4.01  Having looked at the notion of breach, we may now turn to the process of termination. This chapter considers what termination is, how it should be described, and what it involves; there is also consideration of how the right to terminate may be limited, and how termination differs from other related concepts.

4.02  From the discussion in the first chapter, it can be seen that the concept of termination is not easy to define, not least because of the inconsistent terminology used by the courts and by commentators, and also because of the overlap existing between termination itself and other concepts that are akin to it.¹ We can begin by saying that termination is one way in which, in the words of Diplock LJ, a party to a contract (p. 83) is relieved of his undertaking to do that which he has agreed to do but has not yet done.² If we follow Anson and others by referring to this process as ‘discharge’,³ it follows that termination is a sub-species of discharge, alongside discharge by agreement and discharge by frustration.⁴ There are three key factors distinguishing termination from other types of discharge, the first being that it requires proof of a serious breach by the party in default,⁵ the second being that it normally occurs only at the option of the innocent party,⁶ and the third that it leaves the party in default liable in damages. To adopt the terminology used by Lord Diplock, both parties are freed from their primary obligations under the contract, but in the case of the party in default this is replaced by a secondary obligation to pay compensation to the innocent party.⁷

4.03  The process under discussion has been labelled in various different ways, including ‘repudiation’,⁸ ‘treating the contract as repudiated’,⁹ ‘rescission’,¹⁰ and ‘termination’.¹¹ However, the word ‘repudiation’ nowadays suggests a wrongful refusal to perform,¹² and is therefore best not used where the innocent party is fully entitled to do so. ‘Treating the contract as repudiated’ has a respectable pedigree both in statute and in case law, but the label presupposes that the consequences are the same whether the breach consists of a repudiation in the narrow sense or some other kind of serious breach that discharges the innocent party from the obligation to perform, which may not necessarily be the case.¹³ The term ‘rescission’ has (p. 84) also been used in this context, but this is best reserved for the different process whereby the contract is annulled ab initio for misrepresentation, duress, or undue influence.¹⁴ For these reasons the present work will follow other authors in using the word ‘termination’,¹⁵ on the understanding that what is terminated is not the contract itself (whatever that may mean) but the primary obligations of the parties to that contract.¹⁶

4.04  The title of the present chapter reflects the traditional understanding of termination in English law as a process reflecting that of formation, the idea being that just as the latter creates obligations, the former releases one or both parties from those obligations.¹⁷ This approach reflects the historical development of the subject, in which as we have seen it is not easy to disentangle termination for breach from other forms of contractual discharge.¹⁸ However, while this is helpful in explaining the way termination has developed, it misses out on one important aspect of the subject, namely that termination is essentially something which the innocent party is entitled to do. Looked at in this way, termination can be seen as a remedy,¹⁹ alongside other ways of proceeding more traditionally dealt with under that heading.²⁰ Indeed, it is one of the cheapest and most convenient remedies available;²¹ instead of having to go to court, the innocent party can, broadly speaking, simply ‘cancel the contract’.²² Termination for breach of contract cannot be understood without keeping both of these aspects in mind.

4.05  Though termination is traditionally described as involving the termination of the contract as a whole,²³ it is perfectly possible for a contract to be terminated in part.²⁴ Obviously the contract may provide for this by an express term,²⁵ but partial termination may also be possible at common law.²⁶ Say, for instance, a seller of goods under an instalment contract fails to deliver one of the instalments. The buyer need no longer accept and pay for that instalment, but this does not necessarily mean that he or she can terminate the entire contract.²⁷ Again, it has been argued that in a building contract the architect can refuse to pay the builder for a particular piece of defective work without necessarily bringing the whole engagement to an end.²⁸ Indeed, even an ordinary case of termination is in a sense no more than partial;²⁹ as we shall see, the effect of termination is not to discharge the contract as a whole, but only such primary obligations of the parties as remain unperformed at the relevant time.³⁰

4.06  Though termination is a mode of discharge, not all forms of contractual discharge involve termination. A party may rightfully be excused from performance in a number of other ways too, and it is important that these not be confused with termination.

4.07  The process of termination is often referred to by judges and others as ‘rescission’.³¹ There is no harm in this, provided that one keeps in mind that termination for breach of contract is very different in its effects from rescission for misrepresentation, duress, or undue influence. The distinction was aptly summarized in Johnson v Agnew,³² a case involving the sale of land, by Lord Wilberforce in the following terms:³³

. . . it is important to dissipate a fertile source of confusion and to make clear that though the vendor is sometimes referred to . . . as ‘rescinding’ the contract, this so-called ‘rescission’ is quite different from rescission ab initio, such as may arise for (p. 86) example in cases of mistake, fraud or lack of consent. In those cases, the contract is treated in law as never having come into existence . . . In the case of an accepted repudiatory breach the contract has come into existence but has been put an end to or discharged. Whatever contrary indications may be disinterred from old authorities, it is now quite clear, under the general law of contract, that acceptance of a repudiatory breach does not bring about ‘rescission ab initio’.

Thus whereas rescission in its strict sense involves turning the clock back in the sense of restitutio in integrum, termination, as we shall see, operates to discharge the obligations of the parties in so far as they remain unperformed at the time of termination, but not otherwise.³⁴ Termination in this sense is an important remedy for breach of contract; rescission is not.³⁵

4.08  A party to a contract may be entitled to withhold his or her performance without necessarily being entitled to terminate. Thus as a general rule an employer need not pay wages until the employee has worked for a certain period, but this does not mean that the employee has been dismissed. In the same way, if a seller tenders goods that are not in conformity with the contract, the buyer may reject them, but this does not necessarily mean that the buyer may terminate, as the seller may still be able to come up with a proper tender within the time stipulated by the contract.³⁶ However, if the seller is unable to do this, the buyer’s right to withhold performance will become a right to terminate.³⁷ The same will be so if the defective tender is such as to indicate that the seller has no intention of performing the contract according to its terms.³⁸

4.09  Frustration occurs, in the words of Lord Radcliffe, ‘whenever the law recognises that without default of either party a contractual obligation has become incapable of being performed because the circumstances in which performance is called for (p. 87) would render it a thing radically different from that which was undertaken by the contract’.³⁹ The effect of frustration is to discharge both parties, the key difference being that unlike termination, frustration occurs automatically and does not depend on the choice of either party.⁴⁰ However, both doctrines to a certain extent share a common pedigree,⁴¹ and in some cases the line between frustration and termination is a very fine one. For instance, in Jackson v Union Marine Insurance Co Ltd ⁴² a charterparty was held to be frustrated by a protracted period of delay resulting from the ship having gone aground. Since the grounding of the ship was an ‘excepted peril’ under the charterparty, neither party was to blame for the event, which made the case one of frustration. However, had it not been for the excepted perils clause the delay might very well have given the charterers the right to terminate on the grounds of fundamental breach.⁴³ Indeed, given that in cases of this sort the measure of delay needed to frustrate the contract is said to be the same as that needed to amount to a fundamental breach giving rise to the right to terminate,⁴⁴ the same facts may often require consideration of both possibilities.

4.10  Even where the contract is not frustrated, a promisor may have a lawful excuse for failing or refusing to perform in circumstances not involving termination.⁴⁵ The classic illustration of this is the employee who fails to turn up to work because he or she is sick,⁴⁶ or is unable for some other reason to attend.⁴⁷ Again, such excuses may be provided in the contract itself, as in the case of a force majeure clause.⁴⁸ Where performance is excused in this way, the promisor is discharged from the duty to perform the obligation in question without any question either of breach by the other party or frustration of the contract as a whole.⁴⁹

4.11  A situation similar to termination is where a unilateral obligation is discharged for failure of condition. If A agrees to do X if  B does Y, A need not do X unless B does Y. Note that this does not involve any suggestion that B is bound or obliged to do Y—the doing of  Y is no more and no less than a condition upon which the obligation of A to do X depends.⁵⁰ In Hare v Nicoll ⁵¹ an agreement under seal gave the plaintiff an option to repurchase shares at a set price, and provided that he should give notice of his intention to do so and pay the price on or before the dates set out in the agreement. The plaintiff later sought to exercise the option, but was debarred from doing so on the grounds that he had not paid the price by the day stipulated. The effect of this was akin to termination, in that the defendant was discharged from his obligation to sell the shares, but the obligation was a unilateral one; the plaintiff was not bound to pay for the shares, or even to purchase them at all. His obligation to pay for the shares by a certain date was no more than a condition upon which the defendant’s obligation to sell the shares depended.

4.12  Where a contract is fully or partly executory, that is to say when there are still obligations outstanding on both sides, it may be discharged by mutual agreement.⁵² Like termination, this has the effect of discharging the parties from their primary obligations, but it depends not on default by one party but on the agreement of both. However, the picture has been muddied to some extent by an analysis of the process of termination as involving an offer by the party in default to abandon the contract and an acceptance of that offer by the innocent party.⁵³ This analogy can be helpful for some purposes; in particular, it helps to stress that termination is not automatic, but only takes place if the innocent party chooses to respond to the breach in that way.⁵⁴ However, the analogy cannot be pressed too far, for three reasons. The first is that it does not normally reflect the intentions of the parties, even in an objective sense; in particular, whilst an outright repudiation by the party in default may in some ways be seen as an offer to abandon the contract, the same cannot be said of other serious breaches giving rise to termination, such as a breach of condition.⁵⁵ Secondly, the rules regarding termination differ in (p. 89) some respects from those of offer and acceptance; for instance, it may be that unlike the acceptance of an offer the acceptance of a breach does not always have to be communicated to the party in default;⁵⁶ similarly, it has never been suggested that some of the more technical rules relating to offer and acceptance, such as those regarding acceptances through the post, apply to termination.⁵⁷ Last but not least, the analogy confuses termination for breach with true cases of discharge by agreement, for which the rules are very different.⁵⁸ Ultimately, as we have seen,⁵⁹ termination for breach is a doctrine with its own distinct pedigree, and it does not do well to elide it with other doctrines, whatever the apparent similarities may be.⁶⁰

4.13  Though the phrase ‘termination for breach’ is a useful and well-recognized piece of legal shorthand for the process that we are describing,⁶¹ it is nevertheless a misleading one in so far as it suggests that it is the breach that brings about the termination.⁶² Though the ultimate effect of a serious breach of contract may be to absolve one or both parties from their obligations under the contract, this will normally only happen if the innocent party wants it to happen,⁶³ or to use technical language ‘elects’ to terminate rather than affirm.⁶⁴ In other words, the innocent party has a choice.⁶⁵ The consequences of that choice will be discussed in more detail later;⁶⁶ at this stage it is necessary to consider whether there are any situations where there is no such choice—that is to say, whether there are exceptions to the requirement of election.

