On 1 September 2022, the State Treasury Solicitors’ Office published recommendations on the dissolution, termination of and withdrawal from reciprocal contracts. Although the document primarily targets contracting authorities, it is also a rich source of knowledge for economic operators performing public contracts.
Dissolution, termination, withdrawal – what are the differences?
The State Treasury Solicitors’ Office highlights various ways to cease a contractual relationship, including:
- withdrawal from a contract,
- termination of a contract,
- dissolution of a contract,
The above terms are frequently used interchangeably in contracts, despite having different legal effects.
What are the effects of dissolution, termination and withdrawal?
As explained by the State Treasury Solicitors’ Office: “Withdrawal from a contract is a unilateral action leading, in principle, to the expiry of an obligation with a retroactive effect (ex tunc), i.e. from the time the contract was concluded, nullifying its effects. Termination of a contract is also a unilateral action, but having a future effect (ex nunc), i.e. it does not nullify the existing effects of the contract. The exercise of each of these rights is effected by a declaration of intent made to the other party. The differences in the purpose and effect of withdrawal from and termination of a contract make each of these legal actions characteristic of a different category of contracts. […] Withdrawal is most often a way of responding to the other party’s non-performance or improper performance of a contract. […] The purpose of termination is to end the contractual relationship without interfering with the effects of contract performance that have already occurred”.
Dissolution of a contract, on the other hand, requires joint declarations made by both parties to cancel the existing obligation relationship.
Withdrawal from a contract is most often seen in public procurement.
Tenders and public contracts – when a contract can be withdrawn from
In short, a contract can be withdrawn from when certain circumstances occur during its performance, giving rise to one party making a declaration of withdrawal. This withdrawal can be carried out based on the grounds either provided for by generally applicable laws (statutory grounds) or contained in the contract itself (contractual grounds).
Statutory grounds include, but are not limited to:
- delay in the performance of an obligation by fault of a debtor under a reciprocal contract,
- failure to perform an obligation within a strict deadline,
- a declaration by a party that it will not render a performance to which it was obliged,
- lack of cooperation necessary to perform a work, etc.
However, contractual grounds for withdrawal from a contract depend on the intent of the parties to the contract.
A frequent example of a contractual ground for withdrawal occurs where one party is in breach of a contract, but in a manner other than through delay without fault. This could be, for example, the use of inappropriate materials to complete a work, or the use of subcontractors despite a contractor being obliged to render a performance on its own.
When withdrawal from a contract is ineffective
The mere submission of a declaration of withdrawal does not mean that the declaration is actually effective and produces legal effects.
The effectiveness of a declaration of withdrawal requires the answering of a number of questions, such as:
- Are the contractual provisions on withdrawal valid in the light of statutory provisions?
- Has a declaration of withdrawal been drawn up in correct form?
- Was a declaration of withdrawal given within the period prescribed by relevant contractual provisions/laws?
- Are the circumstances giving rise to withdrawal attributable to the other party to a contract?
Depending on the specifics of the situation, a negative answer to any of the above questions may lead to the declaration of withdrawal being ineffective.
If so, the disputed contract continues to be binding upon both parties.
Recommendations on withdrawal – an important position of the State Treasury Solicitors’ Office
The State Treasury Solicitors’ Office recommendations constitute a general position on the application of the provisions on withdrawal from, termination or dissolution of a contract.
Nevertheless, as the authors themselves point out – the publication is general in nature and does not refer to a specific contract, nor does it constitute an assessment of specific findings of fact or of law, either existing now or in the future.
Therefore, in each case involving withdrawal from a contract – whether by a contracting authority or an economic operator – a thorough and in-depth legal assessment of the admissibility of intended withdrawal or the effectiveness of already declared withdrawal is essential.
We can assist you in matters concerning withdrawal from public contracts via:
- preparation of model public contracts, taking into account the legitimate interests of a contracting authority with regard to the possibility of withdrawal,
- analysis of the findings of fact and assessment of the possibility of making a declaration of withdrawal from a public contract,
- analysis of the findings of fact and assessment of the effectiveness of a submitted declaration of withdrawal from a public contract.
Any questions? Contact the authors directly:
Remuneration indexation in public contracts – latest recommendations of the State Treasury Solicitors’ Office