When circumstances arise and you want to terminate a contract, it is important you consider the question, “do you actually have the legal right to terminate the contract?”
Wrongful termination can be expensive and is a common mistake made by Australian businesses. When termination occurs without a valid right, costly consequences can follow.
Citilawyers acts for businesses across Sydney and New South Wales who want to exit a contract. Our commercial lawyers provide clear, commercially viable and decision-focused advice on whether you can terminate, how you should terminate and what you may be exposed to either way.
Termination of a contract may be desired when businesses are facing:
In Australian contract law, there are various grounds for terminating a contract, these include:
Terminating a contract without a valid ground and meeting the specific requirements, can convert you into the breaching party.
Common contractual rights include:
A key consideration for the termination of a contract is whether a right has been triggered and the notice provisions have been complied with.
A termination notice that fails to comply with the contractual requirements is held to be invalid and can lead to repudiation for an invalid termination. Compliance with the technical procedures regarding termination is important to avoid consequences.
Where the other party has breached the contract, your right to terminate at common law depends on the nature of the breach:
A term is “essential” if a reasonable person would say that the contract would not have been entered into without strict compliance with that term. Breach of an essential term gives the innocent party a right to terminate. The most common example of an essential term is the payment date in a contract that expressly states to be of the essence.
It is important to note that not all breaches of an intermediate or non-essential term will invoke the right to terminate the contract. Breaches of an intermediate term must be ‘sufficiently serious’ and go to the root of the contract. The authority is Koompahtoo Local Aboriginal Land Council v Sanpine Pty Limited (2007) 233 CLR 115.
Repudiation occurs when there is an abandonment from the party’s obligations under the contract which can be express or implied.
An anticipatory breach occurs when a party refuses to comply with the contract or will only comply in a manner that is substantially inconsistent from their obligations under the contract.
Where the party repudiates the contract, the innocent party can either accept the repudiation and terminate the contract or affirm the contract and insist the party fulfill their obligations. Failure to comply with the obligations under the contract can result in the innocent party seeking damages. Where a contract is terminated by breach, the innocent party may be entitled to contract damages for the loss flowing from the breach.
If the right to terminate arises for a party, they must elect to either affirm or terminate the contract.
It is important to appropriately consider the two options that must be elected. In regard to a breach of a contract that has been affirmed, termination cannot be subsequently pursued in respect to the same breach.
Termination by frustration occurs in the instance of an unforeseen or supervening event that is outside of either party’s control and makes performance impossible.
There is difficulty in establishing frustration. Notably, hardship is not enough to establish frustration as the doctrine has been narrowly applied. The leading authority for the doctrine of frustration in Australia is Codelfa Construction Pty Ltd v State Rail Authority of NSW [1982] HCA 24.
When frustration applies, the contract is discharged from the date of frustration and relief may be sought.
The Frustrated Contracts Act 1978 (NSW) provides for the adjustment of payments and benefits between the parties.
Termination under a force majeure clause does not automatically give rise to the right to terminate a contract. Generally, the performance of the contract is paused while the extraordinary event occurs, and a time frame is negotiated if the disruption persists. If the event continues beyond the prescribed period, then the parties can terminate the contract if provided with the right.
A termination by agreement arises where both parties want to release each other from the contract. Termination by agreement is the cleanest path and is typically documented in a deed of release. It is important that the deed of release is properly drafted to avoid one or both parties being exposed to claims that are not covered by the deed.
Even where you believe the other party has breached the contract, your own obligations under the contract generally continue until it is validly terminated. Stopping performance, withholding payment, or acting as though the contract has ended, before you have properly established a right to terminate, can itself amount to a breach, and may expose you to a claim from the other party. Before taking any action, we recommend obtaining advice on whether your grounds for termination are sound, and continuing to meet your own obligations in the meantime unless specifically advised otherwise.
If you need to get out of a commercial contract, or if the other party is trying to terminate against you, obtaining legal advice before you act is an important step. Citilawyers provides clear advice on whether a right exists that will enable you to terminate the contract. Our contract disputes lawyers and civil and commercial litigation lawyers work alongside to protect our clients’ position through court proceedings.
If you are currently experiencing a termination of a contract issue, reach out to speak with our team.