LAWS6021 Principles of Contract

Seminar Guide, Week 12

Term 1, 2021-2022

Week 12
Discharge for Breach
Reading: FCLHK Chap 20, pp 1071-1113.
Core Reading:
Repudiation FCLHK § 4.1 (pp 1074-1081).
Anticipatory breach FCLHK § 4.2 (pp 1081-1084).
Election of non-breaching party FCLHK § 4.3 (pp 1084-1102).
Acceptance of repudiation FCLHK § 4.4 (pp 1102-1109).
Affirmation FCLHK § 4.5 (pp 1110-1113).
Core Cases:
• Creatiles Building Materials Ltd v To’s Universe Construction Co Ltd [2003] 2
HKLRD 309 (CA).
• Frost v Knight (1872) LR 7 Exch 111 (ExCh).
• Kensland Realty Ltd v Whale View Investment Ltd (2001) 4 HKCFAR 381, [2002] 1
HKLRD 87, [2002] 1 HKC 243 (CFA).
• Fuji Xerox (Hong Kong) Ltd v Vigers Hong Kong Ltd [2006] HKCU 1335 (CFI),
[2007] HKCU 564 (CA)).
• Chao Keh Lung v Don Xia [2004] 2 HKLRD 11, [2003] 4 HKC 660 (CA).
• Cheung Ching Ping Stephen v Allcom Ltd [2010] 2 HKLRD 324 (CA).

A contract is discharged once there remain no further obligations to be performed

under the agreement. Discharge for breach occurs when one party terminates (or
‘rescinds’) the contract in response to a breach of a contractual term by the other party
where the breach amounts to a repudiation of the agreement. A breach of a term occurs
‘when a party without lawful excuse fails or refuses to perform what is due from him
under the contract, or performs defectively or incapacitates himself from performing’
(Treitel). Rescission for repudiation terminates all future obligations under the
contract, but leaves intact obligations arising prior to rescission.

Repudiation

Breach of condition and serious breach of innominate term and warranty: A

repudiation has been said to occur when the breach ‘goes to the whole consideration of
that which was to be done’ (Duke of St Albans v Shore (1789) 126 ER 158 (CP)) or when
it evinces in the breaching party ‘an intention wholly to abandon the contract and set
the other party free’ (Freeth v Burr (1874) LR 9 CP 208 (CP)), or when it ‘goes to the
root of the contract, goes to the foundation of the whole’ (Decro-Wall International SA
v Practitioners in Marketing Ltd [1971] 2 All ER 216 (CA, Eng)), or when it amounts
to ‘a substantial failure of performance’ (Treitel). In parlance more consistent with the
modern classification of terms, a party repudiates a contract whenever he breaches, (i)
a condition, or (ii) an innominate term in such a way as to deprive the non-breaching
party of substantially the whole benefit of the contract (Hong Kong Fir Shipping Co
Ltd v Kawasaki Kisen Kaisha Ltd [1962] 2 QB 26 (CA, Eng)).

Even where timeliness is not essential to the obligation, a refusal or failure to make
timely instalments (of money, delivery, or other acts of performance) can amount to a
repudiation of the contract provided that it evinces ‘an intention not to be bound by
the contract’ (Creatiles Building Materials Ltd v To’s Universe Construction Co Ltd
[2003] 2 HKLRD 309 (CA)), or to put it another way, evinces ‘an intention wholly to
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abandon the contract and set the other party free’ (Freeth v Burr (1874) LR 9 CP 208).
This can be established by considering two factors; (i) the ratio which the breach bears
to the contract as a whole, and (ii) the degree of probability that such a breach will be
repeated (Chinluck Properties Ltd v Casil Clearing Ltd [2004] HKCU 884 (CFI);
Maple Flock Co Ltd v Universal Furniture Products (Wembley) Ltd [1934] 1 KB 148
(CA, Eng)). Whether a party’s conduct constitutes a repudiation of the contract in this
way is an objective question to be determined by reference to that party’s conduct in
the context of the contract as a whole. Ultimately the question is whether the breaching
party’s conduct would convey to a reasonable person in the position of the other party
an intention not to comply, or an inability to comply, with the breaching party’s
obligations under the contract.

