Critical Analysis of theory of Fundamental Breach

“ ”

Submitted by Supervised by

Aaryan Sanadhya Dr. Vikram Karuna

Class: 1st semester (B.A.LL.B) Assistant professor of law

Roll no: 22270 Dr. Sangeeta Tak

Assistant professor of law

Rajiv Gandhi National University of Law

Punjab, Patiala

2022

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 Declaration

I hereby declare that the case comment entitled “Critical analysis of theory of
fundamental breach” submitted to Rajiv Gandhi National University of Law,
Punjab, Patiala is an outcome of my original work carried out under supervision of Dr.
Vikram Karuna, assistant professor of Law and Dr. Sangeeta Tak, assistant
professor of Law. The project is entirely based on my own research work and has not
been submitted elsewhere. All the ideas and references have been duly acknowledged. To
the best of my understanding, the project is free from plagiarism

Aaryan Sanadhya

Rajiv Gandhi National University of Law, Punjab,

Patiala

10th October, 2022

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 SUPERVISOR`S CERTIFICATE
This is to certify that the case comment entitled “Critical Analysis of theory of
fundamental breach” submitted to Rajiv Gandhi National University of Law, is a
research work carried out by “Aaryan Sanadhya” under my supervision and guidance
for further evaluation.

Dr. Vikram Karuna

Assistant professor of Law

Dr. Sangeeta Tak

Assistant professor of Law

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 Acknowledgement

Every humble being should always first honor and thank those who have helped him
throughout their journey. With that, I would like to express my gratitude towards Rajiv
Gandhi National University of Law, which has allowed me to pursue good and structured
academic schemes and has added to my level of skills. Every opportunity I get here,
every work that I undertake or intend to undertake I will always be grateful to my
University. Further, I would like to thanks our respected Vice-Chancellor Dr. G.S. Bajpai
for steering the university towards growth based and efficient academic curriculum which
allows one to explore and implore their skills and work upon them to a greater extent.
Further, I would like to thank my teacher Dr. Vikram Karuna, for allowing me to choose
a Topic of my choice and then guiding me from the first rough draft to this extremely
researched final draft. In this journey and afterwards, I would always be indebted to you.
Lastly, I would like to extend my letter of thanks to my friends and family for showing
faith in me in the journey of this research project, they are the backbone of this project
and have motivated me when I felt like I cannot do it anymore. And God, without your
eyes on me and inner strength this project would have always remained an idea.

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 Table of Contents

DECLARATION 2
SUPERVISOR’S CERTIFICATE 3
ACKNOWLEDGEMENT 4
INTRODUCTION 6
DEVELOPMENT OF THE 7
“DOCTRINE OF FUNDAMENTAL
BREACH”
RELEVANCE OF “DOCTRINE OF 8
FUNDAMENTAL BREACH” IN
CONTEMPORARY TIMES
CRITICAL ANALYSIS 9
BIBLIOGRAPHY 12

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Introduction:

In today's globalised society, hundreds of businesses conduct transactions involving

millions of people as consumer base. Because it would be challenging for these
businesses to create customised contracts with each customer, they developed the
“Standard Form of Contract” or” Adhesion contract”, a template containing many terms
and conditions that limit each party's responsibility. The two options accessible to people
are to accept it or reject it because they have no chance of negotiating with the large
companies. Contracts with governmental bodies, multinational businesses, or in the
banking and insurance industries, among others, are also subject to the usage of standard
terms and conditions. Contracts of adhesion are now often used in business transactions
in the 20th and 21st centuries. Adhesion contracts are types of standard contracts wherein
one party (often the more powerful side) drafts the agreement and another party (typically
the less powerful side) agrees to it with no authority to negotiate or alter the terms and
“

circumstances of the agreement. Due to the different negotiating positions or powers of

”

the contractual parties, such agreements are made on an unfair basis. According to the
idea of fundamental breach of contracts, when a party violates a contract, it is so
fundamentally flawed that it deprives the weaker party of the majority of its advantages
“

and disentitles the distressed party to seek damages. Standard contracts typically have an
exclusion of liability language that businesses employ as a defence in the event of a
breach. Since standard contracts are utilised by a huge quantity of participants, the
fundamental breach of such agreements must be evaluated on a case-by-case basis. Such ”

contracts should be interpreted in a way that is favourable to the weaker party since they
are prepared by the companies (stronger party). The party who drafts the contract
typically has a better negotiating position than the side that accepts the contract, which
typically has a weaker position. The opposite party almost always has no choice but to
accept the contract's terms and conditions. All form of contracts presented by one party
on the basis of this are nothing but considered as “Adhesion Contracts”. Adhesion
contracts are described as contracts in which one party's involvement is restricted to his
simple adherence to a document that has been unilaterally prepared and demanded by the
other party what is often a strong company, frequently against his choice and without his
knowledge. Standard form agreements or adhesion contracts have a number of

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characteristics, including the fact that one of the contracting parties frames conditions in
the document and that party regularly engages in a volume of the same kinds of
transactions. The drafting party also forces the document upon the weaker party on a
“take-it-or-leave-it basis”. The weaker party typically signs the agreement with little to
no negotiation, and the weaker party does not (or can’t) object to the terms of the
document.