4.14  The first possible exception relates to contracts of employment. Originally the normal rule was said to apply to such cases,⁶⁷ but this was called into question on a number of grounds;⁶⁸ in particular, it was pointed out that where an employee was wrongfully dismissed, the contract was effectively at an end, since as a general rule the courts would not grant specific performance in such cases⁶⁹ and there could be no question of the employee insisting on remaining in post and then suing for his or her wages.⁷⁰ For these reasons it was suggested in a number of cases that a different rule applied to contracts of employment, at least where they involved wrongful dismissal.⁷¹ However, in Geys v Société Générale, London Branch⁷² the Supreme Court, by a majority of four to one, rejected this suggestion and held that contracts of employment were subject to the general rule requiring acceptance. In this case the defendant bank had summarily dismissed the claimant without good cause in November 2007 and had then made a payment into his bank in lieu of notice the following month. The claimant did not contest his dismissal as such, but contended that it did not take effect until January 2008. The bank, however, argued that on the basis of the ‘automatic’ theory the dismissal was effective as from November 2007, or December at the latest. The court rejected the bank’s contention, one reason being that to decide otherwise would allow the defaulting employer to take advantage of his or her own wrong. In the trenchant words of Lord Wilson:⁷³

In proposing that the court should endorse the automatic theory, the bank invites it to cause the law of England and Wales in relation to contracts of employment to set sail, unaccompanied, on a journey for which I can discern no just purpose and can identify no final destination. I consider, however, that we should keep the contract of employment firmly within the harbour which the common law has solidly constructed for the entire fleet of contracts in order to protect the innocent party, as far as practicable, from the consequences of the other’s breach.

(p. 91) Be that as it may, it is still a moot point whether the requirement of election can operate in its full sense of allowing the employee to ignore the dismissal and affirm the contract.⁷⁴ Indeed, it has been admitted that in cases of wrongful dismissal the right to affirm is effectively illusory, and that it would not be hard to conclude that the employee in such cases had elected to accept the repudiation and terminate the contract.⁷⁵ A wrongful dismissal does not legally terminate the contract in theory, but it may effectively do so in practice, and for this reason it must be conceded that the right of a wrongfully dismissed employee to affirm the contract is in most cases no more than an ‘empty formality’.⁷⁶

4.15  A second exception relates to the so-called ‘promissory warranty’ in contracts of marine insurance. Section 33 of the Marine Insurance Act 1906 describes this as ‘a warranty by which the assured undertakes that some particular thing shall or shall not be done, or that some condition shall be fulfilled, or whereby he affirms or negatives the existence of a particular state of facts’,⁷⁷ and goes on to state that such a warranty is ‘a condition which must be exactly complied with, whether it be material to the risk or not’.⁷⁸ Prior to the changes made by Part 3 of the Insurance Act 2015, the rule used to be that if such a warranty was not exactly complied with the insurer was discharged from liability as from the date of the breach in question.⁷⁹ Thus in The Good Luck,⁸⁰ where a ship had sailed into a prohibited zone contrary to the terms of such a warranty, it was held that the insurance policy had ceased to apply as soon as this had happened without any need for election by the insurer, the reasoning being that adherence to the warranty was a condition precedent to any claim being made on the policy.⁸¹ This, of course, was similar to the analysis adopted in some of the older authorities,⁸² and which still survives in relation to unilateral contracts and options,⁸³ the rationale being that the insurer had only (p. 92) agreed to cover the assured so long as the warranty was kept, and it had not been kept.⁸⁴ However, the rule was capable of leading to injustice, and following discussions prompted by the Law Commission⁸⁵ the law was modified by section 10 of the Insurance Act 2015, the basic rule now being that the liability of the insurer is not extinguished altogether⁸⁶ but only suspended so long as there has been a breach of the warranty which has not been remedied.⁸⁷ Despite this, the general requirement of election has still not been extended to this kind of case; what we have here is, as often happens, an exception that pre-dates the rule itself.

4.16  It was said by the Court of Appeal in Total Oil (Great Britain) Ltd v Thompson Garages (Biggin Hill) Ltd ⁸⁸ that the doctrine of termination for breach could not apply to leases, one reason being that a lease conveyed an interest in land, and therefore could not come to an end like an ordinary contract on the basis of repudiation and acceptance.⁸⁹ However, this approach was contrary to a number of older authorities,⁹⁰ and has not been followed in other jurisdictions.⁹¹ The reasoning used by the Court of Appeal in the Total Oil case was later rejected, albeit in the different context of frustration, by the House of Lords in National Carriers v Panalpina (Northern) Ltd,⁹² and on that basis Stephen Sedley QC (as he then was) refused to follow the case in Hussein v Mehlman.⁹³ Others have since followed his lead,⁹⁴ and the better view is now said to be that a lease can be brought to an end by termination no less than any other type of contract;⁹⁵ at the very least, the rule in the Total Oil case is more than ripe for review by a higher court.

4.17  Doubts have been expressed as to the extent to which a partnership can be brought to an end by an accepted repudiation. In Hurst v Bryk⁹⁶ a solicitor who had fallen out with his partners sought to argue that the partnership had been brought to an end by his acceptance of their repudiatory conduct, the result being that he was no longer bound by the debts of the partnership. However, the House of Lords would have none of it. As between the partners, there was certainly no reason why the ordinary principles of termination should not apply, but this did not mean that the partnership itself ceased to exist or that the innocent party could by acceptance of a repudiation get rid of the responsibilities attaching to it. In the words of Lord Millett:⁹⁷

As Lord Millett points out, this is not really a true exception to the doctrine. A contract of partnership is not brought totally to an end by accepted repudiation, but nor is any other contract. In the well-known words of Dixon J in the High Court of Australia:⁹⁸

Given that the process of termination does not necessarily extinguish even rights and obligations which the parties to the contract may owe one another, still less will it do so in relation to third parties.

4.18  Another possible exception to the requirement of election can be seen in the curious decision of the Court of Appeal in the case of Mediterranean Shipping Co SA v Cottonex Anstalt.⁹⁹ Given the way in which this seems to subvert the normal (p. 94) principles of termination, this case merits some discussion, though its ultimate significance is still hard to determine. The carriers (MSC) contracted with the shippers (CA) to convey a load of cotton in containers to the port of Chittagong. Clause 14 of the contract provided that once the cargo was delivered to the port the shippers would have fourteen days free use of the containers, following which demurrage became payable at a daily rate so long as they failed to redeliver them to the carriers. The cargo duly arrived at the port in the months of May and June 2011, but following a collapse in the price of cotton the consignee refused to take delivery. This left the shippers in a difficult predicament, as they were unable to unload the containers and therefore could not redeliver them as required. Worse still, the customs authorities at the port refused to allow unloading to take place without a court order. The result was stalemate. In the meantime, the date for redelivery of the containers came and went, and liability for demurrage began to accrue. In September 2011 the shippers duly informed the carriers that there was no reasonable prospect of the containers being redelivered. In February 2012 the carriers offered to sell the containers to the shippers as a possible way out of the deadlock, but nothing came of this, and the carriers consequently brought a claim for demurrage. The logic of this claim could not be denied—even if the failure of the shippers to redeliver the containers could be regarded as a fundamental or repudiatory breach, this had not been accepted in any way by the carriers. However, it was clear that redelivery might never become possible. Did this mean that the shippers might in principle claim demurrage for ever and a day? It was argued by the carriers that this seemingly ludicrous result could be avoided in two ways. First of all, following the principle laid down by the House of Lords in White & Carter (Councils) Ltd v McGregor,¹⁰⁰ MSC had no legitimate interest in affirming the contract here. Secondly, even if they did, clause 14 was unenforceable as a penalty.

4.19  At first instance¹⁰¹ Leggatt J held that since the failure by CA to redeliver the containers had the effect of frustrating the commercial purpose of the adventure, it could indeed be classified as a repudiatory breach. However, he also agreed with their argument that since similar containers were readily available on the market, MSC had no legitimate interest in affirming the contract and suing for demurrage. It followed that their claim for demurrage could not be allowed beyond the date in September 2011 when they were informed that there was no reasonable prospect of delivery. This was sufficient to dispose of the case for all practical purposes, but Leggatt J went on to hold that clause 14 could not be classified as a penalty merely on the ground that it did not provide a limit beyond which demurrage could not be claimed.

4.20  The Court of Appeal, however, took a different line. They agreed with Leggatt J that the commercial purpose of the adventure had become frustrated, albeit not until February 2012.¹⁰² They agreed that the effect of this was to make CA liable for repudiatory (p. 95) breach.¹⁰³ They agreed that MSC would have had no legitimate interest in affirming the contract and claiming demurrage.¹⁰⁴ They agreed that clause 14 could not be classified as a penalty.¹⁰⁵ However, the main ground for the decision was that, since further performance by CA had become impossible, MSC no longer had the option to affirm at all. In the words of Moore-Bick LJ:¹⁰⁶

4.21  On the face of it, this is a very odd proposition. Is the court really saying that where the effect of a breach by the party in default is to render his or her performance impossible, the normal requirements of election do not apply? This would be totally at odds with principle, and indeed with the affirmation by Moore-Bick LJ elsewhere in his judgment that a repudiatory breach of contract does not automatically discharge the parties from performance of their remaining primary obligations.¹⁰⁷ Granted that the shippers’ claim for demurrage was clearly unsustainable, it might have been better if it had been rejected on a more orthodox ground. In this connection, Morgan mentions a number of possibilities:¹⁰⁸ for instance, the court could have followed Leggatt J in deciding that had no legitimate interest in their claim for demurrage,¹⁰⁹ or that the relevant clause could not be construed so as to require such demurrage to be paid indefinitely.¹¹⁰ Indeed, given the way the concept of ‘legitimate interest’ is now applied in the context of penalties, the clause might now even be struck down on that ground too.¹¹¹ As it is, as Morgan says, we now have another marginal gloss on the election principle,¹¹² without any obvious attempt being made by the court to explain its limits.

