How Do You Cancel A Contract?

29 January, 2018 | Smith and Partners

Cancellation of a contract is a very serious decision to make and one that can have far reaching consequences for both parties particularly if the cancellation is ultimately found to be invalid or wrongful.

A breach of a contract always entitles the innocent party to recover damages but the right to cancel a contract only arises where:

1.  there has been a repudiation of the contract before performance is due or before it has been performed.; or
2.  there has been a misrepresentation or breach of a term; and

• the parties have agreed between them that the truth of the representation or the performance of the term is essential to the innocent party. For example, would the parties still have proceeded with the contract if this representation wasn’t made?; or
• the misrepresentation or breach of the contract has a substantial effect on the innocent party. For example, has the contract become something substantially different to that which the parties originally  had agreed to?

What is repudiation?

Repudiation of a contract is where a party refuses to perform or complete a duty or obligation owed to the other party under an agreement or contract.

Repudiation is defined in section 36 of the Contracts and Commercial Law Act (“CCLA”) as:

“by words or conduct, another party repudiates the contract by making it clear that he does not intend to perform his/her obligations under it or, as the case may be, to complete such performance.”

Repudiation is a serious matter not to be lightly found or inferred. There must have been a clear intention by the other party not to perform his/her obligations under the contract.

It is sound case law that the test is objective, the “question is whether in all circumstances the communication should be regarded as an irrevocable indication that the party concerned would take no further steps to perform his or her obligations under the contract”.

An Example of Repudiation: Ingram v Patcroft Properties Limited

An example where it was found to be wrongful cancellation (or repudiation) is in the case of Ingram v Patcroft Properties Limited [2011]. In this case, there was a commercial lease between the parties. A clause in the lease provided for Patcroft Properties Limited (“Patcroft”) to re-enter the premises if the rent was in arrears for 14 days. The rent fell into arrears on 1 June 2015 and on 14 June, Patcroft changed the locks. Their solicitors wrote to the Tenants advising that Patcroft had re-entered the premises and terminated the lease.

Due to a miscalculation of the timeframe, the re-entry was effected only 13 days after the rent fell into arrears and was therefore not authorised by the lease. The Supreme Court held that the re-entry was unlawful and constituted a “repudiatory breach of the lease contract.”

As you can see, it is vitally important to obtain legal advice prior to taking steps to terminating a contract of any sort.

What should you do if you want to cancel a contract?

The first step when you want to cancel a contract or agreement is to have a contract law expert review the specific contract and understand whether the contract and/or the law allows for cancellation. If there are cancellation clauses in your contract, it is vital that you fully understand your rights and obligations and the process to ensure you do not create a breach yourself, by wrongful cancellation.

Are you considering cancelling a contract? Or do you think your contract has been cancelled wrongfully?
Contact our Contract Law team today.
Phone: 09 836 0939
Email: partners@smithpartners.co.nz