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1. Complete and Adequate Performance

As in civil law, the Contract Law has a clear emphasis on the principle of compete and adequate performance because performance is what the contract is all about in terms of realizing the goal for which the parties have bargained. In Article 60 of the Contract Law, it is required that the parties perform their obligations completely and thoroughly according to the terms of the contract.1

The complete and adequate performance on its face imposes an obligation on the parties to perform what they promised or agreed in the contract to the extent that all legal duties are completely fulfilled and all legal rights are satisfied. In this regard, a performance is complete and adequate when the parties perform the contract obligations exactly under the terms and conditions of the contract. Therefore, any noncompliance with the required terms and conditions of the contract will render the performance incomplete and inadequate. But, scholars in China, in addition, have suggested that complete and adequate performance shall include proper performance, referring to the way in which the contract is performed. A performance is proper if the contract is performed by correct party at the agreed time and place, with conforming goods or services.2

Because of the requirement for the complete and adequate performance, the doctrine of the substantial performance does not apply in China under the Contract Law. Thus, the damage for breach of contract will be imposed if performance is found defective. There are two articles in the Contract Law that directly deal with defective performance. One is Article 71 that is related to the advance performance, and the other one is Article 72 that concerns partial performance. But in both cases, only the contracts with a fixed or agreed time period for performance are relevant.

An advance performance is the performance that is made ahead of the agreed time to perform. The advance performance may occur either at the request of the obligee or at the initiative of obligor. What matters here is the performance that is advanced at the initiative of obligor. Under Article 71 of the Contract Law, the obligee may reject an advance performance of the contract by the obligor. Article 71, however, does not permit the obligee to reject the advance performance that causes no damages to the interests of the obligee. This exception is intended to help facilitate transactions and maintain the business relationship between the parties. But if the advance performance

1 See the Contract Law, art. 60.

2To certain extent, the complete and adequate performance has something in common with the perfect tender rule incorporated in § 2-601 of the UCC, which requires the full tender of perfectly conforming goods.

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causes additional costs to the obligee (e.g. warehouse fees), the obligor shall bear the costs.3

Partial performance is deemed as a defective performance because it violates the principle of the complete and adequate performance. Article 72 of the Contract Law makes it clear that the obligee may reject the partial performance of the contract by the obligor. Once again, there is an exception, that is, the partial performance may not be rejected if it does not damage the interest of the obligee.4 Mostly, the partial performance is permissible when the contract itself is divisible and could be performed separately. Another case in which the partial performance is acceptable is that the parties agreed to have the contract performed in parts. For example, if the parties have an agreement that the delivery may be made in batches, each batch then will be regarded as partial performance, which does not constitute a breach of the contract. However, the obligor will be responsible for any additional costs that may incur to obligee during the course of the partial performance.

2. Good Faith Performance

Closely related to the complete and adequate performance is the principle of good faith performance. As we have noted, good faith is a general principle in the Contract Law, which is based on moral values and standards. Applied to contract performance, good faith means to perform the contract according to the nature, purpose of the contract as well as the transaction usages. Since the complete and adequate performance is the primary requirement for performing the contractual obligations, the good faith performance is used as secondary and supplementary means to ensure that the performance is to be made completely and adequately. The general notion is that the good faith principle, though appearing a bit abstract, has irreplaceable function in helping determine the completion and adequacy of contract performance, particularly in cases where the parties’ agreement concerning performance is incomplete or vague.

Following this notion, Article 60 of the Contract Law in addition provides that the parties shall abide by the principle of good faith and shall perform the duties such as notice, assistance and confidentiality on the basis of the nature and purpose of the contract or transactions practices.5 To be more explicit, the

3 See the Contract Law, art. 71.

4 See id., art. 72.

5 See id., art. 60.

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good faith performance principle under Article 60 of the Contract Law mainly involves the performance of two basic duties that are commonly called in China as the “attached duty” and “other related duty”.6

The attached duty is the duty subordinating to the main duties of the contract, and it entirely depends on the existence of the contractual relationship between the parties. The underlying theory is that since contacts are cooperative behavior through which the parties agree to work together,7 it is essential that the parties cooperate with each other in such a way that may not be explicitly provided in the contract, but would be required under the good faith principle. Thus, the attached duty is the duty necessitated by the contract and is derived largely from the reasonable business standards and expectations. On this ground, to perform the attached duty is not to increase the burden of either party, but rather it is the natural duty imbedded in the performance of contracts.

In accordance with Article 60 of the Contact Law, the attached duty includes the duty to give notice, duty to assist and duty to maintain confidentiality. The duty of notice necessarily arises when a contractual relationship is established between the parties. It is required under the good faith principle that the parties during the contract performance shall faithfully inform each other of all major events or changes that may affect the performance of the contract in order to facilitate the completion of the performance. For example, if a party is unable to perform or could not perform the contract under the required terms or conditions due to an unexpected reason, such as force majeure, he shall notify the other party in a timely manner so that the parties can take steps to deal with the situation.8 Under Article 70 of the Contract Law, if the obligee does not notify the obligor of its separation, merger or change of its domicile, which makes it difficult for the obligor to perform the obligations, the obligor may suspend the performance or submit

6To compare, Restatement of Contracts, section 205 provides: “Every contract imposes upon each party a duty of good faith and fair dealing in its performance and enforcement.” Similarly, UCC section 1-203 provides: “Every contract or duty within this Act imposes an obligation of good faith in its performance and enforcement”.