4.22  As far as other kinds of contract are concerned, the general rule applies in all cases, namely that the innocent party has a choice whether to terminate or affirm. However, the right to affirm is of more practical significance in some cases than in others. Affirmation is most valuable as an option in cases where a decree of specific performance is available,¹¹³ or where the innocent party can complete performance without the cooperation of the party in default and has a legitimate interest in doing so;¹¹⁴ here he or she can effectively force the other party to perform. In other cases, however, the right to affirm amounts to no more than a right to delay matters in the hope that the defaulting party will perform eventually.¹¹⁵ In some cases, indeed, even this will not be a realistic option, as for instance where the effect of the breach is to destroy the subject matter of the contract or to render its performance impossible.¹¹⁶

4.23  Given that termination does not take place unless the innocent party chooses for it to take place, the next question is how such a choice is made. What does the innocent party have to do if he or she wishes to terminate? Though election has been described as a doctrine based on ‘simple considerations of common sense and equity’,¹¹⁷ the law in this area is anything but simple; indeed, it is one of the most tricky areas of contract law.

4.24  The most obvious way of electing to terminate is by an express statement to that effect. Sometimes this can take the form of legal proceedings of some sort, such as an action for a declaration that the contract has been terminated,¹¹⁸ or the issue of proceedings to (p. 97) forfeit a lease,¹¹⁹ but such cases are exceptional; indeed, no set form of words is required at all,¹²⁰ so long as a reasonable person would conclude that the contract was terminated.¹²¹ Election can also be by conduct, as where the innocent party puts himself or herself into a position where further performance is impossible,¹²² or where new arrangements are made that are inconsistent with the previous contract.¹²³ Indeed, it has been said that any act by the promisee which is inconsistent with his or her intention to perform may count as an election to terminate for breach, whether or not that was the intention of the promisee.¹²⁴ As in the case of contract formation, what counts is not the subjective intention of the party in question, but what a reasonable person would conclude was his or her intention on the basis of the relevant words or conduct.¹²⁵

4.25  The election of the innocent party to terminate must be unambiguous, in the sense that it must unequivocally and clearly indicate his or her intention to treat the contract as discharged.¹²⁶ For this reason, a mere failure or even refusal to perform on the part of the innocent party in response to the breach will not normally be enough, as this may be equally consistent with the contract continuing in force.¹²⁷ In the same way, silence will not as a general rule amount to acceptance of a repudiation any more than it will amount to acceptance of an offer.¹²⁸ However, it has been said that the question (p. 98) whether the innocent party has elected to terminate is one of fact rather than one of law,¹²⁹ and for this reason even ‘silence and inactivity’ may be enough if the intentions of the innocent party are clear from the context. In The Santa Clara¹³⁰ the buyers of a cargo of propane gas sent a message to the sellers repudiating the contract, following which the sellers took no further steps to perform it. It was held by the House of Lords that the arbitrators were entitled to find that the repudiation had been accepted, as it must have been clear to the buyers that the sellers no longer regarded the contract as on foot.¹³¹ As Lord Steyn said, if an employer tells a contractor in the evening that he need not come back next day because his services are no longer required, the fact that the contractor fails to put in an appearance the following morning will generally indicate that he considers the contract as at an end. Similarly, if a seller of goods is obliged to obtain an export licence, and the buyer repudiates the contract before he has done so, the failure of the seller to obtain the licence may be good evidence of termination.¹³²

4.26  Need the election to terminate be communicated to the party in default? The analogy of offer and acceptance would suggest that this is so, but the law is not entirely clear. In The Santa Clara Lord Steyn said that the fact of election had to come to the notice of the repudiating party,¹³³ and though this was not central to the decision¹³⁴ it certainly appears to be the orthodox view.¹³⁵ However, it is argued by Carter that this is not an invariable rule,¹³⁶ and that it is enough if the promisee has ‘made plain’ his or her decision to terminate.¹³⁷ The main situation in which this would be likely to be significant is where the party in default takes active steps to prevent communication taking place. (p. 99) As Carter points out, the law concerning rescission for misrepresentation clearly allows the requirement of communication to be dispensed with in cases of this sort,¹³⁸ and the same reasoning would seem to be relevant in cases of termination. The law would surely not allow the party in default to prevent this taking place simply by keeping out of the way.

4.27  There are two issues regarding the time of termination. One is how long the innocent party has to decide whether to terminate or not; the other is when such a decision takes effect.

4.28  Under the Sale of Goods Act a buyer of goods who retains them for more than a reasonable time without rejecting them will lose that right,¹³⁹ and similar rules may apply in the context of express rights of termination,¹⁴⁰ but the extent to which this represents the general law is open to question. It has been said that a right to terminate will not be lost by mere delay,¹⁴¹ but on the other hand that the innocent party cannot be allowed an indefinite time to make his or her mind up.¹⁴² Though the general law in this area is not entirely clear, three principles emerge from the cases.

4.29  The first is that mere delay on its own cannot be enough to bar the right to terminate.¹⁴³ Though it may seem plausible to say that the right to terminate must be exercised within a reasonable time, there is no authority for such a rule outside the particular areas mentioned previously.¹⁴⁴ In fact, such a rule would contradict the general requirement, stated earlier, that the decision to terminate must be clear and unambiguous;¹⁴⁵ after all, (p. 100) mere inactivity on the part of the innocent party may be as consistent with a decision to keep the contract on foot as with a decision to terminate it.

4.30  The second is that the innocent party is not obliged to make a decision the very instant he or she becomes aware of the breach. He or she must be given a reasonable opportunity to decide what to do,¹⁴⁶ all the more so given that a wrongful termination may itself amount to an unlawful repudiation of the contract.¹⁴⁷ How long that opportunity must be will obviously depend on the circumstances; some cases (for instance the withdrawal of a ship for late payment of hire) may call for a very quick decision,¹⁴⁸ whereas in others (for instance cases involving the forfeiture of a lease for late payment of rent) more latitude can be allowed.¹⁴⁹

4.31  The third is that if the conduct of the innocent party taken as a whole gives the party in default good reason to believe that he or she has decided not to terminate but to keep the contract on foot, the right to terminate may be lost. In particular, a party with inconsistent rights and remedies cannot blow hot and cold, but must, in the end, choose whether to exercise one or the other;¹⁵⁰ there is no third choice.¹⁵¹ In the same way, the conduct of the innocent party may sometimes be taken as equivalent to a representation that the right to terminate will not be exercised, and the party in default may have acted in reliance on that representation; here the innocent party will not be allowed to resile if it would be inequitable to do so.¹⁵² These situations will be discussed in more detail later.¹⁵³

4.32  Sometimes a court has to decide precisely when the decision to terminate takes effect; for instance when time limits are specified either in the contract or by statute. This question arose in The Brimnes¹⁵⁴ in the context of a term in a charterparty allowing the owners to withdraw the ship for late payment of hire. Notice of withdrawal was sent to the charterers by telex fifteen minutes before their office was due to close, but the message was not read until the following morning, by which time the payment had been made. The question therefore arose whether the withdrawal had preceded the payment, or whether the opposite was the case.¹⁵⁵ Drawing an analogy with the cases on offer and acceptance,¹⁵⁶ the court held that the withdrawal had taken effect as soon as the message had been received on the charterers’ machine.¹⁵⁷ In the words of Megaw LJ:¹⁵⁸

If a notice arrives at the address of the person to be notified, at such a time and by such a means of communication that it would in the normal course of business come to the attention of that person on its arrival, that person cannot rely on some failure of himself or of his servants to act in a normal businesslike manner in respect of taking cognisance of the communication so as to postpone the effective time of the notice until some later time when it in fact came to his attention.

The basic rule therefore seems to be that termination takes effect when communicated to the party in default, or at any rate when the innocent party has taken reasonable steps to bring it to his or her attention.¹⁵⁹ However, this must be read subject to four qualifications.

