interests of the breaching party and the aggrieved party have been well balanced, and whether the rights and duties of the breaching party have been properly designed.

During the development of Chinese contract law in the past several decades, the ground of liability for breach of contract has shifted from the principle of fault to the principle of the binding effect of contract itself, which gives rise to the concept of liability without fault (Han, 2011b, pp. 590-592). Accordingly, the idea of sanction and punishment on the breaching party should be removed. However, the present Chinese liability system in contract law does not pay enough attention on the balance of interests of the breaching party and the aggrieved party, and therefore excessively protects the latter. As mentioned above, there is neither a supplementary performance period for the seller, who tendered nonconforming subject matters, to provide a second tender nor a right for him to cure under the CCL; there are no instruments for balancing the interests of the parties in such a case except for the general principle of good faith.

In a word, Chinese contract law should have paid more attention to the balance of interests between contracting parties, but not focus on “punishing” the breaching party with all kind of means. Actually, the need for the protection of the seller’s interests in case of nonconformity has already become clear in judicial practice.

4.2.2 The need for the system of cure in legal practice

In legal practice, when determining which remedy right of the buyer should be admitted, the courts have paid attention to the protection of seller’s interests in cure in most cases, and sometimes instructed that the seller should be given a chance to repair before the buyer returned the goods.

In the decision of HuYiZhong MinSi (Shang) Zi No.84 (2005) involving a sale of cellphones, the seller X did not deny quality problems in 2302 cellphones, but he argued that these problems could be solved by repair, while the buyer Y argued that the percentage of

cellphones to be repaired was too high and therefore, these cellphones should be returned. The court found that:

“In the 2302 cellphones that Y intends to return, there are 1407 that were unsold for various reasons. There is no ground to support return of goods based on the argument that quality problems have caused loss of commercial credibility. 608 cellphones of 735 have been repaired, and therefore the buyer should accept them; as to the 127 cellphones left and other 54 pieces returned to the seller, there is no evidence provided by the seller that they had been properly repaired, the demand of the buyer to return these goods thus can be admitted, the seller must return the purchase money accordingly; as to other 106

cellphones, they are still in the process of repairing or delivering to the seller, there is no ground for granting the return of them.”^①

In this case, the return of goods has been considered as partial termination of contract. In the decision above, the court imposed strict conditions on the exercise of returning goods: If the cellphones have been repaired or not been given a chance to repair, the remedy of return would not be granted to the buyer. It is only if the cellphones have not been adequately repaired in time that the buyer can be awarded the remedy of return. In this decision the judge has considered the interests of both parties and found that a second chance to repair should be the general condition of return. Inspiring from this instruction, we can conclude that the seller’s prompt and effective repair or other forms of cure of breach may be a reasonable ground to suspend the buyer’s remedy of return.

A similar standpoint has been adopted by the Chinese Supreme People’s Court’s Judicial Interpretation. In the Judicial Interpretation on the Law of Sales Contract (JILSC), Article 22 provides that where the buyer has notified the nonconformity in quality within the inspection period, quality guarantee period, or a reasonable period, if the seller fails to repair the subject matter as demanded or, due to an emergency the buyer repairs the subject matter by himself or through a third party, the courts shall grant the compensation for reasonable expenses by the seller to the buyer who has so claimed. We can observe that the condition of demanding compensation for reasonable expenses include: (a) notification by the buyer of the

① Unless otherwise stated, judicial decisions referred to in this dissertation all come from the database of Beida Fabao, see http://vip.chinalawinfo.com/index.asp..

nonconformity in quality within the inspection period, quality guarantee period, or reasonable period; and (b) failure by the seller to repair the subject matter as demanded or, impracticability for the buyer to deliver the goods to the seller for repair due to an emergency situation. It can be inferred that, conversely, in case the seller can repair the subject matter as demanded or there is no such emergency situation, the buyer may not repair the subject matter by himself or through a third party, otherwise he will be barred from requiring relevant expenses for repair.

Obviously, the priority of seller’s interests in cure is indirectly confirmed by the JILSC.

