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Termination Notes

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This is an extract of our Termination document, which we sell as part of our Contract Law I Notes collection written by the top tier of University Of Sydney students.

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Termination --- Discharge of a Contract Discharge by Performance Order of Performance

* Dependent obligation
Employer's obligation to pay dependent on the employee's obligation to perform his task: Automatic Fire Sprinklers Pty Ltd v Watson

* Independent obligation

* Concurrent obligation Obstruction of Performance

* Prevention of performance

* Refusal of tender of performance Doctrine of entire contract

* Where a contract is entire, and the condition precedent has not been fulfilled, the contract price will not be recoverable, i.e, performance must be exact: Cutter v Powell; that is to say, promisor's part performance of the contract will not oblige the promisee to pay for the part of the contract that the promisor has performed: Sumpter v Hedges
Recovery will be refused even if the promisor has an excuse in respect of the failure of the condition precedent: Cutter v Powell; or the promisee may take the benefit as a unjust enrichment: Sumpter v Hedges Doctrine of Substantial Performance

* If performance is almost complete, but minor repairs need to be made, it is likely that a court will find substantial performance: Hoenig v Isaacs; another situation is that where a contact has been substantially performed and the cost of replacement would be grossly out of proportion to the difference in value, the court will be reluctant to held the contract invalid, and instead, the measure of damages might be ordered according to the difference in value: Jacob & Youngs Inc v Kent (US case)
However, if the defects/shortcoming goes to the root/essence of a party's reason for contracting, then the doctrine of substantial performance will not be applied: Bolton v Mahadeva Severable contracts

* Where a contract is severable, a promisor may be able to recover in respect of a severable part of the contract, notwithstanding a failure to discharge obligations under the contract: Government of Newfoundland v Newfoundland Railway Co

* The doctrine of substantial performance applies to severable contracts as well: Steele v Tardiani, Discharge by Breach The onus of proof is on the promisee where he is alleging that the promisor has not performed his contactual obligations (failure to perform), or does not likely to perform his contractual obligations (anticipatory breach): Canning v Temby Breach of contract may give rise to damages, with substantial damages awarded where the plaintiff can demonstrate loss resulting from the breach: Holland v Wiltshire; and nominal damages awarded where no loss can be demonstrated: Luna Park (NSW) Ltd v Tramways Advertising Pty Ltd. Failure to perform Types of failure to perform (actual breach) Non-performance of the contract Defective performance

* If a contract for the hire of goods attracts an implied term requiring the goods to be fit for the hirer's purpose, the standard of duty is strict: Derbyshire Building Co Pty Ltd v Becker

* Where an element of special skill is present, as in contracts with solicitors, engineers, doctors and so on, the duty is to exercise the degree of care expected of the 'ordinary skilled [person] exercising and professing to have that special skill: Greaves & Co (Contractors) Ltd v Baynham Meikle & Partners Late performance

* Breach of contract may give rise to substantial damages where the plaintiff can demonstrate loss resulting from the breach: Holland v Whitshire;

* To succeed in a claim for breach of contract, there must be sufficient evidence showing the defendant's failure to perform: Canning v Temby Situation where a contract may be terminated Breach of an essential term (condition)

* A condition of a contract means:
a term that is so essential, without which the parties would not enter into a contract: Luna Park v Tramways Advertising Pty Ltd
a term "goes to the root of the contract', a breach of which will would render the performance of the rest of the contract a thing different in substance from the stipulation of the contract itself: Associated Newspapers Ltd v Bancks;
a term, breach of which is likely to cause serious loss or detriment to the promisee: Willis v Pratt ;
a term, breach of which has the effect of substantially depriving the other party of the benefit of the contract or materially prejudice its interests: Ankar Pty Ltd v National Westminster Finance (Australia) Ltd
In commercial contracts, when performance by one party of a stipulation is a condition precedent to the ability of the other party to perform his obligation, a stipulation as to the time of performance by the first party is generally to be treated as a condition.: Bunge Corporation New York v Tradax Export SA Panama

* A breach of a condition (essential terms) confers a right on the innocent party to choose between termination and recovery of damages: Luna Park (NSW) Ltd v Tramways Advertising Pty Ltd

* No matter how trivial the breach it is: Hong Kong Fir Shipping Co v Kawasaki Kisen Ltd Breach of an intermediate term

* Intermediate terms are usually terms which can be breached in various ways: Cehave NV v Bremer Handelgesellschaft mbH.

