In what was set to be the most publicised takeover deal of the year, billionaire Elon Musk’s purchase of social media platform Twitter, has now flown the coop.
Media reports say that Musk purported to terminate the purchase agreement due to misleading representations in material breach of the agreement and Twitter commenced proceedings in the Delaware Court of Chancery seeking ‘specific performance’ of the contract.
The concepts of termination of contract and specific performance are similar in common law jurisdictions such as the US, UK, Canada and Australia, but naturally, there are jurisdictional differences.
Disputes often arise about whether a party has validly terminated a contract and what the consequences are if they have not done so. Sometimes, those disputes go all the way up to the highest appeal courts.
So when the Musk v Twitter type situation arises in Australia, how do the courts decide the case?
How can a contract be terminated?
There are a number of ways that a party can validly terminate a contract in Australia. We identify the most common below.
- The first (and most obvious) way for a contract to terminate is for both sides to agree to end the contract. However, parties need to be careful about how they approach an agreement to terminate – there is a danger that a proposal may be taken to be a ‘repudiation’ of the contract (see more below).
- The contract itself may contain terms that allow one party to give notice of termination in certain circumstances.
- Again, parties who wish to terminate under an express clause need to take care that they are entitled to do so, otherwise their purported termination may be an unlawful repudiation. For example, the termination clause might specify the preconditions for termination, so it’s important to ensure that those preconditions are met before giving notice of termination.
- Sometimes a contract will specify that the parties will have a right to terminate ‘for convenience’ or upon giving certain notice.
Breach of contract
- Depending on how important a clause is, a breach may allow the non-breaching party to terminate. For what are termed ‘conditions’ (or sometimes essential terms), any breach allows the non-breaching party to terminate. For less important, but not trivial clauses, the seriousness of the breach will determine if termination is available.
- A contract will often specify what terms are ‘conditions’. Unfortunately, that is not always clear and so sometimes disputes arise when a party purports to terminate for breach of a condition or another non-trivial clause, and the other party argues that the relevant clause is instead a ‘mere warranty’.
- Likewise, the innocent party can choose to terminate the contract and sue for damages if the other party clearly indicates that it is not ready, willing or able to perform its contractual obligations. The unwilling or unready party is said to have ‘repudiated’ the contract.
- The innocent party then has an election to make – whether to ‘accept’ the repudiation and terminate the contract or ‘reject’ the repudiation and keep the contract on foot. If terminated, the contractual obligations of both parties come to an end, but the innocent party can sue for damages. If the innocent party elects to keep the contract on foot, it may have to seek an order for ‘specific performance’ (see more below).
- A contract can be terminated due to ‘frustration’ where the parties cannot perform their respective parts of the deal as originally contemplated because of a change of circumstances caused by unforeseen events, which is not the fault of either party. If a contract is discharged by frustration, both parties are relieved from their obligations and can walk away from the deal.
- If one party to a contract alleges that it was led into the contract by a misrepresentation from the other party, it can choose to undo or annul the agreement under the doctrine of ‘rescission’. However, if the misled party chooses to ‘rescind’ the contract, it must be able to put things back the way they were before the contract was entered into.
- For example, if a buyer is misled by a seller into buying a business and the buyer chooses to undo the deal, the buyer must return the business to the seller in the same state as it was before the contract. If payments have been made between the parties under a contract that is ‘rescinded’, then the money has to be returned. It may not be possible to undo a contract on the grounds of misrepresentation if services have been performed under the contract, as both parties cannot return to their original positions.
- In some instances, legislation may allow a party to terminate or seek orders from a court to allow a party to terminate.
- For example, the Competition and Consumer Act 2010 (Cth) contains a number of guarantees that goods sold will be of acceptable quality and fit for purpose. Failure to comply with these guarantees allows consumers the statutory right to reject the goods and terminate the contract if the breach cannot be rectified. Similar to rescission, consumers will not be entitled to reject the goods if they have been lost, disposed of or destroyed.
What is specific performance?
If one party fails or refuses to perform the contract, the innocent party may be able to seek an order for specific performance from a court. The order requires the breaching party to perform its obligations under the contract, and further failure to do so may be punishable by contempt proceedings.
Courts will often make an order for damages to compensate the innocent party due to the breach. However, sometimes damages will be an inadequate remedy and the innocent party may seek an order for specific performance. This most often arises in relation to a contract for the sale of land or chattels (like vessels) that are not easily purchased elsewhere if the seller refuses to complete the sale. Although, the order may also be made in cases where damages are difficult to calculate (which may be the argument to be run by Twitter in the US case) or the breaching party is unlikely to pay damages.
Ultimately, orders for specific performance are relatively rare and can be difficult to obtain. Courts are generally reluctant to impose contractual obligations that would require constant supervision or impose personal obligations upon a party.
Commercial contracts will often contain express clauses for termination by one or all parties. Without an express right, parties may still be able to rely on the principles of common law or consumer law to terminate.
Parties to commercial contracts should consider obtaining legal advice before attempting to terminate a contract, otherwise a party who wrongfully terminates could find themselves in breach of the contract and subject to significant damages claims.