7See Rosett & Bussel, Contract Law and Its Application (6th ed), 697 (Foundation Press, 1999).

8Some scholars in China suggest that the duty of notice under the good faith performance principle shall include notice of (a) means to use; (b) defects; (c) report; (d) danger; (e) business condition, (f) delay; (g) assignment/delegation; (h) event affecting performance; and

(i) inability to pay. Many disagree because they think that several duties listed above are not the duties attached to the contract, rather they are the duties provided by the contract. See Cui Yunling, General View on Contract Law, 158 (China University of People’s Public Security Press, 2003).

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the subject matter of the obligation (or the subject matter of the contract) to relative authority.9

The duty to assist is an inherent obligation of the parties to a contract. Because the contract is the product of cooperation of the parties, good faith principle requires the parties to be cooperative with each other. The cooperation under the good faith principle implies that the parties are obligated to assist each other in performing the contract and to facilitate the completion of the performance. As advocated by Chinese contract scholars, the duty to assist may include several aspects. In one aspect, a party, when performing his own contract obligations, shall try to pave the way for the other party to perform and shall also be prepared to accept the other party’s performance. In other aspect, if a party is facing certain difficulty in performing the contract because of an objective reason, the other party shall give reasonable consideration to this situation and try to help overcome the difficulty, and if necessary, shall negotiate the options with the party facing difficulty in the performance. Moreover, in case of a party’s breach, the other party shall take all measures that are needed to mitigate the damages. A few scholars also believe that under the duty to assist, the parties, when dealing with contractual disputes between them, shall treat each other in a responsible way.10

The Contract Law does not specify what legal consequences there will be if a party fails to carry out the duty to assist. In practice however, the failure may result in certain remedies against the non-assisting party depending on the distinction of the case.11 For example, under Article 101 of the Contract Law, if the obligee refuses to accept the subject matter of the contract without justified

9The submission of the subject matter of the contract with relevant authority is a statutory relief available to the obligor. As will be discussed later in other chapter of this book, this relief is normally used when the obligor could not make delivery of the contracted item either because the obligee’s whereabouts is unknown or the delivery was refused by the obligee without legitimate reason.

10See Cui Yunling, supra note 4 at pp. 158–159; See also Wang Liming & Cui Jianyuan, A new Commentary on Contract Law – General Provisions (revised edition), 320 (China University of Political Science and Law Press, 2000).

11One Chinese scholar summarizes such consequences to include 6 categories: (a) transfer of risk – failure to pick up the goods timely; (b) stop accruing interest – failure to accept payment as agreed; (c) extinguishment of guarantee – refusal to accept timely payment; (d) payment for damage or expenses – failure to timely use the materials provided by the other party; (e) extermination of obligation – failure to accept timely performance; and (f) modification or rescission of the contract – failure to assist, which result in impossibility of performance by the other. See Dong Ling, Performance, Modification, Assignment and Termination of Contracts, 20–21 (China Legal System Publishing House, 1999).

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reason, the obligor may submit the subject matter to relevant authority, and then the obligor’s obligation is discharged.12 Another example is Article 259 of the Contract Law that involves contract for work. According to Article 259, if the contracted work needs an assistance of the ordering party, the ordering party shall have the obligation to provide the assistance. Where the ordering party fails to fulfill his obligation of assistance so that the contracted work could not be finished, the contractor may urge the ordering party to perform the obligation to assist and may extend the term of performance if necessary. The contractor may also rescind the contract if the ordering party does not perform his obligation to assist within the time limit.13

Duty to maintain confidentiality is another important element in performance. Actually it is the extension of the duty that arose at the time of the contract negotiation. When making a contract, the parties have the opportunity to know each other’s business secrets, and it is critical that the parties maintain confidential each other’s business information obtained during the process of contract making as well as the performance. Confidentiality is also required by the mutual trust on which the parties made the contract between them. A breach of the duty to maintain confidentiality would indicate bad faith for which the contractual liability, and in many cases tort liability as well, will be imposed.

The other related duty is a “catchall” provision. It deals with all other obligations that are necessary for the performance of contract but may not be clearly stated or provided by the parties. As noted, good faith performance in China is regarded as complementary, and thus the other related duty refers to the one that is not specified in the contract or the specification of such duty is vague, but the imposition of which upon the parties is needed for the complete and adequate performance of the contract. For example, after conclusion of the contract, each party has the duty to prepare well for the performance. Although such a duty may not be expressly stated in the contract, it is naturally induced that each party is under obligation to make good preparation for the performance. Failure to prepare may constitute the bad faith, particularly when the failure is made intentionally.

One important point to note is that neither the contract Law nor the 1986 Civil Code distinguishes regular contracting parties and merchants. In a country like US, the contract laws impose higher standards on the merchants than on the non-merchants. In China, however, both merchants and nonmerchants are treated the same under the Contract Law with regard to the contract. For instance, in the US, the key element of good faith in the contract

12See the Contract Law, art. 101.

13See id., art. 259.