III Relation between establishment
and effectiveness of contract
We must study contract establishment before discussing about contract effectiveness. 【5】Scholars have controversies over the definition of contract establishment and the relation between contract establishment and contract effectiveness. These controversies originate from both law theories and legal regulations.
Some scholars think that contract establishment and contract effectiveness are different concepts. Establishment means that offer and acceptance are in line with law and parties reach an agreed expression; effectiveness means that the contract conforms with legal conditions for the contract to take effect (Main body, contents and form are legal and meaning expression is true and willing.) and the contract has binding forces over the parties to the contract. Whether a contract is established is an issue of fact and the meaning of it is to identify whether the contract exists, contract type and differences between contract conduct and fact conduct. The results of the judgment are established or not established; whether or not a contract takes effect is an issue of legal judgment. The meaning of it is to identify whether a contract conforms to legal spirit and regulations and whether effect recognized by law can be achieved. The results of the judgment are valid, invalid, undecided effectiveness and revocable. 【6】
According to some scholars, contract establishment is in essence the establishment of contract legal relation. It is an establishment of legal relation chased after by the parties. If there is only consensus over offer and acceptance and the parties have joint meaning, is the legal relation between the parties established? If party A wants to sell a smuggled car to party B and the two parties reached an agreement, is the legal relation between the two parties established? It is prohibited by law to set up legal relation over smuggled commodities. The legal relation of the contract is not established. Therefore, whether a contract is established is related to value judgment. The so-called fact issue is the fact that the offer and the acceptance satisfy each other and it is definitely not the fact that an establishment of legal relation (tenability of legal relation) is achieved.
The Contract Law stipulates conditions where offer and the acceptance reach a joint meaning but the contract is not established. It is a misunderstanding in legal theory, and this misunderstanding penetrates into legislation and is popular among the public. Reaching a joint meaning is only the necessary condition for the establishment of legal relation, not the sufficient condition. Because the Contract Law stipulates that offer and acceptance are only expression of intent, not legal actions. In order not to abandon this misunderstanding too suddenly, I propose to divide contract establishment into substantial establishment and superficial establishment.
Contract establishment Substantial establishment
Superficial establishment ——Parties set up desired contract legal relation.
【7】
——Offer and acceptance meet each other but the desired legal relation is not established.
I believe that the opinions mentioned above analyze establishment and effectiveness of contract from perspectives of different legal principles and theories. The opinions have same point and different point. The same point is that contract establishment is not equal to contact effectiveness. The different point is that one opinion illustrates from the perspective of legal forces and the other illustrates with legal relation theories. These different and same points help me to obtain new understanding about establishment and effectiveness of contract.
(I)Connections between establishment
and effectiveness of contract
Contract establishment is the precondition for contract effectiveness and contract effectiveness is the purpose of contract establishment. Generally, contract establishment and contract effectiveness do not happen at the same time. The purpose for signing a contract is to realize contract target by making the contract effective. Roman law once stipulated “principle of co-establishment”. It means that establishment and effectiveness of contract happens together. Term 1 of article 44 of the Contract Law has similar stipulation. Establishment and effectiveness of contract are closely connected. Only contracts that are set up according to law generates the result that enables the contract to take effect, gets recognition of law, obtain legal protection and realize contract purposes.
(II) Differences between establishment
and effectiveness of contract
1. Key elements of contract establishment and contract effectiveness are different, as discussed above.
2 Procedures for contract establishment and contract effectiveness are different.
The procedure for setting up a contract refers to the whole process in which the parties negotiate about the contract contents to reach a consensus. The procedure for contract effectiveness means that the contract takes effect after a certain period of time after the contract is signed. Although it is stipulated by term I of article 44 in the Contract Law that: “Contracts established according to law take effect once the contracts are established”. In other words, establishment and effectiveness of contracts happen at the same time. I still believe that this term is only a regulation on time from which the contracts take effect. It does not deny that the precondition for contract to take effect is to establish the contract. So, I believe that contract effectiveness must go through the process of contract establishment, but the completion of contract establishment does not necessarily promote the contract to take effect, such as in the case where the binding fore is undecided after a certain contract is established. Therefore, the procedure for contract establishment and the procedure for contract effectiveness are not identical.
Generally, the procedure for contract establishment goes through two phases: offer and acceptance. In addition to general procedures, contract establishment also include special procedures such as bidding invitation, bidding-participation and auction. The procedure for contract establishment will be explained in the following through general procedure for contract establishment:
2.1 Offer
Offer is an indispensable period for contract establishment. Generally speaking, offer is an action to make an agreement. The party send out the offer is called the offeror and the party receives the offer is called the offeree.【8】Offer means the intent of the offeror towards the offeree wishing to sign a contract. It is stipulated by article 14 in the Contract Law that: “An offer is a proposal hoping to enter into a contract with other parties. The proposal shall comply with the following stipulations: (1) Its contents shall be detailed and definite; (2) It indicates the proposal of the offeror to be bound in case of acceptance.” This term is a regulation about the character and components of the offer.
Key elements of an offer include the following:
1) An offer shall be expressed by a specific person, which means a party to the contract to be signed. This person may be a natural person, legal person or other civil body recognized by law.
