When the other party has seriously breached the contract, do you still continue the contract to fulfill your obligations or terminate the contract to limit damages?

Legal grounds:

• Commercial Law 2005.

In a software design service contract, if the service provider violates the performance deadline and fails to complete any items, while you have paid 50%. So do you continue to pay according to the schedule or terminate the contract to limit damage because you no longer have faith in the service provider?

In actual commercial activities, there are many cases similar to the above, and deciding what to do in case you are the service lessee is not easy. Terminating the contract without a solid basis can risk becoming the party in breach of the contract and having to compensate for damages.

Therefore, negotiating and drafting contracts is very important so that when this situation occurs, dispute resolution is easier.

However, the law also has regulations that one party can apply when the other party violates the contract to limit damages caused by the violation.

1. Sanctions for suspension of contract performance

Suspension of contract performance is a sanction in commercial relations stipulated in Article 310 of the 2005 Commercial Law.

Suspension of contract performance is the termination of one party’s performance of a contract, even though they still have unfulfilled rights and obligations in that contract.

For example: Party A agrees to buy equipment from Party B and has paid 80% of the contract value. Party B delivered the device but it did not comply with the design specifications, making it impossible for Party A to use that device to connect to their machines, so it could not operate. Party A requests Party B to change the equipment, but Party B cannot do so within a reasonable time. Therefore, Party A has terminated the contract and does not continue to make payments. In this case, Party A is implementing a sanction to suspend the performance of the contract to limit greater damage to itself.

2. When can contract performance be suspended?

Suspension of contract performance is a sanction. Therefore, this measure can only be taken when there has been a breach of contract.

Cases of suspension of contract performance that do not stem from a breach of contract or agreement are likely to lead to the suspension becoming a breach of contract.

Pursuant to Article 310 of the 2005 Commercial Law as follows:

Article 310. Suspension of contract performance

Except for cases of exemption from liability specified in Article 294 of this Law, suspension of contract performance is the termination of one party’s performance of contractual obligations in one of the following cases:

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

According to the above regulations, unless a breach of contract is exempted from liability, a party will be entitled to use the remedy of suspending the performance of the contract if:

• The other party’s violation of the contract is a condition for suspension of contract performance; And this condition is clearly stated in the contract;
• Or the other party fundamentally violates its contractual obligations.

The above provisions are general principles to determine when a party may suspend performance of the contract. To make it easier for the parties during the contract implementation process as well as when resolving disputes (if any), when negotiating and drafting the contract, the parties should include the following specific contents in the contract:

• What conditions (violations) occur will lead to the performance of the contract be suspended?
• How must the party suspending performance of the contract provide notice?
• What must each party do when the contract is suspended?

Example for a goods sale contract:

• The buyer can include the seller’s violations as conditions for the buyer to suspend performance of the contract: non-delivery, incomplete delivery, untimely delivery, incorrect type of goods, incorrect quality, …
• The seller can include the buyer’s violations as conditions for the seller to suspend performance of the contract: failure to receive goods, failure to pay, payment not on time, etc.

3. Consequences of suspension of contract performance

Pursuant to Article 311 of the 2005 Commercial Law as follows:

Article 311. Legal consequences of suspension of contract performance

When a contract is suspended, the contract terminates from the moment one party receives notice of suspension. The parties do not have to continue performing their contractual obligations. The party that has performed the obligation has the right to request the other party to pay or perform the reciprocal obligation.

The violated party has the right to request compensation for damages according to the provisions of this Law.

According to the above regulations, when a contract is suspended, the contract terminates from the moment one party receives notice of suspension. This leads to:

The parties do not have to continue to perform their remaining obligations;

Each party has the right to request the other party to pay or perform obligations corresponding to the obligations they have performed before the contract terminated.

Note:

• Suspension of contract performance without legal grounds will become a breach of contract;
• Suspension of contract performance has a direct impact on one party to the contract. Therefore, the party suspending the performance of the contract must immediately notify the other party of its suspension. If failure to notify causes damage to the other party, compensation must be made.