Extraordinary termination – also referred to as termination for cause, termination without notice or dismissal – is permissible in all contractual relationships and cannot be excluded by contract. It requires the existence of good cause, must be declared immediately upon its discovery, and leads to the immediate termination of the contractual relationship with no obligation to observe notice periods or dates.
According to case law, extraordinary termination is intended to serve as a ‘last resort’ in cases where the continuation of the contractual relationship has become unreasonable. In practice, however, it is frequently used in an attempt to prematurely rid oneself of a contractual partner who has become unwelcome – which makes extraordinary termination a frequent trigger for civil disputes.
This article examines four key questions that are of particular relevance in this context:
- When does a reason constitute good cause to justify an extraordinary termination?
- What requirements are imposed by the principle of immediacy?
- Does extraordinary termination inevitably have to mean the immediate termination of the contractual relationship?
- And can an invalid extraordinary termination be ‘saved’ by reinterpretation?
When does a reason constitute good cause to justify an extraordinary termination?
The central element of any extraordinary termination is the existence of good cause justifying it. This may be a single event or a chain of several circumstances which, whilst not sufficient on their own, are collectively capable of undermining the very foundations of the contract’s continued performance. The right of termination is fundamentally designed to protect parties from being bound unreasonably to a continuing contract. A contracting party should be able to terminate a contract prematurely if its continuation is unreasonable for them – for example, due to a serious loss of trust. However, a strict standard is applied to the question of unreasonableness. The interest of one party in terminating the contract must be weighed against the other party’s interest in its continuation, within the framework of an overall assessment based on the time of the notice of termination.
In practice, determining whether a reason in fact constitutes good cause to justify extraordinary termination frequently presents considerable difficulties. The distinction must be made on the basis of the circumstances of the individual case. In any event, reasons that were already foreseeable or accepted prior to the conclusion of the contract cannot constitute good cause for early termination. The same applies where the party seeking termination is itself responsible for the good cause or is at least partly to blame. According to case law, the following applies: The more foreseeable the circumstances were at the time the contract was concluded and the more they fall within the sphere of the contracting party now seeking termination, the greater the importance attached to the stability of the contractual relationship and the higher the standards to be applied when weighing up the alleged grounds for termination (e.g., Austrian Supreme Court 1 Ob 176/98h).
Grounds justifying extraordinary termination include, in particular, material breaches of contract, a loss of trust in the contracting party, or serious and unforeseeable changes in circumstances which, for example, result in a subsequent significant increase in the difficulty of performing the obligation. As the burden of assertion and proof regarding the existence of good cause rests with the party terminating the contract, it is particularly advisable to document the relevant circumstances in full. All breaches of contract, incidents, and communications giving rise to good cause should be recorded promptly and in a comprehensible manner.
What requirements are imposed by the principle of immediacy?
One question of particular practical relevance is the timeliness with which good cause must be asserted. In light of the pressing unreasonableness of maintaining the contractual relationship, the prevailing view is that good cause must be asserted without delay, i.e., immediately upon becoming known, without culpable hesitation. However, what is to be understood in concrete terms by ‘without delay’ cannot be defined in general terms and must be assessed according to the circumstances of the individual case.
In principle, the requirements for immediacy are not excessive, and the party entitled to terminate the contract is granted a reasonable period of consideration, for example to seek legal advice. Only culpable hesitation that is not justified by the circumstances leads to the loss of the right to terminate. Specifically, if a party to the contract, upon becoming aware of the good cause, is initially prepared to maintain the contract and only declares termination some time later, this generally indicates that continuing the contract is not unreasonable or, under certain conditions, may result in an implied waiver of the right to terminate.
Labor law applies a comparatively strict standard to the principle of immediacy. An employee should not be left in the dark about the circumstances of the termination for an unreasonably long period, nor should they be led to believe, in view of any hesitation, that the party giving notice is waiving their right to terminate the contract. Provisional measures, such as a suspension until the factual or legal situation has been clarified, may, for example, prevent the assumption that the employer has waived the right to dismiss.
Does extraordinary termination inevitably have to mean the immediate termination of the contractual relationship?
Unlike in the case of ordinary termination, where compliance with statutory or contractually agreed notice periods and dates determines the end of the contractual relationship and thus affords the contracting parties the necessary time to make timely arrangements, the contractual relationship in the case of extraordinary termination generally ends with immediate effect ex nunc, namely upon receipt of the notice of termination by the other party.
In practice, however, it is entirely conceivable that there may be situations in which it appears more efficient and appropriate from a legal and economic perspective not to terminate the contractual relationship immediately, but only after a reasonable notice period. Whether this is possible depends, on the one hand, on the nature of the good cause; on the other hand, assessing this question will require a corresponding balancing of the interests of the contracting parties in each individual case. In any event, however, if the contracting parties can agree on this by mutual consent, extraordinary termination with a notice period should be permissible.
Can an invalid extraordinary termination be ‘saved’ by reinterpretation?
In view of the uncertainties outlined above, the question regularly arises in practice as to what happens if an extraordinary termination turns out to be unjustified. Can it then be ‘saved’ by reinterpreting it as an ordinary termination?
The prevailing view generally answers this question in the affirmative when the interpretation of the notice of termination leaves no doubt that the party giving notice wishes to terminate the contractual relationship in any event. The contract will then end at the latest upon expiry of the standard notice period. Therefore, if one wishes to ensure that the contractual relationship is terminated ‘in any event’, it is advisable to make this clear when formulating the extraordinary notice of termination and, for example, to declare ordinary termination as a contingency at the same time.
Conclusion
Extraordinary termination as a ‘last resort’ for early termination of a contract is subject to strict conditions. It is sometimes fraught with considerable uncertainties and risks, which is why, in practice, it frequently gives rise to civil disputes. Any party making use of this instrument should carefully examine the relevant circumstances, document them fully, and act without delay to ensure that the termination will also stand up to judicial scrutiny.
