Clutch moment: contract termination in case of default

In my legal activity I have come across situations of clients with pending situations, seeking my advice to help them decide the way to go. This is particularly necessary when they are faced with contract partners in situations of default of a relevant contractual obligation.

In many Continental Law jurisdictions (those based in coded law, including Brazil and Portugal) the breach by a party of an obligation may be cause for contract termination at the free will of the innocent party. This right is usually confirmed in the texts of civil codes, whose wording may vary but, in many instances, provide for a similar solution of swift and direct application.

Considering the damaging effect of the event of default, an innocent party may certainly consider the late fulfilment of the obligation as useless and may prefer to finish with the agreement, with all consequences it may arise, among which is to prevent the defaulting party to remedy the situation. Seldom one could “turn back the clock” to a decision to terminate a contract. Hence the seriousness of the moment.   

This decision is of lower risk if, cumulatively, the default is of a material (relevant) nature for the contract, the parties have contractually agreed it is a case for termination, and that there is clear evidence of the default. Usually, a notice for remedy is not required as a preliminary step for effective termination if in the light of these elements.

Furthermore, higher courts have already decided – in favour of the innocent party – that the right of a party to terminate the contract when faced with material default already provided in its text is not dependent upon a court ruling attesting the same. Many instances confirm the right of the innocent party to pull out of the agreement and execute it for damages and penalties directly.

This position is particularly important if the contract in default concerns sales of unpaid assets, such as real estate: contrary to past unclear interpretations, the property may be subject to direct and immediate forced seizure if the event of default was expressly provided in the contract as such and it fits the conditions of relevance and factual existence.

The fact that an event of default is not correctly foreseen in the agreement, or is not provided therein at all, may lead to future problems and legal questioning at courts, with undesired outcomes and results.

In the ordinary course of business affairs, it is natural that the parties who are about to enter a relationship will not dedicate time or energy to negotiate causes of termination, a list of events of default or their consequences. Lawyers however are ready to assume this task with technical arguments and an effective approach, and may contractually provide in advance for smart ways out for the client in case it undergoes bitter experiences in commercial relationships in the future.

Image credits: Vidal de Canellas and Royal Chancellery of the King of Aragón, Jaime I. In Vidal Mayor (1247).