Contract: Breach of Contract

Breach of Contract

Defining Breach

What is a Breach?

A breach occurs where there is a disparity between what the contract requires and what was done (or not done). There is no need for the breaching party to be at fault, unless the contract states this. However: 

  • If the contract states that a term is not yet operative (because, for example a condition precedent must be met), it cannot be breached: Lampleigh v Brathwait (1615) Hobart 105;
  • Some terms are contingent on the other party completing their side of the bargain. If the other party does not perform, then the contingent term cannot be breached because it has not become operative: Cutter v Powell (1795) 6 TR 320.
Anticipatory Breach

What if the defendant declares or objectively indicates that they will not perform? The innocent party does not have to wait until the breach actual happens: Freeth v Burr (1874) LR 9 CP 28. Their right to a remedy arises immediately: Hochster v De la Tour (1853) 2 E & B 678.

This also applies if the breaching party does some act which makes their performance impossible: Universal Cargo Carriers Corp v Citati [1957] 2 QB 401. If an external event makes performance impossible, then the defence of frustration may apply instead.


The Effect of Breach

Classification of Contract Terms

All breaches give rise to an action for damages. Some breaches (‘repudiatory breaches’) allow the innocent party to elect to terminate and discharge the contract instead. The effect of a breach depends on the nature of the contract term which is breached.  

Conditions
conditions, rules, breach

If the term is a condition, breach entitles the innocent party to terminate the contract. A term is a condition if, on an objective interpretation of the contract, it appears as if the parties intended at the time of contracting that breach of the term would allow the innocent party to terminate the contract: Bentsen v Taylor Sons [1893] 2 QB 274. This is likely if the term is very important to the contract.

 

Warranties
warranty, money

If the term is a warranty, the innocent party is not entitled to terminate the contract. They can only sue for damages. A term is a warranty if it objectively appears that the parties only intended the remedy to be damages if the term was breached: Bentsen v Taylor Sons [1893] 2 QB 274. Some statutory terms are specified to be warranties, such as s 12(2) of the Sale of Goods Act 1979.

Innominate Terms
different types

If a term is not a condition or warranty, it is innominate. This is often the case if the term can be breached in many ways with differing severity. Breach only entitles the innocent party to repudiate if it is so severe that it ‘goes to the root of the contract’ (The Nanfri [1979] AC 757) or substantially deprives the innocent party of the contract’s whole benefit: Hong Kong Fir Shipping v Kawasaki Kisen Kaisha [1962] 2 QB 26.

Express Classification

A term might be a condition or a warranty because the parties have expressly stated that they are. However, it should be determined whether the parties intend the term in their technical senses. For example, some parties use ‘condition’ as a synonym for ‘contractual term’: Schuler AG v Wickman Machine Tools Sales Ltd [1974] AC 235.

Classification of Terms Under the Sale of Goods Act 1979.

Sections 13-15 of the Sale of Goods Act 1979 are specified to be conditions. There is an exception, however, where ‘the breach is so slight that it would be unreasonable’ to terminate the contract: s 15A. Some terms under that statute are specified to be warranties, such as s 12(2). 

Election on Breach

If the breach gives the innocent party a right to terminate the contract, they have a choice: White & Carter v McGregor [1962] AC 413.

Accept the Breach: Terminate
walking away

They can accept the breach, which will terminate the contract. They can communicate their desire to terminate in any manner, so long as it is objectively clear and unequivocal: The Santa Clare [1996] AC 800.

Reject the Breach: Affirm
affirm, accept, climbing together

They can reject the breach and ‘affirm the contract’, which keeps it alive. A party who has affirmed the contract (positively or by waiting too long) cannot terminate it later unless the breach is continuing or happens again. 

The innocent party does not need to make the choice to terminate the contract immediately, but waiting too long after learning of the breach may be seen as affirming the contract: Stocznia Gdanska SA v Latvian Shipping Co [2001] 1 Lloyd’s Rep 537.

Effect of Termination

If the innocent party elects to terminate the contract, both sides are released from the contract’s primary obligations going forwards. The contract is merely discharged, not rendered void. The innocent party can sue for damages stemming from the consequences of the breach. They can also sue for losses arising because the remaining primary obligations will not be performed. If the contract is not terminated, then both parties remain bound by their contractual obligations. However, the innocent party may still sue for consequential damages stemming from the breach.

Wrongful Termination

Terminating the contract for an unlawful reason is itself a repudiatory breach of contract. However, if the innocent party gives the wrong reason but there is actually another, valid reason to terminate, they can later rely on the valid reason so long as they did not prevent the breaching party from dealing with the real breach by giving the wrong reason: Heisler v Anglo-Dal Ltd [1954] 1 WLR 1273. 


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Contract Termination Quiz

Test yourself on the principles which determine when a contract is terminated.

1 / 11

If the innocent party terminates the contract in response to a breach, this renders the contract void. True or false?

 

2 / 11

A party to the contract purports to terminate the contract because of the defendant's breach. They give an invalid reason for terminating, but unbeknownst to them, the defendant has committed some other breach which entitles the innocent party to terminate. Is the innocent party in repudiatory breach because of their actions?

3 / 11

The parties agree to a contract which stipulates that the defendant will not be paid until he performs his obligations in their entirety. Can this defendant be paid even though there is a breach of contract?

4 / 11

When will the breach of an innominate term entitle the innocent party to terminate the contract?

5 / 11

When is an existing contract discharged? (Three answers)

6 / 11

Are sums and benefits paid prior to an event which frustrates the contract recoverable?

7 / 11

The defence of frustration renders a contract void. True or false?

 

8 / 11

The parties agree to a contract which makes provision for what will happen if a particular event happens. That event happens, and makes the contract impossible to perform. Does the defence of frustration apply?

 

9 / 11

If a party to a contract makes objectively clear that they intend to breach the contract, when does the innocent party gain the right to a remedy?

10 / 11

The defence of frustration renders a contract voidable. True or false?

 

11 / 11

What are the three requirements of frustration?

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