It is usual to insert a longstop date into agreements where completion is dependent on the occurrence of some extraneous event, to enable the parties to terminate the contract if it has not been completed by an agreed date. Most such contracts will prohibit a party in default from relying on its own breach of contract to terminate the agreement.
What is the position if one of the parties serves a notice before the longstop date putting the wheels in motion for completion a few days after the longstop date? Is it then too late for the other party to withdraw?
In Lancashire Insurance Company Ltd v MS Frontier Reinsurance Ltd [2012] UKPC 42, the assignor of a lease entered into a contract to assign the lease on completion of the work required to fit out its new premises and make them available for occupation. The parties agreed that, if completion had not occurred by 31 December 2009, then either party would have the right to determine the agreement by serving a termination notice on the other.
The assignor served a notice on the assignee on 18 December 2009 confirming that it was ready to move. The contract gave the assignee fifteen working days from receipt of that notice in which to complete. The notice expired on 13 January 2010. On the very last day for completion of the contract, the assignee served a notice terminating the agreement. It claimed that it was no longer under any obligation to take an assignment of the lease because the longstop date had passed.
The Privy Council decided that it was necessary to imply a term into the parties’ agreement restraining a party that was in breach of its obligation to complete from serving a termination notice, but refused to imply a term prohibiting the service of a termination notice at a time when the party serving the notice was not in breach of its obligation to complete. Consequently, there had been nothing to stop the assignee from serving a termination notice on the date fixed for completion of the contract.
The assignor argued that the assignee had lost its right to serve a termination notice by waiver or election because the assignee had made preparations for completion in the period before 31 December 2009 and had, at all times, behaved as if the contract was still in force. However, the Privy Council refused to accept that the assignee had unequivocally waived its right to terminate the contact before the longstop date had passed – and held that the neutral communications sent after its right to terminate had crystallised were entirely consistent with a reservation of its rights while it considered its position.
The case highlights the importance of sticking to deadlines to ensure that no one walks away, and of ensuring that termination rights are unambiguous. The problem could have been avoided if the assignor had been able to serve a completion notice a little sooner, or if the contract had prohibited the service of a termination notice at any time after the longstop date “if a completion notice has been served” – if this is what the parties intended.
Allyson Colby is a property law consultant
