眾律國際法律事務所

When ending a contract, there are always questions regarding to contract termination. There are circumstances where an innocent party will be able to terminate a contract in the following situations:

I. In order to validly terminate a contract, terminating party must show either test of essentiality, proving that one party would not have entered the contract unless he/she assured of a strict or substantial performance of the term and the other party knows or ought to know such contract term.[1]

II. There is sufficiently serious breach of an inessential term.[2]

III. Repudiation by the other party to the contract, either express, implied or by conduct that indicates a refusal to perform the contract.[3] This is where the other party indicated clearly an inability to perform.[4] Nevertheless, such inability or refusal to perform must relate to the contract as a whole, or to an essential term of the contract.[5]

Prior to discharge by termination, you need to systematically apply whether each breach was essential or inessential or repudiation. It is also important to consider if time of essence and the prerequisite of termination.

If there is an anticipatory breach of contract, to be able to terminate the contract, the innocent party would only need to show that the other party were not wholly and finally disabled from performing the contract.[6] However such repudiation does not amount to anticipatory breach unless the innocent party seeks to terminate the contract.[7] Nevertheless, once the due date for performance arrives, all rights for the anticipatory breach would be gone.[8] Please note however a contract will not automatically terminate itself; it must be terminated by one of the parties.[9]

IV. Such contract can also be terminated by delay in performance of an agreement. This is where a party may be able to terminate the contract by breach of a term of the contract or for repudiation. If time is of essence, failure to perform in due time will be considered as breach of an essential term of the contract. This would allow an innocent party to terminate the contract accordingly. Nevertheless, the innocent party has the right to choose whether to terminate or to affirm the contract. If time is not of essence of the agreement, such termination is only possible where a notice making time of essence has been served to the party and the other party fails to comply with the notice.

There are a few questions to be considered whether such time is considered as essential in the contract. Timely performance will be of essence where the surrounding circumstances or subjects make it imperative that the agreed dated being precisely observed.[10]

In circumstances when it comes to land contract, payment of deposit would be considered as prima facie essential due to its special characteristics as an earnest of performance.[11] Therefore failure to pay such deposit would be considered as a breach of an essential term entitling the innocent party to terminate the contract.

If such time is not considered as essential, failure to perform will merely be a breach of an inessential term of the contract. Before an innocent party can terminate the contract, they must serve a notice to complete on the party in breach. Such notice should provide the other party in breach reasonable time to perform the obligations before the innocent party is able to terminate the contract.

There are however two different scenarios for which a notice is needed to be served. This is in circumstances where the contract does not specify a date of completion for which the innocent party must wait for a reasonable time to elapse before such notice to be given. It is not until a reasonable time has elapsed that the other party has failed to perform according to the terms of the contract.[12] Such notice however should provide further time for performance.[13]