Breach of Contract

The starting point for the breach of contract is the pre-existence of a contractual obligation.

For contract lawyers the salient point remains that there has to be an obligation before there can be a breach. Breach of contract may occur in a variety of ways:

1. By non-performance or defective performance
2. By promising the truth of a statement that proves false
3. Through breach of a condition or warranty a breach depriving the other party of substantive benefit of the contract.
4. By stating that you no longer intend to be bound by the contract after performance has started. This is called “anticipatory breach” or “renunciation”.
5. By making it impossible to perform the contract by one’s own actions.
6. Where there is a fundamental breach going to the rest of the contract.

The effect of the breach depends primarily on the breach. A breach of warranty gives a right to damages, but otherwise the contract continues. A breach of a promissory condition allows the innocent party the option of

1. Affirming the contract and keeping it alive or
2. rescinding I.e. bringing his obligation to perform the contract to an end

A breach of condition or intermediate term does not of itself terminate the contract. The contract continues until the injured party either affirms the contract or chooses to rescind it.

As we have noted, the innocent party has a choice of either:

1. refusing to accept the breach and carry on I.e affirm the contract or
2. rescind, the contract, I.e, withholding performance and refusing to perform until the other has done so, or is ready and willing to perform.

He or she may also refuse to accept further performance from the other party. This only arises If the breach is sufficient to justify option B, I.e. a breach of condition or substantial breach of an innominate term.

Contracts normally come to an end when the obligations arising under it are performed. However, under certain circumstances, a contract may be discharged before performance is complete. A contract is discharged when there are no obligations outstanding under it.

Summary

• In practice most contracts are discharged by performance. It is necessary to identify the standard form of performance required in relation to each contractual obligation since a failure to perform to the required standard constitutes a breach. Contractual obligations are either strict or qualified.
• Contracts may be discharged by agreement but such an agreement to discharge must be legally enforceable and so much be supported by consideration, if not contained in a deed.
• A breach of contract will occur where, without lawful excuse, a party either fails or refuses to perform a contractual obligation imposed on that party by the terms of the contract, or performs a contractual obligation in a defective manner.
• Every breach of contract will give rise to a right to claim damages. However, unless the breach constitutes a repudiatory breach, the contract will remain in force. If the breach is repudiatory the non-breaching party will have the option either to accept the breach as terminating the contract (in which case both parties future obligations will be discharged) or to affirm the contract (in which event the contract remains in force for both parties).
• Breach may be anticipatory, I.e., breach occurs before the time for performance because, for example, one party indicates that he will not be performing. The non-breaching party is entitled to take the other party at his word. He can elect either to accept this breach by anticipatory repudiation as terminating the contract; in which event he need not wait until the date for performance before claiming damages. Alternatively, the non-breaching party can affirm and await the date for performance (give the breaching party a second chance). If the non-breaching party chooses to affirm he may, in certain circumstances. Continue with his performance and claim the contract price although this is controversial since it is clear that the performance is not wanted by the guilty party. Affirmation also means that each party is expected to perform their obligations they fall due so that there are some risks to the non-breaching party in selecting this route.

A contract may be discharged by performance, agreement, frustration or by breach.

1. Discharge by performance

A contract is discharged by the performance by both parties of all the primary obligations, express and implied, which they owed under the contract. An obligation will be performed only where the performance meets the standard of performance required. Consequently, a failure to reach the required standard will constitute a breach. In other words to discharge one’s obligations under a contract, a party must perform exactly what he or she promised.

The general rule is that performance must be precise and exact. If there is even a slight deviation from the terms of the contract, the innocent party may be entitled to claim that the contract has been performed, and on this ground claim damages and termination of the contract. The strict application of this rule can be seen in the following two cases, both of which were decided under S. 13 of the sale of Goods Act 1893.

