Right of Termination for Breach of Contract

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Date Created: 1 Feb 2020
Last Update: 29 Sep 2020

A contract is an agreement between two or more parties to create legal obligations for them to perform specific acts. Each party is legally bound to perform the specified duties such as rendering a payment or delivering goods, generally for mutual benefits. Sadly not all contracts go according to plan and breach of contract by one or more parties is not uncommon.

 

Do I have the right of termination for breach of contract by the other party?

 

The short answer is – not all breach of contract gives the innocent party the right to terminate. One will need to look at whether the underlying term relates to a breach of warranty, condition or intermediate term.

 

A breach of a condition will give rise to the right of termination of contract, whereas a breach of a warranty does not. A breach of an innominate / intermediate term may give rise to a right of termination of contract only if it is a fundamental term that goes to the heart of the contract.

 

 

Warranties, Conditions and Intermediate Terms

 

Contracts have differentiated between terms of a contract which the courts have described as "conditions" and those which the courts have described as "warranties".

 

The courts will generally look at the express terms of a contract in deciding whether a term is a warranty or a condition. For example, if the term is found in the warranties section of the contract.

 

However, such determination is not always straightforward and there are numerous exceptions. These are known as "innominate terms" or “intermediate terms”. The best way for the parties who intend a breach of a particular term to give rise to a right to terminate is to make it absolutely clear in the contract that the term is a condition.

 

What is a Condition?

 

A condition is a major term that is central to the agreement. It goes to the root of the contract. If one party to a contract is in breach of a term which is a condition, this entitles the innocent party to choose not to perform his obligations under the contract and claim damages for loss as a result of the breach.

 

Note that "conditions" in this sense is different from a condition which has to be satisfied before a contract exists or a particular obligation becomes enforceable.

 

What is a Warranty?

 

A warranty is a minor term that is not essential for the existence of the contract. If a party to a contract is in breach of a term which is a warranty, the innocent party can only claim damages for breach of warranty, but cannot treat himself as discharged from the contract.

 

Note that the term "warranty" is also different from the way it is used to describe a representation in the contract or a pre-contractual representation (also see below), for example, that the seller is the legal and beneficial owner of the goods to be sold.

 

What is an Innominate / Intermediate Term?

 

An innominate term is an intermediate term which is neither major or minor enough to be defined as a "condition" or a "warranty". Breach of an intermediate term may, depending on the nature and consequences of the breach, entitle the innocent party to treat himself as discharged from the contract if it is of "fundamental" nature. The test is whether the term goes to the heart of the contract, where the substance of the agreement is destroyed if the term is not met.

 

The courts would look at the intention of the parties and the surrounding circumstances to ascertain whether a breach of the term would give rise to a right of termination.

 

 

Termination of Contract for Repudiatory Breach

 

What is a Repudiatory Breach?

 

A breach that gives rise to a “right to terminate” the contract by the innocent party is known as a “repudiatory breach”. However, just because there is a right to termination of a contract does not necessarily mean that the innocent party will have to exercise it.

 

What is the meaning of Repudiation?

 

This exercise of the right of termination of contract known as “repudiation”, meaning that the contract is "discharged". The contract continues to exist but the unperformed obligations owed by the parties fall away. The obligations of the party in breach are to pay damages for the breach instead of to perform the contract.

 

Affirmation of Breach of Contract

 

Instead of terminating a contract resulting from a repudiatory breach, the innocent party can alternately proceed with the contract by “affirming” the contract expressly or impliedly. Once a contract has been affirmed and this has been communicated to the other party, the innocent party loses its “right to terminate” but can still claim damages for any loss suffered from the breach of contract.

 

Waiver of Repuditoary Breach

 

Another way for the innocent party to continue the contract is to “waive” the repudiatory breach. A waiver is given where one party voluntarily agrees to a request not to insist on the other party performing its obligations. 

 

Waivers can be given orally or in writing and can be given for repudiatory breaches of contract. Where a party promises or represents to the other party that it will not enforce its rights under the contract and the other party relied on this, the courts will stop the party from reasserting his rights.

 

Once the breach is waived by the innocent party, it would lose its entitlement to terminate or claim damages resulting from the repudiatory breach.

 

Reservation of Right to Terminate a Contract

 

As such, it is important for the innocent party not to do anything after a repudiatory breach that could be implied as affirming the contract or waiving the breach so as not to lose the right to termination. It is usual for the contract to include the following boilerplate clauses to avoid any inadvertent waiver:

 

This Agreement may be amended or modified, and any of the terms, covenants, representations, warranties or conditions hereof may be waived only by a written instrument executed by the parties hereto or, in the case of a waiver, by the party waiving compliance.

 

“Any waiver by either party of a breach of any provision of this Agreement shall not be considered as a waiver of any subsequent breach of the same or any other provision.”

