When May A Contract Be Terminated?
Commercial contracts form the backbone of commerce in Australia. Many contracts contain provisions setting out the circumstances where one or both parties may terminate the contract. But when may a contract be terminated when it contains no such provisions? We are often asked by clients to advise what action they can take if the other party to a contract refuses to comply with their obligations and/or denies the existence of a contract. Such actions may constitute what is legally described as “repudiation” which sometimes entitles the innocent party to “accept the repudiation” and then terminate the contract.
It is important to consider the implications of terminating a contract in this way because if, at law, there has been no repudiation of the contract then the termination itself may constitute a repudiation of the agreement entitling the other party to terminate the agreement and claim any loss and damage suffered.
The Supreme Court of Queensland recently considered this issue in the context of a franchise agreement in the case of Little Images Pty Ltd -v- Fresh View Venture & Ors [2011] QSC 402.
The case involved a franchisor and a franchisee who were in dispute following the termination of the franchise agreement. Each party claimed that it lawfully terminated the franchise agreement in consequence of the other’s repudiation.
The franchisor claimed that it accepted the repudiation of the franchisee and terminated the franchise agreement. It claimed damages from the franchisee for the loss of the benefit of the contract.
The franchisee argued that it was entitled to terminate the franchise agreement due to an alleged repudiation of the franchise agreement said to be “sufficiently serious breaches of non-essential terms of the franchise agreement”. The primary breach was the alleged failure of the franchisor to provide reasonable support to the franchisee. The franchisee argued that the breaches had the effect of depriving it “of substantially the whole benefit which was intended that (it) should obtain from the contract” and that the breaches “went to the root of the contract”.
The general principal is that breaches of terms that go to the root or heart of a contract (known as essential terms) give the innocent party an election to terminate the contract or require its performance.
In this case the Court held that the alleged breaches did not go to the root of the contract and that the “magnitude of the breaches were not serious nor deliberate”. Consequently it held that the franchisee was not entitled to terminate the franchise agreement. The Court further held that, by terminating the franchise agreement the franchisee itself had repudiated the agreement in circumstances entitling the franchisor to terminate the franchise agreement. As a result the franchisor was successful in its claim against the franchisee for damages arising from the loss of the contract.
This case evidences how important it is to obtain legal advice prior to either not complying with your obligations under a contract (even when you feel it is warranted) or terminating a contract. The implications of making the wrong decision can be devastating.
The lawyers in our Dispute Resolution and Litigation Department have substantial experience advising clients and providing an effective strategy to deal with such circumstances.
Author: Kaye Griffiths
