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of the Contact Law, a party advancing to offset the debts shall notify the other party, and notice shall take effect upon arrival at the other party. In addition, Article 99 provides that the offset may not be accompanied by any conditions or time limits. Accordingly, the Article 99 offset is a unilateral conduct of the initiating party and becomes effective when the notice of the offset is received. The preclusion of conditions and time limits derives from the unilateral character of the offset because the manifestation of the intent to offset need to be certain and shall be operative as long as the legal requirements are met.

The offset may also be made by the agreement of the parties. According to Article 100 of the Contract Law, where the parties to a contract have mutual debts but the type and character of the debts are different, the debts may be offset against each other if the parties reach a consensus through negotiation. It can be easily seen from Article 100 that the requirements for the consensual offset are less restrictive than those of statutory offset. In consensual offset, the debt obligations in questions may differ in types and characters. In addition, the maturity is not an element in consensual offset, and thus a debt obligation that is due may be offset against the one that is not due, or two undue debt obligations may also be offset against each other under the agreement of the parties.

In practice, the consensual offset may take different forms. The parties may offset their mutual debt obligations through an agreement that is separated from their contract. The parties may also make a provision or clause in their contract that set forth terms or conditions under which their mutual debts may be offset. Of course, the parties may through their contract prohibit consensual offset of mutual obligations. In consensual offset, the parties often set forth procedures and accounting measures for conducting the offset. In sales contracts for example, it is quite common that the parties agree to periodically offset their mutual debt obligations (delivery of goods and payments), and after the offset, whoever still owes a fraction of debts to the other party need only satisfy the fractional debts.

2.3. Termination by Deposit

In the context of the Contract Law, deposit means to submit the unperformed contractual obligations to certain authorities due to the reasons that are uncontrollable from the perspective of the obligor, and as a result the obligor’s obligation to perform is then discharged. Since deposit has the legal consequence of terminating a contract, it only applies where it is difficult for the obligor to perform. The primary purpose of the deposit is to protect the legitimate interest of the obligor because without deposit the obligor may always be and remain liable for the unperformed obligations even though the performance is extremely difficult.

The deposit thus is designed to help release the obligor from being liable for performance if there is no way for the obligor to perform. Note that the

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“difficulty” here refers to the situation where the obligor is capable and willing to perform, but for certain reasons the performance could not be conducted without the obligor’s fault. The underlying rationale for having the deposit is to help keep the interests of the parties to the contract fairly balanced.

To make a deposit of contractual obligations, there must present legal ground mandated by the law. In China, the deposit rule was officially adopted first by the Supreme People’s Court in 1988 when the Supreme People’s Court issued its “Opinions (Provisional) on Several Matters Concerning Application of the General Principles of the Civil Law”. According to the Supreme People’s Court, if the obligee, without good reasons, refuses to accept the performance of the obligor, the obligor may submit the subject matter of the performance to relevant authority for deposit, and after the deposit the obligations of the obligor shall be deemed as having been performed.42 There the Supreme People’s Court clearly granted the deposit an effect to terminate a contract, and made the obligee’s unjustified refusal of obligor’s performance a legal ground for deposit.

The Contract Law adopts the deposit rule in the way more appealing to the obligor. Pursuant to Article 101 of the Contract Law, under any of the following circumstances, if the debt obligations are difficult to be performed, the obligor may have the subject matter of performance deposited: (a) the obligee refuses to accept the performance without justified reasons; (b) the obligee is missing; (c) the obligee is deceased and the inheritor is not yet determined or the obligee lost his civil conduct capacity and the guardian is not yet ascertained, or (d) other situations as provided by law.43 All above circumstances state a common ground, that is, the difficulty of performance is caused by obligee, for which the obligor shall not be held liable. After the deposit, the contract is terminated.

The obligee’s refusal to accept performance without justified reason normally involves the situation where the obligee should, and is able to, accept the performance, but refuses to do so. But the prerequisite for the deposit is that the obligor is making the performance exactly according to the terms and conditions of the contract. If the obligee has the right to refuse to accept the performance, e.g. the performance that is improper or incomplete, the deposit rule will not apply. It should be pointed out that under the Contract Law, refusal to accept performance implies a delay in acceptance. In the early draft of the Contract Law, it actually was termed as “delay in acceptance”. The

42See, Supreme People’s Court, “Opinions (Provisional) on Several Matters Concerning Application of the General Principles of the Civil Law” 1988, art. 104.

43See the Contract Law, art. 101.

