There is a difference between an actual breach of contract and an anticipatory breach of contract. An actual breach happens when the other person has already breached the contract. Generally, the party can stop performing and sue the other person.
An anticipatory breach (also called “anticipatory repudiation”) occurs when the other person still has time to perform the contract, but you already know that the person cannot or will not perform. Generally, the party can stop performing, declare a breach, and sue the other person.
This article looks at the legal requirements for anticipatory breach of contract in Minnesota.
The Basics of “Anticipatory Breach”
“Anticipate” means to expect or foresee something in advance. In the legal context, “anticipatory breach” means that a person observes signs that the other party will breach the contract.
This is a legal doctrine that comes up in the context of contract disputes. The concept is often called “anticipatory repudiation”, “repudiation”, “renunciation”, or “preemptive” breach of contract.
At its core, anticipatory breach comes up when the other party refuses to perform the contract or will be unable to perform. Basically, the evidence is clear that the other party will not perform the contract, so you can treat it like a breach of contract. This protects you from having to wait to take legal action.
Anticipatory breach is a contract principle that supports a breach-of-contract claim. Generally, it is not seen as a separate or independent legal claim. Rather, it is a theory on which to claim a breach of contract. A party often sues for breach of contract and, within that claim, argues that there was an anticipatory repudiation by the other party.
Timing of Anticipatory Breach
Anticipatory breach comes up before a lawsuit is commenced. If a party sees the other party struggling to perform, the party can seek an “assurance” that the other party will in fact perform the contract. If the party does not get an assurance, the next step is usually to declare the contract breached. Then the party can suspend his or her performance and sue the other party for breach of contract.
The point is that anticipatory breach comes up before there is any formal court action. Since it directly impacts the breach-of-contract claim, the party must be aware of the rules before declaring an anticipatory breach. The risk is that if there are not sufficient grounds to declare an anticipatory breach, the party could itself breach the contract.
Examples of Anticipatory Breach
Anticipatory breach issues come up in many types of contracts and for many reasons. Here are some basic examples:
- A party refuses to perform the contract, either out of spite or for some other reason.
- A party is insolvent and will not be able to pay for the goods being manufactured.
- A party has significant problems with a supplier and, without those supplies, will be unable to perform a contract.
- A manufacturer is too far behind schedule to meet the deadline set by the contract, and the buyer needs the goods by the deadline.
- A seller has a contract with a buyer for a unique item. The seller sells to another buyer, making it impossible to sell to the original buyer.
- A company's operations have been shut down by government agency and will not reopen until after the contract deadline.
- A service provider double-booked herself for an event (graduation party, wedding, etc.) and will be unable to perform both contracts.
- A party has its equipment seized by a creditor and cannot perform without the equipment.
- A party's license to work has been revoked and it cannot resume operations for an indefinite period of time.
- There is some other information showing that the other party cannot or will not perform as required by the contract.
These are the type of situations where an anticipatory breach could be declared if a party has evidence to support it. Note that we are assuming that the other party has no legal defense to the anticipatory breach allegation (impossibility, impracticability, force majeure, etc.). It is possible that the party could have a valid legal excuse that would excuse the non-performance. If so, there would be no anticipatory breach or any breach at all.
Clauses in Contracts
Anticipatory breach is a general principle of contract law and is typically viewed as a “default rule” that courts will apply.
However, parties to a contract may be able to limit the application of the anticipatory-breach rule. Parties could try using a “Notice and Right to Cure” clause. This could give some protection to a party. Here is a basic template for a Notice and Right to Cure” clause (note: do not use this without tailoring to your situation):
Notice and Right to Cure. Each party shall be entitled to written notice of any default and shall have 15 days after receiving said notice to cure the default, during which time the non-defaulting shall not exercise of any legal remedy. The party claiming a default shall cooperate with other party for purposes of any attempt to cure any default within the default cure period.
Such a clause may be enforced by a court. However, there still would be room for a court to apply the anticipatory-breach doctrine to fill in any “gaps”.
Case Law Rules on Anticipatory Breach of Contract
Most contracts will be governed by case law rules on anticipatory breach. However, commercial contracts for the “sale of goods” under the Uniform Commercial Code (UCC) are governed by statute, but may there may be some applicable precedent from case law. Case law rules are discussed below, while UCC rules are discussed in the next section.
An anticipatory breach occurs when a party expressly renounces the contract, giving notice that he will not perform the contract before performance is due. Space Ctr., Inc. v. 451 Corp., 298 N.W.2d 443, 450 (Minn. 1980). “The refusal to perform must in effect be an unqualified renunciation or repudiation of the contract.” Id. Anticipatory breach may also occur when information shows that the party is unable to perform. Id.
