BUSINESS L AW

PRINCIPLES AND
DOCTRINES IN AN
I N T E R N AT I O N A L C O N T E X T

WITH A FOCUS ON CHINA AND THE UNITED

S TAT E S – S I M I L A R I T I E S A N D D I F F E R E N C E S
1
WHAT IS L AW?
A N D W H AT A R E C O U R T S , A N D W H AT D O W E
M E A N B Y T H E “ R U L E O F L AW ? ”
 W H AT I S “ L AW ” ?
ONE DEFINITION:
“ T H AT W H I C H M U S T B E
O B E Y E D A N D F O L L OW E D B Y
C I T I Z E N S , S U B J E C T TO
SANCTIONS OR LEGAL
CONSEQUENCES”

W E L L , T H AT I S N ’ T Q U I T E
RIGHT OR QUITE ENOUGH.

• P E O P L E W H O A R E N OT
CITIZENS MUST OBEY THE
L AW
• A N D W H AT I S T H I S “ T H AT ?

3
ANOTHER ONE:
• Law is “a body of rules of action or conduct prescribed
by controlling authority a:nd having binding legal force.”

• Well, there are problems with that too.

Sometimes, there is a question of who counts as

controlling authority.
Besides, it is circular – legal and law are connected words.

4
BIGGEST PROBLEM-- RULES

• Too often, people think that learning law is learning “rules.” I want to
challenge that idea.

• Rules change all the time. What would be the point of learning them
when you can just look them up?
• No one can write enough rules to cover everything, but law has to
stretch to cover human behavior in all sorts of unforeseen ways.

5
AND EVEN RULES ARE NOT
JUST RULES

6
 WHAT ARE THE “RULES” HERE?
• “A defensive player is permitted to establish a legal guarding position in the path of a dribbler regardless of his speed and
distance [but, on the other hand, a] defensive player is not permitted to move into the path of an offensive player once he
has started his shooting motion.” <http://www.nba.com/analysis/rules_c.html?nav=ArticleList>.
• The actual rules, of course, specify more detail—provide further textual “interpretation” — of the basic rules, but as the
text describes, what they “mean” is never capable of being fully specified:
“A defensive player is permitted to establish a legal guarding position in the path of a dribbler regardless of his speed and
distance.
A defensive player is not permitted to move into the path of an offensive player once he has started his shooting motion.
A defensive player must allow a moving player the distance to stop or change direction when the offensive player receives
a pass outside the lower defensive box.
A defensive player must allow an alighted player the distance to land and then stop or change direction when the offensive
player is outside the lower defensive box.
A defensive player is permitted to establish a legal guarding position in the path of an offensive player who receives a pass
inside the lower defensive box regardless of his speed and distance.
A defensive player must allow an alighted player who receives a pass the space to land when the offensive player is inside
the lower defensive box.
A defensive player must allow a moving offensive player without the ball the distance to stop or change direction.
The speed of the offensive player will determine the amount of distance a defensive player must allow.
If an offensive player causes contact with a defensive player who has established a legal position, an offensive foul shall be
called and no points may be scored.
A defensive player may turn slightly to protect himself, but is never allowed to bend over and submarine an opponent.
An offensive foul should never be called if the contact is with a secondary defensive player who has established a
defensive position within a designated "restricted area" near the basket for the purpose of drawing an offensive foul.
The "restricted area" for this purpose is the area bounded by an arc with a 4-foot radius measured from the middle of the
basket.
EXCEPTION: Any player may be legally positioned within the "restricted area" if the offensive player receives the ball
within the Lower Defensive Box.
The mere fact that contact occurs on these type of plays, or any other similar play, does not necessarily mean that a
personal foul has been committed. The officials must decide whether the contact is negligible and/or incidental, judging
each situation separately.” 7
THE WORDS GO ON AND ON,
BUT . . .
• Sooner or later, someone has to make a decision.
• And– we want a referee who has made lots of
decisions before to compare to this one.
• What if we decided to define “law” as the decisions
that were made, trying to apply these rules in the best
way possible so that this decision (1) fits with other
decisions and (2) fits with the general principles the
rules exemplify?

8
SO, IN THE VIDEO WE
SAW, WHAT WAS “THE
LAW?”
• YOUR TURN!

9
NEXT STEP: LIFE IS NOT A
GAME
• What happens when you step off a basketball court, or off the football
pitch?
• Then you are out of the game.

• But law covers human affairs in all their complexity– can you step
outside of the area the law covers?

10
SO HOW CAN LAW HANDLE
ALL OF THAT COMPLEXITY?

Again, it’s YOUR TURN!

I will answer when we talk about a case called Parente v. Pirrozolli

11
TWO TYPES OF LEGAL
SYSTEM
• Common law– US, UK, Australia, Hong Kong

• Code systems– PRC

• A little history

• How they are different, how they are the same

• How we will use them in this course

• Substantive law vs. procedural law

12
THE “RULE OF
L AW”

W H AT D O E S I T M E A N ?

13
PRESIDENT XI JINPING HAS
•BEEN TALKING ABOUT IT…
http://www.scmp.com/news/china/article/1157878/xi-jinping-vows-uphold-
constitution-and-rule-law
• "No organisation or individual should be put above the constitution and the
law," Xinhua quoted Xi as telling members of the 25-seat body, the decision-
making body for the Communist Party. He also stressed the need for
government to be administered in accordance with the law, while similarly
developing the country and society as a whole.
• http://www.economist.com/news/leaders/21629383-xi-jinping-invoking-rule-
law-thats-risky-him-and-good-china-china-legal
• At an annual plenum that ended on October 23, 2014, the Central
Committee promised that it [“Socialist rule of law with Chinese
characteristics”] would be implemented by 2020 and would lead to
“extensive and profound” changes.

14
ONE COMMENTATOR

• “The constitution, for example, enshrines property rights. Of the

many thousands of ‘mass incidents’ of unrest each year in rural China,
65% relate to disputes over the (often illegal) seizure of land by
officials. Mr Xi wants to make it clear that their behaviour is not just
illegal but also unconstitutional. That sounds scarier.”

15
THE FOUR
COMPREHENSIVES…
• http://news.xinhuanet.com/english/china/2015-02/25/c_127517905.htm

• “comprehensively build a moderately prosperous society, comprehensively deepen

reform, comprehensively implement the rule of law, and comprehensively
strengthen Party discipline."
• http://english.cntv.cn/2015/04/27/ARTI1430138770651365.shtml

• BEIJING, April 27 (Xinhua) -- A compilation of selected remarks by Chinese President

Xi Jinping on comprehensively advancing the rule of law has been published.
• The book, published by the Central Party Literature Press, contains 193 remarks by Xi
selected from more than 30 speeches, articles and written instructions between Dec. 4,
2012, to Feb. 2, 2015.
• Many of the quotes in the book are published for the first time.
• The remarks can help government officials and Party members acquire a better
understanding of the significance of comprehensively advancing the rule of law and fully
carry out the strategic layout of the "Four Comprehensives."

16
SOME COMMENTATORS…
• “The rule of law requires people in positions of authority to exercise their power under the
authority, and within a constraining framework, of public norms (laws) rather than on the basis of
their own preferences or ideology; the framework of public norms (laws) should provide a basis
of legal accountability for the power that they exercise. It requires also that the laws be the same
for all and that they be accessible to the people in a clear, public, stable, and prospective form. It
requires finally that penalties be imposed on people by the state only through impartial legal
proceedings, and that people have access to the courts to settle their disputes and to hold the
government accountable.”
• Waldron, J. (2012). STARE DECISIS AND THE RULE OF LAW: A LAYERED
APPROACH. Michigan Law Review, 111(1), 1-31, at n. 5, citing .V. Dicey, Introduction to the Study
of the Law of the Constitution 110-21 (8th ed., Liberty Classics 1982).
• “The core of the existing principle is, I suggest, that all persons and authorities within the state,
whether public or private, should be bound by and entitled to the benefit of laws publicly and
prospectively promulgated and publicly administered in the courts.”
• Lord Bingham (2007). THE RULE OF LAW. Cambridge Law Journal 666(1).

17
SOME CHARACTERISTICS

• Universality
• Predictability
• Accountability
• Public

18
BUT DIDN’T WE SAY LAW IS ALL IN THE
APPLICATION; THE LAW ISN’T THE RULE ABOUT
“CHARGING” BUT HOW THE REF CALLS THE
GAME?
• This means
– The law decider (judge) must explain his reasons, open to public scrutiny
– The judge’s reasons should be based on principles of consistency and
coherence, and respect for predictability

19
SO– LAW MEANS “COURTS”
SOMEHOW.
• What are courts?

20
If judges must apply the law to particular
cases to give the law life,
then courts are where that living law is
made.
Courts do not exist to make rules in the
abstract, but to decide disputes, or “cases.”

21
PÀ N W É N ( 判 文 )
AND JUDICIAL
OPINIONS IN THE
C O M M O N L AW
J U S T T O C O M PA R E

22
THE FUNCTIONS
OF COURTS
W H AT E V E R N A M E S C O U R T S H A V E ,
T H E Y H AV E T H E S E F U N C T I O N S

23
FIRST, COURTS AS COURTS
DECIDE DISPUTES
• There must be a real dispute between real people or real institutions.

• Courts, acting as courts, do not give abstract advice, they decide

cases.

• Some systems assign other jobs to various judges, and some people
who are judges at times are also, at times, acting in other roles.
• But when they are judges, they are deciding cases– particular disputes.

24
WHAT DOES IT TAKE TO
DECIDE A CASE
• 1. Deciding what happened.
• Courts do not have time machines.

• 2. Deciding what that means– deciding what the law has to say about
those facts.

25
 THE COUGH DROP CASE

• There are two rules for class (imaginary rules, NOT REAL!!!!!)
• Rules: No eating in class
• Rules: Students must respect the teacher’s lecture by being silent
except when called upon.
• The story– a student slips a cough drop in her mouth.
• What happened? Did she do it?
• What does it mean, is it eating?

26
WHAT ARE THE
ARGUMENTS?
• Eating is for hunger, for swallowing something
• Cough drops are medicine
• Eating is putting something in your mouth

The purpose of the rule is to avoid disturbing the class

Don’t guess about purposes, the law is the law.

What about the other rule?!

27
DECISION OF TRIAL COURT

• She ate a cough drop

• Cough drop is eating
• Eating violates the rules.

• What does student do now? Seeks appellate review.

• What is an APPEAL? It is NOT a new trial from beginning.

• It is NOT another chance to talk about facts.
• The appeals court assumes the story is the same as the trial court says it
was.

28
SO WHAT DOES THE
APPEALS COURT DO?
• It decides if the trial court’s application of the law to those settled
facts was correct.

• Here, let’s look at the rules again.

• Rules: No eating in class

• Rules: Students must respect the teacher’s lecture by being silent
except when called upon.

29
 WHAT IS A
CONTRACT?

YO U T E L L M E !

30
TWO DEFINITIONS:

• An agreement … for the purpose of establishing, altering, or

discharging a relationship of … obligations. (PRC Contract Law).

• An agreement with specific terms between two or more persons or

entities in which there is a promise to do something in return for a
valuable benefit. (Black’s Law Dictionary).

31
WHAT DO THOSE
DEFINITIONS LEAVE OUT?
• Private agreement but public enforcement

• The two or more parties make the rules, but society, acting through
the courts, will enforce them to some extent

• Which means society gets some right to tell you what you can and
cannot agree to do.

32
WHAT IS THE FIRST THING
WE NEED FOR A CONTRACT?
• Remember, this is not just an agreement, but an agreement that is legally
enforceable.

• What do you think is the most important thing to be sure about before
you will force people to abide by their agreements?

• Let’s play a game.

• We need a “meeting of the minds” as shown by objective

behavior.

33
SO– HOW CAN WE BE SURE
THERE IS AN AGREEMENT?
• Articles 13 through 31 of PRC Contract Law are all about figuring out
“offer and acceptance.”

• Cf. with: “To begin with, a contract requires an offer and acceptance.”

• .”

34
WHAT IS AN OFFER?

• Article 14 of the PRC Contract Law.

• An offer is a party's manifestation of intention to enter into a contract with the
other party, which shall comply with the following:

(i) Its terms are specific and definite;

(ii) It indicates that upon acceptance by the offeree, the offeror will be bound
thereby.

• Compare that to Section 24 of the Restatement (Second) of Contracts *

quoted at 246:
• “the manifestation of willingness to enter into a bargain, so made as to justify
another person in understanding that his assent to the bargain is invited and will
conclude it.”

35
HOW CAN WE ACCEPT?

• Can there be acceptance by performance? Yes.

• Example: “The first ten people to arrive at the store will be able to
buy the new I-Phone at half price.” This invites acceptance by
performance. Compare this with PRC Contract Law Article 22,
“acceptance by conduct,” and Article 26, the second sentence.

• Some offers and acceptances involve immediate action – or

“unilateral.” (p. 234)

• Some are exchanges of promises – or “bilateral.” (p. 234).

36
THE OFFER CONTROLS…

• In common law, the offer controls all terms. If the other side agrees,
but wants to change a term, that is called a “counter-offer.”
• The common law rule is called the “mirror image” rule.
• But, in contracts for sales of goods, minor changes do not make the
acceptance a “counter-offer.”
• PRC Article 30 and Article 31– tell me how that compares to
common law.

37
U.C.C.*, COMMON LAW, PRC

• PRC Article 30 Acceptance Containing Material Change

The terms of the acceptance shall be identical to those of the offer. A purported acceptance dispatched by the offeree which materially
alters the terms of the offer constitutes a new offer. A change in the subject matter, quantity, quality, price or remuneration, time, place
and method of performance, liabilities for breach of contract or method of dispute resolution is a material change to the terms of the offer.
Article 31 Acceptance Containing Non-material Changes
An acceptance containing nonmaterial changes to the terms of the offer is nevertheless valid and the terms thereof prevail as the terms of
the contract, unless the offeror timely objects to such changes or the offer indicated that acceptance may not contain any change to the
terms thereof.

• U.C.C. 2-207(2)
• (1) A definite and seasonable expression of acceptance or a written confirmation which is sent within a reasonable time operates as an
acceptance even though it states terms additional to or different from those offered or agreed upon, unless acceptance is expressly made
conditional on assent to the additional or different terms.
• (2) The additional terms are to be construed as proposals for addition to the contract. Between merchants such terms become part of the
contract unless:
• (a) the offer expressly limits acceptance to the terms of the offer;
• (b) they materially alter it; or
• (c) notification of objection to them has already been given or is given within a reasonable time after notice of them is received.
•

38
WHEN IS THE CONTRACT
FORMED?
• Note Article 15: Invitation to offer, and think back to our game
• Article 15 Invitation to Offer

An invitation to offer is a party's manifestation of intention to invite

the other party to make an offer thereto. A delivered price list,
announcement of auction, call for tender, prospectus, or commercial
advertisement, etc. is an invitation to offer.
A commercial advertisement is deemed an offer if its contents meet
the requirements of an offer.

39
UNTIL IT IS FORMED

• Offers (and counteroffers) can be revoked, unless there is an offer made binding
for a certain period of time.
• Option contract (you pay for the option [choice] to choose to accept the
contract over a period of time, and it stays open]

Compare PRC Article 19: “Irrevocable Offer.”

An offer may not be revoked:

(i) if it expressly indicates, whether by stating a fixed time for acceptance or

otherwise, that it is irrevocable;
(ii) if the offeree has reason to regard the offer as irrevocable, and has undertaken
preparation for performance.

40
SOMETIMES WE DO THINGS
BEFORE WE REACH AN
AGREEMENT
• Note this complication: conditions precedent
• What do those words mean?
• See Article 45, PRC Contract Law
• The parties may prescribe that [the] effectiveness of a contract
be subject to certain conditions. A contract subject to a
condition precedent becomes effective once such condition is
satisfied. A contract subject to a condition subsequent is
extinguished once such condition is satisfied.

• Can you think of an example?

41
BINDING AGREEMENTS
REQUIRE COMPETENT PARTIES
• Could a five year old enter a contract?
• Can a person who was drunk enter into a contract?
• Can a person enter into a contract on someone else’s behalf? (See
PRC Contract Law Article 9)

42
SOME COMPARISONS

43
CONSIDERATION
• “The first ten people to come to my store will receive a new iPhone at half price”
• In re Matter of Wirth (p. 262).

• PRC Article Article 8 Binding Effect; Legal Protection

A lawfully formed contract is legally binding on the parties. The parties shall perform their
respective obligations in accordance with the contract, and neither party may arbitrarily amend or
terminate the contract.

