When can I unilaterally terminate a contract?

Miss A ordered a piece of furniture at a store. The next day, the store called and begged her to modify the order with the reason that, “the furniture ordered by Miss A is an old model which has been just sold out, there is a similar new model at the same price.” Miss A refused the store’s suggestion and planned to cancel the order. Coincidentally, Miss B also ordered a piece of furniture at the same store, and she even paid a prepayment. Later, Miss B wanted to cancel the order, but the store refused Miss B’s cancellation and required her to continue to fulfill the order.

Whether Miss A and Miss B have the right to unilaterally terminate the contract?

The answer depends on whether a party has the right to unilaterally terminate the contract. According to the “Civil Code”, there are two categories of unilateral rescission rights: legal rescission right and agreed rescission right.

The legal rescission right is based on Article 563 of the “Civil Code”. The first paragraph of this article stipulates, “The parties to a contract may rescind the contract under any of the following circumstances: (I) It is impossible to achieve the purpose of the contract due to force majeure; (II) Any party expressly states, or indicates through its conduct, that it will not perform its principal debts prior to the expiration of the performance period; (III) Any party delays in performing its principal debts and fails to perform the same within a reasonable period after being urged to do so; (IV) Any party delays performance of its debts, or has other violations, rendering it impossible to achieve the purpose of the contract; or (V) Other circumstances stipulated by the law arise.” Miss A meets the circumstance (II), so she can unilaterally terminate the contract. As for the “indefinite-term contract contains the continuing performance of obligations”, the second paragraph of this article stipulates, “If an indefinite-term contract contains the continuing performance of obligations, any party may rescind the contract at any time, provided that it shall notify the other party before a reasonable time limit.”

The agreed rescission right is based on the second paragraph of Article 562 of the “Civil Code”, that is, “The parties may agree upon causes for rescission of the contract by either party. When a cause for rescission of the contract occurs, the party who has the right to rescind may rescind the contract.” Miss B does not meet any circumstances as stipulated in Article 563, so she does not have the legal rescission right. Therefore, whether Miss B has the agreed rescission right, we have to check the contract between Miss B and the store, if there is any agreed cause for rescission, then Miss B could unilaterally terminate the contract, otherwise, Miss B should not unilaterally terminate the contract in principle. There is an exception, that is, if the furniture is made to order, Miss B could unilaterally terminate the contract, because Article 787 of the “Civil Code” stipulates that, “The party which has placed the order may rescind the contract at any time prior to the contractor completing work, but the said party shall provide compensation for any losses suffered by the contractor as a result.” This is the legal rescission right as stipulated in (V) of Article 563 of the “Civil Code”.

If you have the right to unilaterally terminate the contract, then how to exercise such right?

According to the first paragraph of Article 565 of the “Civil Code”, a party could exercise such right by notify the other party. In addition, the second paragraph mentions that a party could exercise such right by way of filing a lawsuit or applying for arbitration, if the court or the arbitration agency confirms the claim, the contract shall be rescinded upon service of the duplicate copy of the statement of claim or the duplicate copy of the application form for arbitration on the other party.

The exercise of such right is subject to a time limit. Where the law stipulates or the parties agree upon the time limit to exercise the right to rescind the contract, and no party exercises it when the time limit expires, the said right shall be extinguished. Where the law does not provide for or the parties do not agree upon a time limit for the exercise of the right to rescind a contract, and no party exercises such right within 1 year from the date on which the party entitled to rescind the contract knows or should have known of the cause for rescission or fails to exercise such right within a reasonable time period after being urged by the other party to do so, such right shall be extinguished.

Finally, it should be noted that the consequences of unilateral termination of a contract vary depending on the performance. After the rescission of a contract, performance shall cease if the contract has not been performed; if the contract has been performed, a party may, in accordance with the circumstances of performance or the nature of the contract, request that the original state be restored or that other remedial measures be adopted, and shall have the right to request compensation for any losses sustained. Where a contract is rescinded due to breach of contract, the party with the right to rescind may request the breaching party to bear the liability for the breach of contract, except as otherwise agreed upon by the parties.