Innocent Party has Options
A repudiatory or fundamental breach does not automatically terminate the contract. It gives the innocent party, the option to terminate or affirm the contract. If he affirms the contract, he may insist on the other party’s performance. The same principles apply to a repudiatory anticipatory breach, where the breach occurs before performance is due.
There are limits to this principle. At some point, performance may no longer be possible. He may be obliged at some point to accept the breach in order to mitigate his loss. In the case of an anticipatory breach, the courts have indicated that the innocent party must have a legitimate interest in keeping the contract alive.
The rights subsist, even if the contract by its terms, purports to provide that it is rendered void on breach. This is generally interpreted in accordance with common law principles, so as to prevent the party in default from relying on his own breach to his benefit. The courts, in effect, hold that this could not have been the intention of the parties to the contract.
For convenience below, a fundamental breach, a repudiatory breach and a repudiatory anticipatory breach are each referred to as a “fundamental” breach. References below to a repudiatory breach, are references to a fundamental breach, whether anticipatory or otherwise which evince an intent not to be bound by and perform the contract.
Options for Innocent Party on Fundamental Breach
Where there is an fundamental breach, the innocent party has two options. He may accept the breach immediately, terminate the contract and sue for damages. Alternatively he may choose not to accept the breach and wait and see of the other party performs, at least where he has a legitimate interest in so doing.
The innocent party usually has the choice as to whether to terminate the contract. The party in default cannot terminate the contract unilaterally. The duty to mitigate may effectively require the innocent party to terminate the contract. If the innocent party opts to terminate the contract, the party in default owes a secondary obligation to pay damages in accordance with general principles.
The innocent person effectively gives the party in default the opportunity to change its mind and perform the contract. If the innocent party affirms the contract, later events may arise which entitle the party in default himself to terminate, without liability for damages.
Accepting the Breach
If repudiatory breach is not accepted, the contract remains in being. The innocent party may wait and see whether the other party performs his obligations when the date for performance arises. The other party may perform. Where he does so, and there is no other breach there is no right to terminate or to damages.
An anticipatory breach may be accepted by taking an action for damages or by giving notice that it is accepted. Conduct may suffice. A notice to the other party in default is not necessarily required. The acceptance must be unequivocal and complete. The breach of the contract cannot be accepted in part unless it is severable.
The election to terminate must generally be communicated to the defaulting party. Generally, the innocent party must act promptly. The contract may provide for the requisite period.
The innocent party loses the right to terminate by his affirmation of the contract unless there is a further actual breach when performance is due. He may recover damages for breach caused by the repudiation if the other party performs without breach when due.
Affirmation of Contract
The innocent party may affirm the contract. Where he does so, the contract remains in being on both sides. Once a contract is affirmed, it cannot later be terminated in respect of the same breach. He cannot claim damages.
A party may be affirming the contract, if, with full knowledge of the facts, he makes it clear by his words acts or in some cases, by silence that he does not accept the breach as a discharge of the contract. A person may affirm a contract by seeking a court order for specific performance.
The innocent party may ultimately lose the benefit of his rights. This may occur if the party who was in breach is later able to rely on another ground for non-performance, such as an express contract clause or frustration.A further fundamental breach may give a new right to terminate.
The traditional position is that a party who ignores a repudiation may recover damages for breach caused by the repudiation. The normal rules requiring mitigation of loss are modified. The effect is that the liability for damages of the party in default may increase, even though this may seem futile.
One view is that the mitigation rules do not apply at all, until the due date for performance. The implication is that the innocent party may continue to prepare for the performance, incurring substantial expenditure as if the contract will be performed.
Another view limits this right to cases where the innocent party has a legitimate interest in so doing. On this view, the innocent party should immediately mitigate and is not entitled to “wait and see”.
Judging the Seriousness of Breach
The right to terminate will arise where an anticipatory breach is such that would constitute a fundamental breach of contract. If it declares or evinces a non-fundamental breach, it will not justify termination. The matter may be the subject of an express or implied agreement, which designates whether the breach is sufficient to justify termination
The right to terminate or not may depend on the prospective effects of the breach. They may not be self-evident. It is sufficient that the innocent party reasonably believed that the breach at the relevant time, was such as to be fundamental. A renunciation of the contract will generally be fundamental.
Innocent Party Dilemma
The party who seeks to accept the repudiation risks the claim that he has himself wrongfully repudiated the contract. On the other hand, the innocent party may, in theory, be held to have affirmed the contract, where he takes no action. Accordingly, he should be careful to establish the true position before regarding himself as discharged.
