12.01  In this chapter the focus is upon the situation where the innocent party with an option to terminate the contract instead decides to affirm it. What are the obligations of the innocent party in that situation and what are its rights? In particular what remedies may the innocent party be entitled to in the event that it decides in effect to carry on with the contract? Broadly speaking the innocent party affirming the contract would be required to continue performing its own primary obligations under the contract and would be entitled to sue for damages for losses caused by the other party’s breach. But the remedy of greater significance by far usually concerns the other party’s continuing obligations, which the innocent party might be able to seek to enforce through an action for an agreed sum (the price) if they were money obligations or an order for specific performance if they involved non-monetary acts of performance.

12.02  If the innocent party is going to try to enforce the other party’s continuing contractual obligations it is only fair and just that it be obliged to continue performing its own. This is the general rule to which there is one exception. If one party’s obligation is dependent upon prior performance of the other’s obligation there will be no requirement for the innocent party to perform until the prior obligation is performed. Thus an employer is not obliged to pay wages to an employee who has not done the work earning those wages unless payment of wages was to be made (p. 319) in advance.¹ Why the innocent party might wish to affirm the contract as opposed to electing for termination is something better addressed in the context of the specific remedy the innocent party seeks, an action for an agreed sum or specific performance.

12.03  The manner in which the right of election between affirmation and termination may be exercised has been discussed previously and need not be repeated here.² Once the election is made it is irrevocable, so if the innocent party elects to affirm it cannot then seek a remedy for termination.³ The contract will be kept alive and events subsequent to affirmation will have the same effect as they would have had if there had been no previous breach. The consequences of affirmation are well summarized in the following passage from Frost v Knight:⁴

So in Avery v Bowden⁵ the defendant chartered the claimant’s ship at a Russian port and agreed to load her with cargo within forty-five days. Before this period had elapsed the defendant issued several advices to the claimant that he should go away as it would be impossible to supply a cargo. The claimant remained at the port hoping the defendant would be able to perform his contractual obligations but this was to no avail. Before the forty-five day period elapsed the Crimean War broke out between the United Kingdom and Russia. The effect of this was to frustrate the contract between the claimant and the defendant and so the claimant’s decision to affirm in the end cost him any chance of obtaining a remedy for what would undoubtedly have been a repudiatory breach by the defendant. Then in The Simona⁶ a ship charterparty required a ship to sail to Durban and carry a cargo of steel coils to Bilbao. The charterparty contained a cancellation clause under which the charterer could cancel if the vessel were not ready to load on or before 9 July. On 2 July the shipowners asked if they might have an extension of the cancellation date because they wished to load another cargo first. In response the charterers purported to cancel the charterparty. As clear authority established that a charterparty cannot be cancelled in advance no matter how clear it was that the ship would not be loaded in time, this put the charterers in repudiatory breach. However, the shipowners decided to carry on with the contract. The ship did not load on time or at all and the charterers loaded the cargo on to another ship. The shipowners’ action (p. 320) for dead freight failed. By affirming the contract the shipowners kept it alive for all purposes, including the charterers’ right to cancel if the ship was not ready to load in time.

12.04  So affirmation carries with it some dangers arising out of subsequent events. However, if those subsequent events take the form of fresh or continued breaches of contract by the defendant, the innocent party will acquire a fresh right to elect between affirmation and termination.⁷ The decision to affirm allows for no blowing hot and cold. A strategic choice must be made and has to be lived with.

12.05  If the innocent party elects to affirm the contract after the other party’s breach, this effectively treats the breach that would have entitled the innocent party to terminate the contract like a breach of a warranty that allows the innocent party to claim damages only. If the innocent party elects to terminate the contract it may claim damages for loss of bargain as well as for past loss. If the breach is treated like a breach of warranty, loss of bargain damages are not available for the innocent party but damages for past loss are. The principles for the calculation of past losses in this context are the same as those applicable to past losses in respect of a breach terminating the contract.⁸

12.06  Where the innocent party has affirmed the contract, the key objective is to obtain the other party’s contractual performance. If that performance takes the form of delivering goods or providing agreed contractual services, the claimant will most likely seek an order of specific performance or something similar. If it consists of the payment of money, then the claimant will most likely bring an action for an agreed sum (the price).

12.07  In most actions for an agreed sum the claimant has sold goods or performed services for the defendant and seeks payment of the agreed sum (price). Any defence which the defendant raises to this claim is likely to be along the lines of alleging that the goods were defective or the services were inadequate or the claimant’s performance was in some way short or inadequate. Sometimes the defendant may bring a counterclaim against the claimant and the entire dispute may be resolved by assessing the merits of claim and counterclaim and arriving at an aggregate figure in favour of one party or the other. (p. 321) Usually this task is undertaken through a process of negotiation, producing an out of court settlement. In the majority of cases where an agreed sum is claimed the promisee has substantially performed its side of the bargain and is claiming the agreed price earned by its performance. As Andrews has cogently argued in these situations there is usually very little reason why the promisee should not recover the price.⁹ In cases where the claimant has not completed the agreed work (or maybe has not even started it) but seeks to complete or do it and be paid the agreed sum there is greater scope for the defendant to argue that damages should be the remedy. Those damages would usually include reliance expenses incurred in performing the contract or preparing to perform it¹⁰ together with those profits which the claimant can show would probably have been earned if the work had been completed.

12.08  It seems that debt actions, of which the action for an agreed sum is a typical example, are the most common kind of actions in the civil courts.¹¹ By claiming the price as opposed to damages for breach of contract the claimant will be seeking a larger sum in cases where contractual performance is incomplete, but this is not the principal reason why the agreed sum is claimed because if the claimant were to cease performance at the defendant’s request much expense would be avoided and provable profit could still be recovered. The principal advantage of the action for an agreed sum is that the amount of the claim is liquidated and no assessment of damages has to be undertaken. The court need not embark on a calculation of reliance expense or expectation loss. It does not have to take account of remoteness, mitigation, causation, or contributory negligence. In most cases a straightforward ‘yes’ or ‘no’ question is all that has to be answered. The claimant can invoke the summary judgment procedure of the civil courts and effectively force the defendant to show cause why judgment should not be entered for the claimant. If the claimant has suffered loss beyond the agreed sum then these damages can be sought in addition to the price.¹²

12.09  As Chen-Wishart has pointed out, the quick and easy procedure for the claimant to seek judgment in respect of a debt does not come without protection for the defendant,¹³ especially where the latter is a consumer. The obligation on the claimant to perform its contractual duties before being able to force the defendant to pay is strictly interpreted. At common law the claimant must at least substantially perform the contract¹⁴ and (p. 322) paragraph 18 of Part I of Schedule 2 to the Consumer Rights Act 2015 specifies as indicatively unfair (and thus invalid) any term obliging the consumer to fulfil his obligations (usually paying money) where the seller or supplier does not perform his. Where the defendant has a right to set off what the claimant owes it against what is owed to the claimant, the Court of Appeal held that a contract clause barring this right was unreasonable under the Unfair Contract Terms Act 1977.¹⁵ Such a clause is also indicatively unfair under paragraph 20 of Part I of Schedule 2 to the Consumer Rights Act 2015 in contracts between sellers or suppliers and consumers. And as the later discussion will show, there may be a defence for a contracting party who has not received its contractual performance at the time of breach to argue that it should not have been rendered afterwards. This context also presents some other reasons why the claimant may wish to put itself in a position where it can claim the agreed sum.

12.10  The short answer to the question ‘When is an action for an agreed sum available?’ is whenever the claimant’s case is a claim for a debt as opposed to damages. Usually this is not difficult to determine but there have been some problematic cases. It has been held that where an insurer is obliged by a contract of insurance to indemnify the insured against any damages the latter has to pay to a third party, the insurer’s claim sounds in damages.¹⁶ The better view, it is submitted, is that this is the insurer’s primary obligation, a liquidated debt ascertained by calculation of the damages the insured is liable to pay the third party.¹⁷ A more coherent view was taken by the Court of Appeal in the separate but analogous context of Jervis v Harris.¹⁸ In this case a lease provided that on the tenant’s breach of his covenant to repair the landlord could execute the repairs and recover the cost from the tenant. It was held that this claim was for debt, not damages. Like the insurance cases the agreed sum was not ascertained when the contract was made but it was still ascertained when the tenant’s payment obligation arose. This should be the time for determining the status of the obligation. In contractual indemnity cases, where A agrees to indemnify B against any loss or liability incurred in certain events, one of which may be a breach of the A-B contract by A, it seems to be largely a question of construction whether B’s right against A sounds in debt or damages.¹⁹

12.11  As these authorities also indirectly demonstrate, the obligation to pay must sound in debt and also have arisen. In Mount v Oldham Corporation²⁰ a local education authority (p. 323) wrongfully withdrew boys from a school without giving the customary one term’s notice. It was held that the headmaster could bring an action for unpaid school fees as there was an implied term in the contract that these should be paid in advance. The claim had therefore arisen. To say that the claim has arisen is in effect to say that the price has been earned. In a contract for the sale of goods the seller’s action for the price arises in accordance with section 49(1) and (2) of the Sale of Goods Act 1979. Section 49(1) is the general rule and states that the price is payable when the property in the goods has passed to the buyer,²¹ the rationale for the rule being that at this stage the seller has done everything it is required to do to earn the price. However section 49(2) provides that the parties may agree instead that the price is payable on a ‘day certain irrespective of delivery’. The remainder of this section will examine the question of whether a promisee who is faced with a promisor’s clear intimation that it wants to terminate the contract may go ahead and earn the price notwithstanding.

