We often hear of the “spirit of contract”. What is the spirit of contract? In essence, the spirit of contract means that both parties to a contract perform their respective obligations in good faith with regard to the matters agreed upon in the oral or written contract. In reality, however, there are many situations in which a party is unable to honour a promise or perform an obligation for one reason or another.

Today, we will introduce some common situations in which one party may be given the right to terminate a contract.

1. Termination by Agreement

Termination by agreement refers to two situations.

(1) Termination clause in the original contract: this refers to a term in the contract signed by both parties that expressly (express) or impliedly (implied) provides for termination of the contract. A common example is where the contract has a defined term, for instance from 1 January 2019 to 1 January 2022; the contract then automatically expires on 1 January 2022, and neither party needs to give notice of termination.

(2) Subsequent agreement to terminate: this refers to a situation where the original contract contains no express or implied termination clause, but the parties, through a subsequent agreement or by agreeing to abandon the original contract, bring the contract to an end.

2. Termination by Breach

(1) Essential Terms

The most common and most concerning situation for people is breach of contract. A breach may give the innocent party the right to terminate the contract, but this is not absolute.

To terminate the contract, the innocent party must prove that the breached condition was essential to the contract. In other words, without this condition I would not have entered into the contract at all.

Let us look at a case to understand what kind of contractual term is essential.

Case Analysis:

Associated Newspapers v Bancks

Facts

In this case, the plaintiff (Associated Newspapers) and the defendant (Bancks) entered into a contract under which the defendant would draw comics and the plaintiff promised to display them in full on the front page of their newspaper every week. In fact, Associated Newspapers failed to display the comics on the front page. Bancks sought to terminate the contract on the basis of Associated Newspapers’ breach, while Associated Newspapers sought an injunction, arguing that “displaying it on the front page” was not an “essential term”.

Court’s Finding

The court held that “displaying it on the front page” was a condition, and the test for whether it was essential was: would the parties have entered into the contract at all without these conditions/terms?

In this case, the court considered that there were two promises of particular importance. First, for the defendant (Bancks), the obligation to be performed was that he had to provide his own comic artwork every week. For the plaintiff (Associated Newspapers), its key promise was to display the defendant’s artwork in full each week and on the front page of the comics section. The court held that if Associated Newspapers could not promise to display Bancks’s artwork on the front page as agreed, then Bancks would not have agreed to enter into this contract at all in the first place.

The Decision in this Case

Displaying the artwork on the front page was an essential term, so based on Associated Newspapers’ breach, the defendant Bancks was entitled to terminate the contract.

(2) Intermediate Term

An intermediate term is one that is neither essential nor entirely non-essential. Unlike a breach of an essential term, a breach of an intermediate term does not directly give rise to a right to terminate the contract, unless the breach is very serious.

(3) Warranties

Terms in this category are non-essential terms, and their breach does not directly give the innocent party the right to terminate the contract.

3. Termination for Repudiation

Repudiation generally refers to a party being unwilling or unable to perform the contract. So how is repudiation assessed?

(1) In general, it is necessary to infer from a party’s conduct whether that party is unwilling or unable to perform the obligations agreed in the contract. This assessment is relatively objective, that is, how a reasonable person would interpret such conduct. For example, suppose the parties entered into a construction contract. If the terms required party A to clear all existing items from the site by 1 January 2020, but after repeated communications from party A, party B unreasonably delays again and again, and several months after the deadline still shows no intention or action to clear the site, then it may be inferred from party B’s conduct that party B is unwilling to perform the obligations.

(2) In some cases, the “unwillingness” in repudiation may be inferred from a combination of a series of acts. If a single act is not enough to infer a party’s unwillingness, but that person’s series of acts taken together can show an unwillingness to perform, then it may amount to repudiation.

(3) In addition, for instalment contracts which require performance in instalments, does a single failure to perform as required constitute repudiation?

In Maple Flock Co Ltd v Universal Furniture Products, the plaintiff and the defendant entered into a contract under which the plaintiff was to sell 100 tons of rag flock to the defendant in deliveries of 1.5 tons three times a week. Out of 18 deliveries, all except the sixteenth met the contractual requirements. The defendant sought to terminate the contract on the basis of the defective batch. The court held that in considering whether termination was valid, the following two points should be taken into account:

a. The proportion of the breached part to the total

b. The likelihood of such breaches continuing in the future

In this case, the judge considered that the breached portion represented a small proportion of the total quantity agreed, and given that the breach was a single, isolated incident, the likelihood of further breaches was low. The court held that the breach in this case did not amount to repudiation.

Of course, how a contract is drafted matters. A well-drafted contract will usually contain a termination clause. It will set out the circumstances in which either party has the right to terminate the contract, the requirements for termination (such as giving written notice to the other party), and the consequences of termination.

Finally

It is very important to understand in what circumstances you have the right to terminate a contract and to have a contract terminated against you. Although standard form contracts exist in some areas, generally speaking the parties may modify and draft contract terms to better protect their own interests. For advice on how to enter into a contract, whether the contract terms are reasonable and protect your interests, as well as on contract disputes and other related issues, please consult our professional team of lawyers.