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(p. 297) 8. Breach of contract 

(p. 297) 8. Breach of contract
Chapter:
(p. 297) 8. Breach of contract
Author(s):

Robert Merkin

and Séverine Saintier

DOI:
10.1093/he/9780198816980.003.0008
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date: 06 May 2021

Summary of the issues

A contract can be discharged by performance, agreement, frustration (see Chapter 12), or breach. This chapter’s main focus is breach, and particularly repudiatory breach, i.e. discharge (termination) of the contract for that breach.

  • In practice, most contracts are discharged by performance. It is necessary to identify the standard of performance required in relation to each contractual obligation, since a failure to perform to the required standard constitutes a breach. Contractual performance obligations are either strict or qualified.

  • Contracts may be discharged by agreement, but such an agreement to discharge must be legally enforceable and so must be supported by consideration, if not contained in a deed.

  • A contract breach will occur where, without lawful excuse, a party either fails or refuses to perform a contractual obligation imposed on that party by the terms of the contract or performs a contractual obligation in a defective manner.

  • Every breach of contract, however small, gives rise to a right to claim damages. However, unless the breach constitutes a repudiatory breach, the contract will remain in force. If the breach is repudiatory, the non-breaching party will have the option either to accept the breach as terminating the contract (in which case, both parties’ future obligations will be discharged) or to affirm the contract (in which event, the contract remains in force for both parties). If the breach is non-repudiatory (such as a breach of warranty), the victim will only be entitled to claim damages for the loss suffered.

  • It is crucially important therefore to identify repudiatory breaches and the classification of terms is important for this purpose. Breaches of certain types of term (conditions) are, in the main, repudiatory breaches, and breaches of innominate terms will be repudiatory breaches if the effects of the breach are serious. However, the process of identifying conditions and innominate terms is uncertain, and there are risks for the non-breaching party in deciding to treat a breach as repudiatory, because, if not confirmed as such, this will constitute wrongful repudiation.

  • A breach of an entire obligation will also constitute a repudiatory breach, but entire and severable obligations must be distinguished, since breach of a severable obligation does not entitle the non-breaching party to elect to terminate the whole contract. There are recognized circumstances in which it is possible to avoid the usual consequences of the entire obligation rule.

  • Breach may be anticipatory, i.e. breach occurs before the time for performance because, for example, one party indicates that he will not be performing on the performance date. The non-breaching party can take the other party at his word and elect to accept this breach by anticipatory repudiation as terminating the contract, in which event he need not wait until the date for performance before claiming damages. Alternatively, the non-breaching party can affirm and (p. 298) await the date for performance (i.e. give the breaching party a second chance). If the non-breaching party chooses to affirm, he may, in certain circumstances, continue with his performance and claim the contract price—although this is controversial since it is clear that the performance is not wanted by the party committing the breach. Affirmation also means that both parties are expected to perform their obligations as they fall due, so that there are some risks to the non-breaching party in selecting this route.

8.1 Background: bringing primary obligations to an end

  1. 1. The primary obligations of a contract are those that determine the performance obligations of the parties: see Lord Diplock in Photo Production Ltd v Securicor Transport Ltd [1980] AC 827.

  2. 2. Discharge of a contract is the process whereby the primary obligations under a validly formed contract come to an end. Most commonly, the discharge of a contract will occur on performance of both parties’ primary obligations (see 8.2). However, a contract may also be discharged by agreement of the parties. This chapter will briefly examine both discharge by performance and discharge by agreement, before focusing on discharge for breach. A third form of discharge of a contract, is through the operation of the doctrine of frustration, which discharges both parties from performance of their future obligations (Chapter 12). For discharge by breach, a secondary obligation to pay damages for loss caused (or a secondary obligation to pay the contract price) continues (see 8.4). However, where the contract is discharged by frustration (see 12.7), the obligation to pay damages also ends.

Key point

It is crucial to distinguish the process of discharge of valid contracts from situations in which a contract is void or is rescinded.

A contract may be invalid (void or voidable) because it is affected by:

  • mistake (see Chapters 3 and 13);

  • misrepresentation (see Chapter 14);

  • duress or undue influence (see Chapter 15); or

  • illegality, including restraint of trade (see Chapter 16).

Void: Since a void contract is automatically of no effect from the very beginning, and hence gives rise to no obligation to perform, the party asserting its invalidity does not need to do anything aside from pleading the invalidity as a defence to a claim for breach.

Voidable: Where a contract is voidable (e.g. for misrepresentation), the contract remains valid until it is set aside by the party with the right to do so, a process known as rescission. The process of rescission is very different from the discharge of a contract, because if a voidable contract is rescinded, the contract is then treated as having no effect from the beginning; discharge of the contract, however, does not destroy the contract itself—rather, it merely brings the primary obligations to an end, i.e. only future obligations are discharged.

(p. 299) 8.2 Discharge by performance or agreement

8.2.1 Discharge by performance

A contract is discharged by the performance by both parties of all of the primary contractual obligations, express and implied. An obligation is performed only where the performance meets the standard of performance required. Consequently, a failure to reach the required standard constitutes breach.

8.2.1.1 The standard of performance

Contractual obligations require one of two standards of performance.

8.2.1.1.1 Strict contractual obligations

Generally, the performance obligation is strict, so that the contractual obligation must be completely and precisely performed. There is no defence for failure to meet this strict obligation (other than an enforceable exemption clause, discussed in Chapter 7). The only other exception to this strict contractual liability is for what may be regarded as ‘microscopic’ deviations (the de minimis rule).

For example, if a seller fails to deliver the goods to the buyer on the contractual date set for delivery to occur, he is guilty of a strict contractual breach. It is irrelevant that the seller’s breach was due to his own supplier, although the seller may have a remedy against its supplier under the terms of the separate contract with its supplier.

The obligations as to description, fitness for purpose, satisfactory quality, and correspondence with sample in a B2B (business to business) sale of goods contract—under the Sale of Goods Act (SGA) 1979, ss. 13–15 (see 6.4.2.4)—are strict contractual obligations, i.e. any failure of performance to match the contractual undertaking, however slight, is still breach. In Arcos Ltd v Ronassen [1933] AC 470, timber staves of half an inch in thickness were purchased to make into cement barrels. In fact, most of the timber was one-sixteenth thicker than the contractual description, although it was still perfectly useable for the purpose of making cement barrels. Nevertheless, this amounted to a breach of contract. Since it amounted to a breach of condition (SGA 1979, s. 13: see 8.5.3.1 and 8.5.7), the buyer could reject the timber. This, however, is now subject to the SGA, s. 15A(1) which states that there is no right to reject the goods if the breach is so slight that to do so would be regarded as unreasonable.

For B2C (B2C—‘trader’ and ‘consumer’), these various statutory rights relating to goods in contracts to supply goods and digital content (see Part 1 of the Consumer Rights Act (CRA) 2015, ss. 9–11, 13, and 34–36) are entrenched as ‘rights’ and hence strict obligations. Consumers are given specific rights of enforcement in the event of breach (CRA 2015, ss. 19 and 42).

8.2.1.1.2 Qualified contractual obligations

If an obligation is qualified, there is no requirement to achieve a guaranteed result; instead, the obligation is only to exercise reasonable care and skill.

An example of a qualified contractual obligation in the B2B context is s. 13 of the Supply of Goods and Services Act (SGSA) 1982 (see 6.4.2.4). For consumers, s. 13 of the SGSA 1982 is not revoked by Sch. 1 of the Consumer Rights Act 2015, but s. 49 expressly stipulates that there is a term that the trader must perform the service for the consumer with reasonable care and skill (and remedies are provided for in s. 54 CRA 2015). At common law, this standard of performance (p. 300) is regarded as the appropriate standard for professional people such as doctors and lawyers, whose work makes it impossible to guarantee a result. However, it is possible to undertake a strict standard of performance in relation to certain obligations, e.g. in Platform Funding Ltd v Bank of Scotland plc [2008] EWCA Civ 930, [2009] QB 426, the majority of the Court of Appeal (Sir Anthony Clarke MR dissenting) accepted that the normal duty owed by a surveyor was a duty of reasonable care and skill in carrying out the survey and checking for defects. It was, however, a strict undertaking that the surveyor would survey the correct property!

Another example of an implied qualified obligation is the House of Lords’ decision in Liverpool City Council v Irwin [1977] AC 239, involving an obligation to take reasonable care to keep the common parts of a tower block in reasonable repair. On the facts, the local authority had met this standard of performance (see 6.4.2.2). Any failure to exercise reasonable care and skill (i.e. failing to meet the qualified standard) would amount to breach.

8.2.2 Discharge by agreement

8.2.2.1 General

Discharge by agreement between the parties is possible. Provided discharge occurs with the free consent of both parties and without subsequent change of heart, no particular form of agreement is required. The parties may simply abandon performance. In practice, however, to guard against a change of heart by the other party, it is desirable to adopt some form of legally binding agreement to discharge all future performance obligations.

8.2.2.2 The requirement of consideration

In addition to demonstrating the existence of an agreement to discharge future obligations—The Hannah Blumenthal [1983] 1 AC 854—the parties must also demonstrate that this agreement to discharge is legally enforceable. The best way of so doing will be to establish the existence of a second contract to discharge the first, which will require the existence of consideration (see 4.5.2).

8.2.2.3 Mutual release

Where both parties have performance obligations remaining under the contract, mutual abandonment of those remaining obligations (mutual release) is enough to satisfy the requirement of consideration (i.e. each party agrees to give up its right to receive the other’s performance), so that such discharge is legally enforceable (see 4.5.2).

The position is the same where both parties breach obligations under their contract and then agree to discharge it.

8.2.2.4 What is the position if one party’s obligations have been performed, but the other owes future performance?

Where one party’s obligations have been performed so that only the other party needs to be discharged from further performance, the consideration requirement may not be satisfied by mere abandonment of the contract. The parties may enter into a binding release in a deed, whereby the party whose obligations have been performed agrees to discharge the other from that other’s performance obligations. No consideration is required because this agreement to discharge is in a deed (see 4.1).

(p. 301) 8.2.2.4.1 Release and replacement

Agreements that amount to a release and replacement are possible. This involves the total discharge of the original contract, followed by the substitution of a new contract between the parties, assuming that the necessary consideration is present: Morris v Baron and Co. [1918] AC 1. The Court of Appeal, in Compagnie Noga D’Importation et D’Exportation v Abacha (No. 4) [2003] EWCA Civ 1100, [2003] 2 All ER (Comm) 915 (discussed at 4.5.2), held that there was a mutual release from an earlier agreement, followed by a replacement agreement. The mutual release and the mutual promises in the replacement agreement were construed as the consideration to support that new agreement.

8.2.2.4.2 Binding variation (accord and satisfaction)

Alternatively, there may be a separate agreement supported by new consideration (accord and satisfaction) to discharge (or vary) a particular contractual term. For example, one party (A) may agree to release the other (B) from B’s liability to pay damages for B’s breach as long as B pays A £200 in compensation. However, the ‘satisfaction’ (i.e. the consideration) cannot be a lesser form of what was due under the contract: Pinnel’s Case (1602) 5 Co Rep 117a (see 4.6.2.1). Payment of a smaller sum cannot therefore discharge (or extinguish) the obligation to pay the full amount owed. This remains the position because the principle in Williams v Roffey Bros. & Nicholls (Contractors) Ltd [1991] 1 QB 1 which identifies consideration as constituted by a factual (or practical) benefit to the promisor arising from an alteration promise applies only to alteration promises to pay more and does not apply to alteration promises to accept less than the sum owed: Re Selectmove Ltd [1995] 1 WLR 474 (see 4.6.2.3). Therefore, in order for there to be the necessary ‘satisfaction’ to support the variation in the contract terms, the promisee will need to supply something extra, such as agreeing to pay a smaller sum on an earlier date or at a different place at the creditor’s request.

8.2.2.4.3 Estoppel

If the necessary consideration to support a release or variation of a contract term is lacking, a promise to discharge one or more obligations may have some limited effect because of the operation of the doctrine of promissory estoppel. Promissory estoppel operates only to suspend contractual rights and not to extinguish or terminate them (see 4.8.5). Therefore it might be considered that it has no relevance to the discharge of contracts. Nevertheless, since it may cause individual instalment obligations to be extinguished, e.g. as in Central London Property Trust Ltd v High Trees House Ltd [1947] KB 130 (see 4.8.2.1 and 4.8.5), in this limited sense it can be said that a contract (or at least an obligation under that contract) may be discharged by estoppel.

8.3 Discharge (termination) by occurrence of a condition subsequent

A contract may also be discharged by the occurrence of a condition subsequent stipulated by the parties. A condition subsequent is a stipulation of a state of affairs that will cause existing contractual obligations to terminate: Head v Tattersall (1871) LR 7 Ex 7. A modern example might be a provision in a long-term supply agreement that the contract should terminate when the price (p. 302) of the goods in question reaches a stated figure. Thus the condition may be an event beyond the control of either of the parties (e.g. attainment of a certain point on a cost-of-living index), or within the control of one of the parties (e.g. giving and serving a stipulated period of notice).

Key point

A condition subsequent is a ‘contingent’ condition, and such conditions impose no positive obligation to ensure absolutely that the condition does (or does not) materialize. It is therefore different from a promissory condition, whereby one party undertakes (promises) that a certain result will be achieved. For a promissory condition (discussed at 8.5.2.1), failure to achieve the promised result is a breach. Thus a promissory condition is the type of condition that is used to express a primary obligation of the contract.

Where a contract, on its face, has no provision for termination, then, in the absence of any indication of an intention that the contract be perpetual, the courts will imply a term that the contract is terminable upon reasonable notice: Staffordshire Area Health Authority v South Staffordshire Waterworks Co. [1978] 1 WLR 1387.

8.4 Breach and discharge by breach (repudiatory breach)

8.4.1 Identifying breach and remedies available for breach

A breach of contract will occur where, without lawful excuse (e.g. frustration: see Chapter 12), a party either fails or refuses to perform a performance obligation undertaken in accordance with the terms of the contract. Alternatively, a party may perform its contractual obligations, but may do so defectively, by failing to meet the required standard of performance (see 8.2.1.1).

Generally, the non-breaching party is entitled to be compensated for the loss it suffers that was caused by this breach. This is because the failure to perform a primary obligation under the contract gives rise to a secondary obligation to pay damages or to pay the contract price: see Lord Diplock in Photo Production Ltd v Securicor Transport Ltd [1980] AC 827, at 849B. However, that right to damages may be effectively excluded or limited by an exemption clause in the contract (see Chapter 7). This apart, the secondary obligation to pay damages or the contract price will arise on proof of breach.

Damages aside, the consequences of breach by one party for the other party’s performance obligations depend largely upon the nature of the obligation breached (see 8.5.2.1) and upon whether one party’s performance obligation is ‘entire’, so that it must be completely and precisely performed before the other’s obligation arises (see 8.6).

