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However, the exercise of the unrest defense is limited under Article 69 of the Contract Law. The limitation has two parts: (a) when suspending its performance, the prior performing party shall notify the other party of the suspension, and (b) if the other party provides an adequate guarantee, the prior performing party shall resume its performance.36 Therefore, without notice, the prior performing party may not suspend its performance, and an unreasonable suspension of performance after an adequate guarantee is provided may make the prior performing party liable for breach of the contract.

In addition, Article 69 gives the prior performing party a relief of recession of the contract in the situation where the other party’s ability to perform the contract is substantially impeded. According to Article 69, if the other party, within a reasonable period of time after the performance is suspended, is unable to reinstate its ability of performance and fails to provide an adequate guarantee, the party suspending the performance may rescind the contract.37

In order to avoid the rescission of the contract, the party against whom the unrest defense is asserted must meet two requirements: (a) to reinstate its ability to perform and (b) to provide adequate guarantee within a reasonable period of time. The “adequate guarantee” is understood to mean that the guarantee is sufficient enough to bear the liability for damages if the subsequent performing party fails to perform the contract. But the question is what time period would be considered reasonable. Due to the silence of the Contract Law, it is entirely up to the court or arbitration body to make a determination on a case-by-case basis.

5. Protective Measures for Performance

As emphasized in Chapter I of the book, a contract in China is deemed as a relationship of obligatio between the parties, under which they are both obligor and obligee to each other (with an exception to unilateral contracts). Therefore, once a contract is formed, such an obligatio relationship is created between the parties, and to realize the contractual interests of the obligee is to fully perform the contractual duties of the obligor. Generally, under the obligatio relationship, the obligor is obligated to perform the contact. Thus, in cases where the obligee’s contractual interests are, or are likely to be, adversely affected, the assets of the obligor may be used to assure the realization of such interests. The “assurance” so provided is commonly called the protective measures for performance because it is used to protect against the

36See the Contract Law, art. 69.

37See id.

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change of the obligor’s assets that may necessarily affect the contractual interests of the obligee.

The Contract Law embraces two protective measures: the right of subrogation and the right of cancellation. Both rights are granted to obligee and are purposed to ensure that the obligee’s interests under the contract will be realized. It is proper to say that the protective measures, as provided in the Contract Law, are the statutory relief for the obligee to prevent the obligor from inappropriately reducing the obligor’s assets to impede the obligee’s contract interests. Note that although both the right of subrogation and the right of cancellation belong to the obligee, the exercise of such rights may only be made by a court order. In other words, the obligee would need to bring an action in a court in order to take any of the protective measures.

5.1. Right of Subrogation

Subrogation means that in order for the contractual interests of the obligee not to be harmed, the obligee may in its own name exercise the creditor right of the obligor against a third party who is the debtor to the obligor. To illustrate, assume that A owes B, and C owes A, and if A fails to perform its obligation to pay B, B has the right to ask C to pay B as if C pays A. The theory is the external effect of the obligatio, which allows B’s contractual right to be extended externally against C, the third party. As a general principle of contract, the obligee could only ask obligor to perform under the contract between them because the contract may not obligate a third party without the third party’s express consent. However, if the obligor’s conduct with a third party may adversely affect realization of the interests of the obligee, the obligee would under the law be able to take certain action against both A, the obligor and C, the third party for purposes of removing the harm.38

The right of subrogation is provided in Article 73 of the Contract Law. Under Article 73, if the obligor is indolent in exercising its due creditor right against his debtor(s), which damages the interests of the obligee, the obligee may request the people’s court for subrogating the obligor’s creditor right and exercising it in the obligee’s own name, except that the creditor right exclusively belongs to the obligor personally. It is further provided that the subrogation shall be exercised within the scope of the creditor right of the obligee and the necessary expenses incurred to the obligee by exercising the subrogation right shall be borne by the obligor.39 In application of Article 73, the

38See Jiang Ping et al, A Detailed Explanation of the Contract Law of Law, 61 (China University of Political Science and Law Press, 1999).

39See the Contract Law, art. 73.

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Supreme People’s Court has explicitly explained how an action for subrogation should be taken.

5.1.1. Conditions for Subrogation Actions

Shortly after the Contract Law was adopted in 1999, the Supreme People’s Court issued the Explanation to Several Questions concerning the Implementation and Application of the Contract Law of the People’s Republic of China (I). In its opinions, the Supreme Court sets forth the conditions that an action for subrogation shall meet. In essence, the subrogation is a legal right of the obligee to protect itself from being damaged by the obligor’s inactivity in exercising the obligor’s own creditor right that has become due. Since the exercise of the subrogation would involve a third party, it is important that there is a valid ground for subrogating. According to the Supreme People’s Court, to seek a subrogation action in the court, there are four conditions that must be met. The four conditions are: (a) the creditor right of the obligee against obligor is legal, (b) the obligor is indolent in exercising its creditor right, which causes damage to the obligee, (c) the creditor right of the obligor in question is due, and (d) the creditor right of the obligor is not a personal right of the obligor.40

The legality of the creditor right of the obligee means that there is a valid contract between the obligor and obligee, on which the creditor right of the obligee is based. If no contract as such exists or if the contract is void or rescinded, there would be no ground for the subrogation. Some, however, argue that in addition to the legality, the creditor right of the obligee against obligor should be certain. The certainty is deemed to be satisfied where either the obligor admits the obligee’s creditor right, or such right is ascertained by the court or arbitration body.41

The indolence concerns the creditor right of obligor that is due and should be exercised. But this matter is being complicated by the scholars’ arguments on what would constitute the indolence. One opinion is that the indolence refers to the failure to claim the right or the delay in making the claim.42 The other opinion describes the indolence as the situation where the obligor should, and is able to, claim its creditor right through the means of litigation or arbitration,

40 See the Supreme People’s Court, Explanation to Several Questions concerning the Implementation and Application of the Contract Law of the People’s Republic of China (I), art. 11, (1999).

