Legal Briefing

Are parties able to rely on their own breach of contract?

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Corporate & Commercial | 01 September 2011

The courts are regularly asked to imply terms into contracts, and will do so where it can be found that such an implication would reflect the true intentions of the parties. In certain cases, the courts are assisted by rules of construction that create a presumption against a particular intention of the parties.

One such example, is the well-established presumption that parties do not intend that either party should be able rely on its own breach of obligations to avoid a contract or obtain any benefit under it, unless the contrary is clearly provided for by the contract (New Zealand Shipping Co v Société des Ateliers et Chantiers de France [1919] AC 1).

The recent Court of Appeal decision in BDW Trading Ltd (T/A Barratt North London) v JM Rowe (Investments) Ltd [2011]provides an example of circumstances in which the wording of the contract was found to exclude this presumption and should serve as a warning to parties seeking to specify circumstances in which the right to rescind, namely the right to terminate the contract as if it never existed, is lost.

The judgment in BDW also considered waiver of the right to rescind and set out a helpful analysis of circumstances in which a delay in the election to rescind will not amount to a waiver of that right.

FACTS OF BDW

The freehold of several high-street premises was owned by JM Rowe (Investments) Ltd (Rowe). Alliance and Leicester plc (A&L) occupied one of those under two ten-year leases, both running from 24 March 2006. The first of these pertained to the front of the property and the second to the rear. The lease on the rear part of the premises contained a break clause entitling Rowe to terminate the lease on six months notice at any time after 25 March 2007, in exchange for payment of a capital sum and an allowance against the rent on the front lease.

Rowe agreed to sell the high-street premises, with the exception of the front part of the A&L occupied property, to BDW Trading Ltd (Barratt) on 7 February 2008 and accordingly served notice to terminate the lease with A&L on 18 March 2008.

The contract for the sale to Barratt contained several conditions precedent (clause 6.2), that, if unsatisfied by 7 July 2008, would entitle either party to rescind the contract. One of the conditions precedent was that Rowe would provide written confirmation that ‘all sums due’ to A&L, on account of terminating the lease, had been paid and provide a copy of the written receipt to Barratt’s solicitors (clause 6.2(vi)).

A late addition, in manuscript, prior to the signing of the contract of sale, was the proviso that the entitlement to serve notice to rescind applied ‘save where the party purporting to serve such notice is in default of its obligations under this clause 6.2’.

Following exchange of contracts, Rowe granted A&L a tenancy at will, so allowing the continued occupation of the rear of the premises. Accordingly, and unknown to Barratt, Rowe and A&L exchanged side letters agreeing to postpone the termination payment due under the lease.

For commercial reasons, Barratt served notice to rescind the contract on 25 November 2008 on the grounds of Rowe’s failure to satisfy clause 6.2(vi).

On 4 February 2009, Barratt issued proceedings in the High Court, seeking the return of the deposit and Rowe counterclaimed seeking specific performance of the contract or damages in the alternative. The High Court ruled in favour of Barratt, and Rowe subsequently appealed to the Court of Appeal on several grounds, each unsuccessful, and two of these in particular warrant further analysis:

  1. A party may not rely on its own breach and Barratt had breached clause 15.2 of the contract in the run up to the 7 July 2008 causing Rowe’s breach of clause 6.2(vi);
  2. Barratt had elected to affirm the contract and so lost the right to rescind between 7 July 2008 and serving notice on 25 November 2008.

RELIANCE ON OWN BREACH

The presumption that parties do not intend that either should be able to rely on their own breach to avoid a contract is subject to any clear provision to the contrary in the contract.

The Court of Appeal considered that the right to rescind under the conditions precedent was expressly subject to the handwritten proviso that the party serving notice was not in breach of its own obligations under clause 6.2. The question for the appeal was whether this proviso should constitute the only limit on each parties right to rescind for breach of a condition precedent.

Patten LJ stated that to allow a breach of other sections, such as 15.2, of the contract to prevent rescission would require the court to attribute to the parties an intention to further limit their rights despite there having already been an express choice to limit themselves in more restrictive terms.

Patten LJ continued that the language employed in the handwritten proviso, ‘save where’, suggested that it should be an exhaustive restriction. Further, he considered that the contract was of a commercial nature and entered into by parties benefiting from legal advice, which lead to the ‘irresistible’ conclusion that any intended, wider application would have been expressly spelt out.

