Termination of Contract

Termination of ContractThe High Court’s decision in Koompahtoo v Sanpine spelled out the circumstances which can give you a right, under the common law, to terminate a contract. You’ll have a right to seek termination of a contract if:

  1. an essential term of the contract was breached; or
  2. a non-essential term of the contract, causing substantial loss, was breached; or
  3. repudiation of the contract took place.

What Is An Essential Term Of A Contract?

Essential terms are also known as conditions; they are distinct from warranties. A term is said to be essential when it is of such importance to the party receiving a contractual promise “that he would not have entered into the contract unless he had been assured of a strict or a substantial performance of the promise” and the other party knows or ought know of this.

A breach of an essential term will give the innocent party a right to terminate a contract and seek to recover damages for the loss of contract.

A breach of a warranty, on the other hand, will not give you a right to terminate a contract. The available remedy is to seek recovery of damages caused by a breach of warranty (Sale of Goods Act 1896 (Qld)).

It should be noted that even though most contracts use specific language to differentiate between essential and non–essential terms, for example, by using words like ‘conditions’ and ‘warranties’, such usage is not compulsory and the meaning of terms will be determined by the Court, including the meaning of ‘conditions’ if such words were used (Wickman Machine Tool Sales Ltd. v L. Schuler A.G. [1974] AC 235, [1973] 2 All ER 39).

What is a non-essential term of a contract?

A non-essential term is a term occupying a place somewhere between a condition and a warranty (Ankar Pty Ltd v National Westminster Finance (Australia) Ltd [1987] HCA 15 at 561-2), which is why it’s often referred to as an intermediate term in common law. An intermediate, or non-essential term is classified as a term of lesser importance than an essential term because its breach doesn’t give you a right to terminate a contract but its legal value is higher than that of a warranty—a breach of warranty only gives you a right to damages caused by a warranty breach (Sanpine Pty Ltd v Koompahtoo Local Aboriginal Land Council & Ors [2006] NSWCA 291 at 176).

A contract can be terminated, however, if a breach of an intermediate term is sufficiently serious. To determine if a sufficiently serious breach of an intermediate term took place, the courts will consider:

  1. if the whole of the contract was affected by the breach so that its fulfilment is seen substantially different from that originally intended by the parties, as a result of the breach;
  2. the seriousness of the breach will depend on the consequences of the breach, both actual and foreseeable, for the innocent party;
  3. the onus of proof is on the innocent party to show the seriousness of the consequences of the breach which will be assessed by the court.

What is a repudiation of a contract?

In common law, repudiation may refer to conduct which indicates an unwillingness or an inability of a party to perform a substantial part of the contract. It can demonstrate itself in a form of an intention to no longer be bound by the contract or “to fulfil it only in a manner substantially inconsistent with the party’s obligations.”

In Freeth v Burr ((1874), L.R. 9 C.P. 208 at p. 214), Justice Keating said : “It is not a mere refusal or omission of one of the contracting parties to do something which he ought to do, that will justify the other in repudiating the contract; but there must be an absolute refusal to perform his part of the contract.”

This is an important point to keep in mind—a party does not necessarily repudiates a contract when it acts on misinterpreted terms of it (although repudiation may arise if the party persists on wrongful interpretation after the terms have been clarified and brought to their attention). If a party to a contract misinterprets its terms but the other party, instead of trying to clarify the terms, attempts to terminate the contract for repudiation, it may find itself being a repudiating party, giving the party that was acting wrongfully in the first place an opportunity to terminate the contract.

Unexpected twists like that highlight the importance of professional legal advice in the area of commercial law.

A team of experienced solicitors at Hollingworth & Spencer is available to assist your business in matters of commercial law should you require any advice.

Avoid the Pitfalls of a Commercial Lease

Commercial LeaseIf you’re thinking about entering into a commercial lease contract, you should carefully consider these important aspects of your decision to avoid frustration, unnecessary costs and hindrance to your business.

Zoning and Planning Permit

Before signing a lease, make sure your business meets zoning and planning permit requirements. Zoning regulations may impose restrictions on the type of business activity you intend to carry. If you fail to comply with the restrictions, the council may make you stop using the premises regardless of your leasing arrangements. If that wasn’t bad enough, imagine the cost of vacating the premises, especially if you have already spent money on outfitting it, and relocating elsewhere, assuming you can find something suitable on a short notice. And what are the chances of escaping the breach of contract terms in your lease with the landlord?

Lease Period

Aim to negotiate a long term commercial lease with options to renew at the end of the initial term. A long term commercial lease will facilitate the development of an established business and increase its value should you decide to sell it.

Do not rely on the assumption that the landlord will be willing, or even able, to renew a short term lease. Being a business themselves, they may have other plans for the premises once your term comes to an end or even decide to jack-up the rent seeing how valuable the property is to your business and you would, in their estimation, rather pay up than vacate and relocate.

