What is anticipatory repudiation?
What happens if there is an anticipatory breach of contract?
Are there special rules under the Uniform Commercial Code (UCC)?
We will look at what is anticipatory repudiation, its legal definition, its elements in contract law, how a contract can be repudiated, revocation of repudiation, remedies under law, damages, anticipatory repudiation under UCC 2-610, examples and more.
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What is anticipatory repudiation
In contract law, the anticipatory repudiation or anticipatory breach is when a contracting party no longer has the intention to execute his or her contractual obligations or acts in such a way where it is clear that the contractual obligations will not be performed.
In other words, the repudiating party informs the non-repudiating party with a clear statement that he or she no longer intends to perform its obligations under the contract or there is evidence showing that the contractual obligations are voluntarily no longer being performed.
For example:
The seller of a real estate property clearly informs the buyer she has changed her mind, will no longer sell the property and refuses to show up to sign the paperwork on the closing date.
When a party’s prospective failure to perform the contractual obligations prevents the other party from benefiting from the execution of the contract, the aggrieved party will be legally excused from performing his or her obligations in return.
In addition to that, a party’s anticipatory breach may entitle the other party to terminate the contract and legally pursue damages.
Typically, a contracting party will be considered in breach of a contractual obligation when he or she does not perform the required contractual obligations within the stated timeline or in accordance with the terms of the legally binding contract.
However, in the event of a party’s express repudiation of contract, the repudiating party will be considered in breach of contract even though he or she may be within the legal delays to execute the contractual obligation.
Repudiation legal definition
According to Merriam-Webster’s dictionary, repudiation is defined as:
“To refuse to accept” or “to refuse to acknowledge or pay”
In other words, in the context of our discussion here, repudiation can be defined as “breach”.
Anticipatory repudiation definition
According to Merriam-Webster’s dictionary, anticipatory repudiation is defined as:
A refusal by one party to a contract to perform his or her future obligations under the contract that is expressed either by a clear statement of refusal or by a statement or action that clearly implies refusal
What is notable with this repudiation of contract definition is that a party fails to perform future obligations by expressing such intention in a clear statement or by clearly acting as such.
It’s also worth noting that the anticipatory breach definition is the failure to perform contracting obligations “before” they are due.
Typically, you have a contractual breach when the time to do something has already lapsed whereas in the context of an “anticipatory” breach, the breach happens “prior” to the deadline to perform the obligation.
A person’s words or conduct can represent an anticipatory repudiation of contract.
Anticipatory repudiation in contract law
Generally, a contract cannot be breached before the obligations are due or the time required to perform the obligations has passed.
However, in common law jurisdictions, the anticipatory repudiation doctrine allows for a party to be declared to be in breach of contract before the party’s obligations are due under the contract.
A contract is breached in an anticipatory fashion when its essential terms are breached when:
- A party expressly states it will not perform the obligations
- A party acts in such a way that shows it is unwilling to perform the obligations
- A party acts in such a way that suggests it is unable to perform the contract
A simple expression of dissatisfaction with the contract or a party having some difficulties does not qualify as a clear and unequivocal statement of anticipatory breach.
Let’s look at the contract repudiation in more detail.
Retraction of contract repudiation
It is always possible for a party to retract his or her contract repudiation and continue the contract performance.
For the repudiation to be retracted in law, the following must be observed:
- The aggrieved party’s legal position has not changed vis-à-vis the repudiating party in reliance on the repudiation
- The repudiating party resumes the performance of the obligations as required under the contract
- There are no material changes to the obligations of the parties under the contract
For example:
A software development agency informs its client that it will not deliver the custom software build due to a shortage of qualified software developers and a change of market conditions.
If the client retains the services of another software development agency, the repudiating party can no longer retract the contract as the aggrieved party’s position has materially changed in reliance on the repudiation statement.
For the repudiation retraction to be effective, it must be made in a timely fashion and in good faith.
