Insights + Resources

May 13, 2019

Contractual lock-in? Terminating contracts without a clause

Contracts form the backbone of almost all commercial arrangements, creating rights and binding parties to specified duties. But at what point does a breach or failure to perform contractual duties arm the other party with the right to terminate the contract?

The common law right to termination

Sometimes contracts are silent as to when a party has the right to terminate for the non-performance of the other party. Leaving aside the protections in certain circumstances set out in the Competition and Consumer Act, the common law also provides certain termination rights.

Essential or serious breaches

Under common law a party to a contract will be entitled to a right to elect to terminate the contract when the counterparty’s action or inaction constitutes:

  • a breach of an essential term (or “condition”) of the contract; or
  • a sufficiently serious breach of an intermediate term of the contract.

When considering if breached terms were “essential” or “intermediate”, a court will look at the intention of the parties in contracting with each other.

The court will seek to assess whether the language of the contract expresses an intention that the term be so ‘essential’ that any breach of it would also be considered a breach of the core agreement of the parties underlying the contract. If so, this would allow the aggrieved party to treat the contract as discharged.

Similarly, if the term is not essential to the contract but its breach is sufficiently serious to be described a breach of the core of the contract, then the aggrieved party will have a right to elect to terminate the contract

Breaches of non-essential terms (warranties) will not give rise to the common law right to elect to terminate the contract.

 

Terminating following a repudiation

Repudiation of contract also gives rise to a common law right to termination. A repudiation refers to conduct or inaction that shows a party is unwilling or unable to be bound by, or substantially perform its obligations under, the contract.

As a general position, would-be terminators should be aware that courts are reluctant to easily infer a party’s intention to abandon or end a contractual relationship, and repudiation typically only arises in circumstances of very clear abandonment of an agreement.

If a party has repudiated, the aggrieved party can elect to accept the repudiation and parties will be discharged from the future obligations contemplated by the contract. However, importantly, if a party mistakenly presumes repudiation, they may themselves be regarded as the party committing repudiatory conduct (thus arming the counterparty with the right to termination and possible damages arising as a result).

Concluding remarks

Breaches of essential terms or serious breaches of intermediate terms may create a common law right to elect to terminate a contract (and in turn allow for further remedies such as damages). Further, abandonment by a part of a contract can amount to repudiation, also arming the counterparty with the common law right to terminate.

By its nature this area is fraught with uncertainty and subjective analysis and we recommend proceeding with caution. “Trigger-happy” terminators are well-advised to seek legal advice before they issue termination notices, as this can back-fire if not executed correctly.

The above information is general in nature. If you would like specific advice about terminating a contract, please contact us below.

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THE DISRUPTIVE LAW REPORT by Edwards + Co

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