Australian Contract Law/The Right to Terminate
The Right to Terminate
Termination due to breach of a condition or intermediate term
A breach of a certain nature gives rise to the self-help remedy of termination. Termination is where one party unilaterally brings a contract to an end.
The right to terminate
- If the breached term is a condition, the aggrieved party will be entitled to terminate the contract in respect of any breach of that term.
- If the breached term is a warranty (a non-essential term), the aggrieved party will only be entitled to damages.
- If the breached term is an innominate/intermediate term, the right to terminate depends on the gravity of the breach.
Classification of terms: warranty or condition?
- Does a statute characterise it for you? Arcos v Ronaasen
- Have the parties characterised it for themselves? (but see L Schuler AG v Wickham Machine Tool Sales where the House of Lords said that designations by parties themselves is not decisive. If parties want to classify terms as conditions, they could draft in the contract that this term will be terminated in case of any breach.
- Finally, as a matter of construction, which is it? (Tramways Advertising v Luna Park)
Essentiality Test (approved by Associated Newspapers v Bancks): Jordan CJ: “the promise is of such importance to the promisee that he would not have entered into the contract unless he had been assured of a strict or substantial performance of the promise… and this ought to have been apparent to the promisor” In other words, the covenant must go to “the root of the contract”
However, while Arcos requires strict compliance with conditions, Jordan CJ in Tramways stated that substantial performance of conditions could suffice.
Intermediate terms and serious breach In some cases, where the language of the does not clearly indicate the character of a term, that term may be classified as both essential and non-essential. Intermediate terms must be such that a breach can occur to an extent or degree. The court will look to the extent to which this intermediate term is breached to decide whether the right to terminate has accrued: Ankar v National Westminster Finance
Does the occurrence of the breach ‘deprive the party… of substantially the whole benefit…” of the covenant? Diplock LJ in Hongkong Fir Shipping Co Ltd
Termination due to repudiation
Repudiation is where a party is “unable or unwilling” to perform the contract
- If one party repudiates their obligations under the contract – (eg, they say/show that will not perform the contract), the aggrieved party will be entitled to terminate.
What can constitute repudiation of a contract? unlawful termination of the contract
- a continuous breach (Carr v J A Berriman)
- a failure to remedy a breach (Carr v J A Berriman, Progressive Mailing House)
- a number of breaches (Progressive Mailing House)
- any other words or conduct that deny the whole contract or a fundamental part of it
- a breach of one or more instalments in the context of a larger agreement may not constitute a breach
- Indented line
- ‘the ratio quantitatively which the breach bears to the contract as a whole’ (Maple Flock Co Ltd)
- an erroneous interpretation of the contract ‘will nilly’ in the face of the actual or true agreement may amount to repudiation (DTR Nominees, Woodard Investment)
3. Termination due to Delay
Delay is a failure to perform a contractual obligation on time. Where no express time is give, failing to perform within a reasonable time in all the circumstances constitutes a delay.
You may terminate a contract for delay in performance where: a. The time clause is a condition – “time is of the essence” b. Where the delay amounts to a repudiation • failure to remedy a delay after appropriate reasonable notice may constitute repudiation
When will time be of the essence? 1. If the parties have expressly indicated that timing of performance is essential. 2. If the parties have not expressly stated that timing of performance is essential: the equitable approach prevails and time will only be considered to be of the essence if that was intention of the parties. (see eg, Goods Act 1958 s15, Property Law Act 1958 s41)
When will delay constitute repudiation? 1. When the delay is so long or is in circumstances where it demonstrates an unwillingness or inability to perform under the contract 2. Where the defaulting party is given notice to perform within a reasonable time but fails to do so.
Rules for notice 1. As soon as the breaching party fails to perform at a specific date, notice may be given to complete in a reasonable time (Louinder v Leis) 2. When no specific time is mentioned, after a reasonable time has passed without fulfilling the obligation, notice may be given. (Laurinda v Capalaba Park)
Notice requirements (Laurinda) 1. The notice must specify a time for performance of a particular obligation 2. The time allowed must be reasonable in all the circumstances 3. The notice must clearly convey that the time fixed for performance is of the essence or the party giving the notice will regard himself as being entitled to terminate should the notice not be complied with.
There are two courses for the aggrieved party on breach/repudiation when the right to terminate is available:
- Accept the repudiation/breach, terminate the contract and sue for damages; or
- Affirm the contract, lose right to terminate (unless and until another breach occurs (see eg, Bowes v Chaleyer)) but retain the right to sue for damages for that breach.
- If it is a continuing breach, every failure to remedy gives a fresh right to terminate (Carr v JA Berriman)
- In an anticipatory breach and it is affirmed, then when the breach actually occurs, there is a fresh right to terminate
Requirements for valid election
1. The aggrieved party must know of the facts that give rise to the right to terminate; and 2. The aggrieved party, by words or conduct, must demonstrate an unequivocal intention to either terminate or affirm the contract
Rights and Obligations after termination (McDonald v Dennys Lascelles) The rights and liabilities accrued before the termination are still enforceable, whilst the rights and liabilities accruing post-termination are not binding and enforceable (except for, eg, arbitration clauses and alike) Where there is a total failure of consideration, the accrued rights will not be enforceable.
Restrictions on termination
Readiness and willingness For one party to sue for the other's breach under contract they must show that they were ready and willing to perform their obligations under the contract as at the time of the other's breach. (Foran v Wright)
Election There is no requirement to elect immediately – it is possible to keep the question open. Acceptance of a right already accrued under the contract does not manifest an election (See eg Tropical Traders Ltd where the acceptance of interest on payments did not manifest an affirmation of the contract because the interest had already accrued)
Estoppel A party may be estopped from relying on their strict legal right to terminate if an estoppel can be made out (Legione v Hateley).
Waiver A waiver is the voluntary relinquishment or surrender of some known right or privilege. Mutual agreement to waive performance extinguishes the right to terminate or sue for the failure to perform. (Sargent v ASL Developments (not on R.G. 2011))
Relief against forfeiture Relief against forfeiture involves the courts relieving a party of monies forfeited due to an unconscionable exercise of a right under a contract as a consequence of a default.
So, where one party is unduly enriched through a termination, the courts may intervene to remedy the situation: Tanwar Enterprises v Cauchi
1. There must be a property interest – in land or arguable in personal property. A purely contractual interest is insufficient; and 2. There need to be “unconscientious conduct” on behalf of the aggrieved party; and 3. There must be “exceptional circumstances” that justify the granting of relief.