Act Fast Or Lose Your Right To Terminate Your Contract
Key Contact: Declan Goodwin
Author: Rachel McCulloch
A recent case (DD Classics Ltd v Chen 2022) has provided a stark reminder of the importance of good drafting and timely action. The case highlights that the way termination rights are written can result in implied time limits on a party’s ability to terminate the contract. Also, if you intend to terminate based on a breach, don’t delay in doing so.
This case involved a limited-edition Ferrari racing car. The contract said if the buyer did not pay the price of the car within five business days of the due date, the seller was entitled to withdraw from the contract. The judge found this meant, that if payment was not made within this timeframe, the seller could terminate the contract immediately without notice. However, this right to terminate was not a right that could be exercised at any time without limit.
The payment was not provided and thirteen days later, the seller still had not exercised their right to terminate. The buyer then sent the money, but the seller refused to deliver the car saying they were entitled to terminate. The judge disagreed and found that thirteen days is not a reasonable amount of time to make up your mind on whether to terminate or not. The judge found the seller had affirmed the contract and ultimately, lost the right to terminate.
Your contractual termination rights
Many contracts include termination rights, which give a party the right to terminate a contract either for cause (if a triggering event occurs) or for convenience (where no triggering event is required). The party with the right to terminate can choose to terminate the contract or let it continue, but whichever decision they make cannot be reversed.
When reviewing or drafting a contract, termination rights can be overlooked, thought to be standard, or routine. However, termination rights can be drafted in many ways and so it is important to carefully consider the wording of such clauses because it may not be so clear-cut. You should ensure termination clauses express your intentions and you are clear on when you, or another party, can terminate the contract.
Depending on how the clause is drafted, if a triggering event occurs, the party with the right to terminate may have a ‘reasonable’ amount of time to determine whether to terminate. What is ‘reasonable’ will depend on the facts, and where the facts are straightforward, a ‘reasonable’ time is likely to be short. Alternatively, the contract may clarify that the right to terminate applies at any time after a triggering event and so, is not time-barred. However, even in these circumstances, a party’s actions may affirm the contract in which case the right to terminate could be lost anyway.
What should you do?
Whether you will be able to rely on a termination clause will depend on the facts of the situation and the drafting of the contract, so this will need to be considered on a case-by-case basis. Don’t assume that you can rely on a termination clause if a triggering event has occurred, you will need to check the precise wording. Some key considerations are:
- If you are seeking to rely on a termination clause within your contract, check the clause carefully to determine whether you need to act swiftly to avoid losing your right.
- To buy more time, you may wish to reserve your right to terminate. However, this may not always work, particularly if your words or actions contradict a wish to terminate.
- Be careful of doing anything that can be seen as affirming the contract. This could be any positive acts such as answering questions or requesting overdue money.
- When getting into new contracts, review and if necessary, negotiate the termination clauses to ensure you are aware of your rights and can use these effectively.
If you are in any doubt, we would suggest seeking legal advice.
For further information and assistance, please get in touch with our Commercial and Technology Team.