• BUT

• Article 185 Definition of Gift Contract

A gift contract is a contract whereby the donor conveys his property to the donee without reward
and the donee manifests his acceptance of the gift.

Article 186 Revocation Prior to Transfer of Rights; Exception

Prior to the transfer of rights to the gift property, the donor may revoke the gift.
The previous paragraph does not apply to any gift contract the nature of which serves public
interests or fulfills a moral obligation, such as disaster relief, poverty relief, etc., or any gift contract
which has been notarized.

How does In re Matter of Wirth turn out in China?

44
PROMISSORY ESTOPPEL
• Promissory Estoppel:
1) A promise which
2) the promisor should have reasonably* expected the other
party would rely on, and
3) the other party (promisee) did rely, to his detriment.

• PRC Article 42 Pre-contract Liabilities

Where in the course of concluding a contract, a party engaged in any of the following conducts,
thereby causing loss to the other party, it shall be liable for damages:

(i) negotiating in bad faith under the pretext of concluding a contract;

(ii) intentionally concealing a material fact relating to the conclusion of the contract or supplying
false information;
(iii) any other conduct which violates the principle of good faith.

TEST IT OUT: XYZ Construction Co. example on 267

45
WHAT DOES A CONTRACT
MEAN?

46
A STORY

John, who lives in Shawnee, Oklahoma, USA, advertises on Craigslist that

he wants to sell his 1975 Harley Davidson FLH 1200 cc motorcycle
for $7,000.
His advertisement states that the motorcycle is “cherry” and in
excellent running condition.
Jia, in Wenzhou, PRC, has always dreamed of owning this classic
motorcycle. He contacts John by email and says he wants to buy it.
He was confused, though, by the word “cherry” since the motorcycle
was not red. John explained this word was biker slang for “really
good.”

47
THE DEAL

• Jia states he wants the motorcycle very much. He is willing to pay full
advertised price, plus a little extra for John’s trouble in shipping it
overseas, plus enough money to cover the shipping, which he already
has investigated and determined would cost, by slow, cheap freight,
about 5000 RMB.
• Their written agreement stated:
• “John agrees to sell to Jia the motorcycle advertised, in excellent
running condition, cherry appearance, for 50,000 RMB. Upon receipt
of payment, John agrees to ship the motorcycle to Wenzhou, China, at
his expense.”

48
THE PROBLEMS

• Neither thought about duties and customs fees. Who pays?

• Jia complains that the motorcycle was green, not red.

• The motorcycle burns oil.

49
BASIC RULE: ENFORCE
PARTIES’ INTENT

• But what is that?

• 1) People may disagree out of bias/bad memory/ or LIES.
Goal: find out what they really said to each other about meaning.
• 2) They genuinely did not consider this issue, this UNANTICIPATED
situation.
Goal: what would a reasonable person in the parties’ position
have thought the contract would require in this unanticipated
situation?

50
REASONABLE AND
COHERENT
• When a contract is unclear, we
• FIRST, do what is consistent with all the terms of the contract. We try
to read the contract so all its terms fit coherently.
• COHERENT: logical, consistent, forms a unified whole. (相干)
• SECOND, where it really does not appear we can say the parties actually
had an intention about this issue:
• GIVE THE CONTRACT THE READING THAT A REASONABLE
PERSON IN THE RELEVANT GROUP WOULD GIVE IT.
• Reasonable: 在理
• Relevant: 相应
The parties are assumed to be reasonable members of the relevant
“community.”
51
MISTAKES: WHAT IF WE
MISUNDERSTOOD THE FACTS ?
• BILATERAL MISTAKES– BOTH PARTIES HAD THE WRONG IDEA.
• Where both parties agree because of an important factual error, the
contract is VOIDABLE by the injured party.
VOIDABLE– means can be treated as if IT NEVER EXISTED.
This is called rescission. We rescind the contract.
This rule does not apply where there is a conscious uncertainty– that is, it is
clear we do not know the facts.
• UNILATERAL MISTAKES– one side agreed under a mistaken belief of fact.
This contract is NOT VOIDABLE UNLESS:
– 1. the other side KNEW the injured party was mistaken.
– 2. enforcing the contract would be unconscionable.
UNCONSCIONABLE means:
Unusually harsh and shocking to the conscience; grossly unfair.

52
COMPARE TO CHINA
• Article 54 Contract Subject to Amendment or Cancellation

Either of the parties may petition the People's Court or an arbitration

institution for amendment or cancellation of a contract if:

(i) the contract was concluded due to a material mistake;

(ii) the contract was grossly unconscionable at the time of its conclusion.

• Let’s talk about what it means to have a “rule” against things that are
“unconscionable.”

53
CHINA’S CODE HAS SOME
RULES
• …but only for “standard terms.”
• First, consider the difference between truly negotiated terms and
what Article 39 of the PRC Contract Law calls “standard terms…
contract provisions which were prepared in advance by a party for
repeated use, and which are not negotiated with the other party in
the course of concluding the contract.”

• Why might there be more confusion about what “standard terms”

mean?

54
STANDARD TERMS ARE
IMPOSED TERMS
In case of any dispute concerning the • One rule– “common sense”
construction of a standard term, such (PRC 41) or
term shall be interpreted in
accordance with common sense. “ordinary understanding”
(common law)
If the standard term is subject to
two or more interpretations, it shall
be interpreted against the party
• But what happens if we can’t use
supplying it. If a discrepancy exists
common sense alone?
between the standard term and a
non-standard term, the non-standard • (“Ambiguity”)
term prevails. • PRC 41 “contra proferentum”

55
INDETERMINATE TERMS

• Article 61: Article 61 Indeterminate Terms; Supplementary Agreement

If a term such as quality, price or remuneration, or place of

performance etc. was not prescribed or clearly prescribed, … such
term shall be determined in accordance with the relevant provisions
of the contract or in accordance with the relevant usage.

• Article 62

56
WHAT ABOUT NEGOTIATED
TERMS?
• Should all the same rules apply?

• Common law explicitly uses the rules above.

• China’s code says very little about interpretation problems for negotiated
terms, except the “gap filling” provisions, Article 61 and 62, discussed on
next slide.
• BUT– whether a code tells you how to interpret unclear but negotiated
terms, the court still has to do it. The principles of reasonableness and
coherence lead to those same rules.

57
FILLING THAT GAP

Article 62 Gap Filling

Where a relevant term of the contract was not clearly prescribed, and
cannot be determined in accordance with Article 61 hereof, one of the
following provisions applies:

Therefore we need to know the “normal” practice

AND: What about “extrinsic” evidence?

That means, evidence outside the “four corners” of the contract? (And
notice, it assume the contract is written).

58
EXTRINSIC, OR “PAROL”
EVIDENCE
• To find out “normal usage” we have to go outside the written contract.
• “Common sense” is outside the written contract.
• What about other things outside the writing, like evidence of what the
parties said to each other?
• In common the parol evidence prevents a party to a written contract
from presenting extrinsic evidence that reveals an ambiguity and clarifies
it or adds to the written terms of the contract that appears to be
complete.
• BUT… this rule seems, by and large, to be very flexibly applied. China
seems to ignore it.

59
MISTAKE– WHEN THE PARTIES
MAKE A MISTAKE ABOUT A FACT.
• Article 54 Contract Subject to Amendment or Cancellation
Either of the parties may petition the People's Court or an arbitration
institution for amendment or cancellation of a contract if:
(i) the contract was concluded due to a material mistake;

60
GOOD FAITH– WHAT DOES IT
ADD?
• Article 5 and 6— • First sentence of Article 39:
• Do they mean different things? • Where a contract is concluded by way of
standard terms, the party supplying the
standard terms shall abide by the principle
• Article 5 Fairness of fairness in prescribing the rights and
obligations of the parties and shall, in a
The parties shall abide by the principle of reasonable manner, call the other party's
fairness in prescribing their respective attention to the provision(s) whereby such
rights and obligations. party's liabilities are excluded or limited,
and shall explain such provision(s) upon
Article 6 Good Faith request by the other party.

The parties shall abide by the principle of

good faith in exercising their rights and
performing their obligations.

61
PERFORMANCE IN GOOD
FAITH
• Article 60
• The parties shall fully perform their respective obligations in
accordance with the contract.
The parties shall abide by the principle of good faith, and perform
obligations such as notification, assistance, and confidentiality, etc. in
light of the nature and purpose of the contract and in accordance
with the relevant usage.

62
INVALIDATING
CIRCUMSTANCES
ARTICLE 52
• Fraud • Against Interests of society
• Duress

63
WARRANTIES–
IMPLIED
PROMISES
FITNESS FOR INTENDED PURPOSE *
M E R C H A N TA B I L I T Y
64
COMPARE US TO CHINA
• Fitness for intended purpose:
• It is of sufficient quality to serve its
intended function.
• Merchantable:
• Fit to be sold in the market.
• Article 62:
•
(i) If quality requirement was not
clearly prescribed, performance shall
be in accordance with the state
standard or industry standard; absent
any state or industry standard,
performance shall be in accordance
with the customary standard or any
particular standard consistent with
the purpose of the contract;
• What is consistent with contract’s
purpose? Fit for intended use, or fit to be
sold in the market.
65
WARRANTIES CAN BE WAIVED!
“ALL OTHER WARRANTIES,
EXPRESS OR IMPLIED, ARE
HEREBY WAIVED.”
WAIVE MEANS DONE AWAY
WITH.

66
FOR GOODS….

• TANGIBLE, MOVABLE THINGS

• Shirts or shoes can be goods; cars can be goods.
• Buildings are not goods.
• Services, like doing a job for someone, is not a good.

67
FOR MERCHANTS…

• People who sell these sorts of goods on a regular basis.

• Stores are merchants; a bicycle shop is a merchant.
• I am not a merchant; I am not acting as one when I sell my bicycle.

68
THEY (MERCHANTS SELLING
GOODS) MAKE TWO PROMISES
• FITNESS FOR INTENDED PURPOSE
• MERCHANTABLE

69
 OUR CONTRACT
IS BROKEN:
HOW CAN WE FIX
IT?
O N E O F T H E M O S T D I F F I C U L T Q U E S T I O N S I N C O N T R A C T L A W I S W H A T

REMEDY
T H E C O U R T S H O U L D G I V E F O L L O W I N G
A B R E A C H O F C O N T R A C T 70
IT IS NOT A CRIME TO
BREACH A CONTRACT
• The courts do not punish people for breaking contracts, they simply
compensate the other party in some way.

• The concept of economic efficiency suggests that if it makes sense to

you to break the contract but pay for the losses or economic harm
you caused the other party, then you should feel free to do so.

71
FIRST, THOUGH– IS THERE A
BREACH?
• What do we mean by breach?

• There is a difference between complete performance and substantial

performance. A substantial performance that is not complete means
there is some minor breach.
• What do we do?

72
EXAMPLE FROM PAGE 338

73
BUT WHAT OF A “MATERIAL
BREACH?”
“Material” means “important.”
What remedies?
Rescission/restitution
Damages– but what are the damages?

74
FIRST– NOT MEANT TO
PUNISH!
• You are allowed to breach and cover.
• I agree to sell you my bicycle for 200 RMB.
• Someone else wants to pay me 300 RMB.
• What can I do?
• I can sell it for 300 RMB and pay you damages.
• What are your damages?
• 200 RMB? Or the money you spend on another bicycle?
• YOU TELL ME.

75
THE CORE IDEA

• The core idea is to compensate the non-breaching party by

• Making that party whole; or, in other words,
• To put that party in the position he/she/it would have been in had the
contract been performed.

• Compensatory damages

76
SPECIFIC PERFORMANCE

• A big difference between PRC and common law.

• At common law, only “unique” performances can be ordered. You
agree to sell me your house (no other house is the same, really)– if
you breach, I can get the court to award “specific performance.” That
means the court orders you to sell me the house at the agreed-upon
price.
• BUT– PRC is different.

77
PRC Article 110 Non-monetary Specific Performance; Exceptions

Where a party fails to perform, or rendered non-conforming performance of, a

non-monetary obligation, the other party may require performance, except where:

(i) performance is impossible in law or in fact;

(ii) the subject matter of the obligation does not lend itself to enforcement by
specific performance or the cost of performance is excessive;
(iii) the obligee does not require performance within a reasonable time.

SO– How different is this from the common law?

78
C O N S E Q U E N T I A L – R E A S O N A B LY F O R E S E E A B L E - - D A M A G E S

• Reasonably foreseeable damages that result from a breach are

consequential damages—damages arising from circumstances beyond
the contract itself.

• Example: Smith agrees to ship Jones a part needed to repair her

printing press, and to deliver it by Monday. Jones states in the contract
she needs the part in order to print a special order for a customer on
Tuesday.
• Walmart contracts to purchase Barbie dolls from Mattel for its stores.
Mattel breaches; Walmart cannot buy Barbies from anyone else because
of trademark.

79
CONSEQUENTIAL DAMAGES
L I Q U I D AT E D D A M A G E S
L I M I TAT I O N S O F D A M A G E S

IN BREACHES OF CONTRACT

80
LIQUIDATED DAMAGES AND
LIMITATION OF DAMAGES
• So how much will I lose per day for a late delivery of a new office
building?
• We can decide!
• Afraid of excessive consequential damages or other huge losses?
• We can agree to limit them!

81
WHAT IN THE
WORLD IS A
“TORT”?
N OT I C E – T H E “ TO RT L AW O F T H E P E O P L E ’ S
REPUBLIC OF CHINA” NEVER
D E F I N E S T H E W O R D “ T O R T. ”
侵权
STILL– WHAT IS A TORT?
• Article 2 (PRC Tort Law)
• Those who infringe upon civil
rights and interests shall be
subject to the tort liability
according to this Law.
• “A wrong.” Cheeseman, p. 50
• “ Wrong ; injury; the opposite of
right. In modern practice, tort is
constantly used as an English word
to denote a wrong or wrongful act,
for which an action will lie, as
distinguished from a contract. 3 Bl.
Comm. 117. A tort is a legal wrong
committed upon the person or
property independent of contract.”
Black’s Law Dictionary
WHAT TORT IS NOT

• Tort is not contract—it is not • Tort is not a crime– it is a civil

a violation of a duty to which wrong.
you agreed.

• Some torts can also be crimes,

but they are separate legal
actions.
SOME CLUES TO EXPLAIN
TORT
• It involves infringing on the rights and interests of others
What does “infringe” mean?
To encroach, to trespass, to violate

• It involves “fault” -- Article 6, PRC Tort Law

Note this is the big difference with contract law– now being at
fault is critical
WHAT IS “FAULT?”

• There could be three kinds of fault.

1) The tortfeasor acted with intent

2) The tortfeasor was NEGLIGENT

3) “Strict” liability
BUT WHAT IS ACTING
“INTENTIONALLY”?
• If I hit you with my fist– I intentionally touched you in a harmful way,
so I intentionally violated both the right to health and the right to
privacy. Article 2.
• If I lie about you in a mean way– I intentionally infringed your right to
your reputation
• But is it “intentional” if I throw a knife into a crowd and hit someone
in that crowd– did I “intentionally” hurt that person?
WHAT IS NEGLIGENCE?

• This is the primary kind of fault with which most tort law is
concerned.
• Simple definition:
• Failure to act as a reasonable person would act in similar
circumstances AND in so doing, infringing on another’s rights and
interests.

• REASONABLE PERSON
AND WHAT IS REASONABLE?

• But what would a reasonable person do?

• It depends on what that reasonable person would FORESEE.
• So they would act in such a way as to avoid harms that are reasonably
foreseeable to others
• That is my general duty to society.
• BUT…
NO “NEGLIGENCE IN THE
AIR”
• You do NOT commit a tort if you act unreasonably, UNLESS
• Your unreasonable act caused someone to suffer harm to the
interests listed in Article 2.
• There must be a causal connection.
• The chain of causation itself must be reasonably foreseeable– called
proximate cause or legal cause.
• The word “cause” is used 78 times in the PRC Tort Law.
YOUR DUTY

• Act as a REASONABLE PERSON would act, by showing

• REASONABLE CARE to avoid
• REASONABLY FORESEEABLE harms to others, if you
• CAUSE one of those reasonably foreseeable harms.

• What does that mean? Let’s try a particular situation, which is

often called “premises liability.”

