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CONTRACT LAW

When Does the Right to Terminate Arise?

While, in principle, every breach of contract gives rise to a right to damages (see below), it is not every breach that gives rise to a right to terminate. Generally, a right to terminate will arise in three situations:

(i) an actual breach where the term which the defendant fails to perform is a condition of the contract
(ii) an actual breach where the term is an innominate term and the breach has the effect of depriving the other party of substantially the whole benefit which it was the intention of the parties that he should obtain from the contract
(iii) an anticipatory breach

Note that a right to terminate may arise under an express term of the contract: but the consequences of termination under an express term may not be the same as those which follow in the three situations we are looking at.

What are the Consequences of Termination?

Termination brings performance of the contract to an end by discharging both parties of their unperformed primary obligations (although you should not that some primary obligations, ie ancillary obligations, will remain enforceable. Following termination, neither party has the obligation nor the right to continue to perform the contract. But it doesn’t affect what has already occurred. Termination affects the parties’ [continuing and] unaccrued obligations under the contract, ie those obligations whose time for performance has not yet arisen. Termination affects performance of the contract, rather than its existence. The existence of a contract is affected by a distinct remedy, called rescission.

Termination may not bring an end to all the unperformed obligations. Certain primary obligation, so-called ancillary obligations will be unaffected. Examples of ancillary obligations are the obligations arising out of an arbitration clause or a liquidated damages clause.

Note that, depending on the particular contract, termination may be extremely effective or hopelessly ineffective. To be able to recognize in any given case which it may be, we need to identify the benefits and limits of termination as a remedy.

Suppose the defendant works for the claimant under a contract of employment. The defendant has failed to perform his responsibilities with due care and skill. Here, termination will be a helpful remedy for the claimant employer: by terminating the contract of employment, the claimant will no longer be under any obligation to pay the defendant and the defendant will no longer have any right to attend at the place of work.

On the other hand, where the claimant’s concern is not so much as to remainder of contract but as to what has happened, termination may be irrelevant. So if the claimant has bought and paid for goods which turn out to be defective, termination is of no help to her: her issue is as to past performance, not future performance. Where the complaint is as to how the contract has been performed, ie that the contract has been performed badly, termination may be of no help. An alternative remedy, such as damages, will probably be more suitable.

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