2) An offer must have clear intents and it shall be clearly expressed that once the offeree accepts the offer, the offeror will be constrained by such a expression of meaning. When sending an offer to the offeree, the offeror shall express his or her purpose of signing the contract. Only by doing so, can the two parties reach a consensus when the offeree makes acceptance. Article 14 in the Contract Law has stipulated this point clearly.
3) The offer shall be sent to the offeree, who can be one person or more. In addition, it is not forbidden to send an offer to persons that are not specified. For instance, prices on price tags in super markets are offers to unspecified persons within a certain scope. Another example is reward post. It is stipulated by article 3 in Explanations about some issues applicable to Contract Law of the People’s Republic of China by the Supreme People’s Court (2) that: “If a person who publicly declares to pay an award to a party who complete) a certain action, the claim of the party who completes the action asking to be paid by the person who has promised the award shall be supported by the People’s Court.”
4) The contents of the offer shall be detailed and definite. The contents shall include contents of main terms of the contract whose real meaning can be understood by the offeree. The offeree is entitled to require detailed and definite contents of the offer so as to accept and to establish the contract.
2.2 Acceptance
Article 21 in the Contract Law of our country stipulates that: “An acceptance is a statement made by the offeree indicating assent to an offer.” Article 25 writes: “A contract is established when the acceptance becomes effective.” The key for contract establishment is acceptance takes effect and effectiveness time of acceptance determines time of contract establishment. Article 26 in the Contract Law of our country has clear stipulation over the time when acceptance takes effect. A valid acceptance shall have the following key elements.
1) The acceptance shall be made by the offeree. The offer is provided by the offeror to the offeree, so the acceptance shall be from the offeree. The offeree may entrust the agent to make the acceptance to the offeror. The expression made by the third person to the offeror is not an acceptance, even its contents is the same as that of the offer. It can only be regarded as a new offer.
2) The offeree shall make acceptance to the offeror. The acceptance is a reply to the offer so the object of acceptance shall be the offeror. Acceptance made by the promisee to people other than the offeror is not an acceptance but a new offer.
3) The acceptance shall be in consistency with the contents of the offer. Article 30 in the Contract Law of our country writes: “The contents of an acceptance shall comply with those of the offer. If the offeree substantially modifies the contents of the offer, it shall constitute a new offer. The modification relating to the contract object, quality, quantity, price or remuneration, time or place or method of performance, liabilities for breach of contract and the settlement of disputes, etc., shall constitute the substantial modification of an offer.”
4) The acceptance shall be made within a proper time period. The acceptance shall be delivered to the offeror within the proper term specified by the offeror. Articles 23 and 24 in the Contract Law of our country have clear regulations on the term within which the acceptance shall be made.
5) The mode of the acceptance shall meet the demand of the offeror. If the offeror clearly points out the way by which the acceptance shall be made, the offeree shall follow the requirements of the offeror in acceptance-making.
Generally, the time for a contract to be effective is the same as that for the establishment of the contract, so there is no need to go through specific procedures to validate the contract. However, some contracts need special procedures to become effective:
1) Contracts with additional conditions or term. If parties impose additional conditions or term for the contract to become effective, such contracts take effect only when the additional conditions are satisfied or the required term arrives.
2) Contracts that shall be approved by or registered in administrative organs: Many laws and administrative regulations of our country stipulate approval and registration procedures for contracts to take effect, such as Guarantee Law and Regulations on Supervision and Management to Medical Instruments.
3 Wills demonstrated by establishment and effectiveness of contract are different
Contract establishment is the demonstration of the wills of the parties to the contract and the demonstration of contract-freedom principle. The establishment of contract shows that the parties have reached a consensus over the terms of the contract. Contract effectiveness depends on national laws and it is a demonstration of the will of the state. Contracts that take effects because of their conformity to national laws are positive legal evaluations over the contracts and the contracts are protected by law. Contract effectiveness is also the consistency of the wills of the parties and the state.
4 Phases of contract establishment and contract effectiveness are different
Contract establishment marks the end of the period in which the contract is set up and the start of the period in which the contract takes effect. Contract effectiveness means that contract establishment has been completed and contract execution begins.
5 Legal results of contract establishment and contract effectiveness are different
It has been pointed out that contract establishment can be divided into establishment in form and establishment in essence. This theory again divides contract binding force in to binding force in form and binding force in essence. The former one is maintenance force and latter one is execution force. Binding force in form means that after the contract is established, no party is allowed to withdraw, cancel or change the contract without the agreement of the other party. Unless there are other legal regulations, no party is permitted to deny the binding force of the contract. Binding force in essence is the demonstration of contract effectiveness. 【9】Some scholars point out that: “The key of contract binding force is demonstrated by the substantial binding force after the contract is signed effectively. In other words, contents agreed upon by the parties constrain all the parties to the contract. For the parties to the contract, the contract has the same legal forces as those of positive laws.” 【10】 I think that contract establishment in form equals to contract establishment stipulated by the Contract Law and contract establishment in essence equals to contract effectiveness stipulated by the Contract Law. Binding force in form refers to the legal result of contract establishment while binding force in essence refers to the legal result of contract effectiveness.
