Termination of Contracts & Agreements

Business Contracts Litigation & Disputes Article #1

This is first article in a series related to commercial litigation and disputes in the context of business and commercial contracts and agreements.  The focus of this article is termination of a commercial contract and the implications of ending a contract when there is no entitlement to do so.

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It is often the case that commercial or business contracts and agreements contain clauses that enable one party to terminate the contract if the other party has not performed a particular obligation by a specified date.  These clauses may be found in many different types agreements, including sale and purchase agreements regarding the acquisition or the sale of businesses or companies such as a share sale agreement, unit sale agreement or contract of sale of business.

For example, a contract of sale of business may state that the vendor may terminate the contract if the purchaser has not paid the purchase price by a particular date.  These contracts will usually contain a provision to the effect that ‘time is of the essence’ in the performance of the parties’ obligations under the contract.

In an agreement where time is of the essence, and a contracting party fails to perform by the stipulated time, this will in a number of cases give the party who is not in breach the right to terminate the contract immediately by giving written notice of termination, but without any prior notice to the defaulting party.  The person or company terminating the contract will usually then be able to commence commercial litigation against the person or company who was in breach, and seek to recover the loss and damage that they have suffered as a result of the breach of contract.

To use the example of a contract of sale of business the loss and damage that the vendor may seek to recover would include the sale price that was contracted with the original purchaser less the amount for which the vendor is able to sell the business to a new purchaser.  The vendor must mitigate their loss by making reasonable attempts to obtain a reasonable value for the business if they do re-sell to a new purchaser.

It is important that caution is taken in terminating a contract for non-performance of an obligation even where it is stated in the contract that time is of the essence.  This is partly because certain breaches are not sufficiently serious to justify termination or rescission of a contract.  It is also because, even though time may have been of the essence at the time of entering into the contract or agreement, a Court may determine that a party has waived their right in that regard.650x200_strategy

Returning to the example of selling a business, if payment of the purchase price is not made on the settlement date, the vendor may by certain conduct waive its right to receive payment strictly on that date or shortly after that date.  If the right is waived this will be construed by the Court as an election not to rescind or otherwise terminate the agreement consequent upon the failure to pay purchase price by the relevant date.  The purchaser would remain in breach of the contract due to their failure to make payment by that date, but it would not give the vendor the right to terminate immediately.  In effect, time may cease to be of the essence.

If time has ceased to be of the essence, or if it was never of the essence under the provisions of the contract, the party not in breach is nevertheless ordinarily entitled upon the giving of an appropriate notice to fix a reasonable time for performance by the other party of their obligation.  This would have the effect of again making time of the essence.  If the party in breach does not perform within that further reasonable time the other party would then again be entitled to terminate or rescind the contract.  Terminating a contract following such a breach is sometimes known as accepting the other party’s repudiation of the contract.

It is an important step of the process, and can have very serious consequence in relation to any commercial or business litigation and disputes that follow termination, if the party who was not originally in breach terminates the contract or agreement prematurely and without giving the notice that should correctly have been given.  In that case, the person or company that was originally in breach may deny that the contract has been validly terminated.  They could also adopt the stance that, by the party that was not in breach purporting to terminate the agreement prematurely, that party has evinced or shown an intention not to be bound by the agreement.  The party that was originally in breach may then purport to accept the other parties invalid termination as a breach and repudiation of the agreement, and then terminate the agreement themselves.  This can have implications because the types of loss and damage that a party may be entitled to claim can vary depending upon which party that was in breach the time when the agreement was validly terminated.

It is important to seek legal advice prior to giving any notice of termination under a contract or agreement.

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Please note that the facts and circumstances relevant to every client are different.  The above article should not be relied upon as legal advice.  Article by  published 6.8.13.  To be notified of new articles:

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