A recent Court of Appeal decision illustrates the dangers of failing to address contract breaches and other disputes in a timely manner.  It confirms that if a party continues to perform a contract despite the ongoing breach by the other party, there is a danger that the “innocent” party may be unable to exercise its right for that breach.

Facts

Tele2 International Card Company SA and various subsidiaries (“Tele2”) contracted to supply the UK Post Office (the “PO”) with prepaid phone cards.  The contract required Tele2 to provide the PO with an annual parent company letter (the “Letter”) regarding the provision of capital for the following year.  Failure to provide this Letter constituted a material breach, entitling the PO to terminate the contract.  Tele2 failed to provide the Letter in 2004 but the PO continued to perform, and to accept Tele2’s performance of the contract for a further eleven months.

The PO then sought to terminate the contract on the basis of this breach.  Tele2 challenged the attempted termination, claiming that by continuing to perform the contract for the previous eleven months, the PO had elected to affirm the contract and, therefore was no longer entitled to terminate for breach.  The contract contained a waiver clause, which allowed the PO to delay or neglect to exercise any right under the contract without prejudicing its rights under the contract. The PO argued the waiver clause operated so that it was not to be treated as having waived any right to terminate for breaches relied upon by reason of delay, neglect or forbearance.

Decision

The Court of Appeal decided that the delay by the PO in terminating the contract, after becoming aware of the breach, and its continued performance of the contract without “any protest or reserve of any kind” in relation to the default was consistent with an election to abandon the right to terminate for that breach.  This constituted a “clear and unequivocal communication, by conduct” of the PO’s election to affirm the contract and abandon its right to terminate it.

The Court also decided that the waiver clause was of no help to the PO as it could not prevent an election to abandon the right to terminate from occurring.  The Court concluded that such a general “remedies and waivers” clause is of no particular assistance to the relevant party, except perhaps in terms of emphasising the requirement that an election to abandon a right will only be shown if there is clear and unequivocal communication of an election to do so and continue the contract.

The Court also concluded that the wording of waiver clause reinforced the Court’s findings, as it did not attempt to say that the doctrine of election did not apply, “even assuming that any contractual provision could exclude the operation of the doctrine”.  This last observation by the Court means it is not clear that even if the waiver clause had been drafted to specifically exclude the doctrine of election, the PO could have successfully relied upon it.

Comment

This case illustrates the importance of reviewing the options carefully where a right to terminate a contract arises.  If this case is followed in Ireland, where a right to terminate arises from a breach, the failure to promptly exercise the right to terminate and to expressly reserve the right to terminate afterwards may prevent termination of the contract later because of the breach.

In the current economic environment the application of similar principles to the contractual rights of lenders to enforce security could create significant difficulties.  This highlights the need to review the terms of key contracts when putting them in place and the importance of putting protections in place to preserve or renew other rights where a right to terminate arises.