Chapter Eleven	317

1. Third Party Receiving Performance

Under the Contract Law, the parties to a contract may agree to have the contract to be performed to a third party. In China, the third party who is designated to receive performance is specified to consist of two kinds of person. One is the person upon whom the benefits of the contract will be conveyed through performance, and the other one is the person who will not be benefited by the performance but to receive the performance on behalf of the obligee for the benefit of the obligee. In the former situation, the third party is called the beneficiary, but in the latter case, the third party is actually an agent of the obligee for the purpose of receiving performance. Because of this distinction, a third party, in the sense of Chinese law, does not necessarily mean a third party beneficiary only.

According to Article 64 of the Contract Law, where the parties agree that the obligor performs the obligations to a third party, and the obligor fails to perform the obligations to the third party or the performance does not meet the terms of the contract, the obligor shall be liable to the obligee for the breach of contract. Three points could be inferred from Article 64. First, it is permissible that a contract is performed to a third party upon the agreement of the parties. Second, a contract to be performed to a third party is enforceable, and failure to perform constitutes the breach of contract. Third, in case of breach, the obligee remains to have the claim against the obligor for remedies.

However, Article 64 appears to invite confusion. In one respect, it is unclear whether the third party referred to in Article 64 includes both the third party “beneficiary” and the third party “agent” or only one of the two. In the other respect, the uncertainty is whether a third party has the right to demand the performance that the third party is supposed to receive. Some view that Article 64 is about third party beneficiary because it states the situation where the contract is made for the benefit of a third party.3 Others insist that Article 64 actually refers only the third party “agent” who receives the performance for the benefit of the obligee. The reason underscoring this assertion is that the performance to a third party is based on the intent of the obligee and its purpose is to satisfy the contractual interest of the obligee.4

3See Jiang Ping et al, A detailed Explanation of the Contract Law of China, 54 (China University of Political Science & Law Press, 1999). See also Cui Yunling, A General View on Contract Law, 164–165 (China University of People’s Public Security Press, 2003).

4See Li Guoguang, Explanation and Application of the Contract Law, 282–283 (Xinhua Press, 1999).

318 Chinese Contract Law

It has been further argued that Article 64 should be interpreted to also include the situation of third party “agent” but whether the contract is made for the benefit of a third party depends on whether a right to the performance has been created for the third party. Supporters of this argument have offered a threetest guidance to help tell the third party “beneficiary” from the third party “agent”. The first test is the creation of independent right to the third party. If the parties agree that the third party shall be entitled to the performance of the contract and thereby the third party has an independent claim against the obligor for the performance, then the third party shall be deemed as beneficiary. If however, the third party is only to help accept the performance from the obligor for the obligee, the third party is an “agent”.

The second test focuses on the intention of the parties for the performance to a third party. When the performance is intended to be made to a third party and the right of the third party to the performance arises after formation of the contract, the third party is a beneficiary if the third party as such does not reject performance. But if the performance to a third party is only intended as a change of the “route” of the performance and the intended beneficiary is actually the obligee itself, the third party then is an “agent”.

The third test concerns the obligation to perform. In case where the obligor is only responsible to the obligee, not to the third party, for performance, the third party is not the beneficiary because he will not be benefited by the performance. The theory is that as a beneficiary, the third party should also be the person to whom the obligor is obligated to perform the contract.5

But, from a majority viewpoint, Article 64 seemingly intimates an inclusion of both the third party beneficiary and third party agent. On the one hand, Article 64 requires that the performance to a third party be made on the basis of agreement of the parties. The agreement as such may embrace an intent of the parties (obligee in particular) to convey the benefit of the performance on the third party (beneficiary) or may just obligate the obligor to make performance to the obligee through the third party (agent). On the other hand, the language of Article 64 stating that the obligor shall be liable to the obligee for breach of the contract does not necessarily means that the obligor is not liable for the performance to the third party. Their major argument is that Article 64 would become meaningless if it is interpreted to exclude the third party’s right to make a claim against the obligor in the event of breach.6

5 See Wang Liming, Study on Contract Law, 56–57 (People’s University Press, 2003).

6See Li Guoguang, supra note 4 at p. 283. But according to a different view, one of the legal effects of performance to a third party under Article 64 is that the third party has the right to ask the obligor to perform and such right is granted by, and exercised on behalf of, the obligee. See Jiang Ping, supra note 3 at p. 54.

Chapter Eleven	319

Therefore, under the majority opinion, the performance to a third party under Article 64 is in general believed to possess three distinctive features. First, the contract will not be performed to the obligee but to the third party because the obligee has agreed that the third party will be the recipient of the performance. Second, the third party acquires directly from the agreement of the parties the right to request the obligor for performance, and then both the obligee and the third party have the right to the performance. Third, the performance to a third party is not premised on the consent of the third party. In making the third party the recipient of the performance, the obligee does not have to obtain the third party’s consent in advance.7

In case that the third party is the beneficiary of the contract, it is commonly held in China that the third party may choose to accept or refuse the performance. If the third party accepts, its right to request the obligor to perform is vested, and the right is a derivative one of the contractual right of the obligee. When the third party refuses to accept the performance, the obligor is still liable to the obligee for the performance because as a result of the refusal, the right to the performance will automatically be regained by the obligee.

