Transcript When the Deal Goes Sour: Contracting and Dispute Resolution in China’s
When the Deal Goes Sour: Contracting and Dispute Resolution in China’s Transitional Political Economy
Susan Whiting University of Washington
Dramatic increase in economic court cases
Cases Accepted by Court of First Instance
1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Economic 44,080 85,796 226,695 322,153 366,456 508,965 690,765 588,143 563,260 652,150 894,410 1,053,701 1,278,806 1,519,793 1,483,356 1,455,215 1,535,613 1,297,843 1,155,992 Civil 756,436 838,307 846,391 989,409 1,213,219 1,455,130 1,815,385 1,851,897 1,880,635 1,948,786 2,089,257 2,383,764 2,718,533 3,093,995 3,277,572 3,375,069 3,519,244 3,412,259 3,459,025 Criminal 299,720 289,614 313,306 392,564 459,656 427,840 422,991 403,267 482,927 495,741 618,826 436,894 482,164 540,008 560,432 628,996
Avg growth 18.8
8.3
4.7
Source: 全国人民法院司法 统计历史资料汇编 ; 中国法律年 鉴
Hypothesis:
In the rapidly changing context of China’s transition from socialism to the market, • Both the
informal networks
embedded in which firms are • • and the
bureaucratic structures
governed
fail
for the resolution of disputes, by which firms are to provide adequate information and sanctions • making the
courts
an increasingly important element in the process of dispute resolution
Why surprising and counter-intuitive based on existing literature?
•
Social bases of contracting and dispute resolution
Contractual relations are grounded in informal social ties and not in legal rules and sanctions • Chinese communities —role of
guanxi
( 关系 ) • Comparative studies —role of informal social ties
Why surprising and counter-intuitive based on existing literature?
• • •
Confucian tradition
• Emphasis on harmony and mediation
CCP legacy
• Official emphasis on mediation
Courts in China are problematic
Courts suffer from a range of drawbacks • subordinate to the Communist party • incompetent judges • weak enforcement powers
Appears to be consistent with claims of Weber, North
• Weber, North: Legal order offering stable and predictable rights of property and contract is prerequisite for sustained economic growth • Here, focus on contracts • Whiting (2001) focuses on property rights
Study fills empirical gap
• “paucity of empirically based scholarship on the actual operation of the emerging legal system” (Pei, 2001)
Original data
• Representative sample of 76 purchase and sales contract disputes (1999-2001) from one district court in Nanjing • Convenience sample survey with face-to face interviews of 76 enterprise managers (2002-04) regarding contracting practices and dispute resolution
Additional data
• World Bank “Study of Competitiveness, Technology, and Firm Linkages” • survey of 1500 enterprise managers (2000) with small battery of questions on contracting and dispute resolution
Summary of empirical findings
• Steady evolution of legal basis for market economy, improving legal recourse for private firms • Contracting less grounded in social networks than expected • Greater use of courts associated with • relative absence of alternatives and • growing supply of legal services, • themselves related to strategies of political legitimation for CCP: “rule of law” and economic performance
Implications for comparative political economy
•
Law and economic growth:
• Legal order not a prerequisite for economic growth, but conditions economic growth •
Relationship between institutions and culture:
• Institutions shape culture as much or more than culture shapes institutions
Evolution of contract law
• Problematic elements of early contract regime: • private enterprises excluded • transactions controlled rather than fostered 1981 Economic Contract Law 1985 Foreign Economic Contract Law 1987 Technology Contract Law • Evolving contract regime better suited to market economy 1993 Amended Economic Contract Law 1999 Contract Law (unified)
Changes reflected in court records (Nanjing district court 1999-2001)
Examples: • Private enterprise Plaintiffs in 34% of cases Defendants in 36% of cases • Oral contracts Oral contracts in 46% of cases Findings for plaintiffs 55% of these cases
MacCaulay (1963): “What good is contract law?”
Bases of contracting
• What does the available data tells us about the
social basis
of contractual relations?
