The Exculpation of Repudiating Parties by a Right to Terminate the Contract

Many contracts provide for a right of one or all parties to terminate the contract either at any time or under certain conditions. Long-term contracts such as leases and employment contracts often provide for either party's right to terminate the contract by giving notice. Where a contracting party exercises a right to terminate the contract, neither party has a claim with regard to future performance. Where a contracting party purports to terminate the contract without fulfilling the conditions under which termination is allowed (e.g. without giving the notice prescribed), the purported termination is a wrongful repudiation of the contract. An acceptance of the repudiation by the other party does relieve both parties from future performance, but the aggrieved party may then claim damages for non-performance of the repudiating party's future obligations. Damages are then assessed to put the aggrieved party in the same situation as if the repudiation had not occurred. It is settled law that the only damages the aggrieved party is entitled to are the difference between the cost incurred through wrongful repudiation and the cost that would have been incurred had the contract been lawfully terminated. Therefore, repudiating parties are exculpated by a right to terminate the contract. This article discusses three main aspects of this rule. Firstly, for the purpose of determining the damages recoverable, the hypothetical notice period starts to run with the repudiation rather than its acceptance. Secondly, this article shows that a right to terminate which was, at the time of the repudiation, unavailable and even uncertain to arise in future but which the court now knows would have arisen absent the repudiation, exculpates the repudiating party, at least where the right to terminate would have arisen before the aggrieved party incurred the loss in question. Finally, this article suggests chat the mere availability of a right to terminate the contract is alone insufficient to exonerate the repudiating parry. It is further necessary that the repudiating party would actually have exercised that right absent the repudiation. However, the burden of proof should lie with the aggrieved party. It should be for the aggrieved party to prove that the repudiating party would never have lawfully terminated the contract