Parties enter into contracts with the best of intentions to fulfil the contract. However, there are instances when a party becomes incapable or unwilling to perform their contractual obligations. Such conduct may amount to 'repudiation' and potentially lead to a contract dispute. Repudiation may attract significant consequences for the parties to a contract and requires careful consideration.
What is repudiation?
Repudiation of a contract occurs when one party renounces their obligations under a contract. This can be done either expressly or impliedly (by conduct):
- express repudiation may occur when a party explicitly states that they do not intend to fulfil their obligations under the contract. This can be done in writing or verbally
- implied repudiation may occur when a
party's actions or conduct indicate that they do not intend to
fulfil their obligations under the contract. This can include:
- failing to perform a material obligation under the contract. This may include continued breaches of a contract, which individually may not amount to repudiatory conduct, but taken together, amount to a fundamental breach of the contract to such an extent that the conduct demonstrates a clear intention not to be bound by the terms of the contract
- selling or disposing of assets that are essential to the performance of the contract. For example, a purchaser under a contract of sale of a specific property may conclude that the seller has repudiated the contract where the seller disposes of the property to a third party before the date of sale under the contract.
Consequences of repudiation
If a party repudiates a contract, the other party has the following options:
- temporarily suspend their own obligations under the contract. This allows the non-repudiating party to assess the situation and decide whether to terminate the contract
- terminate the contract immediately. This is the most common option as it may enable the non-repudiating party to avoid further losses
- continue to perform their obligations under the contract. This involves some risk as it means that the non-repudiating party may end up bearing additional responsibility in the case of the other party's breach.
Remedies for repudiation
If a party repudiates a contract, among other things, the non-repudiating party may be entitled to the following remedies:
- damages for any losses incurred as a result of the breach
- specific performance, which is an order of the court requiring the breaching party to fulfil their obligations under the contract
- restitution, which is an order of the court requiring the breaching party to return any benefits they received under the contract.
Below are four key considerations when dealing with repudiation.
1. Assess the situation
The first step is to assess the situation and determine whether there has been a genuine repudiation. This involves considering the following factors:
- the nature of the breach
- the seriousness of the breach
- the intention of the breaching party
- the likelihood that the breaching party will be able to cure the breach.
Among other things, you will need to consider any communications (written or verbal) with the other party, along with their conduct.
2. Consider your options
If you believe there has been a repudiation, it is important to consider your legal position to understand your rights. You will then need to consider your options which may include:
- terminating the contract
- seeking damages
- trying to negotiate a settlement.
3. Document everything
It is important to document everything that happens in relation to the repudiation, including:
- all relevant invoices and receipts
- the date and time of the repudiation
- the nature of the breach
- the steps that you have taken to resolve the matter; and/or
- copies of correspondence and messages,
as they may assist as evidence if the matter becomes the subject of court proceedings.
Be cautious in the oral and written statements you make during the process and consider if legal review is required. For example, you may not want to engage in conduct, make a statement or permit something to happen that may waive rights available to you.
4. Be prepared to take legal action
If the other party does not cooperate, you may need to take legal action to protect your rights. This could involve commencing legal proceedings, including seeking urgent injunctive relief to protect your position. You may also consider a claim for loss and damage arising from the repudiation.
This publication does not deal with every important topic or change in law and is not intended to be relied upon as a substitute for legal or other advice that may be relevant to the reader's specific circumstances. If you have found this publication of interest and would like to know more or wish to obtain legal advice relevant to your circumstances please contact one of the named individuals listed.