The Court of Appeal considered that the wording of the proviso was sufficiently clear so as to override the presumption that a party may not rely on their own breach to avoid a contract and therefore Barratt was entitled to rescind regardless of whether there had been a breach of the other provisions.

As a result of this finding, the Court of Appeal was under no obligation to consider the question of whether Barratt’s breach of clause 15.2 caused the subsequent breach of clause 6.2(vi) by Rowe, but did so due to its relevance to the issue of damages and found in favour of Barratt1.

The key implication of the Court of Appeal’s finding on this issue, is that contracting parties should take care in drafting express statements of limitations on the right to rescind, as this may be considered an exhaustive list and so debar any wider limitation.

ELECTIONS TO AFFIRM

The Court of Appeal found that Barratt’s right to rescind under clause 6.2(vi) crystallised on Rowe’s failure to provide notice of payment of the termination sum to A&L by 7 July 2008. Rowe contended that by continuing to negotiate the form of warranties and other matters, right up to the notice of rescission on 25 November 2008, Barratt had elected to affirm the contract and so waived the right to rescind.

For a waiver by election to be effective, the electing party must be aware that it has the ability to decide between taking enforcement action and electing instead to affirm the contract.

The election itself must take the form of an outward manifestation or some other conduct, indicating a knowing, irrevocable election (Insurance Corporation of the Channel Islands v The Royal Hotel Ltd [1998]).

In BDW, the Court of Appeal considered it unlikely that Barratt had no knowledge of the contract terms and the right to rescind as of 7 July 2008, particularly as it was benefiting from legal advice. Patten LJ stated that, despite this finding, having knowledge of the matter:

‘… is not the same as applying one’s mind to the question at some particular point in time’ (para 76).

It is the application of thought and the reaching of a decision that allows knowledge of a breach to become an election.

Patten LJ then considered several authorities on elections to affirm and drew attention to what he called the ‘classic’ election scenario, whereby one party breaches a significant term which amounts to a repudiation and the other party is then faced with a choice between accepting the repudiation and terminating the contract or affirming the contract. In such a scenario, he considered that continued performance is likely to amount to an election to affirm.

The BDW facts were distinguished from this classic scenario and the Court of Appeal considered that due to the nature of the contract, Barratt was not faced with the requirement to make an immediate election. The disputed contract terms were found to confer upon Barratt the right to rescind at any time following non-satisfaction of the conditions, rather than immediately upon the right becoming available and therefore no election had been made until the notice of termination on 25 November 2008.

The Court of Appeal also found that the particular terms of the contract prohibited rescission for breach of a condition precedent only if the rescinding party was in default of their own obligations under that provision. Clause 6.2(iii) required that Barratt continued to act reasonably and use all reasonable endeavours to agree warranties and method statements, so continuing to engage in such negotiations enabled the rescission as opposed to waiving it.

The BDW decision provides a reminder that continued performance of a contract will not necessarily amount to the waiver of a right to rescind and that the courts will pay close attention to the specific requirements of the right to rescind in reaching their decision. It should be noted though, that the Court of Appeal distinguished Barratt’s rescission for breach of a condition precedent from the classic scenario of a repudiatory breach and considered that the latter could more readily be waived by continued performance.

CONCLUSION

The Court of Appeal’s decision in BDW serves as a reminder to carefully consider all contractual provisions as, in this case, a late manuscript addition effectively prevented Rowe from relying on a well-established presumption as to the intent of parties.

A further lesson from the judgment is to carefully consider the full implications of a limitation on a right of rescission. Using terms such as ‘save where’ implys an exhaustiveness that could eventually restrict the freedom to take advantage of even well-established presumptions as to intent. In light of the BDW decision, it would appear prudent to give careful consideration to any other breaches of contract that each party would expect to be able to rely on in restricting the others’ right to rescind.

The case also illustrates that continued performance of a contract will not always amount to a waiver of the right to rescind, particularly when the right to rescind is contingent upon the continued conduct. The Court of Appeal found that the contract was worded so as not to limit Barratt to the need to make an instant election, but cautioned that such a decision will be taken on a case-by-case basis.

 

Note

  1. On the grounds that the payment due under the lease fell due on termination of that lease, which was before the deadlines for delivery imposed on Barratt under clause 15.2, meaning that any breach of the latter could not be responsible for the non-payment (Patten LJ at para 47).