What happens if you have a contract with someone and they outright tell you that they intend to not perform their end of the bargain? How about a situation where they don’t inform you that they plan to breach, but you have strong reasons to believe that they will not be able to perform despite their desire or willingness to do so? Anticipatory repudiation (sometimes referred to as “anticipatory breach”) is a legal concept that allows you to act before the breach occurs. This doctrine recognizes your right to seek remedies immediately, providing a means to address the breach proactively.
In this guide, we will discuss what constitutes anticipatory repudiation, the differences between express and implied repudiation, the concept of reasonable insecurity and your right to demand adequate assurances, your options when faced with an anticipatory breach, and the negative consequences you can incur by neglecting to invoke the right to anticipatory repudiation vis-a-vis the failure to mitigate and how it can limit the damages you may be entitled to.
Before we dive into the specifics, it bears discussing the concept of order of performance in contracts, and how it directly relates to anticipatory repudiation. In many contracts, the parties' obligations unfold in a sequence such that the performance of one party can be viewed as a condition precedent that triggers the other party’s duty to perform. If this principle was followed to the letter, if a contract stipulates that your performance is due first, even if the other party makes it clear they have no intention of upholding their end of the bargain you would not be able to sue them for breach until you fulfilled your own obligations.
Confused? Let's illustrate how this works with a real-world example: Imagine you are a supplier of building materials who extends credit to businesses. You've agreed to deliver a large shipment of lumber to a construction company, with payment due 30 days after delivery. Before the delivery date, you learn that the construction company has filed for bankruptcy and is closing its doors. In such a case, the construction company could claim that there was no breach because you had not fulfilled your end of the bargain yet, and since your performance was a constructive condition precedent for their performance, they have not breached themselves, and therefore you have no right to sue them for breaking the contract(!). Does this mean you should have to deliver the goods to the bankrupt company (i.e. perform your part of the contract first) before suing them? The answer should obviously be no. This is where anticipatory repudiation steps in—by providing you with a legal basis to suspend your performance and seeking remedies or damages for the breach immediately without the necessity of performing your part first.
As an initial matter, it is important to stress that an anticipated breach must be “material” for the non-breaching party to invoke the remedy of anticipatory repudiation. The materiality requirement ensures that the powerful remedy of anticipatory repudiation is reserved for breaches that truly jeopardize the foundation of the contract, and prevents situations where parties treat minor disagreements or temporary setbacks as grounds to terminate the contract entirely.
Courts often use the "substantial impairment" test to determine whether a breach would be deemed material by assessing factors such as:
When a material anticipatory repudiation occurs, the non-breaching party has several options to protect their interests and mitigate losses. These remedies include:
Express repudiation is relatively straightforward in that it involves situations where one party explicitly states they will not perform their duties under the contract. This could be a verbal statement, a written notice, or any other clear communication of intent. For example, if a supplier informs you they cannot deliver the goods you ordered on time, they have expressly repudiated.
Implied repudiation, on the other hand, is more subtle. It occurs when one party's actions (or inactions) make it seem impossible or highly unlikely they'll fulfill their contractual obligations. Examples may include repeatedly missing deadlines without valid reasons, transferring ownership of essential assets needed to perform the contract, and making statements that contradict the intent to perform under the contract without stating an intention to breach outright.
This distinction can be critical given that the non-repudiating party has the burden of proving that the other party has, in fact, repudiated. Practically speaking, this means that if you're considering suspending your obligations due to the other party's anticipated breach, you need solid evidence of their repudiation—whether express or implied.
As mentioned above, to suspend your performance, you must bear the burden of proof that the other party’s conduct amounted to anticipatory repudiation. This is all well and good when one party has expressly repudiated the contract—that is, all you have to do to sustain your burden of proof is produce evidence that the other party expressly repudiated. Issues arise, however, where the other party does not expressly repudiate, but rather the repudiation is implied. In such cases, you may find yourself in a dilemma. On the one hand, you are wary of performing first given that the other party's behavior suggests they may not uphold their end of the bargain. On the other hand, if you suspend your own performance and then it turns out that you’re unable to sustain your burden of proof, you may be found in breach yourself, and liable to the other party for damages.
To address this issue, contract law provides that if a party has reasonable grounds for insecurity that the other party will not perform, they have the right to demand adequate assurances, and if they do not receive adequate assurances within a reasonable amount of time (usually 30 days), they are entitled to suspend their performance. Let’s unpack this point-by-point.
Installment contracts, where goods are delivered or payments are made in a series of lots, create specific complexities regarding anticipatory repudiation. The Uniform Commercial Code (UCC) addresses situations where one party indicates an intent to breach only a portion of an installment contract.
Specifically, Section 2-612 of the UCC grants the non-repudiating party the right to demand adequate assurance of future performance if they have reasonable grounds to feel insecure about the other party's commitment. As applied to installment contracts, this right may, but does not necessarily, apply where the potential breach involves only a single installment. The key requirement for the non-repudiating party to treat an installment breach as a repudiation of the entire contract hinges on whether that breach substantially impairs the value of the whole contract. For these purposes, courts consider the severity of the defective or missing installment, its replaceability, and the overall impact on the contract's purpose.
This can also affect the remedies available to the non-breaching party in that if a single installment breach does not substantially impair the overall contract, the non-breaching party may suspend their performance only for that installment (although they will be entitled to demand adequate assurance for future installments).
While anticipatory repudiation is a powerful remedy, it's not absolute. The repudiating party might raise certain defenses to avoid or minimize their liability. Some common defenses include:
As you can see, anticipatory repudiation is a complex legal concept, and it can be difficult to know when you have grounds to invoke it. If you find yourself in a situation where the other party to a contract seems likely to breach, consulting an experienced contract law attorney can help protect your rights. Through AAL's directory, you can connect with attorneys to provide you with the clarity and guidance needed to protect your interests effectively, ensuring you're prepared to respond proactively.
