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A Comparative study of the contract remedy systems between Anglo-American law and Chinese law Yin, Li 1993

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A COMPARATIVE STUDY OF THE CONTRACT REMEDY SYSTEMSBETWEEN ANGLO-AMERICAN LAW AND CHINESE LAWByLI YINB.A. Beijing Teachers College, (1982)LL.B. China University of Politics and Law, (1988)A THESIS SUBMITTED IN PARTIAL FULFILMENT OFTHE REQUIREMENTS FOR THE DEGREE OFMASTER OF LAWSinTHE FACULTY OF GRADUATE STUDIES(FACULTY OF LAW)We accept this thesis as conformingto the required standard.THE UNIVERSITY OF BRITISH COLUMBIAApril 1993© Li Yin, 1993In presenting this thesis in partial fulfilment of the requirements for an advanceddegree at the University of British Columbia, I agree that the Library shall make itfreely available for reference and study. I further agree that permission for extensivecopying of this thesis for scholarly purposes may be granted by the head of mydepartment or by his or her representatives. It is understood that copying orpublication of this thesis for financial gain shall not be allowed without my writtenpermission.(Signature)Department of  .1eUeThe University of British ColumbiaVancouver, CanadaDate /1/0^7, /1Y3DE-6 (2/88)ABSTRACTThis thesis presents a comparative study of the contractremedy systems between Chinese law and Anglo-American law.The main aim is to deepen the understanding of both contractremedy systems, particularly to enhance an understanding ofthe different principles and features of contract remedies inboth legal systems.The study centres on two major issues which are the moststriking differences between the two contract remedy systems:the principle of specific performance in Chinese law versusthe use of monetary damages in Anglo-American law; and theprinciple of punishment in Chinese law versus the principle ofcompensation in Anglo-American law.The study strives not only to identify the differences,but also to look into the underlying reasons and implicationsof those differences. Special effort is made to illustratethese differences in the context of social, economic andcultural perspectives. Much of the discussion is devoted toexamining and analyzing the relations and interactions betweenlaw and the social and economic environment, especially thegreat impact which the social system, economic structure,ideology and legal culture of a society have on its contractlaw.iiThe hypothesis is that legal principles and doctrinesare but the expressions in legal forms of the conditions ofsocial and economic life in a society. The principles of acontract remedy system are decided and significantlyinfluenced by the social and economic factors of a societywithin which the remedy system operates. Therefore, the rulesand principles of contract remedies differ substantiallybetween a planned economy and a market economy. And thecontrast reflects the different needs of the two societies andthe different responses made at the level of law to thoseneeds. In the Chinese context of a planned scarcity economy,contract remedy principles in particular serve to promote thepurpose of contracts in implementing the state economic plan.Realization and guarantee of the state economic plan is thetouchstone of contract remedies. However, in the context ofa market economy, contract remedial rules emphasize a greatdegree of flexibility and choice to individuals, with minimalgovernment intervention. It is believed that such flexibilityand choices can maximize social welfare and promote theoperations of a market economy.The study also tries to make a brief critical re-assessment of the specific performance principle and punitiveprinciple of Chinese contract remedies in the changingsituations of China which may call for specific reforms in theexisting Chinese economic contract law.iiiTABLE OF CONTENTSABSTRACT^ iiTABLE OF CONTENTS^ ivACKNOWLEDGEMENT viiPART ONE: INTRODUCTIONA. The Objectives of ThisB. Specific Scope of ThisC. The Structure of This1Study 1Study 7Thesis 8PART TWO: COMPARISON AND ANALYSIS OF SPECIFICPERFORMANCE IN CHINESE LAW AND ANGLO-AMERICAN LAW^ 1 0A. Theory and Practice of Specific Performance in China 101. Concept of Specific Performance in China^102. Relevant Legal Provisions and Implications 113. Exceptions^ 144. Challenge to the Traditional Theory 16B. Theory and Practice of Specific Performancein Anglo-American Law^ 181. Specific Performance in Anglo-American Law^18a. Concept of Specific Performance^ 18b. The Characteristics of Specific Performance^191) An Equitable Remedy^ 192) Within the Discretion of the Court^202. Availability of Specific Performance inAnglo-American Law^ 21a. General Rules 22b. Main Limitations on the Scope of SpecificPerformance 243. A Tendency to Enlarge the Scope of SpecificPerformance In Anglo-American Law^ 26C. Comparison and Analysis^ 291. Different Preferences between Anglo-AmericanLaw and Chinese Law 302. The Priority of Specific Performance in ChineseContract Remedies and The Chinese Planned Economy 33a. Relationship between State Economic Plan andEconomic Contracts in China^ 35b. Contracts Are Perceived as an Instrument toOrganize, Distribute and Implement the StateEconomic Plan^ 40ivc. Responses to the Problems of the PublicOwnership^ 50d. The Role of the Scarcity of China's PlannedEconomic Market^ 54e. Influences of Socialist Ideology^ 573. The Priority of Monetary Damages in Anglo-American Law and the Western Market Economy^624. Uniqueness as a Common Ground for Considerationbut Different in Content^ 69a. "Unique Importance" is The Common Basic Groundfor Specific Performance in Both Legal Systems 69b. "Unique Importance" Has Been Given DifferentContent Due to Different Social and EconomicSettings^ 725. Brief Summary 75PART THREE: COMPARISON AND ANALYSIS OF DAMAGES INCHINESE LAW AND ANGLO-AMERICAN LAW^77A. Basic Theory and Practice of Monetary Remedies InChinese Contract Law^ 771. Monetary Remedies and Relevant Legal Provisionsin Chinese Law 77a. Liquidated Damages in Chinese Contract Law^78(1) Concept of Liquidated Damages in China 78(2) Types of Liquidated Damages in China^79(a) Statutory Liquidated Damages 79(b) Pre-agreed Liquidated Damages 80(3) The Nature of Liquidated Damagesin China^ 82(a) Primarily Punitive in Nature^82(b) Supplemental Compensation 84(c) Being of Different Nature underDifferent Circumstances 85(4) Availability of Liquidated Damages inChina^ 87b. Compensation Damages in Chinese Law^90(1) Nature of Compensation Damages in China^90(2) Availability of Compensation Damagesin China^ 92B. Basic Theory and Practice of Damages in Anglo-American Law^ 941. Concept and Object of Damages in Anglo-American Law 94a. Concept of Damages^ 94b. The object of Damages in Anglo-AmericanLaw^ 952. Compensation Principle of Damages in Anglo-American Law^ 96a. Compensatory Nature of Damages^ 96b. General Rules Governing Award of Damages inAnglo-American Law^ 983. Availability of Damages in Anglo-American Law^100a. Availability of Nominal Damages^ 101b. Availability of Substantial Damages 102c. A Law of Strict Liability^ 1024. Liquidated Damages in Anglo-American Law^104a. Liquidated Damages and Penalty 104b. Rules For Distinguishing between LiquidatedDamages and Penalty^ 105C. Comparison and Analysis 1091. Contrast Between Punitive Principle andCompensation Principle 1092. Different Notions of Breach Result in DifferentLegal Treatment Toward Breach^ 113a. Chinese Negative Notion About Breachof Contract^ 113b. Anglo-American Positive Notion AboutBreach of Contract^ 1173. Different Legal Objectives of the Systems ofContract Remedies Lead to Different Principles^125a. Chinese Contract Remedies Aim at Punishingand Preventing Breach of Contract^125b. Anglo-American Contract Remedies Aim AtRedressing Breach and Relieving the InjuredParty^ 1284. Different Traditional Influences^ 1355. Brief Summary 138PART FOUR: CONCLUSION^ 141A. Summary of Comparison and Analysis^ 141B. Reassessment of the Principles of SpecificPerformance and Punishment in Chinese ContractRemedy System in the Changing Situations of China^145C. Suggestions^ 150SELECTED BIBLIOGRAPHY^ 153viACKNOWLEDGEMENTSI would like to express my deep gratitude to my thesissupervisors, Professor Potter and Professor Cohen, for theirguidance and encouragement during the course of my research.I am very much indebted to the Law Foundation of BritishColumbia. Without the financial support, I would have beenunable to make this study at U.B.C.I would also like to thank Lillian Ong, Gillian Cartmelland the librarians in the law library for their kindness andhelp. Barbara Findlay deserves thanks for the long hoursspent grammatical polishing.Finally, I am grateful to my parents , my husband and mylovely daughter for their constant support.viiPART ONE: INTRODUCTIONA. The Objectives of This StudyThis thesis is designed to present a comparative studyof two important elements of the contract remedy systems inAnglo-American contract law1 and Chinese contract law. Myprimary focus will be on the basic principles and doctrines ofcontract remedies in both legal systems. It is important topoint out that this study addresses commercial contract laws. 21 In the process of researching, the writer has noticedthat there are limited books on contracts written byCanadians, instead, there are more books written by Britishand Americans. Many ideas in this study are drawn fromBritish and American literature. In addition, domesticallyCanada is governed by common law except for Quebec. Canadianprivate law rules are largely inspired by British and Americanlaw. At the private law level, there is, as yet, littleindigenous thinking or philosophy either in court decisions orwriting. See J.G. Castel & D.M. Armand L.C., The Canadian Lawand Practice of International Trade, (Toronto: EdmondMontgomery Publications, 1991) at 3. Not much difference willbe found between the Canadian law of contracts and the lawenforced in the courts of England, or indeed of any othercommon law jurisdiction in the commonwealth. With someexceptions, the same is true of the United States. (See J.E.Cote, An Introduction to the law of Contract, (Edmonton:Jurdiber, 1974) at 1.Therefore, it is more precise to say that thiscomparative study is actually made between Anglo-American lawand Chinese law.2 Because so far , China doesn't have a general contractlaw, she only has her economic contract laws. Therefore, forcomparison purpose, the writer has to narrow this study on thecomparison between Chinese economic contract law and itsAnglo-American counterpart.1The purpose of comparative study is not to declare thesuperiority of one legal system over another, but to callattention to the differences of principles in the legalsystems and their institutions according to their socialcontext and purposes. 3 The main aim of this comparative studyis to deepen the understanding of both contract remedysystems, particularly to enhance an understanding of thedifferent features and approaches of contract remedies in bothlegal systems.On the practical level, the disclosure of differences ismore useful than uncovering similarity. The disclosure ofdifferences enables one to see other solutions to a problem,to take account of what is best in such solutions, or toevaluate the correctness of one's own solutions. 4 In my view,it is often the differences rather than the similarities thatneed to be examined and understood in order to find outsomething new and valuable for our own. Of course,similarities will be referred to sometimes in the course ofthe comparison.However, we cannot reach conclusions merely byidentifying the differences between the two systems. Usuallythe causes of the differences are deeply hidden. Therefore,3 See V.A.Tumannov, " On Comparing Various Types ofLegal Systems" in W.E. Butter & V.N.Kudriavtsen, ComparativeLaw and Legal Systems: Historical and Socia Legal Perspectives, (New York: Oceana Publications, 1985) at 73.4 Ibid.2in order to understand fully why the differences exist and tounderstand why a legal institution has developed in aparticular way, we have to go beneath the surface, toinvestigate the underlying social,political and economicfoundations behind the laws. Insights are often to be gleanedfrom a comparison of legal systems which have widely divergentapproaches to issues.Law in all its aspects is a cultural and sociologicalphenomenon. Its institutions, principles and rules must beunderstood as the result of interaction between pastexperience and attitudes, on the one hand, and contemporaryperceptions and needs, on the other. 5 Law and legalinstitutions are products of their social and economicenvironment. 6 One cannot study legal phenomena disregardingthe respective social and economic backgrounds. The beginningof understanding the institution of contracts lies in itshistorical roots, its development, and its relation to theeconomic systems of which it has been an integral part. 7Accordingly, this study not only tries to identify thedifferences between the two contract remedy institutions, butalso tries to look into and disclose the underlying reasons5 See International Encyclopedia of Comparative Law, Vol. 7, c. 1,(Hague: J.C.B.Mohr, Tubingen and Martinus NijhoffPublishers, 1982) at 17.6 See R.M.Pfeffer, Understanding Business Contracts inChina (Cambridge,Mass.: Harvard University Press, 1973) at 1.7 Ibid.3and implications of those differences. Special effort will bemade to illustrate the existence of the differences fromsocial, economic and cultural perspectives.The primary focus of this thesis is the question of whythe contract remedy systems are different, not merely thequestion of how they are different. Much of the discussion isdevoted to examining and analyzing the relations andinteractions between law and social and economic elements,with particular attention to the great effect which the socialsystem, economic structure , ideology and legal culture of asociety have on its contract law. The institution ofcontracts is shaped by the social and economic context ofcertain society in which it grows. Legal doctrines andprinciples are but the expressions in legal forms of theconditions of social and economic life in a society. Differentsocial and economic structures and different culture settingsmay result in different legal doctrines and principles ofcontract law. A society will usually produce a legalmechanism which is consistent with the inner structure anddemand of that society, and which in its turn sustains thatsociety. It seems futile to regard one institution as betterthan the other, since different social and economic models liebehind them and they in turn determine the positions.As an essential element of a culture, law is heavilyinfluenced by the distinguishing features of the overallculture of a society. For example, the growth of Chinese4contract law has been influenced by Chinese traditional legalculture and legal history. The features and principles ofChinese economic contract remedy system reflects, to a greatdegree, the continuing impact of Chinese feudal legal cultureon Chinese existing legal system. In ancient China, there wasno distinction ever developed between civil liability andcriminal liability. All legal transgressions were handledwith criminal punishment. China traditionally emphasized thecoercive nature of law and viewed forced obedience as one ofthe essential elements of law. Consequently, law wasprimarily perceived as a tool of governing, not as a tool ofprotecting individual's rights and interests. By comparison,in Anglo-American notion, contract law is the child ofcommerce, and it has grown with the growth of industry andcommerce. 8 Moreover, contract law has developed in accordancewith the basic premise that law is considered to be theguarantor of rights and the measure of freedom. The Anglo-American position tends to associate contracts and contractlaw with individualism, autonomy and private agreement whichare perceived to be the characteristics of a market economy,rather than with restrictions or prohibitions of people'sbehaviours. Contract law has been primarily perceived as aninstrument of facilitating private transactions, allocatingeconomic sources and risks, and protecting and guaranteeingindividual's rights and interests.8 See Anson's Law of Contract, supra, at I.5Therefore, when we study a legal institution, we shouldstudy it in a larger context. To look merely at the formalprovisions of the legal systems is to see the trees but notthe forest. Only when we situate the laws in their social,economic and cultural settings, can we really understand them.And often, it is the feeling of dissatisfaction with thesolutions in one's own system which drives one to inquirewhether other legal system may have produced something moreeffective. The knowledge of what is going on in othercountries and a comparative study with our own areindispensable if we would make our own legal institution thebest possible instrument of justice. As we know, the basicfunction of law is to regulate social relations and to solvedisputes. Therefore, on a practical level, to find out thedifferences between different legal institutions is actuallyto find out the different approaches and measures with whichdifferent countries tackle the same kind of problems. Since,for historical reasons, China's institution of contractremedies is far from complete, it needs to be developed, boththrough accumulating its own experience and assimilating ideascritically from others, including from Anglo-American law.Thus, it is also the writer's hope to assimilate ideas fromthis research for application in China.In addition, the ever-expanding international trade inthe world today calls for managing the differences and co-operating between different countries and different legal6systems. A comparative study on the contract law of China andits Anglo-American counterparts will therefore be of academicand practical significance. It will be helpful and provide anincentive to China to make improvements in China's contractlaw to meet the needs of her ever increasing internationaltrade.B. Specific Scope of This StudyThe significance of the role played by contract in anyeconomy system can scarcely be denied. Contracts play a keyrole in every economic sphere. Although there are manyinteresting topics in contract law which are worth making aninquiry into, my attention is drawn to the important role andposition of contract remedies. As Professor Farnsworth said,no aspect of a system of contract law is more revealing of itsunderlying assumption than is the set of rules that prescribethe relief available for breach. 9 Remedial questions pervadeevery part of the law of contracts." Also, sinceconsiderations of time and space preclude a full account ofthe whole remedy system, the scope of this study is confinedto the comparison and analysis of the fundamental legalprinciples governing the contract remedy institutions betweenAnglo-American law and Chinese law.9 See E.A.Farnsworth, "Damages and Specific Relief"(1979) Vol. 27, American Journal of Comparative Law, at 247.to See S.M. Waddams, The Law of Contract, 2nd ed.,(Toronto: Canada Law Book, 1984) at 507.7Contract remedies in both Anglo-American law and Chineselaw show clearly a certain degree of similarity. Theinventory of contract remedies is basically the same. Forexample,it mainly consists of damages, specific performance,terminations, etc.. However, the configuration of theremedies, i.e. the preference of the remedy forms of eachlegal system, and the detailed rules or preconditionsgoverning the availability of each remedy form are discerniblydifferent from each other. Among all the differences, themost remarkable ones are: the principle of specificperformance in China versus the use of monetary damages inAnglo-American law; and the principle of punishment in Chineselaw versus the principle of compensation in Anglo-Americanlaw. The discussion in this study will centre on these twocentral issues, focusing on the differences between the twosystems in the context of social, economic and ideologicalfactors.C. The Structure of This ThesisThis thesis contains four parts.^Part One is theintroduction.Part Two will centre on the comparison and analysis ofthe different preference on the forms of remedies for breachof contract between Anglo-American law and Chinese law. Thestudy will examine and analyzes the reason why Anglo-Americanlaw puts special emphasis on monetary damages, regarding8monetary damages as the primary remedy under normalconditions; and why China, on the other hand, tends to stressspecific performance of contractual obligations, with monetarydamages as only a supplementary form of remedy. The analysiswill focus on the effect of China's planned economy, and onthe effects that socialist public ownership and socialistideology have had on China's contract remedy institution andher configuration of the forms of remedy for breach ofcontracts.Part Three will focus primarily on the analysis andcomparison between the principle of punishment in China andthe principle of compensation in Anglo-American law. Thestudy will examine why Chinese contract law focuses on thepunitive function of damages; and why Anglo-American lawfocuses on the compensation function of damages. After ageneral observation, the study proceeds to look at the reasonsfor the differences from three aspects: different notions ofbreach result in different legal treatment toward breach;different legal objectives of contract remedy systems lead todifferent principles of damages; and different traditionalinfluences have different influence on the existing legalsystems and their principles.Part Four is the conclusion. After a brief summary ofthe comparison and analysis, a critical attempt will be madeto re-assess the reliance on the role of specific performanceand punishment in the Chinese contract remedy system.9PART TWO: COMPARISON AND ANALYSIS OF SPECIFIC PERFORMANCEIN CHINESE LAW AND ANGLO-AMERICAN LAW: Specific Performance Versus Monetary DamagesA. Theory and Practice of Specific Performance in China1. Concept of Specific PerformanceSpecific performance is the most conspicuous andcharacteristic feature of the system of contractual remediesavailable in socialist legal system.' The principle ofspecific performance is a very important basic principle inChinese Economic Contract Law. 2 ( hereinafter cited as CECL)See Gyula Eorsi,International Encyclopedia of Comparative Law, Vol. 7, C.16, ( Hague: J.C.B.Mohr, Tubingenand Martinus Nijhoff, 1982) at 135.2 See, The Interpretation of The Provisions of ChineseEconomic Contract Law, by the Legislation Research Centre ofthe State Council of China,( Beijing: Legal PublishingHouse,1982) at 4. China's Economic Contract Law ( hereaftercalled CECL) is the most important source of the law governingcommercial transactions in China. It was promulgated in Dec.1981 and went into effect in June 1982. The law specificallyregulates domestic economic transactions between state-ownedenterprises and other domestic economic entities, includingcontracts between individuals and all such economic entities,but not those solely between individuals. Interpersonalcontracts, as well as contractual obligations arising fromharms inflicted on others, and many other legal questions,including those relating to property, are dealt with in thebroad General Principles of Civil Law.( see footnote 8.) TheCECL is applied to virtually all types of economictransactions in China and it contains the rules for tenspecific contract types, such as contracts of sale,construction, insurance, loan, transportation, and so on.1 0Specific performance, (it is also called "continue to perform"in China) is a decision made by the court to force thebreaching party to perform the contract which he has made, andin accordance with its terms. 32. Relevant Legal Provisions and the ImplicationsAccording to article 35 of CECL:If a party breaches an economic contract, it shall paybreach of contract damages 4 (liquidated damages) to theother party; if the breach of the contract has alreadycaused the other party to suffer losses that exceed theamount of the breach of contract damages, the breachingparty shall pay compensation and supplement the breachof contract damages by the insufficient amount. If theother party demands specific performance of thecontract the breaching party shall continue toperform.3 See Wang Jia-fu & Xie Huai-shi, Hetong Fa (ContractLaw), (Beijing: Publishing House of the Chinese Academy ofSocial Science, 1986) at 494.4 Breach of contract damages in Chinese contract law andpractice is actually the counterpart of liquidated damages inAnglo-American contract laws, for both kinds of damages arepre-fixed sums of money to be paid when breach occurs.However, they are quite different from each other in nature.Chinese liquidated damages are punitive in nature, while inAnglo-American law, liquidated damages are only compensatoryin nature. It is perhaps just because of the fact thatChinese liquidated damages are punitive nature that someWestern scholars have translated Chinese liquidated damagesinto "breach of contract damages" in order to distinguish themfrom the liquidated damages in Anglo-American law which arepurely compensatory in nature. The sharp contrast between thetwo will be one of the focal points of the discussion in partIII of this thesis. However, for easy reference andcomparison, such relief will be called by its Anglo-Americanlaw name of liquidated damages in my discussion.5 See, article 35 of Chinese Economic Contract Law, 1982in J.A. Cohen, Contract Laws of People's Republic of China,(Hong Kong: Longman, 1988) at 55.11The implication of this provision is that payment ofliquidated damages or compensation damages cannot replacespecific performance of the contract. 6 Specific performanceshould be strictly carried out , provided the innocent partydemands to do so and the breaching party is capable of doingSO.Article 111 of the General Principles of Civil Law ofChina8 also provides:When a party does not perform its contractualobligations , or does not comply with the agreed termsin its performing its contractual obligations, the otherparty shall have the right to demand specificperformance or the adoption of remedial measures, and itshall also have the right to demand compensation for6 See " The Official Opinion of The People's SupremeCourt of P.R.C. Concerning a Number of Questions in CarryingOut the Chinese Economic Contract Law"(1984) in Minyong FaluShiyong Daquan (Collections of Civil Law Provisions forPractice Use) (Beijing: People's University Publishing House,1990) at 347-361; also see The Interpretation of theProvisions of Chinese Economic Contract Law, supra, at 83.7 Ibid. 8 General Principles of the Civil Law of the People'sRepublic of China (hereafter called GPCL) adopted at theFourth Session of the Sixth National People's Congress onApril 12, 1986, provides a body of basic norms of conductgoverning civil relations entered into and activitiesperformed by individual citizens and legal persons. In acomprehensive and summery way, the GPCL sets out specifictypes of civil rights and liabilities, with special emphasison the affirmation, normalization and institutionalization ofthose economic relations and principles governing economicactivities which have been proven effective in therestructuring of the economic system. As the pattern oflegislation stands now in China, the CECL is a specializedbranch of Civil Law. The relationship between the two is onebetween a basic law and a special law. Many of thefundamental principles and regimes enshrined in the CECL areregulated and constrained by the GPCL.12losses. 