12.12  Where a contract is executed, ie. where at least one party has performed all or substantially all of its obligations under the contract and all that remains to be done is for the other to pay the price, then the price is the remedy which the innocent party should have if the other party defaults and refuses to pay. One way of demonstrating this is to take an example which shows that damages for breach would, in most instances anyway, be the same as the price. Suppose a builder (A) agrees to build a house for B for a price of £200,000. It will cost A £180,000 to complete the contract work in terms of labour, materials, and other costs, so A’s profit is £20,000. If it is supposed that A has built the house in accordance with the contract and that B has refused to pay, A would be entitled to the contract price of £200,000. If A were to sue for damages for breach A would be entitled to that sum by way of compensation that would put A into the position it would have been in if the contract had been performed. This would involve paying A all reliance expenses in carrying out the contract work (£180,000) plus the profit A could show would have been earned from performing the contract (£20,000), a sum of £200,000 in total.

12.13  In the previous example, if B’s default is anticipatory, ie if it happens before the contract work is substantially completed, then the question arises of whether A should be allowed to continue with the contract work and earn the price or whether A should be required to settle for damages. Suppose that at a time when A has spent only £10,000 in preparatory work B indicates to him that B does not want the house. Damages for breach would require B to pay to A his reliance expenses (£10,000) plus the £20,000 profit, making £30,000 in total. Should A be required to settle for this or should he be entitled to complete the contractual work and be paid the price of £200,000? It may be (p. 324) recalled from Chapter 7 that an anticipatory breach does not automatically terminate a contract,²² so in theory A could decide to affirm the contract and claim the price. As the following narrative will demonstrate, sometimes A will not be entitled to the price and will have to settle for damages. This is usually explained not in terms that A is barred from affirmation because that would mean that the contract was terminated automatically by B’s breach; rather the explanation is that the price is not a remedy A is entitled to in those circumstances, only damages.²³ In deciding this very complex question two competing policy considerations come into play. On the one hand, there is sanctity of contract which requires that the innocent party should be allowed to do what the contract entitles it to do and get what the contract gives it in return. On the other hand, there is the need to avoid extravagant waste, which would certainly occur in the earlier example if A were entitled to claim a £200,000 price when £30,000 damages would adequately compensate. It should be stressed, however, that few cases are quite as simple as this one.²⁴

12.14  The starting point of this analysis has to be the decision of the House of Lords in White and Carter (Councils) Ltd v McGregor,²⁵ a Scottish appeal from the Second Division of the Court of Session, although it has never been suggested that the decision was not reflective of English law. The appellants (pursuers in the trial court) were in the business of supplying litter bins to town councils in urban areas. They were paid, not by councils, but by advertisers who paid the appellants for the use of advertising space on litter bins. There was an annual charge of 5 shillings towards each advertising plate and a weekly charge of 2 shillings for the advertising. The appellants had contracted with the respondents (defenders in the trial court) for the use of advertising space for a period of three years from 1954 to 1957. In 1957 the contract was renewed for a further three years by the respondents’ sales manager but cancelled later that day by Mr McGregor himself. Condition 8 of the renewed contract stated that in the event that one instalment of the contractual payments should be outstanding for four weeks then the entire three years of payments would become due. The appellants refused to accept the respondents’ repudiation of the contract, then proceeding to go ahead with the preparation of the plates for the ensuing three years. On the respondents’ default the entire three years’ of payments were claimed as an agreed sum.

12.15  The lower courts all held for the respondents but the House of Lords by a bare three to two majority held for the appellants. The majority did not all concur on the same reasons so there is some difficulty in stating precisely what the ratio decidendi of White and Carter actually is. Lord Hodson for the majority, with whose speech Lord Tucker (p. 325) concurred, essentially took the line that the innocent party has a completely free choice as to whether to affirm and seek the agreed sum or to terminate the contract. He founded himself upon a dictum of Asquith LJ in Howard v Pickford Tool Co Ltd: ‘an unaccepted repudiation is a thing writ in water and of no value to anybody: it confers no legal rights of any sort or kind’.²⁶ To the argument that this would be wasteful and potentially hard on the respondents, Lord Hodson answered thus:²⁷

Lord Reid’s speech for the majority will be discussed separately later. For the minority Lords Morton and Keith emphasized that the effect of holding for the appellants was to give specific implement (the Scottish equivalent of specific performance) of a money obligation when damages would be an adequate remedy, and to excuse the appellants from all and every obligation to mitigate their loss. Both found the implications of holding for the appellants startling, Lord Keith giving the example of a consultant hired to go to Hong Kong and prepare a report for a client. If the other party were to inform him before the time for performance that his services were no longer required it would seem that the consultant would be entitled to go to Hong Kong, prepare the report and afterwards receive the agreed fee.²⁹

12.16  This dead heat between four of their Lordships made Lord Reid’s speech the all-important one in this case. Lord Reid accepted the general principle of Lord Hodson in the following words:³⁰

To this general principle Lord Reid added two caveats. The first was that where the innocent party needs the cooperation of the other party to perform its side of the contract there is no right to sue for the agreed sum.³¹ This is not, in truth, any exception to the right to recover an agreed sum. It is a condition precedent to the recovery of an agreed sum that the party claiming it has done everything it has to do³² to earn the agreed sum. It will not matter whether the failure of the condition precedent is the fault of the claimant or the defendant; in each case the contractual remuneration has not been earned. That this is a fundamental principle and not an exception to the general rule is confirmed by Lord Morton’s acknowledgement of it in the same case.³³

12.17  The one true caveat in Lord Reid’s speech came in the following passage:³⁴

Several comments on this passage may be offered. First, it is the only acknowledgement in this case of the need to balance the competing policy considerations of sanctity of contract and the avoidance of waste referred to earlier.³⁵ Secondly, Lord Reid does not clearly distinguish between barring the right to affirm and barring the remedy of agreed sum, although in the light of the recent Supreme Court decision in Geys v Société Générale, London Branch,³⁶ it is better to understand this as a bar on the remedy. (p. 327) Thirdly, the analogy with penalty is out of place because this is a doctrine regulating sums payable on breach of contract rather than the exercise of contractual entitlement.³⁷ Fourthly, Lord Reid’s thinking is clearly influenced by an intuitive sense that the innocent party should mitigate its loss, yet mitigation analysis is not applied to a claim for damages for breach of contract where it could be relevant, but to the prior question of whether the claimant should sue for the price or for damages. Fifthly, Lord Reid brings in equitable, discretionary factors to an issue to which they seem to have no principled application. An action for an agreed sum is something to which a contracting party is either entitled or not entitled; it is not a matter of the court’s discretion.

12.18  This confused conceptual thinking makes it difficult to understand what Lord Reid’s ‘legitimate interest’ test really means. Two things are clear and these are that the onus rests on the party in breach to demonstrate that the innocent party has no legitimate interest in claiming the price, rather than the innocent party demonstrating that it has a legitimate interest; and secondly, that the concept of ‘legitimate interest’ is a broad one, encompassing things other than direct financial benefits. The absence of a clear connection with principle also shows that Lord Reid’s test is policy driven, reflecting a judicial concern to place some limits on the innocent party’s right to render contractual performance which is not wanted. Lastly, in relation to the White and Carter case itself it has to be understood that Lord Reid’s speech with the caveats added is the true ratio decidendi of the decision. In Hounslow LBC v Twickenham Gardens Developments Ltd ³⁸ Megarry J pointed out that without Lord Reid there would have been no majority in that case, and, in any event subsequent decisions have treated the general right to affirm and claim the agreed price as limited by the two caveats expressly recognized by Lord Reid.

12.19  The practical need for some measure of cooperation from the defendant promisor explains why there are comparatively few successful cases where an agreed sum has been successfully recovered in the face of a defendant’s anticipatory breach. As Liu has pointed out: ‘In most cases the contract-breaker can prevent a claim for the contract price by simply withholding its co-operation. Co-operation does not necessarily require active steps to be taken. A buyer, by refusing to take delivery, thus withholds its co-operation necessary for the delivery to take place.’³⁹ It matters not that withholding cooperation is a further breach of contract. However caused it simply prevents the innocent party from doing what it has to do to earn the contract price.

