Contracts can be broken as soon as one party indicates that it can't -- or won't -- meet its obligations.
Any kind of contract may be considered broken ("breached") once one party unconditionally refuses to perform under the contract as promised, regardless of when performance is supposed to take place. This unconditional refusal is known as a "repudiation" of a contract.
Once one party to a contract indicates--either through words or actions--that it's not going to perform its contract obligations, the other party can immediately claim a breach of contract (failure to perform under the contract) and seek remedies such as payment. This is sometimes called an anticipatory breach of contract. Read on to learn more about the concepts of repudiation and anticipatory breach of contract. (For more information on disputes involving breach of contract, see Nolo's article Breach of Contract: Material Breach.)
When Does Repudiation Occur?
Courts usually recognize three types of repudiation when it comes to contract law:
A positive and unconditional refusal is made to the other party ("express repudiation"). The other party must tell you, in essence, "I'm not going through with the deal." It's not enough to make a qualified or ambiguous refusal. (For example, "Unless this drought breaks, I won't be able to deliver the apples.") The repudiation must be clear, straightforward, and directed at the other party. (For example, "I will not be delivering the apples as promised.")
An action makes it impossible for the other party to perform. When it comes to repudiation, actions speak as loudly as words. For example, let's say a couple was supposed to repay two loans from the profits of their business. Instead, the couple ran the business into the ground, incurring lots of other debts and making it impossible to pay back their original loans. Their reckless, voluntary actions counted as a repudiation of the original loan agreements.
The property that is the subject of the deal is transferred to someone else. If the contract is for the sale of property, repudiation occurs when one party transfers (or makes a deal to transfer) the property to a third party. For example, if you've contracted to buy a house and you learn that the other party has subsequently sold it to his brother, your sales contract has been repudiated (even if you never heard a word about it from the other party).
Contracts for Sale of Goods -- Special Rules
The Uniform Commercial Code (UCC)--legal rules governing the sale of goods--prescribes a procedure for dealing with anticipatory breach. If you have reason to believe that the other party is not going to fulfill its obligations, you have a right to demand "adequate assurance of performance" of the contract. You can suspend your own performance under the contract until the assurance is provided. If, after 30 days, the other party fails to comply with your request for assurances, the contract is officially over ("repudiated").
As you can see, under UCC rules, a qualified repudiation ("Compco may have trouble filling its summer orders") is enough to stop the clock on the contract, at least until the other side provides the requested assurances. Many commentators have argued that all contracts--not just those governed by the UCC--should follow these rules for requesting and providing assurance.
Repudiation: Can You Take It Back?
It's possible for a party to repudiate the contract and then later retract the repudiation, as long as the other party hasn't made a "material change" in their position because of the repudiation.
When Only Payment Remains
In what may seem like an odd quirk, the rules described in this section don't apply if the only contract obligation remaining is for one party to pay money to the other. In these cases, the party seeking the payment must wait until the due date for the payment has passed. (No claim of anticipatory breach if one party has reason to believe they won't receive payment.).
The Non-Breaching Party's Duty to Mitigate
There's one last twist to anticipatory breach: If one party repudiates the contract, most courts require the other party to act swiftly to avoid incurring unnecessary costs or expenses. This is referred to as "mitigating damages" and generally means that you can't sit around and let the situation get worse. This also explains why some parties repudiate a contract: It gives the other party more time to cut its losses, which reduces the money damages that might be awarded in a breach of contract lawsuit. For instance, in our houseboat example, if Sam repudiates two weeks before Greta starts work, she may be able to find another client to fill that slot -- and thus limit or even wipe out any damages she could have collected from Sam as a result of the breach. If Greta can make up the money with another job, it's essentially a situation of "no harm, no foul."