repudiatory breach of contract

A repudiatory breach of contract is a breach which is sufficiently serious to give rise to the innocent party’s right to terminate the contract.

Repudiatory breaches may take place:

1. before the time for performance has arrived;
2. by a party not performing the relevant obligation by the time it is required to be performed under the contract;
3. by performing the obligations in a defective way; or
4. showing an intention that the contract will not be performed at all when the time for performance arrives.

Identifying whether a repudiatory breach of contract has taken place is not always clear from the facts or the terms of the contract, as it relies on whether the relevant term(s) are conditions of contracts or warranties.

Termination of contracts os a serious business. Wrongful termination of a legally binding contract is in itself a repudiatory breach of contract - it is therefore of some importance to determine whether a breach does in fact entitle the innocent party to terminate the contract or not before exercising the assumed right to do so.

Repudiatory Breach of Contract

A repudiatory breach arises where a party’s failure to perform their obligations is sufficiently serious to justify termination. The question of what constitutes a sufficiently serious breach is determined by a judge and is a question of law. Once a repudiatory breach of contract has been established, the innocent party gains a right to elect whether to affirm or terminate the contract, as well as the right to claim damages.

The breach does not of itself and without more result in termination of a contract. The party in default must be given notice of the innocent party's election. This requires communication of the termination by the innocent party to the defaulting party. Case law shows that the communication does not need to be express, but may be by clear and unequivocal conduct appropriate to the circumstances of the case

Termination of Contracts

The right to terminate will more often than not exist alongside the right to damages or an account of profits. Following termination, the innocent party is not required to perform obligations which remain unperformed. Both parties are released from their primary obligations, ie the obligation to perform in accordance with the contractual terms. The primary obligations are replaced by a secondary obligation on part of the defaulting party to compensate the innocent party in damages committed before termination and for losses suffered as a result of non-performance of any future obligations.

Affirmation after Breach

In the event that the innocent party chooses to affirm the contract (ie treat the contract as continuing), each party continues to be bound by their obligations. The innocent party retains the right to claim damages for the breach.

The decision to affirm will usually (and certainly should) be express and in writing, however acceptance of the defaulting party's repudiation may be implied by conduct. If the innocent party decides to terminate the contract, there should be no significant delay between the time that the innocent party becomes aware of the breach and the time at which the innocent party makes the decision to terminate known to the other party.

Delay may be interpreted as implied affirmation, and the innocent party will lose its right to accept the repudiatory breach if it does so. This is particularly the case where one of the parties has changed its position since the repudiatory breach, such as a supplier being requested to deliver further goods under the contract or payment for the goods supplied. In order to terminate the contract after an affirmation, the innocent party must wait for a further repudiatory breach of the defaulting party.

Conditions and Warranties

It is well established law that there are three types of contractual terms; conditions, warranties and innominate terms.

Conditions are contractual terms which “go to the root” of a contract; that is to say are the very essence of the contract itself, or form the fundamental bargain agreed by the contract. Breach of a condition gives rise to a right to terminate the contract and claim damages. Warranties are less important, subsidiary terms. Breach of a warranty gives rise to a claim for damages “but not to a right… to treat the contract as repudiated”.

Innominate Terms

Contractual terms which cannot be categorised within the limited definitions of conditions and warranties are called innominate terms. Following a landmark ruling by the Court of Appeal in Hong Kong Fir Shipping v Kawasaki Kisen Kaisha (1962), Diplock LJ formulated a test to determine whether a breach amounted to a repudiatory breach, or not (i.e. whether the term was considered to be more like a condition or a warranty).

The question the Court must ask is whether the breach deprives an innocent party of “substantially the whole benefit” or “a substantial part of the benefit” to which the innocent party is entitled under the contract. If it does, treated in the same way as a condition and the innocent party is entitled to terminate. If it does not, 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.

Repudiatory Breach of contract - Case Example

In the recent case of Telford Homes v Ampurius NU Homes Holdings (2013), it was held that a one year delay in a 999-year lease did not amount to a repudiatory breach of contract. The Court of Appeal considered that the starting point is to look at the benefit the innocent party intended to obtain from the contract. Then, the court should look at the effect of the breach on the innocent party, considering whether:

• any financial loss caused;
• any benefit has been received by the innocent party;
• damages would adequately compensate the innocent party;
• the party in breach could resume compliance with his obligations; and
• the breach has fundamentally changed the nature of the contract.