Anticipatory breach, or anticipatory repudiation, is when it becomes clear that one party to a contract will be unwilling or unable to complete their obligations under the contract before the performance is due. What should you do when the other party to your contract indicates they are not going to comply? It’s a complex issue, and your immediate response or lack of response might determine whether you can recover damages for the future breach of contract.
In this article, we will discuss what you should do in the event of an anticipatory breach or anticipatory repudiation of a contract, including:
- When you should ask for “adequate assurances,”
- When the repudiating party can retract their repudiation,
- The importance of mitigating your damages, and
- How to avoid contract litigation whenever possible.
What is Anticipatory Breach?
There are two ways that an anticipatory breach, or anticipatory repudiation, typically happens:
- Before the obligations under the contract are due, one party to the contract communicates to the other party or parties that they intend to breach the contract, or
- Before the obligations under the contract are due, one party to the contract does or says something that indicates they cannot or will not comply with the terms of the contract.
If one party sends a written communication to the other party that says, “I intend to breach this contract,” that’s easy enough. More often, however, things are not so clear. Texas common law (found in our state’s appellate opinions) says that anticipatory repudiation “is an affirmative defense to a breach of contract claim,” and the non-breaching party “is discharged from its remaining duties to perform under a contract where the other party repudiates its contractual duty before the time for performance.” See, Cook Composites v. Westlake.
Anticipatory repudiation is “when the promissor unequivocally disavows any intention to perform in the future.” If it is certain that the breaching party does not intend to honor their obligations under the contract, the non-breaching party can either (1) wait to see if the breaching party changes their mind when performance under the contract becomes due, or (2) accept their repudiation and take appropriate action to protect their interests.
In many cases, however, the statements or actions of the breaching party are not unequivocal, and you should take additional steps to ensure that there are no mistakes or misunderstandings before filing suit, suspending your own performance under the contract, or taking adverse action against the breaching party.
Adequate Assurances
The UCC (Uniform Commercial Code) Sec. 2.609 says, “when reasonable grounds for insecurity arise,” the non-breaching party may demand “adequate assurance of due performance” and may suspend any part of their own performance for which they have not “already received the agreed return.”
If the breaching party does not provide “assurance of due performance as is adequate under the circumstances of the particular case” within “a reasonable time not exceeding 30 days,” it is considered a repudiation of the contract.
Retraction
UCC Sec. 2.611 says that the breaching party can retract their repudiation at any time before their next performance is due unless the non-breaching party has accepted the repudiation, “materially changed [their] position, or otherwise indicated that [they] consider[] the repudiation final.”
A retraction can be accomplished “by any method which clearly indicates to the aggrieved party that the repudiating party intends to perform, but must include any assurance justifiably demanded [per Sec. 2.609].”
Mitigation
A party to a contract must do what they can to minimize their losses or damages after a breach, and this includes anticipatory breaches. As soon as you are certain that the other party is going to breach the contract, you are expected to begin mitigating your losses inasmuch as possible. If it is possible, for example, engage another party to complete the work and don’t incur any additional expenses that could have been avoided.
The best-case scenario is you complete your project with no or minimal losses. If you do suffer significant damages, however, it will be apparent to the court and jurors that you acted responsibly and did what you could to minimize the consequences.
When Should You Sue for Anticipatory Breach of a Contract?
There are situations where you must file a breach of contract lawsuit to protect your business interests, but, in many other cases, your attorney may be able to help you resolve the conflict and settle your case out of court.
Your Houston business litigation attorney can review the facts of your case and advise you as to whether it is in your best interest to file a lawsuit or to take other actions to protect your interests.
How Can Your Houston Business Litigation Attorney Help?
Don’t wait until a potential breach of contract arises to contact your Texas business litigation attorney – your company’s lawyer can help you avoid unnecessary lawsuits and breaches of contract by negotiating and drafting effective contracts on your behalf, reviewing your current contracts, and litigating breaches of contract when necessary.
Negotiating and Drafting Contracts
Good contracts make good business partners, just as good fences make good neighbors…
If you need help resolving a contract dispute, call our business/contract litigation attorneys to find out how we can help. Also – it just makes sense to get your company’s attorneys involved at the very beginning of the process before conflicts arise.
Your company’s contract lawyer can negotiate and draft agreements that will cover all possible contingencies, save your business money, and preserve your relationships with other businesses, customers, and vendors.
A well-drafted contract tailored to your unique circumstances will prevent many of the disagreements and misunderstandings that lead to contract breaches.
Contract Review
Your attorney at Murray-Lobb can review your business’s existing contracts to ensure that they contain (or, when appropriate, don’t contain) key provisions like:
- Clear statements of each side’s responsibilities under the contract,
- Clear statements of what each side receives under the contract,
- Time limits for performance under the contract,
- Notice provisions,
- Special warranties,
- Termination rights,
- Liquidated damages in the event of non-performance or partial performance,
- Force Majeure clauses,
- Choice of law provisions,
- Arbitration clauses,
- Statute of limitations provisions (the statute of limitations for a breach of contract action can be limited to two years by contract), and
- Other provisions that are specific to the services or goods that are being provided.
Contract Litigation
When litigation is necessary, your business litigation attorney on the Murray-Lobb team will act quickly to protect your company’s interests, including:
- Demanding adequate assurances when it appears that one of your company’s partners intends to breach their contract,
- Advising your company as to what actions should be taken to protect your interests now, to mitigate your damages, and to preserve your rights and any causes of action in the event you need to file a lawsuit against the breaching party,
- Negotiate and attempt to resolve conflicts and disputes out of court whenever possible, and
- Aggressively litigate your claims in Texas and federal courts when necessary to protect your company’s interests.
Please feel free to contact any of our Murray Lobb attorneys with your business contract or other business law questions so we can help you better protect all your commercial and contractual rights. We also remain available to help you with all your general business, corporate, and estate planning needs.