When entering a contract, the parties will usually have the intention of upholding, performing and completing their roles under the contract. Sometimes a party may stop fulfilling their obligations or act in a way that prevents you from performing their role. In this case, the party is repudiating their contract; they are refusing to be ready or willing to carry out their obligations. Repudiation can apply in numerous scenarios and is a serious matter with potentially significant consequences that you should be aware of. This article will explain the consequences of repudiation and the alternative options you can pursue.
Definition of ‘Repudiation’
A party repudiates a contract when they demonstrate, directly or through their actions, that they are not ready or willing to play their part. Broadly, this can occur in two different ways.
Firstly, the party may refuse to carry out their obligations under the contract. For example, you may be asked to provide consultancy services for a six-month period. During the six month period, your client stops paying you but continues to demand your services. Here, the client is refusing to carry out their obligation to pay for your services. A party may also not meet their obligations if they tell you they cannot fulfil their role because they are unable to perform. This may be because there are internal conflicts or they lack the capacity to perform. Abandoning a project would also count as repudiation.
Repudiation may also occur if the party acts in a way that stops you from executing your obligations. For example, an author may have engaged you as a publisher. They agree to provide you with a manuscript in exchange for you editing it, providing cover designs, and printing the book. If the author rejects all of your proposed designs without a valid reason, this is a possible repudiation. The author has prevented you, the publisher, from executing your role.
Consequences of Repudiation
There are four key consequences of repudiation which are discussed below. Outside of these consequences, repudiating a contract can result in the loss of the repudiating party’s reputation or, if you cannot reach some agreement, hefty legal costs.
Right to Terminate
A repudiation by the other, especially of an essential promise in the contract, may give you the rise to terminate the contract. For example, you engaged a building contractor to renovate your property. Partway through the renovations and without informing you, the building contractor stops working, takes their equipment away and does not respond to your attempts to reach out to them. The building contractor’s actions demonstrate they are unwilling to perform their part of the contract, that is, renovating your property. This would give you the right to terminate the agreement.
Seeking Damages
If you have suffered loss from the other party repudiating, you may be able to claim damages for these losses. Damages may also be available to you for any sum you have paid due to the contract, such as fees for a service or a deposit. In the same example with the building contractor, you may decide to seek damages from the building contractor. You might be claiming the price you already paid for the contract or for any additional damage/losses you suffered as a result of the building contractor abandoning their work, such as having to pay another builder to finish the work.
Remedy of Specific Performance
In some circumstances, you may seek a remedy called specific performance. This is where the court will require the repudiating party to carry out a certain act, such as performing their contractual obligations. In the above example, the building contractor may be ordered to finish renovating your property. Typically, this remedy is only provided if other options are inadequate and the obligations are quite unique.
Return of Repudiating Party’s Benefit
A repudiating party may be made to return any benefit they have gained from the contract. This is known as restitution. For example, you hired a building contractor to restore walls on your property and made an advance payment, but the contractor ended up damaging your walls further. You could require the building contractor to not only fix the damage they caused, but also to redo the job properly. In other words, you are asking for the building contractor to ‘make good’.
Continue reading this article below the formAlternatives to Repudiation
You may want to avoid taking legal action immediately for repudiation. As the aggrieved party, it is important to consider alternative ways of addressing a repudiation. These are discussed below.
Contract Renegotiation
If a contract was repudiated because some circumstance prevented performance, you may take steps to reduce the contract’s scope or use another approach. For example, if there was difficulty in obtaining materials to perform the contract, you can renegotiate by agreeing to use different but readily available materials. You are making compromises or reaching renewed understandings in order for your contract to proceed.
Mediation
If you are unable to renegotiate the contract, you can also mediate with the other party. Mediation is an alternative dispute resolution method that involves you, the repudiating party and an impartial third party. The goal is for that independent third party to help you and the repudiating party reach an agreement.
Arbitration
Another available alternative dispute resolution is arbitration, where you and the other party present your arguments to an independent third party. This party, or the arbitrator, will make a decision based on what is said. It is important to note that arbitration does not take place in courts.
Waiver of Repudiation.
When you waive the repudiation, you are accepting the repudiation and requesting that the contract continue as normal. In other words, you are choosing to ignore that the other party repudiated the contract. Return to the building contractor example, this would mean that you ignore the fact that the contractor had packed up and abandoned the site. You might reiterate that you expect the construction work to be completed on the agreed date, effectively waiving the repudiation.
This guide provides key information on how to manage a business dispute as quickly and cost-effectively as possible.
Key Takeaways
If a party to a contract has expressed, either through words or actions, that they are unwilling or unable to perform their obligations, they have repudiated the contract. Having a contract repudiated can be stressful, so it is important to understand the rights you could have as the innocent party. These rights may include the right to:
- terminate the contract;
- seek damages;
- seek specific performance; and
- seek restitution.
To avoid a repudiation dispute in court, you may consider alternatives such as:
- contract renegotiation;
- mediation;
- arbitration; and
- waiver of repudiation.
If you would like assistance regarding how to respond to contract repudiation, our experienced contract lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.
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