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A contract is a binding agreement between two or more parties. This agreement sets out the individual rights of the parties and the obligations to which they will be legally bound. Sometimes, you need to exit a contract early, despite your best intentions. Whether you are looking to get out of a rental lease, a business arrangement or a lengthy mobile phone contract, it is important to assess the best way to break your contract. This article will explore some considerations if you are thinking of exiting your contract early, before listing four key ways to get out of your contractual obligations.

Review Termination and Cancellation Clauses

Before considering how you can break your contract, you first need to review your contract’s termination and cancellation clauses. These should set out what you need to do to end the arrangement, and any consequences of doing so. A common consequence, for example, is the payment of a cancellation fee.

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

  • performance;
  • agreement; 
  • early termination for convenience; or
  • breach.

1. Discharge by Performance

You can discharge your liability under a contract by performing your obligations. However, you must follow exactly what your contract says. Therefore, it is important to determine whether your obligations under the contract are ‘dependent’, ‘independent’ or ‘concurrent’.

Type of Obligation Explanation Example
Dependent Obligations You can exit your contract if the other party does not perform their end of the bargain.  If you engage a contractor, you will not need to pay a contractor where they do not complete their work.
Independent Obligations

If the parties’ obligations are independent of each other, each party will have to perform their duties no matter what the other party does. 

If a landlord does not repair damage to the premises, the tenant must still pay the rent.
Concurrent Obligations Concurrent obligations arise where performance by a party is a pre-condition for the other party to perform.  In a sale of goods, it is often a pre-condition that you have to pay before you receive the goods. 

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

2. Discharge or Termination by Agreement

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

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

If you come to an agreement with the other contracting party to terminate or vary a contract, it would be best to obtain confirmation of this agreement in writing.

3. Termination by Breach

If a party does not perform one of their contractual obligations, they will be in breach of the contract. A breach of contract may entitle the innocent party to terminate the agreement in certain circumstances. Once a contract has been terminated, you may be able to release yourself from contractual obligations. 

Even if parties terminate a contract, however, you might not be able to escape all of your contractual obligations. Specifically, clauses in your contract may expressly state how it will still apply, surviving termination or expiry. Such 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. These will continue after the contract has ended.

Types of Contractual Terms

It is important to note that not every breach of contract will allow you to terminate. In general, there are three categories of terms you can find in a contract. The type of term that a party breaches will decide whether you will be able to terminate the contract.

Conditions These are terms that go to the heart of the contract. They are of such importance that the innocent party would not have entered into the contract unless they were certain of its performance.
Warranties These are not as important as conditions. Therefore, a breach of a warranty will not lead to the termination of the contract.
Intermediate Terms Breaching an intermediate term will only result in the termination of a contract if the breach is sufficiently severe. 

For example, if you are a distributor and fail to provide the products that a customer orders, this could be a breach of the condition of your contract. However, if you supply products to a customer that are not of the expected quality, this may be a breach of warranty. This is because the supply of the goods goes to the ‘heart of the contract’, whereas the goods’ quality is secondary.

While breach of any of these three terms will allow the innocent party to seek damages, unless the parties have expressly agreed to allow for termination for certain breaches, only breaching a condition will allow for termination.

4. Termination for Convenience

Finally, the 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 you do not need a reason for terminating. However, while this may seem simple, you must also consider:

The Giving of Notice

The contract will usually stipulate whether the giving of notice is necessary, and if so, how the notice should be given (e.g. in writing or oral). Additionally, the contract will set out what the notice period should be, which will likely vary depending on the nature of the contract. 

Liability

Terminating a contract early can result in loss for the other party. For example, if you terminate a building contract, a house could be left half unbuilt and a new contractor must be engaged 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 (for example, 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. 

To ensure that a termination for convenience clause is enforceable, it is advisable to include the payment of a termination fee.

In that 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

A termination for convenience clause must not be an unfair contract term, otherwise it will be unenforceable for contracts that are covered by the unfair contract.

An Obligation of Good Faith

Some contracts also include a duty to act in ‘good faith’. This means that parties have are obliged to act honestly and sincerely. For contracts that do not expressly provide for this duty, the courts have not yet decided whether this duty still applies. In any case, if one party terminates the contract for convenience and the parties have agreed on the compensation to be paid (even if that amount is $1.00), it is unlikely that the terminating party will have breached any duty of good faith.

Checklist of Things to Consider

To summarise, if you want to end your contract early, you should consider the following:

  1. What does your contract say? In particular, review the termination and cancellation clauses. Certain provisions may also survive termination.
  2. Are there any fees payable if you leave early? For example, a cancellation fee.
  3. Have you fulfilled all of your obligations? If your obligations are independent of the other party’s obligations, then you may be able to discharge your liability under a contract by performing your obligations under it.  
  4. Has the other party fulfilled all of its obligations? If they have not, and their obligations were conditions (that is, they were fundamental to you agreeing to enter into the agreement), you may be discharged from your obligations.
  5. Does the other party agree to end the contract? Often, the other party will be happy to agree to early termination if the arrangement is not working out. You could also offer them an incentive to agree, such as a monetary sum.

How to End a Lease Factsheet

A factsheet that sets out the three ways to end a commercial lease in Australia: surrendering your lease, assigning it or subletting it.

Download Now

Key Takeaways

If you want to get out of a contract early, it is important to first check the terms and conditions to see if there are any consequences. If not, you can consider discharging your obligations by performing what is required of you or by mutual agreement with the other party. You may also be released if the other party has breached the contract.

If you need help with understanding your contractual obligations, our experienced 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.

Frequently Asked Questions

What is discharge by performance?

This is when you discharge your liability under a contract by performing your obligations. This performance must precisely follow what the contract says.

What is discharge or termination by agreement?

This is when parties to a contract agree to terminate the contract or vary it. Termination or variation can result in the release of contractual obligations.

What is termination by breach?

This occurs when a party does not perform one of their contractual obligations, making them breach the contract. Sometimes a breach of contract may entitle the innocent party to terminate the agreement. After this occurs, you may be able to release yourself from contractual obligations. 

What is termination for convenience? 

This is when one party is given a right under a contract to terminate the contract at will, either at their discretion or within a certain time frame, without the other party being in default. 

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