The parties shall fully perform their obligations in good faith. The liability for breach of contract applies the principle of strict liability. The fault or negligence is not a basic element of a claim for breach of contract. Where a party fails to perform the contractual obligations or the performance does not comply with the terms of the contract, the other party shall file a claim for breach of contract. The plaintiff bears the burden of proof. To file a claim for breach of contract, the plaintiff shall submit preliminary proofs along with the complaint to prove that: (1) there is a valid contract; and (2) the other party has breached the contract. The plaintiff does not have to be a 'clean hand'. If the plaintiff breaches the contract as well, the defendant may file a counterclaim.
The rules of proof in complex commercial litigation is the same as in other civil litigations, which are specified in Several Provisions of the Supreme People's Court on Evidences in Civil Litigation. Evidence shall comprise the following categories: statements of the parties, documentary evidence, physical evidence, audiovisual materials, electronic data, the testimony of witnesses, expert opinions and records of inspections and examinations. Evidence shall be verified before it can be admitted and taken as a basis of facts. Evidence formed out of China should be notarised and legalised to become qualified evidence in litigation. It is worth noting that in the very first case of CICC, there are some innovations in rules of proofs of international dispute resolution. For example, notarisation and authentication was not taken as a compulsory requirement for evidence formed out of China. Generally evidence in English shall be translated into Chinese. However, if both parties agree that the evidence in English may not be translated into Chinese, the court might accept evidence in English. If these innovations become new rules of evidence, the proceedings of international disputes resolution will be greatly simplified.
Defences to enforcement
The most common ways parties seek to avoid enforcement of contractual obligations or challenge claims of breach of contract are as follows.
There is no contract or the contract is void or revocable. The definitions of void contracts and revocable contracts in PRC Contract Laws can be found in Section II. To seek the defence that the contract is revocable, a party shall request the court or an arbitration institution to first revoke the contract. The right to revoke a contract shall be extinguished if the party fails to exercise their right within one year from the date the cause for revocation is known or shall be known.
The limitation period has expired. The limitation of action for commercial contract litigation is three years in China. The Civil Code provides a four-year limitation period for litigation or arbitration due to disputes over contracts of international goods sales and import and export of technology. A limitation of action shall run from the date when an obligee knows or should have known that his or her rights have been infringed and who the obligor is.
The contract may be rescinded as provided in the contract or in PRC Contract Law. According to Article 94 of PRC Contract Law, even if it is not agreed in the contract, a party may rescind the contract under any of the following circumstances: (1) the purpose of the contract is rendered impossible to achieve due to force majeure; (2) one party to the contract indicates, expressly or by conduct, before the expiry of the performance period, that it will not perform its principal obligations; (3) one party to the contract delays performing its principal obligations and fails to perform the same within a reasonable time period after being urged to do so; (4) one party to the contract delays performing the obligations or commits other acts in breach of the contract, resulting in the impossibility to achieve the purpose of the contract; or (5) other circumstances as provided by the laws. The Civil Code has added that the a party may rescind an indefinite contract involving a continuing obligation to perform at any time, provided that it give reasonable notice to the other party prior to doing so.
The Civil Code also provides that where there is a significant change in the basic conditions of the contract that could not be foreseen by the parties at the time of conclusion of the contract and is not a commercial risk, continuing to perform is manifestly unfair to one party. If the adversely affected party fails to renegotiate the contract with the other within a reasonable period, this party may request a court or an arbitration to modify or terminate the contract.
The obligations of both parties shall be performed simultaneously. Where both parties have obligations towards each other and there is no order of priority in respect of the performance, the parties shall perform the obligations simultaneously. One party has the right to reject the other party's request for performance before the other party's performance, or if the other party's performance does not comply with the terms of the contract.
The party who shall perform its obligations first has not rendered the performance. Where both parties have obligations towards each other and there is an order of priority in respect of the performance, if the party who shall perform its obligations first (the former) has not rendered the performance, the other party has the right to reject the former's request for performance. If the former's performance does not comply with the terms of the contract, the other party has the right to reject the corresponding request for performance.
The defence of unease. The party who shall perform its obligations first may suspend the performance if there is conclusive evidence that the other party falls under any of the following circumstances: (1) the other party's business conditions are seriously deteriorating; (2) the other party has transferred its property and taken out its capital secretly to evade debts; (3) the other party loses its business creditworthiness; or (4) other circumstances showing that the other party loses or will possibly lose its capability to perform its obligations. If a party suspends their performance without conclusive evidence, they shall be liable for breach of contract.
