Ending a contract

A contract may be concluded in the following ways:

performance;

agreement between the parties;

termination by frustration;

breach of contract.

Performance

When the parties to the contract completely fulfill 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.

Further, the parties may agree that the contract is automatically terminated if a “contingent condition” is not fulfilled. For example, two parties agree to purchase property, subject only to A obtaining finance from the bank. If A is unable to obtain finance, then the contract is at an end. As the clause was a contingent condition, as opposed to a promise, A has not breached the contract.

Termination by frustration

If something happens after a contract has been made that makes the performance of the contract futile or impossible, without fault of either party, the contract will be automatically terminated.

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.

For example, it has been held that court injunctions – that made it impossible for a party to do the amount of construction work they had agreed to do – automatically terminated a contract by frustration (see Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337).

Sometimes, the parties agree to “force majeure” clauses that set out the precise consequences if certain events occur that are beyond the parties’ control. For example, a force majeure may provide that in the event of strikes, floods or war, the time for delivery of a shipment is merely delayed, rather than the contract being automatically terminated.

Breach of contract

As set out above, breach of contract by one party may entitle the other party to terminate the contract, where the breach constitutes “repudiation” or breach of a condition or an intermediate term that causes substantial loss of benefit.

If a party breaches a term that is considered to be a warranty, the wronged party does not have the right to terminate the contract, but can still claim damages (seeTerms may be conditions or warranties” and “Remedies for breach of contract”).

It should be noted that termination of a contract means that unlike where a contract is rescinded (i.e. made void from the beginning), the contract is valid up to the point of termination such that accrued rights and obligations remain intact and parties are only discharged from any outstanding obligations.