LAW OF CONTRACTSPROJECT

PROSPECTIVE NON-PERFORMANCE OF CONTRACTS

DATE: 22 January, 2007

Submitted To: Submitted By:

Professor Ritu Soni Kanishk Kakkar

Faculty, Roll No. 432

Law of Contracts B.Sc., LL.B. (Hons.)

National Law University, Jodhpur Second Semester

NATIONAL LAW UNIVERSITY JODHPUR

TABLE OF CONTENTS

Table of Contents............................................................................................................ 2

Introduction..................................................................................................................... 3

Research Methodology.................................................................................................... 5

Principles and Evolution................................................................................................. 6

Effects of repudiation.................................................................................................... 12

Commercial hardships................................................................................................... 15

Conclusion..................................................................................................................... 19

Bibliography.................................................................................................................. 21

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INTRODUCTION

There are few prospects more threatening for a party to an important contract than that

raised by the other party’s statement that they will not perform. A prospective

nonperformance of a contract or an anticipatory breach of contract occurs when one of

the contracting parties declares that it will not perform the contract before the contract is

due to be performed.

For over a centaury now, authorities in the law of contracts have been struggled with the

repudiation of contracts especially when it precedes the time of performance. Although

clear principles have been laid down time and again lawyers are unsure about specific

situations.1

This is also known as an anticipatory repudiation of a contract. It gives the injured party

an immediate right to damages for total breach, as well as discharging the injured

party's remaining duties of performance.

As such because the time of performance has not arrived, the injured party has no cause

of action, and a suit maybe held to be pre mature, but in such a case the injured party

may have to suffer an extra loss in the form of the time in which they could have

contracted with another party in order to derive the benefit they intended to.

The situation in the legal effect is similar as when the injured party has not fully

performed, but is literally prevented by the other party from continuing performance.

Where work requires some cooperation from both parties this often happens.

1 Rosset, Contract Performance: Promises, Conditions and the Obligation to Communicate , 22, U.C.L.A

Law Review 1083 (1975), cited in Partial, Qualified, and Equivocal Repudiation of Contract, Arthur

Rosett Columbia Law Review, Vol. 81, No. 1. (Jan., 1981), pp. 93-110. http://links.jstor.org/sici?

sici=0010-1958%28198101%2981%3A1%3C93%3APQAERO%3E2.0.CO%3B2-1

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Attempted cancellations of pending contracts, especially when the business prospects

there under change for the worse, are constantly growing in the world of practical

affairs, and the controversies growing out of such attempted cancellations continually

come to lawyers for adjustment and to courts for adjudication.

This project aims to discuss the intricacies of prospective non performance of contracts

and the consequences and remedies of anticipatory repudiation of contracts. Along with

discussing the commercial hardships involved.

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RESEARCH METHODOLOGY

SUBJECT: Contracts

AREA: Performance of contracts

TOPIC: Prospective non-performance of Contracts.

OBJECT OF THE PROJECT:

To understand the law pertaining to prospective non-performance of contracts.

SPECIFIC OBJECTIVES:

1) To study the concept and evolution of prospective non-performance of contracts.

2) To analyze the various judicial decisions involving the prospective non-

performance of contracts.

DATA:

Secondary data in the nature of judicial decisions, reports, reviews and articles will be

used in order to achieve the set objects.

RESEARCH TECHNIQUES:

Analysis of judicial decisions and examination of bare acts related to the project topic.

METHODOLOGY TO BE ADOPTED:

In this project, the researcher would take certain generalized notions into account and

draw specific inferences in the light of the fact situations.

Thus basically the methodology is Deductive.

