Reconsideration of the notion of defects under Chinese law

3.1.3.1 Different meanings of defects in academic research

Many Chinese civil law scholars prefer to use “defects” rather than “nonconformity” in their studies in spite that the latter concept is used much more frequently in both the CCL and

the legal practice (e.g., L. M. Wang, 2003, p. 398; Cui, 2010, p. 386; Han, 2010, p. 389; Ma &

Yu, 2007, p. 642). D. F. Xu (2006) stated that: “If the defects have been disclosed, the mere lack of a certain function in the product will not constitute defects; but if a functional defects has not been disclosed, it will definitely give rise to liability for defects”, and that the common basis for liability for defects and liability for culpa in contrahendo could be reflected in “the relationship between defects and disclosure” (pp. 88-89). It is clear that, in the preceding literature, defects that should be disclosed in the process of contract conclusion and the one that leads to liability for defects must be differentiated at the level of both meaning and function, otherwise the logic is confusing: defects that has not been disclosed will not constitute defects.

H. L. Wang (2005) argues that the concept of nonconformity in quality specified in CCL Article 111 could be considered as one of defects in quality, and “the concept of defects may also provide basis for the pre-contractual obligations and the collateral obligations” (pp. 72-73).

Obviously, defects here do not only refer to the nonconformity in quality in CCL Article 111, but also play an important role for clarifying the pre-contract obligations and the collateral obligations. Therefore, defects have different meanings and functions in academic research and cannot be merely sorted into the instruments for analyzing breach of contract or the ones for determining the pre-contract obligations.

The different functions carried by defects have shown that it is a more general concept, which is often connected with an objective standard. If we go back to the initial meaning of defects in the traditional civil law systems, we can observe that most legislators initially

employed objective rather than subjective standards to define the notion of “defects”. A case in point is the old German obligation law.

The old BGB Article 459 firstly required the seller to warrant the buyer that at the time when the risk passed to the buyer, “it is free from defects which diminish or destroy its value or fitness for its ordinary use or the use presupposed in the contract. An insignificant diminution in value or fitness is not taken into consideration” (C. H. Wang, 1907, p. 100), then in the same provision it required the seller to warrant that, “at the time the risk passes, the thing has the promised qualities.” (C. H. Wang, 1907, p. 100) The notion of “defects” was only defined in light of the “ordinary use or the use presupposed in the contract”, but not primarily according to “the promise”. Therefore, defects and breach of promise may be interpreted as different

systems, and the former should only be determined from the objective perspective.

Accompanying the rise of the performance theory (Erfüllungstheorie), the subjective standard for determining defects has been more emphasized (Westermann, 1995, p.199). When modernizing the old German obligation law, the new wine was put into the old bottle: as Medicus and Lorenz (2010b, §77 Rn. 77, 81, 85) point out, “Mangel” has been redefined with subjective meanings in the first rank (subjektive Fehlerbegriff). The new BGB Article 434 requires the thing sold free from defects as to quality when the risk passed, and the foremost standard to determine whether the thing is free from defects is “the agreed quality”. In the absence of such agreement, the thing being free from defects as to quality can be determined in light of the following standards: (a) the use specified in the contract, and otherwise (b) the normal use and “its quality and condition is such as is usual in things of the same kind and can be expected by the buyer by virtue of its nature” (Tamm, 2006, pp. 52-53). It is obvious that the subjective meaning of defects has been given priority over the objective meaning and the new German law is moving towards the approach of the CISG and EU Consumer Sales Directive of 1999.

The academic researches that consider nonconformity of the subject matter provided in CCL Article 111 and Article 155 as defects, may be inspired from the approach of the

redefinition of Mangel in the new German law. However, the reform of German obligation law reflects that the old German law at first did not define defects with the subject meaning in the first rank; on the contrary, the objective meaning had been put in the first rank since this

concept was established. It is understandable that the German legislators preferred to redefine a traditional concept rather than to replace it with a new one from international conventions; on the other hand, it is not necessary for Chinese scholars to follow the German approach to interpret nonconformity as defects, unless the Chinese contract law is facing the same problem as the German law did. If we examine the provisions of the CCL carefully, it can be found that the law of sales contract was more influenced by the CISG, while the laws of contract for gift and contract for storage have borrowed some rules from traditional civil codes. As a result, on one hand, nonconformity has become the stone concept in the law of sales contract (CCL Arts.

