Editing Contracts/Fundamental breach

{{:Contracts/TOC}}{{Breadcrumb|parent_page=Contracts|alias={{SUBPAGENAME}}}}
'''Fundamental breach''' of [[contract]]<ref>sometimes known as a '''repudiatory breach'''</ref> is a controversial concept within the [[common law]] of [[Law of contract|contract]]. The doctrine was, in particular, nurtured by [[Lord Denning]] [[Master of the Rolls|MR]], but it did not find favour with the [[Judicial functions of the House of Lords|House of Lords]].

Whereas breach of [[Contractual term#Classification of term|condition]] is a serious breach that "denies the plaintiff the main benefit of the contract",<ref>''[[Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd|Hong Kong Fir Shipping v Kawasaki Kisen Kaisha]]''</ref> fundamental breach was supposed to be even worse, with the result that any exemption clause limiting the defendant's liability would automatically become void and ineffective. Also, whereas breach of condition gives the plaintiff the option to repudiate, fundamental breach automatically discharges the entire contract.<ref>[[Harbutt's "Plasticine" Ltd v Wayne Tank and Pump Co Ltd]]</ref>

Although the concept caused some excitement in the 1950s and 1960s, the concept was regarded as flawed by the [[judicial functions of the House of Lords|Law Lords]], whose decision in the ''[[Suisse Atlantique Societe d'Armement Maritime S.A. v. N.V. Rotterdamsche Kolen Centrale|Suisse Atlantique]]''<ref>[1966] 1 Lloyd's Rep. 529</ref> substantially curtailed the doctrine, which has now been effectively "laid to rest" in [[English Law|England]] and Canada.<ref> see [[Photo Production Ltd v Securicor Transport Ltd]]</ref>. The relevant concept in English Law is [[breach of contract|repudiatory breach]] of contract.

==Background – the law of deviation==

The origins of the idea of fundamental [[breach of contract|breach]]  may be traced to early cases on the  doctrine of [[Deviation (law)|deviation]]. In ''Davis v. Garrett'' <ref> Case report [http://www.lawandsea.net/List_of_Cases/D/Davis_v_Garrett_1830_6_Bing_716.html]</ref> Tindal C.J. stated that a carrier's deviation from the agreed voyage route amounted also to a deviation from the terms of the contract, including its exceptions or limitation clauses provided by such a contract. This view was adopted in the leading cases of ''[[Glynn v Margetson]]'' <ref>''Glynn v Margetson''[1893] AC 351 [1907] 1 KB 660</ref><ref>case report [http://www.lawandsea.net/List_of_Cases/G/Glynn_v_Margetson_1893_AC_351.html]</ref> and ''[[Leduc v Ward]]''.<ref> ''Leduc v Ward'' (1888) 20 QBD 475</ref><ref> Case report [http://www.lawandsea.net/List_of_Cases/L/Leduc_v_Ward_1888_20_QBD475.html]</ref> 

In ''Leduc v Ward'' (1888) a vessel bound from Fiume<ref> Fiume is modern day Rijeka</ref> to Dunkirk headed instead towards Glasgow, sinking in a storm in the Clyde estuary. The court held that even though the shipper may have known of the planned deviation, the [[parol evidence rule]] meant that the route described in the bill of lading was conclusive, and that the deviation was actionable, preventing the carrier from invoking the protection of the "[[Hague–Visby Rules#Carriers' duties|perils of the sea]]" exemption.{{fact|date=August 2019}}

Similarly, in ''Glynn v Margetson'' (1893) <ref>[1893] AC 351 [1907] 1 KB 660</ref>  a vessel carrying Seville oranges from Malaga to Liverpool deviated from the agreed route, by heading first to Burriana (near Valencia). This deviation caused delay and deterioration of the perishable cargo. The carrier relied on a 'liberty clause' in the [[bill of lading]] which purported to allow the vessel 'liberty to visit any port in any order'. In the [[judicial functions of the House of Lords|House of Lords]], Lord Herschell LC declared the liberty clause to be an [[exemption clause]] in disguise, adding "The main object of this bill of lading is the carriage of oranges from Malaga to Liverpool". He thus established the '''"main purpose rule"''', holding that no exclusion clause would be allowed to cut into the main purpose of any contract.{{fact|date=August 2019}} 

''[[Tate & Lyle v Hain Steamship Company]]''<ref>iLaw[https://i-law.com/ilaw/doc/view.htm?id=142321]</ref> was a further deviation case following this approach.

