CONTRACTS

TERMINATION

Ovidiu Ioan Dumitru

Claims for Performance
A person who enters a contract expects the other party to do as he promised.
But what if he is disappointed, such as where the seller of goods fails to deliver goods or to
deliver them in time?
What can a client do if the building contractor fails to start agreed construction works, or leaves
the site before work is complete?

The creditor will insist upon compliance with the contract and demand that the debtor does what
it has contractually agreed to do. In doing so, the creditor is asserting a claim for performance
by asking the judge to issue judgment to the effect that the defendant must deliver the goods
sold, or start or continue with the agreed construction work.

There are situations in which the claimant has no interest in other legal remedies that might be
available and the question arises as to if, and under which circumstances, a judgment requiring
performance can be obtained, and how to ensure that it is respected.
Claims for performance are generally regarded as permissible in continental legal systems, but
not under the Common Law.

The first solution is supported by the idea that each contractual party should have a legal and
not just a moral duty to fulfil a contract: pacta sunt servanda.
The general principle of contractual fidelity favours the approach that where there is a breach of
contract, the parties should stick to it and give a fair chance to a solution being found on its
basis.

By contrast, the Common Law tends to take the approach that things should be cleared up as
quickly as possible after a breach of contract has occurred, thus favouring the approach whereby
the disadvantaged party has a right to withdraw from the contract and claim damages.
All continental legal systems in Europe today observe the principle that each party to a
contract has the right to have that contract fulfilled, and that the courts can also enforce such
claims.
But what happens if the debtor still refuses?
The creditor has must turn to the courts, and any court judgment can only be enforced against
the debtor in a state-regulated process.

In France, the current code stipulates that a debtor in default of performance can always be
required by the creditor to perform the obligations under the contract, unless this is
impossible, or there is a disproportion manifeste between the cost of performance for the debtor
and the interests of the creditor in insisting on performance.

In Germany § 241(1) BGB merely states that an obligation (in this case arising from a contract)
entitles a creditor ‘to claim performance from the debtor’.
In contrast to continental legal systems, the Common Law starts from the principle that it is
only in exceptional cases that the creditor who has not received performance can force the
debtor to perform its promise.

The Common Law does assume in principle that the creditor acquires a ‘primary right’ upon
concluding the contract that the debtor will perform its contractual promise in natura.

But when one asks what the creditor can do in practical terms if the debtor has not performed
the contract, or has not performed it correctly, it is no longer the ‘primary right’ that matters,
but only whether the special conditions are satisfied under which the remedy of specific
performance is available to the creditor.
The renowned American judge Oliver Wendell Holmes said:

‘the only universal consequence of a legally binding promise is that the law makes the
promisor pay damages if the promised event does not come to pass.’

This principle applies with only a few important exceptions. Only if the equity court was
satisfied in the case in question that the general claim for damages was ‘inadequate’ and failed
to take sufficient account of the interest of the creditor.

Claims based on the defendant’s breach of contract have their historical roots in the law of
tort, which explains why the sole remedy is damages.
For instance, for generic (generally established) goods, if they are not delivered when
promised, and the risk has not yet been passed to the buyer, it cannot demand specific
performance even if the goods are still available on the market.

In such circumstances, the Common Law takes the view that it would be a waste of time and
money to allow the buyer to demand specific performance and force the seller to perform the
contract in natura.

Instead, it would be perfectly sufficient to allow buyers damages for breach of contract, thus
putting them in a position to take matters into their own hands and acquire the goods from
another provider
Another situation is illustrated by a decision
by the House of Lords from 1998:

The defendant lessee had concluded a long-term lease agreement to operate a supermarket during normal
business hours in a shopping centre built by the claimant.
After the lessee discovered that the supermarket operations at this location were not profitable, it ended the
lease and offered damages to the lessor in order to ‘buy’ out the remainder of the lease.
The lessor did not agree, and applied to the court for an order of specific performance requiring the
defendant to operate a supermarket at the location for the remainder of the lease—a further nine years.
The Court of Appeal allowed the application, but the House of Lords overturned this decision:

From a wider perspective, it cannot be in the public interest for the courts to require someone to carry on
business at a loss if there is any plausible alternative by which the other party can be given compensation. It
is not only a waste of resources but yokes the parties together in a continuing hostile relationship.
The order for specific performance prolongs the battle.
The PICC and PECL developed a convincing compromise on this basis.

