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Remedies for repudiatory breach considered

30 January 2012

In Howard-Jones v Tate [2011] EWCA Civ 1330, 24 November 2011 the Court of Appeal has considered the remedies available following a repudiatory breach of contract.

Although the case does not decide new law, it contains a useful summary of the remedies available for repudiatory breach and provides a good example of how the remedies for repudiatory breach differ from those for misrepresentation. This is an area of law which can confuse parties to litigation because use of the term “rescission” in both contexts leads to the wrong principles being applied.

The case concerned a contract for the purchase of an outbuilding on the defendant’s farm, which the claimant intended to use for his business. Since the property did not have its own independent utility supplies, it was agreed (as a condition of the contract) that the defendant would arrange for utility supplies to be provided no later than six months from the date of completion of the contract. The defendant failed to provide the utility supplies, so the claimant served notice indicating that he intended to rescind the contract if the utility supplies were not provided by a certain date. When they were still not provided, he issued proceedings seeking (i) an order for rescission of the contract and (ii) damages.

At first instance, the court held that although the breach went to the heart of the contract, the claimant was not entitled to rescind. Instead, the court awarded damages equivalent to a return of the purchase price plus all the incidental costs which the claimant had incurred as a result of entering into the contract (such as stamp duty, professional fees, plus his expenses during the period that he had owned the property, such as mortgage interest and business rates).

Issues on appeal

On appeal and cross-appeal, the issues were:

  • whether the claimant was entitled to rescind (this required the court also to consider what was meant by rescission in this context); and
  • what was the correct measure of damages.

Rescission

The court reviewed established case law on the remedies available for repudiatory breach. The leading cases are Johnson v Agnew [1980] AC 367 and Photo Productions v Securicor Transport Ltd [1980] AC 827. In summary, where a party fails to comply with a contractual term which goes to the heart of the contract, the injured party can either:

  • treat the wrongdoer as having repudiated the contract, accept the repudiation, and proceed to claim damages for the breach (both parties being discharged from further performance of the contract); or
  • “affirm” the contract (ie elect to treat it as ongoing) and seek to hold the other to it. Provided the contract is specifically enforceable, the injured party can apply for an order for specific performance, plus damages for the delay in performance.

Acceptance of a repudiatory breach is often referred to as “rescinding” the contract. However, the court explained that there is an important difference between (i) rescission for repudiatory breach, and (ii) rescission in cases of mistake, fraud or lack of consent.

  • In rescission for mistake, fraud, or lack of consent, the contract is rescinded “from the beginning”, ie the parties are placed in the position which they would have been in if the contract had never existed.
  • By contrast, acceptance of a repudiatory breach means that:
    • the contract is not rescinded from the beginning – there is no effect on rights and obligations which have already been performed;
    • both parties are absolved from future performance of the contract;
    • there is substituted for the unperformed obligations of the wrongdoer an obligation to compensate the injured party for the loss caused by the future non-performance of the wrongdoer’s obligations.

The decision in Howard-Jones v Tate provides a good example of the distinction. The Court of Appeal was prepared to accept the first instance court’s decision that the failure to provide the utility supplies amounted to a repudiatory breach. However, as at the date of the “rescission”, this was the only outstanding obligation. Therefore, in accepting the repudiatory breach, the claimant was electing to discharge the defendant from this obligation and to substitute a right to claim damages for the failure to perform this obligation. The claimant had no right to unravel the contract from the beginning and claim the return of the purchase price.

To reach this conclusion, the court had to consider a previous Court of Appeal decision in Gunatunga v DeAlwis [1996] 72 P&CR 161, cited as authority for the proposition that in a contract for the purchase of land, where there is a failure to comply with a condition which only arises on completion of the contract, the purchaser can rescind “from the beginning”. The court held that Gunatunga was probably wrongly decided (although it did not overrule it).

Damages

The court held that the first instance court’s decision on damages (return of the purchase price plus associated costs) was wrong. The correct measure of damages was to identify the loss which the claimant had suffered as a result of the defendant’s breach, ie the failure to provide the utility supplies. This consisted of the cost to the claimant of installing the utility services himself plus the losses which he suffered as a result of the delay in provision of the services (such as rent paid on alternative premises).

Comment: This case shows how easy it is to make a mistake in the remedies available for repudiatory breach. Not only did the first instance court make a mistake in this case, but it also looks like the Court of Appeal made a mistake in Gunatunga. Parties (and those advising them) need to be clear about the consequences of accepting a repudiatory breach, not least because it can have a substantial effect on the decision regarding whether to accept the breach or seek to hold the other party to the contract. This case provides clear and succinct guidance on this issue.

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.