when it receives from the seller drafts drawn by it on letters of credit opened by the Bank of China. Under such arrangements of course, although the Chinese purchasers are purchasing on credit, the source is the seller and not the buyer, and the transaction is formally not a loan. However, presumably the cost of such a credit arrangement is reflected in the price of the goods. More recently, in the spring of 1978, Chinese trade and financial officials began to express to foreign visitors their willingness to borrow directly from foreign banks and consortia.

C. Barter

14

Barter and other arrangements for reducing cash obligations such as counter-purchase and payback in product have been employed only rarely in Sino-Western trade in recent years. In one barter transaction in 1973 when the Chinese purchased five sets of electrical generating equipment from a British company they reportedly paid for one with an assortment of products which included chemicals, foodstuffs and handicrafts. Generally, however, the Chinese have not favored barter because the products exchanged could be exported by foreigners to markets in which the bartered goods would compete with identical products sold by the P.R.C., usually at prices higher than the value assigned to them in a contract under which they were exchanged for goods.

16

D. Delivery

In contrast to the studied ambiguity of delivery dates in Chinese sale contracts, Chinese purchase contracts are quite exigent. A standard machinery import clause provides a penalty for late delivery which is fixed at a percentage of the contract price for each seven days up to a stated maximum, with a right given to the buyer to cancel the contract if delivery is delayed beyond 10 weeks.15 The maximum varies, but is usually no higher than 5 percent. Contracts for whole plants also contain stiff penalty provisions. Under the standard clauses, the Chinese seem to have the right to cancel the contract for any late delivery (unless the force majeure clause applies) and to exact the penalty as well. Sellers to the P.R.C. have had varying experiences under these clauses. Some, particularly steel sellers, have reported the Chinese to be unrelenting in their insistence that the penalty be paid. In other cases, the Chinese have agreed to extend the delivery time without a penalty, even though the clause did not specify a grace period. The difference may depend upon the need for the particular imports and also may be affected by the parties' prior relationship and the care with which the seller has documented the reason for the delay. In one case recounted to the author, the seller was also a buyer of Chinese exports who could point to frequently delayed Chinese deliveries which had caused him economic loss.

E. Force Majeure

Sellers frequently attempt to limit their liability for delayed delivery or non-devilery caused by acts over which they have no control,

14 On barter in Sino-Italian trade, see Reghizzi, supra note 5 at 111-12.

15 See, e.g., Machinery Contract, cl. 17.

16 See Smith, supra note 1, at 149.

while buyers are equally resistant to the efforts. The P.R.C. has a history of highly stubborn and successful buyer resistance; for example, the Chinese are reluctant to define in detail the circumstances that constitute force majeure. A standard machinery clause states that the seller is not liable for delay for non-delivery due to force majeure, but the term is not defined in the contract." The clause further requires the seller to notify the buyer immediately and follow that notification with "a certificate of the accident issued by the competent Government Authorities where the accident occurs.' 518 If the force majeure lasts for more than 10 weeks, the Chinese buyers have the right to cancel the contract.

Chinese corporations occasionally have agreed to specify some of the events which can be considered as instances of force majeure, such as "wars, or severe natural disasters." 19 Other force majeure clauses have been even more specific, such as one which includes "war, earthquake, flood, fire, explosion and other force majeure circumstances agreed upon by both parties or approved by arbitration in the case of disagreement by both parties." 20 For ideological reasons the Chinese usually have been unwilling to specify "acts of God," labor unrest, or strikes as instances of force majeure.

Regardless of the language of the force majeure clause, in practice the Chinese appear willing to recognize the principle that an intervening act beyond the seller's control may excuse him from a penalty for the late delivery. Some clauses have mentioned "any other acts beyond the control of the sellers", and others have included a statement that the seller's liability for delay is to be limited as a result of "other unavoidable circumstances" agreed to by the parties after the seller has invoked the clause.21 Western European sellers who have had to invoke force majeure have stated that the Chinese generally have accepted the delay even though the actual cause was not specified in the contract.

F. Sellers' Guarantees: Inspection

Chinese insistence on purchasing the highest quality goods and holding sellers to the absolute letter of their agreement is partly reflected in a standard machinery import clause which requires that the seller:

[G]uarantee that the commodity is made of the best materials, with first class workmanship, brand new, unused and complies in all respects with the quality specifications and performance as stipulated in this Contract. The Sellers shall guarantee that the goods, when correctly mounted and properly operated and maintained, shall give satisfactory performance for a period of ... months counting from the date on which the commodity arrives at the port of destination. 22 The guarantee period often extends to 12 or 18 months. Some negotiation is possible on the duration of the period and on when it begins to run (ie., from unloading at the port of destination or from arrival at the site).

19 Reghizzi, supra note 5, at 110. This clause is drawn from a contract for the purchase of Italian goods, printed and completed in Peking.Id.

