We know that you and most parties enter into contracts with the greatest of intentions to fulfil the contract. But for whatever reason, sometimes you cannot perform your obligations. This can sometimes result in a contract dispute. Repudiation of a contract, as it is also known, attracts significant consequences and requires appropriate consideration.
What is Repudiation of a Contract?
Repudiation of a contract occurs where one party renounces their obligations under a contract. It can be that 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.
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. Repudiation can be express or implied. 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 an amount of $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.
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.
Remember, repudiation does not itself end the contract. Repudiation simply allows you, as the innocent party, to make an election on how you want to proceed.
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.
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. After acceptance is made out, you, the innocent party, may consider whether you have a cause of action to obtain damages.
What Is Contract Frustration?
In certain situations, the repudiating party may be unable to perform its obligations because it is impossible. ‘Contract frustration’ is 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.
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.
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.
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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 depends on the facts of each matter. 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, contact our experienced contract lawyers 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.
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 on 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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