A new paper by Bingwan Xiong and Mateja Durovic

In the past, Chinese courts tended to directly invalidate illegal contracts, thus possibly tolerate opportunistic behaviour sometimes. Article 52(5) of the 1999 Contract Law provides that a contract is void if it violates a mandatory rule prescribed by law or administrative regulation. Empirical research shows that by April 2014, in 355 of 453 cases concerning Article 52(5) of the Contract Law, the contract was ruled void.[1]

This practice underwent a change with the compilation of the Civil Code, where Chinese scholars sought to establish better coordination between the nature of private law and its attached public or regulatory facet. Building on a 2009 judicial interpretation that introduced a classification of mandatory rules, Article 153 of the new Civil Code stipulates a doctrine of defining mandatory rules with different levels of restrictions, with the aim of relieving the state’s restraint on the transition of economy. In result, a violation of mandatory rules may now render the contract involved void ab initio, voidable or still valid, depending on the significance of illegality defined by the law.

This change of jurisprudence successfully reversed the courts’ strong stance on the invalidation of contracts, giving them much more discretion in deciding the nature of mandatory rules and the effect on contracts. The reform also aligns the treatment of illegal contracts with the general trend in other jurisdictions. Nevertheless, we argue that across jurisdictions, this doctrine is merely targeted at the connotation of mandatory rules and the theoretical effects on contracts. Scholars and judges fail to equally emphasise the enforcement of the law against the contractors after upholding the validity of their illegal contracts. In other words, they end the debate within the realm of private law and simply assume that thereafter competent regulatory agencies would duly resolve the harm of illegality.

In our paper, we look into the case of the regulation of the lottery tickets sales on credit. As per Article 18 of China’s Lottery Regulation, no lottery may sell lottery tickets on open account or credit. Such a deed may result in imposed suspension, confiscation plus fines, and punishment on the person in charge as per Article 39. Armed with the new jurisprudence that not all kinds of illegality shall render contracts void and null, Chinese civil courts tend to uphold the validity of lottery sales on credit. Though this saves the innocent party from the loss because of the invalidation of the contract, the problem is, without the following actions of administrative organs, justice stops at the decision in court and the mandatory rules are not equipped with administrative enforcement power.

We find that the major obstacle is information asymmetry between courts and regulatory agencies: not only would the contracting parties not expose the illegal deal in fear of punishment or losing their interest. Also, the courts fail to actively transmit such information to the responsible departments, despite the Supreme People’s Court of China formally encouraging local courts to issue judicial proposals to regulatory agencies.

Empirical studies show that judges seldom issue judicial proposals about their cases to regulatory agencies due to their heavy workload, worries of engaging in improper judicial interference and a lack of rewarding incentives. As it encourages contracts and prevents opportunistic behaviour, we suggest to uphold the current jurisprudence about illegality, and further propose to establish a better systematic interplay among courts and regulatory agencies. This might be achieved through institutional reforms and technological solutions that help forward information of illegal transactions so it can serve the ultimate objective of enforcing the law.

[1] Ye Mingyi 叶名怡 (2015) Empirical Research of Invalidation of Illegal Contracts in China (我国违法合同无效制度的实证研究), Science of Law (法律科学) 6, 120.

This paper by Bingwan Xiong & Mateja Durovic The Enforcement of Mandatory Rules against Illegal Contracts was published in the Asia Pacific Law Review.

Bingwan Xiong is Associate Professor at School of Law, Renmin University of China. He is also Senior Research Fellow at Renmin University Center for Civil and Commercial Law. He obtained his PhD degree from Renmin University and LLM degree Harvard University. Email: bxiong@ruc.edu.cn.

Mateja Durovic is a Reader in Contract and Commercial Law, having joined The Dickson Poon School of Law in July 2017. Prior to joining King’s, he was Assistant Professor (2015‐2017) at the School of Law, City University of Hong Kong. He holds a PhD and LLM degrees from the European University Institute; LLM degree from the University of Cambridge; and an LLB degree from the University of Belgrade. Email: mateja.durovic@kcl.ac.uk