Questions about withdrawing from a contract come up often in practice. A typical case: the other contracting party is in default on a contractual obligation. How do you withdraw from a contract so that everything is legally in order? When do you have to give the other party an additional period to perform, and when not? What if the creditor gave no period for performance and simply withdrew, do they have to repeat the withdrawal? And what if the contract has its own special rules on withdrawal, can the creditor still proceed under the law?

The Supreme Court recently answered these questions in a decision of its Grand Chamber.[1]

Material breach of contract vs. "material default"

First, the Supreme Court addressed the difference between material breach of contract under Section 2002(1) of the Civil Code and breach of contract by default under Sections 1977 and 1978 of the Civil Code. The rules in Section 1977 and following are special in relation to Section 2002 and following. This is because default on a contractual obligation is a particular kind of breach of a contractual obligation.

Both the general and the special rules agree that the consequence of a material breach of contract (or of a default that amounts to a material breach of a contractual obligation) is the other party's right to withdraw from the contract within a period of "without undue delay". Beyond that, though, the general and special rules differ in how the other party can proceed if they did not exercise their right to withdraw without undue delay.

Under the general rules on breach of a contractual obligation: "If a party could have withdrawn from the contract for a material breach of a contractual obligation and did not use that right, this does not prevent them from withdrawing later by reference to similar conduct of the other party."[2] Withdrawal can therefore be carried out subsequently, on a further repeated breach of the same obligation, or of another obligation, that breaches the contract materially.

Such a rule would, however, make no sense for breach of contract by default, because of the special nature of this type of disruption: default is a continuous state and lasts as long as the obligation in question goes unperformed. It is hard to imagine, in practice, splitting up the default on a particular contractual obligation so as to identify "repeated default". That is why this situation is regulated differently for default.

Under the special rules on breach of a contractual obligation by default: "where one contracting party's default amounts to a non-material breach of its contractual obligation, the other party may withdraw from the contract after the defaulting party fails to perform its obligation even within an additional reasonable period (…)".[3] This means that if the entitled party does not withdraw, within the period of without undue delay, on account of the other party's default that amounts to a material breach, they can nonetheless take the same approach as for non-material default. They can set the defaulting party an additional reasonable period to perform, and if the contractual obligation is not performed within that period, they can withdraw from the contract.

What options does a contracting party have if the other party is in default?

The options for the entitled contracting party where the other party is in default on a contractual obligation are as follows.

The first thing to assess is whether this is what is known as material default (a contracting party breaching its contractual obligation materially by being in default). According to the commentary literature, whether default is "material" depends on the specific circumstances. With fixed-date contracts it can be a single day's default, whereas with long-term obligations even weeks of default need not be material.[4]

If the default is material, the entitled party has several options.

1. First, they can withdraw from the contract without undue delay.[5] By a unilateral legal act they can thus bring about what is essentially an immediate end to the obligation. This strong legal position is, however, limited by the "without undue delay" period, which starts to run as soon as they learn of the other party's default. The short period for withdrawal is meant to stop the entitled party from speculating over whether it pays them better to withdraw or to insist on performance. It also protects the obligated party from uncertainty as to whether it should perform the contractual obligation despite being in default, or whether the entitled party will use its right to withdraw (in which case the costs of any performance by the defaulting party would be wasted by an effective withdrawal and would fall on that party).
2. Second, the entitled party can take the same approach as for non-material default (Sections 1978 and 1979 of the Civil Code). This step is appropriate where the entitled party is not sure whether the default is material or non-material, or where it still has an interest in the contract being performed despite the other party's default. It gives the defaulting party a second chance by granting it an additional reasonable period to perform. In doing so, the entitled party signals to the defaulting party that it insists on performance despite the default, and that it therefore will not withdraw if the defaulting party performs the obligation within the additional reasonable period. If the entitled party also notifies the defaulting party that it will not extend the additional period any further, then it is deemed to have withdrawn from the contract once that period expires without performance. In the absence of such a notification, once the additional period has expired without performance, the entitled party is free to choose whether to withdraw or not; here it is no longer limited by the "without undue delay" period.[6]
3. Third, the entitled party may do nothing. In that case its right to withdraw for material default lapses. It thus loses the option of bringing about an immediate end to the obligation without giving the debtor a chance to perform belatedly. Even so, it can decide to proceed as in option 2 (under Sections 1978 and 1979 of the Civil Code). The entitled party can therefore set the defaulting party an additional reasonable period to perform the obligation, and withdraw once that period expires without performance. Alternatively, it can state, when setting the additional period, that it will not extend it any further, in which case the effects of withdrawal take place automatically when the period expires.
4. The fourth possibility is that the entitled party missed the period for withdrawing for material default (option 1), but nonetheless notified the defaulting party that it was withdrawing from the contract (without granting an additional period). The obligated party's default still continues. In that case the effects of withdrawal take place once the reasonable additional period that should have been granted to the debtor to perform the obligation expires without performance (this period starts to run from the moment the withdrawal reached the debtor).

If the default is non-material, the entitled party can proceed as in option 2 (under Sections 1978 and 1979 of the Civil Code). What happens if the additional period granted for performance is unreasonably short and the entitled party withdraws once it expires? In that case the effects of withdrawal only take place when a reasonable period expires without performance, that is the period that should have been granted to the defaulting party as a reasonable one.

Setting the rules for withdrawal in the contract

The Supreme Court went on to consider whether a party has to withdraw within the "without undue delay" period even where the parties have agreed different rules on withdrawal in the contract.

The statutory conditions for withdrawal are non-mandatory. The law does not expressly prohibit a different arrangement, and neither does the meaning and purpose of these rules call for a prohibition on departing from the statute. The parties can therefore replace these conditions with a different contractual arrangement. The statutory rules on withdrawal then do not apply to the extent that they conflict with the contractual arrangement.

The contracting parties can agree different conditions both for the right of withdrawal to arise and for it to be exercised. The option to withdraw therefore need not be tied to a material (or non-material) breach of contract. Nor need it be limited by the "without undue delay" period or by a duty to grant an additional period.

This text was first published by JUDr. Kateřina Hájková, LL.M., attorney, on 30 July 2024 on the epravo.cz website.

[1] Rozsudek Nejvyššího soudu, sp. zn. 31 Cdo 3823/2023, ze dne 15. 5. 2024.

[2] Ust. § 2003 odst. 2 o.z.

[3] Ust. § 1978 odst. 1 o.z.

[4] HORÁK, Pavel. § 1977 [Odstoupení při podstatném prodlení]. In: PETROV, Jan, VÝTISK, Michal, BERAN, Vladimír a kol. Občanský zákoník. 2. vydání (2. aktualizace). Praha: C. H. Beck, 2023, marg. č. 6.

[5] Lhůta „bez zbytečného odkladu“ je neurčitá a její trvání bude záviset na okolnostech případu. Nicméně půjde o velmi krátký časový úsek v řádu dnů, maximálně týdnů, viz např. nález Ústavního soudu ze dne 15. 8. 2005, sp. zn. IV. ÚS 314/05; rozsudek Nejvyššího soudu ze dne 10. 12. 2013, sp. zn. 32 Cdo 2484/2012; v podmínkách správního práva např. rozsudek Nejvyššího správního soudu ze dne 12. 8. 2010, č. j. 9 Afs 20/2010-74.

[6] Odst. 51 odůvodnění rozsudku Nejvyššího soudu, sp. zn. 31 Cdo 3823/2023, ze dne 15. 5. 2024.