Fundamental Breach of Contract
Breach of Contract: -
Contract is made between the parties who are intended to bind together in a legal obligation i.e.to serve the interest of both the parties. The parties, in order to govern themselves and tosafeguard their interest make their own terms and conditions. And when such terms andconditions are accepted by both the parties, there is an enactment of the contract i.e. the liabilityis imposed on the party to the contract and to function in accordance with the terms andconditions of the contract.
Though many a times, the contracting parties work according to the terms and conditions of theother party, there are instances when one party back steps, thus leading to the loss to other party.
This is referred as repudiation. According to the section 39 of the Indian contract Act, “Anyintimation whether by words or by conduct that the party declines to continue with the contract isrepudiation, if the result is likely to deprive the innocent party of substantial the benefit of thecontract”
Thus, repudiation can occur when the either party refuses to perform his part, or makes itimpossible for him to perform or even fails to perform his part of contract in each of the cases insuch a manner as to show an intention not to fulfill his part of the contract.
Breach of contract is defined is a legal cause of action in which a binding agreement orbargained for exchange is not honored by one or more parties to the contract by non-performanceor interference with the other party‟s performance. It the party does not fulfill his contractualpromise, or has given information to the other party that he will not perform his duty asmentioned in the contract or if by his action and conduct he seems to be unable to perform thecontract, he is said to be breach of contract.
Thus when a party having a duty to perform a contract fails to do that, or does an act whereby the performance of the contract by him becomes
impossible, or he refuses to perform the contract, there is said to be a breach of contract on hispart. On the breach of contract by the one party, the other party is discharged of his obligations toperform his part of the obligations.
Breach of a contract does not discharge the contract, thereby automatically termination theobligation of the innocent party. It gives an opinion to the innocent party to regard itself asdischarged. The innocent party rescinds the contract, the primary obligation of both the parties isover, but the defaulting parties become liable for payment of compensation for the breach. Theinnocent party may also waive the defective performance and elect to accept damages instead ofending the contract.
The breach of contract may be either: (i) actual, i.e. non-performance of the contract on the duedate of performance, or (ii) anticipatory, i.e. before the due date of the performance has come.Thus, when the party to the contract refuses to do an act or does an act at the time of theperformance of the contract then it is said to be the actual breach of the contract, but when theparty to the contract refuses to do an act or does an act before the time of performance by whichthe performance of the contract is not possible, the such breach is known as the anticipatorybreach of contract.
Fundamental Breach of Contract
In today‟s globalized world, thousands of companies engage in business which involves millions
of consumers. Thus, it would be difficult for these companies to draw up separate contract withevery individual, they came out with Standard Form Of Contract, whereby a standard form witha large number of terms and conditions are there restricting the liability of the party to the contract.The individuals can hardly bargains with the massive organizations and therefore theonly option available to them is either to accept it or reject it.
The doctrine of "Fundamental Breach" in the Law of Contract has developed mainly in the areas of sale (and hire-purchase), bailment and carriage. In the last two areas, the difficulty is
R. K. Bangia, Contract –
I, Allahabad Law Agency, Faridabad, Haryana
frequently not so much one of assessing the character of the obligation (i.e., is it a "condition" ora "Fundamental Obligation" as determining the gravity of the breach. In this respect, the distribution of the onus of proof often acquires a new importance in such cases.The customer is in no position to renegotiate the standard terms of the contracts and the
company‟s representative usually does not have the authority to do so. Such contracs are also known as – “Contracts of Adhesion” which means that the individuals has no choice „but to accept; he does not negotiate, but merely adhesion‟, “Compulsory Contracts”, they being a kindof imposition; and “Private Legislation‟, they being a kind of kind of code of bye-laws on thebasis of which the individuals can enjoy the services offered.
Thus, in order to protect the weaker section from exploitation. It is a method of controlling unreasonable consequences of wide and sweeping exemption clauses. Even where adequate notice of the terms and conditionsin a document has been given, the party imposing these conditions may not be able to rely on them if he has committed a breach of contract which can be described as Fundamental. This hasbeen laid down by Lord Denning LJ in J. Spurling Ltd. V Bradshaw.
The Supreme Court of India also emphasized on the same rule in B.V. Nagaraju v Oriental Insurance Co. Ltd. &; Every contract contains a & core; or fundamental obligation must beperformed. If one party fails to perform this fundamental obligation, he will be guilty of a breach of contract whether or not any exempting clause has been inserted which purports to protect him.
