When a contract ends
In a perfect world, a contract will end when the work is complete and you have been paid. But not every contract ends as planned. There are a number of ways in which a contract can end.
- By performance: Where the parties have performed all that is required of them under the contract. This is the most common way for a contract to end. Example 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. Some obligations may continue after the end of the contract. For example, the contract may continue to require you to keep some information confidential.
- By agreement: Where both parties agree to end the contract before the work is complete.
- By frustration: Where the contract cannot continue for some reason beyond the control of you or the hirer and where neither party is at fault. For example, a contract may be 'frustrated' if a party dies or a new law has made the performance of the contract illegal. It is important to understand that a contract cannot be deliberately frustrated by either you or the hirer.
- For convenience: Where a term of the contract allows a party to terminate a contract at any time by notice (where there is no fault by the other party). These clauses are common in government contracts and will usually state that the government will be liable only for direct costs up to the date of termination incurred by the independent contractor as a result of the termination. This would not include the loss of future profits.
- Due to a breach: Where one party has breached an essential term of the contract and the other party decides to end the contract because of that breach. This is discussed more fully below. 'Essential terms' are those that reflect the core of what the contract is intended to deliver.
What is a 'breach of contract'?
If a person:
- fails to do what is required of them under the contract, or
- makes it clear, before the work is due, that he or she is unwilling or unable to do what was promised that person will have breached the contract.
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 can a contract be terminated for breach of contract?
A breach of a contract will not bring a contract automatically to an end (unless the contract expressly states that is what should occur). Normally a breach just gives a right to 'damages' (that is, the right to sue for any loss caused by the breach of contract) and the obligations under the contract continue to be binding. But when the breach of contract is a serious breach or a breach of an essential term, the other party will have a right to choose 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 because it is essential to Rekall Ltd that the software be ready in time. It is not always easy to know whether a particular breach by the other party 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, and you will still be required to comply with the rest of the contract.
One way to reduce the risk is to include in your contract a provision which 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 can happen 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 may specify what payments 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 a genuine pre-estimate of the damage likely to be caused by the relevant 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 unconscionable.