Monday, November 28, 2011

Rescission and Repudiatory Breach

When C and R enter into a contract which is breached by R, C can either claim specific performance of the contract, or elect for the breach to have discharged the contract and claim damages. However, in cases where the latter option is chosen, it has been recognized since Johnson v Agnew that the contract continues to remain valid until the date of the repudiatory breach and is discharged only prospectively. It in only when C seeks to set aside the contract on grounds of fraud or misrepresentation that the contract is rescinded ab initio, and is deemed never to have been in existence. However, one issue that has continued to cause some confusion, partly due to the influence of civilian authority (in particular, the concept of fundamental breach), and partly because of some controversial decisions, is whether the magnitude of the breach influenced the contractual remedy. In other words, if the breach was of a term which formed an important part of the contract, could that be taken as a ground to rescind it ab initio? In Howard-Jones v Tate, the UK Court of Appeal has vehemently answered this question in the negative, reasserting the distinction between rescission and repudiatory breach forcefully laid down by Lord Wilberforce in Johnson v Agnew.

The dispute involved the purchase of a warehouse and some buildings from the respondent by the claimant, and a condition of the contractual agreement was-

"The seller [Mr Tate] shall at his own expense and no later than six months from the Completion Date:

(a) provide a new directly metered single phase electricity supply to the building [the warehouse] forming part of the Property;

(b) provide a separately metered water supply (mains) to the building forming part of the Property." [emphasis supplied]

On the alleged non-performance of this condition, the claimant sought to rescind the contract, the respondent arguing that damages were an adequate remedy for the non-performance, if any, and that rescission ab initio was inappropriate. It was against this backdrop that the Court of Appeal was called on to consider the very interesting conflict between Johnson v Agnew and Gunatunga v DeAlwis, a decision of the Court of Appeal never cited by subsequent case-law.

In Agnew, Lord Wilberforce, in his archetypal style, had provided a clear summary of the law on rescission and repudiatory breach. After making some uncontroversial statements on the consequences of breach by the purchaser in a contract for sale, he observed:

At this point it is important to dissipate a fertile source of confusion and to make clear that although the vendor is sometimes referred to in the above situation as "rescinding" the contract, this so-called "rescission" is quite different from rescission ab initio, such as may arise for example in cases of mistake, fraud or lack of consent. In those cases, the contract is treated in law as never having come into existence. (Cases of a contractual right to rescind may fall under this principle but are not relevant to the present discussion.) In the case of an accepted repudiatory breach the contract has come into existence but has been put an end to or discharged. Whatever contrary indications may be disinterred from old authorities, it is now quite clear, under the general law of contract, that acceptance of a repudiatory breach does not bring about "rescission ab initio".

That same year, Lord Diplock in Photo Productions v Securiror also approved the position laid down by Lord Wilberforce in Agnew, and observed that the effect of an election by the innocent party to accept the repudiatory breach and make a claim for damages was that “(a) there is substituted by implication of law for the primary obligations of the party in default which remain unperformed a secondary obligation to pay monetary compensation to the other party for the loss sustained by him in consequence of their non-performance in the future and (b) the unperformed primary obligations of that other party are discharged.” There was no right to treat the contract as never having existed.

On this understanding of the law, the decision in Howard-Jones should have been fairly straightforward. Matters were complicated however, by the decision in Gunatunga. In that case, a contract for sale of property required that vacant possession be provided to the purchaser. The purchaser, aware that the property was not vacant, proceeded to completion of the contract. However, when the property was still not vacant on the designated completion date, rescission and consequential repayment of the purchase price was sought. The claimant’s counsel made two arguments- that there had been misrepresentation, and that a fundamental condition of the contract had not been fulfilled. The Court rejected the first, but accepted the second and allowed rescission. Sir Christopher Slade held that:

The question whether the refusal or failure to perform part of the contract amounts to a repudiation of the whole depends on the construction of the contract and all the circumstances of the case. As Mr Buckhaven [counsel for the defendants] submitted, there must be a refusal or failure to perform something which goes to the root of the contract, before the innocent party can regard himself as discharged from further performance of the contract and entitled to rescind … In my judgment, Mr Buckhaven's well-sustained submissions were unable to circumvent a fatal weakness in the defendants' case, which was not canvassed before the learned judge, namely that the defendants' failure to give vacant possession on August 30, 1991 gave rise to a new and separate right to rescind the contract which was in due course duly exercised by the plaintiff. [emphasis supplied]