In Davies v Collins it was held that the mere fact of the particular limitation clause in the contract was sufficient to exclude any right to the sub-contract the performance of the substance of the contract. Limitation clauses of this kind do not apply Fundamental breach of contract is referred by the Devlin J. in Smeaton Hanscombe v. Sassoon I.Setty
wherein the learned justice saya in effect that it is a concept narrower that than the concept “condition”. It refers to so mething that goes to the root of the contract. In this regard following observations has been made by the Lord Reid in the House of Lords' are pertinent: -"I think that it would be open to the arbitrators to find that the respondents had committed a fundamental breach of contract.
fundamental or repudiator breach. One way of looking at the matter would be to ask whether the party in breach has by his breach produced a situation fundamentally different from anything which the parties could as reasonable men have contemplated when the contract was made. Then one would have to ask not only what had already happened but also what was likely to happen in future. And there the fact that the breach was deliberate might be of great importance".
10. Section 39 of the Indian Contract Act provides that if a person indulges in any fundamental breach of the contract and the other party does not acquiesce to the breach, then the party not breaching is not bound under the liabilities of the contract. This would, therefore, enable a party to terminate a contract on the ground of substantial failure by the other party which goes to the root of the contract.
In our country question of delay in performance of the contract is governed by Sections 55 and 56 of the Indian Contract Act, 1872. If there is an abnormal rise in prices of material and labor, it may frustrate the contract and then the innocent party need not perform the contract. So also, if time is of the essence of the contract, failure of the employer to perform a mutual obligation would enable the contractor to avoid the contract as the contract becomes voidable at his option, Where time is "of the essence" of an obligation, Chitty on Contracts.
11. states a failure to perform by the stipulated time will entitle the innocent party to (a) terminate performance of the contract and thereby put an end to all the primary obligations of both parties remaining unperformed; and (b) claim damages from the contract-breaker on the basis that he has committed a fundamental breach of the contract ('a breach going to the root of the contract') depriving the innocent party of the benefit of the contract ('damages for loss of the whole transaction').
RELEVANT FACTORS IN DETERMINING THE FUNDAMENTAL BREACH
According to the statement of the unofficial Secretariat Commentary on the 1978 Draft Convention,
12 scholars from different legal systems debated on standards for determining whether a breach is fundamental. A consensus was reached that the determination must be made in the light of the circumstances of each case. There is no such agreement, however there are some relevant factors, as generated by scholars and practitioner, in determining whether an injury is substantial enough to amount to fundamental breach which are roughly categorized under the following headings: a) nature of the contractual liability; b)gravity of the circumstances of breach; c) remedy-oriented approach; d) (in)ability of performance; e) (un)willingness to perform; f) lack of reliance on the other‟s party‟s future performance; g) offer to cure; and h)possible cure.
1. Nature of the Contractual Obligation: - the nature of the contractual obligations is one factor in determination of fundamental breach. Where the parties have expressly or implicitly agree that in the case of a breach by one party, the other party may terminate the contract, strict compliance with the contract is essential and any deviation from the obligation is to be regarded as a fundamental breach. Absent such an express provision, the duty of the strict compliance may also be inferred from the language of the contract, the surrounding circumstances, custom usage or a course of dealing between the parties. The court often looks at the nature of the contractual obligation in considering whether strict performance is the essence of the contract. In the absence of the contract
a. Quality of the Goods
b. Timely delivery
c. Disregard of the Seller‟s
2. Gravity of the Consequences of the Breach: - Gravity of the consequences of the breach is another factor in determining fundamental breach. Whether or not the consequences of the breach actually deprive the party‟s to the contract of the expectation under the contract as 1) Contract‟s overall Value and the Monetary Loss suffered by the Aggrieved Party; 2) Frustration of the purpose of the contract; and 3) remedy-oriented approach.
3. (In) ability of the Performance: - One of the considerations in the determination of fundamental breach of contract is party‟s (in ) ability to perform at all, that is to say either to deliver the ordered well or to pay the purchase price and to take delivery. Regardless of whether performance is due or non-performance is considered a fundamental breach where performance is objectively impossible, namely where the object of the transaction is unique and has been destroyed.
4. (Un) Willingness of Performance: - this is another factor in determining whether fundamental breach is there or not. For e.g. one party refuses to deliver the goods or taking the goods, it therefore constitute the fundamental breach. Except in the cases, where the promisor is entitled to refuse the performance, the breach is not amounted to exist.