==Adoption of fundamental breach within contract law==
Although the 19th century cases were maritime cases, the idea of the "main purpose" caught on in the general [[English contract law|law of contract]] after Lord Greene [[Master of the Rolls|MR]], in ''[[Alderslade v. Hendon Laundry Ltd.]]''(1945) <ref>[1945] KB, 189 at p. 193</ref>, labelled the fundamental term as ‘the hard core of the contract'. 

In ''[[Karsales (Harrow) Ltd. v. Wallis|Karsales  v Wallis]]'' [1956] [http://www.bailii.org/ew/cases/EWCA/Civ/1956/4.html EWCA Civ 4] a buyer inspected a car dealer's used Buick car and agreed to buy it. The car was later delivered at night, and had been towed. When the buyer inspected the car in the morning, it would not work and it was clear it had been involved in an accident, and there were other changes: its tyres had been replaced by old ones, body parts were missing, and the engine's cylinder head was detached, revealing burnt valves. This was a serious breach, but the dealer sought to rely on a clause in the contract: "No condition or warranty that the vehicle is roadworthy or as to its age, condition or fitness for any purpose is given by the owner or implied herein."

Although the clause was clear and well drafted, the [[English Court of Appeal|Court of Appeal]] declared that a "car" was a "vehicle capable of self-propulsion", and accordingly this Buick was not a proper car. Following ''Glynn v Margetson'' and using its "main purpose" concept, the court held that the dealer was "in breach of a fundamental obligation" and so could not rely on any exclusion clause.

This decision was clearly fair to the buyer, and ''Karsales v Wallis'' soon became the leading case on "fundamental breach". As a matter of law, under the doctrine of fundamental breach of contract, exclusion clauses were deemed not to be available to a party in fundamental breach of the contract. However, all was not well, as business people felt alarmed that an agreed contract term could be set aside by a court; there seemed to be no "certainty".{{fact|date=November 2018}}

Also, there arose some confusion as to what "fundamental breach" actually was. Some alleged it was a breach that went to "the root of the contract", a breach so fundamental it would permit the distressed party to [[anticipatory repudiation|repudiate]] the contract and claim damages. However, since both common law<ref>''[[Bettini v Gye]]'' (1876)</ref> and statute<ref>e.g. [[The Sale of Goods Act 1893]]</ref> already recognised that while that breach of warranty entitled a claimant only to damages, any breach of condition would entitle a claimant both repudiation and damages, it seemed that fundamental breach offered nothing new.<ref>In other words, fundamental breach was not some kind of "super breach of condition".</ref>

==Resolution – the ''Suisse Atlantique''==
The matter came to a head in 1966 in the House of Lords decision ''[[Suisse Atlantique Societe d'Armement Maritime S.A. v. N.V. Rotterdamsche Kolen Centrale|Suisse Atlantique]]''<ref>[1966] 1 Lloyd's Rep. 529</ref>. The case involved a two-year [[time charter]] to export coal, the shipowners to be paid [[freight rate|freight]] dependent on tonnage of cargo carried. If [[laytime]]{{efn|"Laytime" is the allowable period for the charterer to arrange loading and unloading}} were exceeded, the charterers were to pay [[demurrage]] of $1,000 per day. The charterers caused huge delays and few round trips were made. Demurrage totalled only $150,000, so the owners claimed damages for their full losses, saying they should not be limited to the demurrage terms because the charterer's gross delays amounted to fundamental breach.

