Rescission /Termination and Damages
The termination of a contract in this context refers to one party being discharged from his obligations to perform, due to the other party’s failure to perform or his defective performance. The contract is not ended as such. In effect, the innocent party accepts the breach and relies on his secondary rights to damages in lieu of his primary rights to performance.
Termination is commonly referred to as rescission. This usage is not correct in strict terms, in that the right to damages for breach remains. Rescission in the true sense involves the complete negation of the contract so that it no longer exists. This may occur for example, where there was no contract, such as by reason of an operative mistake or where the contract was impaired by some factor such as such as by reason of misrepresentation.
Rescission (more correctly termination) for breach of contract in the present sense, involves the innocent party relying on his secondary right to damages. There is no inconsistency in terminating a contract for breach and claiming damages.
Termination may be, but need not necessarily be, accompanied by a claim for damages. The innocent party may simply wish to terminate the contract by returning the defective product or thing and reclaiming the consideration paid so that the transaction is unwound.
Termination by Breach v Lawful Termination
The lawful termination of a party’s contractual obligations may be possible, irrespective of the presence or absence of a breach, where the contract so provides. A party may have a lawful excuse for not performing. The contract may be negated by mistake, misrepresentation, duress, undue influence or illegality.
A contract may be terminated in accordance with its express or implied terms. A party may have an express option to terminate In very narrow circumstances, a contract may be discharged by frustration.
A party’s right to terminate the contract may derive from the other party’s fundamental breach. The exercise of the option to terminate may be more expedient and practical than pursuing a claim for damages. In many cases the risks, costs, delay and relationship issues may make it expedient to terminate the contact without pursuing a claim for damages.
In some cases, the innocent party may have had made a bad bargain so that performance would have cost him more than non-performance. In such a case, there may be little or no damages available, so that litigation is uneconomical.
Criteria for Fundamental Breach
A failure is said to be fundamental where it deprives the innocent party of what he has contracted for. It is often said to “go to the root” of the contract in that it wholly undermines it. The greater the degree of non-performance, the more likely the breach will be fundamental.
Whether the breach is deliberate or negligent may be of some relevance, but will not be determinative. The mere fact that the breach is deliberate is not of itself sufficient. In some circumstances, the fact that breach is deliberate may show a future intention not be bound.
The breach may be fundamental so that termination is allowed, where of its nature, damages would be inadequate in the circumstances. This may be so where monetary compensation does not adequately compensate for the breach. Corresponding, the court is less likely to allow termination, where damages would be adequate
Designated Ground for Termination
Certain terms of the contract may be designated from the outset as so important, that any breach of them will entitle the other party to terminate. This right is usually exercisable where the defined event occurs which the parties regard as a fundamental breach or a repudiation of the contract by the party in default.
Other terms may be designated so that they do not fall into this category and so that their breach provides a right to damages only. Terms terms may be designated as falling into neither such category so that the effect of breach will depend on the interpretation of the contract and the seriousness of the breach in the circumstances.
A contract may provide for a right of termination for breaches which might not appear to be fundamental in themselves. The position under a written contract is determined by the court’s interpretation of the clauses in the circumstances. The courts will be reluctant to classify a trivial breach as giving rise to a right to terminate the contract unless this is provided in clear terms.
Where a party in default under a contract indicates his intention, no longer to be bound by or comply with the contract, there is a repudiatory breach. A request by one party to be released from the contract is not necessarily a repudiation. In order to be a repudiatory breach, it must be so serious that it is clear that there is an intention to abandon and reject the contract.
A repudiatory breach is by definition a fundamental breach. Not all fundamental breaches are repudiatory in nature in that they don’t necessarily disclose an intention not to be bound by the contract. Many fundamental breaches occur for reasons outside one party’s control, and notwithstanding his best efforts to perform his obligations.
