UNDER WHAT CIRCUMSTANCES IS THE CONTRACT USUALLY TERMINATED?
The signing, drafting and implementation of contracts, especially commercial contracts, for enterprises is an important and decisive thing in the business process. The detailed drafting of terms, strict compliance with regulations, performance, and termination of the Contract will help the parties to limit risks and disputes arising. Below, TNTP would like to send to readers some cases of contract termination for businesses to pay attention to and strictly comply with the provisions of the law.
1. What is Contract? What is Contract Termination?
Contract is an agreement between parties on the establishment, change, or termination of civil rights and obligations. Understandably, the Contract defines and governs the parties’ general or separate rights and obligations.
Termination of the Contract is when the parties are no longer responsible for performing their obligations to each other, and the obligee cannot force the obligor to continue performing the obligation. Thus, Contract Termination means that after achieving the purposes of the Contract, the parties terminate or stop performing the terms and agreements in the signed Contract. After the termination of the contract, depending on the specific circumstances and cases, there will be different legal consequences, such as fines for violations, compensation for damage to the aggrieved party, etc.
2. Under what circumstances will the contract be terminated?
(i) The contract has been completed
The desire of the parties when entering into the Contract is to achieve the purpose of the conclusion, thus, it can be understood that when the purpose of the conclusion has been fulfilled, the contract will be terminated. This is considered one of the cases of contract termination.
Regarding the conditions for the Contract to be considered completed: when the parties have properly and fully fulfilled their obligations under the Contract (correct scope of work, delivery of goods in the correct quantity, type, quality, etc.). Depending on the type of contract, there will be different ways to determine the completed contract:
For Unilateral Contract – A contract in which only one party has the right, the other party only has the obligation: when the obligor fulfills its obligation, the contract is considered completed.
For Bilateral Contract – A contract in which both parties have rights and obligations to each other: when all parties have properly and fully fulfilled their obligations to the other party. On the contrary, if only one party fulfills its rights and obligations, the other party has not performed or performed insufficiently, the Contract is still not considered completed.
(ii) Under the agreement of the parties
The nature of the Contract is a form of recording the agreement of the will between the parties, so the Contract Termination may occur if the parties agree not to continue to perform the Contract.
Accordingly, the parties can agree on the termination of the contract within the contract performance term, and may also agree to accept the liquidation of the Contract, even if the obligor has not fully performed the obligation, the agreement on clearing of the obligation, the agreement on replacement of the obligation. At the same time, the parties must also mention the handling of legal consequences when terminating the contract in this case. Agreement to terminate the Contract does not violate the law unless this is done by the parties to avoid obligations to a third party.
(iii) When the individual entering into the Contract dies, the legal person or other subject terminates, but the Contract must be performed by that individual, legal entity or subject.
Not that any individual dies or a legal entity ceases to exist, the Contract will also terminate accordingly, but must satisfy the following two conditions:
The contract must be performed by the subject himself (for example, in the case where the performance of the contract is related to the identity of the contracting party).
The contract is performed by another individual or legal entity, but the work performed cannot be transferred to another entity (because there is no one to replace or inherit to continue the contract performance).
The contract is still valid and has not been considered completed in case there are many people or legal entities to perform, when an individual dies / a legal entity terminates its operation, the remaining subjects still have to perform their rights and obligations under the Contract.
(iv) Upon cancellation, unilaterally terminate the Contract
Canceling and unilaterally terminating the performance of the Contract can both cause the Contract to be terminated, but in essence, these are two different concepts and when the contract is terminated, it will lead to different legal consequences.
The contract is canceled: the contract value is considered to be absent from the time of signing, that is, it is considered that no contract has arisen in reality. Legal consequences are dealt with in the same way that the Contract is declared void.
The contract is unilaterally terminated: it is not valid for the part of the contract that has not been performed, the part of the contract that has been performed in fact is still recognized and legally valid.
(v) When it is impossible to perform because the subject matter of the Contract is no longer available and the parties can agree or replace the object or compensate for damage.
Subject is one of the important terms in the Contract, this clause is the purpose of the contract between the parties, therefore, if the subject matter of the agreement no longer exists, this will lead to the parties not being able to continue for performance of the Contract, equivalent to the termination of the Contract. However, this does not mean the termination of the rights and obligations of the subjects participating in the Contract relationship. If the parties still want to continue to perform the Contract, they can agree to replace that object by terminating the old Contract and entering into a new one or compensate for damage.
(vi) Termination of the Contract when the circumstances change substantially
According to Clause 1, Article 420 of the 2015 Civil Code, the situation changes fundamentally when the following conditions are fully satisfied:
The change of circumstances due to objective causes occurs after the conclusion of the contract;
At the time of entering into the contract, the parties could not foresee the change of circumstances;
Circumstances change so much that if the parties had known in advance, the contract would not have been concluded or was concluded with completely different contents;
The continuation of the contract performance without changing the contract content will cause serious damage to one party;
The party with affected interests has applied all necessary measures in its ability, in accordance with the nature of the contract, but cannot prevent or minimize the impact on the interests.
Accordingly, the contract is being terminated when the following conditions are met:
At least one party’s interests are affected when circumstances change substantially;
The parties fail to agree on the modification of the Contract within a reasonable time;
There is a request to the Court to declare the termination of the Contract by one of the parties.
The above are cases of contract termination in accordance with the law that TNTP wants to send to readers. In order to properly terminate the contract as well as limit future risks, the parties need to remind and pay attention to this subject.
TNTP and Associates International Law Firm