[Q&A] Is it possible to contractually prohibit the voluntary termination of a contract?
2023. 11. 23
[Q&A] Is it possible to contractually prohibit the voluntary termination of a contract?
As a corporate law firm, we are used to answering many questions from our clients about their business in China. In this series of Q&A articles, we will discuss some of the topics that our clients have shown interest in.
Question: Can a contract be drafted in a way that excludes the right of voluntary termination?
Answer: Whether such an agreement is valid or not should be comprehensively assessed based on factors, such as the type of contract and its purpose. The right of voluntary termination refers to the right to unilaterally terminate a contract without assuming a breach by the other party. For example, in Contract Work and Contracts for Commission, the ordering party, the commissioning party, and the appointed party have the right to terminate the contract at any time. Although voluntary termination rights are legally recognized, in practice, they often considered a risk to transactions. Therefore, the terms of contracts, such as purchase and Contracts for Commission, may include provisions stating that "both parties shall not terminate the contract without justifiable reasons." In other words, the exercise of voluntary termination rights is excluded in such cases.
Using a Contract Work as an example, there is a prevailing view that the following points mentioned in "Understanding and Application of the Contract Chapter of the Civil Code (III)" by the Supreme People's Court are pertinent. "The norms set forth by the contract law on the granting of rights should all be classified as mandatory norms. The provision on voluntary termination rights is a mandatory legal norm and cannot be modified by an agreement. Furthermore, as mentioned earlier, the legitimacy of the ordering party's entitlement to exercise voluntary termination right is based on the nature of the construction contract and not on whether it is paid or unpaid. Unless the voluntary termination right of the ordering party is restricted by special laws, it should not be considered to be waived by agreement."
However, with regard to Contracts for Commission, there has been a greater dispute in judicial practice. For example, in cases such as "(2020) Yu 1402 Min Chu 5198" and "(2019) Yu 1402 Min Chu 3300," the court recognized that "If both parties to the commission contract agree to limit or exclude the application of the right of voluntary termination when concluding the agreement, the agreement should be deemed valid and the parties should perform the contract in accordance with the agreement. Neither party can freely cancel the commission or terminate the contract, as doing so would be contrary to the principle of good faith." Thus, the court accepted the standpoint of excluding voluntary termination rights. On the other hand, in the case of "(2022) Hu 0117 Min Chu 6846," the court ruled that "The right of voluntary termination is a statutory right granted to the contractual parties by law and should not be excluded by agreement. The phrase 'no right of termination' in this case should be interpreted as limiting the voluntary termination rights of the parties." Consequently, the court denied the validity of the agreement excluding voluntary termination rights.
In addition to contracts such as Contract Work and Contracts for Commission mentioned above, contracts with the right of voluntary termination on a day-to-day basis include irregular leases, Contracts of Carriage of Cargos, and insurance, among others. As there are practical discussions about the exclusion of voluntary termination rights, it is recommended that when becoming a party to such a contract, one should prudently consider the specific circumstances (such as the nature of the contract) and either choose carefully or adopt other flexible methods (such as damage compensation) to mitigate the uncertainty and risk of voluntary termination.
