In case (2023) Jingmin Shen 6442 (Beijing High Court), the Beijing High Court held in its retrial that: "The point of contention in this case is whether the contract for the sale and purchase of commercial housing should be terminated. A certain company and Dai Mou signed a pre-sale contract for commercial housing, Dai Mou paid the down payment, and also processed a mortgage loan. When Dai Mou and Sun Mou were undergoing divorce mediation, it was clearly agreed that the relevant rights to the house in question and the obligation to repay the mortgage loan would belong to Sun Mou. Afterward, the company repaid part of the loan. Considering the actual performance of the contract, the company has exceeded the statutory exclusion period for exercising the right to terminate the contract. Dai Mou and Sun Mou have occupied and used the house in question for many years, and although they have not yet obtained the property certificate, they have already enjoyed the expectant property right of the house. The bank loan repaid by the company is a creditor's right, and the company can protect its own interests by pursuing the above-mentioned funds from Sun Mou. In summary, the handling of the first and second instances is not inappropriate. In conclusion, the company's retrial application does not meet the circumstances stipulated in Article 207 of the "Civil Procedure Law of the People's Republic of China," and this court does not support it." Based on related cases, most of the debates revolve around "when the person with the right to terminate the contract knew or should have known the reason for terminating the contract," and the exercise period of the right to terminate the contract is generally considered as a key point.

In practice, when problems arise in contract performance, one of the solutions considered by both parties to the contract is termination of the contract. Contract termination is a legal mechanism based on the will of one or both parties, through which the contractual relationship is terminated, leading to the overall extinction of contractual rights and obligations. It is worth noting that, in this process, the right to terminate the contract, as a core right, empowers the parties to exercise the right to terminate the contract in accordance with the law or contract agreement, thereby protecting their legitimate rights and interests.

Contract termination methods can be divided into agreed termination, statutory termination, and arbitrary termination, but the applicable conditions for these three termination methods are different:

(1) Applicable Conditions for Agreed Termination

Article 562 of the Civil Code stipulates that the parties may terminate the contract by mutual agreement. The parties may agree on the reasons for one party to terminate the contract. When the reason for terminating the contract occurs, the party with the right to terminate the contract may terminate the contract.

According to the above legal provisions, the agreed termination of a contract mainly includes two situations: the first is that both parties terminate the contract by mutual agreement after the fact; the second is that both parties stipulate the clauses for the right to terminate the contract in advance in the contract.

It is worth noting that, firstly, the mutual agreement to terminate the contract should be carried out after the contract is validly established and before it has been fully performed; secondly, the agreement by both parties in the contract regarding the right to terminate the contract refers to the specific circumstances under which the contract can be terminated that are set in advance by the parties to the contract. When such circumstances occur, it grants one party the right to exercise the right to terminate the contract.

(2) Applicable Conditions for Statutory Termination

Article 563, paragraph 1, of the Civil Code stipulates that under any of the following circumstances, the parties may terminate the contract: (1) Due to force majeure, the purpose of the contract cannot be achieved; (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 prevent the purpose of the contract from being achieved; (5) Other circumstances stipulated by law.

According to the above legal provisions, in the event of statutory reasons for termination, the party with the right to terminate the contract may unilaterally exercise the right to terminate the contract without the need for mutual agreement with the other party. In other words, the party with the right to terminate the contract may choose to terminate the contract or continue to perform the contract. Whether to terminate the contract is determined by the party with the right to terminate the contract based on the actual situation.

It is worth noting that, firstly, the party urging the other party to perform its obligations must be the party that has fulfilled its obligations; the breaching party does not have the right to terminate the contract based on the fact that the other party still fails to perform after being urged. Secondly, the exercise of the right to terminate the contract must be premised on the fulfillment of the right to terminate the contract, and the termination action must comply with the procedures stipulated by law; otherwise, it will not produce the legal effect of contract termination. [Wanshun Company v. Yongxin Company et al. Case on Cooperation Development Agreement Dispute, Supreme People's Court Bulletin, 2005, No. 3]

(3) Applicable Conditions for Arbitrary Termination

Article 563, paragraph 2, of the Civil Code stipulates that for indefinite contracts with continuing obligations as their content, the parties may terminate the contract at any time, but they shall notify the other party within a reasonable period.

According to the above legal provisions, in addition to statutory termination rights and agreed termination rights, it is generally believed that there is also an arbitrary termination right. The "arbitrary" here does not mean that it is unrestricted, but that there is no need to have statutory reasons to terminate the contract. The arbitrary termination right is actually a type of statutory termination right, the exercise of which requires explicit authorization by law, and must comply with the relevant restrictions stipulated by law.

