Rules Governing Anticipatory Repudiation of Contracts
By Adam Leitman Bailey and John Desiderio
In the practice of real estate law today, very few legal issues are getting as much attention and at the same time being applied incorrectly by practitioners as anticipatory repudiation (or breach) of contract. To test this thesis, we ran a Westlaw search using the search term “anticipatory repudiation in the real property practice area,” and, since 2008, 30 decisions have been rendered compared with a total of 58 decisions from 1920–2007. This article attempts to deliver the rules of anticipatory repudiation and to discard the myths and mistruths.
This is tricky legal territory. Whether a party has anticipatorily breached the contract is not always easy to determine, and, in some cases, the tables may be turned with the court dismissing a party’s allegations of anticipatory breach by the other party to the contract, but finding instead that it was the party’s own conduct that constituted a prior anticipatory repudiation of the contract, thereby entitling judgment to be entered in favor of its adversary. The judgment in each case is more often based upon the specific facts of the matter and not solely upon the elements prescribed by law.
Anticipatory Breach Defined
As the New York Court of Appeals has succinctly stated, “[a]n anticipatory breach of contract by a promisor is a repudiation of [a] contractual duty before the time fixed in the contract for…performance has arrived.”1 Clearly, “an anticipatory breach cannot be committed by a party already in material breach of an executory contract.”2
As further explained by the First Department, “[i]t is well settled law that a contract is not breached until the time set for performance has expired.”3 Or, as the court has stated another way, “[a]n anticipatory breach of a contract is one that occurs before performance by the breaching party is due.”4
What Constitutes an Anticipatory Breach
An anticipatory breach of a contract—also known as an anticipatory repudiation—“can be either a statement by the obligor to the obligee indicating that the obligor will commit a breach that would of itself give the obligee a claim for damages for total breach or a voluntary affirmative act which renders the obligor unable or apparently unable to perform without such a breach.’”5
For an anticipatory repudiation to be deemed to have occurred, “the expression of intent not to perform by the repudiator must be ‘positive and unequivocal.’”6 With even more emphasis, the First Department has stated that “[i]t is clear that there must be a definite and final communication of the intention to forgo performance before the anticipated breach may be the subject of legal action.”7
As the Court of Appeals has noted, if “the apparently breaching party’s actions are equivocal or less certain, then the nonbreaching party…is presented with a dilemma, and must weigh hard choices and serious consequences,”8 such as:
If the promisee regards the apparent repudiation as an anticipatory repudiation, terminates his or her own performance and sues for breach, the promisee is placed in jeopardy of being found to have breached if the court determines that the apparent repudiation was not sufficiently clear and unequivocal to constitute an anticipatory repudiation justifying non-performance. If, on the other hand, the promisee continues to perform after perceiving apparent repudiation, and it is subsequently determined that an anticipatory repudiation took place, the promisee may be denied recovery for post-repudiation expenditures because of his or her failure to avoid expenses as part of a reasonable effort to mitigate damages after the repudiation.9
Repudiation Found Definite and Final
Courts have found a party’s repudiation to be a “positive and unequivocal” and/or a “definite and final” expression of its intent to not perform its contractual obligations in the following circumstances:
•Where a defendant vendor refused to close title, the court held this refusal “constituted an anticipatory breach of the contract obviating a need by the plaintiff to tender performance prior to the commencement of the instant action.”10
•Where a seller refused to schedule a closing and sent a letter to the purchasers stating that seller was “unable to fulfill its obligations under the contract” due to “irreconcilable differences,” the seller’s letter constituted an anticipatory breach of the contract.11
•Where a purchaser of real estate who, upon learning of a cloud on seller’s title, scheduled a Time of the Essence Closing (TOE) law date and demanded return of its down payment, knowing that it was impossible, prior to the TOE closing, for seller to cure the title cloud within the seller’s allotted 90- day cure period (the First Department held that the “peremptory denial of the sellers’ opportunity to cure constituted an anticipatory repudiation of the contract by the prospective buyer”).12
•Where a party attempted to terminate a contract pursuant to conditions to the transaction that were not provided for in the contract.13
•Where a seller declared a contract void and “stated its intention to entertain offers from other buyers.”14
•Where a landlord sent to a tenant, who wanted to rent more square feet, correspondence, containing new terms to the lease, including increased annual rent, stating “if these provisions are not acceptable, I suggest we terminate our arrangement.”15
•Where a party sent a letter stating that, if the other party did not grant an extension on the contract’s mortgage contingency clause, the party would deem the contract cancelled.16
•Where a tenant sued for wrongful eviction, after closing its restaurant business, ceasing all operations, and being locked out by the landlord.17
Repudiation Not Definite and Final
There are also cases where the courts hold that what at first glance may appear to be an anticipatory breach is not a repudiation at all.
