Nonperformance of Contractual Duty (Breach of Contract) Meaning and Requisites of Nonperformance Type of Nonperformance Effect of Nonperformance Impossibility

Meaning and Requisites of Nonperformance Existence of a Contractual Duty Existence of a Contractual Duty There is a valid contract or an obligation. There is a valid contract or an obligation. Existence of Imputability Existence of Imputability Intent Intent Negligence Negligence Gross negligence; Slight negligence Gross negligence; Slight negligence Occurrence of Hurdle to Perform the obligation Occurrence of Hurdle to Perform the obligation Prestation has been tendered on the due day Prestation has been tendered on the due day Imperfect performance Imperfect performance Nothing has been tendered on the due day Nothing has been tendered on the due day Impossibility of performance Impossibility of performance Delay in performance Delay in performance Anticipatory Repudiation Anticipatory Repudiation

Imputability Intent Intent Negligence Negligence Gross negligence; Gross negligence; Slight negligence Slight negligence

Burden of Proof to the Defaulting Party’s Fault The delict provided in article 184 first paragraph of Civil Code requires “intentional or negligently” wrongful act damaged the rights of another as a requisite element. Thus, the claimant who claims damage from the other person who is liable for wrongful act shall bear the burden of proof for intent of negligent element. In non-performance case, the reason for assuming liability for damage by the obligor is the existence of imputable fact to the obligor. Therefore, even though the obligee can prove the existence of contractual relationship and suffering damages therefrom, then he is entitled to claim the debtor to assume the liability for non- performance. If the obligor defense that the non-performance was caused by the reason that can not be imputable to the obligor, the burden of proof shall be on the obligor’s side. (Taiwan Supreme Court Civil Judgment Tai Shang No. 267 (1993)). The delict provided in article 184 first paragraph of Civil Code requires “intentional or negligently” wrongful act damaged the rights of another as a requisite element. Thus, the claimant who claims damage from the other person who is liable for wrongful act shall bear the burden of proof for intent of negligent element. In non-performance case, the reason for assuming liability for damage by the obligor is the existence of imputable fact to the obligor. Therefore, even though the obligee can prove the existence of contractual relationship and suffering damages therefrom, then he is entitled to claim the debtor to assume the liability for non- performance. If the obligor defense that the non-performance was caused by the reason that can not be imputable to the obligor, the burden of proof shall be on the obligor’s side. (Taiwan Supreme Court Civil Judgment Tai Shang No. 267 (1993)).

PRC CL Article 107 Types of Liabilities for Breach If a party fails to perform its obligations under a contract, or rendered non-conforming performance, it shall bear the liabilities for breach of contract by specific performance, cure of non-conforming performance or payment of damages, etc. Article 107 Types of Liabilities for Breach If a party fails to perform its obligations under a contract, or rendered non-conforming performance, it shall bear the liabilities for breach of contract by specific performance, cure of non-conforming performance or payment of damages, etc. Article 108 Anticipatory Breach Where one party expressly states or indicates by its conduct that it will not perform its obligations under a contract, the other party may hold it liable for breach of contract before the time of performance. Article 108 Anticipatory Breach Where one party expressly states or indicates by its conduct that it will not perform its obligations under a contract, the other party may hold it liable for breach of contract before the time of performance.

PRC CL Article 109 Monetary Specific Performance If a party fails to pay the price or remuneration, the other party may require payment thereof. Article 109 Monetary Specific Performance If a party fails to pay the price or remuneration, the other party may require payment thereof. Article 110 Non-monetary Specific Performance; Exceptions Where a party fails to perform, or rendered non-conforming performance of, a non-monetary obligation, the other party may require performance, except where: (i) performance is impossible in law or in fact; (ii) the subject matter of the obligation does not lend itself to enforcement by specific performance or the cost of performance is excessive; (iii) the obligee does not require performance within a reasonable time. Article 110 Non-monetary Specific Performance; Exceptions Where a party fails to perform, or rendered non-conforming performance of, a non-monetary obligation, the other party may require performance, except where: (i) performance is impossible in law or in fact; (ii) the subject matter of the obligation does not lend itself to enforcement by specific performance or the cost of performance is excessive; (iii) the obligee does not require performance within a reasonable time.

