ANTICIPATORY BREACH OF CONTRACT

Conduct renounces a contract if it shows an intention to commit a repudiatory breach. The party doesn’t intend to perform their future contract obligations when they fall due.

So if before the time arrives to perform, a contracting party expresses an intention to break the contract, they commit an anticipatory breach.

When that happens, the innocent party is entitled to jump first, and terminate the contract.

It’s not limited though to situations where a defaulting party says that they intend to breach the contract. It also applies:

  • when the defaulting party disables itself from performing an obligation which must be performed in the future; and even where
  • the obligation to be performed at a future date is a contingent obligation.

The communication of the intention may be by words, writing or by conduct.

Examples of Anticipatory Breach

Showing the intention that a party no longer considers themselves bound by the contract would probably be satisfied by circumstances such as:

  1. Denying access to property required for the innocent party to perform the contract
  2. A supplier saying that goods won’t be supplied when the time to deliver goods arrives
  3. A party becomes unable or incapable of performing the contract, despite genuinely saying, “I want to perform it”, or “I would like to perform it but cannot”.
    These expressions translate in law to “I will not perform”
  4. A party says that it intends to perform the contract in a way inconsistent with the terms of the contract
  5. A party wishes to impose additional terms on performance, where there is no legal entitlement to do so. That is, the additional terms don’t form part of the contractual relationship.

Example:

In one case, the purchaser of goods agreed to pay cash on delivery of the goods.

After a few deliveries, the purchaser said that in the future, it would only pay for the product on delivery of the next batch of product.

Basically, the purchaser tried to convert a cash transaction into a credit transaction… after the (legally binding) contract had been agreed.

That was an attempt to alter the substance of the agreement, and a repudiatory breach.

What are the legal rights for anticipatory breach?

The threat not to perform the contract must be sufficiently serious.

Threats to breach a warranty in the future will leave the innocent party with a claim damages for the expected breach (if it materialises), rather than being entitled to terminate.

Threats or behaviour which go to the conditions of the contract give rise to … (wait for it) a “repudiatory anticipatory breach of contract”. When that happens, the innocent party will be entitled to:

  • terminate the contract before the time for performance arrives, and
  • claim damages.

Alternatively, the innocent party may choose to wait for the time for performance to arrive. That is, wait for the defaulting party to actually default on the contract.

  1. If the defaulting party does not perform, the innocent may elect to terminate the contract at that time, and sue for damages.
  2. This provides the defaulting party an opportunity to change position in the intervening period, and perform the contract when it is required to.
  3. If the party threatening breach does perform with the terms of the contract, the right to terminate is lost. The contract continues in force, as if there had been no threat of the anticipatory breach.

Assessing a repudiatory breach

To decide whether it is a repudiatory breach, courts take into account a host of factors:

  • the nature and effect of the breach
  • the effect of the breach, on the facts: the difference between promised performance and the performance which in fact occurred
  • the parties’ knowledge about the likely effect of a breach.
    This test factors in the overall assessment could be the likely future events, judged by reference to the facts as they stood at the date of repudiation.

So:

  • If it does amount to a repudiatory breach, the innocent party is entitled to terminate.
  • If it doesn’t, it is treated in the same way as a warranty and the innocent party has no right to terminate and can only sue for damages.

Cumulative Effect of several breaches of contract

Let’s say you have a series of minor breach of contract, whether of warranties or innominate terms. Do they all add up to a repudiatory breach?

Sometimes.

The cumulative effect of the breaches needs to be serious enough to justify the innocent party to bring the contract to a premature end. “Serious” in this context means severe.

The history and accumulation of past breaches paints the picture for to show what might or is likely to happen in the future.

When deciding whether or not a contract has been breached and whether it is entitled to terminate, the innocent party does well to:

  1. identify the precise term(s) of the contract which the defaulting party has not complied with, and
  2. have a clear assessment of why the events amount to a breach of contract, and
  3. identify when, where and how the defaulting party was in breach in each case.

Doing so reduces the scope of contract disputes.

What happens after a repudiatory breach?

Acceptance of Repudiatory Breach

To terminate the contract, in the vast majority of cases, the innocent party must tell the defaulting party that it “accepts” their repudiatory breach.

This “acceptance” of the repudiatory breach:

  1. must be communicated clearly and unequivocally
  2. doesn’t require any particular form.

Really, all the innocent party needs to do is say the contract is at an end. Communication may be by behaviour. In some cases, not responding to correspondence has been sufficient.

