As a special form of commercial contract termination, partial rescission is a legal tool to protect the legitimate rights and interests of parties while ensuring stability of the transaction, providing a flexible solution for the contract to achieve the legal consequences of termination of some of the contractual rights and obligations.
However, the application of partial rescission is not without limitations, and leads to many commercial contract disputes. In this article, the author discusses limitations of the application of partial release, and how the court decides relevant requests.
Articles 631 to 633 and article 729 of the Civil Code are generally considered as the direct legal basis of applying partial rescission. These provisions specify the main applicable circumstances for partial rescission as follows: a contract may be partially rescinded due to non-compliance of any ancillary component of the subject matter, or non-compliance of one of the items constituting the subject matter; or when the seller delivers the subject matter in instalments. If the instalments cannot realise the contract purpose, the buyer may terminate that portion of the contract.
According to these provisions, the primary condition for determining whether a contract can be partially rescinded is to assess whether part of the subject matter – or the performance of rights and obligations – deviates from the agreed terms, resulting in partial inability to achieve the purpose of the contract.
In contrast, under article 563 of the Civil Code, regarding “contract rescission”, the key factor in determining whether a contract can be partially rescinded lies in assessing whether the contract can be performed in a divisible manner, and whether the remedies for breach can be separated.
“Divisibility of contract performance” refers to the ability to divide the contractual object and perform the contractual obligations in a divisible manner.
Article 51 of the UN Convention on Contracts for the International Sale of Goods recognises the divisibility of sales contract performance. In reality, it is important to differentiate between “contracts that can be performed divisibly” and “contracts under which the subject matter is delivered in instalments”. If the subject matter delivered in instalments is from the same commercial entity, the multiple deliveries shall be regarded as a whole.
Besides, for a continuously performed contract, the period of obligations’ performance is severable. For example, when a lease contract cannot be performed anymore, what has been irreversibly performed in the past carries corresponding consideration, while the unfulfilled part may be terminated.
The application of partial rescission shall also consider the “proportionality of the remedies for breach of contract”, which means in compliance with the principle of proportionality, and is more beneficial to maintain transaction stability.
This is relevant to the restrictive conditions, i.e. partial rescission shall not: damage the main content of the contract; lead to the failure to achieve the main purpose of the contract; or cause serious imbalance between the rights and obligations of the parties.
Such a restrictive condition originated from an exemplary case of the Supreme People’s Court (SPC). In an appeal case of disputes over equity transfer contract, Dong Mingshu v Zhu Xianjun, Li Wenke, the claimant requested rescinding certain terms in two agreements.
This claim was overruled on the grounds that, “if the part of the contract to be rescinded constitutes the main content of the contract, or this partial rescission will frustrate the main purpose of the contract, or cause serious imbalance between the parties’ rights and obligations and thus damage the legitimate rights and interests of the other party, such part cannot be rescinded individually. Similar claims cannot be supported.”
Article 470 of the Civil Code clearly defines the main contents of a contract. Therefore, the SPC held that partial rescission involving main contents may cause the entire rights and obligations under the contract to be unable to be performed, or the purpose of the contract completely unable to be achieved. Therefore, no request for partial rescission breaking the restrictive conditions shall be supported.
In real cases, a claim for partial rescission of a contract is not only commonly made in divisible sales contracts, but also in other contracts concerning special subject matter, such as equity transfer contracts.
Disputes may easily arise as to rescinding part of the terms or rights and obligations. Consequently, the judiciaries would prudently apply this legal system and focus on examining the restrictive conditions.
For example, in disputes over construction contracts, the contracting party may separately request rescinding part of the contract concerning a certain building or piece of land due to construction delay, project quality or other problems.
The judicial authorities generally consider the following three aspects for this kind of claim. First, the primary applying condition, the precondition for partial rescission, is the agreed obligations objectively cannot be performed, thus the corresponding purpose cannot be achieved.
Second, the key applying condition, namely the divisibility of the contract’s performance; it is vital to assess whether the problematic part of the project can be separately constructed, settled or delivered, and whether there is no sequence relationship with other parts in terms of construction process.
Finally, the restrictive condition; the judicial authorities would first consider the proportionality principle, measuring whether the problematic part owns special economic value, and whether partial rescission may significantly affect one party’s receivable profits and cause new loss.
Additionally, such rescission shall not damage the main content of the contract, or cause serious imbalance between the rights and obligations of the parties. For instance, if a party or third party has already fulfilled the main obligations, the claim for partial rescission, which impairs transaction stability, is generally not supported.
Li Yejing is a case manager of Beijing Arbitration Commission/
Beijing International Arbitration Centre (BAC/BIAC)
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