A written contract often contains a clause allowing either side to terminate the agreement if a specific condition is not met, usually the supply of goods and services or payment by some particular date. If the other party does not meet the requirement, you can choose to terminate the contract under that clause, though you may choose not to.
Suppose you are in a position with a commercial contract that you are considering terminating or in which the other party is misbehaving or breaching an essential contract term or has committed a serious breach of a non-essential term. In that case, you should consult a business contracts lawyer immediately. Commercial litigation over contracts is surprisingly tricky because courts also consider what each party has done since signing. For example, if you overlook some breach by the other party, you may be seen as having waived that requirement, and you may not be able to terminate for that same type of breach further down the track. Or, if you end a commercial contract without good reason, a court might hold you to have ‘repudiated’ the agreement, and you could be up for damages.
If a written contract has no termination clause, the courts will still read into it the right to terminate the agreement upon breach or where the other party repudiates or renounces the contract. The court can also declare the contract to be terminated because it is ‘frustrated,’ where something not the fault of either party prevents the agreement from being carried out. Every natural disaster produces a long list of frustrated contracts! ‘Repudiating’ a contract is where you do or say things that show you will not carry out your side of the contract.
Even if you only have a verbal agreement or a series of letters or emails showing you agree, the law still calls that a contract. If you go to court in a situation like that, the court will apply the old ‘common law’ and any relevant Acts of Parliament to the problem. They will call an agreement a contract if there is an offer to do something in exchange for money or something else, and if that offer is accepted. And, as usual, the courts are pretty nosey with this stuff and will always be considering the reasonableness of your conduct and whether the breach which you are arguing has occurred is big enough to end the contract.
So What Are the Most Common Traps?
- Terminating without sufficient reason: You may be very upset with what the other party has done or not done. You may be pretty sure they have breached the contract, but is that violation terrible enough to terminate it? A court usually agrees that if a breach regards something expressly stated in a written contract, there is a good cause to terminate. Otherwise, if it’s a breach of the written agreement and the court thinks it is not a matter that is ‘essential to the contract’, it may decide that you had no good reason to terminate. If the court decides that, it may also determine that you have repudiated the contract by wrongly terminating it, which may result in you paying damages.
- Terminating sloppily: You must specify exactly what the breach is, referring to the written contract if there is one. If the contract lays out a procedure for termination, like giving notice, etc., be careful to follow it to the letter. Even though a court may accept a non-compliant termination if it identifies the situation leading to it, this will inevitably lead to higher costs of legal advice or commercial litigation.
- You are waiving the right to terminate: The law calls overlooking a breach and continuing with a contract ‘waiver’. Sometimes, you may be happy to waive your right to terminate because you believe the other party won’t provide red cars next time you stipulate white ones. However, be very careful with this one, as sometimes waiving your right to terminate for a particular reason once may be interpreted by a court as waiving your legal right to terminate for that reason forever. In this case, you should have a contract lawyer draft something saying that you nevertheless still demand white cars from now on.
‘Frustration’ of Contracts and Force Majeure
The judge-made common law was a little harsh regarding where damage fell in such cases. For instance, in our example, if the buyer had already paid for the car and the seller hadn’t deliberately torched it, the old common law might have allowed the seller to keep the money. The Frustrated Contracts Act (NSW) 1978 has overridden the common law of frustration regarding the apportionment of loss or damages after the frustration of a contract. It allows part performance and part payment of any part of a contract, which is not frustrated.
Because frustrated contracts present huge risks and the legal options were often not favourable, including force majeure clauses in commercial contracts became common. The phrase means ‘overwhelming force’, and these clauses allow for suspension or termination of contracts when war, insurrection, or natural disaster renders their performance impossible. For centuries, maritime law has had its own detailed legal regime covering frustration and force majeure because of the routine nature of shipwrecks.
Termination of commercial contracts is quite a tricky area of law, and you should approach the situation with great caution. It is best never to terminate a commercial agreement without comprehensive legal advice considering the whole situation. In some cases, if you terminate without good cause, a court may hold you to have repudiated the contract and find you liable to pay damages.
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