1. Re Moore & Co Ltd and Laundauer & Co [1921] 2 KB 519Facts: The defendants agreed to buy from the plaintiffs 3,000 tins of Australian canned fruit. The goods were stated as being in cases containing 30 tins each, payment to be per dozen tins. When the goods were delivered, a substantial part of the consignment was packaged in cases of 24 tins. The buyers refused to take delivery, and the dispute was referred to arbitration. The arbitrator held that there was no difference in the market value of the goods, and therefore the delivery of the consignment was a good delivery.

Held: The court of Appeal held that the contract was for a sale of goods by description, and that as the goods contracted for had been mixed with goods of another description, the defendants were entitled under S. 30 (3) of the sale of Goods Act 1893 to reject the whole consignment.

1. Arcoss Ltd V EA RonaasenFacts: The English buyers had ordered a quantity of staves of Russian redwood and white wood, for use in the making of cement barrels. The contract description allowed some variation in the length and in the breadth of the staves but stipulated that they should be ½ inch thick. Most of the staves delivered were 9/16 inch thick. They were still perfectly usable for making barrels. Six months after delivery, in a falling market, the buyers sought to reject the goods on the ground that they did not conform to the contract description.

Held: The house of Lords affirmed the decision of the court of Appeal, holding that the buyers were entitled to demand goods matching the description in the contract and were therefore not bound to accept the consignment.

The general rule is that the performance obligation is strict, so that the contractual obligation must be completely and precisely performed. There is no defence for failure to meet this strict obligation. For example, if a seller fails to deliver the goods to the buyer on the contractual date set for delivery to occur, it will not avail the seller to argue that it was let down by it’s supplier. There is a strict contractual breach by the seller in failing to deliver the goods on time, although the seller may have a remedy under the terms of the separate contract with it’s supplier.

The only exception to this strict contractual liability is for what may be regarded as “micro-scopic” deviations (the de minimis rule). However, if the failure to meet the strict performance standard falls outside de minimis, there will be a breach.

In some circumstances the performance obligation is S.13 of the supply of goods and services Act 1982. At common law this standard of performance has long been regarded as the appropriate standard for professional people such as doctors and lawyers, whose work makes it impossible to guarantee a result.

Despite the rule that performance must be exact, the law will allow payment to be made, on a quantum meruit basis, for incomplete performance in the following circumstances

• Where the contract is divisible, payment can be recovered for the completed part, for example, goods delivered by instalments.
• Where the promisee accepts partial performance. In Sumpter V Hedges [1989], however, payment for partial performance was refused as Hedges had been left with a half-built house, and had been put in a position where he had no choice but to accept partial performance.
• Where the promisee prevents complete performance. For example, in Planche V Colburn [1831], a writer was allowed payment for the work he had already done when the publisher abandoned the series.
• Where the promisor has performed a substantial part of the contract in Hoenig V Isaacs [1952], the plaintiff decorated the defendant’s flat, but, because of faulty workmanship, the defendant had to pay £50 to another firm to finish the job. Held – the plaintiff was entitled to £150 (the contract price) minus the £50 paid to the other firm: cf Bolton V Mahaseva [1972] where the court declined to find substantial performance.

Discharge by performance can be divided into:

1. Precision of performanceTo discharge his obligations under a contract, a party must perform exactly what he promised.
2. Time of performance

Where a contract fixes a date for performance, it will only be possible for the contract to be repudiated for breach of the time clause where ”time is of the essence’. This will occur where:

• the contract expressly provides that time is of the essence;
• time being of the essence can be inferred from the nature of the subject matter and the circumstances of the contract (e.g. a contract for the sale of perishable fresh fruit);
• time becomes of the essence: this happens where one party fails to perform in a timely manner and the injured party gives notice that performance must take place within a reasonable time.

If time is of the essence, any delay will amount to repudiation: in Union Eagle Ltd V. Golden Achievement Ltd [1997] AC 514 the privy council considered that even a 10-minute delay would suffice.

