17 BREACH OF CONTRACT
CHAPTER 17
BREACH OF CONTRACT
INTRODUCTION
So far in this book we have focused on how contracts are made and performed. We have looked at how the courts and legislature have sought to regulate what is included within the contract as well as what ought to be excluded from it. In this final substantive section, we will look at the issue of what happens when things go wrong. We will consider what constitutes a breach of contract and the remedies which flow from it. In the final chapter on dispute resolution, we will review the different methods and processes of dispute resolution which the parties can invoke when they need the help of a third party to resolve their disagreement. It is worthy of note that most books on contract do not actually include a chapter on dispute resolution processes. In this book the decision has been made to incorporate one because, in the lived world of contract, the advice that lawyers give to a client will be very dependent on the channel through which the dispute is likely to be resolved. Moreover, in the commercial sector, the number of dispute resolution procedures is burgeoning and preference for one form of dispute resolution over another is one of the vital terms which should be included in the contract at formation stage.
Before we go on to discuss these matters in some detail, it is important to stress that, if you have read all the chapters which precede this one, then you already know something about breach of contract. A claim that one party is in breach is the trigger for a legal claim and none of the many cases reviewed in earlier chapters would have even been considered by the courts unless one party had made this allegation. The issue before the court in each contractual claim is whether or not the behaviour of the party in breach is significant enough to allow remedies to flow from it. Clearly this issue cannot be looked at in isolation. In order to assess whether the behaviour was unacceptable, the court needs to understand the nature of the agreement between the parties. It is for this reason that an action for breach so often involves the courts in a consideration of whether a contract was formed in the first place, how different terms should be interpreted, the obligations they impose, whether variations to the contract have complied with the appropriate formalities or whether liability for the behaviour complained of has actually been excluded.
We have seen in earlier chapters that contract planning often covers four main issues: the definition of performances, the effect of defective performance, the effect of contingencies and the use of legal sanctions. Cases which come before the courts are those where the parties’ planning and co-operation have broken down completely. Some would consider these to be failed contracts, not only because an irreconcilable division has developed between the parties but also because they have failed to plan in advance for the problems which have arisen. It is also important to remember, however, that many disputes are resolved by negotiations between the parties. The empirical studies visited in Chapter 4 provide us with a salutary reminder of the limitations of law in addressing the needs of disputing parties. It is within this context that we must study breach and the tensions the cases reveal between the need to balance the parties’ understanding of the contract, the normative frameworks which define what constitutes good practice in a particular industry and the need to impose external standards of fairness on the parties.
JUDICIAL APPROACHES TO BREACH OF CONTRACT
When looking at terms in the context of breach, the courts’ approach has been to introduce a hierarchy between two different types of term. Terms which describe performance are considered to be of primary or substantive nature because they indicate what the contractual obligations are and how they will be fulfilled. In addition, they also imply or express the required quality of performance. Clauses in a contract which relate to defective performance, contingencies and sanctions are taken to be of a secondary or procedural nature. These might include clauses to the effect that ‘if there is a strike then …’ or ‘the parties agree to arbitrate any dispute arising …’; for a discussion of primary and secondary rights in the context of breach, see Lord Diplock in Photo Production Ltd v Securicor Transport Ltd (1980).
Determining the status of a term can be critical to the way a case is managed. When the contractual relationship fails and the parties bring their dispute to the courts, the role of the law is to clear up the mess caused by breach. In the main the law achieves this good by ordering compensatory payments (damages) to be made to aggrieved parties. In some circumstances a right to terminate the contract is also recognised. One way in which the courts have approached the issue of which remedy is available is term-based. In other words, the right is related to the nature of the term broken and a distinction is made between major and minor terms. The first, known as conditions, trigger a right to terminate and claim damages if breached. In the case of lesser terms, known as warranties, breach does not allow for termination but only a claim for damages. From the mass of case law in this area, a condition has been variously described as an essential term or one that goes to the root of the contract, a breach of which reflects a substantial failure to perform the contract at all. By way of contrast, the Sale of Goods Act 1893 defined a warranty as a term which is ‘merely collateral to the main purpose of the contract’. In short, a breach of essential or major terms allows for termination and damages, minor terms for only damages. Terms which could be either conditions or warranties depending on the consequences flowing from their breach have been variously described but are best known as innominate. This literally means that they have no name.