The House of Lords boldly held that ''Karsales v Wallis'' had overstated the law, and that whether or not a fundamental breach extinguishes any protection that the defendant might rely on was a "question of construction" and not a "question of law".{{efn|i.e not automatic}} Although the demurrage clause was so absurdly low that it amounted to an exemption clause, nevertheless its existence plainly showed that the parties had contemplated the possibility of delay, so delays would not amount to fundamental breach.

After the ''Suisse Atlantique'' decision, there was a series of cases where the [[Court of Appeal]] patently ignored the House of Lords' findings. One such case was ''[[Harbutt's "Plasticine" Ltd v Wayne Tank and Pump Co Ltd]]''.<ref>[1970] 1 QB 447</ref> The House of Lords was less than amused, and in the 1980  ''[[Photo Production Ltd. v. Securicor Transport Ltd|Photo Productions]]'' case they emphatically reaffirmed their decision in the ''Suisse Atlantique''.  [[Lord Wilberforce]] effectively overturned the "rule of law" doctrine of ''Karsales v Wallis'' and instead maintained a strict "[[rule of construction]]" approach whereby a fundamental breach is determined by examining the full circumstances, such as the parties' intentions at the time of the contract.

These two cases (the ''Suisse Atlantique'' and ''Photo Productions'') thus form the definitive statement of the law up to the [[Unfair Contract Terms Act 1977]].{{efn|as amended by the [[Consumer Rights Act 2015]]}}

More recently, this law was successfully applied in two cases related to carriage of goods by sea and application of limitation clauses under the [[Hague-Visby Rules]]: ''[[Daewoo Heavy Industries Ltd. v. Klipriver Shipping Ltd.]]''<ref>Also, ''The Kapitan Petko Voivoda'' [2003] 2 Lloyd's Rep. 1</ref> and ''The Happy Ranger''<ref>[2002] 2 Lloyd's Rep. 357.</ref>

Although the ''Suisse Atlantique'' case has taken the sting out of the fundamental breach idea, in deviation itself little has changed. ''Glynn v Margetson'' still holds, so that not only may deviating carriers be denied the protection of exemption clauses expressly in the contract, they will also be denied the protection of implicit exemptions such as Article IV of the [[Hague-Visby Rules]]. However, given the general move in the [[common law]] away from [[strict liability]] to a standard of "[[reasonable care]]" (or "[[due diligence]]"),<ref>''viz'' ''[[Re Polemis]]'' & ''[[Donoghue v Stevenson]]''</ref><ref>''viz'' ''[[The Glenfruin]]'' (1885) 10 PD 103 & ''[[McFadden v Blue Star Line]]'' [1905] 1 KB 697</ref> this may change in due course.

{{notelist}}

==Canada==
The doctrine of fundamental breach has been “laid to rest”<ref>2010 SCC 4, para. 81</ref> by the Supreme Court of Canada in ''[[Tercon Contractors Ltd. v. British Columbia (Transportation and Highways)]].''<ref>2010 SCC 4</ref> In its place, the Court has created a three-step test to evaluate the application of exclusion clauses. The first step is to evaluate the exclusion clause in the factual context of each case to determine if it applies to the material circumstances. The second step is to evaluate if the exclusion clause was unconscionable at the time of incorporation. The final step is to evaluate whether the exclusion clause should not be enforced on public policy grounds.

==See also==
* ''Maxine Footwear Company Ltd. v. Canadian Government Merchant Marine Ltd'' (1957)<ref>[1957] S.C.R. 801: Canadian Supreme Court [https://scc-csc.lexum.com/scc-csc/scc-csc/en/item/6334/index.do]</ref><ref>[1959] A.C. 589: [[Judicial Committee of the Privy Council|Privy Council]] [http://swarb.co.uk/maxine-footwear-co-v-canadian-government-merchant-marine-ltd-pc-1959/]</ref>
* [[Breach of contract]]
* ''[[Pacta sunt servanda]]'', a [[Brocard (law)|brocard]] or basic principle of law
* [[Terms in English contract law]]

==Notes==
{{reflist|2}}