On Contracting Parties' Statutory Power To Terminate Contracts

Termination of Contracts is an important rule in Contract Law of the People's Republic of China (the"PRC Contract Law"), and plays an important role in settling commercial disputes, stabilizing commercial relationships, and promoting economic development. Statutory Termination of Contracts is one of the alternatives to terminate a contract, which is provided in Article 94 of the PRC Contract Law. Regarding which party is entitled to exercise the Statutory Termination of Contracts, there has always been two different views. One is that, the power, as a general rule, should be with a Non-Defaulting Party, with the exception that it can be exercised by a Defaulting Party; the other is that both parties are entitled to that power, no matter in what case. The main difference of the two views lies in the understanding of the Termination of Contracts itself, therefore, this paper considers it necessary to have an all-round analysis and examination of this issue, in the hope that laws can be applied properly.Assuming the first view is reasonable, in accordance with the currently applicable laws, the Non-Defaulting Party may choose to or not to exercise the power to terminate the contract. In the prior case, the contract is terminated and the Defaulting Party shall compensate; in the latter case, the contract is not terminated, and the Defaulting Party shall bear the liabilities for breach of contract, including Specific Performance, Cure of Non-Conforming Performance or Payment of Damages, etc.The Non-Defaulting Party may claim Specific Performance by the Defaulting Party if Article 110 of the PRC Contract Law does not apply, which stipulates the circumstances under which the Defaulting Party shall be released from Specific Performance. In that case, shackles are created by the contract, preventing the Defaulting Party from being released from the contract in a justifiable manner, which, not only goes opposite to the rule of Termination of Contracts, but also violates the true meaning in adopting the PRC Contract Law.The main reasons for not empowering the Defaulting Party with the Right of Termination of Contracts are: firstly, it is contrary to the legal principle that, a Defaulting Party has no rights to terminate a contract by giving up its obligations; secondly, under the current rule of Statutory Termination of Contracts, it would encourage the Defaulting Party to breach the contract and thus de-stabilize the balance within deals if the Defaulting Party is empowered with the right of Statutory Termination of Contracts; thirdly, the Non-Defaulting Party may choose to or not to exercise the right of Statutory Termination of Contracts, if that right is with the Non-Defaulting party only, so that, if the Non-Defaulting Party chooses not to exercise that power, he may claim Specific Performance, which would protect the interests of the Non-Defaulting Party and help stabilize deals; if that power were also with the Defaulting Party, the Non-Defaulting Party shall not be able to claim Specific Performance, which would not provide protection of the interests of the Non-Defaulting Party; lastly, the damages under the Statutory Termination of Contracts, if exercised by the Defaulting Party, would not amount to the loss incurred to the Non-Defaulting Party, so that the interests of the Non-Defaulting Party cannot be sufficiently protected. This paper considers that, the foregoing views are caused by (1) the certain unreasonableness in the current system, and (2) the insufficiency in the understanding of the three relationships, i.e. the relationship between termination of contracts and breach of contracts, the relationship between fundamental breach of contracts and specific performance, and the relationship between statutory termination of contracts and damages.The paper will examine the foregoing three relationships, reveal the unreasonableness in our current system of Statutory Termination of Contracts, and then, from perspectives of legislative studies, expository jurisprudence, and economic analysis of law, discuss the reasonableness in empowering the Defaulting Party with the right of Statutory Termination of Contracts. This paper concludes that, the only condition on which a contract can be subject to statutory termination is that the objectives of the contract cannot be realized. Since the objectives of the contract cannot be realized, the basis for the contract ceases to exist, and the contract should be terminated timely, no matter by what party. In a word, by empowering the Defaulting Party with the right to terminate contracts, we can make our system of Statutory Termination of Contracts more complete, thus encouraging the healthy development of commercial activities.