This appears to be a very straightforward approach but the question of how precisely a court, or businessperson, or their legal adviser goes about making the distinction between the major and the minor terms in a given contract remains. The judge’s job is to construe or interpret the contract as at the time it was made and infer from it the possible intention of the parties. In Bentsen v Taylor Sons and Co (1893), Bowen LJ said that it was necessary to look at the contract in the light of the surrounding circumstances and make up one’s mind whether the intention of the parties would best be carried out by treating the provision as a warranty or as a condition. This is as far as the courts have got in laying down guidelines for the predication or evaluation of terms, and it is clear that there is some degree of obscurity about how this approach to breach operates in practice.
In Behn v Burness (1863), in a deed dated 19 October 1860, it was agreed that the claimant’s ship, ‘now in the port of Amsterdam … and ready for the voyage, should, with all possible dispatch, proceed to Newport’, where the defendant would load it with coal for Hong Kong. At that time, however, the vessel was, in fact, detained by bad weather at Niewdiep, 62 miles from Amsterdam, where it finally arrived on 23 October. When the vessel reached Newport, the charterer who had by then presumably made alternative arrangements, refused to load his coal and repudiated the contract. He was sued for wrongful termination by the shipowner. It was held that the repudiation was justified as Behn was in breach of an essential term which was the clause stating the ‘whereabouts of the vessel’ at the time of agreement. Williams J argued that the place of the ship at the date of the contract is vital information to the charterer on which they could make calculations about the likely time of the ship’s arriving at the port of loading. He made clear that a statement is more or less important depending on the extent to which the object of the contract depends upon it. It was determined that for most charters, considering winds, markets and dependent contracts, the time of a ship’s arrival to load was an essential fact. In short, the whereabouts of the vessel clause was a condition which had been broken by the claimant. In this particular case, this meant that the defendant was justified in terminating the contract.
This decision and other cases involving the breach of similar ‘essential’ terms in regular commercial use led to the understanding that such terms were always to be regarded as conditions. The ‘once a condition, always a condition’ result was applauded. It was seen as introducing a strong element of certainty into business contracts with the consequences of breaking such terms being readily apparent from the case law. Later, this development was reinforced in certain statutes. As we have seen, certain obligations of a seller of goods, such as the ‘satisfactory quality’ of those goods and their fitness for a particular purpose, are implied conditions by reason of the Sale of Goods Act. Breach of such an obligation gives the buyer a right to reject the goods as a matter of statute law. We have therefore reached a point where some terms are always to be classified as conditions on the basis of precedent or statutory authority.
However, an unsatisfactory feature of this position is revealed by the decision in Arcos Ltd v Ronaasen & Son (1933). In this case, a quantity of timber staves, described in the contract as being half-an-inch thick, was bought for the purpose of making cement barrels. Most of the staves delivered were nine-sixteenth inch thick. Although the discrepancy in no way impaired their suitability for the contract purpose, it was held that the buyer might nevertheless reject the timber. The seller was in breach of the implied condition, to be found in s 13 of the Sale of Goods Act 1893, that the goods delivered must correspond to the contract description. The fact that the buyer’s motive in rejecting the goods was to allow himself the chance to buy elsewhere in a falling market did not affect the reasoning of the judges. The case clearly illustrates that breach of an ‘essential’ term can give a right to terminate even though performance is only marginally defective, the consequences for the ‘injured’ party are only slight and he is abusing the right to terminate. The situation has been rectified in part by a 1994 amendment to the Sale of Goods Act 1979 as regards sellers of goods who are dealing with buyers who are not dealing as consumers. The Act requires that if the seller’s breach concerning description, satisfactory quality or fitness for purpose is so slight that it would be unreasonable for the buyer to reject the goods, the breach is not to be treated as a breach of condition but may be treated as a breach of warranty.
In 1962 the whole question of terms and breach was re-opened in the case of Hong Kong Fir Shipping Co Ltd v Kawasaki Kishen Kaisha Ltd (1962), where the ‘term-based’ approach outlined above was seriously challenged. In the leading judgment of the Court of Appeal, Diplock LJ stated that what was critical was not the nature of the term broken but the nature of the event arising from the breach. He argued that, if the consequences for the injured party were sufficiently serious then they should be entitled to terminate the contract. If they were not so serious, then they should only be able to claim damages. Diplock defined a sufficiently serious, breach as one which would deprive the victim of the breach of substantially the whole benefit which it was intended they should have obtained.