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Law China (2006) 1: 121152

DOI 10.1007/s11463-005-0002-1
R E S E A R C H A RT I C L E

HAN Shiyuan

Liabilities in Contract Law of China: Their Mechanism

and Points in Dispute
# Higher Education Press and Springer-Verlag 2006

Abstract: China is drafting its first Civil Code now, and the Chinese laws have seen an
expansion of contractual obligations and a new structure of contractual liabilities. This paper
expounds this trend through the perspective of contract liabilities. It mainly analyses the
anticipatory breach, the enforced performance, damages, payments stipulated by the contract,
the statutory rights to termination, the unification of guarantee liabilities for defects and
liabilities for breach of contract, and makes the conclusion that China Contract Law CCL will
be put into the future Chinese Civil Code, with some necessary technical changes and
amendments.
Keywords: Liabilities, Contract Law of China, damage, enforcement

Introduction
The main civil legislation in China
The main part of the legal system of P.R. China is formulated during 1980s and 1990s.
Though there is still no formal civil code of P.R. China, the main parts of civil law have been
in existence in China, and they include:
1. General Principles of the Civil Law (Adopted on 12 April 1986, and effective as of 1
January 1987; here after GPCL);
2. Law of Guaranty (Adopted on 30 June 1995, and effective as of 1 October 1995);
3. Law of Contract (Adopted on 15 March 1999, and effective as of 1 October 1999; here
after CCL);
4. Law of Marriage (Adopted on 10 September 1980, and amended on 28 April 2001);
5. Law of Adoption (Adopted on 29 December 1991);
6. Law of Succession (Adopted on 10 April 1985).
Besides, there are a lot of Acts by the State Department of P.R. China and Judicial
Interpretations by the Supreme Court of P.R. China.
HAN Shiyuan ())
Law School, Tsinghua University, China
E-mail: lawhsy@mail.tsinghua.edu.cn

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New trends of civil legislation in China

The drafting of law of property and the amendment of constitution law
It is aimed that China has a perfect legal system compliant with market economy and rule of
law by the end of year 2010. Now there is no formal civil code in P.R. China, so in March of
1998, the legislative organ of China (National Peoples Congress) invited nine civil law
scholars and experts to set up a working group to prepare for the drafting of Civil Code of
China. As the programs of the working group, a new contract law should be adopted in 1999,
a property law should be adopted in 4 or 5 years, and by the end of 2010, there should be a
formal civil code of China.
According to the programs, Professor Huixing Liang (Professor of Law, Law Institute,
Chinese Academy of Social Sciences) was consigned in charge of preparing and submitting a
draft of Property Law. And a draft of Property Law by the Professor Liangs group was
accomplished in October 1999. It is composed of 12 chapters of 435 articles.1 But the draft is
thought has not pay enough attention on State Property and Property of Collective
Organizations of the Working Masses by the legislative organ of China. As a result, Professor
Liming Wang (Professor of Law, Law School, Chinese People University) was consigned in
charge of preparing and submitting another draft of Property Law. Professor Wang and his
group accomplished their draft in December 2000.2 The Legal Work Commission of the
Standing Committee of the National Peoples Congress prepared a new draft on the base of the
above two drafts in January 2002. Now the new draft is in the course of inquiring opinions and
suggestions.
On 14 March 2004 the Constitution Law of P.R. China has been amended. The
expropriation system has been improved (art. 10) and the protection of private property has
been emphasized (art. 13).

The amendment of law of marriage

Law of Marriage of P.R. China 1980 has been applied for more than 20 years since it was
enacted. And the society has changed sharply during the past 20 years. In order to adapt to the
changed society, the Law was amended and adopted on 28 April 2001. The contents of the
Law include: Chapter I, General Provisions; Chapter II, Marriage; Chapter III, Family
Relationship; Chapter IV, Divorce; Chapter V, Methods for Help and Legal Liabilities; and
Chapter VI, Supplementary Provisions. There are some important improvements in the new
Law of Marriage, including new provisions on void marriage and voidable marriage (arts. 10
12), manipulable standards of divorce (art. 32), and the right for party without fault in divorce
claiming compensation (art. 46). The Law of Marriage will be one Book of the future Chinese
Civil Code.

1 As

a publication in Chinese, Huixing Liang etc., A propositional draft of Chinese property law: its articles,
notes, comments and comparative law,(2000), Social Sciences Documents Publishing House.
2 As a publication in Chinese, Liming Wang ed., A propositional draft and its illustrations of Chinese property
law, (2001), China Legal System Publishing House.

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The drafting of Chinese civil code

According to the design of Professor Huixing Liang and his drafting group,3 the future
Chinese Civil Code should be composed of seven Books, which includes:
Book One: General Provisions;
Book Two: Law of Property;
Book Three: Law of Obligation in General;
Book Four: Law of Contracts;
Book Five: Law of Torts;
Book Six: Law of Marriage and Family Relationship;
Book Seven: Law of Succession.
A drafting group, which is composed by more than 20 Chinese scholars and in charged by
Professor Liang, had finished its drafting work of Chinese Civil Code. And as a final
achievement, a text composed of 1,924 articles has been published.4
The Legal Work Commission of the Standing Committee of the National Peoples
Congress also prepared a new draft of civil law in December 2002 (here after the Draft
2002). The Draft 2002 is composed with nine books, namely:
Book One: General Provisions;
Book Two: Law of Property;
Book Three: Law of Contract;
Book Four: Law of Personality;
Book Five: Law of Marriage;
Book Six: Law of Adoption;
Book Seven: Law of Succession;
Book Eight: Law of Torts;
Book Nine: Law of Application of Law in Civil Relations with Foreigners.
Now the new draft is also in the course of inquiring opinions and suggestions.

The expansion of contractual obligations and a new structure of contractual liabilities

in Chinese laws
The expansion of contractual obligations
In former Chinese contract law theories, it had been thought that contractual obligations
meant obligations agreed by the parties (Leistungspflicht). But in the past 10 years, theories on
contractual obligations in Chinese civil law science developed a lot. And this profits from
theory receptions of foreign cases and theories.5
3 The author is also a member of the drafting group, in charge of the drafting of Liabilities for Breach of Contract

of Book Four.
a publication in Chinese, see Huixing Liang ed., A propositional draft of Chinesecivil code, (2003), Law
Press, China.
5 See Tze-chien Wang, Studies on civil law theories and cases, Vol. 4, (1991), Taiwan; Jiafu Wang ed., Law of
Obligation, (1991, Guangxing Zhang), Law Press, China, pp.143150.
4 As

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Now in Chinese law, good faith and fair dealing (Treu und Glauben) becomes the most
important general principle (GPCL art. 4; CCL art. 6), and it must be followed by the parties
of a contract while exercise a right or perform an obligation. Correspondingly, the contents of
contractual obligations, influenced by the civil law theories of Germany and Taiwan, is
thought no longer limited to what the parties agreed upon. The parties shall observe the
principle of good faith and fair dealing, and fulfill the obligations of notification, assistance
and confidentiality in accordance with the nature and purpose of the contract and trade
practices (CCL art. 60 par. 2). These kinds of obligations are called ancillary obligations
(Nebenpflicht).
Now ancillary obligation theory has taken its root both in legal theories and legislations
of China. Besides, there are articles on pre-contractual obligations (arts. 42 and 43) and postcontractual obligations (art. 92) in CCL, and contractual obligations are expended further.
Generally laying down ancillary obligations, pre-contractual obligations and postcontractual obligations in a statute, perhaps China is the first one in doing so in civil law
countries. As these kinds of rules are almost in case laws in other civil law countries.6

A new structure of contractual liabilities

In Chinese civil law theories, the concept of contractual liability is a point in dispute.7 In this
paper, contractual liability presupposes the existence of contractual obligations (include those
kind of obligations provided by CCL). Corresponding with the above expansion of
contractual obligations, there is a phenomenon in CCL of expansion of contractual liabilities.
The phenomenon in CCL is somewhat similar with what Japanese scholars called expansion
of contractual obligations (keiyaku sekinin no kakutyou),8 but there are still some
differences. For example, as the German case law theory of Contract with Effects Protecting
a Third Party, although there are some introductions about it in China, but some Chinese
scholars emphasized the doctrine of privity of contract. According to their viewpoints, as a
general rule, a contract cannot confer rights arising from it on a third person.9 CCL confirms
the doctrine (as can be reflected indirectly from art. 121). On the other hand, some other
articles permit a third person having some rights arising from contract. For example,
according to art. 234, if the lessee dies within the lease term of a leased house, the persons who
live together with the deceased may lease the house according to the original lease contract.
In this paper, contractual liability refers mainly to liability for Culpa in contrahendo,
liability for breach of contract and liability for breach of post-contractual obligations (postcontract fault), as being expressed in Figure 1.

6 Greece

Civil Code only has a provision on pre-contractual duty. When the Act on the Reform of the Law of
Obligations (Schuldrechtsreformgesetz) of Germany entered into force on 1 January 2002, it should be noticed
that the appended 241(2) provides duties arising out of the obligation, namely an obligation may require
each party to have regard to the other partys rights, legally protected interests and other interests.
7 As one viewpoint, contractual liability means liability for breach of contract. See Jianyuan Cui, Studies on
contractual liabilities, (1992) Jilin University Publishing House, p.8. As to another viewpoint, contractual
liability means liabilities in contract law. See Liming Wang, On liabilities for breach of contract, (1996),
Chinese Politic and Law University Publishing House, p.26.
8 See Kenzo Miyamoto, Obligation of care for safety and the expansion of contractual liabilities, (1993),
Tokyo, Japan, p.5.
9 Liming Wang, Studies on civil and commercial law, vol.3, (1999), Law Press China, p.429.

