Termination of service supply contracts in accordance with legal regulations

This article clarifies the regulations relating to the termination of service supply contracts and the legal consequences arising from improper or unresolved termination, thereby helping the parties better understand their respective legal responsibilities.

I. Current situation of termination of service supply contracts

At present, the termination of service supply contracts has become relatively common, particularly in the context of an economy experiencing significant fluctuations and continuous development. Disputes related to contract termination are increasingly complex, requiring the parties involved to have a clear understanding of the applicable legal regulations and contractual provisions in order to protect their lawful rights and interests.

II. What is termination of a service supply contract?

1. Concept of termination of a service supply contract

Pursuant to clause 9, Article 3 of the Law on Commerce 2005, the provision of services is understood as a commercial activity whereby one party (the service provider) undertakes to perform services for another party and receives remuneration, while the service user (the client) is obliged to pay for and use the services in accordance with the agreement.

Currently, the Law on Commerce 2005 does not specifically define a service supply contract. However, pursuant to Article 513 of the Civil Code 2015 that a service contract is an agreement between the parties, whereby the service provider performs work for the service user, and the service user must pay the service fee to the service provider.

Accordingly, based on the termination of a service supply contract may be understood as the cessation of performance of the agreements reached by the parties in the contractual relationship, resulting in the complete suspension of the exercise of rights and performance of obligations. The obligated party is no longer required to continue performing its obligations, and the entitled party may no longer compel such performance.

2. Cases leading to termination of a service supply contract

Pursuant to Article 422 of the Civil Code 2015, a service supply contract may be terminated in the following cases:

• The contract has been fully performed;
• Termination by agreement of the parties;
• The individual entering into the contract dies, or the legal entity entering into the contract ceases to exist, where the contract must be performed by that specific individual or legal entity;
• The contract is rescinded or unilaterally terminated;
• The contract cannot be performed because its subject matter no longer exists;
• The contract is terminated due to a fundamental change of circumstances;
• Other cases as prescribed by law.

III. Legal regulations relating to termination of service supply contracts

1. Relevant regulations when handling termination of service supply contracts

When resolving the termination of a service supply contract, the parties should pay attention to the following important regulations:

Pursuant to Articles 428 and 520 of the Civil Code 2015, with respect to service supply contracts, the parties have the right to unilaterally terminate the contract in the following cases:

• Where the continued performance of the work is no longer beneficial to the service user, the service user has the right to unilaterally terminate the contract but must give the service provider prior notice within a reasonable period; the service user must pay remuneration corresponding to the portion of services already performed and compensate for damages.
• Where the service user seriously breaches its obligations, the service provider has the right to unilaterally terminate the contract and claim damages.

Where a contract is unilaterally terminated, it terminates from the time the other party receives the termination notice. The parties are not required to continue performing their obligations, except for agreements on penalties for breach, compensation for damages, and dispute resolution. A party that has performed its obligations has the right to request payment for the portion already performed.

The statute of limitations for initiating a lawsuit to request a court to resolve a contractual dispute is three (03) years from the date on which the entitled person knew or should have known that their lawful rights and interests have been infringed, pursuant to Article 429 of the Civil Code 2015.

The parties may also have the right to request the court to terminate the contract where circumstances have fundamentally changed and the parties are unable to reach an agreement on amending the contract within a reasonable period under Article 420 of the Civil Code 2015.

If disputes arise, the parties may apply dispute resolution methods such as negotiation, mediation, or arbitration.

2. Methods of handling termination of service supply contracts

In principle, a contract is an agreement between the parties; therefore, upon termination, the parties should seek to resolve issues by mutual agreement. If the rights and obligations can no longer be performed, termination of the service supply contract should be carried out. When termination occurs, the resolution must comply with the contractual provisions and applicable laws, including the following steps:

• Step 1: Resolving and substantiating issues arising under the contract demonstrating that continued performance is no longer beneficial, or establish a breach of contractual obligations, or confirm that the case falls within those permitting unilateral termination;
• Step 2: Notifying the other party of the termination of the service supply contract;
• Step 3: Completing the termination process, liquidating the contract, and fulfilling all financial obligations.

3. Consequences of an unresolved termination of a service supply contract

Failure to properly resolve the termination of a service supply contract may lead to various legal consequences for the parties involved, including:

• Contract remaining in effect: Despite the existence of issues or breaches, the contract may still be deemed legally valid, requiring continued performance of obligations;
• Financial risks: The parties may face compensation for damages or penalties for breach due to improper performance;
• Difficulties in dispute resolution: Unresolved termination may result in prolonged and complex disputes, thereby adversely affecting business operations;
• Reputational damage: the inability to terminate contracts in force majeure situations or serious breaches may undermine the parties’ market reputation;
• Obstacles to new transactions: An un-terminated contract may hinder the execution of new agreements and affect business plans.

