I. Introduction
Contracts are legal transactions established by the mutual and corresponding expressions of intent of the parties, which give rise to legal consequences and create a relationship of obligation between the parties. In accordance with the principle of freedom of contract, the parties may determine the content of the contract, provided that it does not contravene mandatory provisions of the law, public policy, personal rights or morality. However, the conditions under which the legal relationship arising from the formation of the contract will terminate are at least as important as the formation of the contract itself.
A contractual relationship may be terminated by mutual agreement between the parties, performance of the obligation, impossibility, default by the debtor, rescission, withdrawal from the contract, and other grounds provided for by law. However, not all legal mechanisms leading to the termination of a contract produce the same results. In particular, the distinction between termination and rescission is decisive in terms of the restitution of performances previously rendered by the parties, the termination of future obligations, and the scope of claims for damages.
In practice, it is observed that the terms ‘termination’, ‘withdrawal’, ‘cancellation’ and ‘rescission’ are sometimes used interchangeably in notices of termination, statements of claim and contractual provisions. Yet each of these concepts may be subject to different legal conditions and consequences. In addition to the term used by the party, the content of the declaration of intent, the type of contract and the applicable statutory provisions must be assessed together.
In this context, it can be said that the distinction between the termination of a contract and withdrawal from a contract is not merely a terminological issue; it directly affects the resolution of the dispute, obligations to return property, and liability for damages.
II. The Concept and Legal Nature of Contract Termination
Termination of a contract is, as a rule, the termination with future effect of a contract giving rise to a continuing obligation, through the proper exercise of the right of termination. In terms of its legal nature, termination is regarded as a right giving rise to a novation. The proper exercise of this right prevents the contractual relationship from continuing into the future.
As a general rule, termination does not result in the contract being deemed to have never produced any legal effect from the moment it was concluded. Obligations that have validly arisen and been performed up to the point of termination do not automatically cease to exist merely because of the termination. In other words, the legal relationship continuing up to the date of termination, and the rights and obligations arising within the scope of that relationship, retain their validity to the extent that the relevant type of contract and specific provisions do not provide otherwise.
For example, where a tenancy agreement is terminated in accordance with the proper procedure, the tenant’s rent liabilities accrued up to the date of termination do not, as a general rule, cease to exist. Similarly, in ongoing employment relationships, wages and other claims earned up to the date of termination do not automatically become void upon the termination of the contract.
III. The Concept and Legal Nature of Rescission
Rescission of a contract is a legal act whereby, upon the fulfilment of conditions stipulated by law or in the contract, the authorised party, by a unilateral declaration of intent, generally terminates the contractual relationship with retroactive effect.
The primary purpose of rescission is to settle the exchange of performances arising from the contract and to restore the parties, as far as possible, to the financial position they were in prior to the performance of the contract. For this reason, rescission is particularly significant in contracts involving immediate performance.
By exercising the right of rescission, the parties are, as a rule, released from the principal performance obligations arising from the contract that have not yet been fulfilled. Performances that have already been fulfilled, however, are subject to restitution within the framework of the relevant legal regime.
However, the fact that rescission produces retroactive effects does not mean that all legal consequences arising from the contract are eliminated in every case and without exception. Obligations to return property, claims for damages, the consequences of default and the rights of third parties must be assessed separately in accordance with the specific circumstances of the case and the applicable provisions.
IV. Fundamental Differences Between Termination of a Contract and Rescission
- The Temporal Effect of Legal Consequences
The most fundamental distinction between termination and rescission lies in the temporal effects of the contract’s termination.
Termination gives rise to prospective effects in ongoing contractual relationships. In such cases, the contract continues to produce its legal effects up to the moment of termination; thereafter, the future continuation of the contractual relationship ceases.
By contrast, rescission generally produces retroactive effects. Rescission brings the parties’ mutual obligations to an end, and the restitution of any performances already rendered becomes an issue.
This distinction becomes particularly significant where performance under the contract has taken place over a long period. In ongoing contractual relationships, the complete recovery of past performances is often neither possible nor equitable; consequently, termination with prospective effect is the general rule.
However, exceptional outcomes may arise due to the nature of the contract and specific statutory provisions. Therefore, when assessing the distinction between termination and rescission, one must take into account not merely the name of the contract, but also the structure of the obligations and the regime governing termination.
- Differences based on the type of contract
Whether a contract involves a single performance or ongoing performance is one of the key criteria in determining the applicable termination mechanism.
In contracts involving a single performance, the debtor’s principal obligation is generally fulfilled at a single point in time or in its entirety. A contract of sale may be cited as an example of this. The nature of the seller’s obligations regarding the delivery of the goods and the transfer of title is significant in classifying the contract as one involving a single performance.
In contracts involving continuous performance, however, the performance of the obligation is spread over time and the contractual relationship continues for a specific period. In a tenancy agreement, the obligation to maintain the leased property in a fit state for use; in a service contract, the obligation to perform the work; and the continuous provision of services in certain subscription arrangements may be assessed within this scope.
Generally, in contracts involving immediate performance, the concept of rescission takes precedence; whereas in contracts involving continuous performance, the concept of termination takes precedence. However, this distinction is not absolute. The specific nature of the contract, statutory provisions and judicial precedents may lead to outcomes differing from the general rule. In particular, in disputes such as those concerning contracts for the creation of a work and construction contracts in return for a share in the land, it must be specifically examined whether the termination of the contract has retrospective or prospective effect.
- Restitution of Performed Obligations
One of the key differences between the termination of a contract and rescission is the fate of obligations previously performed.
In the event of rescission, the parties may be obliged to return the performance they have previously received from the other party in accordance with the relevant legal regime. For example, where the purchase price has been paid but the goods have not been delivered in accordance with the contract, and the right of rescission has been validly exercised, the refund of the price paid may be required.
In the case of termination, however, performances carried out up to the date of termination generally retain their validity. For example, the termination of a tenancy agreement does not automatically require the refund of rent paid by the tenant for the property from which they have actually benefited in previous periods.
- Differences regarding claims for compensation
Termination and rescission are not procedures that automatically preclude claims for damages. However, there may be significant differences regarding the type and scope of damages that may be claimed.
Under Article 125 of the Turkish Code of Obligations (TBK), in the event of rescission of the contract, the creditor may claim compensation for the loss suffered as a result of the contract becoming void, provided that the debtor cannot prove that they were not at fault for falling into default. In this context, where the conditions are met, negative damages relating to the state the creditor’s assets would have been in had the contract never been concluded may arise.
In the event of termination, damages arising from a breach of contract may be claimed in accordance with the grounds for the right of termination and the relevant statutory provisions. In particular, in ongoing contractual relationships, a distinction must be made between claims arising up to the date of termination and damages resulting from the breach of contract.
It is important to note here that the scope of compensation cannot be determined solely on the basis of the concept used to terminate the contract. The debtor’s fault, the appropriate causal link, the loss, the conditions of default, the terms of the contract and any applicable special provisions must all be assessed together.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