For example: the arbitrary termination right of indefinite contracts, the arbitrary termination right of the commissioning party in undertaking contracts, the arbitrary termination right of passengers in passenger transport contracts, the arbitrary termination right of shippers in freight contracts, the arbitrary termination right of the principal and agent in agency contracts, the arbitrary termination right of owners in property service contracts, etc. (Relevant clauses: Article 563, paragraph 2, Article 787, Article 816, Article 829, Article 933, Article 946, etc., of the Civil Code)

Article 564 of the Civil Code stipulates that if the law or the parties stipulate a time limit for exercising the right to terminate, and the party does not exercise the right within the time limit, the right shall be extinguished. If the law does not stipulate or the parties do not agree on a time limit for exercising the right to terminate, and the party with the right to terminate does not exercise the right within one year from the date on which it knew or should have known the reason for termination, or fails to exercise the right within a reasonable period after being urged by the other party, the right shall be extinguished.

According to the above legal provisions, the time limit for exercising the right to terminate is divided into three situations: First, the time limit for exercising the right to terminate is stipulated by law or agreed upon by the parties; second, it is exercised within a reasonable period after being urged by the other party. Current laws do not have a unified standard for determining a reasonable period, and only have sporadic provisions in some named contracts. For example, Article 11 of the "Interpretation of the Supreme People's Court on Several Issues Concerning the Application of Law in Handling Disputes over Contracts for the Sale and Purchase of Commercial Housing" stipulates that the reasonable period is three months. A reasonable period is a relatively vague and uncertain concept of time, and its specific length should be determined according to the specific circumstances of each case; third, it is exercised within one year from the date on which the party with the right to terminate knew or should have known the reason for termination.

It is noteworthy that the "one-year exercise period" is a peremptory period, and the right of termination is a constitutive right, the legal effect of which takes effect only when one party makes an expression of intent. The exercise period is a peremptory period. According to Article 199 of the Civil Code, the provision of Article 564 of the Civil Code that the exercise period of the right of termination is "one year" is a peremptory period. Whether it is an agreed exercise period of the right of termination or a statutory exercise period of the right of termination, it is an invariable period and is not subject to the provisions of suspension, interruption, and extension. Second, the issue of "reasonable period". For the matter of urging, the definition of the exercise of the right of termination within a reasonable period by the parties is rather vague and depends entirely on the specific circumstances of the case. It is necessary to make a comprehensive judgment based on factors such as the performance of the contract, trade customs, the subject matter of the contract, the type of contract, and the principle of good faith.

Article 565 of the Civil Code stipulates that if one party terminates a contract in accordance with the law, it shall notify the other party. The contract is terminated upon receipt of the notice by the other party; the notice specifies that if the debtor fails to perform the debt within a certain period, the contract will be automatically terminated. If the debtor fails to perform the debt within the said period, the contract is terminated upon the expiration of the period specified in the notice. If the other party has objections to the termination of the contract, either party may request the people's court or arbitration institution to confirm the effectiveness of the termination. If one party fails to notify the other party and directly asserts the termination of the contract by filing a lawsuit or applying for arbitration, and the people's court or arbitration institution confirms the claim, the contract is terminated upon service of the copy of the complaint or the copy of the arbitration application on the other party.

(1) The way to exercise the right of termination is notification

The nature of the right of termination is a constitutive right, and the way to exercise the right of termination is notification. The current law does not explicitly require the method of contract termination notice, so the right holder can choose the method of notification by themselves, as long as the notice can reflect the intention of terminating the contract. For example, a formal written notice can be used, or it can be informed through email, communication software, or oral notification, or even by implication, such as the right holder's actions can be considered to have the intention of terminating the contract, etc. All the above methods can have the effect of notifying the termination of the contract. As long as the right holder clearly expresses to the other party the intention to terminate the contract and confirms that the expression of intent is known to the other party, the contract can be terminated without the consent of the other party.

(2) Basic rules for determining the effective time of the right of termination

1. When the right holder exercises the right of termination, as long as the intention to terminate the contract is notified to the other party, the effect of termination is produced, and the time when the right of termination takes effect adopts the arrival principle, that is, the contract is terminated when the notice reaches the other party.

2. The notice specifies that if the debtor fails to perform the debt within a certain period, the contract will be automatically terminated. If the debtor fails to perform the debt within the said period, the contract is terminated upon the expiration of the period specified in the notice.

3. If the other party has objections to the termination of the contract by exercising the right of termination, either party may file a lawsuit with the court or apply to the arbitration institution to request confirmation of the effectiveness of the termination of the contract. If the people's court or arbitration institution confirms the establishment of the right of termination, it shall make a judgment in accordance with the above-mentioned provisions on the effective time of the right of termination.