• Zhou et al. (2003): Social networks (47%) and open information sources (47%) predominate • Shanghai/Nanjing data: Professional ties predominate over social ones
45.0
40.0
35.0
30.0
25.0
20.0
15.0
10.0
41.4
12.9
5.0
0.0
Business associates Trade conferences
Figure 1 How Firms Identify Suppliers (Shanghai and Nanjing)
11.4
Advertising 10.0
Self-initiative Percent 8.6
Government contacts 8.6
Friends 5.7
Trade associations
Figure 2: How Firms Identify Customers (Shanghai and Nanjing)
20.0
15.0
10.0
5.0
0.0
50.0
45.0
40.0
35.0
30.0
25.0
42.9
Business associates 21.4
18.6
14.3
11.4
10.0
10.0
Competitors Trade conferences Advertising Trade associations Self-initiative Identifying customers Percent Government contacts 10.0
Friends
Bases of contracting
• Few alternatives to social sources of information/monitoring to underpin contracting • Not: government • Not: trade associations • Not: credit bureaux • Result: managers scramble to evaluate customers’ creditworthiness and trustworthiness
Figure 3: Functions of Business Associations (Shanghai and Nanjing data, 2002-04, N=73)
90.0
80.0
83.0
70.0
60.0
50.0
40.0
30.0
20.0
10.6
10.0
8.5
4.3
4.3
0.0
Technical information Supplier/client contacts Introduce government policy Supplier/client credit information Percent Dispute resolution 2.1
8.5
27.7
Government supervision No service at all Other services
Functions of Business Associations (World Bank Data, 2000, N=816)
90.0
80.0
70.0
60.0
50.0
40.0
30.0
20.0
10.0
81.2
48.3
46.2
41.5
31.6
28.9
19.2
19.0
18.1
0.0
Ma rke t i nf orma tio n Acce ss cre di t R ep re se nt Vi ew s D ef in e st an da rd s Accre di t me mb ers St ab ili ze C omp et iti on Acq ui re in pu ts R eso lve D isp ut es Pro vi de T ech ni ca l Assi st an ce Percent
Bases of contracting: credit bureaux
“China’s credit system is underdeveloped. There is no unified system for [evaluating] enterprise credit; there’s no way to investigate an individual manager’s creditworthiness ( 中 国的信用制度不发达 , 没有一个统一的企业 信用体系 , 无法考查某个经营者的信誉 ) (Interview with lawyer nj020925p).”
Bases of contracting: credit bureaux
• 2001 State Council set up “Group for Enterprise and Personal Credit Investigation” to propose legislation governing credit evaluation agencies • Only a few specially approved ones now exist • 2004 “Regulations for Managing Credit Evaluation ( 征信管理条例 ) ” still only in draft form • Draft regulations set high barriers to entry • Su Ning, Deputy Governor of PBoC: government control will be “quite strong”
Bases of contracting: credit bureaux
• How do managers evaluate creditworthiness of potential customers: • 9% credit evaluation agencies • 15% banks • 26% other suppliers of a potential client • 39% other (Shanghai/Nanjing data)
Bases of contracting: credit bureaux
• 39% Other (from open-ended responses): • Managers personally visit potential clients 3-5 times on average • Restrict size of deals initially
Bases of contracting: credit bureaux
• “We mainly look at a series of deals and ability to pay. Clients’ reputations develop; before we didn’t pay much attention to this and got burned. Now we’ve begun to pay attention… ( 主要看交易过程和付款能力 . 客户的信誉是动 态的 , 以前我们不大注意这方面 , 吃过亏 , 现在开 始注意了 …(Enterprise Interview #61).” –this firm previously relied on state purchasing meetings ( 订货会 )
Contract formality
• Formal written contract provisions for specifying volume, quality, price, deadlines, and contractual safeguards are the norm • Shanghai/Nanjing data: 90.5% of contracts with suppliers 98.6% of contracts with customers • World Bank data: 82.2% of contracts with suppliers 90.1% of contracts with customers
Summary: Bases of contracting
• Deals are less grounded in pre-existing social ties than expected • Yet, there are few good institutional alternatives to social networks for gathering information about potential customers • Use of formal, written contracts is the norm
Disputes and dispute resolution
In the year 2000, • 31.1% of firms had one or more “major dispute” with clients • 21.9% had one or more “major dispute” with suppliers (World Bank dataset)