8.4.2 Repudiatory breach and the election to terminate or affirm

Unless the breach of contract constitutes a repudiatory breach, the contract remains in force and both parties must continue to perform their obligations under it. However, a repudiatory breach allows the non-breaching party to treat the contract as repudiated (or terminated for (p. 303) the future). It is sometimes said that such a breach entitles the non-breaching party to ‘rescind’ the contract, and this choice of word appears to have been approved by some members of the House of Lords, e.g. Lord Roskill in Photo Production Ltd v Securicor Transport Ltd [1980] AC 827 and Lord Diplock in Gill & Duffus SA v Berger & Co. Inc. [1984] AC 382. Nevertheless, this meaning of ‘rescind’ is very different from the meaning of this expression that is applied in relation to misrepresentation (see 14.5.1), under which a contract is set aside and treated as if it had never existed from the very beginning. The use of ‘rescission’ in relation to breach was attacked several times by Lord Wilberforce, in both Johnson v Agnew [1980] AC 367 and Photo Production. To avoid confusion—exemplified in Howard-Jones v Tate [2011] EWCA Civ 1330, [2012] 1 P & CR 11, in which the wrong measure of damages was applied in the belief that termination for repudiatory breach resulted in rescission ab initio—it is better to restrict the notion of rescission to misrepresentation and, for breach of contract, to refer to termination for repudiatory breach.

Should a repudiatory breach occur, the non-breaching party may treat the contract as repudiated, but is not obliged to do so. Thus, in the event of a repudiatory breach of contract, the non-breaching party has the option (or ‘election’) to treat both parties’ future obligations to perform as terminated or to choose instead to affirm the contract: see Decro-Wall International SA v Practitioners in Marketing Ltd [1971] 1 WLR 361.

Summary

  • Termination: If the non-breaching party elects to accept the breach as terminating the contract, only the parties’ future obligations are discharged. The contract itself survives and its terms may be relevant for the purposes of assessing remedies, e.g. any exemption clauses and/or agreed damages clause will remain, and will be relevant to the assessment of damages.

  • Affirmation: The alternative option to termination is for the non-breaching party to affirm the contract, i.e. to choose not to act upon the breach of the other party. This obliges both parties to continue to perform all remaining obligations due under the contract.

  • Damages: In addition, irrespective of whether the non-breaching party decides to terminate or affirm, the breach will cause the secondary obligation to pay damages as compensation to arise.

If, after a repudiatory breach, the non-breaching party affirms the contract, effectively the ‘slate is wiped clean’ as far as future performance is concerned. Consequently, future defective or non-performance by the party electing to affirm the contract will in turn become a breach: e.g. Motor Oil Hellas (Corinth) Refineries SA v Shipping Corporation of India, The Kanchenjunga [1990] 1 Lloyd’s Rep 391 (HL). It may even be a repudiatory breach entitling the other party, who was originally at fault, to treat the contract as at an end.

8.4.2.1 Electing to treat the repudiatory breach as terminating the contract

Until such time as the non-breaching party elects to treat the contract as repudiated, the contract stands. In Howard v Pickford Tool Co. Ltd [1951] 1 KB 417, at p. 421, Asquith LJ described an unaccepted repudiation as ‘a thing writ in water’. A majority in the Supreme Court in Geys v Société Générale [2012] UKSC 63, [2013] 1 AC 523, confirmed that the elective theory (and not the automatic theory, as had been argued) also applies to employment contracts, so that an employer’s repudiation of an employment contract did not terminate it immediately, but (p. 304) required the employee’s acceptance. The fact that repudiation does not automatically bring the contract to an end (the elective theory) has however been doubted by the Court of Appeal in MSC Mediterranean Shipping Co. SA v Cottonex Anstalt [2016] EWCA Civ 789, [2016] 2 Lloyd’s Rep 494, [2017] 1 All ER (Comm) 483. Indeed, Geys was distinguished by Tomlinson LJ (at [61]) who emphasized the lack of choice on the victim in MSC since the contract could no longer be performed. His lordship stated [at 61], ‘Geys is broadly speaking … a case where the innocent party has a choice between, on the one hand, treating the remaining obligations as discharged or, on the other hand, affirming the contract to wait to see whether the guilty party performs its obligations when the time comes. The present case is different. I do not believe that Lord Wilson in Geys had in mind a case where a contract has become repudiated because it is no longer capable of performance as in the classic case of frustrating delay.’ After emphasizing that in MSC the facts highlighted the classic case of frustrating delay, his lordship concluded (at [61]) that ‘as from 2 February 2012, the contract in its agreed form was not capable of performance’.

A difficult question of fact may be to ascertain whether the non-breaching party has elected to accept the repudiation and treat the contract as at an end. A clear and unequivocal communication to that effect will resolve the matter, and an ‘unequivocal overt act which is inconsistent with the subsistence of the contract’ should be equally effective: State Trading Corporation of India v M. Golodetz Ltd [1989] 2 Lloyd’s Rep 277. In Force India Formula One Team Ltd v 1 Malaysia Racing Team Sdn Bhd [2013] EWCA Civ 780, [2013] RPC 36, F had told X that it was unable to pay the instalments due to X under a contract to provide wind tunnel aerodynamic testing for F’s Formula One (F1) racing cars and would discuss the matter after a two-week shutdown. At the start of the shutdown, X disabled F’s connections to its servers. The Court of Appeal held that this action was not consistent with an unequivocal communication that the contract was at an end; neither was a demand for future instalments of periodical payments due under a contract. However, there was a sufficient unequivocal communication when F was told that X had stopped working for F and would be working for another F1 team.

Question

What if the non-breaching party simply does not perform its own contractual obligations? Is this sufficiently unequivocal to constitute acceptance of the repudiatory breach as terminating the contract, particularly bearing in mind that, generally, an ‘acceptance’ must be unequivocal and that silence will not suffice (see 2.4.5.1)?

(p. 305)

In Vitol SA v Norelf Ltd, The Santa Clara [1996] AC 800, the buyers had sent a telex that amounted to a repudiatory breach and the question was whether that repudiation had been accepted by the sellers, who had then not performed any of their own obligations, including tendering the bill of lading (which would be necessary to give rise to the obligation for the buyers to pay the price). In the House of Lords, Lord Steyn, whose speech was unanimously supported by the other members of the House, considered that the question of whether the election to treat the contract as repudiated had been communicated was a question of fact, depending on ‘the particular contractual relationship and the particular circumstances of the case’. However, he was prepared to accept, at p. 811F, that ‘a failure to perform may sometimes signify to a repudiating party an election by the aggrieved party to treat the contract as at an end’. Lord Steyn then gave two examples of situations in which non-performance could be interpreted as an election to treat the contract as at an end.

  1. 1. In his first example, an employer informs a contractor that his services are no longer required and that the contractor need not return the next day. If the contractor never returns, then, in the absence of any other explanation, in Lord Steyn’s words, at p. 811F, this would ‘convey a decision to treat the contract as at an end’.

  2. 2. The second example concerns an overseas sale, with shipment of the goods on a specified vessel sailing on a specified date and where the seller is under a contractual duty to obtain the necessary export licence. If the buyer repudiates the contract before any loading starts and the buyer knows that the seller has not applied for the export licence, ‘it may well be that an ordinary businessman … would conclude that the seller was treating the contract as at an end’: per Lord Steyn at p. 811G.

It is clear that general inactivity or acquiescence will not suffice as ‘acceptance’ of the repudiatory breach. Examples where an acceptance of the repudiatory breach has undoubtedly taken place can be gleaned from the circumstances of a case, especially where a response or an action is required. For instance, in The Santa Clara, ‘if the contract was still on foot, it was incumbent on the innocent party to perform a positive obligation under the contract’, e.g. tendering the bill of lading. Where, however, no response or action is required it would not be possible to spell out the necessary acceptance (Dubai Islamic Bank PJSC v PSI Energy Holding Co. BSC [2013] EWHC 3781 (Comm), [164]–[166]).

A more recent illustration of a situation when the non-breaching party’s non-performance of its obligations will not amount to an acceptance of a repudiatory breach is Vitol SA v Beta Renowable Group SA [2017] EWHC 1734 (Comm). On the facts, a failure to nominate a vessel in accordance with a time period specified in a contract did not amount to a clear and unequivocal act amounting to an acceptance of the other party’s repudiatory breach, with the court emphasizing the importance of context (including the ‘background of previous consensual variation to the parties’ contractual arrangements’ and ‘ongoing negotiations between the parties’ at [45]).

8.4.2.2 Electing to affirm the contract

In order for an affirmation to be valid, the non-breaching party must know of the facts giving rise to its right to accept the repudiatory breach as terminating the contract, and of its right to choose between affirming the contract and treating the contract as discharged.

8.4.2.2.1 Must be unequivocal

The election to affirm must also be unequivocal and must make it clear that the non-breaching party is committing to continuing with performance of the contract: White Rosebay Shipping SA v Hong Kong Chain Glory Shipping Ltd, The Fortune Plum [2013] EWHC 1355 (Comm), [2013] 2 CLC 884, [2013] 2 All ER (Comm) 449. In Yukong Line Ltd of Korea v Rendsburg Investments Corporation of Liberia [1996] 2 Lloyd’s Rep 604, the response to a repudiatory breach indicated that it was ‘totally unacceptable’ and ‘strongly requested’ the party in breach ‘to honour their contractual obligations’ and to confirm that this would occur. This response was held to be insufficient to convey an intention to continue with the contract. Moore-Bick J stated, at p. 608:

Considerations of this kind are perhaps most likely to arise when the injured party’s initial response to the renunciation of the contract has been to call on the other to change his mind, accept his obligations and perform the contract. That is often the most natural response and one which, in my view, the court should do nothing to discourage. It would be highly unsatisfactory if, by responding in that way, the injured party was to put himself at risk of being held to have irrevocably affirmed the contract.

(p. 306) The choice between termination and affirmation of the contract is sometimes dictated purely by commercial reasons. If the parties have been involved in commercial contractual relations for years, and it is in the interest of the non-breaching party to keep the contract alive in spite of the breach, it will affirm the contract. If, however, the breach is such that, commercially, the relationship cannot be preserved (because the breach creates a lack of trust), the non-breaching party may well choose termination.

8.4.2.3 In what circumstances will the right to accept the repudiatory breach as terminating the contract be lost?

8.4.2.3.1 Estoppel

There is a danger that a party who has not yet affirmed, but is still deliberating what to do, may lose the right to treat the contract as terminated because of the operation of estoppel: see Clough v London and North Western Railway Co. (1871) LR 7 Ex 26. In order for such an estoppel to operate, the position of the party in breach must have been prejudiced in the meantime.

In Peyman v Lanjani [1985] Ch 457, at pp. 495–6, May LJ adopted the following passage from the judgment of Sholl J in the Australian decision in Coastal Estates Pty Ltd v Melevende [1965] VR 433, at p. 443:

If the defrauded party does not know that he has a legal right to rescind, he is not bound by acts which on the face of them are referable only to an intention to affirm the contract, unless those acts are ‘adverse to’ the opposite party, i.e. unless they involve something to the other party’s prejudice or detriment … This is a form of estoppel, for the other party has in such a case acted upon a representation, made by the defrauded party’s conduct, that the latter is going on with the contract.

In Peyman v Lanjani, the defendant entered into an agreement for the assignment to him of a lease, expressed to be non-assignable without the true consent of the landlord. The landlord’s consent was obtained by deception. The claimant then agreed to purchase the lease from the defendant and, again, an attempt was made to obtain the landlord’s consent by deception, although the claimant was not a party to this. On discovering the deception, the claimant consulted the solicitor acting for both parties, who urged him to proceed with the purchase. The claimant therefore paid the first £10,000 of the purchase price. A month later, the claimant consulted new solicitors, who advised him of his right to terminate the agreement on account of the defect in the defendant’s title caused by the original deception.

The Court of Appeal held that the claimant had not lost the right to treat the contract as repudiated. The payment of £10,000 was not an irrevocable election because it had been made before the claimant was aware of the full facts, including the fact that he had a right to treat the agreement as at an end; neither did it give rise to an estoppel preventing the claimant from treating the contract as repudiated, most particularly because there was no detriment to the defendant.

8.4.2.3.2 Acceptance of goods in the B2B context

In relation to a commercial sale of goods, the option to terminate the contract for repudiatory breach will be lost once the buyer has accepted the goods (SGA 1979, s. 11(4)). Section 35(1) and (2) of the 1979 Act define this acceptance to include express indication of acceptance or, once the goods have been delivered, any act by the buyer that is inconsistent with the seller’s ownership after the buyer has had a reasonable opportunity to inspect the goods to determine their conformity with the contract, or to compare the bulk with the sample. A buyer is also deemed to have accepted the goods after the lapse of a reasonable time during which he has retained (p. 307) the goods without indicating an intention to reject them (s. 35(4)). The availability of a reasonable opportunity to inspect the goods is a material factor in determining whether the ‘reasonable’ time has passed so as to constitute a lapse of time. However, in accordance with the SGA 1979, the buyer is not deemed to have accepted the goods by asking for or agreeing to repair (s. 35(6)(a)), or delivering the goods to a third party under a sub-sale (s. 35(6)(b)), or by accepting part of a delivery of goods (most probably a part unaffected by the breach) while claiming to be entitled to reject the rest (s. 35A(1)). In J. H. Ritchie Ltd v Lloyd Ltd [2007] UKHL 9, [2007] Bus LR 944, [2007] 1 WLR 630, the House of Lords considered that if the commercial buyer agrees to repair—so that, under s. 35(6), there is no acceptance—there is a separate contract that suspends the right to reject. This contract places a duty on the repairer to disclose the nature of the defect so that the buyer can make an informed decision as to whether to reject later.

Consumer protection: the right to reject and the availability of other remedies for consumer buyers

By comparison, in the consumer context (B2C—‘trader’ and ‘consumer’), the Consumer Rights Act 2015 collects the statutory implied terms in relation to goods and services in the sales and supply law into a separate regime of consumer terms as ‘rights’, and extends this protection to ‘digital content’ contracts, e.g. that goods will be of satisfactory quality, fit for the particular purpose, etc. These implied terms are presented as ‘rights’ that cannot be excluded or restricted, and consumers are given various remedies that they can enforce (ss. 19, 42, and 54). The existing law (i.e. the SGA 1979 and the SGSA 1982) will remain applicable to B2B contracts and (for some provisions of the SGA 1979) also to B2C contracts.

In relation to the right to enforce terms concerning goods, the following consumer remedies apply under the CRA 2015, s. 19:

  1. 1. There is an immediate short-term right to termination within 30 days (i.e. rejection of the goods or part of the goods) for breaches of terms imposing obligations relating to the goods (e.g. satisfactory quality, fitness for purpose, and correspondence with description, sample, or model seen or examined) and, subject to some qualifications, to receive a refund (ss. 20–22).

  2. 2. The consumer may require the trader to repair or replace the goods unless this is impossible or disproportionate (s. 23).

  3. 3. There will be a right to a price reduction or a final right to reject where repair or replacement is impossible or disproportionate, or the repair or replacement has failed or has not taken place within a reasonable time and without significant inconvenience to the consumer (s. 24). There may be a deduction from any refund for use of the goods by the consumer.

The consumer rights legislation therefore provides for an initial right of rejection to be available to consumer buyers for ‘goods breaches’ for a period of up to 30 days and that any request for repair and or replacement will act to stop time running. If the repair or replacement does not occur or does not result in the buyer receiving goods conforming to the contract, then the ‘waiting period’ comes to an end and the final right to reject is available. Therefore, for breaches of the obligations relating to the goods (as opposed to incorrect installation of goods by the trader, s. 15), consumers will not be compelled to seek a repair or replacement in the first instance, but will retain the ability to reject. This is important because the UK reacted strongly to the proposal in the CRD to give primacy to the remedy of repair or replacement.