PRC CL Article 111 Liabilities in Case of Quality Non- compliance Where a performance does not meet the prescribed quality requirements, the breaching party shall be liable for breach in accordance with the contract. Where the liabilities for breach were not prescribed or clearly prescribed, and cannot be determined in accordance with Article 61 hereof, the aggrieved party may, by reasonable election in light of the nature of the subject matter and the degree of loss, require the other party to assume liabilities for breach by way of repair, replacement, remaking, acceptance of returned goods, or reduction in price or remuneration, etc. Article 111 Liabilities in Case of Quality Non- compliance Where a performance does not meet the prescribed quality requirements, the breaching party shall be liable for breach in accordance with the contract. Where the liabilities for breach were not prescribed or clearly prescribed, and cannot be determined in accordance with Article 61 hereof, the aggrieved party may, by reasonable election in light of the nature of the subject matter and the degree of loss, require the other party to assume liabilities for breach by way of repair, replacement, remaking, acceptance of returned goods, or reduction in price or remuneration, etc.

PRC CL Article 112 Liability for Damages Notwithstanding Subsequent Performance or Cure of Non-conforming Performance Where a party failed to perform or rendered non-conforming performance, if notwithstanding its subsequent performance or cure of non- conforming performance, the other party has sustained other loss, the breaching party shall pay damages. Article 112 Liability for Damages Notwithstanding Subsequent Performance or Cure of Non-conforming Performance Where a party failed to perform or rendered non-conforming performance, if notwithstanding its subsequent performance or cure of non- conforming performance, the other party has sustained other loss, the breaching party shall pay damages.

PRC CL Article 117 Force Majeure A party who was unable to perform a contract due to force majeure is exempted from liability in part or in whole in light of the impact of the event of force majeure, except otherwise provided by law. Where an event of force majeure occurred after the party's delay in performance, it is not exempted from liability. For purposes of this Law, force majeure means any objective circumstance which is unforeseeable, unavoidable and insurmountable. Article 117 Force Majeure A party who was unable to perform a contract due to force majeure is exempted from liability in part or in whole in light of the impact of the event of force majeure, except otherwise provided by law. Where an event of force majeure occurred after the party's delay in performance, it is not exempted from liability. For purposes of this Law, force majeure means any objective circumstance which is unforeseeable, unavoidable and insurmountable. Article 118 Duty to Notify in Case of Force Majeure If a party is unable to perform a contract due to force majeure, it shall timely notify the other party so as to mitigate the loss that may be caused to the Article 118 Duty to Notify in Case of Force Majeure If a party is unable to perform a contract due to force majeure, it shall timely notify the other party so as to mitigate the loss that may be caused to the

Type of Nonperformance Imperfect performance Imperfect performance Impossibility of performance Impossibility of performance Delay in performance Delay in performance Anticipatory Repudiation Anticipatory Repudiation

Effect of Nonperformance Specific performance Specific performance Damage Damage Recovery Recovery Pecuniary damages Pecuniary damages Liquidated damage Liquidated damage Forfeiture deposit (earnest money) Forfeiture deposit (earnest money)

Impossibility Classification of Impossibility Classification of Impossibility Initial Impossibility (at the time of the conclusion of the contract), Subsequent Impossibility Initial Impossibility (at the time of the conclusion of the contract), Subsequent Impossibility Objective Impossibility, Subjective Impossibility Objective Impossibility, Subjective Impossibility Impossibility in Fact, Impossibility in Law Impossibility in Fact, Impossibility in Law Permanent Impossibility, temporary Impossibility Permanent Impossibility, temporary Impossibility Total Impossibility, Partial Impossibility Total Impossibility, Partial Impossibility

Case Study 1 X entered into a contract to sell a painting to Y on Feb 10, 2006 and promised to deliver the painting on Feb 14, X entered into a contract to sell a painting to Y on Feb 10, 2006 and promised to deliver the painting on Feb 14, If the painting was burned up on Feb 8, what relationship between X and Y? If the painting was burned up on Feb 8, what relationship between X and Y? If the painting was stolen by Z on Feb 8, what relationship between X and Y? If the painting was stolen by Z on Feb 8, what relationship between X and Y? If the painting was burned up on Feb 13, what relationship between X and Y? If the painting was burned up on Feb 13, what relationship between X and Y? If the painting was stolen by Z on Feb 13, what relationship between X and Y? If the painting was stolen by Z on Feb 13, what relationship between X and Y?

