Right of Termination without any Reason and Relevant Compensation for Losses Related to Commission Contracts
Both “Contract Law” (repeal on 1 Jan. 2021) and “Civil Code” (effective from 1 Jan. 2021) stipulate that either the commissioning party or the commissioned party may terminate the commission contract at any time, which is the right of termination without any reason. “The law stipulates either party could terminate the commission contract at any time, because the foundation of such contract is the personal trust. Once such trust is vanished, the necessarity of the contract is vanished as well, and the parties should be allowed to terminate the contract.” (Refer to the Supreme People’s Court (2013) Min Shen Zi No. 2491 Civil Ruling).
However, if a commissioning party could terminate the contract without any cost, and the commissioned party has invested manpower and material resources, then the commissioned party may suffer losses. Furthermore, the commissioned party may also suffer losses for the whole or partial of the acquirable profits. Therefore, it is necessary to set a reasonable “cost” for the party who terminates the contract without any reason.
The “Contract Law” and the “Civil Code” have different opinions on the “cost”. Article 410 of the “Contract Law” stipulates that a party shall be liable to provide compensation for any losses sustained by the other party due to the termination of the contract, except with respect to those losses for which the said party cannot be held liable. But there is no further explanation on whether such “losses” should include the profit it may gain after the implementation of the contract. There are different opinions in the judicial practice.
The “Civil Code” has provided a rule on dealing with such dispute. Article 933 stipulates that if the other party suffers any loss due to such termination, except for causes not attributable to such party, the party that terminate a gratuitous contract for commission shall indemnify the other party for direct loss due to the improper termination time; while the party that terminates a non-gratuitous contract for commission shall compensate the other party for the direct loss and the benefit it may gain after the performance of the contract.
According to Article 933, the party that terminates a gratuitous contract for commission shall compensate direct losses, and for the non-gratuitous contract for commission, such party shall compensate direct losses and the acquirable profit.
The “Acquirable Profit” refers to the profit that a party may gain after the implantation of the contract. However, in individual cases, the courts usually hold that the “Acquirable Profit” is not necessarily equal to the profit after the contract has been performed smoothly and satisfactorily, and it shall be decided based on the actual situation of the commissioned affairs. While calculating and determining the “Acquirable Profit”, there are several factors should be taken into consideration, such as whether the termination is foreseeable, the counterparty would be impaired, the overall profit and loss, the seriousness of negligence and etc..
For example, in the case (2020) Su Min Zai No. 21, the Jiangsu High People’s Court pointed out that, “in the first and second instance judgments, judges determined that Company X should compensate Zhong for losses of CNY4,800,000, such determination was wrong, because they had not paid attention to the difference between the profits that the parties could obtain upon the fully or partial implementation of the contract; in the case that Zhong could not prove his losses due to Company X’s termination behavior, ……in consideration of the distribution method of housing sales income as agreed in the contract, Zhong’s role in supporting Company X to get the purification project, the amount of income for selling the house, the breach of contract by Company X, the disputed opinions of both parties and etc., it shall be determined that Company X should compensate Zhong for losses of CNY700,000.
Another interesting topic is whether both parties could agree in the contract that the statutory right of termination without any reason should not be applied? Regarding this topic, the “69th Series of the Civil Trial Guidance and Reference” edited by the First Civil Division of the Supreme People’s Court, states that, “in practice, there are two viewpoints: 1) this is a compulsory statutory right, so such agreed provision shall be invalid; 2) this is not a compulsory statutory right, and such agreed provision shall be valid…….During the conclusion of a commercial commission contract, the main factor is the commissioned party’s reputation and business ability, instead of the personal trust between the legal representatives or authorized representatives. Meanwhile, in order to implement the contract, normally the commissioned party shall invest a lot of manpower and material resources in selling products, contacting clients and etc., so both parties could set a special provision on prohibiting the counterparty to terminate the contract without any reason, which is a special arrangement on protect the parties from uncertain risks, it reflects the principle of autonomy of will, and would not damage the national interests, public interest and third parties’ legal interest. ……. Therefore, in view of the particularity of the commercial commission contract, when both parties have agreed on a special provision on the exercise of the right to terminate the contract without any reason, such provision shall be deemed as eliminating the application of Article 401 of the “Contract Law””.
There is another special occasion. If a party has signed a commission contract with a law firm, and both parties have agreed that no party could terminate the contract without any reason, in judicial practice, there are disputes on the validation of such provision. Those who hold negative view with the reason that, “in a litigation commission contract, the provision on prohibiting the commissioning party from terminating a contract without any reason shall be invalid, because such provision has violated the “Law on Lawyers”, in which it prescribes that a client may refuse to have his lawyer to continue acting as his litigation agent after the commission contract has been established.” (Refer to (2020) Jing 03 Min Zhong No. 6467).