DD Classics Ltd v Chen: High Court’s judgment on what is a reasonable time period to exercise a contractual termination right

On 20 May 2022, the English High Court (the ‘‘High Court’’) made a remarkable judgment under DD Classics Ltd v Chen [2022] on what constitutes a reasonable time period to exercise the contractual right to terminate an agreement due to repudiatory breach before losing such right. The Court’s decision emphasised its initial judgment dated 29 March 2022 (the “Initial Judgment”). The High Court ruled that the choice between accepting a breach and terminating a contract or retaining the contract and waiving the breach is applicable to contractual rights to terminate based on repudiatory breach. Depending on the actual provisions of the contract in question and the interpretation thereof, the termination right shall either be exercised within a reasonable period of time or be exercised at any time if this is expressly stated into the contract.

FACTUAL background

DD Classics Limited (the “Claimant”) and Kent Chen (the “Defendant”) entered a contract on 24 March 2021 (the “Contract”) whereby the Defendant agreed to sell to the Claimant a Ferrari race car (the “Car”) for approximately €3.2 million, €50,000 of which were paid to the Defendant as deposit on 28 March 2021.

As per clause 3 of the Contract, the Claimant was required to make the payment of the outstanding amount within five business days of the date of the Contract, and failure to make such payment within the specified period would allow the Defendant to terminate the Contract with immediate effect. Although the payment was not made by the Claimant at the due date, the parties were still corresponding with an aim to finalise the transaction. Eventually on 9 of April 2021 the Claimant had informed the Defendant that the remaining amount has been transferred to his bank account.

However, on 13 April 2021, the Defendant confirmed that:

  • he has not yet received the payment for the remaining amount;
  • he withdraws from the Contract by exercising his termination right set out under clause 3 of the Contract; and
  • he will immediately transfer the amount back to the Claimant upon receipt.

Further to Defendant’s confirmation the Claimant requested a summary judgment under Part 24 of the Civil Procedure Rules arguing that the Defendant has received the payment foreseen under the Contract but still elected to withdraw from the Contract due to Claimant’s failure to make the payment within the specified time period, despite the ongoing correspondence between the parties aiming to finalise the transaction. The Claimant further argued that based on the ongoing correspondence between the parties which took place after the due date set out under the Contract, the breach arising from the failure to make the payment within five business days of the date of the Contract shall mean that the Defendant lost his right to terminate the Contract. In response, the Defendant stated that he was entitled to terminate the Contract under clause 3 as the payment has not been received on time, and his right to terminate the Contract may be exercised at any time as of the occurrence of such breach.

JUDGMENT OF THE HIGH COURT

According to the Initial Judgment, Judge Keyser QC found that the Defendant lost his right to withdraw from the Contract as he failed to exercise his termination right within a reasonable time period, and further noted that clause 3 of the Contract does not expressly entitle the Defendant to terminate the Contract at any time following the occurrence of a breach. Further, the correspondence between the parties following the due date for the payment was of an affirmative nature and the Defendant actively encouraged the performance of the contractual obligations by the Claimant following its failure to make the payment in time, which resulted in the waiver of such breach and the Defendant’s loss of his right to terminate the Contract.

Judge Keyser QC further held that:

  • to the date of the judgment, the Defendant has retained the funds and failed to make a refund to the Claimant without a credible or a valid excuse;
  • according to Mardorf Peach & Company Ltd v Attica Sea Carriers Corporation of Liberia (Laconia) [1977], the concept of “reasonable time” within which the right to terminate may be exercised depends on the circumstances of each case, but it is a very short period; and
  • a stay will not be granted with respect to the proceedings as the Claimant’s interest in the Car is purely financial, and both the Car and the funds have been in his possession for a long time.

In this case, the High Court held that (i) the Contract does not expressly set out that the termination right may be exercised at any time upon breach, and (ii) Defendant failed to exercise his right to terminate the Contract within a reasonable time period.

CONCLUSION

The decision in DD Classics Ltd v Chen [2022] demonstrates that the parties shall act without delay when seeking to exercise their right to terminate a contract, particularly in cases where the relevant contract does not expressly set out that the right to terminate may be exercised at any time following a triggering event. Furthermore, the continued correspondence and positive acts of affirmation between parties encouraging the performance of the contractual obligations under the contract, which took place after the occurrence of the breach may be interpreted as a waiver of the breach and therefore result in Defendant’s loss of his right to terminate.

To access the Initial Judgment, click here.

To access the judgment dated 20 May 2022, click here.

For more information, and any guidance or advice on exercising termination rights, Cleveland & Co, your External in-house counsel, are here to help.

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