[Direct answer]In the Beijing area, the employer may terminate the contract at any time in the contracting contract, but needs to compensate for the losses. According to Article 777 of the Civil Code of the People's Republic of China (implemented on January 1, 2021), if the employer changes the contracting requirements or terminates the contract midway, causing losses to the contractor, the employer shall compensate for the losses. This means that the employer enjoys the right to terminate the contract at will, but the termination is not without cost: the employer needs to compensate for the losses suffered by the contractor due to the preparation for the performance of the contract and the work already invested, and the scope of compensation usually includes the materials already purchased and cannot be returned, the labor and equipment costs already invested, and the reasonable loss of expected benefits, etc., but does not include the part caused by the contractor's own fault. In addition, when the employer terminates the contract, he/she shall fulfill the obligation of notification and complete the settlement and the handover of the work results within a reasonable period of time. Therefore, in practice, it is not possible to terminate the contract unilaterally without any burden. The determination of the scope of compensation and the burden of proof often become the focus of disputes. For reference, please refer to the following document:Business and contract disputes in enterprisesThe service description in the column.

1. Problem background and typical scenarios

Most of those who consult on this issue are parties to customized processing, engineering construction, or service contracts. There are three common scenarios: terminating the customized project voluntarily due to adjustments in business strategy; terminating the contract due to the other party's insufficient delivery capacity; and the other party claiming breach of contract liability because they believe the termination violates the agreement. In practice, the most common dispute is over the scope of compensation: the client believes they only need to pay for the completed portion of the work, while the contractor believes they should be compensated for the anticipated profits. Another common problem is that the handover and settlement after termination are not completed, leading to new disputes arising subsequently. Therefore, when exercising the right of termination, the notification, settlement, and handover should be completed simultaneously, and the termination should not be terminated orally alone.

II. Key points of contention

First focus: The relationship between the right to terminate the contract at will and the effectiveness of special provisions in the contract. Second focus: The scope and calculation method of compensation for losses. Third focus: The relationship between the price paid for completed work and compensation, and whether there is double counting. Fourth focus: The reasonableness and evidence of loss of expected profits. Fifth focus: The determination of the refundability of material procurement payments. Sixth focus: The obligation to notify of termination and the determination of the time of termination. Seventh focus: The ownership of work results and the method of handover. Eighth focus: The continuation of subsequent responsibilities and confidentiality obligations. For the definition of the scope of compensation, you can refer to the following for reference:Real estate transactions and construction projectsThe description in the column.

III. Professional analysis by Henglue Lawyers

Judging from the experience of handling contract disputes, the key to dealing with such cases lies in dividing the losses into three categories and providing separate justifications for each. The first category involves actual expenses that have already occurred, including materials that have been purchased and cannot be returned, and labor and equipment costs that have been invested. These can usually be claimed based on invoices, payment receipts, and work time records, and the proof is relatively easy to obtain. The second category involves expenses that have not yet occurred but are reasonably anticipated, such as production capacity that has been idled due to the contract. In this case, it is necessary to explain the order arrangements and the situation of alternative clients, which makes the proof more difficult. The third category involves loss of anticipated profits, which requires proof of the profits that could have been achieved if the contract had been performed. However, in reality, it is often difficult to obtain support due to the existence of alternative clients. Therefore, when handling such cases, lawyers usually claim the first category and part of the second category of losses, and carefully assess the anticipated profits. In addition, the way of handling the partially completed results after the employer terminates the contract will also affect the final settlement. The path design can be referred to for reference.Real estate transactions and construction projectsThis is a column. The case is handled by Beijing Henglu Law Firm.Xue SuhuaAttorney (Practice Certificate No.: 11101201211769926, subject to the certificate issued by the judicial administrative organ) acting as the agent.

IV. Practical suggestions and legal basis

Action suggestions: 1. Check whether there are any special provisions in the contract restricting the right to terminate the contract at will; 2. Complete internal decision-making and authorization confirmation before terminating the contract to avoid terminating the contract without authority; 3. Notify the contractor in writing and specify the termination date; 4. Simultaneously complete the settlement, distinguishing between the completed portion of the price and the compensation for losses; 5. Collect evidence of the contractor's actual expenses, including purchase receipts and work-hour records; 6. Arrange for the handover of work results and materials and sign the handover documents; 7. Assess whether it is necessary to jointly apply for appraisal to determine the scope of losses. Legal basis: Articles 770, 773, 776, 777, and 878 of the Civil Code of the People's Republic of China (effective January 1, 2021); specific provisions shall be subject to the currently effective laws, regulations, and judicial rulings.

