How to safely terminate a contract?

A contract is an agreement signed by consent between two or more parties that establishes rights and obligations and is born at the time of its signing. As a rule, the contract is terminated upon the fulfillment of the agreed obligations or at the end of its term.

However, there are situations in which the contract may be terminated before the obligations are fully fulfilled or even before the established contractual term expires, with the breaking of the legal bond that unites the parties.

In these cases, it is important to understand the reasons that lead to the termination of the contractual relationship, respecting the provisions that must be included in the termination term to obtain a secure termination of the contract.

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What are the types of contractual terminations? And what are their differences?

Contracts can be terminated in four ways: 1. Normal termination of the contract at the end of the term or the fulfillment of the agreement; 2. Extinction due to events prior to its celebration; 3. Extinction due to events after its celebration and 4. Extinction by death.

Normal termination of the contract: termination of obligations and end of term

The normal termination of a contract can occur when all parties involved fulfill their obligations as stipulated in the contract.

This may include the delivery of goods, the provision of services, or the payment of an agreed amount instantly, for example. Once all contractual obligations are fulfilled, there are no more outstanding liabilities for either party and the contract is considered terminated.
There will also be the normal termination of a contract when the term stipulated as term comes to an end.

However, the normal termination of a contract should not be confused with the termination of a contract, which occurs when one of the parties decides to terminate it before the fulfillment of the obligations by the parties or the end of its term of validity.

The normal termination of a contract signals the successful fulfillment of contractual obligations and the end of legal liabilities associated with the contract and the bond between the contractors.

Extinction due to factors prior to the celebration

The termination of a contract due to factors prior to its conclusion refers to situations in which a contract is considered void or voidable due to circumstances that existed before the contract was formed. We can list the following hypotheses:

Contractual Invalidity

Contractual invalidity occurs when a contract is considered void or voidable in the following situations:

• a) Due to the incapacity of the Parties: if one of the parties does not have the legal capacity to enter into a contract at the time of conclusion, the contract will be considered void.
• b) Due to the illegality of the Object: if the subject of the contract is illegal at the time of conclusion, the contract will be considered void.
• c) By mistake, intent, or duress: if the formation of the contract was influenced by error, intent, or duress, the contract may be annulled.
• d) In the absence of consent: if the consent of one of the parties was not properly obtained at the time of the conclusion of the contract, the contract may be canceled.

In cases where the contract is considered void, it means that it does not exist legally from the moment of its formation, creating no obligations or rights between the parties. The nullity of a contract is considered an absolute nullity, that is, incurable, since it violates essential legal principles, presenting defects or irregularities in fundamental legal, ethical, or public order norms, and the parties cannot validate or ratify a void contract to make it valid.

Thus, because the contract itself no longer produces legal effects, since it is treated as if it had never been concluded, there is no need to speak of the termination of a void contract.

Unlike void contracts, voidable contracts are initially valid, but can be terminated if one of the parties exercises their right of cancellation, which under article 178 of the Civil Code lasts 4 years. Thus, if legal action is not brought to annul a voidable contract within the four-year period, the right to file for the cancellation of the contract is forfeited and it will be considered valid. Another way to validate the voidable contract is when the parties validate (make valid) the defective act, making the parties accept the terms and conditions even though they are aware of the existing irregularity.

Thus, voidable contracts can be terminated upon the exercise of the right of cancellation by one of the parties, which must necessarily be declared judicially, by means of a declaratory judgment, to terminate the contract.

Repentance Clause and Express Termination Clause

The regret clause and the express resolution clause are other forms of termination of the legal transaction.

The express resolution clause is the provision established in the contract that provides for situations of default by a party, which, if configured, will result in the termination of the contract.

The advantage of stipulating an express resolution clause is the possibility of dissolving the contractual relationship that has become dysfunctional without the need for judicial intervention.

Provided in articles 474 and 475, the express resolution clause is, therefore, an alternative that offers a party to the contract the possibility of disconnecting from a contractual relationship, in the event of an undesirable event expressly provided for in the contract.

The cancellation clause, on the other hand, is a contractual provision that allows one or both parties to withdraw from the contract without suffering legal consequences. If one of the parties repents and terminates the contract in accordance with the regret clause, the contract is considered terminated.

