Enlarged State Power to Declare Nullity : The Hidden State Interest in the Chinese Contract Law

This article is on the hidden state interest that article 52(§1) of the Chinese Contract Law protects and the questionable applicability of freedom of contract to Chinese state-owned enterprises (hereafter “SOEs”). In common law, fraud and duress make a contract voidable. In Western civil law jurisdictions, including Louisiana, fraud and duress make a contract relatively null. Article 52(§1) of the Chinese Contract Law renders a contract induced by fraud and duress absolutely null (null and void if using common law terminology) when state interest is harmed. At the same time, according to article 54 of the Contract Law, fraud and duress only make a contract relatively null just like in Western laws. The situation is further complicated by article 58 of General Principles of Civil Law (hereinafter “G.P.C.L.”), which renders all civil juristic acts absolutely null when induced by fraud and duress. To understand when a contract is null or annullable one has to reconcile these three statutory provisions and figure out what the state interest article 52(1) refers to. This article attempts to demystify this state interest through a historical survey of the evolution of contract law in the communist regime in China in comparison with the similar path Soviet civil law had gone through. If it simply means public interest, Chinese law is no different than the western counterparts. If it means something different, a secretive enlarged state power to declare nullity and invade freedom of contract might come with this law. Given the principal-agent relationship between the state and SOEs regarding the ownership rights of SOE assets, the absence of a sufficiently competitive market, the incentive incompatibility between the state and SOEs, an enlarged state power over contractual autonomy is therefore implied and justified. This article suggests that such a state interest be state-owned enterprises' financial interest, which is different from public interest. As a result, freedom of contract shall not be applicable to Chinese SOEs when ownership rights and a competitive market are missing, and a different interpretation of nullity law should be adopted to protect SOEs' financial interest