Contract termination clauses: when does a business have the right to stop working with a partner?

In business, deciding to stop working with a partner is often complex. It carries as much legal risk as negotiating the contract in the first place. When the relationship reaches a deadlock, the goods do not meet the standard or the partner keeps paying late, a business’s natural reflex is to send a notice at once: it stops supplying goods, stops paying, or declares the contract “rescinded”.

However, if the business stops without a legal basis or does not follow the notice procedure, it faces a serious legal risk. Its position in the dispute is reversed: from the injured party it becomes the party that unlawfully breached the contract, and it must compensate the partner for all resulting losses.

This study analyses the grounds that give a business the right to stop working with a partner, how the different ways of ending a contract are distinguished under Vietnamese law and international practice, and lessons from case precedents and arbitral awards.

1. The different ways to “stop working together” under Vietnamese contract law

Vietnamese law draws a clear line between the different ways of ending a contractual relationship. Each one has very different legal consequences for the validity of the agreement and for the duty to return property.

Rescission of the contract (hủy bỏ hợp đồng)

• Legal basis: Articles 423 to 427 of the Civil Code 2015 and Articles 312 to 314 of the Commercial Law 2005.
• Legal nature: the contract is treated as having no effect from the time it was concluded (ex tunc, with retroactive effect).
• Consequences: the parties do not have to continue performing their obligations and must return to each other what they have received, after deducting reasonable costs.

Unilateral termination / stopping performance of the contract (đơn phương chấm dứt / đình chỉ thực hiện hợp đồng)

• Legal basis: Article 428 of the Civil Code 2015 and Articles 310 and 311 of the Commercial Law 2005.
• Legal nature: the contract ends from the time the other party receives the notice (ex nunc, with no retroactive effect).
• Consequences: the parties do not have to perform future obligations, but obligations completed before the notice was received remain valid. A party that has delivered goods or completed services has the right to require the other party to pay for that work.

Termination by agreement or on completion (Termination by Agreement / Expiry)

• Legal basis: Article 422 of the Civil Code 2015.
• Legal nature: the contract ends when the purpose of the transaction has been achieved, when its term has expired, or when the two parties agree in writing to liquidate the contract early.

2. When does a business have the right to stop lawfully?

Under the Civil Code 2015, the Commercial Law 2005 and the 1980 Vienna Convention (CISG), a business only has the right to stop working with a partner unilaterally in the following 5 cases.

Case 1: A breach occurs that the parties agreed would be a ground for ending the contract

Freedom of contract allows the parties to set their own specific criteria that trigger the right to stop. For example:

• The buyer pays for goods more than 30 days after the due date stated on the invoice.
• The seller delivers goods or carries out construction work more than 15 days behind the agreed schedule.
• The franchisee breaches its brand protection commitment or its exclusive distribution territory.

When the agreed breach actually occurs, the injured party has full right to issue a notice stopping performance of, or rescinding, the contract, without having to prove that the damage is serious.

Case 2: The partner commits a “fundamental breach” of the contract

If the contract does not set out detailed conditions for ending it, a business may only stop when the partner commits a fundamental breach.

• Under Clause 13, Article 3 of the Commercial Law 2005 and Article 25 of the CISG, a fundamental breach is a breach that causes damage to the other party to the extent that it cannot achieve the purpose of entering into the contract.
• International practice: at CIETAC arbitration (disputes over contracts for the sale of palm oil and cotton), the seller’s refusal to deliver on time because market prices had risen was held to be a fundamental breach under Article 25 of the CISG. This gave the buyer the right to avoid the contract under Article 49 of the CISG and to claim the full cost of buying substitute goods under Article 74 of the CISG.
• VIAC practice (Award No. 063): in a dispute over the sale of goods between a Vietnamese company and a Dutch company, the buyer asked to rescind the contract because the goods differed slightly in type. The arbitral tribunal rejected the request. It found that minor differences did not defeat the commercial purpose of the contract and did not amount to a fundamental breach.

Case 3: A force majeure event lasts longer than the period set by law

Not every force majeure event ends the contract immediately. At first, it only suspends performance. However, if the event lasts beyond what is economically bearable, the law allows the parties to walk away:

• Under Article 296 of the Commercial Law 2005, if a force majeure event lasts more than 5 months for goods/services with a delivery period of under 12 months, or more than 8 months for goods/services with a delivery period of over 12 months, each party has the right to refuse to continue performing the contract without any liability to pay damages.
• The parties can agree in advance to shorten this period to 30 or 60 days, to free up financial resources if an objective event paralyses the supply chain.

Case 4: Negotiations reach a deadlock because of a fundamental change of circumstances (hardship) and a court decides

When macroeconomic changes seriously upset the balance of interests in the contract, a business may not stop performing on its own initiative.

• Under Clause 2, Article 420 of the Civil Code 2015, the affected party has the right to ask for renegotiation, but must continue to perform its obligations during the negotiations.
• If the two parties cannot agree on how to amend the contract, the affected party must apply to a court. Under Point b, Clause 3, Article 420 of the Civil Code 2015, only the court has the power to decide to terminate the contract at a specific time. If a business stops performing before the court decides, this will be treated as a breach of contract.

