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Terminating a contract – What you need to know

Sometimes, the performance of terms under a contract does not go smoothly and you may wish to terminate the agreement. The right to terminate a contract can arise from a variety of circumstances, either under the agreement itself or at common law.[1] Your right terminate will be highly dependent on both the terms of your agreement and the conduct of the other party. In this article, we explore the specific circumstances resulting in a right to terminate.  terminate a contract

What does terminating a contract do?

Terminating a contract brings the contract or agreement between you and another party to an end.

What circumstances can lead to a right to terminate?

Contract Performance

A contract may be terminated on the grounds of performance, provided that all the terms have obligations have been complied with perfectly (or to a sufficient standard as provided under the contract). This is a common reason for termination, as it means all of the obligations under the agreement have been fulfilled.

Agreement

Parties to a contract are free to terminate a contract by agreement, even if all the terms of the contract have not been performed. For example, the parties may terminate one contract in order to enter into a new contract.

Breach of Contract

You may be entitled to terminate the contract if an essential term of the contract is breached. An essential term is crucial to the performance of the contract (e.g. a failure to pay money agreed under a contract or an employee breaches company policy [see article]). Breaching an intermediate term can also give rise to a right to terminate, provided the breach is sufficient.[2] However, breaching a non-essential term (e.g. change of address or party name) may not automatically give the right terminate.

Not all breaches will result in a right to terminate and there may be additional steps required to enforce your rights before choosing to terminate. Other remedies available for breaches of contract terms include seeking specific performance, which requires the other party to perform the obligations of the contract. Alternatively you can ‘reaffirm’ the contract and continue its operation by agreeing to the breach. You can also permit the other party to rectify the breach or sever the breached term, enabling the rest of the contract to continue.

Repudiation

If the other party refuses to perform their obligations under the contract (known as repudiation) this gives you the right to terminate the contract. This is because the other party is essentially stating they will not perform their obligations under the agreement.

Frustration

Frustration means that the terms of the contract are unable to be performed and the contract must come to an end (e.g one party has died or due to legislative changes).[3] The frustration must not have been caused by either party and or have been reasonably foreseeable.

Important considerations:

  • Breaches of a contract do not automatically give rise to a right to terminate.
  • You should explore whether other remedies are more suitable. Can the contract be amended? Is it better to accept the breach of contract? Can the contract operate without the breached term? Should I seek specific performance instead? Have I suffered any damages?
  • If any part of your contract is incorrect, ensure you work with the other party to rectify as soon as practicable. The contract could be performed without the incorrect term.
  • Check whether your contract has a termination clause and any associated requirements. Most leases or business contracts will feature notice periods required to inform other parties of your intention to terminate a contract.
  • If you terminate a contract without an adequate right to do so (unlawful termination), you could be sued for damages.

 

[1] Commonwealth of Australia v Amann Aviation Pty Ltd (1991) 174 CLR 64.

[2] Koompahtoo Local Aboriginal Land Council v Sanpine Pty Limited [2007] HCA 61.

[3] Davis Contractors Ltd v Fareham Urban District Council [1956] AC 696.

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