Law of Contract: Option to disregard repudiation Last updated 11-Mar-2015

I do not understand exactly what is meant by the plea that the contract was broken and at an end on Oct. 31, merely because the defender, in pursuance of his scheme of acting wrongfully, gave notice that he would not fulfil the contract … He had no power to alter the date of the fulfilment of the contract: He had no power to affect the extent of the rights and claims of the pursuer, as on the date when the contract was to be fulfilled. That very intimation was a wrongful act,– the commencement of the wrong which was consummated by the actual failure of delivery on Jan. 8. The bargain continued to subsist as a binding contract to be fulfilled at the proper time by the defender, after his intimation of Oct. 31, exactly as if that intimation had not been made.
Per Lord Hope in Howie v Anderson (1848) 10 D 355 at p 357.

Alternative to acceptance of repudiation option

Apart from termination an injured party has an alternative to disregard or refuse to accept repudiation and then the contract remains in full effect.

For this purpose the case is like any other breach of a fundamental condition, which constitutes the repudiation of a contract by one party; the other party may elect not to treat the repudiation as being final, but to treat the contract as subsisting and to that extent may waive the breach, any right to damages being reserved. One party to a contract cannot end it by his wrongful act against the wish of the other party.
Hain Steamship Company Ltd v Tate & Lyle Ltd [1936] 2 All ER 597 per Lord Wright at p.608

This general rule has, however, some limitations as for example in cases in where the injured party cannot perform without the co-operation of the other party. Some other instances were mentioned in Lord Reid’s judgement in White & Carter (Councils) Ltd v McGregor [1961] 3 All ER 1178 at p.1183:

It may well be that, if it can be shown that a person has no legitimate interest, financial or otherwise, in performing the contract rather than claiming damages, he ought not to be allowed to saddle the other party with an additional burden with no benefit to himself. If a party has no interest to enforce a stipulation he cannot in general enforce it: so it might be said that if a party has no interest to insist on a particular remedy he ought not to be allowed to insist on it. And, just as a party is not allowed to enforce a penalty, so he ought not to be allowed to penalise the other party by taking one course when another is equally advantageous to him.

Application of the above limitations will only be applied in extreme cases, viz. where damages would be an adequate remedy and where an election to keep the contract alive would be wholly unreasonable. Furthermore it is on the contract breaker to show that the innocent party has no legitimate interest in performing the contract rather than claiming damages. This burden is not discharged merely by showing that the benefit to the other party is small in comparison to the loss to the contract breaker.

The pros

One may wonder why aggrieving party should wish to go on and incur expense in performing the contract instead of confirming repudiation, terminating contract and recovering damages from the party in default. Kerr J addressed this question in The Odenfeld [1978] 2 Lloyd’s Rep 357 in the following passage:

In practice, however, this is an oversimplification. In practice it is an extremely difficult and lengthy process to assess damages in a situation such as this. How are they to be fairly assessed, when at the time of the repudiation the charter still had about 6 1/2 years to run with many possible variables in the market rate and the performance of the vessel? Of course, the law provides some answer, but having to establish a claim for damages puts a shipowner into a very different position from that of being entitled to hire under a subsisting charter.

Thus within main reasons to keep contract alive is substantial difficulties in fair assessment of damages by injured side, especially when some part of loss is hardly recoverable because it is too remote and commitments, which injured party may have with third parties, as in case of The Odenfeld, which he must honour as a matter of business.

In recent case of Isabella Shipowner SA v Shagang Shipping Co Ltd (The Aquafaith) [2012] EWHC 1077, the High Court considered application of the rule and position of contracting sides in circumstances when charterers repudiated time charterparty but owners decided to maintain the charter and claim hire instead of mitigating loss and claiming the balance in damages. In line with decision in White & Carter (Councils) Ltd v McGregor [1961] 3 All ER 1178, the learned judge stated at para 37:

37. Could the owners claim hire from the charterers under this time charter without the need for the charterers to do anything under the charter? The answer is yes. If the charterers failed to give any orders, the vessel would simply stay where it was, awaiting orders but earning hire. Although the master is under the orders of the charterer, the master and crew are the servants of the owners and the ship is available to the charterers for any order they wish to give. Hire continues to be earned. Although the charterers are obliged under the terms of the charter to provide and pay for fuel, should the bunkers run out whilst awaiting orders, it is open to the owners to stem the vessel and to charge that to the Charterers’ account. In order to complete their side of the bargain, the owners do not need the charterers to do anything in order for them to earn the hire in question. The earning of hire after purported redelivery was not dependent on any performance by the charterers of their obligations.

