A recent opinion by the Virginia Supreme Court reminds us of the basic – but important – principle of contract law that repudiation can be a defense to breach of contract.

The facts of Bennett v. Sage Payment Solutions, Inc., Record No. 100199 (June 9, 2011), are not complicated.  In February 2008, Bennett was promoted to President of Sage and entered into an executive employment contract with the company.  The contract, with a term of one year, set Bennett’s salary at $360,000, and included severance benefits and a 12-month non-competition clause in case Bennett’s employment with Sage ended.  Just four months later, Bennett sent an email demanding increased compensation to the $1 million range.  If his demands were not met, Bennett suggested that he and the company should work on a “mutually agreeable transition plan,” whereby he would continue with his position as President while Sage searched for a replacement.  During the search and transition period, Bennett “wanted the clock running on any post termination restrictions” in the employment contract.  Even more importantly, Bennett threatened that July 1, 2008 was his “drop dead date” for his departure.

Bennett’s employment was ultimately terminated in September 2008, after which Bennett filed suit against Sage seeking the severance benefits under his employment agreement.  On the third day of trial, Sage moved for and was granted leave to amend its pleadings to include the affirmative defense of repudiation on the grounds that Bennett’s email constituted a repudiation of the contract with Sage, and, thus, Sage was discharged of its duties to perform under the contract.  Bennett disagreed, arguing that he did not repudiate the contract because he continued to perform his duties as President until his termination in September.  A jury returned a verdict in favor of Sage.

On appeal, the Supreme Court of Virginia maintained the jury verdict for Sage.  The Court first affirmed the black-letter legal principle that repudiation is a valid defense to a breach of contract claim in Virginia.  Relying on prior Virginia and United States Supreme Court case law and the Restatement of Contracts, the Court then applied this principle to a contract that has been partially performed, holding that abandonment of a continuous-performance contract constitutes an anticipatory repudiation of the contract.  In other words, a party’s abandonment of its duties before full completion of the contract has the same effect as if the party had rejected the contract even before performance began.  Therefore, although Bennett had performed his duties as President for several months, the question of whether Bennett repudiated the contract, based on his demands and threat to depart before the completion of the contract’s one year term, was properly before the jury.

The Court was satisfied by the jury’s verdict because Bennett, in his email to Sage, expected the post-termination non-competition “clock” to begin running even as the parties negotiated an increase in his salary.  Bennett never suggested that there was a third alternative to his receiving a higher salary or leaving the company.  Finally, Bennett suggested his own early departure date, all of which led the Court to uphold the jury’s verdict that Sage was entitled to rely on this indicia of repudiation as it searched for Bennett’s replacement.  This holding is not limited to employment contracts.  Thus, in Virginia, a change in terms of any type of continuous-performance contract, even in the middle of its performance, may be considered a rejection of the original contract and a defense by the other party to its continued performance.