Fulfilling or Ending a Contract
A contract may end in any of the following ways.
- Agreement between the parties;
- Impossibility of performance;
- Termination for breach of contract;
When the parties to the contract completely fulfil their obligations to one another, whether by payment of money or by doing something as agreed in the contract, the contract for most purposes comes to an end.
This does not mean that legally it is at an end. If, for example, goods turn out to be defective, then the contract is still relevant to determine the rights of the purchaser.
In fact a contract has a life for six years after it has been performed. This is because the limitation period for breach of contract is six years in accordance with Section 4(1)(a), of the Limitation Act 1974 (Tas)). This means that if there is a breach of contract, a party has six years to assert his or her rights stemming from that breach.
This information is not absolute and you should always seek legal advice where a limitation period is involved.
Agreement Between the Parties
A contract, being the result of agreement, may be terminated by further agreement between the parties to end their contractual relationship.
Impossibility of Performance
If performance of a contract becomes impossible, without fault of either party, there will be an automatic discharge of the contract. Simple lack of ability of one of the parties to perform the contract is not sufficient.
The impossibility must be something that renders performance totally impossible or something unexpected which changes the circumstances so radically that the contract would have to become fundamentally different from the original contract.
Termination for Breach of Contract
Breach of contract by one party may entitle the other party to regard the contract as at an end.
However, it is rarely as simple as that. There are some breaches of contract which do not give the wronged party the right to end the contract but only entitle a claim to be made for monetary damages to make up for any loss suffered.
Other breaches – serious breaches – may provide the other party with the right to terminate. It is often difficult to know whether a particular breach justifies termination unless the contract itself is very clear about this.
If the term broken is designated an ‘essential’ term (sometimes called a ‘condition’) then a breach of it will justify termination.
Termination must be acted on. Assuming a sufficiently serious breach has occurred, the non-defaulting party has a choice: to terminate or to carry on with the contract.
If that party does nothing this will betaken to be choosing not to terminate.
Once that choice is made the right to terminate is lost (unless a fresh serious breach is committed). Accordingly, a party who wishes to terminate a contract needs to act promptly.
The difficulty with termination is to know whether the breach that has occurred is a sufficient trigger for termination.
If the non-defaulting party terminates and it turns out that he or she did not have sufficient grounds for termination, then that party has committed a serious breach — wrongful termination of the contract. The other party may then sue for damages.
If a contract is terminated, it stops as at the time of termination. This means there was a contract but it was never completed.
Any accrued rights, that is, rights which fell due before termination, are enforceable. This is to be contrasted with rescission.
It is easy to terminate a contract. All that is required is for one party to indicate clearly, preferably in writing, that the contract is terminated.
You should seek legal advice before taking court action over breach of contract.
A person adversely affected by a defective contract may cancel (rescind) the contract.
This can be done by way of defence to a claim on the contract or the party can take the initiative and cancel. Because a contract may be cancelled, it is said to be voidable, that is, it is a perfectly good contract unless and until it is cancelled.
Rescission is something that must be done straight away.
The contract is legal and effective unless it is properly cancelled. If the purchaser delays, he or she may lose the right to cancel.
It must be possible to restore the parties substantially to the pre-contract position. If this is not possible (for example, the goods have been substantially used up or have been sold to a third party), then the remedy of rescission is lost.
With some types of defective negotiation, particularly misrepresentation, it may also be possible to seek damages, either under legislation or under the common law.
Rescission is cancelling the contract as if it had never existed. This is to be contrasted with termination which stops the contract at the time it is terminated.
The act of rescission means that the parties are restored to the status quo prior to contract and the contract is treated as never having existed.
This means that no rights under the contract exist once it has been rescinded.
It is a pre-requisite of rescission that the status quo can be restored. Goods must be returned and money paid back.
If it is not possible substantially to place the parties in the position that existed before the contract was made, then the right to rescind is lost. This rule means that rescission is only available very early in the life of the contract and must be acted on very promptly.
Rescission is one of the remedies available for misleading or unconscionable conduct under the Australian Consumer Law (Section 243).
The remedy is a discretionary remedy which means that the party seeking it is not automatically entitled to it.
The court must decide whether in all the circumstances it is a reasonable response to the fact that the contract was induced by either misleading conduct or unconscionable conduct.
There is also a special right to rescind a contract under the consumer guarantee sections of the Australian Consumer Law where goods or services are unsatisfactory.
You should seek legal advice before taking legal action seeking to rescind a contract.
Rights Outside the Law of Contract
It is important to understand that consumer or commercial dealings between people may attract other legal consequences than those that stem from a contract.
If for some reason a contract remedy is not available or is practically unhelpful, it may still be possible to find legal rights through other areas of the law. The most important areas are
- Remedies under the Australian Consumer Law (ACL) (which replaced the Trade Practices Act1974 (Cth) on 1 January 2011), particularly for misleading or unconscionable conduct; and
- The law of estoppel.
- The remedies under the Australian Consumer Laware discussed at various points in this chapter.
The Australian Consumer Law is found in Schedule 2 of the Competition and Consumer Act 2010 (Cth) formerly the Trade Practices Act 1974 (Cth)).
The Australian Consumer Law has been adopted as a law of each State and Territory in place of provisions formerly in each jurisdiction’s Fair Trading Act.
With effect from 1 January 2011, there is now one single piece of legislation instead of nine different Acts.
Estoppel is not further discussed but should be kept in mind in any circumstance where someone has ‘blown hot and cold’.
The law considers that a person should have a legal remedy if the following has happened:
- A has made a representation to B or has encouraged B to adopt an assumption;
- B acted in some material way on the representation or assumption, that is, B relied on the representation or assumption;
- A then wished to act in a manner that was inconsistent with the representation or assumption and this would adversely affect B because of B’s reliance.
In these circumstances A may be estopped (prevented) from acting inconsistently or else must take the consequences of doing so.
It must be unconscionable for A to act inconsistently and this is usually the case if B has relied on the representation or assumption in some material way.
The remedy for estoppel is open-ended. A court must fashion the remedy so far as possible to undo the detriment suffered by B.
This may be an order to A to act consistently with the representation or assumption; or it may be an order to pay compensation.
Page last updated 15/12/2020