Termination of Contracts - Martin Luitingh Barrister

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Leval 44 MLC Center
16 Martin Place
Sydney NSW 2000

Australian Qualified Arbitrator
IAMA Accredited Australian National Mediator


Termination of Contracts – A Practical Guide

1. Introduction

1.1 Contracts are concluded with a view to establishing reciprocal obligations on the part of the contracting parties and facilitating the performance of those obligations.

1.2 This paper focuses upon works and services contracts rather than sale of goods contracts or other forms of contract. For all practical purposes, nevertheless, there is a single unifying law of contract and the subject matter of the contract (with the exception of specific legislation regulating some sectors or particular transactions) does not control the contractual analysis.

1.3 An important consequence of a works or services contract is that parties incur expense, time and effort both in preparing for and in performing the obligations under the contract. The parties may also forgo alternative opportunities to contract with a competing proponent or to pursue other opportunities with third parties because they have allocated staff and resources to this contract and not to another. The terms of a concluded works or services contract, in relation to the subject matter of the contract, may also limit or restrict the power or discretion of each party in the conduct their business.

1.4 Termination of a contract is a serious step, not least of all because wrongful termination of a contract may in itself constitute a repudiation of a contract which could expose the wrongful terminator to a damages claim by the “innocent party”.

1.5 Where there is a breach of a contract which is sufficiently serious so as to contemplate termination of the contract, each party faces a complex decision and it is readily apparent that terminating the contract involves more than consideration of whether or not there has been a sufficiently serious breach of the contract by an offending party. There are important procedural inquiries, practical considerations, strategic considerations, financial and broader commercial considerations and considerations that can impact upon future relations. The decision to terminate is a multifaceted enquiry that requires scrutiny on a number of different levels.

1.6 Once that decision has been made, the Rubicon has been crossed and there is no mechanism for unravelling or withdrawing that decision.

1.7 In approaching termination, the court will depart from the view that a party must unless good cause is be bound by the contracts it has concluded.

2. Termination of a Contract

2.1 Termination of a contract discharges parties to a contract from performing further contractual obligations. The discharge operates not ab initio but having regard to rights which had already been conditionally acquired by part performance.

2.2 Termination of a contract discharges parties to a contract from performing further contractual obligations. The discharge operates not ab initio (from the beginning) but in futuro (in relation to future actions), so as to discharge obligations under the contract that are still unperformed having regard to rights which had already been conditionally acquired by part performance.

Biggs v Hoddinott, [1898] 2 Ch 307

2.3 In McDonald v Dennys Lascelles Ltd,2 Dixon J held that: “… both parties are discharged from further performance of the contract, but rights are not divested or discharged which have been unconditionally acquired.” Rights and obligations which arise from the partial execution of the contract and causes of action which have accrued from its breach alike continue unaffected.

2.4 It may be that a contract is rescinded for reasons that go to the formation of the contract. A good example would be for reasons of a fraud, the parties are then put into the position that they would have occupied before the contract was concluded.

2.5 It may be that a contract is rescinded for reasons that go to the formation of the contract. A good example would be where the contract was entered into for reasons of a fraud. If the fraud caused the purported contract to be made, the purported contract is rescinded when the fraud is discovered and proven; the contract was never lawfully formed. The parties are to be put back into the position that they would have occupied before the purported contract was concluded by reason of the fraud.

2.6 Where a contract is discharged at the election of one of the parties because the other has not observed an essential condition that goes to the root of the contract, the contract is terminated so far as it is executory only and the party in breach is liable for damages.

2 (1933) 48 CLR 457@ 476-477. 


1. When contemplating breach, one of the initial considerations would be to establish the accrued rights under the contract.


1. McDonald v Dennys Lascelles Ltd (1933) 48 CLR 457@ 476‐477.

2. Biggs v Hoddinott, [1898] 2 Ch 307.

3. The right to terminate a contract

3.1 Contractual terms providing a right terminate.

(a) Most complex contracts (such as building contracts) include clauses which afford the parties a right to terminate the contract. The right to terminate normally follows the breach of an essential term of the agreement.

(b) Some contracts will expressly state which are the essential terms of the contract and which are non‐essential terms. In Hong Kong Fir Co Ltd Kawasaki Kishen Kaisha,3 Diplock LJ described the consideration of the gravity of an essential term as follows:

“… does the occurrence of the event (the breach) deprive the party who has further undertakings still to perform of substantially the whole benefit … as expressed in the contract …”

(c) Theoretically, parties can expressly set out in the contract that breach of any term of the contract can afford the ‘innocent party’ a right to terminate. Generally that is not considered to be an effective and efficient contracting model for construction or engineering contracts or other medium to long term contracts.

(d) In principle, breaches which would lead to the commercial purpose of a contract being defeated are the types of breach which a court is likely to consider a proper cause or reason for termination. As the discussion below will illustrate, persistent minor breaches may also give rise to a right to terminate if the cumulative effect of such persistent breaches is to destroy the fundamental integrity of the contracting relationship. In approaching the issue of whether to terminate a contract or not, both the gravity of the breach and the terms of the contract need to be considered before making any decision to terminate a contract.

3 [1962] 2 QB 26 at page 66.

4 Davies J in Amnan Aviation Pty Ltd v The Commonwealth of Australia (1990) 22 FCR 527 in which the Federal Court held that the terms of the contract was an exclusive code for termination.

3.2 Contractual procedures for termination

(a) In addition to contractual rights governing the rules of termination, contractual procedures for terminating contracts are also to be observed. Contracts may prescribe an exhaustive procedure for termination which must be strictly followed.

(b) A contract may specify that notice must be given to show cause or to remedy a breach in a particular manner before termination of the contract. That notice may stipulate specific time periods for remedy or contain provision as to content. In those circumstances, the requirements must be strictly adhered to.

(c) If a procedure is stipulated for termination, that procedure may not permit a party to terminate the contract in a manner outside the terms of the contract or claim that a term of the contract is of the essence and permit a party to rescind the contract forthwith for a breach going to the root of the contract. See Amman Aviation Pty Ltd v The Commonwealth of Australia (supra) at 527.

(d) It is more complex where a non‐essential term is made essential by the terms of a contract.

Gibbs CJ in Shevill v Builders Licensing Board held:

“It is clear that a covenant to pay rent in advance at specified times would not, without more, be a fundamental or essential term having the effect that any failure, however slight, to make payment at the specified times would entitle the lessor to terminate the lease.
However, the parties to a contract may stipulate that a term will be treated as having a fundamental character although in itself it may seem of little importance, and effect must be given to any such agreement.”

(e) This reasoning received further consideration in Gumland Property Holdings PL v Duffy Bros Fruit Market (Campbelltown) Pty Ltd.
(1982) 149 CLR 620 at 627; [1982] HCA 47. [2008] HCA 10.

(f) In that matter, the fundamental proposition was attacked in two submissions. The first was that a party could not reasonably as a matter of construction elevate a non‐essential term to an essential term unless the breaching conduct was a repudiation of the agreement. The second was that if a non‐essential term could be elevated to the status of essential term for the purposes of termination, the parties could not stipulate that damages were recoverable for breach of the “elevated term”.

