La Desobediencia Impide Que Dios Hable

Traditionally, the parties to a contract owe no contractual duties to each other unless the contract relationship between them has formed. This doctrinal wis- dom came from the classic presumption that either contractual responsibility has arisen or the parties have no legal rights against each other at all.43

However, during the contract negotiations the parties in many cases would have to disclose their business information to each other for purposes of mak- ing the contract. The problem then is how to protect the respective interest of the parties during the process of contract making, particularly when a party’s interest is (or likely to) be damaged by the other party’s improper conduct when there is no contract yet.

A dilemma created by the above problem is the tension between freedom of contract and imposition of pre-contractual liability. In common law coun- tries, the courts were reluctant to impose any responsibility on the parties to

42 _{See Jiang Ping, supra note 14 at p. 8.}

a contract without their consent. A major concern was that the acceptance of pre-contractual liability doctrine would diminish the basic value of the free- dom to the contract.44 _{As a result, the negligence liability in torts was then}

borrowed and applied to deal with the responsibilities arising from the stage prior to the formation of the contract.

In China, however, pre-contractual liability is accepted and provided as a special liability system that is employed to impose liability on the party who during contract negotiations violates good faith and causes the other party to suffer damages. In the general sense, the imposition of pre-contractual liability is intended to deal with the liability that may not be properly characterized as either a contract liability or tort liability. The sole purpose of imposition of the pre-contractual liability is to provide a legal protection to the parties during the course of their making a contract.

The initial provision concerning pre-contractual liability in the current Chinese law is Article 61 of the 1986 Civil Code. Under Article 61, after a civil act has been determined to be null and void or has been rescinded, a party who acquired property as a result of the act shall return it to the party who suffered a loss. The erring party shall compensate for the loss that it has caused to the other party. If both parties are at fault, they shall each bear their proper share of the responsibilities.45 _{Strictly speaking, however,}

Article 61 does not seem to clearly state the pre-contractual liability because it does not directly deal with the liability that arises prior to the conclusion of a contract. It is highly arguable whether a contract that is later declared null and void or rescinded would necessarily mean that the con- tract has not been formed.

The Contract Law explicitly makes pre-contractual liability an important contract law system. Article 42 of the Contract Law provides that the party shall be liable for damages if the party is under one of the following circum- stances during the course of making contract and thus causing losses to the other party: (a) disguising and pretending to conclude a contract and negoti- ating in bad faith; (b) concealing deliberately the important facts relating to the conclusion of the contract or providing deliberately false information; or (c) engaging in other acts violating the principle of good faith.46 _Under

Article 42, the pre-contractual liability could be construed to mean the liabil- ity for damages caused by one party to the other during process of contract making, or in other words, the liability of the party at fault prior to the for- mation of a contract.

44 _{See Hugh Collins, id, at pp. 169–170.} 45 _{See the 1986 Civil Code, art. 61.} 46 _{The Contract Law, art. 42.}

Indeed, what liability the parties may have in the pre-contract stage remains an open question. Article 42 seems too broad in terms of scope and contents, and ambiguity may exist in its actual application, particularly when the “catch- all provision” of Article 42 (c) is to be applied. Therefore, it appears that in order to overcome the possible ambiguity in Article 42, a further interpretation and judicial determination would be needed. Perhaps due to the concern that the application of Article 42 might be mishandled, the Research Office of the Standing Committee of the National People’s Congress has attempted to sum- marize the pre-contractual liability that may trigger Article 42. According to the Research Office, under the existing laws and judicial practice in China, the pre-contractual liability based on “at fault” would refer to the following:

(a) The liability arising from arbitrary withdrawal of the offer, especially when the other party has relied on the offer;

(b) The damages caused by failure to fulfill notice obligation during the contract negotiation;

(c) Liability arising from infringement to the personal or property right of the other party as a result of failure to fulfill the obligation of protec- tion during the contract negotiation;

(d) Liability arising out of the failure to make contract;

(e) Liability occurring when the contract is void due to the negligence of the parties;

(f) Liability arising from the rescission of the contract; or

(g) Liability arising from non-authorized representation of the agent.47

Similarly, Some contract scholars in China have also tried to define the scope of the pre-contract liability. According to Professor Wang Liming of People’s University (or Renmin University), for example, the pre-contract liability would include the following obligations:

(a) Obligation not to withdraw an offer without due course;

(b) Obligation not to conceal material information such as the contracting party’s financial situation as well as ability to perform the contract; (c) Obligation to operate and provide necessary assistance;

(d) Obligation to be faithful;

(e) Obligation to keep secret all confidential information; and (f) Obligation not to abuse the freedom to a contract.48

47 _{The Research Office of the General Office of the Standing Committee of the National}

People’s Congress of China, Explanation and Application Guidance to the Contract Law of China, 50–52 (China Democracy and Legality publishing house, 1999).

