Offer and acceptance of advance repudiation

Introduction

Repudiation in the present sense occurs where a party indicates, either expressly or impliedly, by words or conduct that he does not intend to honor his obligations when they fall due in the future.(Richards, 2004) and (Furmston, 2006) p.688

It must be observed that, even if the party wrongfully repudiates all further liability, the contract will not automatically come to an end. Sinceits termination is the converse of its creation, principle demands that it should not be recognized unless this is what both party intend. The familiar test of offer and acceptance serves to determine their common intention. Where A and B are parties to an executor contract and A indicates that he is no longer able or willing to perform his outstanding obligations, he in effect makes an offer that the contract shall be discharged.(Furmston, 2006)

Therefore B is presented with an option. He may either refuse or accept the offer as in Denmark Productions Ltd v Boscobel Productions Ltd[1]. More precisely, he may either affirm the contract by treating it as still in force or on the other hand he may treat it as finally and conclusively discharged. The consequences vary according to the choice that he prefers.(Furmston, 2006).

Once the innocent party has elected to affirm or for that matter to treat the contract as discharged, he cannot retract his election. In Panchaud Freres SA v Etablissements General Grain Co.[2] it was held that affirmation is really a species of waiver that results in an innocent party being stopped form alternating his election.(Richards, 2004)

1. The lapse of time:

The injured party does have time to decide whether to affirm or terminate the contract but doing nothing for too long may be seen as affirmation as in the case StoczniaGdanska SA v Latvian Shipping[3]. (Koffman and Macdonald, 2004)

The Court of Appeal recognized that there was a period prior to the election when the non-breaching party was making up its mind whether to terminate or affirm. In this period the contract and the right to terminate were both kept alive. As Rix LJ noted, this period cannot extend indefinitely and inaction over a sufficiently lengthy period may be held to constitute affirmation. In addition, since the contract remains alive until the non-breaching party terminates, the non-breaching party will be subject to the same risks that affect the non-breaching party who formally affirms. (Poole, 2008)

2. Accepting the breach:

An anticipatory breach of contract entitles the innocent party to terminate performance of the contract immediately. The novel feature of anticipatory breach is that acceptance of the breach entitles the innocent party to claim damages at the date of acceptance of the breach. He does not have to wait until the date fixed for performance, even though this has the effect of accelerating the obligations of the party in breach. It does seem illogical to say that a party can be in breach of contract before the time fixed for performance under the contract(McKendrick, 2009).

The innocent party may choose to immediately terminate the contract and sue for damages even though the date for actual performance has not passed. This choice arises, it is said, because the other party has repudiated the contract by her actions.(Atiyah and Smith, 2006)

Where the innocent party does decide to terminate performance of the contract he must give notice to the party in breach that he is accepting the anticipatory breach (or otherwise overtly evidence his acceptance of the breach) and he must not inconsistently with his decision to accept the breach (McKendrick, 2009).

The innocent party has the right to elect to accept the repudiation as discharging the contract with the result that all his future obligations under the contract come to an end, as do the obligations of the guilty party, though here his obligation to pay damages arises by operation of law, as stated in Moschi v Lep Air Services Ltd.[4](Richards, 2004)

There are, of course, dangers in treating an action by the other party as repudiation if it turns out to be viewed otherwise by the court. The party purporting to accept a repudiatory breach may well take action (as was the case in Vitol v Norelf) which itself involves a breach may find the tables turned and that that party itself is now liable to damages for its own breach of the contract. In Federal Commerce and Navigation Co Ltd v Molena Alpha Inc, the Nan Fir[5] which concerned the operation of three time charter parties, the charters deduct various amounts from the hire which they paid to the owners. The owners objected and issued instructions to the masters of a vessel concerned to withdraw all authority to the charters on their agents to sign the bills of lading. This action was held to amount to a repudiatory breach which entitled the charter to terminate the charter parties. (Stone, 2009)

