Essential law: Termination, part three

Termination after repudiatory breach of contract is not automatic. A party with a right to terminate has a choice to end the contract or not. Once the choice is communicated, it cannot be undone.

Affirmation

Affirmation is communicating an intention to continue with a contract. A party with a right to terminate for repudiatory breach can affirm the contract (keep it alive and waive the right to terminate), either expressly or as implied by its actions. For example, continued performance of the contract by the innocent party and requiring the defaulting party to continue with its obligations may constitute affirmation.

However, a party cannot affirm a contract following a repudiatory breach unless it has a full understanding of the facts that have led to the repudiatory breach and is aware of the right it has to choose between accepting the termination or affirming the contract.

Therefore, once a right to terminate has arisen, care must be taken to preserve that right and to avoid contradictory statements or actions that may undermine a right to terminate.

>>Also read: Essential law: Termination, part two

>>Also read: Essential law: Termination, part one

Affirmation

Affirmation is communicating an intention to continue with a contract. A party with a right to terminate for repudiatory breach can affirm the contract (keep it alive and waive the right to terminate), either expressly or as implied by its actions. For example, continued performance of the contract by the innocent party and requiring the defaulting party to continue with its obligations may constitute affirmation.

However, a party cannot affirm a contract following a repudiatory breach unless it has a full understanding of the facts that have led to the repudiatory breach and is aware of the right it has to choose between accepting the termination or affirming the contract.

Therefore, once a right to terminate has arisen, care must be taken to preserve that right and to avoid contradictory statements or actions that may undermine a right to terminate.

Exercising an inconsistent termination right

If an innocent party has two termination rights with inconsistent consequences, it must choose between them and cannot go back and choose the other after exercising one right to terminate.

However, this is not the case if there are different rights to terminate with the same contractual consequences. In that case, a party can seek to terminate based on multiple termination rights that it says have accrued. As long as one of those termination rights is found to be valid, the innocent party will be found to have validly terminated the contract.

Delay to election

Delaying the exercise of the right to terminate may lead to the loss of a right to terminate a contract.

Where a right to terminate arises for a repudiatory breach, given the potential consequences of termination a party will usually want time to consider its options. However, it should be careful that by taking this time it does not inadvertently waive its right to terminate.

After becoming aware of a repudiatory breach at common law, a party has a reasonable time to investigate and decide whether to terminate or affirm. If it does nothing for too long, there may come a time when the law will treat it as having affirmed the contract.

It will be a question of fact in each case as to what is a reasonable time for the innocent party to consider its options. This will depend on the nature and complexity of the contract and the timing of any obligations under the contract.

A right to terminate may also be lost if the relevant breach is remedied while the innocent party is considering its options; but, again, this would depend on the facts and the precise wording of the contract.

Reservation of rights

To ensure that a party does not lose its right to terminate while considering its options, it should expressly reserve in writing its rights to terminate.

A general reservation of rights for an indefinite period with no indication of investigations being carried out by the innocent party may not be sufficient to preserve a right to terminate. Therefore, in communicating any reservation of rights, an innocent party may want to consider either:

• Making its reservation of rights contingent on the defaulting party providing further information to allow it to consider whether or not to terminate;
• Or identifying a specific time period it requires to come to its decision.

The aim with any such reservation is to make it clear to the defaulting party that it has made no election to affirm the contract.

Time limits on exercising a right to terminate

In relation to a contractual right to terminate, it goes without saying that the terms of the contract should be considered carefully and any time limits strictly adhered to, so as not to waive any right to terminate. For example, under the JCT Design and Build Contract 2016, for termination by the employer due to a contractor’s default, an initial notice is given to the contractor specifying its default. If the contractor continues that specified default for 14 days following receipt of the notice, then the employer has a 21-day period in which it can issue a further notice terminating the contractor’s employment under the contract.

If the employer does not give the second notice, it will have lost its right to terminate under the contract for that specified default, albeit the JCT form provides that if the contractor repeats a specified default, the employer then has a further chance to terminate within a reasonable time after such repetition.

Sara Cunningham is a senior associate at Charles Russell Speechlys