In New South Wales (NSW), a contract can be terminated through various methods. The termination of a contract can be achieved through mutual agreement, expiration of the contract, breach of contract, frustration, or by obtaining a court order. Different circumstances may determine the appropriate method of termination.
At times when making a contract, things can go wrong. Can an agreement be terminated? There is an outline of what should occur if you find yourself in a situation where things have not gone to plan included in the contract. Anyone wishing to terminate an agreement must read the contract closely to ensure that they can do so. You can only correctly terminate a contract by following the contract terms. If you step outside these terms you are likely to be in breach of contract and there are consequences for breaching a contract covered in the common law.
It is good to understand the legal terminology used in this area of the law before continuing.
1. Rights to terminate – In common law, termination means that the contract will be discharged. In this case, any future obligations fall away.
2. Rescission – Contractual obligations remain until the party who is innocent decides they will rescind the contract. At this stage, the contract will be rendered void.
3. Novation – Novation is when a new contract replaces the original.
4. Breach of contract – This refers to someone failing to fulfil their contractual obligations. In this case though the contact still exists the obligations are replaced by the cost of damages. The damages include any loss that comes about because of the breach.
Reasons For Contract Termination
There are several reasons someone can terminate in common law, and they include:
- A breach of the contract which is the most common cause of termination.
- A clause in the contract triggers a contractual stop.
- By mutual agreement of the parties involved.
Commercial Contract Termination
An express termination clause is often included in a commercial contract that will provide termination under certain conditions or circumstances. It may even have a clause that allows the person to terminate the agreement for convenience. This clause, in common law, does require that the party provide a certain amount of notice.
It is advisable to seek the assistance of a lawyer before signing a commercial contract as they can be complex. Lawyers, when working on a case, are required to consider termination rights in conjunction with other applicable governmental laws.
Reasons to Terminate A Contract
1. Breach – What does a breach of contract mean? A breach in this context refers to someone failing to accomplish their contractual obligations or meet the terms of the contract. If a party of the contract does not live up to the promises made within the agreement’s provisions, they are in breach of contract. Under these conditions, where they have not met obligations under the contract the innocent party can explore terminating the contract. Although the party has the right to terminate, a breach of contract does not always lead to termination.
The Following Circumstances Constitute a breach and provide the innocent party with the right to terminate.
a. A party fails to do what they are required to do under the contract.
b. A party makes it clear that they cannot undertake what they agreed to in the contract.
This action is known as repudiation – Repudiation, concerning a contract, is where one party to the contract demonstrates through their conduct that they cannot substantially perform their obligations or they are no longer willing to complete them. The innocent party does not have to terminate the contract; they can decide to accept the breach and release the other party from the agreement. Alternatively, they can enforce the obligations of the other party.
In the case of an essential term breach, the non-breaching party can terminate the contract and claim damages. Essential terms refer to a term that is of considerable importance and would have meant the party would not have signed the agreement if there was no assurance that they would have fulfilled the terms. In some cases, parties will refer to essential terms as conditions or fundamental terms.
The right to terminate is not available for all breaches. For example, a severe violation or sufficiently serious violation of an intermediate term may not be sufficiently serious to terminate the agreed contract. A commercial contract lawyer can advise on rights and obligations. Advice from a contract lawyer will provide essential guidance.
There may be a clause in a commercial contract that allows for termination due to terms that are considered unfair. An unfair term may be:
- A term that results in a considerable imbalance in the rights and obligations of the parties involved.
- A condition provides an unfair advantage to one of the parties.
A contract term found unfair will not be binding. Unfair terms in the contract apply in small business contracts only.
This term, mutual agreement, means that if both parties agree that they should terminate the contract before completing the obligations and thus you can discharge the contract. This action is known as mutual discharge. One of the parties can release the other from a contract even if that party has not satisfied their obligations.
If one party of the contract provides false information to the other party that encourages them to proceed before forming the contract, this is known as misrepresentation. The misrepresentation must induce them to become a party to the contract for it to be a misrepresentation. If someone enters an agreement while reliant on misrepresentation and suffers a loss, they may terminate the contract. Misrepresentation is when:
- A party enters the contract due to false information that the other party has provided.