(p. 308) 8.4.2.3.3 Lapse of time in general

Except as described earlier for sale of goods, the right to treat the contract as repudiated is not lost by mere lapse of time. Nevertheless, in limited circumstances, lapse of time might result in prejudice to the party in breach or might be regarded as evidence of an intention to continue with the contract, in which case the right to treat the contract as repudiated would be lost: per Fenton Atkinson LJ in Allen v Robles [1969] 1 WLR 1193. In Tele2 International Card Company SA v Post Office Ltd [2009] EWCA Civ 9, affirmation was held to have occurred by means of a delay of over a year in reacting to a repudiatory breach. As no right to terminate arose, when purporting to so terminate, a repudiatory breach had therefore occurred. By comparison, in Force India Formula One Team Ltd v Etihad Airways PJSC [2010] EWCA Civ 1051, [2011] ETMR 10, the Court of Appeal held that Force India had committed repeated breaches of its sponsorship agreement, which had ultimately amounted to a repudiation of the contract since Force India was considered to have adopted an overarching strategy that had ridden roughshod over the sponsors’ rights: per Rix LJ at [95]. Despite delay, the sponsors had not acquiesced in this repudiation and had not affirmed; rather, they had successfully terminated the agreement.

The courts appear to have permitted some latitude on delay in terminating or affirming in times of economic uncertainty. In Red River UK Ltd v Sheikh [2010] EWHC 961 (Ch), in relation to a deliberate sabotage of a property-refinancing transaction, Henderson J held that although it had been over a year before the repudiation had been accepted as terminating the contract, this did not amount to affirmation, but merely ‘keeping … options open’. In Stocznia Gdanska SA v Latvian Shipping Co. (No. 3) [2002] EWCA Civ 889, [2002] 2 All ER (Comm) 768, [2002] 2 Lloyd’s Rep 436 (discussed at 8.7.4.1)—also known as Stocznia Gdanska SA v Latvian Shipping Co. (Repudiation)—Rix LJ referred to this period as ‘the middle ground’.

Later, in Force India Formula One Team v Etihad Airways PJSC, at [122], Rix LJ noted:

In the present case … we are not faced with either an urgent situation … nor are we faced with some minor and remediable breach where the injured party only has to speak up for the matter to be remedied; or where firm protest is immediately necessary to prevent the party in breach from being misled. The present case concerns a complex and medium term relationship, which a takeover has destabilised, and where it necessarily and legitimately takes time for the consequences to become clearer and for the innocent party to consider his position. That is the middle ground between acceptance of a repudiation and affirmation of a contract which I discussed in the … Stocznia case … In my judgment, the sponsors were always in fact considering their position, and Force India knew or must have known that that was so … In my judgment there was no affirmation, waiver or acquiescence which prevented the sponsors from exercising their common law right to accept Force India’s repudiation of the contract.

8.5 What constitutes a repudiatory breach of contract?

8.5.1 Renunciation and incapacitation

The party not in breach must be able to identify whether a repudiation has occurred. The repudiation must therefore be—within evidential limits—unequivocal. Clearly, an express statement that no performance will be undertaken will suffice. Where the repudiation is (p. 309) deduced from conduct, it is not enough simply that performance is unlikely to match the contractual undertakings. It must be apparent that, on the balance of probabilities, the party in question either will not (renunciation) or cannot through its own act or default (incapacitation) perform its obligations: Alfred Toepfer International GmbH v Itex Itagrani Export SA [1993] 1 Lloyd’s Rep 360. As Lord Wilberforce stated, in Woodar Investment Development Ltd v Wimpey Construction (UK) Ltd [1980] 1 WLR 277, at p. 280: ‘[I]‌‌n considering whether there has been a repudiation by one party, it is necessary to look at his conduct as a whole. Does this indicate an intention to abandon and to refuse performance of the contract?’

The majority of the House of Lords in Woodar v Wimpey (for facts, see 11.7.3.1) held that there was no renunciation (i.e. repudiation) of the contract on the facts because, instead of the necessary communicated intention to abandon the contract, Wimpey was relying on a contractual term as justifying the right to terminate. This term gave a right to terminate where compulsory purchase had been commenced and that was precisely what had occurred on the facts.

In Eminence Property Developments Ltd v Heaney [2010] EWCA Civ 1168, [2011] 2 All ER (Comm) 223, the Court of Appeal held, following Woodar, that the test for repudiatory conduct was whether, looking at all of the circumstances objectively (from the perspective of a reasonable person in the non-breaching party’s position), the contract-breaker had clearly shown ‘an intention to abandon and altogether refuse to perform’. It therefore turned on all of the circumstances of the individual case, including motive (although usually a subjective matter), where that motive threw light on the way in which actions would be viewed by that reasonable person. Nevertheless, as Lord Wilberforce had stated in Woodar, the motive for actions, even if relevant, could not of itself be decisive.

8.5.2 Type of term broken determines whether the breach is repudiatory

Outside instances of renunciation and incapacitation, breaches of certain types of term constitute repudiatory breaches, giving rise to the option for the non-breaching party to accept the breach as terminating the contract or to affirm. It is therefore necessary to determine the classification of terms for this purpose, to consider the type of term broken and therefore whether the particular breach is repudiatory.

8.5.2.1 Classification of terms

For this purpose, there are three basic types of promissory term:

  • conditions;

  • warranties; and

  • innominate (or intermediate) terms.

8.5.2.1.1 Different meanings for the term ‘condition’

In ordinary language, a ‘condition’ is a stipulation of something that must be fulfilled before further action will take place or results will be achieved. The law however attributes more specific meanings to the word.

(p. 310) 1. Contingent conditions: distinguished from promissory conditions

Conditions precedent and subsequent, which are sometimes collectively called ‘contingent’ conditions, impose no positive obligation to ensure absolutely that the condition does (or does not) materialize.

  • A condition precedent is a stipulation of a state of affairs that must be achieved before any contractual liability, or possibly any further contractual liability, will be incurred. In some circumstances, the parties agree that a contract shall come into existence between them upon the occurrence of some event that is uncertain, but remain free to withdraw from that agreement until the event occurs: Pym v Campbell (1856) 6 E & B 370. More usually, however, the main contractual obligations do not come into force until the condition is satisfied, but the parties are contractually bound not to withdraw from the conditional agreement: Smith v Butler [1900] 1 QB 694. In these circumstances, the parties may be under an obligation not to impede the occurrence of the condition: Mackay v Dick (1881) 6 App Cas 251. Sometimes, there may even be an obligation to use reasonable efforts to cause the event upon which the contract is conditioned to occur, and failure to use such efforts will constitute a breach: Hargreaves Transport Ltd v Lynch [1969] 1 WLR 215.

  • A condition subsequent is a stipulation of a state of affairs that will cause existing contractual obligations to terminate (discussed at 8.3), e.g. that the contract should terminate when the price of the goods in question reaches a stated figure.

These contingent conditions must therefore be distinguished from promissory conditions, under which one party undertakes that a certain result will be achieved and guarantees that undertaking by its promise. Failure to achieve the promised result is a breach. Thus a promissory condition is the type of condition that is used to express a primary obligation of the contract.

Where the word ‘condition’ is used without qualification, it is almost certainly being used as a promissory condition and it is in that sense that it is being referred to here when discussing breach of contract. The confusion of terminology can arise because these promissory obligations are themselves classified as conditions, warranties, or innominate terms, and the type of term broken determines the remedy available for breach.

2. Promissory conditions (terms): distinguishing conditions, warranties, and innominate terms

  • Conditions are important terms that are said ‘to go to the root of the contract’; if they are broken, the breach is generally regarded as repudiatory, so that the non-breaching party has the option of terminating the contract for the future or affirming it, in addition to the remedy of damages. Conditions can be directly contrasted with warranties.

  • Warranties are less important terms that do not ‘go to the root of the contract’; the breach of which is adequately compensated with a remedy of damages. Accordingly, breach of warranty is not a repudiatory breach and there can be no option for the non-breaching party to terminate or to affirm. The only remedy for the non-breaching party will be damages.

  • Innominate (or intermediate) terms defy rigid classification, but appear to lie somewhere between a condition and warranty, and might best be described as the type of term that may be broken in a number of different ways, not all of which would be serious. Therefore (p. 311) whether a breach of an innominate term constitutes a repudiatory breach, giving rise to the option to terminate or affirm, will depend upon the effects of the breach and whether these effects are serious. If the effects are serious, the breach is repudiatory (with an option to terminate or affirm); if the effects are not serious, the non-breaching party will be limited to a remedy of damages.

A further classification of obligations relevant in determining if a repudiatory breach has occurred is the distinction between breach of an entire obligation and breach of a severable obligation (discussed at 8.6).

8.5.3 Is the term a condition?

Breach of a condition (used in the specific sense) entitles the non-breaching party to treat both parties’ future obligations under the contract as discharged, so that the contract is brought to an end for the future (see the discussion of discharge for breach at 8.4). For this reason, not all of the terms of the contract are classed as conditions. The parties rarely intend that breach of relatively unimportant terms should cause the whole agreement to collapse. Equally, the courts will not lightly classify terms as conditions because of the fact that the consequence of breach of such terms is fixed and does not take account of the actual effects of the breach in question.

8.5.3.1 The statutory classification of conditions

In B2B contracts the implied terms as to description, fitness for purpose, satisfactory quality, and correspondence with sample in the sales and supply legislation are classified as conditions in the SGA 1979 (e.g. ss. 13(1A), 14(6), and 15(3), as amended). It should follow that, in the event of a breach, the buyer should be entitled to reject the goods (terminate the contract for repudiatory breach) or to affirm (as by acceptance of the goods: SGA 1979, s. 35). However, SGA 1979, s. 15A(1) in the B2B context provides that, where there is a breach of ss. 13, 14, or 15, such a breach may instead be treated as a breach of warranty (so that the only remedy will be damages) if the breach is so slight that it would be unreasonable to reject the goods (i.e. unreasonable to exercise the normal remedy of terminating the contract). This legislative provision, which may be ousted by the terms of the contract (s. 15A(2)), introduces remedial flexibility to allow the courts to take account of the nature of the breach that occurs in the B2B context.

8.5.3.2 Non-statutory classification as a condition

Outside this statutory classification in the B2B context (see e.g. SGA 1979, ss. 14(6) and 15(A), discussed at 6.4.2.4 and 8.5.3.1), the starting point for identifying conditions, in both commercial and consumer contexts, is the intention of the parties. Generally, description of a term as a condition, or as entitling a party to terminate the contract (or to reject the goods) upon breach, will result in the court following the parties’ own classification. In Lombard North Central plc v Butterworth [1987] 1 QB 527, at pp. 535–7, the point was considered very carefully by Mustill LJ, who stated:

A stipulation that time is of the essence, in relation to a particular contractual term, denotes that timely performance is a condition of the contract. The consequence is that delay in performance is treated as going to the root of the contract, without regard to the magnitude of the breach.

(p. 312) Nevertheless, the court may be unwilling to accept the parties’ classification if the court considers that a breach of this term could not have been intended by the parties to give rise to the option to terminate the contract.

In L. Schuler AG v Wickman Machine Tools Sales Ltd [1974] AC 235, the House of Lords refused to treat as a condition a term that was expressly stated to be ‘a condition of this agreement’. The clause went on to provide for weekly visits over a period of four-and-a-half years to six named firms (some 1,400 visits in total). The House of Lords did not believe that the parties can have intended that a single failure to make one of the visits should entitle the other party to bring this long-term distribution contract to an end.

Lord Reid said, at p. 251:

We must remember that we are seeking to discover intention as disclosed by the contract as a whole. Use of the word ‘condition’ is an indication—even a strong indication—of such an intention but it is by no means conclusive.

The fact that a particular construction leads to a very unreasonable result must be a relevant consideration. The more unreasonable the result the more unlikely it is that the parties can have intended it …

Schuler v Wickman may therefore constitute an early example of contractual construction to give effect to the meaning that the parties must reasonably have intended on an objective assessment: Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 (see 6.5.2). Nevertheless, the recent decisions of the Supreme Court in Arnold v Britton [2015] UKSC 36, [2015] 2 WLR 1593 (see 6.5.3), and Wood v Capita Insurance Services Ltd [2017] UKSC 24, [2017] 2 WLR 1095, [2017] AC 765 (see 6.5.4) suggest that departures from the natural meaning of the words used must not be pushed too far. The words used must be judged at the date of the contract and it is not possible for the courts to rewrite a term on the basis that events the parties thought they were providing for had not developed as anticipated.

There is further evidence of this approach to classification in the Court of Appeal in Rice (t/a The Garden Guardian) v Great Yarmouth Borough Council [2003] TCLR 1, (2001) 3 LGLR 4, The Times, 26 July 2000, although the problem in this case was that the term in question was not expressly stated to be a condition; rather, the clause referred to a right to terminate.

In Rice (t/a The Garden Guardian) v Great Yarmouth Borough Council, a clause of the four-year contract to provide leisure management and grounds maintenance services stated that ‘if the contractor committed a breach of any of its obligations … the council may … terminate the contractor’s employment … by notice in writing’. The Court of Appeal held that a literal interpretation of this would entitle the council to terminate ‘for any breach of any term’ and that this ‘flies in the face of commercial common sense’. The breach in question would have to constitute a repudiatory breach to justify the ability to terminate.

In light of this decision, it would seem sensible to avoid such open termination provisions and to spell out the status of individual potential breaches. In Dominion Corporate Trustees Ltd v Debenhams Properties Ltd [2010] EWHC 1193 (Ch), [2010] 23 EG 106 (CS), [2010] NPC 63, Kitchin J, relying on Rice, interpreted a similar ‘any breach’ clause as requiring a repudiatory breach. The judge considered, at [32], that ‘the Agreement contains a multitude of obligations, many of which are of minor importance and which can be broken in many different ways’. He therefore concluded that the construction for which Debenhams contended, i.e. any breach gave rise to a right to terminate, ‘flouts business commonsense’ and could not have been what the parties intended on an objective evaluation.

(p. 313) 8.5.3.2.1 Termination provisions and the relationship with repudiatory breach

Such express termination provisions are common in contracts and the Court of Appeal, in Stocznia Gdynia SA v Gearbulk Holdings Ltd [2009] EWCA Civ 75, [2010] QB 27, confirmed that the exercise of an express termination provision in a contract does not prevent the non-breaching party from treating the contract as repudiated at common law (and so recovering contractual damages based on lost expectation), rather than recovering on the basis provided for in the termination provision (in this case, repayment of instalment sums received in anticipation of performance, together with interest). Equally, exercising that termination provision would not constitute accepting a repudiatory breach, because there was no election involved. A termination provision might operate when there was no repudiatory breach, but it would be envisaged that there would come a point at which a breach might be repudiatory, i.e. when the breach went to the root of the contract. Since the delay in delivery on these facts was repudiatory (i.e. it went to the root of the contract), the purchaser could therefore recover the instalment payments (restitution based on total failure of consideration: see 10.5.1) and damages for repudiation (lost bargain).

