In Short
Repudiation happens when a party clearly shows they will not or cannot perform their contractual obligations. The innocent party must choose whether to continue the contract or accept the repudiation and terminate, which may allow a claim for damages. Misjudging repudiation or terminating wrongly can itself amount to repudiation, so careful assessment is essential.
Tips for Businesses
Act promptly if the other party signals they cannot or will not perform. Confirm whether their words or conduct amount to clear repudiation before taking steps. Avoid behaviour that suggests you accept termination unintentionally. If terminating, document your election and mitigate losses by seeking alternatives. Keep records of losses and communications.
Summary
This guide explains repudiation of contract, termination rights, and remedies for businesses under Australian contract law. LegalVision, a commercial law firm, specialises in advising clients on commercial contracts and dispute resolution.
Most parties enter contracts intending to fulfil their obligations completely. However, circumstances sometimes prevent parties from performing their contractual duties, leading to contract disputes. Repudiation of a contract creates significant legal consequences and demands careful consideration from all parties involved.
This article explores contract repudiation, your options when facing repudiation, termination rights, and remedies, including damages.
Whether you’re a small business owner or the Chief Financial Officer of an ASX-listed company, one fact remains: your customers need to pay you.
This manual aims to help business owners, financial controllers and credit managers best manage and recover their debt.
What is Repudiation of a Contract?
Repudiation of a contract occurs when one party renounces their obligations under a contract. The repudiating party demonstrates they are unwilling or unable to perform their obligations under a contract. The Court sees repudiation as a serious matter. Therefore, they require a ‘clear indication’ that a party is unready or unwilling to perform the contract. This often occurs before an actual breach of a contract. For this reason, the Court often refers to it as an anticipatory breach.
Courts distinguish between express and implied repudiation. Express repudiation involves direct statements refusing to perform, while implied repudiation emerges through conduct that demonstrates unwillingness to fulfil contractual obligations.
The easiest example of repudiation is where the repudiating party states they are unwilling or unable to perform their obligations. A party’s conduct can also amount to an act of repudiation. Let us consider two examples.
Example 1: John and Jane enter into a contract where John agrees to design a website for Jane’s business, and Jane will pay John $10,000 upon completion of the website within one month. The terms of the contract clearly outline the scope of work, payment terms and delivery date. However, John sends Jane a letter 2 weeks later stating that he does not think he will be able to design Jane’s website in time because he found a bigger customer, and suggested that Jane find another website designer. This is an example of express repudiation and anticipatory breach.
Example 2: John and Jane enter into a contract of supply. John will supply 100 apples to Jane, to be delivered every month for 1 year. The terms of the contract state that John must deliver these apples to Jane within the first week of each month. However, John consistently delivers the apples in the second or third week of the month, which suggests that John is not intending to fulfil his obligations under the contract. This is an example of implied repudiation by conduct.
What Do You Do In Response?
If you are the ‘innocent party’ (that is, the contracting party that is willing and able to perform your contractual obligations), then you need to tread carefully and respond appropriately.
When facing potential repudiation, you must act promptly and decisively. Courts examine your response closely to determine whether you accepted the repudiation or continued the contract.
If you believe the other party has repudiated the contract, you have a choice to either:
- continue on with the contract; or
- accept the repudiation and elect to terminate the contract.
You should also ensure that you do not conduct yourself in a way that you accept the repudiation or continue the performance of the contract without actually meaning to.
Before terminating a contract for repudiation, you must establish that repudiation actually occurred. Courts apply strict standards when determining whether conduct amounts to repudiation.
A word to the wise, you should confirm that the party unequivocally has repudiated the contract. Otherwise, if you wrongfully form this view and you terminate the contract in response, you may be held to have repudiated the contract yourself. It is critical that you analyse the circumstances carefully.
Continue reading this article below the formWhat Happens If You Elect to Terminate the Contract?
Once you terminate the contract, you naturally do not need to fulfil your contractual obligations. Termination releases both parties from future performance obligations, though pre-termination obligations may still apply. After acceptance is made out, you, the innocent party, may consider whether you have a cause of action to obtain damages.
The innocent party can claim various forms of damages following termination, including direct losses, consequential damages, and in some cases, loss of profit. Courts assess damages based on what the innocent party would have received had the contract been properly performed.
Remedies Available After Repudiation
When you accept repudiation and terminate the contract, several remedies compensate you for losses suffered.
Types of Damages
Courts award damages to place you in the position you would have occupied had the contract been properly performed:
- Direct damages: losses flowing directly from the repudiation, such as undelivered goods or unprovided services.
- Consequential damages: reasonably foreseeable indirect losses, including lost profits.
- Incidental damages: expenses incurred due to repudiation, such as finding alternative suppliers.
Other Remedies
Restitution allows recovery of money or benefits you provided before termination, preventing unjust enrichment of the repudiating party.
Specific performance rarely applies after repudiation, but may be available for unique property where damages prove inadequate.
You must mitigate losses by taking reasonable steps to minimise damages. Courts reduce awards by amounts you could have reasonably avoided.
What Is Contract Frustration?
In certain situations, the repudiating party may be unable to perform its obligations because it is impossible. ‘Contract frustration’ arises when an unforeseen event, or series of events due to neither party’s fault, has made performing the party’s obligations under the contract impossible. To establish this, the frustrated party must prove the event was unforeseeable, that is, both parties did not anticipate it. This event must make your obligations under the contract either impossible to perform or materially different. If your contract does not have a force majeure clause, the repudiating party may be able to establish frustration.
Frustration differs from repudiation because it involves external circumstances beyond either party’s control, rather than a voluntary decision to abandon contractual obligations.
Examples of frustrating acts include:
- a change in the law, making the performance of a contract illegal;
- excessive delay in performance due to unforeseen circumstances;
- physical destruction of the subject matter of the contract;
- death of one of the parties to the contract;
- natural disasters;
- war; and
- terrorist attacks.
If your contract is frustrated, the Court will discharge both you and the other party to the contract from any outstanding contractual obligations. However, liability remains for any obligations that parties to the contract performed prior to frustration.
Key Takeaways
Repudiation is a complex area of law. The test of whether a party has repudiated is an objective test that the court undertakes, and it depends on the facts of each matter. Courts examine all circumstances surrounding the alleged repudiation, including the contract terms, party communications, and conduct patterns. Put simply, whether there is an anticipatory breach or repudiation of a contract will involve careful analysis of the actual terms of the contract and the obligations of each party, and then the conduct/statements of the parties.
If you need help determining whether an act of repudiation has occurred, LegalVision provides ongoing legal support for all businesses through our fixed-fee legal membership. Our experienced contract lawyers help businesses across industries manage contracts, employment law, disputes, intellectual property, and more, with unlimited access to specialist lawyers for a fixed monthly fee. To learn more about LegalVision’s legal membership, call 1300 544 755 or visit our membership page.
Frequently Asked Questions
Repudiation occurs when one party illustrates that they no longer intend to be bound to their obligations under the contract.
If someone repudiates your contract, you can determine whether they wish to proceed with the repudiation and terminate the contract; in which case, you may be entitled to claim damages. Alternatively, you can elect to continue with the contract, whereby both parties continue to satisfy their contractual obligations, the same as prior to the repudiation occurring.
After the contract is terminated, neither party needs to continue with the contractual obligations. You may also be able to consider whether you have a cause of action to claim compensation from the other party.
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