Incoterms_® and Commercial Contracts

Since Antiquity, Chinese governments have implemented monetary economies and, long before their counterparts in the West, Chinese thinkers had turned their attention to problems of production and exchange of goods. For instance, the Analects of Confucius (551-479 B.C.) and the writings of his disciple Mencius (380-289 B.C.) contain comments on economic issues.

From the Spring and Autumn period beginning in the seventh century B.C. to the first unification of China in 221 B.C., Linzi, the capital of the Kingdom of Qi,¹ stood out for its intellectual effervescence nurtured for instance in the Jixia Academy under the patronage of the legendary chancellor Guan Zhong (who died in 645 B.C.).² In contrast with the rulers of other kingdoms that had concentrated on the promotion of agriculture, the leaders of Qi earned considerable revenues from exports of salt extracted from seawater. Lively debates were held about this trade, which produced China’s first economic theories.

During the Former Han dynasty (206 B.C.- 8 A.D.), a collection of texts of various dates treating economic theory were compiled under the title of Guanzi (the Treatise of Master Guan), which included a section entitled “The light and the heavy” dealing more specifically with problems related to markets.³ Its most innovative contribution to economic theory concerned an analogy with the action of weighing using the old Chinese balance to achieve an equilibrium between two sets consisting indifferently of goods or of money wherein may be gleaned the first formalization of a theory of supply and demand. Equilibrium might be modified by increasing or decreasing the supply of either goods or money.⁴ The authorities influenced prices through variations in the quantities of supply.

The commentators of economic issues in ancient China consistently adopted the viewpoint of the State and, in contrast with their Greco-Roman contemporaries, they manifested little interest in issues relating to the “management of private estates”.⁵ Manipulations of the terms of trade in foreign exchanges were regarded as means of conducting economic war, whereas economic management on the domestic level concerned the raising of revenues, such as through State monopolies, and the reduction of social tensions.

Such a concept of economic life ran contrary to the orthodox doctrine promoted by the Confucian school, which required that economic practices respect the rules of ethics while maintaining social order by guaranteeing that producers receive adequate revenues for their production. Thus, the Confucianists, while also approaching economic questions from the viewpoint of the State, opposed monopolies as the cause of price increases and called for remunerations proportional to individual merit.

They were thus led to promote the pricing of goods while discriminating between social classes so that goods intended for the ruling class would be rendered inaccessible to the common people. In the Confucian outlook, only working the land, including the production of fibres and textiles as well as the extraction of raw minerals, was considered to create wealth. Accordingly, agriculture was the basic economic activity. Commercial activities that caused the goods produced to circulate were considered to be of secondary importance and the profits to be made in their conduct were necessarily much lesser than those in production.

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The opposition between these two conceptions of economic activities gave rise to a debate in 81 A.D,. during the Later Han dynasty, between the disciples of Guanzi and the Confucianists, about the role of the salt and iron monopolies in fiscal revenue. The events are related in the Discourse on salt and iron which reveals how the Confucianists prevailed. The ideas promoted in the Guanzi were considered immoral in that the manipulations they encouraged and the price instability they engendered sapped the social order. Still, these ideas continued to exercise a significant influence on administrative practice. Those with respect to storing of goods and issuing coins are present in the “Rites of Zhou”, a later classic that purports to describe the monarchical institutions of ancient China.⁶

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In ancient China, the concept of law (fa) as opposed to the notion of rite (li), which may be rendered as “behaviour appropriate to the situation”, only came into its own right in the fourth century B.C. when the country was torn by violence during the Warring States period leading up to its first unification in 221 B.C. by the State of Qin. The Confucianists considered written law to be a source of squabbling over its interpretation and application. In the Confucian tradition, government was to be conducted according to rites, but this approach supposed the existence of a social consensus.

During this period, the priority of government became the imposition of order that was thought best accomplished by implementing a regime of “rewards and punishments”.