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Fig. 1

Breach of contract and its liabilities

Breach of contract Chapter Seven of CCL is named Liability for Breach of Contract (arts.
107122). In Chinese laws, breach of contract means a party fails to perform its
obligations under the contract or fails to perform them as contracted (CCL art. 107; GPCL
art. 111). On one hand, contractual obligations, as has been pointed above, is not confined
to Leistungspflicht, it also includes ancillary obligations (CCL art. 60 par. 2). A breach of
ancillary obligations may also amount a breach of contract, and may entail liabilities for
breach of contract. On the other hand, breach of contract concerns only to the object aspect
of ones act or omission, and does not care about whether or not the act or omission excused.10
As to the types of breach of contract, there are a lot of disputes between Chinese scholars.
Before the enactment of CCL, the main dispute concerns on whether anticipatory breach
may be a kind of breach in Chinese law or not. CCL confirms that anticipatory breach is a type
of breach of contract (arts. 108, 94 sent. 2).
Now the types of breach of contract may be divided into two categories, namely
anticipatory breach and actual breach. And anticipatory breach, as can be read out from CCL
art. 108, includes explicitly expressing its intention not to perform its obligations under the
contract (anticipatory renunciation of contract) and indicating by act its intention not to
perform its obligations under the contract (anticipatory disablement of performance). Actual
breach, as can be read out from CCL art. 107, denotes failing to perform its obligations under
the contract and failing to perform its obligations as contracted. Failure to perform an
obligation may be interpreted as including disablement of performance, delay of
performance and refusal to perform, the essential characteristic of them (as opposed to
anticipatory breach) is that they occur after the time due for performance. Failure to perform
an obligation as contracted may be interpreted as defective performance. Where the per10 Breach

of contract in CCL should be distinguished from the words in the common law sense. In the
common law sense, a breach of contract is meant a non-performance that is not excused, e.g. under the rules as
to frustration. See G. H. Treitel, The Law of Contract (1995), p.746. So a breach of contract in CCL resembles a
non-performance of a contract in Principles of European Contract Law (PECL).

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Fig. 2

formance of contract by the obligor needs cooperation by the obligee, the obligees refuse or
delay to cooperate may also amount a breach of contract, as being expressed in Figure 2.
Liabilities for breach of contract A liability for breach of contract is a kind of adverse legal
result that one party should bear because of its breach. According to CCL, as a general rule,
the breaching party shall bear the liability for breach of contract by continuing to perform the
obligations, taking remedial measures, or compensating for losses (art. 107). And there is no
requirement of fault on the side of breaching party by art. 107. It is called Strict Liability
Principle. So it can be generally speaking that an obligor cannot be exempted of liability for
breach just by proving that it has no fault for the breach. The only excuse that can be found in
Chapter Seven of CCL is force majeure, laid down in arts. 117 and 118. In this aspect, CCL
learned a lot from United Nations Convention on Contracts for the International Sale of
Goods (here after CISG) and UNIDROIT Principles of International Commercial Contracts
(here after PICC). In former Chinese laws, as in other Civil Law countries, liabilities for
breach of contract is generally a kind of faulty liability, the breaching partys fault is presupposed, and it is the breaching partys burden to prove that it has no fault for the breaching.
During the drafting of CCL, it was a sharp point in dispute whether to adopt the Strict
Liability Principle or not.11 By adopting the Strict Liability Principle, CCL is thought to
pursue a kind of accommodation with the UN convention (CISG) and model laws (PICC and
PECL).12
11 As viewpoints against the adoption of strict liability principle, see Shiyuan Han, Studies on damages for
breach of contract, (doctor degree treatise, 1997, Graduate School, Chinese Academy of Social Sciences; as a
book with the same title published by Law Press China in 1999); Jianyuan Cui, Strict liability? or fault liability?
in Civil and Commercial Law Review, vol.11, Law Press China 1999. As those approve for the adoption of
strict liability principle, see Huixing Liang, From fault liability to strict liability, in Civil and Commercial
Law Review, vol.8, Law Press China 1997.
12 It should be noted that CCL also has some provisions can be read as fault liability, for example art. 406 par. 1.
Whether arts. 374 and 394 may be read as fault liability or not, there are different viewpoints in China. As it to
me, these two articles should also be read as fault liability.

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It should be noted that the concept of liability for breach of contract used by CCL does
not has the same meaning with liability for non-performance of obligation used by
traditional civil law theories. As guarantee liability has been unified with liability for breach
of contract in CCL (arts. 111 and 155). It should also be noted that breach of contract used
by CCL has some differences with non-conformity of contract used by CISG. Especially in
the aspect of corresponding liabilities, liability for breach of contract in CCL may include
consequential damages (as art. 112 may have such interpretation). While in CISG, liability
of the seller for death or personal injury caused by the goods to any person is out of the
Conventions sphere of application (CISG art. 5). So when a breach of contract causes
personal injury or damage to property (other than the very thing contracted for), the injured
party may claim compensation in a contract action according to CCL.
As to the types of liabilities for breach of contract in CCL, there are enforced performance
(arts. 109, 110 etc.), damages (art. 113) and payments stipulated by the contract (art. 114).
And as a remedy for breach of contract, a party who is aggrieved by the other partys failure to
perform contract may terminate the contract (arts. 93, 94 etc.). It should be noted that it is a
freedom of the aggrieved party to choose a specific relief or a substitutionary one or a
combination of the two if possible, as there is no mandatory sequence of the remedies for
breach of contract in CCL.

Pre-contractual obligations and liability for culpa in contrahendo

With a lot of reference to foreign civil law theories and the provisions in PICC (arts. 2.15 and
2.16) and PECL (arts. 2:301 and 2:302), CCL makes a resemble provision (arts. 42 and 43).
And these provisions are interpreted as pre-contractual obligations and the liability for culpa
in contrahendo. Besides, art. 58 of CCL on effects of a void contract also includes some
effects of the liability for culpa in contrahendo.

Post-contractual obligations and post-contractual liability

CCL makes a provision on post-contractual obligations (art. 92), according to which, even the
contractual relationship is over, the parties shall perform obligations of notification, assistance
and confidentiality in light of good faith and fair dealing and in accordance with trade
practices. As to effects of breach of post-contractual obligation, there is no provision in CCL.
In scholastic interpretation, it should be treated by liabilities for breach of contract. But postcontractual liability should not be treated as strict liability, it is a kind of fault liability.

Liabilities for culpa in contrahendo

Introduction
The theory of culpa in contrahendo, which is first presented by German scholar Rudolf von
Jhering in 1861 and is developed by German cases, has its influences in China. The influence

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is started by scholastic introductions about the theory.13 Some provisions of GPCL may be
interpreted as partly on the effects of culpa in contrahendo (art. 61). Arts. 42 and 43 of CCL,
with a lot of reference to PICC and PECL, are much perfect provisions on pre-contractual
obligations and liabilities for culpa in contrahendo.
A lot of discussions on the theory of culpa in contrahendo have been made in China. The
main questions raised from the discussions include the scope of the theories application, the
scope of damages for culpa in contrahendo, etc. As to the legal basis for the liability, also there
are several kinds of theories raised by German theories and cases, there is not so much
divergence in China. In a generally accepted theory in China, a party should negotiate with
due care in accordance with good faith and fair dealing, otherwise there will be a culpa in
contrahendo.14

Key elements for the liabilities (when may it be applied?)

As it has been generally accepted, if one party claims liabilities for culpa in contrahendo, the
following requirements should be fulfilled. First, the parties contact each other with the aim of
a contract. Second, one party breaches a pre-contractual obligation. Third, the party breaching
a pre-contractual obligation has fault for the matter. Fourth, there are some losses occurred.
And in Chinese law, there is no requirement that the other party must with a pair of clean hand.
The party at fault shall compensate the other party for the loss caused by the fault. If both
parties have faults, they shall bear their respective responsibilities (GPCL art. 61 par. 1; CCL
art. 58). It may be viewed as a kind of contributory negligence.

The extend of its application

According to whether the aimed contract validly formed or not, culpa in contrahendo may be
divided into three types, namely type I the aimed contract not formed, type II the aimed
contract void, and type III the aimed contract valid. The problem of type III was first raised
and discussed in 1896 by a German Scholar named F. Leonhard. In 1910, Leonhard advocated
his theory for the second time. A German court accepted Leonhards theory in a case on 26
April 1912. From that time on, it has become a general viewpoint in Germany and Japan that
culpa in contrahendo may be claimed even the aimed contract is valid.15 Unfortunately, the
third type of culpa in contrahendo has not been accepted by the general civil law theory of
China, also there are some different viewpoints on the question. So it is still a point in dispute
in China.
According to art. 42 sent. 2 of CCL, if one party conceals intentionally important facts
related to the conclusion of the contract or providing false information, and thus causes loss to
the other party, the party shall compensate for the loss. Though there is no word on whether
the contract validly formed or not in art. 42 sent. 2, as it seems to me, it has left a space for such
interpretation. So the third type of culpa in contrahendo may exist in Chinese law. And it may
include situations where: (1) one party breaching its pre-contractual obligation to inform
13 Tze-chien

Wang, Studies on civil law theories and cases, Vol. 1, (1975), Taiwan.
Jiafu Wang ed., Law of obligation, (1991), Law Press China, p.339.
15 See Kenzo Miyamoto, Obligation of care for safety and the expansion of contractual liabilities, (1993), p.58.
14 See

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(CCL art. 42 sent. 2); (2) a voidable contract being modified (CCL art. 54); and (3) a voidable
contract becoming valid because the party who has the right to make the contract void losses
its right (CCL art. 55).