12.20  Another illustration of the passive way in which non-cooperation can prevent a successful claim for the price is provided by Hounslow LBC v Twickenham Gardens Developments Ltd.⁴⁰ Megarry J held that a building contractor in physical possession (p. 328) of council land on which it was carrying out contract works still needed the permission of the council to be able to carry out those works validly. So even were the council in breach of contract in seeking to expel the contractors from the land the contractors could not just affirm the contract, carry on with the work, and claim the contract price afterwards. His Lordship gave another example of where cooperation by the defendant would be required. A, the owner of a large and valuable painting, contracts with B, a picture restorer, to restore it over three months. Before the work begins A receives a lucrative offer from C to purchase the painting in an unrestored condition because C doubts B’s competence. So long as the painting remains in A’s house he can obviously prevent B from carrying out the contract work. If the painting is placed in A’s locked barn but B has been given a key to the barn the answer is the same because B needs A’s cooperation in not barring the way to the barn and not changing the lock.⁴¹

12.21  In Ministry of Sound v World Online Ltd⁴² Nicholas Strauss QC, sitting as a deputy High Court judge, allowed an appeal against the dismissal of an action for an agreed sum claiming the last instalment payment under a two-year contract to produce a branded internet service. It was agreed between the parties that the claimant had suffered no loss so would not be entitled to substantial damages. The defendant argued that the action for the last instalment was barred because the claimant still had a number of outstanding obligations to perform under the contract and needed the defendant’s cooperation in order to perform them, which cooperation was not going to be forthcoming. Although the deputy judge refused the claimant summary judgment he allowed the action for the agreed sum (the last instalment) to proceed to trial because the right to payment of this sum was in no way dependent upon any of the claimant’s outstanding obligations for which it needed the defendant’s cooperation to perform.

12.22  In Isabella Shipowner SA v Shagang Shipping Co Ltd (The Aquafaith)⁴³ time charterers of a vessel chartered for fifty-nine to sixty-one months stated their wish to re-deliver the vessel several months early. This was in admitted breach of contract and the owners commenced an arbitration seeking an award of outstanding hire. Cooke J allowed the owners’ appeal against the arbitrator’s decision that the White and Carter principle did not apply both because the charterers’ cooperation was needed to earn the hire and because of the absence of any legitimate interest in claiming hire. The legitimate interest point will be revisited later, but in relation to the cooperation argument the judge held that in a time charter the charterers’ cooperation was not needed. The owners supplied the vessel and the crew who were at the charterers’ disposal. No cooperation, active or passive, was needed from the charterers for hire to be earned. Although the charterers were obliged to provide and pay for fuel for the vessel, the owners could charge this to the charterers’ account so this did not affect the earning of hire either. The judge recognized that the position would be different under a demise charterparty because there (p. 329) possession of the vessel was given to the charterers. This would mean that if the owners took re-delivery of the vessel they would not be entitled to hire any longer.

12.23  It was stated above⁴⁴ that the need for the defendant’s cooperation to enable the affirming party to render its outstanding contractual performance is not a true exception to the White and Carter principle. To earn the right to payment the affirming party has to perform and it makes no difference that the reason it failed to perform was that the party in default would not allow it. In truth any other outcome would be inimical to fundamental principles of contract law. Contract law only very rarely requires performance; specific performance, outside of contracts for the sale of land, is an exceedingly rare remedy. Hence most actions for an agreed sum are cases where the innocent party has substantially performed its part of the contract and is seeking payment of the price. Only in the most exceptional circumstances should it be denied this right.

12.24  In this section the aims are twofold—to paint as accurate a picture as possible of the meaning of ‘legitimate interest’ from the decided cases; and to assess how effectively the court balanced the conflicting policy considerations of sanctity of contract and avoidance of waste as recommended by Liu.⁴⁵ A chronological approach will be taken, beginning with White and Carter v McGregor itself. It is reasonably clear that the appellant pursuers in that case did not need any cooperation from the respondents to carry out the contract work so nothing was said about that earlier. On the legitimate interest question it is more difficult to make a judgment because the respondents could not reasonably have been expected to lead evidence and argument on this issue as there had been no indication in any of the precedents that this issue was even relevant. The appellants relied much on an unreported decision of the Court of Appeal in White and Carter (Councils) Ltd v Harding ⁴⁶ and the respondents on an earlier Court of Session decision, Langford & Co Ltd v Dutch,⁴⁷ which the House of Lords overruled.⁴⁸ Reliance on these authorities would have led most advocates to the conclusion that either the price was recoverable in the event of an anticipatory breach always or never, not that it would be unless the party in breach could show that the innocent party had no legitimate interest in claiming it. Of interest is a note by the late Lord Rodger of Earlsferry in the Law Quarterly Review, where he states that a study of the record in White and Carter v McGregor indicates that the appellants made no effort to procure another advertiser to take up the advertising space not needed by the respondents, and that no finding was made as to whether any such effort would have been likely to meet with success.⁴⁹

(p. 330) 12.25  A short time after White and Carter was decided there was the case of Anglo African Shipping Co of New York Inc v J Mortner Ltd.⁵⁰ The claimants acted as confirming house and shipping agents for the defendant importers. Their contractual duty was to obtain delivery of plastic sheeting from the United States within two to three weeks. The defendants alleged that the delivery date had passed so that the claimants had breached the contract but this stance was not vindicated in the courts. On the contrary it was held that the defendants had repudiated the contract so that the issue arose as to whether the claimants were entitled to affirm the contract and claim payment of the contract price. Megaw J held that they were and that White and Carter applied. The judge held that it would have been commercially unjust if the claimants had had to receive the goods in New York, selling them there with all sorts of arguments about whether they obtained the best price or could have resold them for a higher price in another market. The judge also took into account that the claimants had made various subcontracts for the purpose of performing the contract, for example booking shipping space, and that the cancellation of these contracts would have been very damaging commercially.⁵¹ The legitimate interest point was not directly addressed but it seems clear from these considerations that the claimants did have a legitimate interest in claiming the price instead of mitigating and seeking damages for breach of contract. The facts when analysed in terms of sanctity of contract and the need to avoid waste fully justify preferring the sanctity of contract.

12.26  If Anglo African Shipping Co v Mortner changed nothing the same cannot be said for sure of The Puerto Buitrago.⁵² This case concerned a demise charterparty of a ship for seventeen months between January 1974 and May 1975. After six months the vessel developed engine trouble and had to be towed from Rio de Janeiro in Brazil to Gdynia in Poland. A cargo of soya bean meal was unloaded there and afterwards the vessel was towed to Kiel in northern Germany for repairs estimated to cost $2 million. This compared with an estimated value of $1 million for the vessel if the repairs were carried out. A clause in the charterparty provided that the vessel should be re-delivered to the owner in the same good order and condition as on delivery. The charterers admitted liability for $400,000 of repairs but otherwise re-delivered the vessel and terminated the charterparty. The owners refused to accept re-delivery, contending that the charterers were bound to repair the vessel whatever the cost and pay charter hire until it was repaired. These proceedings occurred some three months after the charterparty expired, by which time the vessel was still in Kiel. The owners claimed that the vessel should be repaired and hire paid until then. The Court of Appeal held that the obligation to repair the vessel was not a condition precedent to the right to redeliver but an obligation sounding in damages only; and further that on the true construction of the (p. 331) charterparty re-delivery was effective notwithstanding that the vessel was not in proper repair. These holdings made the issues of the charterers’ repudiatory breach and the proper response of the owners strictly obiter but the highly nuanced views of the Court of Appeal on this issue are important to the subsequent development of the law.

12.27  Lord Denning MR, in characteristically robust fashion, described the owners’ claim to have the ship repaired at a cost of $2 million when its value once repaired was $1 million and it would probably be sold for scrap for around $500,000, as economic nonsense.⁵³ White and Carter should only be followed in a case precisely on all fours with it. In the words of Lord Denning: ‘It has no application whatever in a case where the plaintiff ought, in all reason, to accept the repudiation and sue for damages—provided that the damages would provide an adequate remedy for any loss suffered by him.’⁵⁴ Upholding the owners’ claim for hire while the ship remained unrepaired would mean that either the charterers paid hire forever if the ship remained unrepaired, or it would be repaired at twice its value and then sold for scrap. This amounted to specific performance of the contract when damages would be an adequate remedy.⁵⁵ Orr LJ agreed with the judgment of Lord Denning MR but added some words of his own on the White and Carter question. He quoted two passages from the speech of Lord Reid in White and Carter dealing with the issues of the defendants’ cooperation and ‘legitimate interest’ and said that neither led him to a different conclusion on the very different circumstances of this case.⁵⁶ Browne LJ agreed with Orr LJ on the White and Carter question.⁵⁷ In these judgments only Lord Denning MR is attempting to explain what ‘legitimate interest’ really means but the allusions to specific performance and the adequacy of damages are not particularly helpful because they refer to a discretionary remedy to be awarded exceptionally, whereas affirming the contract and claiming the agreed sum is the rule and denying this for want of legitimate interest is the exception. By eschewing elaboration the judgments of Orr and Browne LJJ essentially amount to the conclusion that whatever legitimate interest means the owners had no legitimate interest here.

