Thursday, April 1, 2021

Cancellation of Contracts

  Cancellation of Contracts

Cancellation is another remedy for non-performance. Cancellation brings an already existing contract to an end.  What is the difference between invalidation and cancellation?

Cancellation may take two forms-judicial or unilateral. Normally cancellation results from court order. However, there are exceptional circumstances where the party affected by non-performance may unilaterally declare cancellation with out the need to go to court.

A) Judicial Cancellation

As a rule, cancellation of a contract can take place through court action.  The party who claims cancellation as a remedy of non-performance shall bring an action to that effect.  Articles1784 and 1785 deal with the conditions under which a court may order the cancellation of the contract. Article 1784 reads:

A party may move the court to cancel the contract where the other party has not or not fully and adequately performed his obligations within the agreed period of time.

 

A party affected by non-performance may apply to a court requesting it to order the cancellation of the contract. However, it is important to note that a party has applied for cancellation does not necessarily mean that the court will order cancellation. The court may order the cancellation of the contract or not after her the parties and considering the circumstances of each case particularly in light of the conditions stated under Article 1785. This in short means that not all non-performances will lead to cancellation. Article 1785 reads:

 

The court does not cancel a contract when an action is brought to this effect for simply there is non-performance of a contract.  The court has mandatory obligation to consider the good faith of the parties.  Article 1785 has put the importance of good faith to guide the court in settling on either to order cancellation or not.

 

Art. 1785. – Good faith.

(1)    In making its decision, the court shall have regard to the interests of the parties and the requirements of good faith.

(2)    A contract shall not be cancelled except in cases of breach of a fundamental provision of the contract.

(3)    No contract shall be canalled unless its essence is affected by non-performance and it is reasonable to hold for such reason that the party requiring cancellation of the contract would not have entered into the contract without the term, which the other party has failed to execute being included.

 

This article instructs courts to consider a number of things before it render its decision. The court is required to consider good faith and the interest of the parties.  The court is particularly prohibited from declaring the cancellation of the contract where the breach is not fundamental. The burden of proof rests on the party who requires cancellation.  The party requiring cancellation shall establish that his interest is substantially affected by the failure of performance. Minor deviations from the terms of the contract may not be sufficient to cancel the contract. For example, the debtor’s delivery of a quantity less than the quantity agreed up on might not always lead to cancellation. If the discrepancy is small, it is better to resort to other remedies that canceling the contract. In the same way, if the debtor who has delivered a defective thing agrees to deliver a thing free of defect, it would be a violation of good faith for the creditor to refuse to accept; and thus the court may decline cancellation.

 

B) Unilateral cancellation

Unilateral cancellation connotes cancellation of a contract by one party without going to court of law. The law recognizes & gives effect to the automatic right of parties to cancel contract in certain circumstances. The circumstances under which a party affected by non-performance can unilaterally cancel a contract are dealt with under articles 1786-1789. We have such four circumstances, and discuss them separately.

 

(a) The first case, as indicated under article 1786, is where there is a cancellation clause in the contract. Article 1786 reads as:

A party may cancel the contract where a provision to this effect has been made in the contract and the conditions for enforcing such provision are present.

 

This provision is a reaffirmation of freedom of contract. The parties can incorporate a cancellation clause in their contract. Thus, the law recognizes unilateral cancellation made according to the cancellation clause. It relieves parties from going to court and also avoids litigation and court workload.

(b) the second cases relate to cases where the debtor has failed to honor certain time limits. It is important to note that not all lapses of time limits would lead to unilateral cancellation. Article 1787 reads:

 A party may cancel the contract where the other party has failed to perform his oblations within the period fixed in accordance with Art. 1770, 1774, or 1775 (b).

 

According to this provision, the debtor’s failure to perform his obligations within the time limits set by the cross-referenced articles 1770 (i.e period of grace), 1774 (I.e period fixed in the default notice), and articles 1775 (b) (obligations that are such that they must be performed within the time fixed) would entitle the creditor the contract unilaterally.

 

(c) the third case is where performance becomes impossible. Article 1788 reads as:  

A party may cancel the contract even before the obligation of the other party is due where the performance by the other party of his obligations has become impossible or is hindered so that the essence of the contract is affected.

 

This provision envisages situation where performance was possible at the time of the making of the contract but which becomes impossible afterwards. This is usually referred to as intervening impossibility, and different from that found under article 1715. The impossibility under article 1715 affects the validity of the contract and its remedy is invalidation. However, the impossibility under article 1788 occurs after formation but before performance, and as such affects performance, and its remedy is cancellation. Assume the debtor has agreed to deliver a specific object which existed at the time of the contract. However, the thing is destroyed beyond repair before the debtor delivers the thing. It now becomes impossible for the debtor to perform his obligation. Thus, the remedy for the creditor is to unilaterally cancel the contract. The creditor can do this even before the due date simple because there is no point in waiting the arrival of the due date. However, the impossibility shall affect the essence of the contract as in the example above.

(a)    the last case where unilateral cancellation can be invoked is the case of anticipatory breach of contract. Article 1789 reads as;

(1)   A party may cancel the contract where the other party informs him in an unequivocal manner that he will not carry out his obligations under the contract.

(2)   The party who intends to cancel the contract shall place the other party in default and the contract shall not be cancelled where the party in default produces with in fifteen days securities sufficient to guarantee that he will perform his obligations at the agreed time.

(3)   Notice shall not be required and the contract may be cancelled forthwith where a party informs the other party in writhing that he will not perform his obligations.

 

When one of the parties an unambiguously communicates his refusal to perform, the other party may unilateral cancel the contract if he chooses. However, the party intending to cancel the contract shall give default notice to the refusing party. The refusing party may prevent the cancellation of the contract by furnishing, within fifteen days, sufficient security to guarantee that he will perform his obligations as agreed. So, here we expect a change of mind of the debtor; but not mere change of once mind but completed with the furnishing of securities. Nevertheless, if the refusal is communicated in writing, the party intending cancellation is not required to give default notice, and he may immediately cancel the contract.

 

To conclude, the Ethiopian law of contract provides cancellation-judicial or unilateral-as one remedy for the party affected by non-performance. By so doing, the contract comes to an end. What then is the consequence of cancellation? Articles 1815 and following provisions deal with this question. The most important consequence is that the parties shall be reinstated in the position, which would have existed, had the contract not been made. The implication is that what ever the parties have performed in pursuance of the contract has no effect, and what they have paid or delivered shall be returned. Thus, by canceling the contract, the party affected by non-performance may claim back what he has paid or delivered. However, this may not be sufficient to satisfy him because he may have lost a benefit he could have gained from performance. In this case, he may claim compensation in addition to cancellation.

1 comment:

  1. Please clarify the difference between invalidation and cancellation?

    ReplyDelete

Cancellation of Contracts

   Cancellation of Contracts Cancellation is another remedy for non-performance. Cancellation brings an already existing contract to an end....