What is repudiation and what does it mean to repudiate a contract? In this article, we explain what it means to repudiate a contract, how repudiation can be avoided, and how to respond to a repudiation of a contract.
Contributors: Farrah Motley, Legal Principal of Prosper Law, and Ziad Baraja, Legal Intern and Law Student.
What does repudiation mean?
The word “repudiation” means to reject something or to refuse to obey something.
In the context of a contract, repudiation means to show an intention not to be bound by the contract or being unready, unwilling or unable to adhere to the promise that was made.
Repudiation can be in the form of:
- a party may act (or fail to act) in such a way that he prevents himself from performing his contractual obligations in an essential respect: such impossibility, if demonstrated, can amount to a repudiatory breach.
- a party may renounce the contract. it occurs when the party in breach in words or by conduct shows either that it does not intend to perform its obligations under the contract in some essential respect or expressly declares that it is or will be unable to perform them.
Determining whether a party is not “ready, willing, and able” to perform a contract is a tricky legal question. It can be demonstrated through the words and behaviour of a party. Those words and behaviours must clearly show:
- an unwillingness or inability to perform a significant aspect of the contract; or
- an intention to perform the contract, but in a way that is inconsistent with that party’s obligations under the contract
The seminal Australian legal case that explains the doctrine of repudiation is Koompahtoo Local Aboriginal Land Council v Sanpine Pty Ltd  HCA 61. In Koompahtoo, the High Court of Australia defined repudiation as follows:
… conduct which evinces an unwillingness or an inability to render substantial performance of the contract. This is sometimes described as conduct of a party which evinces an intention no longer to be bound by the contract or to fulfil it only in a manner substantially inconsistent with the party’s obligations. It may be termed renunciation. The test is whether the conduct of one party is such as to convey to a reasonable person, in the situation of the other party, renunciation either of the contract as a whole or of a fundamental obligation under it.
A contract is often repudiated before an actual breach of the contract occurs. For this reason, repudiation of contract is often referred to as an anticipatory breach.
The test for repudiation of a contract
Repudiation is a complex area of law. The test for determining whether repudiation has occurred is whether a reasonable person, in the position of the innocent party, would consider the repudiating party’s behaviour to convey renunciation:
- of the contract as a whole (being an unwillingness or inability to perform all of that party’s obligations); or
- of a fundamental obligation under it. A sufficiently serious failure to perform obligations that are not fundamental may also show an unwillingness or an inability to substantially perform the contract according to its requirements
Repudiation based on incorrectly identifying a repudiation
If you think the other party may have repudiated the contract (but they actually haven’t) and you take steps as a result that demonstrates that you (rather than them) are not ready, willing, and able to perform the contract – you may find yourself on the receiving end of a claim of repudiation. The act of termination could mean that the terminating party itself is in repudiatory breach of contract
It is imperative that you seek legal advice before you claim that the other party has repudiated the contract and, as a result, seek to terminate the contract.
What are the consequences of repudiation?
If a party repudiates a contract, the other party can choose either to:
- carry on with the contract; or
- accept the repudiation and terminate the contract.
If a party accepts the repudiation and terminates the contract, they may be entitled to sue the other party for damages for breach of contract.
How can you avoid repudiating a contract?
As the consequences of repudiation can be serious, it is important to ensure that:
- you only agree to contractual obligations that you are willing to carry out
- if the contract obliges you to do something, ensure that you do it
- you exercise your contractual rights only to the extent allowed by the contract
- you seek legal advice before refusing to perform the contract
What should you do if you have already repudiated a contract?
If you believe you may have repudiated a contract, you could attempt to retract the statement giving rise to the repudiation and reiterate (by your words and your conduct) that you are ready, willing, and able to perform the contract.
The best way to retract the repudiatory statement or behaviour is by sending an email to the relevant person which clearly and unequivocally confirms that you are ready, willing, and able to perform the contract and that you retract the statement or conduct.
Retracting the repudiatory conduct by email ensures that it is instantaneous (so that the innocent party does not have further opportunity to accept the repudiatory conduct) and that it is recorded in writing.
In addition, you should comply with the notice terms in the relevant contract which, for example, may require that you issue notices by registered post to a particular person.
It is also possible for a party to repudiate the contract and then later retract the repudiation if the other party hasn’t materially changed their position because of the repudiation. Again, you should act as quickly as possible and document the retraction.
“an intention no longer to be bound by the contract”
What should you do if the other party has repudiated a contract?
If you have entered into a contract with someone and they have repudiated the contract, you have two options:
- continue to carry out the contract (as if nothing has happened); or
- accept the repudiation and notify the other party in writing that you have elected to terminate the contract.
If the other party has repudiated the contract, nothing happens unless and until you have made a choice about whether to carry on with or terminate the contract.
If there is a delay in making the choice, or if other action is taken that shows that the innocent party intends to remain bound by the contract (despite the repudiation), that party may be taken to have affirmed the contract. If so, that party will no longer have the right to terminate the contract. In this scenario, if the innocent party subsequently terminates the contract, it will become the repudiating party.
Frustration of contract is different from repudiation
In some situations, the repudiating party may be unable to perform because performance becomes impossible.
Frustration of contract occurs when:
- an unforeseen event or series of events happens;
- the event(s) are neither party’s fault; and
- it has made performing the party’s obligations under the contract impossible.
To establish frustration of contract, the party in breach and relying on frustration must prove that:
- if the Common Law doctrine of frustration is relied upon – the event was unforeseeable. That is, that both parties did not anticipate it
- if the contract is relied upon – that the requirements of the relevant force majeure clause have been met
This event must make the obligations either impossible to perform or materially different. If your contract does not have a force majeure clause, the repudiating party may still be able to establish frustration by relying on the Common Law rules of frustration.
If a contract is frustrated, the Court will discharge both parties to the contract from any outstanding contractual obligations. However, rights and liabilities which accrued prior to the event of frustration will continue in effect.
Examples of contract frustration may include:
- a change in the law, making the performance of a contract illegal
- excessive delay in performance due to unforeseen circumstances
- physical destruction of the subject matter of the contract
- death of one of the parties to the contract
How can Prosper Law help?
If you think the other party to your contract may have repudiated your agreement, or you have been told that you have repudiated a contract, contact a commercial contract lawyer today.
At Prosper Law, we are able to provide fixed-fee commercial legal advice and help resolve your legal matter. Get in touch today for a no-obligation quote and free legal consultation.
Want to continue reading? Check out What is Consequential Loss?
Farrah Motley | Legal Principal
PROSPER LAW – Australia’s Online Law Firm
M: 0422 721 121
A: Suite No. 99, Level 54, 111 Eagle Street, Brisbane, Queensland Australia 4000