Key points

  • If a contract is rescinded, the parties are restored to their pre-contractual positions
  • Where, on the other hand, a contract is terminated because of a breach committed by one party, the termination only operates prospectively
  • Where a seller commits a breach of an obligation to be performed after completion has taken place, the buyer will not be able to rescind the contract but may only seek damages

Background

The usual remedy for a breach of contract is damages payable by the defaulting party. However, in certain circumstances, one party may have the right to terminate the contract and/or treat it as at an end. The consequences of termination may vary according to which legal rules apply to the termination.

In Howard-Jones v Tate, the parties exchanged contracts on 1 November 2007 for the sale and purchase of some farm buildings. Completion of the sale took place the same day. The buildings had no direct utilities connections. The seller therefore covenanted in the agreement to arrange, within six months of completion and at his own expense, for the property to be provided with new directly metered electricity and water supplies.

The six month deadline passed. The buyer's solicitors wrote to the seller's solicitors, requesting that the works be completed. The seller's solicitors did not respond, and so on 6 June 2008 the buyer's solicitors wrote again, stating that if the seller did not comply before the end of June 2008, the buyer would rescind the contract and claim return of the purchase price and damages. No further work was carried out, and on 2 July 2008 the buyer purported to give notice that the contract was rescinded.

Remedy

The seller was in clear breach of the contract. But what was the buyer's remedy? The County Court found that the seller's breaches went to the root of the contract, because they rendered the property worthless to the buyer. However, it ruled that the buyer was not entitled to rescind the contract so that it was terminated from the very beginning ("ab initio"), and was instead only entitled to damages. The buyer appealed to the Court of Appeal.

The court began by noting the critical distinction between rescission, and discharge by breach. Rescission occurs most often in cases of mistake or fraud. In these instances, where the ground for rescission affects the very formation of the contract, the contract is treated as if it had never come into existence, and the parties are to be restored, so far as they can, to the position they were in before the contract was made.

This should be contrasted with the situation where one party to a contract commits a repudiatory breach (a breach which goes to the root of the contract) which is accepted by the other party. In this case, the contract has come into existence, but has been put to an end or discharged. The acceptance of a repudiatory breach does not bring about rescission ab initio. Instead, it operates prospectively, so that both parties are discharged from the further performance of the contract. Rights which have already been unconditionally acquired are not divested or discharged. The innocent party may still claim damages for breach.

Decision

The buyer relied on a 1996 case called Gunatunga v DeAlwis. In this case, a contract provided for vacant possession of the premises, which comprised business premises with a flat above, to be given on completion. Completion took place, but there was someone in occupation of one of the rooms in the flat. The court held that the buyer was entitled to rescind the contract.

One of the judges in the present case thought that the decision in Gunatunga was "of seriously questionable authority", and should be treated "with some care". In any event, the Court of Appeal managed to distinguish Gunatunga from the circumstances of this case. Unlike Gunatunga, this was not a case where the seller was in repudiatory breach of a condition which became operative on completion. The seller in this case was not in breach until six months after completion took place.

The court thought that such a breach could not possibly justify setting aside what had already been done. The normal principles governing repudiatory breaches applied in such a situation. In other words, the seller was liable to damages for breach, but the buyer was not entitled to rescind the contract ab initio. The buyer's losses could be quantified as the cost of having the services installed, together with any other losses he had suffered as a result of them not having been installed on time (such as rent on alternative business premises).

Things to consider

The law on termination of contracts, and consequent remedies, is complex. Legal advice should always be sought before a contract is terminated to ensure that the party attempting to terminate has the right to do so. The measure of damages payable as a result of termination will depend on whether the contract is rescinded or terminated for breach. In the latter case, the correct measure will further depend on whether the contract is terminated pursuant to an express provision to that effect in the agreement, or simply under the repudiatory breach rules at common law.

In the case of property contracts which have subsequently been completed, it is often difficult to unwind the arrangement to put the parties back in the position they were in prior to the contract (particularly where the disposition has been registered at the Land Registry). This case illustrates that unwinding the contract is unlikely to be appropriate where one of the parties has breached a post-completion obligation.