9It should be noted that, according to the above legalprovisions, specific performance at this stage is no longerperformance within the original meaning in contract. In fact,it is an independent and substantial compulsive measure forliability for breach of contract.According to the legal provisions and the Opinions ofThe Supreme People's Court of China":The breaching party, having paid the damages or/andcompensation, is still obliged to perform itscontractual obligations in accordance with the contractterms, if the injured party demands.In other words, payment of liquidated damages orcompensation damages by the breaching party does not affectthe injured party's right to demand specific performance, ifhe prefers. That is, if the injured party demands specificperformance, under normal conditions, the breaching party isobliged to perform his or her contractual obligations.Article 35 of CECL sets forth two basic principlesgoverning the question whether or not specific performanceshould be enforced when breach occurs:i) In principle, the law obliges the breaching party tocontinue to perform its contractual obligations. Payment ofdamages and liquidated damages cannot relieve the breaching9 See, article 111 of General Principles of The CivilLaw of China, 1986 in J.A.Cohen, Contract Laws of People'sRepublic of China, supra, at 43.See, Minshi Falu Shiyong Daquan. (Collection of CivilLaw Provisions For Practical Use), supra, at 353.13party of the duty to perform its contractual obligations. Thatis, specific performance cannot be substituted by damages orliquidated damages.ii) The innocent party has discretion to decide whetheror not to demand specific performance." To the innocentparty, to demand specific performance is a right; to thebreaching party, specific performance is an obligation. 12The breaching party has to perform the contract so long as theinnocent party demands specific performance and specificperformance is still possible and necessary. 133. ExceptionsHowever, although the innocent party has the right todemand specific performance, it does not necessarily mean thatthe court is bound to enter judgment for specific performanceif the innocent party demands it. 14 There are someexceptions. Since Chinese law recognizes specific performanceas the breaching party's obligation despite payment of damagesSee, Zhou Li-bin, Bijiao Hetongfa( ComparativeContract law)( Lan Zhou: The Publishing House of Lan ZhouUniversity, 1989); also see Yue Li & Liu Jun," ImportanceShould be Attached to Specific Performance"(Sept. 30th, 1991)Fazhi Ribao ( Chinese Legal System Daily).See Li You-yi & Zheng Li: Minfa Xue (Science of CivilLaw),(Beijing: Publishing House of Beijing University, 1988)at 629.13 Ibid.14 See, Liang Huixing: "Jingji Hetong De Shiji Luxing"(Specific Performance of Economic Contract),(Oct.4th, 1989)Fazhi Ribao (China Legal System Daily).14or liquidated damages, generally there are no restrictions orlimitations for demands of specific performance in Chinesecontract law. Instead, however, the law provides severalexceptional situations in which the courts may refuse specificperformance. This practice is quite different from that ofAnglo-American law, which usually provides under whatcircumstances the courts can award specific performance.According to CECL, only under the following circumstances canthe breaching party be relieved of his duty of specificperformance, and the courts reject specific performance:(i) If both parties agree through consultation, and ifsuch modification or rescission would not damage theinterests of the State or affect the implementation ofthe State plan;(ii) If the State plan on the basis of which theeconomic contract was concluded is amended or cancelled;(iii) If one party closes down, stops production orchanges its line of production and truly has no means ofperforming the economic contract; 15(iv) If force majeure or some other cause that a party,although not negligent, can not prevent makes itimpossible to perform the economic contract;(v) If the breach of contract by one party makesperformance of the economic contract unnecessary. Forexample, delayed delivery of seasonal goods whichslipped the selling season. mThus, we can see that, in principle, specificperformance is the primary remedy for breach of contract in15^Usually, oneparty's cessation of production issubject to the State economic plan. This also means that theState economic plan has been changed and the party( theeconomic enterprise) has on choice but to obey the stateadministrative order.16 See article 27 Of CECL.15China's economic contract law."^Only when specificperformance becomes unnecessary or impossible, can thebreaching party be relieved of the duty of specificperformance. And what is more, the most crucial pre-conditionis that such relief of specific performance should not damagethe interests of the State or affect the implementation of theState economic plan. In addition, specific performanceprevails over liquidated damages or compensation except forthe few exceptions mentioned above. It cannot be replaced bymonetary compensation under normal conditions even wheredamages can provide adequate relief.4. Challenge to Traditional TheoryHowever, the interesting thing is that China's ForeignEconomic Contract Law 18 ( hereinafter cited as FECL) hastaken a quite different approach from CECL. Unlike CECL, FECLtakes damages as the first and basic remedy for breach of17 See Yang Zihuan & Xu Jie, Jingji Faxue (Science ofEconomic Law) , ( Beijing: Beijing University Publishing House,1990) at 511.18 China's Foreign Economic contract Law was promulgatedon March 21, 1985. This contract law specifically regulatesthe commercial legal relations between Chinese economicorganizations and foreign economic organizations orindividuals. The promulgation of this contract law marked animportant stage in the development and improvement of thecontract legislation of China, encouraged by the policy of"opening door to the outside world." it is an good example ofChina's effort to keep her foreign trade legislations up withthe international standards.16contract. 19 It is notable that specific performance, whichenjoys priority in China's domestic contractual theory andpractice, no longer appears directly in FECL, even though the"other reasonable measures" stated in article 18 of FECL mayinclude specific performance.Such a fundamental change deserves our close attention.The policy underlying article 18 is that FECL regards damagesas the primary remedy for breach of contract, other remedialmeasures including specific performance might be decreed ifthey are reasonable, ie. if they are appropriate. Thus wecan see here, the configuration and approach of remedies inFECL is completely different from the traditional notion ofChinese contract law theory. Instead, it is closer to the wayof Anglo-American law. It is a challenge to Chinesetraditional legal theory under state planned economy.19 Article 18 of FECL provides: If a party fails toperform the contract or its performance of the contractualobligations does not conform to the agreed terms, whichconstitutes a breach of contract, the other party is entitledto claim damages or demand other reasonable remedial measures.If the losses suffered by the other party can not becompletely made up after the adoption of such remedialmeasures, the other party shall have the right to claimdamages.17B. Theory and Practice of Specific Performancein Anglo-American Law1. Specific Performance in Anglo-American Lawa. Concept of Specific Performance in Anglo-AmericanLaw.Specific performance is the judicial remedy which ordersperformance of a contract according to the precise termsagreed upon. 2° Specific performance will be ordered wheremoney damages would be inadequate compensation for the breachof an agreement. In such cases, the contracting party will becompelled to perform specifically what it has agreed to do. 21That is, a contract may be specifically enforced by a courtorder telling the breaching party actually to perform itsundertakings. Such an order may be positive or negativeaccording to the terms of the undertaking which has beenbreached. 22 Specific performance is by definition limited tothe enforcement of contract duties and is one of the majoralternatives to the award of damages as means of enforcing20 Black's Law Dictionary, sixth edition, 1990, at.1138.21 Ibid. at 1138.22 See G.H. Treitel, An Outline of the Law of Contract. (London: Butterworth, 1975) at 357.18contracts. 23^By ordering the promisor to render thepromised performance, the court attempts to produce, as nearlyas is possible, the same effect as if the contract had beenperformed. 24b. The Characteristics of Specific Performance in Anglo-American Law.(1) An Equitable RemedyIn Anglo-American law system, specific performance is anequitable remedy, and only available at the discretion of thecourt. 25 Specific performance originated in courts ofequity, and its use is within the discretion of the court. 26It could not have been made in commomn law courts in the dayswhen the common law and equity were administered in separatecourts. 27 This point still retains some significance todayin that the remedy may be refused on "equitable" grounds, suchas unfairness or hardship, which would not be a defence to an23 See Restatement of the Law Second, Contract 2nd., Vol.III, (St.Paul, Minn: American Law Institute Publishers, 1981)at 100.24 See E. Allan Farnsworth, Farnsworth on Contracts, Vol.III, ( Boston: Little Brown and Company, 1990) at 163.25^See Anson's Law of Contract, 26th ed., (Oxford:Clarendon Press, 1986) at 491.26 See Restatement of the Law Second, Contracts 2nd.,Vol. III, supra, at 162.27 See International Encyclopedia of Comparative Law, Vol. 7, c. 16, (Hague: J.C.B. Mohr, Tubingen and MartinusNijhoff, 1982) at 7.19action for damages. 28(2) Within the Discretion of the CourtSpecific performance is generally granted in thediscretion of the court against a party who has committed oris threatening to commit a breach. As in the case with allequitable remedies, the decision whether to award specificperformance is discretionary, although discretion isexercised according to the established principles. 29 Itfollows that specific performance will not necessarily begranted merely because the aggrieved party demands it ordamages are not an adequate compensation.For example, specific performance may be refused if theremedy causes severe hardship to the other side. 3° Noplaintiff is, therefore, entitled to specific performance asof right. 31 The court gives specific performance instead ofdamages "only when it can by that means do more perfect and28 Ibid.; and also see E.A.Farnsworth, Farnsworth onContracts, supra, at 161,152; Anson's Law of Contract, 26thed., supra, at 516, 517.29^See Boyle & Percy, Contracts: Cases andCommentaries,4th ed. , (Toronto: Carswell Company, 1989) at 839.30 See Malins v. Freeman (1837), 2 Keen 25; Denne v. Light  (1857), 8 De G.M. & G.774; also see Handley Page, Ltd. v. Commissioners of Customs and Excise, [1970] 2 Lloyd's Rep.459.31^See^Gareth Jones & William Goodhart, SpecificPerformance, (London: Butterworth, 1986) at 1.20complete justice". 32^Since the chancellor was to actaccording to "conscience",^relief be withheld ifconsiderations of fairness or morality dictated. 33In granting specific performance, as well as denying it,a court may take into consideration the specific circumstancesof each case, and usually the courts would consider whether itwould be fair to grant the remedy34 and refuse it incircumstances which would not justify a refusal of the commonlaw remedy of damages. Disobedience of an order of specificperformance constitutes contempt of court and is punishable byfines (payable to the state) and imprisonment. 352. Availability of Specific Performance in Anglo-American LawIs specific performance a normal or an exceptionalremedy? That is, is specific performance available inprinciple or only in special circumstances? As E. A.Farnsworth states:" In our legal system, specific relief is32 See Wilson v. Northampton and Banbury Junction RlyCo.(1874) 9ch. App 179 at 284, per Lord Selborn.33 See E.A.Farnsworth, Farnsworth on Contracts, Vol.III,supra, at 161.34 See Shell UK Ltd. v. Lostock Garages,Ltd., [1976] 1W.L.R. 1187.35 See International Encyclopedia of Comparative law, Vol. 7, chapter 16, supra, at 17.21the exception rather than the rule." 36 The basic approach ofAnglo-American law is that the primary remedy for breach ofcontract is an action for money compensation called damages,and specific performance is only rarely available. 37 Usuallya court grants the promisee substitutional relief by awardinga sum of money intended to compensate for the harm to thepromisee's interests caused by the promisor's failure toperform the promise. 38a. General RulesThe equitable remedy of specific performance is a limitedremedy. As a general rule, an order for specific performancewill not be made in any case where damages are an adequateremedy. 39 Thus it can be seen that traditionally "inadequacyof damages" is a precondition of granting specificperformance. 4°The development of this rule has been much influenced byits history. This principle is the product of the historical36 See E.A.Farnsworth, Farnsworth on Contracts, Vol. I,supra, at 60.37 See International Encyclopedia of Comparative Law, Vol. 7, chapter 16, supra, at 17.38 See E.A.Farnsworth, Farnsworth on Contract, Vol. 1,supra, at 27.39 See Anson's Law of Contract, 26th ed., supra, at 365;also see Sears V. Tanenbaum [1969], 9D.L.R., (3d.) 425,(Canada).See Cud v. Rutter [1720] 1P. WMS 570, 24ER 521.22division of jurisdiction between common law and equity. Itwas originally adopted to minimize the conflict between commonlaw courts and courts of equity, the latter only interveningwhere the former could not give satisfactory relief."In judicial practice, the courts decree specificperformance only where the chattels sold are of unique valueto the buyer or possess special beauty, rarity or interest. 42For example, goods which are either "commercially unique" suchas goods for which the buyer has a very urgent or special needwhich cannot be readily obtained elsewhere;43 or"characteristically unique" such as a painting by a famousartist or a heirloom."Therefore, as a general rule, specific performance willnot be ordered where the plaintiff can be adequately protectedby an award of damages. Obviously, this will generally be thecase where the subject matter of a contract is generic goodswhich are available in the market. Upon the seller's default,the buyer can enter the market, purchase a substitute, andrecover any extra cost by way of damages.41 See International Encyclopedia of Comparative Law,Vol.7, c.16, supra, at 17; also see Restatement of the LawSecond, Contracts 2nd.  Vol.3, supra, at 162.42 See Anson's Law of Contract, 26th ed., supra, at 517;also see Holroyd v. Marshall (1862) 10 H.L.Cas.191, at 209;Falcke v. Gray (1859) 4 Drew. 651, at 658.43 See North v. Great Northen Rly Co., (1860) 2 Giff 64;also see Sky Petroleum Ltd. v. VIP Petroleum Ltd.,(1974) 1 WLR576.44 See Thorn v. Public Works Comrs, (1863) 32 Beav 490.23b. Main Limitations on the Scope of SpecificPerformance.Unlike the common law remedies which have generalgoverning rules or principles, equitable remedies tend to becontext dependent. That is, the courts have to take intoconsideration the specific circumstances of each case.Sometimes even where damages are inadequate, specificperformance will not necessarily be ordered. In Anglo-American law, the availability of specific performance is alsorestricted by a group of other factors which relate to thedesirability of granting this form of relief and to thepracticability of enforcing the court's decree. For example,it has been regarded as undesirable in Anglo-American lawspecifically to enforce a contract which requires one party torender services of personal nature. 45 In addition, a courtwill not order specific performance that has becomeimpossible, unreasonably burdensome, or unlawful."There are some specific situations in which the courtswill refuse to grant specific performance where damages wouldnot be an adequate remedy: First, the court will notSee Johnson v. Shrewbury and Birmingham Ry. [1853]3 D.M.& G.914.46 See E.A.Farnsworth, Farnsworth on Contract, Vol. III,supra, at 163.24specifically enforce a contract of personal services. 47 Thetraditional reason for this rule is that to order the servantto work would unduly interfere with his or her personalliberty. 48 Second, specific performance is sometimes refusedon the ground that the defendant is bound by continuousduties, the performance of which the court can notsupervise. 49 Because specific performance of all contractswould impose too great a human and financial strain on theadministration of justice. As well, it would not always befeasible for the court to supervise the conduct of the partiesin order to ensure obedience to the court's decree. Anglo-American law has a long tradition of distrust for specificperformance, in large part because of sensitivity to theenforcement problems that will confront the court." Third,the court will not order specific performance whereperformance of the contract is impossible"--for example,where the subject matter of the contract has been destroyed orlost. Finally, the so-called doctrine of mutuality of remedy47 See Johnson v. Shrewbury and birmingham Ry.[1853]3D.M.& G.914.48 See G.H.Treitel, An Outline of The Law of Contract, supra, at 358.49 Ibid.50 See Lucie Cheng and Arthur Rosett, "Contract with aChinese Face: Socially Embedded Factors in the Transformationfrom Hierarchy to Market, 1978-1989" (Fall, 1991) Vol.5,Journal Of Chinese Law at 227.51 Ibid.25promisee for theasserts that specific performance will not be ordered at thesuit of one party if it could not equally have been ordered atthe suit of the other. 523. A Tendency to Enlarge the Scope of SpecificPerformance in Anglo-American LawAs mentioned above, in Anglo-American law, specificperformance of contract will be granted only where damages (orother common law remedies) cannot offer adequate protection tothe injured party. The traditional goal of the law has notbeen compulsion of the promisor to perform its promise butcompensation of thebreach."However, as some Westernloss resulting fromscholars have noticed there isa growing tendency to modify this traditional rule. 54 Thereis a growing tendency to liberalize the granting of equitablerelief by enlarging the classes of cases in which damages arenot regarded as adequate remedy. 55 That is, specificperformance should be ordered when it is the most appropriate52 Ibid." See, Restatement of the Law Second, Contracts 2nd.,Vol. 3, supra, at 100.54 See A.S. Burrows, Remedies for Torts and Breach ofContract, (London:Butterworth,1987) at 337.55 See Restatement of The Law Second, Contracts 2nd., Vol. 3, supra, at 169.26remedy56, even though damages may be an adequate remedy.This tendency has been encouraged by the adoption of theU.C.C.,s.2-716(i) 57, which seeks to further a more liberalattitude than some courts have shown in connection with thespecific performance of contracts of sale. 58 The stress israther on the appropriateness of specific performance than onthe "adequacy" of damages. 59 Adequacy is to some extentrelative, and the modern approach is to compare remedies todetermine which is more effective in serving the ends ofjustice.There are also some indications that English courts aremore prepared to accept that specific performance should bemore freely granted and to reject case authority whichinhibits their discretion to do so. 60 Specific performanceshould be decreed if it is the appropriate remedy. 61 The56^See Gareth Jones & William Goodhart, SpecificPerformance, at 3; also see Beswick v. Beswick [1968]AC. 58;Sudbrook Trading Estate Ltd. v. Eggleton [1983] lAC 444 at478, per Lord Diplock.57 U.C.C. S.2-716 (i) provides that specific performancemay be decreed where the goods are unique or in other propercircumstances.58 Ibid.59 See, International Encyclopedia of Comparative Law,Vol.7, c.16, supra, at 18.60^See Gareth Jones & William Goodhart, SpecificPerformance, supra, at 3.61^See Beswick v. Beswick [1968] AC. 58; SudbrookTrading Estate Ltd. v. Eggleton [1983] lAC 444 at 478, perLord Diplock.27American courts have been moving towards that position forsome years, and now give less consideration to the requirementthat specific performance should be granted only if damagesare inadequate. 62 That is, the courts tend to give lessweight to the traditional principle of adequacy of damages andput more emphasis on the test of the propriety of specificperformance. 63 Such growing tendency implies some criticismof the traditional response. It is said that the focus of thetraditional response on the pecuniary aspects of breach failsto take account of actions of the sanctity of contract and theresulting moral obligation to honour one's promises." Inaddition, according to some scholars, if the damages ruleencourages breaches without consultation, whereas the specificperformance rule encourages consultation and mutuallybeneficial agreement, costs will be lower under a specificperformance rule. 6562^See Gareth Jones & William Goodhart, SpecificPerformance, supra, at 3.63 English law has been reluctant to recognize thespecific enforceability of contracts for the sale of goodsother than specific goods. But in the United States, thecourts have extended the remedy of specific performance evento buyers of generic goods whose need for the actual supply isparticularly urgent , or who would in fact be unable to get asubstitute. (See, International Encyclopedia of ComparativeLaw, Vol. 7, c. 16, supra at 18.)64 See Restatement of the Law, Second, Contract 2nd.,supra, at 100.65^For a detailed discussion, see Ian R. Macneil:"Efficient Breach of Contract: Circles in the Sky"(1982) Vol.68, Virginia Law Review, at 946. In this article, the authortries to examine the fallacy in the simple-efficient breach28This modern trend is clearly in favour of the extensionof specific performance at the expense of the traditionalprimacy of damages . 66 The contemporary approach is tocompare remedies to determine which is more effective inaffording suitable protection to the injured party's legallyrecognized interests, which is actually his expectationinterest."C. Comparison and Analysis of Specific Performancebetween Anglo-American Law and Chinese LawFrom the above brief description of the basic theoriesand practices of specific performance in both legal systems insection A and section B of this part, remarkable differencesbetween the two legal systems can be easily seen both intheory and practice. Therefore, the focus of this part is onthe contrast of the different configurations or preferences ofremedies between Anglo-American law and Chinese law.analysis, focusing on specific performance versus damages.66 See Farnsworth on Contracts, Vol. III, supra, at 163;also see Robert J. Sharp, "Specific Relief for ContractBreach", in Reiter & Swan, Studies in Contract 1 ( Toronto:Butterworth, 1980) at 124. In this study, Professor Sharpexamines the contemporary law governing the awarding ofspecific performance. He studies the historical limitations onthe availability of the equitable remedy, notes a modernpredisposition to awarding specific performance in a broaderrange of cases and assesses arguments for expanding the rangeeven more, or alternatively, for restricting it substantially.67 Ibid. at 168.291. Different Preferences between Anglo-American Law andChinese LawAs mentioned above, in Chinese contract law, at leasttheoretically, specific performance prevails over monetarycompensation with only a few exceptions. Specific performancecannot be substituted for by monetary compensation undernormal conditions, even where damages can provide adequaterelief. In short, specific performance enjoys priority andtends to be much stressed in China. 68 The Chinese positionis that there is a general right for the innocent party tohave the contract specifically enforced, but the court may, incertain circumstances, refuse the remedy69 . Chinese law,compared with Anglo-American law, favours a claim for specificperformance. 7068 Although during the last ten years, along with theeconomic reform in China, monetary compensation,ie. damages,have more often been awarded by the courts, in judicialpractice, the basic principle that specific performance cannot be replaced by damages is still deep-rooted, particularlyfor those economic contracts based on a state mandatoryeconomic plan. It has much to do with the present existingsocial, political and economic structures of China.69 Chinese Economic Contract Law provides for specificperformance in principle. An innocent party has the right tobring a claim for performance of a contract and to obtain ajudgement ordering the breaching party to fulfil it. See,article 35 of CECL; and also see, The Official Opinions ofthe Supreme People's Court of China Concerning a Number ofQuestions in Carrying out the CECL,1984.70 A research survey shows that monetary remedies wereseldom imposed in cases of non-performance. Specificperformance is the primary remedy in the case of contract non-performance. Of the forty-six disputes of the survey30The strong preference of Anglo-American law forsubstitutional relief stands in sharp contrast to thepreference of Chinese law for specific performance. Thejurisdiction to order specific performance is supplementary tothe common law remedy of damages. 71 Monetary damages is theprimary remedy under normal conditions. As a general rule, anorder for specific performance will not be made in any casewhere damages are an adequate remedy. 72 It is the courtsrather than the innocent party who have much discretion indeciding whether or not to grant specific performance.It is quite obvious that one of the leading distinctionsbetween the two legal systems so far discussed is whetherspecific performance is in principle recognized as a right ofthe aggrieved party. Chinese law in principle recognizes theright of the non-breaching party to enforce actualperformance, while Anglo-American law doesn't recognize it asinvolving pre-CECL contracts where a remedy was specified, 33resulted only in an order requiring specific performance. Andthere was a continued reluctance to impose monetary damages.Of the 19 disputes over post-CECL commercial or industrialcontracts where a final result was reported, 15 resulted ineither specific performance or some other remedy that didnothing to compensate for the aggrieved parties' losses. (SeeP. Potter, The Economic Contract Law of China,(Seattle:University of Washington Press, 1992) at 99, 108.71 See, Harnett v. Yielding (1805) 2 Sch.& lef.549, at553; Ryan v.Mutual Totine Westminster Chambers Association, (1893) 1 ch. 116, at 126.72 See Anson's Law of Contract, 26th ed., supra, at 365.31a right of the innocent party to enforce actualperformance. Th That is, Anglo-American law regards an awardof monetary damages rather than specific performance as theprimary remedy, and recognizes damages as the right of anyinnocent party of a breach of contract. 74Why does China attach so much importance to specificperformance both in legal theory and practice, regarding it asthe obligation of the breaching party and not replaceable bymonetary compensation? And why should Anglo-American lawchoose the route that specific performance is only anexceptional remedy and that will only be ordered where damagesor other common law remedies afford inadequate protection tothe injured party? In order to answer this question and toillustrate the existence of this legal phenomenon, we canbroaden our perspective and focus our investigation on therelations and interactions between law and related social andeconomic structures--that is, we can trace the differentprinciples governing specific performance back to theirdifferent social, economic and ideological roots.See Gareth Jones & William Goodhart, SpecificPerformance, supra, at 1; also see Wilson V. Northampton andBanbury Junction RLY Co. [1874] 9ch. App279 at 284, per LordSelborne.74 See Anson's Law of Contract, 26th ed., supra, at 391.322. The Priority of Specific Performance in ChineseContract Remedies and the Chinese Planned EconomyThe law of contract could not have developed in totalisolation from the political, economic and social values ofthe society. 75 The social, economic and political structuresof one society have great impact and restraint on its contractlaw.The institution of contract is shaped by the social,economic and ideological context of a society in which itgrows. So is its contract remedy system. Therefore, the keyto comprehending the distinctively national character of acontract remedy institution is to consider broadly the social,economic structures and the entire legal system.This part tries to explore the rooted cause of thedifferences and to examine the underlying economic relationsupon which the law operates. When we study closely theconcrete social , economic systems and culture settings ofChina, the reasons becomes clearer for why specificperformance tends to be more intensively stressed in Chinathan in the counties of the Anglo-American law system. Theimportance of specific performance results from thesocialization of the national economy and the planned economy75 See D.Cohen, "The Relationship of Contractual Remediesto Political and Social Status:A Preliminary Inquiry"(1982) 32University of Toronto Law Journal at 35.33in China. 