• Creatiles Building Materials Ltd v To’s Universe Construction Co Ltd [2003]

2 HKLRD 309 (CA).

Misinterpretation of contract: Not every incorrect assertion of a contractual right will

constitute a repudiation. If the unjustified demand (or unjustified refusal of a demand)
is based on a genuinely and reasonably-held view as to the effect of the contract, it is
unlikely that such an assertion or refusal will, by itself, constitute a repudiation of the
contract (Vaswani v Italian Motors (Sales & Services) Ltd [1996] 1 HKLR 8, [1996] 1
HKC 14, [1996] 1 WLR 270 (PC, HK)). Where, however, a party goes further than
merely advancing a bona fide misinterpretation and attempts to perform in accordance
with that misinterpretation, he may repudiate the agreement (Creatiles Building
Materials Ltd v To’s Universe Construction Co Ltd [2003] 2 HKLRD 309 (CA)).

Illegitimate commercial pressure: A repudiation may take the form of one party
exerting ‘illegitimate commercial pressure’ on the other in order to compel that other
party to comply with an obligation putatively required by the agreement (ATAL
Technologies Ltd v Stratech Systems Ltd [2012] 3 HKLRD 281 (CA)).

Rejected variation: Where the parties have reached a concluded agreement, a refusal
by one of them to sign or accept a contractual document which contains new or varied
terms will not amount to a repudiation of the agreement. Rather, the assertion that the
party refusing to sign or accept has repudiated the agreement will itself constitute a
repudiation (Mak Lai Man v Lam Siu Yui Peter [1993] 1 HKC 452 (HC)).

Anticipatory breach

Where a party, by word or conduct, indicates an unwillingness or inability to perform

or continue to perform his obligations under a contract, before the time arrives when
he is obliged to perform, he commits an anticipatory breach (Hochster v De la Tour
(1853) 118 ER 922 (QB)). Not every anticipatory breach will permit the non-breaching
party to terminate the contract. The non-breaching party will be entitled to terminate
only where the refusal to perform amounts to a repudiation of the contract (Afovos
Shipping Co SA v Pagnan (The Afovos) [1983] 1 All ER 449 (HL); A-Mayson
Development Co Ltd v Betterfit Ltd [1992] 2 HKC 533 (HC)).

Election of non-breaching party

Election: A repudiation gives the non-breaching party an election to either (1) accept
the repudiation, terminate the agreement and claim damages for loss of the bargain,
or (2) continue with the contract. The non-breaching party may therefore refuse to
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accept the repudiation, perform any outstanding obligations on his side of the
agreement, and then sue on the entire bargain when the time comes for the defaulting
party to perform. If the non-breaching party elects not to accept the repudiation, the
contract is kept alive for both parties.

• Frost v Knight (1872) LR 7 Exch 111 (ExCh).

The non-breaching party continues to be bound by his obligations under the contract
and runs the risk of himself engaging in conduct that amounts to a repudiation, which
may be accepted by the other party (Fercometal SARL v Mediterranean Shipping Co
SA (The Simona) [1989] AC 788 (HL)). The non-breaching party also keeps open the
possibility that the contract may be frustrated (Avery v Bowden (1855) 119 ER 647
(QB)).

Prevention principle: There is a ‘fundamental legal and moral rule that a man should
not be allowed to take advantage of his own wrong’ (Hong Kong Fir Shipping Co Ltd v
Kawasaki Kisen Kaisha Ltd [1962] 2 QB 26 at 66, per Diplock LJ (CA, Eng)). As a
general rule, X is always free to terminate a contract by accepting Y’s repudiatory
breach. Where, however, Y is prevented from performing his contractual obligation
because of X’s own earlier breach of legal obligation or duty, the ‘prevention principle’
will operate to preclude X from treating Y’s breach as a repudiation of the contract. A
purported acceptance by X of such a breach may itself constitute a repudiation of the
contract by X, thereby entitling Y to terminate the contract and claim damages for loss
of the bargain.

• Kensland Realty Ltd v Whale View Investment Ltd (2001) 4 HKCFAR 381,
[2002] 1 HKLRD 87, [2002] 1 HKC 243 (CFA).

