Every day people knowingly or unknowingly
Every day people knowingly or unknowingly enter into series of contracts. This may be in the form of purchasing an article from a shop or by purchasing a railway ticket or by numerous ways. In modern societies, because of increasing complexity, there has been a practice of concluding contracts in standard form. One such instance of a standard form of contract is contract of insurance. Thus, standard form of contracts are those kinds of contracts were parties do not sit together to bargain the terms of the contract. One problem that is likely to arise with regard to standard form of contract is that they contain a large number of terms and conditions in fine print which restrict and often exclude liability under the contract. The individual in such cases have no option other than to accept the terms of the contract whether they like it or not.
This gives a unique opportunity for the companies and other authorities entering into standard form of contract with the individuals to exploit the weakness of the individual by imposing upon its terms which may go to the extent of exempting the party from all kinds of liability under the contract. In such cases, courts have found it difficult to rescue the weaker party because they have signed the contractual document. Such contracts have therefore been called “Contracts of Adhesion” which means that the individual has no choice but to accept the terms of the contract without negotiating.
Therefore, to help the individuals entering into such contract from being exploited by certain inherent conditions in the contract, Courts have evolved certain modes of protection. One such protective device is the theory or doctrine of fundamental breach. Fundamental breach simply means that if one party fails to perform the fundamental obligation for which the contract is formed, he will be guilty of a breach of the contract whether or not any exempting clause has been inserted which purports to protect him.
What Is ‘Fundamental Breach' Of A Contract?
Every contract has certain terms which are fundamental, the breach of which amounted to a complete non-performance of the contract. A fundamental term was conceived to be something more basic than a warranty or even a condition. It formed the ‘core' of the contract, and therefore could not be affected by any exemption clause. If one party fails to perform this fundamental obligation, he will be guilty of a breach of the contract whether or not any exempting clause has been inserted which purports to protect him. Fundamental Breach has been defined in the following ways as well:
“This expression is no more than convenient shorthand expression for saying that a particular breach or breaches of contract by one party is or are such as to go to the root of the contract which entitles the other party to treat such breach or breaches as a repudiation of the whole contract.” (In Suisse Atlantique Societe D' Armement Maritime S.A. v. N.V. Rotterdamsche Kolen Centrale)
“If a breach goes to the very root of the contract, it is called ‘Fundamental Breach' (In George Mitchell v. Finney Lock Seeds)
A fundamental breach can be described as a failure so serious that it has the effect of depriving the other party of substantially the whole benefit of the contract - or that the
breach “goes so much to the root of the contract that it makes commercial performance of it impossible” ( In Progressive Mailing House Pty Ltd v Tabali Pty Ltd)
According to Lord Wilberforce “these expressions denote two quite different things, namely:
A performance totally different from that which the contract contemplates
A breach of contract more serious than one which would entitle the other party merely to damages and which (at least) would entitle him to refuse the performance or further performance of the contract.
Fundamental Term And Condition Of The Contract
As said earlier, a fundamental term is a part of the “core” of the contract, the non-performance of which destroys the very substance of the agreement. If the person has departed from the basic contractual obligation it is not justifiable for him to be excluded from liability. To do so, would make an entire mockery of the contractual obligation. It has been distinguished from ‘condition of the contract' by Devlin J as being “something narrower than a condition of the contract” and as something which underlies the whole contract so that, if it is not complied with, performance becomes totally different from that which the contract contemplates.” An illustration can be given through the following case:
Case: Alderslade v. Hendon Laundry Ltd.
In this case, the appellant laundry company lost certain articles received by it from the respondent for laundering. The terms upon which the company accepted its customer's goods included a clause in the following terms:
“The maximum amount allowed for loss or damaged article is 20 times the charge made for laundering.” In an action by the respondent for damages, the appellant company sought to limit its liability by relying on this clause. The county court found that as the loss arose out of the company's negligent manner of carrying on its business, the clause limiting liability did not apply. However, in the Court of Appeal it was held:
The primary obligation of the laundry company being to launder, it must be performed according to its terms and no question of taking due care entered into it. There were, however certain ancillary obligations which only imposed on the laundry company the duty of taking reasonable care of the goods while in company's possession or while being delivered to the respondent customer.
