How to terminate a contract

Key Points:

To terminate a contract at common law, there must have been a breach of an essential term, a sufficiently serious breach of a non¬essential term or a repudiation of the contract by the other party.

This article provides a brief overview of the grounds for terminating a contract and sets out some key issues to bear in mind when making an election to terminate or affirm.

Grounds for termination

A right to terminate an agreement will arise where there is a contractual stipulation conferring the right or there is a breach or repudiation giving rise to the right under the common law.

A common law right to terminate will arise in three circumstances:

a breach of an essential term; a sufficiently serious breach of a non-essential term; or the repudiation or renunciation of the contract by the other party.1 Breach of an essential term

Essential terms are also described as "conditions" (as distinct from "warranties") or "fundamental" terms. The classi?cation of a term as "essential" is a question of construction. The test of "essentiality" depends on whether it was the common intention of the parties, expressed in the language of their contract, that the term be so "essential" that any breach of it would justify termination.2 A well accepted example of an essential term is where time is expressed to be of the essence.

Sufficiently serious breach of a non-essential term

Breaches of non-essential terms, if sufficiently serious, may also give rise to a right to terminate a contract at common law. In this context, non-essential terms are also referred to as "intermediate" or "innominate" terms and a sufficiently serious breach is described as a breach "going to the root of the contract" or a breach which "substantially deprives the innocent party of the benefit of the contract".3

The decision of the High Court in Koompahtoo affords a good example. In that case, the Koompahtoo local Aboriginal land council (land council) entered into a joint venture with a property developer, Sanpine Pty Ltd (Sanpine), for the development of a large area of land. The land council contributed the land and Sanpine was to manage the development. Sanpine caused liabilities of $2 million to be incurred, secured by mortgages over the land. The land was nevertheless not developed. The mortgagee went into possession of the land and the land council was placed into administration. The central issue was whether the administrator of the land council was entitled to terminate the joint venture agreement on the basis that Sanpine had breached its obligation to maintain books of account and financial records of the joint venture.

The majority of the High Court were satisfied that "this was an obligation of basic importance" so as to constitute an essential obligation justifying breach.4 The majority expressly said, however, that they did not rest their decision on this ground. Rather, they upheld the decision of the trial judge that even if it were accepted that all of the contractual obligations which Sanpine breached were not essential obligations justifying termination for every breach, the breaches "were in a number of respects gross, and their consequences were serious".5 The failure of Sanpine to explain the use...