Contract Termination

Contract termination relates to a contract’s end. Termination may be expected and contemplated at the contract formation stage. However, in some instances, problems or circumstances arise during the course of the contract that may result in either party wanting to terminate the contract.

Expected Termination

This usually relates the following circumstances (not exhaustive):

The end date or completion date has been reached.
All the terms are satisfied (i.e. payment, exchange of goods/services).
All the obligations have been met.

In the above circumstances, the termination of the contract is triggered by the completion of an event (or a date) or a certain performance and the contract automatically comes to an end with both parties taking the specified benefit pursuant to the contract.

Unexpected Termination

This relates to circumstances where during the life of the contract, a party wants to end or terminate the contract ahead of the expected termination date. Depending on when the contract is terminated, this could mean that certain terms or obligations under the contract may not have been satisfied.

Termination of a contract may occur when:

either party has breached a condition, term or clause of the contract; or
either party is not in the position to complete their part of the contract.

Termination

Breach

A breach of contract is commonly defined as an act of breaking the terms set out in a contract. This occurs when at least one party fails to perform their obligations according to the terms of the contract, whether it is in the manner or timeframe it should be completed.

There are four types of breach:

Material Breach
- When a key term of the contract has not been provided or undertaken or a party receives significantly less benefit than what was specified in the contract.
Minor Breach
- When a party performs some part of the obligation but not all.
Anticipatory Breach (repudiation)
- See below for more details.
Actual Breach
- When a party is unable to perform their obligations by the deadline or during the performance of the contract.

Repudiation
When a party cannot or will not perform their obligations under the contract, a repudiation of the contract has likely occurred. As repudiation often occurs before an actual breach of the contract, the Court will often refer to this as an anticipatory breach of the contract and looks at the party’s unreadiness and unwillingness to perform their obligations under the contract.

Once you suspect that repudiation will likely occur or should the other party declare that they cannot or that they are unwilling to perform their obligations under the contract, as the innocent party, you have the choice to continue with the contract or accept the repudiation and terminate the contract.

The innocent party may be entitled to terminate the contract and may be entitled to seek damages for the breach.^[1] Depending on the circumstances, the innocent party may be able to institute proceedings for specific performance so that the other party honours and performs their obligation under the contract.^[2]

[1] Galafassi v Kelly [2014] NSWCA 190
[2] Galafassi v Kelly [2014] NSWCA 190
[3] As everybody’s needs are different, please consider obtaining independent legal advice to see what best applies to you and your circumstances.
[4] Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337.
[5] As everybody’s needs are different, please consider obtaining independent legal advice to see what best applies to you and your circumstances.

Frequently Asked Questions

How can I protect myself, my business or my company from contract termination?

There are many ways that you can protect yourself, your business or company from contract termination but here are some of the basics ^[3]:

Obtaining legal advice prior to entering into a contract;
Ensure that there is a specific clause in the contract allowing for termination by either party.
In the above clause, set-out what needs to be done to terminate the contract and what penalties apply (if applicable) in any event.
Prior to signing a contract, review the termination clause and if it is not already included, seek to include a termination clause.

What happens when a contract is “frustrated?”

A frustrated contract occurs when an event radically changes the performance of the contract. Where the contract cannot continue for some reason beyond either party’s control and by no fault of either party, the contract is said to be “frustrated.” ^[4] Note that the event cannot be a deliberate act by either party. Once a contract is frustrated, the parties are discharged from performance and from any obligation to remain ready and willing to perform.

Can I vary a contract once it has been executed?

This would depend on the clauses in relation to the variation of the contract. Once a contract has been signed, the parties are deemed to have agreed to the terms of the contract and the contract becomes binding. In most cases, a variation of the contract may be permitted so long as both parties agree to the said variation. If both parties agree, then they may choose to sign a Deed of Variation to reflect the changes ^[5].

Disclaimer: The information in this publication is general only does not constitute legal advice. If you require specific legal advice you should speak with a lawyer.

Disclaimer

"The content in this publication is general only and is not legal advice to be relied on. If you require specific legal advice concerning the topic of this publication, please contact our office to speak with one of our lawyers."

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