Termination of contract

Termination of contract is when a contract has come to an end. There are a number of ways by which termination can occur:

  • Termination by agreement: the parties to the contract may agree to terminate the contract at any time, either by mutual consent or by incorporating a termination clause into the contract.
  • Termination by performance: the contract may come to an end when both parties have fulfilled their obligations under the contract. This is often referred to as discharge by performance.
  • Termination due to breach: the aggrieved party may terminate a contract for breach if the contractual terms confer such a right or, under the common law, when there was a breach of an essential term, a sufficiently serious breach of an intermediate term or repudiation.

Essential terms of a contract, also known as conditions, are terms of such importance that a party would not have entered into the contract unless they had been assured of a strict or a substantial performance of this term, and this is made known to the other party (Tramways Advertising Pty Ltd v Luna Park (NSW) Ltd). The test of essentiality of a clause depends on the intention of the parties when the contract is executed, and this intention may be evidenced either by express or implied terms in the contract.

An intermediate term is a non-essential term of the contract. To give rise to the right of termination, a breach of a non-essential term must affect the fundamental purpose of the contract and cause substantial loss to the aggrieved party.

Repudiation is the clear demonstration by one party to another of their inability or unwillingness to perform their obligations under a contract. The repudiating party, who is unwilling and unable to perform a contractual obligation, must deprive the aggrieved party of substantially the whole of the benefit of which they would have received if the repudiating party had performed its side of the bargain.

  • Termination by frustration: if an unpredictable event that is beyond the control of the parties occur and make it impossible for the parties to fulfill their obligations under the contract, the contract may be terminated due to frustration. This can occur, for example, if a natural disaster destroys the subject matter of the contract.
  • Termination by operation of law: in some cases, a contract may be terminated by operation of law. This can occur if, for example, the subject matter of the contract becomes illegal.

When a party becomes entitled to terminate a contract because of breach or some other intervening factor, it is confronted with a decision legally classed as ‘election’, where the aggrieved party has the options to either affirm the contract or terminate it. The decision to affirm or terminate the contract is irrevocable and irreversible.

If a party elects to affirm, the contract remains in force and all rights and obligations remain binding. The party then loses the right to terminate for the particular cause.

If the party elects to terminate, this is effective and all requirements for further performance are waived. However, previous rights remain recoverable.

The following remedies are available following a breach of a contract: 

  • Damages: this is the most common remedy for breach of contract. Damages are a monetary award designed to compensate the non-breaching party for any losses suffered as a result of the breach. The purpose of damages is to put the non-breaching party in the same position they would have been in had the contract been performed as agreed.
  • Specific performance: this remedy requires the breaching party to perform their obligations under the contract as agreed. Specific performance is typically available in situations where the subject matter of the contract is unique, such as in cases involving real estate or rare goods.
  • Injunction: this remedy is a court order which prevents a party from persisting on the breach. This remedy is typically available when monetary damages are insufficient to address the harm caused by the breach of contract.
  • Rescission: an equitable remedy which allows a party to a contract to elect, upon the other’s breach, to terminate the contract and be restored to the position they were in before the contract was entered into. This remedy is valid only where it is possible for parties to be properly restored to their original position.