In addition, the imposition of pre-contractual liability under Article 42 would require four elements. First, in order for Article 42 to apply, there must be a breach of duties imposed by law prior to the conclusion of the contract. A dis- tinctive feature of the pre-contractual liability is that the liability does not arise from the agreement between the parties, but rather it is created by the operation of law. Second, the breach has caused damages or losses to the other party. A difficult issue here is how to determine the losses. A majority of Chinese scholars take the position that the losses suffered by a party during the pre-contract stage is his reliance interest, which mainly refers to the costs incurred to him in reliance on the contract to be formed.49_{Third, there must}

exist fault, including intentional misconduct or negligence, for which a party could be blamed. The very fundamental standard in determining whether a party is at fault is whether the good faith principle has been violated. And forth, causation must present between the losses that are claimed and the fault of the liable party, which means that the losses the aggrieved party has suf- fered were necessarily caused by the fault of the other party.

The following case tells how a people’s court determined the pre-contractual liability specifically. In this case, the trial court dismissed the plaintiff’s claim for pre-contractual liability against defendant on the ground that plaintiff failed to fulfill its burden of proof that defendant was at fault.

Sichuan Yafeng Construction Engineering Company, Ltd., v.

Sichuan Green Pharmaceutical Technology Development, Inc.

Pengzhou City People’s Court, Sichuan Province Pengzhou Mingchu No. 51150

Plaintiff: Yafeng Construction Engineering Company, Ltd, Pengzhou City, Sichuan Province (hereinafter referred to as “Yafeng Company”), located in Bai Xian Jie Village, Longfeng Township of Pengzhou City;

Defendant: Sichuan Green Pharmaceutical Technology Development, Inc. (hereinafter referred to as “Green Pharmaceutical Company”) whose principal business office is 10th Floor, International Plaza, 206 Chuncheng Jie, Chengdu City.

The facts of the case were as follows:

On April 6, 2001, plaintiff Yafeng Company attended the public bidding offered by defendant Green Pharmaceutical Company for the project of defendant’s scientific

49 _{See Wang Liming, Introduction to the Contract Law and Case Analysis, 84–85 (People’s}

University Press, 2001).

50 _{This case was reported in National Judicial College & China People’s University School of}

Law, An Overview of Trial Cases of China (Volume of Civil and Commercial Cases of

research and quality testing building. After the bids contest, plaintiff was selected by the Bidding Evaluation Committee as the winner of the bid, and the result was also notarized by the Notary Public Office of Pengzhou City. A “Bid Winning Notice”, numbered as 2001–019, was then issued to plaintiff by the Construction Bidding Management Office of Pengzhou City.

Although plaintiff received the Notice from the Bidding Evaluation Committee, defen- dant refused to sign a written contract with plaintiff for the reason that plaintiff was lack of legitimate bidding capacity and therefore was incapable to perform the contract. Plaintiff then brought the lawsuit against defendant for pre-contractual liability. Plaintiff claimed that defendant’s refusal to sign the contract with plaintiff violated the principle of good faith during the contract making process for which defendant shall be held liable. Plaintiff asked the court to order defendant to pay the damage in the amount of RMB 8,000 plus all litigation costs.

Defendant moved to dismiss by arguing that at the time of bidding, plaintiff had no legal capacity for making the bid. Defendant further argued that the winner of the bid should be decided by defendant, and the winning notice should also be sent to the winner by defen- dant. According to defendant, it never agreed that plaintiff was the bid-winner, and therefore it had every right not to sign the contract with plaintiff. Defendant also asserted that since it did no do anything wrong in the process of the bidding, and there was no fault or negligence on the defendant side, plaintiff’s claim on pre-contractual liability ground should be denied. The court finds that there is no evidence to prove that the Bidding Evaluation Committee was authorized by the defendant to determine the winner of the bid. The court also finds that the Bid Winning Notice issued by the Construction Bidding Management Office of Pengzhou City was not endorsed by the defendant who made the invitation to bid. Based on the facts found, the court is of opinion that plaintiff attended the bidding but did not win the bid. Invitation to bid and submission of a bid are a special means of mak- ing a contract. The public announcement of invitation to bid or notice of public auction is nothing more than invitation to offer. In the bidding process, the submission of the bid is an offer, and the confirmation of the bid winner is an acceptance. Since the acceptance will take effect upon receipt, there will be no effective contract between the parties involved until the winner receives the bid-winning confirmation. Therefore, the key issue whether a contract has been formed is whether the bidder has won the bid. Also the pub- lic bidding shall be conducted under the provisions of the Law of Public Bidding and Submission of Bids of China (Public Bidding Law).

In the instant case, plaintiff did not win the bid and therefore no contract was ever made between plaintiff and defendant. Then the whole issue is whether defendant did anything wrong during the bidding process for which defendant would be held liable pre-contractually. Plaintiff alleged that defendant violated the good faith principle and therefore should bear pre-contractual liability imposed by the law. The court holds that under Article 42 of the Contract Law of China, the pre-contractual liability provision will apply only if defendant during the course of contract making committed bad faith negotiation, fraud or other con- ducts violating the good faith principle.

