When does a contract come to an end? This is an important question since once it has legally ended this terminates the rights and obligations of the parties to it. There are five main circumstances in which a contract might be terminated:
- By performance;
- By agreement or abandonment;
- By frustration; or
- By repudiation (see breach of contract); and
- At common law.
Once the obligations of the parties to a contract have been satisfactorily performed, the contract comes to an end. This makes sense. Normally there will be no problem in such a situation. However, one question that does arise is: how precise does the performance have to be? The answer depends upon whether the term alleged not to have been performed is one implied by statute, in particular the Sale of Goods Act 1923 (NSW). If it is, it must be performed precisely, otherwise the contract has not been completed. However slight the failure to perform one of these implied terms is, it will still be regarded as a breach of contract entitling the innocent party to a remedy in terms of the legislation.
In all other cases, there is a de minimis rule. In other words, where the deviation from the agreed terms is minute, it may be arguable that the contract has been performed, albeit that there is a tiny discrepancy between the stipulated and the actual performances. It will be very difficult to argue that such a situation exists and in most cases, a slight deviation will represent non-performance.
Finally, the obligation of payment is strict so that where a sum of money is fixed in the contract, that sum must be paid in full in order to discharge the obligation of payment.
Agreement or Abandonment
Parties to a contract can agree to abandon the original contract and simply walk away from their obligations. Since a contract is formed by agreement, it can be terminated by agreement. However, the agreement to terminate in this way is itself a contract and should be treated as such. If not, one party may later claim that an agreement to abandon was not reached and may insist on performance of the original agreement. For such an agreement to be enforceable it must be made by way of deed or supported by consideration if a new contract is sought.
For abandonment to occur, one of the parties has to indicate that it does not wish to proceed with the contract and the other party consents.
A contract will terminate by reason of frustration where an unforeseen or unforeseeable event occurs after the contract is agreed that makes performance of it fall into one of the following descriptions:
- Impossible to complete the contract;
- Illegal to complete the contract;
- Subject matter unavailable to fulfil the contract;
- Impractical; or
- radically different from that originally contemplated by the parties.
General rules that apply to any argument of frustration
There are five possibilities where the event was:
- reasonably foreseeable but was not actually foreseen by the parties nor was it provided for in the contract – No frustration;
- reasonably foreseeable and was actually provided for by the parties in the contract – No frustration;
- actually foreseen by the parties whether or not it was provided for in the contract – No frustration;
- not actually foreseen, was not reasonably foreseeable and was not provided for by the parties in the contract – frustration;
- the fault of one or both of the parties – no frustration. The event must be beyond the control of the parties.
Effects of frustration
Under the common law a frustrated contract immediately came to an end. Any obligations that were to be performed before the date of frustration still required to be performed but future obligations simply ended. The loss would lie where it fell. This would lead to severe injustice where one of the parties had carried out most of his obligations under the contract, at great expense and inconvenience, and the other had done nothing.
Sometimes the law on restitution will allow for the parties to be compensated for any loss to them which occasioned a gain to the other party but where this does not apply, any work done prior to the frustrating event will not be compensated for.
The way in which to avoid this possible scenario is to provide for an advance performance on the part of the other party, usually a deposit or advance payment of part of the contract price. However, this can also lead to problems. The frustration of a contract is not an event which gives a right to damages.
In NSW the Frustrated Contracts Act 1978 allows the courts to adjust the effects of frustration according to where the real loss lies. The court may order damages or an adjustment for part performance of that contract.
It is highly recommended that parties include within their contract additional provisions for frustration in order to provide clear and concise direction, obligations and rights to the parties upon such an event.
A common law right to terminate a contract normally co-exists with the contractual right to terminate. However, there must be a substantial and material breach of an essential term, a serious breach of a non-essential term or a repudiation of the contract by the other party. It is not always necessary to follow the contractual mechanism for termination, including the issue of a default notice to remedy the breach, in order to validly terminate.
Matters to consider prior to termination
An innocent party is entitled to:
- affirm the contract seeking damages for the particular breach. If the breaching party fails to perform after the affirmation, the innocent party may approach the court to enforce the contract by seeking specific performance or injunctive relief. If an innocent party affirms a contract, they cannot subsequently terminate in respect of the same breach;
- terminate the contract and seek all damages available to it; or
- neither affirm nor terminate the contract by issuing a breach notice giving the breaching party reasonable time to remedy the breach, failing which the innocent party reserves it’s right to terminate.
Generally, an innocent party is not allowed to partially terminate a contract unless specific provisions have been provided for within that contract.
The contents of this article is intended to provide a general guide to the subject matter and does not constitute legal advice. Ferrer Lawyers always recommend that you immediately obtain legal advice if you are considering termination of a contract and intend on issuing a termination notice or you are a recipient of a termination notice.