"The other party breached the contract. Can we terminate it immediately?"

A company appoints a contractor to complete renovation works within four months.

Six months later, the project remains incomplete. Several defects have been reported and the contractor has reduced the number of workers at the site.

The company wants to appoint a replacement immediately.

Its director says:

“They breached the agreement first. We can terminate today.”

A breach does not always give the innocent party an immediate right to terminate.

Terminating without a proper legal or contractual basis may itself become a breach.

1. Not every breach has the same consequence

A contract may contain many obligations.

Some are fundamental to the transaction. Others are procedural or comparatively minor.

For example, the following situations may not necessarily justify the same response:-

• abandonment of the entire project;

• a short delay affecting one delivery;

• repeated failure to meet critical milestones;

• failure to maintain compulsory insurance;

• submission of a report one day late;

• refusal to perform any further work; and

• a defect that can readily be rectified.

The right to terminate depends on the contract, the nature and seriousness of the breach, the surrounding circumstances and the applicable law.

An innocent party should not assume that every failure permits the entire agreement to be brought to an end.

2. Start with the termination clause

The contract may specify:-

• the events permitting termination;

• whether notice must first be issued;

• the period allowed to remedy the breach;

• the required method of service;

• the address for notices;

• who may issue the notice;

• whether termination is immediate or takes effect later; and

• the consequences of termination.

These requirements matter.

If the agreement requires a 14-day notice to remedy a breach, a party should not ordinarily terminate after seven days merely because it believes the breach is serious.

If notices must be sent by registered post to a stated address, sending a WhatsApp message to a project manager may not satisfy the contractual procedure.

The notice should identify the relevant breach accurately and give the defaulting party the contractual opportunity to remedy it where required.

3. What if the contract has no termination clause?

The absence of an express clause does not necessarily mean that termination is impossible.

Section 40 of the Contracts Act 1950 generally provides that when a party refuses to perform, or disables itself from performing, its promise in its entirety, the promisee may put an end to the contract unless the promisee has signified, by words or conduct, its acquiescence in the continuation of the contract.

Whether section 40 applies depends on the nature of the refusal or inability to perform.

The evidence may include:-

• an express statement that the party will no longer perform;

• abandonment of the site;

• disposal of equipment required for performance;

• persistent refusal to comply with essential obligations;

• conduct making completion impossible; or

• other circumstances demonstrating an intention not to be bound.

A temporary difficulty or disputed interpretation is not automatically a refusal to perform the promise in its entirety.

4. Has the innocent party continued with the contract?

When a serious breach occurs, the innocent party may face an election.

It may seek to terminate if a valid right exists, or it may affirm the contract and insist on continued performance.

A party’s conduct after discovering the breach can therefore be important.

Suppose the employer:-

• continues instructing additional work;

• approves further variations;

• accepts revised completion dates;

• makes further payments;

• confirms that the project will continue; or

• delays for months before attempting termination.

Such conduct may be relied upon to argue that the contract was affirmed or that the party accepted its continuation.

This does not mean that every attempt to resolve a problem removes the right to terminate. However, communications should clearly reserve the party’s rights where appropriate.

Delay and inconsistent conduct may create uncertainty.

5. Can the breach be remedied?

Where the contract provides a cure period, the notice should normally give a genuine opportunity to rectify the identified breach.

The notice should explain:-

• what obligation was breached;

• the relevant contractual provision;

• what must be done to remedy it;

• the deadline;

• how compliance will be assessed; and

• what may happen if the breach remains unremedied.

A vague statement that the other party has “failed to perform satisfactorily” may lead to disagreement about what was required.

The innocent party should also avoid demanding an impossible remedy or imposing conditions not found in the agreement.

6. Be precise about the effective date

A termination notice should state when termination takes effect.

Depending on the contract, termination may occur:-

• upon receipt of the notice;

• after the cure period expires;

• on a specified future date;

• after certification by an architect or another contract administrator; or

• following a further notice.

The party should not appoint a replacement, take possession of property or stop all payments before the termination becomes effective unless it has a proper basis to do so.

Premature action may interfere with the other party’s contractual rights and complicate the later claim.

7. What happens after termination?

Termination does not erase the entire history of the contract.

Rights and liabilities that accrued before termination may remain enforceable.

The parties may still need to address:-

• work already completed;

• goods already delivered;

• outstanding payments;

• retention sums;

• deposits;

• return of property and documents;

• confidential information;

• intellectual property;

• equipment remaining at the site;

• existing guarantees;

• indemnities;

• dispute-resolution clauses; and

• claims for damages.

Some contractual provisions are expressly intended to continue after termination.

The parties should review the agreement before assuming that every obligation has ended.

8. Can the innocent party claim all resulting losses?

Section 74 of the Contracts Act 1950 addresses compensation for loss or damage caused by breach of contract.

Compensation is generally concerned with losses that naturally arose in the usual course of things from the breach or that the parties knew, when contracting, were likely to result from it. Compensation is not generally available for remote and indirect loss.

The claimant must still establish its loss with evidence.

Depending on the case, documents may include:-

• replacement quotations;

• rectification invoices;

• progress reports;

• expert assessments;

• records of delay;

• additional financing costs;

• correspondence with customers; and

• proof of payments made.

The innocent party should also take reasonable steps to mitigate its loss.

For example, it should not allow preventable losses to increase simply because it intends to claim them from the defaulting party later.

9. What if the agreement states a fixed amount for breach?

A contract may provide for liquidated damages, late-payment charges or another agreed sum.

The existence of such a clause does not mean that the amount will automatically be recoverable in every case without further examination.

Its wording, the triggering event, the contractual procedure and the applicable principles governing compensation must be considered.

The party should also verify whether claiming the stipulated sum is consistent with termination and any other remedies pursued.

10. Wrongful termination can reverse the parties’ positions

If a party terminates without a valid basis or fails to follow the required procedure, the purported termination may amount to a repudiatory breach.

The party that originally complained about delay or defective performance may then face a counterclaim for:-

• unpaid contractual sums;

• loss of profit;

• demobilisation costs;

• loss arising from exclusion from the site;

• wrongful use of security or deposits; and

• other provable damages.

This is why the termination letter should not be drafted as an emotional response to a difficult relationship.

It should be based on the contract, evidence and intended remedy.

11. What should be done before termination?

Before issuing the notice:-

1. Identify the exact agreement and amendments.

2. Confirm the breaches relied upon.

3. Gather contemporaneous evidence.

4. Review the termination and notice provisions.

5. Check whether a cure notice is required.

6. Consider whether the contract has already been affirmed.

7. Quantify the present and anticipated losses.

8. Plan the operational consequences of termination.

9. Preserve access, data, goods and project records lawfully.

10. Ensure the notice is served using the correct method.

The commercial plan is as important as the legal notice.

A business that terminates a critical supplier without arranging a replacement may succeed on the legal issue but still suffer severe operational disruption.

Termination is not simply a declaration that the other party was wrong.

It is a legal election with potentially significant consequences for both sides.