A Study On The System For Termination Of Contract

The system for termination of contract is a fundamental system in the contract law. Theright to terminate the contract constitutes the main contents in the system for negotiatedtermination of contract. In the civil private right system, the right to terminate the contractbelongs to the right of formation, and is the typical representative thereof. Therefore, the rightto terminate the contract is also provided with the “arbitrary nature” of “rights” like the rightof formation, in which the unilateral act of the terminating party can generate the strongrelationship of “power and obedience” in the field of right of the related party. This “right inprivate law” is actually the prior choice by the lawmakers after measuring interests and values.What is worth more attention is that interest measurement and value considerations not onlyexist in the legislative process but also are necessary in the judicial process. This dissertationendeavors to conduct a comprehensive investigation and study on the system for terminationof contract from the perspective of the legal restriction of the right thereof. In addition to theintroduction, this dissertation is composed of eight parts.Chapter One: the Concept of Negotiated Termination of Contract and System. Theclarity of the concept and system of the negotiated termination of contract has much to dowith the coordination of the internal structure and the logic reasonableness. The clarity of theconcept of termination is under the influence of whether the termination has retroactivity.Under “with retroactivity”, the non-performance and termination of contract classify thecriteria of legal effect, in which the contract relationship disappear retroactively before thedischarge of contract while the contract relationship remains to be effective before thetermination of contract. In “no retroactivity” and “liquidation relationship theory”, thecontract relationship before the discharge and termination exists. So the biggest differencebetween the two no longer exists. Therefore under the declining of “with retroactivity”, thereis no necessity for the existence of termination of contract other than the non-performance ofcontract. By deconstructing the system for negotiated termination of contract, the author holdsthat it is desirable to exclude the agreement beyond the scope of the system for negotiated termination of contract. According to the legal properties of negotiated termination ofagreement, the negotiated termination of agreement and performance, offset, escrow, exempt,confusion and alteration of debt are incorporated into the debt elimination. The system fornegotiated termination of contract contains the stipulated termination and statutorytermination, and the latter is divided into the general statutory termination and specialstatutory termination. The general statutory termination contains violation termination andlawsuit termination and special statutory termination mainly refers to arbitrary termination.Chapter Two: Negotiated Termination of Contract. The justification of negotiatedtermination originates from the termination of the counterparty’s act of authorization, which isautonomous behavior in the private law in nature. Based on the respect for autonomy of theprivate law and contract freedom,“contract freedom” is endowed into more advantageousposition compared with “strict abiding of the contract” in the interest measurement and valueevaluation, and the justification of negotiated termination is recognized accordingly. However,the freedom has its own limit, and there is no freedom with it. The negotiated terminationwith the contract freedom as the theoretical foundation shall be restricted and remedied by thecontract justice. Through the evaluation and measurement of justice value loaded by thegeneral principles in the civil law such as honesty and credibility and prohibition abuse ofright, the law has gotten rid of the “the legislation centralism”, the absolute rationalism, whichlimit the negotiated termination, and acquire a reasonable justice considerations under theguidance of interest balancing and value evaluating as the methodological principles.Chapter Three: Legal Termination of Contract（一）：Breached Termination. Thebreached termination takes the termination reasons as the core contents, which are the majormeans of law to delimit the right range to terminate the contract; therefore the terminationreasons themselves have the function of right restriction. In the continental legal system, asfor the protection of the non-breaching party, the breached termination which takes thedelivery barrier type as the connection basis is not extended; the judgment standards forbreached termination which takes the violation of obligation as the connection basis iscomparatively fuzzy, therefore it gradually evolves into the legislation mode of the common law system which takes the fundamental breach as the connection basis, though it has notcompletely got rid of the influence of the delivery barrier type. The connection basis of thecommon law system has always been the fundamental breach; CISG and PECL, PICC, andDCFR also takes the fundamental breach as the connection basis. The Contract Law in Chinahas introduced the fundamental breach as the connection basis of breached termination,though some different judgment standards existed for fundamental breach. This dissertation,by reviewing the fundamental breach in the above-mentioned legislation and unifiedregulations, proposes that it is suitable to take the serious result of damage, the possibility ofthe remedy by the breaching party as well as the damage to the trust as the judgmentstandards for fundamental breach, the type of fundamental breach should be divided into theanticipated fundamental breach and the actual fundamental breach and then to divide theanticipated fundamental breach into express anticipated fundamental breach and implicitanticipated fundamental breach. Such provisions are