Repudiation of Contract

Sometimes, the parties to a contract do not always perform their contractual obligations in the way they agreed. This can lead to a breakdown in relations between the parties and ultimately it can mean the end of the contract.

Repudiation of contract is a serious breach of contract, which gives the innocent, or aggrieved, party the right to terminate the contract and potentially claim damages. Such breaches are demonstrated through the repudiating party’s conduct, which objectively shows that they are no longer able to substantially fulfil their contractual obligations.

This guide to repudiation of contract will help you to understand the principles behind this aspect of contract law, as well as the implications for both parties to a contract.

What is contract repudiation?

A repudiation of a contract is a breach of a term of that contract which is so serious that it justifies a termination of the contract by the aggrieved party. It is a breach which goes to the root of the contract. Before terminating a contract for a repudiatory breach, the innocent party must be sure that they have the right to do so. It is a right rather than an obligation and they may in fact decide to continue with the contract. If the contract is however terminated, both parties are then released from the further performance of their obligations.

This right might be expressly stated in the contract, for example where a breach of a specified clause is classified as repudiatory. It is therefore wise to always check the terms of the contract first to see which breaches give rights to terminate. It is also important to follow any set termination procedure where there has been a repudiatory breach: failure to do so may render a termination unlawful if not followed.

If there is no express right to terminate specified in the contract, an aggrieved party can invoke the common law right to terminate the contract for repudiation, a right which exists outside of the contract. This is not such a clearcut right. The common law test for repudiation is whether the party has demonstrated, through their conduct, that either they no longer intend to be bound by the terms of the contract or that they only intend to carry out their contractual obligations in a way which is substantially inconsistent with what was agreed between the parties. The test is applied objectively by the courts: the repudiating party’s actual intentions are not relevant; only how a reasonable party would interpret their conduct will be considered.

Whether a party is held to be in repudiatory breach is assessed not at the time the breach occurred, but at the time the aggrieved party accepts the breach; therefore, all events post breach should also be considered by a court as well as any steps taken to remedy the situation.

How does repudiation occur?

Repudiation can occur in one of three ways:

1. Impossibility

If a party acts, or fails to act, in such a way that prevents them from performing their contractual obligations in an essential respect, such impossibility can amount to a repudiatory breach.

2. Renunciation

If a party shows, either through words or by conduct, that they do not intend to perform their contractual obligations in some essential respect, the innocent party may renounce the contract if the repudiating party’s behaviour is objectively seen as such by a reasonable person.

3. Contractual conditions

A breach may be held to be repudiatory depending on the categorisation of the contractual obligation; a breach of a contractual condition will amount to repudiation, whereas breach of a contractual warranty will not and will only give rise to a claim for damages. However, it is not always clear whether a term is a condition or not, and therefore it is advisable to make it clear in a contract exactly which terms are conditions and thus give the right to terminate the contract for repudiation. Innominate terms fall in between these two and will only constitute repudiation if the breach goes to the root of the contract or is so serious that it frustrates the commercial purpose of the contract.

Whether a breach has already occurred, being an actual breach, or whether it amounts to a breach that will occur, otherwise known as an anticipatory breach, makes no difference to the test for repudiation. If the anticipatory breach amounts to non-performance of a contractual condition or will deprive the other party of substantially the whole benefit of the contract as was agreed between the parties, this will still constitute repudiation.

What breaches of contract might not be repudiatory?

Where the contractual terms are not definitive, it will be up to the court to decide whether a breach gives rise to a right to terminate the contract or not. The court will look at the contract, the conduct of the parties, and their intentions. Any usual practice within specific industry sectors may also be taken into account.

What is clear is that a material breach of contract does not necessarily result in lawful grounds to terminate for repudiation, as, although it might be a serious breach, it might not be sufficiently serious to justify termination. Therefore, for example, poor performance, missing deadlines for performance, or failure to pay for goods or services do not necessarily amount to repudiatory breaches.