Repudiation is “either by words or acts, which is communicated to the other party prior to the time fixed by the contract for his performance.” In re Haugen, 278 N.W.2d 75, 79 n. 6 (Minn. 1979). This part is important because the non-breaching party can sometimes rely on the other party's actions, rather than having to rely on self-serving statements from the other party.
It is important to understand the timing of an anticipatory breach. “Failure to perform under a contract when performance is due establishes an immediate breach.” Park Nicollet Clinic v. Hamann, 808 N.W.2d 828, 837 (Minn. 2011). In other words, the contract is already breached and the party can sue for breach of contract. Anticipatory repudiation, on the other hand, “occurs when a promisor renounces a contractual duty before the time for performance has arrived.” Wold v. Wold, 138 Minn. 409, 415, 165 N.W. 229, 231 (1917). This means that, technically, the party could still perform but there is evidence showing that the party will not perform.
The civil jury instruction, Minnesota CIVJIG 20.46, states that:
A contract is repudiated when one party to a contract communicates by words or acts to the other party that (he/she) does not intend to perform:
- Before the time for performance, and
- Without qualification.
Comments to the jury instruction indicate that a “secret intention not to perform or a negative attitude does not rise to the level of repudiation.” Teeman v. Jurek, 312 Minn. 292, 297, 251 N.W.2d 698, 701 (1977)). Likewise, “[a] suggestion for modification of a contract does not amount to a repudiation unless the party makes it clear that he will not perform without the modification.” Unique Systems, Inc. v. Zotos International, Inc., 622 F.2d 373, 377 (8th Cir. 1980)).
If the other party “repudiates” the contract, generally the party can suspend its performance on the contract. See, e.g., Space Center, Inc. v. 451 Corp., 298 N.W.2d 443, 451 (Minn. 1980) (“a repudiating party cannot set up the other party's subsequent nonperformance or a breach to avoid liability for its own prior total breach.”)
Practically speaking, the concerned party usually asks the other party in writing for an “assurance” that the other party will perform. This is good practice because there is risk if the concerned party relies on bad information. The risk is that the party declaring an anticipatory breach could himself breach the contract by making a declaration that is not supported. So, a party usually asks the other party to confirm the information and see if that party will perform.
UCC Rules on Anticipatory Breach of Contract
There are similar rules for anticipatory breach under the Uniform Commercial Code (UCC), which applies to contracts for the “sale of goods.” The UCC applies to sale of goods to consumers and between “merchants.”
If there are “reasonable grounds” to believe that the other party will breach the contract, the concerned party should ask for an “adequate assurance” from the other party. If other party fails to give an assurance within 30 days (or less, if reasonable), then the concerned party can declare a breach. While the concerned party is waiting to receive the assurance, he can suspend his own performance if it would be “commercially reasonable.”
Here is what Minn. Stat. § 336.2-609 says about reasonable assurances:
RIGHT TO ADEQUATE ASSURANCE OF PERFORMANCE.
(1) A contract for sale imposes an obligation on each party that the other's expectation of receiving due performance will not be impaired. When reasonable grounds for insecurity arise with respect to the performance of either party the other may in writing demand adequate assurance of due performance and until such assurance is received may if commercially reasonable suspend any performance for which the person making the demand has not already received the agreed return.
(2) Between merchants the reasonableness of grounds for insecurity and the adequacy of any assurance offered shall be determined according to commercial standards.
(3) Acceptance of any improper delivery or payment does not prejudice the aggrieved party's right to demand adequate assurance of future performance.
(4) After receipt of a justified demand failure to provide within a reasonable time not exceeding 30 days such assurance of due performance as is adequate under the circumstances of the particular case is a repudiation of the contract.
This is the general framework for receiving an assurance and is the starting point for a concerned party. Generally, a request for assurance should be in writing and set forth the concerns. This could be potential evidence in a future lawsuit, so a party must ensure that it is accurate.
The next question is what happens if a party fails to give an “assurance”.
The UCC gives the concerned party a few options. The party can wait for the other party to perform or immediately pursue a breach of contract. In either case, the party can suspend his or her own performance.
Here is what Minn. Stat. § 336.2-610 says:
When either party repudiates the contract with respect to a performance not yet due the loss of which will substantially impair the value of the contract to the other, the aggrieved party may
(a) for a commercially reasonable time await performance by the repudiating party; or
(b) resort to any remedy for breach (section 336.2-703 or section 336.2-711), even though the aggrieved party has notified the repudiating party that the aggrieved party would await the latter's performance and has urged retraction; and
(c) in either case suspend the aggrieved party's performance or proceed in accordance with the provisions of this article on the seller's right to identify goods to the contract notwithstanding breach or to salvage unfinished goods (section 336.2-704).
