The law has long recognised that a breach of certain types of obligations in a contract will entitle an innocent party to terminate that contract (and sue for damages).
But don’t rush in. Terminate with caution. No matter how bad a situation is, a wrongful termination can seriously backfire, and may entitle the other party to terminate the contract and sue you for damages.
When is it safest to terminate?
If you have the benefit of an express contractual right to terminate the contract in certain circumstances, you are generally in a good position. Make sure you have the evidence of breach and follow all the procedures set out in your contract.
What if I have no express right to terminate?
In the absence of an express right, a contract may be terminated if the term being breached is an ‘essential term’ of the contract – that it, a clause of such importance that you would not have entered into the contract unless you had been assured of strict or substantial performance of that clause. This will depend on the intention of the parties at the time of making the deal.
What about lots of little breaches?
If the breach is not of an essential term, there may still be a right to terminate, but you should carefully consider the implications of terminating a contract on these bases.
In everyday business, we often see the repeated series of small, perhaps inconsequential breaches that build up until there is a “straw that breaks the camel’s back”. Terminating in these circumstances, is often fraught and will require a careful demonstration of the impact and nature of these breaches such that termination is justifiable. if you want to rely on this right, best to get some good advice.
How to do it better next time?
Ideally, the contract itself should allow the parties to agree on which of the terms of the contract would entitle each of the other party to terminate the contract if breached.
Although breach and termination are not pleasant topics for negotiation at the commencement of a relationship, having that hard conversation with a counterparty is always a lot easier than having to take a high risk to terminate an unfavourable situation, or having to live with the ongoing breach (albeit minor) from a counterparty with no option to escape the contract.
For further information, please contact Harwood Andrews’ expert lawyers:
T: 03 5225 5231
T: 03 5225 5215
T: 03 5226 8573
Principal - Harwood Andrews
Paul is a Principal at Harwood Andrews. He brings a commercial approach to the law from a broad set of experiences as a business owner, private legal advisor and in-house counsel, and having worked with management teams over many years. Paul is valued for distilling issues down to what is really important and being prepared to make a risk call based on judgement and experience.
Paul’s key areas of practice include:
- commercial contracts and advice;
- business and share capital structuring;
- sale and purchase of business;
- procurement and service arrangements;
- technology, intellectual property, data protection and start-ups;
- consumer law;
- corporate advisory, including , company secretarial and directors' duties, shareholder relations; and
- capital raising and financing requirements
Paul also manages Harwood Andrews’ corporate counsel advisory service, built on a decade of experience as a client and managing legal functions within one of Australia’s biggest corporations.
Paul believes that evolving how legal services are delivered can be a win-win for lawyers and their clients, particularly how on how technology impacts the legal profession, legal advice and the delivery of efficient legal services.
Paul’s professional commitments include:
- Member of the Law Institute of Victoria
- Member of the Law Institute of Victoria’s Technology and the Law Committee