Through the execution of a contract two or more persons create or transfer rights and obligations, [1] however, there is a risk that one of the parties or even both will breach the agreement.
Nonperformance is the failure to comply with contractual obligations including defective or late performance. Either party is in breach by failing to perform exactly as agreed. [2] The parties must be careful when executing the contract since noncompliance generates several consequences. In this note we will address each of them:
Rescission
It is the right of the contracting party who does comply with his obligation to terminate the contract without liability, when the other party fails to comply with his duties assumed in the agreement.
Rescission implies that the contract is terminated and therefore the obligations are not fulfilled.
If agreed in the contract, rescission is claimed with a notice to the defaulting party or before a judicial authority.
Specific performance
The complying party may claim from the defaulting party the specific performance of his unfulfilled obligations, according to the law.
Thus, the defaulting party may be forced by a judicial authority to comply with his unfulfilled obligations.
Conventional penalty
A conventional penalty is defined as a monetary sanction to be paid by the defaulting party to the complying one, if it is included in the contract. It is an amount of money expressly agreed by the parties in the event of breaches of the contract, even for partial noncompliance.
Mexican law establishes that the conventional penalty clause may not exceed the value or the quantity of the principal obligation. Furthermore, the complying party can only claim it when it claims the recission of the agreement.
However, if specific performance is claimed, the defaulting party may be liable to pay the conventional penalty when it has been agreed as a sanction for the delay of his obligation or due to noncompliance within the agreed terms.
Damages and lost profits
Mexican civil law obliges any person who defaults on his contractual obligations to be liable for the damages and lost profits caused to the other party.
Therefore, the defaulting party is obliged to reimburse or replace the loss thereby caused to the other party’s property in addition to recovering the lawful profits foregone.
The payment of damages and lost profits is applicable if a conventional penalty has not been agreed and may also be claimed either in rescission or specific performance of the contract.[3]
Conclusion
Breaching contractual obligations results in the payment of damages and lost profits or a conventional penalty, depending on what has been agreed in the contract and what is claimed by the complying party (rescission or specific performance).
It is therefore advisable to comply precisely with the obligations agreed in any contract in order to avoid the breach of the contract and give a reason or cause for its rescission. Otherwise, the other party may claim or sue the rescission and the payment of the corresponding conventional penalty.
No person is liable for acts of God, except when the person has been a contributing cause thereof, thus, in principle Mexican law excludes Acts of God as a reason that enables the complying party to claim the payment of a conventional penalty. [4] In addition, attention must be paid to the terms that the parties agree in the contract so as to the exclusion of liability when one of the parties defaults.
[1] Article 1793 of Federal Civil Code.
[2] “Resolución del Contrato por Incumplimiento”, Vaca C. Francisco, Corel Ventura. https://archivos.juridicas.unam.mx/www/bjv/libros/1/138/10.pdf
[3] Article 1949 of Federal Civil Code.
[4] Article 1847 of Federal Civil Code.
By: Monserrath Bustamante
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