When you realize that the other party is violating the contract, do you have the right to temporarily suspend performance of the contract to limit damages if the other party continues to violate?

Legal grounds:

• Commercial Law 2005.

When you realize that the seller has not placed an order from the manufacturer while the delivery deadline has passed, will you continue to pay? If you continue to pay but the other party still does not place an order or has no goods to deliver, you will suffer even more losses.

In reality, cases like the above are not uncommon in commercial activities. And one party must bear the damage caused by the other party’s violation.

Therefore, commercial law allows the party who has breached the contract to have the right to temporarily suspend the performance of the contract to protect its rights.

1. Sanctions temporarily suspend contract performance

Temporarily suspending contract performance is a sanction in commercial relations stipulated in Article 308 of the 2005 Commercial Law.

Temporarily suspension of contract performance is the temporary failure to perform work (obligation), but that work (obligation) will be performed at a later time.

For example: Party A signs a contract to buy goods from Party B. Party A will pay a part in advance to Party B before Party B delivers the goods. In fact, when Party B is ready to deliver the goods, Party A has not yet made partial payment in advance, leading to Party B not yet delivering the goods to Party A even though the goods are ready for delivery. In this case, Party B is applying sanctions to temporarily suspend contract performance.

2. When can you temporarily suspend contract performance?

In essence, it is a commercial sanction. Therefore, one party is only allowed to temporarily suspend performance of the contract when there has been a breach of the contract by the other party.

Pursuant to Article 308 of the 2005 Commercial Law as follows:

Article 308. Suspension of contract performance

Except for cases of exemption from liability specified in Article 294 of this Law, temporarily suspension of contract performance is the temporary failure of one party to perform its obligations in the contract in one of the following cases:

1. The occurrence of a violation that the parties have agreed upon is a condition for temporarily suspending the performance of 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 temporarily suspending the performance of the contract if:

• The other party’s violation of the contract is a condition for temporary 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 one party may temporarily suspend performance of the contract. Therefore, when negotiating and drafting contracts, the parties should specifically stipulate the following contents:

• Where certain conditions (violations) occur, performance of the contract can be temporarily suspended?
• How must the party temporarily suspending performance of the contract provide notice?
• How long of temporary suspension of contract performance?
• If the breach of obligation leads to temporary suspension of contract performance is not remedied, how will it be handled?

3. Consequences of temporary suspension of contract performance

Pursuant to Article 309 of the 2005 Commercial Law as follows:

Article 309. Legal consequences of temporary suspension of contract performance

1. When the contract is temporarily  suspended, the contract is still valid.
2. The violated party has the right to request compensation for damages according to the provisions of this Law.

In principle, even though the contract is temporarily suspended, the contract still has legal value. So once the contractual obligations have not been fulfilled by the parties, the parties must complete those obligations unless otherwise agreed.

Therefore, when the party violating the contract has completely remedied the violation, the parties continue to perform the contract and the party that temporarily suspended performance of the contract has the right to request the violating party to compensate for damages.

Note:

• Temporary suspension of contract performance without legal grounds may also be a breach of contract and the temporarily suspending party must compensate for damages;
• Temporary suspension of contract performance has a direct impact on one party to the contract. Therefore, the party that temporarily suspends performance of the contract must immediately notify the other party of its temporary suspension of performance of the contract. If failure to notify causes damage to the other party, compensation must be made.