Explanation of Article 111
The article addresses the effect of termination regardless of its cause; whether by mutual agreement, by condition option, or due to breach of obligation, and whether the termination is judicial or consensual, as well as the effect of automatic termination due to the impossibility of execution by force of law. The first paragraph clarifies the general principle regarding the effect of termination or automatic termination, which is the dissolution of the contract and the contractual bond retroactively to the time of its conclusion, nullifying all effects generated by the contract, whether for the contracting parties or others, except as will be stated in the following articles (112, 113). The contracting parties return to the state they were in before the contract, each obliged to return what was received in execution of the contract and to return its fruits from the time of judicial demand according to general rules in accordance with articles (675, 676), all in accordance with the provisions of the return of undue payment as stated in article (148).
The creditor who is granted termination, whether restitution is possible or not, can claim compensation from the debtor if the failure to fulfill the obligation is due to his fault according to the general rule established in article (107). That is, if the termination is due to the fault of one of the contracting parties, this party is not only obliged to return what he received but also to compensate the other contracting party for the damage suffered as a result of that termination. However, the contracting party who did not fulfill his obligation cannot claim compensation. If the creditor demands the execution of the contract instead of its termination, he can claim compensation based on contractual liability because the contract remains in effect and its effects are valid for the contracting parties.
The end of the paragraph states that if restitution is impossible in the case of termination or automatic termination, the court shall award compensation. For example, in a sale, if the sold item perishes in the buyer's possession due to his fault, he is liable for compensation. If it is due to an external cause, he is not responsible for the loss of the sold item except to the extent of the benefit he received, and the seller is obliged to return the price according to the rules of undue payment.
The second paragraph outlines an exception to the general principle of retroactive effect of termination or automatic termination concerning time-bound contracts. It explains that contracts are of two types:
The first type: time-bound contracts, which are periodically executed contracts, also known as duration or extended contracts. These are contracts where time is an essential element, serving as the measure by which the subject of the contract is determined, either by its nature, like lease and employment contracts, or by the agreement of the contracting parties, like periodic supply contracts.
The second type: instantaneous contracts, where time is not an essential element, and the subject is determined independently of time, like sales. A contract does not cease to be instantaneous due to the incidental presence of time, either by the nature of the subject, like a contract for work, or by the agreement of the contracting parties, like a deferred sale.
The paragraph states that time-bound contracts do not have a retroactive effect upon termination; these contracts, by their nature, do not accept this effect because what has elapsed cannot be reversed. Consequently, what has elapsed before the termination retains its effects, and the effect of termination applies from the time it occurs. For example, in a lease, the rent due for the period before termination retains the nature of rent, not compensation.
The end of the paragraph stipulates that the court, upon the request of the creditor who is granted the termination of a time-bound contract, may award compensation for the damage suffered if the termination is due to the debtor's breach of obligation. This provision confirms the general rule established in article (107) that the contracting party, when requesting termination, can claim compensation. Time-bound contracts do not differ in this regard from instantaneous contracts; in both, the creditor can claim compensation with his request for termination or execution, and the fact that termination in a time-bound contract does not have a retroactive effect does not prevent this. It is evident that there is no room for compensation if the automatic termination of the contract is due to a cause beyond the debtor's control.
Related To
Article 111
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In cases of contract termination, the contracting parties shall be reinstated to their status prior to the conclusion of the contract. If reinstatement is not possible, the court may order payment of compensation.
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Termination of a time-based contract shall not have a retroactive effect. The court may order payment of compensation, if applicable.