Dissolution Of Contract And Responsibility For Breach Of Contact

There is some controversy over whether dissolution of contract would affect theresponsibility for damage compensation due to breach of contract, and contractviolation responsibility of a default party in academic circles and judicature circles.The purpose of dissolution of contract is to get the contracting party cast off thecontract. As to how to protect the creditor’s rights after dissolution of contract, thereare flexible regulations in Contract Law of People’s Republic of China (hereinafterreferred to as Contract Law), that is,“The party can ask to rehabilitate, take otherremedial measures and is entitled to claim for damages.” It is regulated in ContractLaw that dissolution of contract is one of the cases of expiration of rights andobligations, but retrospective effect of dissolution of contract is not stated. In theacademic world, there is the dispute of direct effect theory and compromise theory.Responsibility for breach of contract protects the rights of observant party andcompensates its loss by asking the default party to continue to carry out the contract,compensate, to pay the liquidated damage and other forms based on the effectivelyexisting contract. If it is only seen from the aspect of whether the dissolution ofcontract can eliminate the contractual relationship and whether dissolution ofcontract can coexist with responsibility for breach of contract, the conclusions willbe different for direct effect theory and compromise theory.In the case of dissolution of contract for breach of a contract, according to directeffect theory, the contract does not exist since it is terminated and the responsibilityfor breach of contract also loses its existing basis. In the case of “House-buyingcontract dispute case between Guangxi Crown Electric Power Limited LiabilityCompany and Guangxi Yongcheng Real Estate Development Limited Company”published in Gazette of the Supreme People’s Court, it was believed that direct effecttheory was applied as for the effect after dissolution of contract. It denied thesimultaneous use of dissolution of contract and responsibility for breach of contractand it was believed that as kind of civil liability, the compensation for damages after dissolution of contract is not shown as the undertake of the responsibility for breachof contract. According to compromise theory, as to the contract that is already carriedout, the contractual relationship does not eliminate and responsibility for breach ofcontract can coexist. In the case “Joint operation dispute case among Chaili Mine ofZaozhuang Mine (Group) Limited Company, Qingdao Branch of Huaxia BankLimited Liability Company and Huadong International Trade Limiited Company inQingdao Bonded Zone” published in Gazette of the Supreme People’s Court, it wasbelieved that compromise theory should be applied to the effect after dissolution ofcontract and it supported the observant party’s claim for paying compensationdamages after dissolution of contract.The basis of coexistence of dissolution of contract and responsibility for breachof contract is shown in two aspects. On the one hand, after dissolution of contract, atleast one party does not fulfill the contractual obligations or has the obligation to fillup the other party’s loss. The object of dissolution of contract is the original rightsand obligations of contractual relationship and it is shown that remedial rights andobligations in responsibility for breach of contract is generated and it is thereplacement of the original rights and obligations. Therefore, dissolution of contractand responsibility for breach of contract can coexist. On the other hand, the existenceof responsibility for breach of contract relationship can find the basis from thejuristic fact of violation of contract. So the damage caused by breach of contract isthe result of contract debt being violated and it is objectively existed. Therefore,responsibility for breach of contract will not be eliminated because of dissolution ofcontract.The coexistence of dissolution of contract and responsibility for breach ofcontract is limited. If the dissolution of contract is caused by force majeure,responsibility for breach of contract is not involved because force majeure isexemption according to law and when the contract cannot be carried out any more,any party has the right to terminate the contract. Termination by agreement is toterminate the contract through both parties’ agreement and it equals to make a newcontract and undertake of responsibility for breach of contract does not exist. If thereis noncompliance, the clearing of damage is done when the two parties terminate the agreement and responsibility for breach of contract will not be produced. Thecoexistence of dissolution of contract and responsibility for breach of contractmainly reflects on the legal discharge of contract by breach. But the coexistence isnot bound to happen in this case. If one party’s noncompliance can make the otherparty have no loss and back to the original status of signing the contract throughrehabilitation, there is no undertake of responsibility for breach of contract. Whendischarge of contract by breach coexists with responsibility for breach of contract,the application of continuing to perform the contract should be excluded. Becausethe observant party exempts its obligations through dissolution of contract, observantparty has no right to ask the default party to continue to undertake the responsibilityfor breach of contract.The application of damage compensation for breach of contract after dissolutionof contract can be divided into three situations. If the contract is not performed yet,the compensation for damages undertaken by the default party should be theobservant party’s necessary expenses prepared to perform the contract. As to therestorable part, if the observant party chooses to restore it, the default party shouldundertake the compensations of performing the contract obligations, taking thereasonable remedial measures and the loss caused by restoring. If it is not restorableor the observant party claims for the direct compensation instead of rehabilitation,the observant party’s all damages should be compensated in terms of the equityprinciple or expectation of the other party’s performance of contract after one party’sperformance of contract. In this case, the compensation for dissolution of contract isin agreement with intension of the damage compensation for breach of contractregulated in No.113clause in Contract Law.In the case of dissolution of contract, liquidated damages clause is a kind ofpayment confirmed by the party and independent of contract debt performance. Seenfrom the status of contract clause, liquidated damages clause is independent. In thecontract dispute cases in judicial practice, as long as there is liquidated damagesclause in the contract, observant parties mostly ask the other party to pay thepayment of liquidated damage when asking for the dissolution of contract. In thiscase the court supports the claim for liquidated damage and it is the approval of effect of liquidated damages clause. Not only it is beneficial to calculate thecompensation for damage, but also it can increase the lawsuit efficiency. Consideringfrom the aspect of keeping the internal consistency of dissolution of contract system,the actual loss should be the application element of liquidated damages at the time ofdissolution of contract. Because liquidated damage is a kind of agreed clause, theliability for liquidated damages should be prior to the legally required liability fordamage under the principle of freedom of contract.