Air warfare over termination – Donau Pty Ltd v ASC AWD Shipbuilder Pty Ltd [2019] NSWCA 185

What is a reasonable time within which to elect to terminate?

This was one issue in Donau Pty Ltd v ASC AWD Shipbuilder Pty Ltd [2019] NSWCA 185

ASC had a Contract with the Commonwealth for the procurement of air warfare services. ASC entered into a Subcontract with Donau Pty Ltd (formerly Forgacs Engineering Pty Ltd).

A second Heads of Agreement (2HA) of 26 October 2012 – which was the “Effective Date” of the 2HA to promote cost and performance efficiencies – provided that key provisions of the 2HA were only to come into effect on the “Transition Date” which was said to be the earlier date set out in clause 4.1 and the date upon which the parties agreed “Baseline True Up”.

Clause 4.1 made reference to two dates: it imposed upon the parties a reasonable endeavours obligation to complete Baseline True Up by 14 December 2012, and provided to ASC a right to terminate the 2HA if Baseline True Up was not agreed by 28 February 2013.

The Baseline True Up was not agreed by 14 December 2012, nor by 28 February 2013. The parties continued to negotiate Baseline True Up in good faith through to early June 2013, but never reached agreement. On 7 June 2013 ASC purported to exercise its right to terminate.

The issue was stated to be whether ASC validly exercised its right to terminate or whether ASC:

1. had elected to affirm the 2HA; or
2. did not terminate the 2HA within a reasonable time.

As to:

1. Bell P, Basten JA and Emmett AJA stated ASC did not lose its right to terminate by election. They said the fact that the parties continued to seek to agree Baseline True Up after 28 February 2013 and that ASC had a reasonable time after that date within which to terminate the 2HA, served to render ASC’s conduct equivocal. This was particularly so considering the imprecise nature of what was a reasonable time within which to terminate and the parties’ tendency to operate outside the precise terms of the contractual arrangements.
2. ASC failed to exercise its right to terminate within a reasonable time. The Court noted the right to terminate was not dependent upon the receipt by ASC of any further information. Further, it was found that it was not apparent from the continued Baseline True Up negotiations that ASC was reserving its right to terminate.

The Court further observed the legal meaning of what is a reasonable time within which to exercise a right or perform an obligation, is to be ascertained at the date of the Contract, although what will be reasonable as a matter of fact will inevitably fall to be assessed by reference to circumstances as at the date upon which the right is first capable of being exercised. Further, what is a reasonable time in any given case may be affected by the nature of the obligation to be performed or the right to be exercised. Basten JA considered the decision to terminate should have been acquired and conveyed to Forgacs by no later than end of April 2013.

Thus:

• The law implies where the time for exercise of a right is not specified in the Contract, it is to be performed within a reasonable time.
• A reasonable time is ascertained as at the date of the Contract although what will be reasonable as a matter of fact will be assessed by reference to circumstances as at the date upon which the right is first capable of being exercised.
• A reasonable time can be affected by the nature of the obligation to be performed or of the right to be exercised.
• A reasonable time is likely to be short where:
  • parties are commercial and sophisticated;
  • a party is on notice of a future right in advance of it crystalising so that it has time to consider the implications of exercising the right;
  • no further investigation or receipt of additional information is required;
  • a party has not reserved its ability to exercise the right in the future.

Michael Heaton QC

MTECC appointees recognised

MTECC has recently updated its website to recognise former members who have been appointed to Australian Courts and Tribunals. Profiles on each MTECC appointee can be accessed here or at the links below:

• The Honourable Justice John Dixon
• The Honourable Justice John Digby
• Mr Andrew Kincaid
• The Honourable Justice Robert Harper
• Judge Caroline Kirton
• Lord Chief Justice Michael Whitten

MTECC once again congratulates its former members on their respective appointments.

MTECC members presenting ICU Legal Seminars in September and November 2019

A number of MTECC members are presenting at ICU Legal Seminars on 20 September and 22 November 2019:

• Jim Stavris is presenting on “Recent cases on the Building and Construction Industry Security of Payment Act 2002” on 20 September 2019;
• Nicholas Gallina is presenting on “Rectification of Construction Contracts” on 20 September 2019; and
• Michael Sharkey is presenting on “Ethical Issues in Engaging Expert Witnesses” on 22 November 2019.

More information can be found here and here.