Breach of contract
The general definition of a breach of contract is where there is a failure or refusal by one or both of
the parties to perform one or all of the obligations imposed upon them under the contract. A breach
of contract may also occur where one of the terms has been performed, but it has not been performed
to the appropriate standard imposed by the contract. There may be lawful excuse for a breach of
contract, which will be covered in the next chapter (the law of frustration).
A breach of contract will usually result in the innocent party seeking one of the various contractual
remedies against the party who breached the contract. These will be discussed in depth in a later
chapter, but include damages, injunctions, specific performance, repudiation, restitution and
rescission. The secondary result of the breach can be the release of the parties from their contractual
obligations, however, this is dependent on the nature of the breach and the term it relates to; there
must be a ‘repudiatory’ breach.
Repudiatory breaches
A repudiatory breach can be defined as a breach of contract which deprives the other party of a
substantial benefit under the contract. There are some tests and presumptions in order to assess
whether a certain breach will amount to repudiatory:
1. What type of term has been breached?
2. Are the obligations ‘entire’?
3. Has the party in breach indicated an intention to abandon the contractual obligations?
In order to identify a repudiatory breach you will need to have knowledge of all three of these tests, as
one or all of these tests may apply to a breach of contract.
For something to amount to a repudiatory breach, the conduct must also be clear and unequivocal as
to intent to abandon the contract, the simple fact that one party seems unlikely to meet their
contractual obligations will not be sufficient. The case of Alfred Toepfer International GmbH v Itex
Itagrani Export SA [1993] 1 Lloyd’s Rep 360 is authority for the general threshold as being: apparent,
on the balance of probabilities, that the party cannot or will not perform their obligations.
The more recent case of Eminence Property Developments Ltd v Heaney [2010] EWCA Civ 1168 further
developed this test: From the perspective of a reasonable person in the non-breaching party’s
position, has the other party shown a clear intention to abandon and refuse to perform?
Type of term breached
The type of term breached can result in a presumption that the contract has been breached and thus
releases both parties from their obligations. Therefore, one of the key parts of a question relating to
breach of contract is to identify whether the term breached can be classed as one of these:
1. Conditions
o Condition subsequent
o Condition precedent
, o Condition
2. Warranties
3. Innominate terms
Contingent conditions
A Condition should first be distinguished from a condition precedent and a condition subsequent.
Conditions precedent and subsequent are ‘contingent’ conditions. This means that there is no
contractual obligation to ensure that the condition is met. Which therefore means a contract cannot
be discharged for breach of a condition precedent or subsequent.
A condition precedent is a condition which must be met before to any contractual liability can incur. In
other words, something that needs to happen before the contract begins. A common example of a
condition precedent can be found in mortgage agreements. It will be usually be a condition precedent
that the property is inspected to assess the value before the mortgages contractual obligations may
arise. Another example is where a contract is formed on the basis of a certain event (Pym v
Campbell (1856) 6 E & B 370).
A breach of a condition precedent is valid and will not usually result in any remedies so long as the
parties do not prevent the occurrence of the condition precedent (Mackay v Dick (1881) 6 App Cas
251).
A condition subsequent is a condition which will terminate the existing contractual obligations. The
most commonly cited example is an employment contract which is for a fixed period. Once the
condition subsequent is met (eg. a 6 month period), the contractual obligations cease.
Exam consideration: When trying to identify whether a term is a condition subsequent or precedent,
try to think of them as a ‘catalyst’ for the beginning or the ending of the contract. Be careful, because
wrongly identifying a condition subsequent or precedent as a condition can change the whole
outcome of the question.
Conditions
A condition is a term which is central to the contract. When attempting to identify a condition, the
question to ask yourself would be: if this term was breached, would the whole nature of the contract
change?
If a condition is breached, the innocent party has a choice to do one of two things:
1. Affirm the breach of contract, and continue to be party to the contract
2. Terminate the contract, which releases both parties from all of the obligations under the
contract
Warranties
A warranty is a term which is not central to the contract. In contrast to a condition, if a warranty is
breached, it would not change the nature of the contract. In other words, a warranty is peripheral to
the main contract, and would not have serious consequences if breached. Therefore, a breach of a
,warranty will not result in an option to terminate the contract. A breach of warranty can be
adequately compensated for with damages.
Innominate terms
An innominate term is somewhere between a condition and a warranty; a breach would not change
the nature of the contract, but it cannot be said to be peripheral or a minor breach (Helpful!). The
result of a breach of an innominate term will be dependent on exactly how the breach has occurred
and the seriousness of the breach in those circumstances. If the breach is more serious, it is likely the
innocent party will be given the option to repudiate the contract. If the breach is less serious, the only
available remedy will be damages.