Effects
Damages
As to a claim for damages because of culpa in contrahendo, there are two main questions.
First, does what the aggrieved party may claim include expectation interest or just reliance
interest? Second, if it is reliance interest, whether it shall not exceed the amount of expectation
interest?
In the general civil law theory of China, damages for culpa in contrahendo is limited to
reliance interest, and not includes expectation interest. This is in accordance with the starting
point of not admitting the third type culpa in contrahendo.
According to German law, damages for reliance interest shall not exceed the amount of
expectation interest.16 In Chinese law, there is no provision on this matter. And the Chinese
scholastic viewpoints diverge very much. Someone thinks that reliance interest should not be
limited by expectation, and all actual losses should be compensated.17 Others think that
damages for reliance interest should not exceed the amount of expectation interest.18 As to the
scope of damages for reliance interest, it is thought that the rule of foreseeability should be
applied.19 Of course, if the other partys body or property is harmed because of ones failure to
perform its obligation to protect the other, what the party guilty of the harm should
compensate is called perfectibility interest or maintenance interest, and it should not be
limited by expectation interest.

Is a right to termination possible?

As we have seen, the third type of culpa in contrahendo has not been accepted by the general
civil law theory of China. So according to this kind of theory, it is illogical for a right to
termination as to culpa in contrahendo. As a contrast, some Japanese scholars advocate that,
as a measure to protect consumers, a right to termination should be one kind of effect of culpa
in contrahendo.20 Following the development of market economy in China, this kind of
issues will be increased. As a response, the consumer may claim that the contract is voided
because of deceit. Whether or not there should be a right to termination for the consumer is
still a question needing further research.
16 BGB

arts.122, 179 and the former art. 307. As an English discussion on this topic, See Fuller & Perdue, The
reliance interest in contract damages, (pt.1), 46 Yale L. J. 52, 7580.
17 See Jianyuan Cui, On liability for culpa in contrahendo, in Social Sciences Journal of Jilin University, No.3
of 1992.
18 See Guangxing Zhang, Law of obligation in general, (1997), Law Press China, p.56.
19 See Huixing Liang, Civil law, (1988), Sichuan Renmin Publishing House, p.144.
20 See Zentaro Kitagawa, Studies on contractual liabilities, (1963), Yuhikaku, Japan, p.287; Junichi Honda,
On the Theori of Culpa in Contrahendo, in Modern Contract Law Series, vol.1, (1983), Yuhikaku, Japan,
p.207; Kenzo Miyamoto, Obligation of care for safety and the expansion of contractual liabilities, (1993),
Tokyo, Japan, p.63.

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Anticipatory breach
Introduction
Before the time due for performance, it may happen that the obligor expressly refuse to
perform the contract, or it may become clear that the obligor, though does not refuse to
perform, will be unable to perform the contract on the time due for performance. How to cope
with this kind of obstacles of performance is so important a topic that it has attracted a lot of
discussion between Chinese scholars before the enactment of CCL. The viewpoints may be
divided into two categories. One category insisted that Chinese contract law should follow
German law on this point, which means the remedy is to suspend performance as stipulated by
art. 321 of BGB (defense of insecurity). The other category suggested that Common Laws
rule of anticipatory breach of contract is much better than the German rule. As art. 321 of
BGB only gives the other party a right to refuse to perform,21 while the Common Law rule
gives the other party a further protection by permitting it seeking damages or other remedies
even before the time due for performance.22 CCL adopts this suggestion (arts. 108 and 94
sent. 2). But it also has an article on defense of insecurity (CCL art. 68).

When may call it an anticipatory breach?

According to art. 108 of CCL, there are two types of situations that can amount an anticipatory
of breach. The first one is that a party explicitly expresses its intention not to perform its
obligation, and it may be called anticipatory renunciation. The second type is that a party
indicates by act its intention not to perform its obligation, and it may be called anticipatory
disablement. Whether or not there is an anticipatory breach should be discussed separately.
Where there is an anticipatory renunciation, the obligors intention is clear and the future
performance is not expectable. So it may be recognized as an anticipatory breach directly.
As to the second type of situation, the obligor does not expressly refuse to perform its
obligation, so it may not be recognized as an anticipatory breach promptly. Here it is
necessary for the obligee to take some measures to make the matter clear. According to art. 68
par. 1 of CCL, the party which ought to perform first may suspend its performance if it has
exact evidence to prove that the other party falls under any of the following situations: (1)
business operations seriously deteriorating; (2) diverting properties and withdrawing capital
to evade debts; (3) falling into business discredit; or (4) other situations showing inability or
possible inability to perform its obligations. Where the party suspend its performance in
accordance with art. 68 of CCL, it shall promptly notify the other party of the suspension. The
party shall resume its performance when the other party provides a guarantee. The party that
has suspended its performance may terminate the contract if the other party has failed to
regain its capability to perform and to provide a guarantee within a reasonable period of time
(CCL art. 69). Here the termination of contract premises that the other party falls into a kind of
anticipatory breach.
21 This

is the former rule of art. 321 of BGB. It should be noted that the new art. 321 par. 2 permit the party
required to perform first a right to termination.
22 See Shiyuan Han & Jianyuan Cui, Anticipatory breach and Chinese contract law, in CASS Journal of Law,
No.3 of 1993.

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Remedies for anticipatory breach

According to art. 108 of CCL, the obligee may demand that the obligor who anticipatorily
breached the contract bear the liabilities for its breach even before the expiration of the period
of performance. It is interpreted that the liabilities may include payments stipulated by the
contract, damages, enforced performance, etc.
If it is before the expiration of the period of performance that the obligee sued the obligor,
judge should consider the benefits, which the obligor may derive from the period of
performance. As to damages, a reasonable interest should be deducted. As to enforced
performance, the liability should be carried out until it is time due for performance. As to
payments stipulated by the contract, whether a reasonable interest should be deducted should
be decided in accordance with the nature of the stipulated payments.

Enforced performance
Introduction
Enforced performance is a terminology used from a point of liability. From a point right, the
same content may be called a claim for performance.23 CCL distinguishes the obligation to
pay a sum of money (pecuniary obligation, art. 109) and other obligations (non-pecuniary
obligation, art. 110), accordingly there are two kinds of claim for performance. As to the
claim for performance of a pecuniary obligation, most countries have a similar practice. So
here our concern will be focused on the claim for performance of a non-pecuniary obligation.

Restrictions on the availability of enforced performance

Restrictions on the availability of enforced performance may be sought at the second half part
of art. 110 of CCL. According to its provisions, there are three kinds of situations where the
creditor cannot claim for enforced performance, namely (1) the performance is legally or
practically impossible; (2) the subject-matter of the obligation is unsuitable for a enforced
performance or costs too much for the performance; or (3) the creditor does not claim for the
performance within a reasonable period of time. Moreover, Chinese law adopted the rule of
mitigation (GPCL art. 114; CCL art. 119). Accordingly, when the rule of mitigation should be
applied, the creditors right to claim enforced performance would be excluded. Although CCL
has no article on the problem of change of circumstances, the principle of change of
circumstances is accepted by Chinese jurisdictions.24 So if the principle of change of
circumstances should be applied, the creditors right to claim enforced performance would
be circumscribed.

23 A

claim for performance may be used in different ways. First, it may mean the obligee may ask the obligor
to perform the contract. Second, it may mean the obligee may sue for enforced performance. Here enforced
performance equals the second meaning of a claim for performance.
24 See Shiyuan Han, Change of circumstances: the civil law approach and a Chinese response, in Peking
University Law Journal, Vol.12, No.4 (2000) pp.435455.

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Types of enforced performance

In Chinese law, two kinds of enforced performance may be recognized. First, if the debtor
failed thoroughly or partially to perform its obligation, the creditor may claim the
performance of the obligation, and the terminology used by Chinese law is continuing to
perform the obligations (CCL art. 107). As the aim is to make the debtor to perform its
original obligation, so it may be called a claim to performance of original obligation. Second,
if the quality fails to meet the agreed requirements, the creditor may claim a cure for the
defects in the subject-matter of the contract by repairing, replacing or redoing (CCL art. 111),
and the terminology used by Chinese law is taking remedial measures (CCL art. 107; GPCL
art.111).25 As the aim is to make the debtor to cure the defects in the subject-matter, so it may
be called a claim to performance of obligation to cure.
The claim to performance of obligation to cure should also apply the restrictions laid
down on the availability of enforced performance by art. 110 of CCL, and what worthy a
discussion is, whether there should be any other restrictions on the claim to performance of
obligation to cure. What CCL requested is in accordance with the nature of the subjectmatter and the degree of the loss, choose in a reasonable manner to demand that... So if the
subject-matter of a contract of sale belongs to generic goods that fails to meet the agreed
requirements of quality, and if the costs of repair exceeds the worth of the goods, the seller
should be permitted to replace the goods. If the buyer insists on repair, it will be unreasonable.

Methods of enforcement
The methods of enforcing a judgment for performance in modern laws include direct
enforcement, vicarious performance and indirect enforcement. In Japanese law, direct
enforcement and vicarious performance can be found in art. 414 of Japanese Civil Code
(here after JCC); and indirect enforcement can be found in art. 172 of Japanese Civil
Execution Law (here after JCEL). In CCL, enforced performance means direct enforcement; but in civil procedural law, there are methods of direct enforcement, vicarious
performance and indirect enforcement.
In Chinese law, the method of enforcing a judgment for performance depends on the nature
of the obligation upon which the judgment is based.
If the obligation is to pay money, to deliver property or negotiable instruments, or to evict
from a building or a plot of land (as is called the obligation to give), Civil Procedure Law of
the Peoples Republic of China (here after CCPL) permits direct enforcement (arts. 221
223, 227229). In addition, according to The Regulations on Some Problems of Execution by
Peoples Court (A Trying Version, 1998) adopted by the Supreme Court of P.R. China, there
are special provisions on the execution of delivering property or carrying out an action. The
attracting matter is that direct enforcement may apply to an obligation to carry out an action
(art. 60 of the Regulations).
25 It should be noted that taking remedial measures used by art. 107 of CCL refers to the remedies in art. 111,
e.g. the party suffering the loss may, with reference to the nature of the subject-matter and the degree of loss,
choose in a reasonable manner to demand that the other party bear the liability for breach of contract in such
form as repair, replacement, redoing, return of the subject-matter, reduction in payment or remuneration, etc.
Among the remedies, repair, replacement and redoing belong to claim to performance. Here it is named a claim
to performance of obligation to cure.