Dispute resolution: self-enforcement
• Self-enforcing contracts (long-term cooperative solution based on anticipated value of future contracts) • “If a client is very late with payment, we stop (shipments of) goods ( 如果超过了信用期 , 我们 就停货 ) (Enterprise interview #39) • 90.6% of firms: end long-term reciprocal relations in event of serious dispute (Shanghai/Nanjing data)
Dispute resolution: self-enforcement
• Self-enforcing contracts (long-term cooperative solution based on anticipated value of future contracts) • Length of contractual relations: average: 7.5 years median: 5.5 years • Reputation 74.2% of firms said: other businesses would know if a dispute arose with supplier or client (Shanghai/Nanjing data)
60 50 40 30 20 10 8.5
0 < 1 Year
Figure 5: Average Length of Business Relationship with Main Clients (World Bank Data, 2000, N=1499)
12.7
1-2 Years 16.8
2-3 Years 12.8
3-4 Years 49.2
4+ Years Percent
20 15 10 5 35 30 25 50 45 40 0 10 < 1 Year
Figure 5b: Average Length of Business Relationship with Major Suppliers (World Bank Data, 2000, N=1473)
46.4
11.7
1-2 Years 16.8
2-3 Years 14.9
3-4 Years 4+ Years Percent
Dispute resolution: self-enforcement
• Self-enforcing contracts • Partial pre-payment • 28% of firms require pre-payment • range of contractual terms for these firms: 30% in advance 40-60% upon delivery 10-30% within thirty days (Shanghai/Nanjing data)
Dispute resolution
• Direct negotiation • Mediation • Arbitration • Litigation • Gang enforcement
Figure 6: Choice of Dispute Resolution Mechanism (Shanghai and Nanjing data, 2002-04, N=69)
40 30 20 10 0 100 90 80 70 60 50 92.8
Direct negotiation 11.8
Mediation 17.6
Arbitration Percent 47.8
Litigation 2.9
Gang enforcement
100.0
90.0
80.0
70.0
60.0
50.0
40.0
30.0
20.0
10.0
0.0
Figure 7: Final Resolution of Disputes with Clients (Percent using given mechanism in at least one dispute, World Bank Data, 2000, N=459)
87.1
Negotiation 12.0
Arbitration 38.8
Litigation Percent
100.0
90.0
80.0
70.0
60.0
50.0
40.0
30.0
20.0
10.0
0.0
Figure 8: Final Resolution of Disputes with Suppliers (Percent using given mechanism in at least one dispute, World Bank Data, 2000, N=336)
93.2
12.5
29.8
Negotiation Arbitration Litigation Percent
Dispute resolution: negotiation
• Direct negotiation “No matter what firm or what dispute, enterprises’ first [step] is direct negotiation. On the one hand, [this approach] minimizes costs, and, on the other hand, it maintains good relations ( 不管是什么企 业 , 什么纠纷 , 企业首先的肯定是协商 . 一方面可 以节约成本 , 另一方面还可以保持好的关系 ) (Interview with lawyer nj020935p).”
Dispute resolution: mediation
• Most striking finding: apparent lack of appropriate third parties
Figure 9: Third Parties in the Mediation of Disputes (Shanghai and Nanjing data, 2002-04, N=56)
30.0
25.0
20.0
15.0
10.0
8.9
5.4
5.0
3.6
0.0
Central government Local government Particular government bureau 0.0
Bank Percent 0.0
Trade association 14.3
Other 26.8
No third party
Dispute resolution: arbitration
• Only 17.6% of firms use arbitration • Arbitration Law—1995 • Nanjing Arbitration Commission not even established until 1998 • Comments like “Where is there an arbitration commission? ( 哪儿有仲裁委员会 )? (Enterprise interview #16)” are common. • First 5 years nationwide: 3,400 cases per year on average arbitrated; compared to 1.3 million litigated • Concerns about lack of appeal, enforcement
Shanghai Arbitration Commission
Total Value 1998 1999 Number of cases 189 253 of Contracts in Dispute Average Value of (10,000 rmb) 27180 Contracts in Dispute (rmb) 1,438,109 58570 2,315,024 2000 2001 2002 2003 Avg Growth 341 431 479 649 22.8
36400 72030 57879 128833 29.6
1,067,449 1,671,230 1,208,330 1,985,100 5.5
Economic Contract Disputes Handled in the Court of First Instance
