Performance of contracts shall match the exact contractual obligations. Therefore, formulating robust and clear contracts is a must to decrease contractual disputes.

Parties to a contract must render exact and complete performances to be released from legal liabilities. Any unfulfilled legal obligations can be subject to civil and administrative penalties – therefore, for companies doing business in China, it is crucial to understand the legal basics of performing contractual obligations.

In part two, we highlight what companies need to know about performance of contracts – related to suspension, nullification, and subrogation.

Suspending the Performance

Q: What if a party wishes to suspend the contractual obligations?

A: A party may temporarily suspend under the following circumstances and can evidence it to the other party:

• Fallen into serious difficulty with its business operation;
• Transferred its assets or capital so as to evade repayment of debt;
• Lost commercial credibility; or
• Lost or is likely to lose the ability to perform its obligations under the contract.

The party who suspends the performance should immediately inform the other party. And should resume its performance when the other party regains its ability to perform or offers an appropriate performance guarantee.

If, during the suspension of performance and within a reasonable time, the other party fails to regain the ability to perform or to offer an appropriate performance guarantee, it is deemed as an indication that the party will not perform his principal obligation. And the party that suspends the performance may terminate the contract and request the other party to bear default liability.

An obligor may also suspend its performance or place the subject matter in escrow where performance becomes difficult under the following circumstances:

• the obligee’s failure to inform the obligor of its’ split;
• the obligee’s failure to inform the obligor of its’ merger;
• the obligee’s failure to inform the obligor of its’ change of address.

However, neither party may refuse to perform contractual obligations on the grounds that either party’s has changed the following:

• name or entity name;
• legal representative;
• the responsible person; or
• the person handling the contract.

Earlier or Partial Performance

Generally, performance shall be rendered in accordance with the terms of the contract. An obligee may reject an earlier performance or partial performance of the obligor unless it does not harm the interests of the obligee. The obligor shall bear all the extra costs incurred from earlier performance or partial performance.

Rights of Subrogation and Nullification

Q: Can a party enable a third party (such as a second creditor or an insurance company) to collect a debt or damages (‘subrogation’)?

A: The obligee may request the people’s court to exercise subrogation.

The scope of the right of subrogation is limited to the obligee’s due claim. The necessary expenses for the obligee to exercise the right of subrogation shall be borne by the obligor.

If people’s court determines that subrogation has been established, the counterparty of the obligor shall perform the obligation to the obligee. After the performance is accepted by the obligee, the corresponding rights and obligations between the obligee and the obligor, and those between the obligor and the counterparty, are terminated.

A: Can a party nullify the actions of the other party?

An obligee may apply to the court to nullify the following actions of an obligor under the following circumstances:

• The obligor gratuitously disposes of his proprietary rights and interests by waiving his claims, waiving the security for his claims, or transferring his properties without consideration, and the like, or maliciously extends the period of performance of his due claim, and the enforcement of the obligee’s claim is thus adversely affected;
• The obligor transfers his property at an obviously unreasonably low price, takes another’s property or provides security for another’s obligation at an obviously unreasonable high price, and the enforcement of the obligee’s claim is thus adversely affected.

If an obligee petitions the People’s Court to annul the obligor’s action of abandoning due claims or transferring the property. And the People’s Court finds that the obligor’s action as improper and annuls it, the obligor’s action shall be deemed invalid from the beginning.

The necessary expenses such as lawyers’ fees and travel costs incurred by the obligee will be borne by the obligor.

Contact Us

If you have questions or concerns on performance of contracts, please contact us at [email protected] to schedule a consultation session. Horizons can provide insight, expertise and the right solutions for you.