Contracts are ubiquitous in our lives. Whether it is corporate trade or the daily necessities, clothing, food, housing and transportation of natural persons, contracts need to be concluded everywhere. In recent years, due to the impact of the COVID-19 pandemic, the number of cases requesting contract rescission has increased significantly. This article intends to introduce the concept, types, procedures and other related issues of contract rescission.

I. Concept and Types of Contract Rescission

1. Concept

Contract rescission refers to an act by which, after a contract is legally established but before it is fully performed, when the conditions for contract rescission are met, the contractual relationship is extinguished ab initio or prospectively by the expression of intent of one or both parties.

2. Types

① Rescission by Agreement

That is, after a contract is established and takes effect, both parties reach a consensus through negotiation to rescind the original contract. In other words, the parties have not stipulated the circumstances for rescinding the contract in the contract, and both parties agree to rescind it through negotiation afterwards.

② Rescission by Stipulation

That is, both parties agree in the form of contract terms in the contract to take a certain future event as the cause for rescission, and based on this, grant one or both parties the right to rescind the contract.

③ Statutory Rescission

It refers to the situation where, after a contract is validly established but before it is fully performed, when a statutory cause for rescission arises, the right holder of rescission may rescind the contract.

Relevant Legal Provisions

Article 562 of the Civil Code of the People's Republic of China: The parties may rescind a contract upon reaching a consensus through negotiation.

The parties may agree on the cause for one party to rescind the contract. When the cause for rescission of the contract occurs, the right holder of rescission may rescind the contract.

Article 563 of the Civil Code of the People's Republic of China: A party may rescind a contract if one of the following circumstances occurs:

(1) The purpose of the contract cannot be achieved due to force majeure;

(2) Before the expiration of the performance period, one party clearly expresses or indicates by its conduct that it will not perform the main obligation;

(3) One party delays in performing the main obligation, and still fails to perform it within a reasonable period after being urged;

(4) One party delays in performing its obligations or commits other breach of contract, resulting in the inability to achieve the purpose of the contract;

(5) Other circumstances as stipulated by law.

For an indefinite-term contract with continuous performance, such as a lease contract, the Civil Code stipulates that the parties may rescind it at any time.

II. Procedures for Contract Rescission

1. Exercise of the Right to Rescind

When the statutory or agreed conditions for rescinding a contract arise, the contract will not be rescinded automatically. The rescission of a contract can only be realized through the exercise of the right to rescind by the parties. In other words, the parties must make a certain expression of intent to exercise the right to rescind. A party who lawfully claims to rescind a contract shall notify the other party.

The Civil Code does not impose mandatory requirements on the form of the notice of contract rescission, which may be in writing, oral form or other forms. However, there must be relevant proof that the expression of intent to rescind the contract has been notified to the other party.

2. Time Limit for Exercising the Right to Rescind

The right to rescind must be exercised within the prescribed time limit:

• Where a time limit for exercising the right to rescind is prescribed by law or agreed by the parties, if the party fails to exercise such right upon the expiration of such time limit, the right shall be extinguished.
• Where no time limit for exercising the right to rescind is prescribed by law or agreed by the parties, if the right holder of rescission fails to exercise the right within one year from the date on which he knows or ought to know the cause for rescission, or fails to exercise the right within a reasonable period after being urged by the other party, the right shall be extinguished.

3. Other Provisions

A party who lawfully claims to rescind a contract shall notify the other party. The contract shall be rescinded when the notice reaches the other party; if the notice states that the contract will be automatically rescinded if the debtor fails to perform its obligations within a certain period, and the debtor fails to perform its obligations within such period, the contract shall be rescinded upon the expiration of the period specified in the notice.

If the other party objects to the rescission of the contract, either party may request the people's court or an arbitration institution to confirm the validity of the rescission act.

If a party claims to rescind the contract by filing a lawsuit or applying for arbitration directly without notifying the other party, and the people's court or arbitration institution confirms the claim, the contract shall be rescinded when the copy of the complaint or the copy of the arbitration application is served on the other party.

III. Legal Consequences of Contract Rescission

Relevant Legal Provisions

Article 566 of the Civil Code of the People's Republic of China: After the rescission of a contract, the unperformed part shall cease to be performed; for the performed part, the parties may request the restoration of the original state or take other remedial measures according to the performance situation and the nature of the contract, and have the right to claim compensation for losses.

If the contract is rescinded due to breach of contract, the right holder of rescission may request the breaching party to bear liability for breach of contract, unless otherwise agreed by the parties.

After the rescission of the principal contract, the surety shall still be liable for the civil liability that the debtor shall bear, unless otherwise agreed in the suretyship contract.

IV. Differences Between Contract Rescission and Contract Termination