Repudiatory breach of contract

What is a repudiatory breach?

A repudiatory breach is a breach so serious that it substantially deprives the innocent party of the benefit they were entitled to receive under the contract. The innocent party can choose whether to accept the breach and terminate the contract or affirm the contract and continue with it.

Some contractual terms are more important than others. A contract may expressly identify certain breaches as grounds for termination, giving the innocent party the right, but not the obligation, to terminate. Before exercising that right, it is essential to check the contractual provisions carefully.

Where the contract does not expressly provide a right to terminate, the innocent party may need to rely on the common law right to terminate for repudiatory breach. If the other party disputes the termination, a court may ultimately have to decide whether it was lawful.

The decision to terminate or continue with a contract can have significant legal and commercial consequences, including implications for the damages recoverable.

Check the contract terms first

Contracts commonly specify which breaches give rise to termination rights and may set out procedures that must be followed before termination. Failure to comply with these requirements can make a termination unlawful, even where there are otherwise grounds to terminate.

Is the breach repudiatory?

Where the contract does not clearly specify the relevant termination rights, whether a breach is repudiatory will depend on the circumstances. A court will consider the contractual terms, the parties’ intentions and conduct, and any relevant industry practices.

Clients are often surprised to discover that:

• Poor contractual performance does not necessarily give the other party the right to terminate.
• Missing delivery deadlines or other contractual milestones may not amount to a repudiatory breach.
• A buyer’s failure to pay does not automatically entitle the seller to terminate.

The seriousness and consequences of the breach are key. Careful analysis of the contract and the surrounding circumstances is essential before deciding whether to terminate.

Part performance only – grounds to terminate?

If one party makes clear that they will not perform their contractual obligations, or will perform only some of them, the innocent party may be entitled to treat this as a repudiation of the contract.

Where a party indicates before performance is due that they will not fulfil their obligations, this is known as an anticipatory breach.

Whether a refusal to perform some obligations amounts to a repudiatory breach will depend on the circumstances, including whether the refusal substantially deprives the innocent party of the benefit of the contract.

Terminate or affirm the contract?

Even where there is a right to terminate, doing so may not be the best commercial decision. The parties may have a longstanding relationship, or the other party may be a key supplier or customer experiencing temporary difficulties.

It is important to distinguish between affirmation and waiver. Affirming a contract following a repudiatory breach means choosing to continue with it, thereby losing the right to terminate for that breach. However, the right to claim damages for losses caused by the breach may remain.

Waiver, by contrast, generally involves giving up a right or choosing not to rely on it. The precise effect will depend on the circumstances and the conduct of the parties.

Deciding whether to terminate or affirm requires careful consideration of the contractual position, potential losses and wider commercial objectives.

Gannons can help you assess the terms of your contract, evaluate whether a breach may justify termination and consider the legal and commercial implications of your options.