Terminating a contract is fraught with risk.
Get it wrong and you may find that you’ve unlawfully terminated the contract yourself.
Here are 5 tips you should be aware of:
1. Is there a termination clause in the contract?
If the contract contains a termination clause which applies to the particular circumstances, it should be strictly followed.
For example, some contracts require a written notice to be given of a default under the contract, requiring rectification of the default within a certain time period. The right to terminate will only arise if the notice procedure is complied with, and the default is not rectified within the specified time.
2. Not every breach of contract gives rise to a right to terminate
Unless the parties have agreed otherwise, the right to terminate a contract for breach of a term depends on the type of term that is breached. This is because terms in a contract are classified by their level of importance:
- inessential terms – a breach will not give rise to a right to terminate (eg common terms, such as a party must notify the other party of a change of address)
- intermediate terms – a breach will only give rise to a right to terminate if the effect of the breach is sufficiently serious in that it deprives the other party of a substantial benefit of the contract
- essential terms – a breach will give rise to a right to terminate, either because the parties have agreed that the term is essential (eg a term that “time is of the essence”), or because the term goes to the heart of the contract (eg. payment of an agreed amount).
3. Has the contract been repudiated?
A party who is not ready, willing or able to perform an essential term of the contract (or an intermediate term where the effect of the breach is sufficiently serious) will be taken to have repudiated the contract. A refusal to perform the contract is a common example.
In those circumstances, unless the parties have agreed otherwise (for example in a termination clause), the other party may terminate the contract by communicating its acceptance of the repudiation.
4. Election to terminate or continue performance
If a party has a right to terminate a contract (either under a termination clause or because of the other party’s repudiation of the contract) it can elect to:
- terminate the contract and sue for damages (or seek specific performance); or
- affirm the contract and continue with its performance.
The right to terminate the contract will be lost if, faced with an election to terminate or affirm the contract, a party conducts itself in a manner which is consistent with the continued performance of the contract.
5. Unlawful termination of contract
A party who terminates a contract for the other party’s alleged breach, without having a lawful right to terminate the contract, will itself be held to have unlawfully terminated the contract, and can be sued for damages.
As can be seen from the above, there are traps involved in terminating a contract. This is why it is prudent to seek legal advice before taking the drastic step of terminating a contract. Please contact me if you require assistance.
“Greg’s responsive, intelligent, strategically considered support to my clients has been invaluable and exceeded my highest expectations.”
Maurice Oteri, Managing Director, My Law Firm, WA