Practically speaking, if the concerned party knows that the other party will breach, the party may choose to sue immediately. On the other hand, the concerned party may be better off receiving a delayed performance than no performance at all. In such a case, the concerned party could wait a “commercially reasonable” time and see what happens. Ultimately, if there is no performance, then the party could still sue.
Retracting the Anticipatory Repudiation
The UCC gives a party the ability to “retract” (undo) the anticipatory repudiation. In other words, the party that was likely to breach has recovered and the contract is reinstated.
Here is what Minn. Stat. § 336.2-611 says:
RETRACTION OF ANTICIPATORY REPUDIATION.
(1) Until the repudiating party's next performance is due the repudiating party can retract the repudiation unless the aggrieved party has since the repudiation canceled or materially changed position or otherwise indicated that the aggrieved party considers the repudiation final.
(2) Retraction may be by any method which clearly indicates to the aggrieved party that the repudiating party intends to perform, but must include any assurance justifiably demanded under the provisions of this article (section 336.2-609).
(3) Retraction reinstates the repudiating party's rights under the contract with due excuse and allowance to the aggrieved party for any delay occasioned by the repudiation.
As the statute says, the repudiating party cannot reinstate the contract if the other has already cancelled the contract or “materially” changed position. Otherwise, the repudiating party can probably can “retract” the repudiation and put the contract back into effect.
Anticipatory Breach in Various Contexts
Anticipatory breach comes up in many contexts and could be applicable to most types of contracts. Here are some common types of cases involving the issue.
Anticipatory breaches are common in the business context and often involve issues with delayed or flawed performance. The parties will have to determine the applicable rules under the UCC and case law.
Anticipatory breach issues are also common in the construction context, where complex projects are a source of performance issues. Case law rules will generally apply, but the UCC may apply to delivery of materials for the construction project. There is also a connection to mechanic's lien claims, which arise when the owner fails to pay contractors under a construction contract.
Anticipatory breaches arise in the real estate context. It may apply to land purchases where a buyer or seller has problems closing on the transaction. In other real estate contexts, anticipatory breach rules may not apply. For example, contract-for-deed cancellations have specific statutory procedures. For leases, a non-breaching party may be able to argue an anticipatory breach in some contexts, but may also have to follow eviction statutes to get full relief. Therefore, statutes may impact or limit the anticipatory breach rules.
Some mortgages might involve anticipatory breach issues, but remember that mortgage loans are heavily regulated. There are many state and federal laws that protect borrowers, so the creditor cannot simply claim an anticipatory breach and foreclose. Instead, the creditor may have to wait for an actual loan default (usually failure to make monthly payments), give pre-foreclosure notice, and then try to foreclose on the property.
Anticipatory breaches could occur in the employment context if a company has an employment contract with a worker. There could be problems with the company's ability to pay the worker, or problems with the worker's failure to perform as required by the contract. Anticipatory breaches in this context may be limited by employment laws, such as those providing notice to workers before any adverse employment action.
Anticipatory breaches may be less likely in the insurance context. However, it might come up if the insurance company indicates that it will not act in accordance with the policy (or has an interpretation that the insured believes is erroneous).
Legal Theories Related to Anticipatory Breach
A breach-of-contract claim is generally the legal theory when there is an anticipatory breach issue. However, a person that has a problematic contract may have other options in addition to declaring an anticipatory breach.
Negotiation and Settlement
This is a practical option rather than a legal remedy, but communication can often resolve contract disputes. The contract can be amended or terminated by agreement of the parties, and a party could “buy out” the other party. If companies want to continue their business relationship, they should consider an amicable discussion before declaring an anticipatory breach.
Sometimes, a party needs a court to interpret the contract and declare the parties' rights. A party may be able to avoid a breach of contract or determine if the other party breached the contract. For instance, it could help a party understand when they have the right to declare an anticipatory breach, determine if certain actions by a party constituted a reasonable assurance, and whether there has been an anticipatory breach.
Courts have the power to give an opinion under Minn. Stat. § 555.03, which states that “[a] contract may be construed either before or after there has been a breach thereof.” Along with the declaration, a judge can issue “supplemental relief” for a party. See Minn. Stat. § 555.08.
While the obvious benefit is to get certainty about a party's rights, the drawback is that it can take time and effort to get such an opinion. As such, declaratory judgments are generally used in bigger contracts, such as rights under insurance policies.
Reformation of Contract
Anticipatory breaches sometimes come up when there is a dispute over how the contract should be interpreted. If one party acts according to the parties' original intent for the contract but the written language is different, the party might claim a mistake and have a judge “reform” the contract.
