I. JUDGE-MADE LAW IN CHINA AND LAW IN ACTION

Chinese law is often conveniently regarded as a civil law jurisdiction in that the law is primarily to be found in legislation, and judicial opinions expressed by courts in their adjudication of actual cases are not recognized as a formal source of law.Footnote ¹ However, those who look solely to Chinese legislation for a solution to a practical problem would most likely be disappointed. What they would find may merely be the law on paper that neither responds to the problem nor is actually relied upon in practice. Unfortunately, Chinese legislation is often characterized by (and duly criticized for) its detachment from the reality of local circumstances as well as its tendency towards statements of broad principles that do not offer any direct solution to a practical problem.Footnote ²

While judges contribute to the consultation process leading to the enactment of major pieces of legislation,Footnote ³ this does not alter the fact that most legislative provisions are ‘inoperable’, namely incapable of direct application to a specific dispute. One reason for this may be the superficial ‘transplantation’ of statements of legal rules from Western (including common law) jurisdictions. Stripped of their ‘social, and above all political, context’, such statements are no more than empty shells and cannot advance genuine legal reforms in the receiving jurisdiction.Footnote ⁴ Therefore, what appears to be a course of convergence with the common lawFootnote ⁵ might conceal fundamental differences that will surface only when the borrowed rules, principles, or notions are evaluated in their practical use.

Another explanation for the indifference of Chinese legislation to concrete problems is that the legislators intentionally adopted vague provisions to provide an overarching framework under which differing solutions can be developed to suit a variety of local situations. If so, the legislation is no more than a starting point for an exploration of the ‘law in action’; it would, therefore, be an entirely artificial enterprise to restrict one's study to the ‘law in books’. Similarly, it is rarely the case that legal research in China sets out to offer solutions to practical problems.Footnote ⁶ It is not surprising that Chinese legal researchers and judges (and practising lawyers) appear to be doing radically different things in their respective work, and most Chinese law review articles are concerned with theoretical discussions of legislative provisions. This provides an interesting contrast to legal scholarship in Western (particularly common law) jurisdictions, where it may be persuasive in judicial reasoning.Footnote ⁷

It thus makes sense for a comparatist to focus on how legislative provisions are applied and interpreted in tune with ‘the conditions of Chinese life’.Footnote ⁸ This requires going beyond the law as written to investigate the ‘law in action’ in China including its longstanding connection with policy.Footnote ⁹ One important and foundational step is to see how a legal solution to a problem is formulated and put to work in the courtroom. In this context, the term ‘law in action’ is used in a broad sense to capture the extension of research into law beyond the plain language of written law – the ‘law in books’ – particularly judicial applications of law.Footnote ¹⁰ Two general points may be made in connection with the methodology to be adopted.

First, Chinese court cases should be understood and examined on their own terms. Standing in the shoes of an internal legal actor, the comparatist must describe not only factors objectively affecting the solution, but also all ‘formal legal arguments’ that the actor subjectively believes are relevant to its operation.Footnote ¹¹ When necessary, they must be able to move back and forth between the internal and external perspectives, in both formulating a common problem and setting up an analytical framework and corresponding strategies.Footnote ¹² But care must be taken when using labels or categories borrowed from Western systems as they might ‘not [be] standardized across legal systems but rather determined locally’.Footnote ¹³ It is important to acknowledge that the differences between Chinese law and, say, German or English law are more fundamental than appears at first glance, and that no presumption of similarity should automatically apply.

The role of law in society has traditionally been viewed differently in China and such differences are reflected, inter alia, in the following aspects. The Chinese legal system is still in transitionFootnote ¹⁴ and we need to accept that many facets of that system remain in flux, and a range of possibilities may exist in respect of the interpretation of Chinese law. The values of legal certainty, stability, and predictability are highly prized in Western legal traditions, but do not carry as much weight in China due to a different attitude toward change.Footnote ¹⁵ Inevitably, a Chinese lawyer would probably disagree with a common law lawyer on the extent to which the state may interfere with or impose regulations over party autonomy.Footnote ¹⁶ For example, Chinese law takes a unique stance on matters such as the availability of court-administered contract adaptation, reflecting a demonstrably different balance struck between the principle of pacta sunt servanda and that of substantive fairness.Footnote ¹⁷ While it is no longer accurate to claim that Chinese law ‘remains a Soviet law system’,Footnote ¹⁸ certain traits of the former Soviet law have left lasting marks on today's Chinese lawFootnote ¹⁹ and a discrete inquiry is required into questions such as the role and elusive weight of party policies in judicial adjudication of individual cases, and the extent to which judges perform paternalistic intervention into matters of a private nature. Recognizing these fundamental differences will guard against blind application of assumptions derived elsewhere to China,Footnote ²⁰ and offer an antidote to uncritical faith in Western, including common law, doctrines.Footnote ²¹ Of course, this is not to suggest that a comparative study involving Chinese law is all about identifying differences; it is a matter of equal importance, in the interest of promoting mutual understanding and cooperation, to identify similarities, particularly those achieved through international unifying laws such as the Vienna Convention on the Law of Treaties and the UNIDROIT Principles of International Commercial Contracts.Footnote ²²

