Termination - By Breach

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A party may be entitled to terminate a contract upon a breach of certain terms. A party may terminate for a breach of:

  • A condition - all breaches of conditions, no matter how small, entitle the aggrieved party to terminate.[1]
    • A term is a condition if it is so important that a party would not have entered the contract without it being assured of strict performance.[2]
  • A serious breach of an intermediate term.[3].
    • A serious breach is defined as one which deprives the aggrieved party of basically the whole benefit which it was going to gain from the contract.[4]

A breach of such terms would confer a right to terminate upon the aggrieved party.

This article is a topic within the subject Contracts.

Contents

Required Reading

Paterson, Robertson & Duke, Contract: Cases and Materials (Lawbook Co, 11th ed, 2009), pp. 519-531 [21.05-21.55].

Introduction

[5] A breach of contract occurs when a party "fails to perform at the time or to the standard required by the contract[6]". By law, the Aggrieved party (the party who did not breach the contract) is entitled to recover damages for the losses caused by the breach. In certain circumstances, the Aggrieved party will also be entitled to terminate the contract.

Classification of terms

[7] Breach of certain terms will entitle an Aggrieved party to terminate a contract, whilst others will only entitle it to recover damages whilst the contract stays intact. Terms are usually classified into 3 categories:

  • Conditions are the most important terms, those without which, the parties would not have entered the contract. If a condition is breached or proved false, the Aggrieved party will be entitled to terminate as well as recover damages.
  • Warranties are less important terms. When a warranty is breached or proved false, the Aggrieved party not be able to terminate, but will be entitled to damages.
    • Terms are usually only classified as warranties if it is required by something like statute (i.e. Sale of Goods Acts). The courts have said before that a term is only classified as a warranty if there is no possible way that a breach of it would basically deprive the Aggrieved party from the main benefit of the contract.[8]
  • Intermediate terms are somewhere between. A breach of an intermediate term will only entitle the Aggrieved party to terminate if the gravity and consequences of the breach are serious.
    • The courts like classifying terms as intermediate because it gives them more flexibility.

Termination by breach of a condition

[9] A breach of a condition, regardless of gravity or consequence, will entitle the Aggrieved party to terminate the contract. The test which is used to determine which terms are to be classified as conditions was set in Tramways Advertising Pty Ltd v Luna Park (NSW) Ltd (note that the test is provided by Jordan CJ of the Supreme Court and not the High Court):

  • A term is considered a condition if it appears, as evident by the objective intentions of the party, that the party considers it so important that it would not have entered the contract without being assured of strict performance of it.

Besides the test for classifying a condition, Tramways Advertising Pty Ltd v Luna Park (NSW) Ltd makes other important general points on termination by breach:

  • A breach of a condition will entitle the Aggrieved party to terminate, no matter how slight.
  • A breach of a condition does not compel the Aggrieved party to terminate, it may choose to proceed with performance of the contract.
  • However, if the Aggrieved party becomes aware of the breach and chooses to ignore it and proceed, it will lose its entitlement to terminate upon that breach (read here for more detail).
  • If a party terminates the contract without justification (i.e., there was no breach of a condition), it will be treated as repudiating the contract. Thus, the other party will be entitled to terminate and seek damages.

The test for classifying terms set in Tramways was adopted by the High Court in Associated Newspapers v Bancks.[10]

Termination by breach of an intermediate term

[11] In Hongkong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd, the English court recognised the existence of intermediate terms. Australian courts have recognised it in later cases[12]. An Aggrieved party will be entitled to terminate a contract on the breach of an intermediate term if:

  • The breach is considered serious by the courts. Or
  • The breach deprives the Aggrieved party of basically the whole benefit which it was going to gain from the contract.[13]

In practice, the court usually classifies most terms as intermediate because it gives more flexibility, and because many terms do not justify the right to termination upon small breaches whilst they do upon serious breaches.

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. Associated Newspapers v Bancks (1951) 83 CLR 322
  2. Tramways Advertising Pty Ltd v Luna Park (NSW) Ltd (1938) 38 SR (NSW)
  3. Hongkong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1962] 2 QB 26
  4. Ankar Pty Ltd v National Westminster Finance (Aust) Ltd (1987) 162 CLR 549
  5. Casebook, p. 519 [21.05-21.10]
  6. Casebook, p. 519 [21.10]
  7. Casebook, pp. 519-20 [21.15]
  8. Hongkong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1962] 2 QB 27, 69-70
  9. Casebook, p. 520 [21.20]
  10. (1951) 83 CLR 322
  11. Casebook, p. 527 [21.40]
  12. Ankar Pty Ltd v National Westminster Finance (Australia) Ltd (1987) 162 CLR 549; Koompahtoo Local Aboriginal Land Council v Sanpine Pty Ltd (2007) 233 CLR 115
  13. Ankar Pty Ltd v National Westminster Finance (Australia) Ltd (1987) 162 CLR 549, 562
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