In fact, there have been many cases of confusion between termination of a contract and cancellation of a contract when both of them lead to the termination of contract performance by both parties.
However, contract termination and contract cancellation are completely different and the legal consequences for each case will also be different. Clearly distinguishing them can help the subjects achieve the purpose of the transaction and protect their legitimate rights and interests. The following article will cover the difference between termination of a contract and cancellation of a contract.
Currently, the 2015 Civil Code does not specifically define contract termination and contract cancellation. Instead, it provides for cases under which a contract will be terminated or cancelled. To be specific:
1. Differences in the applicable conditions
A contract shall be terminated in the following cases:
- The contract has been completed;
- The parties so agree;
- The individual or legal person having entered into the contract dies or ceases its existence while the contract is to be performed by such very individual or legal person;
- The contract is cancelled or unilaterally terminated;
- The contract cannot be performed because its object no longer exists;
- The contract is terminated due to the fundamental change of circumstances, and the parties cannot agree on modification of the contract within a reasonable time limit, and obtain a court's decision announcing the contract termination;
- One party unilaterally terminates the performance of the contract in case the other party commits a serious breach of contractual obligations;
- Other cases as prescribed by law.
A contract shall be cancelled in the following cases:
- One or more party(ies) breach(e)s the contract, which is a condition for contract cancellation as agreed upon by the parties;
- One or more party(ies) commit(s) a serious breach of contractual obligations;
- Cancellation of contracts due to the late performance of obligations;
- Cancellation of contracts due to inability to perform;
- Cancellation of contracts in case of loss of or damage to property;
- Other cases as prescribed by law.
Therefore, cancellation of contracts can also be used as a ground for termination of contracts. However, the cases where a contract is terminated are much more than the cases where a contract is cancelled. Specifically, the parties may terminate a contract upon an agreement or the contract may automatically terminate when the parties fulfill their obligations without any breach or damage. Meanwhile, the cancellation of a contract mostly is a result of the parties’ breach of the contract. Specifically, the parties may cancel a contract in case one party breaches the contract, which is a condition for contract cancellation as agreed upon by the parties; or seriously breaches the contractual obligations; or one party is late in the performance of the obligations, or inability to perform, or in case the property being the object of the contract is lost or damaged due to the fault of a party and the other party has the right to cancel the contract and request for compensation.
It is worth noting that despite the fact that the law respects the freedom of agreement, establishment and disposition of civil transactions between the parties, even in the case of contract termination or cancellation. However, while the contract can be terminated at any time as agreed by the parties, the cancellation of a contract as agreed by the parties can only take place when the parties have agreed on the conditions for contract cancellation. That is, when a breach takes place, the parties can agree to terminate the contract immediately but cannot agree to cancel the contract if the breach is not previously agreed by the parties to be a condition for contract cancellation.
Thereby, it can be seen that the applicable conditions for contract termination and contract cancellation are completely different. This can also be explained by the difference in the legal consequences of contract termination and contract cancellation. While the consequences of contract termination are somewhat more varied and flexible, contract cancellation has almost the same consequences as the invalidity of a contract.
2. Distinguishing the consequences of contract termination from those of contract cancellation.
Consequences of contract termination: Since the applicable conditions for contract termination are more extensive than for contract cancellation, the consequences of contract termination also become very diverse accordingly. Specifically, the parties are not required to continue to perform their contractual obligations upon termination of a contract, but the termination of a contract may or may not be accompanied by any specific consequences, such as compensation for damages, penalties, or other consequences as agreed by both parties.
Consequences of contract cancellation: Pursuant to Article 427 of the 2015 Civil Code, when a contract is cancelled, it shall cease to be valid from the time of its entry and the parties do not have to perform the obligations already agreed upon, except for the agreements on penalties for breach of contract, compensation and dispute settlement. It can be seen that the cancellation of a contract has totally cancelled the contract and not recognized the contract validity. Therefore, the rights and obligations of the parties are returned to the way they were before signing the contract and the parties still have to pay compensation and are fined under the contract as agreed. In addition, the parties must return to each other what they have received after deducting reasonable expenses arising in the contract performance and expenses for property preservation and development.
From the aforementioned contents, it can be seen that the distinction between contract termination and contract cancellation plays a very important role in practice. It is not only a story in terms of legal terms but also a story about identifying and protecting the rights of the parties in the contract. Therefore, the subjects should have a thorough study for the best application.