Reformation of contract generally requires very clear evidence of a mistake, but it can save a party from breaching the contract. A party could argue for it in response to the opposing party's allegation of an anticipatory breach.
Reformation “is available when a party seeks to alter or amend language in a contract so that the contract reflects the parties' true intent when they entered into the contract.” SCI Minn. Funeral Servs., Inc. v. Washburn-McReavy Funeral Corp., 795 N.W.2d 855, 864 (Minn. 2011). Reformation is appropriate when
(1) there was a valid agreement between the parties expressing their real intentions;
(2) the written instrument failed to express the real intentions of the parties; and
(3) this failure was due to a mutual mistake of the parties, or a unilateral mistake accompanied by fraud or inequitable conduct by the other party.
Id. at 865 (quotation omitted).
Rescission of Contract
In defense to an anticipatory breach allegation, a party might have grounds to “rescind” the contract due to a formation problem. A contract may be rescinded if “both parties were mistaken with respect to facts material to the agreement.” SCI Minn. Funeral Servs., Inc. v. Washburn-McReavy Funeral Corp., 795 N.W.2d 855, 861 (Minn. 2011) (quotation omitted). If the parties never had a “meeting of the minds” on essential elements of the contract, there is no “mutual asset” to support a contract. Minneapolis Cablesystems v. City of Minneapolis, 299 N.W.2d 121, 122 (Minn. 1980).
Basically, rescission is a court-ordered termination of the contract. With the termination, the parties are generally put back into their original positions before the contract. As such, there would be no anticipatory breach issue and no breach of contract.
Imagine that a concerned party has evidence to declare an anticipatory breach, but does not declare it. The other party then corrects the performance issue. In a later lawsuit, the concerned party tries to claim that the other party had anticipatorily breached the contract.
In defense to such an argument, the other party may raise a “waiver” defense. “Waiver” is the intentional relinquishment of a known right. If the concerned party failed to declare an anticipatory breach issue and instead let the other party recover, the concerned party may have “waived” the right to claim an anticipatory breach.
Mitigation of Damages
When a party declares an anticipatory breach, the party can generally suspend its own performance and sue for damages. However, a party generally has a duty to “mitigate” damages, which means to take reasonable steps to limit his or her losses. So if a party declares an anticipatory breach, he or she should be thinking of alternative goods or services. This could preserve that party's full damage in a later lawsuit.
Usually, anticipatory breaches arise where there is a contract between the parties. However, if there are problems with the contract (i.e., whether it is enforceable), there may be no anticipatory breach or any actual breach.
In such a circumstance, a plaintiff may raise an unjust enrichment claim. “Unjust enrichment” is a legal theory used when one party takes advantage of the other party and benefits at the other person's expense. Even if there is no formal contract, a judge could make an equitable award to a harmed person as if there was an actual contract. This is sometimes called a “quasi-contract” principle. In such a case, anticipatory repudiation may be unnecessary.
Practical Tips for Anticipatory Breach Issues
- For purposes of protection and certainty, consider adding a “Notice and Right to Cure” clause to the contract that gives you a reasonable time to “cure” any default.
- If you hope to preserve a continuing relationship with the other party, negotiate a contract amendment or cancellation before trying to declare an anticipatory breach.
- If you see a problem with the other party's performance, reasonably assess the issue to see if it could lead to a breach of contract. Document any information you find.
- If you think the other party may breach the contract, promptly get an assurance in writing from that party that they will perform the contract as written.
- Closely consider any “assurance” given by the other party. If they might still perform, it is risky to declare an anticipatory breach. If they do not respond or the evidence shows that their assurance is mistaken, there may still be grounds to declare an anticipatory breach.
- Know the difference between an anticipatory breach and an actual breach of contract. If the person has already breached the contract (i.e., failed to pay or perform by the contract deadline), you may already have the right to suspend your performance and sue.
- If you declare an anticipatory breach, make sure you have the grounds for it and lay out the basic reasons (preferably in writing). This communication will be evidence if there is a breach-of-contract lawsuit.
- If the contract is for the “sale of goods”, make to follow any UCC rules and consider what is “commercially reasonable” under the circumstances.
The anticipatory breach doctrine allows a party to declare a breach when there is clear evidence that the other party will not perform. This allows the party to take prompt legal action to remedy the issue.
However, a party must ensure that they have solid evidence before declaring an anticipatory breach. If not, the party could risk breaching the contract with a premature declaration.
Anticipatory breaches can be tricky issues, so it may be necessary to speak with a lawyer to fully understand if it applies in your case.
If you need legal advice or representation on a breach-of-contract issue, Contact Us for a free consultation. With offices in Shakopee (Scott County) and Litchfield (Meeker County), we serve clients throughout the Twin Cities and Greater Minnesota.