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Where the person subjected to execution fails to perform acts specified in a judgment or
written order or any other legal document according to the execution notice, the court may
carry out compulsory execution or entrust the task to a relevant unit or other persons, and the
person subjected to execution shall bear the expenses thus incurred (CCPL art. 231). So the
obligation to do an act, if it can be performed vicariously, may be enforced by vicarious
performance. This method of execution is available, for example, for the enforcement of
judgments directing performance of a contract to build, or to heat or light premises, or to
operate a lift. It is available even in respect of services if they require no special bodily or
mental skills.26 In German law and Japanese law, where the judgment requires the debtor to
make a declaration of will (for example an entry in a land register) the judgment is selfexecuting in the sense that the declaration is regarded as made as soon as the judgment has
become final and conclusive (German Civil Procedure Code art. 894; JCC art. 414 par. 2,
JCEL art. 171). In Chinese law, as to the same problem, the court may issue a notice for
assistance in execution to the relevant units (for example a land register), for whom it is a duty
to comply with the notice for assistance (CCPL art. 230).
As to indirect enforcement, a relevant provision can be found in art. 232 of CCPL.
According to art. 232, if the person subjected to execution fails to fulfill his obligations with
respect to pecuniary payment within the period specified by a judgment or written order or
any other legal document, he shall pay double interest on the debt for the belated payment. If
the person subjected to execution fails to fulfill his other obligations within the period
specified in the judgment or written order or any other legal document, he shall pay a charge
for the dilatory fulfillment. So the judgment for an act which cannot be vicariously performed,
or the judgment ordering the debtor to forbear or suffer something, may be carried out in
accordance with art. 232 of CCPL.
Whether there should be a sequence of application for direct enforcement, vicarious
performance and indirect enforcement is not very clear in China. The manner to cope with the
problem is somewhat flexible. In one hand, the creditor may be free in choosing. In the other
hand, the court may select a reasonable method in accordance with rules of law and the
common consciousness of fairness.

Damages
Introduction
The general provision on damages in CCL is art. 113. Besides, art. 112 may be used to deal
with consequential damages. Compared with former Chinese laws, CCL has some progresses
on damages. For example, it is clear that lost gains may be claimed if it is foreseeable by the
breaching party at the time of the conclusion of the contract. So if a person who buys raw
materials for manufacturing purposes, both actual loss (not getting the goods bargained for)
and lost gains (profits that can be earned from using the goods in the process of manufacture)
may be claimed by the buyer. Moreover, CCL adopted foreseeablity as a general rule, and the
aggrieved party in a contract action may claim consequential damages.

26 G.

H. Treitel, Remedies for breach of contract, (1988), Oxford: Clarendon Press, p.54.

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Availability of damages
In an action claiming damages for breach of a contract, a Chinese court will check the case by
four factors, namely whether there is a breach, whether the plaintiff suffered any damage or
loss, whether the breach is the causation of the damage, and whether the defendant has a
reason for exemption.

Breach of contract
First, there should be a breach of contract, namely a party fails to perform its obligations
under the contract or does not perform its obligations as contracted(CCL arts. 113 and 112).
As being previously pointed out, no only breach of Leistungspflicht, but also breach of
ancillary obligations, may constitute a breach of contract. Thought CCL distinguishes fails to
perform the obligations and does not perform obligations as contracted, their effects are
not affected by the distinction.

Damage
The damage or loss caused by a breach is mainly on the aggrieved partys property, but
sometime a breach may also cause the aggrieved party mental suffering. Before the enactment
of CCL, Chinese law had no provision on whether this kind of non-pecuniary loss may be
compensated in a contract action. Scholars viewpoints on the problem diverged sharply. The
former general theory gives a negative answer.27 Those who gave a positive answer belonged
to minority.28 But in practice, some special cases were raised in China. In these cases, the film
sent for wash and print was lost by the photo-shop; the bone ash was lost by a funeral home to
which it was consigned; a girl expecting an improvement of her looks was left with a
disfigurement by the fault of a beauty shop. In each of these cases, there is a kind of nonpecuniary loss, and there is a contract between the parties. So it is necessary to re-raise and rethink whether non-pecuniary loss can be claimed in a contract action. My viewpoint on the
problem is that the court should approve the aggrieved party claim for non-pecuniary loss
even in a contract action.29 If we look at the problem from comparative laws, we can see that
many law systems permit non-pecuniary loss in a contract action. Especially, PICC and PECL
both state that the loss for which damages are recoverable includes non-pecuniary loss.30 Now
CCL has left a space for such kind of interpretation (art. 112).

27 See Huixing Liang, Civil law, (1988), p.420; Jiafu Wang ed., Law of obligation, (1991), p.247; Liming Wang,
On liabilities for breach of contract, (1996), Chinese Politics and Law University Press, p.400.
28 See Jianyuan Cui, Studies on contractual liabilities, (1992), p.197.
29 See Shiyuan Han, Non-pecuniary loss and contractual liability, in Legal Science, no.6 1998; Shiyuan Han,
Studies on damages for breach of contract, (1999), Law Press China, pp.3747.
30 PICC art.7.4.2 par.2; PECL art.9:501 par.(2) sent.(a).

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Causation
Nowadays in China, the mighty theory on problems of causation adopts a bifurcated
approach, namely distinguishing cause in fact and cause in law. In determining whether a
defendant should bear a liability of damages, the judge must decide whether there is a cause in
fact between the act of the defendant and the loss of the plaintiff. Here a cause in fact, as is
popularly accepted, is a relationship of conditio sine qua non, and it may be tested by the but
for test.31

Reasons for exemption

Though reasons for exemption may be determined by the parties in their contract, as is known
as exemption clauses, the only reason for exemption that can be found in General Provisions
of CCL is a force majeure (art. 117). Since CCL adopted the Strict Liability Principle, the
scope of reasons for exemption becomes even more important than ever. But insofar as the
provisions of CCL are concerned, we can say that the strict liability in CCL is stricter than
the strict liability in Common Law. Because there is a principle named Frustration of
Contract in Common Law, and its scope is much bigger than the scope of force majeure.32

Scope of damages
According to art. 113 par. 1 of CCL, where a party fails to perform its obligations under the
contract or does not perform its obligations as contracted and thus causes losses to the other
party, the damages shall consist of a sum equal to the loss actually caused by the breach,
including the gains that should be obtained had the contract been performed, but may not
exceed the loss which the party in breach foresaw or ought to have foreseen at the time of the
conclusion of the contract as a possible consequence of the breach of contract. Here as a
method of limiting damages, CCL, instead of following the German theory of Adequate
Causal Relationship, adopted the Rule of Foreseeability.
If we compare art. 113 par. 1 of CCL with its corresponding part of Japanese law (JCC art.
416), we may find there are some characteristics of CCL that differs from Japanese law. First,
there is no distinction between general loss and special loss in CCL, and the rule of
foreseeability applies to all kinds of losses. Second, in CCL it is by the time of the conclusion
of the contract and not by the time of the breach of the contract that the rule of
foreseeability is applied. Third, in CCL it is by the party in breach and not both parties that
the rule of foreseeability is applied. Although art. 416 of JCC is learned from Common Law
and French law, but since Professor Wagatsuma, the general theory of Japan interprets art. 416
of JCC by the German theory of Adequate Causal Relationship. This is a typical example of a
dual structure of the Code Reception and Theory Reception in Japan.33 Of course, it is

31 See Shiyuan Han, Studies on damages for breach of contract, (1999), pp.147159; Jianyuan Cui ed., Law of
contract, (2000, 2nd ed.), Law Press China, pp.285288.
32 See
33 See

G. H. Treitel, The Law of contract (9th ed. 1995), pp.778810.

Zentaro Kitagawa, The history and theory of Japanese legal science, (1968), Nipon Hyoulonshia Press.

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noticeable that there are some new theories on the interpretation of art. 416 of JCC raised in
these years.34 The advocators of the new theories insist that the interpretation of art. 416 of
JCC should go back to its fountainhead (namely Common Law and French law). I think the
evolution of the interpretation of art. 416 of JCC will be a good lesson for Chinese civil law.

Elements for reducing damages

Contributory negligence
Contributory Negligence, as an important rule for reducing damages, had been formulated in
several drafts of CCL, but it is finally replaced by an article on Both Parties in Breach.
GPCL has an article on Both Parties in Breach (art. 113). CCL lays down the rule once
more, namely where both parties breach the contract, they shall bear their respective
liabilities accordingly (art. 120). Whether or not can there be a legal concept of Both Parties
in Breach had been a point in dispute in China.35 Nowadays it appears that, in some special
cases, there may be a situation of both parties in breach. As it is a natural reasoning that for
both parties to bear their respective liabilities accordingly, so there will be no problem even if
there is no provision on the issue in contract law. Moreover, a provision on Both Parties in
Breach is very rare in comparative law. So in the draft of Civil Code of China, it is necessary
to replace the art. 120 of CCL by a rule on Contributory Negligence.
If we make a comparison between Contributory Negligence and Both Parties in Breach,
we can find that, it is only one party that has loss in a case of Contributory Negligence. Its
characteristic is that the aggrieved party also has a fault for or has contributed to the
occurrence of the loss. While in a case of Both Parties in Breach, both parties of a reciprocal
contract failed in the performance of their obligations, and it is possible for them to cause each
other a loss. Its characteristic is that there are two breaches and two pieces of loss. So
Contributory Negligence and Both Parties in Breach are not the same matter.
As there is no special article in CCL on contributory negligence, it is a gap in law. In order
to fill the gap in CCL, it is suggested that art. 131 of GPCL, an article on contributory
negligence for torts, should be extended by interpretation to cover contract cases. As to the
drafting of Civil Code of China, it is still a question whether to formulate contributory
negligence in one article or like JCC to dispart it in two articles.36

34 See Yoshio Hirai, A theory of law of compensation, (1971), Tokyo University Press; Minori Ishida, A reconstruction of law of compensation, (1977), Tokyo University Press.
35 See Huixing Liang, Studies on civil law theories, cases and legislation, (1993), Chinese Politics and Law
University Press, p.82; Liming Wang, On the defence of concurrent performance in a reciprocal contract, in
Civil and commercial law review, vol.3, (1995), Law Press China, p.27. As a Common Law account on the
issue, see G. H. Treitel, The law of contract, (9th ed. 1995), pp.736737.
36 In JCC, art.418 is on contributory negligence in a contract case, while art. 722 is on contributory negligence
in a tort case.

