On The Termination Of Contract

The system of rescission of contracts is an important system in P.R.C contract law. Article115of the General Principles of the Civil Law ofP. R.C firstly prescribes the relevant provision with respect to the rescission of contracts. Article94of The Contract Law of P.R.C (hereinafter referred to as "the Contract Law") provides concise and specific regulation on this issue. What’s more, Article96of the Contract Law prescribes rules with regard to the procedure of parties’exercising rights of rescission of contracts. But in the judicial practice there exist a lot of cases that judges terminate contracts, here we call judicial rescission. There is no concise regulation regarding such cases, thus lots of problems occur in the judicial practice. In particular, the limitation of the Contract Law and the relevant judicial interpretation bring out many difficulties to the judicial practice in China, thus it is necessary to theoretically explore relevant issues on the rescission of contracts.In judicial practice, the party entitled to the rescission right by operation of law may bring a lawsuit to a court or an arbitration institution without notifying the other party to terminate the contract; also, some parties concerned may bring a lawsuit to a court or an arbitration institution to request to terminate the contract after delivering the notification of rescission of contract, the court or the arbitration institution shall directly decide to terminate the contract upon the request of the party concerned; in some cases, even the party concerned files a lawsuit to a people’s court without requesting to terminate the contract, but it is impossible to realize the aim of the contract, the court also may decide to terminate the contract. Is it the right of the party concerned or the power of competent authorities to terminate a contract? Shall the party concerned or a competent authority exercise the right to terminate a contract? There is no specific regulation with regard to these issues in the Contract Law and other relevant laws. During the long-term judicial practice, authorities always exercise the right to terminate contracts on behalf of the parties concerned. It is common that the authorities directly decide to terminate contracts upon the requests of the parties concerned. Courts or arbitration institutions get used to such practice and there are also many similar cases. At the meantime, the rescission of contract is confirmed in the relevant judicial interpretation of the Supreme Court. Article26of the Interpretation Ⅱ of the Supreme People’s Court of Several Issues concerning the Application of the Contract law of the People’s Republic of China, Article15of the Interpretation of the Supreme People’s Court on the Relevant Issues concerning the Application of law for Trying Cases on Dispute over Contract for the Sale of Commodity Houses, Article9of the Interpretation of the Supreme People’s Court on Issues Concerning the Application of law for the Trial of Cases of Dispute over Contracts on Undertaking Construction Projects confirmed the rescission of contracts other than the rescission by operation of law and/or by agreement as prescribled in the Contract law.According to the provision of Article96of the Contract law, a party demanding termination of a contract by operation of law or by agreement shall duly notify the other party. The contract shall be terminated upon the receipt of the notice by the other party. If the other party objects to such termination, it may petition a competent people’s court or an arbitration institution to adjudicate the validity of the termination of the contract. Based on this article, except for the contract rescission by agreement, when a party intends to exercise the right of contract rescission, it shall notify the other party and the contract shall be terminated upon the receipt of the notice by the other party. Thus, the right of rescission of contracts may occur upon unilateral declaration of intention without confirmation of court or arbitration institution. So this kind of right has the features of the right of formation. As the Contract law places more emphasis on fundamental default objective of contract rescission during its system establishment, the right of contract rescission is deemed as a kind of right of formation. While this system establishment cannot fully cover the cases of contract rescission other than the cases prescribed in Article93and94of the Contract law, therefore the nature of the right of contract rescission shall not be deemed as a kind of right of formation but a kind of right of action of formation. The said right of action of formation means that the person entitled the right shall exercise the right through filing a lawsuit to the competent court and the effectiveness of the right shall be confirmed through the decision of the court. Generally, the right of formation shall not be exercised through a court. Such right of action of formation shall be exercised through the litigation with the consideration that such rights may have great influence to the counterparty, thus it is necessary for relevant people’s court or arbitration institution to make relevant decisions to guarantee fairness. On the other aspect, as the right of formation may not be effectively controlled by itself when being exercised, the formed action may come into force only through the judgments with adjudged force. The right of rescission is the right of contracting party given by law in the case of inability to strictly comply with a contract. Once a contract is entered into, both parties shall strictly follow and perform the contract. However, under