When the Guilty Party Repudiates the Contract

1554 words (6 pages) Essay in Contract Law

02/02/18 Contract Law Reference this

Last modified: 02/02/18 Author: Law student

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Generally speaking, under the law of contract, it is the duty of both parties to complete their own contractual obligations. However, disputes may arise when there is an advance repudiation, i.e., one party communicate in advance that he is unable or unwilling to perform the contract. This paper will examine which options are available to the innocent party in these situations – when the guilty party repudiates the contract before the contractual date of performance.

According to Peel (2007), the wrongful advanced repudiation of all further liability will not automatically put an end to the contract. Since the termination of contract is considered the ‘converse’ of its creation, in principle, it should not be ‘recognised’ unless both parties do intend to terminate it (Furmston, 2006). He also insists that the ‘familiar test of offer and acceptance’ must be applied to identify their purpose. When one party indicates that he will not perform the contract, he ‘in effect makes an offer’ that the contract will be discharged (p.688). Therefore, the other party has an option, i.e., either rejecting or accepting this offer. In the other words, he may either terminate the contract then it comes to an end or on the other hand he may affirm the contract then it remains in operation. The innocent party does not have to decide immediately, he has time to make up his mind. However, if he does nothing for too long, it may be held to constitute an affirmation as in Stocznia Gdanska SA v. Latvian Shipping [1] (Koffman and Macdonald, 2004). In addition, in the period before the election, the contract and the right to terminate are both kept alive (Beatson, 2002). Hence, according to Poole (2008), at that time, the innocent party confronts the same risks which affect the affirming party. Once the injured party has decided to affirm the contract or accept the repudiation, he cannot change his mind (Richards, 2004), as what Lord Ackner in Fercometal v. Mediterranean Shipping said: ‘there is no third choice to affirm the contract and yet be absolved from tendering further performance’ (Poole, 2008).

The first option available for the injured party is to accept the advance repudiation and terminate performance of the contract immediately. After this decision, this party has a right to claim for the work he has already done as in Planche v. Colburn (Newark, 2011). Furthermore, according to Atiyah and Smith (2006), the innocent party can sue for damages even though the fixed contractual date for performance has not passed. The leading case upon this subject – Hochster v. De La Tour made it plain that the right to claim damages immediately exists on the basis of an accepted repudiation without any need to wait for the stipulated time of performance (Koffman and Macdonald, 2004). Moreover, the injured party can sue for damages even when the performance is not ‘absolute but contingent’ as in Frost v Knight (Beatson, 2002, p.571). In that case, the performance was conditioned by an event which may not occur in the lifetime of the parties. Chen-Wishart (2007) argues that awarding immediate damages may seem ‘objectionable’. He claims that where there is a long interval between termination and the contractual time of performance, an immediate damage award may increase the probability of errors in assessing damage because it is based on ‘the market value of the lost performance at the time of performance’ (p.497). Nevertheless, this rule can be justified because it enables a quick remedy for broken-down contracts and minimises the innocent party’s losses.

However, the innocent party is subject to a number of requirements when accepting the advance repudiation. Firstly, this party has to give reasonable notice to the guilty party that he is accepting the repudiation and he must not act inconsistently with this decision (McKendrick, 2009). Similarly, according to Upex et al. (2003), there is no reason why the acceptance should not be expressed in ‘the form of words or conducts’ so as to make it obvious that the injured party is accepting the repudiation by putting an end to the contract (p.270). Secondly, there is a duty placed on the non-breaching party to mitigate its loss from the date of termination (Poole, 2008). As in Reichman v Beveridge [2] – a landlord and tenant case, the landlord was under the responsibility to minimise the loss of rent because of the early abandonment of tenant, e.g., by finding another tenant, advertising the premises and not rejecting offers from prospective tenants.

The other option for the injured party is not to accept the advance repudiation, affirm the contract and demand for performance at the stipulated time ,i.e. the contract remains in operation (Peel, 2007). In this case, the non-breaching party can terminate the contract or sue for damages if and when there is an actual breach, but meanwhile he must remain ready and willing to honour his own obligations under the contract (Atiyah and Smith, 2006). According to (Poole, 2008), the decision is ‘irrevocable’, i.e., having affirmed, this party cannot retract his decision in the period between affirmation and the stipulated date for performance (p.338). However, the initial affirmation does not stop the injured party from accepting the breach if at the contractual date for performance, the other party still fails to honour the required obligations (McKendrick, 2009). Similarly, according to Atiyah and Smith (2006), the non-breaching party can eventually terminate the contract if the guilty party keeps making it quite obvious that he will not perform. In addition to affirming the contract, this party has a right to complete his own performance, even though it is plain that the performance is unwanted by that other party (McKendrick, 2009). Since there is no breach if the injured party decides to refuse the advance repudiation, the duty to mitigate loss does not arise at that point. Similarly, Koffman and Macdonald (2004) argued that if the innocent party sues for the outstanding debt, he will not be constrained by ‘the rules restricting recovery of damages, including the duty to mitigate’. This can lead to the fact that after completing its own performance, the injured party can claim the agreed payment (as suing for an outstanding debt) for an ‘unwanted and wasted’ performance (p.520). This point arises from decision in the controversial case White and Carter v. McGregor.

However, the option to affirm the contract is not undoubtedly available to the innocent party. He has to satisfy a number of requirements in order to gain this right. Firstly, the injured party has to demonstrate that he has legitimate interest. Due to ‘wastage’ involved in the White and Carter principle, the courts has tried to restrict the potential scope of this principle (Poole, 2008). According to McKendrick (2009), the restriction is based on the statement of Lord Reid in White and Carter when he said that right to affirm the contract should not be made available to a party who had no ‘legitimate interest, financial or otherwise, in performing the contract rather than claiming damages’. In fact, this statement was adopted and applied in Clea Shipping Corp. v Bulk Oil International Ltd [3] to avoid apparent wastage of the unwanted performance (Poole, 2008). Secondly, the injured party could claim the contract price only if he can fulfill his own contractual obligations without the cooperation of the guilty party (McKendrick, 2009). According to Poole (2008), if the affirming party cannot continue, he will only be able to sue for damages as in Hounslow LBSC v. Twickenham Ltd [4] .

On the other hand, ‘the decision to affirm the contract may work to the disadvantage’ of the injured party (Stone, 2009, p.587). If he decides to keep the contract alive, he is still liable to perform his own contractual obligations. Hence, he could confront the danger that, if he later fails to perform, the other party may have a justification for the non-performance as in Ferometal SARL v. Mediterranean Shipping (Richards, 2004). Additionally, according to Poole (2008), further danger is that a frustrating event might unfortunately happen after the injured party has affirmed and before the contractual date. In this case, the frustration will discharge the contract and he will lose the ability to sue for damages (as in Avery v. Bowden).

In conclusion, this paper has examined the two available options to a party if the other party repudiates the contract before performance falls due. One option is to accept the repudiation, terminate the contract and sue for damages immediately. However, the innocent party has to give notice to the party in breach and he would be under the duty to mitigate the loss. The other option is to reject the repudiation, complete performance and claim the agreed price. In this case, the non-breaching has to demonstrate that he has legitimate interest and he can perform the contract without the cooperation of the other party. Additionally, he would face the risks that he could be in breach himself or a frustrating event might happen, discharging the contract.

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