76^The willingness to stress and to enforcespecific performance in China's legal theory and judicialpractice reflects China's focus on contracts primarily as ameans of realizing or fulfilling the state economic plan.To better understand the rules of a contract remedyinstitution, the social functions of the contract institutionmay be of great significance. The first question to be askedin analyzing Chinese contract remedy system concerns thefunctions of contracts in Chinese reality. Contractinstitutions can function quite differently in differentsocial, economic structures and different culture settings.In China, economic contracts have been used as aninstrument in planning, organizing, distributing andimplementing the state general economic plan under governmentcontrol. Contract is mainly perceived as a means for thegovernment to administer its economy, and the main function ofcontract is to promote the realization of the state economicplan." The CECL makes clear the purpose and the main themefrom the very beginning:This law is formulated for the purpose of protecting thelawful rights and interests of parties to economiccontracts, safeguarding the social economic order,increasing economic benefits, guaranteeing fulfilment of76 See, International Encyclopedia of Comparative law, Vol. 7, C.16, supra, at 153; also see Li Zhuguo, "Lun JingjiHetong De Shiji Luxing" (Specific Performance of EconomicContract) in Minfa Wenji (The Collection of Articles on CivilLaw),( China: Shanxi People's Publishing House,1985) at 245.77 See Zhou Libin, Comparative Contract Law, supra, at6.34the state economic plan and promoting the development ofsocialist modernization. 78Accordingly, the economic contract law is an importantmeans for the state to administer its economy. 79a. Relationship Between State Economic Plan andEconomic Contracts in ChinaFirst of all, it is necessary for us to deal brieflywith the relationship between state plan and economiccontracts, for this relationship is the basis for thefunctioning of the system of contract in China.The contract institution^based on the system ofsocialist public ownership of the means of productionm is aninstrument for developing the national economy in a plannedway and maintaining the order of the socialist exchangesystem. m As we know, after the founding of the People'sRepublic of China, especially after 1956, China has been78 ^article 1 of CECL, 1982.79 See, The Interpretation of the Provisions of the CECL, supra, at 6; also see, Gu Ming: Explanation on the Draft ofEconomic Contract Law of People's Republic of China,  at thefourth session of the fifth People's Congress, 1982.80 For detailed information please see Ma Hong et al.,Xiandai Zhonqguo Jingji Shidian (Modern Chinese EconomicDictionary) (Beijing: Chinese Social Science Publishing House,1982) at 16-20.81 See Tong Rou & Wang Liming, Zhongquo Minfa (ChineseCivil Law), (Beijing: Law Publishing House, 1990) at 339.35operating as a planned economy. 82 Economic contracts inChina are ultimately instruments of the state direction ofthe economy. Their main function is "to contribute to thefulfilment of the national economic plan". 83Under the model of planned economy, the state economicplan84 holds a central position. It expresses thegovernment's economic policies and fixes the course of thecountry's economic development. The function of the contracts,in turn, is to materialize in detail the directives ofgovernment economic policies as expressed in the plan. 85Economic contract is the important form to materialize andimplement the state plan, and is also the important basis and82 In the planned economy, high degree of governmentintervention and central planning is adopted as a basic formof economy. All economic activities of the country aredirected by a central administration in pursuit of toppriority political goals determined by the government; thecentral administration demands a stipulated output from theindividual units of production, for which purpose it allocatesquantities of materials and labour to them; and it distributesthe product to other businesses or to consumers in accordancewith a detailed scheme. There is no room in this economicmodel for the persons or businesses involved to use their owninitiative or advance their own interests.83 International Encyclopedia of Comparative Law, Vol. 1, supra, at 13.84 The State economic plan is the general strategy andarrangement made by the central government for thedevelopment of the state economy and the whole society. Sucha state plan is enforceable. See, The Interpretation of the Provisions of the Economic Contract Law of China, supra, at17.85 See the Editorial: "Jingji Guanxi Zhongde ZhongyiaoZhunze" ( The Important Principles Governing the EconomicRelations) Dec. 17th, 1981, People's Daily.36necessary foundation for the state's economic plan making . °6In short, economic contract must serve and guarantee thefulfilment of the state economic plan. 87 So, for thisgeneral purpose, the CECL provides in its general provisionspart that:In concluding an economic contract, the parties mustcomply with the laws of the state and must conform tothe requirements of the state economic policies andplans .w No units or individuals may use a contract toundermine state economic plans. 89The Contract law further provides that:economic contracts that concern economic dealings inproducts or projects under a mandatory state economicplan" must be concluded in accordance with the state-86 See, The Interpretation of The Economic Contract lawof China. supra, at 3.87 See, article 1 of CECL; and also The Interpretationof The Provisions Of CECL, supra, at 3.88 See, article 4 of CECL.89 See, article 4 of CECL.90 There are two kinds of economic plan. One is calleda mandatory economic plan, the other is called a guidanceplan. (See The Interpretation of the Provisions of theEconomic Contract Law of China, at 30.)A mandatory economic plan is one of the forms of thestate economic plan. It is the plan for the production,construction, circulation and distribution of the essentialproducts and projects important to the national economy andthe people's livelihood.^A mandatory economic plan isenforceable.^Every economic unit must strictly act inaccordance with this kind of plan and has a duty to fulfil it.And the prescribed quota can not be broken through. That is,each economic unit must meet this quota exactly, neitherexceeding nor falling short.Targets in the mandatory economic plan areformulated by the State Planning Commission on the basis ofprojected needs and possibilities of economic and socialdevelopment and are subject to the approval of the StateCouncil. Those targets cover the purchase and allocation of37issued targets; economic contracts that concerneconomic dealings in products or projects under anguidance state economic plan 91 shall be concluded aftertaking account of state-issued target and linking themto the actual conditions of the units involved. 92The content of the economic contracts reflects not onlythe state economic plan, but also the state economicpolicy. 93 Therefore, performance of contracts is just therealization of state economic plan and state economickey produce and products of agriculture, forestry,animalhusbandry, side-line production and fishery; the production, procurement, distribution and allocation of key industrialproducts; fixed assets investment; the volume of keymaterials transported by rail; prices of key commodities andgeneral price indexes; and major national scientific researchprojects and technology extension programs, etc.. Economiccontracts governed by those targets must confirm to suchtargets in terms of object, volume, price and allotted timefor performance. Parties to such contracts are obliged torigorously execute the plan by ensuring performance of thosecontracts.Guidance plan is also issued by the central government.Such plan plays a guidance role in the relevant nationaleconomic activities. Unlike the mandatory plan, the guidanceplan is not enforceable. Targets in the guidance plan haveless decisive influence on economic contracts as compared withthose of the mandatory plan. They serve as a frame ofreference in the process of contract formation without anycompulsory binding effect on the parties. It is comparativelyflexible. It allows the economic units to make someappropriate adjustment based on the actual situations or needsof the economic units. In other words, they provide a courseof action for economic units instead of directly placing themunder obligations to enter into certain contractual relations.91 See supra footnote 90.92 See, article 11 of CECL.93 See Wang Jiafu & Xie Huashi, Contract Law, supra, at172.38policies. 94Thus we can see clearly the close relationship betweeneconomic contracts and the state economic plans and policiesin China. The state economic plan, especially the mandatorystate economic plan, is the basis of the relevant economiccontracts, and the economic contracts made between economicunits serve as a vehicle to materialize and realize the stateeconomic plans. 95 The ultimate purpose of the economic unitsin forming economic contracts is to fulfil the state economicplan assigned to them. 96 For example, in China, especiallybefore 1980, nearly all the economic contracts made betweenstate-owned enterprises were based on state economic plans. 97Even though today the situation in China is changing, thestate economic plan still plays a predominant role in China'seconomy. Economic contracts made between state-ownedenterprises, especially for the key production materials, suchas coal, steel, iron and ect., are still under the control ofthe State economic plan." Ibid. at 172,173; also see the Editorial, "JingjiGuanxi Zhong De Zhongyao Zhunze" ( The Important PrinciplesGoverning the Economic Relations) Dec. 17th, 1981, People'sDaily.95 See the Editorial, "Jingji Guanxi Zhongde ZhongyaoZhunze" (The Important Principles Governing The EconomicRelations) Dec. 17, 1981, People's Daily.96 Ibid.97 See, The Interpretation of The Provisions of TheEconomic Contract Law of China, supra, at 73.39b. Contracts are Perceived as An Instrument toOrganize, Distribute and Implement the StateEconomic Plan(1) Economic Contracts are Assimilated AdministrativeOrders in ChinaThe obligation of the economic units to implement thestate economic plan and to satisfy the needs recognized by theplan is the original and principal reason behind the rule ofspecific performance. 98In China, the impact of the planned economy on theconclusion and enforcement of contract actually results in apeculiar mixture of civil law and administrative law. (In theWest tradition, it is called private law and public law) . 99Under the State economic plan, since the economic units are98 See International Encyclopedia of Comparative Law,Vol.7, c.5, supra, at 14.99 Private law refers to the portion of the law whichdefines, regulates, enforces and administers relationshipsamong individuals, associations and corporations. See Black'sLaw Dictionary,6th ed., at 1196.Public law refers to the portion of the law thatdefines rights and duties with either the operation ofgovernment, or the relationships between the government andindividuals, associations and corporations. See Black's LawDictionary, 6th ed., at 1230.And CECL includes both public and private lawelements within it. Chapter II to V of CECL are theprovisions regulating the relationship among Chineseenterprises and economic units. Chapter VI is the provisionrelated to administration of economic contracts by thegovernment.40usually directly placed under obligations to enter intocertain contractual relations by the State economic plan andare obliged to execute the plan, contracts in China,especially the conclusion and enforcement of contracts, remainlargely in the realm of administrative law, loo and that makeseconomic contracts a hybrid institution of administrative lawand civil law.In China, especially before 1980, contracts servedprimarily to reflect and implement the state economic plan atlower levels. Thus there is little room for the exercise offreedom by the contracting parties with respect to major andimportant terms of the contract. The state economic plan isjust like an administrative order by the state to instructeconomic units , especially the state-owned enterprises, touse certain amounts of materials to produce certain kind oramount of goods. Economic units are supposed to be executorsof state economic plans, and they must always conform to thestate economic plans in the formation, performance,modification or rescission of contracts. 101 Contracts arethen signed between the units to implement the state plantoo See Tong Rou & Wang Liming, Chinese Civil Law, supra,at 3; also see Wang Jiafu & Xie Huaishi, Contract Law, supra,at 9-10.101 See Gu Ming: "The Economic Contract Law is a PowerfulTool in Insuring Implementation of the State Plan"(1982) No.3Faxue Zazhi (Legal Studies Magazine). For its Englishtranslation see Chinese Law and Government, Vol. 18, No.1,spring, 1985.41assigned to them. 102 Here, the private ordering function ofcontracts is largely reduced, for many decisions about what toproduce and possibly what prices to charge are all fixed bythe state plan. Enterprises have hardly any options oralternatives in choosing business partners or in the terms oftheir contracts. Economic contracts are assimilatedadministrative orders. 103 This means that economiccontracts are a kind of mandatory appointment or assignment.They are instruments to plan, organize, distribute andimplement the state economic plan rather than private mutualagreements between individuals entered into on the basis ofvoluntariness and consensus. 104 To great extent, contractsare subject to the dictates of the state economic plan andpolicies rather than to the objectives of individual economicactors. All economic units must strictly carry out thecontracts and produce in accordance with their contractdemands which is based on or assigned by the state economicplan. 105What is more, according to article 32 of CECL, when a102 See Li Zhuguo, "Specific Performance of EconomicContract", supra, at 245.M3 See Wang Jiafu & Xie Huaishi, Contract Law, supra, at1 0.104 See Huan Xin, "Lun Jingji Hetong Weiyue Zeren JibenYuanze"( Basic Principles of the Economic Contract Remediesfor Breach of Contract),(1984) No.2, Zhongguo Faxue 42 at 47.105 See Wang Jiafu & Xie Huashi, Contract law, supra, at153, 184.42breach occurs, if an individual is directly responsible forthe dereliction of duty to fulfil the state economic plan, orother unlawful conduct that gives rise to a major accident orsevere economic losses of the State, he is subject toinvestigation for economic and administrative liability, andeven criminal liability. W6 Thus the economic liability inChinese economic contract law covers both liability for breachof contract itself and liability towards the State. Thisadministrative element and even criminal element in China'scontract liability further make the contract more akin to anadministrative order rather than a self-defined agreementbetween individuals. Under such circumstances, the so-calledcontract relation is virtually an administrative legalrelation in economic contract clothing. 107 The contractingparty has no choice but to carry out the order. And theprinciple of the specific performance embodies that element ofsuch legal relations. 108Thus, we can see that in China's planned economy,contract performance is of the utmost importance, because itis tightly related to the state economic plan. The principleof specific performance is the result of China'soveremphasizing instrumental facets of economic contracts and106 See, article 32 of CECL107 See^Liang Huixing: "Study of The Principle ofSpecific Performance"(1987) No. 2, Faxue Yanjiu, at 40.108 Ibid.43contract law.(2) Specific Performance is Crucial to the Fulfilmentof State Economic Plan and the Maintenance of thePlanned Economic OrderUnlike a free, competitive economy where risk is dividedamong many independently operating and self-adjusting economicunits, a planned economy does not have a great flexibility.The centralized planned economy works just like a chainwithout any ability to adjust it, which is very sensitive toevery disturbance. It is through the legal means of economiccontract that the government establishes an overall chain ofeconomic relations among the economic units. 709 Theperformance of one single contract is not merely to fulfilthat contract itself, it is also very important to thefulfilment of the subsequent contracts and thus ultimately tothe fulfilment of the state economic plan. And since theeconomic plans usually cover the most important key productsand key economic units, such as steel, coal, iron , thecoordinating function of the economic contracts becomesessential and more important to the realization of the stateeconomic plan. Failure to perform one single contract may109 See The Editorial: "Jingji Guanxi Zhongde ZhongyaoZhunze" ( The Important Principles Governing the EconomicRelations) Dec. 17th, 1981, People's Daily.44cause a chain of reactions. 110 That is, breach of onecontract may seriously affect the subsequent contracts or eventhe entire social economic order. 1" For example, aneconomic unit's failure to obtain the essential raw productionmaterials may directly cause it to stop its production, andthat will surely affect its subsequent contracts for sellingits products to other units.Moreover, as a consequence of planning, the goods whichcould not be produced as the result of a breach of contractare missing in the final balance of the plan, or may beproduced only at the expenses of other goods. Therefore,signed economic contracts, especially those based on themandatory state economic plan, must be strictly carried out.Violation of one economic contract may disrupt the stateeconomy as a whole. In such a rigid planned economicstructure, payment of damages can by no means compensatecompletely the damages incurred, for every breach of contractdisturbs a certain planned economic relation pattern anddemands increased efforts to overcome its consequences torestore the previous order. As a result of the planningcharacter of the economic contract in China, the requirementof specific performance of the contract is inevitably more110 See The Interpretation of The Provisions of CECL, supra, at 16.111 Ibid.; also see The Editorial, "Jingji Guanxi ZhongDe Zhongyao Zhunze" ( The Important Principles Governing theEconomic Relations) Dec. 17th, 1981, People's Daily.45intensive. It is believed that specific performance canensure that the state plan is executed according to its termsso that other transactions that are planned in reliance onsuch transaction also will be able to go forward. Therefore,compensation damages are not a desired goal either by theinjured party or the court. On the contrary, specificperformance is much more preferable.Besides, according to socialist theory, in a socializedeconomy, the immediate purpose of the production is to satisfythe social needs which are fixed by the national economic planfor a given period. 112 Such social needs can not besatisfied if one state-owned enterprise pays damages to theother. 113 In other words, damages will not satisfy theproduction needs of the injured party to fulfil the stateeconomic plan. Only by specific performance of contractualobligations, can the plan be fulfilled. For example, thetask of manufacture imposed on a state-owned enterprise by thegovernment plan can only be accomplished if the enterprisereceives the specific raw materials that it has been promisedfor production, monetary damages are not an adequatesubstitute. And also because the economic contracts arebased on the state economic plans, usually they can not bealtered or rescinded unless the state plan has been amended,112 See, International Encyclopedia of Comparative Law,Vol. 7, c.16, supra, at 153.113 Ibid. at 179.46or the special authority in charge that issued the plan hasapproved the alteration. 114 As a consequence, when breachoccurs, the foremost concern to the injured party is how tofulfil the state economic plan assigned to him rather than theeconomic losses he suffers due to the breach. It seems thatin a planned economic model fulfilment of those economiccontracts almost always implies reliance on specificperformance of contracts for goods or serveices which for allpractical purpose may not be easily available elsewhere.Substituted remedies---damages---will not satisfy theproduction needs as well as the ultimate purpose of theinjured party to fulfil the state economic plan.Obviously, China emphasizes the social functions ofcontracts in China primarily as a device for implementing andsupplementing the state economic plan. In order to guaranteethe realization of the state economic plan, especially themandatory state plan, specific performance takes precedenceover compensatory damages. And since primary importance isgiven to the centralization of the state and maintenance of aplanned economy order, the state's interest in the performanceof each contract is increased. So, as a general rule,specific performance will be enforced whenever such114 Article 29 of CECL provides that if the modificationor rescission of an economic contract involves products orprojects under a mandatory state economic plan, before theagreement is signed the party shall report it for approval tothe specialized department in charge that issued the plan.47enforcement is in the best interests of the state.(3) A Recent Tendency to Attach Additional Importanceto Specific PerformanceIt should be pointed out that, before 1980, Chinapractised a complete centralized planned economy. Specificperformance was much more stressed and enforced in judicialpractice. But after 1980, with the economic system reform,the gradual decentralization of economic power, the expansionof enterprise autonomy, and the increasing availability of arelative abundance of goods, specific performance has not beenstressed and enforced so much as it used to be both in China'sjudicial practice as well as legal theory.Recently, however, there is a trend in China whichdeserves attention, calling for paying more importance tospecific performance in judicial practice. 715 The basis ofthat trend is that , in recent years of China's judicialpractice, there is a tendency that more and more large and keystate-owned enterprises go to People's Courts for settlement115 There is an article titled: Importance Should BeAttached to The Principle of Specific Performance. Thearticle criticizes the modification of specific performance inChina's judicial practice in recent years. This article waswritten by Yue Li & Liu Jue and published in Chinese LegalSystem Daily, Sept. 30, 1991. It won the third prize in theprize contribution named: The Economic Judgement During theNew Period. The prize contribution was sponsored by theSupreme People's Court and Chinese Legal System Daily. Itseems to me that the fact that the article won the third prizeindicates the preference of China's recent judiciary as wellas legal theory, because the propaganda in China alwaysreflects the intention of the central authority.48of disputes, and some of the disputes directly involve mattersof fulfilling the state economic plans, especially themandatory state economic plan. 116 Liquidated damages andmonetary compensation can, to certain extent, make up for theactual losses, but such compensation still can not replacespecific performance. 117 Specific performance plays anuniquely important role in realizing the ultimate goal ofsocialist economic contract , which liquidated damages andcompensation can not play. ns The authors attach greatimportance to specific performance of contractual obligationsand regards specific performance as an effective means tofulfil the state economic plan.Such a preference is also decided by the reality ofChina. That is, although nowadays owing to the economicsystem reform the state-owned enterprises enjoy more autonomyin their dealings, the framework of their economic activitiesis still determined and channelled by the owner---the state,mainly through the national economic plan. Enterprises canonly enjoy autonomy in their dealings on condition that theautonomy will not affect the implementation of the state116 See, Yue li & Liu Jue, "Importance Should be Attachedto Specific Performance"(Sept. 1991) Chinese Legal SystemDaily.117 Ibid.118 Ibid.49plan. 119 Thus it can be seen, fulfilment of the stateeconomic plan is still the overwhelming task of the nationaleconomic activities, especially for the state-ownedenterprises.c. Responses to the Problems of the Public OwnershipIn an economy where all the major enterprises are stateproperty, it seems inconceivable that the main purpose ofremedies for breach of contract could be the compensation oflosses. 120As we know, China practises socialist public ownershipand all the state-owned enterprises are state properties.119 Before the economic system reform, enterprises couldonly produce products and conclude contracts exactly accordingto state economic plan. Their production could not exceed thequota assigned to them by the state, even though theirproduction capacity was beyond the quota. And they could notsell their products to other economic units but to the unitsassigned by the state economic plan. That is, they weretotally confined by the state economic plan and had noflexibility and choices in their economic activities.After the economic system reform, economic unitsenjoy certain degree of autonomy. They are allowed to producemore products than the assigned quota and they can sell theextra products to other economic units. However, the pre-condition is that first of all they still have to complete thestate economic plan and their decisions or choices have to beaccord with the state economic plan. For example, they cannot change their products freely according to the demand ofmarket; they can not sell their products to other unitsleaving state economic plan uncompleted; and for certainproducts, they are not free to raise or lower their pricesaccording to the demand of market.120 See Bernhard Grossfeld: "Money Sanctions for Breachof Contract in a Communist Economy"(1963) V. 72, Yale LawJournal, at 1326.50Under public ownership, economic contracts among state-ownedenterprises are not, in a sense, true contracts in the Anglo-American sense, for the contracting parties have the sameowner---the state. Being the property of the state, economicenterprises, especially state-owned enterprises have noindependent economic status, and thus no independent economicinterests. Therefore, it is not necessary for them to bear theresponsibility of economic gains and loss or the operation ofthe enterprises. Whether breach occurs or not, the profits orthe losses go to the state. As a matter of a fact, theeconomic contract relation between economic enterprises couldbe better said to be a relationship of allocation anddistribution of the products and materials of the state,rather than a relationship of real exchange of commoditieswhere resources are allocated based on value. Consequently,it is less important and less necessary that the main purposeof remedies for breach of contract could be the compensationof economic losses, for the payment of the damages from onestate-owned enterprise to another simply results in a transferof the financial resources of the state from one economic unitto another. Metaphorically speaking, it is just like that aperson takes his money out of his right pocket and then putsit into his left pocket. Damages are less attractive to thecontracting parties as well as to the realization of thestate plan. The planned allocation and the distribution of thestate raw materials and products among state-owned enterprises51largely implies the reliance on specific performance. Andthis may further illustrate the reason why specificperformance is much more preferable when breach occurs inChina.Of course, it cannot be denied that since 1980, Chinahas tried various measures to decentralize economic power andhas made an attempt to give more scope to individualinitiatives of economic enterprises. Early in July 1978, theCentral Committee of the Chinese Communist Party (CCP) issuedthe "30-points Decision on Industry 11121 which summarized thebroad political tasks and economic policies for the currentperiod. The decision opened the way for substantial changesin enterprise management policy, by giving each state-ownedenterprise a greater independence and by making it responsiblefor its operations. That is, it made the state-ownedenterprises responsible for their own profits and losses, andseparated the state-owned enterprises from the bureaucracythat supervises their activities.However, it is quite clear under the socialist publicownership, that the enterprise's autonomy and independence arestill quite limited. Even under the economic reform wherestate-owned enterprises enjoy more autonomy in theirSee "Zhonggong Zhongyang Guanyu Jiakuai GongyeFazhan Ruogan Wenti De Jueding" (the Resolution ConcerningCertain Questions on Speeding up the Development of Industryby the Central Committee of the Chinese CommunistParty),(Aril, 20th, 1978) in the Selections of LegislationRelated to Industrial Enterprises of P.R.C.