Limitations on the Right to Terminate for Convenience in Contracts for Work under Chinese Civil Law
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This paper provides a systematic analysis of the principal’s right to terminate a contract for work at will under Article 787 of the Chinese Civil Code. Article 268 of the original Chinese Contract Law explicitly grants the principal the right to terminate for convenience, while stipulating that the legal consequence of termination is compensation for the contractor’s losses. On the basis of the original Chinese Contract Law, Article 787 of the Chinese Civil Code introduces the temporal requirement that the principal must exercise the right to terminate at will “before the completion of the work by the contractor.” Despite the Civil Code’s clarification of the crucial “before work completion” time limit, significant ambiguities continue to undermine its consistent judicial application. This study identifies three core areas of controversy. First, the criteria for determining “completion of work” remain unsettled, with debates over whether it refers to the substantive finishing of the work or its delivery and acceptance. Second, the scope of compensation for the contractor is highly contested, varying from covering only direct costs to including lost profits, with no unified standard in place. Third, the legal validity of contractual clauses that exclude this right is debated, centering on whether Article 787 is a permissive or mandatory norm. This paper argues that the interpretation of “work completion” in Article 787 of the Chinese Civil Code should adhere to its literal meaning, understood as “before the work outcomes are completed,” rather than before the delivery or acceptance of work outcomes. From the perspective of balancing the interests of both parties, the principal should compensate the contractor for both direct losses and the benefits that would have been obtained upon full performance of the contract. If contracting parties agree in advance to exclude the application of the statutory right to terminate at will, such an agreement should be valid. The study extends the analysis to construction project contracts, arguing for a cautious, case-by-case application of the termination right due to their complexity and public interest implications. It concludes that the right, though “at will,” is not arbitrary but is bounded by statutory conditions, compensation obligations, and fundamental principles like good faith.
Abstract
This paper provides a systematic analysis of the principal’s right to terminate a contract for work at will under Article 787 of the Chinese Civil Code. Article 268 of the original Chinese Contract Law explicitly grants the principal the right to terminate for convenience, while stipulating that the legal consequence of termination is compensation for the contractor’s losses. On the basis of the original Chinese Contract Law, Article 787 of the Chinese Civil Code introduces the temporal requirement that the principal must exercise the right to terminate at will “before the completion of the work by the contractor.” Despite the Civil Code’s clarification of the crucial “before work completion” time limit, significant ambiguities continue to undermine its consistent judicial application. This study identifies three core areas of controversy. First, the criteria for determining “completion of work” remain unsettled, with debates over whether it refers to the substantive finishing of the work or its delivery and acceptance. Second, the scope of compensation for the contractor is highly contested, varying from covering only direct costs to including lost profits, with no unified standard in place. Third, the legal validity of contractual clauses that exclude this right is debated, centering on whether Article 787 is a permissive or mandatory norm. This paper argues that the interpretation of “work completion” in Article 787 of the Chinese Civil Code should adhere to its literal meaning, understood as “before the work outcomes are completed,” rather than before the delivery or acceptance of work outcomes. From the perspective of balancing the interests of both parties, the principal should compensate the contractor for both direct losses and the benefits that would have been obtained upon full performance of the contract. If contracting parties agree in advance to exclude the application of the statutory right to terminate at will, such an agreement should be valid. The study extends the analysis to construction project contracts, arguing for a cautious, case-by-case application of the termination right due to their complexity and public interest implications. It concludes that the right, though “at will,” is not arbitrary but is bounded by statutory conditions, compensation obligations, and fundamental principles like good faith.