UK: Losing the right to affirm a contract – A new approach to repudiatory breaches?

21 September 2016

Esther Johnson, Solicitor

This recent decision from the Court of Appeal raises several important issues surrounding termination of contracts, relevant to all sectors. The dispute concerned a contract for the shipment of cotton between Cottonex and the carrier, MSC. MSC transported the cotton to the destination port. However, there was then a dispute between Cottonex and the buyer and neither claimed ownership of the goods. Consequently, the cotton was left unpacked in 35 containers in a port in Bangladesh. The failure by Cottonex to unpack and redeliver the containers to MSC, resulted in a breach of contract which entitled MSC to charge Cottonex liquidated damages for the on-going delay in returning the containers.

The question for the High Court and subsequently for the Court of Appeal was the same: assuming Cottonex had repudiated the contract by failing to unpack and return the containers, did MSC have an unfettered choice whether to affirm or terminate the contract in circumstances where by affirming the contract, it could continue to claim liquidated damages for an apparently unlimited time?

In the High Court, Mr Justice Leggatt observed that where a discretionary power arises out of an express term of a contract then such a discretion has to be exercised in good faith for the purpose for which it was conferred and must not be exercised 'arbitrarily, capriciously or unreasonably (in the sense of irrationally).' (This principle is based on well-established precedent.) He went on to say that such an approach should also apply where 'by operation of law' an innocent party must decide whether to accept a repudiatory breach or affirm a contract. In each case it was clear that 'the decision-maker's power should not be abused.'  Applying the decision in White & Carter v McGregor ([1962] AC 413), it was held that MSC did not have a legitimate interest in continuing the contract. Therefore, neither the contract, nor the on-going contractual payments, could continue indefinitely. In effect, therefore, there was a restriction on the innocent party's right to choose whether to affirm or terminate the contract.

The Court of Appeal agreed that in this case there was no unlimited right for MSC to continue to claim the payments for the delay. However, it differed in its analysis to the High Court, holding that when repudiation occurred – which it held to be later than the High Court, when MSC offered to sell the containers to Cottonex - it had in fact led to the commercial purpose of the contract being frustrated which meant that the contract was no longer capable of performance by the party in breach. In such circumstances, the contract had been terminated and there was no choice available to MSC as to whether to affirm or terminate it. The 'no legitimate interest' argument only applied where the defaulting party was refusing to perform continuing or future obligations.

Interestingly, Lord Justice Moore-Bick, dismissed any suggestion that duties of good faith should apply to MSC's decision whether to affirm or terminate a contract following a repudiatory breach. He argued for a more narrow approach to the exercise of any such duty – noting that "there is…a real danger that if a general principle of good faith were established it would be invoked as often to undermine as to support the terms in which the parties have reached agreement".  

References

MSC Mediterranean Shipping Company S.A. v Cottonex  Anstalt [2015] EWHC 283 (High Court: Mr Justice Leggatt)
MSC Mediterranean Shipping Company S.A. v Cottonex  Anstalt [2016] EWCA Civ 789 (Court of Appeal: Lord Justices Moore-Bick and Tomlinson and Mr Justice Keehan)

 Image of Esther Johnson
Esther Johnson
Solicitor
esther.johnson@twobirds.com