When will a right to terminate be lost?
The NSW Court of Appeal has considered how long a party's right to terminate a contract lasts following a breach by the other party. In doing so, the court considered the doctrine of election and the implied contractual obligation to exercise a right within a 'reasonable time'.
The court overturned the primary decision, and found that although ASC had not unequivocally affirmed the contract following a breach by Donau, ASC's 'reasonable time' to terminate the contract had well since passed.
This case is significant because it holds that, notwithstanding the absence of any election to affirm a contract, a party must still decide quickly whether to exercise a contractual right to terminate.
The Federal Government entered into a contract with ASC for the procurement of air warfare destroyers. ASC then entered into a subcontract with Donau for the construction of certain ship parts.
The first subcontract became unworkable, so the parties negotiated and entered into a second subcontract.
Under the second subcontract, ASC had an express right to terminate the contract if the parties had not agreed to new performance and fee metrics by 28 February 2013. This deadline was not met, and negotiations on these metrics continued until early June 2013, at which point ASC purported to terminate the contract.
The second subcontract did not specify a time by which the right to terminate had to be exercised.
The court considered two key issues:
- whether ASC lawfully elected to affirm the contract; and
- if not, whether ASC terminated within a reasonable time.
Doctrine of election
ASC was expressly entitled to terminate the contract, due to the parties' failure to reach an agreement on the performance and fee metrics.
Justice Bell confirmed that, under the doctrine of election, a party must be aware that their right to terminate has been enlivened; and the act constituting the election must be unequivocal, in the sense that 'it is consistent only with the exercise of one of the two sets of rights and inconsistent with the exercise of the other'.
The court found that ASC's conduct was not unequivocal (but, rather, ambiguous), as (a) it continued to negotiate the terms of the metrics after the express deadline; (b) the parties had operated outside the terms of the contract for some time; and (c) it was unknown to the parties when the 'reasonable time' would expire.
These factors deprived ASC's conduct of the necessary clarity to sustain a conclusion there had been an unequivocal election.
Justice Bell confirmed the well-established principle that if a contract does not stipulate a deadline by which something is to be done, it must be done within a reasonable time.
In relation to the interpretation of 'reasonable time', His Honour articulated the legal position as encompassing the following elements:
- the meaning of 'reasonable time' is to be ascertained as at the date of the contract; but
- the decision as to what length of time is reasonable will need to be assessed at the date on which the right is first capable of being exercised.
This meant that the conduct after ASC's right to terminate arose (28 February 2013) could not be considered in the determination of whether a reasonable time had passed.
Given the size, complexity and sophistication of the project (the procurement of air warfare destroyers) and the particular parties involved, the implied term of 'reasonable time' was interpreted as being a fairly short period.
Therefore, as it was held that the reasonable time had long since passed when ASC purported to terminate the contract, the court held that the second subcontract had not been validly terminated.