#7421 - Termination - Contract Law

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 by the contract they cannot terminate.

• Once you have communicated to the other party that you waive the condition, you are bound by this decision.

• Estoppel can also help when one party leads the other to believe that they will not exercise their right to terminate the contract based on non-fulfilment of the condition. This is misleading conduct.

Rights conferred by the common law:

• Whether or not the aggrieved party decides to terminate the contract they will have a right to damages to compensate for the breach of the contract. The other party will argue that the right to terminate has been lost by some conduct of the aggrieved party.

When is there a right to terminate for breach?

• If a party has an express right to terminate the contract, this will be enough to terminate. There are contract default rules of termination which will be used unless the contract has an express term governing termination.

There is a common law right to terminate for breach of contract depending on how the term is classified.

• The term is a condition or essential term (it goes to the root of the contract):

  • The aggrieved party will be entitled to terminate for any breach of that term by the other party regardless of the gravity of the breach.

  • Damages will be available.

  • An essential promise.

  • It is judged by whether the promise is of such importance to the promisee that he would not have entered the contract without being assured of the strict performance of the promise. You look at the party’s intentions to whether the term is a condition.

  • How do courts decide if the term is a condition?

    • The parties can make it clear that any breach will lead to the termination of the contract.

    • Previous decisions.

    • Promoting certainty in a contract so the parties know their rights.

    • The language in which the obligation is described- a condition is in precise language.

    • The other terms of the contract show that the term is important enough to be a condition.

    • The likely character of the breach- the breach of the term has serious consequences for the aggrieved party and deprives them of their benefit.

    • Whether damages would be an adequate remedy- damages would not adequately compensate the aggrieved party for the breach and termination is more appropriate.

• The term is a warranty:

  • The aggrieved party has no right to terminate the contract because of a breach of the term by the other party.

  • There is only a right to damages are available.

  • Terms are usually only classified as warranties when required by statute like the Sale of Goods Acts.

  • A term will only be a warranty if no possible breach could give rise to an event which would deprive the aggrieved party of substantially the whole of the benefit.

  • An inessential promise.

• The term is an intermediate or innominate term:

  • This lies in the middle between condition and warranty. It is more than a warranty but less than a condition.

  • The aggrieved party’s right to terminate depends on the gravity and the foreseeable consequences of the breach of the term. They can terminate if the breach is likely to have serious consequences for the future performance of the contract.

  • The preferred classification. It gives courts greater flexibility.

  • It focuses on the consequences of the breach and not on the acts and intention of the promisor (their conduct) like in repudiation.

cases

Page 521

Tramways Advertising v Luna Park (1938) – When is a term a condition and what happens when there is a breach?

Ambiguity in the terms of Tramways.

Facts:

• Tramways entered into a contract with Luna Park to exhibit 3 seasons advertising material by...