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 this two-part Q&A, we highlight what companies need to know about contractual performances in China.

Basic Principle

Q: What are the basic legal principles for the performance of contracts?

A: Complete and full performance of a contract as agreed is a basic principle of the Contract Law.

Both parties must fulfill their obligations in accordance with the nature and purpose of the contract. And common commercial practices, and the principle of good faith.

In performing the contract, each party is obliged to cooperate with the other party. And inform the other party as required and retain commercial secrets as confidential.

Ambiguity

Q: What if the clauses in the contract are unclear?

A: The contractual parties should formulate supplementary agreements to clarify unclear clauses such:

• quality;
• price;
• time of performance; and
• place of performance.

If these methods fail, ambiguity shall be solved by the following provisions outlined in the Contract Law:

National Standard

• Where provisions relating to quality are unclear, the contract should be performed in accordance with a mandatory national standard; or
• a recommended national standard in the absence of a mandatory national standard; or
• the standard of the industry in the absence of a recommended national standard.
• In the absence of any national or industrial standards, the contract shall be performed in accordance with the general standard or a specific standard conforming to the purpose of the contract;

Market Price

• Where provisions relating to price are unclear, the contract should be performed according to the market price at the place where the contract is performed; or,
• where it is so required, according to the government price or the price for which the government has issued guidance;
• If the government price is re-adjusted during the time limit of the delivery the payment is calculated at such time;
• If the delivery of the subject matter is delayed and the price is raised, the original price shall be adopted; and
• In the same case and the price falls, the new price is adopted.
• If there is a receipt of delay is overdue or there is an overdue payment and the price is raised, the new price shall be adopted.
• In the same case, the price is dropped, the original price shall be adopted.

Place of Performance

• Where the payment is monetary, the place of performance is the place of the party receiving the monetary payment;
• Transfer of real property is the place where the real property is located.
• For other subject matters, the place of performance is the place where the party performing the obligation is located;
• Where provisions relating to the period of performance are unclear, the obliger may perform its obligations at any time;
• The oblige may also at any time demand the obliger to perform its obligations within a reasonable period of time;
• The performance should be made according to the method which is beneficial to the realization of the purpose of the contract; and
• Where cost of performance are unclear, the obliger (party who performs the contractual actions) shall bear the cost.
• Where the expenses for performance are increased due to the oblige (party who receives the contractual actions), the oblige shall bear the increased part of the expenses.

Performance Involving a Third Party

Q: What if the performance of contracts is outsourced to a third party. And the obligor fails to perform the obligation?

A: The obligor shall bear default liability to the oblige under the following circumstances:

• Where the performance is outsourced to a third party and the obligor fails to perform the obligation to the third party; or
• The performance does not conform to the agreement.

The obligor shall bear default liability to the oblige under the following circumstances:

• Where the parties agree that the obligation shall be performed by a third party to the oblige, and the third person fails to perform; or
• The performance does not conform to the agreement,

The third party may request the obligor to bear default liability under the following circumstances:

• If the third party directly requests the obligor to perform the obligation. And the obligor does not explicitly reject it within a reasonable period of time and fails to perform such obligations; or
• The performance does not conform to the agreement, .

Where a obligor fails to perform an obligation. And a third party has an lawful interest in the performance of the obligation, then third person is entitled to perform on behalf of the obligor.

Unless the obligation may only be performed by the obligor based on the nature of the obligation, as agreed by the parties, or as provided by law.

After the oblige accepts the performance of such obligation from the third party, any claim against the obligor shall be assigned to the third party, unless otherwise agreed by the obligor and the third party.

Order of Performance

Q: If both parties agree to mutual obligations and one party fails to perform obligations?

A: Where there is an order of performance of the obligations, the parties shall perform the obligations at the same time.

A party is entitled to refuse the demand of performance by the other party if the other party has not yet commenced to perform its contract obligations. Or if the other party performs its obligations improperly, to refuse to perform the relevant obligations.

Where there is an order of performance of the obligations, and the party obliged to perform first fails, the other party is entitled to reject the demand of performance. Or if the former party performs its obligations improperly, to refuse to perform the relevant obligations

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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.