In Australia, termination of a contract can be carried out in the following ways:
- by performance of the parties’ obligations under the contract;
- by an agreement between the parties that they no longer wish to continue with the contract and release each other from their obligations;
- by breach of a condition or a repudiatory breach of the contract that gives the innocent party the right to terminate;
- by frustration because an unforeseen event has made performance of the contract radically different from what it was before the event; and
- by operation of law where the contract is terminated independently of the wishes of the parties.
What special rules and language are applicable to contract termination which are implied by law into a contract?
Rights to terminate vary in nature and purpose. Some commercial contracts include obligations to act in good faith and with reasonableness when relying on the right to terminate the contract. However, where the contract includes a clause to exclude all implied obligations, there is no liability on the part of either party to act in good faith while terminating a contract.
How is the notice period calculated if the contract does not mention a notice period?
If there is no mention of a notice period in the contract, the agreement must be terminated by giving reasonable notice to the other party. The circumstances at the time of delivery of such notice will be deciding factors for the “reasonable” notice period. The idea behind this is such that any notice must be extensive enough to enable the recipient of the notice to wind up their underlying business related to the terminated contract.
The time required for winding up such related business depends on certain commercial factors which influence the determination of a reasonable notice period. Such factors include:
- customer relations;
- proposition of alternative business;
- transfer of outstanding deliveries;
- negotiation of new agreements; and
- winding up of subcontracts.
Any major expenditure undertaken by the recipient in relation to the agreement, nature of the business, and the nature of the relationship between the parties is also considered when deciding the termination notice period. When considering all these aspects, it is both prudent and transparent to expressly include the notice period that applies to termination in the contract.
Does insolvency of any party result in the termination of a contract?
Contracts are not automatically terminated in case of insolvency under Australian law. A statutory stay on enforcement of contractual rights against a company is applicable for contracts entered into after 1 July 2018, where the company enters into an arrangement or proposes to enter an arrangement in order to avoid insolvency. Similarly, where an agent, receiver or mortgagee is appointed to the property of the company, or if the company enters into administration, the stay is implemented. However, rights of set off, rights to performance or enforcing performance, rights of assignment or novation, and rights to payment under an indemnity, are exempted from the stay.
Are restrictions applicable on terminating a contract if a party is in financial distress?
A restriction is applicable on suppliers of essential services where the termination of contract is resulting due to financial distress. With the exception of this, no other restrictions are applicable.
What are the consequences of force majeure?
The concept of force majeure (“act of god” events) is not acceptable under common law and parties wishing to make provision for same must include specific terms in their contract. The event(s) must be well defined in the contract and must be beyond the control of both the parties. If such a clause is added to a contract, it is strongly recommended that the conditions, obligations and restrictions relating to such event(s) are specified to avoid any related dispute arising in the future.
At Burke & Associates Lawyers, we, together with our partners, are experienced in providing high-quality corporate, business and commercial legal advice. For more information, or to discuss further, please contact Meghan Warren, Principal, Rosy Roberts or Amelia Nagel, Associates, on mwarren@burkelawyers.com.au, rroberts@burkelawyers.com.au or anagel@burkelawyers.com.au respectively, or by calling +61 3 9822 8588.