There are two questions related to the agreed performance to a third party. The first question concerns the additional expenses that may incur in association with the performance to a third party. Generally, the performance to a third party shall not increase financial burden of the obligor or increase the level of difficulty in performing as compared with the performance directly made to the obligee. A well accepted rule is that any additional costs for the performance to a third party shall be born by the obligee or by the third party if the third party agrees.

The second question is whether the obligor may still make the performance to the obligee after the third party agrees to accept the performance. Seemingly, the answer to this question would depend on the type of the third party who receives the performance. If the third party beneficiary is involved, the performance may not be made to the obligee because by the contract the performance is agreed to be made to the third party. In this sense, the performance made to the obligee may not release the obligor’s duty of performance to the third party, but the obligor may ask the obligee for redemption.8 If however, the third party is simply the agent of the obligee for the purpose of receiving the performance from the obligor, the obligor may feel free to still make the performance directly to the obligee.

7See Sun Lihai, A Practical Explanation to the Contract Law of China, 86–87 (Industry and Commerce Publishing House, 1999).

8 See Li Guoguang, supra note 4 at pp. 283–284.

320 Chinese Contract Law

2. Third Party Performing the Contract

A well-established and classical maxim in the law of contract is that a contract may only bind the parties, and therefore, the parties are prohibited from creating obligations on a third party. But there is an exception in the case where the third party agrees to assume the obligations of the contract between the parties. As long as the third party consents to performing the contract, the effect of the contract will be extended to it. Literally, the assumption of the contractual obligations by a third party may take different forms: third party performance, delegation or novation.

In the contract theory, a delegation occurs when a contracting party (obligordelegator) appoints a third party to render the performance to the obligee. By delegating its contractual duty, the obligor-delegator is transferring its obligations to the delegated third party (delegate) who will then assume the obligations and perform the contract although the obligor-delegator may still remain liable to the obligee.

A novation, as we have mentioned, is essentially a change of an original party to the contract to a new party with the consent of all parties involved. Typically, a novation will take place when the existing contract is replaced by a new one as a result of the change of party. In U.S. for example, a novation substitutes a new party and discharges one of the original parties to the contract by agreement of all parties.9 Therefore, in a novation, because of the change of a party, mostly the obligor, a new contractual relationship is to be established between an original contractual party and a third party.

The third party performance, by Chinese definition, is different from delegation or novation in that the third party performance involves no transfer of debt or change of party but only a substitute of obligor for the performance of the contract. The substitute of obligor means that a third party agrees to render the performance of the contract to the obligee on behalf of the obligor. The substitute normally occurs when there is an agreement and contractual relationship between the obligor and the third party.

To illustrate, assume that A and B enter a contract under which A shall make a payment of RMB 20,000 to B, and in the meantime, A and C have an existing lease where C pay rents to A. When A and B agree that the payment of RMB 20,000 shall be made by C to B, then in terms of performance of the contract between A and B, C will be A’s substitute. The reason why C agrees to make the payment is that the payment will offset the rents C will have to pay to A.

9 See Restatement of Contracts (2nd), § 280.

Chapter Eleven	321

The substitute as such may also be found when a third party volunteers to offer the performance. The voluntary performance could be made with or without the knowledge of the obligor. For example, a father learns that his son owes certain amount of money to A, and the father then pays A for the money owed without telling his son. Clearly, the father’s substitute in making the payment constitutes a voluntary performance with regard to the money his son owes to A, and the performance releases his son from being obligated to pay A.

But, there is a debate on the nature of voluntary performance by a third party. One view is that the third party voluntary performance creates a de facto donation. In the above case, for example, what the father did by paying his son’s debt is actually a gift he made to his son. The other view regards the third party voluntary performance as a conduct of netotiorum gestor (voluntary service).10

The Contract Law adopts the concept of the third party performance or the substitute of obligor, but limits the substitute to the one arising from the agreement of the parties. The recognition of the substitute of obligor in the Contract Law stands on the notion that to allow a third party to substitute an obligor for performance would help facilitate multiple business transactions that are related among each other. In this context, to speak strictly, the substitute of obligor is an assumption of the obligation as in the sense of delegation because, as noted, the delegation will results in the transfer of debts. Therefore, some scholars in China prefer to call the third party who is designated to performs the contract as the “entrusted obligor” in order to differentiate it from the delegate.11

Under Article 65 of the Contract Law, where the parties agree that a third party performs the contract obligations to the obligee and if the third party fails to perform or the performance does not satisfy the terms of the contract, the obligor shall be liable to the obligee for the breach of contract. The provision of Article 65 indicates a number of factors essential to the third party performance. First, the third party performance is based on the consent of the parties to the contract. Second, the substitute of obligor does not need an agreement between the substitute and the obligee or between the substitute and the obligor though in many cases the substitute and obligor have some kind of relationship. Third, the third party, when making the performance, does not acquire the status of a party to the contract. Forth, the third party may refuse to perform, and the obligee has no claim against the third party. And fifth, the obligor remains liable to the obligee until its obligations are fully performed.

10See Wang Liming, supra note 5 at p. 63.

11See Chu Yunling, supra note 3 at pp. 166–167.