Legal Briefing

A clearer picture of entitlement to damages flowing from repudiatory breach?

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Corporate & Commercial | 04 May 2011

In IHL174 Charlotte Bunn commented that the concept of repudiatory breach of contract, and its effects, are commonly misunderstood (p8). The recent Court of Appeal decision in Acre 1127 Ltd (In Liquidation) v De Montfort Fine Art Ltd [2011] should therefore be welcomed in so far as it is a reminder of the distinction between repudiatory breach and non-repudiatory breach of contract, and the circumstances in which the ‘innocent’ party will not be able to recover damages pursuant to the repudiatory breach.

Traditionally, where the ‘innocent’ party (that is to say the party not in repudiatory breach of contract) elects to treat a contracting party’s repudiatory breach as having terminated the contract, the innocent party’s obligations under the contract are at an end. It follows that it is usually irrelevant whether the innocent party can show a willingness to perform its obligations at the time of the repudiatory breach.

The decision in Acre 1127 marks a deviation from this traditional position and provides an example of circumstances where the willingness to perform the contract will be a requirement if that party is to be entitled to damages stemming from the repudiatory breach. Acre 1127 also illustrates the importance of recognising the circumstances whereby a breach of contract will amount to a repudiatory breach.

REPUDIATORY BREACH

A repudiatory breach of contract is, in simple terms, a breach that the law regards as sufficiently serious to justify termination. Although in some circumstances the terms of the contract will dictate when a breach can be considered to amount to a repudiatory breach, it is not difficult to see how uncertainty can arise as to when a breach can rightly be considered a repudiatory breach.

FACTS OF ACRE 1127

The appellant company (Castle Galleries Ltd) appealed against a judgment that it was liable to pay the respondent (De Montfort) damages for breach of a supply agreement entered into on 25 January 2005 (the agreement). Under the terms of the agreement, Castle was to purchase a minimum of £250,000 worth of artwork each quarter until termination by 12 months’ notice.

Notably, there was a disagreement between the parties as to whether an order for the goods had been formally agreed on 19 January 2005. It was De Montfort’s contention that, as a result of a meeting on 19 January 2005 (the meeting), Castle had placed a detailed order for specified works of art. Castle, on the other hand, maintained that, as the meeting had taken place for the purpose of identifying suitable ranges and artists with a view to future orders, no order had been placed. Castle subsequently refused to accept delivery of the artwork that De Montfort alleged had been ordered, and did not make any further orders in the second, third and fourth quarters of the agreement.

De Montfort claimed that Castle’s refusal to accept delivery and reluctance to place orders amounted to a repudiatory breach of the agreement. De Montfort’s solicitors sent Castle a letter to this effect (the letter), which clearly indicated that De Montfort considered itself discharged from any further obligation under the agreement. Castle counterclaimed that De Montfort was in repudiatory breach by virtue of it having sought fulfilment of an order that Castle had never placed. The court at first instance found for De Montfort.

FINDINGS OF THE COURT OF APPEAL

The Court of Appeal found that Castle’s conduct had not amounted to a repudiatory breach because the failure to place orders for the second, third and fourth quarters following entry into the agreement was inextricably linked to the dispute that followed the meeting (ie whether an order had actually been placed). The court also found that the initial correspondence from De Montfort’s solicitors made no attempt to assert that Castle’s conduct was a breach of repudiatory nature. As a result, the court concluded that Castle’s conduct could not have been interpreted by De Montfort as evidencing their unequivocal intention not to be bound further by the agreement.

As there had been no repudiatory breach by Castle, and only a breach of contract that entitled De Montfort to damages for the lack of orders placed in the second, third and fourth quarters, De Montfort was itself found to be in repudiatory breach when it indicated a clear refusal to perform the agreement from the date De Montfort’s solicitors sent the letter to Castle.

As a result of its findings, the court reduced the award that had previously been made in favour of De Montfort to reflect only the lost profits caused by Castle’s failure to place orders in the second, third and fourth quarters as determined in the agreement. De Montfort was not entitled to damages for the remainder of the agreement.

While De Montfort’s conduct amounted to a repudiatory breach of contract, that in the course of legal proceedings Castle had elected to treat as terminating the agreement, Castle was unable to recover damages for the remainder of the contractual term. The court determined that, as Castle had not been willing to fulfil its obligations for the remainder of the agreement, and as it had left a significant delay between the repudiatory breach and electing to treat the agreement as terminated, it should not be entitled to recover damages for De Montfort’s non-performance.

