Case law: Repudiatory breach of contract may mean contract ends automatically, with no option to continue it
A party to a contract faced with a repudiatory breach by the other side should consider whether the circumstances mean the contract's commercial purpose is frustrated. If it is, the contract ends automatically and it loses the option of choosing to continue it, following a recent ruling.
This update was published in Legal Alert - September 2016
Legal Alert is a monthly checklist from Atom Content Marketing highlighting new and pending laws, regulations, codes of practice and rulings that could have an impact on your business.
A seller hired shipping containers from a shipper to transport cargo to a buyer. Under a 'liquidated damages' clause, the shipper could charge daily payments for every day the empty containers were not returned to it after delivery.
Liquidated damages clauses provide for payment of a fixed sum in the event of breach of a contract, in order to avoid protracted and expensive disputes over the amount of compensation payable.
The seller's problem was that its buyer failed to collect the cargo, even though ownership had passed to it. The seller was therefore unable to unpack the containers and return them to the shipper. When it informed the shipper, the shipper started charging the daily rate for non-return of the containers. As the seller could not force the buyer to collect the cargo, allowing it to return the empty containers to the shipper, the seller's liability to continue to pay the daily rate was potentially open-ended.
The High Court ruled that the seller had committed a 'repudiatory breach' of the contract when it told the shipper it could not return the containers. The legal test of whether there has been a repudiatory breach is whether, from the perspective of a reasonable person in the position of the innocent party, looking at all the circumstances, the contract breaker has shown a clear intention to abandon and altogether refuse to perform the contract.
If there has been a repudiatory breach the innocent party usually has a choice of either treating the breach as ending the contract, or affirming the contract so it continues. Previously, the courts have said an innocent party can make its decision in its own commercial interests, and has no duty to take the other party's interests into account.
However, in this case the High Court said that as the shipper had 'no legitimate interest' in affirming the contract, it could not do so. It had no option but to treat the breach as ending the contract. This implied that an innocent party's decision whether to affirm or end the contract following a repudiatory breach is subject to a duty to act in good faith.
On appeal, the Court of Appeal agreed that the contract had been repudiated and had ended, but applied different reasoning to the High Court. It said that the contract in this case had been repudiated by the delay which had frustrated the commercial purpose behind the contract. This meant the repudiation automatically ended the contract. The shipper had therefore lost the option to affirm the contract, as there was no longer any contract to affirm.
Notably, one of the appeal judges warned against implying any duty on a contractual party to act in good faith if there was a repudiatory breach by the other party, saying: "The recognition of a general duty of good faith would be a significant step in the development of our law of contract with potentially far-reaching consequences." His view was that there was "a real danger that if a general principle of good faith were established it would be invoked as often to undermine as to support the terms in which the parties have reached agreement".
- A contractual party faced with a repudiatory breach by the other side should consider whether the circumstances mean the commercial purpose of the contract is frustrated so that the contract is automatically ended, and they have no option to affirm the contract
Case ref: MSC Mediterranean Shipping Company S.A. v Cottonex Anstalt  EWCA Civ 789
Please note: An article published in the April 2015 edition of Legal Alert covered this case at an earlier stage in the legal process.
Disclaimer: This article from Atom Content Marketing is for general guidance only, for businesses in the United Kingdom governed by the laws of England. Atom Content Marketing, expert contributors and ICAEW (as distributor) disclaim all liability for any errors or omissions.