4.33  The first is that The Brimnes is a case involving a contractual right of termination, to which special considerations may apply; in particular, the contract itself may regulate not only the circumstances in which such a right may arise, but also the manner in which it must be exercised.¹⁶⁰ Having said that, there may be cases in which the contract is silent as to the matter, and in which the ordinary rules of the common law will therefore apply.¹⁶¹ Moreover, the rule set out in The Brimnes tallies nicely with the general rule stated previously, namely that a decision to terminate must either be communicated to the party in default or at least overtly evinced in some way.¹⁶²

(p. 102) 4.34  The second is to note that The Brimnes was decided in the context of a commercial transaction where it made sense to speak, as did Megaw LJ, of the ‘normal course of business’. It has been argued that the result might have been different if the notice had been given to a private individual, who presumably cannot be expected to be on hand to deal with communications in the same way.¹⁶³

4.35  The third is that while the rules concerning termination may reflect to some extent those regarding offer and acceptance, the analogy should not be pushed too far in this any more than in any other respect.¹⁶⁴ In particular, there is no authority for importing into the present context the anomalous rule whereby acceptance of an offer made in the course of the post takes effect when posted.¹⁶⁵

4.36  The fourth is that in relation to particular types of contract the rules of the common law may be overridden either by the courts themselves or by statute. Thus, for instance, special rules apply to the termination of contracts of employment,¹⁶⁶ as they do in the consumer context¹⁶⁷ and in relation to the forfeiture of a lease.¹⁶⁸ Though these rules may differ in detail, the policy behind them is the same, namely to ensure that the party in default does not lose out without having a proper chance to know what the legal position is, and in some cases at least to remedy the default in question.¹⁶⁹

4.37  As it stands, the present law puts a great deal of pressure on the innocent party in deciding how to elect in cases of this sort. He or she must first decide whether the breach by the party in default is serious enough to give rise to the right to terminate in the first place, and then, assuming it is, whether to exercise that right. A wrong decision one way may amount to a repudiation, whereas a wrong decision the other way may amount to an affirmation of the contract. For this and other reasons it has been suggested that where the conduct of the party in default is such as to amount to an unlawful repudiation, the innocent party may, without actually terminating, suspend performance until the party in default has indicated a readiness and willingness to perform his or her own obligations under the contract.¹⁷⁰ However, this so-called ‘third option’ was (p. 103) firmly rejected by the House of Lords in The Simona.¹⁷¹ This case involved a clause in a charterparty giving the charterers the right to cancel the charter if the ship was not ready to load by a certain day. The owners having indicated that the ship would not be ready on time, the charterers purported to invoke the clause and made arrangements for the cargo to be carried on another ship. The owners, however, indicated that the ship would still be available to carry the cargo. A few days later, the ship still not being ready, the charterers sent a second notice of cancellation. It was common ground that the first notice of cancellation was premature, and therefore amounted to an unlawful repudiation of the contract by the charterers. Did this prevent them relying on the second notice? The charterers argued that it did not; since the owners had not accepted the repudiation, they could not derive any rights from it.¹⁷²

4.38  In response to this, the owners argued, on the basis of Braithwaite v Foreign Hardwood Co,¹⁷³ that their failure to accept the repudiation did not mean that it could be left out of the equation altogether.¹⁷⁴ The cancellation clause on which the charterers were relying could only be exercised on condition that the ship was not ready to load on the relevant date.¹⁷⁵ However, the owners argued that the charterers’ repudiation, even if not accepted, absolved them from any obligation to have the ship ready on time,¹⁷⁶ the point being that in the circumstances they were entitled, even without going so far as to terminate, to hold back from performing until the intentions of the charterers with regard to the matter became clear.¹⁷⁷

4.39  However, this argument was firmly rejected by the House of Lords. In the words of Lord Ackner:¹⁷⁸

When A wrongfully repudiates his contractual obligations in anticipation of the time for their performance, he presents the innocent party B with two choices. He may either affirm the contract by treating it as still in force or he may treat it as finally and conclusively discharged. There is no third choice, as a sort of via media, to affirm the contract and yet to be absolved from tendering further performance unless and until A gives reasonable notice that he is once again able and willing to perform. Such a (p. 104) choice would negate the contract being kept alive for the benefit of both parties and would deny the party who unsuccessfully sought to rescind, the right to take advantage of any supervening circumstance which would justify him in declining to complete.

4.40  So there is no third option; if the innocent party is not willing to risk termination, then he or she must affirm and take the consequences of doing so. However, this does not mean that the innocent party who affirms is necessarily bound to go to all the effort of rendering a performance that will be pointless, or which he or she knows will be rejected by the party in default. In particular, if the innocent party can show that his or her failure to perform was induced by the conduct of the party in default, then that will be a good excuse even if the contract has been affirmed.¹⁷⁹ Say, for instance, the owners in The Simona would have been perfectly able and willing to have the ship ready to load in time, but had decided that it would be pointless to do so in the wake of the charterers’ repudiation. In that case, the charterers would have effectively been estopped from using this as a ground for cancellation.¹⁸⁰

4.41  As well as this, there may be other remedies available to an innocent party who affirms. For instance, in some cases he or she may be able to obtain a decree of specific performance.¹⁸¹ Even where this is not available, a fresh right of termination may arise if the party in default persists in failing to perform.¹⁸² In particular, the innocent party may be able in these circumstances to issue a notice making time of the essence; the effect of this will be to set a deadline for the party in default, so that if performance is still not forthcoming, the innocent party may then go ahead and terminate.¹⁸³

4.42  A party to a contract who terminates without good reason will normally be held to have repudiated the contract, so giving rise to a corresponding right of termination by the other party. But what if the party who terminates then becomes aware of some factor which would have justified the termination? Can he or she then rely on that factor as a defence? The general answer to this question is that this is allowed, so long as the relevant excuse existed at the time of the termination. A good example of this is Boston (p. 105) Deep Sea Fishing & Ice Co v Ansell,¹⁸⁴ where the defendant was dismissed for misconduct, following which the plaintiffs sued him for damages and an account of profits. The defendant then counterclaimed for wrongful dismissal. The plaintiffs were not able to substantiate the original allegations, but subsequently discovered that the defendant had been taking secret commissions contrary to the terms of his employment. It was held by the Court of Appeal that the plaintiffs could rely on this as a good reason for the dismissal. As Lord Sumner later said in British and Beningtons Ltd v North Western Cachar Tea Co Ltd,¹⁸⁵ a person who terminates without giving any reason at all can rely on any available defences that may exist; the court will not look into his or her reasons or motives for doing so.¹⁸⁶ It therefore follows that even if the party terminating gives a bad reason, that will not prevent him or her later relying on a good reason if one can be found.¹⁸⁷ The only situation where this will not apply is where the problem is one that could have been put right if it had been brought to the notice of the party in default.¹⁸⁸ The general principle is well expressed by Lord Sumner:¹⁸⁹

What he says is of course very material upon the question whether he means to repudiate at all, and, if so, how far, and how much, and on the question in what respects he waives the performance of conditions still performable in futuro or dispenses the opposite party from performing his own obligations any further; but I do not see how the fact, that the buyers have wrongly said ‘we treat this contract as being at an end, owing to your unreasonable delay in the performance of it’ obliges them, when that reason fails, to pay in full, if, at the very time of this repudiation, the sellers had become wholly and finally disabled from performing essential terms of the contract altogether.

4.43  However, this only applies where the relevant excuse existed at the time of the termination. A party who accepts a repudiation does not have to show that he or she would, in fact, have been able to perform; after all, the main point of terminating is to release the innocent party from the duty to perform any future primary obligations under the contract. This is well illustrated by the facts of British and Beningtons Ltd v North Western (p. 106) Cachar Tea Co Ltd itself,¹⁹⁰ which involved a contract for the sale of tea for delivery in London. The tea having been diverted by the authorities to other ports, the buyers terminated the contract on the ground that a reasonable time for delivery had passed. The arbitrator having decided that the termination was premature, it was held by the House of Lords that the sellers could recover damages for repudiation without having to show that they were ready and willing to deliver the goods in London when the time came. Similarly, as Treitel says, a buyer of goods who indicates that he or she will not accept them cannot rely on the fact that the seller was about to tender goods that did not conform with the contract description; at that point, the seller was not in breach, and even if the wrong goods had been tendered, the sellers might have been able to make a proper tender at a later date.¹⁹¹

4.44  There are, however, three cases which cause difficulties in this connection. The first is the notoriously difficult case of Braithwaite v Foreign Hardwood Co.¹⁹² This involved a contract for the sale of rosewood for shipment in instalments to Hull, cash payable against bill of lading. While the first consignment was still en route, the buyers repudiated the entire contract on a ground that was later found to be baseless. The sellers then contacted the buyers and indicated that the bill of lading was ready to be handed over,¹⁹³ but the buyers said they would not accept it; the sellers then sold the goods elsewhere and claimed damages for non-acceptance. At this point it was discovered that the consignment in question did not fit the contract description, and the buyers argued that this provided them with a good defence. The Court of Appeal, however, found for the sellers, Collins MR saying that it was not open to the buyers, having wrongfully repudiated the contract, to ‘hark back’ and say that the sellers were not ready and willing to perform.¹⁹⁴ At first sight this seems to be contrary to the principle discussed earlier, whereby a party who repudiates can rely on any good excuse that existed at the time of the repudiation;¹⁹⁵ if the plaintiffs in Boston Deep Sea Fishing & Ice Co v Ansell ¹⁹⁶ were (p. 107) allowed to ‘hark back’, why were the buyers in the Braithwaite case not equally entitled to ‘hark back’? The facts of the case are not entirely clear, and it has been subject to adverse criticism,¹⁹⁷ but perhaps the best explanation is that the excuse relied on by the buyers did not exist at the time of the repudiation; though non-conforming goods had been shipped, they had not yet been tendered, and there was nothing to stop the sellers coming up, when the time came for delivery, with goods that were in conformity with the contract.¹⁹⁸ On that basis the Braithwaite decision is more or less on all fours with British and Beningtons Ltd v North Western Cachar Tea Co Ltd,¹⁹⁹ and has therefore been described by Carter as, from that perspective at least, an orthodox decision on the effects of termination.²⁰⁰ To adapt the words of Collins MR, the repudiating party is entitled to ‘hark back’ to an excuse that existed at the time of the repudiation, but cannot ‘hark forward’ to something that might have transpired later if the repudiation had not taken place or had not been accepted.

4.45  The second case is Universal Cargo Carriers Corporation v Citati,²⁰¹ which involved the termination of a charterparty by the shipowners on the basis that the charterers had failed to provide a cargo and were unlikely to do so within a reasonable interval. It was held there by Devlin J that the test to be applied was whether the charterers were in a position to furnish a cargo within such a time as would not frustrate the venture; if the owners could show that the charterers were ‘wholly and finally disabled’ from doing this at the relevant time, then they were entitled to cancel the charter. It has been argued²⁰² that this goes contrary to the principle in British and Beningtons Ltd v North Western Cachar Tea Co Ltd,²⁰³ whereby a party who terminates can rely on an excuse existing at the time of the termination, but not on later events. However, the difference is more apparent than real. In so far as the British and Beningtons case suggests that a party who repudiates cannot justify his or her action by reference to future events, that case is certainly inconsistent with Universal Cargo Carriers Corporation v Citati, but it does not say this; what it says is that the innocent party can accept a repudiation without positively having to show readiness and willingness to perform his or her own obligations under the contract.²⁰⁴ It does not suggest that the repudiating party cannot excuse his or her actions by showing unwillingness or total disablement;²⁰⁵ on the contrary, (p. 108) this would itself amount to an anticipatory breach by the other party,²⁰⁶ so bringing the situation within the basic rule whereby the repudiating party can rely on any excuses existing at the time of the repudiation.