41See Wang Liming, supra note 25 at pp. 134–135.

42See Wang Liming, The Scholarly Suggestions and the Legislative Reasons for the Draft Civil Code of China, 112 (Law Press, 2005). Here the draft Civil Code refers to the proposed comprehensive civil code that is in the process of drafting.

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but fails to do so.43 The major difference between the two opinions is whether the resort to litigation or arbitration should be the element for determining the indolence. Under the Supreme People’s Court’s Explanation, however, the subrogation should be made only if the obligor fails to make the claim of its creditor right that the obligor may claim through either litigation or arbitration.

The personal nature of the creditor right of the obligor implies the right that exclusively belongs to the obligor and may not be subrogated. In the opinion of the Supreme People’s Court, the right that is deemed as personal includes the right for payment arising from alimony, child support, maintenance (support of parents and grandparents), as well as inheritance, and the right of the claim related to salary, retirement fund, pension fund, survivor’s pension, relocation settlement fees,44 life insurance and damages for personal injury.

Under Article 73 of the Contract Law, the personal right of the obligor shall not be subrogated. It is also important to point out that subrogation becomes necessary only when the available assets of the obligor are not sufficient to satisfy the creditor right of the obligee. If the available assets are sufficient, the obligee may simply seek to enforce the contract and there is no need to look for the creditor’s right of the obligor against a third party.

One point that deserves further discussions is the determination of damages that incurred to the obligee for purposes of subrogation. The question that is necessarily encountered is how the damages should be defined. One argument is that in the context of subrogation, the damages should be the actual damages that are caused to the obligee by the indolence of the obligor in exercising the obligor’s credit right against the third party. The actual damages doctrine is rested on the notion that because the obligor did not exercise its creditor right, and as a result, obligor’s assets that were supposed to increase did not increase, which made it impossible to fully realize the obligee’s interests, and therefore the obligee has the right to subrogate.

Another argument asserts that the damages as such mean the “likely danger” to affect the realization of the obligee’s creditor right, and the danger is caused by the obligor’s delay in performing its contract obligations and indolence in claiming the obligor’s creditor right against a third party. Under this

43The reason supporting this opinion is that to require the claim of the creditor right to be made by the means of litigation or arbitration will objectively help determine whether the obligor has been indolent in making the claim timely because the initiation of the litigation or arbitration will serve as an objective standard for the determination. See Wang Liming, supra note 25 at pp. 137–138.

44The fees provided by government or real estate developer to compensate the residents who have to be relocated to a new place because of government construction project or real estate development.

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argument, one factor in determining whether the damages have been caused is whether the obligor’s performance is being delayed.45

The third argument is a combination of the above two. It denotes the damages as both actual and possible damages caused by the obligor’s failure to claim its creditor right so that the obligor may not have the assert or may not have enough asserts to satisfy its obligation to the obligee.

The Supreme People’s Court seems to try to adopt a moderate approach that does not specify whether the damages are actual or likely ones. In the words of the Supreme People’s Court, the damages to the interests of the obligee provided in Article 73 of the Contract Law refer to the non-satisfaction of the obligee’s due creditor right as the consequences of the obligor’s indolence in exercising its due creditor right and failure to claim the due creditor right of monetary payment against its debtor through the means of litigation or arbitration.46 Interestingly, however, here the Supreme People’s Court limits the claim via litigation or arbitration to the claim for monetary payment.

5.1.2. Action to Seek Subrogation

As noted, under Article 73 of the Contract Law, the exercise of subrogation right shall be made through an action in the court. In an action to seek subrogation, there are several procedural issues. The first issue is the court jurisdiction. Since the defendant in the subrogation action is the obligor’s debtor (or secondary obligor), the court of the place where the obligor’s debtor resides has the jurisdiction. The second issue is the pending lawsuit against the obligor. If the obligee has brought a lawsuit against the obligor, the subrogation action shall be suspended until the court decision is made for the said lawsuit against the obligor. The third issue concerns the obligor as the third party in the subrogation action. When the obligor is not listed as the third party to join the action for subrogation against the obligor’s debtor, the court may add the obligor as the third party. The forth issue involves the request for attachment on the property of the obligor’s debtor. In order to help ensure the enforcement of the court judgment against the obligor’s debtor, the obligee in the subrogation action may ask the court to attach the property of the obligor’s debtor. But when making such a request, the obligee is required to provide comparable amount of property guarantee.47

5.1.3. Defenses of the Obligor’s Debtor

In the litigation for subrogation, as the defendant, the obligor’s debtor may have different defenses against the obligee. One defense is to deny the obligee’s allegation about the obligor’s indolence in exercising the due creditor right of the

45See Wang Liming, supra note 25 at pp. 139–143.

46See Supreme People’s Court, supra note 40 art. 13.

47See id., articles 14, 15, 16, and 17.