Chapter Seven	207

guidance price. If a contract is covered by the State price, such a price must be accepted. As we have explained, the difference between the Sate stipulated price and State guided price is that in the latter case the parties would have certain room to determine the price they wish around the range of the State guidance price. If a contract is not required to apply the State price, the applicable price shall be determined by the market price of the place of performance at the time of contract.

In addition to Article 62, the Contract Law has a special provision that applies to the case where there is a change of the State price. In accordance with Article 63, for a contract that is required to apply the State stipulated price or the State guidance price, where the State price is adjusted within the delivery period of the contracted items, the price at the time of delivery shall apply. If the delivery is overdue and the price goes up at the time of delivery, the price shall remain unchanged. And if the price goes down, the new price shall apply. In the event of delay in taking the delivery of the contracted items or late payment, if the price rises, the new price shall apply; but if the price drops, the original price stays.20

4. Right of Defense to Non-Performance

The right of defense to non-performance of contract is a civil law concept that is designed to protect obligor from being harmed by the abuse of right of the obligee. It applies only in a bilateral contract where the parties are mutually obligor and obligee to each other. By definition, the right of defense is the right to defend against the claim of the other party or to deny the right asserted by the other party. In the sense in which the obligor may refuse to honor the obligee’s request, the right of defense is also called the right of opposition.

Keep in mind that the right of defense to non-performance is not a denial of contractual obligation or a discharge of contractual duties that are being excused; rather it provides the obligor with the legal ground on which the obligor may refuse the obligee’s request for performance. The underlying notion is that in a bilateral contract, the rights and obligations between the parties are reciprocally connected and mutually dependent. One party’s performance is a prerequisite of the other party’s performance, and each party, when enjoying the rights under the contract, correspondingly bears contractual obligations. Thus, in order to realize the contractual rights, the parties must each perform their respective obligations. Without one party’s performance, the other party’s performance would not occur.

20 See id., art. 63.

208 Chinese Contract Law

Therefore, the right of defense to non-performance is a self-protection right that is created by the law in order to help maintain the balance of interests of the parties in the course of contract performance. Based on such right, a suspension of performance of contract by one party, which takes place in the situation where the party wants to be sure that the other party will properly perform, is not a break of contract. In this regard, many Chinese contract law scholars regard the right of defense to non-performance as a guarantee of contractual rights.21

The right of defense to non-performance did not appear in Chinese contract legislation until the adoption of the Contract Law. In the past, a concept of “mutual breach” was widely used in the judicial practice because at that time it was overly emphasized that a contract involves mutual obligations between the parties and whoever did not perform the contract would be held liable regardless of the reason for the non-performance. The enactment of the Contract Law makes it possible for the parties to protect their contract interests through exercise of the right of defense without litigation.

As provided in the Contract Law, the right of defense to non-performance consists of fulfillment plea and unrest defense. Once again, one may barely find any equivalent concepts in this regard in common law contract theories or practice because those are the concepts typically in the civil law system.

4.1. Fulfillment Plea

Fulfillment plea is the right granted to a party in a bilateral contract to refuse to perform or to reject the request of the other party for performance before the other party performs or properly performs the contract. Under the fulfillment plea, since the parties to a contract are mutual responsible to each other and each bears a duty of performing contractual obligations to the other, any non-performance or non-conforming performance of one party will constitute a ground for the other party to refuse to perform. To illustrate, in the contract in which the parties agreed to the time at which one party makes the delivery and the other party makes payment, if at the provided time, the delivering party failed to deliver, the other party then has the right to refuse the other party’s request for the payment.22 A practical importance of the “fulfillment

21See Dong Ling, supra note 11 at p. 62.

22concept of fulfillment plea looks similar to the doctrine of concurrent condition in common law system. In the US for example, the concurrent condition is defined to exist where the parties are to exchange performance at the same time. But difference is that the fulfillment plea is to give a party the right to refuse to perform, for which no breach of contract will be held, while under the concurrent condition unless tender is excused, a party must perform or tender performance before the party has a claim. See Calamari & Perillo, The Law of Contracts (4th ed), 399 (West Group 1998).

Chapter Seven	209

plea” is that it helps a court or arbitration body to draw a line between breach and non-breach of the contract, especially when a “contributory breach” defense is asserted because the non-performance by a party exercising the “fulfillment plea” is not a breach of contract.

