What happens to a contract if one of the parties repudiates the agreement?

by The FindLaw Team

In an ideal world, we’ll all enter into a contractual relationship with another party and experience no issues, and the contract will come to an end when all parties fulfil their performance obligations. Unfortunately, we don’t live in a perfect world, and problems can sometimes arise if one party acts in a manner that can be seen to be as a repudiation of the contractual relationship. 

Before further exploring the circumstances that may give rise to repudiation of a contract – which may entitle one party to terminate the agreement – we should note that just because such a breach has occurred, not every circumstance will automatically allow a contract to be terminated because of repudiation, however, the innocent party may be entitled to sue for damages.

There are two broad situations where a breach via repudiation can occur:

  • where a party to the contract repudiates the whole contract by an act or deed;
  • where a party to the contract breaks the terms of the agreement.

Repudiation

When a party to a contract is unwilling, or exhibits behaviour which suggests that they are unwilling to perform their contractual obligations, the innocent party has the right to terminate the contract due to repudiation. 

Repudiation due to performance (anticipatory breach)

The tone of this piece so far has run under the assumption that one party will be unwilling to fulfil the terms of the contract, however, under-performance can also occur on both sides where the time for performance has not been reached, and may result in one party repudiating the contract. In such a circumstance, the other party may be able to consider that the contract has been terminated and bring an action of damages, or in other words, anticipatory breach. If such a thing does transpire, the contract should be entirely repudiated. 

What types of behaviours can be considered as acts of repudiation?

In instances where a party to a contract categorically states that they are unwilling or unable to perform the contract, is perhaps the most clear-cut example of repudiation. Conduct amounting to repudiation can also include the words used, or the conduct of a party that can be interpreted as acts of repudiation.

When the courts are trying to determine whether an action of repudiation has occurred, an objective test is applied looking at the conduct of the repudiating party, rather than looking at their subjective state of mind. 

What happens to a contractual relationship upon repudiation?

Allow us to reinforce one of the initial points of this piece which is, just because one party fails to fulfil their obligations under the terms of the contract, does not automatically lead to a termination of the agreement, nor does it release the other party from their liabilities. What an action of repudiation does, is allow an innocent party to either insist on performance, or acknowledge the repudiation and discharge him or herself from any further obligation under the contract.

If an innocent party chooses to discharge themselves from the contract, they may be able to sue the defaulting party for damages. Alternatively, if the innocent party chooses to insist on performance, then the contract will still be on foot and all of the obligations and liabilities will still be applicable. 




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