Contract termination right – use it promptly or risk losing it

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In the recent High Court decision of DD Classics Limited v Kent Chen [2022], a judge found that the defendant had lost its right to terminate as he had not exercised the right within a reasonable period of time.

The facts of the case can be summarised as follows:

  • Mr Chen agreed to sell DDC a Ferrari race car under a contract dated 24 March 2021.
  • The sale price was agreed at €3.2 million. Clause 3 of the contract required payment to be made within five business days of the contract date. Failure to pay by this date entitled the seller to withdraw from the contract.
  • DDC paid a deposit of €50,000 but failed to pay the balance in the required timeframe. Over the next two weeks DDC requested additional paperwork regarding the car before it would make payment, which Mr Chen provided.
  • After discussions between the parties, the balance payable was reduced to €3,105,000. The balance was paid later the same day, and was received by Mr Chen’s bank, but Mr Chen did not find the funds in his account.
  • Six days later, Mr Chen contended he had not received the payment and wrote to DDC to call the deal off and said that he would return the funds as soon as he received them. 14 days later, DDC obtained a judicial order from the Court of Modena preventing Ferrari, who had possession of the car, from releasing it back to Mr Chen, who had by then received the funds.
  • Mr Chen argued he had the right to withdraw from the contract which became exercisable on the original due date for payment (i.e. within five business days of the contract date) and that he was entitled to exercise that right at any time thereafter until he received the balance, under clause 3 of the contract. DDC argued that, by Mr Chen’s continuing correspondence with them after the due date, in which he treated the contract as on foot and was encouraging its performance, Mr Chen had waived his right to withdraw and had affirmed the contract.
  • The Court held that if a default by one party to a contract triggers a right of withdrawal or termination by the other party, and the other party, without making an express election, acts in a manner which is consistent with affirming the contract, then the other party will be held to have waived its right to withdraw. The judge found that Mr Chen had lost the right to withdraw from the contract as he had not exercised the right in a reasonable period of time. Judge Kerser QC held that the clause was not a right that could be exercised at any time without limit, stating “thirteen days cannot possibly be considered as a reasonable time in which to make up one’s mind as to what one’s response would be.” Further, the judge commented that Mr Chen’s conduct was such he was taken to have affirmed the contract by actively encouraging and being open for performance of the contract after the right of termination had arisen. Accordingly, he had no right to terminate, and DDC were entitled to delivery of the car.

The key takeaway from this case is to not delay when seeking to rely on a termination right if the contract does not provide that the right to terminate is exercisable at any time, as this right may be lost if not exercised promptly. You should also be wary of conduct when chasing payment or performance of a contract when the right to terminate has already arisen or if you may still seek to rely on a right to terminate while waiting for the defaulting party to rectify their breach, and not to act in such a way as to affirm the contract.  As more time elapses, there is a greater likelihood a court will infer such conduct to be affirmation of the contract and that the right to terminate has been lost.

It would be prudent to review termination provisions in existing contracts and also when drafting new contracts. Consider whether to include express provisions that the right to terminate may be exercised at any time, to ensure conduct does not fetter either party’s right to terminate under the contract.

For more information on this article, please contact either our Commercial team or our Dispute Resolution team.

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