Termination of Contracts

A contract is usually terminated when both parties have performed all of their respective obligations under the agreement. At this time, both parties have fulfilled what they promised to do at the outset of the contract. Other avenues are available to the parties for termination of contracts, such as by agreement and for breach of contract.

There are four ways in which a contract may be discharged.

1. Termination by performance

Discharge by performance is where both parties to a contract have performed all their primary obligations under the contract, including all express and implied terms. There are three elements required to be satisfied to say, at law, that performance is complete.

Each of the parties is required to perform their obligations under the contract with perfect precision. Any deviation from the contractual obligations will amount to a breach of contract. In the case of Bolton v Mahadeva (1972), it was held that a contractor could not claim payment for a central heating system which did not work properly as it did not fulfil the primary obligation of heating the house. In some cases, performance is not strict and the obligation is not to achieve a specific result, but merely to exercise reasonable care and skill.

Where a contract requires strict performance there are circumstances in which the law may allow payment for part performance of a contract or incomplete contracts on a quantum meruit basis which enables the party performing to get paid fair and reasonable remuneration for their work where:

1. the contractual obligations are divisible, payment can be recovered for the obligations completed.
2. partial performance has been accepted by the other party.
3. the other party prevents complete performance by a party ready willing and able to perform.
4. a substantial part of the contract has been completed.

When a party to a contract "tenders performance", that is, attempts to perform their primary obligations under the contract and is prevented from doing so, that person may be considered to have discharged their obligations under the agreement, thus terminating the agreement. if the tendered performance is refused by the other party, they may be sued for breach of contract, and thus the further performance is not required but the debt arising under the contract for products or services is not.

2. Termination by agreement

A contract may be discharged by agreement in a number of situations.

Where both parties consent, the mutual obligations to perform contractual obligations will come to an end. Where a contract is discharged in this way, as with any contract, the agreement must be supported by consideration be legally binding. Where both parties have performance obligations outstanding under a contract, an agreement between the parties to discharge those obligations will be enough to satisfy the requirement for consideration, making the termination legally binding.

However, where one party still has performance obligations under the contract, for the agreement to be legally binding there must be either:

1. A deed releasing the other party from their obligations; or
2. A separate agreement supported by new consideration (‘accord and satisfaction’); or
3. The doctrine of prommisory estoppel must apply to the facts, that is to say where a promise is made to end the contract, intended to be binding and acted upon, the court will uphold the promise.

It is always open to parties to agree to variations to their contractual arrangements. This is put in place by executing a new agreement which supplements the first (rather than entirely replacing it). In some circumstances, the original contract may be discharged in its entirety and replaced with a completely new contract. In either of these circumstances though, the existence of a separate agreement must be proved. Accordingly, it is best recorded in writing.

A contract may be discharged by a condition subsequent which is a stipulation of a state of affairs which causes existing contractual obligations to come to an end. The state of affairs does not necessarily have to be out of the control of the parties.

3. Termination by breach

When a breach of contract takes place, it does not automatically discharge a contract. If the breach amounts to a breach of a condition of the contract (ie a repudiatory breach), the innocent party has the option of either

1. accepting the breach and terminating the contract (which has the effect of discharging the parties from any further obligations under the contract) and suing for damages; or
2. simply sue for damages caused by the loss caused by the breach, this allowing the contract to continue in force. Where the failure to perform amounts to a breach of warranty, the innocent party is not entitled to terminate the contract, but simply sue for damages.

There are situations in which the innocent party wrongly treats the contract as repudiated by the party in breach, and purports to terminate the contract. This is repudiation of the contract by the innocent party for what is a non-repudiatory breach is a breach of contract in its own right, entitling the other party to treat the contract as discharged. This took place in Federal Commerce and Navigation v Molena Alpha (1979), where the owners of a ship wrongly believed they were entitled to repudiate the contract. The court held that the repudiation was wrongful and therefore the other party could treat the contract as discharged.

Where a contract is treated as terminated in this way, the performance obligations under that contract are discharged at the date of termination. However, performance of secondary obligations, such as (1) to maintaining the confidential information of the other party, and (2) the obligation to pay damages for any losses caused to the innocent party, are not discharged and continue in force.

Anticipatory Breach

Anticipatory breach of a contract may be either explicit or implicit. Anticipatory breaches take place where one party expresses an intention by either not performing their obligations under the contract or performing them in a way in which is inconsistent with the original contractual terms. In these circumstances there are a number of options available to the innocent party.

The innocent party may wait and allow the party in breach to properly perform their obligations. If the part in breach does so, then the right to terminate will be lost. The innocent party may also sue for damages as soon as the anticipatory repudiation occurs, and not wait for the date of performance. The innocent party also has the option of affirming the contract by performing their obligations under it. In the case of White and Carter Limited v McGregor (1962), the defendants cancelled the contract, but the claimants refused to accept the termination and continued with performance under the contract, later suing the defendants for the full contract price. The Claimants were successful in doing so.

The option of accepting the repudiation or terminating the contract is not available where the innocent party requires the cooperation of the other party to perform the contract or if they have no real interest in performance of the contract.

4. Termination by frustration

Discharge by frustration occurs where it is impossible to perform the obligations under a contract due to a subsequent change in circumstances. It is the nature of the outstanding contractual obligations which must have changed.

The modern test for frustration is outlined in the case of National Carriers v Panalpina (1981). Frustration occurs when:

... there supervenes an event (without default of either party and for which the contract makes no sufficient provision) which so significantly changes the nature (not merely the expense or onerousness) of the outstanding contractual rights and / or obligations from what the parties could reasonably have contemplated at the time of its execution that it would be unjust to hold them to the literal sense of its stipulation in the new circumstances.

Frustration may occur in a number of situations:

1. Where the subject matter of the contract has been destroyed, or it is unavailable and was intended by both parties to be the primary subject matter of the contract. In the case of Taylor v Caldwell(1863), a contract to hire a music hall was frustrated when the hall was destroyed by fire;
2. Where a party to the contract dies or is seriously incapacitated;
3. Where the contract has become illegal to perform due to a change in the law or the out break of war;
4. The commercial purpose of the contract has failed, which includes failure of an event which the contract was based upon, and where there has been government interference or delay.

The Doctrine of Frustration will not apply when:

1. simply because an inconvenience has been caused, there has been an increase in expense or loss of profit. In Davis Contractors Limited v Fareham UDC (1956), it was agreed that a council estate would be built at a fixed price, but due to bad whether, strikes and shortages there were delays and the estate was built at a loss. However, it was held that the contract was not frustrated;
2. the contract contains an express provision (force majeure clause), dealing with such eventualities;
3. frustration is self-induced and one of the parties had a choice regarding performance; and
4. the event was reasonably foreseeable by either party as at the date of the agreement.

In Closing

We have set out the fundamental ways and means by which a contract may be brought to an end. Professionally drawn contracts may contain other means by which the contract may be brought to an end without suffering loss, such removing any rights to damages or recovery for loss, providing for termination for convenience of a party, warranties that presuppose a state of affairs as at the time of the contract that has not eventuated. Moreover, damages claims may be limited to specified sums or avoided in their entirety provided the innocent party does not fulfil their duty to mitigate their loss in the circumstances.