Second, Chinese law should not be taken at face value. I have noted that there might be a significant gap between the ‘law in books’ and the ‘law in action’. A comparatist might be perplexed by the discrepancies between law and practice. In most cases, this is attributable to the ambiguity of the law itself. Although judge-made law is by its nature intended to be immediately applicable and to be dispositive in the resolution of a specific dispute, this does not mean that all considerations factored into the court's reasoning are made explicit. The reality is quite to the contrary: the jurisprudential basis of most judge-made laws in China remains opaque, inexplicit, and unexplored. The line of reasoning that Chinese judges pursue in reaching their decisions is often vaguely expressed or undisclosed, and in need of systematization. Compared to court decisions in common law systems, there are limited materials available from which credible conclusions about the court's intentions and actions can be made.

It is thus very much up to the individual comparatist to make his or her best effort at making sense of the court's decision, using all accessible sources including judges’ extrajudicial writings, interviews, and judicial conferences, as well as official documents and judgments. In this process, one may resort to non-legal factors to explain the decision. The methodology to be employed is best seen as a ‘new doctrinalism’ under which the comparatist is constantly aware of assumptions, structures, and conventions imposed by a legal doctrine, always striving to understand and apply the legal doctrine in a non-mechanical manner, and taking advantage of a full range of factors (whether legal or not) relevant to the solution of the problem at hand.Footnote ²³ It is apparent from their judgments and other supporting materials that the law-applying and law-making activities of Chinese judges are undoubtedly doctrinal in nature. The days of substituting a political decision for a judicial one are gone, and formal legal arguments have generally become the paradigm in China's courtrooms. Nevertheless, non-legal factors still have an unmistakable presence in the judicial process. For example, the administrative rank of a court or judge may affect the weight given to their decision.Footnote ²⁴ However, this article is concerned with the Poundist sense of ‘law in action’, focusing on the use of judge-made law in judicial adjudication of disputes, rather than (despite its undisputed significance) the role of ‘living law’ in resolving disputes through other channels.Footnote ²⁵ The task of a comparatist is to discover Chinese judges’ ‘situation sense’Footnote ²⁶ in deciding cases by taking into account all contextual factors relevant to the judicial decision under investigation.

In approaching a Chinese case, to what extent should the analytical method used in the common law be employed to extract a ratio decidendi from the case? How far might a Chinese case help us to identify the solution adopted under the legal system to a given problem? Should the study be confined to a textual analysis or should a broader inquiry be made into the surrounding socioeconomic and political circumstances? To (at least partially) answer these questions, I first assess the current legal status of cases as a whole, using cases published in the GSPC, the SPC's official journal, as the paradigm, and then explore the newly-established system of Guiding Cases, focusing on the intricacies of extracting legal principles or rules from them.

II. APPROACHING JUDICIAL CASES IN CHINA: AN OVERVIEW

The current legal status of cases, or court decisions, in China is rather difficult to ascertain, but the prospect of developing a system of case law in the foreseeable future seems promising. In recent years, the SPC has campaigned hard for greater prominence for court decisions at all levels. For example, the latest Fourth Five-Year Plan issued by the SPC features an ‘open trial’ policy that aims to promote transparency and fairness and to instil public trust in court adjudication.Footnote ²⁷ Two streamlined attempts to implement this policy deserve special attention.

First, considerable progress has been made in enhancing legal reasoning in court judgments. In the SPC's first Five-Year Outline Plan for Reform,Footnote ²⁸ the enhancement and publication (online or in print) of the ‘Reasons of Adjudication’ (ie, grounds of decision) is considered to be a major reform measure aimed at improving the quality of court judgments. It was intended that this measure would enable litigants to better understand why court adjudication is just and fair, and would help to improve judges’ skills in writing judgments.Footnote ²⁹ The SPC further provides that court judgments that fail to explain the ‘Reasons of Adjudication’ or contain obvious defects or errors are unsuited for publication.Footnote ³⁰ With notable improvements in this regard in the more recent cases, the emphasis at the next stage of reforms will be placed on: (1) further enhancing legal reasoning in appellate and retrial decisions, and controversial, complex, and socially influential first-instance decisions; (2) encouraging more attention to be given to counsel's arguments, with the court's reasons for not accepting counsel's arguments to be clearly stated in the judgment; and (3) establishing proper standards for assessing the quality of legal reasoning and factoring the results in the promotion and selection process of judges.Footnote ³¹