12.28  The next case to consider whether the price or damages should be the remedy where there is a repudiatory breach of an executory contract was The Odenfeld.⁵⁸ This case concerned the time charter of a ship for a ten-year period from May 1973. The claimants were the assignees of the charter hire on which repayment of the loan they provided the owners was secured. The loan contract required the owners to ‘take all necessary steps to procure due performance’ by the charterers of the charter. In January 1976 the charterers wrongfully repudiated the charterparty and in September 1976 the vessel was transferred to the claimants who then accepted that the charterparty was at an end. From January to September 1976 the claimants had held the owners to their (p. 332) contractual obligation to hold the charterers (defendants) to the charterparty and the issue before the court essentially became whether the claimants were entitled to hire for that period. The defendants’ argument was that the owners should have accepted the defendants’ repudiation of the contract in January 1976 and sued for loss of bargain damages.

12.29  Kerr J reviewed White and Carter and The Puerto Buitrago and concluded that the innocent party’s right to affirm the contract and seek payment of the price was the general rule which would only be fettered in extreme cases:⁵⁹

It was not wholly unreasonable for the owners to seek payment of charter hire in this case. The loan agreement entitled the lender to call in the loan if the charter were terminated and the owner failed to find alternative employment for the vessel in sixty days. In the then state of the market no alternative employment was likely so the lenders wisely required the owners to hold the defendants to the charter. It was true that any damages claim of the owners had been assigned to the lenders but assessing damages for a lost charterparty with six and a half years left to run would be a very difficult exercise involving many possible variables concerning market rates and the performance of the vessel.⁶⁰ Kerr J acknowledged that in time the legal position of the parties might be altered. Deadlocked situations were usually resolved by practicalities. All that had to be decided was the position as of September 1976.⁶¹ The formula applied in this case was superior to that of The Puerto Buitrago as it avoided unhelpful allusions to specific performance, although whether all three judgments in that case do truly come to this position is not entirely clear. Through his reference to the adequacy of damages and the other considerations in play in this dictum Kerr J can be understood as balancing respect for sanctity of contract against the need to avoid extravagant waste, as recommended earlier.

12.30  Four years on, another ship’s charter case, The Alaskan Trader,⁶² contained a further review of the authorities on the question. After nearly a year’s service under a twenty-four month time charter the vessel suffered a serious engine breakdown requiring several months’ repairs. In this time the market rate for hire declined from $13 to $14 per ton to $8 to $9 per ton and the charterers indicated that they had no further use for the vessel. The owners went ahead with repairs at a cost of $800,000 which were completed and the ship made ready for further service with a little over six months of the charter period (p. 333) left to run. The charterers treated the charterparty as having come to an end but the owners maintained the vessel at anchor with a full crew ready to sail until the charter period expired. Hire was paid throughout this period but the charterers referred to arbitration the question of whether they were entitled to a refund on the basis that the owners should have accepted that the charterparty had ended earlier. The arbitrator decided that the owners had no legitimate interest in keeping the charterparty alive and were thus only entitled to damages. On appeal Lloyd J upheld the arbitrator’s decision. His review of the authorities is worth examining in some depth.

12.31  Lloyd J began with an analysis of White and Carter. He accepted that what Lord Reid said in that case about legitimate interest was strictly speaking obiter and also tentative. He observed that Lord Reid had not gone very far in explaining what he meant by legitimate interest except that the de minimis principle would apply and that it would be insufficient to establish that the innocent party was acting unreasonably. Neither did Lord Reid explain the juristic basis for confining the claimant’s remedy to damages.⁶³ However, without expressly stating it, Lloyd J clearly regarded Lord Reid’s speech as laying down the law on this question. Next Lloyd J considered The Puerto Buitrago. He seemed a little unsure what to make of the judgment of Lord Denning MR on legitimate interest but at the very least there was the strong persuasive authority of the majority of the Court of Appeal (Orr and Browne LJJ) in support of Lord Reid in White and Carter.⁶⁴ Lloyd J lastly discussed The Odenfeld, which he regarded as entirely consistent with Lord Reid’s speech and the views of the majority of the Court of Appeal in The Puerto Buitrago.⁶⁵ The conclusion which Lloyd J ultimately came to was that the innocent party had in general an unfettered right to elect between claiming the price or claiming damages for breach of contract, but that the court would in exceptional cases, in the exercise of its general equitable jurisdiction, refuse to allow the innocent party to receive its full contractual remedies where it had no legitimate interest in asserting them.⁶⁶ The burden of proof lies on the contract breaker to show that the innocent party should have accepted damages and it must be shown that the latter is acting wholly unreasonably. On the facts of this case it had not been shown that the arbitrator had erred in law in making his decision. Judging this decision in terms of the balance between sanctity of contract and the avoidance of extravagant waste it seems quite a marginal one, much dependent on the need to respect arbitrators’ decisions where there is a rational basis for doing so.

12.32  The next decision of significance, The Dynamic,⁶⁷ is also a charterparty case but this time the arbitrator’s decision was quashed. In this case the charterers arrested the vessel one day before it was due to complete discharge. The vessel remained under arrest for (p. 334) fifteen days and the issue before the arbitrator was whether it remained on hire for this time and the owners were thus entitled to claim hire. The arbitrator held that the charterers were in repudiatory breach but that the owners were entitled only to damages. This decision was quashed by Simon J because on the remedies question the award did not make clear how the relevant principles were applied. The judgment is valuable for this statement of the principles applying to legitimate interest:⁶⁸

1. (1)  The burden is on the contract breaker to show that the innocent party has no legitimate interest in performing the contract rather than claiming damages.

2. (2)  This burden is not discharged merely by showing that the benefit to the other party is small in comparison to the loss to the contract breaker.

3. (3)  The exception to the general rule applies only in extreme cases where damages would be an adequate remedy and where an election to keep the contract alive would be unreasonable.

The arbitrator’s failure to ask the right questions makes it impossible to express a clear view as to how the test proposed by Liu should be applied in this case.

12.33  An important case, which breaks the string of charterparty cases, is the Court of Appeal’s decision in Reichman v Beveridge.⁶⁹ Two solicitors practising in partnership took a five-year lease of office premises from January 2000 at a rent of £23,101 per annum. In February 2003 they quit the premises and in January 2004 the landlords commenced proceedings claiming a full year’s rent arrears. The defence was that the landlords had failed to take steps to mitigate their loss, such as by forfeiting the lease and attempting to re-let the premises to another tenant. This defence failed at every stage of the case’s history. In the Court of Appeal the court reviewed the cases dealt with in the preceding paragraphs and came to the following conclusion on the law:

If the word ‘or’ in the last sentence of this passage were replaced by ‘and’, this passage would be a completely accurate statement of the law. As applied to the facts the Court of Appeal held that the tenants had not satisfied the burden on them of showing that (p. 335) the landlords were acting wholly unreasonably in seeking rent arrears and not seeking new tenants.⁷¹ This was mainly because it appeared that English law did not allow a landlord forfeiting a lease to claim damages for loss of future rent so if the premises had stood vacant for any substantial period of time before a new tenant were found, this loss would have been irrecoverable. Neither did the Court of Appeal think that the responsibility of finding a new tenant should fall on the landlords; on the contrary it should have been the tenant who shouldered this burden on the facts here. This decision is not completely satisfactory because the tenants were represented by one of the solicitors who practised from the demised premises and the landlords did not instruct anyone to appear for them to resist the appeal, the case contrary to that presented by the tenants being entrusted to an advocate to the court. Certainly the conclusion reached about the unavailability of damages for future rent loss has been vigorously challenged in academic literature,⁷² but nothing in the Court of Appeal’s discussion of the affirmation and agreed sum issues seems otherwise questionable.

