termination contract law

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KAREN ABIDI

Termination of Contract

Contract LawElements of Formation • Offer• Acceptance• Consideration• Certainty• Intention• Privity

Matters Affecting Formation• Privity• Formalities• Capacity

Contract Terms• Express• Implied

Discharge of Contracts• Frustration• Performance • Breach• By Agreement

Vitiation of Contracts• Misrepresentation• Mistake• Illegality• Undue Influence• Duress• Unconscionability

Remedies• Damages• Injunction • Specific Performance

Remedies• Rescission• Damages• Rectification

Termination Void/voidable

See Butterwortths Tutorials Series - Contracts Law, 2nd ed. 1999

3Where are we?

1. Termination of contracts• Termination by agreement• Termination for breach of a condition (or

serious breach of an intermediate term)• Termination for repudiation• Termination for delay• Consequences of termination

2. Remedies for breach of contract3. Frustration of contracts4. Vitiating factors

4How can a contract be terminated?

Termination by performance Termination under the original agreement Termination by subsequent agreement Failure of a contingent condition Termination for breach or repudiation Termination by frustration

Azhar Abidi

5Termination by agreement

Two situations:

Termination under the original contract.

Termination by subsequent agreement.

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Termination under original agreement

The contract may expressly provide for its termination.

What if contract is for indefinite period and contains no termination clause?

Parties will rarely intend to be bound forever (subject only to frustration).

It is therefore often appropriate to imply a term allowing parties to terminate by notice.

Crawford Fitting Co v Sydney Valve & Fittings Pty Ltd (1988) 14 NSWLR 438

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Crawford Fitting Co v Sydney Valve & Fitting

Crawford Fitting

(US Manufacturer)

Sydney Valve and Fitting

(NSW Distributor)

Contract: for distribution of valves and fittings Indefinite period

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Crawford Fitting Co v Sydney Valve & Fitting

Crawford terminated giving 6 months notice. Issues:

Implied right to terminate an indefinite contract. Period of time required for reasonable notice to terminate.

Held: An indefinite commercial contract can be implied to terminate on

reasonable notice. 6 months’ notice to terminate was reasonable here.

Relevant factors re: reasonable period of notice: Allowing parties to bring their relationship to an end in an orderly

way and having a reasonable opportunity to enter into alternative arrangements and wind up matters.

Enabling distributor to recoup extraordinary expenditure or effort (not ordinary effort or expenditure).

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Termination by subsequent agreement

A “contract to end a contract” requires consideration.

No problem where neither party has (completely) performed original contract, as the consideration is the mutual release of remaining obligations.

But where one party has already completely performed original contract, the other party would be relieved from her outstanding performance without giving up anything.

10Where are we?

1. Termination of contracts• Termination by agreement• Termination for breach of a condition

(or serious breach of an intermediate term)

• Termination for repudiation• Termination for delay• Consequences of termination

2. Remedies for breach of contract3. Frustration of contracts4. Vitiating factors

11What is a breach?

A breach of contract occurs whenever one of the parties to the agreement did not perform their obligations as required under the contract.

12Types of breach

Failure to perform: occurs after time for performance has expired; 3 types:

No performance Defective performance Delayed performance

Anticipatory breach: occurs before performance is due.

General rule: a breach of contract does not require fault.

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Identify the breach

Identify the breach: the contractual obligation and the nature of the non-performance need to be identified.

14Classification of terms

For the purpose of the right to terminate, three types of term must be distinguished:

ConditionWarrantyIntermediate term

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Damages / termination for breach

All breaches gives rise to damages (compensation for loss) for breach of the particular term.

Only some breaches (relatively rare) give rise to the right to terminate the contract (and claim damages for “loss of bargain”).

16When is termination allowed?

Only the following breaches allow termination: Breach of a condition. Serious breach of an intermediate term. Repudiation.