Initial Objective Impossibility If the prestation of a contract is impossible, it is void. However, if the impossibility can be removed and if the parties, at the time when the contract was constituted, intended to have it performed after the removal of the impossibility, the contract is still valid. (RCC 246) If the prestation of a contract is impossible, it is void. However, if the impossibility can be removed and if the parties, at the time when the contract was constituted, intended to have it performed after the removal of the impossibility, the contract is still valid. (RCC 246) When a contract is void on account of the impossibility of the performance, the party who at the time of constituting the contract knew or might know the impossibility is responsible for the damage caused to the other party who, without his own negligence, believed in the validity of the contract. the several prestations subject to a choice is impossible. (RCC 247I) When a contract is void on account of the impossibility of the performance, the party who at the time of constituting the contract knew or might know the impossibility is responsible for the damage caused to the other party who, without his own negligence, believed in the validity of the contract. the several prestations subject to a choice is impossible. (RCC 247I)

ROC Civil Code Article 246 Article 246 If the prestation of a contract is impossible, it is void. However, if the impossibility can be removed and if the parties, at the time when the contract was constituted, intended to have it performed after the removal of the impossibility, the contract is still valid. If the contract is subject to a suspenseful condition or to a time of commencement, and if the impossibility has been removed prior to the fulfillment of the condition or the arrival of the time, the contract is valid. If the prestation of a contract is impossible, it is void. However, if the impossibility can be removed and if the parties, at the time when the contract was constituted, intended to have it performed after the removal of the impossibility, the contract is still valid. If the contract is subject to a suspenseful condition or to a time of commencement, and if the impossibility has been removed prior to the fulfillment of the condition or the arrival of the time, the contract is valid. Article 247 Article 247 When a contract is void on account of the impossibility of the performance, the party who at the time of constituting the contract knew or might know the impossibility is responsible for the injury caused to the other party who, without his own negligence, believed in the validity of the contract. The provision of the preceding paragraph shall be mutatis mutandis applied if the prestation is partially impossible and the contract is valid in respect to the possible part, or if one of the several prestations subject to a choice is impossible. The claims for the injury in the preceding two paragraphs shall be extinguished by prescription if not exercised within two years. When a contract is void on account of the impossibility of the performance, the party who at the time of constituting the contract knew or might know the impossibility is responsible for the injury caused to the other party who, without his own negligence, believed in the validity of the contract. The provision of the preceding paragraph shall be mutatis mutandis applied if the prestation is partially impossible and the contract is valid in respect to the possible part, or if one of the several prestations subject to a choice is impossible. The claims for the injury in the preceding two paragraphs shall be extinguished by prescription if not exercised within two years.

Japan Civil Code The obligor is conclusively discharged from his duty and although the Japan Civil Code does not so provide, impossibility operates as grounds for extinction of an obligation. The obligor is conclusively discharged from his duty and although the Japan Civil Code does not so provide, impossibility operates as grounds for extinction of an obligation.

PRC Contract Law PRC CL contains no rule on contracts involving initial impossibility. PRC CL contains no rule on contracts involving initial impossibility. Following the rule of UNIDROIT art. 3.3(1) Following the rule of UNIDROIT art. 3.3(1) Article 3.3 (Initial impossibility) (1) The mere fact that at the time of the conclusion of the contract the performance of the obligation assumed was impossible does not affect the validity of the contract. (2) The mere fact that at the time of the conclusion of the contract a party was not entitled to dispose of the assets to which the contract relates does not affect the validity of the contract. Article 3.3 (Initial impossibility) (1) The mere fact that at the time of the conclusion of the contract the performance of the obligation assumed was impossible does not affect the validity of the contract. (2) The mere fact that at the time of the conclusion of the contract a party was not entitled to dispose of the assets to which the contract relates does not affect the validity of the contract. A contracts involving initial impossibility will be valid and the party whose performance is impossible will be liable for non-performance. A contracts involving initial impossibility will be valid and the party whose performance is impossible will be liable for non-performance.

Initial Subjective Impossibility The rule in Article 246 followed the German Civil Code Article 306. the “Unmoglichkeit” means “objective impossibility.” The rule in Article 246 followed the German Civil Code Article 306. the “Unmoglichkeit” means “objective impossibility.” Subjective impossibility is a gap of law. Subjective impossibility is a gap of law. Analogue to subsequent impossibility. Analogue to subsequent impossibility.