4. If one party does not notify the other party, but directly sues or applies to the court or arbitration institution, and asserts the termination of the contract through litigation or arbitration, and the people's court or arbitration institution supports the claim of the party exercising the right of termination, the time when the copy of the complaint or the copy of the arbitration application is served on the other party is the time of termination of the contract.

It is noteworthy that, for the termination of a contract by a party through litigation, and then withdrawing the lawsuit, whether the contract is terminated?

In practice, it should be considered that the act of filing a lawsuit and the response of the other party indicate that the expression of intent to terminate the contract by the person exercising the right of termination has been made known to the other party through the lawsuit, and the effectiveness of the exercise of the right of termination does not depend on the court's judgment. In addition, the exercise of the right of termination is irrevocable, which is determined by the nature of the right of termination and the protection of legitimate interests. If the right holder withdraws the lawsuit after the first lawsuit, although the effect of the withdrawal is equivalent to not filing a lawsuit, the withdrawal does not mean the revocation of the expression of intent to terminate the contract, and the right of termination takes effect immediately upon its exercise. Therefore, if a party terminates a contract through litigation and then withdraws the lawsuit, the contract is deemed to have been terminated.

Typical case guidance: Shenzhen Fushanbao Industrial Co., Ltd. v. Shenzhen Foxing Co., Ltd., Shenzhen Bao'an District Fuyong Property Development General Corporation, Shenzhen Jinancheng Investment and Development Co., Ltd., etc. Contract Dispute on Joint Development of Real Estate (Bulletin of the Supreme People's Court, 2011, No. 5)

Key points of case application: When one party to a contract constitutes a fundamental breach of contract, the other party who has not breached the contract has the right to terminate the contract by law. The termination of the contract takes legal effect when the termination notice is served on the breaching party.

(3) The party issuing the termination of the contract shall have the right to terminate the contract

Article 46 of the Minutes of the National Court's Civil and Commercial Trial Work Conference: In judicial practice, some people's courts have a deviation in their understanding of Article 24 of the Judicial Interpretation (II) of the Contract Law, believing that regardless of whether the party issuing the termination notice has the right to terminate the contract, as long as the other party does not raise an objection by filing a lawsuit within the objection period, the contract will be ordered to be terminated, which is inconsistent with the relevant provisions of the Contract Law on the exercise of the right to terminate the contract. The accurate understanding of this article is that only the party who has the statutory or agreed right to terminate the contract can terminate the contract by notice. If a party who does not have the right to terminate the contract issues a termination notice to the other party, even if the other party does not file a lawsuit within the objection period, the contract will not be terminated. When hearing cases, the people's court shall examine whether the party issuing the termination notice has the agreed or statutory right to terminate the contract to determine whether the contract should be terminated, and cannot simply determine that the contract has been terminated based on the fact that the notified party has not filed a lawsuit within the agreed or statutory objection period.

According to the above provisions, only the party who has the statutory or agreed right to terminate the contract can terminate the contract by notice.

In the case of agreement termination, the subject of the right is both parties, and both parties reach a consensus on the elimination of the valid contract. In the case of agreed termination, the subject of the right is generally agreed to be one party. In the case of statutory termination, considering the principle of strict adherence to the contract and the nature of the right of termination as a remedial measure, the right of termination should be enjoyed by the party who has not breached the contract.

In the event of an event not attributable to the debtor, such as force majeure, that makes performance impossible, there is no breaching party in this case, and generally either party may exercise the right of termination. However, in special circumstances such as damage or loss of the subject matter, the applicable rules of risk allocation should still be considered. Specifically: if the risk occurs before the delivery of the subject matter, if the buyer has an interest in the termination of the contract, such as having purchased insurance, the seller's right to terminate the contract can be excluded; if the risk occurs after the delivery of the subject matter, in order to prevent the buyer from evading the obligation to pay the price, the buyer's right to terminate the contract should be excluded; and when the law stipulates that the buyer bears the risk, such as delay in acceptance, the buyer's right to terminate the contract should also be excluded to transfer the risk. In practice, the subject of the right to terminate the contract should also be determined based on the type of contract and the specific circumstances.

Article 566 of the Civil Code stipulates that after the contract is terminated, unperformed obligations shall be terminated; for performed obligations, depending on the performance situation and the nature of the contract, the parties may request restoration of the original state or adopt other remedial measures, and have the right to claim compensation for losses.

According to the above legal provisions, if a contract is terminated due to breach of contract, the party with the right to terminate the contract may request the breaching party to assume liability for breach of contract, unless otherwise agreed by the parties. After the termination of the main contract, the guarantor shall still bear the guarantee liability for the civil liability that the debtor should bear, unless otherwise agreed in the guarantee contract.