- A contract can be terminated for a number of reasons, including a repudiatory breach, a trigger of a contractual termination clause or actionable misrepresentation. Discharge by agreement, for breach or by frustration all have varying consequences.
- Remedies for contract termination can include rescission, damages and specific performance. Contact a specialist Contract Lawyer to understand what remedies are available to you and what is fair and reasonable in all the circumstances.
- Before terminating a contract, it is important to consider whether there are other options to continue the contract at common law, or pursuant to a term of the contract.
Causes of Contract Termination
Performance of the Contract
The most common way a contract is terminated is the fulfilment of all contractual obligations by both parties. When the parties to the contract completely fulfil their obligations to one another, whether by payment of money or by doing something as agreed in the contract, the contract comes to an end. Case law has upheld examples of where partial work completion is considered contract completion.
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, seizure of property by a foreign government would be considered an unanticipated circumstance.
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, even if the other party has not satisfied their contract.
In the scenario where one party breaches the contract, the other party may choose not to enforce the contract and to release the breaching party on a conditional basis. This discharge by accord or satisfaction is essentially the fulfilment of a new promise.
Operation of Law
There are scenarios where the operation of the law may discharge the parties from the contract. For example, where one party dies and is no longer able to perform the contract, this will terminate the contract.
A breach of condition, a refusal to perform (renunciation) or a sufficiently serious breach of an intermediate term can give rise to contract termination. This will depend on the nature of each breach – you should contact a Contracts Lawyer to determine your rights and obligations.
- An informal contract can be converted to a formal contract to make it more enforceable. By formalising this arrangement, this can discharge any previous informal arrangement, and enforce the crystalised terms in the formal agreement.
- If any part of a formal contract is incorrect, rectification should be sought quickly. Failure to act could be seen as an affirmation of the contract.
- A mistake does not necessarily affect the validity of the contract. A court will view whether it is still possible to perform the contract, notwithstanding the mistake.
How to Terminate a Contract
There are two types of breaches which may trigger a contract termination.
An actual breach occurs when an obligation under an essential term of the contract is not met. An essential term is usually specified in a contract. If breached, the non-breaching party will be able to claim damages, as well as terminate the contract.
An anticipatory breach occurs when one party indicates through their conduct that they will not be able and willing to perform their current and/or future obligations under the contract.
Termination is not automatic – an innocent party may either elect to accept the breach or discharge the contract or affirm the contract and enforce the contract to be performed.
Frequently Asked Questions about Terminating Contracts
Q: What is novation?
A: Novation occurs when an original contract is replaced with a new 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.
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