The Unclear Holding in Princess Point
In Princess Point, the latest decision by the Court of Appeals on anticipatory breaches, the court addressed the question of whether “the commencement of an action, particularly one seeking rescission, is itself an anticipatory breach.”18 The court held that “where the amended complaint seeks, among other things, reformation of the amendments to the contract and specific performance of the original agreement, there was no positive and unequivocal repudiation.”19 In so holding, the court likened an action for rescission, which seeks to nullify the terms of the contract, to a declaratory judgment action which “would produce a ruling as to the rights of the parties under the terms of the contract.”20 The court reasoned that “[a]t bottom, both actions seek a judicial determination as to the terms of the contract, and the mere act of asking for judicial approval to avoid a performance obligation is not the same as establishing that one will not perform that obligation absent such approval.”21
While it is true, as the court opined, that both forms of action “seek a judicial determination as to the terms of the contract,” it is difficult to conceive of a more unequivocal, positive, definite, and final expression of a party’s intention to repudiate a contract than by seeking to rescind the contract.22
Nevertheless, in finding no contract repudiation in Princess Point, the similarities the Court of Appeals perceived in actions for declaratory judgment and rescission, may ultimately be limited to the “context” of the facts in Princes Point, where, as the court itself twice noted, the “context” included the plaintiff’s amended complaint which sought, among other things, reformation of the amendments to the contract and specific performance of the original agreement—remedies that, in and of themselves, did not bespeak the plaintiff’s intention to rescind and terminate the entire contract. Whether courts in future cases will distinguish Princess Point on this ground or follow the literal holding of the case without regard to this significant factor remains to be seen.
A somewhat similar situation occurred in Coney Island Exhaust v. Mobil Oil Corp., where Coney Island Exhaust, a tenant of one part of landlord’s premises, had sued to enjoin landlord form excavating the other part of its property to construct a gas station.23 The parties entered into a stipulation which required the landlord to install a concrete barrier or tire stop across the premises. The stipulation was subject to approval by the company that was to supply the gasoline.
The tenant who was to operate the gas station contended that the stipulation was a unilateral modification of its lease and that it constituted an anticipatory repudiation of the lease. The court held that the stipulation did not constitute an anticipatory repudiation of the lease because “the stipulation depended upon the consent of…the proposed oil supplier before it became operative,” and, therefore, “the stipulation was not an unequivocal, definite, and final repudiation of the lease agreement.”24
In addition, “mere expression of difficulty in tendering the required performance, for example, is not tantamount to a renunciation of the contract.”25 In Children of America, prior to the commencement of the lease, tenant sent an email to the landlord advising that tenant was experiencing financial difficulties and offered certain options for modifying the terms of the lease. The landlord stopped the construction it was performing at the premises pursuant to the lease, and ultimately terminated the lease.
