Cancellation vs termination for serious breach
JONES v TATE (CA) [2011]
This case discussed the distinction between the right: (1) to have a contract set aside from the outset so that the parties are put back into the position they were in before the contract was made; and (2) to terminate a contract for serious breach, which simply brings the contract to an end in terms of future obligations.
Firstly, by way of explanation:
Right to have a contract set aside
This is effectively the right to cancel an agreement or, using the legal term, to ‘rescind’ the contract from the beginning. Rescission is one of the remedies available for pre-contract misrepresentation at the Court’s discretion. It will not be available if one of the so called ‘bars to rescission’ is present: such as a party having acted as though it intends the contract to remain in place or simply because of a delay in acting.
Right to terminate for serious breach
This arises where one party commits a breach which goes ‘to the root of the contract’. This has sometimes been expressed as a breach which ‘deprives a contracting party of substantially the whole benefit of the contract'.Facts:
J agreed to purchase some farm buildings subject to a condition that within six months the seller, T, would arrange for the buildings to be connected to his own, independently metered water and electricity supplies. When T failed to do this, J claimed to have rescinded the contract and claimed damages to put himself in the same position as if he had never entered into the purchase contract.
Decision:
- Initially the County Court (CC) found that T was in breach of contract and, perhaps surprisingly, decided that the breaches went to the ‘root’ of the contract and rendered the property worthless. However, the Judge then said that J was not entitled to rescind the contract. When T had failed to comply with his obligations within the permitted six months, J was entitled to treat himself as released from any obligation to accept future performance by T and to claim damages. There was, apparently, no discussion before the CC of any contractual provisions dealing with the right to terminate.
- Despite finding that there was no right to rescind, the Judge then seemed to award damages to put J in the same position as if the contract had been so rescinded. He was awarded damages equivalent to the full purchase price (upon J transferring the property back to T) and resulting damages, including J’s legal and lender's costs.
- T then appealed to the Court of Appeal (CA), which held that the CC had decided the case correctly in finding a breach and that J was not entitled to rescind the contract. However, the CA found that the CC had assessed damages on the wrong basis. It should have considered what losses J had suffered as a result of T's breaches. Instead it had assessed the cost of putting J back into the position he would have been in had the contract never been entered into. This was not a permissible approach given that there was no right to rescind.
- J’s losses primarily consisted of the cost of having the services installed for himself within a reasonable time after the acceptance of T’s repudiation, together with any other losses J had suffered due to the services not having been installed on time. The cost of laying the supplies was easily ascertainable, as was the amount of rent J had spent on alternative premises as a result of not being able to use the property for its intended purpose during the period of delay.
Point to Note:
The different consequences of a right to rescind and a right simply to terminate and claim damages are potentially very considerable. This is why it is important to understand the distinction between the two rights and the separate situations in which they will apply.