Case Study 2 A lent his laptop to B, B sold to C without A’s assent. C did not know B has no right to sell this laptop. Upon A found his laptop in C’s office, A claimed it back. What result will be? A lent his laptop to B, B sold to C without A’s assent. C did not know B has no right to sell this laptop. Upon A found his laptop in C’s office, A claimed it back. What result will be?

A B C Contract for transference of ownership (alienation) (118, indefinitely valid) Loan for use: valid, §464,470) Sale of goods: valid, §345,348,367) If C not in good faith: A may claim it back under §767. If C in good faith: C gains its ownership under §948, 801 A may claim damages based on torts liability (§184) or liability due to breaching contractual duty(§470, 231); or rescind contract, then claim restitution (§254,259,179) Delivery

Subsequent Impossibility Including objective and subjective Impossibility Including objective and subjective Impossibility An issue regarding breach of contract An issue regarding breach of contract Effects can be classified as follows: Effects can be classified as follows: The impossibility can not be imputable to either of the parties The impossibility can not be imputable to either of the parties The debtor will be released from his obligation to perform (RCC 225) The debtor will be released from his obligation to perform (RCC 225) The other party shall be released from his obligation to perform the counter-prestation. If the impossibility is only partial, the counter-prestation shall be reduced proportionately. (RCC 266) The other party shall be released from his obligation to perform the counter-prestation. If the impossibility is only partial, the counter-prestation shall be reduced proportionately. (RCC 266) The impossibility can be imputable to the obligor The impossibility can be imputable to the obligor If the performance becomes impossible by reason of a circumstance to which the debtor is imputed, the creditor may claim compensation for any injury arising therefrom. (RCC 226) If the performance becomes impossible by reason of a circumstance to which the debtor is imputed, the creditor may claim compensation for any injury arising therefrom. (RCC 226) In cases provided by Article 226, the creditor may rescind the contract. (RCC 256) In cases provided by Article 226, the creditor may rescind the contract. (RCC 256) The impossibility can be imputable to the obligee The impossibility can be imputable to the obligee The debtor will be released from his obligation to perform (RCC 225) The debtor will be released from his obligation to perform (RCC 225) If one of the parties is imputed to the impossibility of the other party’s performance, the later may claim for the counter-prestation, but the interests saved or ought to be saved arising from the release of the performance shall be deducted from the counter- prestation claimed. (RCC 267) If one of the parties is imputed to the impossibility of the other party’s performance, the later may claim for the counter-prestation, but the interests saved or ought to be saved arising from the release of the performance shall be deducted from the counter- prestation claimed. (RCC 267) The impossibility can be imputable to the both parties. The impossibility can be imputable to the both parties. Applied the rule in impossibility imputable to the obligor then measure the extent of fault of obligee to decide the extent of compensation from obligor, although the ROC Civil Code does not so provide. Applied the rule in impossibility imputable to the obligor then measure the extent of fault of obligee to decide the extent of compensation from obligor, although the ROC Civil Code does not so provide.

ROC Civil Code Article 225 Article 225 The debtor will be released from his obligation to perform if the performance becomes impossible by reason of a circumstance to which he is not imputed. If the debtor is entitled to claim compensation for the injury against a third party in consequence of the impossibility of the performance under the preceding paragraph, the creditor may claim against the debtor for the transfer of the claim for the injury, or for the delivery of the compensation he has received. The debtor will be released from his obligation to perform if the performance becomes impossible by reason of a circumstance to which he is not imputed. If the debtor is entitled to claim compensation for the injury against a third party in consequence of the impossibility of the performance under the preceding paragraph, the creditor may claim against the debtor for the transfer of the claim for the injury, or for the delivery of the compensation he has received. Article 226 Article 226 If the performance becomes impossible by reason of a circumstance to which the debtor is imputed, the creditor may claim compensation for any injury arising therefrom. In the case specified in the preceding paragraph, if one part of the performance becomes impossible and the remaining part, if performed, will be of no interests to the creditor, the creditor may refuse the performance of the remaining part and claim compensation for the injury arising from complete non- performance. If the performance becomes impossible by reason of a circumstance to which the debtor is imputed, the creditor may claim compensation for any injury arising therefrom. In the case specified in the preceding paragraph, if one part of the performance becomes impossible and the remaining part, if performed, will be of no interests to the creditor, the creditor may refuse the performance of the remaining part and claim compensation for the injury arising from complete non- performance. Article 227 Article 227 If a debtor incompletely performs his obligation by reason of a circumstance to which the debtor is imputed, the creditor may execute his right according to the provisions of the default or the impossibility of the performance. In addition to the injury arising from the incomplete performance in the preceding paragraph, the creditor may claim compensation for other injuries arising therefrom, if any. If a debtor incompletely performs his obligation by reason of a circumstance to which the debtor is imputed, the creditor may execute his right according to the provisions of the default or the impossibility of the performance. In addition to the injury arising from the incomplete performance in the preceding paragraph, the creditor may claim compensation for other injuries arising therefrom, if any.

