By: Devon Griger, Associate, Jones Walker
May 9, 2024

When a multilevel construction project is underway and a contractor or subcontractor isn’t performing as expected, it can be difficult to know how to address the low performance without putting the parties’ contract and good working relationship at risk. However, there may come a time when poor performance lapses into a something much worse: an anticipatory breach or repudiation of the subject contract.

Imagine Scenario One: You are a general contractor managing a large-scale construction project and one of your subcontractors is falling behind on their work. The project manager for the subcontractor calls you and says, “Look, I don’t think we’re going to be able to hit our next milestone, and probably not the next one after that.” A conversation like this would generally trigger concern for most general contractors, but it would not necessarily invoke panic. These types of delay conversations are not uncommon on large scale projects.

Compare that example, however, with Scenario Two, where the subcontractor instead says, “We received an offer to work another job for much more money, so we’re leaving the project site today and will not be returning.” This is obviously different (and potentially worse) than Scenario One, and likely cause for much greater concern.

This article addresses two key legal concepts raised by Scenario Two. The first is called anticipatory breach, and it occurs when a party makes a statement or takes an action that indicates that the party intends to breach the contract in the future. The second, a rarer but more severe situation, is called contract repudiation. It occurs when a party wrongfully states that it will not perform its contractual duties at any point in the future.

There is a significant legal distinction between these legal concepts that impacts how and when a contracting party can take action to deal with a nonperforming partner. This article will provide a high-level overview of the applicable law and underscore the importance of understanding the narrow distinction between anticipatory breach and repudiation in construction contracts. As usual, specific laws will vary from state to state, so always know the applicable law and consult with an experienced construction industry attorney if the issues discussed here arise on your projects.

Anticipatory Breach vs. Repudiation

Anticipatory Breach occurs when a party, through words or actions, communicates in advance of the completion of performance that it does not intend to fulfill a material obligation of the contract. An anticipatory breach creates an entitlement to a legal remedy, typically money damages as permitted by the contract.

Return to Scenario One at the beginning of this article. While it may look like anticipatory breach, a court would likely find that the wavering language used by the subcontractor (“I don’t think”; “probably not”) did not amount to anticipatory breach, but was rather notice of a circumstance or other issue impacting performance. In other words, there is not an obvious intent or desire to breach the contract.

In contrast, a California court found that a verbal statement by an owner that it would not pay a contractor’s invoices constituted anticipatory breach. Howard S. Wright Constr. Co. v. BBIC Inv’rs, LLC, 136 Cal. App. 4th 228, 243 (Cal. Ct. App. 2006). Similarly, a Georgia court found that a subcontractor’s insistence that it would delegate its performance to another company (which was expressly forbidden by the prime contract), constituted an anticipatory breach. Western Surety Co. v. APAC-Southeast, Inc., 691 S.E.2d 234, 238 (2010). These instances are very different than Scenario One.

As you can see from these examples, determining whether an anticipatory breach has occurred is a highly fact-dependent exercise, but in most states, the important distinction is the breaching party’s clear intent to breach the contract. As a result, communication between contractors and subcontractors about potential delay for circumstances outside the party’s control, such as supply chain or workforce issues, do not typically equate to anticipatory breach because there is not an obvious intent to breach the contract. In other words, although there may be a looming breach, it does not appear to be purposeful.

If there is an anticipatory breach, the other party can generally seek damages caused by the actions and, in limited circumstances, the non-breaching party might even be able to legally compel the other party to complete the contract work.

The less common but more clear-cut cousin of anticipatory breach is contract repudiation. The legal definition of Repudiation is a clear and decisive action or statement by one party that indicates its intention to abandon the entire contract. For the action or statement to amount to repudiation, it must (1) be an unconditional refusal to perform the contract at any point in the future or (2) deny the existence of the contractual obligations altogether. A repudiation will typically be triggered by one party either stating that the contractual obligation at issue will not be done or by stating that the contract does not require them to do that thing. Scenario Two above is an example of what a court would likely deem to be a repudiation.

When one party repudiates, the injured party has the following options under the law. It can either “treat the contract as still in force and retain its right to sue on the contract; or to treat the breaching party’s repudiation as a complete breach and terminate the contract immediately.” Pagosa Oil & Gas, L.L.C. v. Marrs & Smith P’ship, 323 S.W.3d 203, 216 (Tex. App.—El Paso 2010, pet. denied)

There can be advantages and disadvantages to both of these options. The “wait and see” option does leave the door open for the repudiating party to take back its repudiation and complete its contractual obligations, so that may be the preferred approach if it is possible for the business relationship to be repaired. In other circumstances, such as when the stage of a project prevents the damages from being estimated accurately, it is preferable to wait for the breaching party’s performance deadlines to come and go before suing for the accrued damages. One thing to keep in mind, however, is that adopting the “wait and see” approach may give rise to statute of limitations issues, which is the subject of another article.

Practical Steps When Faced with Anticipatory Breach or Suspected Repudiation

If it appears that a party you are contracting with is anticipatorily breaching or repudiating your contract, consider the following steps:

  1. Communicate with Your Clients and Subcontractors. On a complex, multi-level project, no one wants to be surprised by discovering that a contractor knew about a risk but did not disclose it. Keep all the parties who may be affected by the potential breach aware of the status of the breach, its implications for them, as well as any foreseeable impacts on the project as a whole.
  2. Prioritize Your Goals: Determine what is most important to you and the other parties affected by the potential breach. Understanding your priorities can guide your decision-making process before and after the breach.
  3. Be Flexible: Where possible and appropriate, remain open to reaching a negotiated solution with the party that is anticipatorily breaching or repudiating your contract. Finding a negotiated solution can prevent a complete breakdown of the working relationship, and often creates the best outcomes for the success of the project as a whole. Additionally, make advance plans to mitigate damage in the event the breach occurs.
  4. Know Your Contract Language: In addition to the breach of contract concepts inherent to most construction contracts, also check the contract for specific provisions related to repudiation and/or anticipatory breach. In some contracts, these terms are specifically defined. For example, “If the Subcontractor anticipatorily breaches or repudiates this Subcontract Agreement for any reason, the Contractor may, at its option, elect to terminate this Subcontract Agreement by providing written notice to the Subcontractor. The failure of the Contractor to terminate this Subcontract Agreement upon the occurrence of an anticipatory breach or repudiation by the Subcontractor shall not constitute a waiver of the Contractor’s right to recover damages for any loss suffered as a result of the anticipatory breach or repudiation, including but not limited to the costs of completing the work, procuring substitute performance, and any loss of profits.”
  5. Understand the Law: Laws related to contracts, including the law’s treatment of repudiation and anticipatory breach, can vary from state to state. Seek legal advice from experienced construction-industry attorneys with knowledge specific to the jurisdiction(s) affecting your contract. They can provide guidance based on your specific circumstances and help you navigate the complexities of breached construction contracts.

In conclusion, recognizing the signs of anticipatory breach and repudiation can be crucial in mitigating risk. By having a general understanding of these concepts and knowing your options for responding, you will be better situated to protect your interests and ensure the successful completion of your projects.

“The Construction Industry Team at Jones Walker LLP is one of the most highly regarded and award-winning construction law practices in the nation. Our experienced construction attorneys understand the complex dynamics between — and the unique priorities of — project participants and can craft effective solutions that minimize disputes, manage risks, and help keep projects moving from conception to completion.”

The views expressed in this article are not necessarily those of ConsensusDocs. Readers should not take or refrain from taking any action based on any information without first seeking legal advice.