 

“The rights to terminate this Agreement given by this Condition shall not prejudice any other right or remedy of either party in respect of the breach concerned (if any) or any other breach.”

 

For other common reservation clauses, please refer to:

https://docpro.com/doc303/general-boilerplate-document-standard-agreement

 

Conditional Agreement 

 

Another way to stipulate the right of termination of a contract is through a conditional agreement. The parties may agree on a conditional agreement in advance, which would allow the other party to withdraw or terminate the contract if the condition is not fulfilled.

 

An agreement is conditional if an obligation depends on an event that is not certain to happen. The law is generally unclear as to whether, before the condition is satisfied, there is any right to withdraw from the contract, a duty not to prevent the condition being satisfied or a duty to use reasonable diligence to bring about the event in question.

 

Where the condition is for the benefit of one party, normally the party can waive it. It is also possible for parties to agree that there will be no binding contract between them unless a condition is satisfied.

 

Anticipatory Breach

 

Even in the absence of an actual repudiatory breach, it is still possible for a party to terminate in anticipation of a breach of a condition or a contractual term that goes to the heart of the contract by the other party. 

 

What is an Anticipatory Breach?

 

If a party expressly refused to perform a contract or implied by the party’s conduct that would lead a reasonable man to conclude that the party has no intention of fulfilling its obligations relating to the contract, such declaration or inference of non-performance of obligations is known as “anticipatory breach”.

 

The renunciation of the contract would give the innocent party a right to terminate the contract. The same test would apply as to whether the anticipatory breach relates to a condition or a warranty. Once the innocent party is aware of such a repudiatory breach, it should indicate whether it would like to terminate or affirm the contract as soon as practicable.

 

Although there is no set timeframe for the innocent party to make the decision, it is important for the innocent party not to do anything to lose the termination right – for example, taking too long to respond, or inadvertently affirm the contract or waive the anticipatory breach by conduct.

 

 

Pre-Contract Representations

 

A party may also seek to terminate a contract by arguing that it has relied on a false statement made by the other party before the contract is entered into (a “representation”). The statement can be made fraudulently, negligently or innocently to cause the party to enter into the contract in reliance on the statement.

 

The consequential effect on the contract and remedy would depend on whether the statement has become a term of the contract. A representation that becomes a term of the contract and can be similarly classified as a "condition", a "warranty" or an "intermediate term".

 

What is a collateral contract?

 

In some cases, the courts will be prepared to treat a statement intended to have contractual effect as a separate contract or warranty, collateral to another transaction. The courts usually find that there is a collateral contract if one party refuses to enter a contract unless the other party gives him assurance on a particular point. Consideration for the collateral contract is normally provided by entering into the main contract but a collateral contract may be actionable even if the main contract is unenforceable.

 

If the representation did induce the party to enter into the contract but has not become a term of the contract, the innocent party can still seek the common law remedy of “rescission” provided the representation was made fraudulently or relate to a fact.

 

What is Recission?

 

Rescission means to unwind the contract and bring the parties back to the original position as if the contract has never existed in the first place. The remedy is different from terminating an existing contract and seeking damages for “loss of bargain” resulting from a repudiatory breach. The latter may entitle the innocent party to claim for the loss of opportunity from the breach of the contract whereas rescission merely restores the parties back to their pre-contractual positions.

 

The innocent party can exercise its right to rescind the contract and reverse any performance of rights and obligations. Any unperformed rights and obligations fall away and the original positions of the parties before entering into the contract are restored. Again the innocent party will have to take care not to lose the “right to rescind” by making the election (i) in a clear and unambiguous statement; (ii) without undue delay, and (iii) not have affirmed the contract by conduct.

 

Entire Agreement and Non-Reliance Clauses

 

To prevent any innocent or unintentional pre-contractual statement from being inadvertently becoming a pre-contractual representation, the parties would usually include an “Entire Agreementclause and / or a “Non-reliance” clause in the contract. 

 

An Entire Agreement clause usually include terms to the effect of: “This Agreement sets out the entire agreement and understanding between the parties with respect to the subject matter of it” - to prevent the parties from adducing extrinsic evidence to affect the document's content.

 

A Non-reliance clause is more common for financial contracts. The parties acknowledge that they have made their own independent decisions to enter into the contract and have not relied on representations made outside of the contract. However, this is subject to various exceptions, including to show the contract is not valid or binding. 

 

 

Exemption Clause to Avoid Termination

 

Another common question is the converse of our initial question – “Does my counterparty have the right to terminate as a result of my breach of contract?” Service providers often rely on exemptions clauses in the contract to avoid this scenario.

 

What is an Exemption Clause?

 

An exemption clause is a clause by which one party seeks to exclude or restrict liability for breach of the contract or a tort connected with the contract. Generally, it must be clearly expressed and unambiguous or it may be ineffective. Doubts and ambiguities will be resolved against the party seeking to rely on the clause.

