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The Australian government is paying $830 million to get out of one!

Contracts, which you might not have noticed, are everywhere in our life. From simple sale and purchase, service supply, property leasing, to employment, banking and investments. Like many of us, you may have been stuck in a contract before and wanted to get out. Can I? You may wonder.

There are different ways to end a contract. However, contracts are binding legal instruments, so a free exit ticket may not always be available. Even the Australian government has to pay $830 million compensation to get out of one contract.

The Australian government signed a contract in 2016 with a French shipbuilder for 12 submarines. In the last five years, the construction costs have increased from $50 billion all the way up to $90 billion, while the delivery has been pushed back from mid-2020s to mid-2030s. In September 2021, the Australian government decided that they did not want to proceed with the contract.

So, the question is, what can we, everyday ordinary people, do if we want to terminate a contract?

Terminating a contract

If you want to terminate a contract, the first thing is always reviewing the contract thoroughly. The contract may give you a right to terminate if a certain event happens.

In general, a contract could be terminated by:

  1. Breach;
  2. Repudiation or renunciation; or
  3. Agreement

Termination by breach

A contract sometimes has conditions or essential terms. These terms are the core and basis of the contract. Without them, a party would not have entered into the contract in the first place. Thus, a party’s breach of an essential term would justify termination by the other party.

One example is that for a commercial lease, the tenant would not have signed the lease if the premises cannot be used as a commercial site at all.

It could also be the case that a party breaches a non-essential term, e.g., the commercial premises are in a poor condition but can be used. In which case, the innocent party may a right to terminate only if the breach is serious enough.

Termination by repudiation

Repudiation is where a party is unwilling or unable to perform the contract. The other party will then have a right to terminate the contract accordingly.

A landlord can terminate the lease if the tenant expressly says that it will leave the premises. Alternatively, the landlord might terminate if it has sufficient evidence that the tenant is using the premises for an illegal purpose.

In this scenario, the terminating party has to prove that the other party has repudiated the contract.

Termination by agreement

Contracts could be changed or terminated anytime if all parties agree to do so. However, it is important that there is no misunderstanding or ambiguity about what has been agreed.

Issues to consider

Remedies

Unless it’s termination by agreement, most of the times, terminating a contract does not resolve peacefully and the innocent party will not walk away empty-handedly.

The contract sometimes may specify what happens if one party breaches the contract. If there is nothing in the contract, the party breaches the contract might need to either pay damages to the innocent party or continue to perform certain obligations under the contract (also called specific performance).

Thus, the Australian government who unlawfully terminated their contract with the French submarine builder had to pay damages.  After negotiations, a settlement sum of $830 million was reached.

Wrongful termination

Termination needs to be done properly. If there are relevant procedures under the contract, these procedures must be followed exactly. Prior notice and an opportunity to rectify is highly recommended.

Wrongful termination is generally considered as a repudiation and a serious breach of the contract. So think twice and act cautiously before you terminate a contract.

In summary:

  • You are only entitled to terminate the contract under a few circumstances.
  • If you don’t terminate it correctly, you might be breaching the contract yourself.
  • After termination, there are remedies available for the innocent party.

If you have any concerns or want to know more about contract breach or termination, do not hesitate to contact Lynn & Brown Lawyers for expert legal advice.

 

About the Author: This article has been co-authored by Tina Xiao and Steven Brown. Tina was admitted as a lawyer in June 2018 in New South Wales after obtaining a Juris Doctor degree from the University of Sydney. After four years of practising in Sydney, Tina moved to Perth and joined the Lynn and Brown team in May 2022. Steven is a Perth lawyer and director, and has over 20 years’ experience in legal practice and practices in commercial law, dispute resolution and estate planning.

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