92
YOU RUN A STORE
• Your store sells, among other things, cooking oil.
• What would a reasonable person who runs a store think he should
do about keeping customers safe?
• After all, you INVITED them here, you want them in your store.
• So you must take reasonable care to avoid reasonably foreseeable
harms.
• So what if customer A knocks a big oil container off the shelves,
makes a mess, and customer B falls down?
– Depends on 1) did you know of the mess on the floor?
– 2) should you have known?
– 3) what efforts must you make to know?
– 4) knowing of mess, what must you do?

93
WHAT DO WE MEAN BY
“CAUSE”?
• Let’s take our store example.
– You fail to watch for accidents, therefore the floor is a mess, therefore
Customer B falls down.
– You fail to watch for accidents, therefore the floor is a mess. Customer
B sees the mess, knows the floor is slippery, and then walks there
anyway.
– You fail to watch for accidents, therefore the floor is a mess. Customer
B sees the mess, avoids that aisle, goes to next aisle. Customer B falls
down in that aisle, though there was nothing particularly slippery or
dangerous there.

94
“PROXIMATE” [WHICH
MEANS ‘NEAR’] CAUSE

95
ANOTHER STORY

• Jiang is driving, badly.

• He hits Wenxia. She is badly hurt.
• Way up high, in an apartment overlooking the street, old lady Xi sees the accident
and has a heart attack from the shock.

• Act as a REASONABLE PERSON would act, by showing

• REASONABLE CARE to avoid
• REASONABLY FORESEEABLE harms to others, if you

one of those reasonably foreseeable

• CAUSE
harms.

96
THIS IS YOUR DUTY SIMPLY
BY BEING PART OF SOCIETY
• If you participate in society, you have this duty– to act reasonably so
as not to infringe on the rights of others.

• But what counts as “reasonable” in particular circumstances?

• Some sorts of circumstances occur over and over again, so some

characteristics of reasonable behavior can be partially specified.
AND THUS– WE HAVE THESE
ARTICLES
• Chapter VI Liability for Motor Vehicle Traffic Accident
• Chapter VII Liability for Medical Malpractice
• Chapter X Liability for Harm Caused by Domestic Animal
• Chapter XI Liability for Harm Caused by Object
BUT SOMETIMES WE DON’T
APPEAR TO LOOK FOR FAULT AT
ALL.
• Chapter V Product Liability
• Chapter VIII Liability for Environmental Pollution
• Chapter IX Liability for Ultrahazardous Activity

99
WHY IS THERE STRICT
LIABILITY?
• Product liability – if the product is defective
• Ultrahazardous activity– if you do it and someone gets hurt
• Environmental pollution– if you pollute, you pay

• WHERE’S THE FAULT?

100
WHAT IS A DEFECTIVE
PRODUCT?
• Back to: not fit for intended (or foreseeable) purpose
• change to “safe” for intended use– or rather, reasonably safe
• Get rid of privity

• Easy case– manufacturing defect

• Harder case– design defect
• And even if can’t really be designed better-
did you warn adequately?

101
WHEN IS A DESIGN
DEFECTIVE?
• I really want to know– when?
• Is my car– a small, highly fuel-efficient car, lightweight, inexpensive–
defective because it is not as crashworthy as your big car?
• Is my ladder defective because it will collapse if you stand on the top?
• Is my cigarette defective because it is addictive and causes health
problems?

102
RESTATEMENT (THIRD) OF
TORTS
• A group of law professors made the attempt to sum up or “restate”
what courts have been doing to define how a product can be
defective.
• This is of course not in any way binding in China, and it is not binding
in the US either. But in fact it is a pretty good description of how
courts are trying to apply the concepts of defective manufacture,
defective design, and defect because of a failure to warn.

103
RESTATEMENT DEFINITIONS

A product:

a) contains a manufacturing defect when the product departs from its intended design even
though all possible care was exercised in the preparation and marketing of the product.

b) is defective in design when the foreseeable risks of harm posed by the produce could have
been reduced or avoided by the adoption of a reasonable alternative design by the seller or other
distributor, or a predecessor in the commercial chain of distribution, and the omission of the
alternative design renders the product not reasonably safe.

c) is defective because of inadequate instructions or warnings when the foreseeable risks of

harm posed by the product could have been reduced or avoided by the provision of reasonable
instructions or warnings by the seller or other distributor, or a predecessor in the commercial chain
of distribution, and the omission of the instructions or warnings renders the product not reasonably
safe.

104
CHINA’S VERSIONS
• First, Article 41 of the Tort Law:
“Where a defective product causes any harm to another person, the manufacturer shall
assume the tort liability.”
• What is “defective”?
A product is defective if “the product poses unreasonable danger to people or property;
or if the product fails to conform to the national or industry standard for protection of
health, person, and property.”
See Article 46 of the Product Quality Law.
• Any product made by a manufacturer must satisfy three requirements:
(1) It does not pose unreasonable danger to the safety of person or property; and it
complies with any national or industry standards for protection of health, person, and
property;
(2) It functions as such a product should, except for products where flaws in their
functions are clearly indicated; and
(3) It conforms to the product standards indicated on the product or its packaging and to
the quality indicated by the product description, physical samples, or other materials.
Article 26 of the Product Quality Law.
SOME FURTHER
THOUGHTS ON
TORTS
PREMISES LIABILITY
R E S P O N D E AT S U P E R I O R
MORE ABOUT CAUSE

A N D T H E N , W H O P AY S W H AT ?
PREMISES LIABILITY

The owner of property has a responsibility to people he/she invites onto the property.
In common law:
• A person who is lawfully on someone else's property and who is injured as a result of some
negligence of that property owner may have a claim against the property owner. The duty or
standard of care to which the property owner is held may depend on the status of injured person.
• The general rule of law is that a property owner has a duty to exercise ordinary care to keep his
or her premises in n reasonably safe condition.When an owner fails to exercise that ordinary care
and someone who is lawfully on the premises is injured as a result, the property owner may be
liable.
• The different statuses that may apply are that of:
• invitee - typically someone who comes onto the property for some legitimate business purpose;
• licensee - may generally be thought of as a social guest (somewhat less care needed) ; or
• trespasser - someone who is not allowed on the premises and who is there without the knowledge
or consent of the property owner.
CHINA?
• Adopts the general rule; no particular law yet on “invitee v. licensee.”

• A few special rules in China– owners of property (trees, buildings)– if

a branch from the tree falls, or part of the building falls, and hurts
someone, owner pays UNLESS proves he is not at fault. See articles
85 to 90.
• BURDEN SHIFTING.
RESPONDEAT SUPERIOR
• “Let the master answer”
• Employer (who or what is that?) is responsible (in the sense
of paying the damages for) any tortious action (what is that?)
of an employee acting within the scope of the employee’s
duty (what is that?)
• Even if the employee violated instructions

• Do you see how that interacts with premises liability?

 CAUSE– MORE COMPLICATED
THAN WE THOUGHT
• My bad behavior puts you in the hospital. There, someone mistreats you
negligently, and you die. What is my responsibility?
• I damage your bicycle, so you walk home instead. A criminal attacks you. What
is my responsibility?
• Three young men throw rocks, blindly, into the river from the road. A
fisherman standing below them on the riverbank is struck by a rock. Who is
responsible?
• Ten companies make a medicine. Danny takes the medicine for many, many
years, then develops a heart condition that is traceable to the chemical
compounds in the medicine. He cannot find out which of the ten companies’
medicines he has taken over the last 20 years. Who is responsible?
FIRST– WHO OWES?

• JOINT and SEVERAL Liability

• This term means that if more than one person is liable, each can be
held responsible for all the damages, if that is needed to compensate
the victim. (That means if only one of the tortfeasors can pay, he/she
pays it all.
• If they are all able to pay, they can share that damage payment.
• The victim does not get increased damages this way, though.

111
QUITE A FEW CODE SECTIONS
ARE ABOUT JOINT AND SEVERAL
LIABILITY

• Most of Chapter II (Articles 8 through 14)

concern this concept.
• Article 14 “The compensation amounts corresponding to the
tortfeasors who are jointly and severally liable shall be determined
according to the seriousness of each tortfeasor; and if the seriousness
of each tortfeasor cannot be determined, the tortfeasors shall evenly
assume the compensatory liability.”

112
COMPARATIVE FAULT

• Article 26 ‘Where the victim of a tort is also at fault as to the

occurrence of harm, the liability of the tortfeasor may be mitigated.”

113
WHAT ARE THE POSSIBLE
REMEDIES?

• Article 15 lists them all– in the US, we call these “injunctive” relief and “damages.”

• Article 15 The methods of assuming tort liabilities shall include:

• 1. cessation of infringement;
• 2. removal of obstruction;
• 3. elimination of danger;
• 4. return of property;
• 5. restoration to the original status;
• 6. compensation for losses;
• 7. apology; and
• 8. elimination of consequences and restoration of reputation.

114
DAMAGES OR
COMPENSATION
• Let’s go over Article 16 in detail:

“the tortfeasor shall compensate the victim for the reasonable

costs and expenses for treatment and rehabilitation, such as
medical treatment expenses, nursing fees and travel expenses, as
well as the lost wages. If the victim suffers any disability, the
tortfeasor shall also pay the costs of disability assistance
equipment for the living of the victim and the disability
indemnity. If it causes the death of the victim, the tortfeasor shall
also pay the funeral service fees and the death compensation.”

115
WHAT ELSE?

• Article 22:

• Where any harm caused by a tort to a personal right or interest of

another person inflicts a serious mental distress on the victim of the
tort, the victim of the tort may require compensation for the infliction
of mental distress
• Compare to the US

116
WHAT ABOUT INJURY TO MY
PROPERTY?
• Article 19:
• This language is tricky:
“Where a tort causes any harm to the property of another person, the
amount of loss to the property shall be calculated as per the market
price at the time of occurrence of the loss or calculated otherwise.”

Do you see the twist at the end?

Compare to contract

117
 PROPERT Y
I N C O D E J U R I S D I C T I O N S : M OVA B L E ,
I M M OVA B L E , L A N D ( U S E ) A N D I N T E L L E C T UA L

I N C O M M O N L AW J U R I S D I C T I O N S : R E A L ( L A N D
AND FIXTURES), PERSONAL, AND
I N T EL L ECT UA L

I N T E L L E C T U A L P R O P E R T Y I S R E A L LY A T Y P E
O F P E R S O N A L P R O P E R T Y, B U T R E Q U I R E S
S E PA R AT E D I S C U S S I O N
TO START– A LITTLE
HISTORY
• China, after many centuries of its own historical legal traditions
dating back at least to the Qin period (roughly2300 years ago),
adopted a “civil code” system at the beginning of the Republic 100
years ago.
• This approach, also used in Japan, is modeled on continental European
approaches.
• Civil codes using this model talk about the law of “things”.
• Common law countries, in contrast, draw a sharp line between “real”
property and “personal” property.
MORE HISTORY

• Real property is land and anything fixed to the land (houses, etc.). The
common law call these “fixtures.”

• China, in part due to the civil code tradition, and in part exemplifying
the socialist understanding of land, divides these items into:
• Movable property
• “Immovable property” same as“fixtures;” and
• LAND. We are only talking about LAND today.
PROPERTY IN CHINA

• The Property Rights Law of China, passed in 2007, is a landmark piece

of legislation of great significance
 THE 1988 AMENDMENT

• Recognized the “lawful rights and interests of the private sector of the
economy”
• (Compare this to the list of interests in the Tort Law, Article 2–
“property interests”)
• Created a concept of a transferable property interest that can be
owned by individuals or other private entities (like companies).
• This includes the transfer of the right to use land.
 THE 2004 AMENDMENT

• The “citizen’s lawful private property is

inviolable.”

• This was the first time the actual words, “private property,” were ever
used in a Chinese constitution or basic legal coe.

• EVER.
THE PROPERTY LAW OF 2007

• Remember the three kinds of property? Movable, immovable, and land?

• It is better to conceive of them, in China, as four kinds:

• 1) Movable, including “lawful income, livelihood goods, production
instruments, raw materials…” (Article 64).
• 2) Immovable, such as “housing.” (Article 64). This will include, of
course, business structures too.
• 3) Land USE rights.
• 4) Land itself– which belongs to “the people as a whole,” through either a
collective or the State.
 REGISTRATION

• Given the "against all others" nature of property rights, there must be a
system of publicity for property rights.
• Under Article 9 of the Property Law, the creation, alteration, alienation
[what does this mean?], or termination of the rights to immovable
property shall not become effective until registered. Unless otherwise
provided by law, the change will have no effect without registration.
• On the other hand, under Article 23, the creation or alienation to
movable property rights is effective upon delivery unless otherwise
provided by law.
• However, no claim may be made against a bona fide third party without
registration.
REAL PROPERTY

• The land belongs to the sovereign

FROM THE BOOK OF SONGS
TO TODAY….
• The song “Bei Shan” (“North Mountain”) includes the famous verse, “All
land under the heavens belong to the King, and all people on the earth
are the subjects of the King.”

• This refers to land, but most commentators agree with the observation
that until the fall of the Qing Dynasty in 1911, the underlying theory was
that all things (property) were at the mercy of the emperor.

• The biggest single development in Chinese legal history relating to

“property rights” – the 1988 Amendment to the Constitution, the 2004
Amendment, and the 2007 Property Law.
ALL PRIVATE RIGHTS IN REAL
PROPERTY COMES FROM THE
SOVEREIGN

• Think about where I come from– Oklahoma.

• Common law– escheat and eminent domain
• Think about the history of China– much longer; and it has gone
through many different systems and rules of ownership, so nothing is
“natural.”
 LAND RIGHTS ARE A BUNDLE
OF INTERESTS
• When talking about land, the notion of ownership can in fact be
misleading.

• It might be wiser to call it a set of rights to use, change and destroy.

• Yes, destroy.
THESE USES CAN BE, AND
OFTEN ARE, SEPARATED
FROM EACH OTHER.

• A right to use some piece of land might not include the right to extract
its minerals.
• A right to live on land might not include a right to change it
significantly– cut down trees
• A right to live on land might not mean you can dig it up and make it
useless for later generations.
 THESE CONCEPTS ARE
UNIVERSALLY APPLICABLE.
• In the US just as in China, the use and exercise of certain rights in
certain land are often separated.
• Example– in China, minerals and timber belong to the State, but
individuals and enterprises may have “usufructory rights” Article 118
• In the US, many mineral and timber rights belong to the State, on
“government land,” but private entities can lease the rights. Or,
where a private individual owns the rights, the mineral rights can be
separately owned or leased.
THE RIGHT TO DESTROY

• The right to a land interest necessarily includes some right to destroy

it.
• We cannot mine the minerals without digging and destroying; we
cannot cut timber without destroying part of the forest.
• We cannot build a house without damaging the land underneath.
• No such right is (or should be) absolute, but can be limited by the law.
SO– LET’S LOOK FIRST AT CHINA

• Under the Chinese constitution, land in urban areas is owned by the

state
• Land outside urban areas is owned by collectives
• But some lands outside urban areas (forests, etc.) belong to the state
as well.
• There is no private “ownership” of land in China.
LAND USE RIGHTS

• In China, your business does not “own land.”

• Instead, you own land use rights
• There are two kinds of land use rights -
• Allocated and Granted.
ALLOCATED LAND USE
RIGHTS
• Allocated land use rights are generally provided by the government
for an indefinite period (usually to state-owned entities) and cannot
be pledged, mortgaged, leased, or transferred by the user.
Furthermore, allocated land can be reclaimed by the government at
any time.
GRANTED LAND USE RIGHTS

• Granted land use rights are provided by the government in exchange

for a grant fee, and carry the rights to pledge,
mortgage, lease, and transfer within the term of the grant.
Land is granted for a fixed term - generally 70 years for
residential use, 50 years for industrial use, and 40 years for
commercial and other use. The term is renewable.
• Renewal is automatic for residential land use.
• Unlike the usual case in European and American systems, granted land
must be used for the specific
purpose for which it was granted.
COMPARE TO THE COMMON
LAW
• In the common law countries, several possible sorts of interests in
land, some of which we loosely call “ownership.’

• “Fee” interests.
• “Life estate” interests.
• “Leasehold” interests.
• “Easement” interests.
“REAL” PROPERTY

• In the common law, where land can be “owned” by private persons,

there is no distinction drawn between the land itself and the fixtures.
• In China, though, there is the distinction between the land for which
use is allowed and the immovable property on it.
 BACK TO LAND USE RIGHTS
IN CHINA
• Article 47 of the Property Law provides that urban land and land in
certain rural areas belongs to the state.