 

Whether an exclusion clause protects a party, even if there is a breach of a fundamental term, is a question of construction of the contract. The extent to which one party can exclude or restrict liability is affected by various local statutory provisions. Local legislations may control contract terms which restrict or exclude liability for negligence, breach of certain terms implied by statute or common law in contracts of sale of goods, hire purchase, and other contracts for the supply of goods.

 

For more example of exemption clauses, please refer to:

https://docpro.com/doc1780/general-boilerplate-clause-term-limitation-of-liability-exclusion-clause

 

 

Force Majeure Termination

 

Sometimes a breach of contract is involuntary and beyond the control of the parties to the agreement. For example, a party may be unable to perform a contract due to a national emergency not arising from the fault of the party. Parties would try to cover breach of contract beyond the parties’ control through a force majeure clause. Force majeure is not a term of art in Common law and is wider than Acts of God.

 

What is Force Majeure?

 

A force majeure clause is a provision that allows one or more parties not to perform the contract in whole or part or to delay or suspend performance if a specified event beyond his control occurs. Examples of force majeure events include accidents, fires, explosion, failure of equipment or machinery, delays in transportations, war, civil commotions, riots, sabotage, epidemic, change in applicable legislation and regulations, interruptions by government.

 

Technically, failure by a party to perform its contractual obligations under a force majeure clause would not be a breach of contract. However, most force majeure clauses would allow for termination of the contract should the force majeure events persist for a long period of time.

 

For more examples of Force Majeure clauses:

https://docpro.com/doc1647/general-boilerplate-clause-term-force-majeure

 

Time is of the Essence Termination

 

Can a Contract be Terminated if it is not Performed in Time?

 

A contract can be terminated if not completed in time only if it has been included as a condition to the contract. This is done through a "time is of the essence" clause to expressly stipulate the intention of the parties. There is a general presumption by the court that minor delay did not cause material harm and would not give rise to a right of termination. "Time is of the essence" is common in property and financial transactions, where the transactions are terminated with payments forfeited if certain deadlines are not met.  

 

What does Time is of the Essence mean?

 

"Time is of the essence" is a contractual clause to indicate the contract must be completed at a particular time. By specifying time as being "of the essence", the need for timely completion will be regarded as an essential condition to the contract.

 

In general, a term in a contract as to time will not be treated as being "of the essence" unless:

  • this is either expressly agreed in the contract; or
  • by necessary implication this was intended by the parties; or
  • where one party has not performed the obligation, the other gives notice that the contact must be performed within a reasonable period. 

If time is originally agreed to be of the essence, failure by the relevant party to perform at the relevant time allows the other party to end the contract and claim damages (as though the obligation were a "condition"). This right to terminate may be lost if the innocent party affirms the contract, or waives the right to terminate.

 

If time is made of the essence by giving notice, the innocent party cannot turn the relevant obligation into a "condition". As a result, one can only terminate the contract if the failure to comply with the notice goes to the root of the contract.

 

 

Should I terminate, rescind, affirm or waive a breach of contract?

 

Assume if you have a right to terminate or rescind the contract as a result of the breach of condition or fraudulent representation, you should consider whether it is more beneficial to end the contract or continue with the relationship and claim for damages. There are four main alternatives for you to proceed:

 

1. If you are still in a good relationship with the party in breach, you could consider negotiating an amendment to the existing contract or a contractual termination taking into account of the damages from the breach with that party.

2. If you would like to continue with the contract, you could send a notice of affirmation to the party in breach but reserve the right to claim damages for the breach.

3. If you would like to rescind the contract, you should ensure that you have relied on a pre-contractual representation that is either fraudulent or factually incorrect when entering into the contract. If there are entire agreement or non-reliance clauses, you should check with a lawyer to ensure that they are not effective concerning your rescission.

4. If you would like to terminate the contract and claim for damages, you should ensure that the breach is in relation to a condition or a fundamental intermediate term that goes to the root of the contract. You may also consider terminating under the common law basis for repudiatory breach instead of a mere breach of contract. This would allow you to also claim for the “loss of bargain” in addition to contractual damages. This is a difficult legal area and you may wish to consult a lawyer before doing so.

 

It is important to note the following when making the above election:

 

1. Not to take too long in deciding to terminate or rescind or you could lose the right to do so.

2. Not to carry out in a “business as usual” way or other conducts which could be seen as affirming the contract or waiving the breach.

3. Qualify any future correspondence with the party in breach with a reservation of rights language.

4. Once the decision to terminate, rescind or continue the contract is communicated to the party in breach, it is final and cannot be changed. If necessary, consult a lawyer before doing so.

 

Please note that this is just a general summary of the position under common law and does not constitute legal advice. As the laws of each jurisdiction may be different, you may want to speak to your lawyer.

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