BREACH OF CONTRACT
Introduction: What is BOC? This looks at how contracts are construed.
Firstly, to understand the topic of Breach of Contract at all we need to firstly understand what makes up a
contract.
– “A breach of contract is committed when a party without lawful excuse fails or refuses to perform what is
due from him under the contract, or performs defectively or incapacitates himself from performing.”
(Peel, Treitel on the Law of Contract, 12th ed. 2007, para.17-049).
So therefore, look at what is “due” under the terms of the contract: Where does the obligation come
from? Express and Implied Terms:
1) EXPRESS TERMS: What the parties put into the contract themselves.
In a contract for the supply of services: an express term requiring the contracting party only to “take
reasonable care” in the supply of those services.
An obligation may be defined as the need to take “reasonable endeavours” to do something, e.g. in a
distributor’s contract, to use “reasonable endeavours” to achieve sales targets.
Specifications for the manufacture of goods, e.g. machines.
Other express terms: Exemption clauses; An express term allowing the other party to terminate the
contract in the event of any breach of the agreement.
Standard terms and conditions: A company may want to contract on their own set of standard terms
and conditions, which may include provisions for e.g. costs of delivery, what happens on cancellation,
price variation (should cost of manufacture increase during the process), exemptions, termination
clause etc.
2) IMPLIED TERMS: Implied terms are not drafted into the contract by the parties themselves. There are
different types of implied term that are implied into contracts to ensure either that the contract works
properly or that it operates fairly.
Link to exemption clauses: See Lesson 5 Exemption Clauses, which covers Implied Terms in more
detail: attempts can be made to exclude them from the contract!
Where necessary to make the agreement commercially workable: A term is implied when necessary
to give make it a workable agreement, as the parties would have done had they thought about what
would happen.
THE “OFFICIOUS BYSTANDER” TEST: Shirlaw v Southern Foundries (1939): A term will be implied
only if “something is so obvious that it goes without saying so that if, while the parties were making
their bargain, an officious bystander were to suggest some express provision for it in their agreement
they would testily suppress him with a common, ‘Oh, of course!’”
EXAMPLE The Moorcock (1889): Defendants owned a riverside jetty and ship owners would unload
there. It was held that there was an implied term in the contract that D would take reasonable care to
make sure the jetty was safe (and the ship would not get torn to bits on the river bed whilst docking!)
An implied term must be necessary not just reasonable.
Terms implied by law: A term may be implied into certain contractual relationships, for example,
between buyer and seller; landlord and tenant. This is a policy decision on the part of the courts.
EXAMPLE: Liverpool City Council v Irwin (1976). In this case, a lease covered tenant’s obligations but
was silent as to the landlord’s obligations. The lifts etc kept getting vandalised and hardly ever worked.
The House of Lords implied an obligation on the part of the landlord to take reasonable care to keep
these parts of the building in reasonable repair.
Terms implied by statute: Sometimes Parliament intervenes and implies terms into particular contractual
relationships, such as buyer and seller, trader and consumer, e.g. regulating the sale of goods and
supply of services.
EXAMPLES: To give you a flavour:
Implied terms in business 2 business contracts:
Sale of Goods Act 1979, s.12: This implies a term that the seller of goods has title to the goods (i.e.
actually owns them):
Sale of Goods Act 1979, s.14: The goods must be of satisfactory quality, and reasonably fit for their
purpose.
Implied terms in consumer sale of goods and supply of service contracts
A term that the goods are of satisfactory quality. Consumer Rights Act 2015, s.9(1):
A term that goods must be fit for particular purpose: Section 10.
A term that a service must be performed with reasonable care and skill: Consumer Rights Act 2015,
s.49(1).
– Liability for breach of contract is basically strict. It is not necessary to prove that a party was at fault in
breaching the contract.
EXAMPLE: A musical instrument dealer may be under a contract to perform a service on my violin
once per year that specifies that it will detect any damage and quote for putting it right. They fail to
notice a crack which then gets worse and causes £6,000 worth of damage. Even if the dealer was not
at fault in failing to notice the crack, then they would still be in breach of contract.
