Fundamental breach of
contract
A contract is a legally enforceable agreement between two or more parties that creates, defines, and governs mutual rights and obligations between them. A contract typically involves the transfer of goods, services, money, or a promise to tr ...
, is a controversial concept within the
common law
In law, common law (also known as judicial precedent, judge-made law, or case law) is the body of law created by judges and similar quasi-judicial tribunals by virtue of being stated in written opinions."The common law is not a brooding omnipres ...
of
contract
A contract is a legally enforceable agreement between two or more parties that creates, defines, and governs mutual rights and obligations between them. A contract typically involves the transfer of goods, services, money, or a promise to tr ...
. The doctrine was, in particular, nurtured by
Lord Denning
Alfred Thompson "Tom" Denning, Baron Denning (23 January 1899 – 5 March 1999) was an English lawyer and judge. He was called to the bar of England and Wales in 1923 and became a King's Counsel in 1938. Denning became a judge in 1944 wh ...
,
Master of the Rolls
The Keeper or Master of the Rolls and Records of the Chancery of England, known as the Master of the Rolls, is the President of the Civil Division of the Court of Appeal of England and Wales and Head of Civil Justice. As a judge, the Master of ...
from 1962 to 1982, but it did not find favour with the
House of Lords
The House of Lords, also known as the House of Peers, is the upper house of the Parliament of the United Kingdom. Membership is by appointment, heredity or official function. Like the House of Commons, it meets in the Palace of Westminste ...
.
Whereas breach of
condition is a serious breach that "denies the plaintiff the main benefit of the contract", fundamental breach was supposed to be even worse, with the result that any
exclusion clause
An exclusion clause is a term in a contract that seeks to restrict the rights of the parties to the contract.
Traditionally, the district courts have sought to limit the operation of exclusion clauses. In addition to numerous common law rules lim ...
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.
Although the concept caused some excitement in the 1950s and 1960s, the concept was regarded as flawed by the
Law Lords
Lords of Appeal in Ordinary, commonly known as Law Lords, were judges appointed under the Appellate Jurisdiction Act 1876 to the British House of Lords, as a committee of the House, effectively to exercise the judicial functions of the House of ...
, whose decision in the ''
Suisse Atlantique'' substantially curtailed the doctrine, which has now been effectively "laid to rest" in
England
England is a country that is part of the United Kingdom. It shares land borders with Wales to its west and Scotland to its north. The Irish Sea lies northwest and the Celtic Sea to the southwest. It is separated from continental Europe b ...
and Canada. The relevant concept in English Law is
repudiatory breach Fundamental breach of contract, is a controversial concept within the common law of contract. The doctrine was, in particular, nurtured by Lord Denning, Master of the Rolls from 1962 to 1982, but it did not find favour with the House of Lords.
Wher ...
of contract.
Background – the law of deviation
The origins of the idea of fundamental
breach may be traced to early cases on the doctrine of
deviation. In ''Davis v. Garrett'' 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) and ''
Glynn v Margetson'' (1893).
In ''Leduc v Ward'', a vessel bound from Fiume (modern day
Rijeka) to
Dunkirk headed instead towards
Glasgow
Glasgow ( ; sco, Glesca or ; gd, Glaschu ) is the most populous city in Scotland and the fourth-most populous city in the United Kingdom, as well as being the 27th largest city by population in Europe. In 2020, it had an estimated popul ...
, sinking in a storm in the
Clyde estuary
The River Clyde ( gd, Abhainn Chluaidh, , sco, Clyde Watter, or ) is a river that flows into the Firth of Clyde in Scotland. It is the ninth-longest river in the United Kingdom, and the third-longest in Scotland. It runs through the major cit ...
. The court held that even though the shipper may have known of the planned deviation, the
parol evidence rule
The parol evidence rule is a rule in the Anglo-American common law that governs what kinds of evidence parties to a contract dispute can introduce when trying to determine the specific terms of a contract. The rule also prevents parties who hav ...
meant that the route described in the
bill of lading
A bill of lading () (sometimes abbreviated as B/L or BOL) is a document issued by a carrier (or their agent) to acknowledge receipt of cargo for shipment. Although the term historically related only to carriage by sea, a bill of lading may toda ...
was conclusive, and that the deviation was actionable, preventing the carrier from invoking the protection of the "
perils of the sea" exemption.