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PRINCIPLES AND EVOLUTION

A prospective nonperformance of a contract or an anticipatory repudiation occurs when

instead of merely failing to provide the due performance at the stipulated time2, one

party may put himself in breach by evincing an intention, by words or conduct, of

repudiating his obligations under the contract in some essential respect.3 In such cases

the injured party can treat the breach as total, even if the breach would have otherwise

been partial.4

Not every refusal to perform a contract amounts to a repudiation which entitles the other

party to treat the contract as at an end; there must be a refusal to perform something that

goes to the root or essence of the contract.5 Thus it is not just any delay that will amount

to repudiation, but only such delay as would frustrate the adventure.6

Repudiation of contracts may be express renunciation of the contractual obligations by

one party as was seen in the case celebrated of Hochster v De la Tour,7 this will be in

cases where one of the parties expressly refuses to perform some or all of his

contractual obligations and says that he is unable to perform. However it is more often

seen that contractual that repudiation is in the form of an implied failure to perform, or

by the party in default putting himself in such a position that he will apparently be

unable to perform when the time comes. A party seeking to rely on the repudiation

implied from conduct must show that the party in default has so conducted himself as to

lead a reasonable person to believe that he will not be able to perform8 or will be unable 2 Para 990 Halsbury’s Laws of England, 4th edn reissue, Vol 9(1) 3 Mersy Steel and Iron Co. v. Nylor, Benzon & Co., (1884) 9 Cas 434 at 438, 997 HLE4 14 Harv. L.R. pg 4225 Para 997 Halsbury’s Laws of England, 4th edn reissue, Vol 9(1)6 Universal Cargo Carriers Corp v. Citati [1957] 2 QB 4017 (1853) 2 E & B 6788 Genral Billposting Co Ltd v. Atkinson [1909] AC 118, HL (here the wrongful dismissal of a repudiation

of contract of service)

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to perform at the stipulated time. The fact that the breach is deliberate will not

necessarily repudiate the contract and nor will words and conduct which do not amount

to a renunciation of the contract.9

Tracing the history of the principle of prospective non-performance of contracts, in gthe

year 1853 the court of the Queen’s Bench for the first time allowed a pre mature action

in the case of Hochster v. De La Tour. On April 12th, 1853, Hochster and De la Tour had

entered into a contract under which Hochster was to serve as a currier for De la Tour

during his travels in Europe for three months starting on the 1st of June. On May 11, De

la Tour wrote to Hochster that he had changed his mind and that Hochster was

discharged. On May 22, Hochster brought suit for damages. De la Tour’s counsel

argued that the suit was brought premature, since there could be no breach of contract

before the 1st of June, when the performance was to begin. Lord Chief Justice

Campbell decided this land mark case saying that the suit was not premature and the

plaintiff did have a cause of action against the repudiating party.

This judgment was criticized by Samuel Williston10 saying that the case was an

unsatisfactory one on the grounds that mere words would not amount to a breach in

duty and there was no cause of action until the time of the contract came, although it

was important for Hochster to know whether he was free to take other jobs, it was said

that allowing the suit pre maturely would not help him in that regard.11 It was further

suggested that it would be sufficient to regard the repudiation as the non occurrence of a

condition of Hochster’s remaining duties, which discharged those duties but did not

operate as a breach. Other critics are of the opinion that:

“there can be no fine-spun reasoning which will successfully make that a

breach of a promise which, in fact, is not a promise which, in fact is not a

9 Franklin v miller (1836) 4 Ad & El 49910 Repudiation of contracts (pt. 2), 14 Harv. L. Rev. 432.11 E. Allan Farnsworth, Farnsworth on Contracts, (Aspen Law Publisher, 2nd edn.)

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breach of promise…. To say that [a promise] may be broken by

anticipation is to say that which, in the nature of things, cannot be so.”

Furthermore it was alleged that damages in an action brought before the time for

performance would be a matter of pure speculation and guess work.12

These arguments were rebutted by Lord Chief Justice Campbell himself in the judgment

as he concluded that;

“where there is a contract to do an act on a certain future day, there is a

relation constituted between the parties in the meantime by the contract,

and they impliedly promise that in the meantime neither will do anything

to the prejudice of the other inconsistent with that relation.”13

In the United States of America, the principles of prospective non-performance of

contracts originated from the case of Frost v. Knight14 Cockburn C.J. stated the law as;

“the promise, if he pleases, may treat the notice of intention as

inoperative, and await the time when the contract is to be executed, and

then hold the other party responsible for all the consequences of non-

performance; but in case he keeps the contract alive for the benefit of the

other party as well as his own; he remains subject to all his own

obligations and liabilities under it, and enables the other party not only to

complete the contract, if so advised , notwithstanding his previous

repudiation of it, but also to take advantage of any supervening

circumstance which would justify him in declining to complete it.”