certain circumstances, as the act of one party has made the contract being unable to be performed, the other party shall request the counterparty to undertake the relevant default responsibility through filing a lawsuit. In such case, if the contract can not be terminated, it will depart from the aim of the contract. Therefore, the counterparty shall be entitled to the right to terminate the contract. But this kind of rescission will not necessarily lead to eliminating the dispute concerning the contract. Firstly, if one party disagrees to terminate the contract, the result of rescission will not occur immediately. Secondly, after the contract rescission, the issues of contract restitution and damages resolution shall be resolved through the relevant procedure. In the end, the party entitled to the right to terminate the contract may settle the dispute only through due lawsuit procedure.The nature of contract rescission is a kind of penalty measure to failure to perform or improper performance. Substantially it is a kind of form of contract responsibility and one of default remedies by one party without breaching contract. The Contract Law deems contract rescission itself as the reason to terminate a contract, which indicates the nature of contract rescission. Whereas under the guidance of the principle of encouragement of trade in the Contract Law, contract rescission is defined that only when one party occurs basic default, then the contract may be terminated, thus the matter of contract rescission is only limited to default rescission to strictly confine the meaning which contract rescission itself is deemed as the reason of terminating a contract.According to The Contract Law, Article94and96are arbitrary regulations. The word "should" in article96can’t be explained as compulsive regulation. Hence, Article94and96are not action regulations; parties needn’t necessarily rescind contracts according to them. Article94is an authorative regulation, not an adjudicative regulation itself. As far as the aim of rescission of contracts, Article94is not an adjudicative regulation. The first half of Item in Article96is not compulsive, but arbitrary regulation. Therefore, it can be inferred that Article94and96don’t restrict judges directly. So the judges have the right to rescind contracts in regulation of The Contract Law. As to public law, as the judicial organ, court should not only follow the principle of Not Managing if not appealing, but also meet the requirement of Managing if appealing in the judicial procedure. And judicial rescission properly adapt to this requirement. The right of contract rescission by court not only ensures the performance of the right of appeal of citizens, but also may benefit optimization of resource in compliance with economic principle of litigation. The right of contract rescission by court meets the value requirement of justice, fair and efficiency etc. as well as judicial activism in the proper meaning.There are twenty-nine articles in the contract law which provides the content of the rescission of contracts. Among them, Article8sets the principle of observing the contracts strictly, that means parties can’t rescind contracts at will. Centered on Article93and94, it establishes the system of rescission of contracts. This system is for ensuring carrying contracts, but it has a lot of shortcomings. It can’t contain the content of sub-duties which causes the confusion of the system of rescission of contracts. It sets force majeure as a condition of rescission of contracts, which also causes the confusion of the system of rescission of contracts. It provides the rescission of contracts as a condition that the right and duty of contracts, which brings about the disorders of law provisions and stipulations. It can’t contain principles of changed circumstances, which results in incomplete system of rescission of contracts. Rescission of contracts is not only is a measure of terminating contracts, but also a measure of looking for release from contracts which parties are unwilling or unable to fulfill. It isn’t bound to compliance with parties’purpose of the contract or conducive to protecting their interests if rescission of contracts is restricted strictly in law. So it is necessary to reconstruct the system of contracts rescission. In order to ensuring balance of parties’contract freedom and judges’jurisdiction with effect in the course of judicial rescission of contracts, general terms of rescission contracts should take into consideration. And it should be classification when the contracts need be terminated or not be terminated.The liability of contract rescission involves the protection of the interest of the party being rescinded. Such interest protection mainly covers whether the interest of the part having been performed is protected or not and the interest of the part not to being performed is compensated or not. The Contract Law considers the contract rescission as one of reasons to terminate a contract, but there is no separate provision of liability of contract rescission but one of breach circumstances. However, the liability of contract rescission is not equal to breach liability because of the fact that the circumstances of contract rescission are not only limited to fundamental breach. In some cases such as change of circumstances, performance of a contract with help of other parties, etc., the contract also may be rescinded. Therefore, the liability of contract rescission cannot be equal to breach responsibility. Integrated contract rescission shall include contract refund liability, protection of contractual reliance interest, protection of legitimate contractual expectations etc.