Two wrongs may create a right: the right to terminate a contract on breach of an "intermediate" term
Historically, the Courts have recognised two main types of contractual terms: conditions and warranties.
A ‘condition’ is a term so fundamental to the contract that a breach of it (however minor) gives the offended party the right to, among other things, sue for damages and terminate the contract. A ‘warranty’ is a term that is not as important as a condition and does not permit the offended party to terminate the contract if it is breached (although a party can still sue for damages).
Sitting somewhere between is a category of term called an ‘intermediate’ or ‘innominate’ term. Up until the High Court case of Koompahtoo Local Aboriginal Land Council v Sanpine Pty Ltd (Koompahtoo), Australian courts recognised the concept (some choosing to use it, others choosing to ignore it). But the High Court’s decision in Koompahtoo put the debate to rest - the existence of the intermediate term has been confirmed.
As to how the intermediate term works in practice, if a party breaches an intermediate term, the offended party may or may not have the right to terminate the contract. Importantly, for a breach of an intermediate term to result in the right to terminate the contract, the breach needs be serious and the term needs to be considered essential to the parties.
To help decide these issues, courts consider the nature of the contract and its terms, as well as the effect that the breach has had on the parties. The Court may also assess the gravity of the breach and its consequence and whether the breach renders performance of the contract substantially different from that intended by the parties. Another factor which the Court can consider is the frequency of relatively minor breaches which, when viewed as a whole, may amount to a breach of an intermediate term of such seriousness that the offended party has the right to terminate the contract.
In short, where someone has breached a contract to which you are a party, do not assume that the breach automatically gives you a right to terminate the contract. Whether you have this right will depend on the term itself in the context of the contract and the nature of the breach. Also keep in mind that if you assert that a contract has come to an end due to another party’s breach, but you are wrong, you may be found in due course to have breached the contract yourself. Finally, as a practical tip, if a term is important to you, express it to be a ‘condition’. This simple drafting inclusion may assist the Court to side with your point of view if a dispute ever arises.
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