By Li Shu | Beijing YunTing Law Firm
A breach does not automatically entitle the other party to terminate a contract. Equally, not every form of termination requires proof that the contractual purpose has become unattainable. The correct sequence is to identify the source of the right, assess whether its conditions are satisfied, and check how and when it must be exercised.
1. Start with mutual agreement and contractual termination clauses
Article 562 of the Civil Code allows parties to terminate by mutual agreement. They may also agree in advance on events entitling one party to terminate. When such an event occurs, the entitled party may exercise the right in accordance with law.
Clauses concerning overdue payment, essential qualifications, approval deadlines or specified breaches should therefore be examined first. Their validity, meaning, factual trigger and exercise in good faith must be assessed against the contract as a whole and its performance. The mere existence of a breach is not a complete analysis.
2. There are several statutory grounds
Article 563 provides multiple grounds: force majeure making the contractual purpose unattainable; an express or conduct-based refusal to perform principal obligations before they fall due; delay in performing principal obligations that continues beyond a reasonable period after a demand; delay or another breach making the contractual purpose unattainable; and other circumstances prescribed by law.
The article also permits termination of indefinite contracts involving continuing obligations, subject to reasonable advance notice. Particular contract types may have additional rules. The test concerning failure of contractual purpose must not replace all the other available grounds.
3. What matters when relying on failure of contractual purpose?
Consider the core performance and commercial objective: does the breach affect a principal or ancillary obligation; how important is the unperformed element to the transaction; is timing essential; can a remedy restore the transaction’s value within a reasonable period; and were any special purposes known when the contract was made?
The proportion of value affected, the extent of performance and the possibility of cure may all be relevant, but no single percentage governs every transaction. Partial breach does not necessarily exclude termination, and the possibility of monetary compensation does not necessarily require continued performance. The specific statutory requirements remain decisive.
4. Manage demands, deadlines and service separately
When relying on delayed performance of principal obligations after a demand, identify the obligations to be performed, allow a reasonable period suited to the transaction, and retain evidence of service and continued non-performance. Whether another ground requires a demand depends on the applicable rule; it should neither always be assumed nor always omitted.
Article 564 governs the period for exercising termination rights. Where neither law nor agreement specifies a period, attention is required to the one-year rule running from knowledge, or constructive knowledge, of the termination event, and to expiry of a reasonable period following a demand from the other party. Article 565 governs the effective timing of termination by notice and of termination claimed directly through litigation or arbitration.
5. Sending notice does not itself establish a valid termination
Article 53 of the interpretation on the general provisions of the contract book requires the court to examine whether the notifying party has an agreed or statutory termination right. A notice issued without such a right does not automatically terminate the contract merely because the recipient failed to object within a stated objection period.
Where the position is disputed, coordinate the analysis of termination, continued performance, repayment, settlement and damages. Stopping payment, refusing delivery or disposing of the subject matter without that analysis may expose a party with an otherwise legitimate complaint to additional breach liability.
6. Practical approach
Create a table linking each proposed termination ground to the triggering facts, evidence, demand requirements, exercise deadline and proof of service. If negotiating an exit, address settlement and reservations of rights expressly. If pursuing unilateral termination, confirm the specific legal or contractual basis before arranging notice and subsequent proceedings. Separately proving breach and the conditions for termination produces a clearer claim than simply emphasizing the other party’s fault.
Principal authorities
Civil Code, Articles 562–566; Articles 52 and 53 of the interpretation on the general provisions of the contract book.