( Beijing: LegalPublishing House, 1981) at 73.52dealings, the framework of their economic activities is stillsubordinate to the state general economic plan. After allthey are the property of the state. They don't really havemuch independent economic interest to care about. It isobvious that in a society still dominated by state ownershipof enterprises, contract remedies based on the payment ofdamages necessarily are weak and ineffective. 122And in the last decade, there has been a keen andintense discussion among Chinese legal scholars andpractitioners as how to solve the problem of the independentstatus and necessary economic autonomy of the stated-ownedenterprises under the socialist public ownership. One theoryis to separate the right of management from the stateownership so as to make the state-owned enterprises becomecomparable---at least to certain extent--- to independentprivate-owned enterprises. The policy behind this is that a122 Under the socialist public ownership, since state-owned enterprises are the property of the state, they areactually run by the state. It is the state (the owner of theenterprises) rather than individual enterprises that isresponsible for the operation of the enterprises. That is,the state is responsible for losses and benefits of theenterprises. If state enterprises lose money, the state isexpected to replenish its capital in order that it cancontinue its production. therefore, when a state enterpriseis ordered to pay damages, the enterprise simply turns aroundand asks the state (the owner) to make up losses. Similarly,if an enterprise recovers damages, the damages go to thestate(the owner). In such cases, money goes in and out of thesame pocket with little impact on the enterprises. As amatter of fact, the state is the damages receiver as well asthe payer. Damages seems meaningless. See Lucie Cheng &Arthur Rosett, "Contract with a Chinese Face: SociallyEmbedded Factors in the Transformation From Hierarchy toMarket,1978-1989" at 242.53higher overall efficiency of the economy could be achievedonly by giving each state-owned enterprise a greaterindependence and by making it responsible for its operations.However, whether or not such theory and practice will besuccessful still remains to be seen. 123d. The Role of Scarcity in China's Planned EconomyThere is another feature in China's economy that makesspecific performance preferable both to the contractingparties and the courts. That is the scarcity of resources ofthe planned economic market.In China, especially before 1980, the economy was one ofgreat scarcity. Instead of efficient markets, key productionmaterials, equipments and capital were-- and still are--123 The reconciliation of the need for decision-makingautonomy of individual enterprises with the public ownershipand the state interests is one of the fundamental problems ofthe present stage of China. Change of status of theenterprise means confirmation of enterprise autonomy indecision-making and recognition of its own interests so as totransform it from a dependent of the state into an independentlegal person with autonomous decision-making power. It alsomeans the transformation of the existing economic relationsbetween enterprises and between the enterprises and the stateinto ones of economic exchanges between equal subjects, i.e.,contractual relations in the sense of Western law, instead ofrelations of administrative subordination.For a more detailed discussion, see Wang Weiguo:"Suoyouquan Zhuanhuan Tanxi",(Inquiry of the Transform ofOwnership,) (1989) No.1, Xiandai Faxue; Ding Jimin: Jingying-quan Yu Suoyouquan", (1987) No.1, Faxue Yanjiu; Huan Mingshu:"Lun Liangquan Fenli De Xingzhi", ( Discussion about theNature of Separating Management Right From Ownership)(1988)No.6, Xiandai Faxue; Sun Xiaoping: "Suoyouquan YuJingyingquan Fenli De Xin Tansuo",( New Inquiry About theSeperating Management Right From Ownership) (1987) No.6,Faxue Luntan.54under the total control of the government. With the policy ofplanned purchase and planned supply, the government controlsthe allocation and distribution of raw materials , productsand credit. Most of the production materials, equipment andcapital are allocated to economic units according to the stateeconomic plan. Little capital and key materials are availableto enterprises outside the plan. Therefore, with limitedaccess and exchange of goods, goods are not freely availableand money may not be easily convertible into desired goods.In addition, since the market is not sufficiently developed,it is also rather difficult for the innocent party to obtainsubstitute goods from somewhere else to mitigate losses whenbreach occurs. In such a planned and scarce economy wheregoods do not circulate freely, there are very rarelyalternative sources of supply.So, a purchaser whose supplier breaches a contractcannot purchase the same kind and amount of goods from anothersupplier or other sources due to scarcity of market and thefixed production and supply plan. This can be mostly clearlyseen in the context of the supply type of contracts. 124Therefore, as a natural result, a purchaser always has a vitalinterest in the specific performance of the contract. It does124 A supply contract is a kind of rigidly plannedcontract based on state production and distribution plans.The conditions of supply are set jointly on an annual basis,normally by the Consuming and Supplying Ministry. Thecontracting parties usually have little room for privatenegotiation. The making of a supply contract not in accordancewith the state plan is punished by the state.55make a great difference to the purchaser if it receives fromthe seller the goods needed for production rather than themoney value of the goods, for only by getting the goods neededfor its production can the purchaser go on to fulfil the stateeconomic plan. By comparison, damages will not satisfy theultimate production needs of the units under such conditions.So, due to the rigid control of the production and circulationof the goods, it is impossible as well as impracticable forthe economic units to have much flexibility, which is quitecommon in Western free market world.Of course, over the last ten years or so, China hastried to transfer from centralized planned economy to plannedcommodity economy, and has attempted to employ marketmechanisms and bring into play market determined price inorder to establish and expand a commodity market whilenarrowing the scope of the centrally-controlled market in aplanned way. However, as things stand now, the desiredcommodity market is still notably weak in China. Much workremains to be done to strengthen and improve it. An openmarket exist only for some, but not all commodities. In suchcircumstances, if a breach occurs, the disappointed party maynot have any practical way to purchase a substitute if awardeddamages.As a consequence, one possibility and the most commonpractice is to emphasize specific performance. That is, thecourt will order the performance of the agreement rather than56award damages for the breach, because the tasks imposed uponthe enterprises by the state economic plan cannot beaccomplished when the enterprises receive money instead of thegoods they need desperately for production. Even thoughdamages may sometimes have a adequate compensatory effect onaggrieved party, the interests of the national economy are notsatisfied. Obviously, specific performance is of greatuniversal and practical significance in China's plannedeconomy.e. Influences of Socialist IdeologyWe can also trace every legal provision right back toits ideological roots. 125 The growth the of contract remedyinstitution is also influenced by cultural values. And anyideological change sooner or later finds its expression ineven the most remote legal provision. 126In China, socialist ideology emphasizes the centralityand overwhelming importance of the state and collectiveeconomy based on the public ownership of the means ofproduction, with less respect to the material interests ofindividuals. Fulfilment of state economic plan takesprecedence over individual economic rights. It is reflectedin the belief that individual interests must submit to state125 See Bernhard Grossfeld, "Money Sanction For Breach ofContract in A Communist Economy", supra at 1345.126 Ibid.57interest and collective interests. The interests of the stateprevail over either collective interests or individualinterests. That is, state interests should outweigh thecollective interest, and collective interest should outweighindividual interest. Personal interests should always conformto those of society. Accordingly, great supremacy is given tothe state interest and collective interest. If individualinterest is in conflict with the interest of the state, thenindividual should give way to state interest. The stateinterests should be first protected and the courts shouldenforce this principle. 127The basic socialist principle in China is that alleconomic contracts made between the economic units must be forthe purpose of increasing the interests of the "public" aswell as of the state. 128 However, this supremacy of thestate interests in China may sometimes mean subordinating theinterests of individual economic units to the needs of theState so that the State can continue to function properly.Obviously, this kind of concern might come into conflict withideas of individualism and individual rights, which are muchstressed in the Western world. And the reflection of thissocialist ideology in economic contract law is that the law127 See Wang Chang-yin: "Yange Zhifa Fangshui Yangyu" (ToEnforce The Law Strictly And Letting the Water out to Breedthe Fish),(Dec. 12, 1992) Chinese Legal System Daily.128 See, Interpretation of The Provisions of the EconomicContract Law of China, supra, at 23.58tends to emphasize protecting the interests of the state andguaranteeing the realization of the state plan, consequentlywith less respect to the material interest of individualeconomic units or sometimes even at the expense of individualinterests.In addition, in Chinese judicial practice, the work ofthe courts is an aspect of the work of the government inachieving its purposes and carrying out its policies.Therefore, economic dispute resolution involves a great degreeof government intervention. The courts tend to favour theneeds of state plan over the right of contracting parties.Specific performance is believed to be able to ensure therealization of the state plan and hereby to increase theinterest of the state. Sometimes even when the innocent partydoesn't want specific performance, the court would still orderspecific performance out of concern to guarantee of the stateeconomic plan. 129 That shows that Chinese courts interpretand enforce law based on the expectation of the Chinesegovernment. This is substantially different from the role ofthe courts in a capitalist market economy country.As the foregoing analysis suggests,^Chinese contract129 In the planned economic model, in order to guaranteethe realization of the state economic plan and to strengthencontract discipline, a seller can be awarded specificperformance, although the buyer rejects the goods. See case:Jingji Hetong Yingdang Ouanmian Shiji Luxing,( EconomicContracts Should be Performed Completely and Specificly) inNiu Baiqian & Xu Zhen, Jingjifa Jiaoxue Anli Xuanbian,(Collection of Cases for Economic Law Research) Vol. 1, (Beijing: People's Court Publishing House,1987) at 43.59law is shaped by the social, economic and ideological contextof China in which it grows. Accordingly, the preference ofspecific performance in Chinese contract law is decided by theconcrete social and economic settings in China and naturallyreflects the social and economic characteristics and thedemands of Chinese society. 130 In the Chinese context of aplanned and scarce economy, the state economic plan is thecore of all the economic activities. Remedial rules inparticular serve to promote the purposes of contracts inimplementing state economic plans. Accordingly, as aprinciple, specific performance of contract will be enforcedwhenever such enforcement is in the best interest of the stateplan realization. And at the same time, compensatory damagesare provided to compensate for the losses suffered by theinnocent party. It might be concluded that the importance ofspecific performance results from the socialization of the130 It should be pointed out that although in Civil Lawsystem, specific performance is also available in principle,it is quite different from the Chinese principle respectingthe ends to be served by remedy. Civil law's theoreticalposition derives ultimately from the proposition that specificrelief gives maximum protection to the obligee's expectationinterest and ensures a high degree of "contractual discipline"without violating the postulate that remedies are tocompensate the obligee, not punish the obligor. (See, TheInternational Encyclopedia of Comparative Law, Vol.7, chapter1, supra, at 103.) They don't go as far as Chinese law whichprovides that even after paying the damages and liquidateddamages, the breaching party is still obliged to perform thecontract if the innocent party so demands. ( See, article 35of CECL.)60national economy and the central planning system. 131And also due to the little wealth and weak market,alternative contractual performance is usually unavailable.The task of manufacture imposed on a state enterprise by thegovernment plan can only be accomplished if the enterprisereceives the specific raw materials that it has been promisedfor production. Monetary damages are not an adequatesubstitute.It is also noteworthy that the reason why China's FECLtakes damages as primary remedy, with specific performance asa reasonable, supplementary remedy, is not merely because thatChina wants to promote her foreign trade with Westerncountries and so she has to respect and follow theinternational commercial customs and usual practice. It isalso because that the situations in international commercialtransactions are completely different from those in domesticChina. This shows that Chinese foreign trade organizationsoperate in world market in very much the same way ascapitalist enterprises. Those contracts are real commercialtransaction contracts in a flourishing market with an abundantavailability of goods and services in the market. With a fewexceptions, in normal conditions, when breach occurs, theinnocent party can easily cover or resell. Therefore, it isno longer necessary for the breaching party to place a very131 See International Encyclopedia Of Comparative Law,Vol.7, c.16, supra, at 153.61high value on specific performance. Thus it can be seen muchmore clearly that specific performance principle in China ismainly the objective result of her planned economy structure.It reflects the great degree of governmental control andinterference over economic contracts. In China, contractsare the linking ties of the production, circulation andconsumption of the state planned economy; contract actually isthe main legal tool by which the government materializes andrealizes its economic plan as a whole. 1323. The Priority of Monetary Damages in Anglo-AmericanLaw and the Western Market EconomyBy contrast, in a free market economy, specificperformance seems not so attractive, instead, monetary damagesare much more appealing. The factors that have made specificperformance so attractive in a planned economy are plainlyabsent in a free market economy. The notion of Anglo-Americanlaw is also the product of its social and economicenvironment. Its preference of monetary damages to specificperformance is also decided by the concrete social andeconomic settings in Anglo-American countries.In the Anglo-American context of a free market economywith a variety of alternative goods, remedial rules inparticular serve to compensate the aggrieved party for the132 See The Interpretation of the Economic Contract Lawof China, supra, at 10.62damage, loss or injury he has suffered due to that breach. 133The willingness of the Anglo-American courts to award monetarydamages for breach, instead of requiring performance in strictcompliance with the terms of the contract, reflects theunderlying economy in which the market places a value onproducts and in which like products normally can be obtainedfor like value. 134 That willingness also reflects thesociety's focus on contracts primarily as a means offacilitating private transactions and its relative disinterestin enforcing remedies not required by that idea. 135In a free market economy, contracts are primarilyregarded as a means to facilitate the operations of themarket. 136 And the law of contract has been evolved mainlyto serve the needs of trade and commerce. 137 That is, thelaw of contract is perceived as a device for enabling privateindividuals to make their own arrangements. 138 The marketeconomy can be conceived of as a regulatory institution. It133 See Anson's Law of Contract, 26th ed., supra, at 391.134 See R.M.Pfeffer, Understanding Business Contracts inChina, supra, at 36.135 Ibid.136 See A.T. Kronman & R.A.Posner, The Economics ofContract Law, ( Boston: Little, Brown and Company, 1979) at 1.137 See J. Landa & B. Grofman, "Games of Breach and theRole of Contract Law in Protecting the Expectation Interest"( Toronto: Institute for Policy Analysis, University ofToronto, 1980) working Paper at 17.138 See P.S. Atiyah, The Rise and Fall of Freedom of Contract, supra, at 408.63reflects an implicit political decision to decentralizeeconomic power to private firms and individuals who assumeresponsibility for the production and distribution of goodsand services in society. 139 Contracts, organized andstructured through contract law are the specific vehiclesthrough which these innumerable decentralized "private"choices allocate resources to their most valued uses--that is,both allocative and distributive functions of the market as aregulatory vehicle are performed through privately designedconsensual arrangements. 140In a free market economy, the major objectives ofcorporations, according to Western economic philosophy, is tomaximizes profit or wealth. People generally enter intocommercial contracts for purely economic reasons. That is,the businessmen are only concerned about benefits. Therefore,when breach occurs, what the injured party is concerned mostis the compensation of his economic losses caused by thebreach. Usually it makes no difference to the injured partywhether he receives the goods he contracted for or their moneyvalue, so long as he can be fully compensated. 141Additionally, in a free and competitive market economy139 See D.Cohen, A Transactional Analysis of Commercial Relations Vol. 1 (unpublished), (Faculty of Law, University ofBritish Columbia, 1992) at 1.uo Ibid.141 See B. Grossfeld, " Money Sactions for Breach ofContract in a Communist Economy", supra, at 1331.64with rich variety of goods and products and with free accessand exchange of goods, nearly all the goods can be evaluatedand replaced by a certain amount of money. Similarly, moneycan be easily converted into desired goods and goods can beeasily converted into money value. As discussed above, insuch circumstances, breach of contract can be fully redressedby monetary damages. The basic assumption is that with rareexceptions for such "unique" items as heirlooms and objects ofart, substitute similar goods are available elsewhere. 142Substitute contract performance is always available in themarket. 143 For example, on the seller's default, the buyercan go into the market, get a substitute, and recover anyextra cost by way of damages. Therefore, damages are alwaysavailable as the primary remedy for breach of contract. 144Thus in Anglo-American contract practice, usually a purchaserdoes not have a vital interest in specific performance ofcontracts except for a few special cases. Monetary damages inmost circumstances can provide effective and adequateprotection for the interests of the innocent parties.Specific performance is only available under certain limitedcircumstances where no satisfactory substitute is obtainable.142 See E.A.Farnsworth: Farnsworth on Contract, Vol. III,supra, at 173.143^See, E.A.Farnsworth: "Legal Remedies for Breach ofContract"(1970) 70 Colum. Law Review, at 1149-60.144^G.H.Treitel: Remedies for Breach of Contract. (Oxford: clarendon, 1988) at 75.65In addition, some modern commentators believe that anaward of damages reflects normal commercial expectations andensures a more efficient allocation of economic resources. 145I will discuss this point of view in more detail in PartThree.And also with the subjective notion of value and thereliance on autonomous ordering in a free market economy, ithas been commonly accepted that economic efficiency is servedby not giving specific relief where the expectation interestscan be accurately measured and fully compensated by moneydamages. 146 The aggrieved party normally has no interest inspecific performance if he can at once replace on a well-functioning market the performance that is in default.Moreover, the existence of a well-developed marketincreases the likelihood that the promisor will usuallyreceive alternative offers before he has performed thecontract, the promisor will therefore be anxious to retain thefreedom and flexibility enjoyed under a money damagesrule. 147The preference of monetary damages to specificperformance in Anglo-American law has also been influenced by145^See G.Jones & W.Goodhart, Specific Performance,supra, at 2.146 See G.H.Treitel, Remedies for Breach of Contract, (Oxford: Clarendon Press, 1988) at 104.147^See A.T. Kronman, Specific Performance in theEconomics of Contract Law,(Boston: Little, Brown andCompany,1979) at 190.66Anglo-American legal traditions and ideology. In Anglo-American law, the legal traditions and ideology have a strongcommitment to certain values, such as individual liberty,freedom of contract and equality. Individualism as a valuehas traditionally been held in the highest respect in Westerndemocratic States, and continued to be so held. 148 TheAnglo-American position tends to associate contract andcontract law with individualism, autonomy and privateagreement which are perceived to be the characteristics offree market economy. 149 The traditional philosophy of themarket economy emphasises the equal freedom of everybodybefore the law and in the market place. 15°In addition, the courts are reluctant to use the processof contempt of court to redress private wrongs where lessdrastic methods of enforcement could do adequate justice toplaintiff. 1" Specific performance is often felt to be toostrong a measure when the aggrieved party could for mostpractical purposes be put into almost as good a position bythe award of a sum of money. For example, specific performance148 See P.S. Atiyah, The Rise and Fall of Freedom ofContract , (Oxford: Clarendon Press, 1979) at 256.149 See Lucie Cheng & Arthur Rosett, "Contract with aChinese Face: Socially Embedded Factors in the Transformationfrom Hierarchy to Market, 1978-1989" supra, at 227.150 See P.S. Atiyah, The Rise and Fall of Freedom ofContract,  supra, at 77.151 See International Encyclopedia of Comparative Law, Vol. 7, c .16, supra, at 20.67would be too harsh a remedy imposing unduly onerous personalobligations on a defendant who is not willing to perform incircumstances where a plaintiff would be adequatelycompensated by an award of damages. 152 This reluctance isconsistent with the limited role of judicial institutions inWestern free market economy. In Anglo-American judicialpractice, it is thought that it is not the court's business tointerfere with private business affairs. Courts are not pre-pre-disposed to create or impose obligations on anybodyderived from its own sense of justice. 153Obviously, without the compulsion supplied by thecontext of a planned and scarce economy, the Anglo-americanlaw adheres to the principle that compensation damagesgenerally are the adequate and proper remedy. 154152^See Gareth Jones & William Goodhart, SpecificPerformance, supra, at 2.153 See P.S.Atiyah, The Rise and Fall of Freedom ofContract, supra, at 404.154 See R.M.Pfeffer, Understanding Business Contract inChina, supra, at 41.684. Uniqueness as a Common Ground for Considerationbut Different in Content.a. "Unique Importance" is the Common Basic Ground forSpecific Performance in Both Legal SystemsWhen we look into the different principles of specificperformance in the two legal systems carefully, we may observethat specific performance in Anglo-American law and Chineselaw are similar to some degree. In both legal systems, theultimate aim of specific performance is to meet effectivelythe aggrieved party's special need for or interest in thesubject matter of the contract. In other words, the subjectmatter of the contract is of "unique importance" to theaggrieved party.Such factor of "uniqueness" of the goods is the commonground for considering applying specific performance in bothlegal systems. For example, in Anglo-American law, specificperformance may be decreed where the goods are unique. 155That is, specific performance would be ordered only in thecases where no satisfactory substitute is obtainable. Themost important common feature is the central role played bythe idea of "uniqueness". 156 And the most obvious andtypical application of specific performance is in relation to155 Black's Law Dictionary, 6th ed., at 1138.156^See A.T.Kronman, Specific performance in theEconomics of Contract Law, supra, at 183.69"unique" goods 157 , ie. goods for which the buyer has a veryurgent or special need, or for which no substitute isavailable. The assumption in Anglo-American law is that theultimate purpose of the contracting party to enter intocommercial contracts is to get the expectation interest theycontracted for. Therefore, when breach occurs, if the subjectmatter of the contract is unique and can not be replaced byother goods, the aggrieved party's expectation interest can beprotected by specific performance. That the courts will orderspecific performance for the sale of physically unique goodsis well established. 