FUNDAMENTAL BREACH OF CONTRACT

The traditional principle was created by Lord Denning:

“However extensive an exemption clause might be, it could

not exclude liability in respect of the breach of a fundamental
term or of a fundamental breach”.
Fundamental breach treated as a rule of law and applied
irrespective of the parties’ intention
Lord Denning in Karsales (Harrow) Ltd. v. Wallis [1956] 1 W.L.R. 936 (C.A.).

“Fundamental breach puts an end to the contract”

If there was a fundamental breach the exclusion clause could
have no application because the innocent party would have the
right to repudiate the whole of the contract due to the fact that
he had not received what he bargained for.
Harbutt’s Plasticine Ltd. v Wayne Tank & Pump Co. Ltd. [1970] 1 Q.B. 447
(C.A.).
 Modern approach:

Fundamental breach is a matter of construction based on the

intention of the contracting parties. It is open to interpretation
whether where there had been a fundamental breach such that the
exemption clause is inapplicable.
U.G.S. Finance Ltd. v. National Mortgage Bank of Greece, [1964] 1 Lloyd’s Rep.
446

“there was no rule restricting the general principle of English law that
parties are free to contract as they may see fit”)
Suisse Atlantique v. N.V. Rotterdamsche Kolen Centrale [1967] 1 A.C. 361(Lord
Reid)

In 1977 the Unfair Contract Terms Act was enacted in the UK to

deal with the doctrine of fundamental breach. The act invalidates
certain kinds of exemption clauses in consumer transactions and
subjects other exemption clauses to a requirement of
reasonableness.
 Modern approach (continued):

Lord Wilberforce reaffirmed the principle that in the absence

of an inequality of bargaining power, the parties are entitled
to contract as they see fit. The task of the courts is to give
effect to their agreements.
Photo Production Ltd. v. Securicor Transport Ltd. [1980] 3 W.L.R. 163

Photo Production is a leading case which confirms that the

term "fundamental breach" should only be used to describe
breaches for which the innocent party is entitled under the
contract to elect to put an end to all primary obligations of
both parties remaining unperformed. This overrules
Harbutt’s Plasticine Ltd. v Wayne Tank & Pump Co. Ltd
 Photo Productions v. Securicor Ltd. [1980] All E.R. 556

The question of whether an exclusion clause applied when there was a

fundamental breach of contract turned on the construction of the whole
contract.

The parties are free to modify, limit or reject by express works the content of
their obligation

Although Securicor was in breach of an implied obligation to perform the

service with proper regard for the safety and security of the plaintiff's
premises, the exclusion clause was clear and unambiguous and protected
them from liability

A fundamental breach occurs where the event resulting from the failure by
one party to perform a primary obligation has the effect of depriving the other
party of substantially the whole benefit of the contract.

“Condition” in the nomenclature of the SGA: A breach of condition occurs

where the contracting parties have agreed, whether by express words or by
implication of law, that any failure by one party to perform a particular primary
obligation irrespective of the gravity of the event that has in fact resulted from
the breach, shall entitle the other party to put an end to all primary obligations
of both parties remaining unperformed.
Lord Wilberforce in Photo Productions v. Securicor Ltd. [1980]
All E.R. 556

The question whether, and to what extent, an exclusion clause is

to be applied to a fundamental breach, or a breach of a fundamental
term, or indeed to any breach of contract, is a matter of
construction of the contract

The rule of law approach of Lord Denning is based on faulty

reasoning

The courts should allow the parties to make their own bargain.

The 1977 Unfair Contract Term Act made judicial intervention in

this area obsolete (even though fundamental breach has served
a useful purpose)
Lord Diplock in Photo Productions v. Securicor Ltd. [1980] All
E.R. 556
An exclusion clause is one which excludes or modifies an obligation,
whether primary, general secondary or anticipatory secondary, that would
otherwise arise under the contract by implication of law

Primary obligations are those contained in the contract

Secondary obligations are those which arise automatically by law when a

contract is breached

For a breach of a contract which is not serious the outstanding primary

obligations remain to be performed. The innocent party must continue to
perform. There is a general secondary obligation on the breaching party to
pay damages for the breach

For a serious breach where repudiation is elected by the innocent party the
outstanding primary obligations are all treated as being substituted for an
anticipatory secondary obligation to pay damages for all the obligations
that would have fallen due in the future (so the innocent party is relieved of
future performance)
 Conclusions regarding breach of contract

If a contract is breached it is not automatically discharged even if the

breach is fundamental.

If the breach is fundamental the innocent party has the right to elect:
Whether to affirm the contract (i.e. continue their performance) and
claim damages, or
To repudiate the contract (i.e. treat their future obligation to perform
as discharged) and claim damages

The consequences of a breach are thus prospective.

 Hunter Engineering Co. v. Syncrude Canada Ltd.
Supreme Court of Canada
(1989) 57 D.L.R. (4th) 321
Wilson J.:
The exclusion clause cannot be considered in isolation from the other
provisions of the contract and the circumstances in which it was entered into.

Exclusion clauses do not automatically lose their validity in the event of

a fundamental breach by virtue of some hard and fast rule of law. They
should be given their natural and true construction so that the meaning and
effect of the exclusion clause which the parties agreed to at the time the
contract was entered into is fully understood and appreciated.

Even if the breach of contract was a fundamental one, there would be

nothing unfair or unreasonable (and even less so unconscionable, if this is
a stricter test) in giving effect to the exclusion clause. The contract was
made between two companies who are of roughly equal bargaining power …
both familiar and experienced with this type of contract
 Hunter Engineering Co. v. Syncrude Canada Ltd.
Supreme Court of Canada
(1898) 57 D.L.R. (4th) 321
Dickson C.J.C:
I am inclined to adopt the course chartered by the House of Lords in Photo
Production Ltd. v. Securicor Transport and to treat fundamental breach as a
matter of contract construction.

The court should not disturb the bargain the parties have struck, and I am
inclined to replace the doctrine of fundamental breach with a rule that holds
the parties to the terms of their agreement, provided the agreement is not
unconscionable.

Only where the contract is unconscionable, as might arise from situations of

unequal bargaining power between the parties, should the courts interfere with
agreements the parties have freely concluded.

Both Allis-Chalmers and Syncrude are large and commercially sophisticated

companies…both parties knew or should have known what they were doing
and what they had bargained for when they entered into the contract
 IMPLIED TERMS TEST (FRIDMAN)
Impact of exclusionary clauses in the context of implied statutory warranty:
The implied conditions set out in the SGA apply (except where the proviso to that
subsection operates).
Where the buyer, expressly or by implication, makes known to the seller the
particular purpose for which the goods are required so as to show that the buyer
relies on the seller’s skills or judgment, then the goods shall be fit for purpose.

Relevant factors:
 The course of the seller’s business
 The knowledge on the part the seller of the purpose of the goods
 Reliance on the seller’s skill or judgment

Dickson C.J. application of the test:

The design and manufacture of the gearboxes was in the course of Hunter U.S.
business activities. Hunter U.S. new the purpose for which the gearboxes were
being purchased. Syncrude, through its agent relied upon the skill and judgment
of Hunter U.S.
Dickson C.J conclusion:
The gearboxes were not reasonably fit for the purpose for which they were
required Hunter U.S. is in breach of the implied condition in s.15 (1) SGA
(Ontario)