Termination
Breach of contract
breach of contract: failure or refusal to perform contractual obligation (without lawful excuse)
Types of breaches:
actual breach: failure to perform when time for performance expired
anticipatory breach: repudiation of contract before time for performance
Actual breach
non-compliance with contractual representation/warranty
the representation becomes a term of the contract but the representation is later found
false (damages for breach of contract)
a written document including clauses about representation and warranty → breach of
contract later
non-performance of obligation
late performance of obligation
defective/unsatisfactory performance
not of the quality/quantity required in the contract (depends on the contractual standards)
Standards of contractual duty
strict liability
absolute liability
reasonable care
Strict liability
Liability regardless of fault or intent
Strict liability usually applies for contractual obligations
e.g. implied terms of goods should be of merchantable quality
most of the contractual obligations have strict liability
Absolute liability
Technically distinguished from strict liability
For absolute liability: any failure to perform constitutes breach
Liability regardless of fault or negligence
Termination 1
Reasonable care
Breach only if failure to exercise reasonable care
e.g. contracts of personal services or professional services
(contracts between solicitors and clients, employment contracts, etc.)
Remedies for breach of contract
Damages: available for any breach of contract
Termination: available only if innocent party has the right to terminate for other party’s breach
of contract
Discharge of contracts
Discharge of contract: contract comes to an end
Discharge by frustration
Discharge by performance
Discharge by agreement
if the agreement was supported by consideration → valid discharge of contracts
if the agreement to discharge the contract is based on provisions in the original contract →
does not need consideration?
Discharge by termination
Termination
should be distinguished from rescission
rescission of a voidable contract: parties are put in the original position as if the contract was
never made
termination: parties are discharged from obligations for further performance (not put in the
original position)
rights which have accrued prior to the termination of the contract are left intact
Right to terminate the contract may arise:
pursuant to contractual provision (e.g. contractual right to terminate upon notice; or
contractual right to terminate for breach of contract)
for employment contracts: usually either party has the right to terminate the contract
upon notice
pursuant to common law for breach of contract (breach of conditions or serious breach of
intermediate terms)
Termination 2
Termination for breach of contract
right to terminate under common law for:
breach of condition
serious breach of intermediate term
no right to terminate for:
breach of warranty
non-serious breach of intermediate term
Classification of contractual terms
1. conditions
2. warranties
3. intermediate terms
→ the condition/warranty distinction is based on consequences of breach
* “Terms and conditions” → only refer to “the following terms”, does not distinguish between terms
and conditions
* “Warranties and representation” → not relevant to the distinction between conditions and
warranties
* “Manufacturer’s warranty” → not the “warranties” in classification of contractual terms
Distinguishing between conditions and warranties
Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd: ‘No doubt there
are many simple contractual undertakings, sometimes express but more
often because of their very simplicity ('It goes without saying') to be implied,
of which it can be predicated that every breach of such an undertaking must
give rise to an event which will deprive the party not in default of
substantially the whole benefit which it was intended that he should obtain
from the contract and such a stipulation, unless the parties have agreed that
breach of it shall not entitle the non-defaulting party to treat the contract as
repudiated, is a 'condition'. So too there may be other simple contractual
undertakings of which it can be predicated that no breach can give rise to an
event which will deprive the party not in default of substantially the whole
benefit which it was intended that he should obtain from the contract; and
such a stipulation, unless the parties have agreed that breach of it shall
entitle the non-defaulting party to treat the contract as repudiated, is a
'warranty'.’
