Fundamental Breach of Contract Guide

fundamental breach of contract

IN THIS ARTICLE

Breach of contract disputes are commonplace, not least within a commercial context, where businesses are dealing with contractual agreements on a daily basis.

Where a breach is especially serious, such that the innocent party feels forced to bring the contract to an end, it is important for the parties involved not only to understand the legal rights and remedies that can flow from this type of breach, but the circumstances in which the right to repudiate, or end the contract, will be triggered. It is also important to understand what constitutes a fundamental breach of contract, when compared with other less serious types of breach, for which the innocent party may be entitled to claim damages only.

What is a contract?

A contract is an agreement between two or more parties that is legally binding on them. By setting out the respective rights and obligations of each party under the terms of the contract, the agreement will govern the contractual relationship, stipulating what each of the contracting parties must do in exchange for the promise(s) of the other(s).

A contract can either be made in writing or orally although, to be valid, there must be both offer and acceptance, as well as some form of consideration, where consideration is essentially the price that one party pays for the promise of the other. There must also be a clear intention by the parties that they will be bound by its terms. This is known as an intention to create legal relations, again without which the contract would not be valid.

As long as the contract comprises all the essential ingredients to create a legally enforceable agreement, its terms will then dictate how that agreement is to be performed by the parties. However, these terms may be either express or implied. Express terms are those explicitly agreed between the parties, either orally or in writing, whereas implied terms are those not necessarily agreed between the parties, but are still contractually binding. Implied terms can be terms implied by fact, by custom and usage, or by operation of law.

In circumstances where the performance of one party falls short of what is contractually required under any one of these terms, this may amount to an actionable breach. In serious cases, this could include a potential fundamental breach for which the innocent party can terminate the contract, in this way being excused from any further performance under it.

What is a breach of contract?

A breach contract can occur in a number of different ways, including where one party refuses to perform their obligations as set out under the agreement, or where they perform their obligations but this performance is substandard. It could also be where a party fails to perform their duties by any agreed date or deadline, or within a reasonable timeframe.

However, there are various different types of contractual breaches, some more serious than others. In very broad terms, a breach of contract can include either an anticipatory breach or an actual breach. An anticipatory breach is basically where one party indicates that they are refusing, or simply unable, to fulfil their contractual obligations. This can arise where the breaching party expressly communicates to the other party that they will not be carrying out a contractual obligation or, alternatively, where their conduct strongly suggests that they do not intend, or will not be able, to deliver on what was contractually promised.

An anticipatory breach can become an actual breach of contract once the date that the contractual obligation in question was due to be performed has since passed, although a breach need not actually occur for the responsible party to be contractually liable.

An actual breach of contract can be broken down into one of three categories:

  1. A minor breach

Also referred to as a partial breach, a minor breach of contract is where the main part of the contract has been performed, or mostly performed, but the standard or timing of that performance is not exactly as agreed. A minor breach will be less severe than a material breach and may give the innocent party the right to sue for damages, provided some loss can be shown. In the context of a commercial sale of goods contract, a minor breach of contract can arise, for example, where goods have been substituted with alternatives or where there has been a slight delay in delivering those goods. However, most minor breaches will not substantially change the outcome of a contract.

2. A material breach

In contrast to minor breaches, a material breach of contract will not be of little consequence, but rather constitutes a serious breach that results in a substantially different result to what was originally agreed. However, for a material breach to arise, the innocent party must have received significantly less benefit from the contract than that which they were promised. When considering whether there has been a material breach of contract, the primary focus must be on the nature and severity of the breach in question, and the overall impact on the innocent party. A material breach can arise, for example, where one party fails altogether to deliver goods due under a commercial supply agreement or where there has been a serious delay in doing so. However, not all material breaches will excuse the innocent party from further performance under the contract, where these types of breaches will not always justify repudiating the contract.

3. A fundamental breach

Also known as a repudiatory breach, a fundamental breach of contract is where the severity of the breach is such that the contract can be lawfully terminated. This essentially refers to a breach that goes to the very root of the contract, depriving the innocent party of substantially the whole benefit of that agreement.

What is a fundamental breach of contract?

In contract law, a fundamental breach of contract is a breach that strikes so deeply at the heart of the agreement that it renders it irreparably broken, essentially defeating the purpose of entering into the contract in the first place. If there is a fundamental or total breach, the innocent party can simply end the agreement and seek damages.

However, what constitutes a fundamental breach of contract will usually require a careful analysis, on a case-by-case basis, as to the character and gravity of the breach, and the nature and extent of any losses sustained, all in the context of the factual matrix involved.
This will involve an assessment of a number of factors, including:

  • whether or not the innocent party has been deprived of substantially the whole benefit of the contract, ie; does the breach go to the very root of that contract?
  • whether or not the breaching party acted negligently or in bad faith, ie; was there any wilful behaviour on their part or was the breach complained of beyond their control?
  • whether or not the breaching party is in a position to fulfil the remainder of the contract, taking into account the extent of any performance at the date of breach, ie; is the guilty party in a position to deliver what they promised and how likely is this?
  • whether or not the innocent party is ready, willing and able to perform, ie; where the non-breaching party has not yet fulfilled their obligations under the contract, would they be in a position to do so had the breach complained of not occurred?
  • whether or not the innocent party can be compensated for their loss, ie; will money resolve the problem, such that the contract can still be kept in place?

