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.