[1972] 2 All ER 393
House of Lords
Lord Reid
... I am unable to accept some of [the Court of Appeal's] reasoning as to what happens when a contract is broken. In particular I cannot agree that after accepted repudiation the contractual obligations still exist as obligations. For the breach of any contract the normal remedy is damages in money. The contract may have been to deliver say 100 tons of wheat. If the party fails to deliver somehow that obligation disappears and by operation of law is replaced by an obligation to pay money. So it appears to me that when a contract is brought to an end by repudiation accepted by the other party all the obligations in the contract come to an end and they are replaced by operation of law by an obligation to pay money damages. The damages are assessed by reference to the old obligations but the old obligations no longer exist as obligations. Were it other wise there would be in existence simultaneously two obligations, one to perform the contract and the other to pay damages. But that could not be right. The only legal nexus remaining is the obligation to pay the damages; so here when the respondents elected to end the company's contract by treating their fundamental breach as a repudiation and accepting it, their right against the company became a right to get damages...
Lord Diplock
My Lords, it has become usual to speak of the exercise by one party to a contract of his right to treat the contract as rescinded in circumstances such as these, as an 'acceptance' of the wrongful repudiation of the contract by the other party as a rescission of the contract. But it would be quite erroneous to suppose that any fresh agreement between the parties or any variation of the terms of the original contract is involved when the party who is not in default elects to exercise his right to treat the contract as rescinded because of a repudiatory breach of the contract by the other party. He is exercising a right conferred on him by law of which the sole source is the original contract. He is not varying that contract; he is enforcing it.
It is no doubt convenient to speak of a contract as being terminated or coming to an end when the party who is not in default exercises his right to treat it as rescinded. But the law is concerned with the effect of that election on those obligations of the parties of which the contract was the source, and this depends on the nature of the particular obligation and on which party promised to perform it.
Generally speaking, the rescission of the contract puts an end to the primary obligations of the party not in default to perform any of his contractual promises which he has not already performed by the time of the rescission. It deprives him of any right as against the other party to continue to perform them. It does not give rise to any secondary obligation in substitution for a primary obligation which has come to an end. The primary obligations of the party in default to perform any of the promises made by him and remaining unperformed likewise come to an end as does his right to continue to perform them. But for his primary obligations there is substituted by operation of law a secondary obligation to pay to the other party a sum of money to compensate him for the loss he has sustained as a result of the failure to perform the primary obligations. This secondary obligations is just as much an obligation arising from the contract as are the primary obligations that it replaces (see R V Ward Ltd v Bignall).
Although this is the general rule as to the effect of rescission of the contract on obligations of which it was the source, there may be exceptional primary obligations which continue to exist notwithstanding that the contract has been rescinded. These are obligations that are ancillary to the main purpose of the contract--which is, of course, that the parties should perform their primary obligations voluntarily. Mutual promises to submit to arbitration disputes arising as to the performance by the parties of their other obligations arising from the contract may be expressed in terms which make it clear that it was the common intention of the parties that their primary obligation to continue to perform these promises should continue notwithstanding that their other primary obligations had come to an end (Heyman v Darwins Ltd).