What is Repudiation?

Repudiation means to show an intention not to be bound by the contract or not being ready, willing or able to adhere to the promise that was made.

Our contract lawyer explains what it means to repudiate a contract. This article will also discuss how repudiation can be avoided, and how to respond to a repudiation of a contract.

Prosper Law provides legal advice to businesses and individual across Australia. If you need a contract lawyer to draft, review or negotiate a contract, contact us today. Or, if you need advice as to whether a contract has been repudiated, call us at 1300 003 077 or email enquiry@prosperlaw.com.au.

What does repudiation mean?

What the word reputation means

The word ‘repudiation’ means to reject something or to refuse to obey something.

Repudiation can happen when:

1. a party acts (or fails to act) in such a way that they are prevented from performing their contractual obligations in an essential respect. And if someone can prove that performance has become impossible, it can amount to a repudiatory breach.
2. a party renounces the contract. this occurs when the party in breach, by words or by conduct, shows either that they do not intend to perform their obligations under the contract in some essential respect or expressly declares that they are not or will be unable to perform their obligations.

The doctrine is a high bar and not easy to establish

The Court stated in Shevill v Builders Licensing Board (1982) 149 CLR 620, that repudiation is “a serious matter and is not to be lightly found”.

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. But, repudiation is a high bar. This means that demonstrating that someone has repudiated a contract is not easy.

The test for repudiation

Determining whether a party is not “ready, willing, and able” to perform a contract is a tricky legal question. The words and behaviour of a party can demonstrate repudiation. 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 [2007] 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. Repudiation of a contract is often referred to as an anticipatory breach for this reason.

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 severe failure to perform responsibilities that are not fundamental may also show an unwillingness or an inability to substantially perform the contract according to its requirements

In yet more commentary from the Courts, repudiation:

“…depends upon whether the threatened non-performance would have the effect of depriving that other party of substantially the whole benefit which it was the intention of the parties that he should obtain from the primary obligations of the parties under the contract then remaining unperformed. If it would not have that effect there is no repudiation, and the other party cannot elect to put an end to such primary obligations remaining to be performed. The non-performance threatened must itself satisfy the criteria of a fundamental breach“

Repudiation based on incorrectly identifying a repudiation

If you think the other party may have repudiated the contract (but they actually haven’t), be careful. If you take steps that demonstrate 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 a repudiatory breach of contract.

It is critical that you seek legal advice before you claim that the other party has repudiated the contract.

Mistaken interpretation and repudiation

In Aslan v Stepanoski [2022] NSWCA 24, the Court made a finding about what should happen when a party is mistaken as to their interpretation of a contract. The Court commented that parties seeking to terminate for repudiation should be careful when the other party’s conduct is based on bona fide reliance on a mistaken interpretation of their contractual rights.  Where this occurs, the party seeking to terminate should take steps to persuade the other party that they have relied on an erroneous interpretation and are potentially repudiating 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.

A party may be entitled to sue the other party for damages for breach of contract if they accept the repudiation and terminate the contract.

Whichever option you choose, you must not delay in making a decision. If you wish to accept the repudiation and terminate the contract, you should act quickly.

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. For example, they 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. This is particularly so 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:

1. continue to carry out the contract (as if nothing has happened); or
2. 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.

A party may be taken to have affirmed the contract where there is a delay in making the choice, or if another action is taken that shows that the innocent party intends to remain bound by the contract (despite the repudiation). 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, 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.

A Court will discharge both parties to the contract from any outstanding contractual obligations if a contract is frustrated, However, rights and liabilities which accrued prior to the event of frustration will continue in effect.

Examples of contract frustration may include:

1. a change in the law, making the performance of a contract illegal
2. excessive delay in performance due to unforeseen circumstances
3. physical destruction of the subject matter of the contract
4. death of one of the parties to the contract

How can Prosper Law help?

Get in contact with the team at Prosper Law if you think the other party to your contract may have repudiated your agreement or been told that you have repudiated a contract.

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 | Director

PROSPER LAW – Australia’s Online Law Firm

P: 1300 003 077

E: farrah@prosperlaw.com.au

W: www.prosperlaw.com.au

Credit to: Ziad Baraja, Legal Intern and Law Student.

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