• Article 58 of the Property Law defines collectively owned property as

including land that belongs to collectives– rural, agricultural lands.

• What private property exists is the right to use the land in certain,
specified ways.
 USUFRUCTORY RIGHTS

• Land use rights are “usufructory” rights (Part III, Property Rights Law–
Chapters X through XIV– Articles 117 through 169).
• “Usufructory” means “the legal right to use the fruits or profits of
something belonging to another”– here, the property of the people.
• The owner of a house owns the immovable property (the structure) and
the right to use the land it is on.
• Under the 1990 State Council Interim Provisions for the Granting and
Transferring of Land Use Rights on State-owned Land in Cities and Towns,
the maximum term for the use of land for a residential purpose is seventy
years. n The term is automatically renewable but a fee for the renewal may
be levied.
WHAT HAPPENS AT THE END
OF THE TERM?
• The state retains the land use right and ownership of other fixtures
(buildings, for example) when the term of right to the use of land
expires.
• Again, under Article 149, residential rights automatically renew.
• But “non-dwelling construction land” renewal is not automatic.
• However, there is a commonly accepted principle that a request for
renewal of land use rights may not be denied without a legitimate
public interest requiring non-renewal.
EASEMENTS

• In common law, there can be implied easements, granted written

easements, etc.
• “An easement is the right of one person to go onto the land of
another and make a limited use thereof.”
• Tim’s property
• In China– easements are granted by contract
• Registration allows them to count as against third parties
• What does all that mean?
 “INTELLECTUAL” PROPERTY

• Now, for something very different.

• Something you can’t see, hear, touch or feel.

WHAT IS INTELLECTUAL
• Let’s start with examples:

PROPERTY?
• As an author of a book, I own a copyright in the book; as
a songwriter, I own a copyright in the song.
• As the inventor of a new device to drive away
mosquitoes, I own a patent in the design.
• Coca-Cola owns a trademark in the name Coca-Cola
and in the graphic designs it uses.
• Why do I say you can’t touch or see or hear this
property? I can see a book, I can hear a song…
• But the intellectual property is not in this physical book,
but in the arrangement of words in it; the intellectual
property is not in the performance or recording of the
song but the musical ideas expressed. The patent is not in
the mosquito repellant I buy at the store, but in the
design for that repellant.
• AND– not in the physical paper where the design is
written, but in the idea expressed.

BUT IT IS “INTANGIBLE”
INTELLECTUAL PROPERTY
• It is the idea, not any physical expression, that is the

CONSISTS OF “IDEAS”
intellectual property.
BUT, A WARNING….
• In copyright law, we say it is not the idea but the
expression of the idea that can be copyrighted. The idea
of writing a movie about a war in space between the
“Empire” and the good guys is not something you can
own; but the actual expression of that idea in the script of
“Star Wars” can.
• But it is not the script– the paper itself– that is
intellectual property, but the expression as written there.
• The author/inventor has the right to control how their
property is used.
• That means the IP owner can control printing books,
selling those books, or making a device that uses a design
like the one patented.
• The right is the right to control (by licenses) the use.

WHAT DOES IT MEAN TO

OWN AN IDEA OR THE
EXPRESSION OF AN IDEA?
THE KEY CONTROL IS
THROUGH LICENSING
• If I own a patent, I can let you make the device by selling
you a license.
• If I own a copyright in a book, I can let you print copies by
licensing you to do so.
• If I own that same copyright, I can control who makes
“derivate use” of that book– for example, you must get a
license from me to turn my book into a movie.
SINCE YOU LIKE
MUSIC…
I N U S L A W, T H E R E I S A “ C O M P U L S O R Y
L I C E N S E ” F O R M U S I C . I F YO U WA N T TO
MAKE A RECORD OF MY COPYRIGHTED
S O N G , I H AV E TO L E T YO U D O S O, A N D
Y O U PAY M E A R O YA LT Y. T H E F E E I S S E T
BY THREE COPYRIGHT JUDGES– UNLESS
YO U U S E O N E O F T H E T H R E E M A I N
L I C E N S I N G C O M PA N I E S , L I K E A S C A P,
T H AT S E T R O YA LT I E S .
T H E R E I S A L S O A C O M P U L S O RY L I C E N S E
FOR PERFORMING RECORDINGS, AS ON
RADIO PROGRAMS.
INTERNATIONAL IP LAWS
• There are a number of international treaties and
agreements governing intellectual property.
• One example is the BERNE CONVENTION.
• The Berne Convention requires its signatories to
recognize the copyright of works of authors from other
signatory countries (known as members of the Berne
Union) in the same way as it recognizes the copyright of
its own nationals.
• The Convention also requires member states to provide
strong minimum standards for copyright law.
• China is a signatory to the Berne Convention.
• Since joining the World Trade Organization (WTO), China
has strengthened its legal framework and amended its IPR
and related laws and regulations to comply with the WTO
Agreement on Traded-Related Aspect of Intellectual
Property Rights (TRIPs).

INTELLECTUAL
PROPERTY IN CHINA
• China’s first patent law was enacted in 1984 and has been amended
twice (1992 and 2000) to extend the scope of protection.
• China follows a first to file system for patents, which means patents
are granted to those that file first even if the filers are not the
original inventors. This system is unlike the United States, which
recognizes the “first to invent” rule, but is consistent with the
practice in other parts of the world, including the European Union.
• Patents are filed with China’s State Intellectual Property Office
(SIPO) in Beijing, while SIPO offices at the provincial and municipal
level are responsible for administrative enforcement.

PRC PATENT LAW

• China’s copyright law was established in 1990 and amended in
October 2001. The new implementing rules came into force on
September 15, 2002.
• Unlike the patent and trademark protection, copyrighted works
do not require registration for protection—this is the same as in
the US.
• However, copyright owners may wish to voluntarily register with
China’s National Copyright Administration (NCA) to establish
evidence of ownership, should enforcement actions become
necessary.
• Protection is granted to individuals from countries belonging to
the copyright international conventions or bilateral agreements of
which China is a member.

PRC COPYRIGHT LAW

• China’s trademark law was first adopted in 1982 and revised in
1993 and 2001.
• China joined the Madrid Protocol in 1989, which requires
reciprocal trademark registration for member countries, which
now include the United States.
• China has a ‘first-to register’ system that requires no evidence
of prior use or ownership, but registration is advised, to avoid
someone else registering it.
• However, the Chinese Trademark Office has cancelled Chinese
trademarks that were unfairly registered by local Chinese
agents or customers of foreign companies.

PRC TRADEMARK LAW

• China’s Unfair Competition Law provides some protection for
unregistered trademarks, packaging, trade dress and trade secrets.
• The Fair Trade Bureau, under the State Administration for Industry
and Commerce (SAIC) has responsibility over the interpretation
and implementation of the Unfair Competition Law.

• Protection of company names is also provided by SAIC.

PRC UNFAIR COMPETITION

LAW
BUT….

• Despite stronger statutory protection, China continues to

be a haven for counterfeiters and pirates
• On average, 20 percent of all consumer products in the
Chinese market are counterfeit.
• How does this affect economic activity?
THE CHAIN OF COPYRIGHT

• Book
• Movie script (derivative use)
• Film that uses that script ( another derivate use).
• Showing that film (performance).

• Song
• Recording of that song (a derivate use)
• Performance of that song, or playing the recording

158
THE KEY CONTROL IS
THROUGH LICENSING
• If I own a patent, I can let you make the device by selling you a
license.
• If I own a copyright in a book, I can let you print copies by licensing
you to do so.
• If I own that same copyright, I can control who makes “derivate use”
of that book– for example, you must get a license from me to turn
my book into a movie.
• If I own a copyright in something that can be performed– a book
can be read out loud, a play can be performed, a song can be sung–
that is a use I can control.
• Musical performances (playing a song, recording a song, playing the
recording) all are subject to compulsory licensing. (ASCAP, etc.)

159
INTERNATIONAL COPYRIGHT
LAWS
• There are a number of international treaties and
agreements governing intellectual property.
• One example is the BERNE CONVENTION.
• The Berne Convention requires its signatories to
recognize the copyright of works of authors from other
signatory countries (known as members of the Berne
Union) in the same way as it recognizes the copyright of
its own nationals.
• The Convention also requires member states to provide
strong minimum standards for copyright law.

160
• China is a signatory to the Berne Convention.

CHINA IS IN THE BERNE

CONVENTION
161
PATENT

• A new and useful idea

• If it is added on to an old product, not under patent, only the new
part is patented.
• To obtain a patent, you must apply to a government office (we will
discuss this office later).
• Your application is on file and available to the public.
• During the term of the patent, no one may use your idea/design
without a license from you.

162
SIMILARITIES AND
DIFFERENCES BETWEEN PATENT
AND COPYRIGHT
• Both are for limited terms– copyright term is much longer.
• After the term, your expression/your design is in the public domain.
• Patents do NOT exist until approved and registered.
• Copyrights, however, exist from the moment of creation; but we
should register to provide evidence of our work.

163
TRADEMARK– A DIFFERENT
STORY
• A trademark is a recognizable sign, design, or expression which
identifies products or services of a particular source from those of
others.
• To be useful as a trademark, it must be without function OTHER than
as an identifier.
• Proper names can be trademarks (McDonald’s) but only in the field of
that business’s operations.
• Registration is forever, as long as the mark is not abandoned.

164
INFRINGEMENT

• To use another’s mark is infringement, even in good faith. You will have to
stop using it. To use it intentionally may lead to significant monetary
consequences, such as treble damages and assumed damages.
• How close must it be to be infringing?
• They key test is this: Likelihood of consumer confusion.
• Prior (earlier) users of the name may be exempt from enforcement
actions. That is, prior to the registration of the mark! This is in a FIRST TO
USE jurisdiction, like the US.
• On the other hand, in a first to register jurisdiction, like China, the only
factor is registration.

165
TRADE DRESS

• Not subject to registration

• IF you package your goods to look like mine, AND we are
competitors, AND consumers are likely to be confused, AND you did
it intentionally, you will face an unfair competition claim.

166
CHINESE IP LAW

• Since joining the World Trade Organization (WTO), China has

strengthened its legal framework and amended its IPR and related
laws and regulations to comply with the WTO Agreement on Traded-
Related Aspect of Intellectual Property Rights (TRIPs).
• International agreements include Berne Convention on copyright, and
the Madrid Protocol on trademarks, and the 1970 Patent
Cooperation Treaty.

167
• China’s first patent law was enacted in 1984 and has been amended
twice (1992 and 2000) to extend the scope of protection.
• China follows a first to file system for patents, which means patents
are granted to those that file first even if the filers are not the
original inventors. This system is unlike the United States, which
recognizes the “first to invent” rule, but is consistent with the
practice in other parts of the world, including the European Union.
• Patents are filed with China’s State Intellectual Property Office
(SIPO) in Beijing, while SIPO offices at the provincial and municipal
level are responsible for administrative enforcement.

PRC PATENT LAW

168
• China’s copyright law was established in 1990 and amended in
October 2001. The new implementing rules came into force on
September 15, 2002.
• Unlike the patent and trademark protection, copyrighted works
do not require registration for protection—this is the same as in
the US.
• However, copyright owners may wish to voluntarily register with
China’s National Copyright Administration (NCA) to establish
evidence of ownership, should enforcement actions become
necessary.
• Protection is granted to individuals from countries belonging to
the copyright international conventions or bilateral agreements of
which China is a member.

PRC COPYRIGHT LAW

169
• China’s trademark law was first adopted in 1982 and revised in
1993 and 2001.
• China joined the Madrid Protocol in 1989, which requires
reciprocal trademark registration for member countries, which
now include the United States.
• China has a ‘first-to register’ system that requires no evidence
of prior use or ownership, but registration is advised, to avoid
someone else registering it.
• However, the Chinese Trademark Office has cancelled Chinese
trademarks that were unfairly registered by local Chinese
agents or customers of foreign companies.

PRC TRADEMARK LAW

170
• China’s Unfair Competition Law provides some protection for
unregistered trademarks, packaging, trade dress and trade
secrets.
• The Fair Trade Bureau, under the State Administration for Industry
and Commerce (SAIC) has responsibility over the interpretation
and implementation of the Unfair Competition Law.

• Protection of company names is also provided by SAIC.

PRC UNFAIR COMPETITION

LAW 171
BUT….

• Despite stronger statutory protection, China continues to

be a haven for counterfeiters and pirates
• On average, 20 percent of all consumer products in the
Chinese market are counterfeit.
• How does this affect economic activity?

172
 SALES, LEASES
AND BAILMENTS

CONTRACTS ABOUT GOODS

173
REMEMBER CONTRACTS?

• When we talked about contracts before, we discussed the difference

between contracts in general and the contracts governed by the
Uniform Commercial Code (U.C.C.)– in particular, contracts about
the sale or other transfer of goods.
• There are similar particular “sale of goods” rules for HK, Australia,
UK; and of course, China follows these commercial rules, as we saw
before.

174
SALE AND TRANSFER OF
GOODS
• The most basic kind of contract
• Seems very simple– in part, because law does a lot of work to make it
seem simple.
• Lots of assumptions built into the law to make our deals go quickly
and smoothly.

175
UNITED NATIONS CONVENTION
ON CONTRACTS FOR THE
INTERNATIONAL SALE OF
GOODS (CISG)
• The CISG applies to contract for the international sale of goods.
• If two countries are part of the CISG convention, and
• If the contract states the CISG controls–
• Then the CISG governs.
• The CISG is much like the UCC and the PRC Code (which of course
are much like each other).
• Both PRC and USA are signatories.

176
ONLY GOODS

Be careful– the UCC/Sale of Goods rules apply only to “goods.”

What is a “good”?
Tangible things that are movable.

177
ONLY MERCHANTS

It is the sort of thing “merchants” sell.

Look up “merchant” – RIGHT NOW!

U.C.C. 2-104(1)–
i) a person who deals in these sorts of goods or
ii) who holds herself out to be, because of her occupation, to have special knowledge about these
goods.

And– as for sales: This is to “pass title” to goods, so we have to decide what “TITLE” means, too.

178
CHINA

• PRC Contract Law… Chapter 9, “Sales Contracts”– Articles 130 to

175.
• So the code drafters certainly saw a reason to talk about sales as a
particular topic! AND
• Chapter 13, Articles 212 to 236– Lease Contracts
• Chapter 14, Articles 237 to 250—Financial Leasing Contracts

179
THESE CONTRACTS ARE
THOUGHT OF AS MORE
UNIFORM, MORE “STANDARD”
• So the law is readier to step in and help you where you ignored key
steps in the contracting process, or maybe where you assumed
everything was “standard.”

• It is like buying something at a store– so much of the contract is

simply assumed or “understood” without words.

• Before talking about formation of these contracts, let’s explain leases a

little.
180
LEASING GOODS

• Leasing of, for example, an automobile, or an airplane, or factory

equipment.
• Leases transfer the right to possession and use of named goods for a
term
• “Lessor” is the one who transfers the right (the “owner,” in standard
leases) and the “lessee” is the one who receives the right.
• See PRC Contract Law, Chapter 9

181
FINANCIAL LEASING
CONTRACTS
• See PRC Contract Law, Chapter 13
• What is a finance lease? A picture is worth a thousand words:

182
SO THERE ARE LOTS OF WAYS
TO TRANSFER GOODS FROM
ONE BUSINESS TO ANOTHER
• But all of them share certain contract formation rules
• We remember “offer and acceptance” right?
• With a change in the terms being a “counter-offer?”
• Who remembers the Bruce Lee T-shirt negotiations between the
museum in Hong Kong and the American T-Shirt Factory CEO?
• Well, some differences here:
• In sales/leases of goods, we move fast and often have very “casual”
contracts (much to lawyers’ chagrin!)

