On The Exercise Of The Legal Rescission Right Of Contract

Contract rescission is of vital influence to the concerned parties, which can result in not only the failure of the realization of the expected benefits stipulated in the contract that the concerned parties have conclude, but also redistribution of rights and obligations between the concerned parties. Therefore, it is necessary for the law to properly regulate the implementation of one party’s right to rescind the contract, and the counterpart’s right to show dissent. Only in this way can the benefits of the contracted parties be balanced, the trade order be maintained and the abuse of relevant rights be prevented.This paper starts with the general issues in legal right of contract rescission, discussing the meaning, characteristics, legal attributes and value function of the legal rescission right. The statutory right of contract rescission refers to the right enjoyed by one party according to laws and regulations to eliminate the validity of contract before performance or completion of performance after the contract is established and takes effect. Its features are mainly reflected as follows: its generation needs to meet certain conditions; it does not directly result in the legal consequence of contract rescission; its performance or elimination has inseparability; it is generally not attached with conditions or term; it can be performed according to the party’s choice; it is irrevocable after performance; its validity is to eliminate contractual relationship.The legal rescission right has legal attributes of right of formation, right of relief, and exclusive right. Its value function is reflected in two aspects: firstly, to balance the interest relationships between two sides concerned, and guarantee fairness and justice; secondly, to stimulate market transactions and improve economic efficiency.The second part discusses the subjective and objective conditions of exercising legal contract rescission right, as well as the subject of exercising this right. The objective conditions of exercising the legal rescission right covers force majeure, change of situation and unexpected events. Unexpected events refer to accidents happening by chance or due to intention or negligence of one party. Unexpected events cannot be completely contained by force majeure. Legislation is proposed to specify that failure to achieve the purpose of contract caused by unexpected events should be considered as the condition of exercising the statutory right of contract rescission. The subjective conditions refers to the situation that the debtor is attributed to the fundamental breach of contract. For rescission due to breach of contract, the non-breaching party should only exercise the statutory right of contract rescission under two conditions: firstly, the opposite party has a nonperformance; secondly, the nonperformance must result in the failure to achieve the purpose of contract. Under the objective conditions, either party should exercise their legal rescission right; under the subjective conditions, the subject of exercising legal rescission right is the non-breaching party in principle, however, the breaching party is entitled to the right in case that it confirms to the Contract Law Article 110. Under some circumstances specified by Article 110 of Contract Law, even if the debtor does not continue to perform non-monetary obligations, the other party is not entitled to request specific performance. At this point, the contract purposes of both parties cannot be achieved, so the contract rescission becomes inevitable. Under these circumstances, if both parties are given the statutory right of contract rescission, it is conductive to terminate the uncertain state of contract as soon as possible and recover free trade.The third part mainly studies the exertion procedures of legal rescission right of contract, including the exertion ways and periods. The exertion ways for legal rescission right contains notice for rescission and litigation or arbitration for rescission. The reasons for admitting that one party rescinds contract through litigation or arbitration are as follows: firstly, though Article 96 of Contract Law states that one party should notify the other party when rescinding the contract according to laws, this provision in essence belongs to a random specification; secondly, the notice of rescission as self-protection does not exclude the litigation of rescission as public protection, and the contract law cannot specify some prepositive procedure for litigation; thirdly, the validity issue of right of formation is a prepositive issue of dispute against the right of court to claim investigation, and denying the contract rescission by parties through litigation will make their right to claim payment loss the basis of judgment; fourthly, one exercises the right of rescission through litigation or arbitration, which can be considered as a way for him to ask the powerful court or arbitration body to convey his meaning of rescinding contract on behalf of him. If the party with rescission right intends to rescind the contract through litigation or arbitration, the contract will be rescinded when the court shall send a copy of complaint or the arbitral institution shall send the application for arbitration to the opposite party. For exertion period of rescission right, if parties have agreed the period of right of rescission, then their agreement should be respected and prevail. If the exertion period for rescission right have not be agreed by the parties, the exertion period for rescission right of the counterpart can last “three months” according to “Commercial Housing Sales Contract Judicial Interpretation” after a reminder. In the meantime, it is suggested that the counterpart should be entitled the right to specify a period for exertion during a reminder by legislation. If exertion period which specified by counterparts has exceeded the legal time limit of three months, the specified time shall be given priority against legal time limit; if not, the status shall be regarded as no time limit has been specified, the exertion period for rescission right shall refer to legal time limit of three months. Without a reminder, the counterpart should exercise the right with a period of “one year” according to “Commercial Housing Sales Contract Judicial Interpretation”.The fourth part explores the problems of exercising the legal rescission right from the perspective of the counterpart of contract involved in the rescission personally. It specifically includes the followings: Firstly, the right of objection reflects the formation of right of defense by virtue of the attributes of right. The right of defense formation means that one party related to right of formation given by laws has the right to defend the other party’s right of formation by exercising his own right of formation. The right of defense formation belongs to a special type of right of formation, which has the legal effect to stop or eliminate the direct effect of right of rescission. On the one hand, the right of objection in essence belongs to the right of formation, which has the legal attributes of right of formation. On the other hand, the right of objection is designed for the right of rescission as the right of formation, which has the same legal effect to stop or eliminate the direct effect of right of rescission as the right of formation. Secondly, for term of right of objection, Article 24 of Judicial Interpretation II of Contract Law regulates objection with “three months” as the legal term of objection, which in essence is a product of balance and priority selection for fairness and efficiency value conflict in statutory dissolution. Legislation is proposed to extend the term of right of objection to one year, so as to avoid the adverse consequence of contract rescission caused to the counterparty by tight prosecution time or inadequate preparation. One-year term of objection is calculated from the date when the notice of contract rescission is sent to the counterparty. In case the counterparty proposes objection after expiration, the contract is rescinded without dispute, so as to achieve the purpose of maintaining trade safety and improving trading efficiency. Thirdly, the objection of counterpart should be raised in the way of litigation or arbitration. The objections raised by the counterpart personally in front of the party with rescission right cannot resist the rescission of the contract, only if the party with rescission right agrees, the purpose is to prevent the validity of contract from falling into inconstant state. Fourthly, the validity of the rescission behavior of contract should be pending until the litigation or arbitrament is announced if the counterpart raises an objection. Its purpose is to prevent the terminated legal relationship recovered to the previous validity state after the adjudication agency confirms the ineffectiveness of contract rescission, thus saving judicial costs and maintaining the authority of judicial adjudication. If it is decided the objection raised by the counterpart is justified, the contract will be valid from the beginning to the end; if the objection is not justified, the rescission of the contract should be valid since the rescission is notified to the counterpart by the party with rescission.