Ending a contract: How contracts work

There are a number of ways that a contract can end and four main remedies for a breach of contract.

A contract may be concluded in the following ways.

Performance

When the parties to the contract completely fulfil their obligations to one another, whether by payment of money or by doing something as agreed in the contract, the contract comes to an end.

Agreement between the parties

A contract, being the result of agreement, may be terminated by further agreement between the parties to end their contractual relationship.

Operation of law

This means that the parties will have no control over the ending of the contract. For example, if one of the parties becomes a bankrupt, the contract may end and the other party may be left to seek relief from the bankrupt’s estate.

Contracts made under seal in Victoria automatically lapse after 15 years, under section 5(3) of the Limitation of Actions Act 1958 (Vic).

Impossibility of performance

If performance of a contract becomes impossible, without fault of either party, there will be an automatic discharge of the contract. Simple lack of ability of one of the parties to perform the contract is not sufficient. The impossibility must be something that renders performance totally impossible or something unexpected that changes the circumstances so radically that the contract would have to become fundamentally different from the original contract.

Breach of contract

Breach of contract by one party may entitle the other party to regard the contract as at an end. However, it is rarely as simple as that. There are some breaches of contract (seeTerms may be conditions or warranties”) that do not give the wronged party the right to end the contract but only entitle a claim to be made for monetary damages to make up for any loss suffered.

Remedies in modern markets

When a term of a contract has been breached, there are four main remedies available to the wronged party: self-help, rescission, damages, and specific performance.

These remedies and others are covered in detail elsewhere (see Taking action as a consumer, and, for some loan contracts, Credit reporting).

In modern consumer markets, such as financial services, utilities and telecommunications, there has been a move toward the establishment of industry-specific ombudsmen (e.g. the Financial Ombudsman Service and the Telecommunications Industry Ombudsman). These bodies offer a low-cost and informal alternative to courts and tribunals.

When resolving a dispute the ombudsman is required to take into account:

the relevant law;

good industry practice; and

what is fair and reasonable in all the circumstances.