While contracts govern the relationship between the parties, it also outlines what happens when things go wrong. This can include when a party is in breach of the contract. If you wish to terminate a contract, you must make sure that you have the right to do so. You must also do so correctly in accordance with the contract terms. There can be costly consequences if you get this wrong and you may find yourself in breach of the contract. This article will explain when contract termination can occur after a breach.

Causes of Contract Termination

You can terminate a contract for a number of reasons, including:

  • a breach;
  • a trigger of a contractual termination clause;
  • frustration;
  • misrepresentation; or
  • by mutual agreement.

Contractual Termination

Commercial contracts often contain express termination clauses which provide for termination in specific circumstances. A termination clause may also provide the right to terminate for convenience. This involves providing the other party with a certain amount of notice. It is important to have your contract reviewed by a lawyer before acting on a termination clause. This is because contractual termination rights can often by complex and operate in conjunction with other applicable laws.

Ipso Facto Provisions 

An Ipso Facto provision allows a party to terminate the contract if the other party becomes insolvent.

For example, this occurs if the other party has an administrator appointed.

This provision is very common and appears in many commercial contracts. In 2018, the Corporations Act 2001 (Cth) introduced a new rule preventing the termination of a contract upon the occurrence of certain insolvency events. This ensures that insolvent companies can continue to trade as they endeavour to recover from the insolvency event. Some contracts may be excluded from the operation of the rule. 

For this reason, it is important to seek legal advice before attempting to terminate a contract, even if your contract contains an Ipso Facto provision.

Unfair Contract Terms

In some cases, the termination clauses in a commercial contract may be an ‘unfair contract term’. A term in a contract is unfair if it:

  • causes a significant imbalance in the parties’ rights and obligations; and
  • is not reasonably necessary in protecting the legitimate interests of the party who would have been advantaged by the term.

If a contract term is found to be ‘unfair’, it will be void, and therefore not binding. Unfair contract terms only apply to small business contracts. A contract will be a small business contract if the upfront price payable does not exceed:

  • $300,000; or
  • $1 million if the contract is for more than 12 months. 

For this reason, it is important to speak with a commercial lawyer for advice on termination clauses in your contract. In some cases, these may be unfair and not enforceable.

Breach

Failing to perform your obligations under a contract gives rise to serious consequences. It allows the innocent party to terminate the contract. A breach of contract occurs when a party to a contract fails to fulfil its promises in accordance with the provisions of the agreement.

A breach of contract may not always give rise to termination. A party’s right to terminate may arise in the following circumstances: 

  • repudiation: where the other party has repudiated the contract meaning they have demonstrated by their conduct that they are no longer able to substantially perform their current or future obligations in the contract or are unwilling to do so. Termination is not automatic – an innocent party may either elect to accept the breach, discharge the contract or affirm the contract and enforce the performance of the other party’s obligations;  
  • breach of an essential term: an essential term is one of such importance that the party would not have signed the contract unless the other party had not assured them of the performance of that term. If a party breaches an essential, the non-breaching party will be able to claim damages, as well as terminate the contract; and
  • a serious breach of an intermediate-term: this may not always give rise to the right to terminate but must be sufficiently serious in order to do so.

There are many factors that need to be taken into consideration when determining if a breach gives rise to termination. This is because not all breaches give a party the right to terminate. You should contact a commercial contracts lawyer to determine your rights and obligations in terminating for a breach of contract.

Mutual Agreement

Discharging by agreement allows both parties to terminate the contract without completion of the obligations. Known as mutual discharge, this occurs when parties agree that each party should be released before either has undertaken actions to perform the agreed obligations.

It is also possible for one party to release another party. This is even if the other party has not satisfied their contract.

Frustration

In the situation where a contract cannot be completed because of unanticipated circumstances, frustration can release the parties from their obligations. To prove frustration, neither party can be the cause of the frustration, and the event must not have been foreseeable by either party.

For example, the seizure of property by a foreign government could be an unanticipated circumstance.

