Court of Appeal considers repudiation by conduct

Sebastian Vettel recently became the youngest driver ever to win the championship at this year’s season finale in Abu Dhabi. This case was an appeal by the sponsors, Etihad Airways, the Abu Dhabi national carrier, and Aldar, a property developer that built the new circuit in Abu Dhabi, against a High Court decision that they were liable in damages to the Force India Formula One team following their alleged repudiation of a sponsorship contract.

The parties had contracted in April 2007, giving the sponsors classic sponsorship rights, such as being the most prominent brand associated with the team under the name “Etihad Aldar Spyker Formula One Team”. However, in September 2007 the team was taken over by Indian entrepreneur, Dr Vijay Mallya, who rebranded the team, changing its name and created a strong affiliation with India with it ultimately being called the “Force India Formula One Team”. All of this was done contrary to the sponsors’ interests, and with no consultation. The sponsors tried to terminate the contract in January 2008. Both sides alleged that the other had wrongfully repudiated the contract.

The issue was whether the sponsors or the team had repudiated the contract.

At first instance, Sir Charles Gray QC (sitting as a judge of the High Court) held that the sponsors had repudiated the contract.

Cumulative breaches can constitute repudiatory conduct

On appeal, the Court of Appeal found that the team had committed repeated and continuing irremediable breaches of the contract which had been inconsistent with the sponsors’ “vital” rights, and constituted a repudiatory breach. It was a “cumulative, continuing and accelerating repudiation born of a very real clash of interests”.

Had the sponsors affirmed the contract?

An interesting part of the Court of Appeal’s judgment concerns the team’s argument that the sponsors had affirmed the contract, or waived or acquiesced in the breaches.

By way of reminder, it is possible to affirm a contract which another has repudiated. A repudiatory breach, whether actual or anticipatory, gives to the innocent party a right to elect whether or not to accept the repudiation as bringing the contract to an end (The Kanchenjunga [1990] 1 Lloyd’s Rep 391 (HL), as summarised in Tele2 International Card Company SA v Post Office Ltd [2009] EWCA Civ 9). An election requires knowledge of the relevant facts and a communication of the election, in words or conduct, in clear and unequivocal terms. A party may be taken to have elected to affirm where it acts in a manner which is consistent only with a decision to affirm or where it allows too much time to pass by without indicating any decision.

Effect of failed terminations

The team argued that an earlier purported exercise of contractual termination rights by the sponsor prevented it from relying on repudiation, because the very act of relying on the contract was inconsistent with arguing that it was terminated for repudiation. In a letter sent in January 2008, the sponsors had sought to terminate for, among other things, breach of contract. In this regard they sought to rely on contractual termination rights providing for termination where there had been a “material and remediable breach”. The Court of Appeal found, as a matter of fact, that irrespective of whether the breach was material, it was not remediable in practice. It was analogous with the publication of confidential information or the publishing of advertising matter not containing a party’s name; “a proper marketing campaign is, generally speaking, all of a piece...the marketing genie cannot be put back into the bottle”. In any event, the court found it was “perfectly clear from all that happened that [Force India] would not have been willing” to reverse its new branding if asked. This meant the contractual termination attempt was ineffective as it was not in accordance with the provisions of the contract relied upon.

A key question for the court was therefore whether a party’s attempted invocation of contractual termination rights prevents it from also relying on the common law doctrine of repudiation.

In Stocznia Gdanska SA v Latvian Shipping Co [2002] 2 Lloyd’s Rep 436, Rix LJ said: “the use of a contractual mechanism for terminating the contracts is not inconsistent with reliance on repudiatory conduct for effecting a common law acceptance of an anticipatory breach. Where contractual and common law rights overlap, it would be too harsh a doctrine to regard the use of a contractual mechanism of termination as unequivocally ousting the common law mechanism, at any rate against the background of an express reservation of rights”.

In Stocznia Gdynia SA v Gearbulk Holdings Ltd [2009] EWCA Civ 75, [2009] 3 WLR 67 Moore Bick LJ held that it is wrong to treat the right to terminate in accordance with the terms of a contract as different in substance from the right to treat the contract as discharged by reason of repudiation at common law. It is sufficient for the injured party simply to make it clear that he is treating the contract as discharged. If he gives a bad reason for doing so (ie a mistaken reliance on a contractual provision), his action is nonetheless effective if the circumstances support it.

In both Stocznia cases, as here, the question was whether the invocation of a contractual mechanism prevented reliance on the common law doctrine of repudiation. In both cases the Court of Appeal rejected the submission that it was. Where one party to a contract has repudiated it, the other may validly accept that repudiation by bringing the contract to an end, even if he gives the wrong reason for doing so or no reason at all.

In the present case, although the sponsors’ attempts to operate termination rights under the contract failed, their letter of 27 January 2008 made unequivocably clear that what the sponsors relied on was a deeply serious (“there can be no more blatant breach of our rights under the Sponsorship Agreement”) and irremediable breach of their vital rights under the contract, which entitled them to terminate it.

Effect of delay

The team also argued that the sponsors’ lack of complaint and course of conduct “over the months” amounted to an affirmation of the contract or otherwise waiver or acquiescence in any breaches of it. This argument was also rejected on an examination of the facts, which made it obvious that any delay in arranging meetings to discuss the issues was due to the team’s fault, and in any case the sponsors were not told until very late in the day about the changes being made.

Rix LJ commented that, although delay may always be capable of being compromising, this contract, especially during the winter break between two racing seasons, did not present the typical case where mere delay may demonstrate a decision to affirm.

Such cases typically occur where time is of the essence, for instance, in an extreme case where markets are always on the move such as in a share transaction, or more generally in a sales of goods case where a seller has to know whether or not his buyer is accepting goods that have been delivered. In the present case, it was not an urgent situation of that kind, nor was there some minor and remediable breach where the injured party only had 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.

This case concerned a complex and medium term relationship, which a takeover has destabilised, and where it had necessarily and legitimately taken time for the consequences to become clearer and for the innocent party to consider his position. This is the “middle ground” between acceptance of a repudiation and affirmation of a contract. The sponsors were considering their position, and Force India knew or should have known this. 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.

Jason Rix, Senior Professional Support Lawyer, comments: It is very rare that the courts are prepared to add together breaches in order to constitute a repudiation. It is surprising that no reference was made to the recent case of SK Shipping (S) Pte Ltd v Petroexport Ltd [2009] EWHC 2974 (Comm) (see the February 2010 Litigation Review) where Flaux J looked at the question of whether one could build a wall of renunciation if the individual bricks were not renunciatory. He held that in appropriate circumstances you could. The facts of the Force India case are dramatic. The sponsors had their names removed in their entirety from the team name. The decision shows that if the other party misbehaves sufficiently, the innocent party may be able to terminate even though the contract does not contain the express rights required.

In terms of tactics, if an innocent party thinks that it may need to delay the decision whether or not to affirm, then it is important that objectively justifiable reasons for doing so are given to the counterparty. On the other hand, if the innocent party is keen to speed up the process then it should aim to give its counterparty all the information that it needs to respond.

Further information

This case summary is part of the Allen & Overy Litigation Review, a monthly update on interesting new cases and legislation in commercial dispute resolution.  For more information please contact Sarah Garvey sarah.garvey@allenovery.com, or tel +44 (0)20 3088 3710.