There are three discrete categories of breach of contract which gives rise to a right to terminate. One such category is a breach of an “essential term”.

What is an essential term?

A term is said to be “essential” when it is of such importance to the party receiving a contractual promise that that party would not have entered into the contract unless it had been assured of a strict or a substantial performance of the promise, and the other party knows or should have known of this: Tramways Advertising Pty Ltd v Luna Park (NSW) Ltd (1938) 38 SR.

Generally, the parties’ intention that a term is to be an essential term may be evidenced by express words used by the parties, or by considering the operation of the relevant term in the context of the contract as a whole.

What happens if the essential term is breached?

A breach of an essential term of a contract does not automatically terminate the contract, but merely creates a right in favour of the nonbreaching party to terminate. The nonbreaching party must then decide whether to terminate or continue to keep the contract ‘on foot’.

If a contract is affirmed, it cannot subsequently be terminated in respect of the same breach leading to the affirmation, although some breaches may be, by their nature, continuing breaches giving rise to a subsequent right to terminate.

An election to affirm will be inferred from conduct which is consistent only with the continued existence of the contract, such as continued performance: Agricultural & Rural Finance Pty Ltd v Gardiner (2008) 238 CLR 570.

Conclusion

Termination must always be done carefully because a party who purports to terminate without any right to do so might be held to have itself repudiated the contract, which would confer upon the non-terminating party the right to treat the contract as being at an end and to claim damages.

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