‘Contract’ or ‘agreement’ – which is correct?

In this article, I consider the meaning of the words “contract” (hetong in Chinese) and “agreement” (xieyi), and various other words in English and Chinese that are used to convey the same or a similar meaning.

In everyday conversation, these words are often used interchangeably. In some cases, the choice depends simply on convention – for example, in both English and Chinese we commonly refer to a “shareholders’ agreement” rather than a “shareholders’ contract”. In other cases, there are subtle technical differences that lawyers and legal translators should understand.

There are four English words that I will consider for this purpose: “contract”, “agreement”, “deed” and “instrument”.

Contracts and agreements

In general, the word “contract” in English is used to describe a legally binding and enforceable agreement between two or more parties. Thus, we talk about contract law, or the law of contract. The word “agreement”, on the other hand, has a broader meaning and can be used either to describe an agreement that is legally binding or an agreement that is not legally binding. Thus, we talk about the parties reaching an “in principle agreement” or entering into “heads of agreement” in relation to a commercial relationship or transaction. Typically, neither of these is binding.

In common law jurisdictions, private contracts are primarily governed by the common law (i.e. judge-made law) instead of statute. This is particularly true in the case of commercial contracts. Consumer contracts, on the other hand, are often regulated by statute as a result of the need to redress the unequal bargaining power between the parties and to protect the rights and interests of consumers. Examples include statutes regulating consumer credit contracts and residential tenancy agreements.

In civil law jurisdictions, the law governing contracts is typically embodied in a code, which regulates all aspects of private contracts. To a large extent, this is the approach that has been adopted in China, where the law governing contracts is primarily governed by the PRC Contract Law, with supplemental laws and regulations that regulate specific types of contract. Article 2 of the PRC Contract Law sets out its scope of application as follows:

For the purposes of this Law, a contract is an agreement between natural persons, legal persons or other organizations with equal standing, for the purpose of establishing, altering, or discharging a relationship of civil rights and obligations.

An agreement concerning any personal status relationships such as marriage, adoption and guardianship shall be governed by the provisions of other laws.

It is relevant to note that the PRC Contract Law is expressed to apply to agreements between parties of equal standing and not to agreements that involve a special status relationship (such as the adoption or guardianship of a child).

As all lawyers have learned during their legal studies, a contract may be formed orally or in writing. In all jurisdictions, however, some contracts are required to be in writing.

In England, the requirement for certain contracts to be in writing first appeared in a statute called the Statute of Frauds, which was enacted in 1677. As its names suggests, the purpose of this statute was to protect parties from fraudulent conduct. It achieved this by requiring certain contracts to be in writing. Originally, the requirement just applied to contracts for the sale of land; subsequently, it was extended to include guarantees.

For similar reasons, the PRC Contract Law requires the following contracts to be in writing:

• • loan agreements, except where the loan is between natural persons
    who have agreed otherwise (article 197);
  • lease agreements where the lease term is six months or longer
    (article 215);
  • financial lease agreements (article 238);
  • construction contracts (article 270); and
  • contracts that are required to be in writing by a relevant law or administrative regulation (examples include guarantees, mortgages and pledges under the PRC Securities Law).

Interestingly, it was also customary under traditional Chinese law for certain contracts to be in writing, as reflected in the following phrase that often appeared in contracts, particularly contracts for the sale of land: kong kou wu ping, li zi wei ju (“this contract is entered into as evidence since a verbal statement cannot serve as evidence”).

A former partner of Linklaters Shanghai, Andrew Godwin teaches law at Melbourne Law School in Australia, where he is an associate director of its Asian Law Centre. Andrew’s new book is a compilation of China Business Law Journal’s popular Lexicon series, entitled China Lexicon: Defining and translating legal terms. The book is published by Vantage Asia and available at www.vantageasia.com