Repudiation and termination of contracts

Victoria Peckett looks at recent authority on repudiation

The issue of repudiation and termination of contracts is a recurring theme
in the construction industry. The recent Court of Appeal case, Leung -v-
Leung, is another case on the point and concerns parties' rights consequent
on repudiation.

In that case, the Defendant was the Employer under a Design and Build
Contract. The Plaintiff was the Contractor. The parties agreed a fixed fee
for the Works. Towards the end of the Contract, however, the Defendant
evicted the Plaintiff from the Site and employed a third party contractor to
complete the Works. The Plaintiff brought an action claiming additional
monies for variations. The Defendant
denied liability and counterclaimed the costs it claimed it had incurred in
rectifying the alleged defective work by the Plaintiff.

The Judge found that the Defendant was not entitled to evict the Plaintiff
from the Site and had therefore repudiated the Contract. Nevertheless, the
Judge made an award in favour of the Defendant that included £7,500 in
respect of its counterclaim for defective works. The Plaintiff appealed.
There were two grounds of appeal against the award on the defective works:

1. The Plaintiff's primary submission was that there was no evidence on which
the Judge could have made his award of £7,500 as the value of the defective
works. The Defendant had counterclaimed approximately £21,000 (being the sum
paid by him to the third party contractor for completing the work). The
Plaintiff had conceded that the Defendant should be allowed a credit of
approximately £2,000 for the costs the Plaintiff would have incurred in
rectifying the defects. The Judge found that some of the £21,000 claimed by
the Defendant was in fact attributable to 'betterment' work (and therefore
not recoverable from the Plaintiff), and found that the Plaintiff had not
made an allowance for some rectification works that it should have done. In
other words, the correct figure was somewhere between £2,000 and £21,000 and
the Judge chose £7,500.

Although the Court of Appeal expressed some disquiet, it held that there
were no grounds on which it could interfere with the Judge's decision:
although the figure chosen by the Judge was arbitrary, on the evidence he
was entitled to choose it and any figure substituted by the Court of Appeal
would be equally as arbitrary. Unfortunately, it is not clear from the
Court of Appeal's decision what the basis of the calculation of the £7,500
was - whether it constituted the Judge's calculation of the cost to the
Defendant of rectifying the defects in the Plaintiff's works or whether it
constituted his valuation of an appropriate reduction in the value of the
Plaintiff's work.

2. The Plaintiff's subsidiary submission was that the Judge should not have
made any award at all on the Defendant's counterclaim as the Defendant was
the party in repudiatory breach and was therefore not entitled to make any
claim against the Plaintiff at all. Both Court of Appeal Judges disagreed
with that submission but for different reasons.

Lord Justice Swinton Thomas said that the Defendant would not have been
able to sue on the Contract once he had repudiated it, but that that did not
prevent the Defendant counterclaiming for any breach of contract by the
Plaintiff for defective work.

Mr Justice Holman stated that the Defendant could not claim damages for the
consequences of his own breach of contract, but that the Plaintiff must give
credit for the costs the Plaintiff would have otherwise incurred in
rectifying the defects.

It is submitted that the judgment of Mr Justice Holman is to be preferred
in this respect as the judgment of Lord Justice Swinton Thomas treats
repudiation as being the same as rescission. There is a distinction to be
drawn between the two concepts: on the one hand, if a contract is rescinded
it is treated as being void ab initio; on the other, if it is repudiated the
parties' rights which accrued up to the date of the repudiation are
unaffected. If Mr Justice Holman's judgment were adopted, the distinction
between repudiation and rescission would be recognised. The Employer would
not be prevented from suing for breaches of contract by the Contractor that
had occurred prior to repudiation but his entitlement to damages would be
based on a reduction in value of the Contractor's work (rather than the cost
to the Employer of rectifying the defects).

Nevertheless, whether the judgment of Lord Justice Swinton Thomas or Mr
Justice Holman is to be preferred, the question still remains: if you are a
Contractor whose contract has been repudiated, but you know that the
Employer may have a significant claim for defects, in the light of Leung v
Leung do you really want to start proceedings in respect of your own claim
for damages?