Contractual right of termination

Automatic termination

A contract can include a term that automatically terminates the contract if a specified event occurs.

For example, a term might require a pre-condition to be met by a particular time before the rest of the contract commences and, if that pre-condition is not met within the required time, the contract will terminate automatically.

Another example is having a term in the contract that makes the contract automatically terminate if some or all obligations are not completed by a certain date (commonly known as a ‘sunset date’).

Usually a contract will automatically terminate when the parties have performed all their obligations.

Specified event

Contracts may have a list of specified events that will create a right of termination.

For example, an inability to obtain finance by a particular time, or the absence of an acceptable government or municipal approval before construction is due to commence, are sometimes specified as events that give one or more parties a right to terminate (rather than resulting in automatic termination).

Insolvency has historically been a commonly specified event creating a contractual right to terminate. Individual acts of insolvency were usually identified as separate events (for example, becoming bankrupt or a company being wound up or having a liquidator appointed).

From 1 July 2018, amendments to the Corporations Act 2001 (Cth) came into effect which stay the ability to exercise a right to terminate a contract as a consequence of certain types of insolvency events or acts.  The Corporations (Stay on Enforcing Certain Rights) Declaration 2018 (Cth) exempt certain rights from the ambit of the statutory stay, including step-in rights and the right to assign or transfer a party’s own rights or obligations under the contract.

Termination is usually made effective by the party with the right of termination giving a written notice of immediate termination to the other parties.

Default

The most common contractual rights of termination are for specified breaches of the contract. Usually only serious or important breaches are specified as meeting the threshold for termination of the contract, for example, a failure to achieve completion of work or supply materials on time or to the required quality, or to make a payment on time.

The defaulting party is usually given a cure notice either requiring the breach to be rectified within a specified time, or requiring the defaulting party to justify (‘show cause’) why the contract should not be terminated.

A right to immediately terminate will arise when the defaulting party has failed to adequately act on or respond to the notice in the manner required by the contract.

The terminating party must be careful to follow the contractual provisions to the letter when terminating the contract, as a failure to do so may amount to a repudiation by the terminating party (Diploma Construction Pty Ltd v Marula Pty Ltd [2009] WASCA 229) and Androvitsaneas v Members First Broker Network  [2013] VSCA 212.

Convenience

A contractual right for one of the parties (usually the principal) to terminate the contract at its discretion has become increasingly common, particularly in large contracts with higher risks and uncertain outcomes and in long term service contracts.

It is usual for compensation to accompany the termination for convenience to allow the terminated party not only the right to recover its actual costs and profits to the date of termination, but also:

• the costs of breaking arrangements it has with others;
• its costs of demobilisation; and
• a contribution towards the profit it has foregone.

However, it is not clear whether Australian courts would hold that a good faith term in the contract or implied would constrain the exercise of a right to terminate for convenience (Apple Communications Ltd v Optus Mobile Pty Ltd [2001] NSWSC 635).