Termination of contracts: things you need to know

In recent blog posts, we’ve covered liability for ‘damages’ (i.e. compensation) for a breach of contract. However, under the common law, there is another potential consequence of breaching a contract: termination of the contract.

Unlike damages (which can only be awarded by a court), termination is a ‘self-help’ remedy. The innocent party can choose to terminate the contract if the other party has committed a serious breach of the contract. The key word here is serious. Generally speaking, termination is only available for a breach of an essential term or a serious breach of any other terms. Here is an overview:

  • An ‘essential term’ of a contract is a term that goes to the heart of the contract. For example in a contract to sell a car, an obligation to supply a car is essential, while an obligation to supply a car of a particular quality is non-essential. So if the seller fails to supply the car, the purchaser can terminate the contract.
  • If the seller supplies a car with quality issues, the purchaser’s remedy is to seek compensation rather than to terminate the contract. But what if the quality issues are so severe that the car is unusable? This would be a serious breach of a non-essential term that would allow the other party to terminate the contract. A serious breach of a term is a breach that deprives the innocent party of the benefit of the contract (wholly or substantially).
  • Finally, the law permits a party in some circumstances to terminate a contract before the other party breaches it. This is when the other party signals (by words or conduct) that it is unwilling or unable to perform the contract (entirely or substantially). This is known as ‘repudiation’.

To summarise the common law on termination in a diagram:

Termination of contracts diagram

These days many contracts contain express termination provisions that override the common law on termination. We will talk about them in a future post but the above principles are still important in understanding what contract termination is all about.

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