Waiver, election and the right to terminate

A common question that arises for contract managers is whether a contractual right, particularly a right to terminate for breach of contract, has been waived.

When one party breaches a term of a contract, the non-breaching party will usually have certain rights to enforce compliance. At the time those rights arise, the non-breaching party has a choice between exercising a right and continuing with the agreement despite the breach. Contract law refers to this principle as ‘election’, but it is more commonly referred to as ‘waiver’.

If there has been a delay between the breach and the making of the choice about whether or not to terminate, the question can arise whether the choice is still open or whether the delay means that the right to terminate is lost. That is, has inaction resulted in the right to terminate being waived?

In fact, the courts have said that unequivocal words or conduct are required to demonstrate an election to continue with an agreement. Mere delay will not usually of itself be regarded as an election.

You can think of it like reaching a T-junction in a road. At the T-junction, a decision needs to be made whether to turn left or right. A person can wait at the T-junction for a while before making a choice, as long as the delay does not cause any confusion. Once a decision is made about the direction in which to turn, the action is irrevocable and the alternative option is no longer available.

In contractual terms, the party who has the right to terminate can elect to end the contract or to affirm it and continue to perform it. They can wait for a time in order to make the decision, so long as the delay does not cause any confusion. Once a decision is made, the effect of electing to continue with the contract is that the right to terminate will no longer be available.

These are some of the principles extracted from relevant cases:

• An election to continue with a contract and abandon a right can be express or it can be inferred from the words or conduct of a party.
• The words or conduct are to be judged objectively, so actual intention is not relevant.
• A failure to terminate immediately will not of itself be regarded as an election to continue with the contract. It is possible to keep the question of termination open, so long as the party does nothing to affirm the contract and so long as the other party’s position is not worsened as a consequence of the delay.
• An insistence that the other party perform the contract is capable of being an election to continue performance.
• An extension of time for performance, which is for a specified period and coupled with a warning that failure to perform within the extended time may lead to termination, is generally not an election to continue performance.
• Where a party grants further time for performance, it is open to the party to make clear that failure to perform before the expiry of the time allowed will result in termination and so, in this respect, to make the election conditional on the other party performing.
• Clauses in a contract that provide that the occurrence of a specific event is not to be regarded as a ‘waiver’ of the right to terminate, or prescribing a particular form for waiver, will not assist a party if its words or conduct actually imply an affirmation or lead the other party, acting reasonably, to rely on those words or that conduct in altering the status quo. The operation of such a clause may itself be waived, formally or informally.
• Conduct that is at best equivocal will not constitute an election to continue performance.

Tip

While good contract management involves the prompt exercise of rights, sometimes delays are unavoidable. In those cases, you should make it clear to the other party that your agency is delaying making a decision and specifically reserve the agency’s rights in writing to avoid any confusion about whether you have made an election.

^{The information in this publication is provided for general purposes only. It is not to be relied on as a substitute for legal advice. Crown Law and the Department of Justice and Attorney-General accept no liability for losses caused by reliance on the material in this publication. Formal legal advice should be obtained for particular matters.}