Terminating a contract? Be careful about delays

A contract can generally be terminated in accordance with its terms (either the terms which are expressly set out in the contract or any terms which are implied into it) or through the common law right to accept a breach of contract as a repudiation of the contract which brings it to an end.

Parties may have different motives to terminate, for example because the other party has breached its terms or because the other party seeking to bring it to an end no longer requires the goods or services.

Termination brings the contract to an end and the parties are not required to perform their primary obligations any further.  Once a contract has been terminated it cannot be revived. Conversely, in some circumstances, if a party elects to keep a contract alive, it may lose its right to terminate.

A recent High Court case shed some additional light on when the right to terminate may be lost. In (DD Classics Ltd v Chen [2022] EWHC 1404 (Comm) the contract provided that if “the buyer does not meet his payment obligations […] within 5 business days after the due date, the seller is entitled to withdraw from this contract without reminder or setting a deadline”. The seller gave notice to terminate 13 days after the payment was overdue based on this clause believing that, if the buyer did not make payment in accordance with the contract, the seller could terminate the contract at any time before payment was made.

However, in this case (presumably because the relevant clause did not include the words “at any time”), the judge took the view that the seller had to exercise the right to terminate within a reasonable time which he held should be very short – because the decision the seller needed to make was a straightforward one.

The judge went on to say that the crucial question was: what would be a reasonable time for the seller to decide whether to terminate for the buyer’s default? The question was not: what would be a reasonable time to allow the buyer to remedy the default? On the facts the judge decided that purporting to terminate 13 days after the breach did not constitute termination within a reasonable time when the contract allowed the seller to terminate just 5 days after the buyer’s breach.

While this case is specific to its facts it does serve as a useful reminder that the window within which an innocent party should decide whether to exercise a contractual right to terminate may be relatively limited and, if a contract is not terminated within this period, the right to terminate may be lost. As always, the exact position in any particular case will depend on the facts and the exact terms of the contract in question (including any “no waiver” provisions).

A contractual right to terminate “at any time” following a trigger event would likely have made the seller’s position easier in this case – because it would have removed the requirement to exercise the right to terminate within reasonable time.

However, even where a contract allows the innocent party to terminate at any time following the other party’s breach, care must still be taken to avoid affirming the breach and thereby losing the right to terminate.

Affirmation (confirmation that a contract should continue notwithstanding a breach) can be express, but it can also be implied from a party’s actions, e.g. if the innocent party continues to perform its obligations and requires the defaulting party to continue to do so too. A contract can only be affirmed if the innocent party is aware not only of the breach but also of its right to terminate.

Where an innocent party wants to ensure it has an extended period within which it could exercise its right terminate, it can inform the other party that it reserves its right to terminate. This approach is strengthened if the innocent party:

• links the reservation of its rights to a contingent factor (such as needing the other party to provide further information to enable the innocent party to decide whether to terminate); and
• provides an indication of how long it needs to make its decision.

However, care must always be taken to avoid contradictory statements or positive actions which could lead the defaulting party to assert that the contract has been affirmed and the innocent party’s right to terminate has been lost.

If you have any questions or would like assistance in relation to your termination clauses, you can contact our commercial and technology team at [email protected].