Second, according to the Fourth Five-Year Plan, all judgments handed down by all four levels of courts (namely the SPC, High People's Courts (HPC), Intermediate People's Courts (IPC), and Basic People's Courts (BPC)) are in principle to be published on a unified online platform, and only in defined exceptional cases is a judgment exempted from this requirement.Footnote ³² In 2016, the SPC designated the ‘China Judgments Online’ (CJO) website as the official platform for publishing court judgments.Footnote ³³ All judgments except those involving state secrets or privacy issues, or resulting from mediation shall be published on the CJO website within seven working days of taking effect.Footnote ³⁴ Aside from technical edits, a judgment published on the website shall be identical to the original judgment.Footnote ³⁵ In an earlier document, the SPC had provided for three other channels of publishing its own judgments in addition to official websites: (1) the People's Daily or Law Daily for influential cases; (2) the People's Court Daily, the GSPC or both for paradigmatic cases with some guiding function; and (3) annually published collections of cases.Footnote ³⁶ With the proliferation of published cases – the number of judgments available on the CJO website is astronomical – the increasing challenge for a comparatist studying Chinese court cases is the practical difficulty in reading every searchable case. A possible approach is to conduct an empirical survey to ascertain the number of cases supporting one or another position. While this might demonstrate the range of different positions in existing decisions, it does little to predict how the controversy is likely to be resolved in a future case. Cases supporting a certain position might have varying degrees of persuasiveness, and mere numbers cannot in and of itself be determinative of the normativity of a particular position.

Given increased publicity and enhanced judicial reasoning, one might plausibly claim that China is developing a system of case law. However, the question that remains to be answered is: what is the weight that should be given to an individual case in China? In other words, how likely is a court decision, including its reasoning, to be accepted and followed by other courts? It is sensible to start with the category of published cases most likely to be treated in a precedent-like way, that is, cases published in the GSPC (Gazette Cases) since 1985.Footnote ³⁷ A recent survey in Sichuan Province shows that the GSPC is regarded by judges and practicing lawyers alike as a publication with the greatest influence on their case work.Footnote ³⁸ The fact that cases are published in the GSPC along with legally binding materials such as Judicial Interpretations creates an appearance of authoritativeness. But are they truly ‘authorities’ binding upon lower courts?

Gazette Cases are said to be ‘an important means through which the Supreme People's Court provides guidance to lower courts with regard to their adjudicative work’.Footnote ³⁹ ‘Guidance’ may be given by various means. The SPC provides guidance on adjudicative work to lower courts through a variety of means, including conducting trials that are supposed to be exemplary, issuing Judicial Interpretations, Guiding Cases or other rule-making documents, holding professional meetings, and training judges from lower courts.Footnote ⁴⁰ Not all such means of guidance can be understood to carry legal binding force. Thus, ‘softer’ words (cankao or jiejian) emphasizing the role of a Gazette Case as a reference for deciding cases have been used. It is, however, argued that all such words must be understood in their political context and the choice of the word ‘guidance’ was intended to counter possible questions as to the SPC's constitutional power to create binding precedents as well as to alleviate the concerns of other state organs.Footnote ⁴¹

Unfortunately, the SPC's true intention has never been made clear. The Gazette Cases are sorted into two categories: ‘cases’ (anli) are submitted by lower courts and approved and rewritten or edited by the SPC, whilst ‘selected judgments’ (published since the GSPC's Issue 2 of 2003) comprise ‘exemplary’ original decisions made by the SPC itself. Since the GSPC's Issue 9 of 2005, published cases in both categories have been prefaced with a paragraph of ‘Essential Points of Adjudication’ (Essential Points), which seems to be the part of the judgment designed to provide the necessary ‘guidance’.Footnote ⁴² But the SPC has not spelt out the legal effect of such ‘Essential Points’. The persuasiveness of Gazette Cases is further weakened by the fact that the selection of cases by the SPC is often driven by the financial or political (as opposed to legal) significance of a case, and that since GSPC's Issue 12 of 1999, Gazette Cases have ceased to be submitted to the SPC's Judicial Committee (SPCJC) for discussion or approval. At any rate, the reception of Gazette Cases by the lower courts is just as important as the SPC's intention. Although lower courts are not allowed to cite Gazette Cases directly in their judgments, such cases may feature in the trial report prepared by the presiding trial judge and be considered and discussed in the internal deliberation process leading up to the final judgment. In practice, some judgments have also adopted the legal reasoning in a Gazette Case albeit without referring expressly to that case.Footnote ⁴³ The frequency with which such an ‘implicit reference’ is made to a Gazette Case has yet to be ascertained empirically. However, given the limited number and accessibility of Gazette Cases (totalling less than 1,000 at present), it would not be surprising that lower courts resort to such cases only sparingly, and in a random and unsystematic manner.Footnote ⁴⁴ After all, Gazette Cases are generally seen by lower courts as something that are in themselves non-binding and merely serve as an aid in deciding similar cases, unless the SPC, on rare occasions, unequivocally requires lower courts to follow the rule established in specific Gazette Cases.Footnote ⁴⁵

