THE EFFECT OF A REPUDIATORY BREACH

Transcription

1 THE EFFECT OF A REPUDIATORY BREACH IN my note, Repudiatory Breach, Illegality and Contracts of Employment, I put forward the thesis that a repudiatory breach operates automatically to bring a contract to an end unless the disadvantaged party chooses to waive the breach2 and firm the contract. Consequently, there is no need for him to prove that he accepted the breach in order to bring the contract to an end. While the recent cases directly on the point have been in the field of individual employment law,n I argued that there was no reason why this should not also be true for the general law of contracts. Lest it be thought that it is now too late to overturn the conventional view that a repudiatory breach must be accepted before the contract comes to an end, it is the purpose of this paper to demonstrate why it is both sound in theory and open on authority so to approach the problem. A repudiatory breach is simply a breach of contract so serious that it entitles the innocent party to treat it as a repudiation of the whole contract. This situation will arise after: (i) A fundamental breach, i.e. a breach which has the result of depriving the innocent party of the total benefit of the agreed consideration; or (ii) A breach of a fundamental term, i.e. a breach which has the result of depriving the innocent party of the substantial benefit of the agreed c~nsideration.~ 1 (1975) 38 M.L.R In using the term to waive the breach, I mean simply that the disadvantaged party elects not to treat the repudiation as bringing the contract to an end. Any right to damages arising from the breach will, of course, remain. This terminology was used by Lord Wright in Tale and Lyle Ltd. v. Hain Steamship Co. Ltd. (1936) 55 L1.L.R. 159, 178. The case is also reported in [1936] 2 All E.R The leading case is Hare v. Murphy Bros. [I9731 I.C.R. 331, upheld on other grounds by the Court of Appeal in [ I.C.R The approach taken in Hare was approved in Sanders v. Ernest A. Neale [ All E.R It has since been followed in the following cases, e.g. Samways v. Swan Hunter [ I.R.L.R. 190; Foster and Brook v. Brook Motors [I9751 I.R.L.R. 191; McCarthy v. Burroughs Machines Ltd. (1975) 10 I.T.R. 46; Burroughs Machines Ltd. v. Timmoney [1976] I.R.L.R. 343; Waudby v. H.F.M. (Transport) Co Ltd. [1976] I.R.L.R. 35. But compare the approach of the Scottish E.A.T. in T.H.F. V. Murphy I.R.L.R It is not clear how far the modern principle is inconsistent with the views of Avory J. in the old case of Healey V. S.A. Francaise Rubastic [I K.B. 946, where he allowed an employee to recover wages which fell due after he had committed a repudiatory breach but before his employers dismissed him; but the employers had delayed dismissing him for several months after they had suspected him of misconduct and that seems a crucial factor in the decision. As we shall see, delay can operate to prevent a party from treating a contract as at an end as a result of a repudiatory breach. In Chappell v. Times Newspapers [1975] I.C.R. 145 Megarry J., as he then was, refused to enter into this controversial area of labour law. 4 Hong Kong Fir Shipping Co. v. Kawasaki Kishen Kaisha Ltd. [1962] 2 Q.B. 26 per Diplock L.J. at p. 66. This case has recently been followed with approval by the Court of Appeal in Cehave N.V. v. Bremer [1975] 3 All E.R

