Contract termination refers to the end of a contractual relationship due to the intention expressed by one or both parties after the contract has been validly established. The unfulfilled portion will no longer be fulfilled, while the fulfilled portion will be settled according to specific circumstances. The general provisions of the Contract Section of the Civil Code stipulate five ways to terminate a contract, including termination by agreement, termination by stipulation, statutory termination, termination due to changes in circumstances, and termination due to stalemate of the contract. Among these, in cases of termination by agreement and statutory termination, one party has the right to terminate the contract as stipulated or required by law and can do so by sending a termination notice. The right to terminate is a general power of formation rather than a right to form a lawsuit. Parties can either send a termination notice directly to the other party or assert their right to terminate by filing a lawsuit without notifying the other party. When the parties have the right to terminate the contract, the conditions for determining the timing of contract termination in the two modes of exercising this right are not entirely the same.

In this article, lawyer Wang takes you to analyze the time cognizance of cancelling a contract in China legal practice.

The cognizance of the time cancelling a contract by litigation.

The termination time of a contract is the point at which the rights and obligations of the parties to the contract terminate, and it is a judgment of the final state of the contract. A contract is generally extinguished retrospectively upon termination, and the parties are no longer bound by the contractual relationship. Unfulfilled debts are exempt from performance, and the portion that has already been performed is entitled to a claim for return. On the premise of distinguishing between burden behavior and disposal behavior, the right to request the return of tangible property paid has the nature and effectiveness of property rights. The time of contract termination is related to debt exemption, breach of contract liability, and loss compensation calculation, and has a significant impact on the interests of both parties. Therefore, in litigation, the time of contract termination often becomes the focus of dispute between both parties. Article 565 (1) of the Civil Code stipulates that if one party claims to terminate the contract in accordance with the law, it shall notify the other party. The contract shall be terminated upon receipt of notice from the other party. From this, it can be seen that when directly claiming termination by notice in accordance with the law, the time of contract termination is “when the notice reaches the other party”, and there is no dispute in practice. But if the contract is terminated directly by issuing a notice, there is a high possibility that the other party will raise objections to whether the contract is terminated and the settlement of the consequences of termination. Once the other party raises objections, disputes related to the termination of the contract often need to be resolved through the people’s court. Therefore, the law grants the parties the right to exercise the right of termination directly through litigation or application for arbitration. This regulation has a positive significance in reducing disputes between the parties and clarifying the validity status of the contract as soon as possible. The essence of terminating a contract by filing a lawsuit with a people’s court is still the act of the parties exercising their right to terminate. The contract is not terminated by a judgment of the people’s court, but rather a confirmation of the parties’ exercise of the right to terminate by the people’s court. Therefore, the time for termination of the contract should still be when the notice reaches the other party, rather than the effective date of the judgment. But for the termination of litigation, the prerequisite stipulated in Article 565 (2) of the Civil Code is that “the people’s court confirms the claim”, and the contract can only be terminated when a copy of the complaint is served on the other party. This means that even if one party has the right to terminate the contract and a copy of the complaint has been served on the other party, the termination notice does not have the effect of termination if the party’s claim is not confirmed by the court, or if the party changes the claim or withdraws the lawsuit. The reason why the conditions for confirming the termination of a lawsuit are different from direct notification is that the termination of a lawsuit has both substantive law and procedural law attributes. If either is missing, its effect will be lost. [2] In terms of direct notification, the termination right holder can unilaterally decide whether to terminate the contract. Once the termination notice is received, the consequences of termination immediately occur, and the counterparty can only tolerate or accept this result. The termination of litigation is achieved through the exercise of the right of termination by the people’s court. If the plaintiff withdraws the lawsuit, changes the claim, or the court rejects their claim, the effect of exercising the right of formation under substantive law will not occur. If the people’s court confirms its claim to terminate the contract, the contract shall still be terminated from the time when a copy of the complaint is delivered to the other party, which is no different from directly notifying the termination. In general, the time for termination of a contract lawsuit is when a copy of the complaint is delivered to the other party, provided that the party has the right to terminate the contract in accordance with the law and the claim to terminate the contract has been confirmed by the people’s court.

The plaintiff withdrew the lawsuit and filed another lawsuit claiming termination of the contract