On the other hand, the promise may, if he thinks proper, treat the repudiation of the

contract, and may at once bring his action as on a breach of it; and in such action he will

12 Treey, Book Review, 34 Harv. L. Rev. 891, (1921)13 The same opinion is held in the J. Beatson, Anson’s Law of Contract (Oxford University Press, New

York, 28th edition) p 541.14 L.R.7 Ex.111

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be entitles to such damages as would have arisen from the non-performance of the

contract at the appointed time, subject, however, to abatement in the respect of any

circumstances which may have afforded him the means of mitigating his loss.”15

Then there was a restatement on repudiation, this restatement said that a Repudiation

was either a statement by an obligor that he will materially fail to perform an obligation,

which failure will substantially impair the value of the contract to the injured party at

such time of breach, or a voluntary affirmative action that renders the party unable or

apparently unable to perform without such a breach.16 When a repudiation occurs before

a breach of non performance it gives rise to a cause of action and a claim for damages

based on the total breach, and discharges the aggrieved parties remaining duties under

the contract.17 Basically the restatement (second) does not distinguish between cases in

which the aggrieved party is discharged of all duties to perform, those cases where there

is an action for damages and those cases in which there are both.

This approach was criticized on the ground that it would encourage wasteful

performance.18 In the same case it was suggested that the remedy of the innocent party

would be only damages, if its performance could not have been carried out except with

the cooperation of the other party.19 Further the right to complete the contract and claim

the price might not be available if it can be shown that a person has no legitimate

interest, financial or otherwise in performing the contract rather than claiming

15 14 Harv. L.R. pg 422

16 Rosset, Contract performance: promises, conditions and the obligation to communicate , 22, U.C.L.A

Law Review 1083 (1975), cited in Partial, Qualified, and Equivocal Repudiation of Contract, Arthur

Rosett Columbia Law Review, Vol. 81, No. 1. (Jan., 1981), pp. 93-110. http://links.jstor.org/sici?

sici=0010-1958%28198101%2981%3A1%3C93%3APQAERO%3E2.0.CO%3B2-1 17 Restatement (second) 25318 Goodhart [1962] 78 LQR 26319 Denmark Production Ltd. V. Boscobel Productions Ltd. [1968] All ER 513; Hounslaw London

Borough Council v. Twickenham Garden Developments Ltd. [1970] 3 All ER 326.

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damages.20 By electing to affirm,21 the innocent party does not lose his right to claim

damages sustained because of the breach.22

Having elected to affirm the contract, the innocent party cannot then seek to repudiate

it. This was observed in the case of Union of India v. S Kesar Singh23 wherein a

contractor needed to supply the army charpoys in certain quantities in installments,

failed to supply the requisite number. Even after that breach, an installment of charpoys

was received by the army authorities. They could not therefore cancel the work orders

and put an end to the contract.

The party repudiating the contract is entitled to withdraw his repudiation before the date

fixed for the completion of the contract and to insist that the contract be performed in its

entirety, unless the other party has accepted the repudiation and elected to treat the

contract as terminated.24

It was held in the case of Murlidhar Chaterjee v. International Film Co. Ltd25 that an

acceptance of repudiation by the promise must be equivocal, and it must be

communicated to the party in breach26. Since the repudiatory breach makes the contract

voidable and not void prima facie.

Further it was made clear that mere doubts by one party that the other party will

perform when performance id due will not excuse the first party from performing.27 The

20 Bensten v Taaylor & Sons Co. [1893] 2 QB 27421 If the innocent party, having the option of accepting the repudiation and ending the contract, instead

elects to treat the contract as continuing, he has ‘affirmed’ the contract; Pollock and Mulla, Indian

Contract and Specific Relief Acts, Volume 1 (LexisNexis Butterworths, New Delhi, 13th edition) 22 Pudi Lazarus v Johnson Edward AIR 1976 AP 243.23 AIR 1978 J&K 102.24 Hindustan Construction Co. v State of Bihar AIR 1963 Pat 25425 AIR 1943 PC 3426 Must be in consonance with Sec. 66 of the Indian Contract act, 1872. 27 Koppelon v. W.M. Ritter Flooring Corp. 116 A. 491 (N.J. 1922)

