Reconsidering Repudiations of Contracts: Recent Developments

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A repudiation of a contract is a breach of contract by one party that is sufficiently serious to entitle the other party to treat the contract as terminated with immediate effect and to sue for damages. An innocent party, faced with a repudiation, is entitled to choose whether to: (i) treat the contract as continuing, which is known as affirmation of the contract;; or (ii) accept the repudiation and bring the contract to an end, thereby discharging all future obligations under the contract. It is said that there is no third choice in addition to these two options. Nevertheless, there is, as described by Rix L.J. in Stocznia Gdanska SA v Latvian Shipping Company (No.2) [2002] 2 All ER (Comm), a middle ground between acceptance of repudiation and affirmation of the contract when the innocent party is deciding what to do. This article examines this grey area.

The test for repudiation derives from the case of Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1962] 2 QB 26. The test can be summarised as the following questions: does the breach deprive the innocent party of substantially the whole benefit of the contract;; or does the breach of the contract go to the root of the contract, such that the breach makes further performance of the contract impossible? If the answer to either of these questions is yes, then the innocent party may argue that the contract has been repudiated and can either affirm the contract or discharge the contract accordingly, as the party sees fit.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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