CPA Exam — REG (Regulation)Business LawMedium
A small business owner, Sarah, enters into a contract to purchase a specialized piece of machinery from Manufacturer Inc. The contract specifies that the machinery must be delivered by October 15th. On October 1st, Sarah receives a letter from Manufacturer Inc. stating that due to unforeseen production issues, they will be unable to deliver the machinery until December 1st. Sarah needs the machinery by October 15th to fulfill a major client order. Which of the following is Sarah's best course of action under contract law?
- ARequest a price reduction from Manufacturer Inc. for the delay.
- BOffer to extend the delivery date to November 1st in exchange for a discount.
- CWait until October 15th to see if Manufacturer Inc. delivers the machinery.
- DImmediately treat the contract as breached and seek remedies.
Show answer & explanationAnswer & explanation
Correct answer: D. Immediately treat the contract as breached and seek remedies.
Manufacturer Inc.'s letter constitutes an anticipatory repudiation, clearly indicating an inability to perform by the contract date. Sarah can immediately treat this as a breach and pursue remedies without waiting for the actual breach date.
Why the other options are wrong
- A. While a price reduction might be negotiated, it is not the best course of action from a legal standpoint when an anticipatory repudiation has occurred, as Sarah has stronger rights.
- B. Offering an extension is a negotiation tactic, but under anticipatory repudiation, Sarah has the right to treat the contract as breached and is not obligated to offer an extension.
- C. Waiting until October 15th would not be the best course of action as the breach has already been clearly communicated, delaying Sarah's ability to seek remedies.
Anticipatory Repudiation
A clear and unequivocal indication by one party to a contract, before performance is due, that they will not perform their contractual obligations.
- Allows the non-breaching party to immediately sue for breach.
- Must be a clear and definite statement or action.
- Can be retracted if the non-breaching party has not yet acted upon it.
Memory trick: Anticipate the Repudiation, then React to the Breach.