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Comparison and Analysis of Contract Termination

Author of article: Kevin Lawyers of Shandong Win & Win Co. Law Firm

Abstract: In international trade, if one party breaches the contract, the other party has to ask for the termination of the contract. However, under what circumstances the party may request the termination of the contract and can be supported by the court or the arbitral tribunal? For the legal termination right, all countries have set relatively strict conditions. However, due to the different legal systems of the contract law in various countries, there are great differences in the provisions of each country for the termination of the contract. In the following content, the author will make a comparative analysis of the contract termination from the British Contract Law, the United Nations Convention on Contracts for the International Sale of Goods and the Chinese Contract Law.


Key words: breach of contract, termination of contract, legal conditions

1、 The termination of contract in British law.

(1) Conditions and warranties.

According to the Sale of Goods Act 1979, the contract terms are divided into three categories: conditions, warranties and innominate terms. If the parties of a contract violate different terms, the consequences will be different. It is important to distinguish the nature of contract terms. Breach of contract itself does not make termination of the contract, it only gives one party the option of termination, and, if the breach is very serious, termination is required.


  1. What circumstances that condition clauses are under can be considered a warranty clause.

Article 11, paragraph 2 of the Sale Of Goods Act 1979 states that ” Where a contract of sale is subject to a condition to be fulfilled by the seller, the buyer may waive the condition, or may elect to treat the breach of the condition as a breach of warranty and not as a ground for treating the contract as repudiated. ” This article gives the buyer the right of choice. Even if the seller violates the conditions and terms in the contract, the contract may not be terminated. The buyer has the right to waive the right of contract rescission, or it is deemed that the seller violates the guarantee terms without requiring the termination of the contract. The paragraph 3 of Article 11 states that ” Whether a stipulation in a contract of sale is a condition, the breach of which may give rise to a right to treat the contract as repudiated, or a warranty, the breach of which may give rise to a claim for damages but not a right to reject the goods and treat the contract as repudiated, depends in each case on the construction of the contract; and a stipulation may be a condition, although called a warranty in the contract. ” This article stipulates the conditions or guarantee terms, which are not rigid and cannot be seen from the literal, but from the terms in the contract, the environment and purpose in which the contract is concluded.

  1. Is “time” a term of contract performance?

“The most basic elements of contract performance are time, place and object of performance. But the time of performance is the fundamental term of the contract, and will failure to perform on time cause the other party to have the right to terminate the contract? Historically, the common law has adopted a strict approach that considers time to be an element of a contract, unless the parties have an express intention to the contrary. If one party fails to perform the contract within the specific time, the other party may consider the contract to be repudiated and have the right to terminate the contract. However, equity adopts the opposite rules. According to equity, unless the parties have the opposite provisions, time is not a contract element. According to Article 41 of the Property Law, 1925, the rule of equity is superior to the rule of common law, so in a contract, time generally does not constitute a fundamental clause. “

According to the first paragraph of Article 10 of the British Contract Law, “unless there are different provisions in the contract terms, the time of payment shall not be the main terms of the contract.” The second paragraph of Article 10 stipulates that “whether the time in other clauses is an important clause of the contract is subject to the specific provisions of the contract.” Therefore, we can see as for “time”, the provisions of British law are relatively not strict, and the time of payment is not an important clause of the contract. If one party delays in payment, the other party may not terminate the contract, unless there is a contrary provision in the contract. The principle of autonomy of the parties’ will, which is mainly stipulated in British law, depends on the specific provisions in the contract if the other party can terminate the contract in violation of the provisions on time in other articles.

In the case of Decro-Wall International Limited v. Marketing Practitioners Limited, Decro-Wall International Limited (plaintiff) is a French company. It signed a contract with Marketing Practitioners Limited (defendant) to allow the defendant to be the exclusive distributor of its products in the UK. The defendant should pay within 90 days. However, although the plaintiff never suspected that the defendant would pay, the defendant always delayed the payment, and the defendant should pay an additional 20 pounds (bank loan interest) each time, but this account was not recorded in the defendant’s account, but in the plaintiff’s account. The plaintiff sued on the ground that the defendant had repudiated the contract. According to Article 10 of the British Contract Law, the court ruled that the time of payment was not a condition of the contract, unless otherwise specified in the contract. In this case, both parties did not stipulate the time of payment as a condition, so the delay in performance in this case does not lead to a fundamental breach of the contract, and the plaintiff has no right to terminate the contract.


