It is well known that construction contracts can bring problems with them if not drafted to contain the correct terms or are ambiguous. Even when a contract is written correctly, things can go wrong, and sometimes get out of control. Determining when a breach of contract has occurred and whether it is a repudiatory breach is fundamental to understanding your rights and resolving a construction claim.
So, what is a repudiatory breach?
A “repudiatory” breach is circumstances where one party so acts or so expresses itself as to show that it does not mean to accept the obligations of a contract any further. A repudiatory breach is one of such significance that it would provide the innocent party with a common law right to terminate the contract and to claim damages.
Which circumstances fall under repudiatory breach?
Determining if a breach of contract is repudiatory breach can be complex, case law judgments have held that amongst other circumstances, the following examples have amounted to repudiatory breach:
- Walk out - an absolute refusal to carry out the works or an abandonment of the works before it is substantially completed without any lawful excuse. The most common example!
- Rendering completion impossible.
- Failure to give possession of the site at all.
- A clear order for the contractor not to complete the works permanently, contrary to the contract.
- Employing third parties to carry out the same work already contracted to the contractor.
- Wrongful termination of the contract.
Circumstances unlikely to fall under repudiation include:
- Defects, where the works have been substantially completed.
- Delays unless the contract provides that ‘time is of the essence’.
- Non-payment or late payment
It should not however be assumed that the above automatically do or don’t constitute repudiation, or that repudiation only occurs for the above examples. Each case should be analysed and considered on its merits and factual background.
What are the rights of the innocent party?
A repudiatory breach does not itself automatically terminate the contract. Rather, where a party has committed a repudiatory breach, the innocent party has the right to either:
- accept the repudiation and terminate the contract, bringing the performance of the primary obligations of the parties to an end, or
- affirm the contract (if possible), in which case the contract and primary obligations continues.
If electing to terminate the contract, the innocent party must communicate the acceptance of the repudiatory breach. Such acceptance can be communicated expressly or by conduct. It is recommended that acceptance is expressly communicated to avoid ambiguity.
If electing to affirm the contract, it would also be recommended that the innocent party expressly communicate to the defaulting party that although there has been a repudiatory breach, they are content to affirm the contract (waiving the right to terminate in the process).
Whether electing to terminate or to affirm, the innocent party will have the right to claim damages for losses arising from the repudiatory breach.
Are there risks to the innocent party?
Repudiatory breach is not without risk to the innocent party, and it is of the utmost importance that the innocent party understand not only their rights, but also their obligations following a repudiatory breach, especially if that innocent party elects to terminate the contract.
Firstly, the innocent party must establish whether or not the breach by the other party is repudiation at all and whether this gives rise to the right to terminate the contract.
Secondly, if electing to terminate, the innocent party should not delay in terminating the contract as any inaction or delay in accepting the repudiation may be considered to be an affirmation of the contract which in turn irrevocably waives the right to termination.
Thirdly, if there is a right to terminate a contract, the innocent party must still consider any formalities within the contract provisions concerning termination of the contract and the formalities of serving notice to a particular address, by a specified method or within a specific period so not to fall foul of any technicality.
Crucially, the innocent party must be accurate in the foregoing establishment of their rights and the way they notify and undertake the termination procedures. If the party is incorrect in their establishment of their rights or is incorrect in the service of their termination notification, then the resulting termination may be wrongful. Wrongful termination is itself a repudiatory breach and one which would make the otherwise innocent party, the offender, and exposed to damages for the other party.
The Covid-19 pandemic has only escalated the level of cases of repudiatory breach in construction contracts, with delays, material shortages, price inflation and increased pressure on cashflow affecting the construction industry for some time now. We have seen examples now where contractors are demanding more money to complete works, or they will walk out - pure repudiation if they do!
How Arbicon can help
Whatever the breach of contract, the innocent party can claim damages as compensation for the loss sustained because of the breach. If repudiatory breach has occurred, the innocent party has the option of terminating the contract, bringing the contract to an end, and claiming damages.
Repudiation in construction contracts is a complex matter. At Arbicon we can support you by:
1. establishing whether you are in circumstances of repudiation breach,
2. advise you on your rights, remedies and obligations arising therefrom,
3. represent you in notifying termination, and
4. collate and prosecute any damages claim using ADR.
If you need any advice on repudiatory breach in construction contracts, please contact Arbicon on email@example.com or call 01733 233737.