Chapter 17 Consequences of termination

Very rarely, a contract will provide that termination of the contract will cancel the contract as if it had never been entered into (see rescission later in this chapter). However, for most contracts, termination results in all parties being relieved of performing future obligations under the contract.

This means that the parties will still be liable for their breaches of contract before termination. Contracts sometimes stipulate that certain obligations are to continue even after termination of the contract (for example, confidentiality obligations or dispute resolution processes). General provisions in the contract (for example, a limitation of liability or an indemnity) will continue to apply in respect of what happened before termination.

If a principal lawfully terminates a contract, it will usually be able to recover from a defaulting party the additional costs involved in having the contract completed by someone else. These costs usually flow from the breach of contract that led to the termination.

If a contractor lawfully terminates the contract, it may, depending on the circumstances, be entitled to recover from a defaulting party the expenses it incurred in demobilising or paying out subcontractors, as well as the loss of profit.

CASE STUDY

Shevill v Builders Licensing Board (1982) 149 CLR 620

Facts
  • Under a commercial lease the landlord (Shevill) had a right to terminate the lease if rent was not paid on time.
  • The tenant paid the rent but not always on time and the landlord used its right of termination.
Result
  • The court said that where someone is given a contractual right to terminate that might operate quite harshly, damages will not be awarded for all of the losses flowing, unless the contract makes this very clear.
  • It was the termination of the lease that caused most of the contractual losses, not the breach of the lease that led to the termination.
  • The landlord was only entitled to losses flowing from the breach (for example, loss of interest on unpaid rent).
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