12.34  The next case in the chronology is another charterparty case, The Aquafaith, the facts of which were outlined previously.⁷³ Cooke J held that the arbitrator had applied the wrong test in deciding that the owners had no legitimate interest in claiming hire for ninety-four days as opposed to accepting that the charterparty was over and trading on the spot market while claiming damages for the difference. He had never asked whether it was ‘wholly unreasonable’ to keep the contract alive; and whether the charterers had discharged the burden of showing that this was an extreme case where damages would be an adequate remedy and that an election to keep the contract alive was so unreasonable that no contracting party should be allowed to do it. He failed to explore whether there was any benefit to the owners and whether or not this was small in comparison to the loss to the charterers. It appeared that the charterers were in financial difficulties and that absolving them from the obligation to pay hire timeously would give rise to the risk that funds would be diverted to meet other liabilities with only an uncertain spot market to rely on in the meantime and a precarious damages award to compensate the owners in the future.⁷⁴

12.35  The last case in the chronology is MSC Mediterranean Shipping Co SA v Cottonex Anstalt.⁷⁵ In this case the carrier contracted with the shipper to carry various parcels of cotton from Bandar Abbas and Jebel Ali to Chittagong. Clause 14.8 of the bill of lading provided for a period of free time for use of the containers after the goods arrived at (p. 336) their destination, after which demurrage would be payable if the containers were not returned to the carrier. The goods were duly delivered to Chittagong but the consignee refused to take delivery because of a collapse in the price of cotton. The shipper considered that it had no right to deal with the goods and the customs authorities would not allow the containers to be released or unpacked without a court order. The free time passed and the containers remained at the port, racking up the demurrage on a daily basis. Four months after the end of the free time the carriers offered to sell the containers to the shipper as a way of breaking the deadlock but this offer was not accepted. The Court of Appeal determined that the shippers were in repudiatory breach due to their failure to return the containers. But the carriers could not effectively affirm the contract and claim demurrage indefinitely. The commercial purpose of the contract had been frustrated by the time the carriers had tried unsuccessfully to break the deadlock in the manner indicated. At this point they lost any legitimate interest in affirming the contract and claiming further demurrage. They had in effect to settle for damages measured by the demurrage earned since the expiration of the free time.

12.36  In the light of the foregoing it would seem that Lord Reid’s legitimate interest test has become accepted law. There is not much reason to question the outcome of any of the cases discussed above, apart perhaps White and Carter itself and this is purely because neither party knew to advance any evidence or argument on the question of legitimate interest. In several of the cases the contracts were not truly executory anyway as the affirming party had little still to do other than allowing the breaching party to continue using property that had been leased or chartered out to it. The position is different in those situations Andrews drew attention to above⁷⁶ where the non-breaching party is proposing to begin a contractual performance the other party does not want. Liu has persuasively argued that the policy considerations at play in cases of legitimate interest are sanctity of contract and the need to avoid extravagant waste and it may well be that courts have been intuitively balancing these considerations in the reported cases. This section can be concluded by commending, subject to some later qualification, Liu’s reformulated legitimate interest test, the principal part of which is stated thus:

The principal test for a legitimate interest is whether, in the particular circumstances of the case, the wastefulness of the victim’s continuing performance outweighs its performance interest in earning the contract price. By its nature this test is equitable and confers on the court a discretionary power, which is exercised only in exceptional cases, to hold that the victim has no legitimate interest in continuing to perform and is thus not entitled to the contract price. There must be some very cogent reason for doing so, as the victim would otherwise suffer inconvenience and injustice.⁷⁷

The qualification added to this statement is that the restriction on the victim’s right to continue performance should not be seen as some kind of equitable discretionary (p. 337) power of the court to compel the victim to settle for damages. Only Lord Reid in White and Carter has ever seriously suggested that equitable considerations might apply in this area. The truth is that if the victim is prevented from claiming the price the court is making an adjudication that it is not entitled to claim the price in these circumstances. This is more like a common law reasonableness test or a good faith principle than an equitable discretionary power of the court.⁷⁸ Ultimately it may not make much practical difference whether these cases are analysed in terms of discretion or entitlement but framing the question in terms of the latter is more consistent with the general approach of the law to contractual remedies.

12.37  It was stated previously⁷⁹ that where the breaching party’s unperformed contractual obligation is the payment of money, the affirming party’s principal remedy is likely to be an action for an agreed sum. Where the breaching party’s unperformed obligations are otherwise, the affirming party is likely to need an order for specific performance. Put simply, specific performance is an order of the court which requires a party in breach of contract actually to perform the contract instead of opting to pay damages for its breach. It constitutes something of a refutation of the observation made over a century ago by the United States Supreme Court Justice Oliver Wendell Holmes Jr that ‘the duty to keep a contract at common law means a prediction that you must pay damages if you do not keep it—and nothing else’.⁸⁰ Since specific performance is an equitable remedy, a strict reading of this statement would be that it fully and accurately summarizes the position at common law but it was probably intended to go further than that and emphasize that the law very rarely ever makes someone perform their contractual obligations. This is because failure to obey an order of the court is a contempt of court and as such potentially punishable by an order for committal to prison.⁸¹ Specific performance is also available in cases where the defendant is presently just threatening to breach the contract so long as this threat is real.⁸²

12.38  Specific performance is an equitable remedy guided by the maxim that equity regards as done that which ought to be done. If specific performance is awarded to a litigant, this represents the judgment of the court that the litigant has an equity to have their contract actually performed. But specific performance does not provide proprietary relief so a party granted specific performance has no priority over other creditors in the (p. 338) event of the defendant’s insolvency. It operates in personam, against the person of the defendant only, and hence is enforceable by those personal contempt orders referred to previously.

12.39  Specific performance is very much an exceptional remedy and will only be awarded where damages are clearly an inadequate remedy. Factors suggesting the inadequacy of damages include situations where successive breaches of contract seem likely so that the claimant would have to bring successive actions for damages, where loss is difficult to quantify, and where damages are otherwise insufficient to meet the justice of the case. But what must be emphasized is that the inadequacy of damages is simply a necessary but by no means sufficient condition for the award of specific performance. The remedy is rarely granted outside its traditional territory of contracts for the sale of an interest in land. It has generally been assumed that for the purchaser each parcel of land is unique and therefore monetary compensation will not do where the land is not conveyed. Some challenges to that theory will be discussed later but it remains the starting position for a purchaser who has not received what the contract promised. Although the obligation of the purchaser in a contract for the sale of an interest in land is to pay money, specific performance, as opposed to an action for an agreed sum, is usually granted to the vendor. This is because of the mutuality principle and the equitable maxim that equality is equity. As the purchaser is normally entitled to specific performance so also should the vendor be entitled to it. Beyond these cases, however, the most that inadequacy of damages can do for a litigant is to allow the court to consider whether this might be the kind of exceptional case requiring a different approach to the usual one of leaving the claimant to the remedy at law.

12.40  The framework for the remainder of this section will first discuss those cases where damages are not an adequate remedy and then move on to the typical grounds on which specific performance is refused in the exercise of the court’s discretion. As specific performance is an equitable remedy, there are no hard and fast rules. There are settled principles but the individual circumstances of a case may justify a departure from the usual approach. Before that there shall be a discussion of a particular contract type, contracts involving personal services, where some special principles apply.

12.41  These contracts are essentially employment or employment-like contracts where mutual trust and mutual confidence between the parties is essential to making the contract work. The importance of mutual trust and confidence means that it is virtually impossible to obtain specific performance of a contract like this. A court order requiring two parties to work together or get along together will almost certainly ‘beat upon the air’ and should not even be contemplated. There is a statutory rule for contracts of employment, section 236 of the Trade Union and Labour Relations (Consolidation) Act 1992, which provides that no decree of specific performance requiring an employee (p. 339) to perform a contract of employment and no injunction restraining an employee from breaching it may be granted. There is no equivalent rule barring an employee from obtaining such orders against the employer but the availability of statutory unfair dismissal remedies of reinstatement, re-engagement, and compensation⁸³ effectively means that no permanent relief of this kind would ever be granted. A temporary injunction restraining an employer from dismissing an employee until an applicable contractual appeal procedure could be exhausted, was granted by Warner J in Irani v Southampton and South West Hampshire Health Authority,⁸⁴ but this fell a long way short of specific performance for even a limited period as it was made a term of the order that the employer was not required to give the employee any work in the meantime. The judge also emphasized that trust and confidence had not broken down between the employer and the employee, as the only relationship problem the employee had was her relationship with a senior consultant with whom she did not get along.⁸⁵

12.42  Moving away from employment contracts as such, prohibitory injunctions have been granted against parties to contracts for personal services restraining the defendant from working for someone else. The first time this happened seems to have been in the celebrated case of Lumley v Wagner.⁸⁶ The claimant engaged the services of the operatic diva, Miss Johanna Wagner, to sing at his theatre in London for the summer season. When Miss Wagner got to London she was offered more money to sing for Mr Gye’s theatre. The claimant obtained an injunction to restrain Miss Wagner from singing for Mr Gye. This would have been a breach of her contract with the claimant but the order did not in terms require her to sing for the claimant. She had a choice between singing for the claimant or singing for nobody. In subsequent cases where the principle of Lumley v Wagner has been followed the courts have emphasized that the defendant must not be put in a position where (s)he has no effective choice but to perform the contract with the claimant.⁸⁷ In these scenarios equity, it seems, looks to substance rather than form.

