Terminating contracts: snooze & lose

Parties to a contract have recently received a wake up call when it comes to acting upon contractual breaches committed by another party.

The recent case of Tele2 International Card Co SA & others -v- Post Office Limited (2009) illustrates the potential pitfalls that can be faced by a contracting party that wishes to end the contract as a result of another party’s breach.

Tele2 International Card Co was part of a group that made phone cards and phone card systems. It had a contract to provide the Post Office with prepaid phone cards and telecoms services. The Post Office agreed in the contract to promote the cards and services through its outlets. The contract contained the following clause (clause 16), which is a typical clause found in commercial agreements:- “In no event shall any delay, neglect or forbearance on the part of any party in enforcing (in whole or in part) any provision of this Agreement be or be deemed to be a waiver … or shall in any way prejudice any right of that party under this Agreement”.

The Post Office gave notice to terminate the contract because Tele2 had not, in breach of its contractual obligations, provided various guarantee letters. However, the Post Office had delayed in giving notice and did not do so until almost a year after Tele2’s initial failure to provide the necessary guarantee letters.

When the case reached court, the Post Office relied on clause 16 to argue that its delay in serving notice to terminate could not be held against it. However, the Court of Appeal disagreed and held that the Post Office’s continued performance of the contract for almost a year without any protest or reservation of rights in respect of Tele2’s failure to provide the guarantee letters could only mean that it wished to continue with the contract.

Therefore, the Post Office’s inactivity caused it to lose the right to terminate the contract. This meant that when the Post Office eventually gave notice to end the arrangement, that, in itself, amounted to a breach and wrongful termination of the contract. Clause 16 did not alter the position. Regardless of clause 16, the law required a party who had a right to terminate a contract, to elect whether or not to do so without delay.

From a practical viewpoint, situations such as these are commonplace in commercial relationships. For example, where services supplied under a contract do not comply with the contractual terms, that may entitle the “innocent” party to terminate the contract.

However, if that party does not act promptly in giving notice to terminate, it may lose the right to end the contract. This may be costly, particularly in the case of long term contracts.

Unfortunately, the case does not give any particular guidance on what timescale would be considered reasonable, although clearly a whole year was too long.

This case provides a salutary lesson on the importance of taking timely advice on termination where a contract is not running smoothly, and acting upon it promptly. Failing to do so may prejudice a party’s rights under the contract.

For more information, please contact Andrew Oranjuik on andrew.oranjuik@harveyingram.com or call 0121 214 1229.