A repudiatory breach is a breach of contract so serious that it entitles (but doesn’t oblige) the innocent party to treat the contract as terminated. It goes to the root of the contract, depriving the innocent party of substantially the whole benefit of the agreement. Examples might include:
- A party refusing to perform their obligations entirely.
- A deliberate breach of a fundamental term.
- Conduct that makes future performance impossible.
Repudiatory breaches are distinct from minor or technical breaches, which may entitle the innocent party to damages but not to terminate the contract.
However, determining whether a breach is repudiatory is not always straightforward. It requires a careful analysis of:
- The terms of the contract.
- The nature and seriousness of the breach.
- The impact on the innocent party.
- The facts and circumstances of the case in question.
Courts look at whether the breach deprives the innocent party of the contract's main benefit. However, this is a fact-sensitive inquiry, and there is generally always scope to argue. Misjudging whether a breach is repudiatory can have serious consequences. If a party wrongly treats a breach as repudiatory and terminates the contract, they may themselves be in breach. This can expose them to:
- Liability to the other party for wrongful termination.
- Damages claims from the other party.
- Loss of their own contractual rights.
This can be somewhat of a double-edged sword, because on the other hand, failing to recognise a repudiatory breach may mean missing the opportunity to terminate and mitigate losses. So if a party to a contract commits a serious breach, yet the other party, being aware of the breach, carries on with the contract regardless, that party may have put themselves in a position whereby they cannot subsequently terminate the contract for that specific breach, because they have effectively waived their right to do so by their conduct. SMEs should seek legal advice before taking decisive action.
When a repudiatory breach occurs, the innocent party has a choice:
- Affirm the contract: Continue with the agreement despite the breach.
- Accept the repudiation: Treat the contract as terminated and claim damages.
This choice must be made promptly and clearly, because delay or ambiguity can be interpreted as affirmation.
Termination for repudiatory breach releases both parties from future obligations but does not affect accrued rights. The innocent party can still claim damages for losses resulting from the breach.
Whether a repudiatory breach can be rectified is a complicated and nuanced question. At common law, once a repudiatory breach occurs, the innocent party may terminate regardless of whether the breach is later remedied. However, in contractual contexts, some agreements include clauses allowing breaches to be remedied within a specified period. Whether a breach is "capable of remedy" often depends on the wording of the contract and the nature of the breach. Remedying a breach typically means putting things right for the future, not necessarily undoing all past harm.
The Court of Appeal addressed this issue in a recent case. The case concerned a shareholders' agreement between two shareholders and the company they controlled. It contained a clause stating that a shareholder was deemed to have served a notice to transfer its shares if it committed a material or persistent breach which, if capable of remedy, was not remedied within ten business days of being notified to do so.
One party committed several breaches, including allotting itself shares allocated to the other and purporting to terminate the shareholder’s agreement. They admitted that these breaches were both material and repudiatory.
The other party argued that, as a matter of law, a repudiatory breach is never capable of remedy, and that once a repudiatory breach has been committed, the innocent party can decide whether to affirm the contract or terminate.
The court decided that a repudiatory breach of the shareholders agreement did not necessarily have to be incapable of remedy. If the parties had wanted a repudiatory breach to be considered irremediable, they could have said so in the contract but here, it did not. In this case, the transfer clause simply referred to whether a breach was capable of remedy and drew no distinction between repudiatory and other breaches.
In terms of what this means for SMEs, understanding repudiatory breach is vital to managing contractual relationships. The stakes are high, and the legal landscape is complex. You should always:
- Review contract terms carefully before entering into any contracts or making any significant decisions in relation to them.
- Be aware that not all breaches of contract are as serious as others. Seek legal advice before terminating any contract.
- Consider whether the breach or breaches in question are capable of remedy.