09 Jul 2015

How to identify and respond to repudiation of a contract

by Tim Jones, Dugan Cunningham, James Byrnes

If you think your contract may have been repudiated, it is important to take care in how you deal with the other party so that your position is protected.

In the current economic climate, contractual performance is a significant issue, so it is timely to consider the issue of repudiation.

To work out whether your contract has been repudiated, you should determine whether the words and actions of the other contracting party clearly show:

  • an unwillingness or inability to render substantial performance of the contract; or
  • an intention to fulfil the contract in a manner substantially inconsistent with that party's obligations.

If you think your contract may have been repudiated, it is important to take care in how you deal with the other party so that your position is protected and you avoid some potential pitfalls, such as inadvertently repudiating or abandoning the contract yourself.

What is repudiation?

The expression "repudiation" is used in a number of different senses. Here, we're using "repudiation" to "refer to conduct which evinces an unwillingness or an inability to render substantial performance of the contract" or "conduct of a party which evinces an intention no longer to be bound by the contract or to fulfil it only in a manner substantially inconsistent with the party's obligations" (Koompahtoo Local Aboriginal Land Council & Anor v Sanpine Pty Ltd & Anor (2007) 233 CLR 115).

How do you know if repudiation has occurred?

Repudiation is "a serious matter and is not to be lightly found" and requires a clear indication of the absence of readiness and willingness to perform the contract (Shevill v Builders Licensing Board (1982) 149 CLR 620).

Whether repudiation has occurred is determined objectively. The test is whether the party's conduct would convey to a reasonable person, in the position of the other contracting party, renunciation of the contract as a whole (ie. an unwillingness or inability to perform all of that party's obligations) or of a fundamental obligation under it. A sufficiently serious failure to perform obligations that are not fundamental may also show an unwillingness or an inability to substantially perform the contract according to its requirements (Koompahtoo).

Repudiation may be established by the words and conduct of the other party or the other party's actual inability to perform (Sunbird Plaza Pty Ltd v Maloney (1988) 166 CLR 245). For example, this could be through an express or implied refusal to perform the contract. Also, a failure to substantially perform non-fundamental obligations may be conduct showing an unwillingness or an inability to perform the contract.

As to inability to perform, this may also be established through words or conduct of the party (such as a declaration of inability to perform) or by reference to the party's actual inability to perform based on the facts (W & J Investments Ltd v Bunting [1984] 1 NSWLR 331).

Accordingly, whether repudiation has occurred depends on the facts having regard to the terms of the contract. As will be discussed below, your response to repudiatory conduct may also be relevant to the outcome of any dispute about your contract.

How do you respond to repudiation?

If you are satisfied that repudiation of your contract has occurred, you may choose to:

  • accept the repudiation (ie. elect to terminate the contract); or
  • elect to continue performance of the contract.

Generally speaking, acceptance of the repudiation or election to continue to perform the contract does not necessarily require an express declaration, but may be determined based on your words and conduct (for example, Chatterton v Maclean [1951] 1 All ER 761). Therefore, you should take great care in how you respond to repudiatory conduct so as not to accept the repudiation or elect to continue performance inadvertently.

When repudiation is accepted, and the contract terminated, the parties are discharged from any further obligations to perform the contract, although accrued rights and obligations remain. Importantly, such acceptance is necessary to complete a cause of action for damages where repudiation occurs before the time for performance (Hochster v De la Tour (1853) 2 E & B 678). This will then enable you to seek to recover damages for breach of contract.

If you elect to continue the performance of the contract, you will remain bound to perform your contractual duties (R v Paulson [1921] 1 AC 271). Depending on the circumstances, you may still have access to remedies for any breach of contract (Wallis v Pratt [1911] AC 394).

It should be noted that the repudiating party may be able to retract the repudiation before your acceptance (Guy-Pell v Foster [1930] 2 Ch 169) or the time for performance of the relevant obligations has passed (Hochster).

What are some potential pitfalls?

The following are some examples of issues to bear in mind in the context of repudiation:

  • A party that adopts an erroneous construction of a contract may have repudiated the contract. However, where there is a bona fide dispute about the construction of the contract, adopting an erroneous construction may not amount to repudiation (DTR Nominees Pty Ltd v Mona Homes Pty Ltd (1978) 138 CLR 423). It may be prudent to first point out to the other party the flaws in their interpretation of the contract before terminating the contract;
  • You need to be ready and willing to perform the contract on its proper interpretation in order to terminate for anticipatory breach (DTR Nominees). The concept of readiness and willingness includes an ability to perform;[1]
  • If you purport to terminate the contract, but are not entitled to do so (for example, where you wrongfully formed the view that another party has repudiated the contract), you could be held to have repudiated the contract yourself. Accordingly, taking such a step requires careful legal analysis (Ogle v Comboyuro Investments Pty Ltd (1976) 136 CLR 444); and
  • The parties may act in a way that leads to a finding that the contract has been abandoned (meaning the parties are free from the agreement and mutually release each other from future obligations). An example of this may be found in the recent case of Protector Glass Industries Pty Ltd v Southern Cross Autoglass Pty Ltd [2015] NSWCA 16. In this case, the parties were held to have abandoned an asset sale agreement by acting in disregard of it (for example, by one party closing down the business to be sold and selling off trading stock, inconsistently with the agreement, and the other party's acquiescence to those actions). This is a practical risk, particularly where parties try to restructure a deal where they have identified difficulties with performance of the contract on foot at the time.

Having regard to the above matters, care should be taken in assessing whether or not repudiation of your contract has occurred and in deciding what actions you wish to take in order to protect your position and avoid potential pitfalls.

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[1] Hyundai Merchant Marine Co Ltd (ABRN 102 471 723) v Dartbrook Coal (Sales) Pty Ltd (ACN 050 139 841)(2006) 236 ALR 115 at 131, referring to Peter Turnbull & Co Pty Ltd v Mundus Trading Co (A’sia) Pty Ltd (1954) 90 CLR 235 at 253.Back to article

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.