The necessity for limiting liability for goods lost could arise only in a case where the goods were lost by negligence and, therefore, the limitation clause applied to the claim of the respondent.
Other examples which can be cited with regard to fundamental breach are those situations where seller delivers goods wholly different from the agreed contract goods or delivers goods that are so seriously defective as to render them in substance not the goods contracted for. E.g. the delivery of beans instead of peas, of pinewood logs instead of mahogany logs, or of a vehicle which is incapable or barely capable of self propulsion instead of a motor car.
Case: Davies v. Collins
The plaintiff entrusted to a dyer and cleaner a uniform for cleaning. On the docket given to him when he handed over the uniform were the following clauses: “Whilst every care is exercised in cleaning and dyeing garments, all orders are accepted at owner's risk entirely and we are unable to hold ourselves responsible for damage, shrinkage, colour or defects developed in necessary handling. The proprietor's liability for loss is limited to an amount not exceeding ten times the cost of cleaning.” The defendant sent the uniform to be cleaned by a sub-contractor and it was never returned. The plaintiff claimed the full value of the uniform.
It was held that the mere fact of the particular limitation clause in the contract was sufficient to exclude any right to sub-contract the performance of the substance of the contract. Limitation clauses of this kind do not apply where the goods are lost not within the four corners of the contract but while something was being done which was outside the terms of the contract altogether, or when loss takes place in the course of some operation which was never contemplated by the contract at all.
Thus, fundamental breach can occur either through the breach of a particularly important term, or through a breach which had the consequences of destroying the whole basis of the document.
What Is Repudiation?
Repudiation means a claim that the contract is not binding owing to a failure of condition or breach of duty which invalidates the contract or it may also mean an anticipatory breach whereby one party to a contract indicates an intention not to be bound thereby whereby the other party accepts the repudiation and rescinds the contract.
The repudiation of a contract entitles the injured party to treat the contract as discharged and to sue immediately for damages for the loss sustained. The contract will thus not be binding if a fundamental breach is there because the entire purpose for which the contract is entered into will become vitiated. Thus where a party breaches an essential or a “fundamental” term, a fundamental breach is said to have occurred, giving the innocent party a right to terminate the Contract and sue for damages.
Case: Alexander v. Railway Executive
The plaintiff deposited a large amount of baggage at a railway station, where with the assistance of C, he re-packed it. He was issued tickets relating to the deposit and he paid the due charges therefore. The deposit was made subject to the following conditions which were bought sufficiently to the plaintiff's notice. One such condition read:
“3. The company shall be entitled to withhold the articles or property deposited except on production of the ticket issued thereof. The company may deliver such articles or property to- (a) any person producing the ticket, or (b) any person who fails to produce the ticket, upon such evidence of the loss of the ticket.
After a few days, C was permitted by the parcels clerk in breach of regulations to remove certain articles from one of the deposited trunks. On another date C persuaded the parcels clerk to permit him to remove further articles on payment by him of certain accrued charges and his signing a form of indemnity. C then re-deposited the remaining baggage and received tickets for it. Upon another day's letter to the parcel clerk, C paid charges for the baggage's spent and later disposed of the baggage, which was the property of the plaintiff, who claimed damages from the Railway Executive in respect of the loss suffered by him.
Held that the Railway Executive were guilty of a breach of an implied term fundamental to their contract of bailment with the plaintiff in permitting C to remove articles from the plaintiff's baggage, with the result that contract was terminated and Executive could not thereafter rely on the terms and conditions of the contract excluding their liability in relation to the rest of the baggage. Apart from any question of bailment, there had been such a breach of a fundamental term of the contract as to give the plaintiff the right to rescind it and therefore, the Railway Executive could not thereafter rely on the conditions of the contract excluding their liability in relation to the rest of the baggage.
What Amounts To Repudiation?
