The doctrine of fundamental breach.

THE DOCTRINE OF FUNDAMENTAL BREACH OF CONTRACT

INTRODUCTION 

After having studied the rules of construction of exemption clauses to a contract, let us now discuss what happens in the case of breach of contract.  In this lecture we will learn what is known as the doctrine of fundamental breach of contract: the essence of the doctrine and constituents of fundamental breach.

1. ESSENCE OF THE DOCTRINE

The rules of construction discussed above have over years proved to be of limited utility.  At times skillful draftsmen have couched exemption clauses very cleverly such as to prevail over the natural reluctance of the courts to uphold an abuse of contractual freedom.

The doctrine of fundamental breach has been developed by the courts as a leeway to escape from even the most carefully drafted exemption clauses.  The aim is to control the unreasonable consequences of wide and sweeping exemption clauses.

The doctrine operates to bar a party from relying on an exemption clause where the same deviates from the contract.  The rule has been stated by Lord Denning L.J. in J. Spurling Ltd. vs Bradshaw [1956] 1 WLR 461 at p. 465 thus:

"These exempting clauses are now-a-days all held to be subject to the overriding proviso that they only avail to exempt a party when he is carrying out his contract not when he is deviating from it or is guilty of a breach which goes to the root of it.  Just as a party, who is guilty of a radical breach is disentitled from insisting on the further performance by the others so too he is disentitled from relying on an exempting clause"

2.  WHAT CONSTITUTES FUNDAMENTAL BREACH?

In every contract there is or are certain terms which form the core of the contract.  Such terms(s) create core or fundamental obligations which must be performed by the parties.  If one of the parties fails to perform such fundamental obligation(s), the breach amounts to complete non-performance of the contract.  For example, if there is a contract for the sale of mahogany logs, the obligation to deliver logs made of mahogany is a fundamental term of the contract.  If pinewood logs are delivered in their place, there would be a complete non-performance of the contract.

The rule is that, an exemption clause cannot prevail against a fundamental breach of a contract.  In other words, no party to a contract can exempt himself from responsibility for a fundamental breach.  As explained by Lord Denning in the J. Spurling Case above, a party could only claim the protection of an exemption clause when he is carrying out his contract, and not when he is deviating from it or when he is guilty of a breach which goes to the root of the contract.  The doctrine of fundamental breach therefore constitutes a substantive rule of law which operates irrespective of the intention of the parties.

Consider the following hypothetical case.  Suppose X sends his three-piece suit to Y for dry cleaning.  The agreement is that the suit should be dry cleaned and delivered on a specified date.  Upon payment of the dry cleaning charges X is given a receipt which contains an exemption clause to the effect that Y shall not be liable for any loss or damage whatsoever.  Suppose Y rents the suit to Z, a graduant of the Open University who intends to wear it during his graduation ceremony and Z never returns the suit to Y thereafter.  In a subsequent claim by X for loss of the suit, Y cannot rely on the exemption clause.  In this case the fundamental term or obligation by Y is to dry clean the suit and deliver it to X by the specified date.  Y's failure to perform this fundamental obligation constitutes a fundamental breach.  That is, he has failed completely to perform the contract.  His action of renting the suit to Z is a total deviation from the contract.  Accordingly the exemption clause cannot avail.

A fundamental breach may denote a departure from the contract.  That is, a performance totally different from that which the contract contemplates, or may denote a breach of contract more serious than one which would entitle the affected party merely to damages or repudiation.  A fundamental breach may result into the total destruction of the subject-matter of the contract such as to put the contract at an end with all its exemption clauses.

The landmark case on the application of the doctrine of fundamental breach is the case of Suisse Atlantique Societe d'Armement Maritime S.A. vs N.V. Rotterdamsche Kolen Centrale (supra)

In that case the plaintiffs chartered to the respondents the M.V. Sivretta for a period of two years.  It was agreed that, in the event of delays in loading or unloading the vessel, the respondents would pay to the appellants $ 1,000 a day by way of demurrage.  Lengthy delays occurred for which the appellants alleged the respondents were responsible, but they nevertheless allowed the respondents to have the use of the ship for the remainder of the term.  On conclusion of the contract, they sued the respondents for damages, claiming a sum in excess of that stipulated for as demurrage.  The respondents relied on the demurrage clause as limiting their liability.

The issue before the House of Lords was, inter alia, whether there was fundamental breach of the contract.

The appellants argued that the respondents had committed breaches which would have entitled the appellants to treat the contract as repudiated.  That these breaches amounted to a fundamental breach of the contract.

The House of Lords rejected this argument.  Their Lordships Observed that the respondents were guilty of conduct which entitled the plaintiffs to repudiate the contract, but they in fact affirmed it. (That is, by not exercising their option to repudiate the contract, and continuing to allow the respondents use of the ship, by conduct they affirmed the contract).  The contract thus remained in force including the demurrage clause.  They further observed that the demurrage clause was not an exception or limiting clause.  It only stipulated liability for breach of contract and, therefore, the principle of fundamental breach was not applicable.

In the case of Harbutt's "Plasticine" Ltd vs Wayne Tank & Pump Co. Ltd, [1970] 1 ALL ER 225, the facts were that:

The defendants agreed with the plaintiffs to design and install equipment for storing and dispensing stearine in a written state at their factory.  The defendants specified durapige, a form of plastic pipe.  In fact thus 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 £2,330.  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.  The court pointed out that one must look not merely at the quality of the breach but also at it results.  If the result of breach is the total destruction of the subject matter of the contract, (factory in this case) then the contract is automatically at an end with all its exception clauses.

You will notice that the contract in the Suisse Atlantique case and the Harbutt's case is that in each the defendant had limited his liability under the contract.  In Suisse Atlantique the liability for delay was £1,000 a day and in Harbutt's Case it was £2,330 for any incidental 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 substratum of the contract.

3. ESSENTIAL POINTS FOR YOUR EMPHASIS

(1) Note clearly the distinction between ordinary contracts and standard form contracts.

(2) In dealing with exemption clauses, always establish the following:

(a) Whether the exemption clause forms part of the terms of the contract;

(b) whether the exemption clause has been sufficiently communicated to the affected party;

(c) Which rule(s) of construction apply to any given circumstance.

(3) What constitutes fundamental breach and which legal consequences follow.