IV. Common questions regarding termination of service supply contracts

1. What is the legal procedure for terminating a service supply contract?

Based on the relevant provisions of the Civil Code 2015 and the Law on Commerce 2005, the procedure for terminating a service contract generally includes:

• Agreement on termination: 
  + The parties may mutually agree to terminate the contract prior to expiry for legitimate reasons.
  + Such agreement should be made in writing, clearly stating the reasons, termination date, and terms for contract liquidation.
• Notice of termination: 
  + In the absence of an agreement, one party may unilaterally terminate the contract but must provide written notice to the other party within a reasonable period in advance. 
  + The notice period is typically stipulated in the contract; otherwise, statutory provisions apply. The notice should specify the reasons, termination date, and any related requests.
• Contract liquidation: Following notice, the parties must liquidate the contract, confirming completed obligations, outstanding debts, and issues related to assets (if any).
• Handling legal consequences: Depending on the grounds for termination and the parties’ agreements, issues of compensation for damages or penalties for breach may arise, which must be handled in accordance with the law and the contract.

2. How are the rights and obligations of the parties affected upon termination?

Upon lawful termination, the parties are no longer required to perform obligations that have not yet arisen. However, rights and obligations that arose prior to termination remain effective and must be fulfilled, including payment obligations, compensation for damages, penalties for breach (if any), and surviving provisions such as confidentiality, asset or data handling, or other clauses intended to remain in effect after termination.

3. If one party breaches the contract, may the other party immediately unilaterally terminate the contract?

Pursuant to Articles 428 and 520 of the Civil Code 2015:

• A party has the right to unilaterally terminate the contract without compensation where the other party seriously breaches its obligations, or where otherwise agreed or provided by law.
• Where the service user seriously breaches its obligations, the service provider may unilaterally terminate and claim damages.
• Where the continued performance is no longer beneficial to the service user, the service user may unilaterally terminate but must provide reasonable prior notice, pay remuneration for services already performed, and compensate for damages.

Accordingly, a party may immediately unilaterally terminate a service supply contract in the event of a serious breach by the other party, provided that reasonable prior notice is given.

4. Which reasons are not considered lawful grounds for termination?

Pursuant to Article 422 of the Civil Code 2015, lawful grounds for termination are limited to the cases listed therein. Any termination outside these cases, or not otherwise provided by law, is considered to be based on unlawful grounds.

• The contract has been fully performed;
• Termination by mutual agreement of the parties;
• The individual entering into the contract dies, or the legal entity entering into the contract ceases to exist, where the contract must be performed personally by such individual or legal entity;
• The contract is cancelled or unilaterally terminated;
• The contract cannot be performed because the subject matter of the contract no longer exists;
• The contract is terminated due to a fundamental change of circumstances;
• Other cases as prescribed by law.

Accordingly, if the termination of a service provision contract falls outside the above cases or is not otherwise provided for under applicable laws, such grounds for termination shall be considered unlawful.

5. What conflicts commonly arise upon termination of service supply contracts?

Common conflicts include:

• Breach of contractual obligations: Failure to provide services of agreed quality, on schedule, or failure to make full payment; Where the service quality does not meet the agreed standards, the service recipient may be dissatisfied and assert that the services do not comply with the contractual requirements.
• Service quality disputes: Dissatisfaction due to services not meeting agreed standards;
• Schedule and delivery issues: Failure to comply with agreed timelines, affecting the other party’s operations;
• Payment disputes: Non-payment, late payment, or improper payment methods;
• Unlawful unilateral termination: Termination without legal grounds or failure to follow proper procedures, leading to liability for damages;
• Fundamental change of circumstances: Significant changes making performance difficult or inconsistent with the original purpose, giving rise to disputes over rights and interests.

V. Why seek legal counsel regarding termination of service supply contracts?

Seeking legal advice when terminating a service supply contract is essential to ensure that the parties’ rights and obligations are exercised in compliance with the law and to avoid unnecessary legal risks. Qualified lawyers help clients understand contractual provisions, termination conditions, potential legal consequences, and provide optimal solutions to safeguard clients’ interests.

The above information addresses common issues relating to termination of service supply contracts as provided by NPLaw. Should you have any further questions regarding this matter or other legal issues, please contact NPLaw for direct consultation and guidance.