A repudiatory breach is one which deprives the innocent party of substantially the whole benefit of the contract. Generally, an innocent party may elect either to terminate the contract if a repudiatory breach has occurred or, if it has a legitimate interest in doing so, to let it continue by affirming the contract. However, the recent Court of Appeal judgment in MSC Mediterranean Shipping Company SA v Cottonex Anstalt [2016] EWCA Civ 789 may lead to innocent parties being prevented from affirming contracts in some cases where there has been a repudiatory breach.
MSC owned containers that Cottonex used for shipping cotton. Cottonex contractually agreed to return the containers by a specified date and in the event of delay agreed to pay MSC a demurrage fee, accruing daily. There was a dispute with a buyer and Customs prevented anybody from retrieving the containers, meaning Cottonex could not return them. MSC sued Cottonex for the demurrage fees.
The Court of Appeal found that MSC could only claim demurrage fees from the date of the breach until the date both parties had shown in correspondence that they understood Cottonex could not perform its obligations. Though a repudiatory breach had happened, MSC could not have affirmed the contract even if it had a legitimate interest in doing so, as the contract had been frustrated by the action of the customs authorities.
This decision is important because it means that innocent parties may be unable to affirm contracts if a repudiatory breach occurs and the defaulting party cannot perform its obligations. In the property sector, a party might be unable to perform for reasons ranging from the dramatic, such as fires or floods, to the banal, such as the failure of a planning application. In such an instance a court might decide that an innocent party cannot affirm a contract even if it wishes to do so based on its own commercial interests, and liquidated damages clauses negotiated between parties may not take effect.
The courts will look at correspondence and the actions of the parties in the period after a breach in determining when a contract ended. Where defaulting parties cannot comply with their obligations and want the contract to terminate, they should immediately communicate this to the innocent party, as a court may decide that the contract was frustrated earlier rather than later.
For the same reason, innocent parties not desiring a contract to terminate should try not to correspond with defaulting parties.
Henry Evans is a corporate and commercial lawyer at Gordon Dadds LLP
