Contractual Etiquette : When ending or terminating a contract

It can be said that the appropriate time when a contract comes to an end is when the parties have satisfied their respective obligations, or when the parties have decided to mutually agree to terminate the contract.

The above scenario applies when both parties are on the same page, however in other cases, and before complete and proper performance can be rendered, one party to the agreement may decide to invoke one of the termination provisions of the contract and bring the contractual relationship to an end due to:

The consequences of invoking the above “grounds for termination” will result in the parties being released from their respective obligations under the contract, but it doesn’t end there, as the party who has the valid right to invoke those provisions has to follow a process set out in the contract. This aspect is discussed below:

REPUDIATION

A party commits an act of repudiation when through their conduct or words, without a lawful reason, manifests an unequivocal intention to no longer intend to be bound by the terms of the contract in relation to their obligations.

When the innocent party is faced with an act of repudiation, he/she has an election to make by either:

This election by the innocent party is based on the principle that he /she is not obliged to accept the repudiation. Therefore, the innocent party can simply ignore such act by the defaulting party and hold them to the terms of the contract, thereby affirming the contract’s continuation.

In cases where the breach is serious and the defaulting party has no intention to abide by the contract, it is advisable that the innocent party must accept the repudiation and forthwith rescind the contract.  Under these circumstances, it is not required to send a default notice to the defaulting party. All the innocent party has to do is accept the repudiation by communicating such acceptance to the defaulting party, and the contract comes to an end.

The consequence of such election will result in restitution taking place together with a claim of damages against the defaulting party.

BREACH OF A MATERIAL TERM

Any failure by a party to fulfil any obligations under the contract will give rise to a specific set of consequences that the innocent party is entitled to, namely:

When a breach of contract occurs, the first step the innocent party needs take is to issue a default notice on the defaulting party calling upon him/her to rectify same within at least seven days.

Failure to do so by the defaulting party entitles the innocent party to immediately cancel the contract and sue for damages. The reason the innocent party will pursue a damages claim is that he/she must be placed in the position they would’ve been in, had the breach not occurred.

Suppose the innocent party does not wish to cancel the contract. In that case, they can approach the Court for an Order demanding specific performance by the defaulting party. By taking this approach, the innocent party is invoking a remedy to keep the contract alive.

KEY TAKEAWAYS

Repudiation is an act of demonstration by a party through words or conduct that he/she no longer intends to be bound by the terms of the contract or fulfil any of the obligations under the contract, without a lawful reason.  The innocent party has an election to affirm the contract (by ignoring or rejecting the repudiation) or rescind the contract by accepting the repudiation, thereby terminating the primary obligations.

The act of cancellation is considered in law to be an extraordinary remedy available to an innocent party when a breach has occurred by the defaulting party.  Suppose the breach is material and remains unremedied. In that case, it is advisable to cancel the contract and proceed with a claim for damages against the defaulting party.

Suppose the breach is not material and capable of being remedied. In that case, specific performance may be the more appropriate option by the innocent party.  Considering the above, the innocent party’s decision on what action to take will ultimately be set out in the contract. Please ensure that the process is complied with before a final decision is taken to affirm, rescind (in the event of repudiation), cancel or claim specific performance (in the event of a material breach).

If you find yourself in a contractual breach situation, whether you are the innocent party or defaulting party, please do not hesitate to contact BBP Law Attorneys. We will gladly arrange a meeting to provide you with the appropriate legal advice and guidance.

Brent Petersen
brent@bbplaw.attorney
Senior Associate