Where both rights exist and ‘the consequences of contractual termination and termination are identical’, either right can be exercised. However, ‘where the consequences of exercising the two rights are different, but not inconsistent, it is necessary to make it clear which right is being exercised or that both rights are being exercised; otherwise there will not be the certainty required for an effective termination’ (per Leggatt J in Newland Shipping and Forwarding Ltd v Toba Trading FZC [2014] EWHC 661 (Comm), at [54]).

8.5.3.3 Assessment of the importance of the term to the contract as a whole

In Hongkong Fir Shipping Co. Ltd v Kawasaki Kisen Kaisha Ltd [1962] 2 QB 26, at p. 69, Diplock LJ suggested that a condition exists for a term only ‘where every breach … must give rise to an event which will deprive the party not in default of substantially the whole of the benefit which it was intended that he should obtain from the contract’. That definition of a condition was rejected by Megaw LJ in the Court of Appeal in Bunge Corporation v Tradax Export SA [1980] 1 Lloyd’s Rep 294 and his view was affirmed by the House of Lords: [1981] 1 WLR 711. It is too strict a test to say that every breach must deprive the other party of substantially the whole benefit for a term to qualify as a condition. Nevertheless, the formulation does give a good indication of the nature of terms that are conditions. They are those terms that contain the main obligations and which are central to the existence of the contract. Consequently, the determination of whether a clause is a condition may require the court to make a ‘value judgment about the commercial significance of the term in question’: per Kerr LJ in State Trading Corporation of India Ltd v Golodetz Ltd [1989] 2 Lloyd’s Rep 277, at p. 283; approved by Lord Ackner in Compagnie Commerciale Sucres et Denrées v C. Czarnikow Ltd, The Naxos [1990] 1 WLR 1337, at pp. 1347–8.

In Bunge Corporation v Tradax Export SA in the House of Lords, Lord Wilberforce expressly approved the dictum of Roskill LJ in Cehave NV v Bremer Handelsgesellschaft Gmbh, The Hansa Nord [1976] QB 44, that the courts should not be too ready to interpret contractual clauses as conditions. The usual alternative will be to classify the term as innominate, which may be more appropriate if the term is such that breach involves either serious or trivial consequences; for those, the courts are unwilling to treat the breach as repudiatory where the practical consequences of breach are trivial.

In Barber v NWS Bank plc [1996] 1 All ER 906, Sir Roger Parker in the Court of Appeal clearly had this distinction in mind when determining whether a term was a condition of the contract. (p. 314) The term in question related to an assertion by a finance company that it would be the owner of a particular car at the time of its eventual sale to a buyer. In concluding that it was a condition, two tests were used. First, the term was ‘fundamental to the transaction’; and secondly, at p. 911:

This term is not one which admits of different breaches, some of which are trivial, for which damages are an adequate remedy, and others of which are sufficiently serious to warrant rescission. There is here one breach only.

Expressions such as ‘fundamental to the transaction’ are problematic, because they mean different things to different judges. Clearly in this case, however, the two tests led to the same conclusion.

8.5.3.4 Time stipulations in commercial (mercantile) contracts

Certain terms that are in common use in commercial contracts have acquired, by custom and the operation of the doctrine of precedent, definitive classification as conditions. The main explanation for this is the requirement of commercial certainty: business people need to know the effect of a contractual term and, more particularly, they need to know what the effect of breach will be. Therefore, when words have been interpreted in a certain way by the courts, it is generally desirable that that interpretation be consistently maintained—a principle of commercial certainty reaffirmed by Lord Steyn in the House of Lords’ decision in Jindal Iron & Steel Co. Ltd v Islamic Solidarity Shipping Co. Jordan Inc. [2004] UKHL 49, [2005] 1 WLR 1363. The certainty requirement is particularly true of time conditions: see United Scientific Holdings Ltd v Burnley Borough Council [1978] AC 904. A striking example of the strictness of the approach to time clauses is provided by the decision in Union Eagle Ltd v Golden Achievement Ltd [1997] AC 514. A delay of ten minutes caused the contract to be lost and the only real issue before the Privy Council was whether relief could be granted (see further 9.6.4.3).

Thus, in commercial and particularly mercantile (or shipping) contracts, the normal rule is that stipulations as to time of performance are crucial (‘time is of the essence’), so that any breach entitles the other party to treat the contract as repudiated without assessing whether the term in question actually ‘goes to the root of the contract’. As explained by Megaw LJ in the Court of Appeal in Bunge Corporation v Tradax Export SA [1980] 1 Lloyd’s Rep 294, at p. 306:

I think it can fairly be said that in mercantile contracts stipulations as to time not only may be, but usually are, to be treated as being ‘of the essence of the contract’, even though this is not expressly stated in the words of the contract. It would follow that in a mercantile contract it cannot be predicated that, for time to be of the essence, any and every breach of the term as to time must necessarily cause the innocent party to be deprived of substantially the whole benefit which it was intended that he should have.

This reasoning was applied by the courts in a series of cases.

In The Mihalis Angelos [1971] 1 QB 164, a charterparty stated that the vessel was ‘expected ready to load’ on 1 July 1965 at Haiphong. The charterers purported to cancel the charter because their cargo was unavailable after the American bombing of the railway line to Haiphong. Such cancellation was not allowed under the terms of the contract. However, unknown to the charterers when they cancelled, at the time of entering the contract the owners had no reason to believe that the ship would be ready to load on the date stated. The phrase ‘expected ready to load’ was held to be a condition, breach of which entitled the charterers to treat the contract as repudiated irrespective of the consequences of the breach.

(p. 315) This approach to time clauses was confirmed by the House of Lords in Compagnie Commerciale Sucres et Denrées v C. Czarnikow Ltd, The Naxos [1990] 1 WLR 1337, in which Lord Ackner cited, with approval, Lord Wilberforce’s statement in Bunge Corporation v Tradax Export SA [1981] 1 WLR 711 that time clauses in mercantile contracts should ‘usually’ be treated as conditions.

Despite the strength of the authorities indicating that time stipulations in commercial or mercantile contracts will be treated as conditions, such a position cannot be regarded as conclusive following the House of Lords’ decision in Torvald Klaveness A/S v Arni Maritime Corporation, The Gregos [1994] 1 WLR 1465, concerning the obligation to redeliver a vessel on time at the end of a time charterparty. The majority of the House of Lords considered this obligation to be an innominate term, and only Lord Templeman (dissenting) considered that, as a time stipulation, it amounted to a condition and was therefore of the essence of the contract. The majority was clearly concerned to achieve flexibility in terms of remedy in the event of a short delay, whereas Lord Templeman’s speech emphasizes the commercial importance of this provision and the need for commercial certainty. This tension between flexibility and commercial certainty is evident throughout this area of law. The underlying basis for this decision appears to be the more general justification for innominate terms—namely, the avoidance of a classification of a term as a condition to prevent a party from using such a breach as justifying escape from the contract for other (normally economic) reasons: see e.g. Reardon Smith Line Ltd v Hansen-Tangen [1976] 3 All ER 570. As Lord Mustill stated in Torvald Klaveness v Arni Maritime, The Gregos, at p. 1475:

[A]‌lthough it is well established that certain obligations under charterparties do have the character of conditions I would not … wish to enlarge the category unduly, given the opportunity which this provides for a party to rely on an innocuous breach as a means of escaping from an unwelcome bargain [Emphasis added]

In light of this decision of the House of Lords, the courts are unlikely to automatically assume that a time stipulation in a mercantile contract is a condition, irrespective of the consequences of the breach, but will instead assess whether the clause fulfils the criteria to qualify as a condition on the facts. This is therefore a question of contractual interpretation—Rainy Sky SA v Kookmin Bank [2011] UKSC 50, [2011] 1 WLR 2900.

In practice, much may turn on the nature of the obligation broken for mercantile contracts. Payment of hire clauses appear to be treated differently from the notice provisions, so that in instances in which there are concurrent ‘conditions’ so that payment is a condition precedent to the delivery of a vessel in a mercantile contract, full compliance with that payment obligation is likely to be considered as a condition—PT Berlian Laju Tanker TBK v Nuse Shipping Ltd [2008] EWHC 1330 (Comm), [2008] 2 Lloyd’s Rep 246, [2008] 2 All ER (Comm) 784—since the parties would not contemplate delivery without payment in full. In Kuwait Rocks Co. v AMN BulkCarriers Inc., The Astra [2013] EWHC 865 (Comm), [2013] 1 CLC 819, [2013] 2 All ER (Comm) 689, Flaux J challenged the result of The Gregos as being ‘limited to the particular provisions’ and not extending ‘to the obligation to make punctual payment of hire’ (at [117]). Flaux J therefore considered, on the facts, that where there is an obligation to make punctual payment of hire and the contract makes it clear that there is a right to withdraw the vessel in the event of any breach, it may be that such an obligation will be considered as a ‘condition’ (making time of the essence) and hence its breach will constitute a repudiatory breach. Flaux J further noted in Kuwait, at [117], relying on statements by Lords Wilberforce and Roskill in Bunge v Tradax, that ‘in the case of so-called time clauses in mercantile contracts … the courts should not show any reluctance to find that such provisions are conditions and, indeed, should usually do so’. Subsequently, (p. 316) however, Popplewell J in Spar Shipping AS v Grand China Logistics Holding (Group) Co. Ltd [2015] EWHC 718 (Comm), [2015] 1 All ER (Comm) 879, [2015] 2 Lloyd’s Rep 407, disagreed with Flaux J’s analysis in The Astra and held that payment of hire was not a condition of the contract in circumstances where there was a similar right to withdraw provision. The Court of Appeal in Grand China Logistics Holding (Group) Co. Ltd v Spar Shipping AS [2016] EWCA Civ 982, [2016] 2 Lloyd’s Rep 447, affirmed the High Court’s decision on the preference for classifying terms as ‘innominate’ ([2015] EWHC 718 (Comm), [2015] 1 All ER (Comm) 879). The court also held that the approach of Popplewell J at first instance in that case was to be preferred to the judgment of Flaux J in Kuwait Rocks Co. v AMN Bulkcarriers Inc., The Astra [2013] EWHC 865 (Comm), [2013] 2 All ER (Comm) 689, which, on that issue, is now to be considered as overruled.

8.5.4 Is the term a warranty?

A warranty is a term of a contract containing a minor (or less important) primary obligation. Breach of such a term gives rise to a secondary obligation to pay damages, but does not constitute a repudiatory breach. The non-breaching party therefore does not have the additional option of accepting the breach as terminating the contract or affirming.

The distinction between conditions and warranties is traditionally demonstrated by contrasting two cases with similar facts.

  1. 1. In Poussard v Spiers (1876) 1 QBD 410, a singer, hired to perform during the entire run of an operetta, did not arrive until after one week of the run, when a substitute had been hired. The singer’s obligation to appear from the first night was held a condition, the breach of which entitled the show’s producer to dispense with her services.

  2. 2. However, in Bettini v Gye (1876) 1 QBD 183, a singer, hired to perform during an entire season, had agreed to arrive six days in advance for rehearsals, but was three days late. The court did not believe that the clause relating to rehearsals was so central to the main purpose of the contract as to constitute a condition. The singer’s breach therefore did not allow the contract to be treated as repudiated, but only allowed recovery of damages for loss.

In the past, the distinction between conditions and warranties was made without considering the actual results of breach, and was determined following the relative importance of the term in relation to the contract as a whole at the date on which it was drafted. Today, it is still true, where the parties have expressly designated a term as a warranty or where the term is classed as a warranty by statute, that the consequences of the actual breach should not be considered. But where there is no express classification of the term by either of these means, the courts are unlikely to classify a term as a warranty without first considering the result of the breach under the innominate term doctrine (see 8.5.5).

8.5.5 More flexibility at a price: innominate or intermediate terms

8.5.5.1 Introduction of the innominate term

Hongkong Fir Shipping Co. Ltd v Kawasaki Kisen Kaisha Ltd [1962] 2 QB 26, introduced the innominate term. Although a classification of either condition or warranty had the advantage (p. 317) of certainty of remedy in the event of breach, once a term was classified as a condition, it allowed the non-breaching party to rely on a trivial breach of that term to escape from the contract for other reasons, such as the fact that the contract had turned out to be a bad bargain. The certainty was therefore inflexible.

In Hongkong Fir Shipping, clause 1 of a contract for the charter of a vessel for a period of two years (commencing in February 1957) described the vessel as ‘being in every way fitted for ordinary cargo service’ (the seaworthiness clause). When delivered to the charterers, the vessel was unseaworthy, because her engines were old. On her first voyage under the charter, she needed repairs, and the vessel was not properly seaworthy until mid-September 1957. In June, treating the breach as repudiatory, the charterers terminated the contract. The question for the Court of Appeal was whether the breach of clause 1 entitled the charterers to treat the contract as repudiated or only entitled them to damages. The court held that since after the repairs had taken place, there were still 17 of the original 24 months left on the charter, the charterers did not have the right to treat the contract as repudiated by the breach of clause 1.

In reaching this conclusion, Diplock LJ analysed the clause broken and said, at p. 70:

There are, however, many contractual undertakings of a more complex character which cannot be categorised as being ‘conditions’ or ‘warranties’. Of such undertakings all that can be predicated is that some breaches will, and others will not, give rise to an event which will deprive the party not in default of substantially the whole benefit which it was intended that he should obtain from the contract; and the legal consequences of the breach of such an undertaking, unless provided for expressly in the contract, depend on the nature of the event to which the breach gives rise and do not follow automatically from a prior classification of the undertaking as a ‘condition’ or a ‘warranty’.

Such terms were christened ‘innominate’ (there being no technical name for them) or ‘intermediate’, since they lay somewhere between conditions and warranties in terms of relative importance. A finding that a term is innominate rather than a condition is said to ‘repress sharp practice’—Weir [1976] CLJ 33—since it prevents a trivial breach of the term being used to justify termination and withdrawal from the contract for other reasons: see e.g. Reardon Smith Line Ltd v Hansen-Tangen [1976] 1 WLR 989 where the parties had entered into a charterparty for a tanker to be built in Japan. The charterparty referred to the tanker as one to be built in Osaka, hull number 354. The tanker was however built in a different yard and bore a different number, even though throughout the correspondence between the parties, the tanker was referred to as ‘Osaka 354’. By the time the tanker was ready for delivery, following the oil crisis of 1974, market prices had collapsed and the charterers were looking for a way out of the contract and consequently argued that, by analogy to contracts for the sale of goods, as the tanker bore a different number than what the contract stated, a breach of description allowed them to terminate the contract. Their argument was rejected unanimously by the House of Lords, the words were not part of the description; see also Torvald Klaveness A/S v Arni Maritime Corporation, The Gregos [1994] 1 WLR 1465 (discussed at 8.5.3.4).

8.5.5.2 Difficulties in identifying innominate terms

Diplock LJ’s analysis in Hongkong Fir Shipping Co. Ltd v Kawasaki Kisen Kaisha Ltd [1962] 2 QB 26 was welcomed by the courts: see e.g. Lord Wilberforce in Reardon Smith Line v Hansen-Tangen [1976] 1 WLR 989, at p. 998. Nevertheless, there was some reaction against (p. 318) the uncertainty that the doctrine introduces into commercial contracts because of the need to wait and see whether the consequences of the breach are sufficiently serious as to render it a repudiatory breach.