20 Id. at 109.

21 For a general discussion of the vagueness of the force majeure clauses, see id. at 110. Reghizzi concludes that, "So far no problems... seem to have arisen, and the Chinese have recognized at least two cases of force majeure confirmed by a declaration of the Chamber of Commerce of Milan." Id.

22 Contract on file with the author. The clause in the machinery contract in the appendix omits the conditions of correct mounting and proper operation and maintenance. Machinery Contract, cl. 14.

27-427-78-51

Standard machinery clauses require the manufacturer to present a certificate of inspection regarding quality, specifications, performance and quantity, although the certificate is not considered final on those matters. The contract requires an additional inspection in China by the Commodity Inspection Bureau when the goods arrive. The standard clause provides that a claim may be asserted "on the strength of the Inspection Certificate" issued by the Bureau, "should the quality, specification or quantity be found not in conformity with the stipulations of the [c]ontract" within 90 days after arrival of the goods at the destination. A claim also may be filed if the "damages occur in the course of operation by reason of inferior quality, bad workmanship or the use of inferior materials.''24

Other clauses are worded slightly differently and include "improper design, inferior quality, bad workmanship and the use of bad materials" as the basis for claims.25 The sellers are responsible for "the immediate elimination of the defects[,] complete or partial replacement of the commodity" or for a partial refund of the contract price.26

Even when contracts involve sales of whole plants or highly complex equipment, the Commodity Inspection Bureau also may be given a prominent role by the contract, although special tests out of the ordinary scope of the Bureau's activities may be involved. In such transactions, the standards which the plant or equipment must attain usually are derived from industrial standards common in the seller's business and are specified in detailed technical attachments to the contract. In contracts for the sale of whole plants, performance tests usually are carried out jointly under the instructions of the seller's personnel. Regardless of the standards used, inspections by the Chinese are rigorous.

Chinese practice has caused some difficulties for Western European and Japanese sellers, and can be expected to do the same in SinoU.S. trade as well. So strict is Chinese insistence on adherence to the contract that several European manufacturers have been known to encounter Chinese complaints or even refusal to accept the goods when they shipped at no extra cost pieces of machinery that were newer models than those actually specified in the contract. Some European sellers have complained that sometimes the tests used by Chinese differ from the tests normally used in Europe. This difficulty perhaps may be prevented by specifying in the contract the relevant tests and standards which the Chinese will employ when the goods are delivered. In other cases the equipment may be so advanced that the Chinese lack the requisite technical expertise or highly sophisticated testing equipment. Compromise has been possible in these cases, but sometimes only with difficulty.

Additional contractual protection for the seller cannot be given by providing for joint inspection by representatives of the seller and buyer. Some turnkey contracts have specified that the Chinese may send their personnel to the seller's plant during delivery of the machinery. Clauses of this type, however, customarily state that the Chinese inspectors lack authority to countersign the certificates of

quality which the seller is obligated to supply. The clauses also explicitly state that the attendance of Chinese inspectors does not affect the seller's guarantee. Turnkey contracts also provide for the seller to send his own representatives to the plant site to inspect machinery and equipment at their delivery, although, again, his guarantee remains unaffected. Regardless of the inspection arrangements agreed to by the parties, it is most unlikely that the Chinese will give up their practice of subjecting imported machinery and equipment to strict inspection. 27

The experience of sellers under these clauses has lead many to marvel at the meticulousness of Chinese inspections and the particularity of Chinese claims. Where other buyers of vehicles are content to purchase small spare parts by volume, such as a kilogram of piston rings, the Chinese count them one by one; where other buyers of steel pipe X-ray the pipe at random for cracks, the Chinese may X-ray every inch and make claims for hairline cracks which most buyers will ignore. The seller must be prepared for extraordinarily detailed inspections and for some uncommon, perhaps minor, claims. U.S. sellers of machinery often state that this care is in principle no greater than that exercised by inspectors in sales to the U.S. Government and to many other governments.

Unfortunately, the present imperfect framework of Sino-Western trade rarely provides an easy opportunity for easily arranged, face-toface contact between representatives of buyers and sellers and for informal claims settlement. Sending the seller's personnel to the site to engage in joint inspection with the Chinese personnel can at least help in this respect, although Chinese rigor in these matters apparently is not abated when arrangements have been made with European sellers. Bureaucratic considerations may significantly stimulate Chinese readiness to assert claims and reluctance to settle them: Chinese officials presumably are not eager to bear the responsibility for ordering or accepting delivery of defective goods from abroad, nor do they wish to be responsible for failing to assert a claim based on defects or for wrongly settling such a claim. As a result, negotiations by Western sellers who have dealt with the Chinese over a period of years sometimes are conducted against a background of unresolved claims previously asserted by the Chinese, which may serve as bargaining counters during negotiations on other contracts.