(g) As authority for this submission counsel relied on AMEV‐UDC Finance Ltd v Austin (1986) HCA 63 and Esanda Finance Corporation Ltd v Plessnig 1989 HCA 7 and particularly on the statement of Gibbs CJ in Austin at 175 where he said it is the actual damage which flowed from the breach which alone can be recovered and where Mason and Wilson JJ said at page 186.

“The point is that when the lessor terminates pursuant to the contractual right given to him for breach by the lessee, the loss which he can recover for non‐fundamental breach is limited to the loss which flows from the lessee’s breach. The lessor cannot recover the loss which he sustains as a result of his termination because that loss is attributable to his act, not to the conduct of the lessee.”

(h) But that case, like Shevill’s case, was a case where there was no fundamental breach. There are different consequences where there is a breach of a fundamental term. In such circumstances, both termination and recovery of loss can result from a breach of a fundamental term or a sufficiently serious breach of a non‐fundamental term.

(i) The question being posed here is what if the contract elevates a non‐fundamental term to the status of a fundamental term (sometimes referred to as condition) and stipulates in the contract that loss is recoverable?

(j) The answer to that question is that the court would look very closely at the words to see if it was the true intention of the parties to afford that status to a nonessential term and would be loath to support that interpretation unless there are very clear words that bind the parties to that provision. See Gibbs CJ in Shevill’s case (supra) at 628. If the words are clear, the court would give effect to the obligations to which the parties bound themselves. This approach was approved of in Gumland (supra) at paragraphs 54‐64.

(k) It is perhaps important to look at the submissions raised against that position and which were rejected by the High Court. The Respondent in Gumland (supra) submitted that it is repugnant to permit a person to terminate for non‐essential breach and recover a sum in the contract as damages. The High Court found that it was not repugnant for the parties to agree the right to elevate a non‐essential term to a condition, or to stipulate that upon termination, damages are recoverable. Gumland (supra) paragraph 56.

(l) It was further argued that parties can agree terms but the legal consequences of what they agree is a matter of law (reserved for the courts) and is not governed by intention. This submission was rejected by the High Court in Gumland at paragraph 58 where the power to support a claim for the recovery of damages by agreement was recognised.What those damages are is a matter of fact.

See Photo Production Ltd v Securicor Transport Ltd [1980] AC 827 at 849; Lombard North Central plc v Butterworth [1987] QB 527 at 535 and 545-546


1. It is essential for termination to determine the status of the breached clause and the impact upon the commercial purpose of the contract.

2. A practitioner should consider closely any determined regime for termination and consider whether he is bound by that regime. Failure to follow the regime could result in exposure to damages.


1. In Hong Kong Fir Co Ltd Kawasaki Kishen Kaisha.

2. Amnan Aviation Pty Ltd v The Commonwealth of Australia (1990) 22 FCR 527.

3. Shevill v Builders Licensing Board

4. Gumland Property Holdings PL v Duffy Bros Fruit Market (Campbelltown) Pty Ltd.

4. The common law

4.1 Common law rights may exist in addition to the contractual rights to terminate the contract. A party intending to terminate a contract ought to be aware of common law rights. The right to terminate a contract at common law was extensively canvassed in Koompahtoo Local Aboriginal Land Council v Sanpine Pty Ltd (2007) 241 ALR 88.

4.2 Koompahtoo Local Aboriginal Land Council concluded a joint venture agreement with Sanpine Pty Limited for the development of land. Sanpine agreed, under the terms of the agreement, to perform financial record keeping services of the joint venture.

4.3 A few years later an administrator was appointed to Koompahtoo. The administrator discovered that Sanpine had failed to keep proper books and accounting records. The administrator requested certain information and documents from Sanpine but the request was not complied with.

4.4 The administrator, on behalf of Koompahtoo, purported to terminate the joint venture agreement on the basis that Sanpine’s breaches of the joint venture agreement evinced an intention not to be bound by it (amounting to repudiation). Sanpine commenced proceedings, seeking a declaration that the purported termination was invalid and that the joint venture agreement was still on foot.

The High Court was seized with the issue of whether Koompahtoo had validly terminated the Agreement with Sanpine. This concerned determining whether Sanpine breached the Agreement with Koompahtoo. If Sanpine had breached the Agreement, then the High Court had to consider whether these breaches were such that Koompahtoo to had the right to terminate the Agreement. 

The High Court had to consider the relevant legal principles which would govern an innocent party’s entitlement to terminate upon a contractual breach.

4.5 In supporting the contention that a breach of a term ( non –essential) could be sufficient cause to terminate a contract the court referred to Tramways Advertising Pty Ltd v Luna Park (NSW) Ltd (1938) 38 SR (NSW) 632 at 641‐642 by Jordan CJ:

“In considering the legal consequences flowing from a breach of contract, it is necessary to remember that

(i) the breach may extend to all or to some only of the promises of the defaulting party,

(ii) the promises broken may be important or unimportant,

(iii) the breach of any particular promise may be substantial or trivial,

(iv) the breach may occur or be discovered

(a) when the innocent party has not yet performed any or some of the promises on his part, or after he has performed them all, and

(b) when the innocent party has received no performance from the defaulting party, or has received performance in whole or in part; and to remember also that the resultant rights of the innocent party and the nature of the remedies available to him may depend upon some or all of these matters.”

4.6 In this case, the distinction is drawn between the remedies available for breach of an essential term and remedies available for a breach of a non‐essential term:

“… The nature of the promise broken is one of the most important of the matters. If it is a condition that is broken, ie, an essential promise, the innocent party, when he becomes aware of the breach, has ordinarily the right at his option either to treat himself as discharged from the contract and to recover damages for loss of the contract, or else to keep the contract on foot and recover damages for the particular breach. If it is a warranty that is broken, ie, a non‐essential promise, only the latter alternative is available to the innocent party: in that case he cannot of course obtain damages for loss of the contract.”

4.7 A term is an essential term if it can be established that a party would not have entered into the contract if the party was not assured that the performance of that obligation would be carried out.

4.8 As indicated above, a term is also essential if the parties agree that it is essential.8
Koompahtoo at page 26.

4.9 In deciding if a term is essential, one should consider:

(a) the common intention of the parties;

(b) expressed in the language of their contract;

(c) the context of the relationship established by that contract; and

(d) the commercial purpose it served, that determines the character of a term so that a breach of that term will justify

4.10 In Hongkong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd , the English Court of Appeal held that further to a distinction between “conditions” and “warranties” there must be added a distinction, within the class of non‐essential obligations, being breaches that are significantly serious to justify termination and other breaches which are not. 

This is recognition that not any breach of a given term will entitle the other party to terminate.

4.11 What is the purpose of classifying terms as intermediate or non‐essential? As put in the eleventh edition of Treitel on the Law of Contract:
“[T]he policy of leaning in favour of classifying stipulations as intermediate terms can be said to promote the interests of justice by preventing the injured party from rescinding on grounds that are technical or unmeritorious.”

