In business relationships, contracts help set clear expectations and ensure clarity between parties. However, things don’t always go to plan in business dealings. Business arrangements can become unworkable due to financial struggles, regulatory changes or irreconcilable disputes between parties. When this happens, parties may need to exit an agreement.
A termination clause is designed to act as a map for disengagement, outlining when and how an agreement can end. A well-drafted termination clause will assist both parties with avoiding drawn-out legal disputes and ongoing contractual obligations. Without a well-drafted termination clause, stepping away from a contract can result in costly and time-consuming litigation, as well as reputational damage.
A. Key Types of Termination Clauses:
1. Termination for Convenience
A termination for convenience clause allows one or both parties to exit the contract “at will” or “for convenience”, allowing a party to terminate the contract as it wishes. The clause may specify whether or not notice is required before termination. Significantly, the terminating party is not required to establish any breach to rely on this clause to terminate the contract (NR Pty Ltd v Kearney [2000] ACTSC 92).
2. Termination for Breach
A termination for breach clause allows a party to exit the agreement in the event the other party fails to meet its contractual obligations. In addition to the right to exit, the contract may impose penalties on a party for their wrongdoing.
Notably, the courts have been reluctant to allow general termination for minor breaches unless the parties’ intention to terminate for minor breaches is made clear in the contract (Amann Aviation Pty Ltd v Commonwealth (1990) 92 ALR 601).
Further, a clause allowing termination for a material breach means that the breach must go to the “very root” of the contract, and must deprive a party substantially of the whole benefit of the contract (Forklift Engineering Australia Pty Ltd v Powerlift (Nissan) Pty Ltd [2000] VSC 443).
3. Termination due to Insolvency
In the event that a party becomes bankrupt or enters administration, the other party may be entitled to terminate the contract. However, for contracts entered into after 1 July 2018, a statutory stay may prevent the enforcement of termination rights in certain insolvency situations. This stay applies when a company enters a restructuring arrangement, or proposes to enter a restructuring arrangement, to avoid insolvency. In addition, a stay can be implemented when an agent, receiver or mortgagee is appointed to the company property, or if the company enters into administration.
4. Force Majeure Termination
A force majeure (or “overwhelming force”) clause allows for termination in the event that an unforeseeable event prevents a party from fulfilling its contractual performance obligations. These events are typically defined to include war, insurrection, natural disasters or acts of God.
It is important to remember that parties intending on relying on a force majeure clause are required to use specific terms in the drafting of the contract, as the concept of force majeure is not a recognised doctrine under common law. As such, parties must expressly define the scope of such a clause, together with the conditions, obligations and restrictions relating to a force majeure event in order to mitigate potential future disputes.
5. Mutual Agreement to Terminate
Certain contracts may allow for parties to mutually agree on termination terms. This can provide for a flexible and amicable exit strategy.
B. Legal Implications of Termination
It is important to remember that even with a termination clause, exiting a contract can still carry legal risks. Businesses should be mindful of the following:
1. Notice period requirements
It is typical for a termination clause to require advance notice to be given in writing to the other party. A failure to comply with this requirement may invoke a breach of contract claim. Notably, if the clause is silent as to a notice period, then it is not necessarily the case that the contract can be terminated with immediate effect.
Common law imposes an obligation on parties to give “reasonable notice” to the other party when terminating a contract (Crawford Fitting Co v Sydney Valve & Fittings Pty Ltd (1988) 14 NSWLR 438). What constitutes "reasonable notice" depends on factors such as the length and nature of the contract, industry standards, and the impact of termination on the other party.
2. Consequences of early termination
Some contracts include provisions that impose financial or legal consequences if a party terminates the agreement before its intended completion. These consequences may include exit fees, which require the terminating party to pay a specified amount; refund obligations, where payments already made must be partially or fully returned; or liquidated damages, which pre-determine compensation for losses caused by early termination. If a contract includes such provisions, failing to comply with them could lead to a breach of contract claim. Additionally, where the contract does not expressly outline these consequences, the non-terminating party may still seek damages for any losses suffered due to early termination, depending on the nature of the agreement and the circumstances surrounding the termination.
3. Post-termination obligations
Many contracts impose post-termination obligations that continue even after termination. These often include confidentiality provisions, which prevent parties from disclosing sensitive information obtained during the contract; non-compete clauses, which may restrict a party from engaging in similar business activities for a specified period; and final payment requirements, ensuring outstanding amounts are settled.
C. Legal implications for non-termination
It is important to remember that when a party to a contract experiences a breach by the other party, they generally have two options: they can either terminate the contract based on the breach or affirm the contract and insist on continued performance. Once an innocent party elects to affirm the contract, they may lose the right to later terminate it based on that same breach (White & Carter (Council) Ltd v McGregor [1962] AC 413).
Affirmation can occur either explicitly (e.g., by stating an intention to continue the contract) or implicitly (e.g., by continuing to perform contractual obligations without raising the breach). In practical terms, if an innocent party becomes aware of a breach and continues to act as though the contract is still in effect, courts may interpret this as an affirmation.
It is also important to consider that once a contract is affirmed, the innocent party may still have alternative legal remedies, such as claiming damages for losses suffered due to the breach. However, they may no longer have the right to walk away from the agreement based on that specific breach.
Given these implications, businesses and individuals facing a contractual breach should act promptly and carefully assess their options. Seeking legal advice before deciding whether to terminate or affirm a contract can help avoid unintended consequences and ensure the best course of action is taken.
How BlackBay Lawyers Can Assist
Navigating contract terminations requires a careful legal approach. At BlackBay Lawyers, we help businesses:
✔ Draft clear and enforceable termination clauses to minimise risk.
✔ Strategically review your agreement and negotiate an exit strategy.
✔ Pursue termination-related claims to enforce a party’s rights.
✔ Defend against wrongful termination claims in commercial litigation.
✔ Ensure compliance with Australian contract and insolvency laws.
The legal team at BlackBay Lawyers can provide specialised and detailed advice pertaining to contract termination. If you are considering terminating a business contract, or if the other party to your contract is seeking to terminate, please feel free to contact BlackBay Lawyers on (02) 8005 3077 or via www.blackbaylawyers.com.au for a confidential discussion with one of our solicitors.
The content in this Article is intended only to provide a summary and general overview on matters of interest. It is not intended to be comprehensive nor does it constitute legal advice. It should not be relied upon as such. You should seek legal or other professional advice before acting or relying on any of the content.
ABOUT THE AUTHOR
Isabella Tziolis assists as a paralegal in commercial, defamation, employment and general matters and is committed to supporting BlackBay Lawyers mission of delivering exceptional legal services. Her work focuses on assisting in providing comprehensive legal support, conducting extensive research, and offering strategic guidance to clients.
Isabella is currently studying a Bachelor of Laws and a Bachelor of Arts, majoring in Politics and International Relations at the University of New South Wales. Her academic and professional experience has fostered her high attention to detail and strong analytical skills which allows her to efficiently handle high-pressure situations and contribute to effective legal strategies.
