Remedies I- Termination of Contract (and affirmation) PDF

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Remedies I: Termination of Contract (and affirmation) When can a party terminate a contract following breach?! What happens when the option to terminate arises?! How does a contract come to an end? 1. Discharge by performance! 2. Discharge by agreement! 3. Discharge by frustration (later in the term)! An event (outside the parties’ control) that was unforeseeable at the time of contract happens. ! BUT ending a contract by termination or frustration undermines contractual security. Therefore, the common law sets a high threshold at which it is lawful to do so.! 4. Discharge by breach (repudiatory) (focus of this lecture)! • Renunciation or anticipatory breach! • Breach of a term (Conditions and Innominate terms) ! • Right of Election —> Terminate or Affirm! Discharge: Bringing an end to primary obligations in a contract. Secondary obligations remain enforceable. ! Repudiatory breach is a breach of such severity that gives rise to the right of election. (when a party says that they do not intend to fulfil their obligations anymore)! The right of election: needs to arise for an innocent party to have the choice to terminate a contract. ! Roadmap to address termination of contract 1. Identify the breach and relevant remedies (e.g. termination) ! I. Actual breach or anticipatory breach?! 2. Establish the Repudiation! I. Consider renunciation or incapacitation — if relevant, still go to step 2.II. ! II. Consider breach of terms (note — this can be in addition or alternative to route step 2.I)! i. The term/s in breach must be classified! ii. If the term is a condition —> repudiation established! iii. If the term is innominate —> apply SWB test (note — a condition can be considered in the alternative as innominate)! 3. If a repudiation is established, advise on the Right of Election! I. Exercising termination or;! II. Exercising affirmation! 4. Consider any other remedies (e.g. damages), if relevant! ! Important • A breach of contract can only give rise to the option to terminate (or affirm) — known as the right of election – If the breach is repudiatory. Repudiation is generally speaking a really serious breach.!

• A repudiatory breach can be established through a breach of a condition (conditions go to the root of the contract) or serious breach of innominate term ! Note that not every breach gives rise to the right of election. ! • A repudiatory breach may occur before (known as anticipatory breach) or after performance is due.! • Once the right of election arises, the innocent party can choose to terminate or affirm (continue) the contract.! • Termination is risky business. Wrongful repudiation (or termination) can occur when a party thinks they are entitled to terminate but they are not.!

Step 1. Breach of Contract “A breach of contract is committed when a party without lawful excuse fails or refuses to perform what is due from him under the contract, or performs defectively (by failing to meet the required standard of performance) or incapacitates himself from performing.”! Treitel, 2011: 17-049!

• To find a breach of contract, the terms need to be identified first (Express and implied terms)! • Must be repudiatory to give rise to the right of election. (Step 2)! Anticipatory breach Where before performance is due, one party indicates by words or conduct an intention not to perform (renunciation) or cannot perform (incapacitation) or will perform defectively (breach of a term)! The anticipatory breach must be repudiatory.! "Repudiation is a drastic conclusion which should only be held to arise in clear cases of a refusal, in a matter going to the root of the contract, to perform contractual obligations".! Lord Wilberforce in Woodar Investment Development Ltd v Wimpey! Construction UK Ltd [1980] 1 WLR 277 at [283]!

Such a breach entitles the non-breaching party to treat the contract as repudiated (or terminated)! PQ example ! based on Telford Homes (Creekside) Ltd v Ampurius Nu Homes Holdings Ltd [2013] EWCA Civ 577! Ampurius enters into a contract with Telford Homes to take four long leases (999 years) of the commercial floors in a large development in Greenwich that Telford Homes will build. The contract requires completion of the buildings in two phases.! The markets are hit by the failure of Lehman Brothers and Telford Homes has difficulty obtaining the funding it was expecting. Telford Homes therefore puts phase 2 on hold for several months resulting in a likely delay in handover. However, Telford Homes reassures Ampurious that they will continue with the work when possible.! Ampurius purports to terminate the contract with Telford Homes. Meanwhile, unknown to Ampurius, Telford Homes restart work.! Has Ampurius lawfully terminated the contract? Breach —> Delay!

But is the delay a repudiatory breach entitling Ampurius to terminate the contract with Telford?!