158And in Chinese law, "uniqueness" of goods is notexplicitly stated by legislation and legal rules orprinciples, but it does underlie the principle of specificperformance in China. As analyzed above, in China, due toplanned economy, controlled purchasing and selling andscarcity of market, more often than not, the aggrieved partyhas a special interest in or special need for the goodscontracted for. And what is more, the importance of specificperformance is, to great degree, due to the "uniqueness" ofthe obligation of the contracting party to fulfil the stateeconomic plan assigned to him, especially in the case wherecontracts are made based on the state mandatory economic plan.157 See A.S.Burrows, Remedies for Torts and Breach ofContract, supra, at 297.158 Ibid. at 297.70Since such obligations to implement the state economic planare usually fixed by the state and can not be altered freelyby the economic units, the economic unit can hardly haveoptions or alternatives but to perform the contract. In otherwords, the economic units usually have a special "unique"expectation interest in the goods contracted for. The special"unique " expectation interest in the goods is to fulfil theproduction task assigned to it. Units can hardly fulfil thestate economic plan assigned to them without the very goodsthey contracted for. And the fact that they cannot getsubstitute goods from other resources out of the state planmakes the performance even more important to the buyer. Insuch a sense, specific performance of economic contracts isuniquely important in fulfilling the state economic plan. Itis just the "unique interest" that the non-breaching party aswell as the state has in the specific performance of contractsthat is the original and principal reason behind the rule ofspecific performance in China.An example will help to illustrate this point better.Suppose tractor factory A has concluded a contract with asteel factory B for certain amount of steel which is thecrucial material for tractor making. Under the state economicplan, tractor factory A is only allowed to conclude acontract for steel materials with none-other than steelfactory B. In such circumstances, the fulfilment of thetractor production quota assigned by the state economic plan71entirely depends on the performance of the contract by thesteel factory. If the steel factory fails to perform thecontract, the tractor factory cannot get the steel supply fromelsewhere. And since it cannot get the materials needed forits production, it can hardly fulfil the production quotaassigned by the state economic plan. As a consequence, thestate economic plan will not be fulfilled completely, leavingthat quota undone. It is just in this sense that the specificdelivery of the steel material for the production of thetractors is "unique" to the tractor factory as well as tofulfilling the economic plan. In such a case, damages willnot satisfy the production needs of the tractor factory. Onlyby specific performance, can the needs be met and the plan befulfilled. Thus we can see, the "unique importance" of thesubject matter of the contract to the aggrieved party is thecommon basic ground for specific performance in both legalsystems.b. "Unique Importance" Has Been Given Different Contentdue to Different Social and Economic SettingsHowever, when we look into the matter further, we shallquickly realize that the similarity is only apparent. Theword "uniqueness" of goods is the same, but the content andconnotation of "uniqueness" is quite different between the twolegal systems.In Anglo-American law, specific performance is the72exception rather than the rule. 159 The typical situation inwhich specific performance would be ordered is that in whichno satisfactory substitute is obtainable. 160 One of therules in Anglo-American Law is that specific performance willbe ordered where the subject matter of the contract are thegoods which are of "commercially unique" or"characteristically unique" and which can not be readilyobtainable from other sources.For example, A steel company enters into a contract toask company B to build a specially designed equipment, and itis really very difficult for the steel company to find anothercompany which is capable of producing the specially designedmachine due to technical reasons. In this case, the speciallydesigned machine is of both characteristic and commercialuniqueness to the buyer. If company B fails to perform, theexpectation interest of the steel company can hardly beprotected fully by damages, for no satisfactory substitute canbe readily obtained else where. Here, damages can not provideadequate protection to the buyer. Obviously, in Anglo-American law, the content of "uniqueness" usually refers toeither the specific qualities of the goods themselves(characteristic uniqueness) or the special commercial interestor need the aggrieved party has in the goods(commercial159 See, Allan Farnsworth: Farnsworth on Contracts, Vol.I, supra, at 28.160 See, International Encyclopedia of Comparative Law. vol. 7, c.16, supra, at 18.73uniqueness). And usually such "uniqueness" can offer theaggrieved party special benefits or interests which othersubstitutes cannot offer. The aggrieved party is concernedthat if he can obtain such special economic benefits orinterests he expected for. That goes consistently with theAnglo-American notion that the ultimate purpose of enteringcommercial contracts in a free market economy is purely foreconomic benefits. Therefore, only when damages cannot offeradequate compensation for the special benefits, specificperformance should be applied.While in China, the content of "uniqueness" mostlyrefers to the indispensable need of the goods in fulfillingthe state economic plan and the deficient sources to get itrather than the specific qualities of the goods or specialcommercial interest in the goods both of which can offer theaggrieved party special economic benefits. In other words,the goods may not be physically unique, but buying asubstitute would be so difficult or would cause so much delaythat the other party's fulfilment of state economic plan wouldbe seriously disrupted. To certain extent, we might call ita kind of "inflexibly monotonous uniqueness" .161 And such"inflexibly monotonous uniqueness" is the product of therigidity of planned economy as well as the scarcity of the161 This term is created by the writer. It means underthe rigid state planned economy and the system of unifiedcontrol of sell and purchase, the economic units have littlefreedom of contract activity.74commodity in China. What concerns the aggrieved party most iswhether he can get the goods he needs for his production sothat he can fulfil the state economic plan assigned to him.That is consistent with the Chinese notion that the ultimatepurpose of entering commercial contracts is to fulfil theeconomic plan. Therefore, as a general rule, specificperformance will be enforced whenever such enforcement is inthe best interest of state economic plan realization.Thus we can see, the original intention or startingpoint of specific performance in both legal systems aresimilar----it is intended to meet the special need or interestof the aggrieved party for or in the subject matter of thecontract. However, we also see, in different social, economicstructures, "uniqueness" of the goods has been givendifferent content and connotation due to the different socialfunctions of contracts as well as different social, economicsettings. And, it is these great differences in content andconnotation of uniqueness that leads to the differentprinciples about specific performance in the two legalsystems. In other words, different principles of specificperformance embodies different standards and contents of"uniqueness" of goods in different social, economicstructures.5. Brief SummaryThe foregoing discussion suggests that Chinese law and75Anglo-American law start with different theories which arebased on different social and economic conditions. Thepriority of specific performance in Chinese contract remediesis the logical necessity of China's planned and scarcityeconomy and its socialist ideology. It has been decided bythe social and economic reality of China. The willingness toattach great importance to specific performance in China'slegal theory and judicial practice reflects China's focus oncontracts primarily as a means of fulfilling the stateeconomic plan.The preference of monetary damages to specificperformance in Anglo-American law is also influenced by theconcrete social and economic settings in Anglo-Americancountries. Such preference of monetary damages reflects theAnglo-American society's focus on contracts primarily as ameans of facilitating operations of market and privateeconomic activities. It also reflects the underlying economyin which the market places a value on products and in whichlike products normally can be obtained for like value.76PART THREE: COMPARISON AND ANALYSIS OF DAMAGES IN CHINESE LAW AND ANGLO-AMERICAN LAW  :Punitive Principle Versus Compensation PrincipleA. Basic Theory and Practice of Monetary Remedies inChinese Contract Law1. Monetary Remedies and Relevant Legal Provisions inChinese Law.Apart from specific performance, there are also monetaryremedies in Chinese contract law, such as compensation damagesand liquidated damages. However, the nature, principle,interpretations and applications of these monetary remedies inChina are quite different from those of the Anglo-Americanlaw.According to article 35 of CECL:If a party breaches an economic contract, it shall payliquidated damages to the other party. If the breach ofcontract has already caused the other party to sufferlosses that exceed the amount of the liquidated damages,the breaching party has to pay compensation damages tosupplement the liquidated damages by the insufficientamount. 11 See article 35 of CECL; also see article 106 of TheGeneral Principles of Civil Law of China, (1986); article 13of Regulations on Contracts for the Purchase and Sale ofAgricultural By-products(1984); article 34 of Regulations onContracts for the Purchase and Sale of Industrial and MineralProducts(1984); article 43 of Measures for the Implementationof Contracts for the Purchase and Sale of Hardware, electricalHardware, Domestic Electrical Goods and ChemicalCommodities(1986) in J.A.Cohen, Contract laws of The People's 77From this provision we can see, there are actually twotypes of monetary remedies in Chinese contract law: one isliquidated damages; the other is compensation damages.a. Liquidated Damages in Chinese Contract Law(1) Concept of Liquidated Damages in ChinaLiquidated damages which are also called breach ofcontract damages2 are certain amount of money which has tobe paid to the innocent party by the breaching party onbreach in accordance with either the provisions of law or aterm of contract agreed by both parties, regardless of thefact of whether the breach has caused any actual losses ornot. 3In some influential Chinese contract textbooks,liquidated damages are even defined as a certain amount ofmoney which has to be paid to the innocent party by thebreaching party once breach occurs. 4 Some legal scholars goRepublic of China, (Hong Kong: Longman, 1988)2 See footnote 4 in part II.3 See The Official Opinions of the Supreme People'sCourt of China Concerning Several Questions in Carrying outthe Economic Contract Law of China,(1984), in Minshi FaluShiyong Daquan ( Collection of Civil Law Provisions forPractice Use), ( Beijing: People's University PublishingHouse, 1990) at 347-353.4 See Li Youyi & Zheng Li, Min Fa Xue ( Science of CivilLaw)  ( Beijing: Publishing House of Beijing University, 1988)at 625; Tong Rou & Wang Liming, Zhongguo Minfa (Chinese Civil Law),(Beijing: Law Publishing House, 1990)at 366; TheInterpretation of the Provisions of Chinese Economic ContractLaw, (Beijing: Law Publishing House, 1982)at 83.78even further. According to them, liquidated damages areactually a legal penalty for breach of contract or a fine forbreach of contract. 5(2) Types of Liquidated Damages in ChinaIn China, liquidated damages can also be of two kinds:one is statutory liquidated damages( or we may call itcompulsory damages), and the other is pre-agreed liquidateddamages. 6(a) Statutory Liquidated DamagesStatutory liquidated damages, as the term suggests, arestipulated or fixed by laws or regulations. For example,article 35 of Regulations on Contract for the Purchase andSale of Industrial and Mineral Products provides:The supplier shall pay breach of contract damages to therequisitioning party if it fails to deliver the goods.Breach of contract damages for general purpose productsshall be 1 to 5 percent of the total value of theportion of the goods that the supplier fails to deliver;breach of contract damages for special purposeproducts shall be 10 to 30 percent of the total value ofthe portion of the goods that the supplier fails todeliver. A party that is liable for failure to delivergoods or make a payment on time shall, in addition topaying compensation for the losses suffered by the otherparty, pay liquidated damages for overdue performance5 See Wang Jiafu & Xie Huashi, He Tong Fa (ContractLaw), (Beijing: Publishing House of Chinese Academy of SocialScience, 1986)at 484.6 See The Official Opinions of the Supreme People'sCourt of China Concerning Several Questions in Carrying outthe Economic Contract law of China(1984),supra.79equal to 0.1% of the total amount overdue for every dayoverdue. 7Statutory damages are a kind of mandatory norm andsanction, and reflect a great degree of governmentintervention. 8 The contracting parties are not free tochange, by private agreement, the amount or the rate of theliquidated damages provided by laws or regulations.(b) Pre-agreed Liquidated DamagesPre-agreed liquidated damages are fixed throughagreement by both contracting parties when a contract is made.That is , the contracting parties may agree in a contract thatin the event of breach , the breaching party should pay theother party a special amount of money. They may also agree inthe contract upon a method of computing the amount ofcompensation for losses arising from a breach of contract. 9So, although laws or regulations have provisions forliquidated damages, at the same time, the laws or regulations7 See article 21 of The Provisions of the ShenzhenSpecial Economic Zone on Economic contracts Involving ForeignInterests(1984); also see article 36(1) of regulations onContract for the Purchase and Sale of Industrial and MineralProducts(1984); article 17(1), (2), (4) article 18 (1), (2) ofRegulations on Contract for the Purchase and Sale ofAgricultural by-products (1984); article 21, 22 of theRegulations on Processing Products(1985); for detailedprovisions see Jerome A. Cohen, Contract Laws Of The People's Republic of China, (Hong Kong: Longman, 1988)8 See Wang Jiafu & Xie Huashi, Contract Law, supra, at486.9 See article 111 & 112 of the General Principles ofCivil Law of China (1986).80also allow contracting parties to pre-fixed liquidated damagesby mutual agreement. For example, according to article 25 ofRules for the Implementation of Storage and SafekeepingContract (1985) :If a party violates the provisions of article 9 and thesecond paragraph of article 22 of these rules, exceptwhere the contract stipulates otherwise, it must payliquidated damages to the other party. The amount ofthe liquidated damages shall, except where the contractstipulates otherwise, be three months' safekeeping fees(or rate) for that part of the goods affected or threetimes the labour and service fees."In such circumstances, the pre-agreed liquidated damagestake precedence over mandatory damages. If there is noliquidated damages clause in a contract, then the rate oramount provided by laws or regulations would apply. If therelevant laws or regulations have no provisions for the rateor amount, and the breach has not caused any losses to theother party, then it can be dealt with according to the actualsituations." Even though the breach has not caused any10 See Jerome A. Cohen, Contract Laws of the People'sRepublic of China, supra, at 149." See The Official Opinion of the Supreme People's Courtof China on Several questions in Carrying out the EconomicContract Law, supra, (1984).The implication of this explanation of the SupremePeople's Court is that breaching party should be punished inany way. It typically shows that China focuses on theprinciple of punishment. The breaching party cannot gowithout any punishment even though there is no actual loss andno liquidated damages provided by laws or agreed by thecontracting parties. Once breach occurs, punishment is due.The "actual situations" usually refer to the intention of thebreaching party and the financial capability of the breachingparty. Based on the actual situations, the courts will makedecisions.81losses to the other party, the breaching party still has topay liquidated damages. 12(3) The Nature of Liquidated Damages in ChinaIn China, liquidated damages have a dual nature", ie.they are punitive in nature on the one hand, and compensatoryon the other. 14(a) Primarily Punitive in NatureThe punitive nature of liquidated damages is animportant feature of China's Economic Contract Law. Accordingto article 35 of CECL, when one party breaches a contract dueto fault, it still has to pay liquidated damages evenif no loss was caused to the other party. 15 In such a case,the liquidated damages are obviously punitive in nature,12 Ibid.13^This dual function of liquidated damages wasoriginally adopted from the Soviet Union.^For furtherinformation see Z.L.Zile, Remedies for Breach of Contractual Obligations in Soviet Law,(student paper, Harvard LawSchool,comparative legal research, 1960) at 38; and also seeThe Interpretation of the Provisions of CECL, supra, at 83;also see Tong Rou & Wang Liming, Chinese Civil Law, supra, at366; Cheng Xinhe, "Jingji Hetong Xin Fazhan" (The NewDevelopment of the Economic Contract law),(1988)No.2 ZhongguoFaxue at 58.14 See The Interpretation of the Provisions of ChineseEconomic contract Law, supra, at 83; Cheng Xinhe, " The NewDevelopment of the Economic Contract law", (1988)No.2 ZhongguoFaxue at 58.15 See the Interpretation of the Provisions of CECL, (1982) supra, at 83.82because its payment is not conditional on actual loss. It isclear that the aim of liquidated damages is not to compensatefor the losses caused by the breach, but to punish thebreaching party for its wrongful conduct in committing abreach. Such liquidated damages are intended as a kind ofeconomic sanction against the breach itself rather than a pre-estimate of the potential loss that a party will sustain inthe event of breach. 16 Whether or not the breach has causedany loss to the other party is immateria1. 17 Once a partybreaches the contract, he has to pay the liquidated damages.Therefore, it is not surprising that some Chinese legalscholars even regard liquidated damages as a security forperformance of contractual obligations. 18The punitive nature can be seen even more clearly instatutory liquidated damages in Chinese contract law, for theamount or rate of the statutory liquidated damages are simplyset up by laws and their payment has nothing to do with anassessment of actual losses or the concrete circumstances ofindividual cases. Statutory liquidated damages are simplyintended to induce performance of contracts and to prevent16 Ibid.17 Ibid.18 ^Li Youyi & Zheng Li, Science of Civil Law, supra,at 626; also see Zheng Li & Yao Hui, " Lun Weiyuejin DeDanbao Shuxin" ( Discussion on the Security Nature of TheLiquidated Damages) (1990) No. 6, Falu Xuexi Yu Yanjiu at 25-27.83breaches by imposing economic pressure on the parties. 19 Insome sense, statutory liquidated damages in Chinese contractlaw serves as a device for carrying out administrativesupervision of economic contracts. It reflects the greatemphasis on the punitive aspect of damages and high degree ofdirect government involvement in contractual practice inChina. 2°(b) Supplemental CompensationOn the other hand, under certain circumstancesliquidated damages also serve a compensatory function. 21According to article 35 of CECL, when the breach of contracthas caused the other party to suffer losses that exceed theamount of the liquidated damages, the breaching party shallpay compensation and supplement the liquidated damages by theinsufficient amount.For example, suppose A and B concluded a contract witha liquidated damages of $500. A breached the contract, and thebreach caused $500 loss to the other party, and in such acase, the liquidated damages is only to compensate for theloss. And if the breach caused $700 loss to B, then apart19^See Gao Min,"Guanyu Weiyuejin Zhidu De Tantao"(Discussion on the System of Liquidated Damages)(1989) No.5Zhongguo Faxue at 100.20 ^Wang Jiafu & Xie Huashi, Contract Law, supra, at486-489.21 See the Interpretation of the Provisions of CECL,supra, at 83.84from paying the $500 liquidated damages, A still must pay anadditional $200 compensation damages to the injured party.Obviously, in such cases, liquidated damages are compensatoryin nature, 22 for in such a case, the liquidated damages areused to make good the loss the other party has suffered.(c) Being of Different Nature under DifferentCircumstancesOne interesting phenomenon is that, due to the dualnature of liquidated damages, liquidated damages in Chinesecontract law can be of different nature under differentcircumstances. All together there are three possiblecircumstances:First, where the innocent party suffers no loss, theliquidated damages are purely punitive in nature. In such acase, they are used to penalize the conduct of breach itselfand to enforce contract discipline. 23 In such case,liquidated damages are a pre-agreed economic sanction againstbreach and are punitive in nature. 24Second, where the innocent party has suffered losseswhich are below the amount of the liquidated damages, theliquidated damages are compensatory as well as punitive in22 Ibid. at 38.23 See the Interpretations of the Provisions of CECL, supra, at 83.24 Ibid.85nature. They are compensatory, because a certain amount ofthe damages are used to compensate for the actual losssustained by the innocent party; they are punitive, becausethe amount still exceeds the actual loss, and the innocentparty has received more than the actual loss. 25Third, where the innocent party suffers losses which areequal to or exceed the amount of liquidated damages, theliquidated damages are purely compensatory in nature. 26 Insuch a case, the liquidated damages are used simply tocompensate the losses the other party has suffered. And inthe event the amount of liquidated damages does not cover thelosses suffered, the injured party can recover compensationdamages to make up the differences. 27However, it is very important to point out that thepunitive function of liquidated damages is primary, and thecompensation function is supplementary. Even in the thirdsituation mentioned above, according to article 35 of CECL, ifspecific performance is claimed together with liquidateddamages and compensation damages, it seems to me that thecombination of liquidated damages and compensation damages are25 See He Yue, " A Different Opinion about the Nature ofLiquidated Damages in China's Economic Contract Law" (1987)No.3 Hebei Faxue at 65.26 See The Interpretation of the Provisions of CECL,supra, at 83.27 See article 35 of CECL; also see "the Official Opinionof the Supreme People's Court of China on Several Questions inCarrying out the Economic Contract Law." supra.86clearly of punitive nature. Because in such a case, theinjured party gets not only liquidated damages as well ascompensation, but also specific performance of the contract.(4) Availability of Liquidated Damages in ChinaThe next question is under what circumstances thebreaching party has to bear the responsibility for breach? Inother words, what are the basic requirements in decidingwhether a breaching party should be liable for the breach andhave to pay liquidated damages?In Anglo-American law, contract law is a law of strictliability, and the accompanying system of remedies operateswithout regard to fault. 28 The situation in China is quitedifferent.Article 32 of CECL answers this question:If, due to the fault of one party, an economic contractcan not be performed or can not be fully performed, theparty at fault should be liable for breach of contract;if both parties are at fault, in accordance with theactual conditions, each party shall be commensuratelyliable for the breach of contract that is hisresponsibility. 29Article 32 and 35 of CECL establish the fault principleas a general rule in deciding whether the breaching partyshould be liable for beach of contract. 3° That is, some28 See A. Farnsworth, Farnsworth on Contract, Vol.III,(Boston: Little, Brown and Company, 1990) at 190.29 See article 32 of CECL.30 See The Interpretation of the Provisions of theEconomic Contract Law of China, supra, at 79.87degree of "fault" is a condition of contractual liability.Under this principle, damages are actually limited byreference to the degree of the breaching party's fault. Inother words, only when the breaching party is at fault, shouldhe be liable for the breach. Therefore, "being at fault" isa prerequisite to liability for breach of contract in China'scontractual theory and practice. mIn Chinese contract practice, in deciding whether or notthe breaching party should pay liquidated damages, two factorsare taken into consideration: a) there must be a conduct ofbreach; b) the breaching party must be at fault for thebreach. 32 That is, the breaching party will only be liableto pay liquidated damages, either mandatory liquidated damagesor pre-agreed liquidated damages, if it is at fault. Hence,if force majeure, changes of state economic plan or government31 so-called "fault" refers to the subjective mentalstate of a person, including intention and negligence.Intention refers to the fact that the acting person clearlyknows the harmful consequences of an act and deliberatelyhopes or lets such harmful consequences to happen. Forexample, a seller sends a buyer inferior goods instead of thesuperior goods the buyer contracted for, or sends imitationgoods instead of real ones. Negligence refers to the factthat the acting person should have foreseen the harmfulconsequences of his act, but he failed to foresee it due tooversight or carelessness or mistake, so that the harmfulconsequences happened. For example, a seller sends the goodsto a wrong destination by mistake; or sends a wrong model ortype of the goods by mistake.32 See The Official Opinion of the Supreme People's Courtof China on Several Questions in Carrying out the EconomicContract Law, (1984) supra; also see Li Youyi & Zheng li,Science of Civil Law, supra, at 627; Tan Youtu, The Theory and Practice of Economic Contract Law of our Country,(Beijing:Education and Science Publishing House, 1986) at 134.88orders are the causes of the breach, the breaching party willnot be liable to pay liquidated damages.It should be remembered that whether or not the breachhas caused any loss to the other party is irrelevant, becauseso long as the party breaches the contract, it has to payliquidated damages.So Chinese contract law starts with the generalprinciple that some degree of fault is a pre-condition of theavailability of contractual remedies. Moreover, "being atfault" is not only a pre-requisite for being liable for breachof contract, but also a standard in measuring the liabilityfor breach of contract. 33 And this is in sharp contrast withAnglo-American law, where fault is not in principle an elementof contractual liability, nor is the degree of fault normallyan element in measuring the extent of damages. 34However, in China's judicial practice, China uses a"constructive fault principle". 35 As we know, it is verydifficult to judge the subjective mental state of people, andusually it is very complicated to tell if the breaching partyis at fault or not. Therefore, in judicial practice, theSee article 32 of CECL.34 See International Encyclopedia of Comparative Law,Vol.7, c.16, (Mouton: J.C.B.Moher, Tubingen and MartinusNijhoff Publisher, 1982) at 58.35 See Li Youyi & Zheng Li, Science of Civil Law, supra,at 621. Wang jiafu & Xie Huashi, Contract Law, supra, at 481;Tong Rou & Wang liming, Chinese Civil Law, supra, at 364.89"constructive fault principle" has been commonly used. 36Constructive fault principle means that as long as one of theparties breaches the contract without a reasonable excuse forexemption from liability, he is deemed to be at fault andthereby liable for the breach. 37 And what is more, it is thebreaching party rather than the injured party who bears theburden of proof. 38 In other words, the breaching party isliable for the breach unless he is able to prove that he isnot at fault. 39 For example, if the breaching party can provethat his failure to perform an economic contract is due toforce majeure or a change of government economic plan, he willnot be liable for breach. The constructive fault principle isemployed as a presumption to carry out fault principle moreeffectively. 