The most remarkable example that supports this view is perhaps the Huang Muxing case,Footnote ⁴⁶ where a lender applied for a retrial of an appellate decision previously delivered by the SPC, alleging that the SPC failed to follow a prior Gazette Case.Footnote ⁴⁷ The lender argued that the SPC should have followed the Gazette Case by declaring the disputed loan contract valid, and should have allowed civil proceedings to proceed despite the fact that one of the borrowers had been charged and prosecuted in separate criminal proceedings for taking out the loan. The SPC rejected the lender's application and stated that:

Notably, the SPC rejected the application without exploring whether the ‘essential points of adjudication’ outlined in the Gazette Case might have applied to the facts of the present case.Footnote ⁴⁹ The failure to refer to the case in the appellate decision was held not to constitute an error of law and hence the lender was denied a retrial of the case.

By contrast, there are circumstances in which it might be hard to justify disregard for a prior court decision. We have seen above that Gazette Cases are not necessarily binding unless they are also Guiding Cases. Might non-Guiding Cases published in the GSPC be given a stronger legal effect than non-Guiding Cases not published in the GSPC? At this juncture, it is only possible to make some general preliminary observations. First, the influence of a case and the regard likely to be given to it by another court depends on a combination of complex factors, and should be assessed on a case-by-case basis. Sometimes the answer hinges on the potential influence on a specific court. Prior decisions of a superior court immediately above in the hierarchy, particularly those concerning appeals from decisions of the lower court in question, may be most influential on that lower court even if they are not published in the GSPC.Footnote ⁵⁰ Second, being published in the GSPC implies that the case is recognized (albeit no longer formally approved by the SPCJC) and edited by the SPC to be easily accessible. This satisfies the minimal standards for a case to be properly regarded as a binding or at least influential precedent, namely accessibility and reasonable quality in legal reasoning and judgment-writing. Whether the decision in the case must come from a court ranked high in the hierarchy (such as IPC and above) is debatable.

Third, although a Gazette Case is not by itself binding, it can acquire binding force or at least greater influence if it has been effectively followed on a number of occasions. A line of well-published cases may develop and reinforce a common principle, rule, or point of law so that they strengthen each other's authority and persuasiveness. For example, a decision of the SPC in 2000 had a devastating effect on the banking industry in China as a vast number of security or surety contracts entered into by banks were declared invalid on the ground that the security was created by the board of directors over company assets in favour of some of the shareholders.Footnote ⁵¹ In a series of Gazette Cases, the SPC clearly steered away from this problematic position, holding that such contracts are valid and enforceable insofar as the third party has duly examined the relevant documents.Footnote ⁵² The subsequent line of cases thus established a clear rule to be followed in future cases.

Fourth, while in most of the Gazette Cases, the ‘Essential Points’ are no more than a reiteration of existing legal rules,Footnote ⁵³ there is an increasing number of Gazette CasesFootnote ⁵⁴ that create new rules, fill existing gaps, and settle uncertain points of law. The latter cases constitute more promising references for courts deciding future cases. For example, a Gazette Case clarifying that a contractual clause excluding an employer's liability for industrial injuries is invalid is likely to be treated as law at a time when the legislation is silent on the matter.Footnote ⁵⁵

Finally, in early 2017, the SPC established a system that makes it harder for the SPC to depart from or ignore its own prior decisions.Footnote ⁵⁶ Under this system, the adjudicating judge is required to compile a report covering all similar or related cases decided or being decided by the SPC. Where the outcome of adjudication differs from the standard adopted in such prior cases, creates a new standard, or where such prior cases adopt different standards, the case must be considered by both a divisional meeting of expert judges and the SPCJC before a judgment is rendered. This system will afford all SPC judgments, not merely those published in the GSPC, with a greater degree of authority.

