Contract law update 2019

Termination

In Donau Pty Ltd v ASC AWD Shipbuilder Pty Ltd¹, the New South Wales Court of Appeal considered the circumstances in which a party, which has a right to terminate a contract, might lose that right. In particular, the court considered when the right might be lost due to an election to affirm a contract or due to a failure to exercise the right within a reasonable time.

The judgment confirmed the difficulties in proving that a party has lost the right to terminate a contract due to an election to affirm it. In particular, it will not suffice that a party's conduct is consistent with the contract remaining on foot. There must instead be unequivocal conduct that is only consistent with affirming the contract and inconsistent with terminating it.

In the absence of an election, and of any express contractual term governing when the right to terminate must be exercised, the court held that the right to terminate must be exercised within a reasonable time. Although this is a well-established principle, the different approaches of the trial judge and Court of Appeal in applying it show the difficulties and uncertainties commercial parties face when there is a delay in exercising a contractual right.

The parties submitted that the issue of reasonableness should be determined at the date the notice of termination was provided.² The Court of Appeal held, however, that reasonableness should be determined at the date the right to terminate arises, rather than the date at which it is (purportedly) exercised. Furthermore, although the trial judge had considered it reasonable for a party to hold off exercising its right to terminate so as to allow more time for certain commercial negotiations with the other party, the Court of Appeal held that the right to terminate should be exercised 'very shortly' after the date on which the right arose.³ The court also noted that there was no express reservation of rights during the period when ASC had a right to terminate but did not do so. Although the court considered the possibility that such a reservation might have led to a different outcome, it would be risky for a party to rely on this possibility, given the court's view that the date for determining reasonableness is the date on which the right to terminate arises, rather than the date on which it is (purportedly) exercised.

If a party does wish to exercise a right to terminate a contract, contracts often require that the party in breach be given a period within which to remedy the relevant default, if the default is capable of being remedied. Two issues that can arise with these clauses are:

• Is notice required when there is no possibility of the relevant default being remedied within the prescribed period?
• Is it possible to remedy a 'once and for all' breach?

The New South Wales Court of Appeal considered the first issue in Visual Building Construction Pty Ltd v Armitstead (No 2)⁴. The court held that the requirement (in that case) to give 10 business days' notice before termination only applied if the default were capable of being remedied within that 10-day period. On the facts of that case, it would not have been possible to remedy the default within the 10 business days, and therefore no notice was required.

The court also considered the 'once and for all' issue. For example, if the relevant breach is a failure to obtain an approval by a certain date, can that breach be remedied by obtaining the approval at a later date? The court referred to an unreported passage from an earlier New South Wales Court of Appeal judgment in Burger King Corporation v Hungry Jacks Pty Ltd⁵, which held that (on the facts of that case) the breach was capable of being cured. It was not necessary, however, for the Court of Appeal to determine that issue in this case.

A party that terminated a contract for breach would usually be entitled to damages putting it in the same position as if the breach had not occurred. In the context of construction contracts, however, a distinct line of authority had developed that enabled the innocent party to choose whether to seek damages under the contract or seek compensation on 'quantum meruit' basis. The ability to seek quantum meruit compensation can be quite important if, for example, the value of the work performed exceeded the contractually agreed price, or if the innocent party had not yet acquired a contractual right to be paid. In Mann v Paterson Constructions Pty Ltd⁶,the High Court severely limited this line of authority and held that:

• a contractor could only sue on a quantum meruit basis if no right to payment had accrued under the relevant contract; and
• the amount recoverable on a quantum meruit basis were limited to the contract price for the relevant part of the works.