40b. Compensation Damages in Chinese Contract Law(1) Nature of Compensation Damages in ChinaWhen a party does not perform its contractualobligations, or does not comply with the agreed terms inperforming its contractual obligations, apart from the right36 Ibid.37 Ibid.38 See Tong Rou & Wang Liming, Chinese Civil Law, supra,at 364.39 See Wang jiafu & Xie Huashi, Contract Law, supra, at481-482.40 See Zhou Libin, Bijiao Hetong Fa(Comparative ContractLaw),(China: Lan Zhou University Publishing House, 1989) at374.^ 90to demand specific performance or liquidated damages, theaggrieved party also has the right to demand compensationdamages for actual losses."In the Chinese sense, compensation damages are an amountof money paid to the aggrieved party to compensate for hislosses caused by the breach. 42The nature and function of compensation damages in Chinaare little different from that of liquidated damages. It issomewhat more complicated. Theoretically speaking,compensation damages, as the words suggest, are mainlycompensatory in nature. 43 The purpose of compensation damagesis to make up for the losses the aggrieved party sustained dueto the breach." Therefore, a party's liability to compensateas a result of its breach of contract shall be equal to thelosses suffered by the other party as a result thereof. 45 Asa principle, compensation damages cannot exceed the actualloss. The aggrieved party cannot get more than the actual41 See article 35 of CECL.42 See The Official Opinion of the Supreme People's Courtof China on Questions in Carrying out the Economic ContractLaw,(1984) in Minyong Falu Shiyong Daquan, (Beijing:PublishingHouse of People's University,1990) at 351.43 See Li Youyi & Zheng Li, Science of Civil Law, supra,at 624; Wang Jiafu & Xie Huashi, Contract Law, supra, at 484.44 Ibid.45 See article 112 of the General Principles of the CivilLaw of P.R.C.(1986).91loss he sustained."And also according to article 35 of CECL, where there isa liquidated damages clause in the contract or there is anamount or a rate of liquidated damages fixed by law,compensation damages are only designed to supplement theliquidated damages by the insufficient amount. 47 If theliquidated damages are enough to cover the loss, then it is nolonger necessary for the breaching party to pay compensationdamages." Where there is no liquidated damages clause set inthe contract or there is no mandatory liquidated damages setby law, the breaching party is liable to pay all the lossesthe injured party suffered due to the breach. 49However, it should further be noted that in Chinesecontract law, payments of compensation damages as well asliquidated damages by the breaching party do not release thebreaching party from his obligation of specific performance.That is, after paying compensation damages as well asliquidated damages, the breaching party is still obliged toperform his contractual obligations, if the injured party46 See Li Youyi & Zheng Li, Science of Civil Law, supra,at 624.47 See article 35 of CECL; also see The Official Opinionof the Supreme People's Court of China on Questions inCarrying out the Economic Contract Law, in Minshi Falu ShiyongDaquan, supra, at 351.48 Ibid.49 Ibid.92demands that he do so. 50 This is a very remarkable feature ofChinese system of contract remedies which is totally differentfrom its Anglo-American counterpart. As some Chinese legalscholars have argued, in circumstances where bothcompensation damages and specific performance are claimed atthe same time by the injured party, compensation damages aresurely of a punitive nature, too."(2) Availability of Compensation Damages in ChinaIn deciding whether or not the breaching party shouldpay compensation damages, at least four factors must be takeninto consideration52 : a) there must be a breach of contract;b) the breach must have caused actual loss to the other party,and the actual loss must exceed the amount of the liquidateddamages; c) the breaching party must be at fault for thebreach; d) there must be a causal connection between thebreach and the actual loss, ie. the losses must be caused bythe breach. 53From the above prerequisites for the availability of50 See article 35 of CECL.51 See Huan Xin, "Lun Jinji Hetong Weiyue Zeren De JibenYuanze" (The Basic Principles of the Economic ContractRemedies for Breach of Contracts),(1984) No.2 Zhonggou Faxue42 at 48.52 See the Official Opinion of the Supreme People's Courtof China on Questions in Carrying out the Economic ContractLaw,in Minshi Falu Shiyong Daquan, supra, at 351.53 Ibid.93compensation damages it can be seen that, in order toestablish a right to compensation damages, actual loss is anecessary element in obtaining compensation damages in Chinesecontract law. In other words, only when the innocent partyhas suffered actual loss due to the breach, is he entitled tocompensation damages. This requirement makes the differencebetween the availability of liquidated damages and theavailability of compensation damages in Chinese contract law,because actual loss is not a prerequisite to obtainingliquidated damages. And in cases where there is a liquidateddamages clause in the contract reached by the contractingparties or where there is liquidated damages fixed by law,only when the actual loss exceeds the amount of the liquidateddamages, shall the injured party obtain compensation damagesto supplement the liquidated damages by the insufficientamount. 54B. Basic Theory and Practice of Damages in Anglo-American Law1. Concept and Object of Damages in Anglo-American Lawa. Concept of DamagesDamages are money compensation sought or awarded as aremedy for breach of contract. 55 The common law remedy for54 See article 35 of CECL; also see The Interpretationof the Provisions of CECL, supra, at 83.55 Black's Law Dictionary, sixth ed., at 389.94breach of contractual promises is that of damages. 56 Everybreach of contract entitles the injured party to damages forthe loss he has suffered. 57 In practice, the injured party'sremedy is most commonly an action for damages to compensatehim for the breach of contract. 58b. The Object of Damages in Anglo-American LawIn Anglo-American law, damages for breach of contractsare designed to compensate the plaintiff for the damage, lossor injury he has suffered through that breach. 59 The objectof an award of damages for breach of contract is to place theinjured party, so far as money can do it, in the samesituation, with respect to damages, as if the contract hadbeen performed. °According to Allan Farnsworth, in Anglo-American law,damages are usually awarded to protect three kinds ofinterests of the contracting party: a) expectationinterests, ie. to put the promisee in the position in which56 See A.G.Guest (ed.) Anson's Law of Contract, 26th ed.,(Oxford: Clarendon Press, 1986) at 491.57 Ibid. at 419.58 See Cheshire Fifoot & Furmston's, Law of Contract,12th ed.(London: Butterworths, 1991) at 595; G.H.L.Fridman,Q.C. The Law of Contract in Canada, (Toronto: Carswell, 1986)at 642.59 See Anson's Law of Contract, 26th ed. supra, at 491.60 Ibid. at 495; also see Robison v. Harman, [1848], 1Exch. 850, at 855.95the promisee would have been had the promise beenperformed. m b) reliance interests, ie. to put the promiseeback in the position in which the promisee would have been hadthe promise not been made. 62 c) restitution, ie. to put thepromisor back in the position in which the promisor would havebeen had the promise not been made."2. Compensation Principle of Damages in Anglo-AmericanLawa. Compensatory Nature of DamagesIn Anglo-American law, damages for breach of contractare given by way of compensation for loss suffered, and not byway of punishment for wrong inflicted." That is, damagescannot be used to punish a defendant, however outrageous itsconduct."The fundamental tenet of the law of contract remedies isthat, regardless of the character of the breach, an injuredparty should not be put in a better position than had thecontract been performed." And as Holmes said: if a contract61 See Allan Farnsworth, Farnsworth on Contracts, Vol.I, (Boston: Little, Brown and Company, 1990) at 60.62 Ibid.63 Ibid. 64 See, Anson's Law of Contract, 26th ed., supra, at 491.65 Ibid. at 492.See, Allan Farnsworth, Farnsworth on Contract,Vol.III, supra, at 189.96is broken the measure of damages generally is the same,whatever the cause of the breach. 67 The measure of damages istherefore not affected by the motive of the breach. 68"Vindictive" or "exemplary" damages have no place in the lawof contract. 69However, in Anglo-American law, punitive damages may beawarded in a tort action, and a number of courts have awardedthem for a breach of contract that is in some respecttortious. 70 Such punitive damages may be awarded not tocompensate the plaintiff but to indicate the court'sdisapproval for the conduct of the defendant. 71 For example,in a few states of the United States, punitive damages areallowed where the breach of contract is accompanied by afraudulent act or some other intentional wrong or grossnegligence. 72 In those cases, punitive damages for breach of67 Ibid.; also see Globe Ref. Co. v. Landa Cotton OilCo., [1903] 190 U.S. 540, 544.68 See Anson's Law of Contract, 26th ed., supra, at 492.69 Ibid.; also see Addis v. Gramophone, Ltd., [1909]A.C.488;^Rookes v. Barnard, [1964] A.C. 1129;^Broom v. Cassell Co., Ltd.,[1972] A.C. 1027;^Drane v. evangelou, [1978] 1W.L.R. 455.70 See Farnsworth on Contracts, Vol. III, supra, at 191;also see Centennial Centre of Science and Technology v. Vs Services Ltd.,(1982) 40 O.R.(2d.) 253.71^See International Encyclopedia of Comparative Law, (Mouton: J.C.B. Moher, Tubingen and Martinus NijhoffPublishers, 1982) Vol.7, c.16, at 25.72 Ibid., Vol.7, c.1, at 90.97contract may represent a surrogate for delictual relief. 73The American Restatement of the law, Contract Second (1979),section 355 provides that punitive damages are not recoverablefor a breach of contract unless the conduct constituting thebreach is also a tort for which punitive damages arerecoverable. 74As Lord Atkinson said:There may be circumstances of malice, fraud, defamation,or violence which would sustain an action in tort as analternative remedy to an action of breach of contract.If one should select the former mode of redress, he may,no doubt, recover exemplary damages..., but if he shouldchoose to seek redress in the form of an action forbreach of contract, he lets in all the consequences ofthat form of action. And one of these consequences isthat he is to be paid adequate compensation in money forthe loss of what which he would have received had thecontract been performed, and no more. 75That is, in a pure contract context, the plaintiff couldonly recover what the contract provided and no more, unless hesues the defendant in an action of tort.b. General Rules Governing Awards of Damages in Anglo-American Law.The general principle for the measurement of thosedamages is that of compensation based on the injured party's73 Ibid. 74 See American Restatement of the Law, Contracts,2nd.Vol. 3, ( St. Paul Minn: American Law Institute Publishers,1981) at 154.See Addis v. Gramphone Co.,[1909] A.C.488.98expectation. 76The principle that damages are compensatory in nature isone of the most notable features in Anglo-American contractlaw. Based on this principle, there are a number of generalrules which govern awards of damages in Anglo-American law:(i) Loss to the plaintiff is the criterion. 77 That is,damages are based on loss to the plaintiff and not on gain tothe defendant. 78 The usual rules of damages in contract donot seek to make the defendant disgorge the profit he has madeby the breach, and give it to the plaintiff. 79 For example,what the plaintiff loses by the defendant's breach may be farless than what the defendant saves by not performing, but thecourt still awards the plaintiff only what he has lost. 80(ii) Damages should not exceed loss. That is, an awardof damages should not enrich the plaintiff. He cannot recovermore than his loss. 8176 See Farnsworth on Contracts, Vol.III, supra, at 186.See G.H. Treitel, An Outline of the Law of Contract,(London: Butterworths, 1975)at 324.78 Ibid.; and also see Teacher v. Calder [1889] 1F.(H.L.) 39.79 See J.E.Cote, An Introduction to the Law of Contract,(Edmonton: Juriliber Limited, 1974) at 234.80 Ibid.See International Encyclopedia of Comparative Law, Vol.7, c.16, supra, at 24.99(iii) No punitive damages in pure contractual context. 82The purpose of damages for breach of contract is to compensatethe plaintiff and not to punish the defendant . a3 Therefore,as a general rule, punitive damages cannot be awarded in apurely contractual action . 84 A leading case denying punitivedamages is Addis v. Gramphone Co.(1909). 85 As laid down inthe case, no exemplary damages can be awarded for breach ofcontract. The plaintiff had been wrongfully dismissed, but theHouse of Lords restricted damages to his pecuniary loss andrefused to award any damages for the harsh manner in which hehad been treated. 863. Availability of Damages in Anglo-American LawIn Anglo-American jurisdictions, the remedy of damagesis always available when a contract has been broken. Damagesare the primary remedy for breach of contract.282 See G.H.Treitel, An Outline of the Law of Contract,supra, at 324.83 Ibid.84 See Perera v. Vandiyar [1953] 1W.L.R. 672; ParisOldham & Gustra v. Staffordshire B.G. [1988] 2E.G.L.R. 39;Reel v. Madon [1989] Ch.408.85 See Addis v. Gramphone Co.,(1909) A.C.488(H.L);86 See A.S.Burrows, Remedies for Torts and Breach ofContract,(London: Butterworths 1987) at 237-238.10087 The victim of a breach of contract is entitled to damagesas a right . m Even if he has not proved any loss, he isentitled to nominal damages. 89a. Availability of Nominal DamagesIn Anglo-American law, nominal damages are awarded eventhough the breach does not cause any loss." For example,where a plaintiff can show a breach of contract but noappreciable loss, it is customary to award him nominal damagesin some small sum, such as one dollar." The award of suchnominal damages constitutes a declaration of right and is notin substance inconsistent with the principle that damages arecompensatory. 92 Thus it can be seen clearly, breach ofcontract---the conduct itself, is the fundamental requirementfor availability of nominal damages in Anglo-American law.87 See G.H.Treitel, Remedies for Breach of Contract,(Oxford: Clarendon Press, 1988) at 75.ss See G.H.Treitel, An Outline of the Law of Contract, supra, at 324.89 Ibid.90 See International Encyclopedia of Comparative Law,Vol.7, c.1, supra, at 90.91 See J.E.Cote, An Introduction to the Law of Contract, supra, at 234.92 See International Encyclopedia of Comparative Law, Vol.7, c.1, supra, at 90.101Even if the plaintiff has not suffered or proved any loss, heis still entitled to nominal damages. 93b. Availability of Substantial DamagesHowever, if a plaintiff wants to get substantialdamages, actual loss is a necessary element. 94 In otherwords, only when the plaintiff has suffered actual loss due tothe breach, can it get substantial damages. 95 Besides, inorder to establish a right to damages, the plaintiff also hasto show that the loss which he has sustained was caused by thebreach, ie. the causal connection between breach and loss isanother pre-condition for substantial damages." Thus we cansee, breach, actual loss and a causal connection betweenbreach and actual loss are the three pre-conditions for ofsubstantial damages in Anglo-American law.c. A Law of Strict LiabilityIn the Anglo-American legal system, contract law is inits essential design a law of strict liability, and theaccompanying system of remedies operate without regard toSee G.H.Treitel, An Outline to the Law of Contract,supra, at 324.94 Ibid.95 Ibid. 96 See Anson's Law of Contract, supra, at 496; For casesin which the causal connection was discussed, see, Weld-Blundell v. Stephens [1920] A.C.956; Quinn v. BurchBros.(builders) Ltd., [1966] 2 Q.B. 370.102101 See G.H.Treitel,(Oxford: Clarendon, 1988)Remedies for Breach of Contract,at 8.fault." Liability for breach of contract is strict, in thesense that the aggrieved party does not have to show that thebreach was committed deliberately or negligently. 98 Anglo-American courts claim to be blind to fault, and they purportnot to distinguish between aggravated and innocent breach."It does not matter for the purposes of the law of contractwhether the breach was deliberate or accidental. iooTherefore, fault is simply immaterial to theavailability of damages in Anglo-American law. Littleattention has been devoted to the question of whether fault isa requirement of contractual liability. The generalassumption probably is that there is no such requirement. 101It has been said that in relation to a claim for damages forbreach of contract, it is, in general, immaterial why thedefendant fails to fulfil its obligations and certainly nodefence to plead that it has done its best. 102 And themeasure of damages is therefore not affected by the motives of97 See Farnsworth on Contracts, Vol.III, supra, at 190.98 See G.H.L.Fridman, Q.C. The Law of Contract in Canada, supra, at 642.99 See E.A.Farnsworth, "Legal Remedies for Breach ofContract"(1970) Vol.70 Columbia L.Rev.1145 at 1146.100 Ibid. 102 Ibid.; also see Raineri v. Miles [1981] A.C.1050,1086;103the breach. 103 Once a breach is established, it makes nodifference, as a general rule, whether the breach is committeddeliberately, negligently or innocently, or whether the partyin default acts in good or in bad faith. 1044. Liquidated Damages in Anglo-American Lawa. Liquidated Damages and PenaltyIn Anglo-American law, the parties enjoy a wide freedomnot only to provide for their primary rights but also to plantheir own remedies .105It is not uncommon that the amount of money which willbe recoverable on breach of contract is hard to predict andcalculate, and sometimes losses cannot be recovered simplybecause the plaintiff can not meet the required standard ofproof. Under such circumstances, the party may try to removethis uncertainty by providing that a fixed sum of money is tobe paid on breach. Such a pre-determined sum of money to bepaid on breach is known as "liquidated damages" .106 Incontracts of any sophistication it is a very common practice103 See Anson's Law of Contract, supra, at 492; also seeGlobe Refining Company v. Landa Cotton Oil Company [1903] 190U.S. 540 at 544.104 See International Encyclopedia of Comparative Law,Vol. 7, c.16, supra, at 58.105 See Cheshire Fifoot & Furmston's, Law of Contract,12th ed., supra, at 595.106 See G.H.Treitel, Remedies for Breach of Contract,supra, at 228-229.104for the parties to insert provisions which either add to orsubtract from the remedies that the general law wouldotherwise provide. 107 Even in relatively simple contracts itmay make excellent sense to contract for a remedy which willavoid the need to go to courts. 108Liquidated damages are pre-stipulated. However, itshould be pointed out, it is not necessary that any pre-stipulated sum will be regarded as liquidated damages andenforceable. Pre-stipulated sums can fall into two classes:liquidated damages clause and penalty clause. 109b. Rules for Distinguishing between Liquidated Damagesand PenaltyThe distinction between liquidated damages and penaltiesdepends on the intention of the parties to be gathered fromthe whole of the contract.m If the intention is to secureperformance of the contract by the imposition of a fine orpenalty, then the sum specified is a penalty; 111 but if, onthe other hand, the intention is to assess the damages for107108Ibid. Ibid. 109 Ibid.no See Cheshire Fifoot & Furmston's, Law of Contract,supra, at 620.ni Ibid.105breach of contract, it is liquidated damages. 112Liquidated damages represent a genuine pre-estimate ofthe expected loss that a party will sustain in the event ofbreach of contract, based on the facts at the time ofcontracting. 113 Thus, a liquidated damages clause expressesthe genuine intention of the parties that the pre-stipulatedsum approximates expected losses and is reasonable under thecircumstances. 114 It is quite obvious that liquidated damagesare purely for compensation purpose. The sum should be areasonable estimate of the probable loss, and in such case,the clause is valid.A penalty clause is not a genuine pre-estimate of the expectedloss that a party will sustain in the event of breach of acontract, based on the facts at the time of contracting.Instead, it is inserted for the purpose of compellingperformance of contractual obligations. 115 A penalty isintended to bring pressure to bear on one of the parties inorder to prevent or penalize a breach.It is true that in many legal systems, the parties can112 Ibid.; also see Law v. Redditch Local Board [1892]1QB. 127 at 132, per Lopes.J.113^See H.D.Pitch, Damages for Breach of Contract,(Toronto: Carswell, 1985) at 75.114 Ibid.;^see for example, Mackenzie v. D.M.BruceAgencies Ltd., [1977], 21 N.S.R.(2nd) 688 (C.A.); Maxwell v. Gibsons Drugs Ltd., [1979], 16B.C.L.R. 97 (S.C.)115 See H.D.Pitch, Damages for Breach of Contract, supra,at 76.106agree to pay a penalty, in addition to full damages, in orderto prevent or penalize a breach. An example is the liquidateddamages in China. However, as we know, Anglo-American lawfocuses on the principle that damages are compensatory andpunitive damages should not be awarded for a pure breach ofcontract. Since the court will exercise its equitablejurisdiction to intervene and set aside oppressive orunconscionable contracts, likewise, the courts will interveneto set aside an agreement fixing damages at an excessive andobjectively unreasonable amount. 116 That is , equity wouldrelieve against penalties, cutting them down to the actualdamages suffered. 117 And this doctrine was later taken up andapplied by the common law, and reinforced by statute, so thatit has become the rule in both jurisdictions. 118In judicial practice, if the court finds that thequantum of damages specified in the contract represents"liquidated damages", it will enforce the damages clause. Insuch a case, the injured party can not disregard the clauseand sue for the actual losses, even though the actual lossesexceed the stipulated sum. 119116 Ibid. at 74.117 See Anson's Law of Contract, supra, at 511.118 Ibid.119 See Anson's Law of Contract, supra, at 512; also seeCellulose Acetate Silk Co..Ltd., v.Widnes Foundry  [1925],Ltd., [1933] A.C.20; In this case, the appellants agreed topay by way of penalty the sum of 20 pounds per week for everyweek they exceed 18 weeks in the delivery of certain107However, if the court classifies the pre-stipulatedamount as a "penalty", the damages clause will generally berejected and not enforced. 120 As to the consequences ofpenalty, so far the courts have not adopted a consistentapproach in determining whether such clauses will be rejectedor upheld. 121 Some take the view that the penalty clause,being invalid, must be rejected and disregarded so that theaggrieved party can cover the whole of his recoverableloss. /22 Others argue for allowing the aggrieved party torecover no more than the stipulated sum on the grounds thatthe invalidity of penalty clause is based on their oppressivenature and that the party in breach can not be oppressed by aclause where it actually works in his favour. 123 However,whichever point of view works, it still can be seen clearlythat compensation, justice and fairness are the common basicmachinery. Calculated on this basis, the damages recoverableby the respondents on breach amounted to some 600 pounds, buttheir actual loss amounted to 5850 pounds. They thereforeclaimed that they were entitled to disregard the penalty andsue for the damages actually suffered. However, the House ofLords held that the sum was not a penalty, but was merely theamount which the appellants had agreed to pay by way ofcompensation for delay, and that the damages must be limitedto this agreed amount.120 H.D.Pitch, Damages for Breach of Contract, supra, at74.121 Ibid, at 73.122 See G.H.Treitel, Remedies for Breach of Contract,supra, at 229.123 Ibid.108considerations for both points of view.Can penalty be claimed together with performance ordamages? As G.H.Treitel explains: so far it has been assumedthat the penalty is payable simply on total non-performance ofthe principal obligation. In such a case, it is clear thatthe aggrieved party can not claim both the penalty andperformance, or both the penalty and damages. 124C. Comparison and Analysis between Punitive Principlein Chinese Contract Law and Compensation Principlein Anglo-American Contract LawIn this section,^I will analyses and compare thepunitive principle in Chinese contract law and thecompensation principle in Anglo-American contract law. Ishall reveal and illustrate the reason why Chinese contractlaw emphasizes the punitive function of damages, and whyAnglo-American law emphasizes the compensation function ofdamages.1. Contrast Between Punitive Principle andCompensation PrincipleFrom the description of the basic theory and practice ofdamages in both legal systems, we can see that the strong124 Ibid. at 217.109punitive principle of damages in Chinese contract law 125stands in sharp contrast to the purely compensatory principleof damages in Anglo-American law.Punitive principle can be seen throughout Chinesecontractual legal theory and legislation. In particular,liquidated damages are intended to coerce the parties intoperforming their contract. It is thought that the fear ofhaving to pay an amount of money by way of punishment willoperate in terrorem to urge the parties to carry out theirundertakings. 126The punitive principle in Chinese contract law is mainlyembodied in the following three respects:i) the government sets up mandatory liquidated damagesthrough legislation. 127 Such mandatory liquidated damages arenot intended to compensate the injured party but rather tosecure performance of contractual obligations or to penalizethe breaching party for his conduct of breach. They reflectthe direct intervention of the government in economiccontractual relations. Under statutory liquidated damages,the contracting parties are deprived of the right to choosethe form of compensation, and the amount or rate of liquidated125 See Huan Xin,"The Basic Principles of Remedies forBreach of Contract",(1984) No.2 Zhongguo Faxue at 48.126 See Li Jianhua & Shen Deli,'The Punitive Nature ofLiability of Obligations'(1987) 5 Faxue Pinglun at 14.127 See supra note 7 for detail information.110damages is limited. 128 And since the parties have no right todisregard or modify the fixed amount or rate, statutoryliquidated damages are actually akin to an administrative fineprovided by the government. 129 Statutory liquidated damagesadd a new legal obligation to the contracting party. 130Statutory liquidated damages serve as a device for carryingout administrative supervision of contracts in a plannedeconomy. 131ii) Payment of either mandatory liquidated damages orpre-agreed liquidated damages is not on condition that thebreach must have caused actual losses. In other words, actualloss is not a prerequisite in obtaining liquidated damages.Once breach occurs, liquidated damages are due.iii) Recoveries to an injured party can go beyond merecompensation. That is, the loss sustained by the injuredparty is not the criterion for the amount of damages. Thetypical example is: after paying the liquidated damages andcompensation damages, the breaching party shall continue toperform his contractual obligations, if the other partydemands specific performance of the contract. 1321 28^See Gao Min, "Discussion on Liquidated DamagesSystem" (1989) No.5 Zhongguo Faxue at 101.129 Ibid.uo Ibid. at 99.131 Ibid. at 101.132 See article 35 of CECL.111In sharp contrast, the concept of punitive damages isseverely limited and confined in Anglo-American jurisdictions.Damages for breach of contract are in the nature of purecompensation, not punishment. 133 That is, damages for breachof contract are assessed on the compensatory basis. Thegeneral rule that punitive damages will not be awarded forbreach of contract is well established in Anglo-Americanlaw. 134 Neither criminal nor civil penalties may be imposedfor breach of contract. 