Cancellation of a contract is an act that seriously affects the rights of the parties to the contract. So need to consider before applying.

Legal grounds:

• Commercial Law 2005.

In a contract to rent a factory for production, because the factory is damaged, before the lessee receives the factory for use, the lessor must repair the factory within 30 days from the date of signing the contract. However, even though the lessee had paid a deposit in advance, at the end of the 30-day period the lessor still had not completed the repairs. The lessee requested the lessor to complete repairs in order to put the machines into production, but the lessor did not do so and still demanded rent. Therefore, the lessee decided to terminate the lease contract because the factory was damaged and could not produce, and did not pay the rent but demanded the deposit back. In this case, the lessee is taking measures to cancel the contract to protect its rights.

In reality, there are many situations similar to the above, where one party does not achieve the desired goal when signing the contract, so they choose to cancel the contract to avoid damage due to the other party’s violation.

1. Sanctions for cancellation of contract

Cancellation of the contract is a sanction in commercial relations stipulated in Article 312 of the 2005 Commercial Law.

Cancellation of contract includes:

• Cancellation of the entire contract: is the cancellation of all contractual obligations in the contract. The contract is not effective from the moment it is entered into, even though it has been concluded for some time.
• Or partial cancellation of the contract: is the cancellation of part of the obligations in the contract, the remaining parts of the contract are still valid.

Example 1: Party A signs a contract to buy printing equipment from Party B. The two parties agree that Party A will deposit 50% to import machines from abroad within 30 days from the date of signing the contract. At the end of the 30-day period, Party A can only pay 10%, so Party B sends a document requesting Party A to make a full deposit within the next 15 days. However, after the next 30 days, Party A still did not deposit 50%, so Party B announced to cancel the contract because the purpose of purchase and sale was not achieved.

Example 2: Party A signs a contract to buy 100 tons of rice from Party B. The two parties agree to deliver in 5 installments, Party A will pay 20% of the value of that delivery in advance for each installment, the remaining value will be paid within 15 days from the date of delivery. The first delivery and payment were carried out correctly by both parties. But in the second installment, Party B could only deliver 15 tons and Party A also paid in full. Party A has requested many times, but Party B still cannot fully deliver the second batch of goods. Realizing that Party B cannot continue to deliver goods, Party A has announced to cancel the remaining part of the contract that has not been performed to Purchasing from other businesses.

2. When can the contract be canceled?

Because it is essentially a sanctions measure. So one party can only cancel the contract when there is a breach of the contract by the other party.

Therefore, cases of contract cancellation that are not caused by a breach of contract by one party or because the subject of the contract cannot be performed are likely to become a breach of contract.

Pursuant to Clause 4, Article 312 of the 2005 Commercial Law as follows:

Article 312. Cancellation of contract

4. Except for cases of liability exemption specified in Article 294 of this Law, contract cancellation sanctions apply in the following cases:

1. The occurrence of a violation as agreed upon by the parties is a condition for canceling the contract;
2. One party fundamentally violates contractual obligations.

According to the above regulations, unless the party violating the contract is exempted from liability, the violated party will be entitled to use the remedy of canceling the contract if:

• The other party has breached its obligations as a condition for canceling the contract, and this condition has been clearly stated in the contract;
• Or the other party has fundamentally violated its contractual obligations, causing the violated party to fail to achieve the purpose of entering into the contract.

The above two cases are general principles for determining conditions for contract cancellation. So if the contract is not more clearly stipulated, it will be difficult to resolve disputes about whether the violated party has the right to cancel the contract or not.

Therefore, when negotiating and drafting a contract, the parties should agree and clearly stipulate a number of contents such as:

• What are the current circumstances and goals of each party when signing the contract?
• What violations are conditions for contract cancellation?
• How must the party canceling the contract notify? Notice before canceling the contract is mandatory.
• When canceling a contract, what must each party do?

3. Consequences of canceling the contract

Pursuant to Article 314 of the 2005 Commercial Law, after canceling the contract, the contract is not effective from the moment the contract is entered into.

Therefore:

• The parties do not have to continue to perform the remaining obligations in the contract. Unless the parties have an agreement on the work after cancellation of the contract, the parties must perform these works.
• In addition, even though the contract has been canceled, the parties always have the right to sue if they believe that one party violates the contract, so the dispute resolution clause will still be valid.

In case the parties have partially performed the contract and then cancel the contract, the rights and obligations that have arisen and have been performed will be resolved as follows:

• Each party has the right to reclaim benefits due to the partial performance of its contractual obligations. If both parties have an obligation to repay, they must perform at the same time;
• The violated party has the right to request compensation for damages;

Note:

• Cancellation of the contract must have a legal basis. Otherwise, cancellation of the contract may become a breach of contract;
• The party canceling the contract must immediately notify the other party. If failure to notify immediately causes damage to the other party, the party canceling the contract must compensate.