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common law recognized a limitation in the above principle and laid down the exception

of insolvency. Although the insolvency of a party is not repudiation and is not a ground

for terminating a contract, but it may give the first party a reason to believe that the

insolvent party will commit a breach. In such a situation the parry has the right to

exercise self-help by suspending any performance for which that party has not already

received the agreed exchange until that party receives the remaining performance or an

offer to adequate security for that performance.28

28 Restatement (second)

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EFFECTS OF REPUDIATION

When one party assumed to renounce the contract, i.e.; by anticipation, refuses to

perform it, he thereby, as far as he is concerned, declares his intention then and there to

rescind the contract. The other party may adopt such renunciation of the contract by so

acting upon it, as in effect to declare that he too treats the contract as at an end, except

for the purpose of bringing an action upon it for damages sustained by him in

consequence of such repudiation.29 Three legal effects follow:

1) It releases the innocent party from his obligation to perform. He can bring an

action without showing that he could have performed within the stipulated

time30, but proof by the guilty party that the other party could not have

performed by that time may affect damages and in appropriate cases reduce

them to a nominal sum. Though a party may exercise his right to treat the

contract as terminated as regards obligations de futuro, it remains alive for the

purpose of vindicating rights already acquired under it on either side.

2) Acceptance of the breach also releases the guilty party from the obligation to

perform as section 64 of the Indian Contract Act, 187231 provides. He can

henceforth be sued for damages. When the promise has so determined his choice

then, whether he sues for damages or not, it is not open to the promisor to go

back on his refusal to treat the contract as subsisting and to insist on

performance or sue for damages for non-performance.

3) The innocent party may sue for damages. Once the innocent party has accepted

the breach it is final, his right to damages is not defeated by actual or possible

29 Jhonstone v. Milling [1886] 16 QBD 460\30 For example wrongful dismissal of an employee has been held to determine not only the contract of

employment but also a term restraining an employee from carrying on the same business after his

termination. General Billposting Co. v Atkinson [1908-10] All ER Rep 619

31 When a person at whose option a contract is voidable rescinds it, the other party thereto need not perform any promise therein contained in which he is the promisor. The party rescinding a voidable contract shall, if he had received any benefit thereunder from another party to such contract, restore such benefit, so far as may be, to the person from whom it was received.1

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supervening events. Subsequent may affect the amount of damages but not the

right to damage. The innocent party can claim damages at once even though his

right to future performance of the contract is only contingent. Where the vendor

has repudiated the contract before the agreed date of performance, he is liable to

refund the amount of earnest money irrespective of the readiness and

willingness on the part of the vendee to perform the vendee’s obligations.

Where a party commits an anticipatory breach of a contract the other party might put an

end to the contract and sue for damages32 but in such a situation the aggrieved party may

not claim for specific performance of the contract, on the other hand the other party may

choose to keep the contract alive till the time of performance and then claim specific

performance according to the said terms of the contract33, he however can not claim

specific performance unless he shows that he is ready and willing to perform his side of

the contract.34

Damages

The measure of damages for the anticipatory breach of a contract is not necessarily the

same as it would be for a failure or refusal occurring at the time when the performance

was due.35 The injured party is under an obligation to take all reasonable steps to

mitigate the loss incurred by the breach.

In the case of Ramgopal v Dhanji Jadhavji Bhatia36 the defendant was an owner of a

cotton mill and they contracted with the plaintiff to allow the plaintiff to use the mill for

a period of six months, for half its working time at fixed rates in order to gin the raw

cotton, which the plaintiff contemplated buying and the defendants agreed to supply

them for the purpose. Before any of the cotton had been taken by the mill the

32 International contractors Ltd. v. Prasanta Kumar Sur [1961] 3 SCR 59733 id34 Jawahar Lal Wadhva v Haripada Chakroberty AIR 1989 SC 60635 State of Kerala v. Cochin chemical refineries Ltd. AIR 1968 SC 136136 AIR 1928 PC 200

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defendants repudiated the contract. The plaintiff sued the defendants for damages and it

was held that the breach being anticipatory, the damages’ were the estimated loss of

profit to the plaintiff by reason of the contract not being carried out and the plaintiff was

not bound to buy cotton and have it ginned at other mills under his obligation to

mitigate the damages.