4.12 Breaches that give rise to an entitlement to terminate are sometimes described as “going to the root of the contract”. This characterisation takes account of the nature of the contract and the relationship it creates, the nature of the term, the kind and degree of the breach and the consequences of the breach for the other party. If there is no right of termination (because the breach is not sufficiently serious) the adequacy of damages as a remedy may be a material factor in deciding whether the breach goes to the root of the contract.


1. Koompahtoo Local Aboriginal Land Council v Sanpine Pty Ltd (2007) 241 ALR 88.

2. Tramways Advertising Pty Ltd v Luna Park (NSW) Ltd (1938) 38 SR (NSW) 632 at 641‐642.

3. Hongkong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd.

5. Consequences of discharge

5.1 It is critical to distinguish between rescinding the contract ab initio and termination of the contract. Principally, it is important to distinguish those two forms of termination as in the first instance, the parties return to the position as it would have been prior to the conclusion of the contract. In the latter, the law has to deal with accrued rights and during the course of the contract prior to termination.

5.2 Termination should be viewed from the perspective of how it affects the rights and obligations of the parties to the contract, rather than from an analysis of the terms of the contract itself.10

5.3 A contract is therefore not rescinded upon termination. Not least of all because damages may follow termination upon breach of contract. That may impose an obligation upon a party to pay damages for breach of contract.11

5.4 There are principally two types of rights which survive termination. Those being (a) a right to damages for breach (which can in the common‐law right or right under the contract) and (b) a right for a party to receive performance of accrued rights under the contract.

5.5 Insofar as the first category is concerned, the right to damages can be in respect of the failure to have performed. The damages could be calculated up to the date of termination on the one hand, in addition to damages pursuant to the termination.

10 Lord Porters Speech in Heymans v Darwins Limited [1942 ] AC 356 @ 399.

11 Photo Production Limited v Securicor Transport Limited [1980] AC 827 at 848-849 per Lord Diplock.


1. Before terminating, consider the classification of the term given the context of the contract.

2. The context of the contract is predominantly governed by the intention of the parties, the language of the contract and the commercial purpose of the agreement.

5.6 To determine the nature of the obligation to be performed upon termination, the party terminating the contract should prove that the “right” must have been unconditionally acquired prior to termination.12 Whether or not a right has unconditionally accrued will depend upon the individual circumstances and the terms of the contract.

5.7 The performance of the accrued right by the party that has breached the contract may also impact upon the compensation recoverable by the “innocent party”.

5.8 John Carter in Carter on Contracts finds merit in the distinction made by Diplock J in Photo Production between primary and secondary obligations, the first being an obligation arising expressly or impliedly out of the contract and the second flows from the consequences of default. Whilst most primary obligations come to an end upon termination, the secondary obligation does not. The unperformed primary obligations are normally discharged by termination. This does not apply to an accrued right at the time of termination.

5.9 It is best practice when drafting a contract to consider and agree the accrued rights in the event of default. In that way it is not necessary to rely upon any interpretation of the contract or the common‐law.

12 McDonald v Dennys Lascelles Limited (1933) 48 CLR 457 at 477 per Dixon J.


1. Heymans v Darwins Limited [1942 ] AC 356 @ 399.

2. Photo Production Limited v Securicor Transport Limited [1980] AC 827 at 848‐849.

3. McDonald v Dennys Lascelles Limited (1933) 48 CLR 457 at 477.


1 Establish the potential scope of damages.

2. Revisit accrued rights under the contract as at the date of termination.

6. Termination for convenience

6.1 These are clauses which give one party a right to terminate the contract for the convenience of that party.

6.2 The power to terminate is usually unrestrained both as to the time when it can be exercised and as to the reasons for termination and are popular in circumstances where companies found themselves in the position of having to rapidly terminate contracts to rearrange financial structure as corporate priorities and markets change .

6.3 The purpose of TFC clauses
(a) The party (who bears the greater risk) reserves the right to “change direction“ without the restraint of contractual obligations.

(b) To avoid (with a clearly defaulting contractor) a protracted and expensive legal dispute over whether the termination was properly executed under the terms of the contract and whether the defaults were serious enough to warrant the termination in all the circumstances.

(c) The clauses usually provide that the terminating party compensate the other party by payment of the value of the work already performed and the cost of any expenses incurred which have not been used. In addition, most clauses promise the costs of de‐establishment but expressly disclaim the liability to pay for consequential loss or loss of profit.

(d) Risks: The terminating party should consider whether or not the contract will continue to its natural conclusion and what the additional price would be to obtain the contractual objective as opposed to the reasons and the risks for not continuing with the existing contracting party.

(e) Risks: The terminated party should ensure his price structure in such a manner that he is able to recover profit and recover set up and closing down (deestablishment) costs in the event of early termination.

(f) In Thiess Contractors Pty Ltd v Placer (Granny Smith) Pty Ltd [2000] WASCA, the Court supported a termination for convenience clause. There, the contractor was contracted to carry out contract mining of an open cut mine. The principal was concerned about the cost and placed the contract out for re‐tender which received a lower bid than the contracting party had been engaged for.

(g) The Court held that principal was entitled to terminate the contract under a termination for convenience clause for the purpose of obtaining a less expensive contract and that in so doing, it did not breach a clause that the parties should act in good faith toward each other.

(h) The Court considered the wording was clear and that the risks were assumed bythe contracting parties and that the good faith provision seemed to be more relevant to an ongoing contract rather than a termination of the contract.

(i) This approach is perhaps contrary to the principle that a party may not capriciously decide whether or not to perform its obligations under the contract. The bulwark against this is to ensure that reasonable compensation is paid on termination.

The matter went to the High Court on the question of whether or not Thiess had acted in good faith by over‐inflating its costs and whether or not Placer had adduced sufficient proof of its damages. It is a pivotal judgment on the question of good faith in contracts.

For the purposes of this discussion however the principle of “good faith” did not extend to the termination clause on two bases. First, the “good faith” obligation was concerned with the successful operation of the contract and not its termination. Secondly, the termination clause provided Placer “with an absolute and uncontrolled discretion” whether or not it would terminate the contract which Placer was “entitled to exercise for any reason” relieving Placer “from any obligation to have regard to Thiess’ interest”.

The issue was again raised in Page 1 of 25 Kellogg Brown & Root Pty Ltd v Australian Aerospace Ltd [2007] VSC 200. On this occasion it was mooted that a true termination for convenience clause did not require a contracting party to take account of the interest of the other contracting party. Thiess and Placer (15 above ) held that good faith did not apply to terminating for convenience where the terms were clear and the risks were assessed.

In Pacific Brands Finkelstein J expressed the opinion obiter (at [64]), that the duty of good faith is an incident (not an ad hoc implied term) of every commercial contract, unless the duty is either excluded expressly or by necessary implication. His Honour acknowledged that the duty could not override an express or unambiguous term to a different effect. He also inclined to the view that the duty operated as a fetter upon the exercise of the subject discretions and powers created by the contract but otherwise did not provide a remedy for breach. In Kellogg it was held that the case for good faith was arguable and a srious matter to be tried on an injunctive basis.

