Earth Research | Understanding Contract Rescission and Termination in One Article
Publish Time:
Dec 05,2024
Source:
Authors: Chen Xia, Wang Xinyu
Concept of Contract Rescission
1
Contract rescission refers to the situation where, during the conclusion of a contract, the expression of intent is not genuine or not free, resulting in the contract being rescindable. The damaged party has the right to request the people's court or arbitration institution to rescind the contract. After the contract is rescinded, it is void ab initio.
Circumstances for Contract Rescission
2
According to Articles 147, 148, 149, 150, and 151 of the Civil Code of the People's Republic of China, the circumstances for contract rescission mainly include:
1. Major Misunderstanding ： For civil legal acts based on major misunderstandings, the actor has the right to request the people's court or arbitration institution to rescind them.
2. Fraud by One Party: For civil legal acts implemented by one party through fraudulent means, causing the other party to act against their true intentions, the defrauded party has the right to request the people's court or arbitration institution to rescind them.
3. Fraud by a Third Party: For civil legal acts implemented by one party due to fraudulent acts by a third party, causing the party to act against their true intentions, if the other party knows or should have known about the fraudulent act, the defrauded party has the right to request the people's court or arbitration institution to rescind them.
4. Coercion by One Party or a Third Party: For civil legal acts implemented by one party due to coercion by one party or a third party, causing the other party to act against their true intentions, the coerced party has the right to request the people's court or arbitration institution to rescind them.
5. 顯失公平 ： If one party takes advantage of the other party's distressed state, lack of judgment, etc., resulting in a civil legal act that is obviously unfair at the time of its establishment, the damaged party has the right to request the people's court or arbitration institution to rescind it.
Concept of Contract Termination
3
Contract termination refers to the act of extinguishing the contractual relationship after the valid establishment of the contract, when the contract meets the conditions for termination, due to the expression of intent by one or both parties.
Circumstances for Contract Termination
4
1. Termination by Agreement
Parties may terminate a contract by mutual agreement.
2. Termination by Agreement
Parties may agree on the grounds for one party to terminate the contract. Agreed termination means that the two parties stipulate in the contract, in the form of contractual clauses, a certain future event as the grounds for termination, and on this basis grant one or both parties the right to terminate the contract.
3. Statutory Termination
Statutory termination refers to the situation where, when certain special circumstances make it impossible to achieve the purpose of the contract, the law directly stipulates that the relevant contracting parties may terminate the contract. According to Article 563 of the Civil Code, the contract may be terminated under the following circumstances:
(1) The purpose of the contract cannot be achieved due to force majeure;
(2) Before the expiration of the performance period, one party clearly expresses or indicates by its own actions that it will not perform the main obligations;
(3) One party delays in performing the main obligations, and after being urged, still fails to perform within a reasonable period;
(4) One party delays in performing its obligations or has other breaches of contract that make it impossible to achieve the purpose of the contract;
(5) Other circumstances stipulated by law.
4. Right of Termination in Special Circumstances
(1) Right of Termination in Prior Performance Defense
According to Article 528 of the Civil Code, if a party that should perform its obligations first has conclusive evidence that the other party has a significant deterioration in its business conditions; transfers property, withdraws funds to evade debts; loses commercial credit; or has other circumstances that have lost or may lose the ability to perform its obligations, it may suspend performance and should promptly notify the other party. If the other party provides appropriate security, performance should be resumed. After suspending performance, if the other party does not restore its ability to perform within a reasonable period and does not provide appropriate security, it is deemed to have indicated by its own actions that it will not perform the main obligations, and the party that suspended performance may terminate the contract and may request the other party to bear the liability for breach of contract.
（ 2） Right of Termination in Change of Circumstances
According to Article 533 of the Civil Code and Article 32 of the Interpretation of the Supreme People's Court on Several Issues Concerning the Application of the General Provisions of the Contract Law of the People's Republic of China, after the establishment of a contract, if the basic conditions of the contract have undergone a significant change that was unforeseeable by the parties at the time of the conclusion of the contract and does not belong to commercial risk, and the continued performance of the contract is obviously unfair to one party, the party that is adversely affected may renegotiate with the other party; if no agreement is reached within a reasonable period, the party may request the people's court or arbitration institution to change or terminate the contract.
(3) Right of Termination in Contract Deadlock
According to Article 580 of the Civil Code and Article 48 of the Minutes of the National Court's Civil and Commercial Trial Work Conference of the Supreme People's Court, if "it is impossible to perform in law or in fact" or "the subject matter of the debt is not suitable for compulsory performance or the cost of performance is too high" or "the creditor has not requested performance within a reasonable period", resulting in the purpose of the contract not being achieved, and "the breaching party does not have malicious breach of contract" or "it is obviously unfair to the breaching party to continue performing the contract" or "the refusal of the non-breaching party to terminate the contract violates the principle of good faith", then the breaching party may terminate the contract.
Differences Between Contract Rescission and Contract Termination
5
1. From the perspective of the cause of occurrence
The grounds for rescission are directly stipulated by law; while the grounds for termination are stipulated by law and agreed upon by the parties.
