What is an 'anticipatory breach of contract' and when might it occur?

A repudiatory breach of contract is a serious fundamental breach which goes to the very core of the contract. It effectively deprives the innocent party of the substantial benefit of the contract.

If there is a repudiatory breach, the innocent party is entitled accept the breach of the contract and repudiate (end) the contract, or continue the contract. In either case, the innocent party can claim damages for breach of contract.

An anticipatory breach of contract occurs where:

• There has been a renunciation by a party of their liabilities under the contract, ie. an intention to no longer be bound by the contract as shown by their words or conduct;
• It is impossible for the party in breach to perform its obligations under the contract due to its actions.

The innocent party must have a subjective belief that the other contractual party will breach the contract to succeed in a claim based on anticipatory breach.

A failure to perform the contract, in whole or in part, will not constitute an anticipatory breach of contract. This would constitute an actual breach of contract, not an anticipatory breach.

It is often difficult to prove that the actions of one contractual party make it impossible for it to perform the contract. An example is where one party contracts to sell goods to another party, but instead decides to sell them onto a third party. This could mean it will be impossible to sell them to the other contractual party, however, it is possible for the seller to buy the goods back from the third party and then honour the terms of the original contract.

Each case will be decided on its facts. If there is no anticipatory breach, there may be a renunciation leading to anticipatory breach of the contract. This means that an act by one contractual party may not create an impossibility of performing the contract but it may show a clear intention not to perform their obligations under the contract (renunciation).

Renunciation may show that there has been an anticipatory breach of the contract. There must have been a renunciation by one party of its liabilities whether by words or conduct.

There are four key factors that 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 goes to the root of the contract;
• The refusal to perform the contract must be absolute, ie. renunciation of the contract cannot be conditional on certain circumstances occurring;
• When deciding whether there has been 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;
• 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.

The innocent party is entitled to claim for damages. Given the nature of repudiatory breaches of contract, the innocent party could potentially be claiming for substantial losses. To do so, the innocent party must show that had the other party performed its obligations, it would have been ready and willing to perform its own side of the contract.