So if an aggrieved party decides to accept the repudiation of the contract and sues for

damages, then the court will look into the damage caused to the plaintiff and it shall be

the plaintiffs duty to mitigate the damages to a reasonable extent, but if the aggrieved

party decides to keep the contract alive and sues for damages when the time of

performance of the contract arrives, in that case there is no duty on part of the plaintiff

to mitigate the damages and damages will be accordingly awarded.

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COMMERCIAL HARDSHIPS

It is well known that the business value of a growing concern far exceeds the value of

the plant and stock in trade as articles of merchandise. In present business credit system

promises arrange their own commitments relying on the performance in good faith of

pending contracts as the resource to meet their own obligations. The value of

established contractual relations is often identifiable further in the very substantial form

of business extended in anticipation of process to be derived from the performance of

such contracts.

The business value, or the present advantage, from established contractual relations is

quickly and seriously impaired or destroyed by the promisor’s anticipatory repudiation.

No one in ordinary commercial business willingly advances money or furnishes credit

accommodation on the security of a law suit.37 A repudiated contract no matter how

binding in law ceases at once to be an effective business resource upon which the

promise can depend in arranging his own affairs. The repudiator at a stroke destroys the

intangible asset of trust and good will.

In commercial cases because the damage is caused to the reputation and reliability of an

establishment or a person, the main question lies that whether the plaintiff promisee’s

interest in the advantage of an established contractual relation pending performance

shall be given legal recognition or not?

Those in support of the principle of anticipatory breach of contracts say that the

situation is a fact and in such cases the principles of anticipatory repudiation should be

applied so that the aggrieved party is not made to suffer for long and they may be

restored to the reputation they had without any damage by non-performance.38

37 Frost v. Knight L.K 7 Ex. 11138 Id

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On the other hand those who oppose the principle, contend that such a situation is not

real and such situations where a company or a person suffers a great loss in reputation

due to a repudiation of another contract is very rare and maximum stress should be laid

upon business importance.

Unlike in other contractual matters where only the two contracting parties are affected

by a breach of such a contract, in business transactions a number of contract may be

dependent on each other and if one of the contracting parties repudiates or even

announces in advance his non-performance of the contract it affect more than just the

contracting party, for example; A contracts with B to provide him with raw material to

manufacture a product which A wishes to sell, now on the basis of this contract A enters

into a contract with C to which A will supply the finished goods. Now before B is due

to supply raw material to A, B repudiates the contract, now this will not only affect A

but will also effect C, because now even if A manages to contract with another supplier

Z, the prices may differ.

It is for cases like this that some general illustrations from various fields of law may be

suggested to indicate a broad general recognition for intangible advantageous relations.

Following these general illustrations the close similarity may appropriately be noted

between anticipatory repudiation by the promisor as a cause of action, and a stranger’s

inducing a breach or repudiation which is independently held actionable as a tort.39

It is now held that it is actionable to interfere without justification in the established

business relations of others40 any interference with another’s access to the market for his

goods or his labor is actionable, over two generations now it has been established that

interference with contractual relations of parties by procuring a breach is actionable.41 In

the case of a repudiation of a contract, as is established above, the aggrieved party

suffers loss in the form of good will as well and hence there will be a cause of action the

39 L. Vold, Tort Aspect of Repudiation of Contracts 41 Harv. L.R. pg 35540 Duplex Printing Co. v. Deering, 254 U.S. 443 (1921)41 Nat. Phon. Co. v. Edison Co. [1908] I Ch. 335.

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moment the contract is repudiated under tort law, and the plaintiff need not wait for the

time of performance in such a case.

The contractual relation, pending performance, is an interest to the promisee, it is

valuable to him as on the basis of such a contract he may further get business or grants

for loans, hence no one be it a stranger or a promisor, may without lawful justification

impair. In cases of prospective non-performance this interest is harmed as one of the

parties declares that he will not perform the contract and this will further affect other

persons in a commercial setup.