There is an anticipatory breach where a party verbally, by conduct or otherwise flags that he will not or cannot perform his contractual obligations, before they fall due to be performed. If the prospective breach relates to a fundamental matter or goes to core of the his obligations under the contract, there is a repudiatory anticipatory breach.
Loss of Confidence
Breaches which are such as to cause the destruction of a relationship of trust and confidence, are more likely to justify termination of the contract.
Where there is an ongoing commercial contractual relationship, a number of relatively minor breaches may be sufficient to cause a loss of confidence in future performance, such as to constitute a fundamental/substantial breach, giving rise to a right of termination.
In certain contexts, such as in employment, disobedience of a leaful order was formally held to be sufficient grounds for immediate discharge. This is not now likely to be the position. Resort should be had to disciplinary procedures.
Various Termination Issues
The injured / innocent party may recover damages for loss by reason of early termination, where he exercises a contractual right to terminate for a minor breach. The party in breach may be held not to have repudiated the contract, so as to entitle innocent party to recover for future breaches, notwithstanding that a right to terminate has been
It appears that damages for early termination, by way of the capitalised present-day value of future losses, requires that there be a fundamental breach / a substantial failure to perform
If both parties have simultaneous obligations and each is in fundamental default, it appears that each party is entitled to terminate by reason of the other party’s breach. Some cases take the view that if performance is in any way interrelated, then neither is entitled to treat the contract as terminated. These cases have been criticised.
The innocent party may be himself in default. He is not precluded from exercising a right of termination by reason of a breach on his part, which is not a fundamental breach. There may be a set off or counterclaim for damages against him.
A contract may be terminated, notwithstanding that it is partly performed by the party in default. Where there has been a substantial failure to perform, but restitution is not possible because the innocent party has received partial benefits or the partial performance which cannot be restored, there is support for the view that termination is less likely to be allowed.
Failures as to Time
The failure to perform on time of itself is presumed not to be of the essence. The contract may provide to the contrary. Where a delay is substantial, it may entitle the other party to terminate. It is presumed that time may be made “of the essence” by giving reasonable notice which so requires is to the party in default.
If a relatively minor breach or delay appears reasonably likely to be prolonged, this may constitute sufficient grounds for termination. The courts do not require that the innocent party wait to see the actual outcome of events.
In some cases, clauses in relation to time are held be of the essence, where the circumstances so require. This may arise in particular circumstances, sectors, such as in the financial services sector, perishable goods, the exercise of options and in other contexts, where the circumstances or the market require that the provisions as to performance in time should be strictly upheld.
The right to terminate by reason of non-timely performance may be lost by waiver, estoppel or affirmation. The right to treat the contract is terminated is waived where the other party is given further time to perform.
In most cases, the giving of further time is interpreted to give an extension of the original strict time limit and does not destroy the “essential” character of time in the context. It does not amount to an affirmation in itself or a waiver of the right of termination.
Right to Terminate
A repudiatory or fundamental breach does not automatically terminate the contract. It gives the innocent party, the option to terminate or affirm the contract. If he affirms the contract, he may insist on the other party’s performance.
The rights subsist, even if the contract by its terms, purports to provide that it is rendered void on breach. This is generally interpreted in accordance with common law principles, so as to prevent the party in default from relying on his own breach to his benefit. The courts, in effect, hold that this could not have been the intention of the parties to the contract.
Accordingly, a party in breach may not argue that the contract is destroyed so as to be entitled to a claim in restitution for the value of work done or assert that he need only pay the market rate for services received. He may not rely on the breach to prevent the innocent party from asserting the terms of the contract which were intended take effect after the breach, such as valid restrictive covenants.
Terminating the Contract
Once the innocent party has elected to terminate, he may not afterwards affirm and seek performance The exercise of the option to terminate is one of fact. There must be an unequivocal indication that the innocent party exercises the option. Silence and inactivity will not generally suffice.
Once the contract is terminated, the innocent party has no obligation to make payment, undertake further performance or accept counter performance, if the other party is in default. He is released from his obligations prospectively. Termination for breach releases the party in default from his primary obligation to perform and substitutes a secondary obligation to pay damages.
