Before reading about breach of contract it is vital that you read the following:
Termination for breach of contract is very complicated and should not be done without seeking legal advice.
Wrongful termination can itself be a breach or repudiation allowing the other party to terminate and commence commercial litigation proceedings to recover damages against you.
Never attempt to terminate a contract before speaking to a qualified solicitor, as the consequences could be severe.
We offer advice and assistance to clients who need to terminate a contract – contact our lawyers today.
DEDICATED CONTRACT LAWYERS – PROVEN RESULTS
OR CALL: 1300 545 133 FOR A PHONE CONSULTATION
What is a Breach of Contract?
A breach of contract occurs when a party to a contract does not perform their obligations under the contract.
A breach may also occur when a party demonstrates that they are unwilling or unable to perform their obligations under the contract
Not all breaches of contract give rise to the right to terminate the contract and so care should be taken, and advice should be sought before attempting to terminate a contract.
There are a number of different forms of breach of contract and legal remedies.
Different Forms of Breach?
There are three (3) main forms of breach of contract:
- Material breach of contract or breach of a fundamental or essential term of the contract; and
- Anticipatory breach of contract or repudiation of the contract; and
- Minor breach of contract or breach of a non-essential term of the contract (also known as an innominate term of the contract).
These different forms of breach allow for different rights at law and allow you to do different things upon satisfactorily proving the breach.
What is a Material Breach of Contract?
In Forklift Engineering Australia Pty Ltd v Powerlift (Nissan) Pty Ltd [2000] VSC 443 Warren J said that:
A “material breach” of a contract does not appear to be a concept known to the law of contract. It is then a question of determining the parties’ intention of the use of the expression “material breach” in the agreement. In so doing I identify the ordinary sense of the word or words used unless such application leads to absurdity or inconsistency is a breach of a fundamental term of the contract.
So, in Australian law a material breach of a contract is known as a breach of an essential or fundamental term of the contract or lease.
The Australian Courts have defined a fundamental term to mean:
Tramways Advertising Pty Ltd v Luna Park (NSW) Ltd (1938) 38 SR (NSW) 632
A term of the contract which went so directly to the substance of the contract or was so essential to its very nature that its non-performance may fairly be considered by the other party as a substantial failure to perform the contract at all.
This case was also cited in Koompahtoo Local Aboriginal Land Council v Sanpine Pty Limited [2007] HCA 61 where they said:
The test of essentiality is whether it appears from the general nature of the contract considered as a whole, or from some particular term or terms, that the promise is of such importance to the promisee that he would not have entered into the contract unless he had been assured of a strict or a substantial performance of the promise
This statement has been cited and followed in Superior Queensland Courts too.
In Fewstone Pty Ltd v Ross Nielson Properties Pty Ltd and George (No 171) Pty Ltd [2003] QSC 82, Atkinson J said:
The test was succinctly stated by Jordan CJ in Tramways Advertising Pty Ltd v Luna Park (NSW) Ltd. The decision was reversed on appeal, but his Honour’s statement of the law is not affected.
In his reasoning in Zonebar P/L v Surfers Paradise Inv P/L [1997] QSC 196, Shepherdson J cited Tramways by saying:
The absence of the certificate could not on any view be said to be a breach of a term which went so directly to the substance of the contract or was so essential to its very nature that its non-performance may fairly be considered by the plaintiff as a substantial failure to perform the contract at all.
To determine if a breach of contract constitutes a material or fundamental breach will entirely depend on the contract and the surrounding facts and circumstances of each individual case.
However in relation to debt recovery, non-payment under a contract is usually considered to be a material breach, that being a breach of a fundamental term of the contract.
Repudiation and Anticipatory Breach
In Australia an anticipatory breach of contract falls under the doctrine of repudiation. There are a number of other factors to consider in relation to the doctrine of repudiation other than anticipatory breach.
Anticipatory breach of contract occurs when a party to a contract repudiates their obligations under the contract before the time set for the performance on the obligations. There are however, other ways to repudiate a contract which may not be classed as an anticipatory breach.