What breaches will be repudiatory?

The facts of each case must be looked at independently, and therefore comparison between cases is often of limited value. Relevant case law has looked at many types of breach in assessing whether termination for repudiation is lawful:

Disagreement on contract terms

If a party does not fully understand the terms of the contract and the implications thereof, any conduct in reliance of this misunderstanding will not be repudiatory if their position would change if they had a clear understanding of their rights. Therefore, conduct must be a clear and absolute refusal to adhere to the contract terms to amount to repudiation.

Wrongful reliance on a contractual determination provision

This does not necessarily amount to a repudiatory breach but can do so if there is a clear intention to terminate the contract.

Suspension of work

Whether a wrongful suspension of work will amount to a repudiatory breach will depend on the terms of the contract, the breach in question and the facts of the case. What is clear is that courts will take a dim view of parties trying to coerce each other into a repudiatory breach. A party will not be able to rely on a breach which has been caused by its own breach of contract in the first place. A party stopping work to force the other party to change the terms of the contract to suit its own purposes will be held to be repudiatory, however.

Delay

Often, delay, and its ramifications, is an issue that will be provided for in a contract and therefore it will not be treated as going to the root of the contract. For delay to justify termination for repudiation, it must have deprived (or continue to deprive) the aggrieved party of substantially the whole benefit of the contract. Serving a notice to complete, thereby making time of the essence, will not automatically make any further breach repudiatory: it still needs to go to the root of the contract.

Non-payment

Simple one-off non-payments are unlikely to be viewed as repudiatory, but if the non-payments are frequent and persistent and show a continuing pattern of breaching the terms of the contract, and particularly, where the payments are the aggrieved party’s only source of income, this may well be seen as repudiatory.

Repeated breaches

A breach which might not in itself be repudiatory may amount to repudiation if the breach is a continuing or recurring material breach which deprives the innocent party of a substantial part of what was originally contracted for.

Defects

Serious and widespread defects which go to the root of the contract can amount to repudiatory breach.

Principal repudiation

Repudiation may occur where a principal removes a substantial part of the work under the contract and engages a third party to carry it out with no clear and express contractual provision to do so. Similarly, ordering a contractor off a work site and replacing them with a third party without authority to do so may amount to repudiation.

Termination or affirmation?

Where a party repudiates a contract, the innocent party has two choices, either to accept the repudiation and terminate the contract or to affirm the contract and insist that the repudiating party continues to perform their contractual obligations.

The second option can however prove tricky as often a court order is required to insist on performance, and this in itself is not guaranteed. The first option is therefore the one which most people will choose. A claim for damages can also be made alongside the termination of the contract.

Once this choice is made, it is crucial that the election to terminate or affirm is done quickly. If there is a delay, the innocent party can be held to have affirmed the contract by their lack of decisive action and will lose the right to terminate the contract.

How to terminate the contract for repudiation

Notice of termination must be given to the repudiating party and this should always be done in writing. A notice should be clear and unequivocal in stating that the contract is terminated, the date the termination should take effect and the grounds for the termination. The notice should also be properly served on the repudiating party, being delivered to the right person at the right address and the onus will be on the terminating party to do this. They do not need to give the repudiating party an opportunity to remedy the situation: they can serve the notice as soon as repudiation has taken place.

Best practice advice

In the absence of express terms in a contract, it is not always easy to establish whether a party has repudiated a contract and each case will turn on the individual facts. Repudiation involves more than an ordinary breach of contract and strong evidence will be needed to support a termination for repudiation. The conduct of the repudiating party must show a clear intention to walk away from their contractual obligations, and whether such conduct amounts to repudiation depends on all the circumstances of the case, including the terms of the contract and will be looked at objectively.

The consequences of getting it wrong are serious and an innocent party may find themselves unintentionally repudiating the contract themselves. Therefore, it is always wise to seek legal advice if in any doubt.