In sum, the conclusion that a case has a general legal effect should be drawn with utmost care and on the basis of an assessment of the particular circumstances of the case. At present, such cases are likely to be small in number. In fact, it is perhaps more prudent to say that cases, even those published in the GSPC, are not per se binding. Apparently, by reason of the SPC's implicit recognition, Gazette Cases are likely to wield greater influence on some judges’ minds than other cases, but this is hardly decisive. There are cases published elsewhere acquiring a similar or even higher level of influence owing to other factors. Next, we turn to examine one specific type of cases that are given formal legal effect, namely the Guiding Cases issued by the SPC.

III. A GUIDING CASE AT WORK

The Guiding Case System was formally established by the SPC pursuant to its Provisions on Case Guidance on 26 November 2010,Footnote ⁵⁷ and it has been the subject of considerable scholarly comment both in China and overseas.Footnote ⁵⁸ Guiding Cases are legally effective court judgments approved by the SPCJC following a set procedure of recommendation, selection, compilation, review, and publication in a specific, highly-edited form.Footnote ⁵⁹ While the title indicates a ‘guiding’ effect on future trials, Guiding Cases are given a more clearly defined effect, as the SPC states that ‘People's Courts of all levels shall canzhao [Guiding Cases] when deciding like cases’.

The word ‘canzhao’ has caused considerable confusion as the new system of Guiding Cases would be pointless if ‘canzhao’ were to be confined to the old sense of ‘refer to’, which implies a duty only to consider Guiding Cases as a reference, but not necessarily to follow them. Therefore, the Detailed Implementation Rules clarify that where the case being decided is similar to a Guiding Case in respect of both its ‘Basic Facts’ and ‘application of law’,Footnote ⁶⁰ the court in making the decision shall canzhao the ‘Essential Points’ of the Guiding Case, and in such a case, shall cite the Guiding Case by its identification number and cite the ‘Essential Points’ as reasons rather than as a formal legal ground (in the sense of an applicable formal source of law) in its judgment. Where a litigant, their counsel, or a prosecutor cites a Guiding Case in their argument,Footnote ⁶¹ the court shall respond and explain in its legal reasoning whether it has canzhao the Guiding Case, and if not, why it has not done so. It thus appears that by canzhao, the SPC clearly intends Guiding Cases not merely to be ‘referred to’ or ‘considered’, but ‘followed’. Some suggest that a court may choose not to follow a Guiding Case as long as it states its reasons for so choosing.Footnote ⁶² However, the better interpretation of the above SPC provisions is that a court may only decline to follow a Guiding Case where it is satisfied and explains clearly that the case at hand is not ‘similar’ to the former.

It is, however, unclear whether failure to canzhao a Guiding Case in a similar case constitutes a ground for appeal or retrial.Footnote ⁶³ Thus, it is clear that Guiding Cases have a greater formal legal force than other cases, including Gazette Cases. Guiding Cases as redacted by the SPC appear to resemble precedents in common law jurisdictions in that they produce legal rules suitable for direct application to future adjudication. However, there is great danger in treating a Guiding Case as a ‘precedent’ in the common law sense. Not only can the former be barely said to be binding in the sense used in common law jurisdictions, but it also operates quite differently. To illustrate the hidden traps for the unwary and the extra care required in approaching a Guiding Case, we take a close look at Guiding Case No 1, Shanghai Centaline Real Estate Consultants Co Ltd v Tao Dehua, A Dispute under a Contract of Intermediation.Footnote ⁶⁴

Let us first examine the ‘Basic Facts’ given by the SPC in Guiding Case No 1. The respondent Centaline entered into a contract with the appellant Tao on 27 November 2008 pursuant to which Centaline would facilitate Tao's purchase of a unit. Under Clause 2.4 of the contract, it was agreed that where, within six months from the date when Tao inspected the property (under Centaline's arrangements), Tao or his agent, representative, or other associated individuals uses information, opportunities, or other facilities provided by Centaline to purchase the unit without the intermediation of Centaline, Tao would be liable to pay to Centaline one per cent of the actual purchase price as ‘weiyue jin’ (ie, liquidated damages or ‘money payable for breach of contract’).Footnote ⁶⁵ Prior to the inspection arranged by Centaline, the unit had been shown by two other intermediaries to Tao and his wife. The price that Centaline had asked Tao to pay to secure the unit was RMB 1.65 million, while another intermediary was able to achieve a considerably lower price of RMB 1.38 million. Tao subsequently signed a contract with the seller through the latter intermediary on 30 November 2008, duly paid that intermediary a commission of RMB 13,800, and consequently refused to pay Centaline any commission or weiyue jin.