Step 2. Establish the Repudiation Step 2.I Renunciation or incapacitation Where one party indicates (by words or conduct) an intention not to perform (renunciation) or cannot perform (incapacitation). The Innocent party is entitled to treat the contract as discharged immediately.! It is not enough simply that performance is unlikely to match the contractual undertakings! • "an intimation of an intention to abandon and altogether refuse to performance of the contract... [or of] an intention no longer to be bound by the contract.”! Freeth v Burr (1874) LR 9 CP 208, Lord Coleridge! •

‘[I]n considering whether there has been a repudiation by one party, it is necessary to look at his conduct as a whole. Does this indicate an intention to abandon and to refuse performance of the contract?’! Woodar Investment Development Ltd v Wimpey Construction (UK) Ltd [1980] 1 WLR 277, at p. 280!

...By words or conduct.! "So far as concerns repudiatory conduct, the legal test is simply stated... It is whether, looking at all the circumstances objectively, that is from the perspective of a reasonable person in the position of the innocent party, the contract breaker has clearly shown an intention to abandon and altogether refuse to perform the contact.” ! Eminence Property Developments Ltd v Heaney[2010] EWCA ! Civ 1168, [2011] 2 All ER (Comm) 223, per Etherton LJ!

...or by self-inducement (breach) — putting yourself out of power to perform contractual obligations. ! The renunciation or incapacitation must be of a nature that gives rise to the right of election (i.e., a repudiation: abandonment or refusal of performance under the contract or an anticipatory breach of condition or serious breach of innominate term). (is this not breach approach?)! ! Hochster v De La Tour (1853) 2 E & B 678 (renunciation example)! • C employed as a courier for three months! • Before due to start, D (employer) tells C that services no longer required. (Renunciation)! • C entitled to treat the contract as having been repudiated and discharged before performance was due.! ! Same PQ example! Has Telford Homes renounced its intention to perform under the contract? Telford makes a deliberate decision to stop work; BUT, Telford had also repeatedly said it would continue with the work. —> Not an altogether refusal to perform. (More like, ‘we’re really sorry, we’re going to be late.’) —> not a repudiatory breach! "This is not a case where the Defendant stated that it had no intention of completing the work but, on the contrary, it repeatedly asserted that it was going to do so, and it indeed

did so after the Contract came to an end. Accordingly, considering this case in terms of renunciation does not take the matter any further.” ! Mayall J in HC, Telford Homes (Creekside) Ltd v Ampurius Nu ! Homes Holdings Ltd [2013] EWCA Civ 577!

Step 2.II Breach of terms Outside instances of renunciation and incapacitation, breaches of certain types of term constitute repudiatory breaches, giving rise to the option for the non-breaching party to accept the breach as terminating the contract (entitles the non-breaching party to treat both parties’ future obligations under the contract as discharged), or to affirm it in addition to the remedy of damages! It is therefore necessary to determine the classification of terms for this purpose, to consider the type of term broken and therefore whether the particular breach is repudiatory.! How to know whether a term is a condition, warranty or innominate term? Step 2.II.i Classification of terms (Condition or innominate term) Determining if a term is a condition is a question of classification of terms.!

- Term is a Condition ! -

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• Conditions are important terms that are said ‘to go to the root of the contract’; if they are broken, the breach is generally regarded as repudiatory.! Term is an innominate term! • If breach, it may or may not amount to a repudiatory breach. ! • If the term is not classified by parties or statute then it is likely to be innominate (can be breached in a number of ways)! Term is a warranty! • Warranties are less important terms that do not ‘go to the root of the contract’. The breach of warranty is not a repudiatory breach and there can be no option for the non-breaching party to terminate or to affirm. The only remedy for the nonbreaching party will be damages!

Step 2.II.ii Breach of a condition Is the term designated by statute SGA 1979, s 13 (1A) this is a condition! (1) Where there is a contract for the sale of goods by description, there is an implied! [term] that the goods will correspond with the description.! SGA 1979, s 14(6) these are conditions! (2) Where the seller sells goods in the course of a business, there is an implied term that! the goods supplied under the contract are of satisfactory quality.! (2A)$$For the purposes of this Act, goods are of satisfactory quality if they meet the! standard that a reasonable person would regard as satisfactory, taking account of any description of the goods, the price (if relevant) and all the other relevant circumstances.! (2B)$$For the purposes of this Act, the quality of goods includes their state and! condition and the following (among others) are in appropriate cases aspects of the quality of goods—!