1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Number of Cases Accepted Total Value of Contracts in Dispute (10,000 rmb) 36,274 69,204 206,582 292,599 332,496 467,872 634,941 543,613 516,507 171,055 149,659 897,804 788,339 814,621 1,110,392 1,935,130 1,731,293 1,987,858 598,610 824,448 2,970,257 6,342,211 971,432 9,727,423 1,184,377 14,830,833 1,404,921 21,406,425 1,373,355 26,303,090 1,329,020 41,343,216 1,410,107 n/a 1,184,613 1,062,302 n/a n/a Average Value of Contracts in Dispute (rmb) Change in Change in Number of Average Value Cases Accepted 51,541 24,443 48,611 28,144 24,552 25,033 31,426 31,277 37,101 -52.6
98.9
-42.1
-12.8
2.0
25.5
-0.5
18.6
90.8
198.5
41.6
13.6
40.7
35.7
-14.4
-5.0
49,878 77,834 100,875 125,865 153,641 192,336 310,167 n/a n/a n/a 34.4
56.0
29.6
24.8
22.1
25.2
61.3
n/a n/a n/a 15.9
37.7
17.8
21.9
18.6
-2.2
-3.2
6.1
-16.0
-10.3
Source: 全国人民法院司法 统计历史资料汇编 1949-1998 ( 民事部分 )
Dispute resolution: litigation
• 36.8% of firms used the courts in their most recent dispute (Shanghai/Nanjing data)
Supply of legal services
• 91.6% of firms had legal representation (Shanghai/Nanjing data)
Expansion of Legal Education and Legal Professionals Graduates at the Bachelor's Level
1994 1995 1996 Philosophy Economics 2117 2110 1960 80981 119042 127018 1997 1998 1999 2000 Avg Growth 1183 1183 1067 916 -11.3
132988 132900 134258 159299 10.1
Law 17650 23170 25852 28270 29649 31500 44124 14.0
Education Literature 35234 41898 40620 92928 115969 120051 39595 40716 40271 42052 2.6
116115 119583 120957 146997 6.8
Graduates at the Master's and Doctorate Levels
History 16794 18117 16423 14559 14179 13374 13661 -2.9
Sciences Engineering Agriculture 87845 100566 97260 228922 295839 315005 27856 32975 33032 90513 92729 90395 98200 1.6
314418 308574 326180 354291 6.4
30190 28941 28070 30370 1.2
Medicine 47090 55711 61417 61239 61379 61545 59857 3.5
Total 637417 805397 838638 829070 829833 847617 949767 5.9
Law Share (%) 2.8
2.9
3.1
3.4
3.6
3.7
4.6
1994 Philosophy Economics 454 1967 1995 1996 1997 460 581 664 2165 3666 4988 1998 1999 2000 Avg Growth 659 649 775 7.9
4740 6302 7308 20.6
Law 1296 1370 1864 2258 2385 3257 3820 16.7
Education Literature 540 577 736 902 893 1008 1221 12.4
1575 1607 2228 2584 2795 3310 3714 13.0
History 506 593 745 926 859 970 1026 10.6
Sciences Engineering Agriculture 5521 12463 945 6039 6646 7625 7473 8251 8077 5.6
14675 17621 19918 20681 23369 24378 10.1
1111 1418 1788 1715 1949 2282 13.4
Medicine 2780 3280 4144 4886 4877 5605 6166 12.1
Sources: 中国科技 统计年鉴 China Statistical Yearbook on Science and Technology (Beijing: China Statistics Press, 2000), p. 9; 中国教育 统计年鉴 Educational Statistics Yearbook of China (Beijing: People's Education Press, 2001), pp. 28, 40.
Total 28047 31877 39649 46539 47077 54670 58767 11.1
Law Share (%) 4.6
4.3
4.7
4.9
5.1
6.0
6.5
Supply of Legal Services
Year Law Firms (Units) 1997 1998 1999 8441 8946 9144 Lawyers (Individuals) (% Increase) (% Increase) 98902 101220 111433 2000 2001 9541 10225 117260 122585 2002 10873 136684 Avg Growth 4.3
5.5
Source: 中国法律年 鉴 (2002:1253; 2003:1335). Law Firms 6.0
2.2
4.3
7.2
6.3
Lawyers 2.3
10.1
5.2
4.5
11.5
Dispute resolution: litigation
• Credible threat to use court leads parties to bargain “in the shadow of the law” (Cases withdrawn increased from 8% to 21%) • Litigants seek authoritative ( 有权威性的 ) resolution of dispute (Enterprise interview nj021127p; judge interview sh040817p) (Cases decided increased from 5% to 44%)
Economic Contract Disputes (Domestic)
Transferred 1983 Mediated by Court 79.3
Decided by Court 5.5
to Relevant Bureau Withdrawn 4.2
8.5
1984 1985 1986 80.6
81.8
79.6
5.6
5.7
7.5
3.2
3.1
3.9
8.7
8.5
8.2
1987 1988 1989 1990 1991 1992 1993 1994 1995 77.3
80.2
76.8
69.5
61.6
61.7
63.1
60.0
57.7
9.5
8.6
10.5
14.7
20.0
20.8
19.5
20.8
22.1
2.8
1.9
2.0
2.1
2.2
1.6
1.5
1.5
1.3
9.6
8.8
10.2
13.0
14.7
14.8
14.9
16.8
17.9
1996 1997 1998 1999 2000 2001 53.7
49.9
43.2
41.3
34.6
30.8
25.5
29.1
34.6
35.5
40.3
43.8
1.3
1.5
1.4
0.0
0.0
0.0
18.4
18.3
18.8
19.3
20.7
21.3
Other 2.4
1.9
0.9
0.8
0.8
0.5
0.5
0.7
1.5
1.1
1.0
0.9
0.9
1.1
1.3
2.0
3.1
4.5
4.1
Total 100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
Source: 全国人民法院司法 统计历史资料汇编 1949-1998 ( 民事部分 ) 北京： 人民法院出版社 , 2000).