Faced with this conflict between Agnew and Gunatunga, the Court in Howard-Jones had one of three options- (i) to hold that Gunatunga was incorrectly decided; (ii) to hold that Gunatunga dealt with an issue different from that in Agnew; and (iii) to distinguish Gunatunga on facts. While Kitchin and Lloyd LJJ (Ward LJ concurring) come very close to adopting the first of these approaches, they ultimately choose to distinguish Gunatunga on facts. Kitchin LJ (¶ 28) suggests that the decision could be per incuriam, while Lloyd LJ (¶39) suggests that it is inconsistent with Agnew. However, both of them conclude that this question does not need to be decided because, unlike in Gunatunga, the condition which was breached here was not a condition to be satisfied on completion, but a condition which was to be fulfilled six months later. Hence, they hold that the breach of such a subsequent condition cannot lead to rescission ab initio. With respect, this distinction seems slightly unsatisfactory. The fact that the condition was one which related to performance which was to occur subsequent to completion, cannot by itself deny rescission. If, following Gunatunga, the condition was such that its breach entitled the claimant to set aside the contract ab initio, the fact that it was breach after the completion and not at the time of completion should not be material. Thus, while the Court is clear is reaffirming Agnew, the reconciliation of Gunatunga is not satisfactory.

However, this is not to say that Gunatunga is necessarily per incuriam. The language adopted by Sir Slade in that case, is more one of failure of consideration, entitling the claimant to restitution. What he seems to say is that the claimant in Gunatunga did not get what he bargained for, entitling him to the repayment of the amount he had paid to the respondent as a restitutionary remedy. One basis on which Gunatunga can be reconciled is by saying that while the facts in Gunatunga entitled the claimant to restitution, the facts in Howard-Jones did not (because the claimant got substantially what he bargained for). The role of rescission in the law of restitution is the subject of much academic debate, with lack of clarity over whether rescission is a restitutionary remedy or is a condition precedent to awarding restitution when there is a contractual relationship between the parties. In other words, what is still not entirely clear is whether the right to rescind a contract is something is granted by the law of restitution, or is something which emanates from the law of contract, and on being exercised, entitles the claimant to restitution. Gunatunga can be understood as a decision which supports the former view, while a strict reading of Agnew could suggest the latter (though not necessarily so).

Admittedly, Kitchin LJ does seem to touch on the restitutionary explanation of Gunatunga, in ¶28 (“Nor is there any suggestion (in Gunatunga) that the plaintiff elected, as an alternative to claiming damages, to sue for recovery of the money paid on the basis that the consideration for the payment had wholly failed”) and ¶30 (“Upon completion, Mr Howard-Jones became the owner of precisely what he had bargained for”). However, one would have hoped for some more discussion of this fascinating issue. No doubt, a conclusive understanding of the place of rescission in the law of restitution was beyond the boundaries of what the Court was called on to decide. However, some clarity on the relationship (if any) between the factual distinction relied on by the Court, and the concept of failure of consideration, would have been welcome.

In sum, Howard-Jones v Tate is very useful for clarifying the distinction between rescission and repudiatory breach, and reaffirming the irrelevance of the magnitude of the breach. However, the controversy over rescission and the law of restitution remains to be resolved another day.

1 comment:

Novice said...

Hi Shantanu

Since I am still learning contract law, I am unable to understand some fundamental stuff. Kindly help.

1- You said "When C and R enter into a contract which is breached by R, C can either claim specific performance of the contract, or elect for the breach to have discharged the contract and claim damages. However, in cases where the latter option is chosen, it has been recognized since Johnson v Agnew that the contract continues to remain valid until the date of the repudiatory breach and is discharged only prospectively. It in only when C seeks to set aside the contract on grounds of fraud or misrepresentation that the contract is rescinded ab initio, and is deemed never to have been in existence."

What is the difference between rescission ab initio and repudiatory breach? What rights does a claimant have you can treat the contract as never having existed?

A possible answer to this question is that under rescission ab initio, the parties are placed back to the position they were in before they entered into the contract. This is kept in mind while deciding the amount of compensation awarded under rescission ab initio. On the other hand, under repudiatory breach, the compensation is awarded based on the losses to the claimant due to the breach. Is my understanding explained hereinabove correct?

2- You have stated: "Admittedly, Kitchin LJ does seem to touch on the restitutionary explanation of Gunatunga, in ¶28 (“Nor is there any suggestion (in Gunatunga) that the plaintiff elected, as an alternative to claiming damages, to sue for recovery of the money paid on the basis that the consideration for the payment had wholly failed”)"

Can you explain how you link the quote on ¶28 to restitution?

Thanks!