(2)Expected breach of contract

Expected breach of contract refers to that before the contract performance period, if one party clearly indicates that he will not perform the contract, the result is that the other party is likely to lose the expected benefits when signing the contract. Because of party’s expected breach of contract, can the other party terminate the contract?

In a two-year and three-month charter party contract(the lessee has the right to choose the length of time), rent is paid every half month. The lessee has always paid on time as agreed in the contract, but due to a mistake made by the bank, there was a delay in payment of a sum of money, so the shipowner claimed to take back the ship on the grounds of expected breach of contract. According to the judge, the lessee’s primary obligation is to pay the rent on time according to the agreement. The payment method is installment payment, which is paid once every half month. During the lease term, the lessee pays at least 42 times, at most 54 times. The delay of one payment is not equal to the fundamental breach of the law. In Frost v. Knight, one party was married to a third person and was unable to fulfill his commitment to marry the other party. Knight’s actions constitute an expected breach of contract. Therefore, we believe that under British contract law, even if one party has anticipated breach of contract, such as the seller does not deliver the goods, the buyer does not pay for goods, can the other party terminate the contract? It is not only need to see whether the breaching party is expected to breach the contract, but also whether both parties stipulate this clause as a substantive and important clause in the contract, whether one party’s expected breach is serious enough to make the other party unable to achieve the purpose of signing the contract, and whether the other party informs the breaching party of the time limit for performance of the contract.


(3) Misrepresentation.

The aggrieved party has the right to terminate the contract because one party induces the other party to conclude the contract due to its misrepresentation. In Whittington v. Seal-Hayne, the plaintiff, a poultry keeper, was tempted by the defendant to sign a house lease contract. The plaintiff mistakenly believed that the house was clean. Because the house was not clean and the polluted water source, the plaintiff and family members got sick, the poultry had been unable to eat or died. Therefore, the plaintiff had the right to terminate the contract.

In the Bissett v. Wilkinson case, the seller admitted that he told the buyer that he thought his land in New Zealand “could feed 2000 sheep”, and the buyer was not an experienced farmer, so he believed his words and bought the land. As a result, the buyer found that the land had no such bearing capacity, so the buyer claimed to terminate the contract due to the seller’s misrepresentation. The judge ruled against the buyer. The verdict showed that in the litigation of termination of contract, just as in the litigation of actual performance, when the misrepresentation is taken as the litigation basis of the relying party, it is necessary to find out whether the statement is a statement of specific facts opinions. Because although the wrong opinion causes from the trust of the other party, the other party has no right to trust it unless there is fraud.

In these two cases, why can the first plaintiff terminate the contract and the second plaintiff cannot? Firstly, whether the misrepresentation deprives the plaintiff of the purpose of the contract? Because according to the principle of good faith, both parties of the transaction should fulfill the obligation of telling the truth. If one party enters into the transaction by fraud, the other party cannot achieve the fundamental purpose of the contract. Secondly, if the false statement constitutes a part of the fact or an expression of one’s own opinions or ideas? If fabricating facts is obviously intentional fraud, the injured party shall have the right to terminate the contract. If it is to express its opinion, even if it is not realized after the performance of the contract, the injured party cannot terminate the contract. Thirdly, it depends on the status of both parties in the transaction. If the seller is an expert of the product, and the buyer does not understand the product and follows the seller’s opinions, and buys the product, and finally suffers serious losses, the buyer has the right to terminate the contract. On the contrary, if the buyer has professional knowledge and full ability to independently evaluate the quality of the subject matter, and causes damage in the end, the contract cannot be terminated. In first case, because land is an important basis for poultry breeding, land pollution has substantially deprived the plaintiff of the purpose of entering into the contract, so the plaintiff can terminate the contract. In second case, the seller only expressed his speculation on the value of the land, not the statement of the facts, so he did not cheat the buyer, and the buyer had no right to terminate the contract.


(4) Frustration in performance.

The frustration of performance occurs after the contract is established, but because of the subsequent environmental changes, the contract cannot continue to be performed, or it has deprived the commercial purpose of the contract. Frustration in performance mainly includes: (1) The subject matter of the contract has been destroyed or can no longer be obtained. (2) Due to changes in law or war, the performance of the contract will become illegal. (3) The commercial purpose of the contract cannot be achieved. (4) The basic events on which the contract exists have not occurred. (5) Government intervention or delay.