(j) In the USA, the question of good faith is approached differently. The termination for convenience clause may be improper where the terminating party has acted in bad faith or there has been an abuse of discretion such as where the clause is used to acquire a better bargain from another source, or where the party enters into an agreement with no intention of fulfilling its promises. See Krygoski Construction Company v United States 94 F 3d 1537 (1996). See also Questar Builders, Inc v CB Flooring, LLC, 978A.2d651 (Md.2009).

(k) Terminating for convenience may restrict a contracting party’s right to claim unearned profit and “consequential damages” The terminating party should also keep in mind that terminating for convenience is likely to disallow that party from post‐termination contract damages (such as delay damages or completion costs), although the terminated party would still be liable for defective work prior to the termination.

(l) Questar Builders v CB Flooring: Limiting the Right to Terminate for Convenience, the Court found and implied obligation of good faith limiting the right to terminate the agreement. On appeal, the Court held that an implied obligation of good faith and fair dealing limits a terminating party’s discretion to terminate for convenience. The Court reasoned that if a party can terminate a contract for any reason whatsoever (including no reason at all), the contract may be illusory (i.e., a promise that does not actually bind the promisor to do anything).

6.4 An agreement to be bound to make a payment upon termination for convenience can avoid an unfair dealings argument. Whether a termination for convenience was exercised in good faith involves detailed factual determinations. 

The Questar Builders Court provided some guidance in this regard – stating that a termination for convenience provision is a riskallocating tool that permits termination where a contractor “determined that continuing with the Subcontract would subject it potentially to a meaningful financial loss or some other difficulty in completing the project successfully.” A terminating party acts in good faith if its determination of the risk of continuing with the contract is commercially unreasonable. (This reasoning was supported in Reynard Constructions13)

6.5 Ultimately, the best approach may lie somewhere between these two views. There is much to be said for the fact that irrespective of whether the parties were in a position to asses and in fact accept the risk, if the convenience clause is no more than a “thanks for turning up, here is a bus ticket home” clause, then the consideration may be illusory and no bargain would have eventuated.

These risks involve some change in circumstances and may include;

• deterioration of the parties’ relationship;
• impossibility of performance (e.g. discovery of unknown or concealed condition);
• delay in completing the work;
• non‐responsiveness of the other party;
• insolvency or other factors impairing a party’s ability to perform;
• a change in the scope of works.

13 Renard Constructions v Minister for Public Works (1992) 26 NSWLR 234

6.6 In the USA, termination to obtain a better price was not considered exercising the right in good faith.

7. Repudiation.

7.1 Claiming that a contracting party has resiled from and repudiated a contract is a complex, high legal‐risk decision and is predicated upon a well‐established legal principle that: “a man shall abide by his contracts and that a man’s contracts should be enforced as against him.

Claiming repudiation in circumstances where a court finds that there was no repudiation is itself repudiation and will expose the claimant to damages.

14 Justice Romer in Biggs v Hoddinott, [1898] 2 Ch 307 where it was held that a brewer might stipulate in a mortgage made to him of an hotel that during the five years for which the loan was to continue the mortgagors would deal with him exclusively for malt liquor.


1. Thiess Contractors Pty Ltd v Placer (Granny Smith) Pty Ltd [2000] WASCA.
2. Questar Builders, Inc v CB Flooring, LLC, 978A.2d651 (Md.2009).
3. Renard Constructions v Minister for Public Works (1992) 26 NSWLR 234.


1. Consider how your client will be compensated/billed for compensation.
2. Establish the cost and impact of termination. Consider a formula for termination when concluding a contract.
3. Consider potential reasons for termination for convenience and anticipate the impact.

7.2 Termination for Repudiation

(a) Repudiation occurs where one of the parties to a contract renounces that party’s obligations under a contract, or;

(b) If that party (the repudiating party) evinces an intention no longer to be bound by the contract, or shows that the repudiating party intends to perform the contract only in a manner substantially inconsistent with the repudiating party’s obligations under the contract (as originally expressed) and not in any other way.

7.3 Scope of repudiation – Essential and Non‐Essential Terms

(a) Where an essential term has been breached, it is unnecessary to consider if the repudiating party has repudiated the contract because the other party will be able to terminate the contract for breach of an essential term in the normal manner.

(b) Where, however, the term breached by the repudiating party is not essential, the party wishing to act upon the repudiation must establish that the conduct of the repudiating party amounts to repudiation at law before the innocent party may elect either of its remedies at law in respect of the repudiation.

7.4 Examples of Repudiation

Repudiation can take different forms. Each case depends on the terms of the particular and the surrounding circumstances as to whether repudiation has occurred.

7.5 Express refusal or notice of refusal to perform or honour the contract

(a) An express refusal to perform all of the obligations under the contract will amount to repudiation: Hochester v De La Tour.

(b) The doctrine of anticipatory breach was first recognised17 in Hochester.

In that case, before the period of employment as a courier was due to commence under a contract of employment, the defendant‐employer told the plaintiff‐employee that 15 See the statement of general principle of McMullin J in Starlight Enterprises Ltd v Lapco Enterprises Ltd [1979] 2 NZLR 744 (CA) at 748 cited by Associate Judge Sargisson in Ludlow v Minter Ellison (2007) HC, Auckland CIV2007-404- 249, 31 August 2007. (1853) 2 El. & Bl. 678. Foran v Wight [1989] HCA 51 PER Mason CJ at para 30. his services were no longer required. The Court held that the plaintiff‐employee could immediately sue for repudiation of the contract, even before the planned commencement date for the employment. The defendant‐employer may immediately be sued for breach of the contract when the defendant‐employer renounced its intention to employ the plaintiff. The plaintiff did not need to wait, ready and willing to perform, until the planned date for commencement of the services. Where the claimant party has suffered damages by reason of repudiation, the damages must be measured to compensate the innocent party for the loss suffered by reason of the repudiation. The Court will take into account all contingencies which might reduce or extinguish the damages or loss claimed.

(c) Repudiation may also occur where one of the contract parties refuses to perform some of his or her obligation under a contract, provided the refusal is a sufficiently serious matter: Associated Newspapers Ltd v Bancks.

(d) In Bancks, the employers of a cartoon artist had agreed to publish the cartoon artist’s work in a particular prominent position in the newspaper. For reasons affecting the wider newspaper business, the editor printed the plaintiff’s cartoon, however, not on the first page as required under the contract. The High Court held this breach was sufficiently serious to amount to a repudiation of the contract which the plaintiff was entitled to accept.

7.6 Implied Refusal

(a) Repudiation may be implied from a contracting party’s words or conduct, if a reasonable person in the position of the innocent party would clearly infer that the other party is acting as if it was not bound by the contract, or would fulfil the contract only in a manner substantially inconsistent with that party’s obligation, and in no other way: Laurinda Pty Ltd v Capalaba Park Shopping Centre Pty Ltd.

