What is a Repudiatory Breach of Contract and its Impact on Your Termination Rights?

Your business could face disruption, operational challenges and a lot of stress when a supplier fails to meet its obligations. However, if you rush to terminate the contract without a careful assessment, you may expose your business to more significant legal and financial risks. For instance, if you end the contract without valid legal grounds or fail to follow termination procedures, your business may be in breach. One way to justify termination is if your supplier commits a repudiatory breach of the contract. This right arises by law and does not need to be stated in the contract. It will apply unless the contract expressly excludes it with clear wording.

This common law right allows your business to elect to terminate in specific scenarios, which can be particularly useful. However, relying on these rights can be challenging and expose your business to risks. This article introduces key issues around repudiatory breaches, how they impact termination rights and key steps your business can take to reduce risk when contracting with suppliers. 

How Can a Repudiatory Breach Impact Your Business’s Termination Rights?

In simple terms, a repudiatory breach can happen under common law when the breach goes to the heart of the contract and substantially deprives your business of the whole benefit of the contract. For example, this may be where the supplier stops performing the work under your agreement.

When your supplier commits a repudiatory breach, you have key choices – you can accept the breach, end the contract, and claim damages. Alternatively, you can affirm the contract, allow it to continue, and pursue damages. However, you should first check your contract carefully to determine if it expressly excludes or limits the common law right to terminate for repudiatory breach. 

Your business may also have contractual termination rights beyond those under common law – such as the right to terminate if your supplier commits a material breach and fails to remedy it.

Are There Risks To Consider When Your Business Terminates for Repudiatory Breach?

Before you terminate for repudiatory breach, your business must consider several key issues and potential risks:

• you must quickly determine whether your supplier has committed a repudiatory breach. This depends on the contract terms, the nature of the breach, and its impact. If you wait too long, you could be deemed to have affirmed the contract; 
• a repudiatory breach does not remove the innocent party’s duty to mitigate its losses, so you must ensure that you do so; 
• you must also consider whether termination is commercially viable. In some circumstances, it will not be. Before terminating, your business should think practically – for instance, do you need to line up an alternative supplier if the services are business-critical?; 
• you must ensure your business follows any contractually required termination procedures. Some contracts require you to provide notice or give the supplier time to fix a breach before terminating. If you fail to follow these steps, your termination may be invalid, and your business could face legal risks; and 
• if your business wrongly classifies a breach as repudiatory, your attempted termination may itself be a repudiatory breach. This could give your supplier the right to claim damages against your business. Courts set a high bar for common law termination, so you must be confident in your position. There has been a range of litigation in this area where terminating for the alleged repudiatory breach has been contested, showing that reliance on it may be better as a last resort than your first port of call. 

Legal Advice

Given the number of issues and possible risks, legal advice can be invaluable before your business makes contract termination decisions. 

A commercial contracts solicitor can help you assess whether your supplier’s actions constitute a repudiatory breach or other breach, identify any termination procedures your business must follow in the event of a breach, and advise on minimising risks. Legal advice can also help your business explore alternative options like renegotiation or dispute resolution before proceeding to termination.

How Can Your Business Proactively Prevent Breaches?

Given the legal and commercial risks of contract termination, your business should take proactive steps to prevent disputes.

You can reduce risk from the outset by drafting a clear supplier contract and taking a proactive approach to contract management.

Your business should also keep strong records of supplier performance, contract changes, and problems. Clear records can help your business prove its position if a supplier dispute arises.

Regular monitoring of supplier performance can help your business detect potential issues early. By addressing minor breaches quickly and communicating openly with your supplier, your company may prevent disputes and avoid the need to seek an early termination.

Key Takeaways

Before your business seeks to terminate a contract for repudiatory breach, you must carefully consider your contractual rights and common law principles. Courts set a high threshold for termination for a repudiatory breach, so your business must ensure the breach is severe enough and constitutes a repudiatory breach before proceeding. Legal advice can help your company assess its options, follow the correct procedures, and avoid the risk of termination escalating into a dispute. 

If your business needs legal advice on a supplier contract, our experienced contract lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to solicitors to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.

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