Termination of contracts of continual performance

Did you know that in the case of long-term service contracts, if you suspend orders, the contract may be tacitly terminated?

You are probably unaware of what happens when you are a party to a long-term, successive-tract service contract. In these contracts, the fact of placing orders on a continuous basis could be considered an obligation rather than a right. And thus, the other party could argue that the stoppage of orders for a certain period of time is cause for termination of the contract. And thus, legally allege that you have been the one who has terminated the contract. And, consequently request the penalties associated with such termination.

What do we talk about when we refer to contractual termination?

Before studying the contracts of successive tract and the tacit termination, it is convenient to review the contractual termination.

Thus, contractual termination is the explicit act by which a party withdraws from a contract. In other words, by performing an express act, it ceases to be bound by the contract.

The termination can be anticipated or by the term of the contract, if the extension of the contract is not wanted. It can be based on just cause, i.e., by means of breach by the other party. Or, by the unilateral will of one of the parties, without any other reason than the desire to terminate it.

If there is just cause, the other party won´t have to indemnify the other party for the damages caused by the termination. The unilateral termination without just cause, although admitted in law, obliges to the compensation of damages.

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How is contractual termination regulated?

Mainly established in article 1124 CC, which sets the possibility of the parties to terminate bilateral contracts. In other words, Spanish law does not oblige the parties to remain in a contract against their will. But this right is not unlimited. Unilateral termination is accompanied by certain consequences. These consequences may take the form of penalty clauses establishing financial amounts to be paid in the event of termination. Or, in the absence of a penalty clause, both consequential damages and lost profits must be compensated, if they are duly proven.

What are the requirements of the contractual termination?

The requirements inherent to this resolutory condition are:

• The party invoking the termination must have complied with its obligations.
• The defaulting party must be legally constituted in default.
• The termination judicially declared will have retroactive character and will extinguish the obligations with effect for the future.
• It shall only apply to bilateral contracts.

What obligation does a continuing performance contract entail?

Contracts of successive performance oblige the parties to perform several actions repeatedly, during a determined period of time.  That is to say, they are contracts whose object is not limited to a single action, as for example the purchase and sale. But contracts whose object is constituted by continuous bilateral obligations, such as supply contracts.

It is important to note that, in order to speak of a successive tract contract, both parties must have continuing obligations. It is not sufficient for one of the parties to have continuing obligations, as for example in the installment sale.

Examples of successive tract contracts

In order to facilitate a better understanding of what a contract of successive tract would be, we will give several examples:

1. A contract for the loan of uniforms and their laundry service. One party would be responsible for making available to the other party uniforms in a state to be used (clean, ironed, etc.). The other party is obliged to request it according to the needs previously established in the contract.

2. They are also very common in the hotel industry. A beverage company “lends” a machine (coffee, beer tap) and is obliged to serve the supplies. And, the other party is obliged to acquire them, on an exclusive basis and with contractually established minimums.

In both cases, they share a monthly, weekly, etc. consumption. And, they are obliged – expressly or tacitly – to place those orders, since that and no other is the meaning of the contract. Therefore, if they temporarily stop placing orders, the other party could understand that a tacit withdrawal has ocurred. Because, under certain circumstances, the abandonment of such orders could amount to an abandonment of its obligations.

What is the tacit termination of successive tract contracts?

The word “tacit” means something that is not expressed or said, but which is understood or implied. The tacit contractual termination is the termination of the contract exercised unilaterally by one party, in a non-express manner.

That is, using the above examples, the owner of the bar decides to stop restocking the beer kegs. But he does not communicate to his counterparty that he does not want to be served any more beer. He simply dissociates himself from the contract, as a fait accompli policy.

So, one party (the owner of the bar) understands that the contract is (tacitly) terminated and the other thinks that it is still in force.

And, if each of the parties has a different perception regarding the validity of the contract, when does a temporary suspension of orders constitute a tacit termination of the contract with all that it entails? And, when can the injured party request the compensation that, if any, entails such termination of the contract?

What does the case law say in this regard?

The Provincial Court of Álava 56/206, of May 28, establishes that withdrawing contact with the counterparty does not in itself constitute conclusive behavior.

Madrid Provincial Court 62/212, of February 6 provides clarity on the matter. Thus, it rules that the passage of time does not reveal a tacit will to terminate a contract. At the very least, the existence of facts, acts or conduct revealing the will to terminate is necessary.

Lleida’s Provincial Court ST 255/2012 establishes that, in order to be in the presence of a tacit termination, a sufficiently long period must have elapsed. During this period there must have been an inactivity of the parties, resulting in a mutual breach. The tacit termination of the contract may be inferred from this. With signs, words or acts it will be possible to externalize the extinctive will of the parties that can be unequivocally deduced.

The recent judgment of the Provincial Court of Valladolid 124/2018, of March 27, guides us a little more. This dictates that there must be conclusive acts that state the will to leave the contract without effect. Through the tacit will of the parties the contract will be terminated.

Conclusion

It may be concluded that it will be necessary to consider the circumstances of the case in order to verify whether the contract was actually tacitly terminated.

The case law requires the passage of a long period of time, to speak of tacit termination. In other words, such suspension of orders must be relevant compared to the duration of the contract.

In addition, together with the suspension of orders, there must be a willingness to terminate through conclusive acts.

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