In considering whether there has been a repudiation of a contract by a party, the whole conduct of that party has to be assessed objectively in order to see whether there was an intention to abandon and refuse performance of the contract. Repudiation is a drastic conclusion which should only be held to arise in clear cases of refusal, in a manner going to the root of the contract to perform contractual obligations. Every minor irregularity in the performance of a contract cannot be seized upon as a repudiation so as to put a premature end to the contract. The Court has to take into account the effect of the breach on the contract as a whole.
Case: Maple Flock Co. Ltd. v. Universal Furniture Products Ltd.
In this case, a contract was there for the supply of 100 tons of flock of Government standard to be delivered by installments, the sixteenth delivery was below the standard and the buyer attempted to treat this as a repudiation, but the Court held that the sellers conduct did not show an intention to throw away the contract and therefore the buyer should have to be contended with damages for defective goods.
In Decrowall International S.A. v. Practitioners in Marketing Ltd., the Court of Appeal pointed out “that to constitute repudiation, a breach of contract must go to the root of the contract… This constitutes the test even where there are recurring breaches- producing different results according to the degree of non-compliance… Notice that a breach is likely to occur or recur cannot, of course, be treated as being repudiation unless it would have that effect when it did occur or recur”
Case: Davidson v. Gwynne
In this case, a charter party provided that the master of the chartered ship should, immediately after loading, joins the first convoy that should sail thereafter for Spain or Portugal. The master failed to do so, but he joined the second convoy and the voyage was performed
Held, that the object of the charter was the performance of the voyage; that had been accomplished; accordingly, the breach of the covenant did not go to the root of the contract and was to be considered, not as a condition precedent, but as a distinct covenant for the breach of which the charterer might be entitled to damages.
Thus, for an act to constitute repudiation, it must be such that it indicates an intention to refuse to perform the contract and to set the other party free from performing his part.
Section 39 of the Indian Contract Act talks of the doctrine of anticipatory breach. The Section reads:
39. Effect of refusal of party to perform promise wholly-
When a party to a contract has refused to perform or disabled himself from performing his promise in its entirety, the promise may put an end to the contract, unless he has signified by words or conduct, his acquiescence in its continuance.
Repudiation of fundamental breach can be of 2 kinds:
The breach in entirety
Partial failure Going to the root of the contract
Both these are explained in light of the relevant case laws:
Breach in Entirety
In such circumstances, the party in default must have refused altogether to
perform the contract and the refusal must go to the whole of the contract, otherwise, the other party would not be justified in putting an end to the contract.
Case: Rash Behary Shaha v. Nirttya Gopal Nundy
In this case, plaintiff agreed to purchase from the defendant under two contracts 300 tons of sugar to be delivered at different dates. Plaintiff failed to take delivery under the first contract, defendant claimed to rescind both contracts
Held that as there was no refusal on the part of plaintiff to perform his promise in its entirety within the meaning of Section 39, defendant was not entitled to rescind the contract
Partial Failure Going to the Root
The question of partial failure going to the root of the contract is a question of fact
in each case.
Case: Juggilal Kamlapat v. Pratapmal Rameshwar
In the instant case, there was a contract for the sale of B Twill and Hessain deliverable in the months of April, May and June. April and May quota of B Twill and April quota of Hessain were delivered and they were accepted and paid for by the buyer. For the rest the sellers sent to the buyers' delivery orders on certain mills asking them to take goods directly from the mills. The orders reached the buyers through the hands of several middlemen. They contained conditions different from the contract and required the buyer to take goods subject to the condition imposed by the mills. The buyer refused to accept.
The Court held that the sellers were in breach of their contract.
Breaches Going To The Root Of The Contract
If the term broken is not a condition, but an intermediate term, the right of the innocent party to be treated as discharged from further performance will depend upon the nature and consequence of the breach. If the breach is fundamental or something that goes to the root of the contract, then it must ‘affect the very substance of the contract' or ‘frustrate the commercial purpose of the venture'. This thus indicates that the breach must be far-reaching in its effect in order to justify its discharge.
Case: Hongkong Fir Shipping Co. Ltd. v. Kawasaki Kisen Kaisha Ltd.