Equity considers that time is not ‘of the essence of a contract’, that is, a condition, except in the following circumstances:

• It Is stipulated in the contract, Lombard North Central V Butterworth [1987]
• One party has given reasonable notice during the currency of the contract that performance must take place within a certain time. In Rickards V Oppenheim [1950], a car body which had been ordered from the plaintiffs was late. The defendants gave final notice to the plaintiff that unless it was delivered within three months they would cancel the other. Held – time had been made of the essence; the defendants could cancel the order.
• The nature of the contract makes it imperative that stipulations as to time should be observed, for example, contracts for the sake of perishable goods.
• The Law of property Act 1925 stipulated that terms as to the time of performance should be interpreted in the same way at common law as in equity. In Rainieri v Miles [1981], the HOL held that it meant that late performance would not give rise to a right to terminate

Equity considers that time is not ‘of the essence of a contract’, that is, a condition, except in the following circumstances.

• It is stipulated in the contract
• One party has given reasonable notice during the currency of the contract that performance must take place within a certain time. In Rickards V Oppenheim [1950], a car body which had been ordered from the plaintiffs was late. The defendants gave final notice to the plaintiff that unless it was delivered within three months they would cancel the order. Held – time had been made of the essence; the defendants could cancel the order.
• The nature of the contract makes it imperative that stipulations as to time should be observed, for example, contracts for the sale of perishable goods.
• The Law of property Act 1925 stipulated that terms as to the time of performance should be interpreted in the same way at common law as in equity. In Rainieri V Miles [1981], the HOL held that meant that late performance would not give rise to a right to terminate, but would give rise to damages.

1. Tender of performance

If a party is unable to complete its contractual obligations without the co-operation of the other party, then it may take a ‘tender of performance’ which can be accepted or rejected by the other party. If a tender of performance is rejected, then the party who has tried to complete their contractual obligations will be discharged from further liability.

Case: Startup V. MacDonald (1843) 6 Man & C 593

Concerning: discharge by performance; tender of performance

Facts: The parties contracted for the sale of 10 tons of linseed oil to be delivered ‘within the last 14 days of march’. The claimant delivered the oil at 8.30 p.m. On 31 March and the defendant refused to accept delivery. The defendant subsequently refused to pay.

Legal principle: The claim was successful. The court held that the tender of performance was equivalent to performance and the claimant was entitled to damages for non-acceptance. (Note that now section 29(5) of the sale of Goods Act 1979 provides that a tender of goods must be made at a ‘reasonable’ hour – what is reasonable is a question of fact.)

If one party tenders performance which is refused, he may sue for breach of contract. If payment is tendered and rejected, the obligation to tender payment is discharged, but the obligation to pay remains.

The general rule is that performance must be precise and exact. If there is even a slight deviation from the terms of the contract, the innocent party may be entitled to claim that the contract has not been performed, and on this ground claim damages and termination of the contract. The strict application of this rule can be

The general rule is that performance must be precise and exact. If there is even a slight deviation from the terms of the contract, the innocent party may be entitled to claim that the contract has not been performed, and on this ground claim damages and termination of the contract. The strict application of this rule can be seen in the following two cases, both of which were decided under s.13 of the sale of Goods Act 1893.

Partial Performance

It follows from the rule that performance must be precise and exact that a party who only partially performs a contact will not be entitled to payment.

Case: Cutter V Powell (1795) 6 Term Rep 320; [1775-1802] All ER Rep 159

The defendant agreed to pay Mr Cutter 30 guineas in return for him serving as second mate on a voyage from Jamaica to Liverpool. The ship ‘Governor Party’ set sail from Kingston on 2nd August 1793 and arrived at Liverpool on 9th October 1793. Mr cutter died on 20 September, 19 days prior to the ship’s arrival at Liverpool, Mr Cutter’s widow brought an action to recover a proportion of the contract price.

Held: The court held that Mr Cutter had undertaken an entire obligation and completion of the voyage was a condition precedent for payment. Since Mr Cutter had not completed the voyage, his widow was not entitled to recover the contract price.