In the case of Kaylor v. Caldwell, the plaintiff agreed to rent a concert hall to the defendant, but the day before the concert, the concert hall was burned by a fire, so the defendant canceled the contract and the plaintiff filed a lawsuit to pay the rent. According to the judgment, the lease contract was frustrated by the fire, and the defendant had no obligation to pay the rent. ” The seller and the buyer entered into a transaction for the sale and purchase of peanuts. The contract stipulated that the peanuts should be shipped from Port Sudan to port Hamburg on CIF terms from November to December 1956. On October 7, 1956, the seller booked a ship for shipment from the port of Sudan according to the agreement. According to the agreement of the parties, the ship should take the Suez Canal. However, on November 2, 1956, the Suez Canal was closed due to Israel’s invasion of Egypt, and it could only bypass the Cape of good hope. However, the seller refused to do so, and the buyer sued, and the seller defended against the frustration of the contract. The judge ruled that the contract was not frustrated. “

Therefore, claiming the termination of a contract must be based on the fact that the events occurred after the contract was signed have substantially prevented the performance of the contract or no meaning to continue the performance of the contract.


2、United Nations Convention On Contracts For The International Sale Of Goods(CISG)

(1) Fundamental breach.

Article 64, paragraph 1 of the Convention, (1) The seller may declare the contract avoided: ” (a) if the failure by the buyer to perform any of his obligations under the contract or this Convention amounts to a fundamental breach of contract; or

(b) if the buyer does not, within the additional period of time fixed by the seller in accordance with paragraph (1) of article 63, perform his obligation to pay the price or take delivery of the goods, or if he declares that he will not do so within the period so fixed. “

“Article 49(1) The buyer may declare the contract avoided: (a) if the failure by the seller to perform any of his obligations under the contract or this Convention amounts to a fundamental breach of contract; or (b) in case of non-delivery, if the seller does not deliver the goods within the additional period of time fixed by the buyer in accordance with paragraph (1) of article 47 or declares that he will not deliver within the period so fixed. “

The definition of “fundamental breach” in Article 25 of the covenant is ” A breach of contract committed by one of the parties is fundamental if it results in such detriment to the other party as substantially to deprive him of what he is entitled to expect under the contract, unless the party in breach did not foresee and a reasonable person of the same kind in the same circumstances would not have foreseen such a result. “

According to this clause, ” actual deprivation” is because the purpose of the contract is to realize the seller’s sale of the products, while the buyer wants to obtain the products he needs. If one party fails to comply with the provisions of the contract, the breach of contract causes the other party to fail to achieve the purpose of the contract. Here, the price, time and quantity stipulated in the contract may actually deprive one party of the purpose of the contract. In terms of time, for some international trade products whose price changes greatly in the international market or which require highly seasonal goods, the delivery time becomes an important clause of the contract. If the delivery is delayed, it may cause great losses to the buyer, then the buyer has the right to ask for the termination of the contract based on the “actual deprivation” of what he is entitled to expect under the contract.


(2) Expected default.

Article 72 of the covenant states “(1) If prior to the date for performance of the contract it is clear that one of the parties will commit a fundamental breach of contract, the other party may declare the contract avoided. (2) If time allows, the party intending to declare the contract avoided must give reasonable notice to the other party in order to permit him to provide adequate assurance of his performance. (3) The requirements of the preceding paragraph do not apply if the other party has declared that he will not perform his obligations. “

The expected breach of contract is relatively strict, which means that if one party needs to have sufficient evidence to show that it can clearly see that the other party has fundamental breach of contract. Secondly, unless the situation is urgent, the party intending to declare the contract avoided needs to give prior notice, and the contract cannot be declared invalid if the other party provides performance guarantee. At the same time, in order to ensure that the observant party can timely exercise its legal rights, it also stipulates that if the breaching party has declared that it will not perform its contractual obligations, then the observant party does not need to perform its notification obligations.


3、 Chinese Contract Law Regulations.

(1)Legal termination clause

Article 94 of the Contract Law Of China stipulates the conditions for legal termination. In case of any of the following circumstances, the parties may terminate the contract “(1) the purpose of the contract cannot be realized due to force majeure; (2) before the expiration of the performance period, one of the parties clearly indicates or indicates by its own behavior that it fails to perform its main obligations; (3) one of the parties delays the performance of the debt and fails to perform it within a reasonable period after being urged to do so; (4) one of the parties delays the performance of the debt Where the purpose of the contract cannot be realized due to the performance of the debt or other breach of contract; (5) other circumstances prescribed by law. “