However, if a party’s anticipatory breach of contract makes it impossible to restore the parties to where they should be under the contract, then retraction will not be possible.
Duty to mitigate damages
Typically, when a person breaches a contract, the other party acquires a legal duty to mitigate his or her damages.
As a result, when a party repudiating a contract notifies the other party in writing, the notification translates into the aggrieved party having to mitigate damages due to the breach.
A notice of repudiation will legally impose a duty on the aggrieved party to mitigate damages in anticipation of the repudiating party’s express intention to breach the contract.
This strategy can provide the repudiating party with a legal basis to contest or challenge the potential quantum of damages the aggrieved party may claim in a breach of contract lawsuit.
A notice can also be given by the aggrieved party.
In light of objective reasons, the aggrieved party can send a written notice to the repudiating party asking for assurances that the contract will be respected.
If the other party fails to respond to the written notice, then he or she can be construed to have repudiated the contract.
Types of contract repudiation
There are three categories of contract anticipatory repudiation cases:
- When a party clearly expresses his or her intention to refuse to execute contractual obligations
- When a party’s behaviour and conduct makes it impossible for the other party to perform contractual obligations
- When the seller of a property sells or transfers the property or good to a third party
Let’s look at an anticipatory breach of contract example for each of the three scenarios:
John informs Mary that he will no longer be able to render the services under the contract as he does not have the resources to allocate to the project and he will not be looking for the required resources to do the job due to financial hardship.
This is an example of when there is a clear and unconditional statement of anticipatory repudiation of contract.
Helen advises Suzanne that she will fully reimburse her outstanding loan.
However, Helen immediately spoils the funds she had to pay back Suzanne’s loan but also incurs additional debt making it impossible for her to respect her contractual engagement.
This is when Helen’s actions, conduct and behaviour makes it clear that there is contract repudiation.
Marc and Jack enter into a promise to purchase where March agrees to buy Jack’s real estate property.
However, before delivering real estate property to Marc, Jack sells the same property to Robert making it therefore impossible to respect his promise to Marc.
This is a clear case where the property that was the subject of the agreement can no longer be delivered resulting in a breach of contract.
Anticipatory repudiation elements
The concept of anticipatory repudiation can be difficult to demonstrate in court.
As a result, it’s important to understand the elements required to prove the existence of an anticipatory breach of contract.
You have an anticipatory breach of contract in the following scenarios:
- A promisor clearly expresses his or her intention not to respect the terms of the contract before the time fixed in the contract for its performance arrives
- There is a clear expression by the obligor it is unable to respect the contract terms
- There is a voluntary and affirmative action by the obligor showing it is unable or unwilling to perform the contract
The intention of the breaching party must be unequivocal and unconditional to qualify as a clear expression of the intention to breach contract or not perform obligations.
Legal defenses
What arguments can you invoke to defend yourself against an anticipatory breach of contract claim?
There are a number of possible defenses that you can invoke in court, such as:
- The plaintiff is the one who actually failed to perform the obligations in your favour forcing you to suspend your obligations (plaintiff’s breach of contract)
- An unforeseeable and unpredictable event out of your control prevented you from fulfilling your contractual obligations (force majeure or “act of God”)
- It is impossible for you to execute your obligation or perhaps it is completely impracticable (impossibility)
- Due to an event out of both parties’ control, the purpose of the contract becomes worthless even though both parties can perform their obligations (frustration of purpose)
- Due to a unilateral mistake of fact, you made a mistaken incorrectly interpreting the terms of the contract (mistake of fact)
Anticipatory breach of contract remedies
There are different types of anticipatory repudiation remedies possible when a party decides to repudiate a contract.
A party repudiating a contract can be exposed to:
- Pay compensatory damages to the aggrieved party (compensatory damages)
- Be compelled to execute the contract (specific performance)
When one repudiates the contract, the aggrieved party will be released to perform his or her obligations as it was intended under the contract.