153-155) and contract for work (CCL Art. 262), on the other hand, there are still rules with the concept “defects” in the law of contract for gift (CCL Art. 191), contract for storage (CCL Art.

370), and contract for trading-trust (CCL Art. 417).

Given the considerable weight of contract for sales, for works, and for lease, it is fair to say, the CCL has, from the beginning, basically refused to adopt the traditional notion of defects, but established similar notion and related rules with the CISG. The following questions should be: in what way the Chinese legislators have actually employed defects in the preceding four provisions? Are they actually the same as nonconformity?

3.1.3.2 Defects in Chinese positive law

In this subsection, each of these provisions that have employed the concept defects will be examined. The first provision that mentions “defects” relates to latent defects in sample for sales. CCL Article 169 provides in this respect that: “In a sale by sample, if the buyer was not aware of a latent defect in the sample, the subject matter delivered by the seller shall

nevertheless comply with the normal quality standard for a like item, even though the subject matter delivered complies with the sample.” No comparable provisions can be found in U.S.

law, German law, the CISG,^① or Japanese civil law. Latent defects in CCL Article 169 cannot be understood from the perspective of nonconformity with the agreement because these defects only concern samples in the pre-contractual negotiation phase. The subject matter tendered afterwards with the same kind of defects as the sample will be viewed as nonconforming only if the defects make them fail to meet the normal requirement for subject matter in the same kind, but they would not be considered as nonconforming merely because of the failure of being fit for a particular purpose of the buyer. In short, the latent defects in sample cannot be defined as nonconformity with the contract.

The second provision that mentions defects relates to gift contracts. According to the first sentence of CCL Article 191(1), the donor is not liable for any defects in the gift property if he did not contract for an obligation to the donee; CCL Article 191(2) then provides: “Where the donor intentionally omitted to inform the donee of the defects or warranted the absence of any defects, thereby causing loss to the donee, he shall be liable for damages.” Yet CCL Article 191 would not make sense if “defect” was defined in a solely subjective sense of nonconformity to the contract, because no donor can be excused under CCL Article 191(2) if the defects refer to

① See A. M. Giuliano (2006); see also J. S. Mo (1999).

quality conditions that do not comply with the requirement agreed in the contract. On the contrary, it seems reasonable to define defects with an objective standard here. Firstly, most contracts for gift with no obligation on the donee would not specify the quality condition of the gift property and, the special requirement of the donee rarely occurs even if it is normal to find some unsatisfactory conditions in the gift property, comparing with the new item of the same kind. Secondly, since the donee gets a benefit from the contract without consideration, it is not unreasonable to consider that he should bear the burden of possible defects. Therefore, it is unnecessary to hold the donor to a general obligation to warrant the gift to meet normal quality standards for a like item, except if the parties expressly agree so. It is more reasonable to hold him instead of an obligation to inform the donee of any defects, as provided in Article 191(2).

And this obligation to inform only makes sense in case defects are defined by an objective standard rather than a subjective one, because the contract will only rarely set a quality standard.

Another two provisions contained defects are Article 370 and Article 417. CCL Article 370 provides that if the deposit delivered by the depositor has defects or requires special safe keeping measures in light of its nature, the depositor shall inform the depository of the relevant situation. If the depositor failed to inform, the depository is not liable for damages. Likewise, according to CCL Article 417, if a trust item was defective, perishable or susceptible to deterioration at the time it was delivered to the trustee-trader, upon consent by the trustor, the trustee-trader may dispose of the item; where the trustee-trader is unable to contact the trustor in time, it may dispose of the trust item in a reasonable manner. These two provisions are related to contracts which rarely need to set subjective quality standards against the delivery of defective subject matter as long as they do not cause losses to the depositary or trustee-trader, which is why the provisions limit themselves to affirming the obligation to inform or the right to dispose. As we can see, these provisions would make no sense if the defects were defined from a subjective perspective of contractual agreement (no quality standards to conform to), which means they must be defined objectively, with regard to the instability of the subject matter.