The innocent party must act so as to make plain that he claims to treat the contract as at an end. There is no reason why the acceptance of an anticipatory repudiation should not take the form of words or conducts which make it plain that the innocent party is responding to the repudiation by treating a contract as at an end. Thus, a failure to perform contractual obligations is capable of amounting to an acceptance of an anticipatory repudiation of a contract: Vitol S.A v Norelf Ltd; The Santa Clara[6]. The non-breaching party can sue at once, need not wait and if he does, he can win even though at the time of action his right is contingent, leading case is Frost v Knight 1872. (Upex et al., 2003)

The most striking feature of the doctrine of anticipatory breach is that the acceptance of the breach entitles the victim to claim damages at one, before the time fixed for performance. This rule was established in Hochster v De La Tour. (Peel, 2007)

Hochster v De La Tour[7] made it clear that damage can be claimed immediately on the basis of an accepted anticipatory breach without any need to wait for the time of performance. A similar result was reached in Frost v Knight[8]. In that case the defendant was promised the plaintiff that he would marry her when his father die. Subsequently the defendant broke off his engagement to the plaintiff. She took action while the defendant’s father was still alive and was successful in her claim. (Koffman and Macdonald, 2004)

A leading case upon this subject is Hochster v De La Tour. The right to claim damages immediately exists even when the performance is not absolute as in Hochster v De La Tour but contingent as in Frost v Knight. In that case, performance was contingent upon an event which might not happen within the lifetime of the party.(Beatson, 2002)

If the non-breaching party has terminated following the renunciation, it is clear that he can claim for damages from that time and does not need to wait until the date fixed for performance under the contract (Hochster v De La Tour). However, the non-breaching party would be under a duty to mitigate its loss as from the date of termination. In Reichman v Beveridge[9], a landlord and tenant case, the tenant argued that having left the premises three years into a five-year lease, there was a duty placed on the landlord to mitigate in a claim for rent arrears following the abandonment, e.g., by finding a replacement tenant, marketing the premises and not rejecting offers from prospective tenants. However, the Court of Appeal accepted that there was no such duty to mitigate in an action in debt (i.e., the action for arrears of rent).(Poole, 2008)

Awarding damages for breach before performance is due may seem objectionable because where the interval between termination and the time of performance is long; an immediate damages award accelerates the defendant’s obligations and increases the potential for errors in quantifying damages since that conventionally rests on the market value of the lost performance at the time of performance. However, the rule can be justified for encouraging the speedy resolution of broken-down contracts and minimizing the claimant’s losses. It gives the claimant the incentive to terminate the contract immediately and move on, rather than keeping himself ready to perform (which is likely to increase his loss) a contract which will inevitably be breached come the time of performance.(Chen-Wishart, 2007)

Affirming the contract

Charactersistics:

The non-breaching party can choose not to accept the repudiation, say by communicating that she is still expecting performance from the other party, then the contract remains in operation. In this case the innocent party can terminate or sue for damages if and when the breach actually happens, but in the meantime must remain ready to perform as required by the contract. This principle that the innocent party must remain able and willing to perform if he keeps the contract alive is, however, qualified by another principle, to the effect that if the guilty party continues to make it quite clear that he will not perform, the the innocent party can eventually abandon his attempts to perform. This can either be seen as an ultimate acceptance by conduct of the repudiation, after its initial rejection, or as an act of induced reliance by the innocent party, which stops the guilty party from complaining about the former’s inability to perform. (Atiyah and Smith, 2006)

On the basis that the breach is repudiatory, the usual election will apply so that the non-breaching party will have the option of accepting the breach as terminating the contract, or affirming and awaiting performance on the contractual date set for that performance to begin (Fercometal SARL v Mediterranean Shipping Co. SA[10]).(Poole, 2008)

In White & Carter (Councils) Ltd v McGregor[11], the House of Lords (by a majority of 3:2) held that they were entitled to recover the contract price. There was no requirement that they minimize (or mitigate) their loss by finding an alternative business or product to advertise on the litterbins.(Poole, 2008)

