Law of Contract: Fundamental Breach Last updated 04-Dec-2014

Extract, The Cambridge Law Journal 1966.

Rescission for breach of warranty—fundamental breach.

The second feature of the Hongkong case is that it illustrates the circumstances in which an act which is apparently only a breach of warranty can give rise to a right to rescind. For this purpose it is the nature of the event, i.e., the consequences of the breach, and not the nature of the term that determines the existence of the right. For an event to have this effect it must be of such magnitude as to bring about a total loss of consideration. That is, it must be a frustrating event – one which destroys the whole purpose of the contract. This doctrine slips into place, if I may put it that way, beside or alongside the doctrine of dissolution by frustration. If an event occurs which destroys the purpose of the contract and it is brought about by the fault of neither party the contract comes to an end because its underlying basis has gone. If such an event is brought about by the fault of one party, the other party has the right to rescind; and if the fault be a breach of an express term in the contract, it is immaterial whether that term is a condition or a warranty.

There is nothing new about this doctrine. It is inherent in the doctrine that gives one party a right to rescind when the other repudiates his contract. Suppose that a contract, in so far as it is expressed, consists entirely of warranties. If one party announces that he is never going to perform any of the warranties binding upon him, the other party is not held to the contract with the right to sue for damages; he can, if he wishes, treat the contract as repudi­ated and bring it to an end. It is unnecessary that the party at fault should announce his intention in words; it can be inferred from his conduct. The same situation may be brought about even where there is an intention to perform. Good intentions are no use if the defaulter has made it impossible for himself to give effect to them. Here again there is to be seen the tie with frustration and impossibility of performance. If the impossibility is independent of fault, it may excuse or dissolve; if it is brought about by fault, it gives rise to the right to rescind.

Where time is not of the essence of the contract so that prima facie delay amounts only to a breach of warranty, the party in breach cannot go on purchasing delay indefinitely by paying damages. There comes a point of time when the breach ceases to be merely a breach of warranty and becomes what has been called in the Hongkong case and earlier cases a fundamental breach. On this aspect of the Hongkong case, I want to consider three things.

First, is there a correlative of the fundamental breach, which is the fundamental term ?
Secondly, if so, in what respects does the fundamental term differ from a condition?
Thirdly, what is the value of the concept of the fundamental term?

The first matter I can deal with shortly because I have already said most of what I want to say about it when I was dealing with an implied condition and a breach of a condition. I said then that it did not matter very much whether you looked at the nature of the term or the nature of the breach. Sometimes it is clarifying to look at it one way and sometimes the other. So it does not matter much whether you ascribe the fundamentality to the breach or to the term. Logically, if there is a fundamental breach, there must somewhere be a fundamental term. A breach must mean a breach of promise and there cannot be a fundamental breach of promise without a fundamental promise that is broken.

Whether you speak of fundamental term or fundamental breach, it is only another way of speaking of the destruction of the basis of the contract. Continued elaboration will only bring us back to the old argument which has now gone on for more than half a century, about the juristic basis for the doctrine of dissolution of the contract by frustration. Is it because, as one theory says, the court of its own motion says that the basis of the contract has gone; or is it because there is to be implied in the contract itself a term that the basis of the contract will continue? We have made very good use of the doctrine of dissolution by frustration without ever finally resolving this argument and I think that we can make equally good use of the doctrine of the fundamental breach.

It is convenient to call it by that name for two reasons. The first is that it is a new name in the sense that the adjective "funda­mental" has not hitherto been applied to "breach." The adjective has been applied to the terms of a contract; I shall hare to go into this when I come to distinguish between the fundamental term and a condition. The second reason is that the reference to the funda­mental breach draws attention to the fact that it is the breach rather than the term that attracts attention. It is the breach of the whole contract that has to be considered, not the breach of any one of its terms however important. This is what makes the expression fundamental breach more appropriate.

I pass now to the next point. There must at least notionally be in every contract something that is capable of being called the fundamental term. In what respects does it differ from a condition ?

Let us examine the position by first taking the contract as a whole and stripping it of all its ancillary and collateral terms. What is left is the main purpose of the contract; and the terms which relate to that, on one side or the other, which give the main consideration moving from one side to the other, are the conditions of the contract. But no single condition contains the whole con­sideration. I should not perhaps put it as definitely as that. Rather I should say that no single condition need contain the whole consideration. It may do so as when, for example, the whole consideration given by the buyer is in the term that he should pay the price in exchange for goods. On the seller’s side the performance in exchange for the price is rarely expressed in a single condition. So the distinction is this. While any term that goes to part of the consideration is a condition, the fundamental term goes to the whole of the consideration and so by its breach the whole is lost.

This distinction is obscured by the doctrine of English law, to which I have already referred, that a failure of part of the considera­tion is a failure of the whole. Suppose that the buyer of a motor­car, being offered a selection of colours with fancy names, chooses juniper green and the car that is delivered is pine green. You cannot separate the paint from the car and, it may be said, you ought not to oblige the buyer to accept a car different from that which he has ordered. But if you give him the right to reject, then the failure of consideration, in itself only partial and perhaps trivial, becomes total. Since he has rightly rejected what is tendered, there is no delivery of any goods at all.

There is however a clear distinction between a car that is the wrong colour and one (if it can be called a car) that has no engine. In the latter case there is from the beginning a total failure of consideration. It has been, I think, a defect in the English law of contract that the treatment of a failure of partial consideration has been the same as if it were total; and the new idea of the funda­mental breach goes, as I shall hope to show, some way towards remedying this.

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