It’s the intention to treat the contract as discharged that needs to be communicated: ie, it’s at an end.

It’s pretty stunning how often it isn’t done. Situations can complicate unnecessarily for it.

Not accepting Repudiatory Breach

Not “accepting” the breach means the contract continues in force for the benefit of the defaulting party and innocent party alike.

Each party continues to be bound by their contractual obligations. However, the innocent party retains the right to claim damages for the breach.

Inactivity or acquiescence does not usually amount to acceptance of a repudiatory breach.

But then, there’s no rule of law that says the innocent party must accept a repudiatory breach and terminate.

After all, the innocent party may not wish to bring the contract to an end. For instance, the innocent party may want to apply for specific performance of the contract – to force the defaulting party to perform the contract.

But it’s not exercising the right to do so (by thinking that it happens automatically) that can cause serious, serious problems and complexity for the innocent party, and lead to further contract disputes.

Affirmation and Repudiatory breaches

There should be no significant delay after the time that the innocent party becomes aware of the breach and communication of termination. If that’s what the innocent party wants to do.

The innocent party can’t affirm a contract where they have knowledge of the facts which give rise to the repudiatory breach. If you don’t know about the events that allow you to terminate, you can’t affirm the contract.

Example:

A tenant of business premises failed to pay rent on time. That failure gave the landlord the right to terminate the lease.

The tenant ended up paying the rent, and the landlord accepted the payment. Afterwards, the landlord purported to exercise the right to terminate.

The landlord affirmed the lease by accepting the rent.

Accepting the rent was an unequivocal affirmation of the continuation of the lease. The lease was affirmed on the subsequent payment date and operated to waive the right to terminate altogether.

Accordingly, when the innocent party doesn’t take any steps to accept the breach (or by conduct), and continues with the contract they are likely to be taken to ‘affirm’ the contract.

That choice is known as an “election”: the innocent party “elected” to continue the contract. It chose not to accept the repudiatory breach rather than end it.

But then there are cases which say that delay accepting the breach of contract is an implied affirmation of the contract.

When is too long to wait?

There is that period of time between the repudiatory breach and potential affirmation of the contract.

If the innocent does nothing for too long, there must come a time when the law will deem the innocent party as having affirmed.

It’s a good idea to expressly reserve your rights to treat the contract as repudiated, so that it is clear that your behaviour does not affirm the contract, but it may not be effective. That’s because some acts are seen as affirming contracts, and can’t be considered as anything else. Such as a landlord accepting late rent under a lease (see above).

During that period of time, the innocent party has a chance to make their mind up whether to “accept” the breach and terminate, or “not accept” the breach and allow the contract to continue.

During this period, the contract continues in force.

Also, events may develop during this period. Such as:

  1. a force majeure event takes place
  2. the contract is frustrated, or
  3. the big one:

the innocent party puts themselves in repudiatory breach of contract

If that happens, the previously defaulting party can terminate on the (previously) innocent party – and can claim damages for the (previously innocent) party’s breach of contract.

For risk management purposes, it may be simpler:

  1. to make an election as soon as possible, to maintain control of the situation, and
  2. for the innocent party remain hyper-cautious to not place themselves in breach of contract during that brief period.

Otherwise, real and valuable legal rights are easily lost. In that decision-making period, the defaulting party might fix or rectify their repudiatory breach: which means that the right to terminate is lost permanently for that breach.

Consequences of Affirmation

When a contract is affirmed:

  1. the right to terminate for the specific breach of contract can’t be recovered or got back.
    It’s lost forever:
    The innocent party can’t then go back and change their mind at a later date and “un-affirm” the contract.
  2. a new or “fresh” repudiatory breach is needed to give rise to another right to terminate.
    That is, the defaulting party needs to commit another repudiatory breach to give rise to a right to terminate.

One further point.

Some breaches of contract are considered “continuing breaches of contract”.

For instance, say a contracting party says that it has power to licence use of a software application. But it doesn’t have that power. Usually, that can’t be cured. It’s a continuing infringement by the licensor, and probably a continuing repudiatory breach that can’t be affirmed.

Only in very limited cases do contracts terminate “automatically” for repudiatory breach. If the acceptance of repudiation is not communicated in time, most litigants argue that some sort of conduct on their part communicated the “acceptance”.

Illustrations of affirmation:

  • where the supplier is the innocent party: refusing to deliver goods or services
  • where the customer is the innocent party: not accepting goods or services offered for delivery
  • in both cases:
    1. refusing to communicate;
    2. saying the circumstances were such that the contract automatically came to an end.

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