Contract Principles Notes Termination:
Contract Principles Notes Termination: Termination by agreement: Parties can terminate a contract if there is an express power in the contract giving one or both parties the ability to do so. This can be after a period of time has elapsed, or simply ‘at will’. Where a contract is silent as to its duration, courts may imply a right for a party to terminate. This will be determined by the construction of the text and circumstances of the contract at the time of formation. (Crawford Valve Fitting Co v Sydney Valve & Fitting 1988 NSWCA) It is assumed a contract will however last for a reasonable period. (Mchugh in Crawford) Usually, where a right to terminate is implied, courts will also require the terminating party to give notice, which allows parties to “bring to an end in an orderly way [their] relationship” and gives “a reasonable opportunity to enter into alternative arrangements and wind up matters.” (Crawford v Sydney) What constitutes reasonable notice depends on the facts of each case, and is determined at the time notice is given. (Crawford v Sydney) Ordinary expenditure will not always be relevant to the period of notice, but extraordinary expenditure or effort will be. (Mchugh JA in Crawford) Parties can also make a subsequent agreement to terminate, which will need to follow the same principles as a normal contract – e.g. consideration – this means both parties will need to be abandoning some form of obligations. Where one party has fully performed their obligations, they can get around this by providing some fresh consideration, called accord and satisfaction. An agreement to terminate need not be in writing. (Tallerman v Nathan) Sometimes a subsequent agreement may impliedly terminate an old one. This will be determined by looking at the intentions of the parties when making that agreement, through looking at the terms of the contract. Parties can also mutually abandon their obligations. This occurs where the conduct of both parties shows that neither considers that the contract should be further performed. (DTR v Mona Homes) Termination for breach: Was the breach a breach of a condition, intermediate term, or warranty? Condition: A term will be classified as a condition where it is essential and goes to the root of the contract. It may be classified by statute, by the parties, or by the courts on a basis of construction.
Parties can classify a term as a condition with express words in a contract. This will not be conclusive however, as they may not have intended it to have the legal meaning. (L Schuler v Wickman) – “The fact that a particular construction leads to a very unreasonable result must be considered.” When it is clear they did intend for it to carry the legal meaning, courts must give effect to it as such. Where there is no express designation, courts will decide if a term is a condition as a matter of construction. In doing so they will apply the essentiality test – was the “promise of such importance to the promisee that he would not have entered into the contract unless assured of a strict or substantial performance of the promise… and this ought to have been apparent to the promisor.” (Tramways Advertising v Luna Park) The test of essentiality is considered at the time the contract was made, determined objectively and having regard to all circumstances. (DTR v Mona Homes) No matter how small the consequences, a breach of condition will allow for termination. (Arcos v Ronaasen) Relevant Factors in determining whether a term is a condition The way in which the parties describe an obligation can show how important it is. One described in clear and precise language is more likely to be classified than one in vague terms. E.g. “we guarantee” in Tramways. Other terms of a contract – like ones that allow termination for breach – may show that another is less important. The likely effect of any breach of that term and whether damages would be an appropriate remedy are also factors. Intermediate term Doctrine of intermediate terms was accepted into Australia in Koompahtoo v Sanpine. An intermediate term is one that may have serious or trivial consequences resulting from a breach, and thus termination will only be granted where the result goes to the root of the contract. The breach must deprive the aggrieved party of “substantially the whole benefit” of the contract. (Koompahtoo) Repudiation: Repudiation differs from termination for breach as it focuses on the intention and acts of the promisor, whereas termination for breach of an intermediate term focuses on the consequences of the breach. Where one party manifests an unwillingness or inability to perform their obligations under the contract, the other party may have a right to terminate. It is a serious matter and is not to be “lightly found or inferred.” (Shevill v Builders) The inability or unwillingness must relate to the whole contract, to a condition of the contract or be otherwise fundamental.
Parties can classify a term as a condition with express words in a contract. This will not be conclusive however, as they may not have intended it to have the legal meaning. (L Schuler v Wickman) – “The fact that a particular construction leads to a very unreasonable result must be considered.” When it is clear they did intend for it to carry the legal meaning, courts must give effect to it as such. Where there is no express designation, courts will decide if a term is a condition as a matter of construction. In doing so they will apply the essentiality test – was the “promise of such importance to the promisee that he would not have entered into the contract unless assured of a strict or substantial performance of the promise… and this ought to have been apparent to the promisor.” (Tramways Advertising v Luna Park) The test of essentiality is considered at the time the contract was made, determined objectively and having regard to all circumstances. (DTR v Mona Homes) No matter how small the consequences, a breach of condition will allow for termination. (Arcos v Ronaasen) Relevant Factors in determining whether a term is a condition The way in which the parties describe an obligation can show how important it is. One described in clear and precise language is more likely to be classified than one in vague terms. E.g. “we guarantee” in Tramways. Other terms of a contract – like ones that allow termination for breach – may show that another is less important. The likely effect of any breach of that term and whether damages would be an appropriate remedy are also factors. Intermediate term Doctrine of intermediate terms was accepted into Australia in Koompahtoo v Sanpine. An intermediate term is one that may have serious or trivial consequences resulting from a breach, and thus termination will only be granted where the result goes to the root of the contract. The breach must deprive the aggrieved party of “substantially the whole benefit” of the contract. (Koompahtoo) Repudiation: Repudiation differs from termination for breach as it focuses on the intention and acts of the promisor, whereas termination for breach of an intermediate term focuses on the consequences of the breach. Where one party manifests an unwillingness or inability to perform their obligations under the contract, the other party may have a right to terminate. It is a serious matter and is not to be “lightly found or inferred.” (Shevill v Builders) The inability or unwillingness must relate to the whole contract, to a condition of the contract or be otherwise fundamental.
