Contract Termination

Contract termination is when a contract between two parties comes to an end. There are a number of ways this can occur which we’ll explore in further detail below.

 

 

Remember;

A contract is a legally binding document that is central to everyday business operations. Contracts set out the terms of an agreement between two or more parties and must contain four essential elements:

  • An offer
  • An acceptance
  • An intention to create a legal relationship
  • A consideration (usually money).

 

Different Ways to Terminate a Contract

When it comes to terminating a contract there are a number of ways this can be done. Let’s explore some of them further below (this list is not exhaustive):

 

Performance

The most common way for a contract to end is by performance which simply means all parties to the contract have performed and fulfilled their contractual obligations. This naturally brings their contractual relationship to an end.

 

Breach of Contract

One of the most common business disputes is a Breach of Contract.

A breach of contract occurs when at least one party fails to perform their obligations according to the terms of the contract. There are 4x types of contract breaches:

1. Minor or Partial Breach

A minor (or partial) breach of a contract is when the terms of a contract have been partly performed. It’s considered less severe than a material breach of contract as the essential obligations of the contract are not significantly affected. Examples of a minor breach of contract include missing parts from a delivery or a delay in delivering goods.

When a minor breach occurs, the parties to the contract are still expected to fulfill their remaining contractual obligations (in spite of the breach).

The non-breaching party is still permitted to sue the breaching party for any damages which were caused by their failure to perform the minor element.

 

2. Material Breach

A Material Breach, otherwise known as a fundamental breach of contract, is the most serious type of breach as it involves a key element of the contract not being performed or undertaken as agreed, causing a significant impact on the breached party.

 

3. Anticipatory Breach

An anticipatory breach is when one party realises the party does not (or will not) intend to fulfil the terms of the contract.

The wronged party can either accept the contract by ignoring the anticipatory breach and holding the other party to their side of the contract or they can accept the anticipatory breach by terminating the contract and claiming damages.

 

4. Actual Breach

An Actual Breach is when a party fails to perform their obligations in the contract leaving the other party no other choice but to seek a remedy for compensation due to the loss (or losses) caused by the breach.

When a breach of contract is disputed and the parties are unable to reach an agreement, the aggrieved party may take further action to resolve the dispute, such as commencing court proceedings.

If you’re unable to resolve a dispute between the parties involved, it’s best to seek independent legal advice.

 

Frustration

Frustration is a common law concept that occurs when contractual obligations are incapable of being performed due to unforeseen circumstances, through no fault of either party.

During the coronavirus pandemic, this had a huge impact on commercial contracts with many parties unable to fulfill their normal contractual obligations.

If a contract does not have an applicable “Force Majeure” clause then the Doctrine of Frustration may apply and it’s advisable to seek legal counsel to help determine this.

“Force Majeure” is a legal principle that refers to unforeseeable circumstances that prevents a party from fulfilling their contractual obligations. In Australia Force Majeure is not recognised in common law, it is used as a contractual concept. This means that parties have the freedom to negotiate their Force Majeure clauses which will differ from contract to contract.

Most Force Majeure clauses include events that are considered “acts of God”, natural disasters, government action or interference, national emergencies or acts of war. However, not every contract has a “Force Majeure” clause and some of those that do may have limited cover depending on the Force Majeure definitions applied when the contract was drafted.

If a contract has been deemed to be frustrated, it will be terminated along with all outstanding obligations.

 

A Trigger of a Contractual Termination Clause

Most contracts include a termination clause which outlines the circumstances in which the agreement can be terminated. It can detail a notice period for doing this as well as any dispute resolution mechanisms prior to terminating the agreement.

An example of this is a ‘termination for convenience’ clause which allows one or both parties to terminate the contract without providing a reason or a ‘termination for default’ clause which gives a party the right to terminate the agreement if the other party fails to perform their obligations under the contract.

 

Misrepresentation

This is where one party gives the other party false information prior to contract acceptance and the information induced them to enter into the contract.

Misrepresentation can be innocent, negligent, or it can be fraudulent and it differs to “puffery” which is when someone uses wildly exaggerated, fanciful or vague claims about a good or service that no one could possibly treat seriously or find misleading.

 

Mutual Agreement

Also known as mutual discharge, the parties to the contract mutually agree to end their agreement.

 

Terminating a contract needs to be done with care in order to avoid future legal issues and disputes. If you need help with any contractual matters contact our friendly team here.