Given the unpredictability of business and law, it sometimes happens that a party to a contract does not or cannot perform their obligations under the agreement. When this occurs, there are significant implications and considerations, particularly concerning the other contracting party or parties. This article explains repudiation of a contract and what a party can do in the event it happens to them.
1. What is Repudiation of a Contract?
Repudiation of a contract happens when a party refuses to perform their obligations under a contract. A party typically repudiates a contract because it is:
- Unwilling to perform its obligations; or
- Unable to perform them;
Repudiation by a contractual party can give the others the opportunity to terminate the contract. As the law considers that termination of an agreement is a serious matter, any party wishing to prove repudiation must satisfy the requirement of seriousness. In other words, it needs to demonstrate that the repudiating party was seriously unable or unwilling to perform.
A party can repudiate a contract through their words. For example, a party could declare that they do not wish or cannot perform their contractual obligations. Alternatively, a party’s conduct can also form the basis for repudiation. Repudiation by conduct is typically harder to establish than an explicit statement to that effect. The difficulty arises because, in these kinds of cases, repudiation will likely need to be inferred from, or implied by, a party’s conduct. If a party repudiates a contract and the other party or parties terminate the agreement, they may have a cause of action to obtain damages after acceptance is made out.
Significantly, repudiation of a contract does not in itself end a contract and automatically discharge the parties from all obligations. It merely provides the other party or parties with the opportunity to choose how to proceed.
2. What Do You Do?
If you are of the opinion that a party to a contract with you has repudiated it, you need to act cautiously and in a measured way.
As the injured party, you have two alternatives. You could either continue with the contract or accept the repudiation and move to terminate the contract. If you decide to terminate, both parties to the agreement are not longer required to perform their obligations.
You also need to ensure that your behaviour does not inadvertently convey either acceptance of the repudiation or continuance of the contract before you have come to a final decision on this point.
3. How Does a Court Decide a Contract Has Been Repudiated?
Repudiation of a contract is not always clear or sure. Indeed, courts are frequently called upon to determine if a party has in fact repudiated a contract, especially if it concerns repudiation by conduct. If it is necessary for a court to do so, it uses an objective test. In other words, the subjective opinion and perceptions of the other contracting parties do not determine if repudiation has occurred. Rather, a court asks whether, in the eyes of a reasonable person, a party’s conduct would convey renunciation of the contract, or a fundamental part of it, to all the other contracting parties. If the answer to that question is affirmative, the court will find that a party repudiated a contract. This test is relatively stringent, reflecting the fact that the law considers repudiation to be a serious matter that cannot be lightly assumed.
4. What If I Preemptively Repudiate a Contract?
As it is not always clear that a party has repudiated a contract, other parties to the agreement who are willing to perform their obligations must exercise caution, even if they feel sure that the other party has in fact repudiated it. If they fail to do so without first carefully analysing the circumstances, there could be negative repercussions for them. For example, a party could move to terminate a contract based on their own belief that the other party had repudiated it. However, if in fact, they have no legal right to terminate the contract, they may themselves have inadvertently repudiated the agreement. Among other negative consequences, they could potentially be liable to pay damages.
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