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Mitigation
The Rule of Mitigation of Damage was first created by an English case more that 320 years
ago.37 In Civil Law countries, the same rule is either not in existence or treated as a part of the
rule of contributory negligence. But in Chinese law, it is an independent rule (GPCL art. 114;
CCL art. 119 par. 1). According to the rule, the aggrieved party should take appropriate
measures to prevent the increase of the loss; if it fails to do so, it may not claim damages for
the increased loss.
Insofar as Mitigation is an independent rule, then what is the relation between Mitigation
and Contributory Negligence? As to the avoidable loss, it may be said that the aggrieved party
has a fault for it. In this sense, Mitigation may be looked as a kind of Contributory Negligence.
But when it comes to the effects of the two rules, there is a notable difference. The mechanism
of Mitigation is all or nothing, while the mechanism of modern Contributory Negligence is
to distribute the losses by the comparison of negligence, contribution or causation of the both
sides. So strictly speaking, they are not the same. Just as a Common Law scholar has pointed
out, the plaintiffs duty to mitigate occurs after the breach, while the plaintiffs contributory
negligence occurs before or at the same time with the occur of loss. The key-point fact to make
the distinction is time.38 The same is true in Chinese law.

Enrichment accompanying losses

If the aggrieved party also got some benefits from the other partys breach, the amount of
damages it can obtain should be its loss minus its gain. This rule is called Enrichment
Accompanying Losses(compensatio lucri cum damno). Though CCL and GPCL, just like
Japanese law and many other countries law, do not have an article on the rule, it is followed
by Chinese Jurisdictions. Now it is generally accepted that the future Civil Code of China
should have an article on the rule.

Payments stipulated by the contract

Introductions
A contract may contain a stipulation providing for the payment of a fixed amount of money by
the debtor in the event of his default. Such a clause is called a penalty clause in China.39 And
rules on penalty clauses are laid down in art. 114 of CCL.
In civil law theories of China, penalty has been divided into two categories, namely
compensatory penalty and punitive penalty. The former is a kind of preliminary damages,
37 Vertue

v. Bird (1677). See Farnsworth, Farnsworth on contracts (1990) vol. III, p.219.
Harvin D. Pitch, Damages for breach of contract (1985), p. 150.
39 As to the terminology, it should be noted that in this paper such expressions as penalty clause would be
used in the Civil Law sense (of a valid provision). While in Common Law, there is a distinction between
penalty clauses and liquidated damages clauses, the former is normally invalid and the later is prima facie
valid. See G. H. Treitel, Remedies for breach of contract, (1988), p.208. This difference in terminology gives
rise to some awkwardness in preparing this paper.
38 See

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which aims to fix in advance the damages payable in the event of default. The later may be
claimed together with performance or damages. Art. 114 of CCL is mainly on compensatory
penalty. But as a deduction of the freedom of contract, punitive penalty is also permitted by
CCL. So it can be said that CCL takes compensatory penalty as a general rule and punitive
penalty as an exception. It also should be noted that compensatory penalty in CCL, not like
art. 340 par. 2 of BGB,40 is not as a minimum sum of damages, but somewhat as the upper
limit of recovery except it is increased by a court or an arbitration institution.

When may a penalty clause be applied?

First, there should be a principal obligation. The obligation raised by a penalty clause is
accessory to the obligation to perform the principal obligation. As an accessory obligation, it
premises the existence of a principal obligation.
Second, there should be a breach that the penalty clause aimed.
Third, should there be a fault on the part of a debtor? Now it has become a point in
dispute in China. On one hand, so far as the Strict Liability Principle is adopted, it seems
ratiocination that there should be no requirement of fault on the part of the debtor for the
application of a penalty clause. On the other hand, it is suggested that there still should be a
requirement of fault on the part of the debtor for the application of a penalty clause even CCL
adopted Strict Liability Principle.41 As to my viewpoint, different kinds of situations should
be distinguished. If the parties agreed that there should be a fault on the part of the debtor,
the agreement should be followed. If it is in a situation of fault liability as laid down in the
Special Part of CCL or other special laws, a fault on the part of the debtor should be
required. If it is in a case of punitive penalty, as its purposes is to provide a means of pressure
on the debtor so as to coerce him into performing his principal undertaking, and it also
represents a punishment on the fault of debtor if there is a failure of performance, so it is
reasonable to require a fault on the side of debtor. In a situation of compensatory penalty, so
long as there are no exceptions as stated above, a fault on the part of the debtor should not be
required. Because its nature is a kind of preliminary damages, and its purpose is to
compensate for the loss caused by the debtors breach of contract.42
Fourth, should there be a requirement to prove the existence of a loss? In a case of punitive
penalty, as its nature is not a kind of preliminary damages, so for its application there is no
need for a requirement of the occurrence of loss.43 But when it comes to a case of
compensatory penalty, there are some conflicts of viewpoints. Since compensatory penalty is
a kind of preliminary damages, so it is naturally thought that there should be a loss, even it is
not required to prove the amounts of the loss, at least it should be required to prove its
existence. But since one of the main purposes of a penalty clause is to avoid the trouble to
prove the existence of loss, so it is generally accepted in China that there is no requirement for
the plaintiff to prove the existence of loss while applying a penalty clause.

40 BGB

art.340 par.2 states that where the creditor claims compensation for non-performance, he is entitled to
the penalty as a minimum sum, and that a claim for further damages is not excluded.
41 See Jianyuan Cui ed. Law of contract, (2000, 2nd ed.), p.320.
42 See Shiyuan Han, Some theoretic issues about the penal clause, in CASS Journal of Law, No. 4 of 2003, p.20.
43 See Shangkuan Shi, Law of obligations: general provisions, (1954), Taiwan, p.499.

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The relation between penalty and damages

The relation between penalty and damages turns on the distinction of penalty.

Punitive penalty and damages

Punitive penalty is not a kind of preliminary damages, so in addition to claiming punitive
penalty, the creditor may still claim the performance of the primary obligation or its damages.

Compensatory penalty and damages

Penalty as a maximum sum In CCL, compensatory penalty is prima facie a preliminary
maximum sum of damages; it is the upper limit of recovery. So generally speaking, the
creditor may claim compensation for its actual losses within the upper limit of recovery. But
there is an exception for the general rule as laid down by art. 114 par. 2 sent. 1 of CCL,
according to which, where the stipulated penalty is lower than the loss caused by the breach,
the party concerned may apply to a court or an arbitration institution for an increase. The
provision involves a perennial conflict between certainty and justice. A lot of questions may
be raised, such as when may a court or an arbitration institution increases the amount of a
penalty? How to distinguish a penalty clause and a clause limiting one partys liability (a kind
of exemption clause)? So art. 114 par. 2 still needs a further interpretation. As to the relation
between compensatory penalty and damages, it should be discussed separately.
If the compensatory penalty and the damages aim the same damage, the party who suffered
the damage should not get double compensation for the same damage. So only one remedy
can be applied. And because compensatory penalty is an agreement of the parties, it takes
priority of damages.
If the compensatory penalty and the damages aim different losses or damage, there will be
no conflict between the compensatory penalty and the damages. The party who suffered the
losses may claim the both.
Penalty as a minimum sum As to a penalty as a minimum sum of damages,44 there is no
provision in CCL, but it is free for the parties to agree upon this kind of penalty clauses.
Because the penalty is a preliminary minimum sum of damages, so the aggrieved party may
still claim damages for any other loss not covered by the penalty.

Penalty clauses, a claim for performance and a right to termination

As it has been generally accepted, a creditors claim for performance is not excluded by the
presence of a penalty clause.45 The same conclusion may be got by an interpretation of art.
107 of CCL. And the same is true with a creditors right to termination.

44 See
45 See

BGB art. 340 par. 22; Swiss Code of Obligations art. 161.
JCC art. 420 par. 2.

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If the creditor terminated the contract because of a non-performance by the debtor, a

penalty clause in the contract may not be affected by the termination. As art. 98 of CCL lays
down that, the ending of rights and obligations under a contract shall not affect the validity of
its clauses regarding settlement and liquidation.

The increase, reduction or exemption of a penalty

In CCL, penalty clauses are not always enforced literally; the enforcement of them may
subject to reduction or increase according to art. 114 par. 2 of the Law. As the drafters of the
Law believe that, as preliminary damages, even the compensatory penalty should not be
conformed to the loss in amount, there should not be a great disparity between the two.
Otherwise, it will be contrary to fairness, and it also will be possible for one party to press and
exploit the other by penalty clauses. Whether or not a court or an arbitration institution, on an
application made by the debtor who proves that there is no loss caused to the creditor, may
exempt a penalty is not so clear in CCL. The Problems need a further research.

