Termination - By Agreement

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Parties may agree to terminate a contract. The rules specifying how a contract may be terminated by agreement are as follows:

  1. Under the original contract:
    • By an expiration of length clause.
    • By an express termination clause. This can be:
      • A right to terminate 'at will'.
      • A right to terminate after a specified period of time.
      • A right to terminate triggered by a certain event (a contingent condition).
    • By an implied termination clause. In such a case, a reasonable notice must be given.
      • Reasonableness varies according to the circumstances.[1]
    • By a procedure of termination previously specified in the contract. Strict compliance is no always required.[2]
  2. Under a subsequent agreement:
    • By an express termination in a subsequent agreement. The new agreement's consideration is the forfeiting of each other's rights under the original contract. If one party has no more rights left (they've have all been performed already), a deed or fresh consideration can be used.
    • By an inference from a subsequent agreement:[3]
      • If the subsequeent agreement is inconsistent to the original, the original is terminated and replaced.
      • If it is unlikely that the parties intended to abandon their rights under the original contract, or that the subsequent contract cannot stand alone as an independent agreement, the original agreement is not terminated and is simply modified. 
  3. By abandonment:
    • If both parties don't consider the contract as operating/don't think it should be performed further.[4]
    • If an 'inordinate' length of time has passed with neither party trying to perform or called the other to perform'.[5]
    • Abandonment less likely to be ruled if contract is partly performed.[6]

This topic is within Contracts.

Contents

Required Reading

Paterson, Robertson & Duke, Principles of Contract Law (Lawbook Co, 3rd ed, 2009), pp. 307-311 [19.05-19.40]

Introduction

[7] At the moment of termination, the contract comes to an end and the parties walk away as at that time (the damage lies as it falls). Parties to a contract may terminate agree to terminate a contract through:

  • An express clause in the original contract.
  • A subsequent agreement which terminates the original contract.
  • An implied agreement that the original contract is terminated.

Termination under the original contract

[8] Commercial contracts usually contain an express term providing for termination. This can be:

  • A clause specifying the length of the contract (after which the contract automatically expires).
  • A clause granting one or both parties the right to terminate the contract. This can be:
    • The right to terminate 'at will' - a broad discretionary right allowing termination at any time.
    • The right to terminate after a specified period of time.
    • The right to terminate triggered by a certain event (namely after a breach or non fulfillment of a contingent condition)

Procedure of termination

[9] Terms which deal with termination sometimes specify a procedure which must be followed before the agreement is terminated (for example, a notification by the terminating party to the other party). In the past, courts demanded strict adherence to the procedure.

However, this resulted in Parties losing their contractual rights due to minor technical issues. The court's ruling in Pan Foods Company Importers & Distributors Pty Ltd v Australian and New Zealand Banking Group Ltd[10] suggests that the requirements of the procedure should not be applied in a strict and technical manner.

Implied Right to terminate a contract of otherwise indefinite duration

[11] The courts have been ready to recognise an implied right to terminate in contracts which do not provide for termination.

  • The implied right is derived from the inference that the parties did not intend the contract to continue forever.
  • In the case of an implied right, reasonable notice of termination must be given.
    • Reasonable notice will vary according to the circumstances. Discussed in Crawford Fitting Co v Sydney Valve & Fitting Pty Ltd[12]

Termination by a subsequent agreement

Termination from an express subsequent agreements

[13] Parties can also terminate an agreement by making a subsequent agreement which releases them from the original one. This contract must comply with all the ordinary rules of contract formation, including consideration.

  • If both parties still have obligations to perform, each party's agreement to release the other from its obligation constitutes its consideration.

The problem arises where one party has fully performed its obligations (the Performing Party) whilst the other has not (the Non-performing Party). This means that the Non-performing Party can't provide consideration by providing a release (because the Performing Party has already performed - it has nothing to be released from). There are a few ways to circumvent this problem:

  • The use of a deed.
  • The Non-performing Party supplying 'fresh' consideration. This can come in the form of an accord and satisfaction.
    • "An accord and satisfaction is the purchase of a release from an obligation[14]."
    • The Non-performing Party pays a sum or makes a promise which serves as consideration for its release from its obligations under the original contract.