Development of the “Doctrine of Fundamental Breach”:

The doctrine of fundamental breach traces its roots back to the “United Kingdom” with
“ Lord Denning being its reputed founder. As originally formulated, the doctrine of
”

fundamental breach provided that “where a breach of contract constituted a radical or

fundamental departure from the obligations set out in the contract, an exculpatory clause
that would otherwise have insulated the party in breach from liability would not have that
effect.” Lord Denning was of the view that, this doctrine should be applied as a rule of
“ “

law regardless of the parties’ intentions relating to liability. That is, if a party was in
fundamental breach of its contractual obligations, such party should not, as a rule of law,
be entitled to rely on an exclusion clause which limits or excludes its liability . According
” ”

to Lord Denning, this approach should be followed as a universal rule of law in spite of
the parties' intended culpability. That is, as a general rule, a party should not be able to
rely on an exclusion provision that restricts or removes its culpability if that party was
fundamentally in breach of its contractual duties. Lord Denning in J. Spurling Ltd vs
Bradshaw stated that “The exempting clauses are now a days all held 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 further
performance by the other, so too he is disentitled from relying on an exempting clause”.
The doctrine of Fundamental breach as we see today in such shape is a result of various
case laws through which it first got its initial shape in United Kingdom but all these cases
had persuasive value in Indian courts and in India “Skandia Insurance Co. Ltd. vs.
Kokilaben Chandravadan & Ors.” being one of the most landmark cases in which the
exclusionary clauses were read down to the extent they violated the core of the contract

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and it made room for the “main purpose rule” and consequently honourable supreme
court in its judgment “B.V. Nagaraju vs Oriental Insurance Co Ltd” held that
exclusionary clauses can’t lend support to the destruction of the core the contract and
explicitly mentioned and held that the doctrine of fundamental breach as applicable in
Indian law (by virtue of its power in article 141) ,according to which wide exclusion
provisions will be interpreted and read down to the degree that they conflict with the
primary goal or intent of the contract.

The outcomes of several cases where the theory of fundamental breach was applied
varied widely, suggesting that it is just a rule of construction and not an autonomous rule
of law. This approach was most clearly and accurately enunciated by “Pearson LJ” in
“U.G.S. Finance Ltd v National Mortgage Bank of Greece, S.A.” His Lordship said:

“As to the question of 'fundamental breach',... there is a rule of construction that normally
an exception or exclusion clause or a similar pro vision in a contract should be construed
as not applying to a situation created by a fundamental breach of contract. This is not an
independent rule of law imposed by the courts on the parties willy-nilly in disregard to
their contractual intention. On the contrary, it is a rule of construction based on the
presumed intention of the contracting parties. It involves the implication of a term to give
to the contract that business efficacy which the parties reasonably must have intended it
to have. This rule of construction is not new in principle but it has become prominent in
recent years in consequence of the tendency to have standard forms of contract
containing exception clauses drawn in extravagantly wide terms, which would have
produced absurd results if applied literally”.

““ In this series another landmark case being “Suisse Atlantique Societe D'Armement S.A. v
N.V. Rotterdamsche Kolen Centrale”, here “Lord Wilberforce” elaborated on what the
expression “Fundamental Breach” refers to: “(i) a performance totally different from that
which the contract contemplates, (ii) a breach of contract more serious than one which
would entitle the other party merely to damages and which (at least) would entitle him to
refuse performance or further performance of the contract.”His Lordship then went on to
explain that if “fundamental or total breach” means a departure from the conditions of
“

agreement, the query will arise as to how great a departure and if it means supply of a

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different thing than mooted, the query will be concerning that how dissimilar and went on
to add that no formula will be able to solve this type of question.

And one must look individually at the nature of the contract, the character of the breach
and its effect on the future performance and expectation and make a judicial estimation of
the final result. And further the English judges tried to give somewhat a certain shape to
the doctrine and remove vagueness and same was intended by Donaldson J in “Kenyan
Son & Craven Ltd V Barter Hoare & Co Ltd.” Here his lordship divided the cases into
three heads where the doctrine was mainly to be applied: (i) Supply of a different article;
““

(ii) Hire-purchase cases; and (iii) Marine cases relating to deviation. ””

Relevance of “Doctrine of Fundamental breach” in contemporary times:

“ To some extent (in context of United Kingdom) it has found statutory recognition in the
“(English) Unfair Contract Terms Act, 1977.” The Act says that “a party who commits
”

breach of his contract cannot take the advantage of any clause in the contract which either
excludes or limits his liability.” Further, if there is any provision in agreement to the
effect that "no performance" or "substantially different performance" then it will be taken
as equivalent to performance, which will be of no avail. Thus the term "breach" will
include a performance which is substantially different from that contemplated by the
contract. ”

The result of the clause is that the courts no longer have to use fundamental breach as a
defense. The Unfair Contract Terms Act, 1977's Section 11's criteria of reasonableness
can be used to get the same outcome (English). The strategy was clear in the House of
Lords' ruling in the case of George Mitchell (Chesterhall) Ltd. v. Finney Lock Seeds Ltd.

