Contracts – What is Repudiation and How does It Work

The relationship between contracting parties can fail for a number of reasons. Sometimes people cannot agree on how best to run a business. Sometimes they do not go through with a sale or transfer. And sometimes the parties just drift apart in their relationship. When these things happen, parties may seek to end their contractual relationship by breaching the agreement. A breach can take two forms. A partial breach occurs when a party is substantially harmed, if they can be compensated adequately in damages, how much the party failing to perform has already performed, and behavior of the breaching party. A total breach occurs when a party wholly fails to fulfill their obligations under the contract.

When a breach happens the harmed party can choose to Repudiate in response. This cancels the contract, so that no future performance is required. The choice to repudiate however can be difficult to make, as there are several factors courts consider. If a party repudiates in response to a total breach, the repudiation itself is not seen as a breach if it is justified. Courts generally require an “absolute or unequivocal refusal to perform or a positive statement of an inability to perform”. Thus parties must be aware that repudiating by failing to perform their part of the agreement can hurt a party in the future if that repudiation was not justified. While this type of repudiation, aka Anticipatory repudiation may seem to fit this unjustified category, so long as a party is reasonably insecure about performance, it can suspend its own performance of a contract (breach it) until assurances are received. This form of repudiation usually happens when there is a set schedule of deliveries and monthly payments, and one party does not perform their duty (paying or delivering). If this happens, the party that performed, can therefore withhold their performance until the situation is fixed or the contract is cancelled. This allows for the parties to keep their contract and fix the situation, without having to go to court, or cancelling the contract right away.

Additionally parties that are concerned about a breach may seek “adequate assurances” from the other side, to ensure that they are confident each side performs their duty. This can take the form of shipping documentation, cash deposit, or irrevocable letter of credit. Just to name a few. This is especially true with contracts for sales, where parties may need to ship goods long distances and therefore want assurances that their goods will be delivered.

If you are a business and are having issues with receiving goods or payments, you want to know what your options are. At Thooft Law, we can help you with you disputes and provide the legal expertise necessary to resolve your conflicts. We can be contacted at thooftlaw@gmail.com. We look forward to hearing from you.