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What is an anticipatory breach?

| Aug 4, 2023 | Business Law And Litigation |

Business contracts are generally beneficial to both parties (after all, that is why both agreed to the contract). Still, circumstances can put one party at risk of financial or other loss. In some cases, one of the parties may anticipate that the other party will breach contract before the breach actually occurs, giving the first party time to take steps to mitigate or avoid damages they would otherwise suffer.

Anticipatory breach: What it is

An anticipatory breach of contract is a situation in which one party to the agreement believes, and can reasonably expect, that the other party will not fulfill its obligations under the contract. In this circumstance, the non-breaching party may be able to terminate the contract before any actual breach occurs and take steps to minimize the damages they might otherwise suffer.

This type of breach in business law is difficult to prove and must be established by clear evidence. Generally, courts will consider several factors in determining whether an anticipatory breach has occurred or not: an indication of the other party’s intent not to perform, an inability or unwillingness of the breaching party to perform its obligations, a refusal to accept any offered alternative performance proposals, and a reasonable notice period given by the non-breaching party.

What non-breaching party can do if a breach occurs

If a breach does occur, the non-breaching party may be able to:

End the contract immediately and pursue legal remedies

If the non-breaching party believes it will likely suffer damages, it may terminate the contract immediately and pursue legal remedies. This could include filing a lawsuit against the breaching party for breach of contract, recovering any damages resulting from the breach, or seeking an injunction to prevent the breaching party from engaging in further breaches.

Continue with enforcement of obligations

The non-breaching party may also continue to enforce the contract’s obligations, depending on its understanding of the situation. This could involve continuing to perform under the terms of the contract while also seeking compensation in damages for what has already occurred. Alternatively, the non-breaching party may suspend performance until a resolution is reached or even take legal action against the other party.

Negotiate a settlement

Finally, the non-breaching party may attempt to negotiate a settlement with the breaching party. This could involve amending the contract’s terms or even providing compensation in exchange for continued performance under the contract. This option is often considered preferable to legal action because it can help both parties avoid costly litigation and resolve their dispute without further risk of breach.

Regarding anticipatory breach of contract, each situation must be evaluated based on its facts. Parties to any agreement need to understand their rights and responsibilities under the terms of the contract so they can take appropriate action should a breach occur.