Dispute resolution: litigation
• Court-sponsored mediation has been locus of government interference (Potter 1992) (Cases mediated by courts declined from 80% to 31%) • Respondents feel that interference in judgments in contract disputes is low (Shanghai/Nanjing data)
Dispute resolution: litigation
• About 60% of judgments enforced (details from Nanjing court data) • Government interference in contract disputes, when it occurs, occurs more often during enforcement • Interference most common when enforcement of judgment would lead to financial difficulties resulting in lay-offs of employees
Attitudes toward business and legal systems
• Attitude toward: legal system business people High/very high 18.3% Average Low/very low 56.3% 25.3% (Shanghai/Nanjing data) 4.1% 42.9% 53.0%
Attitudes toward business and legal systems
• Attitude toward legal system “It’s better than it was before, and in the future it will definitely be good; we’ve entered the WTO. The effectiveness of the courts is okay; in Nanjing, we’re fairly satisfied with the fairness. When companies do business they consider legal factors relatively often ( 比以前好 , 以后也肯定好 , 我们 假如 . 法院的效率还可以 , 在南京么 , 公正性方面 我们都搞定了 .
公司在做业务的时候考虑法律因 素比较多 ). (Enterprise interview #39)
Attitudes toward business and legal systems
• Attitude toward business people “There’s no trust to speak of. The Cultural Revolution destroyed the normal relations between people; there’s no more mutual trust. Under the planned economy, one wouldn’t even call it trust; just irresponsibility. The situation of trust is pretty bad. ( 没有信用可言 . 文革打破了人 与人之间正常的关系 , 不再相互信任 . 计划经济 时期那不叫信用 , 是不负责任 . 信用状况很差 ). (Enterprise interview #39)
Conclusion 1: law and economic growth
• Contra Weber and North • well functioning legal institutions —not a prerequisite for growth • but absence of well functioning legal institutions —does limit growth (Recall examples from legal regime for contracts during 1980s)
Conclusion 2: bases of contracting
• Contracts are often not grounded in pre existing social networks • But, rather, occur at arm’s length
Conclusion 3: role of courts
With respect to contract disputes, • Institutional alternatives to the courts are unavailable or underdeveloped • Courts are neither as completely flawed as they have been portrayed, • nor are disputants as non-litigious as they have been portrayed
Conclusion 4: comparative institutions
• Comparative context: • “Myth of the reluctant litigant” • Japan (Haley 1978) • Taiwan (Winn 1994) • Korea (Park 1997) • Why “myth”?
• Reject non-litigious culture • Highlight institutional
in
capacity
Conclusion 4: comparative institutions
• Contrast China: rapid development of institutional capacity at earlier stage of economic development • Korea (2002) per cap income US$ 11,280 • China (2002) per cap income US$ 960 • Korea (2002) per cap lawyers 9,383 • China (2002) per cap lawyers 9,510
Conclusion 5: “rule of law” and legitimation
• Why rapidly develop institutional capacity? • “Rule of law” new element in CCP’s legitimation strategy • 1999 Constitutional amendment: “The People’s Republic of China exercises the rule of law, building a socialist country governed according to law.” • Complements early reliance on economic performance in legitimation strategy •“Rule of law” to gain benefits of market economy and deepen links to international economy
Conclusion 5: limits to “rule of law” and legitimation
• Instrumental approach to “rule of law” • Contract disputes among most common and least politically sensitive • no direct spillover to other legal arenas • When contract disputes do become politically sensitive (e.g. may lead to lay-offs, unemployment) • “rule of law” does
not
always hold sway