What are the options when an obligation is breached?

Another variant of that question, and very common by the way, can be…: Can a promise of sale be unilaterally terminated if the buyer does not pay me on time?

In the processes of acquisitions or sale of companies, business or business units, the parties usually agree on reciprocal obligations between themselves. These reciprocal obligations are those in which both participants are debtors and creditors, that is, they both have distinct but linked obligations.

And, these obligations, in the Law field, are known as synallagmatic obligations. These obligations are interdependent. In other words, there are two provisions and each one is a counterpart of the other, one does not exist without the other (genetic synalagma).

Above all, it operates the so-called exceptio non adimpleti contractus (exception of the unfulfilled contract). As a result of this exception, a person who has not complied with or is not willing to comply with the contract cannot demand its compliance.

Thus, this exception is deduced from Articles 1100 and 1124 of the Civil Code (CC) and it is present in many other places (as an example, Article 1467). The exception cannot be invoked if the party has breached it first.

In addition, in the Article 1100.3 CC it is expressly stated:

“in the case of reciprocal obligations, none of the obligors will be in default if the other does not comply or does not agree to duly comply with its obligations. As soon as one of the obligors fulfils its obligation, the other begins to default”.

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What if it has not been breached, but it has been poorly executed?

In that case, the exception known as exceptio non rite adimpleti contractus may be invoked. According to this exception, compliance of the obligation by the party who has defectively complied with it (without the need for a breach) may be required. This exception operates in the same way as the previous one, but is based on partial or defective non-compliance.

Can the contract be terminated for its breach?

In conclusion, the aggrieved party may choose between demanding compliance of the contract or the cancellation of the obligation. In the latter case with compensation for damages and payment of interests in both cases.

In addition, he may also request the termination of the contract. Even after he has opted for the fulfillment of the contract, when this fulfillment is impossible.

What would happen if the non-compliant party opposed the termination of the contract?

In this case, the Courts of Justice will be the ones to rule on the resolution that is claimed. This is provided when no deadline can be set for the fulfillment of the contract. This is without prejudice to the rights of third-party purchasers, in accordance with articles 1295 and 1298 of the Civil Code and the provisions of the Mortgage Law.

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Legal Due Diligence

Legal Due Diligence is the analysis of the business through the revision of documents and interviews of the employees. Normally, it is done when one wants to purchase a business or a business unit.

What requirements are necessary to proceed with the termination?

The requirements are the following:

1. That these are reciprocal obligations
2. That the person who is calling for it has complied or is willing to comply and
3. That there is a serious breach that leads to the frustration of the end of the contract (in the case of partial or defective breach, we must look at each case).

The prescription deadline for the correspondent action is 15 years.

What are the effects of the termination?

According to the Supreme Court ruling of 15^th July, 2003:

“The effects of the termination of the contract are generally “ex tunc”, which means that the contract returns to the pre-existing legal status as if the busines had not been concluded. This therefore entails an obligation to return to each party what it has received from the other by resulting from the link of obligations.

In conclusion, the termination of the purchase-sale entails as an effect the return of the thing sold to the seller. Consequently, as far as the price is concerned, a different solution can be adopted, as is the case here. The return of part of the price paid in appropriate application of the liquidation of the state of possession. That is to say, it is retroactive and must go back to the moment immediately prior to the conclusion of the contract.”

What happens if the aggrieved party demands fulfillment of the obligation?

In the event that the aggrieved party demands compulsory fulfillment, it will be taken into account the positive contractual interest by which the current situation is compared with what would have been the perfect compliance of the contract.

Whereas if termination is demanded, the negative contractual interest, which is the comparison of the present situation with the situation immediately prior to the conclusion of the contract, must be added.

In many contracts, automatic termination is agreed upon despite the fact that article 1124 CC states that termination is decreed by the court.

If you liked this article, you may also find the following interesting

The Termination of Bilateral Obligations (in Spanish Law)

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