(b) In Laurinda, the lessee executed a lease of premises with authority for the lessor to complete the lease and lodge it for registration. Nine months elapsed and the lease was not yet registered. In deciding if the lessor had repudiated its obligation, the Court drew a distinction between an intention to carry out a contract only if and 18 [1951] HCA 24.
[1989] HCA 23. when it suits the party to do so and when it suits the party to do so. The first case has repudiated as the party clearly no longer intends to be bound by the contract if it does not suit them. The second case will depend on the circumstances, as the party still intends to be bound. However, the party intends to perform the contract only when it suits them. The long delay was a relevant factor in deciding the lessor had repudiated its obligation to provide a registered lease.

7.7 Unjustified Interpretation of the Contract

(a) If a party acts on an erroneous construction and breaches one or more terms of the contract or evinces an intention not to perform except in accordance with the erroneous interpretation, the party may have repudiated his or her obligation, provided the requirement of seriousness is satisfied: Luna Park (NSW) Ltd v Tramways Advertising Pty Ltd.

(b) In Luna Park v Tramways, the defendant failed to display each and every roof board on its trams for at least eight hours each and every day. The plaintiff notified the defendant of this failure but the defendant continued with its erroneous view, claiming it was unable to control the trams and therefore could not ensure the signs would be displayed for the specified period. The Court concluded that the requirement to display was a condition and the defendant repudiated the contract as it was only prepared to comply on the basis of its erroneous construction.

(c) A party wishing to assert repudiation in these circumstances must draw the other party’s attention to the ‘incorrect interpretation’ of the requirements of the contract and the other party must persist in the face of that contrary assertion of what the contract required.

(d) In DTR Nominees Pty Ltd v Mona Homes Pty Ltd,21 the vendor agreed to sell the purchaser nine subdivisions which were set out on a plan annexed to the contract. In accordance with a term, a copy of the plan annexed was to be lodged with the council. However, a plan different to that annexed was lodged. The Court held that lodgement of a different plan did not repudiate the contract. Two situations should be distinguished, where repudiation may occur in such circumstances:

(1938) 61 CLR 286. [1978] HCA 12.

• where, in the face of adverse comment, a party insists on an interpretation of the contract which is not tenable; not

• where the party, although asserting a wrong view of a contract, is willing to perform the contract according to its tenor.

(e) Because the purchaser had not advised the vendor of the error, nor given the vendor any opportunity to rectify the position, there was no basis upon which the vendor was persisting with its interpretation in the face of enunciation to the contrary.

(f) This case illustrates the complexity of the decision making required of a practitioner. In the contract for the sale of land (lots 1‐9) in Fairfield, Sydney, the vendor promised to lodge and register a plan of subdivision with the municipal council. The plan was attached to the contract. The plan attached to the contract actually covered 35 lots. That is, it covered more lots than the contract was dealing with. The vendor lodged with the council a plan that only sought approval for the subdivision of Lots 1‐9 which were the subject of the contract of sale and grouped the balance of the land in a proposed public reserve (Lot 10) and a balance unsubdivided Lot.

(g) The factors affecting the value of a particular lot in a development are numerous. It is possible that the valuation of Lots 1‐9, without the balance of the proposed subdivision, was greatly diminished or affected by any uncertainty about the balance of the development. It is possible that the business‐case and timetable for development of community infrastructure for the subdivision would be substantially lessened by approval only of the smaller subdivision block or Lots 1‐9. On face value, however, these factors are extraneous to the contract and the vendor’s course of action appears reasonable and explicable.

(h) The contract of sale made time of the essence for the lodgement and registration of the plan of subdivision. Time was not made of the essence in any other respect.22 22 DTR Nominees Pty Ltd v Mona Homes Pty Ltd [1978] HCA 12 per Stephen, Mason and Jacobs JJ at para.3 of their joint judgment
(i) Without any warning to the vendor, the purchaser terminated (“rescinded”) the contract on the basis that the vendor had lodged a plan which was different from the one annexed to the contract. The vendor then responded by saying that the purchaser was in breach by wrongfully repudiating the contract and the vendor then terminated the contract and claimed that it was entitled to keep the deposit.

(j) Wootten J, held that the expression “the relevant plan of subdivision” in the contract of sale was used to mean the plan of subdivision that would be drawn up for Lots 1‐9 to implement a development of the subdivision in stages and that the contracting parties were aware that the subdivision was to proceed in stages. Wotton J therefore held there had been no breach by the vendor. Therefore, the purchasers were in breach by wrongfully terminating and the vendors could keep the deposit. The High Court said this construction of the contract was wrong.23 The relevant special condition referred to the plan of subdivision annexed to the contract.

(k) The starting point in the High Court, therefore, was that the vendor was in breach by lodging a plan which did not accord with the plan attached to the contract. The Court then said that there was a bona fide dispute about the interpretation of the term of the contract concerning the lodgement and registration of the plan of subdivision. The Court says24 that insisting on a wrong interpretation of the contract does not necessarily mean that such insistence is evincing an intention not to be bound by the contract; putting forward a wrong interpretation of the contract is not necessarily repudiatory conduct.

(l) The Court held consistent with the decision of the trial judge (but for different reasons), that the purchasers were not entitled to treat the vendor’s conduct as repudiatory and that therefore, the purchasers were not entitled to terminate on that basis.

(m) Was the vendor entitled to terminate (“rescind”) because of the purchaser’s wrongful purported termination? The High Court said that the vendor was not 23 DTR Nominees Pty Ltd v Mona Homes Pty Ltd [1978] HCA 12 per Stephen, Mason and Jacobs JJ at para.12 of their joint judgment.DTR Nominees Pty Ltd v Mona Homes Pty Ltd [1978] HCA 12 per Stephen, Mason and Jacobs JJ at para.21 of their joint judgment. entitled to terminate because the purchaser’s motive in terminating was honest and it did not intend to repudiate its obligations if the vendor had lodged the correct plan of subdivision for approval and registration. The vendor was insisting on its incorrect interpretation of the contract, so the purchaser could not be held to be repudiating the contract by responding to that incorrect interpretation by purporting to terminate.

(n) The judicial outcome was that neither party had effectively terminated the contract.

(o) In fact, what subsequently happened was that both parties (not surprisingly) thought that the contract was no longer on foot and so nothing more was done. The High Court came to the conclusion that there was mutual abandonment of the contract. This meant that no‐one had justifiably terminated and that the contract simply came to an end and that the purchaser was entitled to get back their deposit.

(p) If a party makes a wrong assessment of the crucial question ‐ has the other party committed a sufficiently serious breach? ‐ and then terminates, the wrongful termination may itself be a repudiatory breach. It may be that a purported
termination in response to a purported termination is no termination.

7.8 Wrongful termination of a contract

(a) Generally, a wrongful termination of the contract constitutes repudiation of the contract: Braidotti v Queensland City Properties Ltd.25

(b) In Braidotti, the vendor, under an instalment contract,26 purported to give notice of termination before complying with the consumer protection requirement in s72 Property Law Act 1974 (Qld) by giving a statutory notice concerning the default in payment and of the intended termination. The purported termination by the 25 [1991] HCA .

