This article was written by Scott Watson and Aisling Scott.
The recent decision of the NSW Court of Appeal in Donau Pty Ltd v ASC AWD Shipbuilder Pty Ltd  NSWCA 185 sheds light on how long a party can wait before exercising contractual termination rights.
In this instance, the Court found that the right to terminate was required to be exercised ‘promptly’ after it accrued, and gave some practical guidance as to the factors that are relevant to assessing the period of time for a party to make an election to terminate.
- where the time for exercise of a right is not specified in the contract, “the law implies that it is to be performed within a reasonable time”.
- what is a “reasonable time”:
- is to be ascertained as at the date of the contract (not when the right accrues); and
- may depend on the nature of the obligation or right which arises.
- a Court is more likely to find that a “reasonable time” means a short time in circumstances where:
- the parties are commercial and sophisticated;
- a party is on notice of a future right in advance of it crystallising, such that it has time to consider the implications of exercising that right;
- the right is not subject to further investigation or receipt of additional information;
- it is not “apparent” that a party has reserved its ability to exercise the right in the future.
Forgacs Engineering Pty Ltd (Forgacs) and ASC AWD Shipbuilder Pty Ltd (ASC) were parties to two contracts in relation to the procurement of air warfare destroyers for the Commonwealth Government. The original contract between the parties had a payment mechanism which had become unworkable due to various design changes to the work under the contract. Following a series of formal and informal variations to the original contract, the parties entered into a second contract - the “Second Heads of Agreement” (2HA).
The 2HA had an “Effective Date” of 26 October 2012. However, certain provisions relating to the new regime for the approval and payment of ongoing construction work were only to come into effect on and from the “Transition Date”. The Transition Date was said to be the earlier of:
- the date set out in clause 4.1 of the 2HA; and
- the date on which the parties agreed the “Baseline True Up”.
Clause 4.1 obliged the parties to use reasonable endeavours to complete the Baseline True Up by 14 December 2012. ASC had a unilateral right to terminate the 2HA if the Baseline True Up was not agreed by 28 February 2013.
The Baseline True Up was not agreed by either 14 December 2012 or 28 February 2013. On that basis, ASC purported to terminate the 2HA on 7 June 2013 (3 months and 1 week after it became entitled to do so).
At issue was whether ASC had lost its contractual right to terminate on the basis that it elected to affirm the 2HA by its conduct, and, therefore whether ASC exercised its right to terminate within a reasonable time.
As to election, the Court found that ASC did not lose its right to terminate by continuing negotiation up to 28 February 2013, nor in the short period thereafter.
However, as to the purported termination by ASC in June 2013, the Court found that there was an implied term that the right must be exercised within a “reasonable time”. ASC had failed to exercise the right within a reasonable time after the right accrued, such that the termination was not valid. Bell P found that a reasonable time had “long since passed” by the time ASC purported to terminate the Contract. Key factors were ASC’s unilateral right terminate on the basis of the ongoing Baseline True Up negotiations, and that ASC could have reserved its right to terminate, but did not do so. It was also relevant that the decision taken by ASC did not involve any further investigation or uncertainty.
Basten JA found, in these particular circumstances, that the decision to terminate should have been taken (and board approval given) by “no later than the end of April 2013” (ie within 2 months of it arising).