End a contract
Contract end by performance
A contract can end when the parties have done all that the contract requires of them. This is the most common way for a contract to end.
Some obligations may continue after the end of the contract. For example, the contract may continue to require you to keep some information confidential.
Example of a contract ending by performance
Effie contracts with Rekall Ltd to deliver catalogues to Rekall Ltd's customers on a one-off basis for a fee of $1000. The contract ends when Effie delivers the catalogues and Rekall Ltd pays Effie for the work.
Contract end by agreement
A contract can end when both parties agree to end it before the work is complete.
Contract end by frustration
This occurs where the contract cannot continue for some reason beyond your or the hirer’s control and neither party is at fault. For example, a contract may be 'frustrated' if a party dies or a new law makes the performance of the contract illegal. It is important to understand that a contract cannot be deliberately frustrated by either you or the hirer.
Contract end for convenience
A term of a contract may allow a party to terminate the contract at any time by notice (where there is no fault by the other party). These clauses are common in government contracts. They usually state that the government will be liable only for direct costs up to the date of termination incurred by the contractor as a result of the termination. This would not include the loss of future profits.
Contract end due to a breach
A contract can end where one party has breached an essential term of the contract and the other party decides to end the contract because of that breach.
What a 'breach of contract' is
A person will have breached a contract if they either:
- fail to do what is required of them under the contract
- make it clear, before the work is due, that they are unwilling or unable to do what was promised.
Example of a breach of contract
Effie's contract with Rekall Ltd requires that Effie deliver all of her catalogues by 4pm on Friday. If Effie fails to do this, she is in breach of her contract. If Effie only delivers 90 per cent of the catalogues by 4pm on Friday, she is still in breach because she did not complete the job. This is called 'part performance'.
Effie's truck breaks down and she tells Rekall Ltd on Monday that the catalogues will not be delivered by Friday. Effie is in 'anticipatory' breach of the contract.
When a contract can be terminated for breach of contract
A breach of a contract will not automatically bring a contract to an end (unless the contract expressly states this). Normally a breach just gives a right to 'damages' – the right to sue for any loss caused by the breach of contract. The obligations under the contract continue to be binding.
When the breach of contract is a serious breach or a breach of an essential term, the other party will have a right to terminate the contract or keep the contract going. However, your contract may require the hirer to provide you with a 'notice to remedy a breach' before it can be terminated.
Example of a breach of an essential term
Lee has a contract with Rekall Ltd to develop new software by 30 June. Rekall Ltd requires the software by this time because it has promised clients that from 1 July the software will be available for sale. If Lee fails to develop the software by 30 June, this will be a breach of an essential term. It is essential to Rekall Ltd that the software is ready in time.
It’s not always easy to know whether a particular breach is serious enough to allow you to end the contract. If you try to terminate a contract for breach where you have no right to, the termination will have no effect. You will still be required to comply with the rest of the contract.
One way to reduce risk is to include a provision in your contract that expressly states that if a particular term is breached, the other party has the right to terminate the contract. Always seek advice before you try to end a contract in this way. Having a good dispute resolution clause in the contract will help manage these issues.
What happens if you breach your contract
If you breach a contract and the matter goes to court, you may be ordered to either:
- pay damages to the other party
- perform your obligations under the contract (also called 'specific performance').
Some contracts specify what will be payable if there is a breach by one party of a particular contractual obligation. This is often called 'liquidated damages'. As long as this agreed sum is an honest estimate of the likely damage caused by the breach, a court can enforce it. However, a court will not enforce it if the agreed sum is significantly greater than the cost of the damage and considered unacceptable.
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