#7299 - Termination By Agreement Textbook Component - Contracts 2

Textbook Component – Termination by Agreement

• Agreements to terminate can be done by: an express term providing for termination in the original contract, a subsequent agreement expressly terminating the original contract. Courts may also find an implied agreement to terminate

Termination under the Original Contract

Express powers to terminate

• Parties commonly include express terms for termination in long-term commercial contracts. This can be done by:

  • Stipulating the contract last for a fixed period of time (e.g. lease)

  • Agree that a party has a right to terminate either ‘at will’ (at any time), upon a specified period of notice, or ‘triggered’ right on certain event (such as non-fulfilment of the condition)

• Contracts can also contain procedures to be followed before terminations take place. Some cases have required strict compliance with termination with interpretations of procedures being read contra proferentem (Lintel Pines Pty Ltd v Nixon)

  • But in Pan Foods Company Importers & Distributors Pty Ltd v Australian and New Zealand Banking Group Ltd [2000] it was suggested that requirements of commercial contracts shouldn’t be construed in an overly restrictive or technical manner

    • Commercial contracts “should be construed practically, so as to give effect to the parties’ presumed commercial purposes and so as to not defeat the achievement of such purposes by an excessively narrow and artificially restricted construction”

  • This was a case where notice by an ‘authorised representative’ of termination was required – the argument was that a solicitor did not represent the bank. The HCA rejected this – the circumstances showed clearly that the notice was from the Bank.

Implied right to terminate a contract of otherwise indefinite duration

• Where contracts are silent on duration courts may imply a right for one or both partie to terminate – this will usually require the terminating party to give reasonable notice of termination. The time required depends on the circumstances of the particular case:

  • Crawford Fitting Co v Sydney Valve & Fitting Pty Ltd – 6 months to terminate a distributorship contract sufficient. McHugh talked about appropriate notice giving the distributor opportunities to exploit any extraordinary effirt ir expenditure made in the interim. But the effort/expenditure won’t be considered relevant to the period of notice – it is a risk the distributor takes by entering into a terminable agreement

Termination by Subsequent Agreement

• To be binding in law an agreement to terminate must comply with ordinary rules of contract formation – including consideration

Partly performed contracts and the issue of consideration

• This raises issues because while the performing party can release the non-performing party from obligations (good consideration) – the other way around cannot occur. Two ways of resolving this include:

  • Execution of a deed to terminate the contract

  • Providing fresh consideration to make a contract of accord and satisfaction (British Russian Gazette & Trade Outlook Ltd v Associated Newspapers Ltd [1933]

    • This fresh consideration can take the form of money or a requirement to perform new/different obligations

    • It can also take the form of a promise to do an act (McDermott v Black) in which case the non-performing party is released from obligation to further perform the original contract on the making of the promise

    • Or a promised act in which case release will only occur when the act is performed

      • Courts tend to interpret an accord and satisfaction as requiring performance

Formal Requirements

• Writing is not required to terminate an existing contract (Tallerman & Co Pty Ltd v Nathan’s Merchandise (Vic) Pty Ltd [1956 HCA]

• Writing is required where the subsequent contract seeks to vary, rather than terminate, the original contract (Stuttor v Gundowda Pty Ltd [1950] HCA

Termination inferred from subsequent agreement

• When parties make subsequent agreements without explaining how it is to interact with the original there are two interpretations. The subsequent agreement is either to:

  • Replace, thus terminate, the original (Wallace-Smith v Thiess Infraco (Swanston Pty Ltd [2005])

  • The subsequent agreement is to vary rather than supplement the original contract (Tallerman (above))

• In the absence of express terms, whether either of these occurs depends on the intentions of the parties disclosed by the terms and circumstances of the subsequent agreement (Tallerman) and is a ‘matter of degree’.

