Implied terms

Do special rules apply to termination of a supply contract that will be implied by law into a contract? Can these terms be excluded or limited by including appropriate language in the contract?

The parties to a contract can terminate the contract by mutual agreement or under agreed conditions as stipulated in the contract.

The PRC Contract Law grants the parties the legal right to terminate the contract in the following circumstances:

  • contract objective cannot be realised owing to force majeure;
  • prior to the expiry of the period for performance of the contract, one party makes it clear that it will not perform its major obligations;
  • one party delays the performance of its major obligations, and fails to rectify its default within the given reasonable period of time, after being requested to perform; and
  • the objective of the contract cannot be realised because of one party’s failure to perform its contractual obligations or any other breach of the contract.

PRC law itself is silent on whether the above legal rights to terminate the contract can be excluded or limited by agreed terms in the contract. In practice, the parties tend to adopt a flexible approach by including clear contractual provisions to define the grounds for termination. Care must be taken in drafting deviations from the above legal rights for termination, to ensure that any contracting-out provisions will not be regarded as circumventing the mandatory provisions under Chinese law.

Notice period

If a contract does not include a notice period to terminate a contract, how is it calculated?

The aggrieved party shall send a notice to the other party if deciding to terminate the contract. The contract will be terminated when the notice reaches the other party, unless the notice otherwise provides for a specific termination date. If the other party objects, it may apply to the court or arbitration institution to determine whether the contract termination is valid.

Automatic termination on insolvency

Will a commercial contract terminate automatically on insolvency of the other party?

A commercial contract will not be automatically terminated solely because of the insolvency of the other party. If the court accepts an application for insolvency and appoints an administrator, the administrator may decide whether the contract that was concluded between the parties prior to the insolvency application, but is still pending completion by the parties, shall be continued or rescinded.

Termination for financial distress

Are there restrictions on terminating a contract if the other party is in financial distress?

A party is entitled to suspend the performance of its own contractual obligations and request the other party to provide security if the other party is in financial distress. If the other party has failed to regain its capability to perform the contract and to provide a security within a reasonable period of time, the party can terminate the contract.

Force majeure

Is force majeure recognised in your jurisdiction? What are the consequences of a force majeure event?

Force majeure is recognised under Chinese law. The PRC Contract Law provides that where a contract could not be performed because of force majeure, the liability for breach shall be excused in part or wholly. Force majeure is defined as circumstances that are unforeseeable, unavoidable and insurmountable. Where a party is unable to perform the contract due to force majeure, it has the duty to mitigate the loss and shall give a notice to the other party about occurrence of the force majeure within a reasonable period of time.