(a)$$fitness for all the purposes for which goods of the kind in question are commonly supplied,! (b)$$appearance and finish,! (c)$$freedom from minor defects,! (d)$$safety, and! (e)$$durability.! (2C)$$The term implied by subsection (2) above does not extend to any matter making! the quality of goods unsatisfactory—! (a)$$which is specifically drawn to the buyer's attention before the contract is made,! (b)$$where the buyer examines the goods before the contract is made, which that examination ought to reveal, or! (c)$$in the case of a contract for sale by sample, which would have been apparent on a reasonable examination of the sample.! (3)$$Where the seller sells goods in the course of a business and the buyer, expressly or by! implication, makes known—! (a)$$to the seller, or! (b)$$where the purchase price or part of it is payable by instalments and the goods were previously sold by a credit-broker to the seller, to that credit-broker,! Any particular purpose for which the goods are being bought, there is an implied [term]1 that the goods supplied under the contract are reasonably fit for that purpose, whether or not that is a purpose for which such goods are commonly supplied, except where the circumstances show that the buyer does not rely, or that it is unreasonable for him to rely, on the skill or judgment of the seller or credit-broker.! SGA 1979, s 15(3) these are conditions! (2)$$ In the case of a contract for sale by sample there is an implied [term] —! (a)$$that the bulk will correspond with the sample in quality;! (c)$$ that the goods will be free from any defect, [making their quality! unsatisfactory], which would not be apparent on reasonable examination of the sample.! SGA 1979, s 15A all of the above are not conditions if! (1)(b) The breach is so slight that it would be unreasonable for him to reject them, the breach is not to be treated as a breach of condition but may be treated as a breach of warranty. (2)!!This section applies unless a contrary intention appears in, or is to be implied from, the contract. Acros Ltd v E A Ronaasen & Son [1933] AC 470 ! • According to the contract, Timber was 1/16 too thick. ! • In this contract, there was a condition (implied under the SGA) that the goods had to match the description. ! • Therefore, as the condition was breached (although it was a minor breach), the buyer was entitled to terminate the contract. ! People might think that this minor breach is not repudiatory; however, even though it was a minor breached, it is a repudiatory (arguably sufficiently serious) breach as the condition breached goes to the root of the contract. !

The case also illustrates a controversy (a tension)! • On the one hand, if everything is written as a condition in a contract, the party will have the power to terminate the contract for any sort of breach —> undermines certainty and security of contract. ! • On the other hand, according to the freedom of contract principle, contracting parties are free to classify the relative importance of the terms of their contract.! Have the parties expressly or impliedly designated the term?

- Express: E.g, “It is a condition that you deliver by 4pm on Friday”! Poussard v Spiers and Pond (1876) 1 QBD 410)! • An actress was under an obligation to play. She became ill, the producers wanted to terminate the contract with the actress to lawfully seek a replacement. ! • The court held that since the term/obligation to perform from the first night goes to the roots of the contract, it was a condition and the producers were entitled to terminate the contract with the actress.! However, in Bettini v Gye (1876) 1 QBD 183, ! • a singer, hired to perform during an entire season, had agreed to arrive six days in advance for rehearsals, but was three days late.! • The court did not believe that the clause relating to rehearsals was so central to the main purpose of the contract as to constitute a condition. ! • The singer’s breach therefore did not allow the contract to be treated as repudiated, but only allowed recovery of damages for loss.! —> In the past, the distinction between conditions and warranties was made without considering the actual results of breach, and was determined following the relative importance of the term in relation to the contract as a whole at the date on which it was drafted.! Today, it is still true, where the parties have expressly designated a term as a condition/ warranty or where the term is classed as a condition/warranty by statute, that the consequences of the actual breach should not be considered. But where there is no express classification of the term by either of these means, the courts are unlikely to classify a term as a condition/warranty without first considering the result of the breach under the innominate term doctrine.! A stipulation that time is of the essence, in relation to a particular contractual term, denotes that timely performance is a condition of the contract. The consequence is that delay in performance is treated as going to the root of the contract, without regard to the magnitude of the breach.! Lombard North Central plc v Butterworth [1987] ! 1 QB 527, at pp. 535–7, per Mustill LJ!