In Bunge Corporation v Tradax Export SA [1981] 1 WLR 711, buyers agreed to purchase 15,000 tons of soyabean meal from the sellers. The contract provided for three shipments of 5,000 tons, one to be made during June 1975. Under the contract, the buyers were to provide a vessel at a nominated port and give 15 days’ notice of expected readiness of the vessel. For shipment in June, notice had to be given by 13 June. Notice was, in fact, given on 17 June. The Court of Appeal and House of Lords both found the delay in giving notice to be a repudiatory breach. Lord Wilberforce said that certain contractual terms, especially those agreed by the parties to give rise upon any breach to a right to treat the contract as repudiated, were not amenable to being classified as innominate terms. He said, at p. 715F, that the contrary proposition would be ‘commercially most undesirable … It would fatally remove from a vital provision in the contract that certainty which is the most indispensable quality of mercantile contracts’.

However, as noted at 8.5.3.4, this did not prevent the majority of the House of Lords in Torvald Klaveness A/S v Arni Maritime Corporation, The Gregos [1994] 1 WLR 1465 from determining that an obligation under a time charter to redeliver a vessel on time was only innominate.

Innominate terms are therefore identified through a process of elimination. Hale LJ, in Rice v Great Yarmouth Borough Council [2003] TCLR 1, (2001) 3 LGLR 4, The Times, 26 July 2000 (for facts, see 8.5.3.2), at [26], defined an innominate term as ‘one which can be broken in so many different ways and with such varying consequences that the parties cannot be taken to have intended that any breach should entitle the innocent party to terminate the whole contract’.

Upjohn LJ, in Hongkong Fir Shipping, at pp. 62–3, explained why the clause in that case constituted an innominate term:

Why is this basic and underlying condition of seaworthiness not, in fact, treated as a condition? It is for the simple reason that the seaworthiness clause is breached by the slightest failure to be fitted ‘in every way’ for service. Thus … if a nail is missing from one of the timbers of a wooden vessel, or if proper medical supplies or two anchors are not on board at the time of sailing, the owners are in breach of the seaworthiness stipulation. It is contrary to common sense to suppose that, in such circumstances, the parties contemplated that the charterer should at once be entitled to treat the contract as at an end for such trifling breaches.

The distinction between conditions and innominate terms can sometimes be far from obvious. For example, in BS & N Ltd (BVI) v Micado Shipping Ltd (Malta) No. 1, The Seaflower [2001] 1 Lloyd’s Rep 341, [2001] 1 All ER (Comm) 240, although the judge at first instance—[2000] CLC 795—held that a clause guaranteeing to obtain approval for a vessel was an innominate term, the Court of Appeal considered it to be a condition. This type of uncertainty does little to assist business people in determining their options, especially considering the possible dangers of wrongful repudiation (see 8.5.5.4).

8.5.5.3 The effect of breach of an innominate term

Where the result of the breach is substantially to deprive the non-breaching party of the benefit that it was intended to obtain under the contract, the breach of the innominate term will be treated as repudiatory: see e.g. Federal Commerce & Navigation Co. Ltd v Molena Alpha Inc. [1979] AC 757.

(p. 319) Where, however, the effects of the breach caused loss to the non-breaching party, but were not so serious as to deprive that party of the benefit of the contract, the non-breaching party is limited to the remedy of damages. In Hongkong Fir Shipping Co. Ltd v Kawasaki Kisen Kaisha Ltd [1962] 2 QB 26, after the repairs to the ship, 17 months of the original charter of 24 months remained and therefore the effects of the breach did not deprive the non-breaching party of substantially the whole benefit of the contract. In Wuhan Ocean Economic & Technical Cooperation Company Ltd v Schiffahrts-Gesellschaft ‘Hansa Murcia’ mbH & Co. KG [2012] EWHC 3104 (Comm), [2013] 1 All ER (Comm) 1277, [2013] 1 Lloyd’s Rep 273, a shipyard’s failure to procure a renewal of a refund guarantee provided to the buyers (until two days before its expiry) was a breach of an implied term of the shipbuilding contract that the shipyard must procure an extension within a reasonable time. The shipbuilding contract had become unprofitable and the buyers were looking for an escape route, and so commenced arbitration alleging repudiatory breach. However, this was held to be a breach of an innominate term. To identify breaches of the term that might have gone to the root of the contract was possible, e.g. if the sellers had failed to procure the extension of the refund guarantee for a period of a year or more after the expiry of the guarantee. The term could therefore be broken in ways that could be serious. However, on the facts, there was no repudiatory breach, since the breach of the innominate term did not deprive the buyers of ‘substantially the whole benefit of the contract’. The buyers’ security was not at risk owing to the fact that the refund guarantee was automatically extended if the buyers commenced arbitration, which they had done, against the shipyard. This also reinforced the term as innominate because breach could have deprived the buyers of substantially the whole benefit of the contract if arbitration had not been commenced.

8.5.5.4 Flexibility, but uncertainty: dilemmas for the non-breaching party

The innominate term is a focal point of the tension that exists in the law of contract between the conflicting interests of certainty and fairness. The essential flexibility, or fatal uncertainty, of innominate terms stems from the fact that it is not possible to predict before the time of the breach what the effect of breach of such a term will be. It is therefore for the parties, if they value certainty so highly, to ensure by careful drafting of their contracts that the consequences of breach of every term are clearly stated, thereby seeking to avoid the possibility of the court treating a term as innominate. However, as noted earlier, it can be difficult to ensure effective classification of a term as a condition—e.g. Schuler v Wickman Machine Tools [1974] AC 235 (see 8.5.3.2)—and the approach of the courts has sometimes been unpredictable, e.g. the approach to time stipulations in mercantile contracts: see Torvald Klaveness v Arni Maritime Corporation, The Gregos [1994] 1 WLR 1465 (at 8.5.3.4).

Whilst there is much to be said in favour of removing the rigidity of the condition/warranty classification, the current uncertainty presents a difficulty for the non-breaching party, who has to decide what action to take and whether to treat the breach as repudiatory.

Weir [1976] CLJ 33 also criticized the innominate term, relying on the decision in Cehave NV v Bremer Handelsgesellschaft Gmbh, The Hansa Nord [1976] QB 44, to conclude that classification as an innominate term and the application of the effects of the breach test can operate to ‘reward incompetence’, i.e. that the party who was originally in breach of contract may terminate in the belief that the term broken is a condition when, in fact, the term broken is only an innominate term and not repudiatory in light of the seriousness of the breach. This action would constitute a wrongful repudiation, entitling the party who committed the original breach to the usual remedies. (p. 320)

Cehave v Bremer concerned the sale of citrus pulp pellets to be used as animal feed at a price of £100,000. Shipment was to be made in good condition. On arrival, it was discovered that some of the pellets were damaged, and the buyers rejected the entire cargo on the basis that this amounted to a breach of condition; it was also the case that the market price for these pellets had fallen since the making of the contract. The sellers then resold the pellets to an importer and the importer resold them on the same day to the original buyers, who used the pellets for the original purpose as animal feed. The Court of Appeal held that the term ‘shipment in good condition’ was innominate and, since the cargo had been used for its intended purpose, the effects of the breach were not serious. Accordingly, the buyers had wrongfully repudiated because they had made the wrong decision on the applicable remedy. (See 8.7.6 on the risk of overreacting to a breach.)

Similarly, in Ampurius NU Homes Holdings Ltd v Telford Homes (Creekside) Ltd [2013] EWCA Civ 577, [2013] 4 All ER 377, [2013] BLR 400, it transpired that the wrong decision had been taken when terminating for an alleged repudiatory breach.

Ampurius NU Homes Holdings Ltd v Telford Homes (Creekside) Ltd concerned an agreement whereby Telford was to build four blocks of flats by a contractual deadline, ‘or as soon as reasonably possible’ after this date, and to lease these blocks to Ampurius under a 999-year lease. Owing to financial pressures, building work on two of the blocks was suspended while Telford sought additional funding. Ampurius had written to Telford, stating that it considered the suspension to be a repudiatory breach and reserving its right to affirm or terminate at a later stage. A year after its initial letter to Telford, Ampurius sought to terminate on the basis of delay and to claim damages. By this stage, work had resumed on the remaining two blocks. The judge at first instance held that Telford had been in repudiatory breach. The Court of Appeal disagreed and held that the consequences of the breach were not sufficiently serious to entitle Ampurius to terminate the contract.

The Court of Appeal held that the test for finding repudiatory breach involved an assessment of whether the breach had deprived the injured party of substantially the whole benefit of the contract judged at the time when the right to terminate was exercised and not at the date of the breach. This involved assessing the benefits Ampurius was intended to get through performance of the contract (a leasehold interest in the four blocks for a 999-year term) and the effect of Telford’s breach (whether Ampurius could be adequately compensated through an award of damages). It was also important to assess whether the breach was likely to be repeated, whether Telford would resume compliance with its contractual obligations, and, in particular, whether the breach had fundamentally changed the value of future performance of the Telford’s outstanding obligations. Telford had restarted the work at the date of the purported termination so that, at the date of the purported termination, it was not possible to say that the actual and reasonably foreseeable effects of Telford’s breach had deprived Ampurius of substantially the whole benefit of the contract—namely, the eventual leasehold interest in the four blocks. The delay was short in relation to the intended 999-year lease and any loss could be compensated in damages. Ampurius had therefore put itself in repudiatory breach of contract by purporting to terminate when this option was not available.

The Court of Appeal in Urban I (Blonk Street) Ltd v Ayres [2013] EWCA Civ 816, [2014] 1 WLR 756 also held that, for a development relating to a 125-year lease of property, a delay of only a month between the earliest possible date for completion and the purported termination of the contract did not deprive the purchasers of substantially the whole benefit of the contract.

The obligation to make monthly payments under the terms of a dental facilities contract was held by a majority of the Court of Appeal in Valilas v Januzj [2014] EWCA Civ 436, [2015] 1 (p. 321) All ER (Comm) 1047, 154 Con LR 38 (Arden and Floyd LJJ, Underhill LJ dissenting), to be only an innominate term so that it was necessary to consider the nature and consequences of the breach. Floyd LJ (at [53]) considered that ‘a multi-factorial assessment’, similar to that employed for frustration (see 12.3.2.1), was needed in such instances so that the court would need to consider ‘the nature of the contract and the relationship it creates, the nature of the term, the kind and degree of the breach and the consequences of the breach for the injured party’. (This was also accepted as the correct approach in Williams v Leeds United Football Club [2015] EWHC 376 (QB), [2015] IRLR 383 (at [53]) where, in relation to an employment contract, forwarding a pornographic email to a junior employee was held to constitute a sufficiently serious breach to result in summary dismissal.)

On the facts in Valilas v Januzaj, the effect of the breaches did not deprive the practice owner of substantially the whole benefit of the contract since he knew that he would eventually be paid. This was not the same as an outright refusal to pay. The loss therefore related to loss of use of the money in the meantime and that is usually compensated by means of interest. However, since the practice owner had accepted the breaches as terminating the contract, he had wrongfully terminated.

8.5.6 Conditions and non-conditions?

In practice, the essential distinction to be made is that between conditions and non-conditions, the effects of the breach test in Hongkong Fir Shipping Co. Ltd v Kawasaki Kisen Kaisha Ltd [1962] 2 QB 26 being applied to all non-conditions. This appears to be because, except for terms expressly designated as warranties, there is little point in distinguishing between innominate terms and warranties. The outcome in terms of remedy is the factor having practical importance and this can be determined by applying the effects of the breach test. This has led to the suggestion that there are two types of contractual term: conditions (repudiatory) and non-conditions (which will be repudiatory only if the effects of breach are serious)—see Reynolds (1981) 97 LQR 541. This also appears to be the approach adopted by Upjohn LJ in the Hongkong Fir case. On this approach, the key determinant is whether a term is a condition. If it is not, it is a non-condition to which the Hongkong Fir test applies.

The approach of the Court of Appeal in Ampurius NU Homes Holdings Ltd v Telford Homes (Creekside) Ltd [2013] EWCA Civ 577, [2013] 4 All ER 377, [2013] BLR 400, appears to indicate support for such an approach, since the focus was on distinguishing repudiatory breach from non-repudiatory breach. The Court of Appeal held that the test for finding repudiatory breach was whether the breach had deprived the injured party of substantially the whole benefit of the contract (the Hongkong Fir test applied to innominate terms).

However, in Urban I (Blonk Street) Ltd v Ayres [2013] EWCA Civ 816), at [44], Sir Terence Etherton C was clear that it was necessary to distinguish the type of term as a condition, warranty, or innominate term using principles of contractual interpretation—Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 (see 6.5.1)—and Peel, in Treitel’s The Law of Contract, 14th edn (Sweet and Maxwell, 2015), [18-051], maintains that it remains important to make the classification between conditions, warranties, and innominate terms because a breach of warranty can never be a repudiatory breach and so will never give rise to the option to terminate or affirm. However, it is extremely difficult to make classifications of terms and it can be argued that the classification can be achieved through the application of the effects of the breach test in Hongkong Fir, i.e. if the effects of the breach (p. 322) are not serious, then the remedy is limited to damages only—and, reasoning backwards, the term is a warranty.

8.5.7 The classification of implied terms as conditions, warranties, or innominate terms

Just as express terms may be classified according to their relative importance (see 8.5.2.1), so some implied terms are more important than others. For B2B contracts, the SGA 1979 employs the expression ‘implied term’, but it goes on to specify more precisely the type of obligation. So the implied terms of satisfactory quality and fitness for purpose in s. 14 are said to be conditions (s. 14(6)). If s. 15A of the 1979 Act (inserted by the Sale and Supply of Goods Act 1994) applies to the sale, it may follow that the applicable remedy will be damages only, rather than the usual option to terminate or affirm. Under s. 15A(1) where there is a breach of ss. 13, 14, or 15 (so-called breaches of condition), such a breach may instead be treated as a breach of warranty (so that the only remedy will be damages) if the breach is so slight that it would be unreasonable to reject the goods (i.e. unreasonable to exercise the normal remedy of terminating the contract). Section 15A can be expressly or impliedly ousted (s. 15A(2)).

This only applies to B2B contracts and not to B2C (consumer) contracts, where the CRA 2015 applies. The CRA 2015 also includes terms of satisfactory quality and fitness for purpose (6.4.2.4) and, although the Act does not describe these terms as conditions, it is clear that they are entrenched rights and give rise to an initial option to reject for repudiatory breach if broken.

Not all implied obligations in the SGA 1979 (B2B) are conditions, e.g. the implied term that the goods in question are free of any charge or encumbrance and that the buyer has a right to quiet possession is expressed to be a ‘warranty’ (SGA 1979, s. 12(5A)). By contrast, the CRA 2015, refers to the corresponding obligations in consumer contracts as ‘terms’, and s. 19(6) states that breach gives rise to the right to reject in the circumstances covered by s. 20, i.e. initial and final rights to reject (discussed at 8.4.2.3).

