Breach and Repudiation (Student Copy) Having discussed the various types of remedies available for breach, we must now look at what constitutes a breach of contract. Some breaches have such an immediate, irreparable, and significant impact on the promisee s rights that they are material as soon as they occur, and there is nothing the promisor can do to rectify them. Other breaches are by nature so trivial that they could never result in a total breach of the K, even if no attempt was made to remedy them. However, between these extremes, there are many variations. In this lecture we will look at what factors go into determining what is considered a material breach of contract in the Common Law, and how repudiation of the contract influence the rights of the parties involved. I. The Nature of Breach A. A party breaches a K by failing, for whatever reason, to honor a promise of performance when that performance is due. B. Four factors need to be looked at in order to establish a breach of contract has happened : 1. Must determine the existence and content of the K to understand the exact nature of the promise that was made. 2. Must establish the date that the promised performance became due: a. can repudiate before contract is due b. a breach for failure to perform, ho wever, can only occur when the duty to perform is due c. If K does not clearly state due date for performance, must determine by construction of K. 3. Must decide if the performance complied with what was promised. 4. Once clear breach has occurred, must determine the severity (how bad) of the breach and on the other party s rights in reacting to the breach. a. Serious breach = Total or Material Breach - withhold performance - terminate K - sue (normally) for full expectation damages 1
b. Less serious breach = Minor Breach - promisor should be given chance to cure (fix the problem) - pay damages II. The Significance of a Breach: Material Breach or Substantial Performance, and Total or Partial Breach A. Any performance that falls short of that promised is a breach B. R e s p o n s e t o breach depends on how serious: If the breach is: Total and Material = promisee may - (Total Breach) - Material but not = promisee may - Total (Partial Breach) - Not Material = promisee may - (Substantial Performance) - - C. What makes a Breach Material? 1. must examine the language of the contract 2. evaluate probl em in light of reasonable expectations of the parties 3. A breach is material if the failure to perform is so central to the contract that it substantially impairs the value and deeply disappoints the reasonable expectations of the promisee. 4. If, on the other hand, the breach is not material, it does not relieve the aggrieved party from continuing to perform under the contract. Such a non - material breach is sometimes called a partial breach. Note: Although the aggrieved party is not relieved from performing after a partial breach, he or she nonetheless has an immediate right to sue for damages stemming from the partial breach. 2
Example: Owen, the owner of Blackacre, contracts with Contractor for the latter to build a house on Blackacre. The K provides that Owen is to make a progress payment every week for the previous week s work. Both parties perform as required during the first month of the K. After the fifth week, however, Owen is three days late with the progress payment for that week. Assuming that this breach is not a material one, Contractor is not discharged from the K. She may, however, immediately sue for whatever damages she sustained as a result of the partial breach by Owen. 5. Important factors: a. the extent of the performance affected b y the breach b. the equities between the parties 6. A breach does not have to be deliberate or willful to be material, BUT court may consider it. Example A is to build a dock for B. If a $2,000down payment is agreed to by the parties. The $2,000 is to b e paid by June 1 st, work is to begin on June 15 th. a. $0 of down payment paid by June 1 s t = clear Material breach b. $1,000 paid, but now A wants to hold off paying the other $1,000 until work begins on June 15 th. Question that must be asked: What was the down payment for? - apportion risk / short delay unimportant = Non- Material breach - K says $2,000 is to buy materials for dock = Material breach. c. Damages -? - Material breach? = D. Substantial Performance. - Non- material? = 1. It is sometimes said that substan tial performance is the opposite of material breach 2. Substantial performance is a non -material breach = partial breach 3
3. Determine using the same process as a material breach 4. Examples #1 - same fact scenario as above with the deck. If parties agreed that B needed the $2,000 to buy material, but only $1,000 was paid on June 1 st, the other $1,000 the next morning Breach/Damages? #2 In the contract, B promised he would put a clear sealant on the dock. B builds the dock, but fails to put the sealan t it. Breach/Damages? - III. Anticipatory Repudiation A. A party may make it unmistakably clear, even before his performance under a contract is due, that he does not intend to perform. When he does so, he is said to anticipatorily repudiated the K. B. Such a repudiation allows the other party to suspend, and perhaps even cancel, his own performance. (the other party is not obligated to accept the repudiation when it occurs, and can wait to see if the obligor withdraws his repudiation) 4