2 138 THE MODERN LAW REVIEW [Vol. 41 While there remain important differences between Ci) and (ii),5 these are irrelevant to the present discussion: consequently, a repudiatory breach covers both a fundamental breach and the breach of a fundamental term.6 What then happens when a repudiatory breach takes place? It is submitted that the law is clearly and accurately to be found in the leading case of Tate and Lyle Ltd. v. Hain Steamship Co. Ltd. Lord Atkin explained the law as follows:... the breach by deviation does not automatically cancel the express contract, otherwise the shipowner by his own wrong can get rid of his own contract.... The event falls within the ordinary law of contract. The party who is affected by the breach has the right to say, I am not now bound by the contract, whether it is expressed in charter party, bill of lading or otherwise... but I am satisfied that once he elects to treat the contract as at an end he is not bound by the promise to pay the agreed freight any more than by his other promises. But, on the other hand, as he can elect to treat the contract as ended, so he can elect to treat the contract as subsisting, and if he does this with the knowledge of his rightsg he must in accordance with the general law of contract be held bound. Lord Wright said,lo But however fundamental is the condition, it may still be waived by the goods owner. 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. Nowhere in these speeches is there mention of the need for the repudiatory breach to be accepted by the innocent party. The contract prima facie ends at the date of the breach subject to the innocent party s right to waive the breach and affirm the contract. But as Lord Atkin warns,ll one must be careful to see that the acts of the cargo owner are not misinterpreted when he finds that his goods have been taken off on a voyage to which he did not agree.... There must be acts which plainly show that the shipper intends to treat the contract as still binding. 5 See Lord Wilberforce in Suisse Atlantique [I A.C. 361, 431, criticised by Coote in Discharge for Breach and Exception Clauses since Harbutt s Plasticine (1977) 40 M.L.R. 31, 39 er seq. 6 Lord Reid s definition of a fundamental breach would serve aptly as a definition of a repudiatory breach as I understand it, i.e. the well-known type of breach which entitles the innocent party to treat it as repudiatory and to rescind the contract. See Suisse Atlantique supra, note 5 at p See supra, note 2. 8 Ibid. at p Italics added. 10 Ibid. at p Ibid. at p. 174.

3 Mar THE EFFECT OF A REPUDIATORY BREACH 139 The power of the innocent party to elect to waive the breach and so prevent the wrongdoer from benefiting from his own wrong accounts for the view that a repudiatory breach must be accepted before the contract is discharged. In Tate and Lyle l2 itself we find Lord Maugham using such terminology. He asks18 whether the effect of the deviation is the same as if a fundamental condition of the contract had been broken by the shipowner so that the charterers become entitled to accept the repudiation and to treat the contract as at an end as from the date of the repudiation. l4 It is clear, however, that Lord Maugham thought that the contract terminated on the date of the repudiatory breach, not the date of acceptance, and, accordingly, the innocent party s acceptance of the breach means simply that he has not elected to waive it. As we shall see, in many of the cases where the judges have talked about the need for acceptance, all that is in issue is whether the repudiatory breach has, or has not, been waived. The approach of the House of Lords in the Tate and Lyle case does not stand alone. Earlier, in Bentsen v. Taylor and Sons,18 for example, the Court of Appeal held that the plaintiffs had broken a condition precedent. Bowen L.J. thought l7 that the failure to perform the condition thus relieved the other party of further obligations under the contract. But he held1* that the plaintiff could attempt to show that the defendants had excused the performance of the condition, and the Court would have to consider whether the plaintiff has sustained that bunthen, so that no reasonable man could doubt that there has been a waiver of the condition or an excuse of its performance. In other words, did the defendants by their acts or conduct lead the plaintiff reasonably to suppose that they did not intend to treat the contract for the future as at an end, on account of the failure to perform the condition precedent.... Lord Esher M.R. took the view lo that the defendants had then [after the breach] a right to treat the contract as at an end, or they could, if they chose, treat it as still subsisting. But, if they intended to treat the contract as at an end, it was their duty so to exercise their right as not to lead the plaintiff to believe that he was still bound by the contract. There is nothing here about the need to accept the repudiation and communicate the acceptance to the wrongdoer: on the contrary, prima facie, the breach relieved the innocent party of his liability but he could, if he chose, waive the breach. But if his conduct would have led the wrongdoer reasonably to suppose that the breach had been waived, then he would be estopped from denying waiver. 12 Supra, note Ibid. at p Italics added. 15 Supra, note Ibid. at p [1893] 2 Q.B Ibid. at pp. 283 et seq. 19 Ibid. at p. 279.