Article 54 of the “Interpretation of the Supreme People’s Court on Several Issues Concerning the Application of the General Principles of the Civil Code of the People’s Republic of China on Contracts” (hereinafter referred to as the “Interpretation of the General Principles of the Contract”) stipulates that if one party directly claims to terminate the contract by filing a lawsuit without notifying the other party, and after withdrawing the lawsuit, files a lawsuit again to claim termination of the contract, and the people’s court supports the claim after trial, the contract shall be terminated when a copy of the lawsuit is served on the other party. However, unless one party withdraws the lawsuit and notifies the other party of the termination of the contract and the notice has already been received by the other party. The termination notice, as a unilateral expression of intention that needs to be received, is different from the factual or conceptual notice of quasi legal acts such as the transfer of creditor’s rights. It should be subject to the general provisions of the Civil Code regarding the issuance, arrival, and withdrawal of expressions of intention. After the copy of the complaint is served on the other party and confirmed by the people’s court, if one party applies to withdraw the lawsuit, it does not produce the legal effect of expressing the intention to terminate the contract to the other party. Therefore, its application to withdraw the lawsuit is not an attempt to withdraw the intention to terminate the contract, but rather to withdraw the intention to terminate the contract, without the effect of terminating the contract. [3] If the parties file a lawsuit again and the contract is confirmed to be terminated by the people’s court after trial, the time when the copy of the lawsuit is served to the other party shall be deemed as the time of contract termination. There are several benefits to adopting the above position in judicial practice. Firstly, after one party withdraws the lawsuit, the other party may still perform the contract based on their trust in its ability to continue. If the delivery of the first copy of the complaint to the other party is used as the time for determining the termination of the contract, it will inevitably be necessary to clear and settle the performance of both parties after the withdrawal of the complaint, restore the original state, and compensate at a discounted price, resulting in cumbersome calculation problems. Secondly, in the case where the reasons for terminating the contract remain unchanged in two lawsuits, if the delivery time of the copy of the first lawsuit is determined, the court accepting the second lawsuit needs to review the materials of the first lawsuit, which may lead to the risk of abuse of litigation rights. If the reasons for terminating the contract are different twice, the people’s court still needs to re-examine whether the reasons for the first lawsuit are valid and whether the right to terminate is fulfilled, which involves many issues such as the time limit for presenting evidence and factual investigation, disrupting the normal judicial litigation order. Therefore, if a lawsuit is withdrawn and the contract is terminated again, it should be terminated when a copy of the lawsuit is served on the other party. The premise for the application of the time point for the termination of the aforementioned lawsuit is that one party only claims the termination of the contract through litigation without any notice of termination outside of litigation. If a party has already notified the other party of the termination of the contract before filing a lawsuit, or directly notified the other party of the termination of the contract after withdrawing the lawsuit, the contract shall be terminated upon the delivery of the termination notice to the other party. It should be noted that the right of termination, as a form of formation right, is subject to limitations during the period of expulsion. If the law stipulates or the parties agree on a time limit for exercising the right of termination, and the parties fail to exercise it upon the expiration of the time limit, the right shall be extinguished. If the law does not provide or the parties do not agree on a time limit for exercising the right of termination, and the person who exercises the right of termination does not exercise it within one year from the date when they know or should know the reason for termination, or fails to exercise it within a reasonable period after being urged by the other party, the right shall be extinguished. Therefore, if one party withdraws the lawsuit and brings another lawsuit, the people’s court should review whether their right to removal has exceeded the legal period for removal. The provisions on the suspension, interruption, and extension of the statute of limitations shall not apply during this period. If the right of rescission has been extinguished, the people’s court shall reject the lawsuit request. If the parties claim the right to terminate based on the new breach of contract, they shall be reviewed and judged in accordance with the law.

The plaintiff changed the lawsuit request after filing a lawsuit to terminate the contract

The prerequisite for the termination of a contract when a copy of the complaint is served on the other party is that the people’s court confirms the party’s claim to terminate the contract. After one party files a lawsuit to terminate the contract, the party has not lost the right to request continued performance of the contract until the effective judgment is made by the people’s court. In the case where the plaintiff changes the lawsuit request, the termination claim shall not have the effect of termination without being reviewed and confirmed by the people’s court. If the party’s request is changed to continue performance, as the request for termination of the contract and the request for continued performance generally cannot coexist, the people’s court does not need to review the party’s request for termination of the contract again, but should judge whether the party’s request for continued performance is valid on the basis of directly hearing the effectiveness of the contract. Based on the above analysis, in the case where the parties exercise the right of rescission through litigation, it has both substantive and litigation attributes. If a party changes their litigation request, even if a copy of the complaint has been served on the other party, it does not have the legal effect of terminating the contract. Unless the other party raises a counterclaim to terminate the contract, the people’s court shall review whether the other party has the right to terminate the contract. If the other party has the right to terminate the contract, the people’s court shall, after examination and confirmation, terminate the contract upon delivery of a copy of the counterclaim to the plaintiff (defendant). If one party claims to exercise the statutory or contractual right to terminate the contract through litigation, and a copy of the complaint has been served on the other party, but it is later changed to continue to perform, how should the other party defend that the contract has been terminated? In the case where the plaintiff changes the claim to continue performance, if the defendant argues that the contract has been terminated, whether the contract has been terminated should be examined as the focus of the dispute. Since the plaintiff has changed their claim and no longer asserts the right to terminate, their original intention to terminate does not constitute a statutory termination, nor does it constitute a cross offer with the other party’s intention to terminate. If, after examination, the other party has the right to terminate the contract by agreement or by law, the people’s court may explain to them whether to file a counterclaim for termination of the contract. If the defendant raises a counterclaim, the people’s court may, after examination and confirmation, determine that the contract is terminated when the counterclaim is served on the plaintiff.