183
 F O R M AT I O N O F
SALES/LEASE CONTRACTS

FOR, OF COURSE, THE TRANSFER OF GOODS

184
OPEN TERMS DO NOT KILL A
CONTRACT
• UCC: A contract for goods will not fail if the parties intended a
contract and there is a reasonably certain basis for giving a remedy.
• Open terms will be supplied under the “gap-filling” rules of UCC 2-
300 et seq. [what is et seq.!?]
Even an open price term can be supplied– “reasonable” based on some
procedure mentioned in the contract.
Payment– at delivery
Delivery– at seller’s place of business
Time– a reasonable time
185
• “Article 61 Indeterminate Terms; Supplementary Agreement

If a term such as quality, price or remuneration, or place of performance etc. was

not prescribed or clearly prescribed, after the contract has taken effect, the parties may supplement it
through agreement; if the parties fail to reach a supplementary agreement, such term shall be
determined (1) in accordance with the relevant provisions of the contract or (2) in
OF COURSE,
accordance with THE thePRC CONTRACT
relevant usage. L AW HAS A CL AUSE CALLED ‘GAP
FILLING”– REMEMBER ARTICLES 61 AND 62?
Article 62 Gap Filling

Where a relevant term of the contract was not clearly prescribed, and cannot be determined in accordance with
Article 61 hereof, one of the following provisions applies:

(i) If quality requirement was not clearly prescribed, performance shall be in accordance with the state standard or
industry standard; absent any state or industry standard, performance shall be in accordance with the customary
standard or any particular standard consistent with the purpose of the contract;
(ii) If price or remuneration was not clearly prescribed, performance shall be in accordance with the
prevailing market price at the place of performance at the time the contract was concluded, and if adoption of a
price mandated by the government or based on government issued pricing guidelines is required by law, such
requirement applies;
(iii) Where the place of performance was not clearly prescribed , if the obligation is payment
of money, performance shall be at the place where the payee is located; if the obligation is delivery of immovable
property, performance shall be at the place where the immovable property is located; for any other subject
matter, performance shall be at the place where the obligor is located;
(iv) If the time of performance was not clearly prescribed, the obligor may perform, and the obligee may require
performance, at any time, provided that the other party shall be given the time required for preparation;
(v) If the method of performance was not clearly prescribed, performance shall be rendered in a manner which is
conducive to realizing the purpose of the contract;
186
(vi) If the party responsible for the expenses of performance was not clearly prescribed, the obligor shall bear the
expenses.”
BUT WHAT ABOUT THE
“BATTLE OF THE FORMS”?
1.Buyer issues a purchase order with its standard terms and conditions
(typically Buyer asks Seller to sign the PO)ƒ
2. Seller sends its Order Acknowledgment with its own standard T&C’s
(typically Seller asks Buyer to sign the Acknowledgment).
3. No one signs.
4. Seller ships the goods and Buyer accepts shipment.
5. Something goes wrong (defective product, failure to pay, etc.) ƒDispute
cannot be resolved.
Is there a contract, and if so, what are its terms?
187
THE BATTLE OF THE FORMS
• The UCC and PRC law both allow the inclusion of additional terms in
an acceptance without turning it into a counteroffer.

• How are these additional terms handled?

• UCC: They are part of the contract unless the original offer expressly
said no additional terms allowed, or the original offeror promptly states
they are not accepted, or if the additional terms “materially alter” the
offer. [what does “material” mean?]

• PRC Article 31:

• Acceptance Containing Non-material Changes

An acceptance containing nonmaterial changes to the terms of the offer

is nevertheless valid and the terms thereof prevail as the terms of the
contract, unless the offeror timely objects to such changes or the offer
indicated that acceptance may not contain any change to the terms
thereof 188
ALSO, UNLIKE COMMON LAW
RULE THAT OFFERS CAN BE
WITHDRAWN AT ANY TIME…
• PRC Article 19 Irrevocable Offer
‘An offer may not be revoked:
(i) if it expressly indicates, whether by stating a fixed time for acceptance or otherwise,
that it is irrevocable;
(ii) if the offeree has reason to regard the offer as irrevocable, and has undertaken
preparation for performance.’

• UCC “Firm offer” 2-205

‘An offer by a merchant to buy or sell goods in a signed writing which by its terms gives
assurance that it will be held open is not revocable, for lack of consideration, during the
time stated or if no time is stated for a reasonable time, but in no event may such period
of irrevocability exceed three months; but any such term of assurance on a form supplied
by the offeree must be separately signed by the offeror.’

189
WHAT IS THE POINT OF
THESE RULES?
• Flexibility, speed, informality

• But not TOO informal:

• UCC requires contracts for sale of goods costing over $5,000 to be in writing.
• UCC requires contracts for leases where more than $20,000 is to be paid to be in
writing.
• PRC Article 36 stays flexible:
• Where a contract is to be concluded by a writing as required by the relevant law
or administrative regulation or as agreed by the parties, if the parties failed to
conclude the contract in writing but one party has performed its main obligation
and the other party has accepted the performance, the contract is formed.

190
SPECIAL RULES FOR E-
CONTRACTS
• Goods and services being sold on the internet.
• How is the contract formed?
• Both China and all US jurisdictions recognize an e-mail contract as
equivalent to a traditional written contract– it is as binding as the
same contract would be if the emails were written on paper.
• It may take several e-mails to piece together the entire agreement,
though.
• The same goes for a so-called “Web contract.’

191
BUT– WHERE IS IT FORMED?
• Traditionally, the place of formation for a contract determines what
law applies, especially if the contract itself does not specify.
• Where was it formed? Where the last act necessary to form the
contract took place.
• Where was that?
• Sometimes, it is hard to tell.
• Sometimes, though, does it matter, if, for example, PRC/UCC/other
places are so similar?

192
 PASSING TITLE

FOR, OF COURSE, THE TRANSFER OF GOODS

193
AFTER IDENTIFICATION, THEN
WE ARE ABLE TO DELIVER THE
• UCC– Title is passed in any way agreed by the parties, but without
GOODS AND
explicit agreement, PASS
it is where delivery isTITLE
completed. The
assumption is delivery and passage of title is the same event– BUT
we can make them separate by agreement.

• PRC Contract Law:

Article 133 Passing of Title

Title to the subject matter passes at the time of its delivery, except
otherwise provided by law or agreed by the parties.

194
SO– WHEN IS DELIVERY?

• A shipment contract requires the seller to make shipping arrangements

and deliver the contract into the carrier’s hands. Title then passes
to buyer and so does the risk of loss.
• A destination contract requires the seller to deliver the goods to a
particular destination. Title and the risk of losses passes only at
that destination.
• Or– title can be passed to goods that are not even moved, if stored in
a warehouse– the warehouse receipt (allowing the holder to remove
the goods) passes title and the risk of loss.

195
SOMETIMES TITLE DOES NOT
PASS FOR A LONG TIME
• Article 134 Conditional Sale

The parties may prescribe in the sales contract that title to the
subject matter remains in the seller until the buyer has paid the price
or has performed other obligations.

196
F.O.B./F.A.S./C.I.F.

• A good term to know is “F.O.B.” or “FOB.”

• This means “free on board.”
• What it really means title transfers at the point named: “FOB Shanghai
port.”
• F.A.S. means “free alongside ship”– the expense and risk of loss on
seller until placed “alongside ship”– at the dock or airport. After that,
risk is on buyer.
• C.I.F. Means “cost, insurance and freight”– the price includes costs of
the goods, as well as insurance and freighting costs. SO– buyer is
paying these costs, even if title passes later.
197
REVIEW OF DELIVERY:

• FAS Asian-American Lines, Shanghai

• FOB Asian-American Lines, Shanghai
• FOB Asian-American Lines, Long Beach CA
• FAS Asian-American Lines, Long Beach CA

198
MORE REVIEW OF DELIVERY

• I sell extremely well-trained Alsatian dogs. I leave them with

professional trainers who raise them in their private residences.
• You buy five dogs from me to sell at your pet store. “Buyer agrees
to purchase dogs for $800 apiece.”
• Where is delivery?

199
SALES OF GOODS

WHEN THINGS GO WRONG

200
WHAT IF THE GOODS ARE
DELIVERED, BUT ARE NOT THE
RIGHT GOODS?
• If non-conforming goods are delivered or “tendered,” {WHAT IS
“TENDER”?}
• and if they are so bad the buyer has the right to reject them,
• risk of loss remains with the seller until the buyer accepts the goods
OR
• the seller replaces them with the right goods.

201
WHAT IF THE GOODS ARE
DELIVERED AND THE BUYER
REFUSES TO TAKE THEM?
• What if a buyer “repudiates” the contract, the risk of loss switches to
the buyer.
• What is “repudiate”?
• To refuse to accept the obligations of the contract– to refuse the
goods for no good reason.
• That is, even if the sale is a delivery contract, if the buyer announces
he is not paying for the goods while they are still in transit, the risk of
loss switches to him.

202
WHAT DOES CHINA SAY ABOUT
RISK OF LOSS WHEN SOMEONE
• Article 146

BREACHES? SAME.
If the seller puts the subject matter at the place of delivery as contracted or
according to the provisions of Item 2 of Paragraph 2 of Article 141 of this Law
and the buyer, in violation of the stipulations, does not take delivery of the
subject matter, the buyer shall bear the risks of damage and loss from the day
the buyer violates the stipulations.
• Article 147
Where the seller fails, as contracted, to provide documents and data in relation
to the subject matter, this shall not affect the transfer of risks of damage to and
loss of the subject matter.
• Article 148
If the quality of a subject matter fails to meet the quality requirements and thus
causes the inability for the realization of the contract aim, the buyer may refuse
to take delivery of the subject matter or dissolve the contract. If the buyer
refuses to take delivery of the subject matter or dissolves the contract, the risks
of damage and loss of the subject matter shall be borne by the seller.
• Article 149
When the risks of damage and loss of a subject matter are to be borne by the
buyer, this shall not affect the buyer's right to request the seller to bear liability
203
for breach of contract if the seller's performance of obligations does not comply
with stipulations.
WHEN IS THERE A BREACH?

• The UCC “perfect tender” rule states that the seller/lessor must deliver
“conforming goods.” If they do not conform, the buyer/lessee may:
– 1) reject the goods
– 2) accept the goods [and seek remedies]
– 3) reject part, accept part [and pay]
UCC 2-601, 2A-509.

o The sellor/lessor has a right to cure the nonconformity– that is,

repair or replace them if
o the time for performance has not expired, and
o the sellor/lessor gives notice of intent to cure.

204
NOW– ABOUT
“CONDITIONAL SALES”
• Remember this one?
• PRC Contract Article 134 Conditional Sale
“The parties may prescribe in the sales contract that title to the subject matter
remains in the seller until the buyer has paid the price or has performed other
obligations.”
Ways in which sales can be conditional:
• Sales on approval– title and risk of loss remain with seller until acceptance
• Sale or return contract
• Consignment– Consigner delivers goods to a consignee to sell on the former’s
behalf; if sale made, consignee earns a fee and gives the rest to the consignor, but
the consignee has title and risk of loss while in possession of goods.
205
AND-- LEASES

• To get some words straight:

• The “lessor” is the one who owns the goods and the “lessee” is the
one who pays for the right to use them. To get the idea; when we are
talking about buildings, the lessor is the landlord, and the lessee is the
tenant.
• The risk of loss passes to the lessee when he/she/it receives the
goods.

206
AND--- INSURANCE

• Of course, we can protect ourselves if we have a risk of loss.

• Anyone who has a risk of loss recognized by the law has an insurable
interest.
• If you do not bear the risk of loss, though, you do not have an
insurable interest.

207
WAREHOUSES, STORAGE FACILITIES,
AND BAILMENT

• Of course, we live in an age where many sellers do not actually have

the possession of the goods they are selling.
• Many items are stored in warehouses, storehouses, storage facilities,
and the like.
• So– actually having goods in your possession does not mean you
own them, necessarily!
• We call this “bailment.”

208
EXAMPLES OF BAILMENT

• My goods are stored in your warehouse.

• My car is parked in your parking garage.
• My clothes are at your laundry.
• The backpack I bought on Taobao is on the delivery truck coming to
the campus guardhouse and postal delivery station.
• Question: Who is the bailor and who is the bailee, in the last
example? Let’s answer that after we define some terms.

209
BAILOR AND BAILEE

• The temporary placement of control over, or possession of personal property by one person,
the bailor, into the hands of another, the bailee, for a designated purpose upon which the
parties have agreed.The term bailment is derived from the French bailor, "to deliver." It is
generally considered to be a contractual relationship since the bailor and bailee, either
expressly or impliedly, bind themselves to act according to particular terms. The bailee
receives only control or possession of the property while the bailor retains the
ownership interests in it. During the specific period a bailment exists, the bailee's
interest in the property is superior to that of all others, including the bailor, unless the
bailee violates some term of the agreement. Once the purpose for which the property
has been delivered has been accomplished, the property will be returned to the bailor
or otherwise disposed of pursuant to the bailor's directions.

• The “bailor” owns the property.

• The “bailee” is given the property to serve the purpose the bailor established.

210
WHAT IS “PERSONAL
PROPERTY?”
• Remember that the common law divides property into “personal” and
“real.” Real property is the land and all structures affixed to the land.

• Code jurisdictions, like China, divide property into “movable,”

“immovable” and “land.” In China, we really have “movable,”
“immovable,” “land use rights” and the land, which belongs to the
people.

• “Personal” property is the same as “movable” property.

211
SO WHO IS THE “BAILOR” OF
THE BACKPACK?
• Well, first. A Taobao, online purchase, is a destination contract, right?
• In fact, they are sales on approval, right?
• So the title and risk of loss remain with the shipper until you receive
and accept the goods, right?
• So who is the bailor?
• The guy who sold you the backpack.

212
TYPES OF BAILMENT

• A bailment for the sole benefit of the bailor.

(You watch your roommate’s bicycle while he goes on a short weekend trip). In
common law, you owe a “slight duty of care.” The only duty is not to be “grossly
negligent.”
Do you remember what “negligent” means?
Failure to act as a reasonable person would act in those circumstances.
What is “grossly negligent,” then?
• Gross negligence is a conscious and voluntary disregard of the need to use
reasonable care, which is likely to cause foreseeable grave injury or harm to
persons, property, or both. It is conduct that is extreme when compared with
ordinary Negligence, which is a mere failure to exercise reasonable care. Ordinary
negligence and gross negligence differ in degree of inattention.

213
BAILMENT FOR MUTUAL
BENEFIT
• For example– I sell that backpack on Taobao; you are the delivery
service. I place the backpack in your care for my benefit– so I can
deliver it to my customer and get paid– and you get a benefit too–
this is your business for which you get paid.
• You we me a duty of ordinary care (reasonable care)– that is,
• DON’T BE NEGLIGENT (Don’t fail to act as a reasonable person in your
situation would act).

214
BAILMENT FOR THE BENEFIT
OF THE BAILEE
• Sometimes, we allow others to borrow our movable property. You,
for example, allow your roommate to borrow your bicycle to go to
Chashan one Saturday. You do this free of charge, simply as a friend.

• Your roommate owes you the duty of “utmost care.” Your roommate
must take the greatest possible care of your bicycle, or he or she is
liable for the loss of your bicycle if it is stolen or damaged while
he/she is using it.

215
REMEDIES

W H AT H A P P E N S W H E N S O M E O N E
BREACHES THE SALE/LEASE/BAILMENT
CONTRACT?

216
REMEDIES– WHAT HAPPENS
WHEN SOMEONE BREACHES
THE SALE/LEASE/BAILMENT
CONTRACT?
• These remedies are simply careful, specific applications of the same
principles we talked about last year, in BLAW I.
• Remember the issues we discussed when the Chinese manufacturer
failed to deliver good quality T-shirts to the T-Shirt Factory in time for
T-Shirt Factory to deliver them to the Bruce Lee Fan Club
Convention?

217
CHINA

• Article 107 Types of Liabilities for Breach

“If a party fails to perform its obligations under a contract, or rendered non-
conforming performance, it shall bear the liabilities for breach of contract by specific
performance, cure of non-conforming performance or payment of damages, etc.” [The
CODE says etc.– that is in the original!]

• Article 112 Liability for Damages Notwithstanding Subsequent Performance or Cure of

Non-conforming Performance

“Where a party failed to perform or rendered non-conforming performance, if

notwithstanding its subsequent performance or cure of non-conforming performance,
the other party has sustained other loss, the breaching party shall pay damages.”

218
 NEGOTIABLE
INSTRUMENTS
LIKE MONEY IN THE BANK

U C C A RT I C L E 3

N E G OT I A B L E I N S T R U M E N T S L AW O F T H E P E O P L E ’ S
R E P U B L I C O F C H I N A ( 2 0 0 4 ) [ P R C N E G OT I A B L E
I N S T R U M E N T L AW ]

T H E R U L E S A R E S U B S TA N T I A L LY T H E S A M E . S P E C I F I C
D I F F E R E N C E S W I L L B E N O T E D B E L O W.
219
WHAT IS A “NEGOTIABLE
INSTRUMENT?”
• Examples– checks, notes
• It is really a contract– an agreement to pay a certain sum of money
that can be transferred to others.
• Transfer is “negotiation.”
• For example – a promissory note is a promise by the bank to pay a
certain sum of money to the legitimate “holder” of the note.

