One of the subcontracting parties was Donau Pty Ltd, formerly Forgacs Engineering Pty Ltd (Forgacs), a Newcastle based civil and defence shipbuilder. Forgacs and ASC entered into a contract in 2009 for the construction of various blocks. The contract also provided for a formula by which Forgacs' fees for the project were to be calculated. The project was fraught with complications and delays, and it became impossible for the parties to use the mechanism under the original contract to calculate Forgacs' entitlement to its fees.
To try to remedy this issue, in October 2012, ASC and Forgacs executed a new contract, being the "Second Heads of Agreement" (SHOA) which, inter alia, provided for a new mechanism for calculating Forgacs' fees. The SHOA also contained various clauses that required the parties to "re-baseline" the various performance metrics of the project. Finally, the SHOA also gave ASC a unilateral right to terminate the agreement (the effect of this being that the parties would revert back to the regime under the original contract). Critically, the SHOA was silent on when this right to terminate had to be exercised by.
The parties were unable to reach agreement on the "re-baseline" and in June 2013, ASC purported to exercise its right to terminate the SHOA. Further disputes arose as to entitlement to fees, which led to proceedings being commenced before the Supreme Court of NSW in 2016 after the completion of the project. The parties were orders of magnitude apart on the question of fees, with ASC claiming overpayment of over $20,000,000 and Forgacs claiming underpayment for a similar amount.
Multiple issues were ultimately ventilated before the Courts, including whether the SHOA came into effect, what date it substantively came into effect or "transitioned" (the two available dates on the construction of the document being in December 2012 and February 2013), and the correct construction of the SHOA as to its effect on Forgacs' entitlement to fees. However, one key issue was whether ASC lawfully terminated the SHOA in June 2013. That is, did ASC fail to exercise their right to terminate within a reasonable time? The matter was heard at first instance before the Supreme Court of NSW by Ball J, who considered this issue.
One question that necessarily arises is what is a reasonable time? Ball J, citing Cavallari v Premier Refrigeration Co Pty Ltd (1952) 85 CLR 20, noted that this was a question of fact to determine in light of the facts of the case. Critically, it was his Honour's view that the analysis of the factual circumstances is to be conducted with reference to the facts that existed "at the time of the exercise of the right".
On Ball J's construction of the SHOA, it came into effect and transitioned in February 2013. On his Honour's construction, this was also the date that the right to terminate arose. His Honour then looked at the conduct of the parties after this date. He considered that the parties had genuinely continued to attempt to negotiate the "re-baseline" between February 2013 and when ASC purportedly terminated in June 2013. His Honour found that this period of time was reasonable and that Forgacs was not prejudiced by the delay. Accordingly, his Honour found that ASC had exercised its right to terminate within a reasonable time.
Last week the Court of Appeal handed down its judgment, being Donau v ASC AWD Shipbuilder Pty Ltd  NSWCA 185, reversing the decision of the trial judge and finding for Forgacs on each of its key grounds of appeal. The Court of Appeal's judgment provides for some developments in contract law on the question of reasonable time.
However, Bell P also clarified the legal process with respect to an implied term for reasonable time. The President stated that the authorities do not support Ball J's proposition that the limit of what is a reasonable time is to be determined based on what is fair to both of the parties at the time the contractual right is exercised. Rather, the factual question of what is a reasonable time is determined at the time that the right is "first capable of being exercised" (that is, when it accrues).
Bell P also considered whether there was any distinction between whether the authorities varied on the question of a reasonable time passing for the performance of an obligation as distinct from an exercise of a right. Ultimately, his Honour noted that this is a "question of fact and law" which may vary based on the nature of the obligation or the right, but no special rules apply for rights as opposed to obligations per se.
After considering the authorities, Bell P neatly summarised the legal position as:
"The legal meaning of what is a reasonable time is to be ascertained as 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 the circumstances as at the date on which the right is first capable of being exercised (or the date on which the obligation falls to be performed), viewed in the context of the contract as a whole."The effect of this is that any conduct of ASC and Forgacs after February 2013 (namely, their continued negotiations to re-baseline) was not relevant to the question of determining whether a reasonable time had passed.
His Honour observed the following:
"A commercial party such as Forgacs, involved in a multimillion-dollar procurement contract, and having negotiated the [SHOA] in a manner that required, by implication, ASC's right to terminate the [SHOA] to be exercised within a reasonable time of that right arising … was entitled to hold ASC to that promise.
… A "reasonable time" had long since passed when ASC purported to exercise its right to terminate."Emmett AJA agreed with Bell P on this issue, meaning that this part of the judgment forms part of the majority of the reasoning of the Court of Appeal.
His Honour found that there are two approaches to the basis of requiring an exercise of a contractual right (or obligation) within a reasonable time. The first is implying such a term, which is the approach that Bell P appears to have taken. The second is to treat the exercise as simply a matter of contractual interpretation.
His Honour recognised there may be a degree of artificiality in this distinction, but emphasised that framing the question as one of implication "is to remove the focus of attention from the [objective] intention of the parties at the time of entering into the agreement". The contract is to be interpreted as it would be understood by an independent observer and "at least where there is uncertainty" by reference to the context and information available to the parties.
This leads to a situation where it is not appropriate to take post contractual events into account, and his Honour noted that this is what Ball J did by referring to continued negotiations between Forgacs and ASC after February 2013.
His Honour then turned to the question of construction of the SHOA, Basten AJA agreed with Bell P that the SHOA transitioned in December 2012 and proceeded to note the following:
At first glance the distinction drawn by Basten JA between implication and interpretation may be a false dichotomy: there will still be some element of "implying" in the requirement of reasonable time. As Basten JA acknowledges, his distinction is more to emphasise the importance of keeping the focus of the exercise on the objective intention of the parties at the time the contract was entered into. That is the orthodox approach to contractual interpretation: you use the four corners of the contract to objectively determine what a reasonable time is (subject to referring to external material to resolve ambiguities).
Bell P's approach gives much more room to reference external factors, but not to those that arose after the relevant right accrued or obligation crystallised. Noting Emmett AJA's agreement with Bell P on this point, the case can be said to stand for the following on the issue of reasonable time:
McCabe Curwood acted for Forgacs throughout the dispute with ASC, including at first instance before the Supreme Court and before the Court of Appeal.