Repudiatory Breach of Contract - Coursework Example

Repudiatory Breach of Contract Introduction Repudiation refers to any conduct of a party to a contract from which a reasonable person in the positionof an innocent party that the first party does not intend to comply with his duties for instance: Where a party denies the validity of a contract. In the case of Tuckers Land the court held that the actions taking place in the case of anticipatory breach is the breach of an ex lege obligation. This obligation is derived from the requirements of good faith (bona fide) which forms part of every contract as the basic element (Scribd). This element prohibits anticipatory breach or repudiation of a contract. It is not necessary that repudiation should take place in so many words; but any conduct which implies or indicates with reasonable certainty that the performance under the contract which is contingent will not be rendered when such performance becomes due is sufficient to prove repudiation. For instance the denial of the existence of the contract would amount to repudiation. Similarly actions to dispute the terms of the contract or an attempt to cancel the contract without valid grounds are instances amounting to repudiation. Breach of Contract and Repudiation Thus breach of contract occurs when one of the parties to the contract fails to perform his part of the contract either fully or in part to the detriment of the other party who is innocent. Usually the breach of a contract comes to light only at or after the time set for the performance of the contract elapsed. Repudiation on the other hand becomes known even before the time ser for performance. Repudiation as a form of breach of contract becomes apparent by the behavior of any of the party to the contract indicating his intention not to honor their obligations under the contract. It is possible that any party to a contract may behave this way with respect to all of his obligations under the contract like the total denial of the existence of the contract itself. Similar inference of repudiation can be drawn from the actions of the parties to try the contract without the necessary jurisdiction to withdraw from the contract or where the party serves notice on the other that he cannot or will not perform under the contract. Any of the party to the contract may also repudiate only a part or some of his obligations under the contract. For instance a party can be said to have partly repudiated the contract when the party tenders inadequate or defective performance as proper performance under the contract. Both the act of repudiation together with the intention to repudiate the contract constitutes a breach of contract. This does not give rise to a situation that the contract is automatically terminated because of the unilateral action of repudiating their contractual obligation under the contract. The other party being an innocent party has an option of deciding whether or not to accept the repudiation. In case the innocent party decides to accept the repudiation, he gets the right to terminate the contract immediately. The innocent party also becomes entitled to claim damages from the party repudiating party. In case the innocent party decides not to accept the repudiation the contract will continue to remain in force and the innocent party can enforce the contract by getting an order from the court for specific performance. Specific performance aims to insist on the performance of the contract under the same terms agreed upon by both the parties. In the case of an order by the court for specific performance the party who repudiates and thereby commits a breach will be forced to deliver or manufacture any article of a specific quality and to pay damages as surrogate for performance. However after the decision in the case of Isep Structural Engineering and Plating (Pty) Ltd v Inland Exploration Co (Pty) Ltd (1981) there is a great amount of uncertainty as to whether damages can be claimed as surrogate for performance as an alternative to a claim for specific performance (ACCAGlobal). The position of the innocent party in the case of a repudiatory breach is discussed in the following section. Consequences of Repudiatory Breach to an Innocent Party A repudiatory breach of contract is a breach which provides sufficient ground for an innocent party to terminate a contract. However identifying repudiatory breaches have always been difficult and it will lead to serious repercussions to the innocent party if one does not take proper care to substantiate the termination. The right to treat a contract as discharged based on a repudiatory breach is a common law right provided to an innocent aggrieved party. This right is to be considered alongside with other termination rights expressly included in the contract. It is important to understand that sometimes contractual termination rights supplement common law rights. In some other instances the contractual termination rights replace the common law rights If a breach is repudiatory the innocent party is left with two options. The first option is to accept the repudiation and treat the contract as terminated. Alternatively the party can affirm the contract and insist on the performance of the contract. “Deciding whether a breach is sufficiently serious can be difficult where there is neither an outright refusal to perform in future nor a breach of "condition" but where the innocent party considers the breach or threatened breach to have significant commercial consequences.” (Ashurst) There may be instances where the innocent party would like to rely on the cumulative effect of a number of breaches that might constitute a repudiatory conduct on the other party. It may be equated to the “straw that broke the camel’s back” approach. The acceptance of the claim of the innocent party in this case depends on the facts of the individual cases. The situations may become even more complicated when the contractual terms are not in a written form or if the obligations on the contract are unclear. Similarly when the parties have been operating under a series of related contracts, the question arises as to whether the acceptance of a repudiatory breach under one