Law of Contract II
Semester 2, 2011
Word Count: 1932
A party’s right to terminate a contract arises from a particular type of breach of contract by another party. The facts of the breach and the nature of the term breached in each case inform the party with whose contract has been terminated, as to whether it is lawful or not. Common law rights to terminate arise in one or more of the following three ways: * Any breach of a condition of the contract;
* A serious breach of an intermediate term of the contract; or * Conduct that shows that a party is unable or unwilling to comply with the contract. Australian Courts have for sometime recognised a tripartite classification of terms in analysing whether or not a breach gives rise to a common law right to terminate. Australian courts have accepted that there is a category of term, known as a condition or essential term, for which strict performance is required, and that an aggrieved party is entitled to terminate for any breach of a condition, however slight. Contractual rights to terminate are of two main types:
* Termination of the contract in total; or
* Termination of the engagement of a contractor, in both cases arising from actual conduct, as described in either the contract’s termination clause or a term arising under statute. Frequently, the common law right to terminate is the most important consideration.
In classifying whether a term is seen as a condition of a contract; a term may be classified as a condition by statute, by the parties or by the courts on the basis of the construction of the contract. A term may be classified as a condition on the basis of the express words used by the parties. However, before courts will conclude a particular term is a condition, with the consequences that any breach will entitle the aggrieved party to terminate, the parties must clearly have expressed their intention for the term to have this status. In assessing whether or not a term should be classified as a condition, the High Court has approved the statement of Jordan CJ in Tramways Advertising Pty Ltd v Luna Park Ltd: ‘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 such importance to the promisee that he would not have entered into the contract unless he had been assured of a strict or substantial performance of the promise ...and this ought to have been apparent to the promisor.’ In DTR Nominees Pty Ltd v Mona Homes Pty Ltd, Stephen, Mason and Jacobs JJ provided further explanation of the relevant test: ‘The quality of essentiality depends ...on a judgement which is made of the general nature of the contract and its particular provisions, a judgment which takes close account of the importance which the parties have attached to the provision as evidenced by the contract itself as applied to the surrounding circumstances.’ Accordingly, in assessing whether or not a term is a condition, courts will consider whether or not the parties would only have entered into a contract on the understanding that there would be strict compliance with the term. Where a term is intermediate, the right to terminate depends on the nature of the breach and its foreseeable consequences. Although the High Court had previously hinted at accepting the doctrine of intermediate terms into Australian law, Koompahtoo Local Aboriginal land Council v Sanpine Pty Ltd was the first case in which the High Court did so expressly. The first recognised authority to introduce intermediate terms was Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd, a decision of the English Court of Appeal. Hong Kong Fir was decided in 1961 and passed into the mainstream law of contract as understood and practised in Australia, although not formally adopted by the High Court until Koompahtoo. Any right to terminate under a provision of the contract terms requires careful...
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