12.43  Contracts for the sale of an interest in land are the most typical example of cases where damages are considered to be an inadequate remedy. This is so much so that the question of ‘adequacy of damages’ is not addressed in the typical sale of land case. Where it is addressed it will be on the defendant’s initiative and not a prior question which needs to be answered in the affirmative before the equitable remedy is considered. The (p. 340) theory on which this is based is that every parcel of land is unique so that damages for losing out on buying it would never do. Recently this view has been challenged in Canada particularly in respect of investment property, large suburban housing estates, and multi-unit developments.⁸⁸ In Canada the position is now that the purchaser must demonstrate some level of uniqueness about the property to justify a decree of specific performance. This controversial view has not been adopted in England and Wales but could have some contribution to make to the ‘can’t pay’ cases discussed in the following paragraphs.

12.44  Contracts for the sale of personal property are nearly the opposite of sale of land cases because a substitute purchase is usually available. One exceptional case was Falcke v Gray ⁸⁹ where the court refused on other grounds specific performance of a contract for the purchase of two china jars of unusual beauty, rarity, and distinction but clearly indicated that these were reasons otherwise justifying the making of an order. Uniqueness was the reason for ordering specific performance of a contract to sell the arch-stone, the spandrill stone, and the Bramley Fall stone of old Westminster Bridge in Thorn v Public Works Commissioners.⁹⁰ Wright J ordered specific performance of a contract to sell a ship in Behnke v Bede Shipping Co Ltd ⁹¹ because the vessel was of unique practical value to the purchaser. An even more exceptional case was the award of an interim injunction restraining the defendant from refusing to supply a commodity (petrol) to the claimant in Sky Petroleum Ltd v VIP Petroleum Ltd.⁹² The exceptional circumstances justifying this were that it was the oil crisis of the early 1970s, the petroleum market was in turmoil, and supplies from the defendant were the only viable way of keeping the claimant’s business afloat. This was not a specific performance order as a matter of form but it was in substance, an injunction being sought because specific performance is a final order only and no interim relief can be obtained. Specific performance would not generally be ordered of a contract to sell shares if the price were quoted on a stock exchange because suitable substitute shares would be available but where substitute shares are not available the position may be different.⁹³

12.45  Another exceptional case where specific performance was granted because of the utter inadequacy of damages was Verrall v Great Yarmouth BC.⁹⁴ The defendant council granted the claimant a contractual licence to use a public hall for the two-day annual conference of the National Front. After a council election the new council attempted to terminate the contract but the claimant obtained a specific performance order because a new venue could not be obtained at the last minute and damages would be an (p. 341) inadequate remedy. This case was not treated as one concerning any interest in land because contractual licences were not treated then as conferring any interest in land.

12.46  An example of a most exceptional case is provided by Beswick v Beswick.⁹⁵ Peter Beswick transferred his coal merchant business to his nephew subject to two conditions—one that he would retain Peter Beswick as a consultant for life and the other that after his death an annuity of £5 per week would be paid to his widow for the rest of her life. After the uncle’s death the nephew made one payment to the widow and then stopped. The widow brought an action for specific performance of this promise but faced two principal difficulties in obtaining relief. First, in her personal capacity the widow had undoubtedly suffered loss but she had not been a party to the contract between Peter Beswick and the nephew so had no personal standing to bring the case.⁹⁶ Secondly, as administratrix of her late husband’s estate she had personal standing to sue but only for such loss as the estate had suffered, which was nothing. The House of Lords held that the widow should succeed because the case was exceptional and significant injustice would be caused if the nephew were able to avoid keeping his promise. Two considerations seem to have influenced the House—one being a desire to ensure that procedural technicalities did not serve as an impediment to justice; the other being a desire to avoid the unjust enrichment of the nephew who would not have obtained the coal merchant business without promising his uncle that he would look after the widow after her husband’s death.⁹⁷ It is the most vivid example of how the principles of specific performance cannot be treated as fixed and immutable.

12.47  A very important equitable maxim in relation both to injunctions and specific performance is that equity does not act in vain, ie that equitable relief will not be granted where inadequate practicable means are available for ensuring that the court’s order will be carried out. One such ground where those practicable means are absent is where the award of a decree of specific performance would require the court to engage in an excessive amount of supervision of the defendant in carrying out the order. Constant supervision does not mean court officials going down to a work site to give orders to the defendant’s staff as to what they should do; it means that it is not possible to set the terms of a decree of specific performance so that it can be clearly seen whether the defendant is or is not carrying out the order. That this is the issue with constant supervision can be seen by comparing two cases, one late nineteenth century and the other late twentieth, on the lease of a building with a resident porter obligation. The first case is Ryan v Mutual Tontine Westminster Chambers Association,⁹⁸ where the lease simply (p. 342) stated that the tenants were entitled to the constant attendance of a resident porter ‘to be and act as the servant of the tenants’. The second is Posner v Scott-Lewis,⁹⁹ where the resident porter’s obligations were spelled out in greater detail—cleaning of the common parts of the building, refuse disposal, and the maintenance of heating services. Specific performance was awarded in the latter but not the former because in the latter it had been made much clearer exactly what the resident porter was to do.

12.48  In Wolverhampton Corporation v Emmons¹⁰⁰ specific performance was granted of an obligation to build houses in accordance with a local authority scheme of improvement on land sold to the defendant by the local authority. The constant supervision problem was overcome because the building work had been very clearly defined in the contract. Other important considerations in decreeing specific performance were that the claimant had a very substantial interest in having the work done (development of the area) and the fact that the land had been specifically sold to the defendant for this purpose. A landlord’s repairing covenant was specifically enforced in Jeune v Queen’s Cross Properties Ltd,¹⁰¹ again largely because the obligation was clearly defined. In Rainbow Estates Ltd v Tohenheld Ltd ¹⁰² Lawrence Collins QC, sitting as a deputy High Court judge, granted specific performance of a tenant’s repairing covenant. This owed much to the absence of any other means of getting the repairing work done, such as terms in the lease allowing the landlord to forfeit the lease or to enter and do the work itself. But the court’s order had to be clear and precise in its terms so that it could be seen whether the tenant had actually done the work.

12.49  The nature of the constant supervision ground for refusing specific performance was the subject of detailed consideration by the House of Lords in Co-operative Insurance Society Ltd v Argyll Stores Ltd.¹⁰³ The claimant landlords leased a large unit in a shopping centre to a supermarket. The lease was for thirty-five years and the tenant was the ‘anchor’ tenant of the entire development. As such, it was intended that it should draw customers into the shopping centre and thus attract custom to the other units in the centre. As the closure of the anchor tenant would have potentially serious and detrimental consequences for the viability of the centre as a whole the defendant’s lease contained a ‘keep open’ covenant which provided that the tenant had to keep the supermarket shop open for the entire duration of the lease and could not surrender it before the thirty-five years had expired. As the supermarket was losing money, the defendant closed it and purported to surrender the lease. The landlords treated this as a repudiatory breach of contract and sought an order of specific performance requiring the tenant to keep the premises open for the outstanding period of (p. 343) the lease. Although the Court of Appeal granted specific performance, the House of Lords unanimously refused it. Lord Hoffmann’s speech, with which the other members of the House agreed, gave several reasons for this decision but they can largely be summarized as follows:

1. (1)  It could not be stated with sufficient certainty what keeping open the supermarket would actually mean. As the tenant was losing money in these premises it was likely to adopt a minimalist approach to compliance with the obligation to stay open and this was likely to result in the case coming back to court over and over for rulings on whether the shop was sufficiently open to comply with the keep open covenant.

2. (2)  The means of enforcing any court order, which ultimately could result in the imprisonment of executive officers of the defendant, were not considered suitable.

3. (3)  It would be contrary to public policy to keep the parties together in a hostile relationship.

4. (4)  It was unfair to force the tenant to trade at a loss. Those losses were likely to exceed the benefits to the landlords and could ultimately result in the landlords extracting a very large ransom fee for releasing the tenant from the covenant.

5. (5)  The general legal advice that had been given to contracting parties about these covenants was that they were not specifically enforceable and this made it unfair to upset assumptions which tenants were entitled to make about the effect of the agreement they were signing when entering into it.

The Inner House of the Court of Session in Scotland came to the opposite conclusion on the same issue in Highland and Universal Properties Ltd v Safeway Properties Ltd.¹⁰⁴ While it is true that Scots law favours specific performance (specific implement is the Scottish term) more than English law, the judgments turn more on a different evaluation of the policy considerations involved.