4.46  The third of these tricky cases is Panchaud Frères SA v Etablissement General Grain Co,²⁰⁷ decided by the Court of Appeal in 1970. This involved a contract for the sale of maize at a price of ‘$65 per 1000 kilos gross for net delivered weight, c.i.f. Antwerp’. The buyers duly made payment against the shipping documents without complaint, but then rejected the goods on arrival on the grounds that they did not comply with the description given in the bill of lading. The dispute having gone to arbitration, an umpire upheld the buyers’ claim to reject on this basis, but on appeal the ground was abandoned on advice that it did not allow the goods to be rejected vis-à-vis the sellers. However, it was then discovered that the date on the bill of lading was false, and that the goods had not been shipped within the contract period. The buyer now sought to raise this as a ground for rejection, despite the fact that it was now over three years since the goods had been shipped. The sellers, however, claimed that by paying against the shipping documents without complaint the buyers had waived the right to rely on the point, and an arbitration appeal committee found for the sellers on this basis.²⁰⁸ The decision was reversed by Roskill J (as he then was), but an appeal by the sellers was allowed by the Court of Appeal, albeit on uncertain grounds. According to Denning MR, this was not a case of waiver strictly speaking, but rather of ‘estoppel by conduct’,²⁰⁹ the principle being that ‘if a man, who is entitled to reject goods on a certain ground, so conducts himself as to lead the other to believe that he is not relying on that ground, then he cannot afterwards set it up as a ground of rejection, when it would be unfair or unjust to allow him to do so’.²¹⁰ Winn LJ agreed that this was not waiver in the legal sense, preferring to rely on what he called ‘a criterion of what is fair conduct between the parties. . . an inchoate doctrine stemming from the manifest convenience of consistency in pragmatic affairs, negativing any liberty to blow hot and cold in commercial conduct’.²¹¹ For his part, Cross LJ stressed the fact that though the buyers were unaware of the discrepancy at the relevant time, it could have been discovered fairly easily.²¹² But none of the four grounds given for the decision stands up to scrutiny. It does not look like waiver, as the buyers had no actual knowledge of the breach at the time of payment.²¹³ It does not look like estoppel, as it is hard to see either an unequivocal (p. 109) representation by the buyers that they would not rely on their rights or any conduct by the sellers undertaken in reliance on that representation.²¹⁴ The principle of ‘fair conduct’ set out by Winn LJ is too vague to be of any practical use,²¹⁵ and the approach of Cross LJ comes very near to a doctrine of constructive notice, something which is said to have no application in commercial affairs.²¹⁶ The case has subsequently been explained on a number of grounds,²¹⁷ but the orthodox view seems to be that it lays down no distinct principles of law,²¹⁸ and perhaps it is best regarded as a decision based very much on its own particular facts.

4.47  The common law right to terminate may be restricted in some cases; in particular, it may be subject to restrictions in the contract and to statutory restrictions.

4.48  Contractual restrictions on termination can be total or partial. In the first case, the right of the innocent party to terminate is excluded altogether, and he or she is restricted to other remedies, most notably damages.²¹⁹ In the second case the right is cut down in some way, for instance by making it subject to certain conditions, such as the duty to warn the party in default,²²⁰ or setting a time limit for its exercise. In either case regard must be had to the general principles of the law regarding exemption clauses; such clauses must be properly incorporated into the contract, they must on their proper construction cover the events that have occurred, and they must not fall foul of statutory restrictions. The principles of incorporation have already been discussed,²²¹ and there (p. 110) is no need to refer to them in the present context, but the other two requirements raise particular issues in relation to termination which need to be considered further.

4.49  As has been seen, an exemption clause must, as a matter of construction, have the effect contended for by the party relying on it,²²² and some of the cases on this rule have particular relevance in the context of termination. Thus, for instance, it has been held that a clause saying that no ‘warranty’ is given will not be effective to exclude the remedies for breach of condition;²²³ and that a clause excluding the right to damages will not exclude the right to terminate,²²⁴ or vice versa.²²⁵ In the past the courts have sometimes applied this rule in an exceedingly pedantic manner, so as to avoid the application of terms that they considered unfair or harsh. However, the attitude of courts has now been altered to some extent by two factors, one being the existence of statutory protection, and the other being the broader canons of construction operated by the courts since Investors Compensation Ltd v West Bromwich Building Society.²²⁶ In this context, it has been said that the courts will be less inclined to place a strained construction on words which are clear and fairly susceptible of only one meaning.²²⁷

4.50  Some reference should perhaps also be made here to the so-called doctrine of ‘fundamental breach’, not least because the present work makes use of that very useful concept.²²⁸ The definition of ‘fundamental breach’ adopted by the present work is that given by Lord Upjohn in Suisse Atlantique Société d’Armement Maritime v Rotterdamsche Kolen Centrale,²²⁹ namely a breach which goes to the root of the contract and entitles the other party to treat such breach or breaches as a repudiation.²³⁰ However, the term was also used in the past in a different connection, namely as a principle derived from cases involving maritime deviation²³¹ that a party could not rely on an exemption clause in the contract when he or she had substantially failed to perform that contract.²³² At one level this was simply a rule of construction whereby it was presumed that the parties (p. 111) could not have intended an exemption clause to provide protection in such circumstances,²³³ and to that extent the principle is an uncontroversial one. However, there was also authority for regarding it as a rule of law,²³⁴ the reasoning being that since a fundamental breach brought the contract to an end, exemption clauses in the contract could no longer apply.²³⁵ There was always an element of circularity to this reasoning,²³⁶ and it did not tally with the way termination works,²³⁷ but for all its shortcomings the doctrine did admittedly serve to prevent parties exploiting a stronger bargaining position by the imposition of oppressive clauses of this nature.²³⁸ However, following the advent of the Unfair Contract Terms Act 1977 the doctrine had served its purpose, and shortly afterwards it was given its quietus by the House of Lords.²³⁹ Except perhaps in the very specialized context of deviation,²⁴⁰ the doctrine (if indeed it still exists at all)²⁴¹ is one of construction only, and the term ‘fundamental breach’ is now free to be applied in a more suitable way.

4.51  As has been seen,²⁴² the Unfair Contract Terms Act 1977 restricts the use of exemption clauses either by preventing a party from relying on them at all, or by allowing such reliance only in so far as the term in question satisfies the test of reasonableness.²⁴³ Once again a number of provisions are of particular relevance to termination.

4.52  The first is section 3 of the 1977 Act, which applies in cases where one party deals on the other’s written standard terms of business.²⁴⁴ In such cases the other party is prevented (p. 112) from doing three things by reference to any contract term except in so far as the term satisfies the test of reasonableness.²⁴⁵ These are as follows: (1) exclude or restrict his or her liability for breach of contract,²⁴⁶ or (2) claim to be entitled to render a contractual performance ‘substantially different from that which was reasonably expected of him’,²⁴⁷ or (3) claim to be entitled in respect of the whole or part of his or her contractual obligation to render no performance at all.²⁴⁸ The first of these is clearly relevant to termination; a clause which restricts the right of the innocent party to terminate where otherwise he or she would have been fully entitled to do so is clearly covered by the section,²⁴⁹ as is one which makes the exercise of that right subject to restrictive or onerous conditions.²⁵⁰ The third may also be relevant to termination, but in a different context, namely where the clause in question grants the innocent party an unreasonably wide right of termination; this will be discussed later.²⁵¹

4.53  The next is section 6 of the Unfair Contract Terms Act 1977, which deals with liability for breach of the implied terms as to title, description, quality, and fitness for purpose in sections 12 to 15 of the Sale of Goods Act 1979.²⁵² Section 6(1) says that the implied term as to title cannot be excluded or restricted by reference to any contract term. Section 6(3) goes on to say that the other implied terms can only be excluded or restricted in so far as the term satisfies the test of reasonableness. Since these implied terms are all conditions, giving the buyer the right to terminate for breach,²⁵³ section 6 applies not only to attempts to exclude liability altogether, but also to situations where the seller seeks to restrict the buyer’s rights in this regard.

