Terminating Contracts Generally

It is not uncommon for contractual relationships to break down and result in differing forms of termination. Generally, contracts will either terminate amicably between the parties or through dispute via formalised court or arbitration proceedings.

Amicable Termination

There are various circumstances, prescribed under common law, where a contract may be terminated. In most cases, contracts are terminated amicably and by no direct implication of either parties’ actions. Scenarios where this manner of termination is found includes, but not limited to, the following:

1. Termination by performance

This occurs where the obligations under a contract have been performed by both parties for example under a contract for building works, when the client has paid and the works have been completed. As such the contract has been ‘performed’ and, absent any perpetual or renewal clauses, it is therefore terminated. Unsurprisingly, termination by non-performance can occur where parties do not act to fulfil their obligations or liabilities under a contract. The courts may infer abandonment of a contract where the conduct of both parties indicate so.

2. Termination by agreement

A contract can be subject to termination if both parties come together in mutual agreement to end the arrangement before completion of the terms. Furthermore, under common law, the courts have decided an inference that can be made by a subsequent agreement between parties is the existence of a reasonable and fair assumption that the initial contract was no longer active. Thus, if a contract is created with terms that are inconsistent with a previous one, common law indicates that the most recent agreement will be taken as enforceable.

3. Termination by frustration

This manner of termination occurs where, due to circumstances completely beyond the parties’ control, the contract can no longer continue. For example, if legislation passes subsequently rendering the agreement illegal or if a pivotal member to the arrangement passes away. To extend the common law, many contracts include ‘Force Majeure’ clauses meaning ‘superior force’ in French. A Force Majeure event is to be defined in the clause but often encapsulates terms to the effect of:

1. the event was unforeseeable;
2. the event would have occurred with or without human intervention; and
3. the event was beyond the control of the parties.

Disputes

Although most contracts are terminated in an amicable manner, there are circumstances where a dispute arises between parties and consequently, specific terms or occasionally, the whole contract is terminated. There are various circumstances where disputes can give rise to a termination claim. The most common are outlined below:

1. Non-Fulfilment of a Contingent Term

A contingent term is a term outlined in a contract that’s operation is dependent on actions or processes occurring beforehand. Where a party, who under the contract was obliged to complete an action under which a term was contingent upon, does not meet this obligation, the term may be terminated. If the contingent term is in relation to the entire contract, however, then the entire contract is likely to be terminated. An example of contingent terms are ‘subject to finance’ clauses.

2. Termination for Breach

Only particular circumstances can give rise to the termination of a contract owing to a breach of a term. A generalised, yet consistent way to view this, is that if a term is a condition or ‘essential’, then common law will give rise to a termination of the contract for its breach. If a term is an intermediate term, then the right to terminate must be evaluated, with consideration given to the gravity and consequences of the breach. Lastly, if a term is a warranty, a breach will not in and of itself give rise to a termination of the contract.

3. Termination for Repudiation

Repudiation will occur where one of the parties manifests an unwillingness or inability to execute their contractual obligations. If one party reveals an intention indicating an aversion to continually be bound to the terms of the contract, the courts may give rise to termination. The same outcome can occur if a party indicates an intent to fulfill contractual responsibilities only in a manner substantially inconsistent with their obligations.

4. Termination for Delay

Where a contract expressly stipulates that ‘time is of essence’ then a party that fails to execute their contractual obligations in a timely manner will face termination of the contract. Additionally, where ‘time is of the essence’ is not expressly specified but a time frame is stipulated by the agreeing parties, then the courts may, in specific circumstances, give rise to termination. Lastly, where no timeframe is stipulated, there will still be an implied term for performance to occur within a ‘reasonable time’. Thus, the courts will provide rulings on a circumstantial basis when considering termination for delay in contractual disputes.

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Please note that this article does not constitute legal advice and Straits Lawyers will not be legally responsible for any actions you take based on this article.