Statutory rights to termination

Introduction
As a remedy for breach of contract, termination of contract may release the party not in breach
from his contractual obligations. In CCL, termination includes termination by a statutory
right (art. 94), termination by a contractual right (art. 93 par. 2) and termination by an
agreement (art. 93 par. 1). Besides, CCL has general provisions on the time limit for
exercise of a right to termination (art. 95), the method for exercise of a right to termination
(art. 96) and effects of termination (art. 97). The general rules on termination of contract in
General Provisions of CCL (arts. 9397) apply to all kinds of contracts, no matter the
performance of a contract is only of one time or of a continuing one. Hereinafter the statutory
rights to termination in CCL would be mainly described and analyzed.

When does a party get a statutory rights to termination?

There are two kinds of statutory rights to termination in CCL. One kind of them may apply to
all kinds of contracts, so it is called a general statutory right to termination. The other kind
only applies to a special kind of contract, so it is called a special statutory right to termination.46
The main concern of this paper is on the general statutory right to termination. According to
art. 94 of CCL, the general statutory rights to termination may be raised both by an objective
cause and by a breach of contract. Here the statutory rights to termination raised by a breach
will be analyzed firstly.

46 Such

as arts. 148, 224, 231, 253, 259 and 268 in CCL.

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No requirement of fault
The original purpose of termination of contract is to release the creditor from his unperformed
contractual obligations, so there is no need to require a fault on the side of breaching party for
the other partys exercise of a right to termination. This point has been make certain since the
first draft of CCL in 1994, and it has been preserved by CCL. In this aspect, CCL has
surpassed its corresponding part in many other Civil Law systems.

Breach of contract (non-performance of contract)

In the first draft of CCL, statutory rights to termination are laid down in six articles in
accordance with a kind of traditional civil law analyzing frame, namely according to patterns
of nonperformance such as impossibility, delay, refuse to perform, defective performance,
partial performance and nonperformance of ancillary obligations. This kind of formulation
was thought too tedious to be accepted, so they were replaced by one article since the third
draft of CCL, and some of ingredient from art. 25 of CISG (fundamental breach) was
introduced.47 The change gave CCL a fateful impact and buried a seed that would cause a
divergent interpretation about art. 94 of CCL. By one kind of opinion, art. 94 of CCL should
be interpreted by a theory of fundamental breach. But in accordance with the original idea of
the drafter of the part of Termination of CCL, art. 94, especially sents. 2 and 3, should be
interpreted by the traditional civil law analyzing frame as mentioned above.48
Refuse to perform Before the period of performance expires, if a party clearly indicates by
word or by act that it will not perform its main obligations, the other party may terminate the
contract (art. 94 sent. 2). The provision learnt a lot from rules of anticipatory breach from
Common Law. It is noticeable that the mere indication not to perform by the debtor, no matter
by word or by act, may entitle the creditor to terminate the contract. Whether a Nachfrist
should be required becomes a point of dispute in China.49
Doubtlessly, the situations laid down in art. 68 of CCL (the defense of insecurity) may
overlaps with the situation of a debtor indicating not to perform by its act in art. 94 sent. 2.
While according to art. 69, where a party suspends its performance in accordance with the
provisions of Article of 68 of the Law, it shall promptly notify the other party of the
suspension. The party shall resume its performance when the other party provides a guarantee.
The party that has suspended its performance may terminate the contract if the other party has
failed to regain its capability to perform the contract and to provide a guarantee within a
reasonable period of time. It is clear that the termination of contract in this kind of situation
requires a notice and a Nachfrist (as used in art. 69 a reasonable period of time). In my
opinion, in the situation of a debtor indicating not to perform by its act in art. 94 sent. 2, there
should be a requirement for Nachfrist so as to overcome the divergence between art. 69 and
art. 94 sent. 22.
47 As

a piece of Japanese material on this change during the drafting of CCL, see Weirong Qian, The statutory
rights to termination in Chinese contract law, in NBL No.699 (2000.10.15), p.62.
48 The drafting work of the Termination of Contract part of CCLs first draft was in charged by Professor
Jianyuan Cui. The first draft of this paper had been read by Professor Cui, and the author wishes to thank
Professor Cui for his helpful comments on this part.
49 See Jianyuan Cui ed. Law of contract, (2000, 2nd ed.), p.203.

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Delay in performance As a general rule, where a party delays in performance of its main
obligations, the other party should notice and set a Nachfrist. If the debtor still fails to
perform after the Nachfrist, the creditor may terminate the contract (art. 94 sent. 3 of CCL).
But where a contract under which the obligations of at lease one party have to be performed at
or within a stipulated time (the so-called Fixgeschft in German law), there is no
requirement of Nachfrist. If the debtor delayed, the creditor may terminate the contract
directly (art. 94 sent. 4 of CCL).
Impossibility of performance As it is still generally accepted in China, the initial impossibility
of performance is a reason of invalidity of a contract,50 while an incidental impossibility of
performance is a reason for termination of a contract.51 Where the incidental impossibility of
performance is caused by a force majeure, the parties may terminate their contract (art. 94
sent. 1 of CCL). Any other incidental impossibility of performance, no matter there is a fault
on the side of the debtor or not, may be treated as a breach of contract. Because the purpose of
the contract cannot be achieved, the creditor may terminate the contract accordingly (art. 94
sent. 4 of CCL).
Imperfect performance In a generally accepted theory in Japan, if the imperfect performance
is still possible for cure, it may be treated as a delay in performance of the obligation, for
which the time of performance is not of the essence of the contract (namely not as a
Fixgeschft). If it becomes impossible or meaningless to cure, it may be treated as an
impossibility of performance, and the creditor may terminate the contract.52 In the first draft
of CCL, there is a similar treatment. Now according to CCL, an imperfect performance may
be treated as one of other kind of breach. And if thus causes the purpose of the contract
cannot be achieved, the creditor may terminate the contract (art. 94 sent. 4).

A re-examination of fundamental breach of contract

Not every breach can justify a right to termination. The seriousness of a breach (default or
other failure in performance) must be considered while deciding whether there is a right to
termination or not. This is a natural request of the principle of pacta sunt servanda. So CCL
describes that what the debtor fails to perform should be the main obligations (as used by
art. 94 sents. 2 and 3). According to Chinese scholars interpretation, the failure in
performance of other obligations (such as an ancillary obligation), generally speaking, is not
enough to justify a right to terminate a contract. But if as a result of a failure in performance of
an ancillary obligation, the purpose of the contract is frustrated,53 or the relationship of
reliance between the parties as a basis of the contract is ruined,54 the creditor may terminate
the contract.
50 Thought it has been suspected, and it is noticeable that both Article 3.3 of PICC and Article 4:102 of PECL do

not take an initial impossibility as a reason of invalidity of contract.

Jianyuan Cui ed. Law of contract, (2000, 2nd ed.), p.204.
52 See Sakae Wagatsuma, Law of obligations: special provisions, Vol. One (1954), Iwanami Book Store, p.174;
Hiroshi Mizumoto, Law of contracts, (1995), Yuhikaku, p.97; Yasuhiro Fujioka etc., Civil Law IV, (2nd ed.,
1998), Yukikaku, p.45.
53 See Jianyuan Cui ed. Contract law theories and cases, vol.1, (1999), Jilin University Press, p.433.
54 See Shiyuan Han, On fundamental breach of contract, in Social Sciences Journal of Jilin University, no.4 of
1999.
51 See

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Fundamental breach is a concept originated from English Common Law, and it has been
accepted by CISG (art. 25). The former Law on Economic Contracts Involving Foreign
Interest of P.R. China, with a reference to art. 25 of CISG, takes fundamental breach as a cause
for the right to termination (art. 29). But there is an important difference between the two. The
former Chinese law does not take the foreseeablity as a part of a fundamental breach. The
standpoint is accepted by art. 94 sent. 4 of CCL. Now some scholars suspect the standpoint.55
And it is noticeable that art. 8:103 of PECL also require the foreseeablity. The issue needs a
further research in China. And art. 94 of CCL should be interpreted with the traditional civil
law analyzing frame.

Force majeure and termination of contract

In Chinese law, where the purpose of the contract cannot be attained because of force majeure,
the parties may terminate the contract (art. 94 sent. 1 of CCL). Where force majeure, as a kind
of objective cause, causes an incidental impossibility of performance, the contract should be
extinguished. But the manner of its extinguishments may be different in different legal
systems. Both in German law and Japanese law, by adopting the theory of the synallagmatic
nature of a reciprocal contract, the contract is treated as automatically extinguished. And the
risk is generally born by the debtor. According to PECL, if a party is excused under Article
8:108 through an impediment which is total and permanent, the contract is terminated
automatically and without notice at the time the impediment arises (art. 9:303 par. 4). While in
Chinese law, the contract is terminated by the parties. It is said that, because of the procedure
of termination, the parties may communicate each other, and this may help them to cooperate
to take remedial measures.56 And the bear of risk and force majeure are not mutually
exclusive.57 It should be noted that China is not the only one, according to PICC article 7.1.7
(force majeure) sentence 4, force majeure does not prevent a party from exercising a right to
terminate the contract or to withhold performance or request interest on money due.
But there is still something needs re-examining. As according to art. 118 of CCL, where a
party is unable to perform the contract due to force majeure, it shall notify the other party in
time so as to reduce losses possibly incurred to the other party, and shall provide evidence
thereof within a reasonable period of time. Here the debtor has a duty to inform the creditor.
So it becomes questionable whether it still necessary to extinguish the contract by the exercise
of a right of termination. As the purpose of the contract has become impossible to be achieved,
if the law gives the parties a right to terminate, in the other side, it may be said that the law
gives the parties a right to hold a contract (namely by not exercising the right to termination).
But there is no meaning to hold a contract the purpose of which becomes impossible to be
achieved, why not to make the contract extinguished by automatic termination?

