#2216 - Termination Of Contract - Contract Law

Termination of Contract

When can a contract be terminated?

• Chen Wishart: courts favour keeping contract in place and D paying damages for unperformed parts rather than allowing termination.

  • Where failure of performance is total

    • C entitled to terminate contract

  • Where failure of performance is partial

    • Chen Wishart: difficult technical questions arise

1. Is the obligation dependent on the other party’s performance?

• Independent Obligations: where A and B have promissory obligation to one another, but this is independent of the performance of the condition (e.g. tenant’s covenant to pay rent is independent from landlord’s covenant to repair)

  • C cannot terminate, but D is liable for any breach

• Dependent Obligations: Where A’s performance is dependent on B’s performance (e.g. where C buys goods from D, C need only pay if D delivers)

  • If this is an entire obligation

    • (where D must complete entire performance before C is obliged to pay, for instance)

      • then if D defaults, C can terminate, need not pay any of the performance completed, and D is liable for any breach.

  • If this is a divisible obligation

    • Then if D defaults

      • C can claim damages

        • But may not be able to terminate contract

2. If the obligation is divisible, when can this be terminated?

• Breaches of “conditions”(essential term) = C can terminate in all circumstances.

  • Hong Kong Fir Shipping v Kawasaki [1962]: X hired vessel from Y for 24 months, returned after 12 claimed “unseaworthy” therefore breaching contract.

    • Sellers LJ:

      • unless the non-performance alleged goes to the whole root of contract,

        • it is not to be treated as so fundamental as to undermine the whole contract.

          • It will only give rise to damages, not termination.

• Breaches of “warranties” (subsidiary term) = C cannot terminate.

  • Hong Kong Fir Shipping v Kawasaki [1962]:

    • Upjohn LJ:

      • Where term is open to many interpretations,

        • it is contrary to common sense to suppose that in such trivial breaches of the term, D should immediately have a right to end the contract.

          • Unless the contract makes that very clear indeed.

• Innominate terms (wait and see)

  • Problem: It’s sometimes impossible to tell at contract formation whether a term in a condition or warranty – hence rise of innominate terms:

    • Hong Kong Fir Shipping v Kawasaki [1962]: X hired vessel from Y for 24 months, returned after 12 claimed “unseaworthy” therefore breaching contract.

      • Diplock LJ:

        • Some contract terms capable of being termed “conditions” and “warranties” from the outset

          • However, in some cases, should look not at the breach, but the event that follows.

        • If an event from the breach deprives the Innocent Party of substantially the whole benefit which it was intended that he should obtain from the contract

          • Then this is a “condition” which can give rise to termination.

            • If not, it is a “warranty” which won’t give rise to the termination, only damages.

3. So, how are terms classified?

• Policy Considerations

  • Prior determination (determination of terms at outset) supported by:

    • Need for Legal Certainty in commercial transactions.

    • Freedom to Contract

  • Subsequent determination (innominate terms) supported by:

    • Wish to avoid bad faith withdrawal

      • i.e. where C terminates contract to avoid bad bargain or market fluctuations, and depends on technicalities to escape liability.

        • This would support innominate terms – the ability to terminate would depend on the seriousness of the consequences, not other considerations.

          • However, Lord Denning in The Mihalis Angelos [1971]

            • Law entitles termination if X has legal right at required time – even if mistake/false reason is the reason originally given.

    • Upholding Bargains

      • Better to have performance than termination – encourages C to keep with contract by classifying as “innominate term”

      • Chen Wishart: but this could also be achieved by classifying the term as a “condition” from the outset, encouraging D to fulfil the contract.

• Statue

  • Sale of Goods Act 1979:

    • Implies conditions that

      • Seller has title to good s.12(1)

      • Goods correspond to description s.13(1) etc.

    • Implies warranty that

      • Goods sold free from encumbrances in favour to third parties not known s.2(2)

      • Buyer enjoys quiet possession of goods s.2(4-5)

    • Innominate Effect: s.15A(1)

      • Non consumer customer must treat breach as one of warranty where breach is “so slight it would be unreasonable for him to reject them”

        • Q = what is slight only answered by “wait and see” approach.

• Weight of Authority

  • The Mihalis Angelos [1971]:

    • Lord Denning: Courts don’t often ask: was the term a condition or warranty?

      • But rather: was the breach such as to go to the root of the contract?

        • If it was, then the other party is entitled to discharge self from further performance.

      • However, some terms are conditions by weight of authority and are always treated as such unless clearly stated in contract otherwise.

• Parties’ express agreement

  • Technically, parties can class terms as conditions and warranties – meaning X can class trivial term as condition and thereby have wide powers of termination

    • Courts can counter this:

      • Find that parties used labels non-technically

        • Schuler v Wickman [1974]:

          • Lord Reid:

            • Using word “condition” in a contract is a strong indication that the parties wish it to be treated as such

              • However, “condition” may have been used in sense its technical definition would dictate.

• Court finding parties’ implied intentions

  • Schuler v Wickman [1974]: “condition” of contract was that W would get reps to make all 1400 visits w/o fail or have contract terminated.

    • Lord Reid: Fact that interpretation of term strictly as dictated leads to a very unreasonable result

      • Must mean that the parties are less likely to have intended it

        • And if they did intend it

          • They must make it absolutely clear.

  • Bunge Corp v Tradox [1981]: D needed 15 days notice of which vessel elected – wasn’t given until 7 days before by C. D terminated contract.

    • Lord Scarman:

      • In cases where seller and buyer need to know where they stand from the outset and not merely in hindsight

        • Then the relevant clause should be interpreted as a condition and not merely an innominate term.

    • Lord Wilberforce:

      • Some breaches have many consequences. This breach has only one consequence: you’ll be late.

        • If you “wait and see” for this sort of contract term – which parties can’t have intended

          • Then you remove commercial certainty from the equation

Electing Termination

• Unlike Frustration, contract does not automatically come to an end – parties may elect whether a contract should be terminated or not

  • To terminate

    • Must be clear/unequivocal

    • Must be within a reasonable time and before any other prejudicing event, but need not be at once (C runs the risk the more time he takes though)

    • Must be communicated to D

  • C can lose right to terminate if

    • His own conduct affirms the contract, is subject to estoppel or he himself is in breach liable for damages

    • D performs when performance becomes due

    • Operation of Law

Effect of Termination

• Terminated contract discharges both parties from further obligations or performances

  • BUT Photo Production v Securicor [1980]:

    • Exemption clauses will still remain in effect

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