What is the difference between termination and rescission of a contract?

Question

José Manuel Alburquerque · Accepted Answer

A contract is terminated when one of the parties fails to perform and rescinded when, even though both perform, it causes harm that the law does not accept. In Catalonia, any contract for value, in which both parties give something, can be rescinded if what one of them receives is worth less than half of what it gives or if the other party took advantage of that party's need, dependence or inexperience to gain an unfair advantage. There are four years from signing to apply for it. Under the Spanish Civil Code (“Código civil”), which applies in most of the rest of Spain, a contract between private individuals cannot be rescinded merely because the price is disproportionate. In practice, people sometimes say “rescind” when what they are actually doing is terminating or withdrawing. Termination It is the remedy for breach. The contract was valid and balanced, but one party commits a serious breach and the other decides to undo it. Each party returns what it received and the party in breach pays damages. In Catalonia it is governed by the Spanish Civil Code, except for sales and exchanges, where the “Código Civil de Cataluña”, the Catalan Civil Code, allows termination by simple notice. Rescission in Catalonia The Catalan code allows sales and other contracts for value signed since 2018 to be rescinded in two cases: On grounds of loss of more than half (“lesión en más de la mitad”). It can be sought by the party that, on signing, received something whose market value was less than half the market value of what it gave, whether the seller or the buyer. For example, if a flat is worth 300.000 euros on the market and is sold for 140.000, there is such a loss, because half its value is 150.000. If it is sold for 160.000, there is not. On grounds of unfair advantage. It can be sought by a party that, on signing, was dependent on the other party or had a special relationship of trust with it, was in a situation of economic vulnerability or urgent need, could not foresee the consequences of its actions or was manifestly ignorant or inexperienced. In addition, the other party must have known or ought to have known this, taken advantage of it and obtained an excessive benefit or a manifestly unfair advantage. Loss of more than half does not count if the imbalance is explained by the risk inherent in the contract, as in a sale in return for a life annuity, or because part of it was intended as a gift. In the case of unfair advantage, the judge can adapt the contract instead of rescinding it if the injured party so requests. In the case of loss of more than half, the party that benefited can avoid rescission by making a cash payment, plus statutory interest from the date of signing. The time limit for seeking it is four years from signing and is a time bar (“caducidad”), so it is not stopped by a simple letter of claim. Nor can it validly be waived in the contract itself. Contracts made before 2018 are governed by the rules then in force, which were more limited. Outside Catalonia and when it is called rescission but is not The Spanish Civil Code, which applies in most of the rest of Spain, does not allow a contract between private individuals to be rescinded merely because the price is disproportionate. It only allows rescission in specific cases, such as contracts made to defraud creditors, when a debtor sells or gives away their assets so that they cannot be seized. This rule of the Spanish Civil Code also applies in Catalonia. In practice, the word “rescind” is often used for any way of ending a contract. People speak of rescinding a tenancy when the landlord terminates it because the tenant does not pay, or when one of the parties backs out by means of a withdrawal deposit (“arras penitenciales”), which is in fact withdrawal. What matters is the reason, because the requirements, the time limits and the consequences depend on it. Nullity and voidability, which affect contracts that had a defect from the outset, are a separate matter.