An example may be – If you have contracted to buy a shipping container of blue widgets to be delivered in 6 weeks:
- An anticipatory breach occurs if the party you contracted with tells you that they can’t be delivered in 6 weeks, but delivery will occur in 12 weeks instead.
- A repudiation occurs if the party you contracted with tells you that they have sent a shipping container of red widgets to be delivered in 6 weeks.
However this article will talk below more broadly about repudiation of a contract.
In Koompahtoo Local Aboriginal Land Council & Anor v Sanpine Pty Ltd & Anor (2007) 233 CLR 115 the Court said that repudiatory conduct is:
Conduct which evinces an unwillingness or an inability to render substantial performance of the contract. This is sometimes described as conduct of a party which evinces an intention no longer to be bound by the contract or to fulfil it only in a manner substantially inconsistent with the party’s obligations
In Shevill v Builders Licensing Board (1982) 149 CLR 620 the High Court of Australia said
Repudiation of a contract is a serious matter and is not to be lightly found or inferred … In considering it, one must look to all the circumstances of the case to see whether the conduct “amounts to a renunciation, to an absolute refusal to perform the contract”
What to do After Repudiation Occurs
If a party to a contract repudiated the contract, then the other party can elect to do one of three (3) things:
- Accept the repudiation and terminate the contract;
- Affirm the contract and so the contract continues until (or if) the breach occurs; or
- Do nothing – This has the same effect as affirmation and so the contract continues on-foot.
Elect to Accept the Repudiation and Terminate the Contract
If a party to a contract repudiates the contract, that is, shows an unwillingness or an inability to render substantial performance of the contract, then the other party may exercise their right to elect to accept the repudiation, and terminate the contract.
This election for termination must be unequivocal.
In Immer (No 145) Pty Ltd v Uniting Church in Australia Property Trust (NSW) (1993) 182 CLR 26 the High Court said:
An act amounting to an election must be unequivocal
In Sargent v. A.S.L. Developments Ltd. (13) (1974) 131 CLR 634 the High Court said:
The words or conduct ordinarily required to constitute an election must be unequivocal in the sense that it is consistent only with the exercise of one of the two sets of rights and inconsistent with the exercise of the other.
In The Kanchenjunga [1990] 1 Lloyd’s Rep 391 the Court said that a party can only be held to have elected:
if he has so communicated his election to the other party in clear and unequivocal terms
If a party elects to terminate the contract after repudiatory conduct then, as long as the conduct does amount to repudiation, the aggrieved party can commence legal proceedings to recover damages for the repudiation after termination.
However, an aggrieved party does not have to elect to accept the repudiation and terminate the contract. Instead, the aggrieved party can elect to affirm the contract.
Elect to Affirm the Contract
If a party repudiates a contract, that is, shows an unwillingness or an inability to render substantial performance of the contract, then the other party may exercise their right to elect to affirm the contract.
An affirmation of a contract is an election by the aggrieved person to accept the repudiation and continue on with the contract, at least until the actual breach occurs (if at all).
Electing to affirm the contract, as stated above, must be clear unequivocal in nature. However, an affirmation of a contract can also be elected by clear and unequivocal conduct.
However, for an election to have occurred, the aggrieved party must have knowledge of the repudiation to allow him or her to make the choice to elect, either by words or by conduct.
In Sargent v. A.S.L. Developments Ltd. (13) (1974) 131 CLR 634 the High Court said:
… election may take place as a matter of conscious choice with knowledge of the existence of the alternative right and in other cases it may occur when the law attributes the character of an election to the conduct of a party
Wrongful Termination after Repudiation
As previously mentioned in Shevill v Builders Licensing Board (1982) 149 CLR 620 repudiation of a contract is a serious matter and is not to be lightly found or inferred.
