Dispute resolution

Be careful not to override your reservation of rights

Published on 8th Apr 2021

If a party has a right to choose whether to terminate a contract following a breach by the other side, it can "hold the ring" while it makes up its mind what to do by reserving its rights. But although (outside of the landlord and tenant context) a reservation of rights will usually prevent conduct amounting to an election to affirm the contract (which would have meant that the contract could no longer be rescinded), this is not an invariable rule. In short, if you act as if the contract is to continue, you may lose the right to rescind the contract, even if you have expressly reserved your rights. What acts do you have to be careful to avoid in order not to override your reservation of rights?

The courts will look at this issue in the round, but your own subjective intention will not matter. Some acts will usually be fine if accompanied by a reservation of rights, such as exercising a contractual right to obtain information about your rights or continuing to perform your own contractual obligations while making up your mind.

But, as the recent case of SK Shipping v Capital VLCC confirmed, some acts are likely to be so "intrinsically affirmatory" that they will cause the contract to be affirmed, even if there has been a reservation. These might include making "an unconditional demand of substantial contractual performance of a kind which will lead the counterparty and/or third parties to alter their positions in significant respects" and also delaying exercising a right for such a long time that an election will be deemed to have been made.

Accordingly, a reservation of rights will not excuse any conduct or delay whatsoever: in some cases, "actions speak louder than words". So do not reserve your rights and then fail to make a decision about what to do – one way or another – in a timely manner.

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* This article is current as of the date of its publication and does not necessarily reflect the present state of the law or relevant regulation.

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