Breach of condition v serious breach of innominate term
I’m sure you will have read the above differences between the types of terms and wondered how on
earth you will be able to tell the difference between a breach of condition and a serious breach of an
innominate term! Thankfully there is some guidance under the common law.
Case in focus: Hong Kong Fir Shipping Ltd v Kisen Kaisha Ltd (1962) EWCA Civ 7
In this case, Hong Kong Fir hired a ship to Kisen for two years. One of the terms in the agreement was
that the ship would be seaworthy and “in every way fitted for ordinary cargo service”. Unfortunately,
the ship’s crew, machinery and engineer were not satisfactory. Kisen argued that these issues
breached the condition that the ship would be seaworthy, meaning the contract was repudiated. Hong
Kong Fir’s response was that this was not a breach of a condition, and therefore Kisen were in breach
for repudiating the contract wrongfully.
The court held that the term breached was innominate. The unseaworthiness of the ship resulted in
the ship being unusable for 80% of the period of hire, and therefore this was adequately remedied
with damages. The nature of the contract had not changed, it was just that the ship was only
‘seaworthy’ for a shorter time than was expected.
The case of BS & N Ltd v Micado Shipping Ltd (The ‘Seaflower’) [2001] 1 Lloyd’s Rep 341 identified four
categories or rules which can help classify a term as a condition or an innominate term.
1. Express conditions
2. Condition by precedent
3. Designated by contract or consequences
4. Nature of the contract
The first of these categories is the most obvious and easy to identify. Express conditions refer to where
a statute expressly states that a particular term or type of term is to be a condition. The most common
example of an express condition are the terms implied into certain contracts by the Sale of Goods Act
1979. Section 12(5A) states ‘the term implied by subsection (1) above is a condition and the terms
implied by subsections (2), (4) and (5) above are warranties’. Here you have some express statements
which leave no doubt as to which parts of the section are warranties.
, Where a statute expressly classifies a certain term as a condition, it is irrelevant if the breach is
extremely trivial and has little or no impact, the fact that statute has classified it as a condition means
a breach will result in a valid repudiation of the contract. In the case of Arcos v EA Ronaasen &
Son [1933] AC 470, there was a contract to purchase some staves sold by description. The staves were
described as being half an inch thick. When the buyer received the goods, they were actually 9/16ths
of an inch thick. This breached the implied term that goods sold my description will comply with the
description from Section 14(2) of the Sale of Goods Act 1979. As this term is classified as a condition
by statute, the buyer was able to repudiate the contract for breach of a condition, despite the small
and potentially trivial difference in the staves.
Exam consideration: Express conditions only apply where the classification is in the statute. Take care
with contracts that classify terms as conditions - it will not automatically mean you can presume it will
be a condition. You should see the third rule to gain a better understanding of these.
The second rule is that where a certain term has been previously categorised as a condition in another
judicial decision, the term should be treated as a condition. This may seem like it would be impossible
in practice, but the fact that many commercial contracts use standard contractual terms means that
this is an efficient method of categorising terms.
The court will not usually categorise the exact wording of a term as a condition, but more so the idea
and aim of the term. In Bunge Corporation v Tradax Export SA Panama [1981] UKHL 11 it was decided
that an obligation of ‘notice of readiness’ in relation to the loading of a shipping vessel was a
condition. Therefore, regardless of the wording of the term, any breach of the requirement to give a
notice of readiness in that context will amount to a condition.
The third rule is that a term will be a condition if it is designated so in the contract or the contract
states the consequence of a breach of the term will be that the innocent party may repudiate the
contract. In order for this rule to operate, it must be express and very clear that this was the intention
of the parties.
The simple use of the word ‘condition’ will not usually be enough. The term defined as a condition
must be considered in the context of the whole contract - is it consistent with the rest of the terms?
Case in focus: Schuler AG v Wickman Machine Tool Sales Ltd [1973] UKHL 2
In this case, clause seven of the contract was stated to be a condition. However, clause eleven of the
contract stated either party could terminate the contract if there was a material breach of any term.
Clause seven was breached, but not in a material way, which meant clause eleven was not effective.
It was held that clause seven being defined as a ‘condition’ was inconsistent with clause eleven, as
surely for clause seven to be a condition it should have been a material term, and would therefore fall
under clause eleven. Therefore, clause seven was not treated as a condition because of inconsistency
with the rest of the contract.
On the flipside, sometimes the term does not even have to make reference to it being a condition or
the consequences of its breach. The term must simply highlight its importance to the contract. For
example, the phrase ‘time is of the essence’ is considered a condition, as it highlights the importance
of keeping to the timings stipulated by the contract.