The plaintiff's chartered to the defendant the m.v. Hongkong Fir for a period of 24 months, on terms that she was ‘in every way fitted for ordinary cargo service'. The vessel was an old one, and by reason of its age needed to be maintained by an experienced, competent, careful, and adequate room staff. This the plaintiff's did not provide. The chief engineer was addicted to drink and inefficient, and the engine room complement inadequate, with the result that there were many serious breakdowns in machinery. In the first 7 months of the charter the ship was only eight and a half weeks at sea, the rest of the time being spent in breakdowns and repair to make the ship seaworthy; but this was eventually achieved. The defendants refused to continue with the charter party.
The question thus arose as does the occurrence of the event deprive the party who has further undertakings to perform of substantially the whole benefit which it was the intention of the parties as expressed in the contract that he should obtain as the consideration for performing those undertakings. However, the Court held that on account of the facts and the delays that have already occurred and the delays that are likely to occur, as a result of the vessel's unseaworthiness, and the conduct of the plaintiff's in taking steps to remedy the same, were not, when taken together, such as to deprive K of substantially the whole benefit which it was the intention of the parties the defendant should obtain from further use of the ship under the charter party. The defendants therefore had unjustifiably treated the contract as repudiated.
The breach or breaches may amount to an express or implied renunciation of the contract. But if they amount only to a failure of performance, they must go to the root of the contract in order to justify discharge.
Case: Simpson v. Crippin
In this case, it was agreed that 6000 to 8000 tons of coal should be delivered in equal monthly installments during a period of 12 months, the buyer to send wagons to receive the coal; the buyer sent wagons for only 158 tons in the first month.
The Court held that the seller was not entitled to cancel the contract as the breach did not go ‘to the whole root and consideration of the agreement'.
Case: Honck v. Muller
Honck in October 1879 bought from Muller 2000 tons of iron to be delivered ‘in November, 1879, or equally over November, December and January next at 6d. per ton extra'. Honck failed to take delivery of any iron in November, but claimed to have delivery of one-third of the iron in December and one-third in January. Muller refused, and gave notice that he considered the contract discharged. Plaintiff bought an action for breach.
The Court held that the action for breach will not sustain because his failure of performance was so substantial as to discharge the defendant from liability.
From the above examples, it is understood that the right of discharge depends on the answers to this question: Does the breach go so far to the root of the contract as to entitle the injured party to say, ‘I have lost all that I cared to obtain under this contract; further performance cannot make good the prior default'?
Effects Of Repudiation
The question of whether the innocent party can terminate the contract because of the other party's breach is usually set to depend on what sort of term has been breached. Accordingly, there are 3 categories:
Condition: Breach always gives innocent party to terminate the contract and claim damages.
Innominate Term: Innocent party can always claim damages and might also be able to terminate the contract if the effect of breach is serious enough.
Warranty: Breach never gives innocent party option to terminate contract; he can only claim damages.
Here, the effect of repudiation of the innominate term will be discussed.
Where an innominate or fundamental term has been breached, an innocent party who regard the consequences as serious enough to justify termination of the contract runs the risk that, years later, the Court might rule that he had misjudged the situation and that the breach was not sufficiently serious. This in turn means that the innocent party's purported termination was itself a repudiatory breach.
When A Breach Of An Innominate Term Justifies Termination?
In Hong Kong Fir case, as discussed above, only a very serious breach of an innominate term will entitle the innocent party to terminate the contract. ‘Serious' here refers to the consequences of the breach for the innocent party (rather than deliberateness or manner of the breach), which must ‘deprieve the innocent party of substantially the whole benefit which it was intended that he should obtain from the contract'.
Repudiation And Anticipatory Breach
The other sort of situation in which the innocent party is entitled to terminate the contract is if the other party repudiate it, which mean wrong full abandoning and renouncing the contract altogether. They may involve the express words (like ‘I want nothing more to do with our contract'), or may be implied from the conduct that is wholly inconsistent with the contract or renders performance impossible.
Renunciation by express words is straight forward.
Case: Frost v Knight
The defendant promised to marry the plaintiff on the death of his father. The father still living, the defendant announced his intention of not fulfilling his promise on his father's death, and broke off the engagement. The plaintiff, without waiting for the father's death at once bought an action for the breach.