However, SGSA 1982, s. 13, which imposes an obligation of reasonable care and skill in the supply of services, has always referred only to an ‘implied term’. It must be assumed that the statutory intention was for this term to be treated by the courts as innominate, on the basis that it is the type of term breach of which may sometimes result in serious damage and sometimes trivial damage. Although s. 49 of the CRA 2015 states that it is a term of the consumer contract that the trader will perform the service for the consumer using reasonable care and skill, the remedies set out for breach of this provision are limited to the right to require repeat performance (s. 55) and the right to a price reduction (s. 56). Nevertheless, s. 54 makes it clear that the consumer buyer can pursue other remedies, if available, instead of or in addition to the remedies in the CRA 2015, including terminating the contract and claiming damages (s. 54(6) and (7)). The usual principle preventing double recovery applies (s. 54(6)). This also suggests that this term may be innominate, since it is implicitly accepted that the right to reject may not always be available.

Except for statutory implied or entrenched terms, there is no reason for prior classification of implied terms, since the terms are not known to the parties until the time of litigation. There is therefore no requirement of certainty or predictability of the effect of breach of such terms, since, being implied, they cannot be relied upon in the course of a party’s planning. The court is free simply to indicate the type of term when specifying the term to be implied in any given case. It seems likely that, in practice, the courts will do so only after considering the consequences of the breach that has been found to have occurred (see, generally, 8.5.6).

(p. 323) 8.6 The entire obligation rule and repudiatory breach

8.6.1 Entire obligations

Entire obligations are obligations under which the whole of each party’s side of the bargain is the necessary condition for the performance of the other. Failure to perform an entire obligation completely and precisely therefore constitutes a repudiatory breach. The obligation to pay a lump sum on completion for building work or some other service in a domestic setting is an entire obligation: e.g. Bolton v Mahadeva [1972] 1 WLR 1009 (lump-sum contract to install central heating in a private house). An advantage of the ‘entire obligations’ rule in such cases is that it gives the consumer a useful means of ensuring that work is completed, since until it is completed, no payment is due.

The classic case example of an entire obligation, Cutter v Powell (1795) 6 TR 320, involved the entire obligation rule operating harshly against an employee.

In Cutter v Powell, a sailor had been hired as mate for the voyage from Jamaica to England. He was to be paid a lump sum on completion of the voyage, and it appears that the payment was considerably in excess of the normal amount for such a voyage. He died before reaching England and his widow sued to recover a reasonable sum as payment, based on the period of the sailor’s service before his death. The court refused her claim. Lord Kenyon CJ regarded the contract as ‘a kind of insurance’, with the result that the sailor’s entitlement was ‘all or nothing’. Moreover, the court was unwilling to allow the remedy of quantum meruit (reasonable sum) where there was an express contract governing relations between the parties.

Ashhurst J said, at p. 325:

This is a written contract, and it speaks for itself. And as it is entire, and as the defendant’s promise depends upon a condition precedent to be performed by the other party, the condition must be performed before the other party is entitled to receive anything under it.

Thus failing to perform an entire obligation completely and precisely may result in depriving the party in breach of any payment for whatever performance there has been. This is why the courts are often unwilling to find that the obligations under a contract are entire.

8.6.2 Avoiding the harshness of the entire obligation rule

8.6.2.1 Construing the contract as comprising a number of separate obligations

Complex commercial contracts, e.g. construction contracts, may be broken down into stages, with stage payments, or long-term sale and supply contracts may involve sale and delivery in instalments, with payment for each instalment. The Court of Appeal in Smales v Lea [2011] EWCA Civ 1325, [2012] PNLR 8, [43], regarded it as ‘relatively unusual’ for the payment obligation in modern construction contracts and contracts of retainer for professional services to be entire.

Instalment payments avoid the entire obligation rule; instead, any individual instalment or stage can be assessed to determine whether any breach of an instalment or stage is sufficiently (p. 324) serious to constitute a repudiatory breach in relation to the contract as a whole. Such a breach will entitle that party to damages and possibly (e.g. subject to de minimis) entitle the non-breaching party to avoid performance of an obligation that was dependent upon the obligation breached, i.e. to avoid payment for a stage or instalment. In the B2B sale of goods context, s. 31(2) of the SGA 1979 states that, for delivery by instalments that are to be paid for separately:

[I]‌t is a question in each case depending on the terms of the contract and the circumstances of the case whether the breach of contract is a repudiation of the whole contract or whether it is a severable breach giving rise to a claim for compensation.

In practice, the non-delivery of a single instalment or a defective delivery of that instalment may not be sufficient to constitute a repudiatory breach. (Section 31 of the SGA 1979 no longer applies in the consumer context. Instead, s. 26 CRA 2015 sets out the applicable provision covering defective instalment deliveries and s. 28 covers failure to deliver an instalment. Section 26(3) provides that defective deliveries in a consumer contract may give rise to a short-term right to reject the whole contract or to reject the goods in the particular instalment. Section 26(4) further provides that the availability of these remedies will depend on ‘the terms of the contract and the circumstances of the case’.)

In Regent OHG Aisestadt v Francesco of Jermyn Street Ltd [1981] 3 All ER 327, the contract called for the supply of 62 suits in a number of instalments. After delivery of several instalments, which had been accepted, one instalment was defective, being one suit short. The buyers claimed to be entitled to treat the whole contract as repudiated on the basis of breach in respect of the single instalment (the shortfall of one suit being outside de minimis: see 8.2.1.1).

Mustill J rejected that argument. The obligation to supply was severable, so that each instalment was a separate delivery. A breach of one instalment did not entitle the non-breaching party to treat the whole contract as repudiated.

The judge did not say, as seemingly he should have, that the breach did, however, entitle the buyers to reject the whole instalment affected by the short delivery: Jackson v Rotax Motor and Cycle Co. [1910] 2 KB 937.

Of course, a series of such breaches having a cumulative effect may amount eventually to a repudiation of the whole contract: e.g. Alexander Corfield v David Grant (1992) 59 BLR 102. In Rice (t/a The Garden Guardian) v Great Yarmouth Borough Council [2003] TCLR 1, (2001) 3 LGLR 4, The Times, 26 July 2000 (for facts, see 8.5.3.2), involving a long-term contract for leisure services of which no single breach was repudiatory, but there were a number of repeated breaches, the Court of Appeal held that the correct approach to determine whether there was a repudiatory breach would be to look at the contractor’s performance over one year (of the four-year contract period) to determine whether the council was substantially deprived of the benefit that it had contracted for in that period. It was possible that there would be some aspects of the contract that were so important ‘that the parties would be taken to have intended that any deprivation would be sufficient in itself’ to justify termination. However, subject to this, the test required an examination of the cumulative past breaches to see whether they were such as to justify an inference that the contractor would continue to deliver a substandard performance in the future. On the facts, the cumulative effect was considered to be insufficient.

Although the courts sometimes refer to entire or severable contracts, it is important to note that it is obligations that are either entire or severable, and not the contracts themselves. A contract (p. 325) may well consist of both entire and severable obligations. For example, although Cutter v Powell (1795) 6 TR 320 is the classic example of an entire ‘contract’, the court’s reflections on the nature of entire obligations did not suggest that every minor breach of the deceased’s duties as a mate during the voyage would have entitled the employer to deny him any payment for his services: per Somervell LJ in Hoenig v Isaacs [1952] 2 All ER 176.

8.6.2.2 Acceptance of the benefit by the non-breaching party

The party in breach of an entire obligation may be entitled to reasonable payment for the value of its actual performance if the non-breaching party accepts such performance as has been given and determines to keep whatever benefit may have been derived from it. ‘Acceptance’ in this sense means that the non-breaching party, while regarding the breach of the entire obligation as bringing the original contract to an end, wishes to keep a benefit conferred and is willing to pay the ‘going rate’ for it. Although the contract may be discharged for the breach of the entire obligation, a new contract to pay a reasonable sum for the benefit that has been accepted will therefore be implied.

This principle was explained in Sumpter v Hedges [1898] 1 QB 673, in which the claimant builder had contracted to build two houses on the defendant’s land for a lump sum of £565. After completion of just over half the work, the builder abandoned the project. The defendant completed the building work, using materials left on the site by the claimant. At first instance, the claimant was awarded the value of the materials used by the defendant to complete the building, but was awarded nothing for the work done but not finished. The first-instance judgment was upheld on appeal.

Collins LJ said, at p. 676:

There are cases in which, though the plaintiff has abandoned the performance of a contract, it is possible for him to raise the inference of a new contract to pay for the work done on a quantum meruit from the defendant’s having taken the benefit of that work, but, in order that that may be done the circumstances must be such as to give an option to the defendant to take or not to take the benefit of the work done.

Therefore such payment depends upon finding a new, implied contract, which will not be found where the non-breaching party has no real choice whether to accept the benefit. For a half-finished building erected on the non-breaching party’s own land, there is no choice over whether to accept the benefit; the building cannot be knocked down and ‘returned’ to the builder in any meaningful way. The builder could not recover for his part performance. However, building materials not incorporated into the unfinished building could have been returned, so that a positive choice had been made to keep them. On this basis, the builder in Sumpter v Hedges was entitled to payment representing the reasonable value of these building materials.

The Law Commission suggested that the fact that payment for an accepted benefit depends upon the availability to the beneficiary of a real choice of whether to accept it has made this rule too strict and that there should be more general recovery in respect of benefits conferred: Law Commission Report No. 121, Pecuniary Restitution on Breach of Contract (1983). Bolton v Mahadeva [1972] 1 WLR 1009 is a striking modern example.

The claimant in Bolton v Mahadeva had agreed to install central heating for a lump sum of £560. It proved to be defective, but the claimant would not put it right, which would have cost a further £174. The claimant was not allowed any payment for the work done, although he had conferred a net benefit on the defendant of £386.

(p. 326) Nevertheless, as was pointed out in a note of dissent in the Law Commission’s Report, the main value of classifying an obligation as entire is that it places powerful means of ensuring proper performance of the obligation—namely, the refusal of payment—in the hands of the other party. Were that possibility to be removed, it might do harm to the interests of a significant number of people who are probably the least likely to be willing to resort to litigation, i.e. since most complex construction contracts are now designed for performance in stages with interim payments, and so are severable, most contracts involving entire obligations will be between small builders and domestic consumers. Therefore entire obligations, which may once have been thought as oppressive to the less powerful in society—see Cutter v Powell (1795) 6 TR 320—may now serve a useful purpose for consumer protection. The recommendation in the Law Commission’s Report, which would have reversed cases like Bolton v Mahadeva, has not been implemented: see Burrows (1984) 47 MLR 76 for discussion of these issues.

8.6.2.3 Substantial performance

The rigours of the ‘entire obligation’ rule may also be avoided by means of the doctrine of substantial performance. Where performance is incomplete or defective (the breach), but the extent of the failure to match the contractual undertaking is trivial by comparison with the primary obligations that have been satisfactorily performed, the court may be prepared to find that there has been substantial performance. The result is to prevent the non-breaching party from treating the contract as repudiated, although that party will still be entitled to damages, or to a set-off against the contract price, for any loss caused by the fact that there has been a breach: Hoenig v Isaacs [1952] 2 All ER 176 and Williams v Roffey Bros. v Nicholls (Contractors) Ltd [1991] 1 QB 1, in which there had been substantial completion of the eight flats, so that the claimant was entitled to be paid part of the extra £10,300 promised (see 4.4.4 for discussion of the enforceability of the promise to pay extra).

In Hoenig v Isaacs, the claimant had agreed to decorate and furnish the defendant’s flat for a lump sum of £750. Some progress payments were made, but, upon completion of the work, £350 was outstanding. The defendant claimed that the claimant could not recover this amount, since this was an ‘entire contract’ and the claimant was in breach in that some of his workmanship was defective. It was found as a fact that some of the work was defective, but that it would cost in total no more than £55 to put it right. It is not surprising, in these circumstances, that the Court of Appeal was unwilling to find that the claimant was not entitled to further payment. This very minor breach would have resulted in a large windfall for the defendant as a result of not having to make full payment under the contract. Therefore the Court of Appeal held that the claimant had substantially performed the contract and could recover, less a deduction to cover the cost of remedying the defects.

The result was not to overlook the claimant’s breach, but to limit the consequences of that breach to the creation of a secondary obligation to pay damages rather than to allow it to operate to excuse the defendant from performing his obligations. It is nevertheless difficult to see that this case should have involved the ‘entire obligations’ rule since the obligation to perform the work with reasonable care and skill is not entire, only the obligation to complete it to be paid. The only explanation therefore must be that the court viewed defective performance as a failure to complete the work.

Furthermore, although the doctrine of substantial performance plays a useful role in mitigating the effects of the entire obligation rule, it is limited to minor failures to match the contractual undertaking. In Bolton v Mahadeva [1972] 1 WLR 1009, for example, the breach was far too serious to fall within the substantial performance rule.

(p. 327) There are clear similarities between the doctrine of substantial performance and the category of innominate terms, the consequences of breach of which depend upon how serious the breach was (see 8.5.5). This similarity is by no means coincidental. In Hoenig v Isaacs, Somervell LJ traced the origin of the substantial performance doctrine to the judgment of Lord Mansfield in Boone v Eyre (1779) 1 H Bl 273, 126 ER 160, and in Cehave NV v Bremer Handelsgesellschaft Gmbh, The Hansa Nord [1976] QB 44, Lord Denning MR traced the origin of the innominate term to the same source.

8.7 Anticipatory breach

8.7.1 Identifying a breach by anticipation and assessing its nature

Thus far, the breach is constituted either by non-performance or by defective (including late) performance once the time for performance stipulated in the contract has arrived. However, where one party indicates in advance of the time for performance, either expressly or by conduct, an intention not to perform, or to perform in a manner inconsistent with the contractual undertaking, special rules apply—or at least the usual rules apply somewhat differently to this particular situation. Such an indication is sometimes called ‘anticipatory breach’, but should more properly be referred to as ‘breach by anticipatory repudiation’, since it is the announcement of intention rather than the non-performance that is in advance of the stipulated time.

In Yukong Line of Korea v Rendsburg Investments Corporation of Liberia [1996] 2 Lloyd’s Rep 604, at p. 607, Moore-Bick J accepted the following clear principle:

A renunciation of the contract by one party, prior to the time for performance is not itself a breach but it gives the other party, the injured party, the right to treat it as a breach in anticipation and thus to treat the contract as discharged immediately. In other words, if a person says he will not perform, the law allows the other to take him at his word and act accordingly.

The application of this doctrine is well illustrated by the early leading case of Hochster v De La Tour (1853) 2 E & B 678, 118 ER 922.

On 12 April 1852, the defendant had contracted to employ the claimant as a courier for three months as from 1 June 1852. However, on 11 May, the defendant wrote to the claimant stating that he had changed his mind and that the claimant’s services were no longer required. On 22 May, the claimant commenced an action for breach of contract, and the defendant argued that there could be no breach of contract before 1 June since, until that time, the claimant could not show that he was ready and willing to perform his side of the contract, and was therefore entitled to a remedy. The court held that the claimant was free to choose whether to await the time for performance, in which case he must then be ready and willing to perform, or to treat the contract as immediately repudiated and claim damages immediately, in which case he did not have to wait until 1 June.

The main justification given for the rule was that it was better for both parties that the claimant should avoid the wasteful expenditure of preparing for a performance that he had already been told would not be accepted. It is clear that the court took the view that the right to an immediate remedy was based on the fact of repudiation and not on any notional ‘acceleration’ (p. 328) of the contract date for performance. Lord Campbell CJ explained this finding on the basis of an implied term that, between the time of contracting and the due date for performance, neither party would ‘do anything to the prejudice of the other inconsistent with’ the contractual relationship that had been created.

