Repudiation

Everyone knows things can go wrong on a contract. Sometimes they seem to get out of control. How bad do things have to be before the innocent party can call things off? This is the question lawyers answer with discussions about “repudiation”.

What do we mean when we say “repudiation”?

The word “repudiation” is ambiguous and has several meanings but it is the most convenient term to describe circumstances where “one party so acts or so expresses himself as to show that he does not mean to accept the obligations of a contract any further” (Heyman v Darwins [1942] A.C. 356). Repudiation, if accepted by the innocent party (by “rescission”), releases both parties from further performance.

How does a party repudiate?

Repudiation can take three forms.

First, a party may act (or fail to act) in such a way that he prevents himself from performing his contractual obligations in an essential respect: such impossibility, if demonstrated, can amount to repudiatory breach.

Second, a party may renounce the contract. “Renunciation” occurs where the party in breach in words or by conduct shows either that he does not intend to perform his obligations under the contract in some essential respect or expressly declares that he is or will be unable to perform them. This is to be judged by looking at all the circumstances objectively, from the perspective of a reasonable person in the position of the innocent party.

Third, the party may breach a contract in a way which more generally is held to amount to repudiatory breach, depending on how the relevant obligation is characterised. Breach of a contractual condition will amount to repudiatory breach. However, where the relevant obligation is a “warranty”, only damages can be obtained. Between “conditions” and “warranties”, there are “innominate terms”. In respect of “innominate terms”, the test is that a breach (or set of breaches) amounts to repudiatory conduct, if it “goes to the root of the contract” or, put another way is so serious as to “frustrate the commercial purpose of the contract” (see cases such as Suisse Atlantique Societe d’Armement SA v NV Rotterdamsche Kolen Centrale [1967] 1 A.C. 361 and Hongkong Fir Shipping Co. Ltd v Kawasaki Kisen Kaisha Ltd [1962] 2 Q.B. 26).

Repudiatory conduct can therefore be demonstrated from a breach which has occurred or by looking forwards and showing that the other party is going to fail to perform its obligations: the second type of breach is called an “anticipatory” breach.

Is the test any different, depending on whether the breach is anticipatory or actual? No. Proving renunciation depends on whether the non-performance will amount to a breach of a condition of the contract or deprive the other part of substantially the whole benefit which it was the intention of the parties that he should obtain from the obligations of the parties under the contract (The Nanfri [1979] A.C. 757).

One might think repudiation by breach of a condition should be easier to establish: if it is a condition then the breach does not have to go to “the root of the contract” for the other party to prove repudiation. Unfortunately, it is not as simple as that. There is often argument whether a given term is a condition or not. Use of the word “Condition” in the contract is not necessarily enough (L Schuler AG v Wickman Machine Tool Sales Ltd [1974] A.C. 235). The approach taken by the Courts can be rather circular: a term is more likely to be a condition whether the contract identifies a right to terminate for breach (Stocznia Gdanska SA v Latvian Shipping Co, Latreefer Inc and Others [2002] 2 Lloyd’s Rep. 436). So, the parties may need to make crystal clear just which terms are “conditions” in this sense.

How do we know the party has repudiated?

In most cases where the impossibility created by one party has manifested itself by conduct, the innocent party will rely upon renunciation by conduct rather than impossibility, because renunciation is much easier to establish.  Let us look at some of the types of breach which apply in a construction. However, one must remember what Etherton LJ said in Eminence Property Developments Ltd v Heaney [2010] EWCA Civ 1168; [2011] 2 All E.R. (Comm) 223: whether or not there has been a repudiatory breach is highly fact sensitive: comparison with other cases is therefore of limited value.

(a) Disagreement on contract terms

The mere fact that a party believed it was entitled to do what in law was a breach of contract does not excuse it if the breach was repudiatory. However, one has to establish a clear and absolute refusal; it is not repudiatory conduct if the party’s position would change if he were shown not to be correct in his understanding of his legal rights (Chilean Nitrate Sales Corp v Marine Transportation Co Ltd (The Hermosa) [1982] 1 Lloyd's Rep. 570).  Thus, for example, in Jim Ennis Construction Ltd v Combined Stabilisation Ltd [2010] C.I.L.L. 2820, the parties agreed a final account settlement figure, against which the contractor paid the sub-contractor ninety five per cent promptly, considering that it was entitled to apply the set-off. This error was found not to be a repudiatory breach.

(b) Wrongful reliance on a contractual determination provision

Woodar v Wimpey demonstrates that wrongly relying on a determination provision is not necessarily a repudiatory breach. That case involved a contract of sale. By a three/two majority, the House of Lords held that the purchaser was not in repudiatory breach by giving a notice of rescission but the facts were unusual: first, the parties seemed to accept that the notice was a protective measure and not treated by the vendor as hostile; second both parties seemed to indicated that they would simply await the outcome of the Courts’ decision and accept it. 