In addition, there are a few rules that mention “defects” in the Chinese Auction Law (CAL). CAL Articles 18, 27, and 35 are related to the obligation of the trustor and auctioneer to

disclose the defects of the auctioned object, and CAL Article 61 mainly regards the obligations of the trustor and auctioneer to compensate for damages in case they breach such obligation to disclose. These rules are unique, compared with similar rules in German law and Japanese law, both of which generally impose no liability for defects on the auctioneer unless some

exceptions.^① In Chinese law, the trustor and auctioneer must disclose the defects which they have been aware of. The defects can only be defined from an objective perspective as there can be no detailed meeting of intention between the trustor or auctioneer and the many bidders, who may have different intentions. Defects in the subject matter for auction should be understood as lack of certain quality that can be normally expected by a rational third party;

however, these defects are not necessarily inconsistent with the agreement, meaning that the seller should be held to no more than an obligation to inform.

To sum up, all the provisions that mention “defects” in the Chinese positive law are concerned mainly with the bargaining process and with contracts that do not normally set express quality standards on the subject matter. Accordingly, the obligation of the seller is usually limited to an obligation to inform of any defects, and this would only really make sense if “defects” were defined in an objective rather than subjective sense.

3.1.3.2 Different meanings of defects and the adoption of nonconformity

According to the two preceding subsections, we can distinguish between two different meanings of defects. One is the “defects” in the sense of nonconformity to the contract, a meaning featuring prominently in academic research. Another is the “defects” in the sense in which it is actually used in the Chinese positive law. As Table 3.1 shows, there are significant differences between them.

① See BGB Article 445 and JCC Article 570.

Table 3.1

Defects with complex meanings

Defects as used to in academic research Defects as occurring in positive law Relevant

Provisions

CCL Articles 153, 154, 155, 216, 244, 262, 62, 111, 148, and 158

CCL Articles 169,191,370,and 417; CAL Articles 18, 27, 35, and 61

Legal Effects Remedies for breach of contract Obligation to disclose

Standards for Determination

First, fail to satisfy the requirement of contractual agreement;

Second, in the absence of contractual agreement, fail to satisfy the requirement of the purpose of contract, usage of transaction, national standard or industrial standard, and other standards provided by law.

Fail to satisfy the ordinary standard of the same kind item or normal expectation of a rational third party.

It is not proper to use defects in a too general sense, as this may lead to confusion in legal decisions due to lack of guidance on the positive rules. In order to bridge the gap between the two meanings of defects and to improve the interpretative theory, I would like to propose the concept of “nonconformity” as a basic analyzing instrument in study. Among the

characteristics of this concept, we can count that: (a) it exists no later than the transfer of risk from the seller to the buyer; (b) it is judged mainly by a subjective standard, especially through the contractual agreement; (c) it is applied to both ascertained objects and unascertained

objects; and (d) it is mainly related to remedies for breach of contract.

There are four aspects of distinction that can be observed between defects and nonconformity in positive law: (a) defects always exist in the bargaining process when no effective contract has yet been concluded, while nonconformity exists no earlier than the conclusion of contract; (b) defects exist only in ascertained objects, while nonconformity may exist in either ascertained objects or unascertained ones; (c) the standards for determining whether a defect exists mainly depend on objective factors, usually in terms of the ordinary purpose and normal expectation of a rational third party, while the standards for nonconformity mainly depend on the agreement itself, with objective standards coming into use only if the

contract does not specify subjective ones; and (d) the major legal consequence associated with

“defects” is the duty to disclose, while in the case of nonconformity the consequence should be remedies for breach of contract.