26 Instalment contracts, also called vendor terms contracts, are a way of selling real property where the seller, in effect, finances the purchase. The business terms ‘wrap’ and ‘wrapping’ are also used to describe this transaction (BROWN, B, Vendor Finance . Housing Under Wraps., The Australian, 23 April 2003). No bank or other third-party financier need be involved in the transaction. No mortgage is granted over the property. The purchaser pays the contract price in instalments to the vendor, together with interest. Entitlement to be registered as the proprietor of the property will not pass until all payments are completed. Until that time, the purchaser has an interest in the property only ‘as purchaser under a long term instalment purchase contract.

vendor (in the absence of the prior statutory notice) therefore was invalid and the vendor’s conduct constituted a repudiation. By their actions, the vendors had ‘signalled their unqualified intention not to proceed with the contract’.

(c) It is this area that gives rise to the most complex issues in decision making and that exposes the client to risk.

(d) The importance of compliance with mandatory statutory notice procedures, in addition to asserting the rights of termination provided in a contract, were affirmed by the Queensland Court of Appeal in Starco Developments Pty Ltd v
Ladd28 where an amendment to a simple sale contract, perhaps unappreciated by both parties at the time, had converted it into an instalment contract and introduced the mandatory requirements for the issue of a notice under s72
Property Law Act 1974 (Qld) in respect of any default in payment. McPherson JA described the result as follows:

… in the present case, the default on which the vendor’s rescission was based was nothing more nor less than the purchasers’ failure to pay the balance of purchase moneys on the date fixed for settlement under the contract as varied. 

That is no doubt capable in ordinary circumstances of being regarded as a repudiation of the contract; but it is a particular form of repudiation which a vendor is prevented by the Act from relying on to rescind or terminate an instalment contract without first having complied with the requirements of s.72(1) of the Act. No such notice was given in this case.

(e) In determining whether or not a purported (in hindsight, wrongful) termination is, in fact, a repudiation of the contract, therefore, depends upon consideration of all relevant factors. Compliance with any mandatory statutory processes is obviously one such factor. There is scope to argue for a number of other factors.

(f) In Diploma Construction Pty Ltd v Marula Pty Ltd,29 letters sent to a subcontractor did not comply with the contract requirements for notices of default. This error infected all reliance upon the notices. The head contractor was required to pay to 27 Braidotti v Queensland City Properties Ltd [1991] HCA 19 per Mason CJ, Brennan and Dawson JJ at para [1998] QCA 344. [2009] WASCA 229.
Marula, the subcontractor, $50,000 less retention being the amount due as at the date of termination, plus interest.

8. Frustration

8.1 It has been a vexed issue as to whether a party to a contract ought to be released from its obligations due to external events which significantly change the circumstances under which the contract must be performed.

8.2 The competing interests are those of risk versus fairness and of course, the promise under the contract.

8.3 The approach adopted as far back as 1647 in the matter of Paradine v Jane Aleyn 26, was that parties are able to arrange their affairs and take into account the vicissitudes of commercial life and that they are in the best position to make those arrangements. In that case, a tenant sought to be released of his obligations following Prince Rupert of Germany invading the area and the premises becoming unavailable. The matter was simply


1. Ludlow v Minter Ellison (2007) HC, Auckland CIV2007‐404‐249,31 August 2007.

2. Hochester v De La Tour (1853) 2 El. & Bl. 678.

3. Laurinda Pty Ltd v Capalaba Park Shopping Centre Pty Ltd 4. (1938)
61 CLR 286.

4. DTR Nominees Pty Ltd v Mona Homes Pty Ltd.

5. Braidotti v Queensland City Properties Ltd

6. Diploma Construction Pty Ltd V Marula Pty Ltd [2009] WASCA 229


1. Establishing someone’s intention is an onerous task.

2. Wrongly claiming repudiation is in itself wrongful termination and exposes the terminating party to risk. approached on the basis of risk allocation.30 Undoubtedly the force majeure clauses make some contribution towards resolving such problems. It is recognised, however, that there is no such thing as a boiler plate force majeure clause.

8.4 In principle that is perhaps an efficient approach. Arguably though, there are circumstances that could not be reasonably contemplated by parties and further, the contract might also be unclear about where the risk lies (in which case, enforcement of the obligation would be the preferred approach)
8.5 Blackburn J in Taylor v Caldwell31 finally changed the perception on this area of the law. In that case, a music hall in Surrey was hired for a music event. The day before the event, the hall burnt down. The hirer brought a claim against the owner of the hall for breach for failing to deliver the hall as agreed. The Court held that the owner was excused from the breach for frustration. This constituted a reversal of the reasoning in Paradine. What is important about this was determination of the underlying principle. The Court found that there was an implied term of the agreement that parties will be discharged from their obligations if the subject matter of the contract is destroyed.

8.6 Whilst the implied term was a reasonable artificial construct and was seized upon by jurists as being the proper test for frustration, there was perhaps another remark in the judgement of Blackburn J that later modified that reasoning.

“… this implication tends to further the great object of making the legal construction such as to fulfil the intention of those that enter into the contract.”

8.7 Undoubtedly, this reasoning was later accepted as the true principle of the doctrine of frustration. The artificial construct as with most artificial constructs became difficult to implement, as was demonstrated in Davis Contractors Ltd v Fareham UDC.32 In that matter, a contractor under a time constraint argued that an unforeseeable labour shortage entitled him to a release of the obligation to build within the contracted time frame. The Court held that the fact that the performance criteria had become more onerous and resulted in increased costs was not in itself a good enough reason to rely on frustration to release the party from its contractual obligations. The difficulty with the construct is that implied 30 Professor Kendrick : The Regulation of Long Term Contracts in English Law. (1863) 3 B & S 826. [1956] AC 696. terms, which in some circumstances could not on the one hand and were not on the other hand contemplated by either party, could not reasonably have been found to apply.

8.8 During the course of the speech of Lord Reid, the following statement was made: “It appears to me that frustration depends, at least in most cases not on adding any implied term but on a true construction of the terms which are in the contract read in the light of the nature of the contract and the relevant surrounding circumstances when the contract was made.”

8.9 We have briefly alluded to the law of frustration as it appeared in England and the common law. Fortunately, the common law was adopted in Australia to large degree in a comprehensive Judgement of the High Court of Australia in Codelfa Construction Pty Ltd v State Rail Authority of New South Wales.33

8.10 The Judges in Codelfa extensively reviewed the English authorities and the history and the basis of frustration claims. Codelfa brought the relief sought in a frustration claim closer to the contractual environment and at the same time expanded its utility. The approach in Codelfa was to focus on the construction of the contract within the environment that the contract was concluded.