135 The compensatory principle inAnglo-American law is mainly embodied in the following fourrespects:i) There is no mandatory liquidated damages. Liquidateddamages and the amount thereof are pre-agreed by thecontracting parties and are intended to compensate thepotential loss sustained by the injured party.ii) The payment of substantial damages is on conditionthat the breach caused actual loss; otherwise, only nominaldamages are available.iii) Damages should not exceed actual loss, ie. the lossto the injured party is the criterion of the amount ofdamages.iv) Punitive damages can not be awarded in a purely133 See Addis v. Gramophone Co.,(1909)A.C.494.134 See International Encyclopedia of Comparative Law,Vol. 7, c.16, supra, at 26.135 Ibid, Vol.7, c.1 at 90.112contractual action. Punitive damages may only be awarded inrespect of tortious conduct which is of such nature as to bedeserving of punishment because of its harsh, vindictive, andmalicious nature. 1362. Different Notions of Breach Result in Different LegalTreatment Toward Breach.As we know, social standards and social values can bequite different from society to society. Punitive principlein Chinese contract law and compensation principle in Anglo-American contract law are embedded in and reflect theirdifferent notions of breach of contract.a. Chinese Negative Notion about Breach of ContractThe greater emphasis on the punitive aspect of damagesin Chinese contract remedies reflects, to a great degree, itsnegative notion about breach of contracts and a higher degreeof direct government involvement in the primary relationshipsbetween contracting parties. In Chinese contractual theoryand practice, breach of contract is regarded as illicitconduct, therefore, the breaching party should be punished by136^See Vorvis v. Insurance Corporation of BritishColumbia, ( 1989) 1 S.C.R. 1085, D.L.R.(4th) 193.113law. 137As discussed in Part II, China adheres to the stateplanning principle and uses economic contracts as aninstrument to plan, organize, distribute and implement thestate economic plan. The basic principle of a socialistplanned economy is that any economic contract establishedbetween economic units or individuals must and is obliged tobenefit the interests of the state and the public. 138Performance of economic contracts, particularly the contractsbased on the mandatory state economic plan, is very importantto the general social order and the state economic plan. Toa certain extent, the performance of contracts based on amandatory state economic plan is not only a contractualobligation between the contracting parties , but also anadministrative obligation imposed on the contracting partiesby the government. 139 Breaches of economic contracts maybring serious harm or even destruction to the society whichcan hardly be adequately recovered by means of compensationdamages. The party who fails to perform such an obligation137 See Wang Liming, " Lun Wuxiao Minshi Xingwei DeWeifa Xing" ( The Illegitimacy of Void Civil Act) (1987) No.6, Zhengfa Luntan at 9; also see Xia Guoqiang, "Shilun WeiyueZeren" (Discussion about the Responsibility for Breach ofContract), (1989) No.2, Faxue Zazhi at 13; Wang Jiafu & XieHuashi, Contract Law, supra, at 474; also see Li Youyi & ZhengLi, Science of Civil Law, supra, at 617, 619.138 See The Interpretation of the Provisions of CECL,supra, at 23.139 See Tong Rou & Wang Liming, Zhongguo Minfa(ChineseCivil Law) (Beijing: Law Publishing House, 1990) at 340.114should bear the responsibility and be punished. 140^Andmoreover, since economic contracts are designed to carry outstate economic plan in which there is the plainest state andpublic interests, breaches of contract are, in mostcircumstances, regarded as illicit and socially harmful.According to the provisions of CECL:no economic units or individuals may use a contract toengage in unlawful activities, disrupt the Stateeconomic order, undermine State economic plans, ordamage the interests of the State or the publicinterest ( for the purpose of seeking illegimateincome ,143Selling of economic contracts at a profit, using of aneconomic contract for speculation, subcontracting to profit atanother's expense and some other acts are all regarded asunlawful activities which are thought to impair the interestsof the state or the interests of the public, to disrupt socialeconomic order, and to undermine the state economic plan. 142Any illegitimate income or profit benefited from such illegalactivities is to be recovered and turned over to the StateTreasury. 143Undermining the state economic plan, impairing the140 See Yang Zixuan, Jingjifa Yuanli (The Fundamental Principles of Economic Law),(Beijing: Beijing UniversityPublishing House,1987) at 43.141 See article 7 & 53 of CECL.142 See article 4, 53 Of CECL,in J.A.Cohen, Contract Lawsof the People's Republic of China,(Hong Kong: Longman,1988)at50,61.143 See article 16 Of CECL.115social economic order, and violation of contract disciplineare usually attached to a party's failure to performcontractual obligations. Consequently, a breach of contractto seek profits is regarded as illicit and definitelyprohibited by law. So in order to ensure the realization ofthe state economic plan and to uphold the sanctity ofcontracts, defaulters must be penalized for failure to performcontractual obligations. 144Punitive principle in Chinese contract law also rests ona deeply felt moral notion that promises should be kept.Ethical and social condemnation is also attached to a breachof contractual obligations. And Chinese tradition considersthat promises have an inherent moral force, so that breach isan immorality and illegality. And concern for the morality ofpromise keeping is likely to lead to a legal system that willpunish promise breakers. 145In the realm where a breach of contract results indamages to the state economic plan, punishment is naturallyjustified as appropriate in strengthening contract disciplineand guaranteeing the realization of state economic plans. It144 See Huang Xin, "Lun Jingji Hetong Weiyue Zeren DeJiben Yuanze" (Discussion about the Basic Principles of theLiability for Breach of Economic Contracts),(1984) No.2Zhonggua Faxue 42 at 48,49.145 See Lucie Cheng & Arthur Rosett,"Contract with aChinese Face: Socially Embedded Factors in the Transformationfrom Hierarchy to Market, 1978-1989"(Fall, 1991) 5 Journal ofChinese Law at 232.116is through the punitive function of damages that thegovernment seeks to stimulate the parties to live up to theircontractual obligations and thereby to serve the nationalinterests and to promote contractual discipline. 146b. Anglo-American Law's Positive Notion about Breach ofContractHowever, as one legal scholar points out: contractdiscipline is also important in Anglo-American law countrieswhere autonomous ordering through contract is central to theprocesses of production and distribution. 147 Then why do theremedies for breach of contract accorded in those societiesreject a penal element?Perhaps the answer lies in the belief that theinterjection of a penal or coercive element can interfere withthe optimal allocation of resources as understood by thosesocieties. 148 In other words, Anglo-American law has acompletely different notion of breaches of contracts, andtherefore has a different attitude towards breach.The disaffection of Anglo-American law with punitive146 See Huang Xin," Lun Jingji Hetong Weiyue Zeren DeJiben Yuanze" (Discussion about the Basic Principles of theLiability for Breach of Contracts),(1984) No.2 Zhongguo Faxueat 45, 49.147 See International Encyclopedia of Comparative Law,Vol. 7, c.1, supra, at 90.148 Ibid.117damages in a purely contractual context reflects, to a greatdegree, its normative concept of breach of contract. UnlikeChinese contract law theory, which regards breach of contractas illicit conduct, Anglo-American contract law regards breachof contract with equanimity, and in some circumstances, evenencourages efficient breaches. 149 The liability rulepermits a promisor to breach a promise provided compensationis paid to the other party by payment of money damages .150The theory of efficient breach, though stillcontroversial in Western legal community, is very influentialin the contemporary contract theory. 151 Posner argues thatcontract law is a system of rules and principles furtheringeconomic efficiency and hence overall social welfare. 152 AsBurrow described: expectation damages for bargain promisesgive the plaintiff no less and no more than the value he hasplaced on the defendant's performance, they provide the149 See D.A.Farber,"Reassessing the Economic Efficiencyof Compensatory Damages for Breach of Contract",(1980) 66Virginia L.Rev.at 1443.150^See D.Cohen, "The Relationship of ContractualRemedies to Political and Social Status: A PreliminaryInquiry", (1982) 32 University of Toronto Law journal, at 33.151 For detailed discussion please see S.Waddams, The Lawof Damages (Toronto: Canada Law Book, 1983) at 576-577; alsosee Ian R. Macneil,"Efficient Breach of Contract: Circles inthe Sky" (1982) 68 Virg. L.Rev. at 947; R. Posner, EconomicAnalysis of Law,(Boston: Little, Brown and Company, 1973) at89-90.152 See A.S.Burrows, Remedies for Torts and Breach of Contract, (London:Butterworths, 1987) at 18.118defendant with an incentive to exchange resources with thosewho place the highest value on them; the efficient result ishereby promoted. 153In a liberal-capitalist market economy, the institutionof contract is the most important legal instrument forallocating resources, and its extensive use is itself anindication of a greater decentralization of economic decisionmaking. The free market produces economic efficiency bymoving resources to those who place the highest value onthem. 154 In order to support this, the law must permit andeven encourage a defendant to break a contract where this willlead to resources passing to those who place a higher value onthem. 155 The Anglo-American position is that if the party inbreach may gain enough from the breach to have a net profit,even though that party compensates the injured party forresulting loss, non-performance and the consequentreallocation of resources are desirable. 156 Society as awhole benefits, since the breach tends to transfer resourcesto their highest valued, most productive uses and tends tomaximize the efficient use of economic resources. 157Economic theory does not sanction but does encourage153 Ibid.Ibid. at 310.Ibid. at 310.See Farnsworth on Contract, Vol.III, supra, at 153.See Farnsworth on Contract, Vol. I, supra, at 8.154155156157119"efficient breach" .158To prevent such a so-called "efficient breach" bycompelling performance would result in an undesirable wealthdistribution, since the party in breach would lose more thanthe injured party would gain. 159 Similarly, to prevent sucha so-called "efficient breach" by imposing punitive damages orpenalties on the party would also result in an undesirableallocation of resources. It is believed that preventing oneparty from breach might mean to force the party to waste hisresources, with no economic benefit to himself as well as tothe society. 160 In other words, the "efficient breach"theory is incompatible with a punitive doctrine which wouldencourage a party to stick to a contract that it would beeconomically efficient for it to breach. 161From an economic point of view, generally speaking, aparty will breach a contract only if it is profitable to doso, and the innocent party will not be hurt because an awardof damages will make it whole. For example, party A to acontract can, after compensating the other party B for B'slost expectancy, gain what is for A a significantly greatereconomic value than that which would be realized under the158 Ibid.159 Ibid.160^See I.R.Macneil, "Efficient Breach of Contract:Circles in the Sky", supra, at 949.161 See A.S.Burrows, Remedies for Tort and Breach of Contract, supra, at 289.120contract, an increase in overall wealth is accomplished byallowing the breach and putting B in as good a position as hewould have been in had the contract been performed. The theoryof efficient breach suggests that promisors who breachincrease society's welfare if their benefit exceeds the lossesof their promisees. 162 The opportunity cost of completion tothe breaching party is the profit he would make from a breach,and if it is greater than his profit from completion, thencompletion will involve a loss to him. If that loss isgreater than the gain to the other party from completion,breach would be value maximizing and should be encouraged. 163Therefore, in Anglo-American law, selling economiccontracts at a profit, using of an economic contract forspeculation, subcontracting for profit at another's expensesand some other activities for profit seeking are regarded asreasonable and are not prohibited by laws. It is acceptedthat to penalize breach of contract might discourage theefficient reallocation of community resources. 164 Naturally,no coercive and punitive legal measures are necessarily takento punish breaches of contract, for they would compelcontracting parties to perform their contractual obligations162 See Ian R. Macneil,"Efficient Breach of Contract:Circles in the Sky" (1982) supra, at 947.163 See R.Posner, Economic Analysis of Law, 2nd. ed.,supra, at 89-90.164 See International Encyclopedia of Comparative law. Vol. 7, c. 1, supra, at 87.121obligations when breach would be socially more desirable. 165Some people may argue that, in efficient breach, whatthe injured party loses due to the breach may be far less thanwhat the breaching party saves by breach; neverthelessaccording to compensation doctrine, the court still awards theinjured party only what he has lost. Thus, the breachingparty may make a profit by breaching contract. It may seem toChinese Lawyers that the compensation doctrine and the theoryof efficient breach acting together result in a premium onwrongdoings. But, as J.E. Cote argues in his book: to theextent that the profits and losses may be accurately weighedin terms of money, no one really suffers. 166 And if thedefendant after paying compensation still save money, is theplaintiff any worse off for that? It may be that in such acase society as a whole may be better off if the contract goesunperformed.w At least some Western economic law scholarsthink that since the law of contract has been evolved mainlyto serve the needs of trade and commerce, considerations ofmorality or equity are, to certain degree, subsidiary toconsideration of Pareto-efficiency. 168 Therefore, punitive166 See Farnsworth on Contract, Vol.III, supra, at 155.166 See J.E.Cote, An Introduction to the Law of Contract. (Edmonton: Juriliber,1974) at 234.167 Ibid.168 See J.Landa, & B.Grofman, "Games of Breach and theRule of Contract in Protecting the Expectation Interest",(Toronto: Institute for Policy Analysis, University ofToronto, 1980) at 17.122measures should not be taken to penalize breaches, becausethey will discourage efficient reallocation of communityresources and encourage performance when breach would besocially more desirable. 169Freedom of contract is also the fundamental basis ofcontract law in Anglo-American law, and freedom of contractinvolves freedom to breach contracts. The classic argumentput forward for limiting curial jurisdiction to order specificperformance is that the court should respect individualfreedom, m The time-honoured phrase is 'The law of Englandwill not permit any man to enslave himself by contract,' sothe courts should not order "enslavement ", that is, specificperformance, for breach. Anglo-American law emphasizes theprivate nature of commercial contracts and restrictsgovernment and judicial interference. State compulsion is notHowever, it is worthy to point out that althoughaccording to some economic law scholars, consideration ofmorality should be subsidiary to consideration of Pareto-efficiancy, it does not necessarily mean that morality hasbeen ignored or disregarded in the reality of market economy.As a matter of fact, in a market economy, business competitionis very keen, and in order to compete for market, businessmenand enterprises do care about their own reputations---commercial morality. However, according to Anglo-Americanassumption, it is not the business of contract law to forcepeople to behave themselves well, but to redress theconsequences of breach, aiming at justice, fairness andefficiency.169 See Farnsworth on Contracts, Vol.III, supra, at 155.in^See D.Cohen, "The Relationship of contractualremedies to Political and Social Status: A PreliminaryInquiry"( 1982) 32 University of Toronto Law Journal, footnote9, at 76.123frequently found in the common law of contract. m There is atradition of economic liberalism among the Anglo-Americanlawyers, dating back to Sir Edward Coke, and perhaps evenbeyond. m Their position is that the failure to perform aprivate obligation is not usually a matter of sufficientpublic concern to justify the punishment of the defaultingparty .173In conclusion, Anglo-American law encourages efficientbreach, emphasizing the pecuniary benefits from breach for thewhole society. Efficient breach is regarded as a movementtowards Pareto Optimality; m therefore, punishment should notbe imposed for breach of contract. This is totally differentfrom the Chinese approach where breach of contract is regardedas illicit and is therefore prohibited by law. Punitive andcompulsive measures have to be taken to punish the defaultingparty so as to enforce contractual disciplines.171 Ibid. at 64.172 See P.S. Atiyah, The Rise and Fall of Freedom ofcontract,(Oxford: Clarendon Press, 1979) at 112.173 See International Encyclopedia of Comparative Law,Vol.7, c.16, supra, at 4.174 An allocation of resources is optimal only if no onemay be made better off, in his own estimation, withoutsimultaneously making someone else worse off; and a change inthe allocation is optimal only if it makes at least one personbetter and no one worse off. See R.A.Posner, Economic Analysis of Law, supra, at 12; International Encyclopedia of Comparative Law, Vol. 7, c.1, supra, at 87.1243. Different Legal Objectives of the Systems ofContract Remedies Lead to Different PrinciplesWhen we go deeper in our comparison and analysis, it isnot difficult for us to see that the legal aim of the systemof remedies in Chinese contract law is different from that inAnglo-American law. The fundamental difference is that, inChinese contract law, the system of remedies is ultimatelydesigned to prevent potential breaches by punishing andeducating the breaching party. It puts much emphasis on theliability of the breaching party for the breach and inflictspunishment on the breaching parties. In Anglo-American law,the system of remedies is designed to redress breaches bycompensating the injured party. It puts much emphasis on theeconomic interests of the injured party and redresses breachby compensating the injured party.a. Chinese Contract Remedies Aim at Punishing andPreventing Breach of ContractAs mentioned before, in China, with its planned economy,the ultimate aim of Chinese contract law is to maintain andguarantee the realization of the state economic plans. 175 Andthe accompanying system of remedies serves this ultimate goal.Therefore, the main objective of the system of remedies in175 See articles 1 & 2 of CECL, in J.A.Cohen, ContractLaws of P.R.C.(HongKong: Longman,1988) at 50; also see theInterpretation of the Provisions of CECL,  supra, at 11.125Chinese contract law is to punish the breaching party for hisoutrageous conduct and to deter him and the others like himfrom similar conduct in the future. 176 That is, Chinaemphasizes the punitive aspect of contract remedies as well asthe educational value of law. And it is through punitivedamages, particularly through statutory liquidated damages,that the government tries to increase the cost of breach ofcontract and to spur the contracting parties ( usually theeconomic units) to perform their contractual obligations. Bydoing so, the government tries to prevent potential breachesof contract, and thereby to guarantee the realization of thestate economic plans. 117The justification for the punitive principle restsultimately on the notion that breach of contract is not onlyan infringement to the economic right of the other party, butis also a disturbance and may even cause damage to the stateeconomic plan and the social economic order." 8 Therefore,176 See Tan Youtu & Wang Heng, Wuoguo Jingji Hetong deLilun Yu Shijian,(The Theory and Practice of Economic Contractin China) (Beijing: Education and Science Publishing House,1986) at 132; also see Li Jianhua & Shen Deli, "Discussion ofPunitive Nature of Contractual Obligations" (1987) No.5 FaxuePinglun,at 14.177^See Gao Min, "Discussion on Liquidated DamagesSystem" (1989) No.5 Zhongguo Faxue 98 at 101.178 See Huan Xin, " Lun Jinji Hetong Weiyue Zeren DeJiben Yuanze" (Discussion on the Basic Principles of EconomicContract Remedies) (1984) No.2 Zhongguo Faxue at 49; also seeWang Hui & Li Reyu, "Lun Woguo Jingji Hetong Weiyue Zeren",( Study of breaches of Economic Contracts in China), (1989)No. 1, Zhongwai Faxue at 27-33.126once a party breaches a contract, there is an obligation tocompensate the other party for loss, but there also must beeconomic punishment. That is, to make the breaching partylose certain economic interests."9 It means that thebreaching party must pay for its wrongdoings. Put anotherway, if the state economic plan and social order aredisrupted, punishment is due. Mere compensation withoutpunishment is thought not sufficient to urge or press thecontracting parties to fulfil their contractualobligations. 180 Only punitive measures can have a strongenough deterrent effect on the contracting parties to preventbreach. It is believed that the fear if having to pay anamount of money by way of punishment will operate in terroremto compel the contracting parties to carry out theirundertakings. 181It is a practical need of the planned economy to resortto punitive measures to compel economic units to perform theircontract obligations, and to prevent them from breaching179 See He Yue, " Guanyu Jinji Hetong Weiyuejin XingzhiDe Yidian Yiyi" (A Different Opinion about the Nature of theLiquidated Damages in Chinese Economic Contract Law) 1987) 3Hebei Faxue at 64; also see Huan Xin, "Discussion on the BasicPrinciples of Economic Contract Remedies"(1984) No.2 ZhongguoFaxue at 45.180 See He Yue, " Guanyu Jingji Hetong Weiyueji Xingzi DeYidian Yiyi" (A different Opinion about the Nature ofLiquidated Damages in Chinese Economic Contract law) supra, at64.181 See Li Jiahua & Shen Deli, "The Punitive Nature ofliability of Obligations (1987) 5 Faxue Pinglun at 14.127contracts. That is, coercive methods have to be employed toprevent potential breaches that would likely destroy thenational plan or disrupt the socialist economic order.Punishment of breaches is the primary means by which breachesof contracts are prevented. 182 Punitive and coercive measuresare thought necessary and effective in preventing breach ofcontract.Thus, it can be seen that punishing the breachingparties and preventing breaches of contracts so as toguarantee the realization of state economic plans is theultimate goal of the system of remedies in Chinese contractlaw.b. Anglo-American Contract Remedies Aim at RedressingBreach and Relieving the Injured PartyIn sharp contrast, the system of contract remedies inAnglo-American law aims at relief to the innocent party toredress breach rather than at compulsion of the breachingparty to prevent breach. 183 It is concerned with ensuringthat one individual does not harm another individual. Thecentral objective behind the system of contract remedies is182 See Liang Zhiping, "Explicating 'Law': A ComparativePerspective of Chinese and Western Legal Culture"(1989) Vol.3, No. 1, Journal of Chinese Law, at 61.183 See E.A.Farnsworth, "Legal Remedies for Breach ofContract"(1970) 70 Colum. Law Rev. 1143 at 1215.128compensation, not punishment. 184 Punishment of a party forhaving broken his promise has no justification on eithereconomic or other grounds. 185 Anglo-American contract lawand theory attach great emphasis to compensation and to theallocative functions of the system of contract remedies,rather than to the punitive and preventive functions of thesystem of contact remedies. At a general level, the primarygoal of contract remedies is to relieve the innocent partyrather than to punish the breaching party.As discussed before, Anglo-American law expresslyrejects the notion that remedies for breach of contract havepunishment as a goal, and with rare exceptions, refuse togrant "punitive damages" for breach of contract. 186 Thepurpose of awarding contract damages is to compensate theinjured party. For this reason, courts in contract cases donot award damages to punish the party in breach or to serve anexample to others unless the conduct constituting the breachis also a tort for which punitive damages are recoverable. 187As Lord Atkinson pointed out in Addis: damages for breach of184 See Restatement of The Law, Contracts 2nd., Vol. 3,supra, at 157.185 Ibid. 186 Ibid. at 1146.187 See Restatement of The Law, Contracts 2nd., Vol. 3,supra, at 154.129contract were in the nature of compensation notpunishment. 188According to Anglo-American position, one importantfunction of contract is to ensure that the expectationscreated by a promise of future performance are fulfilled, orthat compensation will be paid for its breach. 189 The purposeof contract law is often stated as the fulfilment of thoseexpectations which have been induced by the making ofpromise.m Therefore, the leading and well-acceptedprinciple is that damages for breach of contract usually aimto fulfil the plaintiff's expectations by putting him into asgood a position as he would have been in if the contract hadbeen performed .191Justice, fairness and equity are values to which Anglo-American law has aspired and which it will seek to achieve foreternity. 192 The primary aim of contractual remedies is toredress the consequences of breaches and to allocate lossesmore effectively and reasonably, and thereby to serve the end188 See Addis v. Gramophone Co., [1909] A.C. 488.189 See Anson's Law of Contract, 26th ed., supra, at 2.See Murray ,J.R., Murray on Contracts, ( Newyork:Bobbs-Merril, 1974) at 438.191 See A.S.Burrows, Remedied for Torts and Breach of Contracts, supra, at 15; also see G.H.Fridman,Q.C., TheLaw of Contract in Canada, supra, at 680.192^See D.Cohen, " The Relationship of ContractualRemedies to Political and Social Status: A PreliminaryInquiry" supra, at 35.130of social justice and fairness. Basic contractual justice inAnglo-American law requires that one party's breach should notreduce the other party's wealth. 193 Similarly, an injuredparty should not be put in a better position than he wouldhave been had the contract been performed. 194 And since theinjured party of breach can be made whole for his losses bycompensation, contractual justice has been realized. 195As J.E. Murray explains in his book: The Anglo-Americanlegal system does not compel the fulfilment of promises.Rather, it provides redress in the form of compensation toinjured promisees when a promise is breached.m It isconceivable however, for a legal system to compel theperformance of promises through its criminal law or at leastto allow recoveries to injured promisees which go beyond merecompensation. But the Anglo-American legal system has notchosen this route. 197 It has chosen to attempt to place theinjured party in the position he would have occupied had thepromise been performed(expectation interests) or to restorehim to the position he was in before the promise was193 See International Encyclopedia of Comparative Law,Vol., 7, c. 1, supra, at 101.194 See Farnsworth on Contracts, Vol., III, supra, at189.195 See Posner, Economic Analysis of law, supra, at 89-90.pm See Murray,J.R. Murray on Contract, supra, at 438.197 Ibid.131.198made(reliance and restitution interests) The Anglo-American position is that enforcement of punitive damageswould allow the parties to depart from the fundamentalprinciple that the law's goal on breach of contract is not todeter breach by compelling the promisor to perform, but ratherto redress breach by compensating the promisee.mEvidently, the system of contract remedies in Anglo-American law is not directed at compulsion of promisors toprevent breach, rather it is aimed at relief to promisees toredress breach. 200 The preoccupation of Anglo-American lawis not with the question: how can promisors be made to keeptheir promises? Its concern is with a different question: howcan people be encouraged to deal with those who makepromises? 