One of the reasons for the strict approach to identification of affirmation as requiring clear and unequivocal evidence of an intention to continue with the contract, is frequently stated to be that the election is irrevocable, i.e., having affirmed, the non-breaching party cannot change its mind in the period between affirmation and the contractual date for performance (although following non-performance on the contractual date there would be a new opportunity to elect to terminate or affirm for that actual repudiatory breach. As stated by Lord Ackner in Fercometal v Mediterranean Shipping: ‘there is no third choice to affirm the contract and yet be absolved from tendering further performance unless and until the breaching party gives reasonable notice that he is one again able and willing to perform’.(Poole, 2008)

It has long been recognized that where the breach is continuing one (i.e., it continues after affirmation) and is repudiatory, the fact of the earlier affirmation will not prevent the non-breaching party form choosing to terminate in the period prior to that date set for contractual performance. This was recognized by Thomas J (obiter) in Stocznia Gdanska SA v Latvian Shipping Co[12].(Poole, 2008)

If the injured party chooses not to accept the repudiation, then there is no breach at that point and no duty to mitigate. If the injured party can sue for the debt, he will not be concerned with the rules restricting recovery of damages, including the duty to mitigate. This can lead to the injured party claiming payment for an ‘unwanted and wasted’ performance, which contractors awkwardly with the mitigation rule’s limitation on recovery. The point arises from decision in White and Carter (Council) (Koffman and Macdonald, 2004).

Where the innocent party does decide to affirm the contract and demand performance at the stipulated time, a number of consequences flow from this decision. The first is that affirmation does not prevent the innocent party accepting the breach if, at the date fixed for performance, the other party still refuses to perform. The second is that the innocent party, in addition to affirming the contract, may continue with the performance of his obligations under the contract, even though he knows that the performance is not wanted by that other party. This is what happened in the controversial case of White and Catter (McKendrick, 2009).

Requirements:

The principle laid down in White and Carter is, in fact, the subject of a number of qualifications. The first is that the innocent party cannot compel the party in breach to cooperate with him so that, where the innocent party cannot continue with performance without the cooperation of the party in breach, he will be compelled to accept the breach (Hounslow LBSC V Twickenham Ltd). The second qualification is derived from the speech of Lord Reid in White and Carter when he said that: ‘it may well be that, if it can be shown that a person has no legitimate interest, financial or otherwise, in performing the contract rather than claiming damages, he ought not to be allowed to saddle the other party with an additional burden with no benefit to himself.’ (McKendrick, 2009)

1. Legitimate interest:

In view of the objections to wastage inherent in the White & Carter principle, subsequent courts have seized upon statements by Lord Reid in order to limit the potential scope of the principle (indeed, Megarry J in Hounslow v Twickenham[13]).(Poole, 2008)

Lord Reid said that the general power to affirm the contract could not be exercised by a person who had no ‘legitimate interest, financial or otherwise, in performing the contract rather than claiming damages’. However, it would be sufficient that it was merely ‘unreasonable’ to affirm; something more than this would be required.(Poole, 2008)

Thus, the guilty party can avoid the operation of the principle in White & Carter v McGregor by establishing that the non-breaching party has no legitimate interest in continuing performance.(Poole, 2008)

Lord Reid’s statement was adopted and applied in Clea Shipping Corp. v Bulk Oil International Ltd, The Alaskan Trader[14]. The principle is clearly aimed at preventing very obvious wastage when the other party does not require performance. (Poole, 2008)

2. No cooperation:

The second limitation requires that the affirming party must be able to continue with their own performance of the contract without the cooperation of the breaching party in order to be able to claim the contract price (otherwise the affirming party will be limited to a remedy in damages).(Poole, 2008)

Cooperation in this context includes both active and passive cooperation of the renouncing party (e.g., Hounslow London Borough Council v Twickenham Garden Developments Ltd[15]: following renunciation by the local authority employers, contractors had no right to insist on continuing to perform the contract because the work was being done on local authority property and they were unable to gain access to the site without the local authority’s permission).(Poole, 2008)

