How can you lawfully terminate a contract?
Before a party seeks to terminate a contract, it is important that they consider whether they have a legal right to do so. If a party attempts to terminate a contract unlawfully, the other party may be able to seek remedies such as rescission, damages or specific performance.
Contracts may be terminated for a variety of reasons. For example, a contract can be terminated due to:
- a party’s explicit right to terminate under the contract;
- the performance of the contract obligations being fulfilled (or the expiry of the duration of the contract);
- breach of an essential term of the contract;
- a sufficiently serious breach of a non-essential term of the contract;
- a party repudiating the contract; or
- frustration, where the parties make a mutual agreement to discharge obligations under the contract, a party breaches a condition, or an operation of law discharges the parties from the contract.
Difficulties may arise if a party does not correctly terminate a contract. If a party does not properly terminate a contract, to the other party may insist performance or compensation.
Before seeking to terminate a contract, a party should consider the following issues:
Termination is not automatic
Unless the parties have expressly agreed, neither a breach nor repudiation of a automatically terminates the obligation of the parties to perform or to be ready or willing to perform their contractual obligations. These events may give rise to the right to terminate, but it does not automatically terminate the performance.
Requirements of election to terminate
The requirements of election to terminate will be dependent on the source of the right to terminate:
- Right to terminate conferred by common law – If the right is conferred by common law, an election to terminate for breach or repudiation requires no particular form of words. The promise needs to make a plain election to terminate by use of unequivocal words or conduct evincing an election to terminate the performance of the contract.
- Right to terminate conferred by contract terms – If the right is expressly conferred by contract terms, the clause may require the party wishing to terminate the contract to give notice to the other party, or provide for termination at the expiry of the period allowed by notice, or confer a right which is to be exercised by dealing with the subject matter in a specified way.
- Right to terminate by statute – A statutory provision may require that a termination notice be in a specific form, or that the terminating party afford to the other party an opportunity to remedy the breach within a specified or reasonable period of time.
There is certain conduct which can undo the termination of a contract. This may include the parties acting in a manner which is consistent with the contract being on foot even after it has purportedly been terminated.
Repudiation occurs when a party shows that they are not ready or willing to perform the contract, or intend to fulfil the contract in a manner substantially different from their obligations. The test for repudiation of a contract is whether a party’s conduct would communicate to the reasonable person, in the position of the other contracting party, renunciation of the whole contract. A contract may also explicitly deem certain conduct or breaches to constitute repudiation.
If you are uncertain about your contractual rights to terminate a contract or are a party who believes that a contract has been terminated incorrectly, please contact our team of experienced solicitors at Butlers Business Lawyers on (02) 4929 7002 or email us at firstname.lastname@example.org for personalised legal advice.