55 See

Weirong Qian, The statutory rights to termination in Chinese contract law, in NBL No.699 (2000.10.15).
Jianyuan Cui ed. Contract law theories and cases, vol.1, (1999), p.434.
57 Some scholar thought that the relation between termination in case of force majeure (art.94 sent.1) and the
bear of risk (art. 142) in CCL is not easy to illustrate. See Jie Xu, Chinese contract law, (the second part,
translated by Weirong Qian), in Hogaku Shirin (Review of Law and Political Sciences, Hosei University), no. 4
of vol. 97 (March 2000), foot note 81.
56 See

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Partial termination
There is no general rule on partial termination in General Provisions of CCL. The problem is
left to Specific Provisions, such as in Sales (arts. 164166 of CCL). Besides, where the quality
fails to meet the agreed requirements, one of the remedies for the debtor is return of the
subject-matter according to art. 111 of CCL. By interpretation, it may include partial
termination. As to the remedy of discount in payment or remuneration in art. 111, whether it
is a kind of damages (for example where the seller delivers second-rate wine instead of the
agreed first-rate wine) or a result of partial termination (for example where part of goods
supplied fails to reach the agreed quality and becomes useless to the buyer while other goods
has no problem) still needs a further interpretation.

Effects of termination
A general provision on effects of termination is laid down in art. 97 of CCL. According to art.
97, where a contract is terminated, for those not yet performed, the performance shall cease.
For those already performed, the party concerned may, in accordance with the degree of
performance and the nature of the contract, claim their restoration to the original position or
taking other remedial measures, and may claim damages.

Termination and retrospective effect

As it is popularly known, there are Direct Effect theory, Indirect Effect theory and
Compromise Theory on the effects of termination. In China, whether termination has a
retrospective effect is a point of dispute. In the preponderant view, termination of contract has
a retrospective effect in principle (a kind of Direct Effect theory), but when it comes to a
contract with a continuing nature in its performance, there is an exception.58 This is almost the
same with Japanese general theory and case law. But in China, there are other viewpoints; one
of them insists that contract that is terminated should be extinguished only for the future (a
Compromise Theory).59
But since the drafters of Termination in CCL referred a lot to CISG, PICC and PECL, while
the UN Convention and the model laws do not admit a retrospective effect of termination, so it
still needs a further research whether or not to interpret art. 97 of CCL in accordance a premise
of retrospective effect of termination.

Restitution
Chinese law does not accept the German theory of abstrakte Natur der dinglichen
Geschfte, so where termination of contract has a retrospective effect, rights revert
automatically. If a corporeal object was transferred according to the contract, as a result of

58 See
59 See

Jianyuan Cui ed. Contract law theories and cases, vol. 1, (1999), p.438.
Huixing Liang, Civil law, (1988), p.314.

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termination of the contract, the original owner of the corporeal object may claim restitution of
the corporeal object. And the restitutionary claim is a kind of proprietary claim, which is
stronger than a claim for the return of unjustified enrichment. Where restitution in kind is
impossible, the creditor may claim the debtor to take other remedial measures. And this
means, as situations may be, the return of unjustified enrichment, or the pay of preliminary
damages.60
Where termination of contract does not has a retrospective effect, namely where the
performance of the contract would last for some time, the part of contract before the
termination is still valid, the restitutory claim is a kind of claim for the return of unjustified
enrichment.61

Damages
Where a contract is terminated because of one partys breach, the party not in breach may
claim damages. According to the preponderant view in China, the damages may include the
losses caused by the non-performance (namely the expectation interest) and some incidental
losses (such as the costs of restoration).62 A few scholars in China insist that the damages
should be for the reliance interest.63

The unification of guarantee liabilities for defects and liabilities for breach of contract
Introduction
CCL lays down its rules on guarantee liabilities for defects in Chapter IX Sales (arts. 150
158). As it is known generally, the nature of guarantee liabilities for defects is a point of
dispute both in German civil law theories and in that of Japan. The viewpoints may be divided
into two schools, namely the Doctrine of Liability Imposed by Law and the Doctrine of
Liability for Non-performance of Obligations. The viewpoint of the drafter of CCL as to this
problem belongs to that of Doctrine of Liability for Non-performance of Obligations.64
This viewpoint has affected CCL deeply. Besides, CCL adopts the Strict Liability Principle,
this lessens the original differences between guarantee liabilities for defects and liabilities for
breach of contract. So in China, it may be said that CCL has unified guarantee liabilities for
defects and liabilities for breach of contract.

60 According

to art.98 of CCL, the termination of a contract does not affect the validity of its clauses regarding
settlement and liquidation.
61 See Jianyuan Cui, Law of contract, (2nd ed., 2000), p.211.
62 See Jiafu Wang ed. Law of obligation, (1991), p.383.
63 Liming Wang, On liabilities for breach of contract, (1996), p.556.
64 See Huixing Liang, Studies on civil law theories, cases and legislation, (1993), p.148.

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Guarantee for defects in right

In general
According to the provisions of CCL, the seller has the obligation to guarantee that no third
party shall claim rights against the buyer over the subject-matter delivered unless the law
provides otherwise (art. 150). If the buyer is aware or ought to be aware that a third party has a
right over the subject-matter while entering into the contract, the seller shall not assume the
obligations stipulated in Article 150 of the Law (art. 151). Where a buyer has clear evidence to
prove that a third party may probably claim a right over the subject-matter, the buyer may
suspend the payment therefor, except in the case that the seller has provided an appropriate
guarantee (art. 152).
As to the liability of guarantee for defects in right, CCL lays down no special provision.
According to a relative interpretation, where a seller fails to perform its guarantee obligation
for defects in right, and fails to get rid of the defects in right of the subject-matter, the buyer
may treat it as a kind of non-performance of obligations and claim the seller to bear liabilities
for breach of contract.65

Ownership
CCL lays down the sellers obligation of guarantee. One of its purposes is to make the relation
of rights and obligations between the parties clear. As to the problem of ownership, it is left to
the Law of Property to deal with.

Unauthorized disposition and guarantee for defects in right

According to an influential viewpoint, there are four kinds of main situations where a third
party may claim a right over the subject-matter of a sale, namely (1) a sale of a thing of another
(unauthorized disposition); (2) a sale of a co-owned thing without the agreement of other coowners; (3) a sale of a thing mortgaged; and (4) a sale of a thing leased. In its opinion, the first
situation of unauthorized disposition belongs to the law provides otherwise in art. 150.
The contract of sale in this situation should apply art. 51 of CCL,66 and it has nothing to do
with the issue of guarantee for defects in right.67 It should be noted that some scepticism has
been expressed with regard to the above interpretation in China.68
While in Japanese Civil Code, where the subject-matter of a sale belongs to a third party,
the seller bears an obligation to get the right and to transfer it to the buyer (art. 560 of JCC). So
far as the thing of the third party exists, it should not be treated as an initial impossibility.

65 See

Kangsheng Hu ed., A paraphrase of contract law of P.R. China, (1999), Law Press China, p.231.
art. 51 reads as follows: Where a person without a right of disposal disposes of anothers property, upon
ratification by the owner of if the person without the right of disposal obtains the right of disposal after the
conclusion of the contract, the contract shall be valid.
67 See Huixing Liang, How to understand article 51 of CCL, on Peoples Court Daily, January 8, 2000.
68 See Shiyuan Han, Unauthorized disposition and validity of contract, on Peoples Court Daily, November 23,
1999.
66 CCL

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Accordingly the contract of sale is valid ab initio, if the seller fails to get and transfer the right,
he would bear liabilities for guarantee.69 In this point, perhaps Chinese theory should learn
from Japanese law.

Guarantee for defects in things

In general
According to the provisions of CCL, the seller shall deliver the subject-matter in accordance
with the agreed quality requirements. Where the seller provides quality specifications of the
subject-matter, the subject-matter delivered shall conform to the specified quality
requirements (art. 153). Where the subject-matter delivered by the seller fails to meet the
quality requirements, the buyer may demand that the seller bear the liability for breach of
contract pursuant to the provisions of Article 111 of the Law (art. 155). CCL, following CISG
and PICC, does not make a distinction between generic goods and specific goods. And it is
said that art. 111 of CCL not only applies to goods (no matter a generic one or a specific one),
but also to services.70

The arising of a liability of guarantee for defects in things

For guarantee for defects in things, there is no exception in CCL, which like art. 151 in a case
of guarantee for defects in right. And it is ambiguous whether or not there is a requirement for
unawareness and no blame on the side of the buyer. While in Japanese law, for the arising of a
liability of guarantee for defects in things, there is a requirement for unawareness and no
blame on the side of the buyer. This point deserves Chinese legal interpretations following.

Legal effects of guarantee for defects in things

According to art. 155 of CCL, the legal effect of guarantee for defects in things is for the seller
to bear the liability for breach of contract pursuant to the provisions of art. 111. The remedies
for the buyer may include a claim for cure (namely repair, replacement or redoing), a claim for
price reduction (namely discount in payment or remuneration), a right to termination (namely
return of the subject-matter), and a claim of damages. Where there is a penalty clause, the
buyer may also claim the payment stipulated by the contract. As to the nature and the scope of
damages in case of guarantee for defects in things, there is a debate between the theory of
compensating for the reliance interest and the theory of compensating for the expectation
interest in Japan.71 The answer to the same question would be compensating for the
expectation interest as in China.
69 See Sakae Wagatsuma, Law of obligations: special provisions, Vol. Two (1957), Iwanami Book Store, p.276;
Younosuke Inamoto etc., Civil law text book 5: contracts, (1978) Yuhikaku, p.121.
70 I have inquired Professor Huixing Liang, who was an important member of the Drafting Committee of CCL,
on this matter, and he gave me such an answer by e-mail. Here I wish to express my thankfulness to Professor
Liang for his help.
71 See Hiroshi Mizumoto, Law of contracts, (1995), Yuhikaku, p.167.

