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When you terminate a legally binding contract, it can be risky business. Termination clauses can allow you to relinquish yourself from your contractual obligations before the end of the contract period. However, if you wrongfully terminate a contract, this can lead to unwanted legal action brought against you. To avoid wrongfully terminating a contract, you should:
- clarify whether you have sufficient rights to terminate the agreement via express terms or under contract law; and
- consider if you have waived your right to terminate by your words or conduct.
Above all, it would be wise to seek legal advice before you terminate a contract. This article will outline how you can avoid common mistakes when terminating a contract.
Do You Have Sufficient Grounds to Terminate the Contract?
Your right to terminate a contract can arise in two broad instances. This is when you have:
- an express provision within your written contract to terminate the contract; and
- a right to terminate under contract law.
Under what grounds you can terminate your contract largely depends on your circumstances.
An Express Right to Terminate
Your contract can expressly provide you with a right to terminate when certain circumstances arise. The most common circumstance is where a party fails to perform their contractual obligations on time.
You will usually find that a well-drafted contractual right to terminate will detail the procedures that either party must follow. If you fail to follow the termination procedures under the contract, you could find yourself in further legal trouble. This may result in you having to pay damages for any loss the defaulting party incurred due to your wrongful termination.
A Right to Terminate Under Contract Law
In the absence of an express right to terminate, you may still have a legal right to terminate the agreement under contract law. This is if the other party has:
- breached an essential term of your agreement;
- caused a sufficiently serious breach of a non-essential term of your agreement; or
- repudiated your agreement, meaning they have indicated an intention to no longer be bound by the terms of the contract either by words or their conduct.
It might be fairly clear when another party breaches a term in your contract. However, what is less clear is whether a term is essential or not.
A breach of an essential term will give you the right to terminate the contract. Generally, a term is essential where it is of such importance to the commercial arrangement that a party would not have signed the contract unless you assured them of your performance of that term.
The language surrounding the term can also determine whether it is essential or not. For example, the law typically views a term with the expression ‘time is of the essence’ as an essential term.
On the other hand, if the term is non-essential to the arrangement, you can only terminate the agreement if the breach is sufficiently serious. A sufficiently serious breach is one that substantially deprives you of the benefit of the contract. Whether a right to terminate arises from a party’s breach of a non-essential term largely depends on your individual circumstances. For this reason, you should seek legal advice before terminating the contract.
A factsheet that sets out the three ways to end a commercial lease in Australia: surrendering your lease, assigning it or subletting it.
Have You Waived Your Right to Terminate the Contract?
If a right to terminate arises either under an express provision of your contract or under the contract law, you can elect to:
- affirm the contract; or
- terminate the contract.
You can affirm a contract by express words or conduct. For example, the other party might breach a sales agreement by failing to make periodic payments on time. However, if you continue to accept subsequent payments, you will likely have affirmed the contract. Ultimately, you acknowledge that the contract will still be binding when you affirm a contract after a breach. Affirming a contract also means that you cannot subsequently terminate the contract for the earlier breaches committed by the other party. In this sense, you have ‘waived’ your right to terminate the agreement.
On the other hand, if you elect to terminate the contract, this requires your unequivocal words or conduct indicating your intention to terminate the agreement. To use the same example as above, you cannot expect to properly terminate the agreement by accepting payments from the defaulting party. Ultimately, you should seek legal advice to clarify whether you have in fact waived your right to terminate the agreement.Continue reading this article below the form
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To avoid finding yourself in a dispute for wrongful termination, you should clarify:
- your rights and obligations under any express termination clauses in your contract; and
- whether you have a right to terminate under contract law for a breach of an essential term, a sufficiently serious breach of a non-essential term or if the other party repudiates the contract.
Frequently Asked Questions
A particular clause in your contract might provide that you must give the defaulting party written notice of your termination. In the absence of such a clause, it would nevertheless be wise to provide written notice of your termination.
A party can be in anticipatory breach of a contract if they refuse to perform their obligations under the contract before the time specified for performance. For example, if you enter into a contract for the sale of furniture but you do not have the funds to satisfy the next payment, you may be in anticipatory breach of the contract.
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