The Contract Law divides the fulfillment plea into two categories: “simultaneous fulfillment plea” and “orderly fulfillment plea”. The simultaneous fulfillment plea occurs where the contractual obligations of the parties are mutually implicative. Under Article 66 of the Contract Law, if the parties have obligations toward each other and there is no order of priority in performance, the parties shall perform the obligations simultaneously.23 A contracting party has the right to reject the other party’s performance request before the other party performs, and also to reject the other party’s corresponding performance request if the other party’s performance does not meet the terms or conditions of the contract.24 The Contract Law does not specify the contracts in which the rule of simultaneous fulfillment plea may apply. But as interpreted by scholars, the application of simultaneous fulfillment plea mostly involves the contracts for sales and leases.25

It can be seen from Article 66 that to make a simultaneous fulfillment plea, four elements are required. The first element is mutual obligation. In order to qualify for a simultaneous fulfillment plea, the parties must be mutually obligated to each other in performing the contract. Because of the mutual obligation requirement, the simultaneous fulfillment plea only applies to a bilateral contract. The second element is performance without an order (which means that there is no requirement as to who performs first). In a contract where the performance is to be rendered under no particular order or the order of the performance could not be determined by law or trade practice or business dealings, the performance is deemed simultaneous. The third element is the performance that is due. To assert the simultaneous fulfillment plea, the performance must

23See the Contract Law, art. 66.

24The Principles of International Commercial Contracts of UNIDROIT contains a similar provision. Article 7.1.3 (1) of the Principles provides: “Where the parties are to perform simultaneously, either party may withhold performance until the other arty tender its performance.”

25For example, Article 221 of the Contract Law provides: “The lessee may request the lessor to maintain and repair the leased property within a reasonable period of time when the leased property needs maintenance and repair. Where the lessor fails to perform the obligation of maintaining and repairing the leased property, the lessee may maintain it by itself, and the expenses for the maintenance shall be borne by the lessor. If the maintenance affects the use of the leased property, the rent shall be reduced or the lease term shall be extended correspondingly”. This provision is said to give lessee right to exercise the simultaneous fulfillment plea when the lessor fails to perform its duty to maintain the leased property. See Wang Liming, Study on Contract Law (Vol. II), 83 (People’s University Press, 2003).

210 Chinese Contract Law

become due. If the time for performance has not arrived, there is no obligation to perform. The forth element is non-performance or non-conforming performance by a party. The simultaneous fulfillment plea takes place where a party does not perform what he is supposed to fulfill. Note that the nonperformance or non-conforming performance is referred to the performance that is possible, excluding the one that might be excused under the law, e.g. on the ground of force majeure or frustration of purpose of the contract.26

Orderly fulfillment plea is the defense against a party who under the contract should performance first but fails to do so. In accordance with Article 67, where the parties have mutual obligations and the performance of the obligations takes an order of priority, the party who should perform subsequently has the right to reject other party’s performance request if the other party who should perform first has yet not made the performance.27 In addition, if the performance by the party who has the duty to perform first does not meet the contract requirements, the other party has the right to reject the corresponding performance request.

The orderly fulfillment plea is intended to protect the interest of the party whose performance is subsequent to the performance of the other, and to urge the party who is supposed to perform first to fulfill his obligations. The orderly fulfillment plea applies where the first performing party did no perform or the performance was defective. It should be noted that the orderly fulfillment plea, like the simultaneous fulfillment plea, is to give a party the right to withhold the performance until the other party performs.28 Therefore, when the prior performing party performed after the assertion of the orderly fulfillment plea, the asserting party must then perform. In case where the orderly fulfillment plea is made, the prior performing party may be held liable for any delay in its performance, but no liability would be imposed on the other party for not being able to timely perform due to the prior performing party’s delay.

There is an on-going debate among Chinese contract scholars on the term of orderly fulfillment plea. Although it is agreed that the orderly performance plea involves consecutive performance, no consensus has been reached as to

26Some argue that the possible performance of the party should be the fifth element needed to make a simultaneous fulfillment plea. They believe that if the performance of a party becomes impossible, there is no ground for the simultaneous fulfillment plea, and the damaging party may have to seek for other relief. See Cui Yunling, supra note 4 at pp. 171–172.

27See the Contract Law, art. 67.

28The term of fulfillment plea is not used in the Principles of International Commercial Contracts of UNIDROIT, but a term of withholding performance is used instead. Wither regard to orderly performance, Article 7.1.3.(2) provides: “Where the parties are to perform consecutively, the party that is to perform later may withhold its performance until the fist party has performed.”