In legal practice, it is not satisfactory to entitle the buyer to choose any remedy he deems reasonable. It is unavoidable that some buyers will make arbitrary decisions, or that some buyers fail to choose a proper remedy due to their shortcomings of knowledge. Of course, if the buyer and the seller frequently communicate with each other in good faith to solve the problem, dispute may be avoided altogether. Unfortunately, this is not something on which we can rely in real life. Many suits have been brought due to the lack of communication in good faith, and the courts have little choice then but to balance the interests between contracting parties on a case-by-case basis, determining what constitutes a reasonable remedy. Judicial decisions and the SPC’s judicial interpretation have shown that the seller’s interests in cure need to be protected in one way or another.

4.2.3 The need for the system of cure to maintain the coherency of remedy system The establishment of a system of cure is also necessary for the coherency with policies behind the rules on termination of contract and notification of nonconformity.

Firstly, the system of cure is necessary to maintain the coherency with policies behind the rules on termination in the case of nonconformity in quality. According to the fourth item of CCL Article 94, if one party delays its performance of obligation or breaches the contract in some other ways, thereby frustrating the purpose of the contract, the other party may terminate the contract. And according to the first sentence of CCL Article 148, where the quality of the subject matter tendered does not conform to the quality requirements, thereby frustrating the purpose of the contract, the buyer is entitled to terminate the contract. These two articles are the basis of the buyer’s right to terminate the contract in the case of nonconformity in quality.

Compared with the third item of Article 94, which provides that there is a right to termination

if one party has delayed the performance of its main obligation and also failed to perform within a reasonable period after a notice by the other party, it can be found that the CCL has not provided similar conditions for termination of contract in the case of nonconformity in quality or quantity. In other words, the only way for terminating the contract in the case of nonconformity in quality or quantity is the frustration of contractual purpose. Under these circumstances, the system of supplementary performance or cure should be indicated from a reasonable interpretation of the law. Since much nonconformity in quality or quantity can be cured by repair, replace, or other supplementary performance, the cure of the breach should be not only permitted, but also to some extent encouraged, for the sake of saving the contract.

In some cases, the buyer may intend to escape from a bad bargain, and therefore raise an improper claim, imposing a high cost on the breaching party. In such a case, it would be desirable to protect the seller’s interest in cure. A system that enables the seller to refuse unreasonable requirements of the buyer and to tender instead a proper form of cure could protect the seller against bad faith and hardship.

Secondly, the system of cure is necessary for the coherency with the policies behind the rules on notification of nonconformity. In many legal systems the buyer has been required to notify the nonconformity of goods within a reasonable period of time after he discovered or should have discovered the breach, under penalty of losing all his remedies for nonconformity.

Examples of this approach include BGB Article 377 and UCC §607(3). The notice period has been considered as a device to protect the interests of the seller (Canaris, 2006, p.437). In the view of some German courts, the justifications for the notice rule include promoting prompt settlements and encouraging supplementary performance (Boujong, Ebenroth, & Joost, 2001, p.478). Some U.S. scholars also point out that the foremost justification for the notice rule is to

“enable the seller to make adjustments or replacements or to suggest opportunities for cure to the end of minimizing the buyer’s loss and reducing the seller’s own liability to the buyer.”

(White & Summers, 2009, p. 655) Clearly, the major ground for the notice rule is to facilitate supplementary performance or cure of breach.

CCL Article 158 has established a similar requirement for the notification of breach. If the buyer does not notify the seller within the agreed period, or if there is no agreed period and the buyer fails to notify within a reasonable period after he discovered or should have discovered

the nonconformity, the subject matter will be deemed to be conforming to the contract. This rule requires a similar justification. It is plausible to say that the main functions of the notice rule should be to promote the cure of the breach, to provide chances for investigations, and to mitigate the loss due to breach. And only with the help of notification, it is possible for the seller to timely cure the breach; difficulties for investigation and for cure, the loss arising from the breach will certainly increase with the time elapsing. Therefore, from the perspective of maintaining the coherency with the policies behind the notice rule, it is necessary to establish the system of cure.