Whereas breach of condition is a serious breach that "denies the plaintiff the main benefit of the contract",[2] fundamental breach was supposed to be even worse, with the result that any exclusion 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.[3]
Although the concept caused some excitement in the 1950s and 1960s, the concept was regarded as flawed by the Law Lords, whose decision in the Suisse Atlantique case[4] substantially curtailed the doctrine, which has now been effectively "laid to rest" in England and Canada.[5] The relevant concept in English Law, where a fundamental aspect of a contract is breached, is repudiatory breach.[6]
3 Historically restricted in common law jurisdictions but generally accepted elsewhere; availability varies between contemporary common law jurisdictions
The origins of the idea of fundamental breach may be traced to early cases on the doctrine of deviation. In Davis v. Garrett[7] 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 Leduc v Ward (1888) [8][9] and Glynn v Margetson (1893).[10][11]
In Leduc v Ward, a vessel bound from Fiume (modern day Rijeka) 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.[citation needed]
Similarly, in Glynn v Margetson, 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.[citation needed]
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),[13] 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 detached, revealing burnt valves. This was a serious breach, but the dealer sought to rely on a clause in the contract which read "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 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".[citation needed]
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 repudiate the contract and claim damages. However, since both common law[14] and statute[15] already recognised that while that breach of warranty entitled a claimant only to damages, any breach of condition would entitle a claimant to both repudiation and damages, it seemed that fundamental breach offered nothing new.[lower-alpha 1]
Resolution – the Suisse Atlantique
The matter came to a head in 1966 in the House of Lords decision in Suisse Atlantique Societe d'Armement Maritime S.A. v. N.V. Rotterdamsche Kolen Centrale.[16] The case involved a two-year time charter to export coal, the shipowners to be paid freight dependent on tonnage of cargo carried. If laytime (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 Ltd 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".[lower-alpha 2] 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.[17] The House of Lords was less than amused, and in the 1980 Photo Productions case they emphatically reaffirmed their decision in the Suisse Atlantique. Lord Wilberforce effectively overturned the "rule of law" doctrine of Karsales Ltd 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.
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.[18] and The Happy Ranger.[19] In Internet Broadcasting Corporation Ltd. t/a NETTV v MAR LLC t/a Marhedge (2009), Moss J ruled that a court "would expect to see 'clear' language in the sense of 'strong' language" before accepting that a contract exempted one of the parties from the consequences of a repudiatory breach. In that particular case he concluded that the wording did not extend to the deliberate personal repudiatory breach which the defendant had exhibited.[6]
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"),[20][21] this may change in due course.[according to whom?] One commentary on Marhedge noted that in that case the repudiatory breach was the personal action of the company's president and "controlling mind",[22] but warned that legal interpretation might differ in a case where the decision to repudiate was the collective decision of a board of directors.[6]
Canada
The doctrine of fundamental breach has been “laid to rest” by the Supreme Court of Canada in Tercon Contractors Ltd. v. British Columbia (Transportation and Highways) in 2010.[23] 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)[24][25]
Breach of contract is a legal cause of action and a type of civil wrong, in which a binding agreement or bargained-for exchange is not honored by one or more of the parties to the contract by non-performance or interference with the other party's performance. Breach occurs when a party to a contract fails to fulfill its obligation(s), whether partially or wholly, as described in the contract, or communicates an intent to fail the obligation or otherwise appears not to be able to perform its obligation under the contract. Where there is breach of contract, the resulting damages have to be paid to the aggrieved party by the party breaching the contract.
The doctrine of privity of contract is a common law principle which provides that a contract cannot confer rights or impose obligations upon anyone who is not a party to that contract. It is related to, but distinct from, the doctrine of consideration, according to which a promise is legally enforceable only if valid consideration has been provided for it, and a plaintiff is legally entitled to enforce such a promise only if they are a promisee from whom the consideration has moved.
Freedom of contract is the process in which individuals and groups form contracts without government restrictions. This is opposed to government regulations such as minimum-wage laws, competition laws, economic sanctions, restrictions on price fixing, or restrictions on contracting with undocumented workers. The freedom to contract is the underpinning of laissez-faire economics and is a cornerstone of free-market libertarianism. The proponents of the concept believe that through "freedom of contract", individuals possess a general freedom to choose with whom to contract, whether to contract or not, and on which terms to contract.