What should you do if you find yourself in a contract with someone who cannot or will not fulfill their obligations?
To remediate the situation, you should consider:
- Asking the other party for a written assurance that they will respect the terms of the contract
- Try to find an alternative solution or renegotiate the terms of your contract to find a compromise without having to spend a lot of money on litigation
- You should mitigate your losses knowing that the other party will likely not respect the terms of the contract
- File a lawsuit for breach of contract to demand anticipatory repudiation damages in the form of monetary damages or ask the other party to execute the remaining obligations under the contract
Anticipatory repudiation UCC
The Uniform Commercial Code provides for special rules relating to the anticipatory repudiation of contracts.
UCC applies to the contract for the sale of goods to or by a merchant.
Under Section 2-609 UCC, a party having reasonable grounds to believe the other party may not perform the contract is entitled to demand assurance that he or she will receive performance.
Until the other party responds to the written notice of the qualified repudiation, the aggrieved party can suspend the performance of any obligations.
If the other party does not respond to the written demand, UCC will consider that there is a repudiation of the contract.
Under Section 2-610 UCC states that when a party fails to observe the terms of the contract resulting in significant impairment of the contract value to the other, then the aggrieved party may:
- Wait a reasonable amount of time for the repudiating party to execute his or her obligations
- Pursue the repudiating party for damages
- Suspend execute his or her corollary obligations
Under UCC, if a party has sold and delivered goods and is expecting payment as the final obligation remaining to be executed, the client’s statement that he or she will not pay for the goods will not qualify as a contract repudiation allowing the seller file suit on the basis of anticipatory repudiation.
In other words, when the only obligation left under a contract is the payment obligation, the UCC repudiation rules do not apply.
Anticipatory repudiation example
The courts recognize express repudiation to be when there is a clear, unequivocal and unambiguous statement made by one contracting party that he or she will not respect the terms of the contract going forward.
A party can be considered to have repudiated the contract if he or she makes a clear and unconditional statement to this effect.
Let’s look at an example of what may not be an express repudiation and what can be considered as one.
For example:
If a party states that sales have not been great lately and so the inventory levels are low at this time.
He is not sure if he can respect the terms of all the contracts.
This may not qualify as an express contract repudiation as it is a vague statement not reaching the threshold of a clear, unconditional and unambiguous statement.
If a party states that it does not have the intention to ship the goods purchased by the client and will not do so regardless of the terms of the contract, that can legally qualify as an anticipatory repudiation.
A contract can also be repudiated if a party makes it impossible to execute the contractual obligations.
In consideration of a party’s conduct, repudiation is clear and unambiguous.
For example:
A party agrees to sell a rare and collectible vehicle to another.
However, before delivering the rare vehicle to the buyer, the seller sells the car to a third party making it impossible to deliver the same vehicle to the initial buyer.
Anticipatory repudiation FAQ
What is repudiation of contract
Repudiation of contract is when a promisor (repudiating party) states that it will not perform its obligations under a contract.
The other party (non-repudiating party) can consider the statement or actions of the promisor to constitute breach of contract even though the promisor may still have enough time to perform the obligations.
For example:
A client hires a contractor to renovate his basement.
In the middle of the job and without justification, the contractor orders his crew to abandon the job, start clearing their tools and equipment and tells the client that he is leaving for good.
This is when a party’s voluntary actions clearly show contract repudiation.
What is the difference between anticipatory breach and repudiation
An anticipatory breach of contract and repudiation of contract essentially mean the same thing.
They both refer to an instance when a party is considered to be in breach of contract before an obligation is legally due.
This happens when a person clearly states that he or she will no longer execute the terms of the contract or is unwilling to pursue the contractual relationship without having a justifiable reason to do so.
The voluntary act of a person can also constitute an anticipatory breach or repudiation when it is clear that the person is no longer going to perform the contract.
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