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term in the draft was later changed to “refusal to accept performance without justified reason” when the Contract Law was adopted.44 As some scholars explained, refusal to accept performance without justified reason will necessarily lead to a delay in acceptance of performance, or the inevitable outcome of refusal to accept would be the delay in acceptance.45

A question that has been raised concerning the refusal to accept performance is whether the obligor may ask for deposit if the obligee is anticipated to repudiate the contract (namely to refuse to accept the obligor’s performance). A commonly accepted position is that deposit shall not be applied on the ground of anticipatory repudiation. The major reason is that deposit becomes relevant only when the performance is due because the main theme of deposit is to help obligor overcome the difficult in performance caused by obligee.46 Therefore, even if the obligee expressly state not to accept the performance before the performance becomes due, the obligor’s right to make the deposit will not arise until the due day for the performance passes.

The circumstance where the obligee is missing includes the lack of information about the identity and address of the obligee, out of contact with the obligee, or disappearance of the obligee. Three related issues are important to determine whether there is a missing obligee so that that a deposit by the obligor would be justified. The firs issue concerns the agent (including trustee or estate administrator) of the obligee. If the obligee itself is completely out of touch, but its agent is still available, the performance then may be made to its agent and therefore no request for deposit shall be granted. In this case, the performance would be regarded “not difficult”.

The second issue is the cause of missing obligee. The obligor is not entitled to requesting the deposit if the obligee is missing as a result of the conduct of the obligor or his employees. For example, if the missing of the obligee is caused by the threat imposed on the obligee by the obligor or his employee, no deposit would be allowed.47

44See Sun Lihai, Selection of Legislative Materials of the Contract Law of China, 57 (Law Press, 1999).

45See Dong Ling, supra note 7 at p. 237.

46See Wang Liming, supra note 1 at p. 336.

47As discussed in Chapter VIII, according to 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 the subject matter of the contract to relative authority for deposit. It is clear under Article 70 that the reason causing the whereabouts of the obligee unknown must be something for which the obligee shall be blamed.

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The third issue is legal declaration of the missing obligee. If the obligee is deemed missing, there are two different views on the legal process by which the deposit should be granted. One view is that the status of missing person must be determined through a legal proceeding and declared by the court. Therefore, in the case where the obligee is missing, the deposit shall not be triggered until the obligee is declared to be missing by the court. The other view seems less restrictive. It argues that the deposit is based on the difficulty in performance, and thus as long as it can be proved that there is no way to find the obligee, the obligor shall have the right to request for the deposit regardless of the court declaration of the missing obligee.

A harder question is the time for the obligor to make the deposit. The main point of the question is how long the obligor would have to wait before requesting for the deposit when the whereabouts of the obligee is unknown. The Contract Law contains no indication on the matter of time. But if the determination of missing person must be made by the court, there is a statutory requirement of two years under the Civil Code. Article 20 of the Civil Code provides that if a citizen’s whereabouts have been unknown for two years, an interested person may apply to a people’s court for a declaration of the citizen as missing. Actually, since many seem to believe that the deposit is not subject to the judicial determination of the missing obligee, the twoyear requirement does not apply. What appears to be applicable then is the “reasonable period of time” during or after the performance period.

A deposit may also be justified if the successor or guardian could not be ascertained when the obligee is died or has lost capacity for civil conduct. To allow a deposit in this situation is based on the notion that the death or loss of capacity for civil conduct does not necessarily lead to the extinguishment of debt obligations. It is self-evident that upon the death of the obligee, the debt obligations shall be performed to the obligee’s heir or appointed successor, and in case of the obligee’s lack of civil conduct capacity, the performance shall be made to its guardian. However, if the successor could not be identified after the death of the obligee or the guardian could not be determined after the obligee lost its civil conduct capacity, the obligor may request for a deposit in order to have the debt obligations timely discharged.

The uncertainty of the heirs (successors) of the deceased obligee may happen in a couple of situations. One situation is that after the death of the obligee, there appear several successors who claim to be entitled to the creditor right of the deceased obligee, and then the obligor has the difficulty to figure out to whom the performance shall be made. The other situation concerns the multiple deaths of the obligee and its heirs (or successors), in which there is no feasible way for the obligor to determine who would be the right person to receive the performance. Normally, the multiple deaths will be followed by

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a judicial presumption of the sequence of the death in order to identify the eligible and legitimate successor (s).48