4.54  Mention may also be made of Part 2 of the Consumer Rights Act 2015,²⁵⁴ which applies in relation to unfair terms in contracts concluded between a trader and a consumer.²⁵⁵ A term which has not been individually negotiated will be regarded as unfair if, contrary to the requirement of good faith, it causes a significant imbalance in the parties’ rights and obligations arising under the contract, to the detriment of the consumer.²⁵⁶ Schedule 2 of the Act gives examples of terms which may be regarded as unfair;²⁵⁷ in (p. 113) particular, a term ‘inappropriately excluding or limiting the legal rights of the consumer vis-à-vis the seller or supplier or another party in the event of total or partial non-performance or inadequate performance by the seller or supplier of any of the contractual obligations’; this would clearly cover a provision excluding or restricting the consumer’s right to terminate,²⁵⁸ which would therefore not be binding on the consumer,²⁵⁹ though the contract itself might continue to bind the parties if it was capable of continuing in existence without the unfair term.²⁶⁰

4.55  The right to terminate may also be restricted by statute. One common way in which this is done is to provide that the right cannot be exercised without giving the party in default due warning of the breach and allowing him or her a reasonable opportunity to put matters right; thus, for instance, section 146(1) of the Law of Property Act 1925 provides that a lease cannot be forfeited for a breach of covenant without first serving a notice on the tenant specifying the breach,²⁶¹ and requiring him or her to remedy it (if it is capable of remedy)²⁶² or pay compensation (if it is not);²⁶³ only if such remedy or compensation is not forthcoming within a reasonable period may the lessor forfeit the lease. In the same way, section 87 of the Consumer Credit Act 1974 requires a creditor to serve a ‘default notice’ before terminating a regulated agreement as defined by the Act; such a notice must specify: (a) the nature of the alleged breach; (b) if the breach is capable of remedy, what action is required to remedy it, and the date before which that action is to be taken; and (c) if the breach is not capable of remedy, the sum (if any) required to be paid as compensation for the breach, and the date before which it is to be paid.²⁶⁴ These and other provisions are designed to protect the party in default by ensuring that termination does not take place unless he or she is clearly unable or unwilling to perform the contract according to its terms.²⁶⁵

4.56  There are also provisions in place to prevent a party relying on unduly harsh termination provisions in situations where the parties are not on equal terms. In the context of employment, the whole law of unfair dismissal may be seen as an example of this,²⁶⁶ as (p. 114) may the law protecting residential tenants from summary eviction.²⁶⁷ Again, one type of term which may fall foul of the Consumer Rights Act 2015 is one ‘enabling the seller or supplier to terminate a contract of indeterminate duration without reasonable notice except where there are serious grounds for doing so’;²⁶⁸ if found to be unfair within the meaning of the Act,²⁶⁹ such terms will not be binding on the consumer.²⁷⁰ Section 3(2)(b)(ii) of the Unfair Contract Terms Act 1977 may also be of relevance here; this provides that where a party deals on the other’s written standard terms of business, the other party cannot by reference to any term in the contract claim to be entitled to render no performance at all, except in so far as the term in question satisfies the test of reasonableness.²⁷¹ This could on the face of it apply to termination clauses, the whole point of which is to release the innocent party from the duty to perform his or her primary obligations under the contract.²⁷² It has, however, been argued that the provision in question was never intended to apply to clauses of this sort,²⁷³ since in such cases the innocent party is claiming to be entitled to refuse performance not by reference to a contract term, but by reference to the other party’s default.²⁷⁴

4.57  Section 15A of the Sale of Goods Act 1979 also merits mention in this regard.²⁷⁵ This deals with the right to reject goods for breach of the implied conditions as to description, quality, and fitness for purpose under sections 13, 14, and 15 of the Act. The basic rule is that if one of these conditions is broken in any way, be it never so trivial, the buyer can reject,²⁷⁶ but this rule was seen as unduly harsh by the Law Commission,²⁷⁷ which recommended that it be modified except in the consumer context. This was duly implemented by the Sale and Supply of Goods Act 1994, which inserted the new section 15A into the main Act. The effect of this section is to prevent a buyer who is not dealing as consumer from rejecting goods for breach of one of the conditions mentioned in cases where the breach is ‘so slight that it would be unreasonable of him to reject them’;²⁷⁸ instead, the buyer is restricted to his or her remedy in damages. Section 15A does not apply if a contrary intention appears in or can be implied from the contract,²⁷⁹ but it nevertheless represents a significant departure from the traditional doctrine regarding conditions, the whole point of which is to give the innocent party the right to terminate irrespective of the seriousness of the breach in question.²⁸⁰

4.58  Even where a right of termination has arisen, it may subsequently be lost. In particular, the innocent party may lose the right as a result of waiver, or by virtue of the doctrine of ‘acceptance’ under the Sale of Goods Act 1979. In addition to this, the party in default may sometimes be able to avail of equitable relief.

4.59  The word ‘waiver’ is used here not in its technical legal sense—if indeed such a technical sense exists²⁸¹—but simply to denote the situation where the innocent party, despite having the right to terminate, relinquishes that right. That the innocent party may lose his or her right to terminate on this basis is not open to doubt, but the basis on which the right is lost is less certain. However, there seem to be two separate doctrines at work here, one being waiver by election and the other equitable or promissory estoppel.

4.60  As Lord Goff pointed out in The Kanchenjunga,²⁸² the term ‘waiver’ can be used in a number of different ways,²⁸³ but the most significant one in the present context is what he describes as ‘waiver in the sense of abandonment of a right which arises by virtue of a party making an election’.²⁸⁴ What is at issue here is the election of the innocent party whether to terminate or affirm, and in this sense, Carter is right in saying that waiver does not exist as a separate doctrine in this context;²⁸⁵ it is merely an application of the general rules regarding election. Termination for breach of contract does not occur automatically; the innocent party has a choice whether to terminate or to affirm, and in some cases the conduct of the innocent party will be consistent only with the latter option. In the passage which follows the requirements of waiver in this sense will be considered, before going on to look at its effect.

4.61  (i) Requirements According to Eder J in The Mahakam, waiver in the present context involves ‘the unequivocal affirmation of the continuation of a contract with knowledge of a breach justifying termination of the contract’.²⁸⁶ This gives us two basic (p. 116) requirements: (1) knowledge by the innocent party; and (2) clear and unequivocal words or conduct on his or her part evincing an intention inconsistent with termination. According to Lord Goff in The Kanchenjunga, ‘it is a prerequisite of election that the party making the election must be aware of the facts which have given rise to the existence of his new right’.²⁸⁷ This means that the innocent party cannot be held to have affirmed without proof that he or she was at least aware of the relevant breach.²⁸⁸ What about a party who knew of the relevant facts, but was unaware of their significance? According to the Court of Appeal in Peyman v Lanjani,²⁸⁹ this is not enough; the innocent party must not only be aware of the facts, but of the legal right to which they give rise. This was a case where an Iranian who spoke no English agreed to purchase leasehold premises for use as a restaurant. The vendor’s title was defective, a previous assignment of the lease to the vendor having been obtained by fraud. The purchaser subsequently became aware of the fraud, but acting on the advice of his solicitor (who was also acting for the vendors in the transaction) he went ahead with the purchase and went into possession. However, having later changed his solicitor he subsequently purported to terminate the contract. The vendors argued that he had lost the right to do so by having gone into possession with knowledge of what had taken place, but the Court of Appeal held that this was not enough in the absence of proof that the purchaser was aware of his right to terminate at the relevant time. Whilst one can understand why the court were anxious to protect the purchaser in this situation, the case has been heavily criticized by Carter;²⁹⁰ in particular, it creates an inconsistency between the requirements for termination and those for affirmation,²⁹¹ and between cases where the right to terminate was expressly conferred by the contract and those where it arose by operation of law.²⁹²

4.62  It is said that for the innocent party to lose the right of termination in this sort of case his or her decision to affirm must be ‘clear and unequivocal’.²⁹³ In some situations the (p. 117) innocent party may indicate in so many words that the contract is being affirmed; in others his or her conduct will be consistent only with affirmation, as where he or she requests a decree of specific performance,²⁹⁴ or demands that the other party perform obligations arising after the right to terminate comes into existence.²⁹⁵ In other cases, however, the conduct of the innocent party may be equally consistent with termination, as when, for instance, he or she demands that the party in default perform obligations that had already become due at the relevant time, such as arrears of rent or other sums.²⁹⁶ Does the innocent party lose the right to terminate by pressing for performance? Merely protesting about the breach, or even demanding that it be remedied, will not necessarily amount to an unequivocal election to affirm;²⁹⁷ after all, the innocent party is not bound to terminate at once, and does at least have a reasonable interval in which to make his or her mind up about what to do.²⁹⁸ On the other hand, it will be different if the demand for performance is in such terms as to make it clear that the innocent party has decided to go ahead with the contract; in particular, this will apply where time was of the essence of the contract but the innocent party continues to demand performance after the deadline has passed.²⁹⁹ What if the innocent party does nothing to give any indication one way or the other? As a general rule, a right to terminate will not be lost by mere delay,³⁰⁰ but in many cases the inactivity of the innocent party in the face of the breach will not be consistent with this option having been taken.³⁰¹ Since, ultimately, the question whether the innocent party has decided to terminate or affirm is said to be one of fact,³⁰² it is impossible to lay down any hard or fast rules that will apply to every possible situation.

(p. 118) 4.63  (ii) Effect The effect of waiver in this kind of case is that the right to terminate is lost and cannot be revived without the party in default being given another chance to perform. In Charles Rickards Ltd v Oppenhaim,³⁰³ the plaintiff car dealer agreed to deliver a Rolls-Royce chassis to the defendant customer by a certain date in March 1948. The car was not delivered on time, but the customer continued to press for delivery. At the end of June the defendant told the plaintiffs that if the car was not delivered in four weeks he would not accept it. In fact it was not ready until October, by which time the defendant had had enough, and refused to take it. The Court of Appeal held that the defendant was entitled to reject the car. Time was originally of the essence, and the defendant could have terminated at once for failure to deliver on the agreed date. This right had been lost by waiver, and could not be revived without giving the plaintiffs another chance to perform. However, when they still failed to deliver, the defendant was entitled to serve a notice making time of the essence once more;³⁰⁴ when this fresh deadline was still not met, the contract could then be terminated.

4.64  What if the innocent party goes ahead with the contract without being aware of the right to terminate? Here there can be no question of waiver by election or affirmation. However, the party in default may still be entitled to prevent termination on the grounds of promissory estoppel, or equitable estoppel as it is sometimes called.

4.65  (i) Requirements Equitable estoppel was defined by Lord Goff in The Kanchenjunga as follows:³⁰⁵

Equitable estoppel occurs where a person, having legal rights against another, unequivocally represents (by words or conduct) that he does not intend to enforce those legal rights; if in such circumstances the other party acts, or desists from acting, in reliance upon that representation, with the effect that it would be inequitable for the representor to enforce his legal rights inconsistently with his representation, he will to that extent be precluded from doing so.

