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Right to terminate must be exercised within a reasonable time

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A recent decision of the NSW Court of Appeal provides guidance on when a party must exercise a contractual right of termination.

In Donau Pty Ltd v ASC AWD Shipbuilder Pty Ltd [2019] NSWCA 185, the contract required the parties to use reasonable endeavours to agree a ‘Baseline True Up’ by 14 December 2012. ASC had a unilateral right to terminate the contract if the parties had not reached agreement by 28 February 2013. The parties did not reach agreement and ASC purported to terminate the contract on 7 June 2013, which was 3 months and 1 week after it became entitled to do so.

The court considered two issues in relation to whether ASC had lost its contractual right to terminate. Firstly, whether ASC had elected to affirm the contract by its conduct and therefore lost its right to terminate by the time it purported to do so. Secondly, whether the termination occurred within a reasonable time after the contractual right to terminate arose.

In relation to the first issue regarding election, the court concluded that ASC had not elected to affirm the contract by continuing negotiations after the right to terminate had accrued because its conduct had been equivocal. However, in relation to the second issue, the court found that:

  • there was an implied term that the right of termination must be exercised within a ‘reasonable time’; and
  • ASC had failed to exercise its right of termination within a reasonable time after it had accrued and the termination was not valid.

It was particularly relevant to the court’s decision that ASC could have reserved its right to terminate but did not do so and its decision to terminate did not involve any further investigation or uncertainty.

Parties should be aware that a term may be implied into a contract requiring a right of termination to be exercised within a reasonable time and take steps to reserve their rights where appropriate.  This term may be excluded by express terms of the contract.

If you have any questions about drafting of contracts and termination of contracts, Crown Law can help.