, But the sometimes harsh effect of strict liability for breach of contract can be mitigated by the express or
implied terms of the contract, e.g. a “reasonable care” term.
No strict liability where there is a term requiring the contracting party only to “take reasonable care” or to
use “reasonable endeavours” over something. In order for a breach to have occurred, it is necessary to
prove that the other party has failed to use their best endeavours or take reasonable care.
EXAMPLE: Remember the implied term into a contract for providing services: The services must be
performed with reasonable care and skill, e.g. Consumer Rights Act 2015, s.49(1). So if there has not
been negligence/carelessness, the term will not have been breached.
Understanding point
So, all of this (express and implied terms) make up our contract. It determines what obligations the parties are under so that we
know when those obligations have been breached by the acts or omissions of either party.
Remedies are then awarded for these breaches to the innocent party.
So the careful drafting of contracts is important.
You will see during the time you are studying for your Online Tutorial on Exemption Clauses that a term may be included that
attempts to deny the other party a remedy (i.e. exclude liability) for breach of certain terms, e.g. liability for breach of express
standard terms; liability for breach of terms implied by statute; liability for negligence etc.
For more information as to get an understanding of how this links to the topic of
exemption clauses, please see What to do at Law School?!? Lesson 5 on Exemption
Clauses etc.
The Consequences of a Breach of Contract
This topic is not as straightforward as it might appear from this. We not only have to determine whether
a contract has been breached. We have to look at the type of term breached, because the
consequences for breach differ depending on the type of term. A lawyer can go horribly wrong by
advising a client on the wrong course of action in respect of which remedy to take in the event of a
breach of contract. We identify the different remedies available for breaches of contract, and then the
effect and consequences of breach.
– Remedies
DAMAGES: Payment of the sum agreed; payment of damages.
TERMINATION: Termination of the contract (for which you do not need a court order). The innocent
party can effectively tear up the contract and refuse to perform or accept performance of, future
obligations.1 If the innocent party is entitled to terminate the contract, it is possible for them to claim
damages as well, e.g. for loss of profit that would have come out of the contract.
The effect of termination for breach of contract: This is different from when a contract is rescinded (e.g.
for misrepresentation), which has the effect of unwinding the transaction from the beginning.
Primary Obligations (the obligation to perform what is due under the contract/ pay for it); and
Secondary Obligations (e.g. payment of agreed damages in the event of breach of primary obligation),
termination for breach means that parties no longer have to perform these obligations if they have not
become due.
Termination in this context does not have retrospective effect and so parties remain liable for
obligations that have already become due. Ancillary obligations, i.e. covering things like how disputes
are resolved under the contract, are not usually terminated with the contract.2
When does the right to terminate arise? The right to terminate the contract does not arise automatically
on every breach of contract: Only in the event of certain breaches, or breaches of a certain class of
term (i.e. conditions but not warranties).
We must ensure that we can advise appropriately: Note: McKendrick, Contract Law, Chapter 22.
“The need for caution is particularly apparent in the case of commercial contracts because one false step can be
extremely expensive. A contracting party which purports to terminate a contract when it is not in fact entitled to do
so may find itself liable for damages for wrongful termination of the contract (and the damages payable in such
cases may be substantial)”.
EXAMPLE: The buyer terminated the following contract: Was this a false step (and a potentially costly
one for the client) or did his lawyer give good advice to terminate the contract?
There is a contract for the sale of pellets which the buyer intended to use to make cattle food. The contract
provided that “the shipment to be made in good condition”. Part of the shipment was not made. Market value of
goods had fallen from £86,000 to £66,000. The goods could still be used for the original purpose. Market in these
particular goods continued to fall. Buyer took advantage of this – terminated the original contract and then
purchased the pellets for £34,000 and used them for the original purpose. (The Hansa Nord).
1
We are concerned here with termination and damages as consequences of breach of contract. There are other remedies that you will encounter later in the course, such as specific
performance and injunction.
2
If you want to understand these classifications further, see Lord Diplock in, e.g., Moschi v Lep Air Services Ltd. [1973] AC 331, pp.350-351; Photo Production v Securicor Transport
Ltd. [1980] AC 827, pp.848-850.
