Court of Appeal confirms party that has renounced contract cannot rely on own unwillingness to perform to reduce damages payable

The Court of Appeal has confirmed that where a party to a contract has renounced its obligations, damages are to be assessed on the assumption that it would have performed its obligations pursuant to the contract if called upon to do so, notwithstanding its declared unwillingness to perform: SC Compania Nationala De Transporturi Aerience Romane Tarom SA v Jet2.com Ltd [2014] EWCA Civ 87.

The decision is perhaps unsurprising, and provides further support to the established position as to the basis upon which the courts will assess the value of the contractual benefit lost to the innocent party when accepting the renunciation of a contract. As the Court of Appeal pointed out, in the absence of such an assumption, the contract breaker could benefit from its own breach in a case where the innocent party was not obliged to use the contract breaker's services. Sarah Boland considers the decision below.

	Sarah Boland Senior Associate +44 20 7466 2492

Background

The case concerned the termination of an aircraft maintenance agreement entered into between Jet2.com Ltd (Jet2) and SC Compania Nationala De Transporturi Aerience Romane Tarom SA (Tarom) in 2004 (the "Agreement").

Pursuant to the Agreement, Tarom had agreed to undertake maintenance work on Jet2's aircraft. The Agreement was originally for three years but was extended, at Jet2's option, for a further three years on the same terms. Jet2 was not obliged pursuant to the terms of the Agreement to send any aircraft to Tarom.

The Agreement was, however, very competitively priced which meant that, over time, that hourly rate for labour ($26) became commercially unattractive for Tarom. As a result, towards the end of 2006, Tarom was facing difficulties recruiting and retaining labour which in turn led to serious delays by Tarom in completing the required maintenance. Consequently, Tarom sought to renegotiate the terms of the Agreement. In the meantime, Jet2 entered into a separate agreement with another company to provide alternative maintenance services.

On 10 September 2007, Tarom sent a letter purporting to terminate the Agreement on the ground that Jet2 had delayed making payment. In his judgment on liability, His Honour Judge Mackie QC held that Tarom had no right to terminate the Agreement. Accordingly, Tarom had renounced the agreement by its letter and Jet2 was entitled to claim damages. In assessing damages, the court had to determine how many Jet2 aircraft Tarom would have serviced if the Agreement had not been terminated.

Judge Mackie held that, for the purposes of assessing damages, he had to make the assumption that Tarom would have performed its obligations under the Agreement when called upon to do so. On this basis he determined that Jet2 would have required Tarom to service five aircraft in 2007/2008, eight aircraft in 2008/2009 and six aircraft in 2009/2010. 

Tarom's appeal

Tarom appealed, arguing that the judge had erred in assessing damages on the basis of the assumption that Tarom would have performed its obligations under the Agreement. Tarom said the assessment of damages should be based on the actual facts – in other words that Tarom had confirmed that it was not prepared to comply with its contractual obligations and therefore Jet2 was not minded to send it any more aircraft. Had the judge considered the question on this basis, he would have concluded that no aircraft would have been sent to Tarom for the remainder of the term of the Agreement.

Court of Appeal decison

The Court of Appeal dismissed the appeal (Lord Justice Christopher Clarke giving the lead judgment, with which the Master of the Rolls and Lord Justice Briggs agreed).

When Jet2 accepted Tarom's renunciation of the agreement it became entitled to recover the value of the contractual benefits which it had lost as a result. As Jet2 was not obliged pursuant to the terms of the Agreement to send any aircraft to Tarom, valuing what Jet2 had lost required an assessment as to the number of aircraft that Jet2 would have sent to Tarom but for the termination of the Agreement. That assessment necessarily depended upon what assumptions should be made as to Tarom's performance had the Agreement continued.

The appropriate assumption was that Tarom was willing and able to carry out the Agreement in accordance with its terms. Although that assumption was a fiction it was a necessary one in circumstances where Tarom had declared its intention not to perform.

In order to assess the damages to which Jet2 was entitled the Court was required to conduct a factual inquiry as to how the contract would have been performed had it not been repudiated, Durham Tees Valley Airport Ltd v bmibaby Ltd [2010] EWCA Civ 485 applied.

If the question of whether Jet2 would have sent Tarom any aircraft had to be determined as at the date the repudiation was accepted (when Tarom had shown its unwillingness to comply with its obligations) that would mean that Tarom would benefit from its own breach.

The judge at first instance had not found that, by the date of the repudiation, Jet2 had decided to send no more aircraft to Tarom – rather Jet2 would have wanted to continue to send aircraft to Tarom to take advantage of the low hourly rates, on the assumption that Tarom could and would perform in accordance with the Agreement. Accordingly, the appeal was dismissed.