Repudiation refers to a situation in a contract whereby the terms of a contract previously agreed upon by both parties is rejected or renounced by a party. In repudiation, a party refuses to honor his part of the deal by disputing the validity of the contract. Repudiation is most common in fixed income securities, it occurs when a party disowns or rejects terms previously agreed to. Oftentimes, repudiation is regarded as a breach of contract, a party who denies the validity of contract is repudiating the contract.
A Little More on What is Repudiation
Repudiation can occur in a fixed income security such as sovereign debt, in this contract, a creditor or lender issues a loan to a borrower in exchange for interests and payment of principal at an agreed date. If after receiving the loan, a borrower refuses to make payments on the agreed date, repudiation has occurred.
Repudiation can occur in diverse forms, sometimes, borrowers may go default or regard the contract invalid, thereby refusing to make payments. It can also be as a result of the unwillingness or inability of borrowers to fulfill their obligations as stated in the terms of the contract. Creditors whose borrowers repudiate a contract can opt for recourse against the borrower to secure a repayment of debt. If taken to the court, the creditor must be able to prove that repudiation has occurred.
Legally, repudiation is distinguished from an actual breach of contract, it is often called an anticipatory breach which occurs before an actual breach takes place. For instance, if a party clearly states that they are unable to fulfil their part of the contract or disputes the validity of a contract, it is an approach driven towards breaching the contract which is called repudiation.
The court takes repudiation as a serious matter, this is why objective tests are done by the court to determine whether a party has repudiated or not. The core terms of a contract are examined to identify whether repudiation has occurred or not.
Responding to Repudiation
Repudiation does not expressly mean that a contract would be terminated, the party at the receiving end may decide to seek recourse or settle in another way. Two things can occur when a party repudiates the contract, the affected party can decide to end the contract which means they have accepted the repudiation or continue with the contract. Hence, the affected party decides how they want to respond to repudiation.
Caution: terminating a contract based on a wrong assumption that the other party has repudiated without any clear evidence could mean the ‘seemingly’ innocent party has repudiated the contract.