Court of Appeal confirms decision on repudiatory breach

Summary: In an acrimonious situation or where the facts are very complex, it can sometimes be difficult to determine which party has repudiated the contract. The Court of Appeal has upheld a first instance decision that a buyer who was unable to pay the full amount due, and to whom only some of the goods were delivered, had repudiated the contract rather than the seller. The case (Tigris International NV -v- China Southern Airlines Company Ltd and another [2014] EWCA Civ 1649) also includes some interesting points about the effect of "surreptitious dealing" and the relationship between an agent's authority and the existence of fiduciary duties.

Background: The appellant (Tigris) entered into an agreement with the defendant (CSA) in July 2009 for the purchase of six aircraft plus five spare engines and spare parts (the ASA). The plan was to buy the aircraft in China and sell them in Iran, which the trial judge described as a "delicate commercial transaction", not only in the light of UN sanctions against Iran but because Tigris was a Curacao joint venture company with "no market history, no assets, no financial resources of its own and no published accounts". Almost immediately, Tigris had difficulty paying the amounts in the ASA in full and only one aircraft was delivered. Relationships between the parties quickly soured. Meanwhile, one of the joint venturers, Mr Pakdaman, made arrangements through another company, Thesa, to purchase the remaining five aircraft in Tigris's place. In November 2009, CSA told Tigris to take the remaining aircraft at a rate of one per week otherwise it would terminate the ASA in respect of each one as the delivery date passed. Tigris alleged this was unreasonable and CSA's conduct overall evinced an intention not to be bound by the ASA, which entitled it to bring the deal to an end. On 19 December 2009, CSA terminated the ASA, relying on provisions that: (i) CSA's obligation to deliver the aircraft was conditional upon payment having been received; and (ii) failure to pay by the relevant dates would entitle CSA to terminate. Tigris appealed against the first instance decision that it, and not CSA, had repudiated.

Tigris, not CSA, had failed to perform its obligations. The Court of Appeal dismissed the appeal. One important aspect of Tigris's case was that negotiating with Thesa amounted to "surreptitious dealing" by CSA which entitled Tigris to rescind (or, if rescission was impossible, to terminate) the ASA. There was a discussion about bribery in general, and the Court of Appeal acknowledged that a party whose agent has been bribed to enter into a contract may rescind it when he discovers the bribe or, where the bribe occurred after the contract was made, bring it to an end: Panama & South Pacific Telegraph Co -v- India Rubber, Gutta Percha & Telegraph Works Co (1874-75) L.R. 10 Ch. App. 515. However, the trial judge had been entitled to find that there was no "secret agreement" made by CSA in order to divert the ASA, and the Court of Appeal highlighted a number of facts supporting this - not least that CSA intended to terminate the ASA with Tigris whether or not another buyer was interested. Overall, CSA's actions did not amount to "surreptitious dealing" of a repudiatory nature. The more fundamental point was also made that "there was no actual failure of performance by CSA. Delivery of the aircraft was to be against payment, which never came".

Fiduciary obligations and other relationships distinguished. Whether an agent owes fiduciary duties, and the exact nature of those duties, depends on the terms of his appointment (Kelly -v- Cooper [1993] AC 205). The Court of Appeal rejected CSA's argument that the fiduciary nature of an agency appointment depends on there being an ongoing relationship of trust and confidence between agent and principal: "someone who owes fiduciary duties cannot … avoid those duties by breaking them". This concept should be distinguished from the existence of the agency relationship itself; any relevant fiduciary obligations will not survive termination of the relationship which gave rise to them. The termination of Mr Pakdaman's widely drafted power of attorney did not absolve him from continuing duties arising out of his relationship with Tigris. It was possible that he may have been under an obligation in equity to account to Tigris for any profit he made had the Thesa deal come to fruition on the basis that he had diverted a business opportunity belonging to Tigris, but this claim was not advanced.

Please click on the links below for the other articles in the February 2015 commercial contracts newsletter:

• Higher standard of care expected from specialist provider
• Construing payment obligations on breach of contract
• The importance of clear wording regarding "direct/indirect loss"
• Liquidated damages, penalties and the dangers of renegotiating the contract price
• Ensuring entire agreement clauses are fit for purpose
• Personal guarantor bound by signature machine