Applied to the present context, what this means is a situation where a party who has the legal right to terminate unequivocally represents that he or she does not intend to do so, and the other party acts or desists from acting in reliance on that representation. The (p. 119) three crucial requirements here are as follows: (1) there must be a clear and unequivocal representation by the innocent party inconsistent with the election to terminate; (2) the party in default must have acted (or refrained from acting) in reasonable reliance on that representation; and (3) it must be shown that it would be unconscionable in the circumstances for the innocent party to go ahead and terminate none the less.³⁰⁶

4.66  The essence of equitable estoppel is a promise or representation that the contract will not be enforced according to its terms. In some cases the representation will be made expressly, but in others it will be implied from the conduct of the party in question. In Hughes v Metropolitan Railway³⁰⁷ a lease contained a provision for forfeiture if repairs were not done. The landlords served a notice requiring such repairs to be done within six months, but then entered into negotiations with the tenant for the purchase of the lease. When negotiations broke down, the landlords then sought to forfeit the lease on the ground that the six-month period had now elapsed without the repairs being done, but the claim was rejected by the House of Lords on the ground that the tenants had been led to suppose that the landlords did not intend to enforce their rights, and that it would now be inequitable for the landlords to do so having regard to the dealings that had taken place.³⁰⁸ This was clearly not a case of waiver by election, as the relevant conduct on the part of the landlords took place before any right to terminate arose; even so, the fact that the tenants had been lulled into a false sense of security by the landlords’ conduct was enough to debar the landlords from forfeiting the lease. However, the facts must point to a promise or representation of some sort. In The Scaptrade³⁰⁹ the fact that shipowners had acquiesced in the late payment of hire on past occasions was held not to debar them from withdrawing the ship on that ground, since they had never expressly or impliedly represented that they would not insist on punctual payment. Again, this could never have been a case of waiver by election, as the conduct of the shipowners preceded the accrual of their right of termination, but if the necessary promise or representation could have been implied, then that right of termination would have been lost.

4.67  As in the case of waiver, the promise or representation has to be clear and unequivocal.³¹⁰ One of the purposes of this requirement is said to be to prevent a party from losing his or her legal rights under a contract merely by failure to insist on strict performance of the contract at all times, or by granting some other indulgence. Thus in The Scaptrade ³¹¹ it was held by Lloyd J at first instance that the mere fact that the shipowners had accepted late payments of hire in the past did not imply any representation (p. 120) to the charterers that they did not intend to enforce the contract according to its terms. But in The Petrofina³¹² it was held that shipowners who had allowed the charterers to pay the monthly instalments of hire by cheque rather than by cash in advance as stipulated by the contract could not withdraw the ship on this ground without giving the charterers proper notice that they intended to insist on their strict contractual rights from now on; in effect, the accepted method of payment under the charterparty had been modified.

4.68  The key element of equitable estoppel, and the one which distinguishes it from waiver by election, is the requirement of reliance; the representation or promise must, in the words of Denning J, have been ‘acted on’.³¹³ In Hughes v Metropolitan Railway³¹⁴ this requirement was satisfied when the tenants allowed the deadline for the repairs to pass while they negotiated with the landlords for the sale of the lease, and in The Petrofina³¹⁵ the crucial point was that the charterers had paid by cheque rather than paying cash in advance. Where no such reliance can be shown, the doctrine of equitable estoppel will not operate. In Avimex SA v Dewulf & Cie ³¹⁶ a buyer of goods was held not to have waived his rights by acceptance of a defective force majeure notice in the absence of any indication that the seller had acted on the faith of this acceptance, say by appropriating goods to the contract. In the same way, the charterers in The Scaptrade ³¹⁷ were held not to have demonstrated any degree of reliance in failing to pay instalments of hire on time, despite the fact that this was done without any objection from the owner. No doubt they would have paid promptly if they had been warned that the owners were about to withdraw the vessel, but this was not enough.³¹⁸

4.69  Some of the cases seem to suggest that mere reliance will not be enough unless it is accompanied by some degree of ‘detriment’. In The Post Chaser ³¹⁹ the sellers under a cif contract failed to declare a vessel on time as required by the contract. The buyers did not raise any objection, and later requested the sellers to present the shipping documents. It was held that though the buyers’ request for the documents could be construed as an unequivocal declaration that they did not intend to rely on their rights,³²⁰ the sellers had not shown the necessary reliance. They may have ‘relied’ on the buyers’ request to the extent that they had conducted their affairs in accordance with it, but they had suffered no detriment by doing so and it was therefore not inequitable for the buyers to resile from their promise.³²¹ The requirement of detriment has been stated in (p. 121) other cases as well,³²² but it was denied by Lord Denning MR,³²³ and is said to be based on a misleading analogy.³²⁴ The point is not of great importance in the end. In cases where no detriment has been suffered by the party concerned, it will generally not be inequitable for the other to go back on the promise or representation in question; and if it would be so inequitable, the courts are not likely to hold the doctrine inapplicable for lack of detriment.

4.70  (ii) Effect The doctrine of equitable estoppel creates no new causes of action where none existed before;³²⁵ in that sense, it is said to be a shield and not a sword.³²⁶ Rather, the effect is, in the words of Lord Cairns, that a person who otherwise might have enforced his or her rights will not be allowed to enforce them where it would be inequitable having regard to the dealings which have thus taken place between the parties.³²⁷ This gives rise to two further issues: when is it inequitable to allow someone to enforce his or her rights in this situation, and to what extent can the party concerned resume these rights for the future?

4.71  Normally it would be inequitable to allow someone to go back on a promise or representation he or she has made, especially where that promise or representation has been acted on by someone else.³²⁸ However, there are cases where this will not apply. In Williams v Stern³²⁹ the plaintiff gave the defendant a bill of sale as security for a loan, under which certain furniture could be seized if the loan was not paid on time. The plaintiff asked for extra time to pay, and the defendant agreed to this, but then, hearing that the plaintiff’s landlord intended to distrain on the property, he went ahead and seized the furniture. It was held that in the circumstances it was not inequitable for the defendant to act as he did. In the present context it is also relevant to ask to what extent the party in default has changed position in reliance on the innocent party’s undertaking not to enforce his or her contractual right to terminate. Where the party in default has incurred some degree of detriment it will generally not be equitable to allow the innocent party to resile from that undertaking, but this may not be so where the party in default has not been prejudiced in any way by relying on it. This is what happened in The Post Chaser,³³⁰ where the buyers under a cif contract called on the sellers to present the shipping documents despite the fact that the vessel had not been nominated in time as required by the contract. Shortly afterwards the contract was terminated by the buyers on (p. 122) the ground of the delay, but it was held that though the buyers’ request may have led the sellers to believe that the buyers had decided to overlook the late nomination, they had not been prejudiced as a result.³³¹

4.72  In a case of equitable estoppel, the party who makes the representation can generally resume his or her position by giving due notice to the other party.³³² This means that in the present context the innocent party can indicate that though a blind eye may have been turned to such breaches in the past, from now on he or she is going to insist on the contract being performed according to its terms, with a consequent right of termination if this is not done. However, in cases where it is impossible or impracticable to restore the representee to his or her original position, the doctrine may serve to extinguish the representor’s rights altogether.³³³ The reason for the general rule is said to be the discretionary nature of the equitable jurisdiction; the court is allowed to give such relief as is just and equitable in all the circumstances, and in most cases of this sort it would be neither just nor equitable to treat the representor’s rights as being totally extinguished.³³⁴

4.73  There is clearly a considerable overlap between waiver by election and equitable estoppel, and both doctrines share characteristics in common, most notably the requirement of clear and unequivocal words or conduct by the innocent party. However, as Lord Goff indicated in The Kanchenjunga, there are important differences as well.³³⁵ In particular:³³⁶

• •  Waiver by election focuses on the conduct of the innocent party, who is not allowed to blow hot and cold, but must make up his or her mind as to which of two inconsistent rights to pursue. But equitable estoppel focuses on the conduct of the party in default.

• •  Waiver by election does not require proof of reliance by the party in default. But such reliance is of the very essence of equitable estoppel.

• •  Waiver by election requires knowledge of the right to terminate, or at the very least of the facts giving rise to that right. But there is no such requirement for equitable estoppel.

• (p. 123) •  Waiver by election focuses on a decision by the innocent party as to what he or she is doing now. But equitable estoppel focuses on a decision as to what he or she will do in the future.

• •  Waiver by election is final in its effects. But equitable estoppel is generally only suspensory in its effects.

4.74  Given that many cases of termination involve contracts for the sale of goods, mention must also be made in this context of loss of the right to terminate through ‘acceptance’. This is covered by section 11(4) of the Sale of Goods Act 1979, which uses the following words:

Subject to section 35A below, where a contract of sale is not severable, and the buyer has accepted the goods, or part of them, the breach of a condition to be fulfilled by the seller can only be treated as a breach of warranty, and not as a ground for rejecting the goods and treating the contract as repudiated, unless there is an express or implied term of the contract to that effect.

What this does in effect is to provide, subject to provision in the contract to the contrary, an extra³³⁷ way in which the right to terminate can be lost in contracts for the sale of goods. We shall now consider what amounts to acceptance,³³⁸ before looking at how acceptance differs from the common law doctrines of waiver and equitable estoppel.

