When another party in your contract does not follow their obligations, you may be able to terminate the contract. However, the termination process can be quite complicated, and, if not properly followed, can cause you legal repercussions. This article will discuss the key issues to consider if you want to terminate a contract due to a breach.
What Is a Breach of a Contract?
Contracts are legally binding agreements that set out two or more parties' respective rights and obligations. If one party fails to fulfil its promises in line with what the agreement dictates or defaults on the agreement entirely, then the contract is breached.
Does a Breach Mean I Can Terminate the Contract?
A breach does not always mean that you can terminate the contract. You will need to consider the:
- nature of the term that was breached; and
- seriousness of the breach.
It is also important to note any procedure-related requirements in the contract itself. You may be able to terminate if:
- there is a breach of an essential term;
- there is a sufficiently serious breach of a non-essential term; or
- either party repudiates the contract.
What Is an 'Essential' Term?
Each contractual term can be divided into three types. These are:
- Essential terms ("conditions"): An essential term must be fundamentally important to the contract. In other words, you would not have entered into the contract in the first place if the other party had not promised to perform that term.
- Minor or non-essential terms ("warranties"): A warranty is a term that is less important than a condition. Its inclusion (or exclusion) would not be considered a dealbreaker during the negotiating process.
- Intermediate terms: These are terms that sit in between essential and non-essential.
The category of term is important in the context of breach of contract. This is because you only have a right to breach the contract if you can establish the other party has breached an essential term. This is subject to any procedural requirements in the contract. You will also be entitled to sue for damages (ie, compensation). In contrast, a breach of a minor or intermediate term will not usually provide a basis for termination. Rather, you will be entitled to damages only. The exception to this is if the other party has committed a serious breach of an intermediate term.
What Is a 'Serious' Breach?
Whether there has been a serious (or 'material') breach is a factual question. A material breach will generally be a substantial failure to meet a promise. Multiple minor breaches could potentially add up to a material breach. If a breach of an intermediate term is sufficiently serious, you may be able to terminate (subject to any procedural requirements in the contract).
When Is a Contract 'Repudiated'?
Repudiation is a separate category that goes beyond a breach of a contract. If the other party, through actions or statements, expresses they are unwilling or unable to continue performing their contractual obligations, they have repudiated the contract. If this is the case, you may elect to terminate (subject to any procedural requirements in the contract).
Procedural Requirements
Even if you have grounds to terminate, you will still need to comply with any contractual termination clause. This will usually set out certain procedural requirements for a party seeking to terminate, including:
- written notice;
- a notice period before termination; and
- providing the other party an opportunity to rectify the breach.
The contract may also set out a dispute resolution procedure that you should engage in prior to terminating.
What if I Am Not Sure Whether I Can Terminate?
It can be unclear whether a term is essential, or whether a breach is sufficiently serious to allow for termination. These questions can get even more difficult if the underlying factual scenario is disputed. The courts exist to resolve this kind of question, but going to court can be very drawn out and expensive.
If you are considering terminating for breach, it is important that you seek legal advice before doing so. If you terminate a contract without a proper basis (or without following the prescribed termination procedure), the other party may argue that your purported termination is, in itself, a repudiation of the contract. This can open you up to a claim for damages.
The reason many contracts contain a termination procedure is to avoid a situation whereby there is a dispute over whether or not the termination was correct.The procedure will allow you to air your grievances, and give the other party an opportunity to respond, before resorting to termination.
Key Takeaways
Terminating a contract for breach can be very complex. Not all breaches give you the right to terminate, and there are many factors that will need to be considered. Importantly, there are three types of contractual terms, which are:
- essential terms ("conditions");
- non-essential terms ("warranties"); and
- intermediate terms.
You can only terminate for breach if the term breached is an essential term or a very serious breach of an intermediate term. Otherwise, you will be able to receive damages. If you do not terminate on the right grounds, you may be repudiating the contract, which could cause you to face legal action.
FAQs
What is a breach of contract?
Contracts are legally binding agreements that set out two or more parties' respective rights and obligations. If one of the parties fails to fulfil its promises in line with the provisions of the agreement, then a "breach" of that contract occurs.
Does a breach mean I can terminate the contract?
The right to terminate a contract will only arise if there is a breach of an essential term, a sufficiently serious breach of a non-essential term or if either party repudiates the contract.
When is a contract 'repudiated'?
If a party shows through actions or statements that they are no longer willing or able to perform their contractual obligations, then they will 'repudiate' that contract.