4 140 THE MODERN LAW REVIEW [Vol. 41 It might be argued that these principles are only applicable in relation to charterparties. Such a view is unsound. For, as we have seen,2o the judges in the Tate and Lylez1 case took great pains to point out that the situation there was governed by the ordinary law of contracts. Moreover, the views of these learned Lords have lately been approved by the House of Lords in the Suisse Atlantique 22 case. Accordingly, it is not surprising to find that often the issue before a court is whether or not the innocent party has waived a repudiatory breach rather than whether or not he has in some sense accepted it as terminating the contract. For example, in Aquis Estates Ltd. v. MintonZ3 the Court of Appeal was not concerned with the question whether or not the plaintiff had accepted a breach by the defendant of a condition in their contract for the sale of a long lease that the property was free from an adverse entry in the local land charges register: instead, the issue before the court was simply whether the plaintiff by his conduct had waived his right to treat the defendant s repudiatory breach as bringing the contract to an end. As Russell L.J. explained 24: If the discovery on 28th June by the plaintiff of the fact that the property was listed as an historic building conferred on the plaintiff a right to repudiate the contract far breach of condition, it must then be considered whether the actions of the plaintiff thereafter constitute an unequivocal election to treat the contract as still on foot and so to waive the right to repudiate based on the breach of the condition. It is therefore crucial to know what conduct will amount to waiver. This questions was explored by McNair J. in Tsakiroglou and Co. v. Transgrains S.A.25 In an action by the buyers of groundnuts for nondelivery of goods, the sellers maintained that they had a good defence in that the buyers had broken a condition orf the contract by failing to nominate a ship by the date when the performance of the contract was due to begin. It was argued that the sellers could not rely on the buyers breach because there was no evidence that they had accepted it and thereupon treated the contract as at an end. McNair J. held 26 that the buyers breach otf a condition precedant was a complete answer to the action unless they conld allege either a positive ad of election not to treat the breach as a breach of condition precedent, but merely to treat it as a breach of warranty, keeping the contract alive; or they might have pleaded waiver. But until one of those two things was raised, it would seem to me that the dafence would be unanswerable. 20 Supra. 21 Supra, note 2 at pp. 174 and Supra, note 5 at pp and 491B. See also Dawson, Fundamental Breach of Contract (1975) 91 L.Q.R. 380, 386 et seq All E.R ibid. p [1958] 1 Lloyds Rep. p Ibid. at p. 573

5 Mar THE EFFECT OF A REPUDIATORY BREACH 141 In other words, it was not necessary for the sellers to indicate their intention to bring the contract to an end: prima facie the contract was brought to an end by the buyers repudiatutolry breach subject to the sellers power to waive the breach. But proof of waiver rested on the buyers and they had not shown that the sellers had acted in such a way that a reasonable man in the sellers position would have thought that the breach had been waived and the contract affirmed. It therefore follows that if the innocent party does nothing after a repudiatory breach, the contract will usually come to an end in spite of his silence. This is clear from Tsakiroglou 2T in so far as the innocent party can rely on the repudiatory breach as a defence in an action for non-perfommce of the contract. But delay in taking the appropriate action may have M~QUS results. In contracts for the sale of goods, for example, the disadvantaged buyer must act promptly after the seller s repudiatory breach because he will be deemed to have elected to Content himself with damages if he accepts the goods.28 Again, generally, if the innocenit party has delayed before seeking rescission he may be met by a plea of laches. In the recent case of The L~coniu, ~ there was an express provision in a charterparty that failure to pay instalments punctually gave the owners the right to withdraw the vessel: in other words, the failure to pay on time amounted to a repudiatory breach of the contract. The charterers failed to pay an instbent which was due on a Sunday but paid it into the owners bank on the Monday following at 3 p.m. At 7 p.m. that evening, the owners informed the charterers tha t the vessel was to be withdrawn as a result of thek breach. The House of Lads held that the owners were entitled to withdraw the ship. The effect of the charterers repudiatory breach was to bring the contract to an end at the date of the breach i.e. on the Sunday, unless the owners had, by their conduct, led the charterers to believe that they had waived the breach and affirmed the contraot. Their Lordships were of the opinion that neither the fact that the owners bank had accepted the late payment nor the fact that the owners had delayed for a few hours before giving notice of withdrawal, amounted to waiver of the breach. However, Lord Wilbaforce did stress that notice of withdrawal had to be given within a reasonable time: unreasonable delay could result in the owners losing their right to treat the contract as at the end. Accordingly, while delay in itself will not amount to waiver, an innocent party will not be allowed to treat the contract as at an end if he has unreasonably delayed in exercising his rights.30 Conversely, there may be situations where the nature or extent d Ithe breach is such that the innocent party cannot waive the breach 27 Supra, note Sale of Goods Act 1893, s. 11 (1) (c). Wallis Son & Wells v. Pratt [1910] 2 K.B Kenyon, Son and Craven v. Barter Hoare & Co W.L.R. 519, [1977] 1 All E.R Zbid., per Lord Wilberforce at p. 551; Lord Salmon at pp. 555, 556 and 559. See also thr, Mihalios Xilas [1976] 3 All E.R. 865, per Kerr J. at p. 876.