Case 5: Unilateral termination at will (termination for convenience)

In many long-term supply or consulting contracts, the parties may agree that one party can end the contract at any time without any fault of the other party, on condition that it:

• gives reasonable advance notice (for example, written notice 30 or 60 days in advance); and
• reimburses the other party’s reasonable costs for work in progress and pays the full value of the work completed.

3. The risk of “reversed roles” when stopping unlawfully

One of the most common mistakes of business managers is deciding to stop performing too early, before collecting enough legal evidence or before following the correct notice procedure.

Lessons from Precedent No. 21/2018/AL of the Supreme People’s Court

Precedent No. 21/2018/AL deals with a dispute in which a tenant unilaterally terminated a lease of property early, and the lease did not contain any agreed conditions for termination.

• The facts: the tenant sent a termination notice with too short a notice period, then handed back the premises on its own initiative and stopped paying rent. As a result, the landlord could not find a replacement tenant in time to use the property.
• The legal solution in the precedent: the court held that the tenant’s termination was unlawful and at fault. The tenant had to compensate the landlord, including all the rent for the period the premises stood empty until the landlord found a new tenant.
• What it means: a termination notice issued in haste, without giving the partner a reasonable time to prepare, gives the partner grounds to sue for all its lost profit.

4. A 4-step process to control risk when ending a contract

To exercise the right to terminate or stop performing a contract safely and lawfully, the legal department and management of a business should strictly follow this process:

1. Review the legal and contractual basis
2. Issue a breach warning notice and give a cure period
3. Issue the formal termination notice
4. Sign the inventory record, reconcile debts and return assets

Step 1: Review the legal basis and the nature of the breach

• Check whether the partner’s conduct has reached the threshold of a “fundamental breach” under the Commercial Law, or falls within the list of termination events specifically set out in the contract.
• Strengthen the evidence of the breach: on-site records, work emails, reminder letters, or an independent inspection certificate from a third party.

Step 2: Issue a breach warning notice with a cure period

• Unless the parties agreed on immediate rescission, the injured party should send a written notice that clearly identifies the partner’s breach.
• Give a reasonable period to remedy the breach (usually 15 to 30 days), with a warning: if the party in breach has not remedied the breach or paid compensation by the end of this period, the contract will formally end. This step is critical to show good faith before a court or arbitral tribunal.

Step 3: Issue the formal termination notice

• Under Clause 2, Article 311 and Clause 2, Article 313 of the Commercial Law 2005 and Article 428 of the Civil Code 2015, the party ending the contract must immediately notify the other party in writing. If it quietly stops performing without notice, it must compensate the damage caused by the failure to notify.
• The notice should be sent by registered delivery to the partner’s registered business address and to the legal representative named in the contract.

Step 4: Sign the inventory record, reconcile debts and return assets

• As soon as the contract ends, the parties should hold a formal meeting and sign a record confirming the cumulative quantity of work/goods handed over.
• Set off debts against the contractual penalties and damages that have been agreed.
• Deal with inventory, recover internal documents, and end the right to use the brand or any shared software system.

5. The legal value of survival clauses after a contract ends

A common misconception is that when a contract is rescinded or terminated, the whole document disappears. In fact, Vietnamese law treats certain core clauses as remaining in effect independently, so that the legal consequences of the case can be resolved.

The independence of the arbitration agreement (doctrine of separability)

Under Article 19 of the Law on Commercial Arbitration 2010 and Article 314 of the Commercial Law 2005, the termination or rescission of a contract does not affect the validity of the clause on dispute resolution by arbitration. The arbitral tribunal keeps full jurisdiction to accept the claim, decide which party was at fault and rule on damages.

Contractual penalty and compensation for damage clauses

Clause 1, Article 427 of the Civil Code 2015 and Article 314 of the Commercial Law 2005 state clearly that when a contract is rescinded, the parties do not have to continue performing their obligations, except for the agreements on contractual penalty, compensation for damage and dispute resolution. So the right to claim a contractual penalty (up to 8% under Article 301 of the Commercial Law) and the right to claim compensation for actual losses arising before the contract collapsed remain fully protected by law.

Confidentiality and non-compete agreements (NDCA)

In judicial practice, Precedent No. 69/2023/AL of the Council of Judges of the Supreme People’s Court established the principle that a confidentiality and non-compete agreement (NDCA) is a separate commercial transaction. When the main contract formally ends, the duty to protect trade secrets and customer data and the non-compete obligation continue to bind the parties for the agreed period (from 1 to 5 years after the relationship ends). A breach after the main contract has ended can still lead to a contractual penalty and damages before a commercial arbitration tribunal.

6. A model termination clause for businesses

To protect its right to stop working with a partner as fully as possible without falling into the trap of breaching the law, a business should use the following standard clause structure:

7. Summary table: risks and solutions when ending a contract

Documents and sources cited in this article

I. Legal instruments

1. Civil Code 2015 (Law No. 91/2015/QH13):

• Articles 3 and 11: basic principles of civil law and freedom of agreement.
• Articles 156 and 351: force majeure events and exemption from civil liability.
• Articles 360 and 419: liability to pay damages for breach of contract.
• Article 418: agreements on contractual penalties in civil relations.
• Article 420: performance of a contract when circumstances change fundamentally (hardship).
• Article 422: grounds for terminating a contract.
• Articles 423 to 427: conditions for rescinding a contract and the legal consequences of rescission.
• Article 428: the right to unilaterally terminate performance of a contract and liability to pay damages for unlawful unilateral termination.

