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Contract Termination: Whose Right Is It?

The following is a quick guide outlining when a party can terminate a contract at common law, namely - where a party has enunciated the contract; has breached a condition of the contract; or seriously breached an intermediate term.

It must be noted that the common law right to termination may be excluded by agreement between the parties, most notably through express termination provisions (Commonwealth of Australia v Amman Aviation (1991) 174 CLR 64). But clear words are needed, as there is a general presumption that contracting parties intend to preserve their common law rights (Gilbert-Ash (Northern) v Modern Engineering (Bristol) [1974] AC 689). Consequently, poorly drafted provisions will serve, not to exclude these remedies, but rather to augment them.

Renunciation

Renunciation refers to conduct that shows a party’s unwillingness or inability to render substantial performance of the contract – that is to no longer be bound by the contract or to fulfil it only in a manner substantially inconsistent with the party’s obligations (Koompahtoo v Sanpine [2007] HCA 61). The test is whether the actions of one party would convey renunciation to a reasonable person in the situation of the other party, either of the contract as a whole or a fundamental obligation under it.

Conditions

A condition refers to an essential term of the contract, it is a promise made in a contract that is so important that a party would not have entered into the contract unless they were assured that the promise would be fulfilled. This must have been apparent to the promisor.

A breach of an essential term allows you to terminate the contract and seek damages.

This should be distinguished from the breach of a non-essential term of a contract, for example a warranty. The breach of a non-essential term only entitles you to damages (Tramways Advertising v Luna Park (NSW) (1938) 38 SR (NSW) 632).

 

Intermediate terms

Intermediate terms are middle of the road terms whose breach does not result in an automatic right to terminate. Their breach may only result in a termination right when the breach goes to the root of the contract, depriving the innocent party of a substantial part of the benefit to which they are entitled. One must take into account the nature of the contract, the relationship it creates, the nature of the term, the nature of the breach, and the consequences of the breach for the other party.

Right to terminate may be circumscribed

Where is exists, the right to terminate may be restricted in certain circumstances, depending on the conduct of the complaining party before, during, or after a breach. These should be taken into consideration. Examples include:

  • A terminating party who is not ready and willing to perform;
  • Where performance was prevented or dispensed with by the terminating party;
  • Where the terminating party has elected to affirm the contract, waived the right to terminate, or is stopped from terminating;
  • Where the termination would have breached implied obligations of cooperation and good faith;
  • Where termination is unconscionable (unfair) in equity;
  • Where termination would cause an unjust forfeiture of property; and
  • Where termination is unconscionable conduct under legislation.

Things to consider

If you have concerns regarding an existing contract of if you are considering terminating your contact please contact Berrigan Doube Lawyers for advice specific to your situation.

When considering whether you are entitled to terminate a contract at common law, we could consider:

  • Whether common law rights have been excluded;
  • What conduct is being said to justify the termination;
  • In renunciation cases, whether renunciation would have been conveyed to a reasonable person by the conduct of the other party, either in regards to the contract as a whole or a fundamental obligation under it;
  • In regards to a breach of contract, whether the term breached is a condition, warranty, or intermediate term. This will involve identifying the common intention of the parties (as determined objectively from the contract) and determining whether the innocent party would have entered into the contract in the first place, had they not been assured performance of an obligation);
  • Where a term is intermediate, consider whether it goes to the root of the contract and deprives the innocent party of a substantial part of the benefit for which it contracted; and
  • If the right to terminate exists, whether any relevant circumstance constrains that right.

The legal rights and obligations of parties are complex and depend on the facts of your case.

If you have any specific or general questions in relation to this article, please do not hesitate to contact us.