Three routes, and they are not equal
Article 382 gives three ways out of a contract:
- By agreement — the main route, and nothing else is needed;
- By court order — on two grounds only: a material breach by the other party, or the other cases provided for by the Code, another law or the contract;
- By unilateral withdrawal — only where a law or the parties' agreement allows it.
The third route deserves emphasis. A letter saying "I am withdrawing from the contract" has no legal effect at all if the contract does not give a right of unilateral withdrawal and no law does. The contract carries on, and you become the party in breach.
What "material breach" means
Article 382 defines it, and the test looks not at the size of the loss but at deprivation of what was expected:
A breach by one party is material where it causes the other such loss that it is substantially deprived of what it was entitled to expect when making the contract.
So the test is not "how much loss" but "how much of the point of the contract is left". A breach worth little money that destroys the whole purpose can be material; a large but remediable one may not be.
A material change of circumstances: art. 383
This is one of the harder articles in the Code, and it has no direct US analogue.
The ground is a material change in the circumstances the parties built the contract on. When the change counts as material:
Circumstances have changed materially where they have changed so far that, had the parties been able reasonably to foresee it, they would not have made the contract at all or would have made it on substantially different terms.
That alone is not enough. If the parties cannot agree, a court may terminate the contract — and only where all four of the following are present together:
- when contracting, the parties assumed no such change would occur;
- the interested party could not overcome the causes of the change despite the good faith and care required of it;
- performing on unchanged terms would upset the balance of the parties' property interests and cause the interested party such loss that it would be substantially deprived of what it expected;
- neither trade usage nor the nature of the contract implies that the interested party bears the risk of the change.
The fourth condition is often decisive. If the contract itself put the price or currency risk on one party, that party cannot later fall back on art. 383.
Modification, as opposed to termination, is a different matter
Article 383 part five makes modification considerably narrower. A court may modify the contract for changed circumstances only in exceptional cases:
- where terminating it would be contrary to the public interest; or
- where terminating it would cause the parties loss significantly exceeding the cost of performing on the terms the court would set.
So the standard outcome is termination, not rewriting. An expectation that a court will reset the price to a "fair" level is not well founded.
Part four gives the court its bearings on the consequences of termination: a fair allocation between the parties of the costs of performing.
Procedure: form, and thirty days
Article 384 sets two practical rules.
First: the agreement to change or terminate takes the same form as the contract — unless legislation, the contract or trade usage says otherwise (in the edition of Law OʻRQ-683 of 21 April 2021).
Second, and this is often missed: a proposal must be sent first. You may go to court only:
- after receiving a refusal from the other party; or
- after receiving no answer within the period stated in the proposal, set by law or set by the contract — and where there is no such period, within thirty days.
A claim brought without this step will be sent back. In practice: written proposal first, then wait, then court.
Consequences: art. 385
- Modification — the obligations continue as modified;
- Termination — the obligations end;
- from when — from the moment of the agreement, or through the courts from when the judgment enters into legal force.
And the most important clause, because it is the opposite of what people expect:
Unless law or the parties' agreement provides otherwise, the parties are not entitled to reclaim what they have performed under the obligation before the contract was changed or terminated.
So termination does not look backwards. Money paid and goods delivered before termination stay where they are, unless the contract says otherwise. If you want an advance payment back on termination, you have to provide for it in the contract itself.
The last part: where the ground was the other party's material breach, you may recover the loss caused by the change or termination.
When drafting: four clauses
- A right of unilateral withdrawal. The statute does not give you one. If you want it, write it in — in which cases, and on how much notice.
- Accounting on termination. Article 385's default is that nothing comes back. Write down what happens to an advance, to a part-performed stage, to materials bought in.
- Who carries the risk. Putting the price or currency risk on one party in the contract removes that party's access to art. 383. It cuts both ways — draft it knowingly.
- The proposal step. Article 384's thirty days is the default. If you need to move faster, set a shorter period in the contract.