2. Commercial Law 2005 (Law No. 36/2005/QH11):

• Clause 13, Article 3: definition of a fundamental breach of contract.
• Article 292: types of remedies in commercial activities.
• Article 294: cases of exemption from liability for breach of contract.
• Article 296: extension of the time to perform the contract and the right to refuse to continue performing when force majeure lasts a long time.
• Articles 300 and 301: contractual penalties and the cap of 8% of the value of the breached part of the obligation.
• Articles 302 and 303: grounds for liability to pay damages and the burden of proof.
• Articles 310 and 311: grounds for, and legal consequences of, stopping performance of the contract.
• Articles 312 to 314: grounds for rescinding a contract and the independence of the penalty, damages and dispute resolution clauses after rescission.

3. Law on Commercial Arbitration 2010 (Law No. 54/2010/QH12):

• Article 6: the court refuses to accept a case where there is an arbitration agreement.
• Article 13: loss of the right to object (waiver of right to object).
• Article 18: cases where an arbitration agreement is invalid.
• Article 19: independence of the arbitration agreement from the main contract.
• Article 68: grounds on which a court may set aside a commercial arbitral award.

4. Resolutions of the Council of Judges of the Supreme People’s Court:

• Resolution No. 01/2014/NQ-HĐTP dated 20 March 2014: guidance on certain provisions of the Law on Commercial Arbitration 2010.
• Resolution No. 01/2019/NQ-HĐTP dated 11 January 2019: guidance on certain provisions of law on interest, interest rates and contractual penalties.

II. International treaties and trade practice

1. United Nations Convention on Contracts for the International Sale of Goods, Vienna 1980 (CISG):

• Article 25: definition of a fundamental breach of contract.
• Articles 49 and 64: the buyer’s and the seller’s right to declare the contract avoided.
• Article 74: full compensation for actual loss and lost profit.
• Article 79: exemption from liability due to an impediment beyond a party’s control (force majeure).
• Uniform Customs and Practice for Documentary Credits (UCP 600), International Chamber of Commerce (ICC): the principle that a documentary credit is independent of the underlying commercial contract.
• Uniform Rules for Demand Guarantees (URDG 758), ICC: the principle of independent, unconditional guarantees.

III. Precedents of the Supreme People’s Court of Vietnam

• Precedent No. 09/2016/AL: adopted by the Council of Judges of the Supreme People’s Court on 17 October 2016; establishes the rule that no late-payment interest is charged on contractual penalties and damages.
• Precedent No. 13/2017/AL: adopted on 14 December 2017; confirms the independence of the letter of credit (L/C) under UCP 600, which does not lose effect when the underlying international sale of goods contract is rescinded.
• Precedent No. 21/2018/AL: adopted on 17 October 2018; determines fault and liability to pay damages for unilaterally terminating a contract early with too short a notice period.
• Precedent No. 42/2021/AL: adopted on 24 February 2021; protects a consumer’s right to choose a Vietnamese court when a standard-form contract contains a foreign arbitration agreement (SIAC).
• Precedent No. 69/2023/AL: adopted on 18 August 2023; confirms that a confidentiality and non-compete agreement (NDCA) is a separate commercial agreement within the jurisdiction of commercial arbitration, and the principle of loss of the right to object to the tribunal’s jurisdiction.

IV. Notable court judgments and arbitral awards

• Judgment No. 02/2022/KDTM-ST dated 16 March 2022 of the People’s Court of Binh Duong Province: a dispute over a contract for the sale of plant protection products between Vietnamese and Chinese traders; the court found that the arbitration agreement was incapable of being performed and applied the CISG directly.
• A 2022 commercial appeal judgment of the People’s Court of Ho Chi Minh City: recognised as lawful a clause on pre-estimated damages (liquidated damages, LD) in a construction contract and the mechanism releasing the claimant from proving actual loss.
• Decision No. 08/2019/QĐ-PQTT dated 25 July 2019 of the People’s Court of Hanoi: considered a request to set aside a VIAC arbitral award on the ground of conflict with the fundamental principles of Vietnamese law.
• Award No. 063 of the Vietnam International Arbitration Centre (VIAC): an award on the conditions for rescinding a contract, finding that the buyer had no right to rescind because it could not prove a fundamental breach by the seller.
• Awards of the China International Economic and Trade Arbitration Commission (CIETAC): applied Articles 25, 49 and 74 of the CISG in international disputes over the sale of palm oil and cotton; rejected the argument that market price changes amount to force majeure to justify refusing to perform.
• Toepfer v. Sao Mai: a judicial precedent in which a Vietnamese court refused to recognise and enforce an award of GAFTA international arbitration (London) on the ground that it breached the domestic law principle of compensation for actual damage.