Termination of Contract: Distinctions Between Termination, Rescission and Conversion

TBK m.125 grants the creditor three elective rights in synallagmatic contracts upon the debtor's default: (i) to demand actual performance and delay damages; (ii) to declare immediate renunciation of performance and demand positive damages in lieu; (iii) to rescind the contract and seek negative (reliance) damages.

Exercise of these rights generally requires that the creditor have granted the debtor a reasonable additional period and that the period have lapsed in vain (TBK m.123). Where the debtor has expressly declared an intention not to perform, where performance has become useless, or where the contract is one with a fixed date, no additional period is required (TBK m.124).

When rescission reaches the other party, TBK m.125/3 releases reciprocal performance duties and permits recovery of what was already given. The basis of restitution is subject to differing doctrinal approaches; it is inaccurate to say that every contractual term and accrued right disappears as though it never existed. Winding-up duties, interest and time limits depend on the claim's legal character.

On rescission the creditor may claim damages for invalidity of the contract — that is, negative damages (TBK m.125/3). Negative damages cover losses that would not have arisen but for the contract: for instance, expenses incurred under the contract or other opportunities forgone.

TBK m.126 concerns default in continuing-performance contracts whose performance has begun, typically leases and employment. A work contract is generally characterised by a single completed performance even if construction takes time. It cannot invariably be ended only prospectively; special provisions and the stage reached must be examined.

TBK m.126 lays down an important rule: in continuous-performance contracts on which performance has begun, on the debtor's default the creditor exercises termination instead of rescission. Such termination preserves the right to claim damages for the contract's premature end (positive damages).

'Conversion' (Umwandlung) refers to the situation where, the creditor having opted for damages in lieu of performance, the original obligation is replaced by a damages obligation. The contract is not entirely extinguished; rather, the principal performance is replaced by a monetary debt.

Choosing damages in lieu of performance is not invariably a novation and does not reset every deadline. Continuing security, penalties and interest depend on their legal basis; maturity and limitation depend on the claim and when it arose. A fresh limitation period should not be assumed merely because a different remedy was elected.

In contractual disputes, not only the signed text but also offer correspondence, revision history, invoices, delivery records, payment records, formal notices and the parties' subsequent conduct are taken into account. The formation, performance and termination of a contract often acquire meaning only through these ancillary documents.

Form requirements, authority of representation, penalty clauses, exclusion-of-liability provisions, standard terms and consumer-protection rules may all affect the validity or enforceability of a contract. For standard terms, the requirements of clear information, an opportunity to learn their content and acceptance under Article 21 of the Code of Obligations must be considered, together with any special consumer rules.

Before any dispute arises, the scope of obligations, delivery date, defect notice, default notice, interest and competent-court clauses should be drafted explicitly. Vague provisions may give rise to interpretation disputes and to difficulties of proof later on.