Breach of contract and termination

1. Contracts may be brought to an end by: full performance; mutual agreement; the operation of a term in the contract; the operation of the law; or one party’s termination for the other party’s breach.

2. Breach of contract occurs when a party, without lawful excuse, refuses (‘renunciation’) or fails (‘failure of performance’) to perform any of his contractual obligations; performs defectively; or incapacitates herself from performance (‘impossibility’). Breach of contract does not automatically bring a contract to an end. It always gives the claimant a right to claim damages (and perhaps specific performance), but does not always entitle her to terminate the contract.

3. Where renunciation and impossibility occur before performance is due, this is known as anticipatory breach; the claimant is entitled to terminate (if the breach is sufficiently serious) and claim damages immediately.

4. The claimant can terminate the contract if renunciation, impossibility or breach relate to all of the contract-breaker’s obligations (ie breach is ‘total’). Where they are partial and relate to only some of the contract-breaker’s obligations, the right to terminate depends on whether the breach is sufficiently ‘serious’, and this, in turn, depends on the status of the term breached:

  1. breach of a ‘condition’ (an essential term) allows the claimant to terminate;
  2. breach of a ‘warranty’ (a subsidiary term) does not allow termination; it only gives a right to damages; and
  3. breach of an ‘innominate term’ (a ‘wait-and-see’ term) will only allow termination if the claimant is thereby deprived of substantially the whole benefit that she was intended to receive from the contract.

5. A party can withhold her own performance (without terminating the contract for breach) simply because her own performance is not yet due because: (a) a contingent condition (an event upon which the existence of the contract depends but which neither party is obliged to bring about) has not occurred; or (b) her own performance is dependent on the other party’s ‘entire’ performance of a promissory condition which has not been substantially completed.

6. Contractual terms are classified by statute, the parties’ express agreement, binding precedent or judicial determination of the parties’ implied intentions. It is for the court to interpret whether the parties used the words ‘condition’ or ‘warranty’ in their technical termina­tion-yielding sense and to interpret the effect and scope of any agreed termination clause.

7. An otherwise unclassified term is likely to be a condition if: it involves a single performance, with a clearly specified time limit and sequence, can only be breached in one way, is vital to the contract or necessary for commercial certainty. A term is likely to be innominate if: it can be breached in different ways with varying degrees of seriousness, performance takes place over a long time and substantial performance has already been given, or where the obligation is loosely framed.

8. An election to terminate must be clear, unequivocal and generally communicated to the contract-breaker. It can only come after repudiatory breach. The claimant is not bound to elect at once, but delay may lead to affirmation. The claimant need not give her real, or indeed any, reason for termination, so long as she is legally entitled to terminate. The election to terminate or affirm the contract is irrevocable once made. The right to terminate may be lost by the claimant’s own conduct (e.g. affirmation), performance by the defendant in the case of renunciation or anticipatory breach or the operation of a rule of law.9. The effect of termination is to discharge both parties from further performance of the contract and impose a secondary obligation on the contract-breaker to pay damages. In contrast, no contractual liability remains in respect of outstanding obligations where contracts are (a) discharged for frustration; or (b) rescinded ab initio (eg for misrepresentation), although there may be restitutionary liability for benefits received.

10. The claimant can elect not to terminate, but rather to affirm the contract and sue for the price unless she needs the contract-breaker’s cooperation or has no ‘legitimate interest’ in completing her performance.