8.7.2 Identifying a breach by anticipatory repudiation

For a breach by anticipation, it is necessary to decide whether the anticipatory breach is repudiatory to determine whether there is an option to terminate or affirm the contract. Renunciation (declaring an intention not to perform or to perform in a manner inconsistent with the contract) and incapacitation (being unable to perform when due) may both constitute anticipatory repudiatory breaches, but the court will need to determine whether what the breaching party has indicated it will not do at the time set for performance, or cannot now do, would amount to a repudiation at the time fixed for performance in the contract (Geden Operations Ltd v Dry Bulk Handy Holdings Inc., The Bulk Uruguay [2014] EWHC 855 (Comm), [2014] 2 All ER (Comm) 196, [2014] 2 Lloyd’s Rep 66, [15]). The classification of the term broken is relevant to determine whether the breach would constitute ‘a substantial failure to perform’. There needed to be either a breach of condition or a breach of an innominate term which went to the root of the contract or deprived the non-breaching party of substantially the whole benefit of the contract. In Decro-Wall International SA v Practitioners in Marketing Ltd [1971] 1 WLR 361, the claimant argued that late payments, which were likely to be repeated, amounted to an anticipatory repudiation of the whole agreement. The Court of Appeal accepted that the late payment was a breach and that there was every likelihood of that breach being repeated in the future, but did not accept that this amounted to an anticipatory repudiatory breach since the practical results of the breach were not sufficiently serious to amount to repudiation justifying bringing the whole contract to an end.

In Geden Operations Ltd v Dry Bulk Handy Holdings Inc., The Bulk Uruguay [2014] EWHC 855 (Comm), [2014] 2 All ER (Comm) 196, [2014] 2 Lloyd’s Rep 66, Popplewell J considered that where a party makes it clear that its ability to perform is wholly dependent on the actions of a third party, this may not be sufficient to constitute an anticipatory breach by renunciation since it did not necessarily evince an intention not to be bound. It was also necessary to consider the benefit that the non-breaching party might be deprived of if the third party acted so as to prevent the contracting party’s performance and whether this constituted ‘substantially the whole benefit of the contract’. This determination needed to be made at the time of the alleged anticipatory breach, i.e. prospectively.

For a thorough review of the law and academic views on anticipatory breach, see the judgment of the Singapore Court of Appeal, delivered by Andrew Phang Boon Leong JA in The ‘STX Mumbai’ [2015] SGCA 35, [40] ff.

8.7.3 The election to terminate for anticipatory repudiatory breach or to affirm

If the anticipatory breach is repudiatory, the usual election will apply, so that the non-breaching party can either accept the breach as terminating the contract or affirm and await performance on the contractual date set for that performance to begin: Fercometal SARL v Mediterranean Shipping Co. SA [1989] AC 788.

(p. 329) However, there is a limitation on the power of the non-repudiating party to elect to affirm the contract.

8.7.3.1 The limitation on the power of the non-repudiating party to elect to affirm the contract

In White & Carter (Councils) Ltd v McGregor [1962] AC 413, the appellants had agreed with the respondents to advertise the respondents’ business on litter bins to be supplied to local authorities. On the same day, the respondents repudiated the agreement, but the appellants went ahead, performed their side of the contract for the full three years agreed, and claimed the contract price. The House of Lords (by a majority of three to two) 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 litter bins.

This decision has proved controversial because of the wastage involved. Nevertheless, in Reichman v Beveridge [2006] EWCA Civ 1659, [2007] Bus LR 412, 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).

Whereas we could assert that the principle deriving from White & Carter is that mitigation does not apply to an action in debt, in MSC Mediterranean Shipping Co. SA v Cottonex Anstalt [2015] EWHC 283 (Comm), [2015] 2 All ER (Comm) 614, [2015] 1 Lloyd’s Rep 359, at [91], Leggatt J considered that mitigation would be relevant only ‘once the breach of contract on which the claim is based has occurred’ and it was this point that had significance in White & Carter rather than the nature of the claim. The judge considered that mitigation had no relevance to the critical question of whether it was possible to affirm and so continue to perform to trigger the payment obligation. Although on appeal ([2016] EWCA Civ 789, [2017] 1 All ER (Comm) 483) it was not necessary to reach a final decision on this particular question, Moore-Bick LJ nevertheless stated that Leggatt J had reached the right decision on this question (at [49]).

Considering the objections to wastage inherent in the White & Carter principle, subsequent courts have seized upon statements by Lord Reid to limit the potential scope of the principle—indeed, in Hounslow v Twickenham [1971] Ch 233, Megarry J considered them to be part of the ratio in White & Carter.

Key point

In White & Carter, at p. 431, 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 not be sufficient that it was merely ‘unreasonable’ to affirm; something more than this was required.

Thus the breaching party can avoid the operation of the principle in White & Carter by establishing that the non-breaching party has no legitimate interest in continuing performance.

Lord Reid’s statement was adopted and applied by the Court of Appeal in Attica Sea Carriers Corporation v Ferrostaal Poseidon Bulk Reederei GmbH, The Puerto Buitrago [1976] 1 Lloyd’s Rep 250 and by Lloyd J in Clea Shipping Corporation v Bulk Oil International Ltd, The Alaskan (p. 330) Trader [1984] 1 All ER 129. The initial approach to ‘legitimate interest’ in these cases was to consider the reasonableness of the affirmation by the non-breaching party, bearing in mind the availability of damages for the anticipatory breach. If continuation with the contract would be ‘wholly unreasonable’ given the availability of a remedy in damages (and this tended to relate to the relative costs involved in affirming as compared with termination), then affirmation was unavailable.

The facts of The Puerto Buitrago were extreme. The charterers tendered redelivery of the vessel in breach of the repair obligation. The shipowners sought to affirm the premature redelivery and to claim the charter hire until the repairs were completed. In the Court of Appeal, Lord Denning MR rejected this as amounting to enforcing specific performance when damages were an adequate remedy. The cost of repair was double the value of the ship when repaired and four times the scrap value.

In The Alaskan Trader, it was held that the owners had acted ‘wholly unreasonably’ when, despite the charterers’ rejection of a two-year charter after one year of the term when the vessel had to undergo extensive repairs, the owners had carried out repairs, and kept the vessel and the crew ready to receive sailing instructions from the charterers, although it was clear that this was unwanted.

However, the balance was altered in favour of allowing affirmation, in relation to early redelivery by the charterers and the owner’s claim to be entitled to affirm and claim the hire, in Ocean Marine Navigation Ltd v Koch Carbon Inc., The Dynamic [2003] EWHC 1936 (Comm), [2003] 2 Lloyd’s Rep 693. Simon J considered that the rationale for Lord Reid’s limitation of ‘legitimate interest’ was to avoid saddling ‘the other party with an additional burden with no benefit to himself’. However, it was accepted that it was serious to ‘fetter’ the non-breaching party’s right of election (by restricting the election to terminating and claiming damages). Therefore the limitation needed to be confined to ‘extreme cases’ in which damages would be an adequate remedy, and in which an election to affirm and go on with the contract would be ‘wholly unreasonable’—the word ‘wholly’ indicating that this exception applied only in extreme cases.

At [23], the judge considered the following to be the applicable principles governing the exceptional case in which affirmation will be prevented:

(i) The burden is on the contract-breaker to show that the innocent party has no legitimate interest in performing the contract rather than claiming damages. (ii) This burden is not discharged merely by showing that the benefit to the other party is small in comparison to the loss to the contract-breaker.

Thus the burden of preventing the usual election from operating will be on the contract-breaker and it requires more than simply evidence that the benefit of affirmation to the non-breaching party is relatively small.

For example, in Isabella Shipowner SA v Shagang Shipping Co. Ltd, The Aquafaith [2012] EWHC 1077 (Comm), [2012] 2 All ER (Comm) 461, [2012] 1 CLC 899, shipowners refused to accept early delivery of the ship in anticipatory breach of the charterparty and so affirmed. Affirmation meant that the charterers would be liable for the charter hire for the minimum term. Cooke J rejected the charterers’ argument that the shipowners had no legitimate interest in affirming rather than claiming damages. The judge held that it was not sufficient to refuse affirmation simply because damages would be an available remedy on the facts. Affirmation had to be ‘beyond all reason’ or ‘perverse’ before there was no legitimate interest in maintaining the contract. That involved considering whether there was any benefit to the shipowners, however small, as compared to the loss to the charterers. On the facts, there were 94 days left of a five-year time charter in a market in which finding a substitute time charter would have (p. 331) been very difficult. Maintaining the hire was therefore neither ‘unreasonable’, nor ‘wholly unreasonable’, and this was not an ‘extreme or unusual’ case. (The application of Lord Reid’s second limitation on these facts is discussed at 8.7.4.3.)

The movement towards favouring the ability to affirm (and concluding that there is a legitimate interest in keeping the contract alive) appears to have been limited by the decision in MSC Mediterranean Shipping Co. SA v Cottonex Anstalt [2015] EWHC 283 (Comm), [2015] 2 All ER (Comm) 614, [2015] 1 Lloyd’s Rep 359, and again on appeal ([2016] EWCA Civ 789, [2017] 1 All ER (Comm) 483). A cargo had been delivered but was never collected by the buyer although ownership of the cargo had been transferred. Consequently the seller could not unpack the containers and return them to the shipper. This constituted a repudiatory breach and, in accordance with the terms of the contract, the shipper was entitled to charge ‘container demurrage’ for every day that the containers were not returned following delivery of the cargo. In the High Court, Leggatt J was unhappy at the prospect of such an open-ended liability and held that the shipper had no legitimate interest in affirming following that breach and should be forced to accept the repudiatory breach as terminating the contract because it was clear that there was no reasonable prospect of redelivery of the containers and future performance. This is a startling result since it limits the non-breaching party’s ability to act in its own commercial interests—and the exercise of the agreed ‘container demurrage’ provision ought to be seen as a legitimate interest in affirming and continuing with the contract. Leggatt J went further (at [97]), stating that the decision to terminate for repudiatory breach needed to be taken in ‘good faith’ although the judge recognized that the election for repudiatory breach arose by operation of law. This development represents a cause for concern. Critically, perhaps, the judge felt obliged to conclude that the ‘container demurrage’ was an unenforceable penalty (but this was due to the circumstances in which it operated). This provided justification for the conclusion that there was no legitimate interest in affirming on these facts. On appeal ([2016] EWCA Civ 789, [2016] 2 Lloyd’s Rep 494, [2017] 1 All ER (Comm) 483), Leggatt J’s analysis of the relevance of principles of good faith in this context were rejected (at [45]). The court also agreed that the delay by Cottonex in returning the containers was indeed a repudiation of the contract but that, on the facts, this was not a case ‘in which the White and Carter principle applies’ (at [43]). The commercial purpose of the venture had been frustrated on 2 February (namely, when the carrier offered to sell the containers to the shipper) and the shipper was in repudiation of the contract as from that date (at which point demurrage ceased to be payable). Once that had occurred, ‘the option of affirming the contract’ was closed as ‘further performance became impossible’ (at [43]). The White & Carter principle has a particular application for landlord and tenant contracts.

In Reichman v Beveridge [2006] EWCA Civ 1659, [2007] Bus LR 412 (discussed earlier in this section), the argument was that the landlord could not choose to affirm and seek rent due under the contract following the anticipatory breach by the tenant because damages would be an adequate remedy and it was ‘wholly unreasonable’ (relying on Lord Reid’s first limitation) to elect to affirm. However, the Court of Appeal held that: (i) it was not wholly unreasonable for an innocent landlord to refuse to take steps to find a new, replacement tenant; and (ii) damages might not be an adequate remedy because if the landlord was to accept the action as forfeiting (terminating) the lease and re-let, but at a lower market rent than that available under the terms of the lease, damages could not be recovered for loss of that rent, there being no authority in English law allowing a landlord to recover loss of future rent (i.e. from forfeiture to expiry of lease) from a former tenant. The landlord would therefore not be acting unreasonably in concluding that he should not terminate the lease because, if the future rent were lower, he might not be able to recover the lost rent as damages.

(p. 332) Thus, while the Court of Appeal stressed the limited nature of the principle in White & Carter—namely, affirmation and recovery in debt with no duty to mitigate—it found it to be applicable to this situation involving a relationship of landlord and tenant.

8.7.3.2 Conclusion on the White and Carter principle

The impact of the Court of Appeal’s decision in MSC Mediterranean Shipping Co. SA v Cottonex Anstalt is difficult to assess. Moore-Bick LJ, after reviewing the precedent value of the ‘White and Carter principle’ stated (at [35]) that ‘the outcome of the debate has been, perhaps inevitably, inconclusive, but the decisions reflect a continuing recognition that the principle has a role to play in appropriate cases’. What that will be, given the lack of discussion on appeal of Leggatt J’s approach to the ‘legitimate interest’ (Morgan, CLJ 2017, at 14) is not entirely clear. The debate goes on.

8.7.4 Affirmation following anticipatory repudiation

An election to affirm the contract means that all of the obligations of both contracting parties remain alive. To constitute an affirmation of the renunciation, there must be evidence of a clear and unequivocal intention to continue with the contract: see the earlier discussion of affirmation in Yukong Line Ltd of Korea v Rendsburg Investments Corporation of Liberia [1996] 2 Lloyd’s Rep 604 (at 8.4.2.2.1), which is authority for the fact that a request to the renunciating party to change its mind and honour its obligations on the contractual date will not suffice for affirmation.

8.7.4.1 Is the election irrevocable or can the non-breaching party change its mind before the contractual date set for performance?

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 Lord Ackner explained in Fercometal v Mediterranean Shipping [1989] AC 788, at p. 805E:

[T]‌here 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 once again able and willing to perform.

Although this represents the general principle, it has long been recognized that where the repudiatory breach is a continuing one (i.e. it continues after affirmation), the fact of the earlier affirmation will not prevent the non-breaching party from 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. [2001] 1 Lloyd’s Rep 537, at p. 565, when he stated:

To require an innocent party, who has by pressing for the contract affirmed it, to wait until there is an actual breach by the party in breach before he can bring the contract to an end might well … have required that innocent party to engage in performance that is entirely pointless and wasteful as the party in breach would, when he became under an obligation to accept performance, refuse to do so.

(p. 333) This involved a different emphasis (and different result), as Thomas J recognized, from the approach taken by Colman J in the Stocznia litigation ([1997] 2 Lloyd’s Rep 228 (below)). Colman J considered it important that, following affirmation, the breaching party must be able to rely on the fact that it will have a further opportunity to perform, whereas Thomas J’s approach focused on the position of the non-breaching party, who would otherwise be bound to continue performance when it was clear that it continued to be unwanted. The existence of these two differing positions made this a difficult area of law. In policy terms, it was necessary to determine whether the law favoured allowing an unrestricted opportunity for the breaching party to rescue initial non-performance (i.e. the possibility of curing the ‘breach’) at, or before, the contractual date for performance, or favoured recognizing the realities of the parties’ positions in the light of recurrent breach so that wasteful additional expenditure could be avoided. In the latter scenario, in essence, the court is concluding that there is no realistic possibility of cure.