8.11 Two principles of construction were re‐visited in this process. The parties’ subjective beliefs and the antecedent negotiations. An important distinction was drawn between those two generally prohibited construction aids and establishing the surrounding circumstances (to determine the plain meaning of the words in the contract).34 Support for this thinking was found in the speeches of Lord Wilberforce35 and Cardozo J.36

8.12 The result was that that extrinsic evidence of the circumstances in which a guarantee was executed was received for the purpose of determining the terms of the contract. Cardozo J at p 608 stated that surrounding circumstances may “stamp upon a contract a popular or looser meaning” than the strict legal meaning, certainly when to adopt the latter would make the transaction futile (at p 349) was received with approval. Undoubtedly this diminished the trictness of the parole evidence rule.

(1981‐1982) 149 CLR 337 Codelfa at paragraph 12. Prenn v. Simmonds (1971) 1 WLR 1381, at pp 1383‐1385; (1971) 3 A11 ER 237. Utica City National Bank v. Gunn (1918) 118(1918) 118 NE 607.

8.13 In Australia, permissible evidence of surrounding circumstances was embraced in the High Court decision in DTR Nominees Pty Ltd v Mona Homes Pty Ltd [1978] HCA 12; (1978) 138(1978) 138 CLR 423 at p 429, Stephen and Jacobs JJ and Mason J held :

“A court may admit evidence of surrounding circumstances in the form of ‘mutually known facts’ ‘to identify the meaning of a descriptive term’ and it may admit evidence of the ‘genesis’ and objectively the ‘aim’ of a transaction to show that the attribution of a strict legal meaning would ‘make the transaction futile’ . . . “

8.14 In the analyses of the role of implied terms, the High Court suggested that whilst a party may under certain circumstances seek relief based on an implied term, that the essence of a claim for frustration was as stated by Lord Radcliffe In Davis Contractors:37 “. . . frustration occurs whenever the law recognizes that without default of either party a contractual obligation has become incapable of being performed because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract. . . . It was not this that I promised to do.”

His Lordship, noting that special importance attaches to an unexpected event, observed “There must be as well such a change in the significance of the obligation that the thing undertaken would, if performed, be a different thing from that contracted for”.

8.15 With respect, the Australian refinement of this rule is a welcome return to basic principles of construction. At the same time it brings sensible relief to a contracting party which would earlier have been denied or would have been dependant on an artificial construct, straining the interpretation of the terms of the contract.

8.16 The first observation is that attention is being re‐directed to the terms of the contract. The interpretation aid and old adage of words must be afforded their ordinary grammatical meaning is perhaps diluted somewhat to read “within the circumstances under which the contract was concluded”. 37 (1956) AC, at p 729.

8.17 In my view, no damage will be done to look at the contract within the context in which it was concluded because the initial premise that words would be afforded their ordinary grammatical meaning is not violated on account of the fact that it will be looked at within the context of the circumstances under which the agreement was concluded. On the contrary, the greater probability is that more clarity is likely to be afforded to those words.

8.18 The law correctly assumes the parties will sensibly conclude arrangements and an interpretation of contract to sensibly and justly arrange their affairs is a proper premise on which to base the analysis of any contract.

9. Restrictions on terminating contracts

The contractual provisions of termination.

9.1 The first and most common restriction on terminating contracts often lies within the terms of the contract itself. A contract may determine how the election to terminate the contract must proceed. An election to terminate which does not follow the stipulated clauses for


1. Paradine v Jane Aleyn 26.
2. Taylor v Caldwell (1863) 3 B & S 826.
3. Davis Contractors Ltd v Fareham UDC 1956] AC 696.
4. Codelfa Construction Pty Ltd v State Rail Authority of New South Wales 1982.


1. The reliance on an implied term may not be successful, a practitioner should pursue the intention of the parties.
2. Consider closely the language of the contract and the environment in which it was concluded and pay particular attention to the commercial objectives. termination may be an invalid and wrongful termination and may result in repudiation of the contract. (This does not detract from the fact that the alternative grounds for termination may not be contemplated in the contract and may remain available to a party ‐ such as, for instance, the other party’s inability to perform the contract, a fact that may not be contemplated in the terms of the contract or, for instance, fraud).

9.2 It is not the purpose of this paper to contemplate in detail the restrictions on a contracting party’s right to terminate a contract but rather to draw to the attention of a party intending to terminate a contract, that in exercising its discretion, it is essential for a party to investigate its own conduct, the contractual terms relating to termination and possible statutory limitations.

Statutory Requirements

9.3 There may be statutory requirements which preclude a party to a contract from terminating the contract on an alternative basis.38 There are statutes that stipulate certain requirements before termination can take place.39 Employment contracts, particularly employment of public sector employees, often contain statutory requirements for termination.

Opportunities to Remedy the Defect

9.4 Contracts may have clauses which stipulate that the defaulting party must be given, in specific terms, an opportunity to remedy the defect. Whilst it is generally recognised that an innocent party is not compelled to give the defaulting party an opportunity to remedy the defect, a court may find that it was reasonable to do so.

Lane v Arrowcrest Group Pty Ltd ( 1990) 99 ALR 45. Section 75 of the Trade Practices Act (New South Wales); ‐generally a solicitor should have regard to the Trade Practices Acts , The Fair Trading Acts and the Consumer Legislation.

40 Macksville District Hospital versus Mayez (1987) 10 NSWLR 708 and Roderick versus Australian and Oversees Telecommunications Corp Ltd ( 1992) 111( 1992) 111 ALR 355@ 364.

Estoppel and Waiver

9.5 Principles of Estoppel and Waiver may operate to prevent a party from terminating the contract, 41 or it may be a relevant factor in considering whether or not a contract should be terminated.

9.6 It is not intended in the course of this paper to provide a detailed analysis of the effects of Estoppel or Waiver on the decision to terminate a contract. It is, however, an objective to point out that in considering the question of termination to consider whether or not there is conduct on the part of the terminating party that might restrict or destroy a party’s right to terminate a contract.

9.7 A party’s conduct may prevent a it from exercising a right to terminate. The most obvious case is where a party has conducted himself in a manner that is inconsistent with the right to terminate, such as, for instance, the affirmation of the contract.

9.8 Where a party has made a promise, which is relied upon by the other party that affects his entitlement to terminate a contract, he may be held to that promise. A party might agree that he will not terminate a contract within a particular period of time (notwithstanding his right to do so in a contract) or that he would not terminate a contract for a particular reason (notwithstanding his right to do so in a contract). If such a promise is made, it will limit or curtail his right according to the representation.

9.9 The simple estoppel principle as expressed in Thomson versus Palmer42 would apply to a contract. Where one party has made a representation leading to an assumption which was adopted by the other party and where the failure to adhere to the assumption would result in unfairness and operates to the other party’s detriment.In such circumstances, the court may hold that the assumption must be adhered to and that in turn, may restrict a party’s right to termination. It is important to note that the estoppel does not presume to know or take into account the right to terminate. The estoppel is, in and of itself, sufficient reason to operate independently of the right to termination in the contract.