The plaintiff was held entitle to sue on the ground of the Hochster case.
Rule In Hochster's Case
In the case of Hochster v. De La Tour
D engaged H on 12 April to act as his courier and accompany him on an overseas tour, starting on 1 June. On 11 May D wrote to H saying he no longer required his services, an express renunciation of the contract.
The court held that this repudiation gave H the right to terminate the contract and bring an action for damages immediately, even though performance was not due for three more weeks.
The rationale is to encourage mitigation. Potential losses are kept to a minimum by allowing the innocent party the option of terminating the contract as soon as it is clear that the other party is not going to perform when the time comes and claiming damages immediately.
Thus there are three possible options for the innocent party in case of repudiation. They are:
Innocent Party has an option to discharge the contract
Electing to ‘reject the breach' and keep the contract alive.
Electing to ‘accept the breach' and discharge the contract.
Innocent Party's Option To Discharge Contract
As Hochster makes clear, in theory the innocent party is at liberty to bring the contract to an end following a breach of condition, serious breach of an innominate term or repudiation (together often referred to as a ‘repudiatory breach'') but is not obliged to do so. This is supposed to be a completely unfettered choice, but in practice the innocent party may have a little option but to terminate the contract. in many cases the innocent party will be unable to honor his continuing obligations without the co-operation of the part in breach. For example, if an employer dismisses an employee in beach of contract , the employee cannot realistically elect to keep the contract alive and continues to present himself for work every morning. More controversially, it has been suggested that, even if the innocent party is able to perform his obligation without the cooperation of the other party, if he insist on keeping the contract alive, when he has ‘No legitimate interest, financial or otherwise'. In performance, he may not be able to claim the contract price; White & Carter (Counsels) Ltd. v McGregor (1962).
The language of the cases is somewhat confusing. If the innocent party does not wish to terminate the contract, he is said to ‘reject' the other party's repudiatory breach, but this does not mean that he is waiving it entirely, in the sense of treating it as it were not a breach for all purposes, because he may still claim damages. On the other hand if the innocent party decides to terminate the contract, he is said to ‘accept' the other party's repudiatory breach.
Electing To ‘Reject The Breach' & Keep The Contract Alive
Until the innocent party decides what to do, the contract remains on foot, but once he has elected to keep contract alive, that decision is irrevocable. The party repudiating the contract may nevertheless choose to perform when the time comes and the promisee will be bound to accept the same. In the meantime, the contract is alive and the innocent party runs the risk of breaching his own obligations.
Case: Avery v Bowden
The defendant charted the plaintiff's ship agreed to load it with a cargo at Odessa within forty-five days. On arrival of the ship there the defendant told the captain that he had no cargo for him and requested him to go away. The captain, however, stayed there in the hpe that the defendant would fulfill his contract. But, before the expiry of forty-five days, a war broke out which rendered the performance illegal. The plaintiff then brought an action for breach.
It was held that the contract had ended by frustration and not by breach it was open to the captain to accept the renunciation and in that case “he would have had a right to maintain an action on the charter party to recover damages equal to the loss he has sustained from breach of the contract on the part of the defendant.”
Very occasionally, the courts will take some notice of the fact that one party committed the repudiatory breach, even where the innocent party opted to keep the contract alive. For example, an innocent party who knows of the other party's intention not to perform on the due date for performance because he earlier purported to repudiate the contract, may be able persuade the court to give a decree of specific performance in advance of the due date. If it is the sort of contract for which specific performance is available, the innocent party's option to keep the contract alive in the face of a repudiatory breach is more meaningful than normal.
Electing To “Accept The Breach” And Discharge The Contract
Acceptance of a repudiatory breach must be clear and unequivocal, but need not be by express words. In Heyman v Darwins the court said “the other party may accept the repudiation by so acting as to make it plain that, in view of the wrongful action of the party who has repudiated.”
This acceptance must generally be communicated to the other party (described as a ‘basic and well known principle' by the Privy Council is Sookraj v Samaro (2004)) can the innocent party accept the repudiation by mere failure to perform its future obligations? In State Trading Corp of India, the Court of appeal suggested not, since ‘such conduct would be equivocal and equally consistent with a decision not to exercise the right to treat the contract as repudiated'.
