Be wary of time-barring your rights of contractual termination
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Senior Associate
UK
I am a senior associate in Bird & Bird's Retail & Consumer Group (London), the founding member of the firm's International Cosmetics, Beauty & Fragrance Group, and a member of the firm's International Luxury, Fashion and Retail Leadership Team.
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In DD Classics Ltd v Chen [2022] EWHC 1404 (Comm), HHJ Keyser QC has provided a pertinent reminder that an innocent party may not have long to decide whether or not to exercise a contractual right of termination, depending on how the relevant contractual clauses are drafted, before the right expires. Therefore, in drafting a contractual right of termination, it is important if you are the party who would be entitled to the right to consider clarifying that such right persists and applies "at any time" after a trigger event, so that it is less likely to be lost by delay.
In the case at hand, the parties agreed that the buyer must pay an agreed price within five business days of the due date, failure of which would entitle the seller to withdraw from the contract “without reminder or setting a deadline”, i.e. immediately and without notice. When payment was not made by the given date, the judge considered that the seller’s right to terminate came to life immediately. Accordingly, when the seller still had not exercised the right of termination thirteen days later, the judge opined that “it was entirely simple and straightforward to decide what to do upon non-payment… thirteen days cannot possibly be considered as a reasonable time in which to make up one’s mind as to what one’s response would be.” The result was that the seller was taken to have affirmed the contract, and he lost the right of termination.
The judge provided a succinct obiter summary of the applicable legal position. The question as to whether a party with a contractual right to terminate has waived that right by delaying in exercising it must depend on an analysis of the provisions of the particular contract and the circumstances in which the right has arisen. In particular (and as was discussed in Mardorf Peach & Company Ltd v Attica Sea Carriers Corporation of Liberia (Laconia) [1977] AC 850), if there is an election to be made (i.e., on whether to terminate or affirm the contract) and the contractual provisions provide that this election must be made within a given period or a “reasonable” timeframe, then the right to terminate could be lost where there is an “unreasonable” delay in exercising the right. What is a “reasonable” timeframe will depend on the circumstances but in some cases (as was the case in DD Classics Ltd v Chen) this may be a relatively short time.
Conversely (as was discussed in BDW Trading Ltd (t/a Barratt North London) v JM Rowe (Investments) Ltd [2011] EWCA Civ 548), if the contractual language permits a party the right to terminate “at any time”, then the right to terminate should not be time-barred in the same way.
It is worth mentioning that, notwithstanding the foregoing, it will also be relevant to look at whether a party’s actions or omissions constitute affirmation of a contract, in which case, the right to terminate would be lost in any event. For example, if an event occurs which triggers the innocent party’s right to terminate the contract but that innocent party nevertheless continues in full performance under the contract, then it is likely that they would be seen to have affirmed the contract and thereby lost the right of termination.
In summary, DD Classics Ltd v Chen reiterates the possibility that the drafting of termination rights may time-limit a party’s ability to invoke them before they effectively expire.
If you would like further information on any of the issues raised in this article, please reach out to Nicola Conway in our Retail & Consumer Team, or your usual Bird & Bird contact.