How long should you wait before terminating?
FORCE INDIA v ETIHAD AIRWAYS (CA) [2010]
A contracting party faced with serious breaches by the other side faces a difficult choice. Act prematurely and you risk purporting to terminate when you do not have the right to do so. You then lay yourself open to a claim for breach of contract and damages, not to mention ruining any possibility of a negotiated settlement and potentially allowing the party initially in breach to escape from its ongoing contractual commitments. Act too slowly and you risk having waived your rights even if the contract has the traditional 'no waiver' clause (whereby neither party waives the right to exercise its rights under the contract due to delay). This case looked at what a party must do in such circumstances.
options:
Faced with a serious ‘repudiatory’ breach of contract, a party must either decide to:
- ‘accept’ the repudiation and terminate the contract; or
- ‘affirm’ the contract and keep it in place.
Neither option affects the right to claim damages. A party cannot, however, unduly delay in choosing between these options. The case of Tele2 International v The Post Office [2008], showed how a 11 month delay resulted in a party losing the right to terminate despite the usual waiver clause which purports to avoid just that happening.
facts:
- F, a formula 1 racing team, had changed ownership and was particularly interested in exploiting the Indian market for sponsorship. As a result the team changed its name and livery to promote a new sponsor. E, which had previously been one of the principal sponsors, became aware of these changes, which were held to be repudiatory breaches of contract.
- Meetings were held between the parties before E finally wrote to F terminating its sponsorship contract almost 11 weeks later.
- F denied it had fundamentally breached the contract, and maintained in any event that E had waited too long to act and it had therefore effectively waived its rights to terminate.
decision:
- The High Court agreed that E had delayed too long. The Court of Appeal (CA) overturned that decision, saying that any delay could constitute an affirmation where:
- timing is critical and the party in breach needs a decision urgently, such as in a highly volatile market or in the case of perishable goods; or
- silence would be misleading.
- In this particular case:
- E legitimately needed some time to consider its position;
- F must have known E was considering its position; and
- the whole delay took place during the winter break between two racing seasons, so there was less urgency.
- On that basis the near three month delay did not amount to an affirmation by E.
- Apart from deciding that F had committed breaches that were “repeated, cumulative, continuing and repudiatory’”, the court also concluded that they were not capable of being remedied. It is sometimes quite difficult to come up with examples of breaches that are irremediable (with the possible exception of breach of confidentiality), but here the court said that once a marketing campaign had been launched under a new name “the marketing genie cannot be put back into the bottle”. This was an important finding since E had failed to allow any opportunity to remedy when terminating which might otherwise have been fatal.
- Despite the usual contractual wording that any termination notice for breach should require its remedy first where it is remediable, the CA ruled that notwithstanding that wording, the breaches were such that E was also entitled to elect to accept F's repudiation and therefore put an end to the contract under common law, even though its notice made no mention of any common law right outside the contract. The notice of termination served was regarded as being sufficient to act as such an election.
points to note:
- 'No waiver' clauses do not work indefinitely. Expressly reserving your rights to end the contract, while you consider your position, will reduce the risk of affirmation but does not give you unlimited protection. The time available will depend, at least in part, on the other party's reasons for needing a quick answer. You can perhaps improve your position by spelling out how much time you need (and revising the date if the position changes).
- This is another example of the courts allowing the parties to use the underlying common law in order to exercise remedies. Another example was Gdynia v Gearbulk [2008], which dealt with damages and on which we reported previously. Whilst this approach may enable the courts to achieve what they regard as a fairer result, it arguably enables the parties (and the courts) to circumvent the written contract and leads to considerable uncertainty which, after all, is supposed to be one of the primary purposes of a written contract.
- On that basis, those tasked with drafting contracts might like to seriously consider as part of the ‘boilerplate’, expressly providing that all common law remedies including rights to terminate and claim damages are excluded.