Termination Notes

Class 6- Termination

Termination by agreement:

Parties can make an agreement about terminating their contract:

• The party’s original contract may include an express term providing for its termination.

  • The parties might provide that the contract is to last a fixed period of time. Once the time expires the contract will come to an end.

  • One party may be given a broad discretionary right to terminate at will (at any time).

  • A party might be able to terminate after a specified period of notice.

  • A party might be able to terminate when there is a trigger of certain events like a breach or the non fulfilment of a contingent condition.

  • A term may require a certain procedure before termination.

  • Where a contract is silent as to its duration, courts will imply a right for one or both parties to terminate. The parties would not have intended the contract to continue indefinitely. The terminating party must give reasonable notice and the period of time for this depends on the case.

• The parties may make a subsequent contract expressly terminating their original contract.

  • They can terminate in this way if they comply by the ordinary rules of contract formation. This includes the requirement of consideration.

  • If both parties have performed there is consideration from both to terminate.

  • This is difficult when one party has performed the original contract and the other has not. To get around the problems of consideration they can sign a deed or provide fresh consideration.

  • An accord and satisfaction is when a party purchases a release from an obligation. They might pay for termination. When it is uncertain the courts will require the performance of the promise which provided fresh consideration and not just the promise.

• The parties may have an implied agreement to terminate their contract in the existing or subsequent contract.

  • Writing is not required for an agreement to terminate an existing contract.

  • The parties could either have intended the subsequent agreement to terminate the contract or the subsequent agreement could be merely varying the original contract. It is terminated if the subsequent agreement can stand alone as a new and independent contract.

  • Where a subsequent contract does not change the obligations of the original contract but substitutes new parties it is a novation and discharges the original contract.

  • Parties can mutually abandon the contract. Both parties may indicate that neither considers that it should be performed. Or an inordinate length of time has passed where no party has performed or called the other to perform. This does not work if one party has performed.

Failure of a contingent condition:

• Parties may make the performance of their contract conditional upon the occurrence of a specified event that neither party promises to ensure will occur. E.g. obtaining a loan to buy a car. If the event does not occur, one or both of the parties will have to terminate the contract but there will be no breach.

• Parties may also make performance conditional upon a particular event not occurring. E.g. if the seller’s license is revoked.

• The word condition means a contractual promise that is essential. A contingent condition suspends the party’s obligations to perform.

• E.g. neither party will have to perform if the sale of a house is contingent on receiving a loan and may not do anything if the condition is waived. However the owner will breach the contract if they sell the house to someone else.

• E.g. The agreement may have a contingent condition that it is subject to the formation of a formal contract.

• The courts describe a condition as a qualifying performance to show it is contractual.

• A condition precedent means that the condition must be fulfilled before the parties are bound to perform the contract. A condition subsequent is one where the contract is immediately binding but will come to an end if the condition occurs (look at dot point 2).

• Parties may be under an obligation to respect the condition. The contract may require the parties to use a certain level of effort to ensure the condition is fulfilled. When they breach this there will be damages to pay but they may be discounted because the condition may not have taken place.

• A contingent condition will fail when the events do not occur or time for fulfilment lapses.

• The language of the condition determines whether an objective or subjective test is used.

  • It may lie on a discretionary judgment by one of the parties (e.g. they are satisfied or approve). Fulfilment of the condition is subjective. The person must be honest and act reasonably in finding that they are dissatisfied. E.g. In Meehan v Jones satisfactory finance was required.

The consequences of non fulfilment of a contingent condition:

• Non fulfilment of a contingent condition excuses performance.

• If the contingent condition relating to the performance of the whole contract is not fulfilled, the contract is voidable. The parties can decide to terminate. No parties will be up for damages.

• In some cases the contract automatically comes to an end when the condition is not fulfilled. If neither party can control the condition (e.g. it must not rain) then the court will find it terminated.

• However if one party acts to their detriment on the assumption that the contract is continuing, the other party may be estopped from asserting that it automatically came to an end.

• Notice is not required to terminate a contract where a contingent condition fails to be fulfilled.

• Who can terminate depends on the contract.

Waiver of a contingent condition:

• If both parties waive a condition, then they cannot terminate the contract and they are bound by the agreement.

• One party can waive the condition if the condition is ‘primarily’, ‘wholly’ or ‘solely’ for the benefit of that party.

Restrictions to the right to terminate for non fulfilment of a contingent condition:

• If a party has prevented the conditions performance or has intimated that they do not intend to be bound...

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