220
WHY DO WE HAVE THEM?

• Negotiable instruments act as a SUBSTITUTE FOR MONEY.

• Negotiable instruments enable records to be kept in ways cash does
not.
• Negotiable instruments can be used to give credit:
– My note promising to pay you for your goods– I buy your goods on
credit.

221
TYPES OF NEGOTIABLE
INSTRUMENTS—DRAFTS OR
“BILLS OF EXCHANGE”
• A draft involves three parties.
• The drawer gives an unconditional written order to
• the drawee to PAY MONEY to
• the payee.
• Of course, OFTEN the drawee is the drawer’s bank (a check/cheque).
But this need not be the case.
• There can be a time draft (payable on a future date) or a sight draft
(payable “on sight”– right now).

222
NOT JUST FOR BANKS.

• You might owe me money, and you might be required to pay me all of
it back next Friday.
• I may want to give the money to my son.
• I can order you to pay the money you owe me to my son next Friday.
• I will be the drawer, you are the drawee, and my son, the payee.

223
TYPES OF NEGOTIABLE
INSTRUMENTS—PROMISSORY
NOTES
• The maker of the note gives an
• UNCONDITIONAL WRITTEN PROMISE
• to pay a certain sum of money
• to the payee of the note. The payee can be named, or can be “to
bearer.”
• The promise can be to pay it all at a certain time, to pay in
installments, to pay interest– whatever the parties decide.

224
A BANK CAN MAKE A NOTE
TOO…
• Certificates of deposit are notes issued by a bank. I deposit money in
the bank, and they promise to pay me more than that amount later.

225
WHAT IS THE THING THESE
HAVE IN COMMON?
• These instruments are NEGOTIABLE.
• I can transfer it to another.
• They are binding promises, binding orders, that are
UNCONDITIONAL.
• The later transferee (the person who takes the note or the draft from
the original payee) does not need to know what led to the
instrument’s creation, or worry about who had what obligations.
• The person you transfer the instrument to is called “the holder.”
• The easiest way to make it transferable is to make the instrument
“payable to bearer.”

226
WHAT, EXACTLY, IS
“UNCONDITIONAL”?
• There can be no “IFS”
• It cannot be, for instance, “I promise to pay you ¥5000 if I am satisfied
with your goods.”
• However, reference to another agreement or writing does not make it
conditional.

227
228
FIXED AMOUNT

• “I promise to pay you money” or “Please give the bearer some

money” would not work, would it?
• There has to be a fixed amount of money involved.
• The amount must be MONEY, too. It can be US dollars, or HKD, or
RMB, but it must be MONEY. It cannot be “payable in cases of pepper
sauce.”

229
ONLY MONEY

• Nothing extra to muddy things up.

• PRC Negotiable Instruments Law adds a requirement that is normal

practice under U.S. law, but not actually a requirement:
– “Article 8. The amount of a negotiable instrument shall be written in
both Chinese characters and in numerals and the two shall tally with
each other. The negotiable instruments shall be invalid if the words and
figures do not tally. “

230
PAYABLE EITHER

• on demand (for example, on “sight”)

• or at a fixed, definite time.

• NOT-” payable when the goods are delivered”

• Special note: PRC Negotiable Instruments Law requires all checks to

be payable on sight. Article 90.

231
WHAT IF IT IS…

• Not payable at a fixed time, for fixed amount of only money, on

unconditional terms?
• Well– it can still be a contract or agreement to pay money, but it is
not negotiable.

232
HOLDER IN DUE COURSE
• To whom do we transfer an instrument, and who can collect the
money, other than the original payee?
• Holders– and the best kind is:

• THE HOLDER IN DUE COURSE

• Holders in due course take the instrument free
of all claims and most defenses.
• This can be better than the position the original payee has.

233
ENDORSEMENT

• How can the payee transfer it to a

holder?
• By endorsement/indorsement.
• It can be spelled either way. British practice favors “endorsement,” so
that is what you will see in HK.
• If a check or note is payable to ME, I endorse it by signing the back of it.
If I sign it, it becomes payable to the bearer. This is “endorsement in
blank.” It is “bearer paper.”
• If I sign it “payable to Jack Jones,” it is now payable to a new payee– Jack
Jones. It is “order paper.”

234
HOW TO TRANSFER

• Bearer paper? • Order paper?

• Hand it to the someone. • Endorse it to them.

235
236
JUST TO GET NAMES DOWN:

• The payee who endorses/indorses it to another is called the

“endorser/indorser.”
• The person to whom it is endorsed is the “endorsee/indorsee.”
• If it is endorsed in blank, the person who has the paper in his/her
possession is the “bearer.”

237
MORE VOCABULARY:
• Blank endorsement: Payee signs it, and no more.
• Special endorsement: Payee signs it, and says something like “Pay to
Wu Xulin.”
• Qualified endorsement: I sign it but add words like “no recourse” or
“without recourse,” disclaiming (what does that word mean?) any
liability for the endorser.
• Restrictive endorsement: “for deposit only,” “to John, in trust for
William.” A late holder who cashes the check for John to pay for his
phone bill cannot be a “holder in due course.”
• PRC law specifies the restrictions, “Not transferable,” “Collection”
and “Hypothecation.”
Articles 34 and 35.

238
NOW, WE ARE READY FOR
THE KEY IDEA:
• The

HOLDER IN DUE
COURSE

239
HOLDERS AND HOLDERS IN
DUE COURSE
• A holder is someone
possession the instrument,
payable to bearer or to the
holder.
• He has exactly the same rights
as the person who gave the
instrument to him.
• A holder in due course is free
of the claims and defenses that
can be asserted against his
transferor– only so-called
“universal defenses,” not
“personal defenses,” can be
asserted.
240
SO WHAT DOES IT TAKE TO
BE ONE OF THOSE?
• A HOLDER IN DUE COURSE is a holder who takes the instrument
• FOR VALUE
Performed or given something for it, or given up something for it.
• IN GOOD FAITH
– Subjective test, were you actually honest in fact?
• WITHOUT NOTICE OF DEFECT
– Objective test. No notice that it is overdue, has been dishonored,
there is something wrong with the signature, someone else has a
claim, there is a defense against it.

241
HOLDERS IN DUE COURSE
CREATE SHELTER FOR OTHERS…
• If a holder in due course gives me the instrument, the “shelter principle”
says I acquire the same rights.
• I buy oranges from Wu, paying half and giving Wu an
unconditional note for the other half of the price. The
oranges were spoiled. But Wu transferred the note to Li,
who paid for it in good faith without notice of my dispute.
Li transfers it to Ma, and Ma promises to sell Li his
tangerines when they are ready. Ma takes “shelter” in
Li’s HDC status.

242
SO WHAT WAS THAT ABOUT
“UNIVERSAL” OR “PERSONAL”
DEFENSES?
• The universal, or real, defenses, that apply even against a Holder in Due Course:
• Infancy or minority
• Extreme duress (force or violence). Not “ordinary duress,” a personal defense
• Mental incompetence
• Illegality
• Fraud in the inception (I did know what I was signing because of a deception).
• Forgery
• Material alteration
• Discharge in bankruptcy
• Other defenses are “personal.”

243
SO WHO IS LIABLE?

• PRIMARY LIABILITY
• SECONDARY LIABILITY
– This arises only when the party with primary liability does not pay

244
WHO HAS PRIMARY
LIABILITY TO PAY?
• Makers of notes (including certificates of deposit) have primary
liability.
• A draft is different. No one has primary liability. The drawee owes
nothing to the payee if it refuses to pay; rather, may be liable to drafter.
But what about the drawer? Next slide!
• Certified checks or accepted drafts– make the drawee primarily liable,
though.

245
SECONDARY LIABILITY

• The drawer of a draft/check has secondary liability; only has a duty to

pay if and after the drawee (like the bank) refuses to pay.
• An unqualified endorser has secondary liability. BUT– remember that
“qualified endorser” who says, “without recourse?”
• WHAT DOES RECOURSE MEAN??
• “Without recourse” means what it says.

246
SECONDARY LIABILITY DOES
NOT ARISE UNTIL:
1) The instrument was properly presented for payment.
2) The instrument was dishonored.
3) Notice of dishonor is timely given.

247
BE CAREFUL…

• Sometimes, people sign as a “maker” or “drawer” or “acceptor” or

“endorser” as an accommodation, to help out. That might be your
father co-signing a note. They have the same liability as anyone else
who signs in the capacity. If you sign as a maker, you have primary
liability.

248
SO– SIGNATURES ARE
IMPORTANT, RIGHT?
• What is a signature?
• My signature, my agent’s signature
• UCC 3-401(b): “any name, word or mark used in lieu [in the place of]
a written signature.” Handwritten, typed, printed, stamped, or almost
anything else, if executed OR adopted by signer to authenticate his
“signature.” Including trade names, assumed names, etc.
• PRC: signature not defined.

249
WHAT ABOUT E-
SIGNATURES?
• OF COURSE! That fits the definition we just gave, right?

• BUT– does this worry you?

250
FORGERIES AND ALTERATIONS
• If it is easy to sign, it is easy to fake.
• If someone signs as your agent without authority, the fake agent is
liable, not you (unless you decide to ratify it)
• If someone forges your signature, what is the rule?
• MOSTLY, you are not liable, except two situations.

251
Imposter rule states that if someone forges payee’s
endorsement, the drawer/maker is liable to someone
who pays the instrument in good faith, or in good faith
takes it for value or collection.

Fictitious payee rule--- Drawer or maker liable on forged

endorsement if the original payee was not intended to
actually receive the money either. ???? Examples are
helpful here.

252
253
WARRANTY LIABILITY

• The liabilities discussed so far are signature liabilities. There are also
warranty liabilities. That is, parties to the instruments make certain
warranties– promises.
• There are two types, transfer warranties and presentment warranties.

254
THE TWO TYPES OF
WARRANTIES

• Transfer warranties • Presentment warranties

– The transferor has good title – The presenter (person
– The signature are genuine presenting the instrument for
payment) has good title
– The instrument has not been
materially altered – The instrument was not
materially altered
– There are no good defenses
against transferor – The presenter is not aware of
problems with any signatures
– The transferor knows of no
insolvency by anyone liable on
the instrument

255
 BANKRUPTCY
E S P E C I A L LY
R E O R G A N I Z AT I O N / R E C T I F I C AT I
ON
U.S. BANKRUPTCY CODE

T H E E N T E R P R I S E B A N K R U P T C Y L AW O F T H E P E O P L E ’ S
REPUBLIC OF CHINA—2006

SIMILAR STRUCTURE WITH SOME DIFFERENT NAMES FOR

THE SAME THINGS.

B I G G E S T D I F F E R E N C E : T H E P R C L A W O N LY A P P L I E S T O
“ A N E N T E R P R I S E L E G A L P E R S O N .” R E M E M B E R A R T I C L E 3
O F T H E P R C C O M PA N Y L AW :
“ A C O M PA N Y I S A N E N T E R P R I S E L E G A L P E R S O N , W H I C H
H A S I N D E P E N D E N T L E G A L P E R S O N P RO P E RT Y A N D
E N J O Y S T H E R I G H T T O L E G A L P E R S O N P R O P E R T Y. I T
SHALL BEAR THE LIABILITIES FOR ITS DEBTS WITH ALL
I T S P R O P E R T Y. ”

256
THREE MAJOR ROUTES

• Liquidation
– In U.S., this is “Chapter 7”
– In PRC, Chapter X
• Reorganization/Rectification
– In U.S., this is “Chapter 11.”
– In PRC, Chapter VII
• In US-- individual wage earner (Chapter 13) NOT AT ALL THE SAME
AS:
• But in PRC—compromise (Chapter IX)

257
SOME COMMON FEATURES TO
ALL ROUTES
• Either the debtor OR a creditor can file a bankruptcy petition ( one is voluntary, the other is involuntary).
• PRC Article 2:
– When an enterprise legal person fails to settle its debt as due, and if its assets are not enough to pay off all the debts
or if it is obviously incapable of clearing off its debts, its liabilities shall be liquidated according to the provisions of
the present Law.
– When an enterprise legal person is under the aforesaid circumstances or if it is obvious that it is unable to pay off its
debts, it may be subject to rectification according to the provisions of the present Law.

• US BR Code:11 U.S.C. §101:

• The term “insolvent” means—
• (A) with reference to an entity other than a partnership and a municipality, financial condition such that
the sum of such entity’s debts is greater than all of such entity’s property, at a fair valuation, exclusive of—
• (i) property transferred, concealed, or removed with intent to hinder, delay, or defraud such entity’s
creditors; and
• (ii) property that may be exempted from property of the estate under section 522 of this title;

258
IT BEGINS WITH THE
PETITION
• In the US, filed in special federal court called the Bankruptcy Court.
• In the PRC, in “the people’s court where the debtor is domiciled.”
Article 3.
• Again, either debtor can do it, voluntarily, or the creditors can do it,
involuntarily– same in both countries.

259
SCHEDULES

• Voluntary petitioner must provide court with lists of debts, income,

creditors, and the like.
• See PRC Article 11, 11 U.S. Code § 521

260
THE IMMEDIATE EFFECT OF
THE PETITION
• Automatic stay
– Stops all actions to collect prepetition debts, all attempts to perfect liens
against debtor’s property.

• PRC Article 16
– After the people's court accepts an application for bankruptcy, the
repayment of debts made by a debtor to individual creditors shall be
invalidated.

261
BUT

• Then the trustee is appointed (Chapters 7 and 13)

• In PRC, the administrator is appointed. Administrator=trustee.
• For Chapter 11(reorganization), rectification in PRC– different rules
which we will discuss shortly.

262
AND

• PRC Chapter 17
– After the people's court accepts an application for bankruptcy, the
debtors or asset holders of the debtor shall pay off the debts or deliver
the relevant assets to the bankruptcy administrator.

• In US BR we call this the estate. It goes into the control of the

trustee.

263
FIRST DIFFERENCE WITH
REORGANIZATION/RECTIFICATI
ON
• In Chapter 11 reorganization, as it Chapter VII rectification, the debtor
can continue to run its own business.
• The debtor acts like its own trustee/administrator.
• This is called “debtor in possession” (US).
• In PRC Article 73, “a bankruptcy administrator that has taken over the
assets and business operation shall deliver the assets and business
operation to the debtor according to the provisions of the present
Law, and the bankruptcy administrator’s functions and duties as
prescribed herein shall be exercised by the debtor.”

264
THIS DOES NOT MEAN THE
DEBTOR CARRIES ON AS
BEFORE, OF COURSE.
• 1) There must be a creditor’s meeting, and that of course means
notice is given to the creditors.
• 2) The creditors must approve a plan of reorganzation/rectification.
• 2A) For liquidation, the trustee/administrator develops a plan to
liquidate assets to pay debts.
• 3) No one will get paid in full!

265
SKIPPING AHEAD…

• Putting aside momentarily how the plan,

etc. works– what happens at the end of it all?
• After the debtor comes out of bankruptcy, all but certain exempt
debts are discharged.
• This means a new start.

266
NOW– BACK TO THE PROCESS
OF WORKING OUT THOSE
DEBTS…
• In the plan of reorganization or rectification.
• The debtor-in –possession usually runs things; a trustee/administrator
is only put in if there is a showing of fraud, dishonesty, gross
mismanagement.
• Can continue to operate in the ordinary course of business.
• Post-petition credit gets priority.

267
THE PLAN
• PRC • USA
– Article 81 says it must include – Establishes the proposed new
– (1) A business plan of a debtor; financial structure
(2) Classification of the – Sets forth how and how much
creditor’s right; unsecured debt gets paid
(3) An adjustment plan of the – Specifies rejected contracts
creditor’s right; (next slide)
(4) A repayment plan of the
creditor’s right; – Disclosure statement to
(5) Term for implementing the creditors and equity holders
rectification plan;
(6) Term for supervising the
performance of the rectification
plan; and
(7) Any other plan conducive to
the debtor’s rectification.

268
WHAT CAN THE PLAN DO?

• US:
• Executory contract (contracts not yet performed) and unexpired leases may be
repudiated, with court approval and with the votes of the creditor’s committee.
• PRC:
• Article 18
After the people's court accepts an application for bankruptcy, the relevant
bankruptcy administrator shall decide whether to rescind or continue to perform
a contract that has been established before acceptance yet has not been fully
performed by both parties concerned and notify the other party concerned of its
decision. Where the bankruptcy administrator fails to inform the other party
concerned within 2 months from the day of acceptance or to make any reply to
an urge made by the other party concerned, it shall be deemed as rescission of
the contract.