Comparing the above facts with those stated in the appellate judgment of the Shanghai No 2 IPC,Footnote ⁶⁶ there are two notable differences. The first difference is that under Clause 2.4, Tao was liable to pay the stipulated weiyue jin in the event that he or his agent, representative, or other associated individuals ‘purchased the unit from the seller’. Strikingly, the IPC did not deal with this part of the clause in its judgment and the provision was subsequently omitted from the Guiding Case. The second difference is that all Centaline had done to facilitate Tao's purchase of the unit was to arrange the inspection, and Centaline did not remain in contact with Tao regarding the potential purchase after the inspection. This fact is not stated in the Guiding Case, although it was cited by Tao during the trial, and might have carried some weight in the IPC's decision.

In the actual legal proceedings, the Court at first instance held for Centaline on the ground that Tao had obtained information from Centaline, and had breached Clause 2.4 by purchasing the unit through the other intermediary. On appeal, the IPC reversed the decision holding that Clause 2.4 was legally enforceable, but it had not been breached by Tao, who was therefore not liable to pay the stipulated weiyue jin. In the Guiding Case, the SPC summarized the ‘Essential Points’ as follows:

What legal principle(s) or rule(s) applicable to like cases can be derived from this statement? How should this Guiding Case be followed in future cases? It seems that the distillation by the SPC of a Guiding Case from the original case and its overriding concern for producing a set of easy-to-follow rules have created huge difficulties in maintaining the internal coherence of the Guiding Case, and have presented real challenges for courts striving to achieve uniformity and consistency in future cases. A prior survey found thirty-three cases decided between 20 December 2011 and 29 January 2014 in which the cause of action arises from an contract of intermediation and contain the term ‘jumping order’, of which fourteen are classified as relevant to the issue dealt with in Guiding Case No 1.Footnote ⁶⁷ At the time of writing, the number of cases released on the ‘China Judgments Online’ website falling within the above two search conditions has surged to a staggering figure of almost 250. Most of these cases were decided by Intermediate People's Courts and Basic People's Courts.Footnote ⁶⁸ These cases confirm my analysis of the intricacies and subtleties associated with Guiding Cases, which will be demonstrated in two points.

First, it is questionable whether the Guiding Case properly addresses the principal legal issue arising on the facts of the case.Footnote ⁶⁹ The principal issue in the case appears to be whether, and if so to what extent, a court should enforce a contractual clause designed to prohibit or deterFootnote ⁷⁰ a property purchaser from striking a deal with the vendor either directly or through another intermediary at the expense of an intermediary (usually a real estate agency) retained by the purchaser. However, the SPC paid little attention to this issue in the Essential Points. The issue is significant in that it calls for a court to strike a delicate balance between two parties who are placed in a relatively weak bargaining position vis-à-vis a third party. It is important to note, by way of background, that the residential real estate market in China (at least in the bigger urban centres) is largely a vendor's market, such that both the intermediary and the purchaser are ‘weaker’ parties when bargaining with the vendor. In this context, the court ought to have an appropriately balanced interpretation of Articles 40 (invalid standard-form contract terms), 54(2) (manifestly unfair contracts), and 114 (judicial adjustment of weiyue jin) of the Chinese Company Law (CCL) and apply them to the facts of the case.

Both the ‘Reasons of Adjudication’ section of the Guiding Case and the appellate judgment of the IPC state that the relevant contractual clause is not invalid under Article 40 of the CCL since, as a standard-form contract term, it does not ‘exclude the liability’ of the intermediary or ‘increase the liability or exclude the main right’ of the purchaser.Footnote ⁷¹ However, the Essential Points formulated by the SPC make no reference to Article 40 of the CCL when stating that the contract clause is valid. Should this holding be interpreted restrictively as a specific reference to Article 40 of the CCL instead? Such a restrictive interpretation appears appropriate in that the Guiding Case ought not to preclude a court from invalidating or varying a like contractual clause under other provisions (such as Articles 54 and 114) of the CCL. This is so even though reference to Article 40 of the CCL is found only in the ‘Reasons of Adjudication’, which are strictly not binding, and in the original judgment, which is not part of the Guiding Case. Importantly, it is the application of the tests under Article 40 of the CCL in the Reasons of Adjudication that has been repeatedly quoted in later cases.Footnote ⁷² However, reliance on the Reasons of Adjudication is problematic, particularly where statements in the Reasons of Adjudication are not sufficiently clear, or are at variance with the original judgment, or diverge from the Essential Points.

