VLP Legal Press #27
Event of Default Clause
Clauses on “Event of Default” are commonly found in many commercial contracts. However, parties often wonder whether such clauses are compulsory, or whether they can simply omit them to keep the contract shorter.
To answer this question, it is helpful to first consider the following.
Q1: What is a “default”? Does every non-compliance of the contract obligation/condition count as a “default”?
A default commonly refers to a failure to fulfill an obligation. The legal framework for default can be found in Section 1 of the Cambodian Civil Code (Articles 389 to 395) – general rules concerning non-performance.
Article 389, a non-performance is a party’s failure to perform an obligation arising under a contract.
In addition to the above definition, the law also provides a non-exhaustive list of events considered as non-performance as following:
(a) when the obligation is not performed by the agreed deadline;
(b) when the obligation cannot be performed at all;
(c) when the obligation is performed but not fully or properly according to the purpose of the contract;
(d) other situations where the obligation is not performed as intended under the contract; and
(e) when there is a breach of any other obligation arising under the contract.
According to the Civil Code, a non-compliance with a contract obligation or condition can be counted as a non-performance or default.
A contract shall state all obligations and conditions that a party needs to perform or fulfill for the purpose of the contract as clearly as possible. Otherwise, it may be difficult to argue/determine that a failure to comply amounts to a non-performance or default.
In such, in order to assert a default, the non-defaulting party would need to prove that the default action meets the criteria provided under Article 389 (i.e., a delay, an inability to perform or a performance not compliance with the purpose) to be counted as a default or non-performance.
Based on the above, whilst any non-compliance with a term of the contract counts as default, not every failure to perform an action expected by the other party counts as a default especially if it is not stated in the contract or under the law.
For example, under a loan agreement secured by a property, failure to repay the loan on the due date would typically constitute a default. However, if the loan agreement does not have express contract terms requiring the debtor to notify the creditor before leasing the secured property, the creditor cannot claim that the debtor should have notified of the lease and the debtor’s failure to provide such notification would not normally be considered a default.
Q2: If the other party fails to perform the contract terms, what can the non-defaulting party do? Can the non-defaulting party immediately terminate the contract (and take action against them) or request to continue with the contract (but ask for compensation)?
When a party fails to perform a contract term which results in a default, the other party has the right to demand for the following remedies set out in the Civil Code (Article 390):
(a) compulsory performance;
(b) payment of damages; or
(c) termination of the contract.
Based on Article 395, if there are multiple remedies available, the non-defaulting party may select any or all of such remedies so long as they are not contradicting each other.
For example, the non-defaulting party cannot demand a specific performance (i.e. complete the performance of the contract) and termination of contract (ask for refund of monies paid and losses incurred) at the same time.
Termination is not the only option in the case of non-performance. Depending on the circumstances, the non-defaulting party may choose to continue the contract while claiming damages. The buyer may want to demand a land seller, who suddenly refuses to sell his land, to complete the sale of a land when the value of the land continues to rise.
Q3: How does an “Event of Default” clause typically look like?
An Event of Default clause typically defines the circumstances that will be considered a default and sets out the consequences if such events occur.
In many contracts, the clause may include provisions on:
situations that constitute an Event of Default;
whether the defaulting party has an opportunity to remedy the default (cure period);
the remedies available to the non-defaulting party; and
the termination process and consequences.
A simplified structure of an Event of Default clause may look as follows:
[This is just an example of the structure of the clause and shall not be deemed as a legal advice nor confirmation of the applicability of such clause to every contract or its enforceability.]
“Clause [x] – Event of Default and Termination
(a) Event of Default (definition )
Each of the following events shall constitute an Event of Default under this Agreement:
(i) [-]
(ii) [-]
(iii) [-]
(iv) [-]
(b) Notice of Event of Default and Cure Period
(c) Remedies for an Event of Default
(d) Termination
(e) Effect of Termination”
Q4: If the law already deals with non-performance of contracts, why do lawyers still include long “Event of Default” clauses?
While the Cambodian Civil Code already provides a framework and remedies when a party fails to perform its contractual obligations, including an Event of Default clause in the contract allows the parties to define more clearly when and how those remedies may be triggered. These situations are commonly listed as Events of Default, even if an actual breach of a core contract obligation has not yet occurred.
Following are common situations deemed as events of default:
Failure to make payment when due: this is usually considered a default because payment obligations are often a key element of the contract.
Breach of important contractual obligations: if a party fails to comply with a material obligation under the contract, the other party may need the right to take action to protect its interests.
Insolvency or bankruptcy: if a party becomes insolvent or is subject to bankruptcy proceedings, there is a significant risk that it may no longer be able to fulfill its obligations under the contract.
Loss of required licenses or approvals: if a party no longer holds the necessary licenses or permits to carry out its business, it may become legally impossible for that party to continue performing the contract.
Change of control of a company: When the ownership of a company changes, the other party may face uncertainty regarding the new owner’s financial capacity, management approach, or willingness to continue the contractual relationship.
By identifying these situations as Events of Default, the parties can clearly agree in advance on the circumstances that will justify certain remedies, such as terminating the contract, suspending performance, or claiming damages.
Therefore, although such clauses are not strictly required under the law, they help reduce uncertainty, manage risks more effectively, and allow parties to respond more quickly when the contractual relationship becomes unstable.
This is for general reference only and does not constitute legal advice. For further guidance, contact us at:📧 connect@vlplaw.co