Under English common law, repudiatory breach is a breach of contract that is considered serious enough to give the innocent party a right to terminate and claim damages. However, the principle is often misunderstood and, as such, can have damaging consequences if incorrectly applied.
In order to be considered repudiatory, there must usually be a breach of a condition – a term that goes to the heart of the contract. Contracts can be open to interpretation if not tightly drafted, so it can be difficult to decide whether a term is a condition, making for a tricky a judgement call on whether it constitutes repudiatory breach – especially if there has not been an outright refusal to perform by the other party. If the contract is wrongly terminated, the innocent party may itself be in breach of contract.
Parties often try to eliminate this uncertainty by ensuring the contract identifies what constitutes a “material breach” and prescribing specific remedies, such as liquidated damages or termination. The contractual provisions can augment and override the common law, so even when parties describe a breach as “material”, it is not always repudiatory. This can have a significant effect on the type of damages that can be claimed, an issue explored further below.
Affirmation or termination?
If repudiatory breach is established, the innocent party has two choices. They can either end the contract (terminate), or let the other party know that they wish to continue (affirm) despite the breach. In either case, the innocent party can claim damages. Once a contract is affirmed, the right to terminate is irrevocably lost. On termination, the obligations of the innocent party will fall away, but until the exercise of the right to terminate is communicated to the other party, the innocent party must continue to perform its obligations, or may find itself in breach.
Timing is everything
The right to terminate must be exercised in a timely fashion. Any significant delay, or continuing conduct suggesting that the contract has been affirmed can inadvertently jeopardise the right to terminate. The recent Force India case, involving a Formula 1 team and its sponsors, reinforced this position by confirming that where time is of the essence, or where silence or inaction misleads the other party into thinking that the risk of termination has passed, the right to terminate will be lost.
The Courts will determine what constitutes a significant time between the breach arising and when termination is elected on a case by case basis. Whilst recent cases have recognised that a certain amount of “thinking time” should be permitted, it is still best for a party considering termination to act quickly and decisively to exercise that right. If there are ongoing discussions or negotiations that might delay the option, the innocent party should clearly “reserve its rights” – but even then, reserving them for too long will prejudice the right to terminate.
Contractual waiver clauses
Most commercial contracts have a boilerplate clause that states that no delay or failure to enforce the terms of the contract will waive a party’s ability to exercise such rights in future (i.e. a “no waiver” clause). In a key 2009 case, telecoms operator Tele2 claimed that despite the valid no waiver clause in the contract, the one year delay by the Post Office in exercising its right to terminate for breach constituted affirmation by conduct. The Court of Appeal agreed, placing greater value on the parties’ actual conduct than the terms of their written agreement. Although the circumstances of each case are unique (the Post Office gave no indication that it intended to terminate, and used the year-old breach as a pretext to end the contract) the judgment has called the effectiveness of such clauses into serious question.
Get the damage right
The Shell case is a timely reminder that parties should carefully consider the process of termination as well. Shell relied on its contractual right to terminate, rather than clearly stating that termination was for repudiatory breach. The difference is crucial. Under the common law, Shell would have been entitled to damages for “loss of profits”, but under the contract, that right was specifically excluded – costing Shell the opportunity to recover 15 million US Dollars in investment costs.
Although recent case law has clarified the nature of repudiatory breach, whether or not a breach of contract will qualify is still very much a judgment call. As such, it should only be exercised after careful consideration (and preferably professional legal advice). Given the uncertainty, the innocent party may be better served by using the breach as leverage in settlement negotiations, especially if termination is not really an option for commercial or strategic reasons.
The law on repudiatory breach under English contract law can be summarised as follows: (a) it is a serious breach that gives the innocent party a right to terminate; (b) the innocent party has a choice to either affirm the contract or terminate it; (c) in either case, the innocent party can claim damages for loss of bargain; (d) the right to terminate must be exercised in a clear, unambiguous and timely fashion; (e) the contract can be inadvertently affirmed by conduct, silence, or significant delay; and (f) affirmation is irrevocable.