* Where the term is intermediate, only 'sufficiently serious' breach will give rise to right of termination: Hong Kong Fir Shipping Co v Kawasaki Kisen Kaisha Ltd; approved and applied in Australia by Koompahtoo Local Aboriginal Land Council v Sanpine Pty Ltd

* In respect of the 'sufficiently serious' breach, the promisee must either prove he has suffered detriment as a consequence of the breach (a question of fact) or there is a reasonably foreseeable consequence of the breach, which is a question of fact: Hong Kong Fir Shipping Co v Kawasaki Kisen Kaisha Ltd. Termination for Repudiation Unwillingness to perform terms which go to the 'root of the contract' will constitute repudiatory conduct: Luna Park v Tramways Advertising Pty Ltd; The promisor must be both ready AND willing, and an absence of either may amount to repudiation: Rawson v Hobbs Whether the conduct of a party amounts to a repudiation does not depend on the subjective intention of that party, it can be implied based on inability of the party to perform the contract. If the conduct of a party leads the other party to reasonably infer inability to perform, this will amount to repudiation: Universal Cargo Carrier Corporation v Citati

A repudiation may occur where the promisor acts in a manner substantially inconsistent with the contract: Laurinda Pty Ltd v Capalaba Park Shopping Centre Pty Ltd (1989); Federal Commerce & Navigation Co Ltd v Molena Alpha Inc

* It is irrelevant whether or not the promisor has acted bona fide: Federal Commerce & Navigation Co Ltd v Molena Alpha Inc Repudiation confers the right on the innocent party to terminate the contract: Bowes v Chaleyer

* However, the party is still bound by its obligation if the repudiation has not been accepted: Bowes v Chaleyer Termination for Delay The party may expressly or impliedly provide that the contract is one where 'time is of the essence'.

* Where time is of essence, and the performance is not rendered, the innocent party may elect to terminate the contract: Bunge Corporation New York v Tradax Export SA Panama

* If time is not of the essence, termination is not allowed without giving "notice to complete", the function of the notice is to fix a reasonable date for completion and to make that time the essence of the contract: Louinder v Leis;
If the notice is not complied with, termination is then allowed: Laurinda Pty Ltd v Capalaba Park Shopping Centre Pty Ltd
Time allowed for performance must be reasonable, and it must be made clear that non-compliance of the notice may lead to termination. The party serving the notice must itself be ready, willing and able to perform the contract. To be entitled to discharge the contract for delay or time stipulations, there must have been an unreasonable delay in the completion of the contract: Louinder v Leis Right to Termination Unless otherwise specified by the parties, breach or repudiation does not automatically terminate contractual obligations. The aggrieved party has the right to elect to terminate or affirm the contract: Tropical Traders Ltd v Goonan. Once a party has elected either to terminate or affirm the contract, that decision is final. Termination An election for termination for breach puts the whole contract to end at the time of its communication.

*
Termination affects future contractual obligations. It has no effect on past contractual obligations: McDonald v Dennys Lascelles Ltd.

* The promisee can terminate the contract at once and is under no obligation to allow the promisor more time to remedy the breach: Bunge Corporation New York v Tradax Export SA Panama.

* If the promisee was initially unaware of the breach, but then becomes aware, they can legally terminate the contract: McDonald v Dennys Lascelles Ltd.

* If a party has a contractual right to termination, it is allowed to exercise the right, but it cannot gain expectation damages for the loss that was caused by its desires to terminate the contract, because the losses were caused by the termination, not the breach of the other party: Shevill v Builders Licensing Board Affirmation

* Party can also choose for the contract to remain on foot, reserving the right to damages in respect of breach. This is also known as a waiver: White & Carter Councils Ltd v McGregor.

* A party can decide to waive a right to terminate once but not the remainder of the contract: Tropical Traders Ltd v Goonan.

