On The Compensation For Expectant Interest Of Termination Of Contract

According to Article 97 of Chinese Contract Law(the “Contract Law”), the legal consequences for termination of a contract includes compensation for damages, but the Contract Law does not set forth the scope of compensation for damages and whether the damages include expectant interests which makes it a controversial issue and causes the inconsistence between law and practice. Thus, a unified approach is needed. This article will start from the analysis of relevant judgments and judicial practices to identify the fundamental causes of the above-mentioned inconsistence. And in order to have a more perfect, in-depth study and description on the whole issue, this article will further explore the scope of compensate for termination of a contract under different circumstances and how to define the accurate amount of expectant interest. In addition to the introduction and conclusion part, this article comprises the following four parts:The first part is about the relationship between the termination of a contract and compensation for expectant interest in practice. This part is mainly to elaborate the current judicial practice, perspectives of legal departments and legal rules on whether the scope of damages for termination of a contract contains the expectant interest in practice. By enumerating pros and cons, summarizing the five different views of judges and the different legal provisions, the article draws a conclusion that the fundamental difference results from the following controversial issues:(i) the retroactive effect of a contract;(ii) the nature of compensation for damages for termination of a contract; and(iii) the relationship between termination of a contract and responsibility for breach of a contract.The second part is on the theoretical origin of compensation for termination of a contract based on the above-mentioned three theoretical issues summarized in the first part. The core issue of the effect of termination of contract is retroactive effect. There are currently five theories on the legal consequence of the termination of a contract and different theories produce different legal consequences on this issue. By comparison with foreign regulations as well as the analysis of the advantages and disadvantages of each theory, compromise theory is more in line with Chinese current legislation and thus termination of a contract with no retroactive effect is more applicable based on the interpretation and application of Chinese current legal regulations. The compensation for termination of the contract, taken into consideration the connotations of current legal regulations, the purpose of termination of a contract, the principle of justice and retroactive effect of termination of a contract, should be taken as the compensation for breach of a contract. Termination of a contract and breach of a contract are two separate theories under Contract Law, each of them has different features and legal significances respectively, but due to the overlap on the issue of compensation, the two theory are not exclusive with each other.The third part is the justification of the compensation for expectant interest of termination of a contract. This part will explore the compensation for expectant interest under four different circumstances,(i) termination of a contract due to breach of a contract based on statutory right to termination,(ii) mutual agreement to termination a contract;(iii) termination of a contract because of force majeure; and(iv) termination of a contract based on right of discretional termination. If one party defaults and the non-defaulting party exercises his or her statutory right to terminate the contract, the scope of damages should include the expectant interest due to breach of the contract. In the case of mutual agreement to terminate a contract, whether the damages should include the expectant interest can be agree upon parties in the agreement. If parties can not reach an agreement on that, the injured party should not be arbitrarily deprived of the right for compensation of expectant interest and each case should be judged upon its specific facts, the extent of breach of the contract by the parties and the reasons and the purpose of the termination of the contract. For the force majeure termination of a contract, normally parties could be exempted from liability in part or all, but the parties shall sill undertake the responsibility for delay in performance(if any) and the scope of damages should include the expectant interest. As to termination of a contract by exercising discretional right of termination, this article mainly focuses on termination of a commission contract that could be divided into commission without consideration and commission with consideration. For commission with consideration, the judge should consider the legitimacy of the reasons for terminating, the reasonableness of the period of exercising the right to terminate and other factors to determine whether the expectant interest are compensable.The fourth part is about the determination of the amount of the compensation for expectant interest. This part mainly focuses on the method of calculation, certification rules and special restrictions on expectant interest. By referring to judicial practices, the article put forward opinions on the method of calculation and the application of relevant rules. Due to the nature of the expectant interest, it is extremely difficult to accurately certificate the amount of compensation for expectant interest. It is suggested that the standard of certification shall be lowered in judicial practice and the judges should play an active role in the application of discretional evaluation of evidence to determine a reasonable amount of compensation for expectant interest in order to safeguard the legitimate rights and interests of the parties.