Contract Law in the People's Republic of China - Rule or Tool: Can the PRC's Foreign Economic Contract Law Be Administered According to the Rule of Law?

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I. INTRODUCTION

"Arbitrary Justice: Breach of contract in China becomes test case;"(1)

"S&P Warns China That Confidence May Be Hurt by Contract

Disputes."(2)

Despite the size and growth potential of the People's Republic of

China (PRC), some international investors are questioning the

wisdom of doing business with Chinese companies.(3)

Highly publicized contractual disputes between Chinese and foreign enterprises have focused attention on the PRC's perceived failure to consistently enforce contractual obligations according to the rule of law.(4) China has drawn the attention of the international community for two reasons. First, despite perceived problems with contractual enforcement, the PRC represents a large and attractive market for foreign enterprises. China's economy is the most dynamic of any size in the world.(5) With a population of 1.1 billion,(6) an average annual gross domestic product growth rate of seven percent over the last fourteen years,(7) an abundance of low-cost labor, natural resources and space, and its proximity to other booming markets in East and Southeast Asia,(8) the PRC is an attractive target for firms seeking to open new markets. For example, from 1979 to 1982, the amount of money committed for investment in China by U.S. companies totaled $2.81 million.(9) By 1995, U.S. investment in China had increased to $7.471 billion.(10)

Second, Hong Kong, a hub for foreign ventures in the Pacific Rim,(11) is scheduled to revert to PRC sovereignty in 1997.(12) Hong Kong is one of the most prosperous economies in the world in part because of its commitment to a free market economy and to the application of the rule of law in business practice.(13) The concern is that when the PRC takes over Hong Kong, Hong Kong's relatively effective legal system will be replaced by one resembling the PRC's.(14) The comments of a U.S. judge in a recent wrongful death case exemplified these fears.(15) Holding that the case could be tried in the United States, the judge noted that "the uncertain future of the Hong Kong legal system, given the island's reversion to Chinese sovereignty in less than two years, counsels heavily in favor of jurisdiction to ensure that the [plaintiffs] have an opportunity to obtain redress, if any be appropriate, for the grievous loss they have suffered."(16)

The judge's comments reflect the belief of many experts in the United States and Hong Kong that the rule of law will be eroded in Hong Kong after the island reverts to Chinese sovereignty in 1997.(17) Erosion of the rule of law would expose companies in Hong Kong and those that deal with them to the same risk of contractual non-enforcement as that faced by companies currently doing business with or in the PRC.(18) Further, Hong Kong is a major source of free and unrestricted economic information concerning the PRC.(19) Some speculate that this source of information will dry up after reversion, thus increasing the risk of investing in mainland China.(20)

The adjudication of contractual disputes according to the rule of law is extremely important to the international business community because the PRC is an attractive market and adjudication according to the rule of law significantly increases the predictability of contractual enforcement.(21) However, because the law traditionally has been viewed from an instrumentalist perspective in the PRC.(22) the question has been raised of whether, given the PRC's current system of government, the law can ever be the kind of overlying, guiding principle that makes contractual enforcement predictable. The goal of this Note is to answer this question, at least with respect to the PRC's Foreign Economic Contract Law (FECL), which governs disputes between enterprises of the PRC and foreign businesses.(23)

II. THE RULE OF LAW RULE BY LAW AND CONTRACTS

In the West, a key characteristic of a "civil society" is autonomous economic organization and transactions. …