It’s a commercial reality that sometimes contracts go unfulfilled. Whether due to an intentional breach of contract or circumstances beyond the control of the breaching party, the terms of the contract are either not met in full, or at all, and the agreement is broken.
There can also be occasions where one party to a contract will be given a clear indication that the other has no intention of performing their end of the bargain, even though the time for performance is yet to expire. This is known as an anticipatory breach of contract, and provided the ingredients of a repudiatory breach are present, as such entitling the innocent party to bring the contract to an end, that party may treat the contract as repudiated.
In this guide, we look at what amounts to an anticipatory breach of contract where, especially in a commercial context and the stakes are high, it is important for both the breaching party and non-breaching party to know where they stand, legally speaking. In this way, the parties can make an informed decision as to how best to handle the breach. In many cases, by pre-empting a probable breach at the earliest possible opportunity, this can help to minimise any losses later down the line and avoid costly litigation to recover those losses.
What is classed as a breach of contract?
To fully understand breach of contract law, from what amounts to a contractual breach, to the rights and remedies that can flow from this, it is essential to understand the body of law which regulates the making and enforcing of legally binding agreements.
First and foremost, the contract itself must be made up of all the essential components to constitute a valid and enforceable agreement. This means that there must be offer and acceptance, consideration, which is the price that each party pays for the promise of the other, as well as an intention to create legal relations. Provided these ingredients are all present, there will be a valid contract in place; a contract whose terms can be enforced.
It is also important to ascertain exactly what terms make up an enforceable agreement. This is because the terms that dictate how the contract is to be performed by the parties, and their respective rights and obligation under it, can be express or implied. An express term is one which has been explicitly agreed between the parties, either in writing or orally, whilst implied terms are those that are usually necessary to fill in the gaps left by the express terms. For example, in the context of a commercial supply agreement, the contract may be silent on the issue of quality but, as a matter of law, a term can be implied as to satisfactory quality. As such any breach of this term, even though unstated, can still be enforced.
A breach of contract is therefore where the performance of one party falls short of what is contractually required under either an express or implied term. This could be because that party refuses to fulfil their contractual obligations altogether, or the performance of those obligations is not what was promised or expected under the terms of the contract.
What is an anticipatory breach of contract?
An anticipatory breach of contract refers to words or actions that show one party’s intention to not fulfil its contractual obligations to the other. This type of breach will often come about where one party expressly notifies the other party that they are no longer prepared to fulfil their contractual obligations, or that they are physically unable to do so, for example, because of problems in their own supply chain. An anticipatory breach can also come about where it is clear from the conduct of one party, even though the deadline for performance of their obligations has not yet passed, that they do not intend or will be unable to comply.
In the case of an anticipatory breach of contract, the whole premise of this type of breach is that an actual breach has not yet occurred. It is therefore an intention to commit a repudiatory breach of the contract. As such, the crucial issue is often the stage at which the innocent party is able to claim that there has been an anticipatory breach, and that breach becomes actionable. This is essentially the point at which the innocent party can lawfully treat the contract as being terminated and be excused of any further performance under it.
When considering the meaning of an anticipatory breach of contract, to be able to treat the contract as terminated, there must be a clear case of a refusal by the other party to perform their contractual obligations, such that this goes to the root of the contract. In accordance with guidance from the courts, the innocent party must also be able to show that:
the other party acted in such a way so as to provide a clear and absolute intention that they would not perform their obligations, where that refusal must be absolute, and not conditional on some circumstance occurring or remaining
the words or conduct of the other party would be clear and absolute to any reasonable person having regard to all of the circumstances at the point of termination, as such, taking into account the history of what has been said and done between the parties
the innocent party holds a subjective belief that the other party will in fact breach.
It is only once all of these conditions are satisfied can the innocent party take steps to end the contract and mitigate its losses. A contracting party will be far better placed to mitigate any loss if it is aware that the contract will not be performed prior to those contractual obligations falling due. If an anticipatory breach occurs, then the innocent party can treat the contract as repudiated and seek alternative arrangements elsewhere to meet their needs. For example, if a supermarket is told in advance that a supplier is unable to meet a particular delivery, that supermarket can strike another deal with a different supplier in time to stock their shelves and meet customer demand, or to take other remedial action.
However, the point at which the conditions are met to amount to an actionable anticipatory breach of contract will be a question of fact, to be carefully assessed on a case-by-case basis.
How does an anticipatory breach differ to other breaches?
The expression ‘anticipatory breach’, as the name suggests, will always refers to scenarios where the breach has not yet happened, but one party has made it clear, either through their words or conduct, that they will not be fulfilling their contractual obligations. In contrast, all other types of contractual breaches refer to actual breaches of contract.
