Corporate and Finance

Non-waiver Clauses: Effective in case of Silence?

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INTRODUCTION

In the law of contracts, ‘waiver’ is a term used to define the forbearance of right where one party voluntarily agrees to grant a concession to the other contracting party with regards to the performance of a contract. In India, Section 63 of the Indian Contracts Act 1872 contains the provision that deals with the waiver of contract, but does not deal with the mode or form in which the waiver has to be done. (However, based on jurisprudence, waiver can both be implied or expressed.)

The scope of this essay is limited to the study of waivers when one party remains silent on the failure of the other contracting party to perform his/her part of the obligation. First, the essay analyses whether the injured party holds the right of non-waiver in case the party remains silent on the non-performance of the obligation by the other contracting party. Second, the essay analyses the effectiveness of non-waiver clauses that are designed to protect the rights of the party in case the injured party fails to take any action with respect to a breach of a contract. Lastly, the essay makes an attempt to provide solutions to the problem of the ineffectiveness of non-waiver clauses.

SILENCE ON NON-PERFORMANCE: DOES IT AMOUNT TO WAIVER?

To ascertain whether silence amounts to a waiver of contractual rights, it is important to first establish the essentials of waiver. In M/S Motilal Padampat Sugar Mills vs State Of Uttar Pradesh And Ors, the Supreme Court dealt with the doctrines of waiver and promissory estoppel. The Supreme Court held that a waiver can be made either expressly or can be implied from the conduct of a party but the essence of waiver is that it must be an “intentional act with knowledge”.

In another case called P. Dasa Muni Reddy vs P. Appa Rao, the Supreme Court also took upon the task to lay down some of the essentials of waiver. While holding that waiver must be an intentional act and the party must have knowledge of his right, the court added the requirement that the act done must be voluntary in nature. So, these judgments give us the three essentials of waiver i.e., intention, knowledge, and voluntary nature of the act.

In an express waiver, which is either done orally or through writing, the establishment of these three essentials is easy. However, in the case of an implied waiver, it is not an easy task. For example, let’s assume that the party remains silent on the breach of contract. Does it mean that the party has waived his right? If we take all of the essentials of waiver into consideration, then the answer to this question would be no, as mere silence cannot amount to a waiver of rights since the intention and knowledge of the party forbearing his right cannot be established.  

The Kerala High court in Rev. Msgr. Philip Njaralakkatt v. State Of Kerala took a similar position. The issue before the court, in this case, was whether a college can be estopped from not paying a tax even though it is exempted from the tax liability just because the college has paid it in past and thus waived its right. The court relied on the definition of “implied waiver” as given by Black and held that there is no waiver in this case. It is observed that the mere silence of a party cannot be construed as a waiver unless there is a duty to speak. Attention must be paid to the conduct of the party and if the conduct is so that it establishes the intention of waiver of the right and shows sufficient knowledge on the part of the party forbearing his right, then only waiver can be claimed.

However, this does not mean that silence can never amount to a waiver of rights. As observed in Philip Njaralakkatt case, silence does not amount to waiver unless there is a duty to speak. So, if one party has breached the contract and the other party has the option to either affirm the contract or secure his remedy for breach of contract then, in this case, the party’s deliberate silence can amount to representation and can be taken into consideration by the court to hold that he has waived his right. Once the right has been waived, the party loses this claim for damages or other remedies.

NON-WAIVER CLAUSES: WORKING AND EFFICACY

In order to prevent such unintentional or accidental waiver, parties usually include a “non-waiver” clause in their contract document. Such clauses preserve the contractual rights of a party, such as the right to pursue remedies for breach of contract, if the party takes no action when a contract has been breached. These clauses prescribe the manner or form in which the party can waive his rights. These clauses also protect the right to enforce certain provisions of a contract that may have been relaxed in the past.

Now, the main question arises: are these waiver clauses always effective and enforceable? The answer to this question is ‘no’. Though these clauses are added to limit the scope of the general doctrine of waiver, they are not always successful in doing so. Non-waiver clauses have been subjected to various limitations by the courts.

