May a Contract Be Terminated Pursuant to Agreement for the Counterparty’s Minor Breach?

Paragraph 2 of Article 562 of the “Civil Code” provides that: “The parties may agree on the grounds for termination of the contract by one party. Where the grounds for contract termination occur, the party entitled to the right of termination may terminate the contract.” This provision permits parties to pre‑agree termination grounds, embodying the core value of party autonomy in private law. Nevertheless, some parties seek to terminate the contract upon even trivial missteps by the counterparty, which also undermines contractual stability.

To address this issue, Article 47 of the “Minutes of the National Courts’ Civil‑Commercial Trial Work Conference” (Fa〔2019〕No. 254) stipulates: “Where the contractually‑agreed condition for termination is satisfied and the non‑breaching party petitions for contract termination on such ground, the people’s court shall examine whether the breaching party’s breach is de minimis and whether it frustrates the non‑breaching party’s contractual purpose, and determine whether the contract shall be terminated in accordance with the principle of good faith. …” It follows that in judicial practice, courts possess ex‑officio authority to review contract‑termination grounds agreed by the parties and render a decision on whether termination is warranted.

In light of judicial practice, where grounds for contract termination have been agreed and the counterparty’s conduct triggers such grounds, the following analytical steps are recommended to assess the follow up actions.

First, to confirm whether the contract is eligible for termination. Judicial interpretive positions on this question have evolved over time.

Article 47 of the aforesaid 2019 “Minutes of the National Courts’ Civil‑Commercial Trial Work Conference” once served as the primary legal basis for determining whether a contract could be terminated.

However, Article 26 of the “Judicial Interpretation of the Supreme People’s Court on Several Issues Concerning the General Provisions of the Contract Book of the Civil Code” (Fa Shi〔2023〕No. 13), which took effect on 5 December 2023, provides that where the breaching party fails to perform non‑primary contractual obligations as agreed, a claim for contract termination brought by the non‑breaching party shall not be upheld, unless such non‑performance frustrates the contractual purpose or the parties have agreed otherwise. Upon issuance of this judicial interpretation, viewpoints emerged arguing that minor breach per se should not bar exercise of the contractual right of termination.

In 2024, the Research Office of the Beijing Higher People’s Court submitted an inquiry to the Civil Division of the Research Office of the Supreme People’s Court concerning “whether a party may exercise a contractual right of termination in cases of minor breach”. The Supreme People’s Court indicated that the following factors should be weighed when exercising the contractual right of termination:

1. Degree of fault on the breaching party. While the “Civil Code” adheres to the strict‑liability principle and disregards fault when establishing breach of contract, fault is not devoid of significance under contract law. Where the breaching party is merely slightly negligent or even free from fault, a claim for contract termination ought generally not to be sustained.
2. Form of the breaching conduct. Contractual obligations may be categorized by nature into primary obligations, accessory obligations and collateral obligations. Courts should exercise caution when upholding a non‑breaching party’s termination claim for breach of accessory obligations, and especially collateral obligations.
3. Consequences of the breach. In scenarios such as minor delayed performance or isolated breaches arising in the performance of continuing contracts, where the breach is markedly trivial and does not defeat the non‑breaching party’s contractual purpose, granting termination may render substantial prior investments by the minor‑breaching party irrecoverable and produce severe imbalance of interests.
4. Availability of alternative remedies. Termination is neither the sole nor an automatic remedy for breach of contract. A de minimis breach does not absolve the breaching party of contractual liability. Where the non‑breaching party’s losses can be redressed through other forms of contractual liability (most commonly damages), and such remedy achieves greater fairness than outright termination, the non‑breaching party’s right of termination may be subject to restriction.

The response from the Supreme People’s Court largely returns to the doctrinal tone of Fa〔2019〕No. 254, that is, assessment must proceed by comprehensively weighing all relevant circumstances surrounding the minor breach.

Second, if the four factors have been reviewed, by which the termination could be confirmed as permissible, the contractual right of termination may be exercised. Conversely, the non‑breaching party may elect specific performance coupled with claims for contractual liability, or partial contract termination together with pursuit of contractual liability, depending on the circumstances of the contract.

In conclusion, from the contracting parties’ perspective, agreeing on termination grounds remains advisable. At minimum, it imposes an additional constraint on contracting parties. Should the counterparty indeed commit a breach, notwithstanding some uncertainty as to whether termination will ultimately be upheld, such clauses furnish an additional method.