The criminal laws were derived from legalist doctrine that gained ascendancy in the west of the country, in particular in the State of Qin (now the province of Shaanxi). After going through a series of social and administrative reforms implemented by Shang Yang (who died in 339 B.C.), this peripheral kingdom became centralized and was then able to conquer the feudal kingdoms to the east and south.⁷

The first Code to have survived in its entirety is that of the Tang dynasty (618-906), on which all subsequent dynastic law codes were patterned.⁸ The new code replaced the regime of mutilations for crimes with a range of punishments varying from lesser or larger numbers of strokes with a light or a heavy bamboo stick, temporary or permanent exile, and capital punishment by either strangulation or by decapitation (a desecration reserved for those guilty of the most heinous offences). In fact, capital punishments could be commuted or suspended for example to permit a convicted single son to care for his aged parents.

The Tang Code, adopted in 653 and revised several times before its final version in 707, contained 501 articles divided into 12 sections representing essentially a catalogue of criminal offences and relevant procedures and sanctions.⁹ The harshness of the old legal regime was somewhat attenuated under the influence of Buddhism, which had by then reached the summit of its ascendancy in Chinese society.¹⁰

The structure of the dynastic code undergoes an important change during the national Ming dynasty (1368-1644). In its first version in 1374, the number of articles was increased to 606 before being reduced to 460 articles in the final version in 1397. A main innovation is that the number of sections is increased to 30 and they are classified according to the jurisdiction of the six ministries. After a first part, devoted to the definition of general principles and the stipulation of punishments, the Ming Law is then divided into sub-sections gathered into groups depending on whether they concern administration, finances, the rites – including diplomacy, education, religious affairs – the army, justice, or public works.

The Law of the Qing dynasty, established by the Manchus and overthrown by the Revolution led by Sun Zhongshan (Sun Yat Sen), retained the structure of the Ming Law but contained only 436 articles and remained a reference until the 1930s.

A major difference between Chinese and Western legal traditions is the obliteration in the former of the distinction between criminal and civil law, or perhaps more accurately stated, criminal law was used to regulate matters that would be subject to civil law in the Western legal tradition. Chinese rules governing such civil matters as family law, property or commercial law akin to those found in the civil law of foreign countries are the subject of only a few provisions in the Chinese codes. Most concern family and property law and, to a lesser extent, commercial and employment law.¹¹

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Just as no distinction was drawn between criminal and civil law, nor were administrative and judicial functions separated at the level of the elementary units of the state organization, corresponding in traditional China to the county (xian) and sub-prefecture (zhou).

The lowest officials attached directly to the ministry of justice might be found in the upper echelons of the prefectures (fu) and circuits (dao). The local magistrates (zhixian, zhizhou) were multi-functional officials who combined administrative and judicial functions within their territorial jurisdictions. They carried out investigations and had at their disposal a “judicial bureau” headed by a secretary as well as police forces. The notion of separation of powers was traditionally alien to the Chinese legal culture. Commoners might file written complaints with the administrative office or “yamen”. They might do so directly or through unofficial counselors. Anonymous denunciations were inadmissible and often deemed to be infractions in their own right. Only homicides might ground legal actions by the authorities.

By our contemporary standards, justice in traditional Chinese society was expeditious.¹² Investigations were usually carried out during the hearing of complaints when the parties were interrogated and might be tortured. Suspects had no right to counsel. The magistrate might summon witnesses and be assisted by a private judicial advisor. Magistrates rendered decisions on the basis of the ascertained facts. Judgments had to be rendered in writing, identifying the articles of the law applied and specifying the sanction to be implemented. When defendants were convicted of only minor crimes, judgments were executed immediately.

Notwithstanding its expeditious nature, justice in traditional China was not administered arbitrarily and magistrates of integrity enjoyed high public esteem.

Indeed, the quality of justice in traditional China attracted the admiration of contemporary commentators in the West.

The provisions of the law applied to persons of equal standing, which meant without family relations and not involved in any hierarchical relation. Magistrates were expected to pay special attention to the exact relationship between the parties.

In traditional Chinese judicial procedure, great importance was attached to determining the degree of responsibility of the accused. Account was taken of factors such as the existence of premeditation, the presence of criminal intent and the particular circumstances of the crime. Distinctions were made based on the deliberate, negligent or accidental nature of the acts. In accordance with these factors, the punishment would be aggravated or reduced. Crimes committed against one’s hierarchical superiors, whether a parent or a person exercising social authority, entailed aggravated punishments. The contrary applied to those having committed crimes toward persons in a position of inferiority, except when officials were guilty of abusing their powers over the administered, as such conduct was deemed to constitute corruption.