conducive to the judgment on whetherthe fundamental breach constitutes and the fundamental breach can give full play to itsinterest balance and right restriction.Chapter Four: Legal Termination of Contract（二）：Lawsuit termination. Thejudicial foundation of lawsuit termination is the right of formation action enpowered to theobligee by the law. The right of action of formation is a special type of rights of formation andrestriction over the obligee to exercise the right of formation. The prerequisite of thetermination of lawsuit is that the law has to empower the right of formation, such as thetermination of lawsuit when the circumstances change. If there is no empowerment of suchright, but the terminating party intends to terminate the lawsuit, so such party must notify thecounterparty at first and transfer the right of formation into the right of lawsuit formation.Only then can the right of lawsuit formation choose lawsuit termination. That’s how thelawsuit termination happens to be the right of formation. This chapter describes the principleof circumstances changes in Chinese law and distinguishes such changes from force majeure.it holds that the principle of circumstances changes should include the force majeure whichcauses failures of contracts. So it should not completely exclude all the force majeure. Article 26in the Interpretation II of the Contract Law stipulates the principle of circumstanceschanges. But the restriction on the procedures of the principle of circumstances changesgiven by the Supreme Court indeed exerts certain influence on the application. At last, thecomparison between the cases before and after confirms the necessity to stipulate the principleof circumstances changes in the legislation.Chapter Five: Legal Termination of Contract（三）： Arbitrary Termination.Although unified into the name of arbitrary termination, the theoretical foundation of it whichapplies to different types are not always the same. The theoretical foundation of arbitrarydissolution based on the efficiency value or contract freedom, personal freedom, breakdownof the trust as well as the protection of the interests of the weak party differs greatly, so that itis impossible to make general provisions thereof. The restriction provision of arbitrarytermination constitutes the core contents of the system. The application scope of the arbitrarytermination right should be strictly restricted, and furthermore, based on the difference in thecontract type, the subject, time, mode of performance, damage and direct provisions are alsogreatly restricted. The right of arbitrary termination should also be excluded because ofexcessive intrusion into the interests of the counterparty of the termination. As for the twotypical arbitrary termination of contract, the focus of the restriction over the arbitrarytermination of commission contract lies in the commission type, in which unpaid commissionand general paid commission may apply to arbitrary dissolution while commercialcommission cannot. If the party claims to terminate the contract with the relationshipbreakdown as the reason, it is appropriate to terminate the contract through lawsuit andexpand the extension protection of the consumers’ rights and interests, as the ConsumerProtection Law makes excessively strict restriction over the trade type and subject applicableto consumers’ right to terminate contract without conditions,Chapter Six: Exercise of the Right to Terminate the Contract. The exercise of rightof termination reflects the restriction of the law over the right of termination, thequalifications of exercise subject as well as the selection over termination mode. However, themore direct restriction over the right of termination is reflected in the restrict of exercisedeadline and the dissertation right of the counterparty. The subject qualifications of statutorytermination right shall be clarified in the legislation so as to prevent the breaching party lackof qualification or the court to abuse the right to terminate. The dissolving party exercises theright of termination by means of notice as well as the counterparty, if he has dissent after receiving the notice on termination,. The validity of the right of dissolution previouslyexercised is pending after the dissolving party receives the dissent and the right of dissolutionof the dissolving party is transferred into the right of indirect formation which is thefoundation of lawsuit, if the dissolving party still intends to dissolve the contract. Thelegislation should add the provision to interpret the general scheduled period for the exerciseof right of dissolution and shorten the general scheduled period by stipulation or designatedreasonable period so as to fit into different contract types and performance of contract, whichconform to the jurisprudence of restriction to the excise of the right of dissolution combingwith the shortened special scheduled period stipulated or designated. t It is difficult to reflectthe invalid period in the exercise of the right of dissolution. Only in the circumstance thebreaching party can be offered the remedy chance and the non-breaching party with the rightof interpellation fails to exercise the right can the court apply the system for invalid period toprotect the legitimate rights and interests of the beaching party. The dissent right of thecounterparty reflects the interest balance between the dissolving party and the counterpartyand it is comparatively proper to take the means of notice. After the dissolving party notifiesthe counterparty, the contract can not be revoked immediately but be pending and required theexercise of dissent right of the counterparty by the means of notice. So the dissent periodshould not be too long shortened from three months to15days. The distinction of right ofdissolution does not mean the non-breaching party permanently loses the remedy mode ofdissolution of contract in the successive performance of the contract. When the reasons forstatutory dissolution appear again, the