The Consequences of Incorrectly Terminating a Contract


Local Governments, as part of their day to day functions, find themselves party to contracts in a wide variety of circumstances. Procurement of goods or services is often considered the main arena of local government contracts. However, many other divisions of local government also contract on a regular basis including for property and asset management, engineering and governance.

Whilst contracts are designed to govern what the parties are required to do and when they are required to do it a contract should also provide for what happens if things do not go according to plan or if one party fails to do what they are contracted to do either wholly or in part.

The right to terminate is integral to a contract, but there can be costly consequences if a party gets this wrong.

Meaning of Incorrect termination

There are several things that a terminating party needs to get right to successfully terminate a contract.

Right to terminate

The terminating party must firstly have the right to terminate. These rights can be:

  • expressly set out in the contract; or
  • they can arise at common law; or
  • they can be statutory.

Carrying out the Termination

If a party is relying on a right to terminate that is set out in the contract, then there may be requirements set out in the contract that must be followed for the carrying out of that termination to be effective.

If the right to terminate arises at common law or by statute, the contract may still require notice of the termination to be served in a particular manner.

Conduct and timing

Parties need to also take considerable care in their conduct and timing of giving notice of termination. This is because even if a party has effectively carried out the requirements to terminate a contract, it is possible that the terminating party can put the contract back on foot again by their own conduct.

For example, where a terminating party acts in a manner consistent with the contract being on foot after it has terminated then that conduct can undo the termination.

Consequences of getting it wrong.

If the terminating party does not actually have the right to terminate, but proceeds to carry out a termination then the following situation can arise.

In these circumstances the other party can treat the attempt to terminate as what the law calls a “repudiation”. The concept of repudiation is often stated as:

“where a party evinces an intention to no longer be bound by the contract or to fulfil it only in a manner substantially inconsistent with his or her obligations and not in any other way”

Shevill v Builders Licensing Board (1982) 149 CLR 620

If a party repudiates, the other party must elect to do either one of two things:

  • The first option is to accept the repudiation and terminate the Contract; or alternatively
  • Affirm the Contract and insist on performance.

If a party has a right to terminate but does not correctly follow provisions of the contract to carry out the termination then the termination may be ineffective at law. The terminating party, believing it has effectively terminated the Contract could then cease to carry out an obligation or obligations it has under the contract.

If the termination was ineffective then the contract will remain on foot and the party that thought it had terminated the contract may find itself in breach of the contract.

Ultimately a party could also lose consequential rights to seek damages and can inadvertently give the other party rights to damages if it gets the rights and requirements of termination wrong.

 

For Local Government officers with an interest in this area Brenton Oakley will be presenting Kott Gunning’s second seminar in their Contract 101 series on the termination of contracts on Friday, 14 February 2020. Email marketing@kottgunn.com.au for details if you would like to attend.

The information published in this paper is of a general nature and should not be construed as legal advice. Whilst we aim to provide timely, relevant and accurate information, the law may change and circumstances may differ. You should not therefore act in reliance on it without first obtaining specific legal advice.