6 142 THE MODERN LAW REVIEW [Vol. 41 even if he desires. Thus, in Harbutt's Plasticine:' the extent of the damage d m by the fire-the destruction of the faotolry-made it impossible to perform the contm% i.e. imtall suitable pipes, with the result that the innocent party could not waive the breach and affirm the contract. In contracts of employment, moreover, it is only in the most exceptional circumstances that an employee will be able to waive his employer's repudiatory breach and hold him to the contract against his will; this is because it is usually only when mutual confidence between employer and employee remains that the employee can get a remedy other than damages.32 But thae are excepticmal cases. Normally the courts take the view that a man only affirms a contract when he knows33 of the breach and by his conduct elects to go on with the contract despite it. Authority for this proposition is to be fmd in the passages cited earlier from the Tate and Lyle 3c case and more rmt1y in the judgment of Lord Denning, M.R., in Farnworth Finance Facilities v. Attryde." It follows, therefore, that silence will usually not be evidence of waiver. But as waiver is ultimately a question of fact, there may be circumstanm when the innocent party's silence, contrary to the geneu-al rule, will be taken as evidence that the contract is still subsisting. For example, while in theory a strike will usually amount to a repudiatory breach of the striker's contract of in practice neither employer nor striker contemplates that the contract is terminated as a result of that braah. Accordingly, it is now settled that, in the case of a strike, the employer's silence will be treated as evidence Ithat he does not wish to treat the contract of employment as at an end: if an employer does wish to regard the contract as terminated by the strike, he must within a reasonable the give the employees notice that he regards their repudiatory breaoh as terminating the contract.37 An employer's silence will only be evidence of waiver when the repudiatmy breach is a strike: in the case of any other repudiatq breach by an employee, the employer's silence is not 31 [1970] 1 Q.B Sanders v. Ernest A. Neale Ltd. supra, note There may be situations where knowledge is not necessary. See e.g. Panchard Frtes S.A. v. Etablissements General Grain Co. [ Lloyds Rep. 53. For an interesting discussion of this case and the whole question of waiver, see Dugdale and Yates, 'I Variation, Waiver and Estoppel-A Re-Appraisal " (1976) 39 M.L.R. 680 et seq., esp. at p Supra, note [1970] 1 W.L.R See also Matthews v. Smdlwood [I Ch Temple S.S. Co. v. Sovfracht (1945) 79 L1.L.R. 1, See the recent case. of Simmons V. Hoover [1976] I.R.L.R. 266 in which the E.A.T. rejected Lord Denning M.R.'s suspension theory of strikes which he enunciated in Morgan v. Fry [1968] 2 Q.B. 710 and, instead, held that a strike was a repudiatory breach of an employee's contract. Of course, there will be no breach at all if the strikers have terminated their contracts of employment by giving the required notice. ST Cannon v. Firth [ I.R.L.R For a full discussion of this question, see Thornson, " The Effect of a strike on the Contract of Employment" [1977] J.R. 187.

