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Repudiation is a powerful weapon that can backfire

Repudiation allows a contract to be terminated when one party is not satisfying the agreed conditions. But you must be clear when accepting repudiation – or face the consequences.

Repudiation happens, for example, when people stop doing things that they should under contracts. It entitles the innocent party to bring a contract to an end and sue for damages.

It features in recent case reports, perhaps because of the current economic climate. So what do these cases tell us about repudiation and how it works? And why should it come with a financial health warning?

Types of repudiation

There are different varieties of repudiation.

One is breach of a condition (in the technical, legal sense – a key term). Another is breach of an unclassified (‘innominate’) term that deprives the injured party of substantially the whole benefit of the contract.

The last, sometimes called renunciation, is where the contract-breaker demonstrates an intention not to perform the contract.

For example, under an agreement to construct and lease commercial units in a development for 999 years, developers had to carry out the works with ‘due diligence’ and to use reasonable endeavours to meet target dates.

Because of funding difficulties they suspended work on two blocks for more than a year and, shortly after work had resumed, the prospective tenant claimed the suspension was a repudiation and accepted it. But was it?

The Court of Appeal disagreed. The actual and reasonably foreseeable effects of the breaches at the date of purported termination – a six-month gap in handover, in the context of an agreement to grant 999-year leases – would not deprive the tenant of a substantial part, let alone the whole, of the benefit of the contract.

Need for clear acceptance

But repudiation on its own is not enough.A repudiatory breach of contract gives the innocent party a choice: to accept it or affirm the contract. Acceptance must be clear and unambiguous.

A specialist aerodynamics company working for a Formula 1 racing team disabled the team’s connection to their servers because of the team’s delays and failure to pay sums due under the contract.

“A repudiatory breach of contract gives the innocent party a choice: to accept it or affirm the contract. Acceptance must be clear and unambiguous”

At the same time, however, it issued a fee invoice for the subsequent period, having just said it would resume work after the Formula 1 shutdown.

The Court of Appeal said that acceptance requires no particular form. It is enough that the communication or conduct clearly and unequivocally conveys to the repudiating party that the aggrieved party is treating the contract as at an end.

The aggrieved party does not even have to notify the repudiating party personally, or by an agent, so long as it comes to the repudiating party’s attention.

Disabling of the server connection on the same day as sending the invoice was not a clear and unequivocal communication that the contract was at an end, although a later conversation was.

Potential dangers

So why does repudiation need a health warning?

Because if you accept a repudiation but it isn’t, you might find that you have yourself repudiated the contract, which entitles the other party to accept, stop the contract and sue you for damages. You can go from victim to contract-breaker in one go.

“Repudiation is a powerful weapon but its lack of precision can turn it into a loose cannon. So be careful what you do with it”

But because renunciation repudiation is a drastic conclusion, the courts need to be satisfied that, objectively, there clearly is a refusal ‘in a matter going to the root of the contract’ to perform contractual obligations.

The issue is highly fact-sensitive. In another Court of Appeal case, miscalculating a notice period for a notice to complete and serving formal notice of rescission too early was therefore not a repudiation. 

All of which underlines the health warning.

Repudiation is a powerful weapon but its lack of precision can turn it into a loose cannon. So be careful what you do with it.

Wisam Sirhan is a senior associate and Richard Craven is a professional support lawyer in the construction & engineering group at Mayer Brown International

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