When parties enter into a contract, they promise one another to carry out the terms that were agreed upon. Failure to do so is a breach entitling the innocent party to damages that should put them (much as possible) into the same economic position as if the contract had been fulfilled.
When goods or services are not delivered or payment is not made, it is easy to see that a contract was broken. But what if the time to perform has not yet come and one side indicates it cannot (or will not) fulfill their end of the bargain?
In that instance, you may have what is known as a “repudiation” of the contract (and more specifically an “anticipatory breach” in this particular situation).
What is a repudiation of contract?
In Texas, a repudiation occurs when one party says or does something that either denies the existence of its contractual obligations or indicates they do not intend to carry out such obligations. That can occur in advance before performance is ever due (then called an “anticipatory breach”), during performance, or after partial performance.
When one party repudiates, there arise two “options” (although which applies is still subject to mitigation so as to make less than a true choice on what to do). The non-breaching party can accept a repudiation immediately as a full breach of contract—either by unconditional words of acceptance or materially altering their position in reliance—and then sue for all damages resulting, or, if not able to take any other path they can wait until the time for performance and sue as damages then accrue. Sometimes it is necessary to wait for performance and hope it may eventually occur, and it may also be that future damages are conditional, contingent, staged, or otherwise not ascertainable until the future occurs. But, in that instance, you must stay ready at all times to carry out your obligations as well since the other side is entitled to retract a repudiation that is not accepted and start performing when due.
How do you know when an anticipatory breach has occurred?
To anticipate something means to know or expect it in advance. There are all kinds of situations where it may not be exactly clear whether the other side can or will perform. But you do not want to prematurely declare an anticipatory breach or repudiation, as that puts you at risk of being in breach yourself. So how can you be sure?
The key legal factor for a repudiation in Texas is that there must be an unequivocal “intention to abandon, renounce, and refuse to perform the contract” (under common law), or a “clear determination” not to perform (under the Uniform Commercial Code, or UCC). That can arise by either words or the conduct of the other party.
For example, your counterparty may expressly communicate directly to you that they are not going to be able to meet the terms of the contract. If that goes to a material aspect of the bargain, you can rely on it as an anticipatory breach or repudiation to move on to other options and recover for any damages from the breach (and, in some instances, there may be no damages if it is actually cheaper to go with a different option at that point. But keep in mind it is best to have such a thing in writing to make sure there is a “clear” or “unequivocal” basis. The contemporaneous written record, unlike memories and testimony in litigation, does not evolve or change over time.
Alternatively, your counterparty may simply act in some way that makes it certain they do not intend to comply with the terms of your contract. Perhaps they sold their entire inventory to a competitor (and cannot assign the contractual duty to perform). With no product, there is no way they could honor the contract. Again, however, you want to be sure and have objective proof to rely upon, since it would not be reasonable for you to act upon mere rumors or indirect indications from others of the counterparty’s inability or unwillingness to perform. They may have other unknown arrangements in place to fulfill their part of the deal once due. Declaring a repudiation could be a breach on your part and otherwise materially changing your position would only cost you more.
You can seek “adequate assurances” if there is a legitimate reason to question the other party’s intent to perform
The best policy in most situations, when possible, is to communicate with the other side and ask questions until you get to the point where inability to perform is clear.
Communication is important too because an anticipatory breach cannot exist if there is a mistake of law or fact creating a reasonable misunderstanding by the other party as to whether performance was due, so it is incumbent on you to clear up any such mistake before declaring a breach. Further, the fact that one party is merely uncertain or unsure if they will be able to hold up their end of the bargain is never enough. The intent to not perform must be unequivocal and clear. That also prevents parties from unjustly manipulating appearances to declare an early breach on the other side.
There are further tricky situations where one party may express dissatisfaction with a contract that is no longer as profitable for them as before, or perhaps they request additional compensation to do the work. If an agreed-upon payment is written into the contract or otherwise fixed, threats to renege or efforts to extract better terms can constitute a repudiation in the right circumstances. However, there must be a clear refusal to perform involved since, again, an equivocal (or conditional) implication that performance may not occur without more payment is still not an anticipatory breach. The other side can always characterize themselves as simply trying to negotiate for a modification while still always intending to perform if that was not successful.
Fortunately, the UCC allows a party who has good reason to worry whether the performance of the other may occur to request “adequate assurances” in writing from the other side. If such assurances are not given within 30 days, that alone can be deemed a repudiation allowing you to exercise statutory remedies. The common law in Texas—which applies to contracts not involving a sale of goods of $500 or more (with such a sale of goods governed by the UCC)—does not expressly recognize the same right, but communicating with the other side can lead to information that effectively serves the same purpose.
So, again, the best policy as usual is to communicate first before acting.
Do not delay mitigation if possible
Mitigation means acting reasonably and promptly to minimize loss or damage after a breach. Breach of contract can occur for all kinds of reasons—accidental, unknowing, or in bad faith and intentional—with all subject only to the same type of recovery: putting the innocent party in the same position it would have been otherwise. But that means parties are expected to take reasonable actions to minimize their losses as well, and failure to do so when it was easy to accomplish may not be compensated.
That is true also for anticipatory breach or a repudiation of contract. If you are dealing with such a situation, you are expected to start mitigating losses (if possible) as soon as you know the other party will not be meeting their obligations. Sometimes that is not possible for a number of reasons (i.e., custom work or products, a unique long-term arrangement, lack of money to engage someone else, etc.) and so you can sue for damages when they accrue. But if you can take steps to stop the bleeding, you are expected to do that rather than just rack up the other side’s bill.
Mitigation protects you in court. If you have notice of a breach or anticipatory breach, for example, yet continue to incur expenses that reasonably could have been avoided, you likely will not be able to receive compensation for that expense and will be left without a full recovery. Taking action to avoid additional losses is prudent also because it shows the court (or jury) you acted responsibly and seek only just and appropriate compensation.
Consider contacting a Commercial Litigation Attorney
The possibilities and scenarios that may (or may not) give rise to an anticipatory breach or repudiation are limitless, so it is often best to have an experienced business litigation attorney review and advise you before taking any drastic actions.
Wright Commercial Litigation offers reasonable rates and often takes appropriate commercial cases on a contingency or hybrid basis. Consulting with an experienced attorney early on can help ensure you respond correctly at every step of the way so that any losses resulting from an anticipatory breach or repudiation of contract are properly minimized and compensated.