The tenant commenced an action for the landlord’s breach of the lease, and the landlord counterclaimed, to recover damages arising from the tenant’s alleged anticipatory repudiation of the lease. The court held that the email “did not constitute an anticipatory repudiation because it was not an unequivocal, definite, and final expression of the tenant’s intention not to perform its obligations under the lease.”26
Retracting Without Liability
A party who has repudiated its obligations under the contract may nevertheless retract its repudiation until the other party has elected to terminate the contract or has materially changed its position in reliance on the repudiation.27 In Dembeck v. Hassler, the seller had wrongfully repudiated the contract based upon the buyer’s failure to obtain a mortgage commitment, but upon learning that the buyer had subsequently obtained its mortgage commitment, the seller retracted its repudiation of the contract.28 The court held that the seller had “effectively retracted” its repudiation, explaining that, “[t]he effect of the seller’s wrongful repudiation was an anticipatory breach that did not put the contract out of existence but merely relieved the buyer of her future obligation to perform, and entitled her to a remedy if her position materially changed before the retraction had been issued.”29 The court noted that there was no issue of fact as to whether the buyer’s position had changed, and unanimously upheld summary judgment dismissing the buyer’s complaint. However, in order to be effective, the retraction of the repudiation must be found to be both timely and bona fide.30 Election of Remedies In Princess Point, the Court of Appeals noted that it has previously “taught that the party harmed by the repudiation must make a choice either to pursue damages for the breach or to proceed as if the contract is valid,” and that “a wrongful repudiation of the contract by one party before the time for performance entitles the non-repudiating party to immediately claim damages for a total breach.”31
However, in order to be effective, the retraction of the repudiation must be found to be both timely and bona fide.30 Election of Remedies In Princess Point, the Court of Appeals noted that it has previously “taught that the party harmed by the repudiation must make a choice either to pursue damages for the breach or to proceed as if the contract is valid,” and that “a wrongful repudiation of the contract by one party before the time for performance entitles the non-repudiating party to immediately claim damages for a total breach.”31
As further explained by the Second Department, in AG Properties of Kingston v. Bestcorp-Empire Development:
When confronted with this attempted [repudiation], the [non-repudiating party] had to choose between two options. It could either (1) treat the termination as an anticipatory breach, consider the agreement at an end and seek damages, or (2) ignore the anticipatory breach, continue to perform the agreement, wait to see if the [repudiating party] would perform when required by the terms of the agreement and, if it did not do so, then bring suit on the subsequent breach. *** In determining which election the non-breaching party has made, “the operative factor…is whether the non-breaching party has taken an action (or failed to take an action) that indicated to the breaching party that [it] had made an election.”32
Nevertheless, “[t]here is no particular time within which the non-breaching party must make the election,…He may refuse, for a time, to acquiesce in the repudiation, and urge the repudiator to perform without waiving any of his rights,” [and] “[t]he repudiator may retract his repudiation until the other party has elected to terminate the contract or has materially changed his position in reliance on the repudiation.”33
As further explained in AG Properties Where a non-repudiating party affords the repudiating party an opportunity to repent, but [the repudiating party] does not do so, the non-repudiating party’s subsequent failure to perform is not a breach….The injured party does not change the effect of a repudiation by urging the repudiator to perform in spite of his repudiation or to retract his repudiation. (Internal quotations and citations omitted).34
However, as the First Department, in Rachmani Corp., has also noted:
Once a party has indicated an unequivocal intent to forego performance of his obligations under a contract, there is little to be gained by requiring the party who will be injured to await the actual breach before commencing suit, with the attendant risk of faded memories and unavailable witnesses.35
Conclusion
As noted at the beginning of this article, cases involving claims of anticipatory breach or repudiation of contract obligations are varied in nature and often involve complex analytical application of straightforward legal principles to convoluted facts, particularly in real estate transactions. Practitioners therefore need to be very careful in how they plead their clients’ causes, whether as plaintiff or defendant, to avoid the pitfalls latent in the facts of all such cases.
Adam Leitman Bailey is the founding partner of Adam Leitman Bailey, P.C. and John M. Desiderio is the managing partner in the firm’s real estate litigation practice group. Michelle Brown, a former law student intern at the firm, assisted in the preparation of this article.
This is a revised version of an article that originally appeared in the June edition of the New York Law Journal© 2019 ALM Media Properties, LLC. Republished with permission. All rights reserved.
Original Article