Claims for performance are generally allowed, in contrast to the approach of the Common Law.

But such claims are excluded when:

• they would not be allowed under Civil Law jurisdictions, or
• where they are allowed but no forms of execution are made available, or
• where they have no practical benefit for creditors because enforcement is too arduous or
where creditors could reach the same result more quickly using other available legal remedies
—particularly damages.
Termination
The term ‘termination’ of the contract ia general used one, but we could also use terms such as
rescission, revocation, distancing from the contract, or withdrawing from the contract.

German law refers to Rücktritt and Kündigung,

French law to résolution and résiliation,
Italian law to risoluzione and recesso,
Dutch law refers to ontbinding, or dissolving the contract.
English law uses a range of terms, but in recent times ‘termination’ has become more prevalent
and has also been adopted by the international sets of rules.

Whichever term is used is a matter of taste, but all of these terms basically mean the same: the
main consequence of the termination of the contract is that neither party will have any further
obligations to perform in the future.

Jurisdictions differ in the extent to which they require that non-performance is not excused, a
notice needs to be sent or a second chance to perform needs to be given the debtor.
But under which conditions is the creditor entitled to terminate the contract if the debtor has
not met its contractual obligations, or not met them in full?

The creditor may wish to take this course of action because it no longer trusts the debtor, or
does not want to spend a long time in dispute on when and how the other party’s breach of
contract might be cured or remedied in some other way.

Or maybe that the price promised by the debtor to perform its obligations has fallen after the
contract was concluded, and the creditor could now secure the goods or service from a third
party at a lower cost.
It might seem obvious that a creditor must be able to cancel a contract if the promised
performance does not happen, or if the debtor breaches the contractual terms in some other
way. But general rules on the right to terminate a contract did not develop in most European
legal systems until very late, and they did not exist in Roman law.

There are signs that Roman law allowed the party being sued for performance to rely on a
defence—later called an exceptio non adimpleti contractus—by refusing performance if the
plaintiff himself had failed to perform.

This provision still exists in current legislations, one of them being the new Romanian cicil
code, which provide the possibility of a party to ”escape” from a contract if the other one failed
to perform its duties under the agreement.
 The exception for non-performance of the contract
(anticipatory breach)
(exceptio non adimpleti contractus)

It is a way of defence made available for the party that is asked to carry out
his obligations although the party who is asking did not carry out his own
obligations.
German Law
323(4)BGB : ”The creditor may already terminate the contract before
perforce is due, if it is obvious that requirements for termination will be met”

PECL
Art. 9: 304 : ”Where prior to the time for performance by a party it is clear
that there will be a fundamental non-performance by it the other party may
terminate the contract”
Conditions in Romanian civil code

a) The mutual and interdependent obligations of the parties must have their basis in the same
contract.

b) To exist a non-performance, even a partial one, but important enough from the other party.

c) The non-performance should not be due to a certain fact of the party that invokes the
exception and because of this, the other party could not perform his own obligation.

d) Parties should not have agreed a term for the performance of their mutual obligations.
 SELLER BUYER

1. IPHONE only after the price is paid 2. IPHONE at a certain term after delivery

BUYER requests the IPHONE,

SELLER invokes the exception for non-performance of the contract
 Claims on termination of contracts

Different jurisdictions adopt different approaches to limit claim for

termination.
While CISG, PECL and English Law adopt a clear substantive criterion and
only allow termination in case of a breach that is serious enough,
French law traditionally gives the court the central role in assessing whether
termination is justified,
German law limits termination by requiring that the non-performance is
serious enough or that the debtor was granted a second chance to perform and
the
Dutch law is the odd one out by not limiting the termination action in
significant ways.
French law

Art. 1184(1) Code civil stated that each reciprocal contract was subject to the condition
precedent of timely fulfilment of the contract by the other party.

If that party failed to fulfil the contract, pursuant to art. 1184(2) the counter-party could choose
either to assert a claim for performance, or to instead terminate the contract and assert a claim
for damages.