of the contracts discharges just that contract where the breach occurred or the breach will affect all the contracts which are interconnected are being performed in a series. Here the timing of entering into the contract and performance of the contract is crucial to decide the alternatives available to the innocent party. It is for the innocent party to decide quickly on the course of action which he wishes to follow. If the party remains idle without taking any action, he runs the risk of affirming the contract especially in situations where the defaulting party is led to believe that business as usual. However the party cannot reserve his right for a long time. When the innocent party is not clear about the basis on which he chose to reserve his rights under the contract, it implies that he is risking the new contractual terms replacing or supplementing the original terms of the contract. There may arise situations in which one of the parties was of the view that there was a repudiatory breach; but it may subsequently turn out to be not repudiatory. These are the instances that indicate that unjustified termination contracts do not always represent instances of repudiation. In particular the situation in which one of the parties to the contract takes action with an honest reliance on the terms of the contract without having an ulterior motive to abandon it, then that situation does not necessarily give rise to repudiation. On the other hand complications may arise in cases where high authority is involved, where the honest misapprehension of the defaulting party may be assumed to be no bar in finding the repudiation in the light of the immediacy and severity of its threatened breach. If the default is likely to result in serious consequences to the other party, such action may lead to the decision of the court to decide there is repudiation. The question of assessing as to whether the other party acts honestly or not places the innocent party in a difficult position about deciding on the alternative course of action. Similarly the assessing the immediacy and severity of the consequences of a threatened breach may also pose serious problems for the innocent party. “If the innocent party decides to accept what it thinks is a repudiatory breach, but a court finds otherwise, that party may risk being held to have committed a repudiatory breach itself.” The situation will become further complicated when there is a series of contracts following the one which is under consideration for repudiatory breach. For example suppose A terminates his contract with B and obliges B to serve notice in respect of all the associated contracts with C and D. B’s position would be under considerable uncertainty because of the validity of the notices B chose to issue as such validity can be determined only subsequent to the ruling of the court on the conduct of A. The question of claiming damages for repudiatory breach may also pose considerable problems to the innocent party. When a party accepts a repudiatory breach under common law, then the party is entitled to claim “loss of bargain” damages. Loss of bargain implies the compensation for the loss of profits due to the loss of future sales. However when the party decides to exercise a contractual right to terminate the contract and when the breach in question would not find a common law right to terminate, the damages will get restricted to the amount of loss suffered until the date of termination of the contract and will not extend to the loss of profits on future likely sales, unless there is a different stipulation in the contract on this account. In this case the difference in the damages claimable may be significant, Delay in Performance If the time stipulation is a condition attached to a contract and where time is the essence of the contract the breach of time entitles the innocent party to claim the termination of the contract. A time stipulation will become a condition attached to the contract when the parties to the contract have expressly agreed to make time as an essential condition. However in commercial contracts the stipulations as to time are treated as conditions attached to the contract. (See Bunge Corp New York v Tradax) When the time stipulation is not a condition attached to the contract its breach will not entitle the innocent party to terminate unless (i) the delay is so prolonged to result in a wrongful repudiation of the contract, (ii) the innocent party serves a notice on the late party insisting on performance within a reasonable time and the other party does not comply with the notice. Conclusion In some cases affirming the contract may do good to the innocent party and it may be suggested as the best tactic to be adopted by the innocent party. If the contract is kept alive, the continuance of the contract may give rise to a debt claim in respect of the sums due under the contract. This will safeguard the innocent party from exercising his right under the common law or under the contract. However the practical limitations in exercising the right to affirm have to be considered which may suggest that the innocent party must terminate the contract and under such circumstance the party may as well consider that option. In this regard the innocent party must consider whether a right to payment is conditional upon the prior or simultaneous performance of services or other contractual obligations. Thus there is a general loss-based damages rule is applicable when a breach of contract is established in light of the competing policy objectives which are framed for enhancing contract rights versus efficient breach. In exceptional cases as decided by the House of Lords in the case of Attorney General v Blake [2000] 3 WLR 625 the innocent party who has suffered no loss as a result of the breach may recover the resultant profits which the other party has gained. However the court has not prescribed any specific circumstances when this right can be exercised. Works Cited ACCAGlobal. Answers. June 2009. 10 December 2009 . Ashurst. Repudiatory Breach of Contract: Traps for the Unwary. March 2005. 10 December 2009 . Scribd. Law of Contract Notes. 09 October 2009. 10 December 2009 . Read More