7 Mar THE EFFECT OF A REPUDIATORY BREACH 143 evidence of waiver and the contract of employment will cease at the date of the breach in accordance with the general rule.38 If the law seems so clear why, it might be asked, has the doctrine of the need for acceptance become current? While it is true that most textbooks take that there is very little authdty to justify the approach. Many of the cases commonly cited are not in point because they deal with cases of anticipatory breach and not with the analysis of the effeot of an immediate repudiatory breach. This distinction is vital, for, as the Court of Appeal explained in the leading case of Johnstone v. MiZZing, O an anticipatory breach is not a breach of contract at all until the inn& party agrees to treat it as such. As Bowen L.J. said. l the innocent party must elect to treat the renunciation as wrongful, so that it may constitute an immediate breach of the contract. Consequently, the cuntract comes to an end when the anticipatory breaoh is accepted as an immediate breach of contract. Once again. it is the breach of amtract which brings the contract to an end but the innocent party s consent is needed to turn an anticipatory breach in$o an immedirtte breach in the first place; the anticipatory breach is a nullity till accepted as a breach. As Lord Wright put it in Heyman v. Darwins Ltd.,42 It is true that the [anticipatory] breach is only complete and enforceable at the moment of rescission so that breach and termination of the contract are simultaneous. If, then, the cases on anticipatory breach are not authority on the point, what other cases are usually held to be relevant? Indubitably, in many of these the judges talk about acceptance of the breach but in nane of them does the case turn on the point because there is evidence that the innocent party waived the breach. In other words, all the cases are consistent with the analysis of the effect of a repudiatory breach given in the Tute and Lyle 43 case. In Heyman v. Darwins Ltd.44 Viscount Simon s analysis-the locus classicus of the acceptance approach-is not inconsistent with my views. He sayscs that afbr a repudbtory breaoh the innocent party can elect either to insist on holding 4he co-contractor to the bargain and tender his awn performance or to rescind the contract or (as it is sometimes expressed) accept the repudiation, by so acting as to make plain that, in view of the wrongful action of the party who has repudiated, he claims to treat the contract as at an end.... The innocent party, he argues, may treat the contraot as at an end 3 he chosses, 38 See Hare v. Murphy Bros. Supra, note See e.g. Anson, The Law of Contract (24th ed.), p. 505 et seq. Cheshire and Fifoot, The Law of Contract (9th ed.), p (1886) 16 Q.B.D At p [ A.C. 350, 382. See also Tredegar Iron and Coal Co. Lrd. v. Hawthorne (1902) 18 T.L.R 716, C.A.; Garnac v. Faure [1966] 1 Q.B per Diplock L.J. at p Supra, note Supra, note Ibid. at pp. 361 et seq.

8 144 THE MODERN LAW REVIEW [Vol. 41 and claim damages for its total breach, but it is a right in his option. Viscount Simon is clearly anxious that a wrongdmr should not be able to take advantage of his own wrong and, thus, he talks in terms of acceptance in a similar way to Lord Maugham in Tare and Lyle.46 But Viscount Simon s dictum 47 that it takes two to end a contract-repudiation by one party and acceptance of the repudiation by the other-is clearly obiter : moreover, both Lord Wright 48 and Lord Parker 48 treat the case as one of the anticipatory breach which, as we have seen, is a different matter altogether. In Golding V. London and Edinburgh lnsurance CO.~O it is not clear whether there ever was a breach at all. Assuming that thme was, however, Greer L.J. held 51 that the matter was put right by what happened afterwards, because the plaintiff was content to have the policy reinstated, i.e. he had affirmed the contract after the breach. Scrutton L.J s dictum 52 about the need for acceptance is obiter. Similarly, in Howurd v. Pickford Tool Co. Ltd.53 Asquith L.J s dictum 54 that an unaccepted repudiation is a ithilng writ in water and of no value to anybody is obiter: the plaintiff there had continued to work under the contract for two months after ithe repudiatory breach. Lord Evershed M.R., wbde admittedly talking in terms of acceptance, explains 55 : If the conduct of one party to a contract amounts to a repudiation, and the other does not accept it as such, but goes on performing his part of the contract and affirms the contract, the alleged act of repudiation is wholly nugatory and ineffective in law. 56 This analysis, however, is using acceptance not in a technical sense but simply as a convenient shorthand term for the plaintiff s right to elect to waive the breach and affirm the contract, if he should please. More recently, it has been suggested 57 that authority for the view that a repudiatory breach must be accepted before it can have any effect is to be found in Winn L.J s dissenting judgment in Denmark Productions v. Bos~obel.~~ It is true that he did argue 59 that termination of a contract was the converse of its creation and therefore acceptance of the repudiation was necessary: moreover, he did take the view that silence was evidence that the innocent party did not 46 Supra, note 2 at p Supra, note 42 at pp. 361 et seq. 48 Ibid. at p I have assumed for[the] purposes of this case what I very much doubt, that the allegation in the writ showed a prima facie case of anticipatory breach and rescission. 49 Ibid. at p I What, then, is the effect of such repudiation if it be accepted? In such a case the injured party may sue on the contract forthwith whether the time of performance is due or not (1932) 43 L1.L.R $1 Ibid. at p Ibid. at p I have never been able to understand what effect the repudiation of one party has unless the other party accepts the repudiation. 53 [1951] 1 K.B Ibid. at p Ibid. at p Italics added. 57 Cheshire and Fifoot, The Law of Contract (9th ed.) at p [I Q.B Ibid. at p. 731.