ROC Civil Code Article 266 Article 266 If none of the parties is imputed to the impossibility of one party’s performance, the other party shall be released from his obligation to perform the counter-prestation. If the impossibility is only partial, the counter-prestation shall be reduced proportionately. In the case provided in the preceding paragraph, if the counter- prestation has been wholly or partially performed, it may be claimed for the reimbursement in accordance with the provisions concerning Unjust Enrichment. If none of the parties is imputed to the impossibility of one party’s performance, the other party shall be released from his obligation to perform the counter-prestation. If the impossibility is only partial, the counter-prestation shall be reduced proportionately. In the case provided in the preceding paragraph, if the counter- prestation has been wholly or partially performed, it may be claimed for the reimbursement in accordance with the provisions concerning Unjust Enrichment. Article 267 Article 267 If one of the parties is imputed to the impossibility of the other party’s performance, the later may claim for the counter-prestation, but the interests saved or ought to be saved arising from the release of the performance shall be deducted from the counter-prestation claimed. If one of the parties is imputed to the impossibility of the other party’s performance, the later may claim for the counter-prestation, but the interests saved or ought to be saved arising from the release of the performance shall be deducted from the counter-prestation claimed.

ROC Civil Code Article 373 Article 373 The profits and dangers of the object sold pass to the buyer at the time of delivery, unless otherwise provided by contract. The profits and dangers of the object sold pass to the buyer at the time of delivery, unless otherwise provided by contract.

PRC CL The contract law does not provide for breach due to impossibility of performance as a special category and so the general rules on contractual liability apply to this type of breach. The contract law does not provide for breach due to impossibility of performance as a special category and so the general rules on contractual liability apply to this type of breach. General justifications for non-performance, such as force majeure, assumption of risk and contributory conduct, may also apply to breach due to impossibility of performance so that the defaulting party’s liability may be exempted or diminished. General justifications for non-performance, such as force majeure, assumption of risk and contributory conduct, may also apply to breach due to impossibility of performance so that the defaulting party’s liability may be exempted or diminished. The specific performance shall be denied. (PRCCL 110(1)) The specific performance shall be denied. (PRCCL 110(1))

PRC CL 110 Article 110 -monetary Specific Performance; Exceptions Article 110 -monetary Specific Performance; Exceptions Where a party fails to perform, or rendered non- conforming performance of, a non-monetary obligation, the other party may require performance, except where: Where a party fails to perform, or rendered non- conforming performance of, a non-monetary obligation, the other party may require performance, except where: (i) performance is impossible in law or in fact; (i) performance is impossible in law or in fact; (ii) the subject matter of the obligation does not lend itself to enforcement by specific performance or the cost of performance is excessive; (ii) the subject matter of the obligation does not lend itself to enforcement by specific performance or the cost of performance is excessive; (iii) the obligee does not require performance within a reasonable time. (iii) the obligee does not require performance within a reasonable time.