Legal result of contract establishment: According to article 8 of the Contract Law, no party is allowed to change or cancel the contract without permission of the other party. If the contract cannot be recognized, parties to the contract shall bear contracting fault liability.
Contracting fault liability refers to the pre-contract liability of the party who violates the principle of honesty in the process of contract-signing. If this violation leads to the fail of contract establishment, or invalidity or cancel of the contract and cause loss of the other party, the party who has errors shall bear compensation liability. 【11】 Contracting fault liability system is an important part of civil liability system, but it is not like the system of responsibility of contract-breaching, which originated from Roman law and came into being with contract system. The theory of contracting fault liability system was first advocated by German law expert Rudolf Vou Jhering, who first suggested this theory in his article “Compensation for contracting fault, contract ineffectiveness and unattained loss” published in 1861 on the 4th volume of Jhering Law Annual Report, a magazine he edited as the chief-editor. Later on, there have been continuous discussions by experts in law and justice and there are different ideas in this issue. From the perspective of legislation, German Civil Law Code published in 1896 did not accept the theory of contracting fault liability and did not stipulate it as a key element of general responsibility. It was only referred to by some articles. Civil law codes in Japan, Italy, former Soviet Union and other countries had similar article. Contracting fault liability was formally stipulated as a general legal principle until 1941 in Greek Civil Law Code. 【12】Articles about contracting fault liability in the Contract Law of our country are article 42: “The party shall be liable for damages if it is under one of the following circumstances in concluding a contract and thus causing losses to the other party: (1) disguising and pretending to conclude a contract, and negotiating in bad faith; (2) concealing deliberately the important facts relating to the conclusion of the contract or providing deliberately false information; (3) performing other acts which violate the principle of good faith.” It is written in article 43: “A business secret the parties learn in concluding a contract shall not be disclosed or unfairly used, no matter the contract is established or not. The party who causes the other party to suffer from losses due to disclosing or unfairly using the business secret shall be liable for damages. In addition, contracting fault liability is also showed by liability for random offer-canceling, confirmation of invalidity of contract, failure to notify and failure to assist.
Key elements of contracting fault liability
5.1 One party to the contract breaches pre-contract obligation. One party to the contract violates the principle of good faith in concluding the contract and fails to carry out necessary attention obligations. Pre-contract obligations refer to obligations of the parties in the process of concluding the contract, including duties of care such as notification, assistance, consideration and secret-keeping. These obligations do not exist beforehand, they gradually generate in the process of contracting in which the parties understand each other. So, pre-contract obligation is a kind of collateral duty.
5.2 The party violating pre-contract obligation has caused losses of trust interests to the other party. Losses of trust interests are generated because the contract cannot be established or is valid. The losses include but not limited to the following: cost generated in the process of concluding the contract, cost to prepare for contract execution. These losses shall be compensated because of contracting fault liability.
There are different ideas about how to determine the scope of loss caused by contracting fault liability. Mr. Wang Zejian believes that, generally, when the requests of the victim do not intend to harm others, trust principle shall be adopted. According to German and Japanese theories and examples of judgment, amount of compensation under the circumstance of contracting fault liability shall not exceed execution benefits. In other words, the punishment shall not be higher than predicable benefits when concluding the contract. Compensation for losses because the contract fails to be established, is invalid or is cancelled shall not be higher than execution benefits when the contract is established or valid.【12】The laws of our country do not have clear stipulations over compensation scope for contracting fault liability. This requires the judge consider cases carefully and make reasonable judgment on compensation according to concrete conditions of the cases and fundamental principles of civil law. I believe that the compensation scope shall not be limited to direct loss only and shall be determined according to different conditions of the cases.
5.3 The party violating pre-contract obligations has errors. The party violating pre-contract obligations has subjective errors which lead to failed establishment, invalid or cancel of the contract. The errors include deliberate mistakes and negligence. That contracting fault liability comes into existence is because the doer has subjective errors and thus is condemnable.
5.4 There is causality between violating of pre-contract obligation and loss. The loss suffered by one party shall be caused by the other party who violates pre-contract obligation. Otherwise, contracting fault liability does not exist even if loss of trust interests occurs.
5.5 Contracting fault liability exists in the process of concluding a contract and accompanies failure of establishment, invalid and cancel of the contract. Liabilities occurred after effectiveness of contract are liability for breaching the contract, compensation liability or other liabilities, not contracting fault liability.
Legal result of contract effectiveness: After a contract takes effect, parties to the contract shall execute the contract according to contract terms. Otherwise, they shall bear responsibility for breaching the contract. Chapter 7 of the Contract Law of our country is about such responsibilities. Responsibility for breaching a contract is also termed as civil responsibility for breaching contracted terms. It means that any party that fails to carry out contract obligations or does not carry out such obligations in agreed methods shall bear civil responsibility to the other party. Such responsibility includes continuation of contract execution, taking remedial measures, compensating for the loss, paying penalty and using advanced money to make compensation. Scope of compensation for contract-breaching shall include direct loss and loss of attainable gains. |