We can see that force majeure is regarded as the legal condition of contract termination in our legislation. This provision does not exist in the the CISG. The second article of legal termination of contract is expected breach of contract, that is, before the time limit for performance of the contract comes, one party clearly and definitely indicates to the other party that it will no longer perform the contract, so the other party can directly terminate the contract. However, the CISG stipulates that if one party clearly sees that the other party will fundamentally breach the contract, the other party may declare the contract void. That is to say, before the contract performance period comes, one party finds that the other party will fundamentally violate the contract, for example, the performance capacity is seriously insufficient, the commercial credit is lost, etc., and the contract can be declared invalid. “Delay in performance by the debtor. If the time limit for performance is specified in the contract, and the debtor fails to perform when the time limit for performance expires, the creditor may directly terminate the contract without calling. If the debtor fails to perform the contract not completely, and the debtor performs the contract with the intention of full performance, but its performance is inconsistent with the purpose of the contract, if the debtor can still achieve the purpose of the contract after correction, but the creditor can terminate the contract according to the delay of nonperiodic debt performance and after being urged; If the contract cannot be corrected or the debtor refuses to make correction or correction has no interest to creditor, the creditor may terminate the contract without notice.”


(2) Interpretation of legal termination clause.

According to Article 26 of the Judicial Interpretation Of The Contract Law (2), “After the establishment of the contract, there is a significant change in the objective situation that cannot be foreseen by the parties at the time of the conclusion of the contract, which is not a commercial risk caused by force majeure, continuing to perform the contract is obviously unfair to one party or fails to achieve the purpose of the contract, if the parties request the people’s court to change or terminate the contract, the  court shall, on the basis of the principle of fairness and actual situation of the case, determine whether to change or terminate it. ” This article stipulates that “major changes”, which shall include three items. Firstly, unforeseeable changes must be unforeseeable by the parties based on their own industry experience. Secondly, not force majeure, extends the scope of events, even those that can be overcome and avoided. Thirdly, “not belong to commercial risk”, commercial risk is the inevitable risk of commercial operation, which can not be avoided or mitigated to terminate the contract, otherwise it will affect the seriousness of the contract. This article is similar to the frustration of contract in British Contract Law. According to judge Simon, “the frustration of contract occurs in an event (both parties have no fault for it, and the contract has no provisions), which seriously changes the nature of rights or obligations (not only costs or obligations) that can be reasonably predicted when both parties sign the contract. Therefore, in the new environment, it’s unfair for both parties are required to comply with the contract. “

Article 24 of the Judicial Interpretation Of The Contract Law (2) stipulates that “if the parties have objections to the termination of the contract as stipulated in article 96 of the Contract Law, but raise objections and bring a lawsuit to the court after the expiration of the agreed period of objection, the court shall not support it; If the parties have no agreed period of objection, they shall not submit to the people’s court until three months after the arrival of the notice of termination of the contract, the court shall not support a lawsuit. “

This article makes more specific provisions on the objection period of the legal termination right, which clearly stipulates that one party rescinds the contract according to Article 96 of the Contract Law. If the contract has agreed on the objection period and does not agree to rescind the contract, it must file a lawsuit with the court within the objection period. If the contract does not stipulate the objection period, and the other party does not agree to terminate the contract, it must file a lawsuit with the court within three months after the service of the termination notice, otherwise it will lose the right to win the lawsuit.


4、 Conclusion.

It can be seen that Contract Law of China fully draws lessons from the provisions of the CISG on the termination of the contract, and adds the provisions on “force majeure”, and also draws lessons from the British “contract frustration” theory, which is not only sufficient in content, but also flexible in practice, in order to fully ensure the fairness of both parties to the transaction and maintain the social economic order. However, the contract termination provisions are relatively loose, which is not conducive to the stability of transactions, violates the principle of freedom of contract, and is also unfavorable to the development of China’s foreign economic and trade. Therefore, in order to become a international trade country, we should take full account of the characteristics of international economy and trade, take into account the seriousness of ensuring the performance of the contract, use less legal termination clauses to terminate the contract, make Chinese enterprises aware of the risks and challenges of the international market, and constantly learn to resist commercial risks, so as to enable Chinese enterprises to grow rapidly in the international market. The internationalization of Contract Law will also make more international companies choose to apply Contract Law of China to resolve disputes when signing contracts with Chinese companies, so as to accelerate the development of Chinese market economy.


Reference:

[1] The Sale of Goods Act 1979.

[2] 1980 United Nations Convention on the international sale of goods.

[3] Xie Lin and Zhang Zheng, Case Selection and Evaluation of British Contract Law, University of foreign economic and trade press, Beijing, June 2004, 1st edition.

[4] Contract law of Zhang Suhua, Wuhan University Press, first edition, April 2003.

[5] Ma junju, Yu yanman: the original theory of civil law, Law Press, August 1998, first edition.

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