The Court of Appeal was recently given the opportunity to consider the remedy of rescission in Howard-Jones v Tate [2011] and in doing so, stressed a distinction between the remedies that are available to an innocent party where there has been a repudiatory breach of contract, and those situations where rescission ab initio will be awarded.
In the November edition of The In-House Lawyer, we considered the decision of Erlson Precision Holdings Ltd (formerly GG 132 Ltd) v Hampson Industries plc [2011] and looked at where the right to rescission would be lost. In that case, there had been fraudulent misrepresentations, from which the right to rescind a contract arose. However, the case of Howard-Jones helps to clarify when a party will (or will not) be in a position to elect rescission.
RESCISSION
Where a contract is rescinded ab initio, that contract is treated as never having come into existence and, as such, the innocent party will be returned to their pre-contractual position. Rescission will normally only arise where there has been some mistake or fraud which led to the execution of the contract. This helps to explain why the remedy differs from the principle behind other contractual remedies: that the innocent party should be put into the same position as if the contract had properly run its course (Robinson v Harman (1848)).
However, as Lord Wilberforce observed in Johnson v Agnew [1980], the term ‘rescission’ is often confusingly used to refer to termination following a repudiatory breach of contract, whereby both parties are merely discharged from future obligations. Such use of the term has resulted in uncertainty as to the consequences of serious or ‘material’ breaches of contracts. In 1996 the Court of Appeal held that a landlord’s breach of a condition to provide a lessee with vacant possession of a property on completion gave rise to a right to rescind the contract (Gunatunga v DeAlwis [1996]), while earlier case law has suggested that even where the repudiation entitled the innocent party to terminate, rescission ab initio was never available as a remedy for breach of a contract for the sale of land.
HOWARD-JONES V TATE
Facts
On 1 November 2007, Mr Tate sold a piece of land to Mr Howard-Jones. The land sold comprised a warehouse and some outbuildings (the property), which were in need of their own electricity and water supplies. By a special condition in the contract of sale (the condition), Mr Tate agreed to provide a new directly metered electricity supply, and a separately metered water supply to the property no later than six months from the date the property was sold.
Mr Tate failed to provide the required water and electricity to the property by the date stipulated. Between May and July 2008, Mr Howard-Jones wrote to Mr Tate notifying him that he was in breach of the condition. In a letter dated 2 July 2008, Mr Howard-Jones purported to rescind the contract for the transfer of the property. In October 2008, Mr Howard-Jones issued proceedings to obtain an order for rescission of the transfer and damages.
Decision at first instance
At first instance, the recorder at the County Court concluded that Mr Tate had breached a condition that went to the root of the contract, on the basis that without water and electricity, the land would have been worthless to Mr Howard-Jones. In determining the correct remedy for the breach, the recorder ruled that Mr Howard-Jones was not entitled to rescind the contract, but should be awarded damages. He held that Mr Howard-Jones was entitled to damages amounting to the purchase price of the property, plus compensation for expenses related to the purchase, such as surveyor fees, mortgage interest and council tax. But as a corollary, he ordered Mr Howard-Jones to return the property to Mr Tate.
The appeal
Mr Tate accepted the recorder’s decision that his breach of the condition went to the root of the contract. However, he appealed the judgment on the basis that the recorder had assessed quantum in a manner more akin to the remedy of rescission than damages, despite expressly stating that Mr Howard-Jones was not entitled to this form of relief. Mr Howard-Jones, on the other hand, contended that he should have been entitled to rescission of the contract, but even so, he agreed with the recorder’s decision on damages.
The Court of Appeal found that the recorder had been correct in deciding that the remedy of rescission was unavailable in the circumstances but considered that the recorder’s calculation of damages was inappropriate. The court held that Mr Howard-Jones’ compensation should have been limited to the costs he would have incurred had he installed water and electricity facilities himself within a reasonable time after Mr Tate’s breach, together with losses suffered as a result of the delay.
Reasoning
Lord Justice Kitchin, who handed down the judgment, was unequivocal that rescission was not the appropriate remedy in situations where, as a result of a repudiatory breach, the innocent party elects to treat the contract as no longer binding. He drew on the case of Johnson v Agnew to support his finding that:
‘Rescission is very different from failure of performance which entitles the innocent party to treat the contract as discharged. This latter situation, though still sometimes referred to as “rescission” does not have the consequence that the contract is treated as never having come into existence. Rather, the parties are absolved from future performance and the innocent party may claim damages for breach.’
He also followed Lord Diplock’s formula from Photoproductions v Securicor Transport Ltd [1980] to describe the position of the innocent party that elects to treat the contract as discharged:
‘Where such an election is made:
(a) there is substituted by implication of law for the primary obligations of the party in default, which remain unperformed, a secondary obligation to pay monetary compensation to the other party for the loss sustained by him in consequence of their non-performance in the future; and
(b) the unperformed primary obligations of that other party are discharged.’
Accordingly, Kitchin LJ stated that, rather than attempting to restore Mr Howard-Jones to the position he would have been in had the contract never been entered into, the proper remedy was to relieve him of any future obligations under the contract, and to award damages equal to his losses flowing directly from the breach, assuming he had mitigated these losses appropriately by taking it upon himself to arrange for the work to be done a reasonable time after Mr Tate’s breach.
In his judgment, Kitchin LJ addressed the view raised by Mr Howard-Jones that this reasoning produced an unfair result when applied to post-completion conditions in contracts for the sale of land. Once the land had been conveyed and the purchase money paid, there was little benefit in a remedy which entitled him to be released only from future obligations, given that the term breached was one which went to the root of the contract and deprived him substantially of the whole benefit of it. In response, Kitchin LJ stated that at the point of completion, Mr Howard-Jones obtained precisely the deal he had expected, and at the point of the breach six months later, he had obtained benefit from the property as a place to store vehicles. He commented, obiter, that the only way Mr Howard-Jones could have recovered all of the purchase money was if he had successfully argued that there had been a total failure of consideration, which, on these facts was not viable.
COMMENT
While Kitchin LJ and Lloyd LJ were both directly critical of the earlier Court of Appeal case, Gunatunga v DeAlwis, they both stopped short of concluding that it was not binding. Instead it was distinguished on the basis that in the earlier case the breach occurred at completion, whereas in Howard-Jones Mr Tate did not breach the contract until six months later. This distinction takes away from the clarity which Kitchin LJ sought to establish in this case, leaving room for the possibility that a case on the same facts as Gunatunga could be decided in the same way. However, Lloyd LJ said that it appeared the decision in Gunatunga ‘must be of seriously questionable authority’ as it had completely failed to take account of the House of Lord’s decision in Agnew, which suggests the courts might be reluctant to follow Gunatunga in future.
The decision in Howard-Jones has helped provide clarity on the availability of rescission, and the distinction between situations where the contract is to be treated as not having come into existence with those where the parties have simply been released of their future obligations. The decision also illustrates the reluctance to set aside a contract that has been concluded where it can fairly be dealt with in the provision of damages.
Howard-Jones serves to remind contracting parties that they will generally be held to their bargains, whether good or bad, unless it can be shown that the contract was entered into pursuant to some mistake or fraud. In other circumstances, the award of damages will usually be able to rectify any breaches of contract and parties will not be able to use those breaches as a means to set aside a contract. Should the parties wish to retain the right to rescind for a serious breach of contract, they should clearly express this intention in the contract itself.