* Even if the right to terminate the contract for a breach is waived, the party can still use the breach to support a claim of repudiatory conduct, however, two elements must be satisfied: 1) the performance does not require the cooperation of the other party; 2) the innocent party has a legitimate interest in performing the contract: White & Carter Councils Ltd v McGrego

Estoppel can act as a restriction on the right to terminate the contract when the alleged termination is unconscionable: Legione v Hateley Discharge by Frustration Doctrine of Frustration Common law stipulates the parties are released from future obligations under the contract at the moment of the frustrating events: Simmonds Ltd v Hay

* Since the effect of frustration is to kill the contract and discharge the parties from further liability under it, the doctrine is not to be lightly invoked, must be kept within very narrow limits and ought not to be extended: Davis Contractors Ltd v Fareham UDC; Modern test of Frustration Frustration occurs whenever the law recognises that without default of either party a contractual obligation has become incapable of being performed because the circumstances in which performance is called for would render it a thing radically different from that which we undertaken by the contract: Davis Contractors Ltd v Fareham UDC The test was approved in Codelfa Construction Pty Ltd v State Rail Authority of NSW Limitation of the Doctrine

* The risk of the frustrating event must not have been provided for by the parties in their contract: Codelfa Construction Pty Ltd v State Rail Authority of NSW

* The purported frustrating event must not be one which the parties could "reasonably be thought to have foreseen". Further, it is not hardship or inconvenience or material loss itself which calls the principle of frustration into play: Davis Contractor Ltd v Fareham Urban District Council

* The frustrating event must have occurred without fault by the party seeking to rely on frustration: Bank Line Ltd v Arthur Capel & Co;

* Reliance cannot be placed on self-induced frustration: Bank Line Ltd v Arthur Capel & Co

* And should not be due to the act or election of the party seeking to rely on it: Maritime National fish Ltd v Ocean Trawlers; J Lauritzen AS v Wijsmuller BV (Super Servant Two) Consequence of Frustration A frustrated contract comes to an end automatically.

* Where a contract on its true construction stipulates the consequence, if frustration should occurs, that stipulation governs the matter,

* But, in the absence of a term of the contract dealing with the matter, "the loss lies where it falls"

* However, where a party obtains no benefit from a contract (K), and they have paid part of a sum before frustration, then that party can recover the money paid in advance because it can be said there has been total failure of consideration: Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd

* Generally speaking, a plaintiff is not entitled to recover damages for disappointment and distress occasioned by a breach of contract, however, the situation will be different if the object of the contract is to provide enjoyment, relaxation and freedom for molestation: Baltic Shipping Co v Dillon (The Mikhail Lermontov)

* In terms of remedy, full compensation and complete restitution cannot be awarded for the same breach of contract: Baltic Shipping Co v Dillon (The Mikhail Lermontov) The Frustrated Contracts Act 1978 (NSW) replaces the common law in NSW in relation to contracts covered by it. It provides a series of fixed rules for the adjustment of the parties' rights.

GENERAL "Discharge" simply refer to the process whereby a valid and enforceable contract is brought to an end, thereby releasing the parties to it from all further obligation to perform. Contract can be discharged in five ways: by performance when all the duties required in the contract are performed by all the parties, the contract comes to an end. It is called discharge by performance. through breach when one party violates the conditions of lawful contract it is called breach of contract. When there is a breach by one party the other party gets a right not to perform his obligations it may also take action against the other party who has failed to perform. through frustration by agreement between the parties by operation of law If any contract is declared void by law then the parties involved to such contract are discharged from the liabilities. Unless one of these occurs, the contract remains on foot and its obligation can be enforced by either party.

* However, if the contract is brought to an end, the parties' consequential rights, duties, and liabilities depend on the type of termination involved. PERFORMANCE

Sequence, who performs the first.

1. Watson worked as a GM of Automatic fire Sprinklers Pty Ltd.

2. Company empowered to terminate employment on one month's written notice where employee unfit to fulfil position.

3. Resolution passed dismissed Watson from position based on unfitness.

4. The dismissal was contrary to National Security (Man Power) Regulations (Cth) where the permission of Director-General of Man Power was required.

5. Upon the appellant company ceased to be the protected undertakings which are subject to the regulations,Watson was excluded from the company's offices.

6. The company refused to pay Watson by alleging he had already been dismissed by the resolution.

7. Judgment for the respondent. Whether the purported termination

*
was effective or not?

* Whether the respondent was entitled to the salary during the period where he was willing to perform the duties?

Order of Performance Determining the order of performance (i.e., which party performs their obligations under the contract first) is a matter of construction.

* In every contract, there must be receipt of the bargain, therefore, it is necessary to decide who has to perform first. The Courts will construe the contract according to the objective intention of the parties.

