September 5, 2019

The recent decision of the New South Wales Court of Appeal in Donau Pty Ltd v ASC AWD Shipbuilder Pty Ltd [2019] NSWCA 185 considered, amongst other things, whether a right to terminate had been validly exercised within a ‘reasonable time’.

We previously prepared an update regarding the first instance decision of Ball J in the Supreme Court of New South Wales, in which his Honour held that ASC AWD Shipbuilder Pty Ltd (ASC) validly terminated its contract with Donau Pty Ltd (formerly known as Forgacs Engineering Pty Ltd) (Forgacs) within a reasonable time. A copy of that update is available here.

Both parties enjoyed a measure of success at first instance and reflective of this, both parties appealed different aspects of Ball J’s decision. Relevantly, Forgacs appealed the finding that ASC had validly exercised its right to terminate, asserting that the reasonable time period for ASC to exercise such right had expired before the termination occurred.

On appeal, Bell P (Emmett AJA agreeing) stated that:

  •   the time for ascertaining the legal meaning of a ‘reasonable time’ to terminate is at the date of the contract; and
  •   what will be ‘reasonable’ as a matter of fact will be determined by reference to circumstances as at the date on which the right is first capable of being exercised.

Applying this to the facts, Bell P determined that ASC and Forgacs’ conduct (namely, continuing to negotiate after the right to terminate arose) did not affect what would constitute ‘reasonable time’ to terminate the contract. In regard to the circumstances relevant to determining whether the time taken to terminate was in fact ‘reasonable’ His Honour also observed that:

  •   there was no indication that ASC’s right to terminate had been extended or reserved, nor that Forgacs considered ASC’s termination rights preserved;
  •   the right to terminate should have been exercised quickly, as the longer the parties operated under the new agreement the more difficult it would be to revert to the previous contract;
  •   ASC had a ten-week period of notice to consider whether or not to terminate the contract on the relevant date; and
  •   it was available to ASC to negotiate a standstill agreement if more time was required to consider termination, but it did not do so.

Consequently, the Court held that ASC failed to exercise its right to terminate within a reasonable time.

This decision acts as a reminder to parties to carefully consider whether a right to terminate has arisen and needs to be exercised promptly, or the right to terminate needs to be expressly reserved, as a failure to do so may result in the right being extinguished.

The full decision can be found here.

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