An innocent party to a breach of contract is entitled to damages in compensation for his loss. And, depending on the seriousness of the breach, he may also be entitled to put an end to the contract in addition to claiming damages.
A contract can be ended by way of rescission or it can be terminated for repudiatory breach. Superficially, the effects of rescission and termination for breach appear alike. To add to the confusion, termination for breach is frequently referred to as “rescission”. However, the two are distinct, being available in different circumstances, and creating very different outcomes in relation to damages, as the recent case of Howard-Jones v Tate illustrates.
Rescission
If a contract is rescinded, it is set aside and treated as though it had never existed. The court will seek to restore the parties to the position they would have been in had they never signed the contract. For example, if a seller made false representations about his goods and the contract was rescinded as a result, the seller would be compelled to take back the goods and refund the purchase price to the buyer. If the buyer had incurred additional expenditure in relation to the contract, such as warehousing costs, then he would also be entitled to reimbursement of these, to ensure that he was not adversely impacted by having entered into the contract.
The circumstances may prevent the court from being able to rewind time in this way. If the buyer had sold on the goods in this example, they would not be available for return to the seller and rescission would be impossible. An award of rescission is therefore always at the court’s discretion. Where rescission is not available, the innocent party will still be entitled to damages.
Rescission is generally only available in limited circumstances, such as where there has been misrepresentation, fraud or mistake - matters which affect its formation. This can be varied by agreement between the parties; some contracts set out circumstances in which the agreement will be capable of rescission. Conversely, the right to rescind can also be expressly excluded by contract.
Repudiatory breach
If a breach is so serious that it goes to the root of the contract, the innocent party may elect to terminate performance of the contract from that point, in addition to claiming damages.
The difference here is that the contract is not treated as though it had never existed. The journey that the parties have been on since the contract began is cut short at the point where the innocent party elects to treat itself as discharged from further obligations. The obligations of both parties under the contract end. The defaulting party cannot travel freely on, as his original obligations are replaced by an obligation to pay compensation for the loss the innocent party has suffered as a result of the breach.
The crucial difference in the damages here is that the loss is assessed by reference to the future obligations that should have been performed rather than just the loss already sustained.
Termination for repudiatory breach will only be made out if there has been a breach of a fundamental term or a condition of the contract.
Where certain obligations are of particular importance to the parties, it is advisable to designate them as conditions to enable an injured party to elect to terminate the contract in case of breach.
Illustration of the difference in damages
A recent case illustrates the difference in the amounts that may be awarded for damages for rescission or for repudiatory breach.
In Howard-Jones v Tate, Mr Howard-Jones agreed to buy a portion of Mr Tate’s farmland, which included some outbuildings. At the time of purchase, the outbuildings were connected to supplies of water and electricity from the retained part of the farm. Mr Howard-Jones wanted separate, metered supplies direct to the outbuildings and it was a condition of the contract that Mr Tate would arrange this at his own expense within six months.
Mr Tate failed to do so and Mr Howard-Jones sought to rescind the contract. The County Court judge rightly held that rescission was not available as there had been no misrepresentation, mistake or fraud. Mr Howard-Jones had contracted to buy some land without its own water and electricity supply, and that is what he got. However, there had been a breach of the condition to supply water and electricity.
Somewhat inexplicably, however, the judge awarded damages as though the contract was being rescinded. He held that the land should be re-conveyed to Mr Tate and that Mr Howard-Jones should be refunded the purchase price and all his subsequent outlay on the property (such as council taxes). Altogether the award was about £190,000, significantly in excess of the £140,000 Mr Howard-Jones originally paid for the property.
When Mr Tate appealed, the Court of Appeal found that the the County Court had assessed damages on the wrong basis. Mr Howard-Jones was entitled to terminate the contract and he was discharged from any further obligations, but he was not entitled to recover the purchase price for the land. Instead, he could only recover the costs of arranging the supply of electricity and water to his property, and of the rent he’d incurred on alternative premises while he was unable to use the outbuildings. This sum was likely to be only a few thousand pounds; significantly lower than the original award.
What to take from this case
As this case illustrates, termination for breach is not rescission by another name. It is important for contracting parties to be clear about the differences between the two so that they have a realistic understanding of their entitlements in case of breach.
You can read about Howard-Jones v Tate [2011] EWCA Civ 1330 here.