How to terminate a contract? This question often comes up when a party to an agreement no longer wishes to continue with a contract. If you want to terminate a contract, there are a number of things it is important to consider. In this article, we explain how to terminate a contract and how to avoid unintended consequences.
Terminating a contract will release both parties from any future commitments. However, rights that have accrued before termination may continue to be available to one or more parties.
There are many ways in which a contract can be terminated and they will fall under either:
a right to terminate the contract under the principles of the Common Law (i.e. case law); or
an express right to terminate under the terms of the contract.
The Difference Ways to Terminate a Contract
There are many different ways to terminate a contract according to the law in Australia.
Let’s go through some of the ways a contract can be brought to an end.
Terminating a contract where there is no fault
Terminating by agreement
A contract can be ended by both parties mutually agreeing to terminate the contract.
This mutual agreement must be written and it must declare the mutual intention of both the parties to terminate the contract. This written agreement to terminate the contract should state the rules the parties have agreed to as a means of bringing the contract to an end.
If one party thinks the contract has been terminated, but it is unclear that the other party also agrees to terminate the contract, the agreement may not be effective in bringing the contract to an end.
Performing the contractual obligations
If both the parties have performed their duties and commitments set out in the contract and according to its terms, the contract may come to a natural end.
When a party becomes unable to perform its obligations under a contract because of matters outside of the party's control, the contract may become frustrated. The doctrine of frustration is an important aspect of contract law in Australia and it is a way that contracts can be terminated.
Terminating a contract where there is wrongdoing
Breach of contract
When one party fails to fulfill their duties according to the terms of the contract, that party is in breach of the contract. This may allow the innocent party to end the contract. Let's take a look at the three types of breach of contract which may lead to a termination of the contract.
If a party has failed to comply with the terms of the contract, there is an actual breach of the contract. This gives the innocent party the right to terminate the contract. However, it does not mean that the contract is automatically terminated. The innocent party may decide to terminate the contract and then communicate that choice to the other party in accordance with the terms of the contract.
A repudiatory breach of contract occurs when a party indicates by words or conduct that they are not ready, willing or able to perform their obligations according to the terms of the contract. Again, the innocent party may decide to terminate the contract and then communicate that choice to the other party in accordance with the terms of the contract.
If the innocent party decides that they want to proceed with the contract despite the repudiatory breach, they can.
A minor breach of a material term, or a material breach of minor term, may not give the innocent party the right to terminate the contract. However, the innocent party can take legal action to pursue damages if the minor breach resulted in any kind of financial loss.
What is the process of terminating a contract?
Identify the issue
Identify the contractual or Common Law right to terminate the contract
Comply with the contract terms relating to termination
Communicate the termination in writing to the other party in a clear way
Issues to Consider when Deciding to Terminate a Contract
When termination is being considered, the affected party must decide whether they choose to:
declare the contract and claim damages for the specific part of the breach. However, it is also necessary to claim for particular commitments to make the other party perform their duties; or
end the contract and claim for full damages.
Terminating the contract requires clear words or conduct that displays the intention of that party to terminate the contract. It is best to communicate the termination in writing.
The party terminating the contract needs to justify the termination based on their legal right to terminate a contract. However, at the time of the election, they can depend on any valid ground stating if, at that time, they were aware of it or not.
Limited or Partial Termination
If there is no express provision that has been breached - but rather the whole of the contract appears to have been breached, the affected or innocent party can cancel the whole contract, instead of a part of it. However, some formal requirements must be completed like arbitration clauses and exclusion clauses. For instance, the right of a party to partially terminate a contract will arise if a party has the right to terminate a purchase order, completely or in parts.
Right to terminate versus right to cancel
When the contract is terminated, the duties of both the parties to further performance is dismissed. However, all the rights which have accrued before the termination remain. The affected party will have the right to claim damages and either one or both the parties may have the right to compensation as well.
The right to cancel, on the contrary, is an impartial right that is applicable when the contract is voidable or invalid so that the parties are restored to the position they were in before entering into the contract.
Author: Farrah Motley, Legal Principal of Prosper Law.