The main limitation on the enforceability of non-waiver clauses is the “doctrine of affirmation by election”. “The doctrine of affirmation by election” provides that when a contract is breached, the injured party has the option to either treat the contract as continuing (i.e. Affirmation) or treat it as terminated (i.e. Repudiation).[1] So, if the injured party has knowledge of the fact that a breach of contract has happened but still chooses to ignore the breach and continues to act as if the contract is still in place, then the party is said to have affirmed the contract by election.

In  Tele2 International Card Company SA and others v Post Office, the court applied the “doctrine of affirmation of contract by election” despite the fact that non-waiver clause provided that any delay or negligence should not be considered as a waiver. In this case, the Post Office chose to terminate the contract after Tele2 committed a material breach. However, despite the fact that the party was fully aware of the breach from the start, the notice of termination was served by Post Office after one year. The Post Office argued that the delay in serving the notice should not be considered as a relinquishment of the right to terminate as the non-waiver clause provided that delay in enforcing the right does not amount to waiver. However, the Court of Appeal ruled that, regardless of the contract’s non-waiver clause, the Post Office had elected to affirm the contract by conduct, and thus had given up the right to terminate for breach of the contract.

While, it could be said that the court did justice to Tele2 communication as it would have been inequitable if Post Office were allowed to terminate the contract after enjoying benefits for one year, it has far-reaching consequences for non-waiver clauses. When both the contracting parties have agreed to a certain “non-waiver” clause, the court’s decision to override that non-waiver clause undermines the freedom of parties to decide on the terms and conditions of the contract.

In another case called Force India Formula One Team Ltd v Etihad Airways, the court relied on the decision of Tele2 to hold that Etihad had affirmed the contract and relinquished its right to terminate it because it had remained silent and continued to perform his part of the contract even after Force India had committed multiple breaches. The decision of this court reaffirms the doctrine of affirmation by providing that when there is a breach of contract, the party has to make a decision and if the party does not make one, the court will infer it from your conduct.

In India, there has not been much jurisprudence on the issue of the effectiveness of non-waiver clauses. However, in the case of Gail (India) Limited vs Newton Engineering & Chemicals, the non-waiver clause did come under challenge. The case pertained to the issue of liquidated damages for delay in performance of the contract by Newton Engineering. The court held that in case of delayed performance by Newton, Gail had the option to terminate the contract but it did not exercise such right. By doing so, it has waived its right to claim liquidated damages for the delayed period. The court relied on Section 55 of the Indian Contract Act 1872 to hold that it concerns the public policy and the non-waiver clause cannot operate by overriding section 55.

So, it can be concluded that though non-waiver clauses are added to limit the scope of the doctrine of waiver, their efficacy is limited as courts look at the conduct of the party to decide whether a party has waived his right or not.

CONCLUSION AND THE WAY FORWARD

One way to make the non-waiver clauses more effective is to draft them in a way as to make them more specific. For example, in Tele2 case, the non-waiver clause stated that no delay or negligence should be considered as a waiver of right but it does not specify in which mode the waiver or affirmation should be made. Had the waiver clause included the requirement that it should be made in writing, the court might have put the obligation on Tele2 to show that they have demanded the affirmation in writing.

Additionally, parties can also specifically exclude the doctrine of affirmation by election by stating that in their non-waiver clause. However, it cannot be conclusively said if that would be successful.

However, instead of putting complete reliance on non-waiver clauses, the more practical solution is that the injured party should submit a letter to the other party as soon as the contract has been breached in order to preserve the contractual rights. In addition to this, the injured party must ensure that their actions demonstrate their willingness to retain the ability to terminate the contract. Otherwise, courts can interpret their action to mean that the party has affirmed the contract.  

[1] Jack Beatson, Andrew Burrows and John Cartwright, Anson’s Law of Contract (29th Edition, OUP 2010) 510.


ABOUT THE AUTHOR

Harshit

Harshit is a second-year B.A., LL.B. (Hons.) student at the National Law School of India University in Bengaluru. His research interest lies in the area of Commercial and Corporate Law.

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