Lord Denning MR Panchaud SA Freres v Etablissements General Grain [1970] 1 Lloyds Rep 52@57. ( 1933) 49 CLR 507@547
Craine v Colonial Mutual Fire Insurance Co Ltd(1920) CLR 305@327.

9.10 A party may waive its right to termination. A distinction should be drawn between waiving the right to terminate in advance of any reason to terminate, in which case the parties would really be dealing with estoppel, or waving a right to terminate after an event which entitles the party to terminate.

9.11 The nature of the waiver will become relevant because it may be construed as exercising an election in the termination process. Waiver may also be dependent upon a fact or circumstances agreed on between the parties and might be either temporary or permanent or conditional.

Good at Faith and Unconscionable Conduct.

9.12 There are circumstances in which the exercise of good faith and/or unconscionable conduct may restrict a party’s entitlement to terminate the contract. There is a complex philosophical debate about the role of good faith and unconscionable conduct which requires more attention than can be afforded in this paper.

9.13 Good faith in concluding the agreement and executing it, will be viewed differently for instance from the good faith in terminating a contract. In the former the interests of the other contracting party is critical in the latter such as in the case of terminating for convenience it may be irrelevant or play a much lessor role.

In the matter of Thiess ( Supra) the High Court held that in a joint venture agreement where the parties would jointly share the profits and submit their costs as a basis for calculating profit, that inflating the costs was a breach of good faith and tantamount to fraud.

At its most fundamental level that kind of conduct breaches the “ duty to co‐operate”. Renard Constructions held that reasonableness was an implied duty and that unreasonable the use of flowing from the words in a clause of the contract may be held to be unreasonable.

In considering the application of good faith in contract the court will also consider “proper purpose” In circumstances where the court comes to the view that conduct is capricious even in circumstances where it is permitted by the power of a clause, it may fall foul of thegood faith requirement and could be subject to sanction by the court.

Ultimately we are compelled to the view that good faith is not defined and will include acts which are evidence of the evasion of the spirit of the deal, wilful rendering of only substantial performance, abusive of power to determine compliance, interference, failure to co‐operate in another party’s performance when required to do so are all instances of lack of good faith or evidence of bad faith. Good faith is not yet an entrenched concept within Australian contract law although elements of good faith have been alluded to on many occasions.

The paper of Matthew Harper; Murdoch University Electronic Journal of No 3 volume 11 September 2004 presents an interesting discussion on the benefits and disadvantages of introducing good faith and unconscionable conduct as criteria upon which to contemplate the termination of contract.

44 Burger King Corporation versus Hungry Jack’s (2001) New South Wales Court of Appeal 187


1. Lane v Arrowcrest Group Pty Ltd ( 1990) 99 ALR 45.
2. Macksville District Hospital versus Mayez (1987) 10 NSWLR 708 and Roderick versus Australian and Oversees Telecommunications Corp Ltd ( 1992) 111( 1992) 111 ALR 355@ 364.
3. MR Panchaud SA Freres v Etablissements General Grain [1970] 1 Lloyds Rep 52@57.


1. Termination is rarely a one way street, introspection and scrutiny of own conduct is a critical factor to assess.
2. Have any representations been made by failure to act timeously ?
3. Consider relevant legislation.
4. Scrutinise the client’s motive to make sure no good faith argument can be made out.

10. Conclusion: The exercise of discretion in terminating contracts.

Ultimately when one has considered the difficulties that could theoretically arise when terminating a contract a few practical consideration emerge for the decision makers

(i) for the ‘innocent party’, there is an urgent requirement to:

(1) read the contract terms governing the termination process within the terms of the contract;

(2) consider any arbitration agreement in the contract or any notified or incomplete dispute resolution processes and assess whether or not the processes under the contract for termination are mandatory or provide a code governing both the process and the determination of the rights and entitlements of the parties upon termination;

(3) consider the position at common law and any election between available remedies that may apply if the breach is a repudiation; whether to affirm the contract and remain ‘ready and willing’ to perform its part whist reserving its rights to seek damages caused by the breach, or to accept the repudiation and to sue for damages;

(4) consider whether the circumstances are such that a Court may order specific performance of the contract;

(5) check the date for any payment due from the ‘innocent party’ to the other party;

(6) check the source of funds for the payments under the contract and the terms of the funding facility including any tri‐partite agreement for any terms governing notification in the event of a breach or default;

(7) check the availability of any security or retention fund and the rules for conversion of any bonds or similar instruments or access to retention money;

(8) check any contracts with third party that may be affected by any termination of the contract;

(9) consider whether there are any security interests or security holders that need to be notified;

(10) check whether there is a parent company guarantee or other third party guarantee of performance;

(11) review the performance of the ‘innocent party’s’ agents or personnel in connection with the management or administration of the contract to identify potential waiver or estoppels claims;

(12) check the ownership or intellectual property rights in ‘working papers’ and incomplete designs and reports;

(13) review the measured progress of the work or performance of the contract and assess the extent of the delay or disruption that will be incurred as an outcome of the proposed termination;

(14) for building contracts, consider the known payment position in relation to subcontractors and suppliers and for any off‐site materials or materials not yet incorporated in the works;

(15) for building contracts, consider the industrial relations on site;

(16) for building contracts, consider the availability of specialist construction plant required to complete the works and the rights under the contract to continue to use temporary works such as scaffolding;

(17) for building contracts, consider the work necessary to remove rubbish and secure the site and protect incomplete work from the weather or deterioration;

(18) for building contracts, consider the impact if any a change in operator under any specialised processes such as welding;

(19) for building contracts, consider the insurance cover arrangements and the risk of losing cover arranged by the party in default or breach;

(20) consider the ability of the contracting party in default to meet any substantial damages award or judgment; and

(21) consider any other matters relevant in the broader commercial context between the parties.

(ii) for the party in default or breach, there is an urgent requirement to:

(1) consider everything the ‘innocent party’ may consider in relation to the issue and assess the likelihood of the ‘innocent party’ taking any action to terminate the contract;

(2) consider the availability of urgent interlocutory relief or injunctive relief to prevent any unjustified conversion or use of security funds;

(3) consider the availability of urgent interlocutory relief or injunctive relief to prevent any proposed unlawful termination of the contract;

(4) consider the availability of an order for rectification of the contract if the drawings and specifications included in the signed contract are materially different from the drawings and specifications tendered and agreed when the price was accepted;

(5) consider the availability of declaratory relief in relation to the proposed termination process or the valuation or assessment of compensation upon the exercise of such powers;

(6) investigate and determine the cost of the work performed to date and the forecast final cost to complete the work under the contract;

(7) investigate and determine the cause of any delay or increased costs and whether any such causes are eligible for an extension of time or variation under the contract;

(8) investigate and estimate the cost of measures (additional resources, planning and management) to overcome the problems experienced and to complete the contract;

(9) where the problems are caused by the performance or nonperformance of a subcontractor or supplier, consider the enforcement rights and remedies against that party; and

(10) consider the feasibility of negotiating a variation or change to the terms of the contract.
Articles & Publications - Contract - Termination of Contracts – A Practical Guide

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