Ending A Contract Because Of Repudiation - English Law's Russian Roulette

The English Court of Appeal has recently clarified the law regarding repudiation of contracts. How does this affect UK agency, distribution and joint venture agreements, when relationships have turned sour and one or other party would like to bring the agreement to an end?

Under English law, a party to a contract who either:

* commits a serious breach that goes to the very root, or heart, of the contract; or

* indicates that he does not intend to perform or abide by it, is said to have "repudiated" the contract.

Generally speaking, once the innocent party becomes aware of what the other has done, he must choose either:

* to communicate his acceptance of the repudiation,in which case both parties will then usually be released from any remaining obligations under the contract, and the innocent party will be entitled to claim damages for loss caused by the other's breach; or

* to affirm the contract, i.e. elect to continue with it (although he may be able to retain the right to sue for damages for the other party's breach). If he does nothing, then - after whatever is deemed to be a sufficient time, in the circumstances - he will be taken to have affirmed the contract.

Accrued rights

If the innocent party decides to accept the repudiation, the parties will normally retain all their accrued rights at the time of his acceptance. For example: commission earned will still be payable, as will the price of goods supplied. An innocent party who intends to claim damages in respect of the other's breach may wish to set that claim off against his liabilities to the other party. (Whether he can do that is something we'll look at in a future article)

Future rights

The party who has repudiated the contract - the guilty party - will normally lose his future rights under the contract. In the case of an agency or distribution contract, for example:

* a right to sell(or buy) back stock on the termination of a distribution contract; or

* a right to goodwill compensation upon termination of an agency contract.

A more difficult question is whether restrictive covenants, intended to give post-termination protection to a party, will survive and be enforceable by the guilty party after his repudiation. For example: a producer agrees to pay goodwill compensation to his distributor on termination, and in return the distributor agrees not to sell or offer to sell directly competing substitute products to former customers for a period of X months after termination. P repudiates, D accepts the repudiation. D will still be entitled to the goodwill compensation, but is he still bound by the restriction?

The answer is unclear. For many years it was regarded as settled that a repudiation automatically discharged the innocent party from all further obligations. More recently, however, there have been suggestions that this might not always be so. Restrictions protecting confidentiality, for example, should perhaps continue notwithstanding the guilty party's repudiation. Until the position is clarified, however, it would be advisable to assume that a party who repudiates a contract risks being unable to enforce any restrictive covenants it contained.

Fact-sensitive

Two of the critical questions in any case where repudiation is alleged are both highly fact-sensitive, i.e. dependent on an examination of all the relevant circumstances in that particular case.

* Has one party clearly shown an intention to abandon and altogether refuse to perform the contact? - The test recently approved by the Court of Appeal is whether, looking at all the circumstances objectively, from the perspective of a reasonable person in the position of the innocent party, the contract-breaker has clearly shown such intention.

* How long should it have taken the innocent party to decide whether to accept the repudiation or not? - Again, the length of time allowed will vary according to all the relevant circumstances.

Tread very carefully!

Deciding to end a contract on grounds of the other party's repudiation can be a very high risk strategy. It's rather like Russian Roulette. If you get it wrong - or your advisers do - it will be your refusal to continue that is the repudiation, and you, not the other party, who could be liable for damages and unable to enforce covenants designed for your protection. Definitely not something to do lightly, or without taking the best possible advice first.