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First Rule

If the breached term is a condition, the aggrieved party will be entitled to terminate the contract for any breach of that term, even if it was of little gravity or consequence.

See eg Arcos v Ronaasen

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Second Rule

If the breached term is a warranty, the aggrieved party will be entitled only to damages. They have no right to terminate the contract.

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Third Rule

If the breached term is an intermediate term, the aggrieved party may be entitled to terminate, depending on the gravity and consequences of the breach.

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Is it a condition or a warranty?

1. Does a statute characterise it for you? eg Sale of Goods Acts (see eg Arcos v Ronaasen)

2. Have the parties characterised it themselves in the contract? See eg Schuler

3. If not, you must work it out as a matter of construction. See eg Tramways Advertising v Luna Park

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What is a condition?

An essential term that goes to the root of the contract.

Condition = any breach entitles termination

Warranty = no breach entitles termination

Condition = any breach entitles termination

Warranty = no breach entitles termination

Intermediate terms: consequence depends

on seriousness of breach

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Arcos v Ronaasen

Contract prescribed the length of pieces of wood sold to be used to make barrels. Some of the wood was of a fractionally different length which made no difference to the use of the wood. The buyer terminated the contract.

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Arcos v Ronaasen

Correspondence with description was a condition under Sale of Goods legislation.

Where a term is classified as a condition, there is a right to terminate regardless of the gravity of the breach.

Nb. commercial / economic motivation for terminating here.

26Express classification in contract

Parties can define nature of terms in contract.

Terminology used by parties is not decisive:Goods Act 1958 (Vic) s 16(2) - a stipulation

may be a condition though called a warranty in a contract for the sale of goods.

L Schuler AG v Wickman

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Schuler v Wickman Machine Tool Sales

Schuler(manufacturer

)

Wickman(sole

distributor in UK)

Distribution Agreement

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• This clause required Wickman to make 1400 visits over the contract term. Wickman didn’t make all these visits.

Clause 7(b):It shall be [a]

condition of this agreement that (i) [Wickman] shall

send its representatives to

visit [the six largest United Kingdom

motor manufacturers] at least once in every

week for the purpose of

soliciting orders for panel presses.

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Issue: Could Schuler terminate the contract if Wickman failed to make one single visit out of the 1400? Yes - If the term was a condition in the technical

legal sense (an essential term going to the root of the contract which the parties contemplated that any breach would give a right to terminate).

No - If the term was a condition only in the popular, layman’s sense (a term or provision of the contract).

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Held: Not a condition

Schuler had no right to

terminate

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If it is clear that the parties intended a condition in a technical legal sense – then it is a condition. Here it was not clear. “Condition” may have different meanings. “Condition” may mean just the terms or provisions of the contract.

Just because it is called a condition isn’t conclusive – If unclear the court will decide what was the intention of the parties having regard to the terms and subject matter of the contract:

“what did the parties mean to say?”

Relevant consideration: where a particular construction leads to a very unreasonable result (where the nature of the term is such that breach is likely), it is unlikely that strict compliance is required.

32Intention of the parties

Absent express classification by the parties or statute, the parties’ intention is decisive (determined by construction of the contract).

Section 16(2) of the Goods Act 1958 (Vic) confirms this principle for the sale of goods – whether a term is a condition or warranty “depends … on the construction of the contract”.

33Intention of the parties

Ask: What was the objective intention of the parties (having regard to the terms of the contract and the surrounding circumstances)? Apply the Tramways’ essentiality test:

Tramways Advertising Pty Ltd v Luna Park (NSW) Ltd (1938) 61 CLR 286

Associated Newspapers Ltd v Bancks (1951) 83 CLR 322

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Tramways Advertising v Luna Park

Luna ParkTramways Advertisin

gContract to advertise Luna Park by 53 boards on trams.

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Contract said:“We guarantee that these boards will be on the tracks at least eight hours per day throughout your season”

Tramways’ position - sufficient if boards on tracks for an average of at least 8 hours per day.