Art. 1184(3) went on to say, however, that the decision about the termination of the contract
could only be made by the judge, who could determine that the contract would only come to an
end if the debtor failed to perform within a period set by the court.

The above provision may bring the parties in difficult situations which from economic point of
view (like not being able to sell the goods till the end of trial), so French law has avoided this by
recognising a long list of ‘exceptions’ that permit the innocent party to effect unilateral
The debtor can always have recourse in court to assert that the unilateral avoidance was
unjustified. If the debtor is successful in the application, the creditor has also committed a
breach of contract by terminating the contract without justified reason, and must pay damages.

This prepared the ground for the recent revision of the law on contractual termination.
Firstly, arts. 1224 and 1225 state that the parties can agree that a contract is to be avoided if a
party fails to meet certain obligations (clause résolutoire).

Even if no such agreement is reached, the creditor may unilaterally terminate the contract
(without recourse to a court), but only if the non-performance is ‘suffisament grave’ and the
creditor has given the debtor a reasonable period for supplementary performance and has
warned it ‘expressément’ that the contract will be terminated if this deadline is not complied
with (arts. 1224, 1225 Code civil).
English law

Innocent party may terminate a contract if the other party’s breach is sufficiently important:
there must be a ‘substantial failure of performance’.

However, this is only a rule of thumb that is subject to many exceptions.

In order to distinguish between ‘substantial’ and other breaches, English case law relies on the
difference between ‘warranties’ and ‘conditions’.

Any contractual promise carries either an ‘express warranty’ or an ‘implied warranty’. If a party
does not comply with such a promise, the innocent party may claim damages for breach of
contract, but remains otherwise bound by it. A party is only entitled to escape from the contract
altogether where the promise breached by the other party constitutes a ‘condition’.
How can one distinguish between a warranty and a condition?

If the contract clearly labels a contractual term as a condition, this is generally accepted as such
by the courts, even if the disadvantages suffered by the innocent party do not appear under the
circumstances to be particularly onerous.

If there is no express agreement that a clause is a condition, it depends on whether the breach
leads to a ‘substantial failure of performance’ or (as is often said) ‘goes to the very root of the
matter’. In this respect, the gravity of the consequences that the innocent party would face if the
breach were to occur is generally important.

What about the situation where neither the agreement between the parties nor the case law or
statutes classify a contractual promise as either a condition or warranty? Such promises, which
are usually called ‘intermediate terms’ or ‘innominate terms’, can carry consequences if
breached, and these consequences can be so severe that the innocent party will basically no
longer receive what was promised in the contract.
German law

Under German law, termination of a reciprocal contract is called Rücktritt.

(§ 323(1) BGB) provides that termination is permissible if a debtor fails to perform on time or
in line with the contract and the creditor has also ‘specified, without result, a reasonable period
for performance or cure’ - Nachfrist

German law has numerous important cases where the setting of a Nachfrist is unnecessary and
wherea contract can be terminated with immediate effect. - Immediate termination,

For intance where the performance of the debtor is ‘impossible’ in accordance with § 275 BGB.
Nor is a Nachfrist required if the debtor has not performed its obligations by the agreed due
date, or within the agreed period, and it appears from the contract that the creditor’s interest in
timely performance is ‘essential’.
In comparative legal literature, there is no longer much debate about the basic requirements
needed for an immediate termination of the contract.

As a summary of those there are three important points.

1. in a reciprocal contract the creditor has the option of whether or not to terminate the contract.

2. the termination of the contract by the creditor might be justified if the breach by the debtor is
sufficiently grave

3. There is recognition, particularly if the breach is not ‘significant’ or the creditor has doubts
about its significance, that termination of the contract by the creditor can be justified if the
debtor has failed to perform or perform successfully on time, the creditor has set a reasonable
additional period for performance, and the debtor has failed to perform within this additional
period.
 Romanian Law

Termination of a contract is the abolition of a contract, usually mutually binding, at

the request of a party when the other party did not perform the obligations that he had
taken when the contract was concluded

Features:
a) Arises when the non-performance of the obligations is due to the debtor’s guilt and
not to the force majeure or due to some unforeseeable circumstances.
b) Operates by virtue of a court judgment, of an unilateral declaration of termination
or if the law expressly provides it.
c) If this exception is invoked and obtained, the contract is disbanded.
d) The termination frees the one who obtain or invoke it from its own commitment.
e) It is optional – the creditor may choose between the forced execution of the
obligation or the termination of contract
Termination may be: judicial, conventional, legal

The judicial termination

The judicial rescission will be decided by the court at the request of the interested party.

