An anticipatory breach of contract is an action that shows one party's intention to fail to fulfill its contractual obligations to another party. An anticipatory breach of contract is an action that shows one party's intention to fail to fulfill its contractual obligations to another party. An anticipatory breach, or repudiation, preempts a failure of a party to meet its contractual obligations to another party. An anticipatory breach occurs when a party demonstrates its intention to break a contract. The intent to break the contract must be an absolute refusal to fulfill the terms in order for it to qualify as an anticipatory breach.
What Is an Anticipatory Breach?
An anticipatory breach of contract is an action that shows one party's intention to fail to fulfill its contractual obligations to another party. An anticipatory breach ends the counterparty's responsibility to perform its duties.
Demonstrating the other party's intention to breach the contract gives the counterparty grounds for beginning legal action. An anticipatory breach is also referred to as an anticipatory repudiation.
Understanding Anticipatory Breaches
An anticipatory breach occurs when a party demonstrates its intention to break a contract. However, vocal or written confirmation is not required, and failure to perform any obligation in a timely matter can result in a breach.
By declaring an anticipatory breach, the counterparty may begin legal action immediately rather than waiting until the terms of a contract are actually broken.
Parties claiming an anticipatory breach are obliged to make every effort to mitigate their own damages if they wish to seek compensation in court. That could include halting payments to the party that committed the breach and immediately looking for ways to minimize the effects of the breach. It also might mean seeking a third party who could perform the duties outlined in the original contract.
Requirements for an Anticipatory Breach
The intent to break the contract must be an absolute refusal to fulfill the terms for it to qualify as an anticipatory breach. The expected breach cannot be based solely on the assumption that the other party will not meet its obligations.
If the anticipatory breach involves the sale of goods, then section 2-609 of the Uniform Commercial Code (UCC) also lays down several requirements. The party anticipating a breach has the right to ask the other party to provide reassurance that the contract will be fulfilled. While awaiting assurance, payments and other duties can and should be stopped. If the other party does not offer the proper assurance within 30 days, the contract is officially breached.
The requirements for an anticipatory breach can vary. It is a good idea to consult an attorney before taking any action.
Example of an Anticipatory Breach
Let's say a real estate developer contracts an architecture firm to create plans for a new building by a specific deadline. If the developer requests regular updates on the project and is not pleased with the latest results, this is not grounds to claim an anticipatory breach. The architects may be behind schedule while continuing to work on the project. Such a circumstance still leaves the possibility that the architects might meet their deadline if corrective steps are taken.
If the architects took actions that made it impossible to meet the deadline, it would constitute an anticipatory breach. For example, the architects might halt all work on the first project and commit all their resources to a new project with a different developer. That would preclude them from fulfilling the initial contract.
"Best endeavors" is a phrase in commercial contracts that obligates a party to use all efforts necessary to fulfill a duty. read more
Breach of Contract
A breach of contract is a violation of any of the agreed-upon terms and conditions of a binding contract. read more
A counterparty is the party on the other side of a transaction, as a financial transaction requires at least two parties. read more
A demand letter is a document that gives notice requesting compensation or to right a wrong for a previous action. A demand letter occurs prior to formal legal action. read more
Meeting of the Minds
A meeting of the minds occurs when comprehension of and mutual agreement on all terms of a contract have been acknowledged by the parties involved. read more
Novation is the act of replacing a contract with another contractual obligation, requiring the consent of all parties involved. read more
Pre-settlement risk is the possibility that one party in a contract will fail to meet its terms and default before the contract's settlement date. read more
Repudiation is disputing a contract and refusing to honor it. Repudiation is most relevant to fixed income securities, particularly sovereign debt. read more