8 August 2019
In Donau Pty Ltd v ASC AWD Shipbuilder Pty Ltd [2019] NSWCA 185, the New South Wales Court of appeal deals with two important contractual issues. The Court had to decide when a party loses the right to terminate a contract for breach, and what constitutes a reasonable time for exercising that right. Both issues are of importance as they govern parties’ ability to terminate a contract in the event of breach by the other party.
Facts
Forgacs, now Donau, entered into a subcontract with ASC AWD Shipbuilder Pty Ltd (ASC) in 2009 to provide ‘Blocks’ for the AWDs. The original contract became unworkable and after a series of formal and informal variations, the parties entered into a new agreement called the “Second Heads of Agreement” (2HA) on 26 October 2012.
Under the 2HA, Forgacs was required to ‘use all reasonable endeavours to complete the Baseline True Up by 14 December 2012 provided that if the Baseline True Up is not agreed by 28 February 2013 ASC may terminate this Agreement’. The Baseline True up was not agreed by 28 February, but negotiations continued until early June 2013, at which point ASC purported to terminate the 2HA.
Election
A party with the ability to exercise alternative remedies or inconsistent rights is faced with the doctrine of election. In this instance, ASC was entitled to terminate the contract for the failure to reach agreement on the Baseline True Up, or to affirm the contract and keep it on foot. Once an election is made, the alternate option falls away.
President Bell, citing Sargent v ASL Developments Ltd (1974) 131 CLR 634, identified that an election must be ‘unequivocal’ in the sense that ‘it is consistent only with the exercise of one of the two sets of rights and inconsistent with the exercise of the other’.
Forgacs submitted that because ASC failed to issue purchase orders pursuant to the original contract, and chose to continue negotiating the 2HA, it had elected to affirm the 2HA and therefore lost the right to terminate.
President Bell (Basten JA and Emmett AJA agreeing) held that ASC had not unequivocally affirmed the contract. In particular, Bell P took three things into account:
• First, that there was a finding that the parties had a reasonable time to exercise the right to terminate;
• Secondly, the parties had consistently operated outside the precise terms of their contractual arrangements; and
• Thirdly, the parties had been in the Baseline negotiations since 14 December 2012, and so their conduct had not changed to unequivocally affirm after 28 February 2013.
This is illustrative of an approach to election that requires a clear, unambiguous choice from the electing party.
‘Reasonable Time’
While ASC retained the right to terminate the contract, the Court found that there was an implied term within the 2HA stipulating that the right must be exercised within a ‘reasonable time’.
The Judges took different approaches, but all reached the same conclusion. Bell P (Emmett AJA agreeing) based his decision on the principles governing the implication of a contractual term. Basten JA, on the other hand approached the question as one of interpretation, while recognising that the distinction between the two approaches may be elusive.
President Bell
Bell P rejected Ball J’s (the judge at first instance) finding that ‘reasonable time’ is ascertained at the time of exercising the right. Rather, as it is found in an implied term, ‘reasonable time’ should be ascertainable as at the date of the contract, but may be assessed with reference to the circumstances as at the date ‘on which the right is first capable of being exercised’.
Thus, looking at the circumstances up until February 2013, Bell P found that the size of the agreement and commercially sophisticated nature of the parties strongly indicated that a reasonable time in these circumstances meant a short time. The continuation of negotiations did not evidence that ASC was still within a reasonable time because ASC had the unilateral right to accept or reject the outcome. Finally, ASC could have reserved their rights to terminate, but never did so. Thus Bell P found that a reasonable time had ‘well since passed’ and ASC failed to exercise their right to terminate in time.
Basten JA
In contrast, Basten JA approached the question as one of contractual interpretation. His Honour’s main concern was that tackling the question as one of implication risks overlooking the objective approach the court should take when construing contracts.
His Honour placed emphasis on the structure and content of both the original contract and the 2HA when determining what constitutes a ‘reasonable time’; taking into account factors such as:
• The six week period between executing the 2HA and the ‘transition date’ by which the parties were meant to initially agree on the Baseline True Up;
• The requirement that parties use ‘all reasonable endeavors’ to have the agreement made by 28 February 2013;
• Although the power was discretionary, it did not involve an obligation to make further enquiries; and
• The fact that the contract already contemplated a two month delay period indicated that the right to terminate should be exercised promptly.
These factors lead Basten JA to conclude that the right to terminate should have been exercised no later than the end of April 2013, some months before ASC in fact purportedly terminated.
Take Away Points
When it comes to election, the New South Wales Court of Appeal has unanimously confirmed that the electing party must clearly evince, through words or actions, an unequivocal decision.
However, on the issue of ‘reasonable time’ the distinction between Bell P and Basten JA’s approaches can have an impact on the extent to which external factors may be considered. Bell P’s approach appears to allow reference to external factors up until the point at which the right to terminate arises. Conversely, Basten JA would focus purely on the contract and the objective intention of the parties, rendering external factors as a last resort to clarify latent ambiguity.
No doubt the courts will have more to say about these issues in the future, but the takeaway is that parties to high value defence contracts (and contracts generally), expose themselves to loss and litigation if they depart from the terms of their written agreements without agreeing and clearly documenting variations immediately, rather than allowing these works to drift on with critical, contractual issues remaining at large.
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Disclaimer: The information published in this article is of a general nature and should not be construed as legal advice. Whilst we aim to provide timely, relevant and accurate information, the law may change and circumstances may differ. You should not therefore act in reliance on it without first obtaining specific legal advice.
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