The judicial termination can be admitted if the following conditions are fulfilled:

a) One of the party did not perform his obligation; the non-performance may be either total or
partial and in this last case, the non-performance must have been considered essential at
the moment when the contract was concluded.

b) The party who did not perform his obligation should be responsible for this situation;

c) The debtor who did not perform his obligations must have been given notice, in the
conditions provided by the law.
Conventional Termination (art. 1552 Romanian civil code)

It can take place through a written notice send to the debtor

- when the parties agreed this way
- when the debtor is in default without notice or
- when the debtor did not perform his obligation in time.

The resolutive clause in a contract (art. 1553 Romanian civil code) is

the clause by which the parties stipulate the termination of the contract
for non-performance of the obligations of one of them.

For this to be applied, the parties should indicate the cases in which the
contract will be terminated
The termination of instantaneous performance contracts v.
successive performance contracts

The action for termination is the same procedural instruments which allows the party
that had performed his obligation from a contract to ask the court the termination of
the contract when the other party did not performed his own, no matter the type of it
(with instantaneous or successive performance), but the conditions and the effects are
different depending on the way the contracted had to be performed

Romanian civil code provides in its section 5 (Rezoluțiune, rezilierea și reducer

prestațiilor) the right of innocent parties to invoke the termination (article 1549) and
the way that may operates (article 1550)
The most important effect of the termination of instantaneous contracts (ro:
rezoluțiune) is its retroactive nature which produces the following consequences:

-The benefits which were performed will be restored

-If a third party had obtained some rights from the purchaser of the good, once the
termination was obtained, these rights will be disbanded as well.

-If a third party had concluded conservation acts or acts of administration and termination
was obtained, these acts will remain valid.
 The Injury and Damages

The injury may be defined as the damages caused to the creditor by the non-
performance of the obligations of the debtor, or by the inadequate performance of these
or by the performance of the same obligations too late.
The injury may be:
- patrimonial – consists of the actual damage suffered by the creditor (damnum emergens)
and the loss of profit (lucrum cessans)
- moral – the physical pain and sufferings caused to the creditor by the non-performance of
the obligation
- corporal – the damages caused to the health and physical integrity of a person.
 Damages

If a party (debtor or obligor) does not perform its obligations under a contract or does not
perform them properly, the other party (creditor or obligee) can demand performance of the
obligation or can also ask for damages, either by insisting on performance of the contract and
simultaneously asking for damages for the harm caused by the debtor performing late or
having breached contractual obligations in some other way.

The action for damage for non-performance and the action for termination of the contract have
in common that they both require non-performance from the debtor and there can be 3 types:
1. a party not to perform at all
2. Perform defectively
3. Perform late
And , in addition to those there can be case of a performer to take place, but a collateral
damage to be caused.
Conditions

There is little debate about the most important conditions needed for the innocent party to
claim damages.
Firstly, the debtor must not have performed its obligations under the contract, or performed
them badly, or in some other way breached its contractual obligations

Secondly, the non-performance must be ‘attributable’ to the debtor, in that it must be

responsible or answerable to the creditor.

Thirdly, there must be a legally relevant connection or link between the non-performance of
the contract and the harm for which damages are sought.

Fourthly, there can be doubt as to whether the injury is compensable and how it can be
calculated.
 Contractual liability in Romanian law

The contractual liability means the debtor’s obligation to repair the damage that he had
caused to the creditor due to the non-performance, improper execution of his own obligation or
due to the fact that he had performed his obligation, but not in time.
The essential condition to exist a contractual liability is to have a valid contract between
the debtor and the creditor.
If a contract does not exist, then we will apply the tort liability

Conditions:
1. The existence of a valid contract
2. An illegal act
3. The existence of an injury
4. The existence of a connection between the illegal act and the injury
5. The debtor’s guilt
Existence of non-performance

According to the international sets of rules, a party is only obliged to pay damages if the harm
is caused by the non-performance of the contract, which is understood to mean that the party
has not fulfilled its obligations under the contract, or not performed them correctly.