On proper analysis of all preceding case law, Cooke J found that owners’ have had a legitimate interest to continue performance under the charter because while insisting on repudiation the contract breaker was seeking to be shot of the difficulties in trading the vessel by imposing that burden on the innocent party, as well as depriving him of the assured income of advance hire. He concluded at para 47 that:

47. …The owners were therefore at risk of the charterers directing their limited funds to meet obligations to other parties, whilst delaying payment of any sums owing to the owners until the end of the charterparty and the assessment of what was due in damages. Instead of paying hire up front, semi-monthly in advance, with all the cashflow implications of that, the charterers wished to compel the owners to trade the vessel in mitigation of loss and leave themselves liberty to argue about the quantum of damages at the end of the relevant period and pay whatever they could at that stage. The existence of expert reports produced by the parties, as recorded in the Reasons, showed that the views of the parties about the state of the market were not identical, giving rise to the possibility of significant argument as to proper mitigation of loss and the extent of damages recoverable. Should the charterers choose to do so, payment of any liability could be postponed until the conclusion of an arbitration, months away, by which time the charterers could conceivably have become insolvent or arguments used to secure a settlement discount on any loss claimed. The owners wished to guard against that by maintaining the charter with the ability to claim hire and sue/proceed in arbitration for it on any default, without the propensity for argument as to failure to mitigate damages. The arbitrator never appears to have grappled with this point at all.

And cons of election to keep the contract alive

There are, on the other hand, a great many cases in which it is of no benefit to the innocent party to keep the contract alive for the simple reason that, in the long run, unless the repudiating party can be persuaded or impelled to change his mind and withdraw his repudiation, the only remedy available to the innocent party will lie in damages. So there are vast numbers of cases where the innocent party can in one sense be said to be forced to adopt the only practicable course because any other would be valueless. Moreover, the passage of time might in itself alter the legal position of the parties, because an insistence to treat the contract as still in being might in time become quite unrealistic, unreasonable and untenable.

An illustration of the above is a recent case MSC Mediterranean Shipping Company SA v Cottonex Anstalt [2015] EWHC 283 (Comm). MSC was the carrier and owner of 35 containers with cotton shipped to Chittagong in Bangladesh under 3 B/Ls. Seller of cotton had 14 days to return containers once they put ashore and goods collected by consignee, after which demurrage charges would be incurred at a daily rate. Due to collapse of cotton price while containers were still in transit, the consignee has never collected the goods. Nor has anyone else. Containers were arrested by custom authorities and all attempts of seller to get them back failed. The court found that when it became clear that there was no realistic prospect of returning the containers, the seller was in repudiatory breach of all the contracts of carriage. Carrier has chosen not to terminate the bill of lading contracts in response to repudiatory breach and instead to keep the contracts in force and go on claiming demurrage.

As at 1 January 2015, the amount of the claim had reached US$1,090,424 plus interest from the date when each daily payment accrued, while the value of the 35 containers (measured as their replacement cost) is US$114,172.

The court held that the carrier had a legitimate interest in keeping the contracts of carriage in force for as long as there was a realistic prospect that the seller would perform its remaining primary obligations under the contracts by procuring the collection of the goods and the redelivery of the containers. Once it was quite clear, however, that the seller was in repudiatory breach of these obligations and that there was no such prospect, the carrier no longer had any reason to keep the contracts open in the hope of future performance. The learned judge summarised his conclusion in the following words at para 121:

 

121. …[T]he Carrier had no legitimate interest in keeping the contracts of carriage in force after that date in order to continue claiming demurrage. Its election to do so, and to go on doing so ever since, can in my view properly be described as wholly unreasonable. It is wholly unreasonable because the Carrier has not been keeping the contracts alive in order to invoke the demurrage clause for a proper purpose but in order, in effect, to seek to generate an unending stream of free income.

Therefore apart from evident advantages which innocent party may gain in certain circumstances if he so chooses elect not to accept the repudiation, he may also be at certain risks, the chances either that the other party may yet take a different course or that it may be one of those special cases of limitations to general rule or that keeping the contract alive may become unrealistic if party in default should persist in their refusal to perform.

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