Court of Appeal warns against Hasty Acceptance of Repudiatory Conduct

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Eminence Property Developments Ltd v Kevin Christopher Heaney  concerned repudiation of contracts for the sale of property in England, which were subject to English law, but has relevance to the concept of repudiation in the context of commercial contracts at large.

The background is that a buyer agreed to purchase 13 flats “off plan” (“Buyer”) from a property developer (“Seller”) for a total price of £1,470,000. Following the exchange of 13 identical contracts and payment of a deposit for the purchase of the 13 individual flats on 10 December 2007, completion should have taken place on 4 December 2008, but due to financial difficulties and a downturn in the property market from the time contracts had been exchanged, the Buyer failed to complete. On 5 December 2008, the Seller, through solicitors, served a notice to complete in accordance with the contracts, requiring completion within 10 working days. Unfortunately for the Seller, their solicitors’ letter stated: “We calculate the final date for completion under the notice is 15th December 2008”. This was incorrect: 10 working days from 5 December was 19 December. The solicitors had calculated the time period by reference to consecutive days and not working days.

Having failed to notice the error in their completion notices, the Seller’s solicitors subsequently served notices on 17 December 2008 accepting the Buyer’s failure to complete by 15 December 2008 as a repudiation. The Buyer’s solicitors then wrote to the Seller’s solicitors advising that the purported rescission by Sellers prior to the expiry of the completion period provided for in the contracts amounted to a repudiatory breach of contract by the Seller, which the Buyer was accepting, the Buyer thus being discharged from performance thereunder and entitled to the return of his deposit.

The Seller commenced legal proceedings in the English Commercial Court, and a trial was ordered to deal with, as a preliminary issue, the question of whether the Buyer had validly rescinded the contracts following the Seller’s alleged repudiation. If the Buyer was correct, then he would be entitled to the return of the deposit paid upon exchange of contracts, plus interest. At first instance, the Commercial Court held that the Sellers solicitors’ letter dated 17 December amounted to an unconditional repudiation of the contracts, entitling the Buyer to rescind the contracts himself and to have the deposit returned to him with interest. In other words, it was an unlawful early termination of the contracts by the Seller.

The Seller appealed this decision to the Court of Appeal. It was argued on behalf of Seller that they could only have been in repudiatory breach if, by their conduct, they had clearly intimated an intention to abandon and altogether refuse to perform the contracts; whether that was the case should be considered objectively from the perspective of a reasonable person in the Buyer’s position. The Appeal Court agreed that this was the correct test to apply and, in so doing, the Court had also to take into account all of the circumstances and the Seller’s entire conduct.

Those circumstances were that the Seller had served completion notices as they wanted to enforce their rights under the contracts to compel the Buyer to complete. Indeed, the property market had become advantageous to the Seller and onerous to the Buyer because of the economic downturn. In light of those circumstances, the Court of Appeal took the view that it was impossible to conclude that the Seller intended to abandon the contracts, rather that they were acting in a manner consistent with their wish to enforce their contractual rights.

The Court of Appeal also considered the question of whether the rescission notices on their own indicated an intention not to perform the contracts, leaving aside the factual background. The Court answered that question in the negative; the rescission notices showed an intention to implement the contractual procedure for terminating the contracts and the Seller exercising their rights of remedy thereunder, which were to keep the deposit already paid, plus interest, and claim damages.

This case vividly illustrates the delicate position faced by parties on two sides of the same coin: a party wishing to enforce rights against a recalcitrant contractual partner, and a recalcitrant party in receipt of a notice terminating a contract that does not comply with the contractual requirements. If the recipient of the rescission notice points out the timing error to the notice giver, then they allow the latter to correct themselves and the recipient could lose out on potentially being able to avoid a claim for damages. The miscalculation of the completion date in the earlier completion notices led to an early termination that was entirely unintended, the intention being, all along, to terminate if/when a right to terminate arose.

From the perspective of the party seeking to exercise a contractual right of termination, there are some key points to consider:

1. Take great care in considering if and when a right to terminate arises and then carefully follow the correct procedure.
2. Consider carefully whether or not, under the terms of the contract, it is necessary to state when the right to terminate arises. In the Eminence v Heaney case, the Sellers were under no obligation at all to specify in their completion notices a date on which the notices would expire. The Sellers could, and on reflection, should, have simply stated that they require completion on the expiry of 10 working days. That would have bought them time to work out the 10 working day period accurately.
3. An innocent mistake may not prove fatal if the underlying circumstances show that you do not mean to rescind. However, you may not always be able to rely on the court’s generosity - it is better to get it right in the first place. This case involved a clear and genuine mistake in rescinding too early where there was no obvious or clear intention on the part of the Seller to abandon the contracts. Circumstances may not always be as favourable.

This case arose around the same time as another, about which the Club has written an article Zodiac v Fortescue Metals. In that case, charterers under a series of consecutive voyage charter parties to be performed over five years found themselves in financial difficulties and unable to perform further voyages after the first five had been completed. Prior to loading of cargo for the sixth voyage, charterers advised owners that given the global downturn, they were unable to fulfil their freight commitments and sought a suspension of the contracts. There then ensued a series of written and verbal exchanges between owners and charterers, following which owners declared the charterers communications and conduct as a repudiation, which they were accepting in order to give rise to a claim for damages. Charterers argued that their communications and conduct were not intended to be repudiatory, and alleged that owners themselves were in repudiatory breach by terminating the contract.

In that case, the Commercial Court held in favour of owners, a decision based largely on witness evidence, centring around the contents of a particular telephone conversation in which owners contended that charterers had clearly said they were terminating the contract. That case was reported in an earlier website article Termination of Consecutive Voyage Charter - Measure of Damage.

Both cases emphasise the need for parties to be clear that what they are saying is what they are intending.
 

Article by Sacha Patel

Eminence Property Developments Ltd v Kevin Christopher Heaney [2010] EWCA Civ 1168