Article 74 CISG also states that damages can be claimed for a breach of contract ‘suffered by
the other party as a consequence of the breach’.

French law uses the term ‘inexécution de l’obligation contractuelle’ in the same sense.

In Germany, an obligation to pay damages depends upon a party having breached a Pflicht
aus dem Schuldverhältnis; here the Schuldverhältnis arises from the parties’ contract.

The legal meaning of the ”breach of contract” is that the actions of a party are less than what
was promised in the contract.
Attribution of non-performance
Mere non-performance is not sufficient—it must somehow be attributable to the debtor if it is to be held liable.

The debtor is only liable to pay damages to the creditor if the non-performance of the contract
can somehow be ‘attributed’ to it, either because it is to blame for the non-performance, or
because it agreed to assume the risk of non-performance, or because it cannot excuse itself by
proof that the non-performance was unavoidable or caused by force majeure.

In Civil Law, most legal systems still differentiate (at least implicitly) between non-
performance and attribution, and the main reason why a debtor may have non-performance of
the contract attributed to it can be that the debtor was to blame for the non-performance.
There is a presumption that the debtor’s non-performance is based on some sort of fault.

In German law rebut the presumption of fault by proof that the non-performance was caused
neither intentionally nor negligently.

The debtor is also liable for damages under Swiss law, unless it can prove that neither it nor its
agents can be held responsible for the fault

French law (art. 1231-1) provides that the debtor must pay damages if it has not performed, or
not performed in time. But this does not apply if the debtor can show that the failure to
perform or late performance is due to force majeure or were not reasonably foreseeable
However, the debtor will only need to fall back on force majeure or similar only if it has
assumed an obligation de résultat (result), the situation being different if the contract shows
that the debtor has merely agreed an obligation de moyens (best efforts)
In contrast to the continental legal systems, the Common Law basically regards the contract
as a guaranteed promise.

If the debtor has not done what was promised in the contract, it must pay damages for breach.

This liability is strict, because it does not generally turn on whether responsibility, in
particular some form of fault or negligence, can be laid at the door of the debtor or his or her
employees, agents, or subcontractors.

However, if the debtor exercised due care, it will not be liable in damages—not because the
breach is excused, but because there is no breach in the first place since the debtor did all it
was required to do under the (correctly interpreted) contract.
Link Between Non-Performance and Damage

If the debtor has failed to perform, it in principle compensate the creditor for all resulting
harm. But that applies only in so far as there is sufficient linkage between the non-performance
of the contract and the harm suffered.

The debtor is not liable to pay damages for harm caused to the creditor if it can be shown that,
upon closer analysis, the harm is not really the consequence of the debtor’s breach.

French law provides (1231-4 Code civil) that the debtor, even if it committed a ‘faute lourde
ou dolosive’, will only be liable for the damage ‘qui est une suite immédiate et directe de
l’inexécution’.

Under German law, the liability of the debtor is limited with the help of Adäquanztheorie
(theory of adequate causation), by which the debtor is not liable for damages which a neutral
observer would conclude could be expected ‘only under especially unique, rather improbable.
Nature and Extent of Damages

A party that has failed to perform its obligations under a contract and is therefore liable in
damages to the other party must pay an amount of money that would bring the other party into
the same position it would have been in if the contract had been fulfilled.

This basic rule is universally recognised, but how the loss is calculated may raise many
questions and offer many different ways.
 Romanian Civil code

Damages can be defined as compensation money that the debtor is held to pay for repairing
the injury (harm) suffered by the creditor as a consequence for non-performance of the
obligation of the debtor, for an inadequate performance of the obligation or for not performing
the obligation in time.
Damages are always established in money.

The following effects arise from the moment when the debtor was given notice
a) the debtor is held:
- to punitive damages,
- to compensatory damages
b) if the obligation is to transfer an individually determined good, the risk of the contract is
not any more beard by the debtor of the obligation of releasing the good, but by the creditor
c) If an amount of money is not paid in time, the creditor has the right to receive punitive
damages, in the amount agreed by the parties or in the amount stipulated by the law