Breach of agreement - Repudiation and election: Persistence is key

Where a party to an agreement breaches it obligations by repudiating its obligations, the innocent party has an election to either reject the repudiation and enforce the performance thereof or accept the repudiation and cancel the agreement.

The general rule is that if the innocent party elects to reject the repudiation and enforce performance, they cannot change their mind, unless a new ground for breach arises. But what happens if the defaulting party persists in its first breach?

This is what occurred in a recent matter before the Supreme Court of Appeal (SCA) and now finally decided in Primat Construction v Nelson Mandela Bay Metropolitan Municipality (1075/2016) [2017] ZASCA 73 (1 June 2017). The appellant, Primat Construction CC (Primat), concluded an agreement with the respondent, the Nelson Mandela Bay Metropolitan Municipality (Municipality) for the upgrade of roads in Port Elizabeth.

The Municipality sent a notice of cancellation purporting to terminate the agreement with immediate effect relying on various clauses of the agreement (Purported Cancellation). It was not in dispute that this letter did not constitute a proper termination and thus amounted to a repudiation of the agreement by the Municipality. Primat rejected the repudiation and requested specific performance from the Municipality in terms of the agreement. In addition to the Purported Cancellation, the Municipality breached its obligations in terms of the agreement further by appointing contractors other than those used by Primat and did not allow Primat’s contractor to mitigate its damages. This conduct constituted a further breach by the Municipality, and Primat, hereafter, gave notice of its election to accept such repudiation and cancelled the agreement in question.

The court a quo held that Primat was not entitled to change its election and cancel the agreement as there was no new act of repudiation that entitled them to do so. On appeal to the SCA, Primat argued that the court a quo erred in requiring an additional act of repudiation before the innocent party is entitled to exercise a further election, and claim cancellation and damages. Primat also argued that there is authority for the view that the innocent party could change its election after giving the party in breach the opportunity to perform. If the defaulting party persisted in its repudiation, thus failing to repent, the innocent party could change their election and choose to treat the agreement as at an end. This is known as the repentance principle.
In the SCA, the Municipality continued to rely on its argument before the court a quo, relying on the doctrine of election and argued that once Primat had elected not to accept the repudiation, it was precluded from changing its election.

Lewis JA, handing down the judgment in the SCA, referred to earlier decisions and went on to say that where there was an unequivocal intention not to fulfill contractual obligations, the emphasis is not on the repudiating party’s state of mind - on what he subjectively intended - but on what someone in the position of the innocent party would think he intended to do. Repudiation is accordingly not a matter of intention, but perception. The perception is that of a reasonable person placed in the position of the innocent party.

The learned judged further held that the requirement of a new and independent act of repudiation by the Municipality before Primat could change its election and exercise its right to cancel and claim damages is not one mentioned in any of the earlier authorities and, as Primat submitted, it is nonsensical, because it would allow the defaulting party, who persistently refuses to comply with the agreement, to keep the agreement alive until it commits another act of repudiation. Deciding in favour of Primat, Lewis JA held that any contention that there must be another act manifesting an intention from the defaulting party, not to comply with its obligations in terms of the agreement, is artificial. The intention from the Municipality continued and Primat did not have to wait to change its election until the Municipality committed another act of repudiation. It was sufficient that Primat reasonably perceived that the Municipality would not repent its repudiation, despite the opportunities given to it to do so, and then for Primat to change its election, as it did.

Accordingly, if you are an innocent party to an agreement and the defaulting party has repudiated and you elected to reject the repudiation and demand specific performance, you can change such election when the due date for performance arises. This remedy would be available to the innocent party where the defaulting party persists with such repudiation, irrespective of the amount of acts of repudiation that follow the first breach.