Similarly, in ''Glynn v Margetson'', a vessel carrying
Seville orange
Bitter orange, Seville orange, bigarade orange, or marmalade orange is the citrus tree ''Citrus'' × ''aurantium'' and its fruit. It is native to Southeast Asia and has been spread by humans to many parts of the world. It is probably a cross bet ...
s from
Malaga to
Liverpool
Liverpool is a city and metropolitan borough in Merseyside, England. With a population of in 2019, it is the 10th largest English district by population and its metropolitan area is the fifth largest in the United Kingdom, with a populat ...
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.
''
Tate & Lyle v Hain Steamship Company'' was a further deviation case following this approach.
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), labelled the fundamental term as ‘the hard core of the contract'.
In ''
Karsales v Wallis''
EWCA_Civ_4a_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_[
EWCA_Civ_4a_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_English_Court_of_Appeal">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".
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_
EWCA_Civ_4a_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_English_Court_of_Appeal">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".
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_anticipatory_repudiation">repudiate_the_contract_and_claim_damages._However,_since_both_common_law_and_statute_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.
_Resolution_–_the_''Suisse_Atlantique''
The_matter_came_to_a_head_in_1966_in_the_House_of_Lords_decision_''_
Suisse_Atlantique''._The_case_involved_a_two-year_EWCA_Civ_4a_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_English_Court_of_Appeal">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".
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_anticipatory_repudiation">repudiate_the_contract_and_claim_damages._However,_since_both_common_law_and_statute_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.
_Resolution_–_the_''Suisse_Atlantique''
The_matter_came_to_a_head_in_1966_in_the_House_of_Lords_decision_''_
Suisse_Atlantique''._The_case_involved_a_two-year_chartering_(shipping)">time_charter_
Time_Charter_(6_April_1979_–_7_July_2005)_was_an_Irish-bred,_British-trained_Thoroughbred_racehorse_and__broodmare_who_won_several_major_middle-distance_races_between_1982_and_1984._After_winning_twice_as_a_two-year-old_in_1981,_she_deve_...
_to_export_coal,_the_shipowners_to_be_paid_freight_rate.html" "title="chartering_(shipping).html" "title="anticipatory_repudiation.html" ;"title="nglish_Court_of_Appeal.html" ;"title="956
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 English Court of Appeal">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".
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 anticipatory repudiation">repudiate the contract and claim damages. However, since both common law and statute 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.
Resolution – the ''Suisse Atlantique''
The matter came to a head in 1966 in the House of Lords decision '' Suisse Atlantique''. The case involved a two-year chartering (shipping)">time charter
Time Charter (6 April 1979 – 7 July 2005) was an Irish-bred, British-trained Thoroughbred racehorse and broodmare who won several major middle-distance races between 1982 and 1984. After winning twice as a two-year-old in 1981, she deve ...
to export coal, the shipowners to be paid freight rate">freight
Cargo consists of bulk goods conveyed by water, air, or land. In economics, freight is cargo that is transported at a freight rate for commercial gain. ''Cargo'' was originally a shipload but now covers all types of freight, including tran ...
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 ''
'' 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". 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
patently ignored the House of Lords' findings. One such case was ''
''. The House of Lords was less than amused, and in the 1980 ''
'' case they emphatically reaffirmed their decision in the ''Suisse Atlantique''.
" approach whereby a fundamental breach is determined by examining the full circumstances, such as the parties' intentions at the time of the contract.
These two cases (the ''Suisse Atlantique'' and ''Photo Productions'') thus form the definitive statement of the law up to the
.
More recently, this law was successfully applied in two cases related to carriage of goods by sea and application of limitation clauses under the
'' and ''The Happy Ranger''.
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
. However, given the general move in the
'' in 2010. 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.
* ''Maxine Footwear Company Ltd. v. Canadian Government Merchant Marine Ltd'' (1957)