When can you terminate a contract for Breach?
There are two broad circumstances that give you a right at common law to terminate a contract:
- Breach of a term of the contract;
- The repudiation or renunciation of the contract by the other party.
Breach of a Term of the Contract
In any contract there are two types of terms, warranties and conditions.
A condition is an essential term of a contract. It is a term which “goes to the root of the contract”. Any breach of a condition is a fundamental breach of the contract and justifies termination.
A warranty is a non essential term of a contract. Generally, a contract will survive breach of a warranty, and the wronged party will only be entitled to claim damages for the breach. They also remain bound by the contract and must observe the essential conditions (e.g. settlement in a purchase contract for property).
However, a breach of a warranty may give rise to a right to terminate if the breach is sufficiently serious. The question is whether the breach goes to the root of the contract and deprived the wronged party of a substantial benefit for which it contracted. For example, ongoing and repeated breaches of warranties under a contract may give rise to the right to terminate under this principle.
Repudiation is said to have occurred when one party evinces an intention to no longer be bound by the contract, or to fulfil it only in a matter substantially inconsistent with the party’s ongoing obligations.
If there are no grounds to terminate, a purported termination is ineffective and amounts to a repudiation, entitling the other party to terminate. This emphasises the careful consideration required before terminating a contact. A good example of this is when a party purports to terminate a contract for an alleged breach but the breach is not of a fundamental nature that would entitle them to do so. This can often occur with buyers purporting to terminate under a pest and building clause. In the case of Meehan v Jones (1982) 149 CLR 571 it was held the buyer should act honestly when deciding if a building report is satisfactory or not. The buyer cannot just terminate because there is a leaking tap. There must be a significant issue raised to warrant a valid termination.
What to do when a termination event arises
If a right to terminate arises, the wronged party has a choice as to whether it:
- Affirms the contract and claim damages for the particular breach. It may also be necessary to claim specific performance or injunctive relief to compel the other party to comply with the contract.
- Terminate the contract and claim damages for the loss of the bargain.
Once a contract is affirmed it cannot be terminated for the same breach. Affirmation can be inferred from conduct which is consistent with the continued existence of the contract, such as continued performance.
A termination must be unequivocal, either by words or conduct, evincing an intention to terminate. The terminating party is required to justify termination outlining the legal basis upon which they terminate.
The law surrounding termination of a contract is complex and if it is not done correctly, you could well be the party in breach of the contract! If you are in a position where you are considering terminating a contract, we recommend you seek legal advice from an experienced litigation lawyer before doing so. The consequences of ‘getting it wrong’ can be quite catastrophic and all relevant issues need to be considered very carefully before such an important decision is made.
Quite often clients receive incorrect advice from conveyancers or firms not familiar with this important area of law. We have a dedicated Litigation team who deal with these issues regularly and specialise in these matters.
If you would like more information or want to obtain the best possible chance of a successful outcome in your dispute, please contact our Commercial Litigation Department Manager, Amanda Heather on direct line 07 5506 8245, email email@example.com or free call 1800 621 071.
We have an experienced dedicated Commercial Litigation team that practice exclusively in these areas.