If you ever touch CIPS L5M3 study guide, different types of contract breach may confuse you, especially major breach and fundamental breach. In fact, you don’t need to care about fundamental breach anymore as UK’s House of Lord dismissed this doctrine in 1980. However, if you are interested in gaining deeper understanding of ‘fundamental breach’, this blog post is for you!

What is ‘fundamental breach’?

Aaron Tan, the author of L5M3 study guide, defines fundamental breach as: “A breach so serious that it affects the fundamental nature, performance and existence of a contract.”

The definition is so vague that students are likely to be unable to distinguish between major breach (which derives the innocent party of the contractual purposes) and fundamental breach. Though the innocent party is entitled to terminate the contract in both major and fundamental breach event, the award for damages in each case is different. If a breach is considered as major, the defaulting party can still invoke exemption clause to limit or justify his action, thus the damages awarded to innocent party may be either capped at a certain amount (as in liquidated damages) or totally excluded (as in force majeure).

On the other hand, British judges once considered the fundamental breach was a breach “which goes to the root of the contract [and] disentitles the party from relying on the exempting clause” (see Karsales (Harrow) Ltd v Wallis). This means that once a party breached a contract ‘fundamentally’, no excuse or limitation or exclusion can protected it from the innocent party’s damages. 

Historically, the following two groups of breach were typically considered as fundamental:

• Deviation: In a contract for sea transportation, if a ship deviates from the established sea route, the ship owner’s liability to the customer cannot be excluded or limited. For example, a UK company hires a shipping company to transport chicken’s breast from Brazil to UK. In the contract, the two parties agree a clause that limits the shipper’s liability. Then the shipping company’s vehicle strays from the agreed route to collect more goods. This adds the time to the shipment and prompts the meat uneatable. If the case was brought to the UK court, the shipping company wouldn’t be entitled to limit its liability.
• Unfit for purpose: In SMEATON, HANSCOMB & CO., LTD. v. SASSOON I. SETTY, SON & CO.; Karsales (Harrow) Ltd v Wallis and Harbutt’s “Plasticine” Ltd v Wayne Tank and Pump Co Ltd, if a purchased goods is unfit, then the seller will be totally responsible for all damages caused by the goods without the protection of any exclusion or limitation clause.

How ‘fundamental breach’ doctrine rose and fell

The doctrine of ‘fundamental breach’ arose from deviation in sea transportation (see above). Its scope was expanded to become a substantive rule of law by the case SMEATON, HANSCOMB & CO., LTD. v. SASSOON I. SETTY, SON & CO (1953). In this case, the seller agreed to deliver mahogany timbers to buyer’s premise. Then the seller failed to deliver timbers as the contract had stated, instead it delivered pine wood. The buyer also failed to to take action within the contractual 14-day time limit on claim. The judge, Mr. Devlin, generalised the fundamental breach doctrine:

“It is no doubt a principle of construction that exceptions are to be construed as not being applicable for the protection of those for whose benefit they are inserted if the beneficiary has committed a breach of a fundamental term of the contract, and that a clause requiring the claim to be brought within a specified period is to be regarded as an exception for this purpose: see Atlantic Shipping & Trading Co. v Louis Dreyfus & Co. In that case, the fundamental term was the implied condition of sea worthiness, which is treated, as Lord Sumner said as ‘underlying the whole contract of affreightment.’ The same principle has been applied in cases of deviation and other fundamental terms. I do not think that what is a fundamental term has ever been clearly defined. It must be something I think, narrower than a condition of the contract, for it would be limiting the exceptions too much to say that they applied only to breaches of warranty. It is I think something which underlies the whole contract so that, if it is not complied with, the performance becomes something totally different from that which the contract contemplates. If, for example, instead of delivering mahogany logs the sellers delivered pine logs and the buyers inadvertently omitted to have them examined for fourteen days, it might well be that the sellers could not rely on the time clause.”

Mr. Devlin’s reason was used in judgement of Karsales (Harrow) Ltd v Wallis. As a result, fundamental breach became an important implied term of commercial contracts in 1950s and 1960s.

Things started to change from the case Suisse Atlantique Societe d’Armament SA v NV Rotterdamsche Kolen Centrale (1967) which was eventually decided by UK’s House of Lords. The case involved a two-year time charter to export coal from Europe to the USA. The ship was to make as many trips as possible, and the owners were to be paid an agreed freight rate according to the amount of cargo carried. If the laytime were exceeded, the charterers were to pay demurrage of $1000 per day. Serious delays occurred because the charterers had difficulty both in getting cargo to the port, and in loading and unloading efficiently. Nevertheless, the shipowner did not cancel the contract, but allowed the charter to continue for the remainder of the two years. In all, only eight round trips were made, whereas the owners claimed that, without delays, a further six trips were feasible. The total demurrage payable amounted to only $150,000. The owners sued for damages, saying their claim should not be limited to the demurrage amount because the charterer’s gross delays amounted to a fundamental breach of the contract. The plaintiff then argued that the breach was fundamental and the limitation on defendant’s liability should have been eliminated. Their Lordships decided that the limitation was a question of construction (how the parties wrote the contract), not a question of law, and that Karsales (Harrow) Ltd v Wallis had overstated the law. 

However, the doctrine of ‘fundamental breach’ had not died yet. It was once revived with Harbutt’s “Plasticine” Ltd v Wayne Tank and Pump Co Ltd and Wathes v Austins (Menswear). Eventually, with the birth of Unfair Contract Terms Act (1977) and the case Photo Production Ltd v Securicor Transport Ltd (1980), the doctrine was laid to rest.

Summary

The fundamental breach doctrine had a relatively short life in UK common law. Initially, it was formed in sea transportation, then it was generalised and became a ‘substantive rule of law’ in 1950s, 1960s and the first half of 1970s. During that time, the doctrine was used to strip the defaulting party of the exemption clause’s protection. But this approach took away the free will of contracting parties and did not distinguish between a standard contract terms and contract which was made on negotiation basis. The Unfair Contract Terms Act 1977 had made this doctrine superfluous before it was completely rejected by House of Lords in Photo Production Ltd v Securicor Transport Ltd.

Reference

• Coote, Brian. THE SECOND RISE AND FALL OF FUNDAMENTAL BREACH.