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Termination (contract)

Termination (contract)

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This precedent has been authored by Dr. Gordon Hughes, Principal, Davies Collison Cave Law.

Introductory note

A party has a common law right to terminate in the event of a fundamental of a condition of a contract. Accordingly, the role of the termination clause is to modify or clarify the common law position by elaborating on circumstances which do, or do not, constitute a terminating event.

It is common to refer to the right arising in the event of a breach of a “material: term”, although the meaning of the word “material” has been open to debate (see Minister for Immigration v Dela Cruz (1992) 34 FCR 348; (1992) 110 ALR 367; BC9203397). A “material” breach is not a term recognized by contract law, as opposed to “fundamental” breach (see Forklift Engineering Australia Pty Ltd v Powerlift (Nissan) Pty Ltd [2000] VSC 443; BC200007795). Ambiguity can be reduced if specific triggering events are provided as examples of a “material” breach (see Forklift Engineering Australia Pty Ltd v Powerlift (Nissan) Pty Ltd [2000] VSC 443; BC200007795).

Insolvency is typically listed as a triggering event. The terminating party should be aware of the ipso facto provisions of the Corporations Act 2001 (Cth) (see parts 5.1, 5.2 and 5.3A) which applies a stay to the exercise of termination rights in the event of insolvency, so as to allow the insolvent party a reasonable period in which to address its financial difficulties.

Termination for convenience

A “termination for convenience” clause is sometimes sought by customers in particular, enabling them to withdraw mid-term without penalty from a contractual commitment. The rationale for termination clauses of this nature is not compelling — it is even less so if it is the supplier, as opposed to the customer, seeking the right to withdraw from a contractual commitment in the absence of a breach by the customer.