What worries business owners most is not signing the contract, but what happens when the other party fails to do what they committed to. Do you demand performance? Terminate the contract? Withhold your own obligation? Claim compensation? The Civil Transactions Law gives you several paths, and choosing the right path at the right time may determine whether you come out ahead or behind. Here is a practical guide to the options available to you.
The first rule: formal notice before any step
Before taking any action, there is a fundamental step that is often overlooked: the formal notice (i'dhar). The general rule is that compensation is not due except after putting the debtor on notice, unless there is an agreement or provision to the contrary. The notice is a formal notification by which you demand that the breaching party perform.
The notice may be by any agreed means, or by any means legally prescribed for notification — including filing the case itself or any judicial procedure.
But the law exempts you from notice in certain cases, including: if you agreed that the debtor is deemed on notice merely by the term falling due, if performance has become impossible by the debtor's act, or if they declared in writing that they will not perform.
Your options upon breach
In contracts binding on both sides, if one party fails to perform their obligation, you may — after the notice — seek one of two things, with compensation in both cases if warranted:
Option one: specific performance
To demand that the breaching party be compelled to actually perform what they committed to — deliver the goods, complete the work, transfer ownership. This is the default as long as it is possible. If specific performance would be onerous for the debtor, the court may limit the creditor's right to compensation if doing so causes the creditor no grave harm.
Option two: termination
To seek termination of the contract and release from it. But note: the court may reject the termination request if the part not performed is of little importance relative to the obligation as a whole. In other words, a minor breach may not justify terminating the entire contract.
The agreed termination clause — a powerful tool for companies
You may agree in advance in the contract that you have the right to terminate it upon the other party's breach without need for a court judgment. But this clause does not exempt you from the notice unless you expressly agree to waive it. Drafting this clause clearly can save you months of litigation.
An immediate weapon: the defense of non-performance (withholding your obligation)
One of the most powerful and fastest practical tools: in contracts binding on both sides, if the mutual obligations are due, you may withhold performance of your obligation as long as the other party withholds performance of what they committed to. Simply: "I won't deliver until you pay, and I won't pay until you deliver." This right protects you without need for a prior judicial procedure.
What if performance becomes impossible?
If performance of the obligation becomes impossible for a cause beyond the debtor's control (such as force majeure), their obligation and the corresponding obligation are extinguished, and the contract is dissolved automatically. If the impossibility is partial, the obligation is extinguished only in the impossible part, and the creditor may seek termination of the entire contract.
A tool of equity: unforeseen circumstances
What if performance has not become impossible, but has become onerous to a severe degree? Here the theory of unforeseen circumstances intervenes: if exceptional general circumstances arise that could not have been foreseen at the time of contracting, rendering performance onerous for the debtor such that they are threatened with a grave loss, they may invite the other party to negotiate. If no agreement is reached, the court may reduce the onerous obligation to a reasonable extent. Importantly: any agreement contravening this provision is void.
What happens after termination?
In both termination and automatic dissolution, the parties return to the state they were in before contracting, and if that is impossible, the court orders compensation. But in continuous (time-based) contracts (such as lease), termination has no retroactive effect.
An important point: termination of the contract does not extinguish the dispute-resolution clause (such as an arbitration clause) or the confidentiality clause, unless otherwise agreed. In other words, terminating the contract does not discharge your confidentiality obligation or your obligation to resort to arbitration.
Agreed compensation (penalty clause)
You may determine the amount of compensation in advance in the contract. But the court has the power to adjust it: it reduces it if the debtor proves it is excessive or that the obligation was partially performed, or does not award it at all if the debtor proves the creditor suffered no harm. Any agreement contravening this is void.
Conclusion
Upon breach, do not act on reflex — think about the path. Is performance possible and beneficial? Demand it. Is the relationship over and the breach fundamental? Terminate. Has the other party not performed their corresponding obligation? Withhold yours. The golden rule: always start with a clear written notice — it is a condition for many of your rights, a document proving your seriousness, and it often pushes the breaching party to perform before escalation.
How does LEXIUM help?
We assess your contract and the nature of the breach, and recommend the most suitable path — performance, termination, withholding, or compensation — while preparing the notice and necessary procedures, and drafting termination and compensation clauses in your future contracts to protect you in advance.
Disclaimer: This article is for general informational purposes only and does not constitute legal advice. See our full disclaimer.