5. Lack of Reliance on
The Other's Party Future Performance: - In determining fundamentalbreach, consideration is also given due importance. The party‟s contention is that whether the breach gives the aggrieved party reasons to believe that he may not rely on the other party‟s future performance. For example, that even where the contractual terms broken is minor and the consequences of the breach do not substantially deprive the
aggrieved party of his expectation under the contract.
6. Offer to Cure: - there is much controversy among the scholars as to whether fundamental breach should be determined in the light of the offers to cure. Many authors favor the consideration whether such offer in determining is fundamental breach or not. Their contention is that the breach is not fundamental as long as the repairs is possible within a reasonable time and without causing the aggrieved party unreasonable inconvenience or uncertainty of reimbursement by the seller of expenses advanced by the buyer.
III Judicial Trends
1. Karsales (Harrow) Ltd. V. Wallis
Facts: - A man named Stinton offered a Buick car, KKC 822, to Wallis, the defendant. Wallis inspected the car and found it excellent. He wanted to buy it but could do so only on hire-purchase. Stinton tried to arrange this but he clearly met the difficulty that any private person meets: finance companies want recourse agreements, and will take them only from dealers. So Stinton arranged to sell the car to the plaintiffs, Karsales, who were dealers. He did not give possession to Wallis and after the agreement had been completed some days elapsed before delivery was made by Stinton because Stinton had not been paid. Eventually Stinton effected delivery of what might still perhaps be described as Buick car KKC 822 except that the cylinder head of the engine had been removed, the valves in it were burnt out and two of the pistons broken. It had been towed to Wallis's premises late at night. Also the tyre had been changed, the radio removed and some chromium adornment taken off. Wallis refused to accept the car and got Stinton to retake it. Wallis also refused to pay any installments to the finance company, who, it seems, operated their recourse agreement and made Karsales take over the hire-purchase agreement. This action for arrears resulted from continued refusal to pay
Issues: - three issues were raised in this case
(1) Whether the defendant had been offered the goods described in the hire-purchase agreement, and, even if not, whether an exemption clause in respect of alleged breaches of conditions or warranties express or implied protected the plaintiffs;
(2) Whether a claim that the exemption clause did not protect could be sustained without having been pleaded in express terms or whether, the facts showing that to be the case, judgment could be given on that basis;
(3) Whether an action for arrears was proper where the goods had been rejected by the hirer, or whether a claim for damages was not the proper claim. Judgment: - the judgment of Parker L.J. is preferred. His Lordship held that there was a duty on a hire-purchase finance company to ascertain that the chattel is reasonably fit for the purpose for which it is expressly hired. But although exemption clauses are commonly inserted to give protection from that liability, it was held that they do not and cannot operate to give protection from the breach of a fundamental term. His Lordship adopted the definition of Fundamental term to be found in the judgment of Devlin J. in Smeaton Hanscombe v. Sassoon I. Setty (No. 1),
wherein the learned justice says in effect that it is a concept narrower than the concept "condition." Here there was such a breach because the car was incapable of self-propulsion. Denning L.J. adopted a similar line of reasoning except that he says that a breach of a fundamental term is something that goes to the root of a contract.
This is unobjectionable if his further statement that it is something "different in kind" is regarded as exegetic but not if regarded as an alternative, since the term " goes to the root" is usually used as wide enough to cover conditions. On the point as to pleadings, the court allowed the submission that there was a breach of a fundamental term, as revealed by the facts, to be received notwithstanding that the pleadings did not sufficiently make this clear. They further held that the claim for the installments could never have succeeded, because the hirer refused delivery: the proper remedy is damages. On that the plaintiffs would have been in a difficulty if they had sought damages for, apart from the fundamental breach, they had only taken an assignment of the right to the payments of hire. A similar point on what is a fundamental breach arose in the case of the Caspiana (G. H. Renton, Ltd. v. Palmyra Trading Corporation of Panama)
It will be of interest to see whether the Law Lords adopt or amplify the principle involved, and in particular, whether they make clear the distinction between a condition and a fundamental term. Conclusion: - THE facts in Karsales (Harrow) Ltd. v. Wallis' were classic and it was a pity that the judgments do not quite reach the potential heights that were attainable. But it is a useful case
The shop assistant handed her a documents headed „Receipts‟ which she was asked to sign. Before doing so, Curtis asked the assistant why her signature was required. She was told that it was because the shop would not accept liability for certain specified risks including the risk of damage by or to the beads and sequins with which the dress was trimmed. Curtis then signed the receipt, which in fact states. This… article is accepted on condition that the company is not liable for any damage howsoever arising. When the dress was returned to Curtis, there was a stain on it. Curtis claimed that the shop has been negligent and brought an action against the shop claiming damages of 32 euros. The shop sought to rely on the exemption clause contained in the signed receipt.