Clearly the pre-contractual liability under the Contract Law of China is based on the principle of fault liability. Applying this principle to this case, three factors must be ascer- tained in order to hold defendant liable. The first factor is whether defendant has breached its pre-contractual obligations. According to the provisions of Articles 7, 40 and 45 of the Public Bidding Law, the administrative supervision department shall supervise the public bidding activities, and investigate and punish illegal conducts in the public bidding process under the law; The inviter of bids may decide the bid-winner according to the written evaluation report or recommendation of the bid evaluation committee or authorize

the committee to make the decision; After the bid-winner is determined, a notice of win- ning bid shall be issued by the inviter. Thus in this case, it is the defendant’s right not to authorize the committee to directly determine the bid-winner, not to have plaintiff selected as the winner among all candidates, and not to verify and issue the notice of the winning- bid to plaintiff. On the other hand, plaintiff did not provide any evidence to prove that defendant had violated its pre-contractual obligations.

The second factor is whether defendant had any fault subjectively. Plaintiff failed to prove that there existed fault on defendant side such as intentionally concealing important information pertaining to the conclusion of contract or providing false information. Absent subjective fault, defendant shall bear no fault liability as imposed by the law.

The third factor concerns whether plaintiff had any reliance interest and lost such inter- est due to defendant’s fault. Plaintiff claimed that it had suffered RMB 8,000. But the evi- dence in the form of receipts only proved that the actual cost incurred to plaintiff for its participating in the public bidding was RMB 2,700. Of the cost, only RMB 300 for the notary public fees may constitute a reliance interest, and all other fees were the normal cost directly associated with the bidding activities. By normal, it means that plaintiff did not believe that it would win the bid by spending such money. In addition, the cost was clearly stated in the public bidding documents as the one to be born by plaintiff.

Based on the above facts and analysis, it is concluded that plaintiff does not meet the three-factor requirement for imposing pre-contractual liability on defendant, and therefore its claim must be denied for lack of legal grounds and sufficient evidence.

The case is then dismissed.

* * * * *

The interesting part of Sichuan Yafeng is that the court established a three- factor test for imposition of pre-contractual liability under Article 42 of the Contract Law. Thus, in order to hold defendant liable on the ground of pre- contractual liability, plaintiff must prove with sufficient evidence all of the following three factors: (1) defendant’s violation of its pre-contractual obliga- tions, (2) defendant’s subjective fault, and (3) loss of plaintiff’s reliance interest. An important implication of this case is of course of the burden of proof. In the judicial proceeding, to impose pre-contractual liability, it is imperative that the claiming party produces evidence. Under Article 64 of Civil Procedure Law of China (1991), it is the duty of a party to a civil action to provide evi- dence in support of his allegations. According to the Supreme People’s Court, the party to a civil action is responsible for providing evidence to prove the facts on which his claim stands, if there is no evidence or the evidence is not suffi- cient to prove the facts, the party who has the burden of proof shall bear the adverse consequences,51_{meaning that a judgment will be entered against him.}

51 _{On April 1, 2002, the Supreme People’s Court adopted the Several Rules of Evidence}

Concerning Civil Litigation. For general information about the Evidence Rules, see Mo Zhang, Burden of Proof: Developments in Modern Chinese Evidence Rules, 10 Tulsa J. Comp. & Int’l (2003).

Additionally, with regard to the pre-contractual liability, a relevant provision is Article 43 that applies to business secrets. In accordance with Article 43, neither party may disclose or inappropriately exploit business secrets obtained in the making of a contract regardless of whether the contract is formed or not.52_{If a party discloses or inappropriately exploits the said business secrets}

and consequently causes losses to the other party, the party shall be held liable for the losses. But the Contract Law contains no definition about what would constitute the business secrets. Therefore, in application of Article 43, a cross application of other law would be sought in order to make a determination on business secrets. A frequently cited provision in this regard is Article 10 of Unfair Competition Law,53 _{under which the business secrets are defined to}

refer to any technology information or business operation information that meet the following four tests: (a) it is unknown to the public, (b) the owner of the business secrets has taken measures to keep it secret, (c) it could bring about economic benefits to the owner, and (d) it has practical utility.54

52 _{See the Contract Law, art. 43.}

53 _{The Unfair Competition Law of China was adopted on September 2, 1993, effective}

December 1, 1993.

54 _{In order to implement the Unfair Competition Law, on November 23, 1995, The State}

Administration of Industry and Commerce issued “The Several Rules about Prohibition of Conducts Infringing Business Secrets”. Under the Rules, “not known to the public” means that the information may not be obtained directly from public channels; “to bring about eco- nomic benefit and having practical utility” imply that the information in question has the definite applicability and could provide actual or potential economic benefits or competitive advantages; “secret-keeping measures” include the signing of security agreement, the estab- lishing of security system as well as other reasonable security measures; “technology or business operation information” consists of information containing design, program, recipe, production workmanship, production method, management know-how, customer list, sources of goods, production and marketing strategy, base amount of bid as well as the con- tents of bidding document.