Article 60 Paragraph 2 of the Judicial Interpretation Concerning General Provisions of Contracts Book of Civil Code establishes the rule of substitute transaction,which not only has a comparative legal basis but also serves multiple functions and is an important method for calculating the loss of profits.The rule of substitute transaction mainly applies to contracts with fungible goods as the subject matter,but it also has room for application to contracts with labor or specific goods as the subject matter,provided that it is predicated on a fundamental breach of the contract.The rule of substitute transaction generally requires the termination of the contract,but in certain special circumstances it is also possible to carry out a substitute transaction without termination.Substitute transactions must be reasonable,thereby excluding unreasonable substitute transactions to protect the breaching party.Although market price is a key factor in determining the reasonableness of a substitute transaction,it is not the sole criterion.Unless required by the mitigation rule,substitute transaction is not an obligation,the non-breaching party can choose to carry out substitute transactions or obtain compensation based on market price differences.The rule of substitute transactions can solve the problem of calculating the loss of profits in continuing contracts.After implementing a substitute transaction,the non-breaching party is generally precluded from demanding performance under the original contract and is instead subject to a duty to mitigate losses.
substitute transactioncontract damagesduty to mitigatecontinuing contract
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