Contractual right of termination due to breach: use it or lose it

In this article we take a look at how you can exercise a contractual right of termination due to a breach of contract. In the recent case of DD Classics Ltd v Chen [2022] (“Chen”) some interesting observations were made as to what a reasonable timeframe to exercise this right is – we explore these in detail below.

The case 

Chen involved the sale of a car and an attempted withdrawal from the contract by the seller. In this case, a contractual right to terminate was present and the judge offered some insight into what a reasonable timeframe to exercise the right is before it was lost and the breach waived.

In Chen, the contractual right read “if the buyer does not meet his payment obligations…within 5 business days after the due date, the seller is entitled to withdraw from this contract without reminder or setting a deadline”. This was deemed to be a termination right that could be exercised immediately from 5 business days after the due date. On the basis of other case law, it was decided that the seller – the innocent party – could exercise the right within a reasonable time period before it was lost.

The buyer had not paid, and the seller gave notice 13 days after the payment became due. The judge stated it was an “entirely simple and straightforward” decision whether or not to withdraw from the contract and that 13 days, and beyond, was not a reasonable time period.

These comments suggest that where the contractual provision is clear cut, like the one in this case, the window to exercise the contractual right of termination is short. This is in contrast to termination rights that are indefinite in their construction.

Losing a right to terminate

If you are confident that you have the appropriate legal grounds for termination, and you have decided you want to terminate, you must ensure you do not inadvertently lose your right to terminate whether contractually or at common law.

Where breach has occurred, a party has a choice: either to terminate the contract or to keep it alive. Once one course of action has been exercised, the other ceases to be an option. As such:

    • A party cannot choose to withdraw its termination notice once given.
    • Once a contract is terminated, it cannot be revived.
    • When a party communicates its choice to keep the contract alive:
      • The right to accept a repudiatory breach is lost as the contract is affirmed,
      • Many other rights to terminate are lost, but
      • A termination right that is intended to be indefinite is unaffected.

Key principles

Chen highlighted two principles, election and affirmation, which apply to both contractual rights of termination as well as the common law right (not discussed in this article).

Firstly, election; this is where the innocent party has to elect whether or not to exercise their contractual termination right (as they did in Chen). Where the right is clearly not intended to be indefinite in its construction, it should be exercised within a reasonable time period.

Secondly, affirmation; a contract can be kept alive by affirmation. Where the innocent party knows of the breach and of its right to end the contract, the contract can be kept alive expressly but also inferred by a party’s actions. In Chen, the innocent party affirmed the contract by taking steps to keep the contract alive which consisted of answering questions relating to the car, providing confirmation of sale to the manufacturer and providing comfort to the breaching party. It is important that, if you wish to terminate, you do not affirm the contract.

There are other important points to ensuring proper termination of a contract, such as the giving of notice, and other grounds on which you can terminate. If you have any queries on termination rights please do not hesitate to contact a member of the Commercial team.

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