Contract cancellation is the unilateral termination of a contract by one party’s will. However, due to its “retroactive” nature, contract cancellation is a more complex matter. Therefore, the law tightly regulates contract cancellations. In this article, TNTP will present some key points that parties need to consider when applying this measure, helping them choose an appropriate contract cancellation strategy in line with their goals and legal regulations.
1. Definition of Contract Cancellation
Contract cancellation includes cancelling the entire contract or cancelling a part of the contract. Cancelling the entire contract means completely abandoning the performance of all obligations under the contract. Cancelling a part of the contract means abandoning the performance of some obligations, while the remaining parts of the contract remain valid.
2. Grounds for Contract Cancellation
Except for cases of exempting liability specified in Article 294 of the Commercial Law of 2005, parties can cancel a contract in the following cases:
• When there is a breach of the agreed-upon conditions for contract cancellation. Depending on the type of contract and the parties’ objectives when entering into the contract, the parties can agree on actions that constitute grounds for each party to cancel the contract.
• When one party fundamentally breaches the contractual obligation. Fundamental breach refers to a breach of a party’s contract that causes damage to the other party to the extent that the other party cannot achieve the purpose of entering into the contract. In specific contracts, the parties should consider the purpose of entering into the contract, the nature of the breach, and its impact on the other party’s contractual purpose. If the breach directly affects and prevents the other party from achieving its contractual purpose, it is considered a fundamental breach.
3. Legal Consequences of Contract Cancellation
• Except in the case of cancelling a contract for the delivery of goods or partial service, after cancelling a contract, the contract is not effective from the time of formation, and the parties are not obligated to continue performing the agreed-upon obligations in the contract, except for agreements on post-cancellation rights and obligations and dispute resolution.
• Parties have the right to claim benefits resulting from the performance of their obligations under the contract. If both parties must return, their obligations must be performed simultaneously. If restitution cannot be made in the form of benefits received, the obligated party must make restitution in cash.
• The violated party has the right to claim compensation for damages. The party cancelling the contract does not lose the right to claim compensation for losses arising from the other party’s contract violation when the contract cancellation measures are applied.
4. Notification Obligations in Contract Cancellation
The party cancelling the contract must promptly notify the other party of the contract cancellation. In cases where delayed notification causes damage to the other party, the cancelling party must compensate for the damages. Although the law does not specify the form of notification, it is advisable to notify in writing or by email. In dispute resolution at an arbitration body, this notification will be considered evidence that the parties need to submit.
5. Contract Cancellation in the Case of Delivery of Goods, Partial Services
• In cases where there is an agreement on the delivery of goods or partial services, if one party fails to fulfil its obligation regarding the delivery of goods or services, constituting a fundamental breach for that delivery or service, the other party has the right to declare the contract cancelled for that specific delivery or service.
• If one party fails to fulfil its obligation for a specific delivery or service, creating grounds for the other party to conclude that a fundamental breach will occur in subsequent deliveries or services, the violated party has the right to declare the contract cancelled for subsequent deliveries or services, provided that this is done within a reasonable time.
• If a party has declared the cancellation of the contract for a specific delivery or service, that party still has the right to declare the contract cancelled for the deliveries or services already performed or to be performed later if the ongoing relationship between the deliveries leads to the delivered goods or services being unable to be used for the intended purpose agreed upon at the time of contract formation.
The above is the article “Commercial remedy: Cancellation of contracts” that TNTP is sharing with readers. In case of any issues for discussion, please contact TNTP for timely support.