Can you terminate your contract for breach of a non-essential term?
Breaches of contract occur on a regular basis in business, however there is still some confusion as to what a business can do to terminate a contract. It’s crucial that you’re aware of the non-essential terms in your contracts so that you may determine what your rights are and whether you may terminate a contract due to the breach of a non-essential term.
What is a non-essential term?
A non-essential term of a contract is commonly referred to as an intermediate term or a warranty at common law. Non-essential terms are seen as minor terms (compared with essential terms) as you are not provided with an automatic termination right for a breach of a non-essential term.
Some common examples you may find in contracts of non-essential terms are as follows:
- A term providing the required number of copies of a document to be provided;
- Where a party agrees that at settlement the property will be in the same state and condition, it was immediately before the date of the contract. If the condition of the property has changed between the date of the contract and settlement the aggrieved party may settle and pursue damages, but there is no right to terminate;
- A performer enters into a contract which states they must arrive at a certain time before the performance, i.e. a week prior but arrives the day before; and
- Covenants in a lease – failure to perform an obligation which is otherwise essential on a stipulated date or if no date is stipulated within a reasonable time will not entitle the other party to bring the lease to an end unless the time of performance is expressly or impliedly made essential by the lease or is made effective by a notice to complete.
How to determine if you can terminate the contract
To terminate a contract due to a breach of a non-essential term, the breach must be sufficiently serious to give rise to the termination at common law. Such breach must substantially deprive the aggrieved party of their rights under the contract. To determine if there has been a sufficiently serious breach of a non-essential term, the courts will take into account:
- If the entire contract was affected by the breach, resulting in performance being exceptionally different from what was originally expected by the parties;
- The seriousness of the breach and what will amount from it for the innocent party, including both actual and foreseeable; and
- The onus of proof will lie with the aggrieved party to prove the seriousness of the outcome of the breach (as determined by the court).
When drafting contracts, certain terms may be implemented to outline the intentions of the parties in relation to what a serious breach is, i.e. a breach that is ‘substantial’, ‘material’ or ‘significant’. However, in determining whether there has been a significant breach of a non-essential term, it may come down to the interpretation of the terms.
It’s therefore important to ensure your intentions are adequately drafted into the contract and negotiated with the other party to make certain the correct terminology is implemented. If the non-essential terms are not evident, the courts may rely upon the commercial context in which they have been drafted and the purpose of them.
To distinguish between an essential and a non-essential term a test must be applied and a term will only be considered essential if it can be shown that the other party would not have entered into the contract if that particular term was not included.
In the case of Ankar Pty Ltd v National Westminster Finance (Australia) Ltd (1987) 162 CLR 549, it was held that if there is uncertainty about whether a term is essential or not, the courts generally determine the term is non-essential.
It’s important that you recognise the non-essential terms included in your contracts. If it can be established that a non-essential term has been significantly breached then the contract may be terminated.
Have questions about the non-essential terms in your existing contracts or want to draft them into new contracts? Call NB Lawyers, the lawyers for employers, on +61 (07) 3876 5111.
About the Authors
Jonathan Mamaril is the principal and director of NB Lawyers, the lawyers for employers, and a specialist in employment law. Over the last ten years, Jonathan has helped hundreds of employers understand their legal requirements, mitigate risk and liability, protect their reputation and achieve their goals for business growth and expansion.
Kayleigh Whittaker is a lawyer on our commercial and property team who also assists with employment law matters. With a high level of experience in commercial and retail leasing, voluntary and involuntary purchase and sale acquisitions, property development and employee relations, Kayleigh provides practical advice to ensure smooth business transactions