Misrepresentation

Misrepresentation is where one party to a contract gives to the other party false information before the forming the contract, which induces them to enter the contract. If a person enters into a contract in reliance on a misrepresentation and, as a result, suffers a loss, they may be able to terminate the contract and claim for damages. Misrepresentation could occur if a party:

  • has entered into a contract on the basis of a false statement made to it by the other party (misrepresentation);
  • were mistaken on the terms of the contract and the other party was aware of its mistake (mistake); or
  • were unfairly persuaded by another individual to sign the contract (undue influence).

Misrepresentations may not always give rise to termination of the contract. If the representations made have become contractual terms of the contract, the court will ask whether the representor promised that the statement was true. Here, the term will constitute a breach of contract and could trigger the right to terminate.

If a representation does not become a contractual term, the party misrepresented will be able to rescind the contract. This means that all rights and obligations are no longer valid, and the parties pre-contract position is restored. The contract is treated as though it never existed. 

There are some exceptions to this rule of misrepresentation. As such, it is important to talk to a commercial contracts lawyer if you feel you have been involved in any form of misrepresentation.

Key Takeaways 

Wrongfully terminating a contract could mean that the terminating party might find themselves in breach of the contract and as a result be liable to a claim for damages. It is therefore important to follow the procedures for termination as set out in the contract. As discussed, there are common law principles and legislative instruments that may also apply to your circumstances when terminating a contract. It is important to seek legal advice before terminating a contract so that you can ensure your termination is lawful and doesn’t put you at risk of breach of contract.

How can LegalVision help me?

LegalVision has experienced commercial contract lawyers who can assist businesses and individuals with commercial contracts matters including advice on termination of a contract. If you have any questions about terminating a contract, contact LegalVision’s contract lawyers on 1300 544 755 or fill out the form on this page.

Frequently Asked Questions about Terminating Contracts

Q: What is novation?

A: Novation occurs when a new contract replaces the original contract. This new contract might apply to the original contracting parties or might apply to different parties altogether.

Q: Can you discharge a contract before a breach occurs?

A: Discharging a contract because of a breach can occur following (i) an actual breach or (ii) an anticipated breach. If a contract is discharged because of an actual breach, or a breach that may occur in the future, this means that either party has expressly or impliedly communicated its intention not to perform their obligations under the contract.

Q: What is rescission?

A: Rescission refers to the retrospective avoidance of a voidable contract.

Q: What are the consequences for a breach of a non-essential term?

A: Breaches of non-essential terms, if sufficiently serious, may also give rise to a right to terminate a contract at common law.

Get in Touch

Fill out the form below and a LegalVision team member will be in touch shortly!

  • By submitting this form, you agree to receive emails from LegalVision and can unsubscribe at any time. See our full Privacy Policy.
  • This field is for validation purposes and should be left unchanged.
Our Awards
  • 2019 Top 25 Startups - LinkedIn 2019 Top 25 Startups - LinkedIn
  • 2019 NewLaw Firm of the Year - Australian Law Awards 2019 NewLaw Firm of the Year - Australian Law Awards
  • 2020 Fastest Growing Law Firm - Financial Times APAC 500 2020 Fastest Growing Law Firm - Financial Times APAC 500
  • 2020 AFR Fast 100 List - Australian Financial Review 2020 AFR Fast 100 List - Australian Financial Review
  • 2020 Law Firm of the Year Finalist - Australasian Law Awards 2020 Law Firm of the Year Finalist - Australasian Law Awards
  • Most Innovative Law Firm - 2019 Australasian Lawyer 2019 Most Innovative Firm - Australasian Lawyer
Privacy Policy Snapshot

We collect and store information about you. Let us explain why we do this.

What information do you collect?

We collect a range of data about you, including your contact details, legal issues and data on how you use our website.

How do you collect information?

We collect information over the phone, by email and through our website.

What do you do with this information?

We store and use your information to deliver you better legal services. This mostly involves communicating with you, marketing to you and occasionally sharing your information with our partners.

How do I contact you?

You can always see what data you’ve stored with us.

Questions, comments or complaints? Reach out on 1300 544 755 or email us at info@legalvision.com.au

View Privacy Policy