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Contracts create and protect the relationships you have with other businesses. However, there may be instances where you wish to terminate, or cancel, a contract. In New Zealand, there are specific legal grounds on which you can invoke your right to cancel a business contract. This article will outline what these grounds are.

The Grounds for Termination

As the innocent party, you must demonstrate that your circumstances fall into one of several possible courses of actions for contract termination. These are:

  • repudiation; 
  • a breach or an anticipated breach of a contractual term; 
  • misrepresentation;
  • frustration; or 
  • mutual agreement. 

Repudiation

Repudiation occurs when the other contracting party clarifies that they do not intend to perform or complete the obligations that the contract required them to perform.

The other party may repudiate a contract by statements they make, or through their conduct. Repudiation by conduct will occur if a reasonable person believes that specific actions demonstrate an intention not to perform their contractual obligations. Overall, you must show clear evidence of the repudiation to terminate your contract. Where possible, it is best to communicate with your contracting parties to determine what their intentions are. 

Misrepresentation, or Actual or Anticipated Breach of a Term

A misrepresentation is a false written or oral statement another party makes about a past or existing fact. This misrepresentation must have induced your entry into the contract. For example, you wanted to buy a house in a particular school zone. The seller falsely informs you that the house is in a school zone and you purchased it based on that statement. In that case, you would have grounds to claim misrepresentation.

When a party does not perform their contractual obligations, there is a breach of the contract. Similarly, if it is clear that the other party will not fulfil their contractual obligations, this is an anticipated breach. 

To cancel a contract for misrepresentation or an actual or anticipated breach of a term, you (as the non-breaching party) must demonstrate that:

  • that there was a misrepresentation, a breach, or an anticipated breach of the contract; and
  • this misrepresentation or breach either 1) related to a term that you and the other contracting party agreed was essential to you, or 2) would result in one or more of the required substantial consequences.

Essential Term

A term is essential if it is so important to you that the breach of that term would justify cancellation. Although this term only has to be essential to you (the cancelling party), the other contracting parties must be aware of its essentiality. You can make the other party aware of the essential nature of a term by:

  • stating in the contract that the term is essential,
  • stating that the breaking of a term would warrant termination, i.e. a termination clause; or 
  • affirming that you will not enter into the contract unless the other party fulfils that specific term. In such instances, you may not have expressly stated that a term is essential to your agreement. Instead, the term is essential by implication.

Substantial Consequences

A breach of or a misrepresentation about your contract’s unessential term could still warrant termination if the breach is serious enough. A breach is serious if it:

  • substantially reduces the benefit(s) you receive from the contract;
  • substantially increases the burden you have to take on from the contract; or
  • makes the benefit or the burden of the contract substantially different from that contracted for. 

An example of a substantial consequence would be if a misrepresentation was made regarding your business’s turnover. The turnover ended up being 40% less than what you thought it was when entering the contract. Such circumstances would give you the right to cancel the contract, as your ability to benefit from it is substantially reduced. 

Other Requirements

It is important to note that you cannot cancel a contract if you have affirmed the contract with full knowledge of the repudiation, misrepresentation or breach. 

For example, you may have entered into a contract to purchase land in a particular school zone and was later aware that it was not in this zone. You cannot cancel the contract if you proceeded to remain in possession of the property, and continued to pay the monthly instalments of the purchase price. This is because, despite knowledge of the misrepresentation, you have affirmed the contract. 

The termination of a contract for a breach, misrepresentation or repudiation does not take effect until you have:

  • given notice of the cancellation to the breaching party; or
  • if you cannot communicate with the other party, made it clear that you intend to cancel the contract. 

Frustration

There may be instances where, at no fault of either contracting parties, a disastrous event occurs. Consequently, the performance of the contractual obligations becomes impossible. In such circumstances, the contract is frustrated. All contracting parties become discharged from all of their obligations under that agreement, and the contract is effectively cancelled.

Some examples of frustration are:

  • if the subject-matter of the contract stops existing. For example, if you enter into a contract to hire out a hall, but that hall burns down in a fire; 
  • if a party to a contract for personal services dies or becomes physically incapable of carrying out their obligations. For example, if you enter into a contract to hire a singer to perform at your birthday party, but they have a laryngectomy (making them permanently unable to sing); or
  • the specified way the contract is to be performed becomes impossible. For example, a contract will be frustrated if you specify that goods are to be carried by a particular ship, but it is wrecked in a storm. 

Mutual Agreement 

As you create contracts by agreement, you can also terminate your contract by agreement. To cancel your contract, it has to be supported by consideration provided by all contracting parties. Consideration refers to something of value. In these circumstances, an agreement will be backed by consideration if all parties exchange promises to release their rights under the contract, in exchange for a similar release by the other parties. 

Take Care When Cancelling

Before you cancel a contract, you must be sure that you have the right to do so. Suppose you do not, and you try to cancel. In that case, your attempted cancellation may be considered a repudiation of the contract (which could entitle the other party to cancel and claim damages). 

Key Takeaways

In New Zealand, to terminate a business contract, you have to demonstrate that you can exercise your right to cancel. You can do this when the other party has repudiated the contract or has made it clear that they do not intend to perform their contractual obligations. You may alternatively demonstrate that the other party has made a misrepresentation that induced your entry into the contract, or has or will breach a contractual term. If the contract becomes frustrated, it will be effectively terminated. When both you and the other contracting parties wish to cancel the contract, you may agree to do so. If you wish to terminate a contract, LegalVision’s contract lawyers can help. Contact us at 0800 005 570 or complete the form on this page. 

FAQs

What does it mean to terminate a contract?

Termination means to put an end to the contract and any future contractual obligations. 

What is the difference between cancellation and termination of a contract?

Both termination and cancellation to refer to the ending of a contract.

Why can a contract be terminated?

A contract can be terminated when one party no longer upholds their contractual obligations. This party may not intend to carry out these obligations, they may have breached a term of the contract, or it appears they will breach a term of the contract. You can also terminate your contract if all contractual parties agree to its termination, or if the contract becomes frustrated.

What happens when a contract is terminated?

After a contract is terminated, all unperformed contractual obligations come to an end. However, certain rights and obligations persist (including potential liability for damages or unperformed obligations).

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