Termination 3
→ the test here refers to the “deprive of substantially the whole benefit” test
The test should focus on what the parties intended objectively at the time of the contract:
whether the term goes to the root of the contract; whether (failure of) performance rendered a
thing different in substance from that stipulated for; whether likely effect of breach would
deprive the promisee of substantially whole benefit of the contract
warranties are the opposite of conditions (which do not go to the root of the contract)
Importance of term: whether the promisee would have entered into the contract if no assurance
of strict or substantial performance (or whether the promisee would not have contracted unless
there is strict compliance with terms)
where the term broken is of minimal significance then the right to terminate will not arise
→ an objective assessment: the term in question shall be treated as a “condition” as a matter of
necessary implication in the light of the parties’ intentions
the actual outcome does not affect the fact that the term is a condition (if it has been
ascertained that the breach of the clause would be serious by assessing the objective
intentions when the parties entered into the contract)
Other relevant factors (for distinguishing between conditions, warranties and intermediate
terms):
1. whether the terms have been previously classified in decided cases (parties presumed to
contract on basis of accepted interpretation)
the term in question has been treated as a “condition” in a strict sense by either statute or
by precedent
2. whether damages for breach would be adequate remedy
3. whether construing terms as conditions would lead to an unreasonable result
Express words used in the contract to designate the terms as conditions or warranties (even if the
terms are minor, as long as the parties objectively intended the terms to be conditions, the court
may give effect to the conditions) may entitle the parties to terminate the contract when there is
breach of conditions
in other words, the parties have expressly stipulated that the term in question shall be treated
as “condition” in the strict sense
parties are entitled to provide for contractual right of termination for any kinds of breach of
contract; but risks of termination clause would be read down
but wording like ‘condition’, ‘warranty’ is not necessarily decisive (if the parties did not intend to
use the words in its technical meaning, the terms may not be conditions)
→ In McKendrick’s Contract Law Text, Case and Materials, the author concluded that ‘None of their
Lordships doubted that the parties were entitled, by the use of clear words, to elevate clause 7(b) to
the status of a condition’
Termination 4
Time of the essence
Use phrase “time of the essence” if time stipulation is intended as condition
even if there was a small delay, if the time stipulation is intended as condition, the party would
be entitled to terminate the contract under breach
Intermediate terms (innominate terms)
💡 Default classification as intermediate term: a term is classified as an intermediate term
unless it is clear that the parties intended the terms to be conditions or warranties.
Both Bunge and The Mihalis Angelos demonstrate that it is possible to satisfy
a court that the parties did have a contrary intention, even when that
intention has not been set out in express terms by the parties. But the onus
is on the parties to provide evidence from which the court can infer that the
parties did intend that the disputed term be classified as a condition.
→ if no such intention can be established, the court will adopt the default position that the term is
an intermediate term
💡 In Grand China Logistics Holding (Group) Co Ltd v. Spar Shipping AS, the court stated that
‘the modern English law approach to the classification of contractual terms is that a term
is innominate unless it is clear that it is intended to be a condition or a warranty’
Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd: ‘Of such
undertakings all that can be predicated is that some breaches will and
others will not give rise to an event which will deprive the party not in default
of substantially the whole benefit which it was intended that he should obtain
from the contract; and the legal consequences of a breach of such an under‐
taking, unless provided for expressly in the contract, depend upon the
nature of the event (and the consequences) to which the breach gives rise
and do not follow automatically from a prior classification of the
undertaking as a 'condition' or a 'warranty'.’
→ a precise definition of an intermediate term
the intermediate terms are neither very important, nor very trivial
Where the term is an intermediate term, whether the innocent party has a right to terminate the
contract depends on the actual effect of breach in question (whether consequences
Termination 5
sufficiently serious)
breach of an intermediate terms is sometimes serious, sometimes trivial (not necessarily
serious breach of the contract)
the test should be applied at the date of the termination, but not the date of the breach?
→ focus on the consequences of the breach, rather than the nature of the term
Whether the consequences of the breach were serious depend on:
the benefit which it was intended that the innocent party would obtain from performance of the
contract, the losses suffered by the innocent party as a result of the breach, the cost of making
performance comply with the terms of the contract, the value of the performance that has been
received by the innocent party, the willingness of the party in breach to make good the
consequences of the breach, the likelihood of a further breach by the party in breach, and the
adequacy of damages as a remedy to the innocent party
(not exhaustive)
Repudiation and anticipatory breaches
Prospective breaches
Repudiation of prospective obligations: repudiation occurs where a party expressly or impliedly
indicates that they are unwilling or unable to perform all of the party’s obligations or where
the proposed breach, when it occurs, would give rise to a right to terminate
Terminology:
wider sense of repudiation: covers both actual breaches and prospective breaches
where innocent party entitled to terminate for the repudiation
narrower sense: concerned with repudiation of prospective obligations only
In Rice (t/a) Garden Guardian v Great Yarmouth Borough Council, two points of significance
emerge from this case. The first is that, in deciding whether or not there has been a repudiatory
breach of contract, it is permissible to take a cumulative approach and have regard to the range
of breaches committed by the party in breach.