Rendering judgments was thus a delicate exercise involving a multiplicity of considerations.

In cases of doubt, magistrates might bring the case before colleagues in neighbouring counties.

Convicted defendants might appeal based on failures by judges of first instance to take account of the true situation.

In especially serious cases, appeals were presented to special officials representing the ministry of justice at the provincial level or to censors on tour.

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Except in the cases of especially horrific crimes - the ten abominations including parricide and rebellion - cases of capital punishment had to be reported to the emperor for his approval before their execution.

In various situations, such as where the facts of a case were not covered by a specific provision of the law, the magistrate would reason by analogy on the basis of reports of prior judgments on appeal available in voluminous compilations of jurisprudence.

Laws entered into force on the date of their promulgation, even if the infraction had been committed earlier.

Commoners were discouraged from bringing their grievances before the courts and local magistrates able to keep down the number of legal actions enjoyed a good reputation and qualified for bureaucratic promotion. The resolution of complaints of a purely civil nature was better sought through the arbitration of “elders” (laoren) or heads of collective responsibility groups of 100 hundred households (baozhang) acting as justices of the peace.

These arbitral awards were often based on customs as ascertained from the analysis of various types of contracts, which, as will be examined below, played a very important role in economic and social life.

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At the time of the first premises of economic and legal theory in China more than 2,500 years ago, land was still not appropriated by individual owners. Peasants gained access to cultivated land by pledging allegiance as well as a fraction of their crops to a “feudal lord”. Chinese historians credit the legalist Shang Yang¹³ with the introduction of non-noble private ownership of land. Tax-exempt land, transmissible by inheritance or by alienation under certain conditions, was distributed to soldiers as rewards. Texts dating back to the Han Dynasty refer to aristocratic domains that sold a part of their crops on the markets and were exempted from taxation as well as to self-sufficient households tenancies that paid a fee in bronze coins based on the value of their assets (land, animals, tools). According to the first censuses, peasants registered on the tax roles as “free” constituted only a small fraction of the actual population. The growth of the proportion of dependant peasants ultimately contributed to the apparent decline of the population during the Later Han dynasty and the following period of division.

From the end of the fourth century to the latter part of the eighth century, several dynasties, beginning with the Northern Wei (386-532), implemented variations of the “equal field system” (juntian fa) with the objective of increasing agricultural production on which tax revenues depended. Plots of land, from three to seven hectares depending on the region, were distributed on lifetime leaseholds to all free households in proportion to the number of their members, including dependants, and sometimes in relation with the number of cattle they owned.

In return, these households were then bound to “triple taxation”: the remittance of quotas of grain and of textile fibers, as well as the accomplishment of corvée and military service.

In theory then, land belonged to the State and was to be returned to it by the heads of household upon reaching the age of 60 years. But historical documents leave the impression that it was possible for free peasants by contract to rent or mortgage parcels of land.

Until the end of eighth century, commercial transactions were allowed only during specific periods and only within the confines of walled markets where the government could verify respect for its price controls and where it could conveniently collect taxes.

The instauration of private ownership of land and the liberalization of economic transactions coincided with the reform of the taxation regime. In 780, a new system called “double taxation” was implemented according to which peasants could claim full ownership to their land by paying their share of the land tax in two installments (the spring textile quota and the fall grain contribution).

The society that emerged toward the end of the Tang dynasty had become much more open and its social inequalities resulted from economic status. There were then two social classes: the “residents” (zhu hu), who owned their land and paid the land-tax, and the “guests” (ke hu), who rented theirs. The wealthiest of the peasant households formed a sub-bureaucratic layer that managed rural society at the local level.

During the Song dynasty (960-1276), the right to engage in trade was further liberalized, spurring the development of rural markets. Nevertheless, monopolies were imposed on trading in salt, tea and alcohol and rights to sell these commodities were subject to advance payments of indirect taxes. There prevailed a monetary economy. Citizens could avoid performing their corvée duties by paying for substitutes to replace them. The tax reforms instituted by Wang An Shi (Chancellor from 1069 to 1086) even included compulsory loans to peasants during the spring when market prices peaked, to avoid their recourse to professional moneylenders who might impose excessive rates of interest. This interventionism, which was intended to improve the people’s living conditions, never materialized in the code.