12.50  All of the cases on this issue discussed so far have related to contracts for the sale of an interest in land. However, the issue before the courts in all of those cases concerned the specific enforceability of covenants within those contracts rather than the contracts themselves. Hence these cases should not be understood primarily as cases where there would have been a decree of specific performance unless some discretionary factor resulted in refusal, as is the approach taken in contracts for the sale of land, although they are authoritative on the significance of constant supervision as a discretionary factor militating against specific performance. In these cases the adequacy of damages and the discretionary grounds militating against specific performance all went into the mix together.

12.51  Another application of the maxim that equity does not act in vain comes in those cases where it is simply impossible for the defendant to comply with a specific performance order or it would otherwise be futile to grant it. Specific performance will not be granted of a vendor’s obligation to convey land he does not own.¹⁰⁵ In Warmington v Miller¹⁰⁶ specific performance of an under-lease was refused because the defendant had granted it in breach of his covenant against sub-letting in the head lease. An example of futility is provided by the old case of Hercy v Birch¹⁰⁷ in which specific performance of a partnership agreement terminable at will was refused because it could be validly terminated any time.

12.52  Impossibility is illustrated by cases that have arisen out of the collapse of the property market in both parts of Ireland in recent years. The specific context in which this problem has arisen is important to understanding the way in which the ‘impossibility’ defence has been applied. A developer obtains planning permission to erect an apartment building. Units in the building are then offered to purchasers ‘off the plans’, ie the purchaser buys not an apartment as such but a right to an apartment once the building is complete. The building process can take up to two years and a lot can change in that time. An important feature of a typical ‘off the plans’ apartment sale was that the contract of sale did not usually contain any ‘subject to finance’ clause. This meant that if the purchaser needed a mortgage to purchase the property (s)he was still contractually bound to purchase even if a mortgage could not be obtained. When the property market crashed a lot of purchasers who had entered into contracts at the top of the market found themselves unable to pay when the completion stage was reached. Sometimes this was because they had lost their jobs or livelihoods in the economic recession which accompanied the collapse or because they could not get a mortgage sufficient to enable them to complete, as lenders would only lend against the current market value of the property, now much lower than the contract price.

12.53  The High Court in both Irish jurisdictions has recognized that if the purchaser simply cannot pay then specific performance should not be granted to the vendor. First it was the High Court in the Republic of Ireland that made this move with the decision of Clarke J in Aranbel Ltd v Darcy.¹⁰⁸ Then Deeny J in the High Court in Northern Ireland came to a similar conclusion in Titanic Quarter Ltd v Rowe.¹⁰⁹ Strictly speaking this was a summary judgment specific performance application and the judge went no further than ruling that the defendant’s inability to pay because he was unemployed and had no other property he could sell to meet the contract price could be a defence at trial. Deeny J said that if the defendant had a job come trial, then specific performance might (p. 345) become an option again but this takes nothing away from the fact that the principle is established that inability to pay can be a defence to a claim for specific performance. In Northern Ireland the practice has now developed of filing a ‘Rowe affidavit’ of means to substantiate a defendant’s claim that he or she is unable to pay.

12.54  Notwithstanding the highly significant nature of this development it is important not to make too much of it. The defence that has been recognized is ‘impossibility’, that the purchaser simply cannot pay. In Rowe Deeny J heard argument on the separate issue of ‘hardship’ and, while not expressly ruling it out, he was careful not to base his decision on it. Hence as the law currently stands it would appear that if the ‘Rowe affidavit’ revealed that the defendant was buying an apartment as an investment rather than a home and had a substantial equity in a family home the defendant would be expected to sell the family home to raise the finance to purchase the apartment. This would be a hardship but it would not be impossible for the defendant to pay.¹¹⁰ Even the impossibility defence may not necessarily apply outside the specific context of ‘off the plans’ apartment sales. In most other land sales the time between contract and completion is usually much shorter and ‘subject to finance’ clauses are not deliberately omitted. Dowling has challenged the assumption that a specific performance order would necessarily be futile in the sense that nothing would be accomplished by granting the order.¹¹¹ There is no sign yet that courts in England or Ireland are likely soon to travel down the road taken by the courts in Canada and refuse specific performance to purchasers unless the property can be shown to be unique in some sense.¹¹² If this lead were followed, the basis for awarding the vendor specific performance would be compromised where the vendor was a developer because the purchaser’s obligation is to pay money and specific performance is afforded to the vendor on the twin principles of mutuality and equality. Where the vendor is a private person who may have to sell their house before being able to move to another one, different considerations may apply. Lastly, the bottom line remains that a purchaser who escapes a specific performance order on the grounds of inability to pay, does not escape a judgment for damages measured by the difference between the contract and the market price of the property. This is likely to be a financially crippling sum and in many cases unenforceable.

12.55  Specific performance may be refused if the decree would involve excessive hardship for the defendant. In Denne v Light¹¹³ specific performance was refused against the (p. 346) purchaser of farming land to which there seemed to be no access. In Wroth v Tyler¹¹⁴ specific performance was refused against a vendor because it would have required him to commence uncertain litigation against his wife to obtain vacant possession of the property and thus bring about a likely break-up of the family. In Patel v Ali¹¹⁵ there had been a long delay in the completion of the sale of a house by married vendors. This was nobody’s fault so did not affect the disposition of the case. After the contract was executed the husband vendor became bankrupt and was later imprisoned. The wife developed bone cancer and had a leg amputated while heavily pregnant. The vendors were members of the Muslim community and the wife spoke very little English. She became heavily dependent on the support of family and friends in the area where she lived and it would have involved great hardship to her if she had been forced to move. For these exceptional reasons specific performance was refused and the purchasers were left to their remedy in damages.¹¹⁶

12.56  One side to the mutuality principle has already been mentioned. This is that the vendor in a sale of land case can get specific performance of the purchaser’s obligation to pay the price because the purchaser can get specific performance against it. The other more complex side was originally understood as Fry expressed it in 1858:¹¹⁷

A contract to be specifically enforced by the court must, as a general rule, be mutual, that is to say, such that it might at the time it was entered into have been enforced by either of the parties against the other of them.

This rule was not supported by authority and was challenged by Ames, who maintained that the defendant will not be ordered to perform unless there was sufficient assurance that the claimant will in turn perform. As Ames wrote:¹¹⁸

Equity will not compel specific performance by a defendant if after performance the common law remedy of damages will be his sole security for the performance of the plaintiff’s side of the contract.

The leading case is now Price v Strange.¹¹⁹ The defendant was the head lessee of some flats in a house. She orally agreed to grant the claimant a new under-lease of his flat in return for the claimant’s promise to effect certain repairs to the house. The claimant did about half the repairs but the defendant did not allow him to complete, instead completing the repairs at her own expense and refusing the defendant the new under-lease. (p. 347) The claimant was granted specific performance subject to compensating the defendant for the expenses she had incurred. The defendant relied upon Fry’s rule to argue that as the claimant’s obligation was not specifically enforceable from the time the contract was made specific performance could not be ordered against her. Fry’s rule was rejected as looking at mutuality at the wrong time. The correct time is when specific performance is sought, not when the contract is entered into. If when the claimant seeks specific performance the defendant would be unable to get specific performance against it specific performance should be refused if damages would be an inadequate remedy for the defendant in that situation and this would cause injustice to the defendant. Any injustice to the defendant in Price v Strange could be compensated by requiring the claimant to pay compensation to the defendant for the repairs she had carried out herself.

12.57  There are various grounds on which a claimant may be refused specific performance because it would be unconscionable for the claimant to have equitable relief. Two well established equitable maxims are: ‘He who seeks equity must do equity’ and ‘He who comes to equity must come with clean hands’. The former means that the claimant must have complied with all of his or her obligations of conscience under the contract and be ready and willing to perform those that have not matured. Burrows cites the example of Chappell v Times Newspapers Ltd,¹²⁰ where employees were refused an injunction amounting to specific performance of their contracts of employment because they would not give undertakings to perform their contracts by not engaging in industrial action. An exceptional case would have to have been shown in any event as this was a contract of employment but the claimants’ unwillingness to do equity themselves made this task impossible. The latter means that the claimant must not have engaged in any tricky or unfair behaviour in the context of the contract. So, in Quadrant Visual Communications Ltd v Hutchison Telephone (UK) Ltd ¹²¹ the claimant contracted to sell its car and portable telephone business to the defendant. The price depended on the number of the claimant’s customers prior to the completion date. The claimant made two marketing deals prior to completion, informing the defendant of one but not the other. On the defendant’s breach specific performance was refused because the claimant had tricked the defendant and not come to equity with clean hands.