PRC CL Article 117 Force Majeure Article 117 Force Majeure A party who was unable to perform a contract due to force majeure is exempted from liability in part or in whole in light of the impact of the event of force majeure, except otherwise provided by law. Where an event of force majeure occurred after the party's delay in performance, it is not exempted from liability. A party who was unable to perform a contract due to force majeure is exempted from liability in part or in whole in light of the impact of the event of force majeure, except otherwise provided by law. Where an event of force majeure occurred after the party's delay in performance, it is not exempted from liability. For purposes of this Law, force majeure means any objective circumstance which is unforeseeable, unavoidable and insurmountable. For purposes of this Law, force majeure means any objective circumstance which is unforeseeable, unavoidable and insurmountable. Article 118 Duty to Notify in Case of Force Majeure Article 118 Duty to Notify in Case of Force Majeure If a party is unable to perform a contract due to force majeure, it shall timely notify the other party so as to mitigate the loss that may be caused to the other party, and shall provide proof of force majeure within a reasonable time. If a party is unable to perform a contract due to force majeure, it shall timely notify the other party so as to mitigate the loss that may be caused to the other party, and shall provide proof of force majeure within a reasonable time.

PRC CL Article 119 Non-Breaching Party's Duty to Mitigate Loss in Case of Breach Article 119 Non-Breaching Party's Duty to Mitigate Loss in Case of Breach Where a party breached the contract, the other party shall take the appropriate measures to prevent further loss; where the other party sustained further loss due to its failure to take the appropriate measures, it may not claim damages for such further loss. Any reasonable expense incurred by the other party in preventing further loss shall be borne by the breaching party. Where a party breached the contract, the other party shall take the appropriate measures to prevent further loss; where the other party sustained further loss due to its failure to take the appropriate measures, it may not claim damages for such further loss. Any reasonable expense incurred by the other party in preventing further loss shall be borne by the breaching party. Article 120 Bilateral Breach Article 120 Bilateral Breach In case of bilateral breach, the parties shall assume their respective liabilities accordingly. In case of bilateral breach, the parties shall assume their respective liabilities accordingly.

Initial Impossibility Subsequent Impossibility Objective Impossibility Contract void (ROC, JP) Contract valid (PRC) Valid Contract Subjective Impossibility Valid Contract

CISG 79 (1) A party is not liable for a failure to perform any of his obligations if he proves that the failure was due to an impediment beyond his control and that he could not reasonably be expected to have taken the impediment into account at the time of the conclusion of the contract or to have avoided or overcome it or its consequences. (1) A party is not liable for a failure to perform any of his obligations if he proves that the failure was due to an impediment beyond his control and that he could not reasonably be expected to have taken the impediment into account at the time of the conclusion of the contract or to have avoided or overcome it or its consequences. (2) If the party's failure is due to the failure by a third person whom he has engaged to perform the whole or a part of the contract, that party is exempt from liability only if: (2) If the party's failure is due to the failure by a third person whom he has engaged to perform the whole or a part of the contract, that party is exempt from liability only if: (a) he is exempted under the preceding paragraph; and (a) he is exempted under the preceding paragraph; and (b) the person whom he has so engaged would be so exempt if the provisions of that paragraph were applied to him. (b) the person whom he has so engaged would be so exempt if the provisions of that paragraph were applied to him. (3) The exemption provided by this article has effect for the period during which the impediment exists. (3) The exemption provided by this article has effect for the period during which the impediment exists. (4) The party who fails to perform must give notice to the other party of the impediment and its effect on his ability to perform. If the notice is not received by the other party within a reasonable time after the party who fails to perform knew or ought to have known of the impediment, he is liable for damages resulting from such non- receipt. (4) The party who fails to perform must give notice to the other party of the impediment and its effect on his ability to perform. If the notice is not received by the other party within a reasonable time after the party who fails to perform knew or ought to have known of the impediment, he is liable for damages resulting from such non- receipt. (5) Nothing in this article prevents either party from exercising any right other than to claim damages under this Convention. (5) Nothing in this article prevents either party from exercising any right other than to claim damages under this Convention.

Doctrine of Change of Circumstances ROC Civil Code Article ROC Civil Code Article If there is change of circumstances which is not predictable then after the constitution of the contract, and if the performance of the original obligation arising therefrom will become obviously unfair, the party may apply to the court for increasing or reducing his payment, or altering the original obligation. If there is change of circumstances which is not predictable then after the constitution of the contract, and if the performance of the original obligation arising therefrom will become obviously unfair, the party may apply to the court for increasing or reducing his payment, or altering the original obligation. The provision in the preceding paragraph shall apply mutatis mutandis to the obligation not arising from the contract. The provision in the preceding paragraph shall apply mutatis mutandis to the obligation not arising from the contract.