  • An intention to terminate the original will be inferred if the obligations under the subsequent is inconsistent with those in the original and they cannot co-exist (British & Bennington’s Ltd v North Western Cachar Tea Co Ltd)

  • The parties are unlikely to intend to terminate the original if the subsequent cannot stand alone as a new and independent contract, or if it can’t be presumed that the parties would have intended to abandon their rights under the original contract (Concut Pty Ltd v Warrell [2000]

• Concut Pty Ltd v Worrell – court held it unlikely that a subsequent written agreement (for employment) was to replace an earlier oral contract. Person fired under terms of an oral contract alleging that the new contract terminated the old. Court based its reasoning on the fact that it was unlikely the employer would have deprived himself of accrued rights under the original.

Termination by abandonment

• Some cases exist where parties will have conducted themselves as to mutually abandon their contract (Summers v The Commonwealth (1918) CLR)

  • This occurs where each party is entitled to assume from the conduct of the other that the contract is at end

• Abandonment can be inferred where parties indicate that neither considers the contract to be performed.

  • In DTR Nominees Pty Ltd v Mona Homes Pty Ltd [1978] HCA – neither party regarded the contract as being on foot and therefore were regarded as having abandoned their contract

• Contracts can be inferred to be abandoned when an ‘inordinate’ length of time has elapsed “during which neither party has attempted to perform, or called on the other to perform” (Fitzgerald v Masters [1956]) but the courts are less likely to conclude this when a party has partly performed

Failure of a Contingent Condition

Contingent conditions

• A contingent condition refers to when parties make performance of their contract conditional upon occurrence of a specified event that neither party promises to ensure will occur (condition precedent) or an even not occurring (condition subsequent)

• In the case of this kind of condition – if the condition is not fulfilled, there will be no breach of contract since neither party has promised to ensure the condition will be fulfilled. As a result there will be no right to damages.

Different Uses of the word condition

Contingent and promissory conditions

• Condition can also refer to a contractual promise that is essential in that breach by one party will entitle the other party to terminate the contract and entitle them to damages e.g. payment at a specified date

Contingent conditions to performance and formation

• There are two types of contingent conditions. They either:

  • Qualify performance – in which case the parties won’t be obliged to perform unless fulfilled. In this case even before fulfilment parties are bound to not do anything inconsistent with the contractual obligations (e.g. selling land to another when sale to one is subject to finance – in such a case the contract is breached).

  • Qualify formation – parties are not bound by the contract unless and until the condition is filled (e.g. when something is subject to preparation of a formal contract

• Courts tend to prefer to treat contingent conditions as qualifying performance rather than formation – Perri v Coolangatta Investments Proprietary Limited [1982] HCA – artificial to say that no binding contract exists till the event happens (Kirby J)

Contingent conditions precedent and subsequent to performance

• Conditions precedent to performance are one that must be fulfilled before parties are bound to perform their contract

• Conditions subsequent to performance are when the parties obligations are binding but come to an end when a specified event occurs

Duty to Co-operate

• Even though parties don’t undertake to ensure that a condition is fulfilled they may be under an obligation with respect to the condition

  • Contracts may require parties to use a certain level of effort (Hawkins v Pendor Bros [1990] – “best efforts”]

  • Parties may be under an implied duty to co-operate – to do everything reasonably within their power to see that condition fulfilled (Perri (above))

    • Butts v O’Dwyer - implied obligation on the part of transferor of property to do all things reasonable to obtain ministers consent

• If contingent conditions aren’t fulfilled as a result of breach of the duty to co-operator the party may not be able to use this as a reason for termination (Perri)

  • Mackay v Dick – contract for sale of digging machine. Failure to test the machine breached the implied duty to co-operate so buyer was not entitled to rely on failure of the condition relating to testing as a reason for non-payment

  • Newmont Pty Ltd v Laverton Nickel NL –

• When parties breach the implied duty to co-operate in fulfilling the contingent conditions damages will usually available and may be reduced to account for the fact that even if they had co-operated the condition might not have been fulfilled

Non-Fulfilment

When will a contingent condition not be fulfilled?

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