Repudiatory Breach of Contract: The Need for Aggrieved Party to Make and Communicate a Clear Choice as to Whether the Contract is at an End

Transcription

1 Repudiatory Breach of Contract: The Need for Aggrieved Party to Make and Communicate a Clear Choice as to Whether the Contract is at an End

2 Summary 1. In Force India Formula One Team v. Aerolab SRL [2013] EWCA Civ 780 the Court of Appeal has provided a recent reminder of the requirements for a party aggrieved by breach of contract to accept the other party s repudiatory breach and to bring the contract to an end:- The aggrieved party has an election to accept the repudiation, and bring the contract to an end, or to affirm the contract, whereby the contract continues. For a person to be bound by his election he or she needs to have an informed choice: he or she has to know that he or she has the choice between the 2 options; and Having made that informed choice, if he or she unequivocally and communicates or acts in such a way as to convey that he or she is treating the contract at an end, he or she is bound by that choice. Equivocal acts and communications, which are consistent both with the contract continuing or being at an end will not suffice to bring the contract to an end. Background to the case 2. Force India, a Formula 1 racing team, entered into a contract with Aerolab for Aerolab to perform wind tunnel aerodynamic development services for Force India in the development of a new racing car. Force India had difficulties keeping up with the payments due under the contract and, eventually, on 3 rd August 2009 disabled Force India s connection to Aerolab s servers. There was a Formula 1 industry-wide shutdown in relation to aerodynamic development between 3 rd and 16 th August 2009 inclusive. When Force India s staff returned to work on 17 th August they queried what was going on, and were told that Force India s stuff had been put in a box and would be returned when Aerolab received what it was owed, and that the matter had been put in the hands of lawyers. 3. It was common ground that Force India s persistent non-payment amounted to a repudiatory breach of contract. Aerolab argued that disabling the server on 3 rd August 2009 constituted acceptance, putting the contract to an end. 2/5

3 Legal Principles 4. Relying on the House of Lords decision in Vitol SA v. Norelf Limited [1996] AC 800 the Court of Appeal noted as follows:- Where a party has repudiated a contract the aggrieved party has an election to accept the repudiation or to affirm the contract. Acceptance of a repudiatory breach (like its counterpart affirmation) is based on the principle of election. The doctrine of election rests on the basis of informed choice. If a person has (and knows he has) the choice between two inconsistent courses of action; and unequivocally communicates his decision to pursue one of them, he cannot, thereafter, pursue the other. The doctrine of election rests on the communication of the choice, and not on the reaction of the person to whom the choice is communicated. In other words, there is no need to prove reliance on the communication. Reliance belongs to the realm of estoppel; not election (paragraph 37, per Lewison LJ). An act of acceptance of a repudiation requires no particular form: a communication does not have to be couched in the language of acceptance. It is sufficient that the communication or conduct clearly and unequivocally conveys to the repudiating party that that aggrieved party is treating the contract as at an end. It is clear that there must be a communication to the party in default and that the communication must be clear and unequivocal. In deciding whether these criteria are satisfied, it is important to consider the communications (if more than one) as a whole (paragraph 38, per Lewison LJ). (c) The aggrieved party need not personally, or by an agent, notify the repudiating party of his election to treat the contract as at an end. It is sufficient that the fact of the election comes to the repudiating party's attention, e.g. notification by an unauthorised broker or other intermediary may be sufficient. 3/5

4 Application of those principles on the facts 5. The Court found that the act of disconnecting the server did not constitute unequivocal communication of acceptance of repudiatory breach of contract, because, considering the facts as a whole:- On the working day before the server was disconnected Aerolab had told Force India that work would be temporarily stopped and would be resumed on 17 th August Disabling the server, at least until 17 th August, was therefore consistent with that. Aerolab, on the very day of disabling the server connection, sent to Force India an invoice in advance for its services for the month of August 2009, which was not payable until 15 th August The Court referred to the law of landlord and tenant and waiver of forfeiture:- a solid body of authority stands for the proposition that a demand for rent accruing due in the future operates as an election to affirm the contract (i.e. to waive the right to forfeit). In my judgment a demand for future instalments of periodical payments due under a contract is not consistent with an unequivocal communication that the contract is at an end. In my judgment the disabling of the connection with the server, carried out on the same day as the sending of the August invoice, did not amount to a clear and unequivocal communication that the contract was at an end (paragraph 40, per Lewison LJ). (c) Further, in circumstances in which it was known by Aerolab when it disconnected the server that the August shutdown meant that no work could be done until 17 th August 2009 anyway, the disconnection could not constitute communication until at least 17 th August in any event. 6. On the facts, it was found that the contract came to an end later, on 19 th August. Conclusions 7. A party aggrieved by a repudiatory contract has a choice: to affirm the contract or accept it as being at an end. The Force India case reminds us that if he or she is to put the contract to an end that decision must clearly and unequivocally be communicated. A decision has to be made, clearly communicated, and then 4/5

5 everyone has to live with it. Unequivocal responses which try to keep, or have the objective appearance of keeping, the position open will not suffice to bring the contract to an end. September 2013 was called to the Bar in He is a specialist in business and commercial, property, planning and environment, personal injury and costs matters. jonathanowen@ropewalk.co.uk Disclaimer: The information and any commentary on the law contained in this presentation is provided free of charge for information purposes only. The opinions expressed are those of the writer and do not necessarily represent the view of Ropewalk Chambers as a whole. Every reasonable effort is made to make the information and commentary accurate and up to date, but no responsibility for its accuracy and correctness, or for any consequences of relying on it, is assumed by the writer nor by Ropewalk Chambers. The information and commentary does not, and is not intended to, amount to legal advice to any person on a specific case or matter. You are advised to obtain specific, personal advice from a lawyer about your case or matter and not to rely on the information or comment contained within this Article. 5/5