Termination of a Contract: What You Need to Know

Fatima Alsayed ([email protected]) – Associate

Contracts are essential in defining the rights and responsibilities between parties. However, there are times when a contract must be terminated, whether by mutual agreement, breach or other legal reasons. Bahrain’s legislation regulates the termination of a contract under Articles 140 to 147 of the Civil Code (Decree Law 19/2001) (BCC). This article will explore the conditions where a contract may be terminated.

Rescission of the Contract

In a bilateral contract, where both parties are bound by mutual obligations, if one party fails to fulfill their duties within the agreed time frame, the other party is entitled to either demand the performance of the contract or seek its rescission from a judge. Furthermore, the non-breaching party may claim damages for any losses incurred as a result of the failure to perform, unless they themselves have also failed to meet their own obligations. However, the judge has the discretion to grant an extension of time to allow the defaulting party to perform their obligation, depending on the circumstances. The judge may also reject the application for rescission, if the unperformed obligation is insignificant compared to the obligations in the contract’s as a whole. This is stated under Article 140 BCC.

Article 141 BCC further provides that in the event of a party’s failure to fulfill their contractual obligations, the contract will not be considered automatically rescinded (ipso facto) without a court order, unless the contract explicitly provides for such termination and both parties are fully aware of its legal consequences. This means that a failure to perform does not, by default, result in the cancellation of the contract unless the parties have expressly agreed to this outcome. Furthermore, except in commercial transactions, even if the parties have agreed that the contract will be automatically rescinded in the case of non-performance, they remain obligated to serve a notice requiring performance.

This has been confirmed by a recent ruling of the Bahraini Court of Cassation in Challenge No. 246 J.Y. 2011 wherein the Court held that:

“It is established, according to Articles 140 and 141 of the Civil Code, that in bilateral contracts, if one of the parties fails to fulfil their obligation when due, the other party may, after serving notice, request that the contract be rescinded, unless they themselves have also failed to fulfil their obligations. In non-commercial matters, the intention of both parties expressed explicitly in the contract to treat the contract as automatically terminated in the event of non-performance does not exempt the requirement of notice, even if they agree to waive it. Therefore, notice is considered an essential condition for the rescission of the contract, whether it is an agreed rescission that occurs immediately upon the failure to perform according to the contract’s terms or a judicial rescission, which arises through a court order in the absence of such a provision”.

Mutual Consent to Rescission of the Contract

The contracting parties may agree to rescind the contract by mutual consent after its conclusion, as long as the subject matter of the contract is still in the possession of one of the parties. However, if the subject matter is lost, damaged, or partially transferred to a third party, the contract can only be rescinded for the remaining portion of the subject matter. In such cases, the party may also be entitled to a share of any compensation for the loss or damage, corresponding to their interest in the contract. This is stated under Article 148 BCC.

Termination of the Contract

In accordance with Article 145 BCC, if the performance of an obligation in a bilateral agreement becomes impossible due to a force majeure event, the obligation under such agreement shall be considered extinguished and the corresponding obligations of the other party will be discharged, resulting in the automatic termination of the contract. However, in cases where the impossibility of performance is partial, the party has the option to either demand the enforcement of the contract to the extent that the remaining obligation can still be performed or to seek the termination of the contract in its entirety.

In accordance with Article 146 BCC, in a unilateral contract, if the performance of an obligation becomes impossible due to an external cause beyond the party’s control, the contract will be automatically terminated. However, if the impossibility is only partial, the other party may choose to enforce the contract for the portion of the obligation that remains possible to perform.

Effects Following Termination and Rescission of Contracts

Following termination and rescission, the parties will return to their original positions before the execution of the contract. If one party is unable to restore the other to their prior status, the court may order the party to provide an equivalent performance instead. This is stipulated under Articles 142 and 147 BCC.

Concluding Remarks

In conclusion, Bahrain’s Civil Code offers a comprehensive framework for the termination of contracts. These provisions ensure that both parties are protected and that the termination process is carried out fairly and with due legal consideration. Understanding these legal guidelines is essential for navigating contractual disputes and safeguarding the rights and obligations of all parties involved.

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