In many cases, there is a difficulty in the determination of guardian for an incapable obligee. On the one hand, the range of person who is eligible to become the guardian is very broad. According to Article 17 of the Civil Code, those who may serve as a guardian for mentally ill person without capacity for civil conduct include (a) spouse, (b) parents, (c) adult child, (d) other close relatives, or (e) other related relatives or qualified friends. In practice, there always exist disputes over who should be the guardian.49 On the other hand, if there is no legal (statutory) guardian or there is a dispute over the guardianship, a guardian should be appointed. The appointment of the guardian has to go through certain legal process, which would take time.50

The deposit in any other circumstances must be authorized by the law. The most notable example is the Guaranty Law where a number of provisions permit deposit. For instance, under Article 49 of the Guaranty Law, the proceeds obtained by the mortgager through transfer of the mortgaged property shall first be used to liquidate the claim secured by the mortgage or otherwise the proceeds shall be deposited with a third party agreed upon by the mortgagee. Another example is the Rules of Notarization of Deposit adopted by the Ministry of Justice on June 2, 1995. One of the situations where a deposit may be notarized under the Rules is that the parties agree in their contract to make payment in the form of deposit.51

48In its Opinions in the Matters Concerning Application of the Succession Law of China, the Supreme People’s Court offered a special guidance in determination of successor in the multiple deaths. Article 2 of the Opinions provides: “when several people who have inherent relationship to each other die in the same incident, if the time of the death one after another could not be determined, the person who has no heirs should be assumed to have died first; if the deceased each has heirs and each is in the different generation of the family, the elder member of the family should be assumed to have died first; If the decedents are all in the same generation, they should be assumed to have died simultaneously, and no succession will take place among them, but their each heirs will inherit them respectively.”

49As it has been observed from the courts practice that the disputes over the appointment of guardian include the following: (1) disputes among the deceased’s relatives at the different levels of family relation who argue against each other for the guardian, (2) disputes among the relatives in the different levels of family relations who each tries to shift the guardianship responsibility onto the other, and (3) disputes among the family members either in the situation where all want to become the guardian or in the situation where all refuse to become the guardian. See Li Guoguang, supra note 30 at pp. 392–393.

50Under Article 17 of the Civil Code, in case of a dispute over guardianship, the work unit of the incapable person or the neighborhood or village committee of his residence shall appoint a guardian among its close relatives. If disagreement over the appointment leads to a lawsuit, the people’s court shall make a ruling.

51This practice seems like a creation of escrow account for the purpose of payment.

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Still, there are certain questions concerning the deposit. A significant one is what could be deposited. The terminology used in the Contract Law is “the subject matter of the obligations”, which seems ambiguous. A scholarly interpretation is that the subject matter of obligations in the context of deposit mainly includes monetary items and other things suitable for deposit. Under the Rules of Notarization of Deposit, the items that may be deposited are currency, negotiable instrument, valuable notes, bill of lading, certificate of rights, precious articles, collaterals (money) or substitutes, and other items appropriate for deposit. The items that are regarded not suitable for deposit mainly involve those that are perishable or fast depreciable. In addition, the deposit will also be deemed unsuitable if the costs for the deposit are too high. In accordance with Article 101 of the Contract Law, if the subject matter is not fit for deposit or the deposit expenses are excessively high, the obligor may auction or sell the “thing” concerned and deposit the proceeds obtained therefrom.52

Another question is the authority with which the deposit shall be made. The Contract Law does not define the authority, but under the Rules of Notarization of Deposit the notary public office is designated as the authority to accept deposit. Article 2 of the Rules provides that the deposit notarization is the administrative activity to take care of or take custody of the subject matter of the debts or guarantees (including substitutes) submitted by the obligor or guarantor for the benefit of the obligee, and to return them to the obligee when required conditions are met. Many in China believe that the only authority for the deposit is the notary public office. Some, however, argue that the deposit authority shall also include those appointed by the court, such as bank, trust institution, as well as warehouse.

To make the deposit, the obligor would need to make request first with all supporting documents, and when approved by the deposit authority, the obligor shall submit what would be deposited. After the submission the obligor shall be given a certificate of deposit. The certificate will have an evidential function that helps release the obligor from its debt obligations. However, in order to make the deposit effective, the obligor must meet the requirement of notice. According to Article 102 of the Contract Law, after the subject matter is deposited, the obligor shall, except for the missing obligee,

52A dispute over the object of deposit is whether real property could be deposited. One view is that real property may not be deposited because the immovable nature of the real property. When oblilgee refuses to accept the real property, the obligor may not request for deposit but may abandon it. The opposite view argues that the purpose of deposit is to end the debts relation between obligee and obligor, and thus the deposit shall not be denied as to real property because the real property could not be moved, but could be sealed for deposit purpose.