If you think that conduct of the other party amounts to repudiation, and you elect to accept the repudiation and terminate the contract; but the conduct purported to be repudiatory did not amount to repudiation, then the act of terminating the contract can itself be repudiation, allowing the other party to terminate and recover damages.
Extreme caution should be taken before terminating a contract, and specialist legal advice should be sought, as the risk of not doing so could be severe. Contact our debt recovery solicitors today.
Minor Breach of Contract
In Australia a minor breach of a contract is the breach of a non-essential term of the contract, or an innominate term or intermediate term of the contract.
Usually, a breach of a non-essential term of the contract doesn’t give rise to a right of termination, but may give rise to an action to recover damages for the breach.
However, a serious breach of an intermediate term, or a number of different actions amounting to a serious breach, may give rise to a right to terminate.
In Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1961] EWCA Civ 7 the Court said:
Does the occurrence of the event deprive the party who has further undertakings still to perform of substantially the whole benefit which it was the intention of the parties as expressed in the contract that he should obtain as the consideration for performing those undertakings?
This is similar to the test for a fundamental term of a contract, however the distinction is that Hong Kong Fir Shipping applies to the breach of the contract, and not the term of the contract.
Once again, we reiterate that caution should be taken before terminating a contract, and specialist legal advice should be sought, as the risk of not doing so could be severe. Contact our debt recovery lawyers today.
Frequently Asked Questions
We answer a number of common questions in relation to breaches of contracts.
What is considered a breach of contract?
A breach of contract is the non-adherence to a term of that contract. The breach of an essential term will allow you to terminate and recover damages. A serious breach of a non-essential term may allow you to terminate and recover damages.
What is discharge by breach of contract?
A contract is discharged when the contract comes to an end.
A contract can be discharged in a number of different ways:
- Discharge a contract by agreement;
- Discharge a contract by frustration;
- Discharge a contract by operation of law;
- Discharge a contract by performance; and
- Discharge a contract by subsequent agreement;
However a contract can also be discharged by an election to terminate after breach.
What happens if there is a breach of contract?
If there is a breach of an essential term of the contract; or there is a serious breach of a non-essential (intermediate or innominate) term of the contract; or there is an election after repudiation; then the aggrieved party may elect to affirm the contract, or terminate the contract and recover damages.
How do you prove breach of contract?
A contract breach depends on the facts of your particular case, and the terms of your particular contract. To prove a breach of contract, you will need to provide evidence of the facts that give rise to the legal rights.
What are the remedies for breach of contract?
Legal remedies available for contract breach are damages and liquidated claims.
The main equitable remedies available for breach of contract are specific performance, injunctions, and in some cases equitable damages.
Most debt recovery claims are liquidated damages claims. A contract will allow an amount of money (consideration) in exchange for a promise.
The non-payment of consideration can be quantified by unpaid invoices, for example, and are therefore liquidated claims.
What is a substantial breach of contract?
In Australia a substantial breach of contract, or material breach of contract, is defined by the breach of an essential term of the contract.
Can you sue for breach of a contract?
Yes. You can sue for damages, liquidated claims, specific performance, injunctions, and in some cases equitable damages.
What is repudiation in law?
In Koompahtoo Local Aboriginal Land Council & Anor v Sanpine Pty Ltd & Anor (2007) 233 CLR 115 the Court said that repudiation is
- Conduct which evinces an unwillingness or an inability to render substantial performance of the contract; or
- Conduct which evinces an intention no longer to be bound by the contract or to fulfil it only in a manner substantially inconsistent with the party’s obligations.
Is repudiation a breach of contract?
No. Repudiation is where a party indicates an unwillingness or inability to substantially perform their obligations under the contract. This will usually happen before the non-performance occurs.
It may be possible, after the indication of repudiation that the repudiating party could actually satisfy the term of the contract, therefore not breach. However, this must occur before the election to accept the repudiation and terminate.
DEDICATED CONTRACT LAWYERS – PROVEN RESULTS
OR CALL: 1300 545 133 FOR A PHONE CONSULTATION