The divergence of socio-economic realities and the state of legislation continued during the last dynasties, Ming (1368-1644) and the Qing (1644-1911).

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The first part of the Ming dynasty coincided with a reaction against the monetary economy that led, during the 14th and 15th centuries to the prohibition of the use of silver in transactions and to the implementation of payments in kind of taxes. As during the Song dynasty, individual citizens’ relations with the State administration largely continued to be determined by their economic status. The wealthy peasants constituted a sub-administrative layer that managed the villages. Social stability was enhanced by the implementation of a system of ten-year rotations of corvée services. Land could be freely alienated. The provisions of the law with respect to land ownership were amended to require that land sales and mortgages be concluded in writing and that a special tax be levied on such transactions. The law, however, took no notice of other forms of alienations through contracts or private agreements (rental agreements subject to the payment of a deposit with possessory rights but not ownership). Over time, a category of “perpetual tenants” came into existence, called “managers” (ye zhu) who exercised all the prerogatives of owners, including the rights to alienate or rent their property, or to associate with other investors, for instance for the exploitation of mineral resources. They were, however, exempt from reporting to the fiscal authorities and paying property taxes. Managers were supposed to own only the surface of the soil. The obligation to pay land taxes remained for the account of the landowner, who would generally charge rent at least sufficient to cover the taxes. This legal regime is designated in Chinese literature as “stratified property” (yi tian liang zhu - a plot of land owned by two masters, sometimes even three). But no mention of it is made in the codes.

As regards trading activities, except for the salt and alum monopolies, which had lost much of the fiscal importance they enjoyed under the Song dynasty, they were undertaken independently on free markets. The authorities’ regulation of economic life was limited to the issue of currency (bronze coins), the monitoring of prices and the storage of a portion of all grain production to be sold on the market when prices reached unacceptable levels.

The provisions in the Ming and Qing codes concerning the regulation of markets amounted to only five articles. They covered private attempts to fix prices above market levels, attempts to monopolize river traffic through the installation of illegal wharfs, the use of weights and units of measure not conform with official standards, and the sale of defective silk or cotton cloth. Another article prohibited usury by limiting the total amount of interest to 100% of the principal.

The only domain of private law that receives detailed treatment in the codes is family law, which is treated in several articles, for the most part in sections dealing with offenses subject to the jurisdiction of both the ministry of finance and the ministry of justice. The special importance attached to family law in the written law is consistent with the role of family relations in Confucian ethics and the analogies that might be drawn between parental and imperial authority.

Marriages were considered to be alliances as well as contracts between two families. Their organization involved the intervention of intermediaries and an exchange of gifts. In the laws, these matters were in each case approached from the penal viewpoint, with sanctions being attached to violations.

In a manner similar to the absence from the Ming and Qing codes of a property law as actually practiced, the codes do not contain provisions with respect to the enlargement of the family that had become the rule from the Ming dynasty onward. The family as mentioned in the Qing code appears much the same as in the Tang Code that prevailed a millennium earlier, when lineage did not extend beyond one’s great-great-grandfather.

As early as the 15th century, the actual cell of society had become the clan, encompassing the totality of the descendants of a presumptive common ancestor that held property in common and manifested various forms of solidarity.

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To conclude, traditional Chinese law was intended to manage relations between subjects and the imperial power exercised through the government. It is by nature penal in that its provisions stipulate infractions and their corresponding punishments. It served to maintain an idealized and ultimately archaic social and political order.

The concrete rules that governed social and economic practices in the late imperial period were mostly customary and they might vary considerably from one region to another. This paradoxical situation explains the importance attached to contracts in daily life in traditional China. They were applied on a wide variety of occasions. They had to respect very strict rules and were signed in front of witnesses, though they were rarely registered with the authorities except in maters involving State authority. Their widespread use facilitated spontaneous adjustments to new social conditions. They were binding upon their parties, and their provisions might be invoked before arbitrators agreed upon by the parties to obtain their enforcement. This state of affairs continued until the early 1930s, when the first civil code in the Western sense of the term was adopted.

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