Termination does not generally act retrospectively. The innocent party remains liable for obligations which have already fallen due. If he could recover back the payment which had already fallen due upon termination, he is not obliged to make it. If he has performed prior to termination, he may be entitled to the return of monies paid or goods provided. Where this happens, the corresponding counter performance obligations on the part of the party in default are likely to be released.
Rights and Obligations Surviving Termination
Upon termination, the secondary obligation of the party in default to pay damages arises, where applicable under the general law of damages. This may relate both to existing and prospective breaches in consequence of the non- performance. The future sums may be capitalised into a present-day damages lump-sum.
Certain obligations which are ancillary to the principal performance may be interpreted as surviving the termination. This may include, for example, rights and duties relevant to disputes and breaches such as clauses regarding arbitration.
The innocent party may be entitled to a fixed sum under the terms of the contract. In the event of a fundamental breach by the other party, the entitlement will remain, even if it exceeds the amount of damages, due for example, to a change in market conditions. This may occur where a deposit is due but unpaid, which exceeds the actual loss arising from the repudiation of the underlying contract.
Waiver and Estoppel I
Where a party does not exercise his right to terminate, he may affirm the contract. Even where he does not affirm the contract, he may waive his rights or become estopped from asserting a right of termination.
A party may affirm or waive his rights to terminate the contract, where he continues with performance, in the knowledge of the other person’s breach. A landlord may lose his right to forfeit, where he demands rent for a further period.
A total waiver is a complete abandonment of the rights under the contract, which have arisen from the breach. This differs from a waiver of the right to terminate, which reserves the right to damages for the breach. In this context, a waiver is more readily interpreted as a waiver of the right to terminate than of the waiver of both the right to terminate and the right to damages for breach.
Waiver and Estoppel II
Estoppel may arise where the innocent party by his words or conduct leads the defaulting party to believe that the right to terminate will not be exercised, and that party relies on the representation and thereby acts to his detriment.
An affirmation is generally irrevocable, once communicated. Estoppel may be suspensory and limited in its effect. It may be lifted by giving reasonable notice, sufficient to remove the inequitable consequence.
Affirmation applies only to a particular breach. If there is a further breach which independently justifies termination, the innocent party may exercise the right to terminate. However, there may be circumstances where estoppel is such as to prevent the exercise of the option to terminate, even in these circumstances.
Basis of Termination and Knowledge
It is not clear whether the party who affirms the contract must necessarily know of the right to terminate. It appears that he need not know of the right as such. He must, at least, have made an informed choice based on knowledge of the relevant facts which entitle him to terminate.
Unlike the position with estoppel, affirmation does not require reliance on the part of the party in default. In the case of an affirmation, the innocent party indicates that he will not exercise the right to terminate. In the case of estoppel, the representation is that he will not exercise his legal rights in the future. In this latter case, reliance is necessary.
Affirming and Later Terminating
By pressing for performance, the innocent party does not necessarily waive his right to terminate. However, if he leads the other party to believe that he has terminated, he may be estopped from denying this, if it would be otherwise unjust and inequitable.
Where one party obtains an order of specific performance, which is not performed by the defendant, the injured party may apply to court have the order discharged.
The House of Lords has held that where a party fails to perform an order for specific performance, the court may award damages, not only under the special Chancery Act jurisdiction to award damages in lieu of specific performance but also at common law. The party who has obtained specific performance must apply to court for an order for or confirming termination of the contract
Effect of Obligation to Mitigate
The innocent party’s options may be limited by the principle that he must mitigate his loss. He may, in fact, be required to take steps which leave him unable to perform the contract so that he necessarily terminates it. Equally, the requirement for mitigation may sometimes oblige him to accept the other party’s performance, even it does not accord with the contract terms.
The innocent party is not necessarily obliged to contract with the party in default, even if this is the optimum mitigation. See generally the sections on mitigation.
