Business 4000

Contracts – Breach of Contract

 Fundamentals
 “Breach” = a party fails to satisfy its obligations
under a contract
– Always creates rights to remedies (usually
damages – next chapter)
 Question is whether or not the breach is sufficient
to discharge the contract – in other words:
– Do you have the right to a remedy, but still have to
perform or follow through with contract; or
– Do you have the right to a remedy, and can
declare the contract over(discharged)?
 Different from other means to discharge a
contract:
– Not every breach will discharge a contract
– Discharge is never automatic – depends on the
response of the other side
 For a breach to discharge a contract:
– The breach must be “major” or “fundamental”
– The other party must declare the contract
terminated / discharged (reserving their right to
sue)
 However, declaring contract terminated /
discharged because of breach is a choice; it is
not automatic
 No matter how major or fundamental the breach,
the other side may still seek to continue with
contract:
– perform
– demand performance,
– but always reserving their right to sue for a remedy
because of the breach
 Declaring a contract over because of a “major”
breach can be risky, because the other side and /
or a Court may not see it as having been “major”
 If this happens, the “major” or “fundamental”
breach may be the party declaring the contract
over, and they can be sued by the party who
committed the original breach in the first place
 Once a breach has occurred, the other party
must ask:
– Was this a major or minor breach?
– What does this breach entitle me to?
– How should I respond?
 Different Breaches
 Contract are comprised of major and minor terms:
“conditions” and “warranties”
 Minor breaches include breaches of minor terms
(“warranties”), or minor breaches of major terms
(“conditions”)
 Minor breaches only create the right to damages:
– They do not create the right to terminate the contract
– The contract obligations otherwise continue on both sides
 If a party declares a contract discharged and refused to
perform when there has only been a minor breach, they
may have caused a major breach, and may be subject to
be sued by the other side
 “Major breach” is the breach of a condition - it will
create the right to terminate the contract
 The difficulty:
– Identifying what are conditions v. warranties in the
terms of a contract
– Determining what is a major v. minor breach of a
condition
 Can come down to a judgment call when the
other side has breached – was it a major
breach? How do you react?
 How a Breach May Occur
 Express Repudiation
– Party declares expressly that they will not perform
– “Anticipatory Breach” occurs where the party
declares ahead of time that it will not be performing
at the required time
 If it is a major breach, the other party has two
choices:
– Notify the defaulting party that it considers the
contract over, find someone else to perform and
sue for damages
– Wait until actual performance and then sue for
breach – exposure to intervening events
 Performance Rendered Impossible
– Essentially self-frustration – the party does something which
makes its performance impossible
– Wilful or negligent act
– Contrast with what happens if an event beyond one’s control
renders performance impossible – that’s frustration
 Failure to Perform
– Usually only apparent at the time performance due
– Varying degrees of failure to perform
– Again, the big issue will be – is it a minor or a major breach?
 Failure to Perform –
Continuing Performance
 If the contract requires performance by
instalments, performance failures can be difficult
to sort out – when to they become a major
breach?
 May consider a breach or breaches to be major
if:
– There is good reason to expect performance to
continue to be equally as defective in the future
– The actual deficiency, or the expected deficiency,
are important to the whole performance promised
 Failure to Perform
 Substantial Performance
– Means a party has completed performance on a
significant portion of the contract requirements
– If a party has substantially performed, the court is
likely to find that any failures to perform are minor
breaches, not major ones
– In other words, they have satisfied enough of the
conditions of the contract that performance failures
cannot be seen as breaches of those conditions
– Means the other side cannot rely on the
performance failure to declare contract terminated
 Failure to Perform – Loss of
Rights
 Notwithstanding a major breach, a party’s right to
terminate the contract can be lost if:
– It continues with the contract and accepts the
benefits under the contract
– It does not know of the major breach until
performance is complete (cannot reject or return
performance)
 In both circumstances, the party is required to
fulfil its obligations but can sue for damages –
however, in some of these cases the damages
may offset most if not all of the performance
owing
 Failure to Perform –
Exemption Clauses
 Commercial parties can create significant exposure to
liability under contracts
 Three ways to handle this risk:
– Insurance against risks – raises the cost of services to cover
costs
– Self – Insurance
• Again requires raising costs to permit savings for reserve
fund
– Exemption clauses in the contract
• Contractual terms releasing a party from liability in
contract, tort or otherwise, either entirely or for any
amounts about a set amount
• No standard clause – each has to be read and
interpreted on its own to see what it tries to do
 Exemption clauses are the preferred option because:
– Lower cost
– Quick settlement of disputes which do arise (as the other side
has contractually restricted its ability to sue)
– Negotiating advantage, particularly where they are included in
standard form contracts
 Can be abused – as a result they are controlled to protect the
other party:
– Must give other party have notice of the clause
– Court will read the clause strictly against the party it benefits; any
interpretation issues will usually be decided against the drafter
– Fundamental Breach – if the court feels the breach of contract is
so serious it defeats the entire contract, it will not let the other
side hide behind an exemption clause
 Economic of Breach
 Sometimes, it may make economic sense to
breach a contract
– The damages payable to the other side are known
– The benefit from the breach may be higher
 However, some costs are not strictly economic
– Reputational costs in an industry
– Moral costs
 Sometimes (albeit rarely) breach of contract may
also lead to criminal consequences