A termination clause is typically a large bone of contention
between the contracting parties in any negotiation and often
during the performance of the contract.
Termination may be a suitable remedy if you no longer
require the goods or services, however, in many contracts the
goods and services are needed immediately and may be unique or
too costly to source elsewhere.
Termination may not be an option if the contractor is the
only party who is able to provide the goods and services or to
provide the goods or services for a reasonable price and within
a reasonable time frame.
Even if another party has the technical and management
capability and capacity to complete the contract, cost
escalations and delay will almost be inevitable if a contractor
is replaced during the performance of the contract.
Another factor to consider is whether, if you decide to
complete the contract yourself or engage a third party, you
have the capacity to do so.
While termination is undoubtedly the single most powerful
contractual right, it may, if utilised for the wrong reason
place you in a worse position.
Termination for breach should also be seen as a last resort.
Once it is used, it means that the contract has failed and it
is also legally very risky.
In the absence of any special contractual provisions, the
right to terminate arises only on serious or what can be
defined as a substantial breach. Case law on what amounts to a
serious breach provides little guidance. The legal risk arises
from the fact that wrongful termination of the contract is
itself a serious breach which then provides the other party
with a right to terminate and seek damages.
It is, of course, possible (and it is usually the case) that
parties to a contract specify what particular breaches justify
termination. In addition, it is also common to put a procedure
into the contract for termination such as a show cause
procedure or a procedure under which the defaulting party is
given an opportunity to rectify the breach. If there is such a
procedure in the contract, care must be taken to ensure that it
is closely followed.
There is a particular problem of enforceability of clauses
where government, in particular, may be seeking to bring about
some extraneous purpose, for example, industry development,
anti-discrimination or environmental protection. To terminate
on the basis of a breach of an extraneous purpose obligation is
a high risk strategy, as such obligations may not be regarded
by the court as sufficiently serious so as to justify
termination in the absence of an express clause.
Termination for convenience
Termination for convenience is a remedy that has
increasingly found favour in both the public and private
sector. It is worthwhile noting that its origins rest in the
doctrine of executive necessity (a government based
The courts have long recognised that despite the binding
nature of contracts, the capacity of government to govern
should not be fettered. There are special needs of government
which may mean that either a government contract is not binding
or that government must be allowed to break a contract because
it cannot inhibit the business of governing. The government may
be able to break an otherwise perfectly valid and enforceable
contract because it is necessary to do so for acceptable
governmental reasons (such as a change of policy). Naturally
this doctrine has found its way into typical
Principal/Contractor relationships with either party seeking to
use this get out of jail free clause to maximum advantage.
Hopgood Ganim recommendations
1. Plain english drafting will keep everybody on the same
page and should be used wherever possible;
2. Come and see us long before commencement of your project
so we can assist you in adopting a best for project
3. Always weigh up ALL possible outcomes of exercising your
rights to terminate, it may not be the most commercial option
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