What is a repudiatory breach?
Repudiatory breaches are serious breaches in a contractual relationship. A repudiatory breach of contract is one that is so serious that it entitles the innocent party to the contract to terminate it. This type of breach can take place in any type of contract whether it is between and employer and an employee, a sale and purchase of land or the sale / supply of goods and services.
To be clear, it is the choice of the innocent party as to whether he or she would like to terminate the contract or whether to affirm the contract (i.e. to continue the contractual relationship). Affirming the contract does not however preclude the innocent party from making a claim for damages and whether the innocent party actually realises the fact that the contract can be terminated or affirmed is key.
Affirmation of contract?
Upon realising that there has been a repudiatory breach the innocent party should communicate to the counterparty that although there has been a repudiatory breach, they are content to affirm the contract (i.e. they are happy to be bound by its terms); this will still give the innocent party the right to make a claim for damages. Where the realisation has not been communicated the election to affirm can be implied provided the innocent party is aware of the repudiatory breach and is aware that there is an option to affirm or terminate.
Right to terminate contract after serious breach?
Upon realising that there has been a repudiatory breach the innocent party should communicate to the guilty party that there has been a repudiatory breach and they would like to terminate the contract and claim damages. This has the effect of releasing the party from the terms of the contract.
If upon realising that there has been a repudiatory breach the innocent party elects to affirm the contract this is then irrevocable i.e. the right to terminate has been lost, save for exceptional circumstances, for example, where there has been an element of duress applied on the innocent party whilst the counterparty continues to be in breach. In this case the innocent party should clearly communicate to the counterparty that they are revoking their affirmation.
Dangers of assuming you have the right to terminate contract or should do
There are many dangerous associated with repudiatory breaches for the innocent party and it is important that the innocent party understands the effect of the breach including the fact that once there has been a repudiatory breach his or her rights and obligations may change.
Firstly, the innocent party must decide whether the breach has been serious enough to be called repudiatory i.e. whether it is serious enough to justify terminating the contract. Once making the difficult decision of whether the contract is going to be terminated or affirmed the innocent party must then ensure that they understand the implications of their decision and that the correct procedures are being followed.
It is important that the innocent party does not delay in electing to terminate the contract or at least notifying to the counter party that there has been a repudiatory breach. This can be done in any manner, although doing it in writing would of course be preferable. Any delay or prevarication could go against the innocent party.
It should be noted that the innocent party will have difficulty in claiming any damages where there is evidence to suggest that the innocent party was not intending on performing its obligations under the contract.
Notice of termination
If there is a legally valid right to terminate a contract it’s important still to check for necessary formalities. The vast majority of commercial contracts have detailed provisions about terminating the contract. Clauses often do not just deal with grounds of termination, they deal with formalities. So, it may be necessary to serve formal notice of termination in a certain way or within a certain time of an event of termination. Making a mistake with this or lack of care in the wording of the notice might mean the party in breach avoids liability at court due to a technicality. This is another good reason to get good legal advice before terminating a contract.
The tests identified in this article, including those where there has been an implied affirmation or termination will rest on the facts of the individual case and by looking at all the circumstances from the perspective of a reasonable person in the position of the innocent party.
Haven't found what you need yet?
Why not search the whole site?