* dependent obligations:
!
those which are not required to be performed until the other party has performed his obligations independent obligations:

*
!
those which must be performed regardless of the performance of the other party

* concurrent obligations:
!
where performance of obligation occurs simultaneously Automatic Fire Sprinklers Pty Ltd v Watson (1946) If an employer wrongfully dismisses an employee and refuses to allow further performance of services, i.e., a breach of contract, the effect at common law is to terminate the contract of employment and to confine the employee to remedies in damage. The employee's remedies in the case of an ineffectual dismissal included a right to salary during the period where the employee continues to offer performance of employment because the employer's obligation to pay depends on the employee's obligation to perform his tasks. Obstruction of Performance Prevention of performance When one party prevents performance, the other may regard the contract as at an end, will be released from further obligation and may:

* sue for damages for the breach occasioned by the wrongful prevention;

* sue for damages on a quantum meruit if the performance of an "entire" contract had commenced but had not been completed at the point of obstruction. Refusal of tender of performance Where a party cannot perform without the co-operation of the other, a tender (or offer of performance) is sufficient to make the other party liable. The offer to perform is treated as equivalent to performance to the extent that the party refusing to co-operate will be liable in damage. Discharge by Performance Doctrine of the Entire Contracts An entire contract is one in which the parties have agreed, expressly or impliedly, that complete performance by the promisor, is a condition precedent to the enforcement of the contract, i.e., performance must be exact.

1. Cutter signed on a contract as the second mate on a ship sailing from Jamaica.

2. The contract stipulated that he would be paid for 30 guineas "provided he proceeds, continues and does his duty...to the port of Liverpool".

3. Three quarters of the way through the voyage he died.

4. His wife sued for a proportionate share of his wages on a quantum meruit.

5. Her action failed for Cutter's contract was "entire".

1. The plaintiff contracted to build two houses and stables for the defendant for$565.

2. When the houses were little more than half completed, the plaintiff ran out of money and abandoned the job.

3. The defendant then completed the work.

4. The plaintiff sued for payment for what he had done. The contract is an entire contract, the employer actually will not be happy for partial performance because benefit received is not intended to be half built houses. Therefore, if you do not get the benefit that you have requested that there is not a legal benefit.

General Principle: A contractual obligation arises only when the other party has fully discharged their contractual duties: Cutter v Powell; that is to say, promisor's part performance of the contract will not oblige the promisee to pay for the part of the contract that the promisor has performed: Sumpter v Hedges

* Recovery will be refused even if the promisor has an excuse in respect of the failure of the condition precedent: Cutter v Powell Cutter v Powell (1795)

* Where a contract is entire, and the condition precedent has not been fulfilled, the contract price will not be recoverable.

* Further, under the doctrine of entire contract, recovery will be refused even if the promisor has an excuse in respect of the failure of the condition precedent. Sumpter v Hedges [1898]
If no new contract can be inferred from the mere fact (i.e., it is an entire contract) and the defendant does not restrict or prevent performance, a plaintiff who has done part of what was required by the contract but who has not completed performance because of some personal breach cannot usually recover either damages or a quantum meruit, even though the defendant may take the benefit as an unjust enrichment. Exceptions to 'Performance must be exact' Substantial performance Severable contracts Doctrine of Substantial Performance Under the doctrine of substantial performance, courts will recognize that something short of complete performance is sufficient to discharge a contractual obligation.

* If performance is almost complete, but minor repairs need to be made, it is likely that a court will find substantial performance: Hoenig v Isaacs

* However, if the defects/shortcoming goes to the root/essence of a party's reason for contracting, then the doctrine of substantial performance will not be applied: Bolton v Mahadeva

* In addition, the doctrine of substantial performance applies to severable contracts as well: Steele v Tardiani

1. The plaintiff was employed by the defendant to decorate his room for a sum of $750.

2. The plaintiff claimed to have carried out the work in compliance with the contract and requested the residue payment of
$350.

3. The defendant refused to pay, alleging that the plaintiff had failed to perform his his contract, and alternatively, that the work was done negligently, unskillfully and in an unworkmanlike manner.

4. Evidence showed that there had been a substantial compliance with the contract and that the defendant was liable for
$750 less the cost of remedying the defects, which was assessed at $55.18.