In consumer relations, the cancellation clause allows the consumer to withdraw from the contract without the need for justification, returning the product or giving up the service, and being reimbursed for any amounts paid. This clause is of special importance in consumer relations, as it provides the consumer with an additional right of protection, protecting their vulnerability in the contractual relationship. The Consumer Protection Code - CDC, in its article 49, establishes the right to complain in consumer relations, namely:

Art. 49. The consumer may rescind the contract within 7 (seven) days from the date of their subscription or the act of collecting the product or service, whenever the contracting of the supply of products and services takes place outside the commercial establishment, especially by telephone or at home.

It is important to note, however, that this right applies especially to situations in which the hiring takes place outside the commercial establishment, such as when shopping on the internet, by telephone or at home. This clause seeks to balance relations between consumers and suppliers, guaranteeing the consumer the opportunity to evaluate the product or service before making the final purchase, especially in those situations where the decision is taken without direct physical contact with the product.

Extinction due to events after the celebration

The termination of a contract for events after its conclusion refers to situations in which a contract is terminated due to events or circumstances that occur after its formation. In those cases, in which one of the parties has suffered a loss, we speak of a contractual termination.

Contract termination is a broad concept, which has the following classifications: resolution, unilateral resilience, and distraction (or bilateral resilience), as we can see below:

Resolution

As a form of resolution, four categories emerge:

1. Voluntary Failure: 

Resolution for voluntary non-execution occurs when one of the parties, without justification, decides not to comply with their contractual obligations. Thus, it is related to the impossibility of providing benefits due to the fault or intent of one of the parties. In such cases, the aggrieved party has the right to seek redress for the losses and damages caused by the breach of contract.

Article 475 of the Civil Code (CC) provides for the possibility of the party injured by the default to request the termination of the contract with compensation for losses and damages, namely:

Art. 475. The party injured by the default may request the termination of the contract, if they do not prefer to demand compliance, and in any case there is compensation for losses and damages.

2. Involuntary Failure:

Involuntary non-execution also causes the termination of the contract by termination, which occurs when one of the parties is unable to fulfill their contractual obligations due to circumstances beyond their control, such as natural disasters or changes in legislation, for example.

3. Tacit Resolving Clause:

It is possible that when concluding a contract, the parties may cease to explicitly specify the relevance of certain obligations to the legal transaction in question. However, the non-fulfillment of an obligation by one party may lead the other party to no longer be interested in remaining in that contractual relationship.

In this sense, the tacit termination clause applies to terminate the contract. The clause derives from the law itself and applies in situations where the parties, during the term of the contract, lose interest in the concluded agreement. When such a situation occurs, the law allows the party that felt harmed by the other party's default to seek the termination of the contract in court, even if the possibility of such non-compliance is not expressly provided for in the contractual instrument.

The clause is considered to be tacit, not because there has been any presumption of the establishment of a resolving clause, but rather because of express legal determination. It is important, however, to seek judicial provision to terminate the contract.

4. Resolution for Excessive Excessive Excessive Fees:

Excessive burden occurs when an obligation becomes clearly more burdensome than when it was assumed, when faced with consideration for its default. When this occurs, it is possible to terminate the contract for excessive onerosity, due to a cause beyond its formation.

This possibility exists so that a balance can be guaranteed between the parties. Should the imbalance occur after the conclusion of the agreement, it may be resolved, even if such circumstances are not unforeseeable or extraordinary.

Unilateral Resilition

Unilateral restraint is the termination of the contract at the will of one or both parties, without there being any reason for this, and there is no need for justification and the consent of the other party. In these cases, the contract must provide for the hypotheses in which unilateral resilience is allowed. Resilition ends the contract without creating any liability for the parties.

Unilateral resilience occurs in contracts that admit dissolution by the simple declaration of will of one of the parties, provided that the law, implicitly or explicitly, admits this form of extinction. This is what article 473 of the Civil Code recommends:

Art. 473. Unilateral resilience, in cases where the law expressly or implicitly allows it, operates upon a complaint notified to the other party.

It should be noted that, in order to unilaterally rescind the contract, it is necessary for the party that intends to end the contractual relationship to formally notify the other party.