4.75  Section 35 of the Sale of Goods Act 1979 gives three situations in which goods are deemed to have been ‘accepted’, namely: (1) where the buyer ‘intimates’ to the seller that he or she has accepted them;³³⁹ (2) by an act inconsistent with the seller’s ownership;³⁴⁰ and (3) where after the lapse of a reasonable time the buyer retains the goods without indicating to the seller that he or she has rejected them.³⁴¹

4.76  (i) Express intimation Under section 35(1)(a) of the 1979 Act, a buyer is deemed to have accepted the goods ‘when he intimates to the seller that he has accepted them’.³⁴² The most obvious way in which this can be done is by express indication to that effect, such as the signing of a delivery note,³⁴³ but it has been said that intimation can also be implied from conduct.³⁴⁴ However, in either case the words or conduct of the (p. 124) buyer must be unambiguous in this regard; merely complaining about the defects and demanding that the seller do something about them is not enough.³⁴⁵ Problems may also arise where the buyer has had no chance to look at the goods and where the ‘intimation’ in question is buried in the small print of a standard form contract.³⁴⁶ For this reason, section 35(2) goes on to say that this will not apply unless either the buyer has examined the goods or at least had a reasonable opportunity to examine them in order to discover whether they are in conformity with the contract. This provision can be excluded by contrary agreement, but not as against a buyer who is dealing as consumer.³⁴⁷ As well as this, buyers may be protected against unfair ‘acceptance’ clauses by the Unfair Contract Terms Act 1977³⁴⁸ and the Consumer Rights Act 2015.³⁴⁹

4.77  (ii) Act inconsistent with seller’s ownership Section 35(1)(b) of the 1979 Act indicates that a buyer will be deemed to have accepted the goods ‘when the goods have been delivered to him and he does any act in relation to them which is inconsistent with the ownership of the seller’.³⁵⁰ The most obvious example of this used to be where the buyer had sold the goods on to a third party (so indicating that he or she, and not the seller, was now the owner),³⁵¹ but section 35(6)(b) now provides that the buyer is not deemed to have accepted the goods merely because the goods are delivered to another under a subsale or other disposition. However, this will not protect the buyer in relation to acts which do not involve delivering the goods to another at all, as where the buyer destroys them or throws them in the sea. A buyer may also fall foul of section 35(1)(b) by making use of the goods for his or her own purposes in such a way that it is no longer possible to return them to the seller, as where perishable goods are consumed,³⁵² or raw materials are incorporated into a house or other structure.³⁵³ However, section 35(1)(b) is subject to the same limitation as section 35(1)(a), namely that it does not apply unless the buyer has examined the goods or at least had a reasonable opportunity of examining them,³⁵⁴ and making use of the goods may be the only way in which this can be done.

4.78  (iii) Retention of goods for more than a reasonable time The third situation where acceptance by the buyer is deemed to have taken place is ‘where after the lapse of a reasonable time he retains the goods without intimating to the seller that he has rejected them’.³⁵⁵ The question of whether a reasonable time has elapsed in this context (p. 125) is one of fact³⁵⁶ depending on the circumstances of the case, in particular the extent to which the buyer had a reasonable opportunity to examine the goods to see whether they are in conformity with the contract.³⁵⁷ Thus, for instance, the time for acceptance may be relatively short in relation to perishable goods, or where the defects were fairly obvious. On the other hand, in relation to complex items such as a car or other piece of machinery a longer period may be appropriate. A buyer is not deemed to have accepted the goods merely because he or she asks for or agrees to their repair by or under arrangements with the seller,³⁵⁸ but in a case where this allows the seller to tender goods that are fully in conformity with the contract, the right to reject would generally be lost.³⁵⁹

4.79  At first sight there is some similarity between these rules and the general common law rules relating to waiver by election and equitable estoppel; in particular, the requirement that acceptance by intimation be unambiguous, and the rules relating to lapse of time. Acceptance, unlike waiver by election, does not require proof that the buyer was aware of the defect at the relevant time, and in that sense is akin to equitable estoppel, but unlike estoppel it does not require any act of reliance by the buyer. The policy behind waiver by election focuses on the innocent party, who cannot be allowed to blow hot and cold, but must make his or her mind up as to which of two or more inconsistent remedies to pursue. The policy behind equitable estoppel focuses on the party in default, the rationale being to protect that party where he or she has acted in reliance on a promise or representation by the innocent party. The policy behind acceptance would appear to be neither of these, but rather the need for finality in commercial affairs; in the end, in the words of Rougier J, the seller must be allowed to ‘close his ledger’³⁶⁰ reasonably soon after the transaction is complete without the threat of rejection hanging, like the sword of Damocles, over his head for an indefinite period.

4.80  Another way in which the right to terminate may be lost is as a consequence of the court’s jurisdiction to grant relief in appropriate cases. This derives from a number of sources, but the main distinction that must be drawn in the present context is as between statutory relief and equitable relief against forfeiture.

4.81  There are various statutory provisions which have the effect of allowing the court to grant relief in circumstances where the normal rules of termination would produce unduly harsh consequences. For instance, there are various provisions allowing the courts to grant relief where a landlord seeks to forfeit the lease for breach of covenant; where the breach consists of non-payment of rent, there are various provisions the effect of which is to allow the court to grant relief to the tenant, if necessary subject to appropriate conditions including the payment of the outstanding arrears and costs,³⁶¹ while in other cases a more general jurisdiction is given by section 146(2) of the Law of Property Act 1925.³⁶² Again, in the context of consumer credit, the extent to which a creditor can reclaim the goods for arrears of instalments is restricted by statute,³⁶³ and the debtor threatened with termination may apply for what is known as a ‘time order’, giving in effect extra time to pay.³⁶⁴ A fuller explanation of these provisions can be found in the specialist works on the subject.³⁶⁵

4.82  There is also a long-standing equitable jurisdiction to grant relief in cases of this nature.³⁶⁶ Prior to 1973 this was thought to be restricted to two cases, one being where the right of forfeiture was inserted by way of security for payment of a specific sum of money, and the other where the breach in question was occasioned by ‘fraud, accident, mistake or surprise’.³⁶⁷ However, a more general principle was enunciated by the House of Lords in Shiloh Spinners Ltd v Harding.³⁶⁸ In the words of Lord Wilberforce:³⁶⁹

(p. 127) 4.83  Though the words of Lord Wilberforce were expressed in general terms,³⁷⁰ it is now clear that the jurisdiction is confined to situations where the contract is one involving the transfer of possessory or proprietary rights. Thus in The Scaptrade,³⁷¹ the House of Lords refused to allow relief against the withdrawal of a time chartered ship for late payment of hire; the charter was an ordinary time charter which gave the charterer no interest in or right of possession to the vessel, but was in essence no more than a contract for services.³⁷² As Robert Goff LJ pointed out in the Court of Appeal,³⁷³ such a charter was an ordinary commercial transaction carried out in the course of a trade between parties acting at arm’s length; the possibility of withdrawal under these circumstances was well known to parties in the shipping world, and if a prospective time charterer was not happy with such a clause it was perfectly possible to exclude it by agreement with the owner.

4.84  There is some uncertainty as to what kind of possessory or proprietary rights can be protected in this context. The doctrine is certainly not confined to cases involving the forfeiture of rights in land; thus, for instance, it has been held applicable to a charterparty by demise,³⁷⁴ to a chattel lease,³⁷⁵ to an agreement involving the transfer of patent rights,³⁷⁶ and to an appropriation of charged shares under a facility agreement following a specified event of default.³⁷⁷ A more controversial question is whether the doctrine can protect rights created by the very obligation that the innocent party is seeking to be discharged from by his or her election to terminate. In Re Dagenham (Thames) Dock Co, ex parte Hulse ³⁷⁸ a company agreed, in a contract signed in 1865, to purchase land for the construction of a dock, and was let into possession to undertake the works. The contract provided for the payment of the purchase price in two instalments, half in advance and the other half on completion. Time was stated to be of the (p. 128) essence, and the vendors were given the power in the event of default by the purchasers to re-enter and take possession of the land and of any works done thereon, and also to forfeit any instalments of the purchase price that may have been paid. The company failed to complete the works and was eventually wound up without the final instalment of the price ever having been paid. The purchasers then sought to exercise their power of re-entry and to forfeit the sums already paid, but this was disallowed by the court on the grounds that this would amount to the enforcement of a penalty. The case can easily be explained on the grounds of the well-established equitable jurisdiction to relieve against forfeiture of instalments,³⁷⁹ but it has also been seen as one involving relief against the forfeiture of the estate itself.³⁸⁰ But there is a certain circularity involved in this argument.³⁸¹ The only estate that the purchasers have in a case of this sort is the equitable interest arising out of the contract of sale. But this interest is founded on the willingness of the courts to grant specific performance of the vendor’s obligation to convey the land—the very obligation that is at issue when termination is sought.

4.85  A similar line of reasoning was used by the High Court of Australia in Legione v Hateley,³⁸² where a contract for the sale of land provided for completion on a certain day and made time of the essence. The purchasers were allowed into possession, and even erected a building on the land, but in the end were unable to pay the price on time. The vendor’s claim to terminate the contract and forfeit the deposit failed on the ground that this would involve an unjust forfeiture of the purchaser’s equitable interest in the land,³⁸³ but as was later pointed out this reasoning was ‘bedevilled by circularity’;³⁸⁴ if the vendor was entitled to terminate, the purchaser had no equitable interest to protect in the first place. Whilst there can be no quarrel with the court’s decision to grant relief in principle—after all, termination would have given the vendors an undue windfall by allowing them to claim ownership of the building that had been put up on the land by the purchasers—a better ground for such relief might have been the law of restitution for unjust enrichment.³⁸⁵

(p. 129) 4.86  Whatever might be said about the present status of Legione v Hateley, the proposition at stake there—namely that a court can prevent a purchaser of land from termination on the basis of relief against the forfeiture of his or her equitable interest in the land—now appears to be untenable in the light of the decision of the Privy Council in Union Eagle Ltd v Golden Achievement Ltd,³⁸⁶ where the court refused to give relief to a purchaser who had tendered the purchase money ten minutes late. The contract had provided that time should be of the essence, and in giving the judgment of the Board Lord Hoffmann stressed the need for commercial certainty even in the context of contracts for the sale of land.³⁸⁷ Turning to the reasoning in Legione v Hateley, Lord Hoffmann cast doubt on the proposition that the very fact of termination in a contract for the sale of land involved a forfeiture of the purchaser’s equitable interest in the land. In the words of Lord Hoffmann:³⁸⁸

Given that the reasoning in Legione v Hateley has now been doubted even in the jurisdiction in which it was formulated,³⁹⁰ the better view now seems to be that the equitable doctrine does not apply in such cases. As the present author has argued in another context, while equity may protect the party in default from being summarily deprived by termination of the contract of a proprietary interest he or she already has, it will not go so far as to insist on that party being allowed by virtue of the contract to acquire a proprietary interest that he or she does not yet have.³⁹¹ (p. 130)