269
 WHO APPROVES THE PLAN?
• PRC Article 82:
THE COURT, OF COURSE,• MUST US APPROVE IT.
– WhereBUT FIRST,
the relevant THE
creditors who CREDITORS’
have the following –COMMITTEE MUST
Unsecured claims creditors
discuss a draft of rectification plan, they shall APPROVE IT.– Secured creditors
creditor’s rights attend the creditor’s meeting to
be
grouped according to the following creditor’s rights so
as to vote a draft of rectification plan: – Equity holders
– (1) The creditor’s right with guarantee on the debtor’s
particular assets;
(2) The wages, subsidies for medical treatment and
disability and comfort and compensatory funds as
defaulted by the debtor, the fundamental old-age
insurance premiums, fundamental medical insurance
premiums that shall have been transferred into the
individual accounts of employers as well as the
compensation for the employees as prescribed by the
relevant laws and administrative regulations;
(3) The taxes as defaulted by the debtor; and
(4) The common creditor’s right.
– The people’s court shall, when it so requires, decide to
set a group of the small-amount creditor’s right in the
group of the common creditor’s right so as to vote a
draft of rectification plan.

270
WHAT HAPPENS WITH THE
VOTE?
• PRC: 2/3 of value, majority in number of total claims in each class
must approve.
• USA : Same.
• PRC and USA: Potential “cramdown” under certain conditions.
• What is a “cramdown?”
– Court ignores dissenting class vote (at least one class must vote yes)– if
certain conditions are met.

271
CRAMDOWN CONDITIONS:

• In order for the court to confirm the rejected bankruptcy plan, the
debtor must prove that it is fair, equitable and does not discriminate
among creditors. The plan must pay each claim holder as much as he
would have received in liquidation unless those who receive less accept
the plan.
• A secured creditor must receive the entire value of the asset securing the
claim or the entire value of the claim, whichever is smaller, in order for
the plan to be considered fair.
• Unsecured creditors voting by class must either accept the plan or the
owners of the debtor cannot retain an interest in the reorganized debtor
under the plan unless they contribute “new value.”

272
HOW DOES ALL THIS AFFECT
SECURED CREDITORS?
• THIS is why you perfect a security interest!
• PRC Article 109
“An owner of the right to guarantee on the particular assets of the
bankrupt may enjoy the priority right to be repaid by means of the
particular assets.”
• That is, secured creditors have their security! Actions are stayed, but
only temporarily to allow orderly disposition.

273
IF
REORGANIZATION/RECTIFICATI
ON FAILS, OR IF NOT WORTH
TRYING…
• There is liquidation (Chapter 7, Chapter X).
• That “liquidates” the debtor’s assets to pay its liabilities.
• All non-exempt property sold for cash, distributed to creditors,
unpaid debts are discharged, under supervision of
trustee/administrator.
• Available to individuals in US if they meet an eligibility test; NOT
available to individuals in PRC

274
 SOME PROPERTY IS EXEMPT FROM
LIQUIDATION– IN US.
READ THE LIST AND ANSWER, WHY NOT PRC?

275
 BUT WAIT– CAN’T WE
“GAME” THE SYSTEM?
• Fraudulent transfers prohibited
• PRC code sections:
• Article 31
Within 1 year before the people's court accepts an application for bankruptcy, a bankruptcy administrator has the right to plead the court
to revoke any act relating to the debtor’s assets:
• (1) Transferring the assets free of charge;
(2) Trading at an obviously unreasonable price;
(3) Providing asset guarantee to those debts without any asset guarantee;
(4) Paying off the undue debts in advance; or
(5) Giving up the creditor’s right.

Article 32
Within 6 months before the people's court accepts an application for bankruptcy, if a debtor is under any circumstances as prescribed by
paragraph 1 of Article 2 of the present Law relating to the repayment to individual creditors, its bankruptcy administrator has the right to
plead to the people's court to revoke it, except where an individual repayment may do good to the debtors’ assets.

Article 33
Any of the following acts involving the debtor’s assets shall be deemed as invalid:
• (1) Concealing or transferring the assets in order to avoid the debts; or
(2) Fabricating any debt or acknowledging any unreal debt.

Article 34
As to any asset of a debtor as obtained under any circumstance as prescribed by Articles 31, 32 or 33 of the present Law, the relevant
bankruptcy administrator has the right to recover it.

276
ALMOST EXACTLY THE SAME
TESTS FOR FRAUDULENT
TRANSFER EXIST IN THE US
• A transfer made with intent to hinder, delay or defraud creditors and
the debtor received less than reasonable equivalent in value.

• Easy example: My company is about to file a petition. First, I sell all

my equipment and inventory to another company owned by major
shareholders for very low price.

277
NOW, A DIFFERENCE:

• In US, there is Chapter 13 (wage-earner plans).

– Under Chapter 13, consumers pay part or all of their debts under
a tightly controlled budget plan overseen by a court-appointed
bankruptcy trustee. The process takes three to five years.
– Nothing like this is PRC, since individuals cannot file here.

278
BUT PRC HAS CHAPTER IX,
“COMPROMISE”
• The key tool here is the conciliation agreement, accepted by the
creditors, which then adopts a “composition deed.”
• This is a voluntary settlement arrangement, with court approval.

279
COMPANY L AW
O R – C O R P O R AT E L A W, O R B U S I N E S S
O R G A N I Z AT I O N S … .
AND WHY THEY EXIST

280
THERE ARE A NUMBER OF WAYS
TO ORGANIZE A BUSINESS
ENTERPRISE
• So what is an “enterprise” anyway?
• The enterprise as a legal person…” Article 68, PRC Property
Rights Law
• “A company is an enterprise legal person, which has
independent legal person property and enjoys the right to
legal person property. “ Article 3, PRC Company Law.
• Any business organization, considered separately from its
owners.
• What is the simplest form of business organization?
A sole proprietorship– “There is only one owner, and there is
no separate legal entity.”
281
 * AND THE ACCUMULATION OF CAPITAL
– THE LADDER OF LIMITED LIABILITY

282
BUT THERE ARE MANY
• First, partnerships.

OTHERS
• A general partnership, a limited partnership, a special
general partnership.
• These are governed in China by the Partnership
Enterprise Law (NOT reproduced in Blackboard).
• US and China partnership law is very similar.

283
GENERAL PARTNERSHIPS
• “An association of two or more persons to carry on as
co-owners of a business.”
• Remember who can be a “person.”
• Governed by a Partnership Agreement; that is, by a
contract.
• Sharing all rights and liabilities

284
RIGHTS AND DUTIES OF
The partners share the right to:

GENERAL PARTNERS
• Participate in management
• Share in the profits
The partners all have a duty:
• To show loyalty to one another (no self-dealing)
• To show care to the business
• To inform

285
WHAT DOES “LOYALTY”
• A partnership is looking for a new place to build a store.

MEAN?
Wu, a partner, owns the land use right for a good place
for the store to go. Before selling it to the partnership, he
must tell them he owns it. He cannot do this secretly.

• Same story– but this time, Li, a third party, has offered to
sell the land use right to Wu for the partnership. Wu buys
it for himself.

286
WHAT LIABILITY TO
• Partners have full, personal, joint and several liability for all

GENERAL PARTNERS HAVE?

partnership debts and obligations.
• FULL
• PERSONAL
• JOINT AND SEVERAL (remember that phrase from
Torts?)

287
LIMITED PARTNERSHIPS
• “A type of partnership that has two types of partners:
• 1) general partners
• 2) limited partners.”

• What is the difference?

• “Limited partners invest money but do not participate in
management or have personal liabliity beyond their
investment.”
• General partners are, well, general. See previous slides.

288
LIMITED LIABILITY
• “For a limited liability company, a shareholder shall be

COMPANY
liable for the company to the extent of the capital
contributions it has paid.” Article 3, PRC Company Law.
• This functions much the same was as an LLP does– do
you see why?
• What does “to the extent of capital contributions” mean?
• Why is a shareholder called an “it?”

289
AND THEN, THE “BIG” ONE
• In the US, we call the “big one” a corporation.

• In most of the rest of the world, it is called something like

a “joint stock company.”

290
CORPORATIONS
• The key fact about a corporation is that it is a separate
legal person from any of its owners, who are called
“shareholders” or “stockholders.”
• The ownership is divided up into “shares” of “stock.”
• A shareholder’s liability for corporate debts or obligations
or liabilities is NORMALLY limited to the value of the
shares themselves.
• NORMALLY because there is a doctrine called “piercing
the corporate veil.”

291
JOINT STOCK COMPANIES
• “For a joint stock limited company, a shareholder shall be
liable for the company to the extent of the shares it has
subscribed to.” Article 3, PRC Company Law.
• “The shareholders of a company shall be entitled to enjoy
the capital proceeds, participate in making important
decisions, choose managers and enjoy other rights. “
Article 4, PRC Company Law

292
SOME DEFINITIONS
• The word “corporation” is formed out of the word “corporate” which
means “united in one body.”
• It is a fictitious legal “person” chartered by a state government; when it
receives its charter, it is “incorporated” (meaning, “given bodily form.”)
• A corporation, as a legal person, can enter into contracts and own
property.
• Compare to Article 3: “A company is an enterprise legal person, which
has independent legal person property and enjoys the right to legal
person property.”
• Also Article 2: “The term "company" as mentioned in this Law refers to
a limited liability company or a joint stock company limited set up within
the territory of the People''s Republic of China according to the
provisions of this law.”

293
SO– WHAT DO CORPORATIONS
AND JOINT STOCK COMPANIES
SHARE IN COMMON?
• The limited liability– liable only to the extent of the value of one’s shares.

• How is that different from “liable to the extent of capital contributions?” in

Limited Liability Companies?
•
In JSC/corp, owners own shares of stock, the stock owns the company– the
sale of stock is easier than sale of direct percentage share of a company.

294
HOW DO THESE COMPANIES AND
CORPORATIONS AND LLP S MAKE
DECISIONS AND DO ANYTHING?
• Well, the short answer that applies to all– through AGENTS. (Remember
them? We talked about this in Contract Law and Employment Law).

• But the long answer is what we will talk about next time.

295
HOW ARE CORP/JSC S RUN ?
• Articles of Incorporation/Articles of Association
These can be viewed as the “constitution” of the company. The
basic framework for corporate governance, and they must contain
certain kinds of information, see, e.g., Article 82 of the PRC Company
Law.
• Bylaws for corporations are more detailed rules that follow the
articles of incorporation guidelines.

• The JSC, it is assumed by the Company Law, will have its

“operational guidelines and investment plans” created by the
shareholders at the shareholders’ assembly. See PRC Articles 100
and 38.

296
THE DIVISION OF POWER
• Shareholders, who meet/assemble at least once a year, to
• Elect the board of directors.
• This is the same for both corporations and JSCs.
• The PRC Company Law calls the shareholders’ assembly the
“organ of power.” Article 99.
• In Article 4: “The shareholders of a company shall be
entitled to enjoy the capital proceeds, participate in making
important decisions, choose managers and enjoy other
rights.”
• BUT….

297
CORPORATIONS IN US TEND TO
HAVE LESS SHAREHOLDER
GOVERNANCE POWER
• In JSC structure, shareholders not only elect directors but
make decisions on major business strategies.
• In corporate structure, shareholders are usually only asked
to elect directors, though they can attempt to introduce
resolutions.
• Directors in both the JSC and the corporation may then
choose the manager/management (an employee with day to
day agency power).
• For example, the “Chief Executive Officer.”
• The manager can be and usually is a director.
• BUT….

298
PROXY POWER
• In US corporations, ANDcanREVERSING
the management request “proxy”

THE PYRAMID OF COMPANY

from shareholders. That means the management can ask
to be the shareholder’s agents for voting at the annual
POWER
meeting.
• The management can nominate slates of directors.
• Those slates often win– meaning managers pick their own
bosses.

• There are proxies in China too, Article 107.

299
THE JSC STRUCTURE IN
• Some specifically Chinese rules for boards of directors:

CHINA
1. It allows for employee representation on the board
through election by employees. US allows this too, but
employee election is not required.
2. There is a board of supervisors, separate from the
directors, at least 1/3 of whom are employee elected,
and none of whom may be directors or managers.
Article 11

300
WHAT DO THE SUPERVISORS
• The board of supervisors or supervisor of a company with no board of supervisors may exercise the following
powers:

DO?
• (1) To check the financial affairs of the company;
• (2) To supervise the duty-related acts of the directors and senior managers, to put forward proposals on the
removal of any director or senior manager who violates any law, administrative regulation, the articles of
association or any resolution of the shareholders' meeting;
• (3) To demand any director or senior manager to make corrections if his act has injured the interests of the
company;
• (4) To propose to call interim shareholders' meetings, to call and preside over shareholders' meetings when the
board of directors does not exercise the function of calling and presiding over shareholders' meetings as prescribed
in this Law;
• (5) To put forward proposals at shareholders' meetings;
• (6) To initiate actions against directors or senior managers in accordance with Article 152 of this Law; and
• (7) Other duties as provided for by the articles of association.
• The supervisors may attend the meetings of the board of directors as non-voting attendees, and may raise
questions or suggestions about the matters to be decided by the board of directors.

See Article 119, referring to Articles 54 and 55

301
THERE IS NOTHING LIKE THE
BOARD OF SUPERVISORS IN US
LAW

302
OK– SO DIRECTORS AND
MANAGERS RUN THINGS DAY TO
DAY– WHAT ARE THEIR LEGAL
DUTIES?
• They owe a duty of care…
• But in US Law we have the “Business Judgment” rule
• This keeps courts for second-guessing business decisions.
• BUT– duty of loyalty is stricter
1. No self dealing
2. No usurping corporate opportunities
3. No competing with the corporation
THESE DUTIES ARE OWED TO THE COMPANY, NOT THE
SHAREHOLDERS DIRECTLY.
Where does China stand on all this?

303
LET’S PUT ALL THESE TYPES OF
BUSINESS ORGANIZATIONS
TOGETHER…
• And we can see why you need to know something about
the similarities and differences in how the law chooses to
organize these companies.
• See if the following slide will make you dizzy or not!

304
ALIBABA
• Here are some quotations from Alibaba’s filing with the U.S. Securities and Exchange Commission, which
governs the buying and selling of shares of stock on the public exchanges (our next, and final, topic for the
course).
• Our Corporate Structure
• Alibaba Group Holding Limited is a Cayman Islands holding company established on June 28, 1999, and we conduct our
business in China through our subsidiaries and variable interest entities.
• Our significant subsidiaries, as that term is defined under Section 1-02 of Regulation S-X under the Securities Act, consist of
the following entities:
• Taobao Holding Limited, an exempted company incorporated with limited liability under the laws of the Cayman Islands, which is
our wholly-owned subsidiary and the indirect holding company of the PRC subsidiaries relating to our Taobao Marketplace
and Tmall platform.
• Taobao China Holding Limited, a Hong Kong limited liability company, which is the direct wholly-owned subsidiary of Taobao
Holding Limited and the direct holding company of the PRC subsidiaries relating to our Taobao Marketplace and Tmall
platform and operating entity for the overseas business of our Taobao Marketplace and Tmall Global.
• Taobao (China) Software Co., Ltd., a limited liability company incorporated under the laws of the PRC, which is an indirect
subsidiary of Taobao Holding Limited and a wholly-foreign owned enterprise, and provides software and technology services
for our Taobao Marketplace.
• Zhejiang Tmall Technology Co., Ltd., a limited liability company incorporated under the laws of the PRC, which is an indirect
subsidiary of Taobao Holding Limited and a wholly-foreign owned enterprise, and provides software and technology services
for our Tmall platform.
• Alibaba.com Limited, an exempted company incorporated with limited liability under the laws of Cayman Islands, which is our
wholly-owned subsidiary and the indirect holding company of the PRC subsidiaries relating to our Alibaba.com, 1688.com and
AliExpress businesses.

305
ETC…..
• Alibaba.com Investment Holding Limited, a company incorporated with limited liability under the laws of the
British Virgin Islands, which is the direct wholly-owned subsidiary of Alibaba.com Limited and a lower
level holding company of the PRC subsidiaries relating to our Alibaba.com, 1688.com and AliExpress
businesses.
• Alibaba Investment Limited, a company incorporated with limited liability under the laws of the British
Virgin Islands, which is the principal holding company for our strategic investments.