But this is not the case in Indian context as there is no statutory backing in Indian statutes
for the doctrine of “Fundamental Breach” but Indian courts are still applying this doctrine
to safeguard the interests of weaker parties in standard forms of contract. But due to its
development through judicial law making there have been many conflicting decision and
opinions by judges which give utmost importance and uphold the freedom and sanctity of
a contract if the words are clear and have nothing dubious. The current Indian Statutes
are insufficient to address these challenges, as stated in the 103rd Law Commission of

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India Report. Shankaran Nair J. said in his dissenting judgment from 1909 that Section 23
of the Contract Act applies to such exemption provisions; however, this position has been
disproved by the High Courts in subsequent decisions, which have previously been
mentioned. In a few instances, the courts have fought courageously to support the less
powerful party. However, the legal foundation for such judgments is murky. The
Commission recommended adding a new a clause to the Indian Contract Act of 1872 that
would combine the benefits of the “(English) Unfair Contract Terms Act of 1872” with
“Section 2.302 of the Uniform Commercial Code of the United States” in order to
address this issue.

Critical Analysis of Doctrine and its development:

Due to the widespread commercialization of activities, businesses that provide services to

millions of customers every day began entering into contracts with them using a
“standard form of contract or an adhesion contract”, allowing them to take up a sizable
portion of the market. Dealing with individual customers separately requires entering into
an individual contract with them, which is a time-consuming, cumbersome and expensive
process. Due to the "leave it or take it" nature of these contracts, there is a chance that the
customer, who is the weaker party, may be exploited. Since the customer signed the
agreement and accepted the terms and conditions, they are not entitled to any legal
recourse. The court created the notion of “Fundamental Breach or Fundamental” Terms
to enable the protection of the weaker segment of society. The Indian Contract Act in its
current form is insufficient to address the demands of the modern world. The nature of
contracts has changed recently as a result of changes in business settings and the
introduction of new contract types. One of these is an adhesion contract. Standard form
contracts cannot be adequately covered by the current general contracting requirements.
Applying conventional contract law to new adhesion contract variants is challenging.
Almost all common law nations have realized the value of endowing the theory with
statutory sanctity in order to protect the weaker party, who is forced to abide by the
conditions put forth by the stronger party, make it more predictable, and eliminate all the
uncertainty resulting from conflicting judgments. The evolution of this theory paints a
picture of tremendous unpredictability and uncertainty. On the one hand, judges are all

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too willing to use this new principle of fundamental obligation to settle disputes between
parties who have entered into a contract that contains clauses whose full implications the
parties either did not realize or did not intend to address through the language they used.
Even in this case, we cannot claim that the knowledgeable judges were constantly aware
of the existence, much less the significance, of such a concept.  Even as M. Jourdian for
forty years uttered prose without knowing it, the judges in the Easwara Iyer and Lily
White cases spoke of fundamental obligation without realizing it. Judges on the other side
are supporting the freedom and integrity of contract in the most conservative and
classical manner. In the words of Mr. Justice Sarkar and Mr. Justice Mohammad
Hidayatullah, "Where parties agree upon certain terms which are their relationship it is
not for the court to make a new contract, however reasonable, if the parties have not
made it for themselves," respectively, "there is very little the courts can do if the words
used in the contract are clear." And in the name of this freedom, they disregard the fact
that one party may escape his responsibilities under a contract to the detriment and loss of
the other due to a provision in the contract to which the aggrieved party could never have
agreed had it known all of its implications or, at the very least, which is contrary to the
contract's primary goal.

Given the seemingly conflicting dual jobs of carrying out the contract and rendering
substantive justice between the parties in accordance with the specific judge's best
judgment regarding that abstract idea, such confusion may be unavoidable. Fortiori, with
a theory like Fundamental breach that is so new, England has only just come to
understand its importance as a check against the misuse of standard form contracts. As
was already said, it is believed that, in order to limit the extent of exemption and other
elements that are inconsistent with the basic requirement in the “Sussie Atlantique case”,
legislation should be sought rather than judicial lawmaking in those contracts. Overall,
we can only hope that any future efforts to change the contract law in India would strive
to eliminate the current ambiguity by an appropriate legislative action.

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 BIBLIOGRAPHY

1. Aakanksha N, Critical Analysis of the Theory of Fundamental Breach of

Contract, Jus Corpus Law Journal
2. V. Ramaseshan, Journal of the Indian Law Institute , APRIL-JUNE 1968, Vol. 10,
No. 2 (APRILJUNE 1968), pp. 331-346; https://www.jstor.org/stable/43949997
3. Contract and Specific Relief, Avtar Singh, eastern book company

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