Disputes arising from non-monetary debt contracts present unique challenges that require careful consideration from arbitrators. By understanding the nature of such contracts and adopting a flexible approach, the aim for arbitrators here should be preventing any performance deadlock and ensuring equitable resolutions.
A non-monetary debt contract is a contract agreed on by the parties, whereby the main debt is not in the form of money. The main characteristic of a non-monetary debt contract is that the debtor’s obligation is not the payment of money, but rather a certain performance or service.
This type of contract focuses more on constraints of conduct such as technical services, delivery of goods or completion of specific activities. Performance of a non-monetary debt contract is usually more personalised and non-fungible. The interest of performance is particularly important to the creditor, such as artiste brokerage contracts, works creation contracts and technology development contracts.
When an arbitration dispute arises under this type of contract – no matter whether the parties insist on continuing to perform the contract or demand its termination – the author believes the tribunal should consider more than whether the parties’ claims have legal basis. Instead, the tribunal should further consider the practical reality of the situation: what if the arbitral award does not support termination or rescission of the contract, but leaves the contract in a condition that it remains valid and to be performed? In this situation, it may be impossible for the debtor to objectively perform to the contract, or for it to be enforced by the courts. Thus, it may fall into a “contract deadlock”.
For example, take a dispute over an exclusive creation contract for work that the author has come across. One party was a music company; the other a musician. The musician agreed to exclusively provide creative work to the music company within three years. After the contract was performed for one year, a conflict occurred between the parties.
When the musician refused to provide the works to the music company, the music company could not apply to a court for enforcement and then chose to refuse to pay the musician the share of proceeds of previously released joint works.
For such non-monetary obligations, if the acts of the parties do not constitute a fundamental breach of contract, and there is no provision of unilateral right of termination of the contract, the performance of the contract will fall into “deadlock”, although the contract is valid.
In this situation, based on the facts of the case and in view of properly solving the issues, the arbitrators should allow the parties to terminate the contract under certain circumstances to extricate the parties from the deadlock of the contract.
As an arbitrator and an attorney, the author has dealt with many similar disputes over such non-monetary debt contracts, and has his own different views. In this article, the author would like to share with the readers an analysis of some typical scenarios of such disputes and suggestions on how to deal with them.
A better approach
Given that the scope and mode of hearing in an arbitration case are limited by the claim, it is better to approach from the claim in order to better understand this type of case. The claims in such cases generally include the following situations:
- One party claims breach of the contract (stating or failing to state the specific performance in the arbitration request), the other party does not acknowledge the breach, but agrees to continue to perform the contract.
- One party directly claims breach of the contract (with or without specifying the performance in the request for arbitration), while the other party neither acknowledges the breach of the contract nor agrees to the specific performance, without making a counterclaim for rescission.
- One party claims breach of the contract (specifying or failing to specify the performance in the arbitration request), while the other party does not recognise the breach of the contract and makes a counterclaim for rescission, claiming that the other party is in breach of the contract.
- One party requests rescission, claiming breach of the contract; the other party does not acknowledge the breach of the contract but agrees on rescission, or makes a counterclaim for rescission, claiming the other party has breached the contract.
- One party requests rescission and claims breach of this contract; the other party does not recognise the breach, nor agrees to rescission.
The most important difference between these types of cases and other cases is that a specific performance is impossible or unsuitable. Therefore, the author is of the opinion that, as long as a debtor who performs non-monetary obligations clearly states that it does not wish to continue to perform the contract, the tribunal should attach great importance to the argument and handle the argument accordingly, rather than just determining the legal relationship based on the claim itself, irrespective of whether it appears in a formal arbitration request, or whether it is the claimant or the respondent, or not.
Therefore, the author’s opinion is that in cases as specified in points two to five, if the party claiming non-performance of the contract or termination of the contract is not, or does not, include the debtor who performs non-monetary obligations, the case may be heard as normal and strictly according to the requests of the parties and the provisions of law invoked.
However, if the debtor who performs non-monetary obligations raises such arguments or opinions, the tribunal should be aware that the contract may fall into the deadlock of performance.
No matter whether the statutory or agreed conditions for termination of the contract are met in a specific case, the tribunal should request the parties to express their opinions on “whether the case may constitute the scenario specified in article 580 of the Civil Code and, if so, what is the liability for breach of the contract to be borne by the breaching party,” and decide whether to ask the party to change the claims.
Specifically, in situation (1) the tribunal should proceed in accordance with the requests and opinions of the parties to a general case. In situation (2), if the respondent is the debtor who performs non-monetary obligations, the tribunal should interpret as aforesaid. In such a case, if no party claims for termination of the contract, it is only necessary for the tribunal to proceed in accordance with a general case to determine whether the claims and opinions of the parties can be substantiated.
If any party makes such a claim, it will fall within situations (3) to (5). In situation (3) or (5), if it is the non-monetary creditor who claims termination of the contract, the tribunal will proceed as in situation (1).
However, if it is the non-monetary debtor who claims termination of the contract as a counterclaim, the ruling may proceed either to hold that the debtor has the right of termination and terminate the contract, or, although the debtor has no such right, to apply paragraph 2 of article 580 of the Civil Code, which will uphold the termination but support the other party’s claim for damages for breach of contract.
In situation (4), since both parties to the arbitration have raised claims for termination, the tribunal shall, either when determining that either party has the right to terminate the contract unilaterally, or where neither party has the right to terminate the contract, apply paragraph 2 of article 580 of the Civil Code after giving an explanation in support of the termination of the contract (instead of directly rejecting both claims).
To sum up, the inappropriateness of enforcing the performance of non-monetary debts shall be correctly understood. The method explained by the tribunal shall be used flexibly to manage parties’ anticipation of the case and their choice of motions, and “contractual deadlock” due to the award shall be avoided as far as possible.
However, at the same time, arbitration rules shall be strictly followed and the principle of neutrality shall be abided by, and neither party shall be compelled or induced to make a decision in accordance with the opinions of the tribunal.
Xiong Dingzhong is an arbitrator of BAC/BIAC and the principal partner of TsingLaw Partners
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