• http://www.sec.gov/Archives/edgar/data/1577552/000119312514184994/d709111df1.htm#toc709111_11
• And this:

• Alibaba.Com, Inc. operates as a B2B e-commerce company. The company also focuses on technology
maintenance, marketing and administrative services. The company was incorporated in 2000 and is based
in Santa Clara, California. Alibaba.Com, Inc. operates as a subsidiary of Alibaba.com Limited.

• http://investing.businessweek.com/research/stocks/private/snapshot.asp?privcapId=38707079

306
 AND….
• Contractual Arrangements among Our Wholly-foreign Owned Enterprises, Variable Interest Entities
and the Variable Interest Entity Equity Holders

• Due to PRC legal restrictions on foreign ownership and investment in, among other areas, value-added
telecommunications services, which include the operations of Internet content providers, or ICPs, we, similar to all
other entities with foreign-incorporated holding company structures operating in our industry in China, operate our
Internet businesses and other businesses in which foreign investment is restricted or prohibited in the PRC through
wholly-foreign owned enterprises, majority-owned entities and variable interest entities. The relevant variable
interest entities, which are 100% owned by PRC citizens or by PRC entities owned by PRC citizens, where
applicable, hold the ICP licenses and other regulated licences and operate our Internet businesses and other
businesses in which foreign investment is restricted or prohibited. Specifically, our variable interest entities
are generally majority-owned by Jack Ma, our lead founder, executive chairman and one of our principal
shareholders, and minority-owned by Simon Xie, one of our founders and a member of our management. We have
entered into certain contractual arrangements, as described in more detail below, which collectively enable
us to exercise effective control over the variable interest entities and realize substantially all of the
economic risks and benefits arising from, the variable interest entities. As a result, we include the financial
results of each of the variable interest entities in our consolidated financial statements in accordance with U.S.
GAAP as if they were our wholly-owned subsidiaries.
• Other than the ICP licenses and other licenses and approvals for businesses in which foreign ownership is restricted
or prohibited held by our variable interest entities, we hold our material assets in, and conduct our material
operations through, our wholly-foreign owned and majority-owned enterprises, which primarily provide technology
and other services to our customers. We generate the significant majority of our revenue directly through our
wholly-foreign owned enterprises, which directly capture the profits and associated cash flow from operations
without having to rely on contractual arrangements to transfer such cash flow from the variable interest entities to
the wholly-foreign owned enterprises.

• http://www.sec.gov/Archives/edgar/data/1577552/000119312514184994/d709111df1.htm#toc709111_11
307
• Corporate social responsiblity

SO– IF COMPANIES ARE

PERSONS, DO WE HOLD
THEM RESPONSIBLE
LIKE PERSONS?

308
CHAPTER 1– CAN
ORGANIZATIONS BE MORAL
AGENTS?

309
WHY DOES IT MATTER?
• Three stories:
– The Business Ethics Club
– DeBeers
– Volkswagen

310
• The strategic importance of diamonds became acutely clear to both the
Allies and Axis powers with the approach of the Second World War in
1939. Only diamonds were hard enough to stamp out the millions of
precision parts that were necessary for mass-producing airplane engines,
torpedoes, tanks, artillery and the other weapons of war. Only diamonds
could be used to draw the fine wire needed for radar and the electronics
of war. Only diamonds could provide the jeweled bearings necessary for
the stabilizers, gyroscopes and guidance systems for submarines and
planes. Only diamonds could provide the abrasives necessary for rapidly
converting civilian industries into a war machine. Without a continuing
supply of diamonds, the war machine would rapidly slow to a halt.Yet,
nearly all the diamond mines remained closed, and De Beers controlled
the world supply of diamonds. Obtaining these industrial diamonds thus
became a paramount objective for both the United States and Hitler's
Germany.

DEBEERS
 AS THE WAR PROGRESSED…
• According to a summary of OSS documents, the OSS learned through its
agents in Germany that in November of 1943 Hitler had only an eight-
month supply of industrial diamonds. When these diamonds ran out,
Hitler's war machine would be crippled. It would no longer be possible to
build V-2 rockets or other exotic weaponry. It was thus a crucial wartime
goal to prevent Hitler from replenishing his supply of diamonds.
YET…
• As all mines in South Africa were closed, the OSS reckoned that there was only
one place on earth from which the Germans could get industrial diamonds in
sufficient quantity to maintain their .military-industrial complex: the Belgian Congo.
The Belgian Congo was, however, administered by the Belgian government in exile,
which was in London and completely under British control.
• The mines themselves were supervised, and policed, by the De Beers syndicate.
The OSS had determined, however, that tons of diamonds were somehow
reaching Nazi Germany. If the De Beers system of "elaborate controls" was as
effective as the War Department held, how could such enormous quantities of
diamonds be regularly reaching Germany?
• It turns out tons of diamonds were reaching Germany, from DeBeers-controlled
mines, in Red Cross packets.
THE PEOPLE ARE GONE, THE
COMPANY GOES ON AND ON.
• No one at DeBeers was ever prosecuted.
• DeBeers continues to have a near lock on diamonds, world wide.
SO, BACK TO THE QUESTION:
CAN COMPANIES BE MORAL
AGENTS?
• In this meaning of the word “agent,” we mean something that can act
on its own and be considered responsible for those actions.
• What has moral agency? People, definitely.
• Computers? No. We blame their programmers, right?
• Companies? Why not simply hold their “programmers”
(management) responsible?
• Or is that a bad comparison?

315
BUT WHO OR WHAT CAN BE
MORALLY RESPONSIBLE?
• One of the great philosophers in world history, Immanuel Kant, based
his entire moral theory on the idea that we, as autonomous rational
creatures, can choose how to act on the basis of reasons our reason
recommends to us, and that we are subject to blame or praise because
we are such autonomous rational creatures.
• You do not have to agree with Kant’s entire theory to at least see he
has a point. Morality is something that applies, as we said, to people
but not to computers or automobiles. If a computer does something
“evil,” we blame the people who programmed it to do that bad thing.
The moral focus is on the person, not the computer.
• So that leads us to ask– is a business organization (corporation,
company, firm, etc.)– is that an “autonomous rational creature?”
• Can companies be judged a moral beings?
• We assume so, since we talk about “corporate social responsibility”–
but why?

316
REMEMBER WHAT A
COMPANY IS….
• The law says it is a person.
• And remember the ladder of limited liability– when we get to the top,
real people escape liability.
• So– what does it mean to hold this person responsible?

317
• Note what happened with Volkswagen– the scandal over the program
that cheated on emissions test.
• The old CEO resigned– but this program was a criminal matter; which
VW manager is worried about going to prison?
• Why? Well, at least as a matter of legal responsibility, we require fairly
strict proof of actual criminal intent. In a large, diffuse organization,
that is hard to do.
• Could we hold any one person or group of persons responsible control
company behavior?

MANY WOULD ARGUE THERE WOULD

BE NO PROBLEMS IF ONLY WE WERE
TO HOLD MANAGEMENT AS
ACCOUNTABLE AS WE SHOULD– BUT
IS THAT POSSIBLE ?
318
THE CRITICAL WORD--
DIFFUSE
• That means all spread out. Companies are not just about widespread
ownership (allowing the raising of capital) but also about harnessing
lots of different people’s talents, including decision-making talents.
• The “brain cell” analogy.

319
BUT WAIT…
• Let’s draw another analogy. Remember that Immanuel Kant argued that morality
presupposes that moral agents are rational, autonomous decision makers. This means
morality presupposes free will.
• He did not argue that he could prove “free will”- but rather, that morality must assume
it.
• One way to read that argument is that it is morally necessary and useful in guiding
human behavior to talk “as if” we were free actors.
• So why not make the same “as if” statement about companies?
• They have decision-making processes, like “brains”– so why not call them “rational?”
• Those “brains” can be said to be just as “autonomous” as our own brains are.
• So why not act “as if” companies are moral agents?

320
BUT…

• Some find that a bit hard to accept. Too speculative.

• How about this, then? Society creates them, society can demand and
expect responsibility from them.
• An American legal version (reflected in China’s law, too)– companies
are “persons,” with the powers of personhood– so they must have
the same responsibility as persons.

321
SOME LAW.
• The Company Law of the
People’s Republic of China
• Article 3
A company is an enterprise
legal person, which has
independent legal person
property and enjoys the right
to legal person property.
• Santa Clara County v. Southern
Pacific Railroad, 118 U.S. 394
(1886) – often cited as the
foundational judicial decision
for a doctrine that could be
summarized as “corporations
are people too.”
322
SOCIAL RESPONSIBILITY

• So rather than say, “moral” responsibility, some will say, “social

creations have social responsibility.”

323
1. The law says they are persons– so they must have the accountability
we demand of persons.
2. Society creates organizations; society can demand return on its
investment.
3. Organizations have a organized decision making chain that uses the
power of reason– the people are like “brain cells.” No one brain cell is
responsible, but together, the “brain” is responsible for its actions. If it
has an autonomous, decision making power, it should be held
responsible morally.

SUMMARY:
WHY DO ORGANIZATIONS
HAVE MORAL
RESPONSIBILITIES?
324
C O R P O R AT E S O C I A L
R E S P O N S I B I L I T Y – W H AT
ARE COMPANIES’ MORAL
O B L I G AT I O N S ?
I F A N O R G A N I Z AT I O N C A N B E A M O R A L
A G E N T, W H AT A R E I T S M O R A L D U T I E S ?
W E C A N N O T S I M P LY A S S U M E T H AT A L L T H E
M O R A L O B L I G AT I O N S O R D U T I E S O R
R E S P O N S I B I L I T I E S T H AT I N D I V I D U A L S
H A V E C A N B E D I R E C T LY A S S I G N E D T O
O R G A N I Z AT I O N S A S W E L L .
PUT IN TERMS OF DUTY (THE
D E O N TO L O G I C A L A P P R OA C H ’ S FAVO R I T E
P E R S P E C T I V E ) – H AV I N G D E C I D E D
O R G A N I Z AT I O N S H A V E M O R A L D U T I E S , T O
W H O M D O E S I T O W E T H E M , A N D W H AT A R E
THEY?

325
THE “FRIEDMAN” VIEW–
• In 1970, a very influential economist named Milton Friedman wrote a piece in the New
York Times where he summed up a position he had been arguing for years:
• “In a free -enterprise, private -property system, the corporate executive is an employee

MOSTLY REJECTED NOW.

of the business owners [sic].The owners have direct accountability to their employers,
the corporation's shareholders and investors.That accountability generates a
responsibility to conduct business in accordance with their desires (within certain
constraints), which generally is to make as much profit as possible while conforming to
society's basic rules, those embodied in law and ethical custom” (Friedman, 1970).
• But Friedman made it clear his view of ethical custom was quite limited:
• “[T] he corporate executive would be spending someone else's money for a general
social interest. Insofar as his actions in accord with his 'social responsibility' reduce
returns to stockholders, he is spending their money. Insofar as his actions raise the
price to customers, he is spending the customers' money. Insofar as his actions lower
the wages of some employees, he is spending their money” (Friedman, 1970).

326
MILTON FRIEDMAN ARGUED…
• Managers, as people, have their moral duties; but while on the job,
their duty is to the company (and, as managers, nothing else?).
• In turn, the company has a duty to shareholders, those who own it
(and, apparently, no one else?)
• As he wrote, famously,
• [T] he corporate executive would be spending someone else's
money for a general social interest. Insofar as his actions in accord
with his 'social responsibility' reduce returns to stockholders, he is
spending their money. Insofar as his actions raise the price to
customers, he is spending the customers' money. Insofar as his
actions lower the wages of some employees, he is spending their
money. (Friedman, 1970) (emphasis added).

327
 LET’S LOOK AT THAT QUOTE
MORE CLOSELY, FROM BACK TO
FRONT.
• “Insofar as his actions lower the wages of some employees, he is
spending their money.”
– Why would those actions lower wages? Aren’t employees part of the very
social responsibility we are talking about?
• “Insofar as his actions raise the price to customers, he is spending the
customers' money.”
– Why would those actions raise prices? Aren’t customers part of the very
social responsibility we are talking about?
• “ Insofar as his actions in accord with his 'social responsibility' reduce
returns to stockholders, he is spending their money.. (emphasis added).
– Who says it is “HIS” social responsibility, anyway?
It is the company’s responsibility we are talking
about.
328
THUS, FRIEDMAN ARGUED THAT THE MORAL OBLIGATION
OF A COMPANY IS TO ITS SHAREHOLDERS ONLY,
SUGGESTING THAT IT WAS UP TO THE SHAREHOLDERS
TO EXPRESS WIDER OBLIGATIONS.

• But how can shareholders even do that, really? Shareholder

resolutions? Selling out? But why sell shares simply in order to
buy shares in another company that claims to be “morally
bound” to ignore my moral interests? After all,
• This artificial person was created by society, not shareholders.
• That “person” owes obligations to society, not just
shareholders.
• The dominant answer today is “STAKEHOLDER”
Theory.
• A major proponent of this approach is R. Edward Freeman, a
professor at the Darden School of Business of the University of
Virginia. We have some text material from a textbook he
helped write, to which we will now turn.

329
• The story of a big, big flood.

JOHN DEERE AND

PEORIA

330
WHY DO WE WANT TO ACCEPT
THE STAKEHOLDER MODEL?
• Freeman points out one reason, on 71– if management looks to
shareholders’ interests only, “concerns of customers and employees are
often traded off… and under conditions of uncertainty, these trade-offs
usually have unpredictable, negative consequences,” and he cites legal and
PR problems Walmart has had.
• Friedman would say that Walmart, if it were REALLY smart and wanted to
serve shareholders, would have avoided these problems because they
hurt shareholders at the end of the day.
• Freeman asserts (but does not argue) that it is a fallacy (define!) to
believe that business decisions are separate from ethical decisions (72).
He calls this the separation fallacy.
• What arguments do we have to support that assertion?

331
STAKEHOLDERS, NOT JUST
• THE ACCEPTED APPROACH TODAY IS TO VIEW

SHAREHOLDERS
BUSINESSES AS HAVING MANY STAKEHOLDERS:
• CUSTOMERS
• SUPPLIERS
• SHAREHOLDERS
• EMPLOYEES
• THE COMMUNITY

332
WHO IS A “STAKEHOLDER”?
• Someone with a “stake” in the company’s actions is
someone who will be affected by those actions.
• The list on the previous slide is generally recognized as a
basic list that always applies.

333
• “If a firm is not attending to [the interests of a particular set of
stakeholders,} it only makes sense that [these] stakeholders will defect
and take their resources elsewhere. Rather than focusing on a zero-sum
game where value is to be divided among stakeholders and oppositional
trade-offs among them are the norm, managers should focus on how
cooperation among stakehoders allows (and is necessary) for the
expansion of value for all.” Freeman, 74.

• Here he is talking about such groups as customers, suppliers, employees,

financiers, local community.

“WHAT’S IN IT FOR ME?”

334
SO WHAT IS IT ABOUT THE
STAKEHOLDER MODEL THAT MAY HOLD
PROMISE OF ALLOWING TRUE MORAL
DECISIONMAKING IN BUSINESS?
• “Business can be understood as a set of relationships among groups
that have a stake (i.e.,VESTED INTEREST) in the activities that make
up the business.” (74).
• Or– an organization of any sort is a set of relationships among those
with a stake in the activities for which the organization exists.
• Accordingly, if we pay attention to only one of these relationships, we
will fail to build a sustainable business.

335
• The FOUR Questions about stakeholders:
– If this decision is made, for whom is value created and destroyed?
– Whom does this decision harm, and whom does it benefit?
(Consequentialist)
– Whose rights are enabled, whose values realized (and whose adversely
affected)? (Deontological)
– How does this decision help define the kind of person I am (the kind of
organization we are)? (Virtue ethics).

HOW DO WE ASK ETHICAL

QUESTIONS, THEN?
336
FREEMAN’S PLAN
• P78
• 1. If we are to use this “stakeholder” approach to identify our moral
duties (or to identify where we can most effectively maximize the
good given our roles in social structures):
• 2. Identify your organization's goals beyond profit-- what values to you
hope to effectuate?
• 3. Identify your organization's best methods to coordinate and
cooperate with stakeholders.
• 4. Identify the values of the society as a whole.
•
• Connect 3 and 1.
•

337
• If you say-- my goal is to sell lots of widgets, you will act differently

DOING WELL BY DOING

than if you say your goal is to make it possible for customers to have
the widget they need and to provide your widget-makers with a

GOOD
•
chance to find useful work that can support their families.

338