G. Dispute Settlement

Consistent with the tenacity with which Chinese assert and resist settlement of claims is their practice in settling foreign trade disputes. The Chinese have a record of energetically avoiding not only litigation but any third-party participation having overtones of adjudication. A standard clause provides that, "[a]ll disputes in connection with this Contract or the execution thereof shall be settled [amicably] through negotiations." 28 In the event that the negotiations fail, the parties

27 In contracts for the sale of whole plants, the parties will have agreed on the performance tests that must be run, as well as on payment of penalties by the seller according to a sale "reflecting the importance of the failed parameter (s)." Dingle, supra note 8, at 45. The contracts usually allow the seller to repeat the test. But it has been observed that "[i]n practice, since the penalty scales representing payment as liquidated damages apply only to relatively small failures, significant discrepancies from guaranteed parameters such as output, product quality, and consumption of raw materials and utilities, will involve the Seller in making modifications theoretically without limit." Id. at 49.

28 Machinery Contract, cl. 18.

are limited by this clause to arbitration before the Foreign Trade Arbitration Committee (FTAC) in Peking. Some sellers have been able to obtain Chinese consent to arbitration in Sweden or in Switzerland, and a recent contract with a U.S. seller reportedly has specified Canada as the arbitral forum. Sometimes the contract will simply provide that arbitration will be held in an unnamed third country to be agreed upon by the parties.29 In recent years the Chinese have become more willing to specify a third country as the arbitral forum, and to specify the arbitral body and the rules applicable to the arbitration proceeding.30

The Chinese long have expressed antipathy to choice-of-law clauses that subject any disputes to the rules of a designated foreign legal system, whether the seller's or that of a third country. Presumably, no legal system can be neutral, since the Chinese view law as an instrument by which ruling social classes maintain their dominance.31 In at least one recent transaction, however, a Chinese corporation not only agreed to arbitration before a named third-country body under International Chamber of Commerce rules, but also agreed that the contract would be governed by the law of that country. Nonetheless, no matter what the clauses on dispute settlement and the applicable law in the contract provide, the most significant aspect of Chinese practice on these matters is their determination to avoid arbitration altogether.

To date it has been impossible to obtain a detailed account of any trade arbitration involving a Chinese corporation.32 Some traders say that they will never ask for arbitration because they believe that the Chinese would consider the request to be "unfriendly," and that the request would endanger future business.33 Other traders have said in private conversations that by either formally requesting or informally hinting that they were about to request arbitration they have brought about a prompt settlement. In other instances, however, the Chinese have been known not to respond at all. In one such case they are reported to have ignored the formal invocation of an arbitration clause

29 Machinery Contract, cl. 20.

39 This opinion is based on contracts which have been shown to the author and on conversations with Western businessmen and officials of the Legal Affairs Department of CCPIT.

31 See, e.g., Institute of Civil Law of the People's Republic of China, Central Political-Legal Cadres School, Basic Problems in the Civil Law of the People's Republic of China 8 (Chung-Hua Jen-Min Kung-Ho Kuo Min-Fa Chi-Pen Wen-T'i, 1958), U.S. Joint Publications Research Service No. 4879 (1961): "MarxismLeninism has always maintained that both law and jurisprudence possess a very intensive class character and can only serve the ruling class of a given period."

32 Representatives of the American Arbitration Association were told that in 1974 over 100 cases that were brought to the attention of the FTAC were settled by "friendly negotiations," while 12 were settled on the basis of "non-binding recommendation" made by the FTAC, and only two cases in 1974 were settled by formal FTAC arbitration. Holtzmann, Resolving Disputes in U.S.-China Trade, in LEGAL ASPECTS OF U.S.-China Trade 77 (H. Holtzmann, ed. 1975). The Holtzmann account offers a fascinating recapitulation of the Chinese emphasis on avoiding arbitration and on maintaning fluid and informal devices for disputes settlement. For a recent Chinese view. see Primer on International Trade (translation of Writers Group of the Foreign Trade Department of the Liaoning Fiscal Institute, Primer on International Trade), 8 Chinese Economic Studies, Winter 1974-75, at 32-33:

Cases conducted within the arbitration systems of capitalist countries are usually not public, and the written rulings more than half the time do not give reasons for the decisions made. Our nation's foreign trade arbitration system operates in accordance with the "Temporary Rules of the Foreign Trade Arbitration Committee of the Chinese Council for the Promotion of International Trade." Unless the parties involved in the dispute demand otherwise, the cases are heard publicly. Reasons are always given for the rulings. Moreover, our country's foreign trade arbitration system relies on a spirit of cooperation between arbitration and mediation. We try whenever possible to solve disputes through mediation, doing everything we can do to help the two sides reach an agreement through the principles of negotiation and voluntarism and, by reaching an amiable settlement, promote the development of mutual trade.

33 Reghizzi indicates that "[e]ven the suggestion that a dispute be submitted to arbitration in Peking is met with disfavor." Reghizzi, Law and Sino-Italian Trade, in Law and Politics in China's Foreign Trade 184 (V. Li ed. 1977).