Chapter 17 Common law right of termination

Breach of an essential term

Simple breaches of contract (for example, not submitting a payment claim on time or not providing the required number of copies of documents) will not create a common law right to terminate, but a breach of an essential term of the contract will.

A term is an essential term of the contract when it is a condition of the contract. A condition is a promise of such importance that the promisee would not have entered the contract without an assurance of strict or substantial performance of the promise (Tramways Advertising Pty Limited v Luna Park (NSW) Pty Limited (1938) 38 SR (NSW) 632).

An essential term/condition can be contrasted to a term that is a warranty. A breach of a warranty only entitles an innocent party to damages and does not permit termination.

In the construction industry, essential terms usually deal with timely performance of works or services or with payment. Sometimes an essential term will be implied under common law if it had not been adequately included in the contract to start with.

A breach of an essential term of a contract does not automatically terminate the contract. Instead, the breach creates a right to terminate. The party with that right will need to promptly elect whether to terminate or keep the contract going and preserve its rights to be paid damages for the breach.

The termination is usually made effective by giving a written notice of immediate termination to the party in breach.

Breach of intermediate term

In 2007 the High Court recognised that a contract can be terminated where there is a sufficiently serious breach of a non-essential term (Koompahtoo Local Aboriginal Land Council v Sanpine Pty Limited [2007] HCA 61). Whether a term is an intermediate term will depend on:

  • the nature of the contract; and
  • the nature of the breach and consequences for the innocent party.

Repudiation

A repudiation occurs where a party demonstrates an intention to no longer be bound by the terms of the contract.

Courts have found that a party has repudiated a contract if it:

  • tries to terminate the contract without any right to do so;
  • tries to terminate the contract, but makes a mistake with the termination procedure;
  • suspends performance of the contract without any right to do so; or
  • clearly indicates it cannot or will not perform its obligations under the contract.

Exclusion of common law right of termination

The general presumption is that the common law right of termination exists unless the contract expressly sets out a complete and exhaustive termination regime (Commonwealth of Australia v Amann Aviation Pty Ltd (1991) 174 CLR 64).

CASE STUDY

Carr v J A Berriman (1953) 89 CLR 327

Facts
  • A building contract required Carr, as the principal, to excavate the site and provide possession of the excavated site to Berriman, the contractor, by a particular handover date. The contract also required the principal to supply certain structural steel to the contractor.
  • The principal had not even started excavation two months after the handover date and the contractor was informed that the steel was no longer to be supplied by the principal and was to be omitted from the contract.
  • The contractor refused to proceed with the contract.
Result
  • The court considered that the continuing failure to provide the required possession could demonstrate an intention to no longer be bound by the contract and, therefore, amount to a repudiation of the contract by the principal.
  • The failure to supply the required steel as required by the contract was further demonstration of that intent.

The other party will need to promptly elect whether to accept the repudiation or insist that the contract be performed. Acceptance of the repudiation will create a right of immediate termination.

CASE STUDY

Tropical Traders Ltd v Goonan (1964) 111 CLR 41

Facts
  • A land sale contract required the purchaser to make payments by the times specified in the contract.
  • The contract provided that time was of the essence in the contract in all respects and if the purchaser failed to pay by the times for payment, the vendor would be able to rescind the contract without notice.
  • The purchaser routinely made late payments. The deposit was  paid one day late and instalments were paid three, thirteen and five days late respectively.
  • The purchaser then sought an extension of three months in respect of a payment. The vendor gave an extension of one week, while reserving its rights under the contract.
  • The purchaser did not make any payment within the week and the vendor elected to terminate the contract the day after the extended date.
  • The purchaser claimed that by accepting late payments, time was no longer of the essence in respect of the latest due date. It said that the vendor had induced an assumption that it would not terminate for late payments by accepting late payments or giving the extension.  The purchaser claimed that the vendor had elected not to terminate for this late payment as a result of the extension granted.
Result
  • The vendor’s conduct of accepting late payments did not waive the clause that time was ‘of the essence’ or induce an assumption that it would not terminate as a further late payment.
  • Acceptance of late payments was merely acceptance or affirmation in respect of each particular breach.

The vendor’s decision to grant an extension substituted the original time in the contract with a new time which was still ‘of the essence’ and, therefore, was not a waiver or affirmation.

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