The innocent party's election to accept a repudiation has the effect of terminating the contract, but in fact the proper analysis is that the contract does not disappear and is not ‘unraveled' or ‘undone' (as, for example when a contract is rescinded for misrepresentation). Strictly, the parties' outstanding primary obligations (to perform, pay the price and so on)are discharged and replaced automatically by secondary obligations (principally, the obligation on the party in breach to pay damages, subject to the innocent party's ‘duty' to mitigate). Lord Diplock made this clear in Photo Production Ltd v Securicor Transport Ltd. The context was to explain that ‘termination' of a contract for repudiatory breach did not have the effect of destroying or nullifying the exclusion clause in the contract (since it was not primary obligation). For the same reason other contractual obligation, such as liquidated damages clauses and arbitration clauses, continues to operate following acceptance of repudiatory breach. If this was the intention of the parties, the courts will give effect to that intention.
The acceptance of repudiatory breach is not the same as rescission, which is the setting aside of a voidable contract which is thereby treated as if it had never existed, contractual obligation and rights that have already accrued by the date a repudiatory breach is accepted survive, and in fact it makes no difference which party has the accrued obligation or right.
Generally, acceptances of a repudiation discharge the whole contract in other words, all the outstanding primary obligations. It is however possible for a contract to be constructed as having severable obligation.
Effect Of Repudiation In Case Of An Exemption Clause
A problem that created headaches for the Court was that fundamental breach in case of standard form of contracts, were accompanied by an exemption clause that excluded liability. So, Courts to tackle this problem adopted the rule of law and rule of construction on dealing with the exemption clauses that excluded liability.
There is a difference between rule of law and rule of construction. A rule of law operates irrespective of the parties intentions. Rule of construction, on the other hand is one of the methods of ascertaining the parties intention. At one time it was considered that there was a rule of law whereby no exclusion clause could protect a party from liability for a fundamental breach or a breach of a fundamental term of the contract.
Fundamental Breach as a rule of law can be explained by the following case:
Case: Karsales (Harrow) Ltd. v. Wallis
In this case, the defendant was shown a second-hand Buick motor car in excellent condition, and wished to buy it on hire-purchase. His agreement with the finance company contained an exemption clause excluding liability for breach of conditions or warranties of any description. After the contract had been concluded, the car was pulled at the defendant's premises in a deplorable condition. Many detachable parts had been removed; new parts replaced by old; the engine was now so defective that the car would not go. The defendant refused to accept it, and was sued by the plaintiff, the assignee of the finance company.
Held that the car delivered was not the thing contracted to be taken on hire-purchase and there was a fundamental breach of the contract, which disentitled the plaintiff's from relying on the exemption clause.
However, with the passage of time, the rule of law approach was rejected. Pearson L.J. in U.G.S. Finance Ltd. v. National Mortgage Bank of Greece stated that:
“I think there is a rule of construction that normally an exception or exclusion clause or similar provision in a contract should be construed as not applying to a situation created by a fundamental breach of the contract. This is not an independent rule of law imposed by the court on the parties willy-nilly in disregard of their contractual intention. On the contrary it is a rule of construction based on the intention of the contracting parties.”
This opinion was subsequently unanimously endorsed by the House of Lords in Suisse Atlantique Societe d' Armement Maritime S.A. v. N.V. Rotterdamsche Kolen Centrale. In this case:
The plaintiff's chartered to the respondent the m.v. Silvretta for a period of 2 years. It was agreed that in the event of delays in loading or unloading the vessel, R.K.C. would pay to S.A. $1000 a day by way of demurrage. Lengthy delays occurred for which S.A. alleged R.K.C. was responsible, but it nevertheless allowed R.K.C. to continue to have the use of the ship for the remainder of the term. On conclusion of the contract, S.A. sued R.K.C. for damages, claiming a sum in excess of that stipulated for as demurrage. R.K.C. relied on the demurrage clause as limiting its liability.