Luna Park’s position - each and every board must be displayed for at least eight hours on each and every day (not only for an average period of 8 hours).

High Court agreed!

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Tramways’ essentiality test

Test for whether a term is a condition:“The test of essentiality is whether it appears from the general nature of the contract, or from some particular term or terms, that the promise is of such importance to the promisee that he would not have entered into the contract unless he had been assured of a strict or a substantial performance of the promise, as the case may be, and this ought to have been apparent to the promisor.”

Jordan CJ in NSW SC, approved by High Court in Luna Park v Tramways, and affirmed by High Court in Associated Newspapers v Bancks

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High Court held: Clause was a condition – relevant factors:

Importance/essentiality derived from the words “we guarantee”. Payment not to commence until all 53 boards were all displayed. Preliminary correspondence demonstrated importance of

continuity of display. Therefore, Luna Park could terminate the contract for

breach of condition. There was also a repudiation of the contract by Tramways -

not only did they not have the trams on the tracks for 8 hours every day but they insisted that they would continue to not do so – they clearly indicated an intention not to perform.

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Associated Newspapers v Bancks

10 year contract for one page cartoon for Sunday newspaper - to be published on front page of comic section.

Jimmy Bancks

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On several occasions, AN

published cartoons on other pages.

Bancks terminated the

contract.

Was Bancks’ termination valid?

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High Court held: It was a condition - Bancks could terminate contract.

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Relevant factors: The obligation of Bancks was to deliver a one page

cartoon every week and this was a condition. The newspaper had to publish on the front page. It would be strange if Bancks’ obligation was a condition but the newspaper’s corresponding obligation was only a warranty.

Continuity, integrity of the cartoon (published as a whole) and most conspicuous page = important to Bancks.

Affirmed legal test stated by Jordan CJ in Tramways v Luna Park.

Newspaper’s conduct was also repudiation.

42Intermediate terms

Originally, only two types of term were known: Condition: any breach allows termination Warranty: no breach allows termination

This regime was inflexible:

The seriousness of the breach was irrelevant.

43Intermediate terms

The courts now recognise intermediate terms;termination is allowed if the breach is serious:

Hongkong Fir Shipping Co Ltd v Kawasaki (intermediate terms part of UK law)

Ankar Pty Ltd v National Westminster Finance (obiter approval of intermediate terms in Australia)

Koompahtoo Local Aboriginal Land Council v Sanpine (intermediate terms part of Australian law)

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Breach of an intermediate term

The right to terminate for beach of an intermediate term depends on the gravity of the breach and its consequences.

Can terminate for breach that is “serious” / goes to the “root of the contract” / “-9ut”.

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Hongkong Fir Shipping Co

Hong Kong Fir

(owned ship)

Kawasaki(chartered

ship)

Contract for 24 month charter of ship.

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Seaworthiness clause:

”She being in every way fitted for

ordinary cargo service”

Breach:Ship out of action for about 7 months.

• Kawasaki terminated contract. Was termination valid?

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Recognised 3 categories of terms: Condition - simple contractual undertaking– every breach

must deprive the innocent party of substantially the whole benefit (as intended by parties) of the contract.

Warranty – simple contractual undertaking– no breach can deprive the party not in default of substantially the whole benefit (as intended by the parties) of the contract.

Intermediate Term – complex contractual undertaking – breach may or may not deprive the innocent party of substantially the whole benefit (as intended by parties) of the contract - there may be many different types of breach ranging from the trivial to the important.

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The seaworthiness clause was an intermediate term – breach may or may not deprive the innocent party of substantially the whole benefit of the contract - can be breached by trivial defects (which can be easily remedied by attention or repairs, and compensated by damages) to more serious defects.

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Test for when breach of an intermediate term will justify termination:

“Does the occurrence of the event deprive the party who has further undertakings still to perform of substantially the whole benefit which it was the intention of the parties as expressed in the contract that he should obtain as the consideration for performing those undertakings.”