non-breaching party regains the right to dissolve thecontract and whether the stipulated dissolution right can be regained should be determinedwith comprehensive consideration according to the stipulated contents and the trade.Chapter Seven: Legal Effect of Termination of Contract. The core issue of the legaleffect of dissolution of contract is the retroactivity of the dissolution of contract, and thedetermination of restoration and damages is both based on the retroactivity. With the differentunderstandings of the meanings of retroactivity as the beginning point and the historicaldevelopment vein as the main line, this paper investigates the legal effect of dissolution ofcontract and analyzes the dissolution condition theory—indirect effect theory, direct effecttheory, compromise theory, liquation relationship theory and its “replacement and continuity”,and it believes that in the view of “retroactivity makes the legal act retroactive anddisappear”, the compromise theory can justify itself in logic on the definition of the legal effect of dissolution of contract. The liquidation relationship theory which holds “retroactivitymakes the results of the legal act retroactive and disappear”, without difference in theexistence of retroactivity or not, is the most appropriate in theory. However in the view thatthe acceptance of liquidation relationship theory remains to be seen, the advanced legislationexperience of the provision on nonexistence of retroactivity of dissolution of contract in theDutch Civil Code can be referred to and the adoption of the compromise theory in thelegislation can better conform to the real present situation in China.Chapter Eight: Reflection on the Legislative Perfection of the System forTermination of Contract in China. On the basis of the research results previously, and forthe purpose of improving the relevant provisions in China, this part proposes suggestions forthe improvement of the system for dissolution of contract in China, mainly including:(1) takeapart the provisions in Paragraphs1and2in Article93under the Contract Law and removethe negotiated termination stipulated in Paragraph1from Termination of Contract toTermination of Debt under the general provisions on debt to make enumerative provisions onperformance, offset, escrow, exempt, confusion and alteration of debt;(2) separate theprovisions on negotiated termination in Paragraph2in Article93under the Contract Law as asingle article and retain it in the termination of contract, but not add the restriction over theconditions of the stipulated dissolution in this article;(3) separate the provisions onanticipated fundamental breach in Paragraph2in Article93under the Contract Law as asingle article and specifically provide “Where prior to the time for performance, a partymakes it clearly that there will be a fundamental non-performance by word or act whichmakes the purpose of contract in vain, the counterparty can terminate the contract and shallnotify him to provide guarantee or may suspend his performance. If the party fails to provideguarantee, the other party can terminate the contract”;(4) delete the provisions on “The aimof the contract cannot be attained because of force majeure” in Paragraph1of Article94under the Contract Law, and improve the stipulation on the exemption clause about forcemajeure in Article117under the Contract Law by changing “unable to perform the contractbecause of force majeure” into “violate the contract because of force majeure”;(5) delete theprovisions of grace period in Paragraph2in Article94under the Contract Law and changeArticle94into two paragraphs:“The non-breaching party may terminate contract as thedefault of the breaching party substantially deprives the non-breaching party of interests likelyto be acquired according to the contract. However, if it is possible for the breaching party to make remedy for the consequence caused by the breach, a reasonable period of time may beoffered. If he fails to make remedy within the time, the non-breaching party can terminate thecontract. If the non-performance is intentional or imprudent, and the non-breaching party hasthe reason to believe the breaching party will not perform, he may terminate the contract.”(6)incorporate Article26under the Interpretation II of Contract Law into the termination becauseof breach and delete the restriction over “the non-force majeure”;(7) add the provisions onthe general scheduled period in the exercise of right of termination:“The right to terminateshall vanish if the party fails to exercise within one year as of the day when he knows orshould know the reason for termination”;(8) amend Article96under the Contract Law as“When advocating termination of contract in accordance with the provisions of Paragraph2of Article93and Article94of this Law, the party shall notify the other party. And theobjection shall be notified to the dissolving party within15days if there is. After receivingthe objection notice of the other party, the dissolving party may apply to a people’s court or anarbitration tribunal to determine the validity of the termination of contract;(9) amend Article97under the Contract Law as “The termination of contract has no retroactivity. After thetermination of contract, the party can refuse to perform as clauses in contract not yetperformed,and have the right to ask for recovery or other remedial measures or compensationin accordance with the situation of performance and the nature of the contract as those alreadyperformed”;(10) amend Article410under the Contract Law as “In the unpaid commissioncontract and the general paid commission contract, the consignor or consignee may dissolve acommission contract at any time, but are obliged to compensate for the losses to the otherparty because of this termination, except for reasons not attributable to them. If therelationship between the parties of the commission contract has broken, any part may apply toa people’s court or an arbitration tribunal to terminate the contract”.