It was argued that the breaches would have entitled S.A. to treat the contract as repudiated that these breaches amounted to a fundamental breach of contract and that in consequence R.K.C. could not rely upon the clause which limited their liability to $1000 a day. The House of Lords rejected this argument. They held that the demurrages clause was not an exemption clause but an ‘agreed damages' provision. Further, the House of Lords expressed the strong disapproval of the argument that there was a substantive rule of law which meant that certain types of breach automatically prevented reliance on an exclusion clause.
The House was also of the opinion that the parties should generally be allowed to determine their obligations, and the effect of exclusion clauses in their contract. If there was a breach which appeared fundamental, then it was a question of trying to determine the parties' intentions as to whether such a breach was intended to be covered by any exclusion clause. As observed by Lord Wilberforce, the Courts are entitled to insist, as they do, that the more radical the breach, the clearer must be the language if it is to be covered, but the question is one of the proper construction of the clause, and not a rule of law.
Case: Harbutt's Plasticine Ltd. v. Wayne Tank & Pump Co. Ltd.
In this case, the defendants agreed with the plaintiff to design and install equipment for storing and dispensing stearine in a molten state at their factory. The defendants specified durapipe, a form of plastic pipe. In fact this was wholly unsuitable for the purpose. It burst at the very first testing leading to a fire which destroyed the factory. The defendants had limited their liability under the contract for any accident, etc. to 2330 pounds. The plaintiff's loss was much greater.
The Court of Appeal held that the defendants were guilty of fundamental breach and, therefore, they could not avail of the limitation clause and were liable of reinstating the factory. Also, held that to determine whether a breach of contract was fundamental not only the breach itself but also the events resulting from the breach must be looked at, and in the present case the breaches by the defendants and the consequences of them were so fundamental as to bring the contract to an end and where the defendant had been guilty of such a fundamental breach that the contract was automatically at an end so that the innocent party did not have an election to treat the contract as ended, the guilty party could not rely on an exclusion or limitation clause in the contract when sued for the damages for the breach and accordingly the defendants were not entitled to rely on that particular clause of the contract which limits their liability. The Court pointed out that one must not look at the quality of the breach but also at its results. If the result of the breach is the total destruction of the subject matter of the contract (factory in this case) then the contract is automatically at an end along with all its exemption clauses.
The difference between the Suisse Atlantique case and Harbutt's Plasticine case is that though in both the cases the defendant had limited his liability under the contract, that is in the Suisse Atlantique case liability for delay was 1000 pounds a day and in the Harbutt's Plasticine case, it was 2330 pounds for any accidental damage, in the former the delay did not operate as a fundamental breach, but in the latter the supply of unsuitable material destroyed the very base of the contract.
The Court of Appeal argued that the principles outlined in the Suisse Atlantique case should only apply where there was an affirmation of the contract by the parties following the breach and not where the breach itself brought the contract to an end. In the latter situation, there should be no reliance on the exclusion clause. The difficulty with this argument was that it is a well established principle in contract law that a breach never in itself brings a contract to an end. The party not in breach has the option (if the breach is a serious one) of either accepting the breach and terminating the contract or affirming the contract and simply suing for damages.
Suppose there is a contract for the sale of components which are to be supplied with certain fixing holes drilled in them. If when delivered, the fixing holes are not there, this will amount to a breach of condition. The buyer will have the right to accept the breach, reject the goods and sue for damages. Alternatively, however the buyer may affirm the contract, accept the goods and simply sue for the cost of having the holes drilled and any other consequential losses. The Court of Appeal in Harbutt's Plasticine case took the view that this did not apply to certain fundamental breaches of contract, which themselves brought the contract to an end, without the need for acceptance by the party in breach. This view was however rejected by the House of Lords in Photo Production Ltd v. Securicor Transport Ltd. This case overruled the Harbutt's Plasticine, and finally disposed of the argument that certain types of fundamental breach could never be covered by an exclusion clause.
Case: Photo Production Ltd. v. Securicor Transport Ltd.