In some circumstances, the innocent party’s initial reaction may be to request the other party to perform. This will not necessarily be an affirmation and it is arguably insufficient by itself. It is usually reasonable for the innocent party to request performance before he decides his course of action.
The courts are likely to protect the innocent party in this context, notwithstanding the possible hardship to the party who has committed the anticipatory breach
Apparent Incapacity to Perform
The position is more difficult where a repudiatory breach is claimed to arise from the other party disabling himself from performance. The matter will turn on the seriousness of the disability. It is considered at the relevant time, with reference to the relevant circumstances.
A party should not readily assume that the other party is wholly disabled. He may be able to perform the contract in another way. The apparent prospective breach may be a matter of speculation. The breach must be proved in fact and not in supposition.
It may be unfair that one party is liable for damages because the other party reasonably believes that he cannot perform, if it turns out that he can, in fact, perform. The courts may hold that his supposition is premature if it is not tested and verified.
Revocation of Affirmation
The affirmation of the contract is generally irrevocable. Affirmation does not prevent termination on the basis of another fundamental breach of contract.
There are several contexts, where it appears likely that the affirmation may be revoked. It is not clear whether a later breach of contract which is not of itself sufficient to allow termination of the contract may be used to justify later termination. On one view, the innocent party should not be permitted to change his mind, in that the party in default has acted in reliance on the affirmed contract.
On another view, if no actual prejudice is suffered, it argued that the later termination is reasonable. It may be that a further less serious breach is destructive of the requisite trust a confidence, although it might not be so, it occurs in isolation.
Anticipatory Breach and Damages
Where there is an anticipatory breach, damages are immediately available to the innocent party. Damages may be available, before the date of performance. This may lead to practical problems of assessment, which is usually made with reference (e.g., the market at the due time for performance.
There may be practical difficulties where there is a long delay between the repudiation and the due date. However, courts commonly make assessments of a hypothetical nature in relation to future loss.
References and Sources
Irish Textbooks and Casebooks
Clark, R. Contract Law in Ireland 8th Ed. (2016) Ch 18
Friel, R. The Law of Contract 2nd Ed, (2000)
McDermott, P. Contract Law (2001) 2nd Ed (2017) Ch 21
Enright, M. Principles of Irish Contract Law (2007)
Clark and Clarke Contract Cases and Materials 4th Ed (2008)
English Textbooks and Casebooks
Poole, J. Casebook on contract law. (2014) 12th edition
Stone and Devenney, The Modern Law of Contract 10th Ed (2015)
McKendrick, Contract Law 10th Ed (2013)
Chen-Wishart, Contract Law 5th Ed (2015)
Anson, Reynell, Beatson, J., Burrows, Cartwright, Anson’s law of contract. 29th Ed (2010)
Atiyah and Smith, Atiyah’s introduction to the law of contract. 6th Ed.
Chen-Wishart, M. (2015) Contract law. 5th Ed.
Cheshire, Fifoot and Furmstons, Furmstons and Fifoot Cheshire, Fifoot and Furmston’s law of contract. OUP.
Duxbury, Robert (2011) Contract law. 2nd Ed.
Halson, Roger (2012) Contract law. 2nd Ed.
Koffman & Macdonald’s Law of Contract. 8th Ed. (2014)
O’Sullivan, Hilliard, The law of contract. 6th Ed. (2014)
Peel, and Treitel, The law of contract. 13th Ed. (2011).
Poole, J.Casebook on contract law. 12th Ed. (2014).
Poole, J. Textbook on contract law. 12th Ed. (2014)
Richards, P Law of contract. 10th Ed. (2011)
Stone, R. The Modern law of Contract. 10th Ed. (2013)
Treitel, G. H. An outline of the law of contract. 6th Ed (2014).
Turner, C Unlocking contract law. 4th Ed. (2014).
Upex, R. V., Bennett, G Chuah, J, Davies, F. R. Davies on contract. 10th Ed. (2008).
Stone,Devenney, Text, Cases and Materials on Contract Law 3rd Ed (2014)
McKendrick, Contract Law Text, Cases and Materials 6th Ed (2014)
Stone, R, Devenney, J Cunnington, R Text, cases and materials on contract law. 3rd Ed (2014)
Burrows, A. S. A Casebook on Contract. 4th Ed.
Beale, H. G., Bishop, W. D. and Furmston, M. P. Contract: cases and materials. 5th ed. (2008)
Blackstone’s Statutes on Contract, Tort & Restitution 2017 (Blackstone’s Statute Series)
UK Practitioners Texts
Chitty on Contracts 32nd Edition, 2 Volumes & Supplement (2016)
The above are not necessarily the latest edition.