The contract itself may provide some guidance as to what constitutes a fundamental breach. In some cases, the contact may cite specific scenarios that will allow the innocent party to repudiate the contract, such as a failure to deliver on time, expressly stating that ‘time is of the essence’. Very often contracts will also classify certain terms as either conditions or warranties, so as to make clear the effect of their breach. A condition is a fundamental term of the contract, going to its very core, whereas a warranty is a minor term and so not central to the contract’s existence. A breach of a condition would justify bringing the contract to an end, whilst breach of warranty would only sound in damages.

In contract law, there are also innominate terms. These are intermediate terms that do not naturally identify as either conditions or warranties. In these cases, should a contractual dispute arise, the court would need to assess the impact on the innocent party to determine how the term should be categorised, and whether that party was deprived of substantially the whole benefit of the contract. If a breach is serious or fundamental to the contract, this will be treated as a breach of condition. If the breach is minor, and therefore not critical to the contract’s performance, this will be treated as a breach of warranty.

Remedies for a fundamental breach of contract

The remedies potentially available to an innocent party for breach of contract will all depend on the nature and extent of the breach complained of. However, where a fundamental breach of contract can be proven, where a condition of a contract has been broken, the innocent party will be entitled to terminate the contract and treat themselves as discharged from further performance under it. This is known as repudiation. The innocent party will also be able to claim damages. In contrast, if a warranty is breached, the innocent party can claim damages, but they will not be able to repudiate the contract.

Damages is essentially a sum to compensate the innocent party for the breach. If the contract specifies that a fixed amount should be paid if one side breaks the contract, such as a penalty clause for late delivery of goods, the innocent party may be entitled to claim ‘liquidated damages’. Otherwise, when claiming damages, this will be a sum specifically designed to put the innocent party back in the position that they would have been in had the contract been properly performed. The claim for compensation will therefore be scrutinised with reference to various legal principles, including causation and remoteness. The innocent party must also show that they took all reasonable steps to mitigate their loss.

However, in some cases, repudiation and damages may not represent an adequate remedy for a fundamental breach of contract. As such, the innocent party may choose not to bring the contract to an end, instead seeking to compel the breaching party to fulfil their contractual obligations. In these circumstances, the innocent party may be able to seek equitable relief from the court by way of an order for specific performance. This can include, for example, requiring the breaching party to deliver goods already paid for.

Specific performance is an alternative remedy for breach of contract in which the court can order a party to perform what was contractually promised. Unlike damages, which are available as of right, specific performance is granted at the court’s discretion, although the court will look closely at whether damages would be an adequate remedy. Where the breaching party is unwillingly to perform their contractual obligations, specific performance will only usually be granted when damages cannot adequately compensate the breach.

How to deal with a fundamental breach of contract

Since breach of a condition entitles the innocent party to terminate the contract and to claim damages, contractual disputes can often centre on whether or not a particular term of the contract takes effect as a condition or a warranty. As such, having in place a clear and comprehensive contract, defining which terms should be treated as fundamental to the contract, will help to minimise the potential for conflict in any commercial relationship.

However, even where the contract has sought to classify a term in a particular way, the labelling of a term does not necessarily resolve the issue as to how a term should be construed. This can still be a matter of construction and interpretation where, even with careful drafting, breach of contract disputes can still arise. This is because, in the context of commercial disputes, the implications of breach can be potentially far-reaching.

It is therefore essential, if a dispute arises, for the parties to seek independent legal advice at the earliest possible opportunity, allowing them to assess their respective positions and make an informed decision as to how best to proceed. Breach of contract litigation can be both costly and complex but, with the right advice and representation, it is often possible to find a mutually agreeable way forward without recourse to legal proceedings.

Fundamental breach of contract FAQs

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Legal disclaimer

The matters contained in this article are intended to be for general information purposes only. This article does not constitute legal advice, nor is it a complete or authoritative statement of the law, and should not be treated as such. Whilst every effort is made to ensure that the information is correct, no warranty, express or implied, is given as to its accuracy and no liability is accepted for any error or omission. Before acting on any of the information contained herein, expert legal advice should be sought.

Author

Fundamental Breach of Contract Guide 1

Gill Laing is a qualified Legal Researcher & Analyst with niche specialisms in Law, Tax, Human Resources, Immigration & Employment Law.

Gill is a Multiple Business Owner and the Managing Director of Prof Services - a Marketing Agency for the Professional Services Sector.

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