Unilateral termination of a contract due to one party’s breach of obligation

When performing a contract, it is not uncommon for one party to fail to fulfill their agreed-upon obligations. In such cases, the non-breaching party may have the right to unilaterally terminate the contract in order to protect their legal rights and interests. However, this right only arises and becomes effective when all conditions and procedures under the contract or as prescribed by law are fully met. In this article, TNTP will provide a practical explanation of the concept, conditions, and legal consequences of unilaterally terminating a contract due to a breach of obligation.

1.What is unilateral termination of a contract?

Unilateral termination of contract is a unilateral legal act by one party in a contractual relationship, aimed at ending the performance of the contract before its term. According to the provisions of Article 428 of the 2015 Civil Code, a party has the right to unilaterally terminate the contract in the following cases: (i) when the other party conducts material breaches of contractual obligations; (ii) when the parties have an agreement; (iii) as prescribed by law.

2.Conditions for unilateral termination due to serious breach of obligation by the other party

To legally terminate a contract unilaterally, the terminating party must prove that the following conditions are met:

(i) A breach of obligation occurred

A breach can result from either action or inaction. Accordingly, a breach of obligation can be either non-performance or performance that is incorrect or incomplete according to the contract or legal regulations.

(ii) The breach is fundamental

The “fundamental” of a breach of contractual obligations is stipulated in the 2015 Civil Code. According to Clause 2, Article 423 of the 2015 Civil Code, a breach of contractual obligations by one party that results in the other party not achieving the purpose of entering into the contract is considered a fundamental breach of contractual obligations.

However, proving the fundamental nature of a breach in practice can be difficult, since assessing the purpose of the contract depends on various factors such as the perception of each party in the contract, the expectations of the parties, and the actual consequences of the breach, etc. Accordingly, without clear contractual language defining the purpose of the agreement or listing serious breaches of obligations that can lead to unilateral termination of the contract, this assessment becomes subjective and complex.

(iii) Proper termination procedure

According to Clause 2 and Clause 3, Article 428 of the 2015 Civil Code, the terminating party must send a written notice to the other party. The termination only takes effect once the notice is received. If failing to notify the other party about a unilateral contract termination causes damage, the terminating party may be required to compensate for proven losses. Furthermore, a party that ceases to perform contractual obligations without valid grounds may itself be deemed in breach of contract.

In short, a party may only unilaterally terminate the contract if a serious breach has occurred and written notice has been duly sent. If the breaching party does not receive this notice, the contract remains in effect – unless the breaching party knows or should have known about the termination.

3.Legal consequences of unilateral termination

According to Clause 3, Article 428 of the 2015 Civil Code, a contract is considered terminated from the moment the breaching party receives valid notice of termination. At that point, the parties are no longer obligated to continue performing under the contract, though certain provisions may still remain in effect to resolve the consequences of termination. Specifically:

(i) Termination of contractual obligations

The contract ceases to be in effect as of the date of termination. Any unfulfilled obligations are no longer binding, except for those arising before the termination or those intended to survive the contract (e.g., confidentiality, settlement, etc).

(ii) Compensation for damages

According to Articles 360 and 361 of the 2015 Civil Code, if the breach causes damage to the other party, the breaching party must compensate for both actual losses and lost profits.

(iii) Contractual penalties

The penalty clause remains effective even after termination. The breaching party must pay the penalty to the non-breaching party.

(iv) Return and payment

If the contract has been partially performed, the parties must return any unfulfilled obligations. For example, in a service contract, a party may be required to return a portion of a deposit corresponding to unrendered services or return leased or borrowed property.

(v) Dispute resolution

Even if one party unilaterally terminates the contract in accordance with Article 428 of the 2015 Vietnamese Civil Code, the dispute resolution clause shall remain in effect. This clause continues to govern the settlement of any disputes arising from or related to the contract, including those occurring after its termination.

In conclusion, unilateral termination of a contract is an effective legal tool that allows the non-breaching party to protect their legitimate interests. However, to perform correctly and avoid legal risks, both parties need to accurately assess the severity of the breach, fully prepare relevant documents and evidence, and comply with legal procedures for notification and handling of consequences after contract termination. In particular, both parties should specify in detail in the contract the conditions for unilateral termination to avoid difficulties in proving the breach. At the same time, this creates a basis for recovering damages, fines for breaches, and obligations that have been fulfilled but not yet paid.

Accordingly, before unilaterally terminating the contract – especially with contracts of large value or complex content – the parties should consult legal advice to ensure that the termination is carried out legally, effectively, and to limit the risk of disputes arising.

This article, “Unilateral termination of a contract due to breach of obligations”, was prepared by TNTP. We hope this article proves useful to our readers.

Sincerely,