Mortgagee’s Consent To Lease

If the property you intend to lease is mortgaged, you should (although you’re not required to by law) secure consent from the property’s mortgagee to lease the property to you. You and your landlord may be bound by a contract but no legally binding relationship exists between mortgagee and you. What it means is—should the relationship between mortgagee and your landlord end, the mortgagee will be in a position to terminate your lease and ask you to vacate the premises unless you have their consent to lease (see the Land Title Act 1994 (Qld) s66, s184).

Tenancy Interference

Ensure the lease does not allow the landlord to terminate your tenancy before the end of the lease. Watch out for refurbishment clauses in your contract—you don’t want to find out that a refurbishment clause opened a door to a full scale renovation of the premises, driving away your customers and disrupting your business.

Multiple Occupancy

If you intend to lease in a shared building, make sure the most recent plan is included with the lease. This document should show exactly what area of the building will be leased to you as well as specify your allocated car parking lots and other common areas such as entries and exits, toilets or kitchens. Without details like these a possible dispute resolution will be difficult to achieve.

Professional Advice

Overlooking even a small detail of a commercial lease can be very expensive. For an entrepreneur, it should make perfect sense to hedge against a possible loss before it happens by engaging an experienced solicitor to look after your interests and ensure every aspect of your commercial lease is properly evaluated.

Building a Resalable Business

gearsPeople sell their businesses all the time. Usually they do this because they’re ready to retire or perhaps want to relocate elsewhere, maybe do something else or just want to cash in, whatever the reason may be. Other times, and this happens more often than you think, a sweet offer comes out of nowhere and you begin to contemplate that age old proverbial question—to sell or not to sell (or is it, to be or not to be?)?

As a commercial law firm, we have seen plenty of regret among business owners who could not clinch a lucrative sale of their business when a ready to buy entrepreneur knocked on their door with cash in hand only because their business wasn’t as good “under the hood” as it appeared to the outside world.

Even if you’re not thinking of selling right now, as a business owner you should be prepared for all kinds of eventualities and a sale of your business is one of them. If you want to be ready when the time comes to sell, consider these few points we recommend.

Always Ready

Successful business owners are good at what they do—running their business. Selling it, however, is an entirely different undertaking. To be in a position to sell, keep in mind the idea of selling your business at all times because it will impact all areas of your business and decision making.

Business Structure

Decide the legal structure of your business before you start operating it. Is it going to be a sole trader operation, a partnership, a company or something else? This is where legal and accounting advise can make or, in the absence of it, break your business.

Different business structures have different legal and tax implications. Get it wrong off the bat and you could be up for unexpected tax and legal liabilities or a restructure. Neither of these are fun and you’ll do yourself a favour to get it right from the start.

Business Plan

We’re not going to give a lecture on how to create a competent business plan. We’ll say this though—it’s imperative you have one. In it, outline your marketing strategy; know how you’re going to attract and retain your customers; devise steps to create or improve your brand; set realistic financial goals and funding sources if necessary.

A functioning business plan is not something you make in the beginning, get your business going and then forget about. It should be adjusted from time to time to reflect changed circumstances and growth of your business. An updated business plan is a powerful bargaining chip in negotiations.

Business Records

Make every effort to keep your financial records accurate. This is where a buyer will look to see if your business is a fair dinkum or a pair of window dressings with a financial mess behind it.

Business Infrastructure

The value of your business will increase if you’ll be able to demonstrate an independent enough infrastructure that can function without you. A system with robust processes in place will help a buyer to have confidence in their ability to run your business without major dramas once they step in to replace you.

Business Contracts and Obligations

Review your contracts to ensure everything is in good order at all times: leases, client and supplier contracts, hire, licence or purchase agreements. A pitfall to look out for is whether or not any of the contracts your business is a party to can be re-assigned to a third party, which is why we mentioned above to keep the sale of your business in mind at all times—think twice before binding your business to a contract you won’t be able to get out of when needed.

On the other hand, if a buyer can see that they’re getting a good, long term contract(s) with your business, all of a sudden you may feel like you can ask a better price.

If you employ staff, review their employment contracts to ensure you will not breach any statutory laws or obligations by selling your business. As always, if you’re not sure where you stand, seek legal advice. And even if you think you know what you’re doing, double check with an experienced solicitor anyway.

Intellectual Property

Make sure you have a clear understanding of what is and what is not intellectual property. Knowing this will have a direct impact on the sale price of your business since intellectual property, like any other property, varies in price. Although an exact figure is not easy to determine, you should at least know what it is you own so that you can negotiate armed with proper knowledge.

For example, a business name isn’t worth much since it’s not protected by law and is not a property while a trade mark is both protected and a property. Knowing these kinds of nuances can be a game changer when it comes to selling your business. As before, a legal advice will provide you with information necessary for a good business decision in this area of law.

Conclusion

Take the steps to prepare your business for sale regardless of the stage it is at right now. Whether you’re already thinking of selling or simply want to be ready should the opportunity come along, speak to a lawyer you can trust about your plans.

Due to the impact of specific facts on any given case please treat this information as a general guide and not as legal advice. If you require advice on how to adequately protect your security rights please contact Adam Robinson on 07 3123 5700.