For any number of good reasons you may wish to (or need to) consider whether you can terminate a contractual relationship. In our first series of litigation survival guides we set out some of the general factors to consider prior to terminating a contractual relationship.

An issue to consider is whether the other party may be in repudiatory breach of contract. If so, are you entitled, at common law, to treat the contract as at an end? Here is our guide to repudiatory breaches and relying on such a breach to treat the contract as at an end.

Is the other party guilty of a repudiatory breach?

Not all breaches of contract are repudiatory. The general rule is that to be repudiatory the breach must go to the very heart of the contract and have substantially deprived a party of the very benefit that the contract was intended to deliver.

What amounts to a repudiatory breach will vary with each contract. Some general principles are as follows:

Poor performance does not, in itself, necessarily amount to repudiatory conduct.

  • If time is not of the essence, a party which fails to perform within the stipulated time does not commit a repudiatory breach (although will be liable to you in damages).
  • Non-payment will not necessarily constitute repudiatory breach of contract, particularly where the court would not consider that you are suffering financial risk from the non-payment. Certainly, a single non-payment in a contract providing for on-going payments frequently does not justify a claim for repudiatory breach.
  • Multiple breaches may constitute a repudiatory breach (i.e the "straw that broke the camel's back" approach). This could include a chain of non-payments.
  • The contract may provide guidance as to whether a breach is repudiatory. If a breach is not sufficiently serious to entitle you to invoke a contractual termination clause, the breach is unlikely to be repudiatory. Equally, if the contract provides that a period of notice should be allowed to remedy the breach concerned, it is unlikely the breach will amount to a repudiatory breach before you have gone through the notice process. However, please note our comments later in this guide as to the risks of exercising contractual rights at the same time as seeking to treat the contract as repudiated. This is a complex area and you may want to take legal advice to manage the risks.

Consider any anticipatory breaches. If before the time arrives at which a party is bound to perform a contract, that party expresses an intention to break it, or acts in such a way as to lead a reasonable person to the conclusion that it does not intend to fulfil its obligation(s), this constitutes an anticipatory breach. The test for whether such an anticipatory breach is also repudiatory is the same as for an actual breach.

If so, act swiftly and, in the meantime, expressly reserve any right(s) to terminate for repudiatory breach

Unless and until a repudiation is accepted, the contract continues in existence. If you are faced with a repudiatory breach you have a choice: to elect to treat the contract as continuing ("affirmation") or to bring the contract to an end.

The law allows you a reasonable amount of time to make up your mind. You can maximise the time the law will allow by expressly reserving your rights to treat the contract as repudiated. However, if you do nothing for too long, there may come a time when the law will treat you as having affirmed the contract, and having lost the right to treat the contract as at an end on the grounds of repudiatory breach.

Watch your conduct

While you are making up your mind as to whether you wish to affirm the contract or to treat it as at an end, ensure that you do not do anything that could be viewed by the other party (and the court) as waiving the repudiatory breach. You may still have a claim for damages for the breach, but if you do act in a way which is deemed inconsistent with the contract being at an end, you will be treated as electing to affirm the contract. Conduct can amount to waiver of a right to terminate.

Even a "no-waiver" clause in the contract cannot always prevent you from having affirmed the contract and losing the right to treat the contract as at an end.

How to treat the contract as at an end

Be consistent. If you choose to treat the contract as at an end on the grounds of repudiatory breach, accepting the repudiation requires no particular form. However, communications with the other party must be unequivocal and it is important to act consistently with an election. Give clear instructions to any staff involved in the day-to-day administration of the contract - you would not wish them to affirm the contract before you can terminate it, or afterwards inadvertently put a new contract in place by conduct.

Know the risks. Be aware that treating the contract as at an end where the other party is not in repudiatory breach is an unlawful termination and itself potentially a repudiatory breach entitling the other party to terminate as against you and/or sue you for damages. You should check that the contract does not preclude you from relying on a repudiatory breach to treat the contract as at an end.

If you are treating the contract as at an end on the grounds of repudiatory breach you should be careful not also to exercise rights under the contract in such a way as to be inconsistent with your election. This can include (counter-intuitive as it may be) termination rights under the contract. Otherwise, the court may hold you as having affirmed the contract and having lost the right to terminate at common law. If you only then terminate under the contract, the contract may also set out the remedies that apply, and these could be less than would apply at common law on a repudiatory breach. This is a complex area and you may want to take legal advice before terminating to manage the risks specifically in relation to this point, as well as generally if you are concerned about your entitlement to treat the contract as at an end.

What next following acceptance of a repudiatory breach?  

From the time the contract is discharged, as a general rule both parties are excused from further performance of the primary obligations under the contract which each had still to perform. However, obligations for the resolution of disputes will remain in full force and effect as may other clauses having a function ancillary or collateral to the subject matter of the contract. Beware that confidentiality provisions, for example, could be lost. Whether a contractual obligation survives is a matter of construction of the contract.

If you accept a repudiatory breach you are entitled to claim "loss of bargain" damages. That means you can recover damages to compensate you both for loss suffered in consequence of those breaches which preceded your acceptance of the repudiation and for the loss of your opportunity to receive performance of the other party's outstanding obligations under the contract (which will include, absent a valid exclusion clause otherwise, lost profits on the contract). This is worth noting as this can entitle you to claim a greater sum than if you exercise a contractual right to terminate. However, accepting a repudiatory breach does not alter your obligation to take reasonable steps to mitigate the loss to you.