201 Perhaps it is more seemly for a system of freeenterprises to promote the use of contract by encouraging thepromisees to rely on the promises of others, rather than bycompelling promisors to perform their promises out of fearthat the law will punish their breacher. 202 In the result,this at least adds to the celebrated freedom to make198 Ibid.199 See Farnsworth on Contract, Vol. III, supra, at 283;also see Jaquith V. Hudson(1858) 5 Mich.123.200 See E.A.Farnsworth, "Legal Remedies for Breach ofContract"(1970) 70 Columbia L.Rev.1145 at 1147.201 See Farnsworth on Contract, Vol. III, supra, at 146.202 See E.A. Farnsworth,"Legal Remedies for Breach ofContracts" (1970) 70 Columbia L.Rev. at 1147.132contracts, a considerable freedom to break them as well. 203Thus we can see that the system of remedies for breachof contract in Anglo-American law has compensation as its maingoal. By compensating the party injured by a breach , the lawtries to guarantee and protect his expectation interests andreliance interests, and thereby to encourage promisees to relyon the promises of others. In so doing, contract lawregulates and facilitates the operation of commercialtransactions in a market economy.Again, take liquidated damages as an example. In Anglo-American law, liquidated damages are intended merely as aconvenient method of determining the amount to be paid in caseof breach. 204 They are intended to reduce the inconvenienceand cost of proof, to save time, to cut the expense oflitigation and sometimes to limit the amount of the loss tobe born by the promisor.m In short, the accepted importantfunction of liquidated damages is to avoid difficulties ofassessment and actual loss proving. Payment of liquidateddamages automatically ends the breaching party's obligation toperform the contract.In contrast, in China, as discussed before, liquidateddamages embraces an element of penalty and often are referredto as fines. Liquidated damages are intended primarily to203 Ibid.204 See Farnsworth on Contract, Vol. 3, supra, at 283.205 Ibid.133prevent contracting parties from breaching contract and topunish the breaching party. 206 It is intended to coerce thepromisor into performing his contract by imposing andincreasing the liability for breach of contract. Inparticular, statutory liquidated damages are related to thefunction of the state in managing its economy. To a greatdegree, it is a government ( official) sanction against thebreaching party. 207 It is punitive in nature. Payment ofliquidated damages does not end the breaching party'sobligation to perform the contract.The sceptical readers may well argue that the system ofcontract remedies in Anglo-American law also has a role inpreventing breach of contract. However, as Farnsworth pointsout: this result is only the incidental effect of a systemdesigned to serve other ends. 208 That is, the preventiveeffect is achieved as a byproduct of redressing breaches bycompensating the injured party. Compensation is still theprimary rationale of damages in Anglo-American law.206 See He Yue, " Dui Woguo Jingji Hetong WeiyuejinXingzhi De Yidian Yiyi" (A Different Opinion about LiquidatedDamages in China's Economic Contract Law) (1987) No.3, HebeiFaxue at 33-35.207 See Yang Zixuan, Jingjifa Yuanli^(Principle ofEconomic Law), ( Beijing: Beijing University Publishing House,1987) at 129.208 See Farnsworth on Contract, Vol.III, supra, at 146.1344. Different Traditional InfluencesLaw is sometimes said to be the product of a nation'spast history and cultural mentality. 209 As an essentialelement of a culture, law is influenced by the distinguishingfeatures of the overall culture. 210 The growth of contractlaw can also be influenced by traditional legal culture andhistory, apart from existing social and economic factors.Therefore, the legal history and culture are also central toan understanding of the principles of contract remedies in asociety.The growth of Chinese contract law has been influencedby Chinese traditional legal culture and legal history. Thepunitive principle in China's economic contract remedy systemreflects, to a great degree, the continuing impact of Chinesefeudal legal culture on Chinese existing legal system.In ancient China law was generally understood as asystem of punishments applied by officials to people whodisturbed social orders, and no distinction ever developedbetween civil liability and criminal liability. 211 And Chinatraditionally emphasized the coercive nature of law and viewed209 See Liang Zhiping, "Explicating 'Law': A ComparativePerspective of Chinese and Western Legal Culture", (1989) Vol.3, No. 1 Journal of Chinese Law, at 55.210 Ibid.211^See^The New Encyclopedia Britannica, Vol. 4,(U.S.A.: Encyclopedia Britannica, Inc. 1979) at 408.135forced obedience as one of the essential elements of law. Alllegal transgressions were handled with criminalpunishment. 212 The cruelty and variety of punishment werethe distinguishing characteristics of all ancient Chineselaw. 213 The traditional understanding of law is that law wasnot directed at the good; instead, its only purpose was todeter the potentially evi1. 214 In traditional China, the roleof formal law was limited mainly to the maintenance of thepublic order. 215 Law was primarily perceived as a tool ofgoverning, not as a tool of protecting rights or individualinterests. 216 The widely accepted concept was that law (fa)was punishment (xing), and punishment (xing) was law (fa). 217As a result, commoners feared law and legal institutions.They only knew that when they violated law they would bepunished; but they never thought of law as something thatcould protect their rights and interests. 218 Law was212 Ibid.213 See Liang Zhiping, "Explicating 'Law': A ComparativePerspective of Chinese and Western Legal Culture" (1989) Vol.3, No. 1, Journal of Chinese Law at 88.214 See Yu Xingzhong, "Legal Pragmatism in the P.R.C."(1989) Vol. 3, No. 1, Journal of Chinese law at 32.215 See P. Potter, The economic contract Law of China, (Seattle: University of Washington Press, 1992) at 9.216 Ibid.217 See Wang Jiafu & Xie Huaishi, Hetong Fa (ContractLaw) supra, at 22.218 See Yu Xingzhong," Legal Pragmatism in the P.R.C."supra, at 32.136understood, therefore, not as having the function ofprotecting rights.Despite the fact that the stages of history and socialconditions have already changed, this ancient Chinese view oflaw as punishment still remains and has influence today,especially in Chinese legal theoretical underpinnings. Thedeep social and culture foundations are hard to dislodge.Nowadays, many Chinese people (including the legislators)still view law as a restriction or prohibition, ie. a kind ofcompulsive measure to govern social life. Under thetraditional influences, it is not surprising that Chineselegal scholars, theorists and legislators tend to stress thepunitive and coercive aspects of law. They still perceivecontract law primarily in its social function. And the factthat punitive doctrine is still clearly discernable in Chinesecontract remedy system is just one of the examples of thelasting influences of Chinese traditional understanding oflaw.By comparison, in Anglo-American notion, contract law isthe child of commerce, and it has grown with the growth ofindustry and commerce. Moreover, contract law has developedin accordance with the basic premise that law is considered tobe the guarantor of rights and the measure of freedom. 219As mentioned before, the Anglo-American position tends219 See Liang Zhiping, "Explicating 'Law': A ComparativePerspective of Chinese and Western Legal Culture"(1989) Vol.3, No. 1, Journal of Chines Law at 58.137to associate contracts and contract law with individualism,autonomy and private agreement which are perceived to be thecharacteristics of market economy, rather than withrestrictions or prohibitions of people's behaviours. In otherwords, contract law has been primarily perceived as aninstrument of facilitating private transactions, allocatingeconomic sources and risks, and protecting and guaranteeingindividual's rights and interests.In Anglo-American law, particularly its economic lawdoes have social governing function, ie. to maintain socialorders. However, such social governing and social ordermaintaining function of law is not practised in the way thatlaw should force or coerce people to obey. In the Anglo-American traditional legal culture, it is individual freedomand rights that are the core standards of legal thinking.5. Brief SummaryThrough the above analysis and comparison, the punitiveprinciple is one of the basic principles of the system ofremedies in Chinese contract law. m China emphasizes theimportance of economic sanctions as inducements toperformance. The system of contract remedies is ultimatelyintended to bring pressure to bear on the breaching party andto increase the cost breach of contract so as to prevent220 See Huan Xin,"The Basic Principles of the Remediesfor Breach of Contract" supra, at 45.138breaches.The reason why Chinese contract law adheres to punitiveprinciple rather than the equal value compensation principleis that what the Chinese economic contract law reflects,recognizes and protects is not the economic relations arisingfrom a market economy in the typical sense of Westerncapitalism, but those arising from a socialist economy basedon the system of public ownership of the means ofproduction 221 , where the state plans plays a dominant role.Economic contract law is not only the legal system whichguides the economic activities and regulate the economicrelations, but also, and more importantly, is the effectivelegal measure to carry out the state economic policies and toguarantee the realization of the state economic plan andsocial developing plan. As discussed before, breach ofcontract not only infringes the contractual right of the otherparty, but also disturbs and even undermines the stateeconomic plan and social economic order. Therefore, in orderto strengthen contract discipline, to effectively preventbreach and to ensure the realization of the state economicpolicies and plan, naturally compulsive and punitive measureswould be taken.It is quite different in Anglo-American law.Compensation is the fundamental principle of the system ofcontract remedies in Anglo-American law. It emphasizes the221 Ibid. at 49.139importance of economic compensation as legal redress for theinjured party, and reject the notion that remedies for breachof contract have punishment as a goal. The system is aimed atprotecting and guaranteeing the economic interests ofcontracting parties so as to realize social justice andfairness, and hereby to encourage people to rely on contracts.It is just in this way that the law maintains the socialeconomic order in a free market economy and to facilitate theoperations of market.140PART FOUR: CONCLUSIONA. Summary of Comparison and AnalysisContract, being the legal form of economic exchange,exists in every economy. The social institution of contractis found in virtually every society. However, in differentsocial and economic structures, the functions and principlesof contract institutions can be different from each other.Contract law is a reflection of the social and economicclimate of a society. As we can see in this study, theprinciples and doctrines of a system of contract remedies aredecided and heavily influenced by the social factors andeconomic philosophy of a society within which the remedysystem operates. In short, legal principles are but theexpressions in legal forms of the conditions of economic lifein a society.The rules and principles of contract remedies differsubstantially from a market economy to a planned economy. Andthe contrast reflects the different needs of the two societiesand the different responses made at the level of law to thoseneeds.The Chinese contract remedy system comes out oftraditional and socialist sources that operate on assumptionswhich are quite different from Anglo-American assumptions. Ina planned economic model, the emphasis of contract remedy is141to generate compliance with the state economic plan, which isdeveloped with a great degree of government involvement. Itis believed that this emphasis will effectively maintain thesocial economic order and guarantee the realization of thestate economic plan.In the Chinese context of a planned scarcity economy,remedial rules in particular serve to promote the purposes ofcontracts in implementing state economic plans. Realizationand guarantee of the state economic plan is the touchstone ofthe principles and rules of contract remedies. What isemphasized most is the obligation and duty of economic unitsto implement the state economic plan assigned to them. TheChinese position on contract remedies centres on the role ofeconomic sanctions which is perceived to be an inducement toperformance of contracts. Failure to perform a contract isregarded as failure to carry out the state economic plan,therefore, the contract remedy is punitive and coercive innature. So, we may conclude that excessive emphasis onspecific performance and giving rich punitive element todamages is a Chinese product with the characteristics ofplanned economy and high degree of government interferencewith individual economic and commercial activities. Itreflects the internal demands of planned economy. That is,Chinese contract remedies arise out of the needs of China'sspecific social and economic reality.In addition, the fact that China over-stresses specific142performance and punitive principle in contract remediesreflects, on the other hand, the influence of the feudal legalthinking of centralization of power, which has ruled China forthousands of years. This thinking still remains very strongin today's Chinese legislations. The fact that these ideashave persisted reflects the reality that China is still asociety remarkably untouched by the commercial values andinstitutions that are quite common in the West. That is,market economy is still underdeveloped in China.Clearly, as the result of a planned economy andsocialist ideology emphasizing supremacy of the stateinterests, contracts have been used as a tool in planning ,organizing and implementing state economic plan.Consequently, the planning principle, the punitive doctrineand specific performance as the primary remedy are the mainfeatures of Chinese contract remedy system.However, on the other hand, the factors that have madespecific performance and punitive damages so attractive in aplanned economy are plainly absent in a free market economy.In the context of a free market economy, contract remedyemphasizes a great degree of flexibility and choices to theeconomic actors, with minimal government interference. Suchflexibility and choices, it is believed, can maximize socialwelfare and promote the operation of the free market economy.In effect, contract is the instrument by which the separateand conflicting interests of the participants can be143reconciled and brought to a common goal. 1 Contract serves asa vehicle for private economic activities. In addition,Anglo-American law prefers to restrict rather than to enlargethe responsibility of the party in breach. Therefore, the aimof contract remedies is mainly to compensate for the lossessustained by the innocent party, emphasizing the compensatoryprinciple of contract remedies. The preference forsubstitutional relief rather than specific relief reflects theassumption that markets make substitutes freely available.All in all, the Anglo-American contract remedy system isheavily influenced by the economic philosophy of free marketeconomy. As the result of a free market economy and anideology emphasizing individualism, freedom and economicefficiency, contracts are perceived as a means of facilitatingprivate transactions and of allocating social resources andpotential risks. Freedom of contract, compensation doctrine,and damages as the primary remedy become the main features ofAnglo-American contract law.1 See G. Gurvitch, Sociology of Law, (London: K.Paul,Trench, Trubner, 1947)144B. Reassessment of the Principles of SpecificPerformance and Punishment in Chinese Contract RemedySystem in the Changing Situations of China.Beginning in 1980, a major effort has been under way tostimulate economic growth in China through a series of neweconomic policies. And in the last decade, with theimplementation of economic reform, China's commodity economy 2has developed rapidly both in its domestic economy and in itsforeign trade. With the practice of a planned commodityeconomy, the gradual decentralization of the centraleconomic power, the expansion of the enterprises' decision-making autonomy, 3 and the gradual and appropriate narrowingof the scope of mandatory planning and expansion of the scope2 The resolution concerning reform of the economicsystem which was passed in October, 1984, at the third plenumof the twelfth party central committee pointed out that theP.R.C.'s economy is a planned socialist commodity economy withsocialist public ownership as its basis. However, the term"planned commodity economy" has never been systematicallyexplained by Chinese leaders or authorities. My personalunderstanding is that by using commodity economy instead ofusing market economy, the Chinese leaders tried to distinguishsocialist market economy from capitalist market economy. Forby that time, they still thought that market economy was aexclusive relic of capitalism.3 As the result of the expansion. every state-ownedenterprise now is supposed to have the duty to work profitablywithin the framework established by the state economic planand in accordance with the economic goals it set forth.State-owned enterprises have been equipped with separateassets and money, and they are supposed to be responsible fortheir economic gains and losses. Thus , state-ownedenterprises have become comparable to independent privately-owned enterprises responsible for their own operation in theWest.145of the guidance planning, there have been a lot of changes inChina's social and economic conditions and environment.More important, China has changed her attitude towardsmarket economy. 4 Not long ago, the plenary of the FourteenthCentral Committee of the Chinese Communist Party decided thatChina will totally implement market economy model. 5 Thisdecision marks the starting of a new economic model in Chinaand is of great epoch-making significance. It will surelyhave far-reaching effect on China's economy.Such great changes in China's economic model andpolicies and China's willingness and attempt to develop marketeconomy in turn suggest that China should re-think or re-assess her existing economic contract law which was4 China used to regard market economy as the exclusiveproduct of capitalism and also thought it was absolutelyirreconcilable with socialism. It was a long time beforeChina realized that market economy is not merely a relic ofcapitalism. As one article recently published in the People'sDaily states: China should make use of capitalism. To makeuse of capitalism includes to properly develop the capitalisteconomy(market economy) in China. The article goes further:China should take in some useful Western economic ideas,economic models and measures from modern capitalist economictheory and practice. The economic policies and legislationwhich have been practised in capitalist society and whichreflect the inner rules of the market economy are worthlearning. See Fang Sheng, "To Open the Door to the Outside andto Make use of Capitalism", (Feb. 24, 1992) People's Daily5 The last forty-year's experience has proven thatplanned economy could not save China. Now, Chinese leadershave been convinced that market economy is the road toprosperity for China. See Jiang Zemin, "Jiakuai Gaige KaifangHe Xiandaihuai Jianshe Bufa Duaoqu You Zhongguo Tese ShehuiZhuyi Shiyie De Gengda Shengli"---The report at the FourteenthNational Congress of Chinese Communist Party, Oct. 12th, 1992,People's Daily.146promulgated more than ten years ago when planned economy stillplayed a predominant role in China's economy. Although thesituation in China is changing significantly, the rules ofCECL have not been modified at all. The question raised hereis whether rules and principles drafted in the early 80'srepresent efficient rules in the present situations in China,and whether they can still accord with the currentexpectations and conditions of market economy.The contractual practice of the last few years in Chinashows that contracts are no longer exclusively used as a toolto realize the state economic plans. To a certain degree,economic contracts have been increasingly becoming the legalforms for exchange of commodities among various equal economicactors, which is closer to the notion of contract in a marketeconomy in the Western sense. Individuals begin to emerge ascontracting parties in commercial transactions. Economicactors are obtaining a certain degree of autonomy to engage inincreasingly independent transactional activities free fromexternal organizational control. In short, many signs haveindicated that China is now in the process of moving from aplanned economy to a market economy.While market economy is in the process of being built inChina, some of the principles and legal doctrines arebeginning to seem out of date. Some of them may have falleninto obsolescence. Excessive emphasis on specific performanceis one of them. If we admit that specific performance of147contract is an effective remedy in guaranteeing therealization of the state economic plan in a context of plannedeconomy and scarce market, then what is the most effectiveremedy in protecting the expectations and interests ofindividuals or private enterprises in a market economy?Prior to the economic reforms, economic transactionsamongst socialist organizations were in large part governed byplanned contracts, whose performance had a direct bearing onthe fulfilment of the state economic plan. Such being thecase, the principle of specific performance was deemedextremely important. As the result of the reform efforts,however, enterprises are now enjoying much greater freedom ofcontract and are constrained much less by the state plan.Economic transactions in the form of contracts are largelyleft to the enterprises themselves. In this new economiccontext, the function of contracts in fulfilling andrealizing the state economic plan is no longer so predominantas it used to be. Any single-minded emphasis on specificperformance, disallowing the use of monetary damages insteadof specific performance, will only lead to constraints on theeconomic actors' flexibility and dynamics in the productionand exchange of commodities. On the other hand, should breachof contract occur in a more advanced market economy, theinnocent party always have the possibility of obtaining thenecessary raw materials or products in the market. Therefore,substitution of performance in kind by performance in monetary148terms in certain contractual relations is not unlikely as therole of market mechanisms comes into fuller play. Thus, wemight say that the principle of specific performance in Chinashould gradually lose its ground under the presentcircumstances in China. If China still sticks rigidly to theenforcement of specific performance under normal conditions,it might largely limit the necessary flexibility and mobilityin commercial transactions, and as a result, it might hinderthe further development of a market economy in China. So, thelaw should allow the use of monetary damages instead ofspecific performance, for this would be more conducive to thedevelopment of a market economy.It is also quite ironic that the punitive function ofdamages in the Chinese contract remedy system has not reallyserved its intended purpose. It has had an undesired result:the penalty imposed on the breaching party is oftendisproportionate to the seriousness of the actual lossescaused by a breach. Conversely, the greater the actuallosses caused by a breach, the smaller the penalty; thesmaller the actual losses are or even no losses at all, thegreater the penalty. 6 In addition, with the development ofmarket economy, the underlying social and economic factors6 For a detailed discussion, please see Zhang Guilong,"Summery of The Opinions Concerning Modifications of theEconomic Contract Law"(1990) No. 6, Zhongwai Faxue at 43-46.Also see He Yue, "A Different Opinion about the Nature of TheLiquidated Damages in China's Economic Contract Law"(1987) No. 3, Hebei Faxue at 65.149which made the punitive principle so attractive in a plannedeconomy may vanish. I personally think, if an economic legalprinciple does not minimize costs and maximize benefits, it isunlikely to attract many adherents and can not work well.Therefore, the punitive principle should be reconsidered andinquired. And, the compensation principle in Anglo-Americanlaw is worth being further studied and can be used forreference.C. Suggestions.Law , as a system of authority and regulation insociety, must respond to social needs and changes. As JusticeCardozo said: the law becomes whatever the needs of life in adeveloping civilization require. 7 Law must fit a growingsocial body and be adaptable and expendable to meet newproblems and changing conditions. 8 Society's needs, wants andvalues are always changing. Legal concepts and principlesmust be continually tuned and re-tuned to keep in harmony withsociety's needs. 9 As mentioned above, the reform of economicstructure in China has resulted--and will result insignificant changes in Chinese society. The political,7 See MacPherson v. Buick Motor Co.,[1961] 217 N.Y.382,111 N.E.1050.8 See C.E. Witherell, How to Avoid Product Liabilitylawsuits and Damages, (New Jersey: Noyes Publications, 1985)at 40.9 Ibid. at 42.150economic and social climate has changed drastically in thelast few years and is still being on its way to anotherdrastic change---the transformation from a planned economy toa totally market economy. Such fundamental changes willinevitably be reflected at the level of law, and the economiccontract institution in China should change in response tothose changes in the social and economic environment.Continued economic reform would surely challenge concepts andprinciples in both Chinese traditional contract theory andpractice which have been frozen for years and no longer accordwith the way the society is developing, or which may evenhinder the development of market economy in China. With theprogressive transformation from planned economy to a marketeconomy, China is facing and will be facing many new problems.There is really a practical challenge before China---how tocope with these issues through legal means. For example, howto regulate the contractual relations between privateindividuals in a market economy? How to adequately protectcontract expectations and interests of private individualactors so as to promote the operation and vitality of marketeconomy?Market economy has the features and the inner rules ofits own, which requires a corresponding legal mechanism. Andas Anson said: Commercial developments depended--and still dodepend---for their successful operation upon contract. 1° I10 ^Anson's Law of Contract, supra, at 1.151personally think that just like factory life requireddifferent approaches from agricultural life, market economyrequires a different approach from planned economy. Whiletrying to promote and develop market economy, China also needsto take active steps to improve her existing economiccontract law, including its remedy system, and to establish abetter corresponding legal mechanism so as to facilitate theeffective operation of market economy in China.I may conclude by suggesting that with the advent ofmarket economy and the consequent need for more sophisticatedrules to deal with market economy, the time is plainly ripefor a corresponding reforms in the existing Chinese economiccontract law. To meet the needs of the ongoing market economyin China, there is a crucial need to create new institutionsto expand, regulate and channel economic transactions.Perhaps, resolution of problems requires reforming China'seconomic contract law with an emphasis on applying marketmechanism and values rather than on state planning.On the other hand, Western countries are much moreexperienced in market economy and their economic contract lawsare well-established. 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