9 May, 2018
A breach of a contractual term may, in certain circumstances, give the innocent party the right to terminate the contract pursuant to a termination clause in the contract. Termination clauses commonly require the innocent party to give notice of the exercise of their right of termination to the other party, should they choose to exercise that right. This article will look at the requirements for giving an effective notice of termination.
Prior to giving notice
Satisfy yourself that a right of termination exists
It goes without saying that before you give a notice of termination, you should be confident that you have the right to terminate. This right may arise under an express term of the contract or termination clause, or under common law principles (where there has been a breach of a condition of the contract, or a sufficiently serious breach of an intermediate term of the contract).
Where the right arises under a termination clause, the clause will usually specify the particular clause(s) the breach of which will give rise to a right to terminate. You will need to conduct an assessment of all the relevant facts to determine whether the other party has breached the particular clause(s). A breach will occur if a party fails to perform a contractual obligation in accordance with the applicable standard of duty. Failures to perform include non-performance, defective performance, and late performance. The standard of duty applicable to a contractual obligation depends on the construction of the contract and will either be strict, in which case a breach will occur if the obligation has not been performed, or alternatively depend on the exercise of the requisite due care, skill and diligence by the other party.
It is important to be satisfied that a right of termination exists because the consequences of wrongfully terminating a contract can be serious. Such wrongful termination may amount to a repudiation of the contract, with the resultant risk of exposure to a claim from the other party for damages arising from the repudiation.
A recent illustration of this principle is the decision of the New South Wales Supreme Court in Curnow Consulting Pty Limited v JPD Media and Design Pty Ltd t/a Durie Design [2017] NSWSC 1171. In that case, the Respondent served notices of termination on the Applicant purporting to terminate their services agreement and management agreement on the grounds that the Applicant had breached the agreements. Slattery J found that the alleged breaches by the Applicant were not sufficient grounds for the termination of the management agreement. The Applicant was entitled to damages for the respondent's repudiation of both agreements by serving the notices of termination.
An innocent party doubtful of its right to terminate the contract should consider investigating the matter further, including utilising the courts' pre-trial discovery processes where appropriate, before purporting to exercise its right of termination.
Give the other side a second chance if required
It is very common for contracts to contain a termination clause which requires the innocent party to give the party in breach the opportunity to either remedy the breach before terminating the contract. This is to be contrasted with the position at common law, where an innocent party is generally not obliged to give a second chance to the party in breach.
A basic example of this type of termination clause is as follows:
- If either party breaches [clause X] of this contract, the other party must by notice require the party in breach to remedy the breach within such time as the other party specifies.
- If the party in breach fails to remedy the breach within the period specified by a notice served under 1, the other party may terminate this contract.
A more advanced termination clause might set out the types of breaches which are capable of being remedied, or alternatively give the innocent party the discretion to determine which breaches are capable of being remedied.
Alternatively, the termination clause may require the innocent party to give the party in breach the opportunity to explain (or show cause) why the contract should not be terminated. This means that the innocent party must act reasonably, or in good faith, both in considering the other party's response and then deciding whether or not to terminate the contract based on the response.
If you are the innocent party, it is important to ensure that you comply with the requirement to give the other side the opportunity to remedy the breach or show cause. This means not giving a notice of immediate termination, or a premature notice of termination, to the other party. Such termination will almost always be ineffective and may amount to a repudiation of the contract.
The contract will remain on foot if the party in breach remedies the breach within the time specified in the notice or shows cause as to why the contract should not be terminated. The innocent party is not prevented from bringing a claim for damages against the party in breach, unless the termination clause indicates that the right to damages ceases to be available.
The termination clause will dictate the process to be followed in the event that the party in breach does not remedy the breach or shows cause. The clause may require a further notice of termination to be given to the party in breach.
Giving notice of termination
What form should the notice take?
A termination clause often specifies the form the notice must take. In such cases, a notice should comply with the clause to minimise the risk of a dispute arising later on over the form of the notice. The notice should also specify the particular breach relied on, and indicate clearly that termination may occur if the notice is not complied with.
Notices that do not comply with the required form are not necessarily invalid. In such cases, the courts generally look at the substance of the notice and the impression that it would convey to the reasonable person in the position of the recipient, taking into account the relevant objective contextual scene. If the notice is clear or so plain that a reasonable person would not be misled by it, the notice will generally not be invalid by reason only of its non-compliance with the termination clause.
An example of this principle is the decision of the Federal Court of Australia in Australasian Performing Right Association Ltd v Metro on George Pty Ltd (2004) 210 ALR 244. In that case, the Applicant served a notice of termination which referred to the incorrect clause in the contract. Bennett J held that this fact did not, of itself, invalidate the notice of termination. His Honour confirmed that what matters is the substance of the notice and whether it would have conveyed a clear message to a reasonable person in the Respondent's position. The notice in question expressed the Applicant's wish to terminate the contract in unmistakable terms and was therefore effective.
When should the notice be given?
A termination clause may also specify the time within which the innocent party must give notice to the other party. In such cases, a notice should be delivered within the specified time.
Where no time is specified, the notice must be given within a reasonable period of time after the breach. What is a "reasonable period" will depend on the circumstances of the case. Factors such as the duration of the contract and the seriousness of the breach may be relevant.
Once notice has been given
The contract will be at an end once a valid notice of termination is served and any applicable period of time in the notice has lapsed.
The contract will usually set out the consequences of an effective termination. If the contract is silent, the common law rules apply so that the parties are discharged from the obligation to perform their contractual duties, and the substantive terms of the contract cease to apply. Any accrued rights of the parties will remain.