I think it can fairly be said that in mercantile (commercial) contracts stipulations as to time are to be treated as being ‘of the essence of the contract’, even though this is not expressly stated in the words of the contract.! Bunge Corporation v Tradax Export SA [1980] 1 Lloyd’s ! Rep 294, at p. 306, Megaw LJ!

The Mihalis Angelos [1971] 1 QB 164!

• A charterer stated that the vessel was ‘expected ready to load’ on 1 July 1965 at Haiphong. • The expected ready to load clause was a condition despite the fact it had caused no loss to the defendant. The classification as a condition was said to be because of the need for commercial certainty in shipping contracts.! • Confirms the rule that time clauses in mercantile contracts should ‘usually’ be treated as conditions.! Tension between flexibility and commercial certainty • Despite the strength of the authorities indicating that time stipulations in commercial or mercantile contracts will be treated as conditions, such a position cannot be regarded as conclusive following the House of Lords’ decision in Torvald Klaveness A/S v Arni Maritime Corporation, The Gregos [1994] 1 WLR 1465! • The majority of the House of Lords considered the obligation to redeliver a vessel on time at the end of a time charter-party to be an innominate term. Only Lord Templeman (dissenting) considered that, as a time stipulation, it amounted to a condition and was therefore of the essence of the contract. ! • The majority was clearly concerned to achieve flexibility in terms of remedy in the event of a short delay, whereas Lord Templeman’s speech emphasises the commercial importance of this provision and the need for commercial certainty.! • The underlying basis for this decision appears to be the more general justification for innominate terms—namely, the avoidance of a classification of a term as a condition to prevent a party from using such a breach as justifying escape from the contract for other (normally economic) reasons! • [A]lthough it is well established that certain obligations under charterparties do have the character of conditions I would not … wish to enlarge the category unduly, given the opportunity which this provides for a party to rely on an innocuous breach as a means of escaping from an unwelcome bargain [Emphasis added]! Torvald Klaveness v Arni Maritime, The Gregos, p. 1475, per Lord Mustill!

—> In light of this decision of the House of Lords, the courts are unlikely to automatically assume that a time stipulation in a mercantile contract is a condition and will instead assess whether the clause fulfils the criteria to qualify as a condition on the facts. This is therefore a question of contractual interpretation—Rainy Sky SA v Kookmin Bank [2011] UKSC 50, [2011] 1 WLR 2900! L. Schuler AG v Wickman Machine Tools Sales Ltd [1974] AC 235! • House of Lords refused to treat as a condition a term that was expressly stated to be ‘a condition of this agreement’. ! • The clause went on to provide for weekly visits over a period of four-and-a-half years to six named firms (some 1,400 visits in total). ! • The House of Lords did not believe that the parties can have intended that a single failure to make one of the visits should entitle the other party to bring this long-term distribution contract to an end.! • Lord Reid said, at p. 251:! ‘We must remember that we are seeking to discover intention as disclosed by the contract as a whole. Use of the word ‘condition’ is an indication—even a strong indication—of such an intention but it is by no means conclusive.’!

‘The fact that a particular construction leads to a very unreasonable result must be a relevant consideration. The more unreasonable the result the more unlikely it is that the parties can have intended it …’! • The HoL held that it was not a condition. The party cannot terminate the contract because of the single breach. The court ignored the wording of the contract, they read down the express condition and ruled that it does not reflect the intention of the parties.! • When deciding whether the term, expressly dedicated as a conditions by the parties in the contract, is really a condition, the court will refer to the meaning that the parties must reasonably have intended on an objective assessment. ! • There is further evidence for this approach, In Rice (t/a The Garden Guardian) v Great Yarmouth Borough Council [2003] TCLR 1, (2001) 3 LGLR 4 a clause stated that ‘if the contractor committed a breach of any of its obligations … the council may … terminate the contractor’s employment … by notice in writing’. The Court of Appeal held that a literal interpretation of this would entitle the council to terminate ‘for any breach of any term’ and that this ‘flies in the face of commercial common sense’. therefore, could not have been what the parties intended on an objective evaluation.! • The clause was therefore re...