When a contract ends

Contributed by Ian Macdonald and Su Mahalingham and current to 1 September 2005

Once a contract exists, it must at some stage end.

PERFORMANCE

Most contracts come to an end by being completed. Once the parties to the contact completely fulfil their obligations to one another, the contract comes to an end.

AGREEMENT BETWEEN THE PARTIES

The parties to a contract can agree at any time to end it. Such an agreement is itself a contract, so all the elements discussed above must be present, including consideration.

Where both parties still have obligations under the old contract, the new contract will consist of promises by each party not to enforce the promises made by the other under the old contract, so each receives something of value. Where one party has already fully performed their side of the contract, they may require the other party to give value in exchange for release from the remaining obligation. The party promising to release the other party may change their mind before the value is paid. However, if the party in breach has relied on the agreement and has changed their situation in some way, a court may force the party promising release to keep to the agreement.

FRUSTRATION

Sometimes circumstances change so much after a contract is made that it is impossible to carry it out. For instance, the subject matter of the contract may be destroyed, such as where there is a contract to buy a painting, but before it can be handed over, it is stolen or destroyed by fire. If this happens without the fault of either party a court may find that the contract has automatically ceased (become frustrated). In that case neither party will be bound. The court must be satisfied that there is no provision in the contract that the contract should continue to bind even if such an event should occur.

BREACH

A breach of a contract term does not necessarily discharge the contract. The normal remedy for a breach of contract is damages to compensate the innocent person by putting them in the same financial position as if the contract was fulfilled.

Certain serious breaches of a contract (known as repudiatory breaches) give the innocent party the right to choose whether to terminate the contract or keep it in force. If they decide to cancel (rescind), they must inform the party in breach at once. The contract comes to an end from the moment the party in breach is informed of cancellation. Neither party is bound by the contract from then on. However, any obligations that arose before then (for example, obligations to pay damages for breach) survive and can be enforced.