C. Question: What constitutes a repudiation? 1. Common Law as long as the promisor left any chance open that she could perform, there was no repudiation. 2. Modern America a positive statement by the obligor to the obligee (not a third party) which is reasonably interpreted by the oblige to mean that the obligor will not or cannot perform his contractual duty : a. a statement by the promisor that he intends not to perform (must be quite likely n o t vague doubts ) b. an action by the promisor making his performance under the K impossible c. an indication by the promisor via some other means that the promisor will be unable to perform, although he desires to perform. 3. Insolvency A party s bankruptcy is generally considered to be an anticipatory repudiation, which has the effect of allowing the other party to make a claim in bankruptcy. 4. Threatened breach must be material IV. Retraction of Repudiation As noted above, the promisor has the ability to retract a repudiation. This power if lost as soon as the other party notifies them that the repudiation has been accepted or taken action in reliance on it, resulting in a significant change of position. Example: D contracts to supply gas to P for a certain period. Prior to the end of the period, D anticipatorily repudiates by stating that it will not continue to perform after a certain date. P advertises for new bidders, receives a bid from X Corp, and notifies D that unless D retracts its repudiation within three days, it will accept X Corp s bid. The three day s pass, D does not retract, and P notifies X Corp that it has accepted its bid. D then retracts, but P signs the contract with X Corp and sues D. Held? 5
V. Can the innocent party continue to fulfill there part of the K? A. The party may not ignore the repudiation and continue the K if to do so would aggravate her damages. B. The other party is thus obligated to mitigate damages, or be not allowed to recover those damages which could have been avoided. Example: Contractor contracts to build a house for Owner. Before Contractor starts to work, she repudiates the K. Owner cannot ignore the repudiation, sitting by and waiting for damages to mount up. He must instead attempt to engage another contractor, or he will not be able to recover from Contra ctor damages which could have been avoided. Similarly, if it was Owner who had anticipatorily repudiated the contract, Contract would be under an obligation to find another project, to sell any materials she had bought for work on Owner s house, etc. VI. Can the injured party decide to ignore the repudiation, and demand performance? Can the injured party then change there mind and sue for breach of K? A. Traditional Common Law = No, once the other party urges the repudiator to withdraw the repudiation, the former has re-instated the K and looses their right to treat the repudiation as a breach. (This rule makes life for the innocent party VERY difficult!) B. Modern View: Most courts now hold that the injured party does NOT lose any rights by insisting on performance, and that they can later change their mind and sue for a breach. (However, if, due to the injured party s urging, the repudiator retracts before the innocent party materially changes their position, this retraction is effective. 6
VII. Repudiatee s (injured party) inability to perform: The injured party may not recover if it is shown that they would have been unable or unwilling to perform their share of the bargain. Example: A corporation owns a particular apartment buildin g. D, a bank which owns all of the stock in the corporation, gives P the right of first refusal to match any offer which D receives for the corporation s stock. The agreement requires D to notify P of any offer so that P can decide whether to match it (with P to have 60 days to come up with the money if he decides to match it). D sells the stock to a third party without giving P the required notice. P sues D for breach. D argues that P, in order to recover, must show that P would have been willing and able to come up with the money to exercise his right of first refusal. H o l d i n g? : VIII. The Dangers of Dealing with possible Repudiation A. Risks arise, both to the obligor and obligee, when there is any degree of uncertainty about the existence and extent of the right claimed to have been repudiated, or when it is unclear if the conduct amounts to a repudiation. B. It may take litigation to resolve whether the obligor s indication of intent really was a repudiation of an important contractual duty, and if the o bligee overreacts in response, this could itself amount to a repudiation! 7