BASIS OF THE COURT OF APPEAL’S DECISION: ANALOGY WITH THE DEFENCE OF IRREMEDIABLE DISABILITY

According to the authorities of Braithwaite v Foreign Hardwood Company (1905), British and Beningtons Ltd v North Western Cachar Tea Co (1923) and Cooper, Ewing & Co Ltd v Hamel & Horley Ltd (1923), where a party in repudiatory breach can show that at the time of the repudiatory breach the innocent party was already permanently disabled from performance of their own obligations (for a reason other than the repudiatory breach itself), this will prevent the innocent party from recovering damages. Tomlinson LJ considered that Castle’s unwillingness to perform was analogous to this ‘irremediable disability’ rule.

The irremediable disability rule seeks to prevent a party from recovering damages for repudiatory breach where the contract would not have gone ahead anyway, regardless of whether or not there was a breach. Applying the same logic, Castle’s unwillingness to perform the contract meant that De Montfort’s repudiatory breach did not cause Castle any loss, because the contract would not have been performed in any event.

CASTLE’S UNWILLINGNESS TO PERFORM ITS OBLIGATIONS

Castle contended that its failure to perform its obligations under the agreement stemmed from De Montfort’s alleged insistence that the disputed order is honoured first and the subsequent refusal of access to premises for the purpose of selecting new works. The Court of Appeal did not accept this argument and found that Castle was simply unwilling to perform its obligations under the agreement. The court based this largely on Castle’s failure to place any orders or bring any action against De Montfort over the lengthy period between the disputed first order and the eventual acceptance of the repudiation. Castle had made no attempts to seek performance by De Montfort or advance a claim for damages in the period between the repudiatory breach and Castle filing its counterclaim.

UNWILLINGNESS UNCONNECTED TO THE BREACH

As mentioned above, the ‘irremediable disability’ defence requires that the inability to perform is unconnected to the repudiating act. Were it to be otherwise, a repudiatory breach that rendered performance impossible would be self-serving in that the repudiator would be free from liability for damages purely on account of the breach. The Court of Appeal held that this applied equally to Castle’s unwillingness and lack of intention to perform, and that it was clear from the facts of Acre 1127 that Castle had proved unwilling to perform the agreement since long before De Montfort’s repudiatory breach.

CONCLUSION

The judgment in Acre 1127 is useful for several reasons.

First, it highlights the distinction between repudiatory breach of contract and a non-repudiatory breach. Any person attempting to claim damages as a result of a repudiatory breach should closely analyse whether the breach is indeed sufficiently serious so as to give rise to a right to terminate by the other party. The innocent party should also perform a thorough assessment of their own conduct during the life of the contract. Should De Montfort’s solicitors have indicated in correspondence that De Montfort was willing to proceed with the agreement if Castle’s breaches were remedied, it would likely not have amounted to a repudiatory breach and would have forced Castle to perform or repudiate themselves.

Secondly, the decision suggests that the Court of Appeal is reluctant to award a party damages pursuant to a breach of a contract which that party had no intention of performing, even though a party’s willingness to perform is not generally questioned where the counterparty’s conduct amounts to a repudiatory breach. Where it can be shown, notwithstanding the repudiatory breach, that a contract would not have been by virtue of the innocent party’s unwillingness to comply with its terms, then the innocent party may have difficulty in showing it suffered loss as a result of the counterparty’s breach.

Thirdly, the decision illustrates the importance of the innocent party making a clear and timely statement as to whether it seeks to affirm the contract or treat it as terminated following a repudiatory breach. The Court of Appeal here has indicated that parties should not be able to delay treating the contract as terminated indefinitely only to rely on having done so at a later date when seeking damages. In Acre 1127 the delay ultimately provided further time in which Castle displayed its unwillingness to perform the agreement.

COMMENT

The interesting aspect of Acre 1127 relates to the Court of Appeal’s justification for refusing to award Castle damages for De Montfort’s repudiatory breach. On the facts of Acre 1127, Castle is clearly in breach of contract for failing to place any orders under the terms of the agreement, but Castle’s actions were not deemed sufficiently serious to allow De Montfort to terminate.

The Court of Appeal’s willingness to draw analogies with the ‘irredeemable disability’ rule signifies its reluctance to award a party damages pursuant to a contract that it had no intention of performing. However, it is unclear whether the decision would have been the same if there had been no delay on Castle’s part in treating the agreement as terminated following De Montfort’s repudiatory breach. It is clear that it was Castle’s unwillingness to perform that barred it from recovering damages, but it is unclear whether its failures to place orders in the second, third and fourth quarter would have been sufficient in proving this unwillingness had there not been such a delay (and further evidence of unwillingness to perform) after the De Montfort’s repudiatory breach.

Perhaps the most useful lesson to learn from the decision is that unwillingness to perform the contract can be used against a party that is seeking damages pursuant to it. Therefore, to ensure maximum entitlement to damages where a counterparty is in breach, it would be prudent to insist on performance until it is clear the other party is not willing to honour its obligations any further.