The role of good faith in the application of unilateral termination clauses

By Juan Camilo Duque, Litigation Partner

From the litigation area of Forvis Mazars Colombia, we follow up on the orientations and postulates that in different topics show the jurisprudence of the high courts, as well as the foundations that leave arbitration courts in several decisions. Given the above, we want to share with our clients, and followers, these bulletins where we will address, periodically, the analysis that our area performs against recent court decisions, as well as against regulatory developments that we believe may be of interest in the development of their own business.

UNILATERAL TERMINATION CLAUSES MAY BE APPLIED ONLY 

IN STRICT GOOD FAITH.

Nowadays, it is common for commercial contracts and some civil contracts to include clauses that allow one or both parties to terminate the contract unilaterally. That is, one of the parties may decide to terminate the contract without the other party's agreement, either due to a possible breach or simply for convenience.

Although these clauses are frequent, Colombian law does not have specific rules on them, beyond respecting the will of the parties that agree to them. What is clear is that these clauses are valid in Colombia, as long as they are used fairly and in good faith.

Good faith means that, both in the negotiation and during the execution and termination of the contract, the parties must act with honesty and mutual respect. Therefore, the unilateral termination clause should not be applied in a surprising or abusive manner, since both parties are expected to behave in a loyal and collaborative manner throughout the contract.

When one of the parties decides to terminate the contract unilaterally, it must do so respecting the rights of the other party, without abusing its power, and taking into account the legitimate expectation that the other party had when signing the contract. In other words, it must be done in a reasonable manner, without causing unnecessary damage.

In the event that the contract allows for unilateral termination due to a breach by the other party, this decision should also not be made suddenly. It is important to give notice in good time, in order to give the other party the opportunity to adjust its plans and resources.

If the party terminating the contract does not respect these principles of good faith, the unilateral termination could be considered illegal and improper. This could lead to claims or lawsuits for abuse of this clause.

For all these reasons, it is advisable to have legal advice when deciding to apply a unilateral termination clause. A lawyer can help to follow the process correctly and avoid legal problems in the future, ensuring that the decision is legitimate and not a whim of one of the parties.

Sources used:

A. BOGOTÁ CHAMBER OF COMMERCE. Arbitration and Conciliation Center. Arbitration Award of Greenyellow Energía de Colombia SAS. against Termotasajero Dos SA ESP. Dated November 5, 2024.

B. BERNAL FANDIÑO, Mariana. THE DUTY OF CONSISTENCY IN CONTRACTS.

C. SUPREME COURT OF JUSTICE, Civil Cassation Chamber, cassation judgment of August 30, 2011. Rad.: 11001-3103-012-1999-01957-01. Presiding Judge: William Namén Vargas

D. CHAMBER OF COMMERCE OF BOGOTÁ. Arbitration and Conciliation Center. Arbitration Award in the case of Automotora Nacional S.A. - Autonal S.A. vs. Sociedad de Fabricación de Automotores S.A. -Sofasa S.A. Date: April 25, 2017.