4 Ways to Release Yourself from Contractual Obligations

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Table of Contents

• Review Termination and Cancellation Clauses
• 1. Performance as Discharge
• 2. Agreement for Discharge or Termination
• 3. Termination for Convenience
• 4. Termination by Breach
• Checklist to Consider
• Key Takeaways

A contract binds two or more parties in a legal agreement, outlining their rights and obligations. Sometimes, you may need to exit a contract early for various reasons. Whether you are seeking to terminate a rental lease, a business arrangement or a lengthy mobile phone contract, it is essential to assess the best way to end your contract. This article will discuss key considerations and outline four primary ways to release yourself from contractual obligations.

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Review Termination and Cancellation Clauses

Before you consider breaking your contract, review its termination and cancellation clauses. These clauses should outline the steps you must take to end the arrangement and whether there are any consequences. This includes:

• what form of notice is required;
• what will happen upon termination; and 
• whether any cancellation fees, if any, may be payable.

However, if your contract does not include guidance on terminating a contract before an agreed date, you may release yourself from contractual obligations through:

• fulfilling the performance;
• reaching an agreement; 
• early termination for convenience; or
• breaching the contract.

We unpack each of these methods below. 

1. Performance as Discharge

To discharge your liability under a contract, perform your obligations as outlined in the contract terms. It is crucial to determine whether your obligations are categorised as ‘dependent’, ‘independent’ or ‘concurrent’ within the contract.

If the matter goes to court, a judge will look at the words of the contract to determine the nature of your obligations. In doing so, the judge will be able to decide whether you have been adequately performed under the contract.

2. Agreement for Discharge or Termination

The parties to a contract can, at any time, agree to terminate the contract or modify it. Termination or variation can result in the release of contractual obligations. Specifically, the parties can:

• terminate an existing contract and replace it with another agreement;
• terminate part of a contract;
• modify the terms contained in their contract; or
• terminate the entirety of an existing contract.

If you agree with the other contracting party to terminate or modify a contract, you must obtain written or oral confirmation of this agreement. Doing so may help resolve any potential confusion, misunderstanding or dispute in the future about the existence of an agreement or any particular obligations under it.

3. Termination for Convenience

Parties to a contract can agree that one party (or both parties) may terminate the contract ‘for convenience’ as part of the contract. Having a termination for convenience clause means that a reason for terminating is not necessary. However, while this may seem simple, you must also consider:

• giving sufficient notice;
• your liability when terminating; and
• any unfair contract terms.

We explore these considerations below.

The Giving of Notice

The contract will usually specify whether you need to give notice and, if so, how to do so (e.g. in writing or orally). Additionally, the contract will set out the notice period, which will likely vary depending on the nature of the contract. The notice period may vary from seven days up to six months.

Liability

Terminating a contract early can result in a loss for the other party. For example, terminating a building contract may leave a house unbuilt, requiring the engagement of a new contractor to finish the job. The contract will usually state whether there is an early termination fee or if there are other amounts payable on early termination (e.g., payment must be made for all services rendered up to the date of termination). Any termination fee must be reasonable and genuinely estimate the loss a party will suffer due to the early termination. If the termination fee goes beyond that, it may be deemed a penalty or an unfair contract term.

To ensure that a termination for convenience clause is enforceable, it is advisable to include the payment of a termination fee. In this way, this obligation is supported by consideration. For example, if you engage a contractor and want to terminate for convenience, you would ideally pay them for their fees up to the date of termination.

Unfair Contract Term

Where the Australian Consumer Law applies, a termination for convenience clause must not be an unfair contract term; otherwise, it will be unenforceable and significant financial penalties may apply. A termination for convenience may be unfair where only one party can exercise that right, but this can depend on the specific circumstances.

4. Termination by Breach

If a party does not perform one of their contractual obligations, they breach the contract. A breach of contract may entitle the innocent party to terminate the agreement under certain circumstances. Usually, the party in breach will have an opportunity to correct the breach after receiving notice before the innocent party can terminate the contract. Once the contract terminates, you may be able to release yourself from contractual obligations. 

However, even if parties terminate a contract, you might not be able to escape all of your contractual obligations. Specifically, clauses in your contract may expressly state how they will continue to apply, surviving termination or expiry. These obligations will use words like: “This clause will survive termination or expiry of this agreement.” This is common for restraint of trade clauses, confidentiality and liability provisions. After the contract ends, these will continue.

Types of Contractual Terms

It is important to note that only some breaches of contract will allow you to terminate. Generally, a contract contains three categories of terms. The type of term that a party breaches will decide whether termination of the contract is possible.

Checklist to Consider

To summarise, if you wish to terminate your contract early, you should consider the following:

1. review your contract, specifically the termination and cancellation clauses – certain provisions may also survive termination;
2. determine if there are any fees payable for early termination, such as a cancellation fee;
3. ensure you have fulfilled all of your obligations – if your obligations are independent, you may discharge your liability by performing them;
4. verify if the other party has fulfilled all obligations – if not, and their obligations were fundamental conditions, you may be discharged from yours;
5. seek agreement from the other party to terminate the contract early, particularly if the arrangement is not working out as expected. 

Key Takeaways

If you wish to terminate a contract early, it is crucial to first review the terms and conditions to identify whether any consequences apply. If none exist, you can discharge your obligations by performing your requirements or reaching a mutual agreement with the other party. You may also be released if the other party breaches the contract. Before attempting to exit a contract early, consulting with a lawyer is essential to reduce the risk of unintended consequences and prevent potential disputes.

If you need help understanding your contractual obligations, our contract lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.