Requirement to accept repudiation: As a general rule, ‘there is no duty on an innocent

party to accept a repudiatory breach, either within a reasonable time or at all’
(Diamond Jubilee Investment Ltd v Chan Yiu Chung Sidney [2010] 1 HKLRD 638
(CA)). There is, however, a relatively narrow exception to the rule that the non-
breaching party may decline to accept the repudiation, perform his side of the bargain,
and sue for the entire bargain. Where the exception applies, the non-breaching party
will be required to accept the repudiation. The non-breaching party will retain his
choice between accepting the repudiation and permitting the contract to continue
where the repudiating party cannot prove either that (i) a refusal by the non-breaching
party to accept repudiation and claim damages was in all the circumstances
‘unreasonable’ or ‘wholly unreasonable’ because damages would be an adequate
remedy, or (ii) the non-breaching party’s essential obligations under the contract could
not be performed without the repudiating party’s co-operation or assent in, for
instance, a contract of employment or the grant of access to the repudiating party’s
property (White and Carter (Councils) Ltd v McGregor [1962] AC 413 (HL); Clea
Shipping Corp v Bulk Oil International Ltd (The Alaskan Trader) [1984] 1 All ER 129
(QB); London Borough of Hounslow v Twickenham Gardens Development Ltd [1971]
Ch 233 (Ch)).

• Fuji Xerox (Hong Kong) Ltd v Vigers Hong Kong Ltd [2006] HKCU 1335
(CFI), [2007] HKCU 564 (CA).

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Acceptance of repudiation

Necessity of acceptance: Conduct by a breaching party amounting to repudiation does

not automatically terminate the contract. A non-breaching party who wishes to accept
a repudiation must normally communicate his acceptance of the repudiation to the
breaching party, although no particular form or formula of words is required. It is
enough that a reasonable person would understand the communication as indicating
a clear and unequivocal acceptance of the repudiation.

‘Turning the tables’: Caution needs to be exercised in accepting a repudiation. Where

A wrongly assesses that B has repudiated the agreement and then proceeds to ‘accept’
B’s putative repudiation, A will be repudiating the contract and B will have the right to
accept A’s repudiation. In this way, A enables B to ‘turn the tables’ (Tse Ping Shun
David v Lai Ho Man Shan Grace [2010] 4 HKC 191 (CA); Chao Keh Lung v Don Xia
[2004] 2 HKLRD 11, [2003] 4 HKC 660 (CA)).

Form of communication: Acceptance of a repudiation requires no particular form, and

may be effected by language or conduct that clearly and unambiguously conveys to
the repudiating party that the non-breaching party is treating the contract as at an end.
The language or conduct must also clearly and unambiguously indicate that the non-
breaching party’s reason for termination is the other party’s repudiation. It is most
unlikely that a mere failure to react to a repudiation will amount to an acceptance
(Fujian Finance Co Ltd v Link Brain Ltd [1990] 1 HKC 46 (CA)).

• Chao Keh Lung v Don Xia [2004] 2 HKLRD 11, [2003] 4 HKC 660 (CA).

Affirmation of contract

Once the non-breaching party becomes aware of the repudiation and affirms the
contract, he loses his right to accept the repudiation. He is then obliged to continue
with the contract until another repudiation occurs or the contract is otherwise
discharged. Affirmation will not operate as a bar to rescission unless (1) the representee
is aware that he has a right to rescind, and (2) his conduct unequivocally demonstrates
an intention to proceed with the contract (Peyman v Lanjani [1985] Ch 457, [1984] 3
All ER 703, [1985] 2 WLR 154 (CA, Eng); Okachi (Hong Kong) Co Ltd v Nominee
Holding [2005] 4 HKLRD 447, Ltd [2005] 3 HKC 408 (CFI)).

Affirmation may be either express or implied. In either case, the question is whether
the non-breaching party’s words or conduct would be understood by a reasonable
person in the position of the repudiating party as amounting to a clear and unequivocal
affirmation of the contract (Perry v Davis (1858) 140 ER 945 (CP); Chua Ming Yuen v
Hentron Investments Ltd [2005] 1 HKLRD 611 (CFI); Zebra Industries (Orogenesis
Nova) Ltd v Wah Tong Paper Products Group Ltd [2016] 1 HKC 213 (CFI)).

Mere delay in accepting a repudiation does not per se amount to an affirmation of the
contract (Diamond Jubilee Investment Ltd v Chan Yiu Chung Sidney [2010] 1 HKLRD
628 (CA)). In order to constitute an affirmation, the delay must be consistent only with
an affirmation of the contract; if there is any reasonable alternative explanation for the
delay, it will not amount to an affirmation.

• Cheung Ching Ping Stephen v Allcom Ltd [2010] 2 HKLRD 324 (CA).
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