Exclusion clauses and limitation clauses are terms in a contract which seek to restrict the rights of the parties to the contract.
Scruttons Ltd v Midland Silicones Ltd[1961] UKHL 4, [1962] AC 446 is a leading House of Lords case on privity of contract. It was a test case in which it was sought to establish a basis upon which stevedores could claim the protection of exceptions and limitations contained in a bill of lading contract to which they were not party. The Court outlined an exception to the privity rule, known as the Lord Reid test, through agency as it applies to sub-contractors and employees seeking protection in their employers' contract.
A charterparty is a maritime contract between a shipowner and a "charterer" for the hire of either a ship for the carriage of passengers or cargo, or a yacht for leisure.
Photo Production Ltd v Securicor Transport Ltd[1980] UKHL 2 is an English contract law case decided by the House of Lords on construction of a contract and the doctrine of fundamental breach.
A Himalaya clause is a contractual provision expressed to be for the benefit of a third party who is not a party to the contract. Although theoretically applicable to any form of contract, most of the jurisprudence relating to Himalaya clauses relate to maritime matters, and exclusion clauses in bills of lading for the benefit of employees, crew, and agents, stevedores in particular.
New Zealand Shipping Co. Ltd. v. A. M. Satterthwaite & Co. Ltd., or The Eurymedon is a leading case on contract law by the Judicial Committee of the Privy Council. This 1974 case establishes the conditions when a third party may seek the protection of an exclusion clause in a contract between two parties.
George Mitchell (Chesterhall) Ltd v Finney Lock Seeds Ltd is a case concerning the sale of goods and exclusion clauses. It was decided under the Unfair Contract Terms Act 1977 and the Sale of Goods Act 1979.
Suisse Atlantique Societe d'Armament SA v NV Rotterdamsche Kolen Centrale [1967] 1 AC 361 is a landmark English contract law decision of the House of Lords, concerning the notions of fundamental breach of contract and inequality of bargaining power.
Interpreting contracts in English law is an area of English contract law, which concerns how the courts decide what an agreement means. It is settled law that the process is based on the objective view of a reasonable person, given the context in which the contracting parties made their agreement. This approach marks a break with previous a more rigid modes of interpretation before the 1970s, where courts paid closer attention to the formal expression of the parties' intentions and took more of a literal view of what they had said.
In English contract law, an innominate term is an intermediate term which cannot be defined as either a "condition" or a "warranty".
The Supply of Goods Act 1973 was an act of the Parliament of the United Kingdom that provided implied terms in contracts for the supply of goods and for hire-purchase agreements, and limited the use of exclusion clauses. The result of a joint report by the England and Wales Law Commission and the Scottish Law Commission, First Report on Exemption Clauses, the Act was granted royal assent on 18 April 1973 and came into force a month later. It met with a mixed reaction from academics, who praised the additional protection it offered while at the same time questioning whether it was enough; several aspects of the Act's draftsmanship and implementation were also called into question. Much of the Act was repealed by the Sale of Goods Act 1979, which included many of the 1973 Act's provisions.
The doctrine of deviation is a particular aspect of contracts of carriage of goods by sea. A deviation is a departure from the "agreed route" or the "usual route", and it can amount to a serious breach of contract.
Karsales (Harrow) Ltd v Wallis [1956] EWCA Civ 4 is an English Court of Appeal decision which established fundamental breach as a major English contract law doctrine. Denning LJ MR gave the leading judgment replacing the Rule of Strict Construction, which require a literal approach to the construction of contract terms.
The law of carriage of goods by sea is a body of law that governs the rights and duties of shippers, carriers and consignees of marine cargo.
Harbutt's "Plasticine" Ltd v Wayne Tank and Pump Co Ltd [1970] is an English contract law case involving the quantum of damages and the concept of fundamental breach. It was heard in the Court of Appeal by Lord Denning MR, Widgery LJ and Cross LJ.
Glynn v Margetson is an English case on the law of carriage of goods by sea which established the "Main Purpose Rule" in relation to deviation.
Leduc v Ward is a leading English case on deviation within the law of carriage of goods by sea. The case also addresses bills of lading, and the parol evidence rule.
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