Anticipatory breach of contract
Under certain circumstances a situation will occur when one party to a contract will become aware of the fact that the other party to the contract has no intention of performing their contractual obligations, even though the time period for performance of the contract is yet to expire.
When this is the case, and where the requirements of a repudiatory breach of contract are present, the innocent party may be able to treat the contract as repudiated.
The grounds of this will be as a result of an anticipatory breach of contract.
What does repudiation of a contract mean?
A repudiatory breach of a contract is a breach of a contract which is deemed to go to the very core of the contract in the fact that it shows evidence on the part of one of the parties that they no longer intend to be bound by an essential term of the contract.
What happens if there is a breach of a fundamental term in this manner?
If there is a breach of a fundamental term of the contract in this manner the innocent party will be able to accept the breach of the contract – termed the repudiation of the contract – and thus bring the contract to an end.
When will an anticipatory breach of the contract occur?
An anticipatory breach of contract will occur in one of the following situations:
- Where there has been a renunciation by a party of their liabilities under the contract – an intention to no longer be bound by the contract shown by their actions
- Where there is an impossibility of performing obligations under the contract due to their actions
Would a failure to perform the contract constitute an anticipatory breach of contract?
A failure to perform the contract, whether this is a total or partial failure, will not constitute an anticipatory breach of contract. The reason for this is that this breach can only occur once performance of the contract is due.
Accordingly this will constitute an actual breach of contract rather than an anticipatory breach of contract.
When will it become impossible for obligations under a contract to be performed?
It is often difficult to prove that the actions of one party bound by the contract makes it impossible for them to perform the contract.
An example where this will difficulty occurs is where one party contracts to sell goods to another party but decides to instead sell them to a third party. Many may view this as meaning that the action of selling the goods to a third party makes it impossible to sell the goods to the original party under the original contract. However, there is still the possibility for the seller to purchase the goods back from the third party in order to honour the terms of the original contract.
Will it still be possible to find an anticipatory breach of contract?
When courts decide that there has been no anticipatory breach of the contract due to impossibility they will then have to consider in detail whether in the same circumstances there may have been a renunciation leading to anticipatory breach of the contract.
This means that an act by one party to the contract may not create an impossibility of performing the contract but it may show a clear intention not to perform their obligations under the contract – termed renunciation.
When will a party be deemed to renunciate their liabilities under the contract?
Renunciation is the main avenue by which a party can show that there has been an anticipatory breach of the contract.
The following four key factors will be taken into consideration in determining whether there has been a renunciation of a contract amounting to an anticipatory breach:
- Whether there has been a clear case of a refusal to perform contractual obligations that it goes to the root of the contract
- The refusal to perform the contract must be absolute – this means that renunciation of the contract cannot be conditional on certain circumstances occurring
- When deciding whether there has been a sufficient refusal to perform contractual obligations, it must be judged according to whether a reasonable person in the position of the innocent party would regard the refusal as being clear and absolute
- That the words and other conduct relied on for the renunciation must be considered as at the time when it is treated as terminating the contract – this means that the history of the transaction must be evaluated