[Sriram Venkatavaradan and Saai Sudharsan Sathiyamoorthy are Advocates practicing at the Madras High Court and can be reached at [email protected] and [email protected] respectively]
Where one party to a contract indicates by words or through conduct that he does not intend to perform his obligations, he is said to have repudiated the contract by his actions [Stephen A. Smith, Atiyah’s Introduction to the Law of Contract (6th ed. 1995), p. 201]. According to the doctrine of ‘anticipatory breach’, the innocent party, under such circumstances, has a choice to make. Such party may either choose to accept the repudiation and sue for damages, or continue to keep the contract alive even if the party at breach has no intention of performing his obligations [White & Carter (Councils) Ltd. v McGregor, [1962] AC 413].
However, the issue arises when the innocent party, having already complied with his obligations, decides to keep the contract alive solely with the intention of claiming damages, knowing fully well that there is no realistic prospect that the party at breach can execute his set of duties. Recently, the Madras High Court in Simplex Infrastructure Ltd. v Aban Offshore Ltd. (‘Simplex Infrastructure’), has held that in such a circumstance, the innocent party would not be entitled to claim compensation for the entire period of contract.
Repudiatory Breach and Right of Affirmation
Where the innocent party chooses to accept the repudiatory breach, he may terminate the contract and sue for damages for breach of the contract. In the Alaskan Trader case ([1984] 1 All ER 129 at 134), Lloyd J. had observed that the innocent party “cannot claim remuneration under a contract if you have not earned it; if you are prevented from earning it, your only remedy is in damages.” Thus, the innocent party cannot sue for any sum which was to accrue after the date of termination. However, he may claim damages for wrongful repudiation based on sums that he ought to have received if not the for the repudiation.
If the innocent party elects to keep the contract alive, he is said to have ‘affirmed’ the contract. In Mackay v Dick ((1881) 6 App. Cas. 251), the Court held that if the innocent party has already completed the performance of his duties under the contract, he is entitled to bring an action against the party at breach for the sum agreed. However, if the innocent party is not able to complete performance due to lack of cooperation of the party at breach, the innocent party may only sue for damages [Attica Sea Carriers Corporation v Ferrostaal Poseidon Bulk Reederei GmbH, [1976] 1 Lloyd’s Rep. 250].
The judgment delivered by the House of Lords in White & Carter, which has been quoted with approval in Motilal Srinivasa Sarda v Netha Co-operative Spinning Mills Ltd., is the leading case on the issue of election in the event of a repudiatory breach. In White & Carter, the Court was to decide whether the innocent party was justified in continuing with the contract, despite intimation by the other party about their inability to perform. The House of Lords, by a majority (3:2), held that the contract had remained intact and that the innocent party was entitled to sue for the contract price.
This approach, however, has attracted criticism as it allows actions that consciously and purposefully increase the economic burden on the party at breach [Treitel, The Law of Contract (10th ed, 1999) pp 946–949]. In order to overcome this, Lord Reid, in his famous obiter dicta in the same judgment, had carved out a qualification, that the innocent party may not elect to keep the contract alive where he has “no substantial or legitimate interest” in completing the performance and that, in such cases, the innocent party’s only remedy is in the form of damages.
Legitimate Interest
Now, the question arises as to what constitutes a ‘legitimate interest’. Though the requirement of ‘legitimate interest’ brought the English law closer to the law in the jurisprudence in the United States, the meaning of the term has been a subject of constant debate. In the U.S., Restatement, Contracts s. 338, Comment c requires that the innocent party must not unreasonably continue with the contract in case of a breach.
While the applicability of ‘legitimate interest’ has differed from case to case, it is broadly agreed that an insistence on continuation of contract cannot be sustained where such continuation would be ‘wholly unreasonable’, a ‘commercial absurdity’ or ‘perverse.’ [Gator Shipping Corporation v Trans-Asiatic Oil Ltd. (The “Odenfeld”), [1978] 2 Lloyd’s Rep 357 (QB); and Ocean Marine Navigation Ltd. v Koch Carbon Inc (The “Dynamic”), [2003] EWHC 1936 (Comm.)] In Isabella Shipowner SA v Shagang Shipping Co. Ltd. (The Aquafaith), [2012] 1 C.L.C. 899 Cooke J. held:
The effect of the authorities is that an innocent party will have no legitimate interest in maintaining the contract if damages are an adequate remedy and his insistence on maintaining the contract can be described as ‘wholly unreasonable’, ‘extremely unreasonable’ or, perhaps, in my words, ‘perverse’.
The test of ‘legitimate interest’ was recently applied in MSC Mediterranean Shipping Company SA v Cottonex Anstalt[2015] EWHC 283 (Comm) to determine whether the continuation of contract in light of a repudiatory breach was tenable in law. One of the issues before the courts in the United Kingdom was whether the Carrier could keep the contract alive and claim demurrage thereafter, or whether it was obliged to accept the repudiatory breach and claim damages. Leggatt J. held:
the Carrier had a legitimate interest in keeping the contracts of carriage in force for as long as there was a realistic prospect that the Shipper would perform its remaining primary obligations under the contracts by procuring the collection of the goods and the redelivery of the containers. Once it was quite clear, however, that the Shipper was in repudiatory breach of these obligations and that there was no such prospect, the Carrier no longer had any reason to keep the contracts open in the hope of future performance.
Judgment in Simplex Infrastructure
In Simplex Infrastructure, the Madras High Court was confronted with a similar issue: whether the innocent party was justified in keeping the contract alive and claiming compensation for the entire duration of the contract, especially in light of the express communication from the party in breach regarding its inability to continue with its obligations? Relying on the judgments in White & Carter and MSC Mediterranean, the Court held that the innocent party was not entitled to compensation for the entire period of the contract, but only up to the date of filing of the suit. By denying the innocent’s party right of affirmation, the Madras High Court had essentially followed the test of ‘legitimate interest’ in ensuring that the right of affirmation is not unfettered.
Coda
While the decision in White & Carter has been quoted with approval by courts in India, none of the decisions appear to have specifically dealt with the issue of ‘legitimate interest’. In this regard, the judgment in Simplex Infrastructure recognises the applicability of the ‘legitimate interest’ test to contractual obligations, although the scope of the term was not delved into. This, therefore, leaves the term open to numerous interpretations depending on the factual circumstances of a particular case. While the duty of good faith behoves an innocent party to act reasonably in exercising its contractual discretion, a more exhaustive definition of legitimate interest would certainly help in preventing unwarranted affirmations in light of a repudiatory breach.
– Sriram Venkatavaradan & Saai Sudharsan Sathiyamoorthy