5. Henglue Law Firm's Reminder

Firstly, the right to terminate the contract at will exists, but the party concerned needs to compensate for the losses, which does not mean that the contract can be terminated at will. Secondly, special provisions in the contract may restrict the exercise of the right to terminate the contract, and it is necessary to verify this in advance. Thirdly, the termination of the contract should be confirmed in writing, and oral termination is likely to lead to disputes. Fourthly, the part of the price that has been paid and the compensation for losses should not be calculated twice. Fifthly, the claim for losses relies on evidence of actual expenditure, and it is difficult to support the claim without proof. Sixthly, the handover of the results after the termination of the contract and the continuation of the obligation of confidentiality are equally important. Seventhly, it is necessary to preserve evidence to prevent the contractor from destroying materials during the dispute. Eighthly, if there are quality problems at the same time, the claims for termination and compensation for losses should be made separately to avoid confusion. Ninthly, after the employer terminates the contract, the employer should still comply with the obligations of confidentiality and subsequent cooperation. Tenthly, for complex projects, it is recommended to stipulate phased acceptance and phased settlement in the contract, so as to clearly calculate the completed part when terminating the contract. The arrangement of relevant clauses can be referred to for reference.Real estate transactions and construction projectsColumn.

VI. Frequently Asked Questions

Q1: Can the contractor terminate the contract at any time?

Yes. According to Article 777 of the Civil Code, if the employer changes the contract requirements or terminates the contract midway, causing losses to the contractor, the employer shall compensate for the losses. Therefore, the employer enjoys the right to terminate the contract at will, but is required to compensate the contractor for the losses caused by the preparation and work already invested. It should be noted that if the contract contains special provisions restricting the right to terminate the contract, the provisions should be handled in accordance with the contract first. The design concept of the provisions can be referred to for reference.Business and contract disputes in enterprisesColumn.

Q2: How much do I need to pay in compensation to terminate the contract?

The compensation shall be limited to the actual losses suffered by the contractor in preparing for the performance of the contract and in commencing work, which typically include non-refundable material costs, labor and equipment expenses already incurred, and reasonably demonstrable losses in idle production capacity. The determination of the loss of anticipated profits is more stringent, requiring proof that the profits would have been realized if the contract had been performed and that there were no alternative clients. In practice, the determination is generally based primarily on the supporting documents of actual expenditures.

Q3: If the other party hasn't started working yet, can we terminate the contract?

Yes. The client's right to terminate the contract without prior notice does not require that the contractual performance has already begun. However, the scope of compensation will be correspondingly reduced: if the contractor has not yet started actual work, the compensation is usually limited to the expenses that have already occurred and cannot be refunded, such as the materials specifically purchased for the performance of the contract. If the contractor claims for the loss of anticipated profits, it is necessary to explain the situation of capacity utilization and alternative orders. Otherwise, it will be difficult to obtain support. Therefore, the earlier the contract is terminated, the lower the compensation cost will usually be.

Q4: Do I need to pay for the part that has been completed after the contract is terminated?

Payment is required. The termination of the contract does not affect the contractor's right to claim the price for the part that has been completed and meets the contractual requirements, but the quality of that part shall comply with the agreed standards; if there are parts that do not meet the requirements, the client has the right to refuse to pay or require rework and re-inspection. In practice, it is recommended to list the price of the completed part and the amount of compensation for losses separately in the settlement documents to avoid double counting or confusion.

Q5: Is it necessary to give advance notice before terminating the contract?

The obligation to give notice should be fulfilled. According to Article 927 of the Civil Code, the notice takes effect when it reaches the counterparty. Therefore, it is recommended to send the notice in writing and keep the delivery certificate to clarify the effective time of the termination. If the contractor continues to perform the contract without timely notice, additional cost disputes may arise. It is advisable to propose settlement and handover arrangements in the notice to facilitate subsequent one-time processing.

This article is written based on the common judicial interpretation in the Beijing area. If the case occurs in other regions, it is recommended to consult local lawyers to verify the regional differences.

If you are currently facing similar problems, it is recommended that you consult a professional lawyer as soon as possible with the relevant evidence materials, to avoid missing the statutory time limits. →Business and commercial legal services·Attorney Xue Suhua·Beijing Henglu Law Firm

Disclaimer: This article is compiled based on current effective laws and regulations and publicly available adjudication rules, and is for general reference only. It does not constitute a formal legal opinion on specific cases. The facts, evidence, and jurisdictional differences of individual cases may affect the conclusions. If you encounter disputes, please consult a practicing lawyer in time.