If no action is taken by the innocent party in response to an anticipatory breach of contract this can become an actual breach, but only once the date that the contractual obligations were due to be performed has passed. However, by this stage, the innocent party may have lost any useful opportunity to mitigate their losses and take remedial action.
The extent to which any action can be taken for an actual breach will also depend on the nature and extent of that breach. If the breach is fundamental, as anticipated prior to the time for performance passing, this will still allow the innocent party to bring the contract to an end. A fundamental breach is essentially one that goes to the very root of the agreement, depriving the innocent party of substantially the whole benefit of that contract.
However, as with an anticipatory breach, which relies on the ingredients of a repudiatory breach being present, what constitutes a fundamental breach of contract will require a careful analysis, on a case-by-case basis, as to the nature and severity of the breach.
The contract itself can often provide clarification, for example, by defining which terms are ‘conditions’ or which are ‘warranties’. These are important legal expressions which make clear the effect of their breach. A condition is a fundamental term of the contract, going to its core, whereas a warranty is a relatively minor term, not central to the contract’s purpose or existence. This means that a breach of a condition would justify bringing the contract to an end, whilst breach of a warranty would entitle the innocent party to claim damages.
In contract law, there are also what are known as innominate terms, which cannot immediately be classed as either conditions or warranties. Where a contractual dispute arises in these cases, the court would need to assess the impact on the innocent party to decide how to categorise the term in question, and what remedies flow from any breach.
In some cases, the breach may be classed as a material breach. This still refers to a serious and substantial breach, but not all material breaches are repudiatory breaches. A material breach could be, for example, where one party fails to deliver goods due under a commercial supply contract, or where there has been a serious delay in doing so, but it is still possible to compensate the innocent party and keep the contract in place.
How to deal with an anticipatory breach of contract?
Anticipatory breaches are one of the most difficult types of breaches to deal with. This is because even though a breach need not actually occur for the responsible party to be contractually liable, it can be incredibly difficult for the innocent party to know exactly when they will be entitled to end the contract and excuse their own performance under it.
Much, of course, will depend on the unique factual matrix involved, where guidance from the courts can only go so far in helping an innocent party to navigate the point at which a claim for anticipatory breach of contract has arisen in all the circumstances. As a basic starting point, there must be either words or conduct on the part of the other party that indicates a clear and absolute intention by them not to perform what was fundamentally promised under the contract. Importantly, it is the total sum of those words or actions that matters, where if this is taken over the course of time, or in light of other circumstances, then this should still satisfy the test, provided the innocent party also holds a firm subjective belief that the other party really will breach the contract.
However, it can then become a legal and factual minefield when it comes to deciding if and when to proactively respond to the breach. For the innocent party who elects to repudiate the contract and mitigate their losses, they too could find themselves facing a claim for damages for repudiatory breach if the other party disagrees with the conclusions drawn. For example, the other party may argue that the alleged innocent party wrongfully treated the contract as repudiated while there were was still time left to run, and that nothing said or done made it clear that they would not perform the contract as agreed. In contrast, the innocent party who waits until the time has passed for performance, so as to avoid allegations of breach on their part, claiming instead for an actual breach of contract, they may lose the opportunity to mitigate. It is therefore vital that any party involved in a potential dispute involving an anticipatory breach of contract seeks expert legal advice.
There are, of course, many cases where the party who has made it clear that they will not, or cannot, fulfil their contractual obligations, who will simply choose to accept the other party’s decision to terminate the contract and to be no longer bound by its terms. This would seem the obvious response in circumstances where they themselves are unable to comply with all that is required of them, contractually speaking. However, these types of cases are rarely clear cut. In addition to those scenarios where the innocent party has wrongly assumed that the contract would or could not be fulfilled, there are also scenarios in which the other party has every intention of fulfilling their contractual obligations, but in a different way to that which was agreed when the contract was entered into. This then becomes a potentially complex issue of whether this amounts to a repudiatory breach.
Anticipatory breach of contract FAQs
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Legal disclaimer
The matters contained in this article are intended to be for general information purposes only. This article does not constitute legal advice, nor is it a complete or authoritative statement of the law, and should not be treated as such. Whilst every effort is made to ensure that the information is correct, no warranty, express or implied, is given as to its accuracy and no liability is accepted for any error or omission. Before acting on any of the information contained herein, expert legal advice should be sought.
Author
Gill Laing is a qualified Legal Researcher & Analyst with niche specialisms in Law, Tax, Human Resources, Immigration & Employment Law.
Gill is a Multiple Business Owner and the Managing Director of Prof Services - a Marketing Agency for the Professional Services Sector.
