Terminating a contract can often be a significant step and stressful. You should always give careful consideration to ensure you are not exposed to consequences either real or unintended.
There are basically three reasons why you can terminate a contract apart from the circumstance where it is agreed by the parties:
- an express contractual right;
- a serious breach or repudiation at common law; or
- a statutory right
What is a Contract?
Before we look at termination rights of a contract it is important to understand exactly what a contract is.
A contract is a legally binding agreement or promise between two or more parties and it can be in writing, oral or as a result of the actions of the parties.
For a contract to be binding there must be:
- an offer and acceptance;
- consideration;
- capacity; and
- it must be for a lawful purpose
What does termination of a contract mean?
Terminating a contract will mean that it has come to an end prior to the parties having fulfilled their legal obligations under the terms and conditions of the contract.
A contract can be terminated in any of the following ways:
- by agreement
- a breach
- for convenience
- through frustration
Generally, when the contract is terminated by agreement, for convenience or through frustration the parties will agree to the terms and conditions on which the contract will come to an end.
For the purposes of this paper, we will be looking as to when a contract is terminated for breach.
Termination as a result of an express contractual right
When entering into a contract parties may wish to include specific rights as to when either party can terminate the agreement.
For example, the parties may determine that the contract can be terminated upon one party providing to the other party 30 days written notice.
Generally, that right to terminate will be in favour of both parties, but it does not need to be.
The parties can also indicate whether the rights to terminate will operate alongside the common law or whether the common law is not relevant to any termination rights.
Often poorly drafted contracts have these types of conditions, but they are not clear. In those circumstances a court will look at the actions and intentions of the parties when the contract was formed to assist it in deciding what the intention of the contract actually was.
This is why it is important that when drafting a contract to be clear and precise in your language and communication. It is always preferable to get expert advice to ensure that the language used is legally binding and lawful.
Serious breach or repudiation at common law
This occurs when an essential term which is at the core of the contract is breached.
It is such a significant breach that the innocent party would have never entered into the contract if they knew the offending party would not comply and breach it.
Another instance would be where there is a breach of what would be considered a non-essential term but due to the breach it goes to the heart of the contract and destroys the benefit of the contract.
Finally, repudiation or as it is sometimes referred to renunciation occurs when through the actions of one party there is a clear intent not to abide by the contract, and this can happen even before performance is due (anticipatory breach).
Statutory Rights
A statute can create a right to terminate a particular contract.
The statute may specify certain conditions which, if breached, create a right to terminate as if they were part of the contract.
There is a range of statutes that legislate when a party can terminate a contract including Australian consumer law and various state based fair trading and sales of goods legislation to name a few.
Tips for terminating a contract
- Make sure you get expert advice
- Make sure you have all the relevant documents including the contract and associated documents leading up to and post contract
- Clearly record the facts surrounding your reasoning for the termination
- Identify the correct ground for termination and if in doubt seek advice
- If required provide relevant notices as per the contract
- Make sure all notices are served correctly and in accordance with the contract
- Manage the exit by paying outstanding amounts etc
- Ensure you comply with any surviving conditions under the contract such as confidentiality, IP etc
- Be precise and clear in all your communications
At FC Lawyers, our business and corporate team can assist you with any issues relating to your contractual obligations. Contact us before making any decisions which could cause significant legal, financial and reputational damage.
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