Termination of a Contract - Law

Part A

A contract may be discharged or brought to an end at any time after formation and there are several ways in which this can happen. One party may avoid a contract – for example, for unconscionable conduct by the other; one party may terminate the contract before performance is complete – for example, for breach; or the contract may be performed to the satisfaction of the parties.

The contract of sale that takes place at a supermarket checkout is for all purposes completed at the time the money is paid and the goods are given to the customer. The rights attached to the contract persist for longer; for example, it is an implied term of the contract that the goods are of merchantable quality and whether this is satisfied might not become known for some time after the check out transaction.

When a contract is terminated, the future rights and obligations of all parties cease, but the contract itself remains in existence in the sense that the rights and liabilities arising prior to termination may still be pursued. Where appropriate, damages are assessed on the basis of the contract and some terms may still be enforced (Pentony, Graw, Lennard & Parker, 1999).

Termination by performance

This is when contractual obligations are fulfilled exactly as stated. Exceptions to the rule are partial and dividable performance, which must be accepted by the parties concerned. Also prevented and substantial performance allows recovery (Khoury & Yamouni, 1998).

In Sumpter v Hedges , Sumpter agreed to build 2 houses on Hedges land for the sum of 656. Work to the value of 336 had been done when Sumpter advised he wished to terminate the contract. Sumpter’s claim was not successful. The contract was a lump sum or an entire contract, and its price could not be recovered until the work was done.

The builder could not claim for part payment under a quantum meruit as the owner was not responsible for the builder’s failure to complete, nor part performance, because there was no evidence of agreement by the owner to part performance and no agreement by the owner to terminate the contract at this stage. This rule could clearly result in harsh and unjust decisions being made and thus led the courts to develop exceptions to the rule.

Termination by agreement

The contract may be terminated by agreement between the parties concerned, called bilateral discharge. Bilateral discharge may also be accompanied by a new agreement. Here both parties agree to terminate original contract and to replace it with an entirely new contract (Latimer, 2002).

In the case McMahon’s (Transport) Pty Ltd v Ebbage , Ebbage sent a cheque to McMahon’s Transport stating ‘in full and final settlement of all claims’. The cheque was for a lessor amount of what McMahon expected. McMahon banked the cheque and was still able to claim the difference owed to him by Ebbage because he had not agreed to the smaller amount. In other works, there was no binding contract for the smaller amount.

Discharge by Operation of Law

There are rules of law, which will bring about a discharge of a contract in certain circumstances. Likelihood for discharge can be death, mergers, insolvency or alteration of written documents (Vermeesch & Lindgren, 1983).

Termination by Lapse of time

A contract may be discharged by the passage of time, in accordance with various statutory provisions covering the limitation of actions. The contract is not discharged by the legislation, but is made unenforceable by it. Each State and Territory has a Limitation Act , which provides that a right to sue must be enforced within a fixed period such as six years. This legislation makes clear that the right to sue cannot be exercised outside this limitation period (Latimer, 2002).

Discharge by Breach

A contract may be discharged when one party fails to comply with any of the obligations imposed by the contract. A party may indicate in advance that their part of the contract will not be performed when the time for performance falls due. This is referred to as anticipatory breach (Khoury & Yamouni, 1998). Such a breach occurred in Hochster v De la Tour .

De la Tour engaged Hochster as a courier in April, with the appointment to take effect on 01 June. Three weeks before commencement, De la Tour informed Hochster that his services were no longer required. This was clear anticipatory breach entitling Hochter to damages for breach of contract, because De la tour had indicated his intention to be no longer bound by his contractual obligations.

Discharge by Frustration

This occurs when the contract cannot be fulfilled due to unexpected events or possibilities that radically change the nature of the contract (Pentony, Graw, Lennard & Parker, 1999). This occurred in Taylor v Caldwell , where Taylor contracted to hire a building for a concert. Shortly before the concert, a fire destroyed the building. The building was essential to the performance of the contract, and this contract was terminated by frustration due to there being no building as a result of the fire.


A contract is discharged when the obligations created by it cease to be binding. Generally, commercial parties to a contract will avoid going to court and often their contracts will contain arbitration and similar clauses, which enable differences to be settled outside courts but normally with legal assistance. In some instances, the discharge stems from the failure of one of the parties to fulfil his or her obligation under the contract, allowing the other party to treat the contract as discharged. In other instances, the discharge stems from a cause outside the control of the parties to the contract.