Notice that a subsequent agreement to terminate an original one does not have to be in writing.[15]

Termination inferred from subsequent agreement

[16] Sometimes parties make a subsequent agreement which does not specify what is to happen to the original agreement. Two possibilities arise:

  • The subsequent contract terminates and replaces the original.
  • The subsequent contract modifies the original.

The court determines this by examining the intentions of the parties as manifested by the terms of the subsequent agreement:

  • If the terms of the subsequent agreement are inconsistent to the ones of the original agreement, it is most likely intended to terminate and replace it.
  • If it seems unlikely that the parties intended to abandon their rights under the original contract, or that the subsequent contract is cannot stand alone as an independent agreement, the courts will not infer the termination of the original contract.

This issue of distinguishing between when a subsequent contract replaces or merely modifies an original contract was discussed in Concut Pty Ltd v Worell:[17]

  • Employee was employed originally through an oral contract, and then a written one too.
  • The employee was fired without notice, the employer claiming that a breach of the oral contract occurred and therefore he is allowed to terminate the contract without notice.
  • Court of Appeal decided the subsequent contract replaced the old one - therefore, no breach, and unlawful termination.
  • However, High Court ruled that it was obvious that the parties didn't intend to forfeit their rights under the oral contract. Therefore, it simply modified it and exists alongside it. Therefore, there is a breach.
  • The employer was entitled to terminate the contract by virtue of the breach.

Termination by abandonment

[18] The courts are also ready to infer termination if the conduct of the parties indicates they have abandoned the contract. It is viewed as if the parties have made a subsequent agreement to terminate. This may be inferred where :

  • Both parties indicate that they don't think the contract should be performed further.
    • DTR Nominees Pty Ltd v Mona Homes Pty Ltd[19]: Parties issued each other notices of termination, which did not satisfy the requirements set by their agreement. At that time their contract was still in effect.
    • However, by the time they commenced proceedings, both of the parties' conduct indicated that they don't consider the contract in effect.
    • The contract is deemed abandoned and thus terminated.
  • An 'inordinate' length of time has passed with neither party trying to perform or called the other to perform.[20]
    • The courts are less likely to deem a contract abandoned if one party has partly performed the contract, even after a lengthy period of inactivity. [21]

References

Casebook refers to Paterson, Robertson & Duke, Contract: Cases and Materials (Lawbook Co, 11th ed, 2009).

Textbook refers to Paterson, Robertson & Duke, Principles of Contract Law (Lawbook Co, 3rd ed, 2009).

ACL refers to the Australian Consumer Law.

  1. Crawford Fitting Co v Sydney Valve & Fitting Pty Ltd (1988) 14 NSWLR 438
  2. Pan Foods Company Importers & Distributors Pty Ltd v Australian and New Zealand Banking Group Ltd (2000) 170 ALR 579
  3. Concut Pty Ltd v Worell (2000) 176 ALR 693
  4. DTR Nominees Pty Ltd v Mona Homes Pty Ltd(1978) 138 CLR 423M
  5. Fitzgerald v Masters (1956) 95 CLR 420, 432
  6. Fitzgerald v Masters (1956) 95 CLR 420, 420
  7. Textbook, p. 307 [19.05]
  8. Textbook, p. 307-8 [19.10]
  9. Textbook, p. 307-8 [19.10]
  10. (2000) 170 ALR 579
  11. Textbook, pp. 308-9 [19.15]
  12. (1988) 14 NSWLR 438
  13. Textbook, pp. 309-10 [19.20-19.25]
  14. British Russian Gazette & Trade Outlook Ltd v Associated Newspapers Ltd [1933] 2 KB 616, 643
  15. Textbook, pp. 310 [19.30]
  16. Textbook, pp. 310-1 [19.35]
  17. (2000) 176 ALR 693
  18. Textbook, pp. 311-2 [19.40]
  19. (1978) 138 CLR 423M
  20. Fitzgerald v Masters, (1956) 95 CLR 420, 432
  21. Fitzgerald v Masters, 1956) 95 CLR 420, 420
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