A contract is a very important document that outlines your legal responsibilities under the agreement it governs. However, not always will a contract hold up; issues may arise if circumstances out of your control have an impact on it, or if the other party is in breach of it. If you wish to terminate your contract and end your contractual obligations, you must do so accordingly with the contract terms and ensure that you are not in breach yourself and at risk of repudiation.
Termination for Breach
A contract can be terminated if one party breaches a condition or an intermediate term of the contract.
A condition, or an essential term, is a term of such importance that the parties wouldn’t have entered into the contract otherwise.[1] The innocent party can either elect to affirm the contract and keep it on foot, or terminate the contract. In either case, they will receive damages.
Alternatively, a breach of an intermediate term (or non-essential term) can be made, which is a term that can also be important, but to varying degrees. If the breach of such a term is serious enough to deprive the innocent party of substantially the whole benefit of the contract,[2] the innocent party may also elect either to affirm to terminate the contract and seek damages. Additionally, a contract may include specific termination clauses that allow termination for particular breaches.
With regards to affirming a contractual breach of a condition or an intermediate term, it is important to remember that once a breach is affirmed, the innocent party cannot later terminate based on the same breach (unless it is a continuing one).
Repudiation
If a party repudiates the contract by renouncing its liabilities or indicating an intention to no longer be bound by the contract, the innocent party can accept the repudiation and terminate the contract.[3] Repudiation can also occur if a party announces before the time for performance that it will not perform an essential term of the contract. It is important to note that repudiation generally does not occur where an erroneous interpretation is made by one party, who purports an incorrect construction of a clause due to simple error or misunderstanding.[4] However, if they persist in their interpretation despite being made aware of its inaccuracy, this may give grounds for the other party to terminate the contract based on repudiation.
Termination by Agreement
Parties may agree to terminate a contract either through an express term in the contract or by mutual consent. This can include termination for convenience, where one or both parties can terminate the contract for any reason by giving notice.
With regards to express contractual termination clauses, one must be careful when drafting or agreeing to them and recognise if they are unfair contract terms. If a contract term is found to be ‘unfair’, it will be void, and therefore not binding. Unfair contract terms apply to small business contracts. In summary, they cause a significant imbalance in the parties’ rights and obligations; and is not reasonably necessary in protecting the legitimate interests of the party who would have been advantaged by the term. To understand the realm of unfair contract terms better, check out Warlows Legal’s update at Changes to the unfair contract terms regime – a comprehensive guide.
Frustration
A contract may be terminated by operation of law if unforeseen circumstances arise that make performance of the contract impossible or radically different from what was agreed upon. This includes situations such as the death of a party or significant illness.
Key Takeaways
In essence, contract termination can arise if the other party has breached or repudiated the contract, by mutual agreement, if the contract has been frustrated, or in cases of misrepresentation. These key factors are important because they uphold the principle that a contract should be fair to both parties and never result in an unfair bargain for either side.
Properly terminating a contract is crucial, as failing to follow the correct legal process could result in legal and financial consequences. Always seek legal advice to navigate these complexities and protect your interests.
Termination is a serious step, and understanding the specific legal grounds and processes for doing so can help avoid costly disputes and ensure your contractual rights are upheld.
Contact Warlows Legal today if you need help with your contract today.
[1] Koompahtoo Local Aboriginal Land Council v Sanpine Pty Ltd [2007] HCA 61
Luna Park (NSW) Ltd v Tramways Advertising Pty Ltd [1938] HCA 66
[2] ibid
[3] Above (n 1)
[4] DTR Nominees Pty Ltd v Mona Homes Pty Ltd (1978) 138 CLR 423