Much of the criticism of the principle of prospective non-performance was based on the

assumption that there is no duty to perform before the due date of performance, so there

is no breach before such a date and hence there is no cause of action, but in case where

the contracting parties are in a commercial setup wherein they are not the only parties

affected by the repudiation of their contract, the anticipatory repudiation or breach of a

contract in a commercial situation often causes an immediate injury and a present cause

of action. The injury caused in such a case is most often not financial but is in the form

of hampered reputation and good will; this only makes establishing the quanta of

damage more difficult in such cases. All considerations for the maintenance of

contractual good faith, all the considerations for stability or promises to the end that

reasonable exceptions arising from promises may be realized, come into play while

establishing the damages in such a case.

Essentially prospective non-performance of a business contract causes a great amount

of commercial hardship as his plans for counter performance under the contract are

thrown into confusion. This further worsens because the duty to mitigate is at once

imposed on the aggrieved party, then there is confusion about the facts of the case and

whether the facts fit into the definition of repudiation or not and then further find out

whether or not for some reason the repudiation was justified.42

42 Rohem v. Horst 178 U.S. I (1900)

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Further in the presence of a repudiated contract a person or organization will loose

reputation and will find it difficult to get a loan. Especially if the contract was granted

on the basis for his business credit in the promisee’s own transactions with others, this

resource also shrinks when it is repudiated.

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CONCLUSION

Prospective non-performance of a contract is actionable on three grounds;

1) There is a prospective breach of a contract and keeping the interest of the

plaintiff such cases are held to be maintainable.

2) The repudiation is a breach of an implied contract apart from the main contract

which is there between the promisor and the promisee, and the cause of action ia

a breach of that contract and not the main contract.

3) The cause of action is derived on the basis of tort law and in cases of

commercial contracts the case will be maintainable.

A number of cases have laid down principles of prospective non-performance of

contracts, then there was issued a statement in this regard and then there was a

restatement (second) which laid down rules for governing prospective non-performance

of contracts.

Legal rules of repudiation should be structured and interpreted in such a manner that it

encourages the parties to resolve disputes without judicial intervention. A resolution is

in every way better when the parties themselves reach an amicable solution instead of

going to court and going through a cumbersome litigation process. The right of an

insecure party to demand an assurance from the contracting party should be upheld and

the duty of the breaching party to offer timely cure of previous failures of performance

frequently diffuse the dispute caused by the repudiation. The rules should make

guidelines to this effect and the Courts must ensure to not penalize a party that is trying

to adjust his differences with the other side on the basis of good faith.

Early settlement of the controversy ends the uncertainty as to the rights of the parties,

avoids loss through future idleness or misdirected activity pending developments, and

sets the parties free to devote their time and resources to independent productive efforts

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General repudiation of business contracts pending performance would throw the whole

productive and credit machinery out of joint and bankrupt the business, industrial and

commercial world. Individual repudiation of a particular contract, while equally

pernicious in its tendency, does not cause so great a general damage, only because its

scope is too small and the damage done is largely absorbed by the aggrieved promise.

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BIBLIOGRAPHY

Articles

Repudiation of Contracts 14 Harv. L.R. pg 422

L. Vold, Tort Aspect of Repudiation of Contracts, 41 Harv. L.R. pg 355

Partial, Qualified, and Equivocal Repudiation of Contract, Arthur Rosett

Columbia Law Review, Vol. 81, No. 1. (Jan., 1981).

Rosset, Contract Performance: Promises, Conditions and the Obligation to

Communicate , 22, U.C.L.A Law Review 1083 (1975)

Books

E. Allan Farnsworth, Farnsworth on Contracts, (Aspen Law Publisher, 2nd edn.)

Halsbury’s Laws of England, 4th edn reissue, Vol 9(1)

J. Beatson, Anson’s Law of Contract (Oxford University Press, New York, 28th

edition)

Pollock and Mulla, Indian Contract and Specific Relief Acts, Volume 1

(LexisNexis Butterworths, New Delhi, 13th edition)

Websites

www.google.co.in/

www.jstor.org

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