- One person was persuaded unfairly to sign the contract. This persuasion is known as undue influence.
- One person is mistaken regarding the terms of the agreement, yet the other party was aware of the mistake.
Misrepresentation does not always lead to a termination of the contract. The court may consider the misrepresentation to decide if the person should trigger a termination. If the misrepresentation does not refer to contractual terms, then the person who has been misrepresented can rescind the contract. Revoking the agreement means that all the rights and obligations will not be valid any longer, and the contract will be treated as though it didn’t exist.
Frustration refers to any unanticipated circumstance that comes up and means the person cannot complete a contract. These sort of unforeseen circumstances, known as frustrations, can allow parties to be released from the contractual obligations. Neither of the parties can cause an unexpected event and it cannot have been predictable.
The parties can agree to end the contract before the work is complete if they cannot continue for reasons beyond their control and where neither of them has caused the issues. An example of ending a contract due to frustration might be that one of the people has passed away.
A contract may include a term of convenience allowing a party to terminate the contract at any time. In this context, notice is required. In this situation, there can be no fault appointed to either party. In government contracts, the convenience term is often included.
The Ipso Facto Provision
The Ipso facto provision permits one of the parties to terminate a contract if insolvency is involved for the other party. An example of this is when an administrator is appointed. In 2018 in the Corporations Act 2001, a new rule was introduced to prevent contract termination due to certain insolvency events. They introduced this rule as the issue was prevalent in commercial contracts. The 2021 Act allows companies who have become insolvent to continue to trade to recover from their insolvency. This operation rule will not apply to all contracts, so it is advisable to seek legal advice.
What Is Partial Termination?
Generally, when there is a contract breach or repudiation, a contract is terminated as a whole, not in part. However, there are situations where a party can terminate a part of a contract. The right of partial termination would have to be part of the contract for this to occur.
Are Termination and Rescinding the Same?
If a contract is terminated, the party’s obligations regarding further performance are discharged; however, any rights or obligations accrued before the termination remains in place.
Suppose you rescind a contract where the contract is void. There is an equitable remedy that restores the parties involved to the position they were in before the agreement. The opportunity to rescind only occurs if the contract expressly provides a right of rescission.
If a contract is breached, the court will generally award damages to the innocent party. The purpose of the damages is to compensate the hurt party for any loss incurred due to the breach. If a loss is considered minimal, then the damages awarded will be nominal.
Damages for misrepresentation are pretty complex, and as such legal representation is advisable. The court considers if the act was fraudulent and what deceit was employed. If the court agrees that deception is involved, then compensation can be pretty generous.
If you are a signatory to a contract and you need to terminate the contract, it is advisable to seek the guidance of a lawyer. It can be quite a complex process, and you do not want to wrongfully terminate and end up in breach of contract as this can result in a claim for damages. In the contract, there will be procedures that will indicate how a party can terminate the contract.
There are grounds for termination. If there is a breach of an essential term of the contract, the party will have a right to terminate. If there is a sufficiently severe breach, in regards to a non-essential term termination will be considered and there can be a rejection of the contract by the other party. Because it is complex, the advice and support of a lawyer are advisable before signing a contract. Get a lawyer to read the agreement and provide you with feedback. Seeking advice can save you from issues in the future.
Frequently Asked Questions
1. If there is not a termination clause, can the contract be terminated?
Answer: A party is entitled to terminate a contract even if there is no termination clause in the contract. In this case, reasonable notice has to be provided. If a dispute follows, the court will decide if the notice was reasonable.
2. Do you have to terminate a written contract in writing?
Answer: Legally you cannot terminate a written contract verbally. A written termination must be submitted.
3. What if I signed a contract that I shouldn’t have?
Answer: Signing a contract means that you and the other person who is a party to the contract are legally bound to undertake your obligations. The warning here is that you must carefully read every part of a contract and consider terms before you sign it. You can take the contract to a lawyer to look over it before signing. It is not something into which you should rush.
4. Is termination of a contract possible without a breach of contract?
Answer: There are conditions where the innocent party may leave the contract without there being a breach. Advice from a lawyer will provide information relating to your case.