12.58  By section 36(1) of the Limitation Act 1980 contractual limitation periods do not apply to specific performance actions. They are usually too long for relief of this nature. A claimant may be refused equitable relief if (s)he has been guilty of laches, ie such inexcusable delay in seeking relief that it would be unfair to the defendant to grant it. In Frawley v Neill ¹²² the Court of Appeal said that the claimant did not have to show (p. 348) itself eager and zealous to obtain relief but specific performance would be refused if the claimant’s actions made it unconscionable to assist it. How long delay must last before relief is refused cannot be measured. Regard is had to the length of the delay, the degree of prejudice to the defendant and the degree to which this can be attributed to the claimant’s actions.

12.59  A degree of procedural unconscionability, such as misrepresentation, mistake known to the claimant, duress, undue influence, or unconscionable bargaining can lead to the refusal of specific performance. This is so even though these are reasons that are capable of resulting in the contract being rescinded. So, if A has been guilty of misrepresentation but B’s right to rescind the contract is barred, A may still be refused specific performance. Mistake can be a reason to refuse specific performance if hardship amounting to injustice would otherwise be caused. In Tamplin v James¹²³ the defendant purchaser of land made a unilateral mistake about the extent of the land. The vendor had accurately described the property in the plans but the purchaser failed to consult them because he had first hand knowledge of the property. Specific performance was granted because any mistake here was down to the defendant’s carelessness. Any contribution made by the claimant to the defendant’s mistake will help the defendant. In Denny v Hancock¹²⁴ specific performance was refused because the vendor claimant’s plans were carelessly misleading. Burrows has queried whether this power to refuse specific performance is much more than a historical relic of pre-Judicature Act days that is not needed today after the expansion of the grounds for rescinding a contract entirely.¹²⁵ The view taken in this book is that where unconscionable conduct falling short of a basis for rescission is shown, it is fair and just for the claimant to be left to a remedy in damages which post-Judicature Act is more easily obtained in the same court.

12.60  Section 49 of the Senior Courts Act 1981 allows for the award of common law damages in addition to specific performance. This would be useful as a means of compensating the claimant for loss suffered between the completion date and the date when specific performance is ordered. Section 50 of the 1981 Act, the successor to the Chancery Amendment Act 1858 (Lord Cairns’ Act), allows for equitable damages to be awarded in lieu of or in addition to specific performance. This power is of considerable importance to injunctions restraining a nuisance or a trespass because in that context there is often an important distinction to be drawn between cases where a tort is complete and where it is ongoing. If it is complete, common law damages would be an adequate remedy and there would be no case for an injunction at all. If it is ongoing, there would be a case for awarding damages for losses suffered up until the grant of an injunction (p. 349) in addition to the injunction, or in lieu of an injunction if the injunction were considered inappropriate.¹²⁶ This distinction is less meaningful in the context of specific performance as all breaches of contract are ongoing and the House of Lords held in Johnson v Agnew¹²⁷ that the same measure of damages applies under Lord Cairns’ Act as at common law.

12.61  Prior to Lord Cairns’ Act the Court of Chancery had the power to award specific performance with some abatement of the purchase price or compensation where the land sold was not entirely as promised. The power to do this has not been abolished but in view of the power to award damages in addition to specific performance one may question whether it might not be better if it were.¹²⁸

12.62  For the protection of the defendant specific performance may be granted subject to certain conditions. In Baskcomb v Beckwith¹²⁹ the defendant contracted to buy land without realizing, owing to the plans being unclear, that the vendor was retaining a small plot of land nearby not covered by restrictive covenants preventing the building of a public house. The vendor was given a choice—either specific performance with the restrictive covenant extended to the retained plot of land or no specific performance. In Langen and Wind Ltd v Bell ¹³⁰ specific performance of a sale of shares for a price to be fixed in the future was made subject to an order that the shares be transferred to the claimant’s solicitors until payment. In Price v Strange¹³¹ specific performance was granted subject to the claimant compensating the defendant for the repairs she had carried out at her own expense. Finally, in Harvela Investments Ltd v Royal Trust Co of Canada Ltd ¹³² specific performance was granted subject to the condition of paying the seller interest from the completion date to payment.¹³³

12.63  If the specific performance order breaks down and it becomes impossible to implement it the claimant will become entitled to seek damages. In Johnson v Agnew¹³⁴ this happened because mortgagees of the land subject to specific performance enforced their security and sold off the land. Much of the speech of Lord Wilberforce (with which the other Lords agreed) was given over to why the claimant could still be awarded damages and need not concern us. What matters is the following passage in Lord Wilberforce’s speech which establishes that the claimant does not have an automatic right to damages:¹³⁵

(p. 350)

Once the matter has been placed in the hands of a court of equity . . . the subsequent control of the matter will be examined according to equitable principles. The court would not make an order dissolving the decree of specific performance and terminating the contract (with recovery of damages) if to so do would be unjust, in the circumstances then existing to the other party, in this case to the purchaser.

Burrows’ qualification to this statement, that it is only where the claimant’s default has brought about this situation that the court may refuse the award of damages, seems correct.¹³⁶

12.64  This chapter concludes by considering in a little more detail the question of whether a promisee who affirms a contract after a breach by the promisor entitling the promisee to terminate, would be entitled to terminate in the event of a subsequent or continuing breach by the promisor. In principle the answer is ‘yes’ as was stated earlier,¹³⁷ but three qualifications must be entered to that basic proposition.

12.65  The first qualification is that if a breach is ‘once and for all’ there can be no revival of the right to terminate. The distinction between a continuing breach and a ‘once and for all’ breach was explained by Dixon J in the Australian case of Larking v Great Western (Nepean) Gravel Ltd as follows:¹³⁸

In the Larking case itself the defendant granted an exclusive fifty-year licence to the claimants to remove sand gravel from a river. In return the claimants promised to fence a particular area and to construct and maintain a gate as an extension of one of the fences erected. The claimants commenced the removal of gravel in 1937, paid royalties, but did not erect the fencing and gate. On 26 October 1939 the defendant gave notice (p. 351) requiring the claimants to remedy their breach within 14 days. The claimants failed to comply with the notice but continued paying royalties which the defendant accepted. Further notice was given on 1 December and then on 12 December the defendant purported to terminate the contract by revoking the licence. The High Court of Australia held that by continuing to accept royalty payments after the expiry of the notice the defendant had elected to continue with the performance of the contract and no longer had the right to terminate for past breaches. The notice converted the obligation to erect the fence from a continuing obligation in the second part of Dixon J’s dictum (quoted earlier in this paragraph) into a ‘once and for all’ obligation in the first part. The claimants were granted an injunction restraining the defendant from acting contrary to the terms of the licence.

12.66  In a case of continuing breach, just as with initial breach, the promisee will not be permitted to terminate the contract where it has estopped itself from exercising that right. An example is provided by Bull v Gaul,¹³⁹ where a contract for the sale of land provided for the payment of a £100 deposit and weekly instalments of £3 towards the remainder of the purchase price of £1,200. Time was of the essence of the contract and various payments were made late but accepted by the vendor. Subsequently the vendor purported to terminate on the ground of the purchaser’s failure to pay on time and sought a declaration that her election was effective. This declaration was refused because by leading the purchaser to believe that she would not insist on timely payment the vendor had made it unconscionable to treat this as a ground for termination without first giving notice to the purchaser that timely payment would be insisted on in future.

12.67  That notice can revive the right to terminate a contract for breach is illustrated by the Court of Appeal’s decision in Charles Rickards Ltd v Oppenhaim.¹⁴⁰ In 1947 the defendant ordered a Rolls Royce chassis from the claimants. After delivery the defendant decided to have a body built on the chassis and the claimants found a firm of coachbuilders who said they would have this done in six to seven months. A contract was then entered into between the claimants and the defendant on the footing that the claimants would enter into a sub-contract with the coachbuilders. The latest time for delivery was 20 March 1948 but the work was not completed by then. The defendant then pressed for delivery by Ascot June 1948 but that time passed too. On 29 June 1948 the defendant wrote to the coachbuilders that they would be unable to accept delivery after 25 July. That letter was passed to the claimants but nothing of significance happened. The vehicle was completed on 18 October 1948 but the defendant refused to take delivery as it had acquired another vehicle elsewhere. The claimants sued to recover the balance of the price and the defendant counterclaimed for the chassis or its value. The court held for the defendant.

(p. 352) 12.68  The Court of Appeal held that time was originally of the essence of this contract but that the defendant was effectively estopped from relying on this as it led the claimants to believe this would not be insisted on. However the defendant could overcome this estoppel bar by serving notice requiring the work to be done within a reasonable time. Reasonable notice was given by the notice of 29 June 1948 so the defendant was entitled to terminate the contract because this notice had not been complied with. As Carter has pointed out, a rationale for this view lies in the need to ensure that the promisee is not bound to the contract forever.¹⁴¹