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When a contract can be rescinded: Or what a wedding dress and fresh bread have in common

When a contract can be rescinded: Or what a wedding dress and fresh bread have in common

10.03.2014 12:32
Autor: KŠB, KSB

Breach of a contractual obligation

The law allows rescinding a contract if it has been breached. It is necessary, however, for the breach to be material, i.e. so severe that, had it been anticipated, the parties would not have concluded the contract in the first place.

One such breach could be a breach of confidentiality. If one party breaches this obligation despite knowing that confidentiality was of significant importance to the other party, the contract can be rescinded. However, keep in mind that the contract must be rescinded without undue delay. Although the breach would be assessed individually, the deadline for rescinding the contract must be as short as possible. If the right is not exercised within the deadline, the contract cannot be rescinded on the grounds of the breach. It may be rescinded later but only on account of a similar (or another) breach.

Default

You can also rescind a contract if the other party is in default. The options for rescinding a contract in the event of default have been expanded such that now default can apply to either party. The defining criterion for whether default has occurred is whether the particular deadlines have been met. In other words, a party is in default if it fails to fulfill an obligation within the time stipulated in the contract.

Unlike rescission on the grounds of a mere breach, the parties have two options under the Commercial Code valid till 31 December 2013 for rescinding the contract in the event of a default. The first option is where the default results in a material breach. The entitled party in this case is again obliged to rescind the contract without undue delay.

But there is also another option. The contract may also be rescinded on the grounds of a minor breach, for example, if a grace period was granted in order to ensure the performance was fulfilled and that deadline was not met. Note that the grace period should be determined based on the length or demands of the performance.

However, it is important to keep in mind that where a party provides the defaulting party with a grace period to remedy a failed delivery, the default will very likely be presumed to be a minor default even though the parties would consider it material at the moment they entered into the contract. For example, let us say that you run a hotel and have made arrangements for fresh bread to be delivered precisely at 6 am to be served at the hotel’s first breakfast service at 7. The supplier calls you and says it cannot make the delivery until 9 am, but it is difficult for you to find another supplier in such a short amount of time. Even though you would originally consider the supplier’s default to be a material breach, you still want your guests to have fresh bread for the second breakfast service. Therefore, you extend the deadline and thus re-qualify the material breach as minor. Consequently, your right to rescind the contract on the grounds of default will not arise until after the grace period expires.

As we can see, where a contractual obligation is significantly breached, you must rescind the contract immediately after learning of such breach; otherwise, you will lose your right to rescind. If a default occurs, your right to rescind arises only after the grace period has expired.

Rescission on the grounds of an expected breach

For the sake of completeness, it must be mentioned that the new Civil Code, which corresponds to what was stipulated in the “old” Commercial Code, contains the possibility to rescind a contract when an obligation has not yet been breached but where the other party’s conduct indicates that a material breach will occur. For example, you make arrangements to have your wedding dress delivered the day before your wedding but you believe that, because the delivery company picked up the dress late from the shop, the dress will be delivered on the morning of your wedding day. If the other party fails to provide sufficient certainty that it will follow through on its commitments, the contract can be rescinded on legal grounds as in the first case above, provided it is done without undue delay. It is also necessary to assess what is considered “sufficient certainty” with regard to the specific circumstances. Sometimes a mere declaration will suffice; other times the entitled party may need to be given evidence that the obligation will be fulfilled. The right to such certainty thus arises before the performance becomes due.

Stipulate your rights contractually as much as possible

As we can see, the law provides several options for rescinding a contract. Since life is too varied for the authors to be able to describe every case, the grounds for rescission are formulated in abstract terms only. For instance, in the fresh bread example, late delivery may constitute a material breach if the restaurant cannot serve breakfast due to the delay, while, in another case, such as when the bread is delivered at 9 am instead of 7, but is to be served at dinner, the late delivery may not constitute a material breach. Obviously we need not remind you that the question whether or not the reasons for rescinding a contract are legitimate often gives rise to very complicated disputes that are very difficult to resolve.

To avoid any doubts regarding what can and cannot be considered a material breach, we recommend specifying the details in the contract. In addition to the grounds for rescission, the law also enables parties to stipulate other issues contractually, such as deadlines for rescission, the form of notification of rescission, and which rights and obligations remain unaffected by the rescission.

KŠB

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