The plaintiff's owned a factory, entered into contract with the defendants, a security company, by which the defendants were to provide security services at the factory including night patrols. While carrying out a night patrol at the factory an employee of the defendant deliberately lit a small fire on the premises which got out of control, and destroyed the entire factory. Thus, rather than protecting the plaintiff's property, as they had been contracted to do, the defendants could be said to have achieved the exact opposite. The contract however contained a very broadly worded exclusion clause, which on its face, seemed to cover even the very serious breach of the agreement which had occurred.
The Court of Appeal held that the exemption clause could not protect the defendants as there had been a fundamental breach which thus makes the exemption clause ineffective. The House of Lords however took this opportunity to state its position with no possible ambiguity. It ruled that there was no rule of law that a fundamental breach of contract prevented an exclusion clause from being effective. The so called doctrine of fundamental breach was no more than an aspect of the doctrine of construction. It was the case that the more serious the breach of contract the clearer the words would need to be which would exclude liability for it. However, in the instant case, the plaintiffs were paying very low rate for the defendants' services. It was therefore not unreasonable that the defendants should have a low level of liability. The ratio of the case was not, however, that the clause such as that under consideration could be enforced because it was reasonable in all the circumstances, because on its true construction it covered the breach.
Thus, in the instant case, the House of Lords firmly rejected the view that the exclusion clause came to an end with the contract and reaffirmed that that the effect of the exclusion clause remained a matter of construction. This means that the contract does not come to an end on termination, only the future obligations of the parties cancelled. Exclusion clauses remains intact and effective if sufficiently worded to cover the breach. Accordingly, where a contract comes to an end or not after even a fundamental breach or breach of fundamental term, it would seem that in all cases the effect of an exclusion clause is a matter of construction. The effect is considered later.
Fundamental Breach: The Present Position
The theory of fundamental breach has now found statutory recognition to some extent in the (English) Unfair Contract Terms Act, 1977. The Act says that a reasonable exclusion clause survives termination of contract (s. (9(1)). The exclusion clause can also be given effect to whether or not the contract has been terminated as a result of the breach. The Act says that a party who commits breach of his contract cannot take advantage of any clause in the contract which either excludes or limits his liability. Further, if there is any provision in the contract to the effect that “no performance” or “substantially different performance” will be taken as equivalent to performance that will be of no avail. Thus, the term breach will include a performance which is substantially different from that contemplated by the contract.
The demise of the doctrine of fundamental breach as a rule of law has to some extent simplified the law in that area. Sometimes, it may be difficult to decide in particular cases regarding what to do in the case of a breach that negates the whole purpose of it. It is a matter of looking at the precise wording of the exclusion clause and trying to determine the intention of the parties in relation to it. In these days, Courts no longer resort to the “fundamental breach” and they resort to use the test of reasonableness.
Case: George Mitchell (Chesterhall) Ltd. v. Finney Lock Seeds Ltd.
In this case, the plaintiff's who were farmers, ordered a quantity of seeds from seed merchants. It was known to the sellers that the seed should be for winter white cabbage fit for human consumption. The supply was on standard terms which limited liability in case of defective goods to replacement or refund of price. The seeds grew into unusable weeds and not fit for human consumption.
The Court held that the defendants are not entitled to claim the protection of the exemption clauses and were held liable for the plaintiff's loss.
Thus, where as a result of the breach, the injured party rescinds the contract, all the exemption clauses will fall with it. But if he treats the contract as still subsisting and wants only to be compensated, it will be a matter of construction whether the type of breach which will be covered by the exemption clause or not.
In our country, no statute is in existence for fundamental breach and related aspects. One view was held by Shankaran Nair J in his dissenting opinion in Sheikh Mohd. Ravuther v.B.I.S.N. Co. that Section 23 of the Indian Contract Act hits out at the exemption clauses. But this was discarded by the Courts in subsequent judgments. The 103rd Law Commission under K.K. Mathew suggested that to cure the evil of exemption clauses, the only solution is to enact a provision that combines the advantages of the Unfair Contract Terms Act of England and the Uniform Commercial Code of the U.S.A dealing on the same aspects. But nothing much has happened. The law in our country still remains the same. But it is advisable that we should take the provisions from other law countries (preferably England) since much of our decisions pertaining to the law of contract are adopted from England.