9 Mar THE EFFECT OF A REPUDIATORY BREACH 145 accept the breach and, instead, affirmed the contract.6o But it is not clear whether Winn L.J. is discussing immediate breaches or anticipatory breaches, for he talks simply of the rqudiation of exerutory contracts.61 If his remarks are confined to anticipatory breaches, they are unobjectionable, but if they do rder to immediate repudiatory breaches they are, with the greatest respect, as unsound as he himself fears! For he prefaces 62 his remarks about the nature of repudiatory breaches as follows : naturally and respectfully, I recognke that it is very probable that my own view as to the effect on contractual obligations of a repudiation is wrong. It is submitted that the authorities are such that it still remains open to argue that the effect of a repudiatory breach is to operate automatically to bring a contract to an end unless the disadvantaged party chooses to waive the breach and affirm the contract. If the acceptance theory is supported, its adherents will have to argue that there is an exception in relation to breaches of contracts of employment where repudiatory breaches clearly operate without the need for acceptance.63 Moreover, they will have to accept that sometimes a repudiatory breach can operate automatically when its results are so serious that the disadvantaged party has no choice but to accept. Only thus can they explain Harbutt s Pl~sticine.~~ But the question still remains at what stage in that case did the contract end: for on their view the contract subsists till acceptance of the breach or its equivalent has taken place. In the writer s view, the contract ended with the faulty installation of the pipes, i.e. when the innocent party received a performance totally different from that for which he contracted: the effect of the fire simply rendered it impossible for him, had he so desired, to waive the breaches. In this, I respectfully follow Sir John Donaldson s analysis of the case in Kenyon, Son and Craven v. Baxter, Hoare & C O.~~ Lord Diplock was well aware of the acute difficulties to which the acceptance analysis can give rise when in Moschi v. L.E.P. Air Services 66 he explained how... it has become usual to speak of the exercise by one party to a contract of his right to treat the contract as rescinded in 60 Ibid. at p C1 Ibid. at p Ibid. at p See Hare v. Murphy Bros. Supra, note Supra. note Supra, note 28 at p. 530 et seq. Now as a result of s. 9 (1) of the Unfair Contract Terms Act 1977 whenever an exemption clause has to satisfy the requirement of reasonableness then even if the contract is terminated as a result of a repudiatory breach, the exemption clause will still apply to losses resulting from the breach -even where the losses have arisen after the date of termination-provided that as a matter of construction the clause was intended to cover such a breach and the clause satisfies the requirement of reasonableness. On the other hand, when the innocent party has elected to affirm the contract and waive the repudiatory breach, he will not be bound by any exemption clause in the contract unless the clause satisfies the requirement of reasonableness, s. 9 (2). For the previous position, see Thomson, Fundamental Breach in Scots and English Law [ J.R. 38 et seq. 66 [1972] 2 All E.R. 393, 402.

10 146 THE MODERN LAW REVIEW [Vol. 41 circumstances such as these [i.e. after a repudiatory breach] as an acceptance of the wrongful repudiation of the contract by the other party as a rescission of the contract. But it would be quite erroneous to suppose that any fresh agreement between the parties or any variation of the terms of the original contract is involved when the party who is not in default elects to exercise his right to treat the contract as rescinded because of a repudiatory breach of the contract by the other party. He is exercising a right conferred on him by law of which the sole source is the original contract. He is not varying that contract; he is enforcing it. In order that, in future, similar problems can be avoided, it is suggested that the use of the term, acceptance, as a shorthand method of describing the innocent party s power to waive the breach and affirm the contract must not be allowed to obscure the rule that it is the breach and not the acceptance which terminates the contract. Authority does not substantiate the acceptance analysis but, on the contrary, illustrates that adherence to that view results in unnecessary complexity. J. M. THOMSON.* * LL.B.(Edin.), Lecturer in Laws, Centre of European Law, King s College, University of London.