Generally, however, matters are less amicable. In Dalkia Utilities Services Plc v Celtech International Ltd [2006] EWHC 63 (Comm); [2006] 1 Lloyd's Rep. 599, a contractor was held to be entitled to determine the contract in the event of non-payment of three separate monthly instalments. The Court held that, if that had not been the case, the contractor’s notice of termination would have been a repudiatory breach since it was clearly indicating a refusal to carry out any further work.

Dalkia accords with what is most likely to be the case in a construction scenario but there is a real danger in seeking to engineer another party’s breach. In Eminence Property Developments Ltd v Heaney [2010] EWCA Civ 1168; [2011] 2 All E.R. (Comm) 223, the Defendant agreed to sell the Claimant 13 flats. The completion date passed and the Claimant serviced notice to complete, wrongly identifying the final date for completion as earlier than was correct.  That was met with silence and, when the Claimant then prematurely served notices of rescission, the Defendant argued that the Claimant was in repudiatory breach. The Court of Appeal rejected that contention: looking at the circumstances objectively, an observer would consider the Claimant’s honest mistake not to be a clear intention to refuse to perform the contract.

(c) Stopping work

Wrongly suspending work is not automatically a repudiatory breach, as is shown in the decision in Mayhaven Healthcare Ltd v Bothma [2009] EWHC 2634 (TCC); [2010] B.L.R. 154; 127 Con. L.R. 1. The contractor had suspended work on the mistaken view that a payment due to it had not in fact been made. The Court held that the arbitrator deciding the subsequent dispute had not erred in law in deciding that such a genuine mistake, which the paying party had been aware of but had not corrected, did not amount to repudiation. Ramsey J stressed that whether a contractor’s wrongful suspension of the works amounts to a repudiatory breach will depend on the terms of the contract, the breach or breaches of contract and all the facts and circumstances of the case.

Parties should beware of trying to “jog” others into repudiatory breach. It has been held that the complaining party cannot rely on a breach which has resulted from its own breach of contract/act of prevention. In C.J. Elvin Building Services Ltd v Noble [2003] EWHC 837 (TCC), the Court held that an employer which was guilty of non-payment of invoices was in serious breach of contract and was unable to contend that the contractor’s suspension was a repudiatory breach: the breach had been caused by the employer’s own failure to make payment.

Stopping work to force a party to change contract terms is another matter. A party’s non-performance in such circumstances was held to be repudiatory in Gold Group Properties Ltd v BDW Trading Ltd [2010] EWHC 1632 (TCC). The contractor had not commenced work on time, had failed to proceed with the work with due diligence and was not going to finish by the completion date and had made it clear that it was not going to proceed unless the other party agreed to revised payment proposals.

(d) Delay

In construction contracts, there are normally provisions setting out the effect of delay: usually fixing the amount on a weekly basis. The starting point therefore is that the parties have agreed what damage is likely to be suffered and a mechanism to pay it, which would indicate that delay does not go to the root of the contract. Time is not of the essence in the sense that it is not generally treated as a condition.

The test in relation to delay therefore is that one has to consider whether the delay in issue has deprived (or, in the case of continuing breach, is likely to deprive) the innocent party of substantially the whole of the benefit it should have achieved from the contract (Astea (UK) Ltd v. Time Group Ltd [2003] EWHC 725, [2003] All ER (D) 212)).

More recently, in Ampurius Nu Homes Holdings Ltd v Telford Homes (Creekside) Ltd [2013] EWCA Civ 577; [2013] 4 All E.R. 377, the Defendant developer was to develop four mixed-use blocks (A, B, C and D). The other party ultimately intended to take 999-year leases of commercial units in the blocks. The target date for completion of blocks C and D was July 2010; for A and B the date was February 2011. Work on C and D fell behind schedule but was completed by April 2011. Work on A and B was suspended because of funding difficulties but had recommenced at the time of purported termination. The Court of Appeal held that it was essential to focus on the financial loss actually suffered as against the ultimate objective of the contract, in the case the grant of 999 year leases. At present, the developer had suffered no loss thus far and set against a purchase price exceeding £8 million and overall development costs exceeding £100 million, the predicted loss to be suffered of some £100,000 additional funding was not of a scale sufficient to characterise it as repudiatory.