Bilateral Distraction or Resilience

Distraction (or bilateral restraint) is the termination of the contract by mutual consent of the parties, who decide to end the contractual relationship in an amicable manner. It is common to see clauses in contracts containing the provision of distraction, with the possibility of communicating the intention to terminate the contract of one party to the other and giving them the opportunity to decide on the termination.

This allows the parties to close their obligations early, relieving themselves of fulfilling their future installments and terminating the contract without giving rise to any liability.

According to the Civil Code, in article 472,”The distraction is done in the same way as required for the contract”. This means that the distraction must comply with the same formality as the contract, under penalty of absolute nullity. In other words, if the contact was made in written form, the distraction must also be made.

Extinction by death

The death of one of the parties involved in a contract may lead to its termination, freeing the other party from its obligations.

Some contracts may contain clauses that specify what happens in the event of the death of one of the parties. For example, a rental agreement may stipulate that the contract be transferred to a close relative if the tenant dies.

In very personal contracts, the execution of the contract depends on the skills or personal qualities of the deceased party. In such cases, death will result in the termination of the contract. For example, a contract with an artist for a one-time performance would be terminated if the artist died.

In contracts that are not very personal, obligations may be transferred to heirs or legal successors. However, if the obligation is too burdensome for the heirs, they may have the right to waive the contract.

Penalties for non-compliance with contractual clauses

Failure to comply with contractual clauses may result in penalties, depending on the nature of the default. Examples of some penalties are:

Payment of Losses and Damages:

Article 389 of the Civil Code establishes that:

Art. 389. If the obligation is not fulfilled, the debtor is responsible for losses and damages, plus interest and monetary updates according to regularly established official indices, and attorney's fees.

Losses and damages include the amounts suffered as a result of the resulting damage and the loss of profits, as provided in art. 402 of the Civil Code.

Art. 402. Except for the exceptions expressly provided by law, the losses and damages due to the creditor include, in addition to what the creditor actually lost, what reasonably ceased to profit.

Contractual Fines

Contractual fines are established in the criminal clause that provides for the penalty to be imposed in the event of partial or full default of an assumed obligation. The fines can be established in a fixed way, with a previously determined amount, or they can be calculated based on specific criteria, such as a percentage of the total contract amount or a daily amount.

Loss of Rights

Failure to comply with certain contractual clauses may result in the loss of specific rights under the contract. For example, if a party breaches a non-compete clause, they may lose the right to receive certain benefits under the contract.

Termination of the Contract

In some cases, non-compliance with a contractual clause may result in the termination or termination of the contract with specific penalties, such as the loss of the amounts already invested for the fulfillment of future obligations, among others.

Instruments used to formalize the termination

A well-drafted contract must have a termination clause, in order to establish the specific conditions regarding the termination of the bond. Thus, if one of the parties wishes to terminate the contract, they must follow the provisions established in this clause for a contractual termination in order to guarantee legal certainty.

The notice of termination, a common condition provided for in the contractual termination clauses, is a formal document that one party sends to the other, in advance, either judicially or extrajudicially, to inform them of their intention to terminate the contract. As a rule, this notification must be made in writing and must specify the date of termination and the reason for it.

After formalizing the intention to terminate the contract, the parties must draw up the respective term of termination of the contract, at which time they can give mutual discharge of the obligations that have been agreed upon, ending the contractual relationship in a secure manner. In the termination term, it is important to define that no obligation will remain valid, so that there are no pending issues for either party, with the exception of certain obligations, such as confidentiality clauses (if any), which must be complied with for the stipulated period, regardless of whether the contractual relationship has ended or not.

Also, in cases where there is a lawsuit, where the termination of the contract is ordered by the Judicial Branch, the decision of the respective court will be the document that will formalize the end of the contractual relationship.

How electronic signatures can help with the secure termination of contracts

As we have seen, it is desirable to formalize the intention to terminate a contract by sending the notice of termination. In addition, to securely terminate a contract, it is important that the parties formalize the act through a contract termination term to prove that there are no longer any outstanding obligations.

As the electronic signature promotes great agility in the formalization of documents, it will contribute to the formalization of contractual terminations, as it will accelerate the termination of the relationship between the parties.

Here at Clicksign, the user can send and sign both the notification and the contractual termination term with any of the three types of signatures provided by law (simple, advanced and qualified), with full validity and legal security, and this will make the process of terminating the contractual relationship much more agile and secure.