Lord Diplock

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Held:

Delay (7 months out of 24) not likely to deprive of substantially the whole benefit of the contract (the ship was still available for about 17 months).

No right to terminate.

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Ankar v National Westminster Finance

Ankar

manufacturing company

National Westminster

Finance (formerly Lombard)

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Lombard’s obligations under Security Deposit Agreement:

Clause 8 to notify Ankar if the

manufacturing company proposes to assign its interest in the leased machinery

Clause 9 to notify Ankar if the

manufacturing company is in default

under the lease agreement

Lombard’s breaches:

agreed to the manufacturing

company assigning the machinery

without informing Ankar

failed to advise Ankar that the manufacturing company was in

default

Ankar sought a court declaration that it could terminate the Security

Deposit Agreement and be released from its guarantee (and get the $125,000 back).

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Ankar v National Westminster Finance • Damages not a way of enforcing the promises,

too difficult to prove.• Obligation to give notice so that Ankar could

take action to safeguard its position and its interests.

• Ankar would be liable but the machinery on which the liability was owed was no longer owned by the lessee.

• it is not just an ordinary contract, but is a suretyship contract – with special relationship between surety and creditor.

Factors favouring interpretation as

conditions

• Not expressed to be conditions.• No time is fixed for giving notice. • Language not clear that intended to be

conditions.

Factors favouring interpretation as

not conditions

• Was a condition – Ankar could terminate.• Obiter approval of intermediate terms. Held

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Courts won’t too readily construe a clause as a condition - preference for construction that encourages performance (not avoidance) of a contract.

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Koompahtoo v Sanpine

Koompahtoo Local

Aboriginal

Land Council

Sanpine Pty Ltd

Joint Venture Agreement

contributed land

contributed management and financial expertise

Sanpine breached obligations re: keeping proper books of account and financial recordsCould Koompahtoo’s administrator terminate?

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The relevant clauses were intermediate terms - High Court recognised intermediate terms as part of Australian law.

Intermediate terms offer practical utility:

give greater flexibility to the law of contract.

promote the interests of justice by limiting the right to terminate to serious and substantial breaches (and not mere trivial or technical breaches).

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Koompahtoo’s termination was valid. Sanpine’s breaches were sufficiently serious:

they “went to the root of the contract” and “deprived Koompahtoo of a substantial part of the benefit for which it contracted”.

having regard to “the nature of the contract and the relationship it creates; the nature of the term; the kind and degree of breach; the consequences of the breach for the other party”, and “the adequacy of damages”.

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Kirby J in Koompahtoo

Kirby J sees no need to have a third category of intermediate terms, and his preferred approach is that is a right to terminate upon: breach of an essential term; breach of a non-essential term causing substantial

loss of benefit; or repudiation.

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Breach of a Warranty

No breach of a warranty gives a right to terminate (only entitled to damages).

Be cautious in characterising a term as a warranty. It is preferable to classify a term as an intermediate term (if it can be breached in more than one way with varying degrees of seriousness) as it gives courts more flexibility in dealing with the breach.

A term will only be a warranty only if no possible breach could give rise to an event which would deprive the aggrieved party of substantially the whole of the benefit of the contract (unless clearly expressed otherwise) (Lord Diplock in Hong Kong Fir).

Terms generally only warranties where classified as such under statute (eg. Sale of Goods Acts).

60Consequences of termination

Contract is “frozen” on termination:

Relieves both parties from further performance;

Does not affect rights already accrued (ie. those fallen due before termination), which are binding and enforceable.

Contrast: Rescission for vitiating factors invalidates/avoids the contract retrospectively.

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Wrongful termination = repudiation

Terminate with care, as wrongful termination is a repudiation of the contract and gives the other party the right to terminate the contract and obtain damages:

“…a party who without lawful justification purports to treat himself as discharged from the obligations of the contract for a supposed essential breach by the other party is himself guilty of repudiating the contract and thereby vests in the other party a right lawfully to put an end to the contract…” (Jordan CJ in Tramways CB p587).

