Many businesses and consumers often wonder whether they can end a contract. Such an issue is complicated because you typically cannot change your mind and walk away from a contract. Contracts create legally binding obligations, and there can be serious consequences if a party breaks the contract before it ends.
There are however many situations in which you can end a contract, including:
- Fulfilment of the contract;
- Breach or repudiation of the contract;
- Contracts declared void or voidable;
- Discharge by frustration; and
- Discharge by agreement.
Before going into these points, it is important to understand that ending a contract encompasses both termination and rescission, and the right to either terminate or rescind a contract depends on the circumstances of each case.
Termination of a contract for breach means that the parties are no longer required to perform their obligations; however, they retain any rights accrued up until the point of termination. When determining the remedies available for ending a contract, accrued rights are important.
Under the law of equity, rescinding a contract aims to restore the parties to the position they were in before entering into the contract.
Termination for breach or repudiation
At common law, the right to elect to terminate a contract arises if there is a breach of an essential term, a sufficiently serious breach of a non-essential term, or either party repudiates the contract. The High Court case of Koompahtoo Local Aboriginal Land Council v Sanpine Pty Ltd (2007) 233 CLR 115 explains such concepts and principles, briefly outlined below.
Breach of an essential term is when a party does not comply with a ‘condition’ or a ‘fundamental’ term in the contract. The classification of a term as ‘essential’ depends on whether it can be determined that the parties intended the term to be considered essential and that breach of such term would give rise to the right to terminate.
A sufficiently serious breach of a non-essential term is where there is breach of an ‘intermediate’ term that goes ‘to the root of the contract’ or is such that the innocent party is ‘substantially deprived’ or a benefit under the contract. For example, in the Koompahtoo case, there was a failure to maintain proper books and financial records, which went to the root of the joint venture, and justified termination.
Repudiation of a contract encompasses anticipated breaches of a contract, and such conduct that shows an ‘unwillingness or inability’ to perform obligations under the contract, or be bound by it. When such conduct occurs, it is important that each party attempts to clarify what they consider their obligations to be before trying to terminate the contract. Clarification of party obligations is important because if there are no proper grounds for the termination, the termination is effectively repudiation.
Void and voidable contracts
A contract that is ‘void’ is one that is not enforceable, and deemed to have never been created, for example, a contract may be void because it is illegal. A contract that is ‘voidable’ is still valid and enforceable; however, there are factors that give one party the right to end a contract (through rescission). Contracts may be declared voidable for reasons such as mistakes or misrepresentations of facts, duress or undue influence.
At common law, it is rare for a contract to be declared void, largely because complete restitution is so often impossible. A voidable contract rescinded under the law of equity, however, only requires substantial restitution to be possible.
The Australian Consumer Law, however, enables contracts and terms within contracts to be declared void under the unfair contracts provisions. Furthermore, compensation may be available in such cases.
Discharge by frustration
Frustration occurs when the parties’ obligations under a contract cannot be performed due to unexpected circumstances, for example, a natural disaster. In such cases, no party defaults, but to require performance would make the outcome wholly different to what the parties originally agreed to on.
For frustration to occur, aside from each party being innocent, the event causing frustration cannot have been foreseeable, and the party who wishes to rely on frustration to end a contract cannot have caused the frustrating event.
Discharge by agreement
Parties to a contract are free to end a contract via mutual agreement in writing, or one party may have performed their obligations, but may still agree to release the other party. Parties, may also end a contract by replacing the contract with a new one.
The actions of each party may also indicate they do not intend to perform the contract, and the contract will be considered discharged.
How can LegalVision help?
If you would like to end a contract, or you are having difficulty with a party to your contract, get in touch with LegalVision today. It is important to have your contract reviewed by a lawyer to assess your options before you take any action. LegalVision’s team of experienced contract lawyers can work quickly and efficiently to review your options, and take action on your behalf.