Issues: - (1) Whether the oral assurance given by the shop assistant overrode the written agreement so as to negate or modify the exemption clause.
Judgment: - As the judgment delivered by the Lord Denning held that it was an important case because many people signed the printed forms without reading them, only to afterwards that they exemption contain the stringent clauses exempting the other side from their common-law liability. In every such case it must be remembered that, if a person wishes to exempt himself from a liability which the common law imposes on him, he can only do it by an express stipulation brought home to the party affected, and assented to by him as part of the contract. He referred to Olley v. Marlborough Court, if the party affected sign written documents, knowing it to be a contract which governs the relations between them, his signature is irrefragable evidence of his assent to the whole contract, including exempting clauses, unless the signature is shown to be obtained by fraud or misrepresentation. In the present case, the customer knew from what the assistant said that the document contained conditions. If nothing was said she might not have known it. In that case, the documents might reasonably be understood to be like a boot repairer,
law liability for negligence. In that case it would not protect the cleaners: see Chapelton v. Berry Urban District Council. I say this because I do not wish it to be supposed that the cleaners would have been off if the assistant had simply handed over the document to the customer were not so inquiring as the plaintiff, but were an unsuspecting person who signed what was asked without question .In those circumstances the conduct of the cleaners might well be such that it conveyed no conditions, or, at any rate, no condition exempting them form their common-law liability, in which case they could not rely on it.
In my opinion when the signature to a condition, purporting to exempt a person from his common-law liabilities, is obtained by an innocent misrepresentation, the party who has made that misrepresentation is disentitled to reply on the exemption.
Owing to the large scale commercialization of the activities, the companies which serves the millions of consumers daily started making a contract with them with the help of a Standard form of Contract, which enables them to occupy a large market share, as dealing with a separate consumer separately which requires a separate contract with them, which in turn is a time consuming process and a costly one. So, the companies started adopting the Standard Form of Contract, which contains the general terms and conditions in a form and each customer is provided with that form. But since such type of contract are known as “leave it or take it, there are possibilities that the weaker party i.e. the client is in a position of exploitation. The client does not have appropriate legal remedy since it accepted the terms and conditions and signed it. To enable the protection for the weaker section of the society, the court developed the doctrine of Fundamental breach or fundamental terms.
Fundamental breach protects the interest of the weaker party to the contract. It provides the remedy if there is a breach which is going to the root level, thus the purpose of which does not fulfills. The Lord Parker Judgment in Karsales (Harrow) Ltd. V. Wallis clearly states that when there was a duty on a hire-purchase finance company to ascertain the conditions of the chattel is fit so that it will serve the purpose for which is bought. Thus, the purpose for which something is purchased and it is not in a position to serve that purpose, the contract is said to be void on account of the breach i.e. fundamental breach of contract. Although, if the seller or buyer puts a conditional clause in the agreement, then also there is a breach of fundamental term. The said breach is not acceptable to the Courts, which provides the appropriate remedy either to compensate the aggrieved party or to restore the position as it was before the contract.
The Court in Curtis v. chemical Cleaning & Dyeing Co held that the cases on which the party So to the contract wishes to exempt himself from a liabliitty which the common law imposes on him, he can only do it by an express stipulation brought home to the party affected and assented to by him as a part of the contract. Thus in the view of Lord Denning,
“when the signature to a condition, purporting to exempt a person from his common-law liabilities, is obtained by an innocent misrepresentation, the party who has made that misrepresentation is disentitled to reply 21 on the exemption.
”Thus the contract which are violates the terms and conditions of the said agreement, then it amounts to the fundamental breach of contract. Thus, in order to provide appropriate remedy, the court can compensate the party who is in a loss or restore the contract back to its origin. Again it was held that whether a breach constitutes a fundamental breach has to be decided on the facts and circumstances of the each case. There is no hard and fast rule to determine a fundamental breach, it is based upon the case to case basis.
The author can be reached at: email@example.com