In Stocznia Gdanska SA v Latvian Shipping Co. (No. 3) [2002] EWCA Civ 889, [2002] 2 All ER (Comm) 768, [2002] 2 Lloyd’s Rep 436, also known as Stocznia Gdanska SA v Latvian Shipping Co. (Repudiation), on appeal from Thomas J’s decision, the Court of Appeal recognized (again obiter) that once affirmation had occurred, in the event of a continuing anticipatory repudiation in the period prior to the contractual date set for performance, the non-breaching party could terminate despite the earlier affirmation. The Court of Appeal therefore preferred the approach taken by Thomas J (obiter) on this issue and considered that affirmation of an anticipatory repudiation related only to past breaches ‘leaving open the question of continuing or renewed anticipatory breach’: per Rix LJ at [99]. Of course, as the Court of Appeal recognized, this does leave open the question of defining a continuing breach, especially the status of silence. It was recognized that, for a continuing duty to perform following affirmation, such silence might be ‘a speaking silence’. Rix LJ added, at [96]:

The difficulty with silence is that it is normally equivocal. Where, however, it is part of a course of consistent conduct it may be silence which not only speaks but does so unequivocally. Where silence speaks, there may be a duty on the silent party in turn to speak to rectify the significance of his silence.

In White Rosebay Shipping SA v Hong Kong Chain Glory Shipping Ltd, The Fortune Plum [2013] EWHC 1355 (Comm), [2013] 2 CLC 884, [2013] 2 All ER (Comm) 449, Teare J approved the statements and approach of Rix LJ in the Stocznia case for arguments concerning the identification and effect of a continuing renunciation, which followed affirmation of an anticipatory repudiatory breach. Teare J stated, at [53]:

In a case of renunciation or anticipatory breach (as opposed to repudiation based upon an actual breach) it does not necessarily follow that a termination following an affirmation is a repudiatory breach. For if the renunciating party continues to renounce the contract after the affirmation then the acceptance of that continuing renunciation is not a repudiatory breach but a lawful termination of the contract with a right to damages caused by the renunciation.

On the facts, the owners had affirmed on 11 November, and Teare J noted, at [53], that:

If the charterers’ renunciation of the charterparty continued until 14 November when the owners purported to accept the charterers’ renunciation as terminating the charterparty then that termination is likely to be lawful and not repudiatory.

(p. 334) The Court of Appeal in Stocznia recognized that there was a period prior to the election during which 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 (see below).

8.7.4.2 Risks to the non-breaching party following the decision to affirm after the other party’s anticipatory repudiation

Following affirmation, the non-breaching party bears a number of risks during the period between affirmation and the contractual date for performance, which might seriously affect its position and remedies following the earlier renunciation. The existence of these risks lends support to the position adopted by the Court of Appeal in Stocznia Gdanska SA v Latvian Shipping Co. (No. 3) [2002] EWCA Civ 889, [2002] 2 All ER (Comm) 768, [2002] 2 Lloyd’s Rep 436, 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.

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

  1. 1. If the non-breaching party is itself in breach of contract, for example, that party cannot argue—at least not unless estoppel operates—that the initial renunciation by the other party operates as an excuse for its own subsequent breach.

In Fercometal SARL v Mediterranean Shipping Co. SA, The Simona [1989] AC 788, charterers of a ship gave notice of cancellation of the contract that was not in accordance with the terms of the charterparty and amounted to repudiation. The shipowners did not accept the repudiation, but instead gave notice of readiness to load. This notice complied with the charterparty’s terms and constituted an affirmation, but as the shipowners were not on the facts ready to load, the notice was false, and itself constituted a breach. The charterers consequently rejected the notice and gave further notice of cancellation, which on this occasion complied with charterparty’s terms. The shipowners sued the charterers. The House of Lords rejected this claim. 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 its own non-performance by reference to the earlier repudiation.

  1. 2. Similarly, if the contract is frustrated (see Chapter 12) 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.

In Avery v Bowden (1855) E & B 714, the master of a ship had been told in advance of the last possible date for loading that there was no cargo available. This may have amounted to repudiation. He elected to affirm the contract and remained in port, hoping that a cargo would eventually be provided. Before the last possible date for performance of the contract, the contract was frustrated by the outbreak of the Crimean War, thus depriving the shipowners of a remedy that they might have had for the failure to provide a cargo, had that repudiation been accepted as terminating the contract.

(p. 335) 8.7.4.3 Limitation on the ability to claim the contract price having affirmed

In White & Carter (Councils) Ltd v McGregor [1962] AC 413, Lord Reid discussed a further limitation (in addition to the legitimate interest requirement before being able to affirm) on the principle in that case. However, it is a limitation on the ability of the non-breaching party to claim the contract price, rather than a limitation on that party’s ability to affirm following a breach by anticipatory repudiation.

Key point

This second limitation requires that the affirming party must be able to continue with its own performance of the contract without the cooperation of the breaching party to be able to claim the contract price. (Otherwise, the affirming party will be limited to a remedy in damages.)

Cooperation in this context includes both active and passive cooperation of the breaching party, e.g. in Hounslow London Borough Council v Twickenham Garden Developments Ltd [1971] Ch 233, 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.

For a sale of goods contract, the seller can bring a claim for the price where property in the goods has passed from the seller to the buyer, which is determined by ss. 17 and 18 of the SGA 1979 (see the impact of the Supreme Court decision of PST Energy 7 Shipping LLC and another v OW Bunker Malta Ltd and another [2016] UKSC 23, [2016] AC 1034 in this area). If the sale is for specific goods, property passes immediately to the buyer (s. 18, r. 1). Specific goods are ‘identified and agreed upon at the time the contract is made’ (SGA 1979, s. 61). If the sale is for ‘unascertained or future goods by description’, property cannot pass until the goods are ‘unconditionally appropriated to the contract’ with the parties’ assent (s. 18, r. 5). Unascertained goods include generic goods, such as 1,000 gallons of diesel. Future goods are defined as ‘goods to be manufactured or acquired [by the seller] after the making of the contract of sale’ (s. 5(1)), and so would include, for example, a yacht to be manufactured to the buyer’s specification. Therefore, for unascertained or future goods, the buyer who has indicated in advance that he does not want the goods can prevent the seller who affirms from being entitled to claim the contract price, because the buyer’s assent is required for property in the goods to pass. In a practical sense, the buyer would refuse to accept delivery and therefore prevent property in the goods from passing: per Lloyd J in Clea Shipping Corporation v Bulk Oil International Ltd, The Alaskan Trader [1984] 1 All ER 129.

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 that has been prevented by the breach was a precondition to the payment obligation, i.e. the performance obligation was entire. In Ministry of Sound (Ireland) Ltd v World Online Ltd [2003] EWHC 2178 (Ch), [2003] 2 All ER (Comm) 823, the non-breaching party could perform only if CDs were supplied by the party in breach. However, since there was no link between the required performance and the right to receive the contractual payment, it did not matter that performance was impossible without cooperation, and since the contract had been affirmed and not terminated for repudiatory breach, in principle the contract term providing for payment could be enforced by a claim in debt (i.e. a claim for the sum due under the contract rather than a claim for damages).

(p. 336) Similarly, in Isabella Shipowner SA v Shagang Shipping Co. Ltd, The Aquafaith [2012] EWHC 1077 (Comm), [2012] 2 All ER (Comm) 461, [2012] 1 CLC 899 (for facts see 8.7.3.1), it was argued that the owners could not claim the remaining hire following early redelivery, since the operation of the charter involved the cooperation of the charterer. This argument was rejected. Cooke J, at [39], considered that: ‘the court must focus upon dependent obligations and whether the contract breaker had to do something before the innocent party could do what was required of him to earn the contract sum’. Since the hire was payable in advance, earning the hire was not dependent on any performance by the charterers of their obligations and the owners could hold the ship available without any cooperation.

8.7.5 Accepting the anticipatory repudiatory breach as terminating the contract

As discussed at 8.4.2.1, it must be clear to the party in breach that the non-breaching party has accepted the conduct as terminating the contract and, although it is possible as a matter of law for this to occur simply by the non-breaching party failing to perform its own contractual obligations, whether it will do so is ‘a question of fact depending on the particular contractual relationship and the particular circumstances of the case’: see generally Vitol SA v Norelf Ltd, The Santa Clara [1996] AC 800, per Lord Steyn at p. 811 (discussed at 8.4.2.1). In practice, however, it would seem to depend on whether the non-breaching party’s failure to perform its own contractual obligations is explicable to a reasonable person only on the basis that the non-breaching party has accepted the repudiation as terminating the contract.

If the non-breaching party has terminated following the renunciation, they can claim damages from that time and do not need to wait until the date fixed for performance under the contract: Hochster v De La Tour (1853) 2 E & B 678 (for facts, see 8.7.1). However, the non-breaching party would be under a duty to mitigate its loss as from the date of termination.

8.7.6 The risk of overreacting to a breach

A party faced with what it thinks is an actual or anticipatory repudiation must take careful stock before acting.

The position of a party confronted by conduct that is ambiguous and may amount to a repudiation is improved a little by the common-sense approach of Moore-Bick J in Yukong Line Ltd v Rendsburg Investments Corporation [1996] 2 Lloyd’s Rep 604. On this approach, a party’s legal position should not be adversely affected if the first steps taken are to verify the precise intentions of the other, since this will not necessarily amount to treating the breach as repudiatory and electing to affirm. In addition, the decision in Stocznia Gdanska SA v Latvian Shipping Co. (No. 3) [2002] EWCA Civ 889, [2002] 2 All ER (Comm) 768, also assists the position of the non-breaching party faced with the election to terminate or affirm, since it recognizes the existence of a period during which the non-breaching party can make up its mind on the election. Nevertheless, it will not be possible to delay unreasonably without risking a finding of affirmation.

However, if the non-breaching party mistakenly thinks that the other party has repudiated the contract, its own purported election to accept this action as discharging future obligations may itself amount to a repudiation, actual or anticipatory: Federal Commerce and Navigation Ltd v Molena Alpha Inc. [1979] AC 757.

(p. 337) It might be thought that there is some protection for the mistaken non-breaching party in the statement by Lord Wilberforce in the House of Lords in Woodar Investment Development Ltd v Wimpey Construction (UK) Ltd [1980] 1 WLR 277 that, in the absence of bad faith, the mistake as to its rights would not lead the court to regard a purported termination of the contract as a repudiation. It was accepted in Vaswani v Italian Motors (Sales and Services) Ltd [1996] 1 WLR 270 that merely to assert a claim based on an erroneous, but good faith, interpretation of the contract would not amount to a repudiation. However, the court was clear that there would necessarily be a repudiation if the assertion were to go beyond any position consistent with being willing to continue with the contract. In many instances, a party who, believing that a repudiatory breach has occurred, wishes to escape from the contract will make it perfectly clear that it wants no more to do with the contract: see Hongkong Fir Shipping Co. Ltd v Kawasaki Kisen Kaisha Ltd [1962] 2 QB 26 and Cehave NV v Bremer Handelsgesellschaft Gmbh, The Hansa Nord [1976] QB 44, in which the goods were wrongfully rejected. It is for this reason that this ‘good faith’ solution would not apply in a large number of cases.

To remove some of the uncertainty from that risk, English law might imitate § 2–609 of the US Uniform Commercial Code (UCC), which enables a party who has reasonable ground for insecurity with respect to the other’s performance to demand an assurance of the performance due and, if such is not forthcoming within a reasonable time, then to treat the contract as repudiated. Similar provisions exist in Art. 7.3.4 of the UNIDROIT Principles of International Commercial Contracts (PICC) and Art. 8:105 of the Principles of European Contract Law (PECL).

Multiple-choice questions

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Further reading

General

Carter, Carter’s Breach of Contract (Hart Publishing, 2012).Find this resource:

Classification of terms

Bojczuk, ‘When is a condition not a condition?’ [1987] JBL 353.Find this resource:

Girvin, ‘Time charter overlap: determining legitimacy and the operation of repudiatory breach of contract’ [1995] JBL 200.Find this resource:

Treitel, ‘Types of contractual terms’ in Some Landmarks of Twentieth Century Contract Law (Clarendon Press, 2002).Find this resource:

Weir, ‘The buyer’s right to reject defective goods’ [1976] CLJ 33.Find this resource:

Repudiatory breach and the election

Adams and Brownsword, ‘Breach and withdrawal’ in Key Issues in Contract (Butterworths, 1995).Find this resource:

Andrews, ‘A breach of contract: a plea for clarity and discipline’ (2018) 134 LQR 117.Find this resource:

Brownsword, ‘Retrieving reasons, retrieving rationality? A new look at the right to withdraw for breach of contract’ (1992) 5 JCL 83.Find this resource:

Carter, Courtney, and Tolhurst, ‘An assimilated approach to discharge for breach of contract by delay’ (2017) 76 CLJ 6.Find this resource:

Carter, Courtney, and Tolhurst, ‘Two models of discharge of a contract by repudiation’ (2018) 77 CLJ 97. (p. 338) Find this resource:

Carter and Courtney, ‘Breach of condition and express termination right: a distinction with a difference’ (2017) 133 LQR 395.Find this resource:

Ezeoke, ‘Assessing seriousness in repudiatory breach of innominate terms’ [2017] JBL 198.Find this resource:

Hedley, ‘Eloquent silences and reasonable people’ [1996] CLJ 430.Find this resource:

Morgan, Great Debates in Contract Law, 2nd edn (Palgrave Macmillan, 2015), ch. 8, pp. 223–34.Find this resource:

Morgan, ‘Repudiatory breach: inability, election and discharge’ (2017) 76 CLJ 11.Find this resource:

O’Sullivan, ‘Repudiation – keeping the contract alive’ in Virgo and Worthington (eds.), Commercial Remedies – Resolving Controversies (Cambridge University Press, 2017), ch. 3.Find this resource:

Reynolds, ‘Warranty, condition and fundamental term’ (1963) 79 LQR 534.Find this resource:

Reynolds, ‘Discharge of contract by breach’ (1981) 97 LQR 541.Find this resource:

Shea, ‘Discharge from performance of contracts by failure of condition’ (1979) 42 MLR 623.Find this resource:

Stannard and Capper, Termination for Breach of Contract (Oxford University Press, 2014).Find this resource:

Treitel, ‘Affirmation after repudiatory breach’ (1998) 114 LQR 22.Find this resource:

Wilmot-Smith, ‘Termination after breach’ (2018) 134 LQR 307.Find this resource:

Breach of entire obligation as repudiatory

Burrows, ‘Law Commission report on pecuniary restitution on breach of contract’ (1984) 47 MLR 76.Find this resource:

Law Commission Report No. 121, Pecuniary Restitution on Breach of Contract (1983).Find this resource:

Anticipatory breach

Carter, Phang, and Phang, ‘Performance following repudiation: legal and economic interests’ (1999) 15 JCL 97.Find this resource:

Coote, ‘Breach, anticipatory breach, or the breach anticipated?’ (2007) 123 LQR 503.Find this resource:

Dawson, ‘Damages for anticipatory breach’ [2016] LMCLQ 6.Find this resource:

Liu, ‘Inferring future breach: towards a unifying test of anticipatory breach of contract’ [2007] CLJ 574.Find this resource:

Liu, Anticipatory Breach (Hart Publishing, 2011).Find this resource:

Liu, ‘The White & Carter principle: a restatement’ (2011) 74 MLR 171.Find this resource: