Does, and should, the availability of the action for the agreed sum turn upon the claimant having a ‘legitimate interest’?

© Riccardo Serafin

The action for the agreed sum is a common law remedy that awards the claimant a debt – generally the price – that is already due under the contract. Despite being the most common remedy sought in English courts, the law on its availability still presents some uncertainties. In particular, when the claimant chooses to affirm the contract following a repudiation and continues to perform its obligations to earn the contract price, the availability of the remedy turns on whether the claimant had a ‘legitimate interest’ in doing so.

The notion of legitimate interest has been criticised as problematic and excessively vague. On the contrary, those who defend this limitation claims that it is necessary for preventing wasteful performance and that it enhances economic efficiency. My opinion is that the requirement in question is both unnecessary and undesirable. To explain my view, I will divide the following essay into four sections.

In the first one, I will address the state of the law in the area. I will show that the notion of legitimate interest has been interpreted as a requirement of reasonable conduct of the claimant. However, the caselaw suggests that denying a debt because the claimant lacks any legitimate interest is extremely uncommon and, in any event, it is hardly decisive for the outcome.

In the next two sections, I will deal with the arguments, respectively, in favour and against the existence of this requirement. Despite the strong case made for a qualification that prevents wasteful performance on an unwilling defendant, I will demonstrate that coherence in the law, as well as adherence to the sanctity of contract, show that legitimate interest should not be a bar for the availability of the action for the agreed sum.

In conclusion, I will reiterate my view, that is that the notion of legitimate interest is a source of useless confusion in the current law and that in principle this requirement should be set aside.

 The leading case in the area is the House of Lord’s decision in White & Carter v McGregor. In the case at issue, the defendant unlawfully purported to cancel the contract with the claimants, hence committing a repudiatory breach; the claimants refused to accept the repudiation, performed their contractual obligations and sued for the agreed price. The House of Lord found in favour of the claimants by relying on the principle that the innocent party has a right to either terminate the contract and claim damages or affirm the agreement and keep the parties bound to its terms. In siding with the majority, Lord Reid, however, added two limitations to the availability of the action for the innocent party. The first one is that the performance of the innocent party’s obligations must not require the cooperation of the other party. The second is that the injured party must have a financial or non-financial legitimate interest in performing the contract.

These requirements have been endorsed by subsequent judgments but the notion of legitimate interest – given Lord Reid’s vagueness on the point – has remained largely unclear.

The most natural interpretation is that a court should take into account the claimant’s expectations under the contract so to objectively justify the party’s decision to keep the contract open rather than claiming damages. In some cases, this is because the innocent party may have a non-financial interest (e.g., protecting its reputation) in continuing to perform its obligations. However, Lord Reid expressly acknowledged that the interest could be merely financial so that a party could choose to sue for the agreed price because it is more economically advantageous than claiming damages after the breach. Given that the amount of losses is generally difficult to quantify and that their recoverability is subject to various restrictions (remoteness, mitigation etc.), it is almost impossible to envisage a situation where the claimant has no legitimate interest to prefer a claim in debt over a claim in damages.

Because of that, while retaining the language of legitimate interest, courts have oriented the analysis more on the conduct of the claimant and on whether its choice to affirm the contract was reasonable. Consequently, courts have found that a lack of legitimate interest was proved only when the election to keep the contract alive was, in the circumstances of the case, ‘wholly unreasonable’ (The Odenfeld) or ‘perverse’ (The Aquafaith). Importantly, the consensus is that this exception only covers the most extreme cases and that the burden of proof falls entirely on the defendant (The Aquafaith).

As a consequence, only in rare cases the claimant was held not to have a legitimate interest. In particular, in The Puerto Buitrago and in MSC Mediterranean v Cottonex, the courts held that the claimant could not claim the agreed sum because the costs which would have been borne by the defendant were excessive and utterly disproportionate. However, in both decisions, the point in question was obiter since the same conclusion could be reached by applying other doctrines. Additionally, in The Alaskan Trader, the High Court found against the claimant too, relying on the arbitrators’ conclusions that it had no legitimate interest. However, the facts of this case were in no way extreme or extravagant and the decision is generally viewed as unconvincing.

In light of the above, a first conclusion may be inferred. Although nominally the availability of an action for the agreed sum requires the claimant’s legitimate interest, in practice the said requirement is virtually never decisive. On the contrary, the notion remains hard to encapsulate and may lead to wrong decisions.

The question, therefore, is whether the law should conserve the concept of legitimate interest. Those who advocate for its retention advance two main arguments.

The first one is that an action of debt is a form of specific performance and, as such, its availability should share the same limitations. The risk of interference between these remedies was argued by the minority in White & Carter and, later, by Lord Denning in The Puerto Buitrago. In the latter, his Lordship explained that, when a claimant is suing for a debt, it is seeking to enforce specific performance of the contract, which could not be ordered if damages would be an adequate remedy. Therefore, he concluded that the decision of not accepting the repudiation is unreasonable every time damages would be adequate to redress the breach. It is worth mentioning that this position significantly widens the legitimate interest exception and has been abandoned in the recent caselaw.

Another explanation notes that allowing the injured party to carry on its unwanted performance to earn the contract price is generally a waste of resources and time. Lord Sumption in Societe Generale v Geys criticisedthe wastefulness of the unwanted performance as an undesirable consequence of White & Carter. In White & Carter itself, Lord Keith in the minority expressed concerns for the potential wastes and suggested that a duty to mitigate apply to the innocent party after a repudiatory breach even if it chooses to affirm the contract. Accordingly, the claimant should have a duty to minimise its losses and to avoid any unreasonable waste of resources. This view is coherent with the economic analysis of law as it enhances economic efficiency. As a consequence, the legitimate interest exception in an action for the agreed sum should be preserved because it disincentivises unwanted performance in cases where the negative costs for the contract-breaker manifestly outweigh any benefit for the innocent party.

Nevertheless, the arguments in favour of the notion of legitimate interest do not seem entirely convincing.

In the first place, confronting the action for the agreed sum with specific performance is misleading. In fact, the latter is a discretionary equitable remedy, whereas the former is awarded as of right as soon as the debt accrues and it traditionally does not involve any discretion of the court. In addition, the reasons justifying stronger limitations on the availability of specific performance, namely the invasion of the defendant’s freedom and the fear of constant supervision by the court, do not apply to an action for the agreed sum since the latter is a monetary remedy. Hence, it is inappropriate to subject the action for the agreed price to the same requirements for an order for specific performance.

Likewise, it is inappropriate to extend the duty of mitigation to the cases in question. Mitigation is a limit to the recoverability of certain losses that the claimant should have avoided in a claim for damages, but it does not and should not apply when a party is merely performing its side of the contract. As a matter of fact, if a duty of mitigation were applicable during the performance of the contract, courts would need to scrutinise the reasonableness of the party’s conduct in carrying out its obligations and this could even surreptitiously introduce a general principle of good faith in the performance. Such a result is incompatible with English law and, as pointed out by Lord Hodson in White & Carter, it would result in great uncertainty and excessive judicial discretion.

It may well be that a principle preventing wasteful expenditures of resources following a repudiation fosters economic efficiency. However, economic efficiency is only one of the several principles at stake in contract law and, arguably, it is not even amongst the most prominent. If economic efficiency were indeed so fundamental, it would be hard to justify, for example, the traditional reluctance of English courts in implying a term because it would lead to a more reasonable outcome. It is submitted that other important principles could trump abstract economic considerations, in this case specifically the principle of sanctity of contract. As a matter of fact, in an action for the agreed sum, the claimant is asking nothing more than honouring the agreement the parties originally consented to. Recognising the availability of the action protects the innocent party by not allowing the contract-breaker to force termination with its own breach. Furthermore, the choice of affirming the contract is not necessarily an easy one given that the injured party accepts the risk of future frustration and the possibility that in case of its breach the counterparty terminates the contract. If the innocent party decides at its own risk to remain bound to the terms of the contract, there should be no room for an additional and somewhat unpredictable requirement such as the existence of a legitimate interest.

Finally, coherence in the law suggests the same conclusion. As said above, English law gives the innocent party the right to elect whether to terminate the contract or keep it open following a repudiatory breach. This general principle has been solemnly reaffirmed by the Supreme Court in Geys. Allowing the right to affirm the contract but subsequently denying the right to the most usual remedy under it because the innocent party lacked a legitimate interest in performing seems an odd conclusion. In Cottonex, Moore-Bick LJ justified the result by saying that a court in the exercise of its general equitable jurisdiction may decline to grant a party the remedy to which it would normally be entitled. However, it seems preferable to avoid such an unnecessary complication. If the claimant has a right to elect, its choice should be definitive and courts should restrain from second-guessing it.

In conclusion, I contend that the requirement of legitimate interest for the action for the agreed sum should be abolished. If the claimant was able to fulfil all the conditions for earning the debt under a contract that remains in force, there is no reason to frustrate its expectation to earn the agreed price. It may be that in some cases this conclusion may lead to economically inefficient outcomes, but it is submitted that the sanctity of contract and coherence in the law justify it. Moreover, setting aside the notion of legitimate interest would not be a drastic departure from the current law since the exception is already rarely used. On the contrary, its abolishment would remove a source of confusion and misunderstanding, thus promoting legal certainty.