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Conclusions
Liabilities in Chinese Contract Law should be a title of a book, as there are so many
problems that the topic may include. As the purpose of this paper, the author just makes a
description of the main points of the topic, and shows the main problems that Chinese scholars
are concerning with.
CCL is a new law enacted in China by the end of the 20th century. There are a lot of new
provisions in the law, such as it adopts the Strict Liability Principle, it has unified the
liabilities for guarantee of defects with liabilities for breach of contract.
CCL is a product of comparative law method. Both Civil Law and Common Law may find
their influences in CCL, for example, CCL borrows anticipatory breach of contract from
Common Law, while its provisions on penalty clause and enforced performance bear a
striking character of Civil Law. And CCL also refers a lot to CISG, PICC and PECL. So after
the enacting of the law, how to interpret and apply the law becomes a pressing problem.
Now the legislative organ of China is drafting a Chinese Civil Code. And CCL will be put
into the future Chinese Civil Code, with some necessary technical changes and amendments.
Contract Law of the Peoples Republic of China (CCL) 1999 Re-translated by Shiyuan Han
(with a reference to Contract Law of the Peoples Republic of China, Law China 1999)
Art. 42 In the course of negotiations, the party that falls under any of the following situations,
causing thus losses to the other party, is liable for the losses.
(1) entering into or continuing negotiations with no real intention of reaching an agreement
with the other party;
(2) concealing intentionally important facts related to the conclusion of the contract or
providing false information; or
(3) taking any other act contrary to the principle of good faith and fair dealing.
Art. 43 Neither party may disclose or inappropriately use business secrets obtained in the
course of negotiations whether or not a contract is subsequently concluded. The party that
discloses or inappropriately use the said business secrets causing thus loss to the other party
shall compensate for the loss.
Art. 60 The parties shall fulfill fully their respective obligations as contracted.
The parties shall observe the principle of good faith and fair dealing and fulfill the
obligations of notification, assistance and confidentiality in accordance with the nature and
purpose of the contract and trade practices.
Art. 68 The party, which ought to perform its obligations first, may suspend its performance if
it has exact evidence to prove that the other party falls under any of the following situations:
(1) business operations seriously deteriorating;
(2) diverting properties and withdrawing capital to evade debts;
(3) falling into business discredit; or
(4) other situations showing inability or possible inability to perform its obligations.

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Where a party suspends its performance without exact evidence, it shall bear the liability
for breach of contract.
Art. 69 Where the party suspend its performance in accordance with Article 68 of this Law, it
shall promptly notify the other party of the suspension. The party shall resume its performance
when the other party provides a guarantee. The party that has suspended its performance may
terminate the contract if the other party has failed to regain its capability to perform and to
provide a guarantee within a reasonable period of time.
Art. 92 After the ending of rights and obligations under a contract, the parties shall perform
the obligations of notification, assistance and confidentiality in light of the principle of good
faith and fair dealing and in accordance with trade practices.
Art. 93 The parties may terminate the contract upon an agreement.
The parties may stipulate the conditions for termination of the contract by one party. When
the conditions for termination of the contract mature, the party with the right to termination
may terminate the contract.
Art. 94 The parties may terminate the contract under any of the following situations:
(1) the purpose of the contract cannot be achieved because of force majeure;
(2) before the period of performance expires, one party clearly indicates by word or by act that
it will not perform the main obligations;
(3) one party delays in performance of the main obligations and still fails to perform them
within a reasonable period of time after being urged;
(4) one party delays in performance of obligations or commits other kinds of breach and thus
makes the purpose of the contract unable to be achieved; or
(5) any other situations as provided for by law.
Art. 95 If a time limit for exercising the right to termination is provided for by laws or by
agreement of the parties, and the party concerned does not exercise such right at the expiration
of the time limit, such right shall vanish.
If no time limit for exercising the right to dissolve is provided for by laws or by agreement
of the parties, but the party concerned does not exercise such right within a reasonable period
of time after being urged by the other party, such right shall vanish.
Art. 96 When a party declares the termination of the contract in accordance with the
provisions of Paragraph 2 of Article 93 and Article 94 of this Law, the party shall notify the
other party. The contract shall be terminated when the notice reaches the other party. If
the other party has objection, it may apply to a peoples court or an arbitration institution to
determine the validity of the dissolution of the contract.
Where provisions of laws and administrative regulations require the dissolution of a
contract to go through approval and registration procedures, such provisions shall govern.
Art. 97 After the termination of a contract, for those not yet performed, the performance shall
cease. For those already performed, the party concerned may, in accordance with the degree of

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performance and the nature of the contract, claim their restoration to the original position or
taking other remedial measures, and may claim damages.
Art. 98 The ending of rights and obligations under a contract shall not affect the validity of its
clauses regarding settlement and liquidation.
Art. 107 Where a party that fails to perform its obligations under the contract or fails to
perform them as contracted shall bear the liability for breach of contract by continuing to
perform the obligations, taking remedial measures, or compensating for losses.
Art. 108 Where a party explicitly expresses or indicates by act its intention not to perform its
obligations under the contract, the other party may, before the expiration of the period of
performance, demand that the party in question bear the liability for breach of contract.
Art. 109 Where a party fails to pay charges or remuneration, the other party may demand the
payment.
Art. 110 Where a party fails to perform non-pecuniary obligations or fails to perform nonpecuniary obligations as contracted, the other party may demand the performance, except in
any of the following situations:
(1) the performance becomes legally or practically impossible;
(2) the subject-matter of the obligation is unsuitable for an enforced performance or costs too
much for the performance; or
(3) the creditor does not demand the performance within a reasonable period of time.
Art. 111 Where the quality fails to meet the agreed requirements, liability for breach of
contract shall be borne in accordance with the agreement between the parties. If the liability
for breach of contract is not stipulated or is not clearly stipulated, nor can it be determined
pursuant to the provisions of Article 61 of this Law, the aggrieved party may, in accordance
with the nature of the subject-matter and the degree of the loss, choose in a reasonable
manner to demand that the other party bear the liability for breach of contract in such form as
repair, replacement, redoing, return of the subject-matter, discount in payment or
remuneration.
Art. 112 Where a party fails to perform its obligations under the contract or does not perform
its obligations as contracted, after the performance of the obligations or the adoption of
remedial measures, if the other party still has any other losses, the breaching party shall
compensate for the losses.
Art. 113 Where a party fails to perform its obligations under the contract or does not perform
its obligations as contracted and thus causes losses to the other party, the damages shall consist
of a sum equal to the loss actually caused by the breach, including the gains that should be
obtained had the contract been performed, but may not exceed the loss which the party in
breach foresaw or ought to have foreseen at the time of the conclusion of the contract as a
possible consequence of the breach of contract.

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A business operator who practices fraud in providing commodities or services to

consumers shall bear damages in accordance with the provisions of the Law of the Peoples
Republic of China on the Protection of Consumers Rights and Interests.
Art. 114 The parties may stipulate that in case of breach of contract by either party a certain
amount of penalty shall be paid to the other party according to the seriousness of the breach,
and may also stipulate the method for calculating the sum of compensation for losses caused
by the breach of contract.
If the stipulated penalty for breach of contract is lower than the loss caused by the breach,
the party concerned may apply to a peoples court or an arbitration institution for an increase.
If the stipulated penalty for breach of contract is excessively higher than the loss caused by the
breach, the party concerned may apply to a peoples court or an arbitration institution for an
appropriate reduction.
Where the parties agree upon a penalty for a delayed performance, the breaching party
shall, after paying the penalty for breach of contract, perform its obligations.
Art. 117 If a contract cannot be fulfilled due to force majeure, the obligations may be
exempted in whole or in part depending on the impact of the force majeure, unless laws
provide otherwise. If the force majeure occurs after a delay in performance, the liabilities of
the party concerned may not be exempted.
Force majeure as used herein means objective situations that are unforeseeable,
unavoidable and unable to be overcome.
Art. 118 Where a party is unable to fulfill the contract due to force majeure, it shall notify the
other party in time in order to reduce losses possibly inflicted to the other party, and shall
provide evidence thereof within a reasonable period of time.
Art. 119 After one party breaches the contract, the other party shall take appropriate measures
to prevent the increase of the loss; where it fails to take such measures and thus the loss
increased, it may not claim damages for the increased loss.
The reasonable costs by the other party in preventing the aggravation of the loss shall be
borne by the breaching party.
Art. 120 Where both parties breach the contract, they shall bear their respective liabilities
accordingly.
Art. 150 The seller has the obligation to guarantee that no third party shall claim rights against
the buyer over the subject-matter delivered unless the law provides otherwise.
Art. 151 If the buyer is aware or ought to be aware that a third party has a right over the
subject-matter while entering into the contract, the seller shall not assume the obligations
stipulated in Article 150 of the Law.
Art. 152 Where a buyer has clear evidence to prove that a third party may probably claim a
right over the subject-matter, the buyer may suspend the payment therefor, except in the case
that the seller has provided an appropriate guarantee.

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Art. 153 The seller shall deliver the subject-matter in accordance with the agreed quality
requirements. Where the seller provides quality specifications of the subject-matter, the
subject-matter delivered shall conform to the specified quality requirements.
Art. 154 Where the parties have not stipulated or have unclearly stipulated the quality
requirements of the subject-matter, nor can they determine them pursuant to the provisions of
Article 61 of this Law, the provisions of subparagraph 1 of Article 62 of this Law shall apply.
Art. 155 Where the subject-matter delivered by the seller fails to meet the quality
requirements, the buyer may demand that the seller bear the liability for breach of contract
pursuant to the provisions of Article 111 of this Law.
Acknowledgements The author is grateful for the helps from Professor Huixing Liang (Law
Institute, Chinese Academy of Social Sciences), Professor Jianyuan Cui (Law School, Tsinghua
University) and Professor Kenzo Miyamoto (Law Faculty, Hosie University, Japan).