One example is the omission from the Basic Facts of Guiding Case No 1 of a material fact in the original case, namely the provision under Clause 2.4 that Tao's liability to pay weiyue jin would also be triggered where Tao or his agent, representative, or other associated individuals ‘purchase the unit from the vendor’. Under this provision, Centaline's entitlement to the stipulated weiyue jin is not dependent upon any use by Tao of information provided by Centaline. Apparently, the IPC could have decided the case in favour of Centaline on the basis of this provision alone. By omitting this provision from the ‘Basic Facts’ of the Guiding Case, the SPC effectively ‘manufactured’ a new set of facts involving a contractual clause under which the weiyue jin is payable only when the purchaser has utilized information or other facilities provided by the intermediary. Does this ‘manufactured’ Guiding Case apply to a standard-form contract of intermediation which provides, as is commonly the case in practice, that weiyue jin is payable wherever a sale is concluded? Of immediate interest here is the validity of such a contractual provision. Should a court follow the first sentence of the Essential Points and hold that the provision is valid?

In practice, some courts explicitly reasoned that such a provision was manifestly invalid under Article 40 of the CCL, despite the fact that bold letters and underlines were used when drafting the clause.Footnote ⁷³ However, other courts have held the provision to be valid and this holding appears to have been influenced by Guiding Case No 1 (particularly its Reasons of Adjudication, which refer to Article 40 of the CCL).Footnote ⁷⁴ This latter approach represents a mechanical application of the first sentence of the Essential Points of the Guiding Case, but it also illustrates how putting a blue pencil through (ie, deleting parts of) the original case without regard for its factual context might distort the application of law in future cases.Footnote ⁷⁵

Further, the failure to identify and focus on the issue of validity meant that the applicable legislative provision was wrongly identified. The Guiding Case cites Article 424 of the CCL as a legal ground for the decision. Yet, Article 424 provides a definition of a contract of intermediation and does not resolve the dispute in the case. Instead, Article 40, which is discussed in the Reasons of Adjudication, should be cited as the applicable legal rule. More importantly, a weiyue jin clause like the one in the Guiding Case is also governed by Article 114 of the CCL, which empowers a court to, inter alia, reduce the amount of the stipulated weiyue jin where it is ‘excessively higher than the actual loss incurred’. It is thus surprising that both the IPC and the SPC ignored this important mechanism that was designed to re-balance the interests of contracting parties in a case precisely like this. Unfortunately, this means that Guiding Case No 1 does not lay down any rule about how Article 114 is to be applied to a weiyue jin clause, and therefore cannot provide any guidance on the power of a court to fix a reasonable amount of weiyue jin where the purchaser is found liable in breach.Footnote ⁷⁶

Second, similar difficulties arise when we turn to the ‘Essential Points’. The Essential Points appear to focus on the issue of what constitutes the impugned conduct. However, the real issue in the case is how Clause 2.4 should be construed – specifically, what amounts to ‘utilising information, opportunity or other facilities provided by Centaline’ under that clause. Having concluded that a clause ‘prohibiting’ the stipulated conduct is lawful and valid, the Essential Points do not proceed to ascertain the meaning to be attributed to that clause. Neither the adjudicating court nor the SPC made any attempt to construe the clause based on the parties’ actual or presumed intention. No mention was made of an applicable legislative provision, namely Article 41 of the CCL, which provides for the construction of a standard-form contract clause pursuant to the principle of contra proferentem. In a subsequent case, the Court had to interpret a clause which provided that the purchaser was liable to pay double the agreed commission where he struck a deal with the vendor ‘in private under any circumstance’ within one year after signing the contract of intermediation. The Court was of the view that the clause was ‘too harsh’. Yet, instead of invalidating it, the Court construed the quoted words restrictively to mean ‘in private by utilizing the information provided by the intermediary’.Footnote ⁷⁷ To add a qualifying condition of ‘utilizing information’ to the plainly unqualified text of the contractual clause creates its own problems. However, at least, the approach adopted in the subsequent case points to a possible solution to the ‘jumping order’ problem, a solution of which Guiding Case No 1 ought to, but does not, avail itself.

In practice, it may be extremely difficult for a court to determine whether the purchaser has actually utilized information or other facilities provided by an intermediary in contracting with the vendor. The Essential Points state, in effect, that where the same property is listed by more than one intermediary and information about the property is duly accessible to the public, a purchaser is deemed not to have utilized information provided by one intermediary when it chooses to buy through another intermediary who offers a better price and service.Footnote ⁷⁸ However, there are a number of challenges facing a court applying this proposition to the facts of a particular case. First, the Essential Points refer only to ‘information’, whereas the Reasons of Adjudication opt for the full version of the phrase comprising ‘opportunity and other facilities’.Footnote ⁷⁹ This creates uncertainty as to whether the rule laid down in the Essential Points is applicable by analogy to a future case under which something more than mere information is involved. The Guiding Case attaches no importance to the fact that Centaline did nothing to facilitate the sale other than arranging a single inspection of the unit. How significant is this fact in the application of the above proposition? It is reasonable to suspect that the proposition stated above should have no application where the outflanked intermediary has provided substantial facilitative services such as negotiating the price and communicating inquiries and replies between the parties.