Much depends on what the parties knew of the likely effect of delay. In South West Water Services Ltd v International Computers Ltd [1999] B.L.R. 420, the parties contracted for delivery of a computer system with a required level of functionality. The Claimant claimed that it was entitled to terminate the contract when the Defendant was unable to give an assurance that it would deliver the computer system on time. The completion of the contract in time for the 1997 billing season was held to be a term of the agreement. The effect of the delay was that the realistic date for full development of the system had moved back to the end of 1998 and that there was a high risk that the system could not be developed to meet the Claimant’s requirements even by that date. This delay was so grave as to go to the root of the contract.

Parties sometimes take the view that they can, once the completion date has passed, give a notice requiring completion by a certain date, hence making “time of the essence” so that, in effect, further delay automatically becomes a repudiatory breach. That is not correct. One still has to prove that the further breach is a repudiatory breach (Re Olympia & York Canary Wharf Ltd (No. 2) [1993] BCC 159). There has been some lack of clarity as to what impact the notice does have.  In Multi Veste 226 BV v NI Summer Row Unitholder BV [2011] EWHC 2026 (Ch); 139 Con. L.R. 23, Lewison J held that “service of notice making time of the essence changes the question from whether delay amounts to a repudiation to the question whether failure to perform the obligation at all amounts to a repudiation.” If that is right, then a notice making time of the essence in a construction contract would be powerful because not carrying out any further work at all clearly would constitute repudiation. However, by the time he considered the issue again, in the Court of Appeal, Lewison LJ was not so sure (see Samarenko v Dawn Hill House Ltd [2011] EWCA Civ 1445; [2013] Ch. 36).  The safest approach is to treat the notice as evidence of the date by which the innocent party considers it reasonable to require the contract to be performed, hence failure to perform by that date is evidence of an intention not to perform but the notice does not automatically make further delay a repudiatory breach: see the most recent Court of Appeal decision, in Urban 1 (Blonk Street) Ltd v Ayres [2013] EWCA Civ 816; [2014] 1 W.L.R. 756). In that case the Court overturned a finding of repudiatory delay. The defendants were to be granted a 125-year lease of residential premises. The delay of approximately one month between the earliest possible date for contractual completion and the defendants’ purported termination of the contract could not possibly be said to have deprived the defendants of a substantial part of the benefit of the contract, let alone substantially the whole of the benefit.

(e) Non-payment

Mere non-payment is unlikely to be repudiatory, as the result in the Dalkia case showed: non-payment of three monthly payments was significant so as to justify use of a contractual determination provision, but not repudiatory. However, persistent and cynical breaches can be repudiatory, where they indicate that the paying party is likely to continue a pattern of failing to observe the contract terms, in particular where the contract provided the other party’s only income: see the Court of Appeal decision in Alan Auld Associates Ltd v Rick Pollard Associates [2008] EWCA Civ 655; [2008] B.L.R. 419, in which there had been substantial delay to payment of 19 invoices.

(f) Defects

Widespread defects, in particular where the works are in delay, can amount to repudiatory breach. An instance is Eribo v Odinaiya [2010] EWHC 301 (TCC), in which the defects included the total failure of the electrical systems.

(g) Repeated breaches

Breaches which are not repudiatory in themselves may together be so serious as to justify rescission. The Court will consider the history and also what it indicates about the future if the breaches indicate that the party shall continue to underperform with the result that the other party would be deprived of a substantial part of the totality of what it contracted for (Rice v Great Yarmouth BC [2003] T.C.L.R. 1). This involves the same analysis as in other instances: first, what is the benefit of the contract to the innocent party against that benefit; second, how serious is the effect of the breaches on that benefit?

When do we look at the facts?

The question of whether a party is in repudiatory breach is to be considered as at the time not of the relevant breach but of the time the other party claims to accept the breach: this applies both to actual and anticipatory breach (see the Court of Appeal decision in Telford Homes (Creekside) Ltd v Ampurius Nu Homes Holdings Ltd [2013] EWCA Civ 577, a construction case). This means that the tribunal must take into account events post breach, including any steps taken to remedy them.

Getting to repudiation

What can one conclude from this? First, one must always identify what the contract was for; what was the benefit the innocent party was intended to obtain? This means taking into account only what the contracting parties agreed or knew. Second, one has to identify what loss the innocent party has suffered and what loss it is likely to suffer from the breaches. Third, one has to judge the effect of the loss against the benefit before one can prove repudiation has occurred. Fourth, one can improve one’s position by giving notice in the case of delay, but this is not going to provide an automatic entitlement to bring the contract to an end. Fifth, if there is one thing the Courts do not like, it is cynical conduct. They frown on attempts to “game” the situation to enable one to terminate the contract. Finally, if one wants to be sure that one can terminate, one should ensure that the contract contains express rights to do so. But that is another issue.

Article by John Denis-Smith of 39 Essex Chambers  www.39essex.com

John Denis-Smith is a barrister at 39 Essex Chambers, specialising in construction and commercial disputes.