whether there is repudiation and termination:
1. was the actual breach a breach of condition or a serious breach of an intermediate term
2. if the breach is not actual breach, do circumstances of the breach of contract show an intention
that the future obligations are not to be performed
the innocent party was entitled to accept repudiation and terminate contract immediately
without waiting for time for performance to arrive for actual breach
Termination 6
choice for innocent party whether to terminate immediately or keep contract on foot
anticipatory breach arises where innocent party elects to terminate (accept repudiation)
the party can either terminate the contract or ignore the breach of the contract and
continue performance of the contract, and then claim the contract price (the right to
continue the contract and claim contract price was recognized by the House of Lords in
White & Carter (Councils) v McGregor)
under anticipatory breach, if the party chooses to affirm the contract, he has no cause
of action and prior to the time for performance, the contract is frustrated
Where repudiation was not accepted
Contract remains on foot
Repudiating party may change their mind and retract repudiation, and may perform when time
for performance arrives
Election to terminate is required to complete cause of action for anticipatory breach
e.g. if the contract was not terminated but is frustrated in interim, there is no breach by the
repudiating party
Exceptions (to the principle in White v Carter (Councils) Ltd, where the party not in default can
choose to affirm the contract and continue performance, and sue for contract price afterwards):
1. where performance by innocent party is dependent on cooperation of party in breach (either
active cooperation or passive cooperation)
if the party has obtained the property of the party in breach, it amounts to passive
cooperation and the performance of the party is still dependent on the cooperation of the
party in breach
→ the party would not be entitled to continue performance and claim contract price
2. where innocent party has no legitimate interest in completing the contract, and there was no
legitimate interest where damages adequate and keeping contract alive is wholly/extremely
unreasonable or preverse
Anticipatory breach: It is therefore clear law that an anticipatory breach of contract gives to the
innocent party an immediate cause of action; he is not required to wait for the time for
performance. The innocent party can seek a remedy immediately or can choose to affirm the
contract and wait for the time for performance. The remedies available to the innocent party at the
time of the anticipatory breach will depend upon the nature of the breach. If the anticipatory breach
is a repudiatory breach of contract then the innocent party can terminate the contract and seek
damages to compensate him for the loss of his bargain
Wrongful termination
Wrongful termination itself amounts to repudiation
the party who wrongfully terminates the contract will be liable for damages for the loss suffered
by another party for the wrongful termination
Termination 7
Termination or affirmation of contracts
Notes:
An election
Where there was actual breach (of a condition or where the breach is a serious breach of an
intermediate term):
The innocent party has a choice whether to terminate or to affirm the contract. The innocent
party needs to make an election whether to terminate or affirm.
Termination occurs where words or conduct of the innocent party clearly and unequivocally
conveys to the other party that the innocent party is treating the contract at an end.
Affirmation occurs where words or conduct of the innocent party clearly and unequivocally
conveys to the other party that the innocent party has elected to proceed with the contract.
The courts give some leeway to the innocent party in making their decision whether to
terminate or affirm. That is, a reasonable time is given. Where there is some delay in
termination, there is no implicit affirmation of the contract unless the delay is consistent only
with affirmation or unless a reasonable time has passed. See Cheung Ching Ping Stephen v
Allcom Ltd [2010] 2 HKLRD 324.
Once affirmation is made, the right to terminate for the breach of contract is lost: Cheung
Ching Ping Stephen v Allcom, above.
The mere fact that the party has called on the party in breach to perform his contractual ob‐
ligations does not necessarily constitute affirmation
As a general rule a party will not be held to have affirmed the contract unless he had knowledge
of the facts giving rise to the breach and he knew of his right to choose between affirmation
and termination
Where there was repudiation (of prospective obligations) giving the innocent party a right to
terminate:
Again, the innocent party has a choice on whether to terminate or to affirm the contract. The
above principles also apply.
Termination following a repudiation is referred to as acceptance of the repudiation.
If the repudiation is not accepted (ie contract is affirmed and not terminated), the repudiating
party can retract the repudiation. The innocent party who initially affirmed the contract will not
be able to terminate the contract following affirmation unless there is continuing or further
conduct amounting to repudiation (which has not been retracted).
Termination 8