Second, all evidence seems to suggest that in formulating the ‘Essential Points’, the SPC probably confused the issue of contractual interpretation with another issue, namely the default rule to be applied to determine whether the purchaser's conduct constitutes a breach of contract. Instead of confining itself to a determination of what amounted to ‘utilization of information’ as prescribed by the parties under the contract, the SPC elevated ‘utilization of information’ into a default rule that should be applied even where the contract was silent on the matter. Resort to notions extraneous to the contractual clause, such as deliberateness or bad faith, to describe the colourful metaphor of ‘jumping order’ suggests that a default rule was in play.Footnote ⁸⁰ This confusion has caused widespread consequences for subsequent cases, as the ‘utilization of information’ test has often been applied to cases where expressions of a similar effect are not found in the contract.Footnote ⁸¹

Third, the determination of whether a purchaser has utilized information provided by an intermediary hinges very much on which party bears the burden of proof. Whichever party bears this evidential burden has to overcome substantial challenges. It is thus surprising that the SPC did not deal with this crucial matter in any detail, or indeed at all in the Guiding Case. It has been suggested that neither the trial court in the original case (the Shanghai No 2 IPC) nor the SPC favoured approaching the case on the basis of allocating the burden of proof one way or the other.Footnote ⁸² The implication seems to be that neither party should lose its case simply because it failed to prove or disprove that Tao had used information provided by Centaline and that the Court should make a finding on the basis of all available evidence accepted by the Court. However, courts in later cases have given more weight to the issue of the burden of proof even though differing opinions have been expressed on both the allocation and extent of the parties’ evidential burdens.Footnote ⁸³

Fourth, in Guiding Case No 1, while the intermediary through which Tao purchased the unit evidently obtained a lower price than Centaline did, it is not clear whether the intermediary had also provided better service. In any event, there is nothing in the Guiding Case that suggests that if a purchaser has not obtained a lower price or better service by resorting to ‘jumping order’, the purchaser will be deemed to have used information provided by the outflanked intermediary.

It should be clear from the above that a Guiding Case is not intended to be, and should not be regarded as, something akin to a precedent in the common law jurisdictions. In essence, a Guiding Case is not a ‘case’ at all. At its core are ‘Essential Points of Adjudication’, which comprise a set of rules stripped of their factual context. In this respect, a Guiding Case resembles a provision in a Judicial Interpretation, since both embody abstract rules supposedly derived from judicial practice, except that the Guiding Case contains a separate section ‘Basic Facts’.Footnote ⁸⁴ However, the ‘Basic Facts’ section does not have legally binding effect. The facts are given not as a source from which the rules originate, but as an ‘illustration’ of how the rules can be applied to an actual scenario. The rules under the ‘Essential Points’ section are formulated in such a way as to lend themselves to easy comprehension and application by lower courts. As a result, the SPC often has to heavily edit and simplify the original case, or even ‘manufacture’ a new factual matrix to suit the rules formulated. The detachment from the factual context of the original case deprives a Guiding Case of the essential character of case law.

It is therefore suggested that the issuance of a Guiding Case marks only the beginning of a process of case law-making. A Guiding Case starts by laying down basic rules, and future cases develop those rules based on their own facts within the boundaries of the broad principle or ‘spirit’ expressed by the Guiding Case.Footnote ⁸⁵ In a case discussed above, a local court announced that:

The Court went on to list four factual points in the case that diverge from the Basic Facts of Guiding Case No 1.Footnote ⁸⁶ It is of course rather presumptuous for the Court to state that Guiding Cases have no binding force but only ‘general guiding significance’. However, if the approach adopted by the Court is understood correctly, it appears that the broad principle or rule established by a Guiding Case should be followed, but it is open for particularization and refinement in its application to the facts of a future case. In this way, the Basic Facts of the Guiding Case or even the facts of the original case may be reintroduced into the continuing development of case law, a process that involves not merely drawing distinctions between separate sets of facts, but also filling gaps and fixing defects in the Guiding Case. For example, some judges in the lower courts have extended Guiding Case No 1 by drawing a distinction between buying through a friend and buying through a professional intermediary.Footnote ⁸⁷ If sound case law jurisprudence and methodologies are to be developed from the Guiding Case system at all, this must be by way of a joint enterprise in which the work of the SPC is necessary but hardly sufficient, and where contributions from all other courts and legal academia are essential.