Relief Against Forfeiting Termination
In the case of certain statutory rights and in equity, there is a possibility of relief against forfeiture in some classes of case. In the case of a lease, where the landlord seeks to terminate a lease for a relatively trivial breach of covenant, statutory and /or equitable relief against forfeiture may be available. In the case of consumer hire purchase courts, there are statutory provisions which allow the court to grant relief.
Relief against forfeiture is equitable in nature and is limited to proprietary and possessory rights. It will not be available in respect of agreements which are purely commercial in nature. A contract of a commercial nature may confer quasi-proprietary rights, such as in the case of intellectual property and a demise charterparty.
In the case of the purchase of land, the purchaser has an equitable right from the moment of contract. This appears to be sufficient to allow for relief against forfeiture. Some English case have cast doubt on the extent which relief against forfeiture is available to a purchaser. It may be available to the limited extent of preventing unjust enrichment.
The Unfair terms in consumer contract regulations limits the extent to which clauses may provide for forfeiture or for termination, by reason of relatively minor breaches. A right to cancel in all circumstances, including in the case of very minor breaches may be deemed to be an unfair contract term and may be thereby ineffective.
References and Sources
Irish Textbooks and Casebooks
Clark, R. Contract Law in Ireland 8th Ed. (2016) Ch 18
Friel, R. The Law of Contract 2nd Ed, (2000)
McDermott, P. Contract Law (2001) 2nd Ed (2017) Ch 21
Enright, M. Principles of Irish Contract Law (2007)
Clark and Clarke Contract Cases and Materials 4th Ed (2008)
English Textbooks and Casebooks
Poole, J. Casebook on contract law. (2014) 12th edition
Stone and Devenney, The Modern Law of Contract 10th Ed (2015)
McKendrick, Contract Law 10th Ed (2013)
Chen-Wishart, Contract Law 5th Ed (2015)
Anson, Reynell, Beatson, J., Burrows, Cartwright, Anson’s law of contract. 29th Ed (2010)
Atiyah and Smith, Atiyah’s introduction to the law of contract. 6th Ed.
Chen-Wishart, M. (2015) Contract law. 5th Ed.
Cheshire, Fifoot and Furmstons, Furmstons and Fifoot Cheshire, Fifoot and Furmston’s law of contract. OUP.
Duxbury, Robert (2011) Contract law. 2nd Ed.
Halson, Roger (2012) Contract law. 2nd Ed.
Koffman & Macdonald’s Law of Contract. 8th Ed. (2014)
O’Sullivan, Hilliard, The law of contract. 6th Ed. (2014)
Peel, and Treitel, The law of contract. 13th Ed. (2011).
Poole, J.Casebook on contract law. 12th Ed. (2014).
Poole, J. Textbook on contract law. 12th Ed. (2014)
Richards, P Law of contract. 10th Ed. (2011)
Stone, R. The Modern law of Contract. 10th Ed. (2013)
Treitel, G. H. An outline of the law of contract. 6th Ed (2014).
Turner, C Unlocking contract law. 4th Ed. (2014).
Upex, R. V., Bennett, G Chuah, J, Davies, F. R. Davies on contract. 10th Ed. (2008).
Stone,Devenney, Text, Cases and Materials on Contract Law 3rd Ed (2014)
McKendrick, Contract Law Text, Cases and Materials 6th Ed (2014)
Stone, R, Devenney, J Cunnington, R Text, cases and materials on contract law. 3rd Ed (2014)
Burrows, A. S. A Casebook on Contract. 4th Ed.
Beale, H. G., Bishop, W. D. and Furmston, M. P. Contract: cases and materials. 5th ed. (2008)
Blackstone’s Statutes on Contract, Tort & Restitution 2017 (Blackstone’s Statute Series)
UK Practitioners Texts
Chitty on Contracts 32nd Edition, 2 Volumes & Supplement (2016)
The above are not necessarily the latest edition.