Learning Outcomes
After reading this article, you will be able to identify and explain the main legal grounds for terminating a contract, including termination for breach, frustration, and agreement. You will be able to apply the key principles to practical scenarios, determine the consequences of termination for the parties, and distinguish the effects of termination from rescission and performance.
SQE2 Syllabus
For SQE2, you are required to understand when and how a contract may be lawfully terminated and to apply this knowledge to client or scenario-based questions. In your revision, focus on knowing:
- termination for repudiatory breach (actual and anticipatory)
- termination by agreement (with and without consideration or by deed)
- discharge by performance and exceptions
- frustration and its practical and legal consequences
- the difference between termination and rescission
- the effects of termination on rights and liabilities, including accrued and future obligations
Test Your Knowledge
Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.
- What distinguishes a repudiatory breach from a minor contractual breach?
- What is required for a party to accept a repudiatory breach and terminate the contract?
- In what circumstances can a contract be terminated by frustration?
- What happens to accrued rights and future obligations when a contract is terminated for breach?
- Can the parties terminate a contract by agreement without fresh consideration? If so, how?
Introduction
Contract law regulates how and when parties are discharged from their contractual obligations. Termination may arise due to breach, agreement, frustration, or by operation of law. Knowing the principles and consequences of termination is essential for advising clients on their contractual rights and remedies.
Termination for Breach
A contract may be terminated following a serious breach by one party. The law distinguishes between repudiatory breaches and breaches of lesser terms.
Key Term: repudiatory breach
A serious breach that deprives the innocent party of substantially the whole benefit of the contract and entitles that party to terminate.
A repudiatory breach allows the innocent party to choose between affirming the contract or accepting the breach and bringing the contract to an end for future obligations. Usually, a breach of condition or very serious breach of an innominate term will be repudiatory.
Actual vs. Anticipatory Breach
A repudiatory breach may be "actual" (occurs at the time performance is due) or "anticipatory" (when one party makes clear, before performance is due, that they will not perform).
Key Term: anticipatory breach
When one party, before their contractual obligations are due, shows an intention not to perform or fulfill their obligations.
On anticipatory breach, the innocent party may immediately accept the breach and terminate or choose to wait until performance is due, subject to certain risks.
Accepting and Affirming Breach
To terminate, the innocent party must communicate acceptance of the repudiatory breach to the other party, clearly and unequivocally. If instead they affirm the contract (either expressly or by conduct), they lose the right to terminate for that breach.
Key Term: affirmation
Where the innocent party, after a repudiatory breach, elects to continue with the contract, losing the right to terminate for that breach.
Worked Example 1.1
Lola contracts to supply Ravi with 10,000 units by 1 July. On 15 June, Lola informs Ravi she will not deliver any units. What are Ravi's options?
Answer:
Lola's statement is an anticipatory repudiatory breach. Ravi may either accept the breach and terminate now, claiming damages, or affirm the contract and require Lola to perform when due, risking loss of remedy if circumstances change before 1 July.
Termination by Agreement
Parties can terminate a contract by mutual agreement, but the terms and requirements differ depending on whether consideration is present.
If both parties have continuing obligations, mutual release is generally sufficient consideration to support termination. If only one party has performed in full, fresh consideration from the other party is required, unless the release is executed as a deed.
Key Term: termination by agreement
Ending contractual obligations by mutual consent, which must be either supported by consideration or executed as a deed if consideration is lacking.Key Term: deed
A document executed with specific legal formalities stating it is a deed, signed, witnessed, and delivered, allowing release without consideration.
Worked Example 1.2
A cleaning contractor agrees to provide two years of daily services at a fixed monthly price. After six months, both parties agree to end the contract. Is further consideration required to make this effective?
Answer:
No further consideration is required because both parties had future obligations. Each is giving up those rights/duties, making the agreement binding.
Discharge by Performance
Full and exact performance usually discharges the contract. If a contract is 'entire', incomplete performance may result in no payment unless the contract is divisible or an exception applies.
Key Term: entire contract
A contract in which full and precise performance is required; partial performance generally earns no reward.
Exceptions include:
- Substantial performance (where minor defects exist but essential obligations are met—allowing price adjustment)
- Divisible contracts (structured in stages or instalments, permitting recovery for completed parts)
- Acceptance of partial performance (with express or implied consent)
Termination may also occur when an "entire" obligation becomes impossible, as discussed below.
Discharge by Frustration
A contract is frustrated when an unforeseen event, not caused by either party, makes performance impossible, illegal, or radically different from what was agreed.
Key Term: frustration
Automatic discharge of a contract due to unforeseen events making performance impossible, illegal, or fundamentally different.
Examples include destruction of subject matter, change of law making the contract illegal, or cancellation of a central event. Mere increased expense or difficulty does not suffice, nor does self-induced frustration.
When a contract is frustrated, both parties are freed from future obligations. However, accrued rights up to the frustrating event remain, and special statutory rules may apply (e.g., Law Reform (Frustrated Contracts) Act 1943).
Worked Example 1.3
Olive rents a venue from Faith for a concert on 9 September. On 1 September, the venue is destroyed by fire (not caused by either party). What is the legal effect?
Answer:
The contract is frustrated. Both parties are automatically released from obligations from 1 September. Olive may claim repayment of fees paid in advance, subject to the court's discretion and statute.
Consequences of Termination
Upon termination for breach or frustration, the future, unperformed obligations are discharged. Accrued rights—such as claims for payment for services already rendered, or for damages for breaches before termination—remain enforceable unless otherwise agreed.
Key Term: accrued rights
Rights or obligations that have become due or enforceable prior to termination or frustration; these survive termination.
Upon termination for actual or anticipatory repudiatory breach, the innocent party may claim damages for losses arising from the breach. Upon termination by agreement, rights are governed by the new agreement, subject to consideration or deed.
Terminating a contract does not automatically rescind it. Rescission is an equitable remedy (usually for misrepresentation or vitiating factors), which unwinds the contract retrospectively.
Key Term: rescission
An equitable remedy which renders a contract void from the beginning, restoring parties to their pre-contract position; differs from termination, which operates prospectively.
Exam Warning
When termination occurs, ensure you distinguish between the effect of discharge (future obligations only) and rescission (entire contract treated as void ab initio). Misapplying the remedy may mislead on whether restitution or damages is available.
Key Point Checklist
This article has covered the following key knowledge points:
- Termination can occur for repudiatory breach (actual or anticipatory), frustration, agreement, or by performance.
- A repudiatory breach entitles the innocent party to terminate for future obligations but leaves accrued rights intact.
- To terminate for anticipatory breach, the innocent party must elect to either accept the breach or affirm the contract.
- Termination by agreement requires mutual release, fresh consideration, or execution as a deed where only one party has unperformed obligations.
- Frustration automatically ends the contract upon occurrence of a qualifying event outside the parties' control.
- Accrued rights and prior breaches generally survive termination; future obligations do not.
- Termination and rescission are distinct: termination ends the contract for the future; rescission unwinds the contract from the start.
Key Terms and Concepts
- repudiatory breach
- anticipatory breach
- affirmation
- termination by agreement
- deed
- entire contract
- frustration
- accrued rights
- rescission