1. The plaintiff agreed to install a combined heating and hot water system in the defendant's home for a price of $560.

2. The defendant alleged that the work was improperly done and that the plaintiff had wholly failed to perform the contract and the remedial work would cost $174.50. Practical effect of this case, the plaintiff suing for money got nothing, while the defendant who was sued had to cost their own money to make the repair, therefore, another case that both parties were unhappy.

1. The plaintiff, Jacob & Youngs built a house for the defendant under the contract.

2. Contract provided that piping ought to use the brand "Reading", however, the plaintiff used "Cohoes", though the qualities of the two pipings are similar.

3. The defendant asked the plaintiff to do the work again.

4. Changing the brand of the piping would incur great expense to demolish the substantial parts of the completed work.

5. The plaintiff left the work untouched and the defendant refused to pay.

6. Judgement for the plaintiff. Famous American Case

One of the issues before the Privity Council was whether the Railway Co. was entitled to receive title to the land.

1. The Newfoundland Government agreed, as part of its obligation under a railway construction contract, to grant Railway Co. title to 5000 ares of land for each mile of the railway constructed, on completion of each five-mile section.

2. The Railway Co. promised to complete the construction in five years, but completed only 17 of the 68 five-mile sections. Held, the Government was bound to grant the title for the work done, because each claim to grant was independent or severable and earned when each section of the railway was completed.

1. The plaintiff,Tardiani, was employed by the defendant to cut firewood.

2. The job were not to cut any specified amount but rather were to be paid at a price per ton and all parties were entitled to terminate the contract at any time.

3. The trial judge found the contract was to cut firewood into length each 6 feet long and 6 inches in diameter, that payment was to be made at the rate of 8s per ton, and that the plaintiff had cut 1,500 tons split into lengths varying from 6 to 15 inches in diameter.

* Further, if one party contracts wanting exact specifications (e.g., planks of wood 6.55 metres long), then a court will not find substantial performance if the other party provides approximate specifications (e.g., planks of wood 6.50 metres long) Hoenig v Isaacs [1952]
When a contract provides for a specific sum to be paid on completion of specified work, the courts lean against a construction of the contract which would deprive the contractor of any payment at all simply because there are some defects or omissions. The promise to complete the work is, therefore, construed as a term of the contract, but not as a condition. It is not every breach of that term which absolves the employer from his promise to pay the price, but only a breach which goes to the root of the contract, such as an abandonment of the work when it is only half done. Unless the breach does go to the root of the matter, the employer cannot resist payment of the price. He must pay it and bring a cross-claim for the defects and omissions, or, alternatively, set them up in diminution of the price. Bolton v Mahadeva [1972]
In considering whether there was substantial performance, it is relevant to take into account both the nature of the defects and the proportion between the cost of rectifying them and the contract price.

* In the present case, it is not merely that so very much of the work was shoddy, but it is the general ineffectiveness of it for its primary purpose that leads me to that conclusion.

* Having regard to the objective of the contract, the character of the defects and the relative cost of the necessary remedial work, bolton had not substantially performed what was required of him. the basic rule, that entire contracts must be exactly performed, continued to apply and he was not entitled to recover any part of the agreed price. Jacob & Youngs Inc v Kent (1921) Where a contact has been substantially performed and the cost of replacement would be grossly out of proportion to the difference in value, the correct measure of damages is the difference in value. Severable Contracts A contract which is not entire is usually referred to as a 'severable' or 'divisible' contract. General Rule: Where a contract is severable, a promisor may be able to recover in respect of a severable part of the contract, notwithstanding a failure to discharge obligations under the contract: Government of Newfoundland v Newfoundland Railway Co For example, often a seller is entitled to receive payment in respect of goods delivered, even though the contract has not been completed. The doctrine of substantial performance applies to severable contracts: Steele v Tardiani Government of Newfoundland v Newfoundland Railway Co (1888) Where a contract is severable, a promisor may be able to recover in respect of a severable part of the contract, notwithstanding a failure to discharge obligation under the contract.

* The contract is not so framed as to make the grants of land dependent in any way on the completion of the whole line, or upon anything but the completion of each five-mile section. As each of those section was completed, the right to 25,000 acres of land became perfect. Steele v Tardiani (1946) The doctrine of substantial performance applies to severable contracts.

* The defendant was liable under the contract to accept and pay for the firewood cut into proper dimensions, and that he was also liable to pay a fair price for the other firewood because he had in fact accepted the benefit of the plaintiff 's work in taking possession of the firewood and selling it.

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