However, the restriction in White & Carter that a claimant will be limited to a remedy in damages where he is unable to perform without the cooperation of the contract-breaker, applies only where the performance which has been prevented by the breach was a pre-condition to the payment obligation, i.e. the performance obligation was entire (in caseMinistry of Sound (Ireland) Ltd v World Online Ltd[16]) (Poole, 2008)

Risk to the non-breaching party following the decision to affirm after the other party’s anticipatory repudiation:

On the other hand, a decision to affirm the contract may work to the disadvantage of the innocent party. The first disadvantage is that an innocent party who affirms the contract may lose his right to sue for damages completely if the contract is frustrated between the date of the unaccepted anticipatory breach and the date fixed for performance (Avery v Bowden). Secondly, an innocent party who affirms the contract but subsequently breaches the contract himself cannot argue that the unaccepted anticipatory breach excused him from his obligation to perform under the contract. Where the breach is not accepted the parties remain subject to their obligation under the contract, so that the ‘innocent party’ may find himself liable to pay damages for breach of contract if he fails to accept the breach and subsequently breaches the contract himself (The Simona).(McKendrick, 2009)

Following affirmation, the non-breaching party is exposed to a number of risks in the period between affirmation and remedies following the earlier renunciation. The existence of these risks lends support to the position adopted by the Court of Appeal in Stocznia since, if the non-breaching party does have to accept these risks, it is arguable that in this period the ability to terminate should continue to exist where the renunciation is continuing.(Poole, 2008)

The risks placed on the affirming party in the period between affirmation and the date for performance are not insignificant. For example:

1.If the non breaching party is itself in breach of contract, that party cannot argue, at least not unless estoppels operates, that the initial renunciation by the other party operates as an excuse for its own subsequent breach as in Ferometal SARL v Mediterranean Shipping Co, SA, The Simona[1]. Once the contract was treated as being still in force, it was ‘kept alive for the benefit of both parties’, and the party affirming could not both keep it alive and seek to justify his own non-performance by reference to the earlier repudiation.(Poole, 2008)

In a situation where there has been an anticipatory breach of contract the innocent party elects to affirm the contract, he is still required to perform his own obligations under the contract but faces the danger that, should he subsequently become guilty of a breach of contract, the other party may escape liability. This point was discussed in Ferometal SARL v Mediterranean Shipping Co, SA, The Simona.(Richards, 2004).

2.Similarly, if the contract is frustrated in the period between the affirmation and the due date for performance, the frustration will discharge the contract and the non-breaching party will lose the remedy of damages for the breach as in Avery v Bowden[2], the outbreak of Crimean War, thus depriving the ship-owners of a remedy they might have had for the failure to provide a cargo, hat that repudiation been accepted as terminating the contract.(Poole, 2008)

A further danger with affirmation lies in the possibility that a frustrating event may occur after the innocent party has affirmed the contract. Where an innocent party has decided to affirm a contract and there is a breach when the date of performance on the contract arrives.

References

Atiyah, P. S. & Smith, S. A. (2006), Introduction to the law of contract, 6th ed, Oxford: Oxford university press.

Beatson, J. (2002), Law of contract, 28th ed, Oxford: Oxford University Press.

Chen-Wishart, M. (2007), Contract law, 2nd ed, Oxford: Oxford University Press.

Furmston, M. (2006), Cheshire, Fifoot and Furmston’s law of contract, 15th ed, Oxford: Oxford University Press.

Koffman, L. & Macdonald, E. (2004), The law of contract, 5th ed, London: Tolley.

Mckendrick, E. (2009), Contract law, 8th ed, Basingstoke: Palgrave Macmillan.

Peel, E. (2007), Treitel, The law of contract, 12th ed, London: Sweet & Maxwell.

Poole, J. (2008), Textbook on contract law, 9th ed, Oxford: Oxford University.

Richards, P. (2004), Law of contract, 6th ed, Harlow: Pearson Longman.

Stone, R. (2009), The modern law of contract, 8th ed, London: Routledge-Cavendish.

Upex, R., Bennet, G. & Chuah, J. (2003), Davies on contract, 9th ed, London: Sweet & Maxwell.