Contracts/Fundamental breach: Difference between revisions

A fundamental breach of a contract, sometimes known as a repudiatory breach, is a concept within the common law of contract.

Although the concept caused some excitement in the 1950s and 1960s, the concept has been regarded as flawed and wrongheaded, and has been effectively "laid to rest" in England and Canada.

Background - the law of deviation

Template:Contract law The origins of the idea of fundamental breach may be traced to early cases on the doctrine of deviation. In Davis v. Garrett ^[1] 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 ^[2][3] and Leduc v Ward.^[4][5]

In Glynn v Margetson (1893) ^[6] 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 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.

Similarly, in Leduc v Ward (1888) a vessel bound from Fiume^[7] 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 "perils of the sea" exemption.

Tate & Lyle v Hain Steamship Company^[8] 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 law of contract after Lord Greene MR, in Alderslade v. Hendon Laundry Ltd.(1945) ^[9], labelled the fundamental term as ‘the hard core of the contract'.

In Karsales v Wallis [1956] 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 detaches, revealing burnt valves. This was 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 an well drafted, the Court of Appeal declared that a "car" was a"vehicle capable of self-propulsion", and that 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".

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 the contract and sue for damages. However, since both common law^[10] and statute ^[11] recognised that while that breach of warranty entitled a claimant only to damages, clearly any breach of condition would entitle a claimant both to repudiate and claim damages, it seemed that fundamental breach offered nothing new.

Resolution - the Suisse Atlantique

The matter came to a head in the House of Lords decision Suisse Atlantique^[12]. The case involved a two-year time charter to export coal, the shipowners to be paid freight dependant on cargo carried. If laytime ^[13] were exceeded, the charterers were to pay demurrage of $1000 per day. The charterers caused huge delays, and only eight round trips were made. Demurrage payable amounted to $150,000. The owners claimed damages for their full losses, saying they should not be limited to the demurrage amount because the charterer's gross delays amounted to a fundamental breach of the contract.

Crucially, the House of Lords 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. While 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 that the delays did not amount to fundamental breach.

After the Suisse Atlantique decision, there was a series of cases where the Court of Appeal patently ignored the findings of this case. One such case was Harbutt's "Plasticine" Ltd v Wayne Tank and Pump Co Ltd.^[14] The House of Lords was less than amused, and in the 1980 Photo Productions case they emphatically reaffirmed the principles of the Suisse Atlantique. Lord Wilberforce effectively overturned the Rule of Law doctrine and instead maintained a strict 'Rule of Construction' approach whereby a fundamental breach is found only through examining the reasonable intentions of the parties at the time of the contract.

These two cases then, the Suisse Atlantique and Photo Productions form the definitive statement of the law prior to the Unfair Contract Terms Act 1977 (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.^[15] and The Happy Ranger^[16]

Canada

The doctrine of fundamental breach has been “laid to rest”^[17] by the Supreme Court of Canada in Tercon Contractors Ltd. v. British Columbia (Transportation and Highways).^[18] 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 [1959] A.C. 589
• Breach of contract
• Pacta sunt servanda, a brocard or basic principle of law
• Terms in English contract law

Notes