Contract Law
Repudiation of Contract: A Legal Overview
Author
Barbora Korcova
Author
Barbora Korcova
September 11, 2024
Contract Law
Contracts form the backbone of most business relationships. They establish the rights and obligations of the parties involved.
A common concern is what happens when a party doesn’t adhere to the terms of the contract or indicates a refusal to do so. This is where the legal concept of “repudiation” may come into play.
In this blog post, we will explore what repudiation means, its legal implications, and how parties manage might manage it.
What is repudiation?
Repudiation is a breach of a contractual term that substantially deprives the innocent party of the benefit of the contract. A minor breach would not be repudiatory. Repudiation also includes a refusal to perform a significant contractual obligation in advance or by a party rendering performance impossible (“anticipatory repudiation”).
An example of repudiation would be a scenario such as this:
Alice and Bob entered into a contract where Bob agreed to paint Alice’s house for £1,000, with the work to be completed by the end of the month. Halfway through the month, Bob sent Alice a message stating, “I have decided not to paint your house as agreed, and I won’t be able to fulfil the contract.” This statement from Bob is a anticipatory repudiation because he is clearly and explicitly indicating that he will not perform his contractual obligation.
Repudiation triggers a common law right of the innocent party to terminate the contract or affirm it (do something to demonstrate that the innocent party does not consider the contract as terminated). This right arises because the breach is substantial enough to give the innocent party this option.
The common law right to terminate for repudiatory breach may exist alongside other contractual rights. It is important to check any written contracts for such terms.
Repudiation by conduct
Anticipatory repudiation may occur both by words or by conduct
As above, a party to a contract can merely state to the other party that they will not perform it.
Repudiation by conduct more frequently consists of a party doing something that would logically prevent it from performing its obligations. This could include:
1. A party selling off stock that was due to be delivered to another party.
2. A party absenting themselves from a location or refusing to go to a place where performance was to take place.
3. A party ceasing to trade before performance was due.
How do you know if the breach is repudiatory?
As above, the breach by the party has to be sufficient to deprive the innocent party of the benefit of the contract.
The law has broadly classified contractual terms into three categories. Using these categories can help a party identify whether the breach is repudiatory.
Warranties
A warranty is a minor term of a contract that does not go to its central object. It is ancillary to other, more important terms of a contract. Warranties are often characterised as statements of fact. A breach of a warranty would not be a repudiatory breach.
Conditions
Contrary to a warranty, a condition is a term of a contract that is central to its performance – a contract would not work without it. A breach of a condition would be a repudiation of the contract.
Intermediate terms
The law states that most terms of a contract are not conditions or warranties – they are intermediate terms.
The classification gives the law the flexibility to assess the true consequences of the breach. If a breach of an intermediate term was severe (i.e. to deprive the innocent party the substantial benefit of the contract), then that would be a repudiation). Less severe breaches of an intermediate term would not constitute repudiation.
What are the consequences of repudiation?
When repudiation occurs, as stated, it gives the innocent party two options: (1) accept the repudiation and terminate the contract or (2) affirm the contract and keep it open for performance.
Words, writing, or conduct can communicate acceptance or affirmation.
If the innocent party accepts the repudiation, the contract ends, and all parties release themselves from their obligations. The innocent party will have the right to claim damages, compensating them for the loss(es) caused by the repudiation.
You do not have to accept a repudiation – it may be worthwhile to keep the contract going.
If the innocent party affirms the contract, the contract will not terminate and it will remain in force. Even though the innocent party can still await performance, it will always have the right to claim for breach of contract even if the contract is performed.
It is important to note that whether the breach is repudiatory is determined at the time the contract was terminated. This gives the defaulting party an opportunity to try and fix their breach in the period between the repudiation and the innocent party’s acceptance. If the defaulting party fixes matters to a suitable extent, what breach remains at the time of termination may not be repudiatory. In short, it is not possible to retract a repudiation. However, it can be mitigated to the extent that it does not trigger the common law right to terminate.
Accordingly, it is important for the innocent party to seek legal advice to ensure it understands its rights and obligations.
What is the difference between repudiation and rescission?
In contrast to repudiation, rescission is the process of voiding a contract from the beginning due to a defect in its formation, such as misrepresentation, mistake, duress or undue influence. When a contract is rescinded, it is treated as if it never existed. Both parties are released from their obligations, with any benefits conferred being returned. While repudiation addresses breaches in a valid contract, rescission nullifies a contract due to issues in creation or validity.
Is frustration different from repudiation?
Yes, frustration occurs when an unforeseen event, beyond the control of either party, makes the performance of the contract impossible, illegal, or radically different from what was originally agreed, without any fault or deliberate action by either party. While repudiation arises from a party’s conduct or decision, frustration is due to external circumstances, such as natural disasters, new laws, or death, that fundamentally alter the contract’s performance, leading to its automatic termination without liability for breach.
Conclusion
If you are faced with a situation where repudiation may have occurred, seeking prompt legal advice is vital to protect your interests and navigate the complexities of contract law effectively.
Do not hesitate to contact us here or our contract lawyers Neil Williamson or Colin Lambertus who would be more than happy to assist.
