DEFINITION of Anticipatory Breach
An anticipatory breach (also referred to as an anticipatory repudiation) is an action that shows a party's intention to fail to perform or fulfill its contractual obligations to another party. An anticipatory breach negates the counterparty's responsibility to perform its requirements under the contract. By demonstrating a party's intention to breach, the counterparty may also begin legal action.
BREAKING DOWN Anticipatory Breach
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 an obligation in a timely matter can result in a breach. By declaring an anticipatory breach, the counterparty may begin legal action immediately rather than wait until a contract's terms are actually broken.
For example, if Company A refuses to pay substantial interim payments to Company B, Company B can begin legal action due to anticipatory breach. Company B could also stop performing its contractual obligation, potentially saving time and or money.
Criteria for an Anticipatory Breach
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. The expected breach cannot be based solely on an assumption that the party will not meet their obligations.
Let’s say a real estate developer contracts an architecture firm to create plans for a new building by a certain 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 or the design might not be as desired but the architects could be continuing to work. Such a circumstance still leaves the possibility that the architects might meet their deadline if corrective steps are taken.
If the architects were to take actions that would make it unconditionally impossible to meet the deadline, this 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 they agreed to.
Parties that claim that an anticipatory breach has occurred are obliged to make every effort to mitigate their own damages in response if they wish to seek recompense 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. This can include seeking a third party who could perform the duties outlined in the original contract.