What did the case reviewed by the Court consist of?
In a recent ruling, the First Chamber of Mexico’s Supreme Court of Justice (the Court) examined whether it is legitimate for one of the parties in a contract to conclude or terminate it unilaterally and without any justification.
Although the matter examined by the Court was very specific, in the sense that it involved an agreement called a “Nomination Letter” that met the characteristics of a supply contract, which did not have a stipulated duration. However, due to the characteristics of the document, the Court concluded that it did not imply that either party could terminate it at any time, nor that it would continue indefinitely.
Even though the agreement contained a clause to rescind it, in practice this did not happen. Therefore, the Court had to analyze the documents submitted in the trial to determine how the contractual relationship functioned.
In the end, the Court determined that by one party prematurely and unjustifiably terminating a contract, it incurred contractual liability.
Therefore, the appropriate was for the party that unjustifiably terminated the contract to compensate the other party for the damages and lost profits caused by such termination.
Now then, could what the Court has decided be applicable to any other type of commercial agreement?
It is not uncommon for certain commercial agreements, for example, service or supply contracts, for the party with greater bargaining power to include a clause that allows them to terminate the contract without cause, without liability, and by simply notifying the other party in writing.
In that case, could the party that terminated the contract without cause be ordered to pay damages caused to the other contracting party? This, regardless of whether the parties agreed to it in the contract?
Well, first we would have to address the type of commercial agreement. For example, the grounds for termination of credit contracts, or guaranty contracts, for instance, are very specific.
For such operations, the applicable legal framework mostly regulates termination cases in a precise manner, due to their scope and nature. Therefore, a clause for unilateral early termination without cause could be widely challenged in court, not to mention if it is not even included in the contract and one of the parties decides to terminate it under those terms.
However, in atypical contracts like the one examined by the Court, which are not regulated, they will have to be interpreted according to the general rules of contracts and the agreement reached by the parties, or, failing that, in accordance with the contract that is most similar, among other tools provided by law.
A different situation would be if the parties include a clause that empowers them to rescind the contract in case of the other party’s breach.
Although it is not even necessary to include it, since the law empowers them to do so, as long as there is a breach by the party to whom the termination will be notified. In the first case, an express resolutory condition is present, and in the second case, an implied resolutory condition is made, which both have been recognized and endorsed by our courts.
What can we conclude?
The unilateral decision of one party to terminate a contract without cause, even if it is contemplated as a remedy in a commercial agreement, with or without duration, could be regarded by a judge as a breach of the contract, with the consequent order to pay damages and lost profits to the other party.
This is because the Court sought to sanction the illegitimate behaviors of the parties in their contractual relationships, such as the unilateral termination of a contract without any justification.
This does not mean that a party who does fulfill their obligations under a contract is prevented from concluding it if the other party does not fulfill what they in turn committed to. In such a situation, the law does legitimize it, whether it was agreed upon in the contract or not.
Of course, the recommendation will always be to document and leave evidence, both of the compliance by the party that terminates the contract (the one who rescinds it) and of the one that breaches it. In a potential trial, such evidence will lead to convincing a judge that the contract was legitimately rescinded.
Here you can find the link to the press release that refers to this Court criterion https://www.internet2.scjn.gob.mx/red2/comunicados/comunicado.asp?id=8333