May get a court declaration that a right to terminate is being properly exercised (eg. Ankar).

62Reading suggestion

A concise and easy-to-read overview of the grounds of termination is given byAdam Rollnik, “Termination for breach of contract” (2009) 23 Commercial Law Quarterly 3-10(available online via the Law Library website)

63What do you need to know?

What is a condition, intermediate term, and warranty.

Be able to classify a term in a given fact scenario, and persuasively justify your classification.

The consequences of classification – can the contract be terminated or are only damages available?

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Overview: Is there a right to terminate?

Step 1 – Identify the breach.Step 2 – Classify the term:

Is it a warranty? Where no breach is likely to deprive the innocent party of substantially the whole benefit of the contract.

Is it an intermediate term? Where the term can be breached in a variety of ways, from the trivial to the serious (preferred because gives greater flexibility).

Is it a condition? Where every breach is likely to deprive the innocent party of substantially the whole benefit of the contract.

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Overview: Is there a right to terminate?

Step 3 – Identify the consequences of the classification of the term: Breach of warranty - no right to terminate (damages only). Breach of intermediate term- look at gravity of breach and its consequences-

Does it deprive the innocent party of substantially the whole benefit of the contract? If yes = right to terminate. If no = no right to terminate (damages only).

Breach of condition - right to terminate for any breach. Consider also - Is there a repudiation? (see Week 2) Remember:

Damages will be available to compensate for any particular breach (but loss of bargain damages are available only where contract is terminated).

The right to terminate is a rare occurrence and courts encourage performance, rather than avoidance, of contracts.

Be careful when terminating, as wrongful termination may be a repudiation. If unsure, can get a court declaration that have the right to terminate.

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Hypothetical

You are a lawyer representing a supplier of free range organic chicken eggs. Your client has entered into a contract with a prestige bakery for the supply of 1000 fresh unbroken eggs per week over the course of a year. Advise her in the following scenarios:

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Scenario 1

The first 1000 eggs are delivered and it turns out 5 of them are broken. The bakery terminates the contract on the basis of this breach. The egg farmer created additional capacity to cater for this contract and now has more eggs than she can sell.

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Scenario 2

What if the egg farmer’s delivery driver had been a bit careless, and instead of 1 broken egg there were 999 broken eggs?

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Scenario 3

Would your answer change if the contract expressly states that it is a condition of the contract that the 1000 eggs arrive in unbroken condition?

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2009 Exam Q1(a)

Owen owns three boats moored off Port Melbourne. Their names are Albatross, Boar and Caesar. He runs a business of renting the boats out for cruises on Port Phillip Bay. His customers are individuals who hire a boat for private events, and businesses which offer cruises to paying customers. Advise Owen as to his rights and obligations under the following contract that he has entered into:In July 2009, Owen enters into a contract with Aqua Pty Ltd, which is represented by its managing director Mona. Owen agrees to let the Albatross to Aqua Pty Ltd from 1 October 2009 to 31 May 2010, and Aqua Pty Ltd agrees to pay $80,000. Clause 3 of the contract provides: “The Albatross must be in every way fitted for conducting commercial cruises on Port Phillip Bay”. The boat is delivered on 1 October, but there are no fire extinguishers on board. It is illegal to operate a vessel on Port Phillip Bay without fire extinguishers on board. It would cost $1,000 to equip the boat with a sufficient number of fire extinguishers. On 2 October, Mona discovers that she could hire a similar boat from a third party for $60,000. On 3 October, Mona writes to Owen: “The Albatross has no fire extinguishers. We regard the contract with you as at an end”. Owen demands that Aqua Pty Ltd go ahead with the contract.

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Acknowledgment and Copyright

Thank you to Sirko Harder, Rebecca Giblin and Mark Davison for the use of their slides.

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