FAQ on the Extinction of Contractual Obligations

Understanding how contractual obligations come to an end.

What are the primary ways in which a contractual obligation can be extinguished?

Contractual obligations, which are of a proprietary nature, do not typically last forever. They can be extinguished for various reasons. The most common way is through performance of the contract in a legally required conformity. Beyond performance, other methods of extinction discussed include invalidation, cancellation, termination, remission of debt, novation, set-off, merger, and limitation of action (prescription).

What is the difference between invalidation and cancellation of a contract?

Invalidation of a contract occurs when there is a defect in the formation of the contract, such as lack of capacity of a party or lack of legally required consent. It makes an effective contract ineffective from its beginning (retrospective effect). Cancellation is also a mechanism for extinguishing obligations and shares similarities with invalidation, including a retrospective effect where parties are put back to their position before the contract, and potential for compensation. The sources imply that while their effects are largely the same in terms of restitution, the grounds and potentially the parties entitled to initiate them differ.

How does invalidation of a contract relate to void and voidable contracts?

Invalidation is primarily associated with "voidable" contracts, where there is a defect in formation (like issues with consent or capacity) that allows the affected party to choose to either invalidate the contract or uphold it. A contract that is not invalidated remains effective. "Void" contracts, on the other hand, are considered to have no legal effect from the very beginning, often due to issues with the object of the contract being unlawful, immoral, impossible, or undefined, or lacking the prescribed form. While the text discusses invalidation in the context of void contracts in some legal provisions, it questions the logic of invalidating something that is inherently ineffective, suggesting a potential inconsistency in the law.

What is the time limit for invalidating a contract and when does the period start?

An action to invalidate a contract must generally be brought within two years from the time the ground for invalidation disappears. For mistakes, the period starts from the knowledge of the mistake. For duress, it starts from the avoidance of the threat. For incapacity, it begins when the incapable party becomes capable. A specific exception exists for unconscionable contracts involving an adult party, where the two-year period starts from the formation of the contract.

How does termination differ from invalidation and cancellation?

Termination is another way to extinguish contractual obligations, but unlike invalidation and cancellation which have retrospective effect, termination has prospective effect. This means that when a contract is terminated, the obligations cease from the time of termination onwards. Any obligations already performed before termination are generally not required to be returned, unlike in invalidation or cancellation where parties are restored to their pre-contractual position.

What is novation and how does it extinguish an obligation?

Novation is the extinction of an existing obligation by substituting it with a new obligation that differs from the original one in its object or nature. This substitution must be agreed upon by the parties and is required to be intentional. A key effect of novation is that it extinguishes not only the principal obligation but also any accessory obligations (like securities or privileges) attached to the original obligation, unless otherwise expressly agreed upon. Mere variations in a contract, such as changing the place of delivery, do not amount to novation.

Under what conditions can set-off extinguish contractual obligations?

Set-off occurs when two persons owe debts to one another. It extinguishes the obligations of both parties up to the amount of the lesser debt. For set-off to occur, both debts must generally be money debts or relate to a certain quantity of fungible things of the same species. Both debts must also be liquidated (their amount is certain) and due. However, there are exceptions where a court may allow set-off for an unliquidated debt to the extent of the admitted amount or suspend judgment until the debt can be liquidated. Certain obligations, such as maintenance payments, obligations owed to the state/municipality, obligations to return unjustly taken things, or obligations to return a deposited thing, are typically not subject to set-off. Set-off requires the intention of the debtor and cannot be initiated by the court unless pleaded by a party.

When does merger extinguish an obligation and what are its limitations?

Merger extinguishes an obligation when the positions of creditor and debtor become one and the same, making performance towards oneself absurd. This often happens through succession, such as a son inheriting a debt owed to his deceased father. However, merger does not affect the rights that third parties may have in respect of the obligation. The obligation can revive if the merger comes to an end, for example, if the event causing the merger is reversed (like the return of a person declared absent).