Repudiatory breach of contract
A repudiatory breach can arise in 2 ways.
First, the terms of the contract may expressly state that a breach of a specified type is repudiatory, giving the other party the right, but not the obligation, to terminate the contract.
If this does not apply the position is more risky. The innocent party may claim the common law right to terminate for repudiatory breach relying on the breach being considered serious enough that a court will decide that repudiation was lawful.
There are major implications of repudiating a contract or deciding not to. There are choices to be made which impact the damages recoverable by the innocent party.
Check the contract terms first
Many businesses have detailed written contracts, negotiated with the other party or which may be your own terms and conditions or those provided by a supplier or customer.
Whichever is the case, if there is a written agreement in place it’s essential to carefully check it. A contract will commonly expressly state which breaches give rights to terminate and may also include procedures to comply with where there has been a repudiatory breach if the aggrieved party wants to then terminate. Failure to comply with process can sometimes render what would otherwise be a lawful termination of contract unlawful even if there is a clear, contractual right to terminate.
Contract breaches which may not allow lawful termination
In the absence of clear clauses in contracts which stipulate that a breach gives the right to terminate, in a dispute, it will be up to the court to decide. The court will look at the contract and the intention of the parties and their actions. Industry or sector specific norms may also be relevant.
Clients who come to us with breach of contract claims are often surprised to discover that :
- poor contract performance of itself may not be repudiatory and give rise to a right to terminate the contract;
- missing time deadlines for performance such as delivery times or time related contractual milestones may not amount to a repudiatory breach;
- failure by a buyer of goods or services to pay does not necessarily amount to a repudiatory breach;
The context of the breach and experienced analysis of the contract are key, in the absence of very clear termination rights. You can rely on our experience so please do get in contact.
Part performance only – grounds to terminate?
If 1 party to a contract makes it clear that they will not perform their commitments in the contract, or will only comply with some obligations in the contract, can the innocent party treat this as repudiation of the contract?
If the refusal to comply with contractual commitments takes place before such commitments fall due, this is known as anticipatory breach.
As with other contract law issues decided by courts, the question of whether a breach in these circumstances amounts to a repudiatory breach may come down to whether partial non-performance is tantamount to depriving the innocent party of substantially the whole benefit of the contract.
A material breach is generally a breach that is serious but unlikely to be found by a court, of itself, to be sufficiently serious to be repudiatory and in turn to result in lawful grounds to terminate. However, a continuing or recurring material breach could potentially be repudiatory. For example, a tenant repeatedly either being late in paying rent or failing to pay full rent, or perhaps a tenant that has made alterations to a property without consent and has failed to reinstate the premises to comply with the lease.
The difficulty with thinking you can rely as grounds to terminate on a continuing course of material breaches of the same type is that you may well face an argument that you waived your right to take action if you did not take action when the breach happened. using the example above, accepting rent late could well be considered a waiver of the breach.
A stronger but still risky unilateral termination might be possible if the other party has materially breached the contract in a number of ways and you act as soon as you find out about these multiple breaches of clauses that do not expressly state that breach creates the right to repudiate.
Terminate or affirm the contract?
Where there is a clear right to terminate a contract it does not follow that you have to terminate. Commercial relations may be longstanding or the other party to the contract may be a key supplier or customer facing a short term problem.
Confusion can also arise relating to the difference between 2 legal terms – affirmation and waiver. Affirmation following a repudiatory breach does not equate to waiving the breach. With waiver you are effectively letting the breach go. With affirmation, you will lose the right to terminate but, importantly, you are not giving up the right to claim damages for losses caused by the breach.
Consequently, it’s very important to make the right decisions about whether to terminate or affirm, to best protect your interests, both legal and commercial.
Our lawyers deal with breach of contract issues on a daily basis. Given the very significant potential implications of terminating a contract and the risks of making a legal or strategic error, we’d be happy to speak to you and to assist in protecting your interests. Please do get in contact.