2. From the perspective of effective force
Both revocation and rescission have retroactive effect, and a revoked contract is void from the beginning; while termination often has no retroactive effect, meaning the parties are only not required to continue performing the contract in the future.
3. The methods of exercising the right to terminate and the right to revoke a contract by the contracting parties are different
The party entitled to revocation can only assert the revocation of the contract before a court or arbitration institution. If the party entitled to termination asserts termination of the contract, they only need to notify the other party, and the contract is terminated upon the notification reaching the other party. If, after one party exercises the right to terminate, the other party objects, they may request the people's court or arbitration institution to confirm the validity of the contract termination.
4. The exercise periods for the right to terminate and the right to revoke a contract by the contracting parties are different.
The exercise of the right of revocation is subject to the limitation period of preclusion. If a party fails to exercise the right of revocation within the statutory period from the date they knew or should have known the grounds for revocation, the right of revocation is extinguished. The exercise period for the right of termination is subject to agreement; if there is no agreement, and the right is not exercised within a reasonable period after the other party's demand, the right is extinguished.
5. The consequences of revocation and termination are different
After a contract is terminated, if it has not yet been performed, performance shall cease; if it has been performed, depending on the circumstances of performance and the nature of the contract, the parties may demand restoration to the original state, take other remedial measures, and have the right to claim compensation for losses. After a contract is revoked (including being void), property acquired under the contract shall be returned; if it cannot be returned or there is no need to return it, it shall be compensated at a discounted price. The party at fault shall compensate the other party for losses incurred thereby, and if both parties are at fault, they shall each bear corresponding liabilities.
Reference Cases
Reference Case 01
Case of Li Dingxiu v. Jiang Fuyu concerning a house sale and purchase contract dispute
【Key Points of Judgment】: 'Material mistake' should meet the following requirements: first, there must be an expression of intent where the intent is inconsistent with the expression; second, the expresser must have a factual cognitive error; third, the expresser must have no intention to make the expression inconsistent with the intent. To maintain transaction stability, the interpretation of material mistake should be based on the principle of restrictive interpretation, limiting 'mistake' to the scope of the true intentions of both parties to the contract; otherwise, it should be considered whether the contract purpose can be achieved, and the right holder should be granted the right to terminate the contract.
【Case Number】: (2019) Yu 02 Min Zhong No. 196
Reference Case 02
Case of a certain Laizhou Port Company v. a certain Laizhou Pipe Pile Company and others concerning a lease contract dispute
【Key Points of Judgment】: In a lease contract relationship, the lessor's primary obligation is to deliver the agreed leased property, and the lessee's primary obligation is to pay rent on time. If the lessee fails to pay or delays in paying rent without valid reason, the lessor may request the lessee to pay within a reasonable period. If the lessee fails to pay overdue, the lessor may terminate the contract. When the conditions for termination agreed in the contract are met, if the non-breaching party requests to terminate the contract, the people's court shall examine whether the breaching party's breach is significantly minor and whether it affects the non-breaching party's achievement of the contract purpose, to determine whether the contract should be terminated.
【Case Number】: (2021) Lu Min Zhong No. 477
Reference Case 03
Case of Yong'an Yancheng Real Estate Development Co., Ltd. v. Zheng Yaonan, Far East (Xiamen) Real Estate Development Co., Ltd., and Third Party Gao Lizhen concerning a third-party revocation lawsuit
【Key Points of Judgment】 ： Generally, a third party, as an ordinary creditor, does not have grounds to file a third-party revocation lawsuit based on their creditor's rights. However, if the debtor's relevant property disposition confirmed by an effective judgment meets the conditions for the right of revocation stipulated in Article 74 of the Contract Law, then the creditor who lawfully enjoys the right of revocation has a legal interest in the outcome of that effective judgment case, thereby possessing the plaintiff's standing to file a third-party revocation lawsuit as a third party without an independent claim.
【Case Number】: (2017) Zui Gao Fa Min Zhong No. 885
Lawyer Profile
Chen Xia
Chen Xia
Heilongjiang Dadi Law Firm
Director
Currently serves as a member of the Construction and Real Estate Business Committee of the All China Lawyers Association; a member of the Heilongjiang Provincial Committee of the CPPCC; a member of the Heilongjiang Provincial Committee of the China National Democratic Construction Association; Director of the Social and Legal Committee of the Heilongjiang Provincial Committee of the China National Democratic Construction Association; an arbitrator for the Harbin Arbitration Commission; an arbitrator for the Korean Commercial Arbitration Board; an arbitrator for the "Belt and Road" Wuhan Arbitration Court; a member of the Administrative Reconsideration Expert Committee of the Heilongjiang Provincial People's Government; a member of the Administrative Reconsideration Expert Committee of the Harbin Municipal People's Government; recognized as one of "China's Top 60 Construction Lawyers" by ENR magazine and Construction Times (USA); an arbitrator for the Wuhan Arbitration Commission.
Wang Xinyu
Wang Xinyu
Heilongjiang Dadi Law Firm
Lawyer
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