Restrictions on the innocent party when faced with a repudiatory breach of contract

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Restrictions on the innocent party when faced with a repudiatory breach of contract

Restrictions on the innocent party when faced with a repudiatory breach of contract

Repudiatory breaches of contract are breaches that dispossess the innocent party to the contract of largely all the benefits that the contract provides or indicate intention not to perform the contract at all.

Traditionally, the innocent party to the contract has had one of two courses of action when faced with a repudiatory breach:

  1. Either accept the breach and terminate the contract.
  2. Or affirm the contract thus requiring both parties to carry on with duties under the contract.

This second option in the past has been limited in a decision of the House of Lords. If the innocent party has no legitimate interest in continuing to perform the contract, then it will not be allowed to affirm it.

Now, the Court of Appeal has in MSC Mediterranean Shipping Company S.A. v Cottonex Anstalt [2016] EWCA Civ 789 further considered restrictions on the innocent party’s option to affirm the contract.

Cottonex (a cotton supplier) acquired the services of MSC to ship containers of cotton to a buyer in Bangladesh. During transit, cotton’s market price collapsed and whilst the buyer paid for the cotton, it refused to collect it upon arrival.

Following an injunction to embargo the cotton, the Bangladeshi port authority refused to allow the containers to be unloaded without a consent order. The containers could therefore not be returned to MSC by Cottonex.

Owing to these circumstances, a provision in the contract between the parties was activated that required Cottonex to pay MSC damages that accrued on a daily basis for not returning the containers after a period of 14 days from delivery. MSC filed proceedings to claim damages, requesting the damages continue to accrue until the containers were returned.

The High Court gave a decision that Cottonex only had to pay damages until the date Cottonex informed MSC that it no longer held the legal title. The reasoning behind this decision was that this action repudiated the contract and MSC should not be allowed to keep the contract in place for the sole purpose of claiming damages. The Court also decided that the decision to terminate in the face of a repudiatory breach should be made in good faith.

The Court of Appeal agreed with the High Court’s decision that damages were only payable up to the termination of the contract. However, the Court decided that this breach occurred when the offer to sell the containers was made, as it “was the clearest indication that the commercial purpose of the venture had by then become frustrated.”

The Court did not apply the principle from the previous case of White & Carter, as Cottonex had no ability to perform its obligation to return the containers. For this reason, and because the contract had been frustrated, the Court decided that MSC did not have the right to affirm the contract and that this right would only arise where the other party was refusing to perform its obligations.

This case is of significance as it had further expanded the exceptions to affirmation of a contract. Not only must the innocent party have a legitimate interest, the party who have committed the repudiatory breach must be able to perform the contracts obligations.

For more information, contact our Dispute Resolution team on 0345 070 6000.