Have you been told that you repudiated the contract? What does that mean?

An allegation that you or the other party has repudiated the contract is a serious claim with potentially significant risks for both parties. Many contractors think it means the contract has been terminated but that is not right.

What is repudiation?

Repudiation happens when one party shows they are unable or unwilling to follow through on their contractual obligations. This can be through their words, actions, or circumstances that make performance impossible. An example could be if the party requires a licence to complete contracted works, but that licence has been cancelled.

If a party repudiates the contract, the other party (often called the non-repudiating or innocent party) has two options:

1.     Continue with the contract, or

2.     Accept the repudiation and terminate the contract.

It is important to understand that repudiation does not automatically end the contract. The contract only ends if the innocent party chooses to terminate it, and this decision must be clearly communicated to the other side in writing.

What happens after termination for repudiation?

Once repudiation is accepted and the contract is terminated, the innocent party is no longer required to meet its obligations under the contract. They can also seek damages through legal action for any losses suffered due to the repudiation.

However, the innocent party must be able to prove that the other party either:

• Clearly intended not to follow the contract; or
• Was unable to perform the contract as agreed.

This can be shown through words, actions, or practical circumstances.

What might count as repudiation?

Courts are cautious about declaring repudiation as it is a serious conclusion and not one to be made lightly. However, it may be found in situations such as:

• One party renounces or walks away from their responsibilities under the contract
• A party acts in a way that is clearly inconsistent with the contract (e.g. buying from a competitor when they were required to purchase from you)
• A party refuses to perform, for example, because they misunderstood the contract terms
• The party cannot carry out the contract (e.g. because of a cancelled licence or insolvency)
• One side terminates the contract without proper reason
• There are repeated or serious breaches, such as ongoing delays or failure to make payments

Be careful. Wrongful termination is a serious risk

If you incorrectly claim that the other party has repudiated the contract and terminate it without proper grounds, you may be found to have repudiated the contract instead. This could leave you exposed to a claim for damages.

Also, to terminate for repudiation, you must be ready and willing to fulfil your own obligations at the time of termination. If you are not, you may lose your right to terminate.

Given how high the legal threshold is to prove repudiation, along with how risky a wrongful termination can be, you must seek legal advice:

• Before terminating a contract due to suspected repudiation; or
• If someone accuses you of repudiating a contract.

Queries

At Cornwalls, we help businesses navigate these complex issues with confidence and care. If you are unsure about your next steps or you have any questions about this article, please get in touch with a member of our Building & Construction team.

Disclaimer

This information and the contents of this publication, current as at the date of publication, is general in nature to offer assistance to Cornwalls’ clients, prospective clients and stakeholders, and is for reference purposes only. It does not constitute legal or financial advice. If you are concerned about any topic covered, we recommend that you seek your own specific legal and financial advice before taking any action.