Introduction: breach defined
Treitel (2015, para 17-049) has defined a breach of contract in the following terms: ‘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’. It should be noted that in all cases the failure
to provide the promised performance must be ‘without lawful excuse’. Thus where
the contract has been frustrated there is no liability for breach of contract because
both parties have been provided with a ‘lawful excuse’ for their non-performance.
Similarly, where one party has breached the contract and the breach has given to the
other party the right to terminate performance of the contract, that party is not in
breach of contract in refusing to continue with performance because he is given a
‘lawful excuse’ for his non-performance.
Although the breach can take the form of words (such as an express refusal to
perform the terms of the contract), it need not do so and can be evidenced by the
conduct of one party in disabling himself from performing his obligations under the
contract or by performing defectively. Where it is alleged that one party has
incapacitated himself from performing his obligations under the contract, his inability
to perform must be established on a balance of probabilities. This is relatively easy to
do where the party alleged to be in breach has sold the subject-matter of the contract
to a third party, but greater difficulty arises where he enters into alternative
obligations which it is alleged are inconsistent with his existing contractual
obligations. The fact that a party has entered into inconsistent obligations ‘does not in
itself necessarily establish [an inability to perform], unless these obligations are of
such a nature or have such an effect that it can truly be said that the party in question
has put it out of his power to perform his obligations’ (Alfred C Toepfer International
GmbH v Itex Hagrani Export SA [1993] 1 Lloyd’s Rep 360, 362). In short, it must be
proved that the inconsistent obligation or disablement has rendered the breach
inevitable. It does not suffice to demonstrate that there is uncertainty about the ability
of a contracting party to perform its contractual obligations (Geden Operations Ltd v
Dry Bulk Handy Holdings Inc (M/V ‘Bulk Uruguay’) [2014] EWHC 885 (Comm),
[2014] 2 Lloyd’s Rep 66).
When does breach occur?
The question whether or not a particular contract has been breached depends upon the
precise construction of the terms of the contract. No universal legal principle can be
established which displaces the need for a careful analysis of the terms of each
20.3
individual contract. It is for the party alleging the existence of the breach of contract
to prove that a breach has occurred. It is not generally necessary to prove that a party
has been at fault before breach can be established. Many obligations created by a
contract are strict; that is to say, liability does not depend upon proof of fault. A good
example of a strict contractual obligation is provided by section 14(2) of the Sale of
Goods Act 1979 which states that, where a seller sells goods in the course of a
business, there is an implied condition that the goods supplied under the contract are
of satisfactory quality, except in relation to defects drawn to the buyer’s attention
before the contract was concluded or, in the case where the buyer examines the
goods, as regards defects which that examination ought to have revealed. The
purchaser is not required to prove that the seller was at fault in selling goods which
were not of satisfactory quality; the seller may have taken all reasonable steps to
ensure that the goods were of satisfactory quality but he will still be in breach of
contract if they are not of such quality.
It is, however, important to note that contractual liability is not always strict. A
contractual term may impose a duty to take reasonable care, in which case a breach
can only be established where it is proved that the party alleged to be in breach has
failed to exercise reasonable care. An example in this category is provided by section
13 of the Supply of Goods and Services Act 1982 which provides that a person who
supplies a service in the course of a business impliedly undertakes to ‘carry out the
service with reasonable care and skill’.
The consequences of breach
A breach of contract does not automatically bring a contract to an end (Decro-Wall
International SA v Practitioners in Marketing Ltd [1971] 1 WLR 361; Geys v Société
Générale, London Branch [2012] UKSC 62; [2013] 1 AC 513). Rather, a breach of
contract gives various options to the party who is not in breach (‘the innocent party’).
The extent of these options depends upon the seriousness of the breach. Even the
most serious breach, such as a fundamental breach (see Section 11.7), does not, of
itself, terminate or discharge the contract (Photo Production Ltd v Securicor
Transport Ltd [1980] AC 827). However, in the case where the breach renders further
performance of the contract impossible or something radically different from that
which was in the contemplation of the parties at the time of entry into the contract, it
would appear that the innocent party cannot affirm the contract (given that
performance can no longer take place in accordance with the terms of the contract)
and must instead recognise that the contract has come to an end and seek a remedy in
damages for the loss that has been suffered as a result of the breach (MSC
Mediterranean Shipping Co SA v Cottonex Anstalt [2016] EWCA Civ 789; [2016] 2
Lloyd’s Rep 494, [43] and [61]).
The consequences of a breach of contract depend upon the facts of each individual
case, but three principal consequences of a breach of contract can be identified. The
first is that the innocent party is entitled to recover damages in respect of the loss
which he has suffered as a result of the breach. The second is that the party in breach
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20.5
20.6
may be unable to sue to enforce the innocent party’s obligations under the contract.
The third consequence is that the breach may entitle the innocent party to terminate
further performance of the contract. We shall now deal with these consequences
individually.
Damages
Every breach of a valid and enforceable contract gives to the innocent party a right to
recover damages in respect of the loss suffered as a result of the breach, unless the
liability for breach has been effectively excluded by an appropriately drafted
exclusion clause. An action for damages lies whether the term which is broken is a
condition, a warranty or an innominate term (see further Chapter 10). The basis upon
which the courts assess the damages payable will be discussed in Chapter 21.
Enforcement by the party in breach
The second consequence of a breach of contract is that the party who is in breach may
be unable to enforce the contract against the innocent party. Where the obligations of
the parties are independent, that is to say, the obligation of one party to perform is not
dependent upon performance by the other party, then breach by one party does not
entitle the innocent party to abandon performance of his obligations under the
contract. For example, a landlord’s covenant to repair the premises and a tenant’s
covenant to pay rent are independent obligations so that a landlord is not entitled to
refuse to repair the premises because the tenant has failed to pay his rent (Taylor v
Webb [1937] 2 KB 370). But, where the obligations of the parties are dependent, then
a contracting party must generally be ready and willing to perform his obligations
under the contract before he can maintain an action against the other party for breach
of contract. Obligations created by a contract are generally interpreted as dependent
obligations (see, for example, s 28 of the Sale of Goods Act 1979 which provides
that, unless otherwise agreed, delivery of the goods and payment of the price are
concurrent conditions, so that a seller must be ready and willing to give possession of
the goods to the buyer in exchange for the price and the buyer must be ready and
willing to pay the price in exchange for possession of the goods).
The right to terminate performance of the contract
A breach of contract may entitle the innocent party to take the further step of
terminating performance of the contract. Here it is necessary to recount a little of the
material which we discussed in Chapter 10. It will be remembered that contractual
terms can be classified as conditions, warranties or innominate terms. Breach of a
warranty does not give the innocent party a right to terminate performance of the
contract; it only enables him to claim damages. But breach of a condition does give
the innocent party the additional right to terminate performance of the contract, as
does the breach of an innominate term, where the consequences of the breach are
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sufficiently serious (see Section 10.5). A breach of contract which gives to the other
party the right to terminate performance of the contract is often referred to as a
‘repudiatory breach’.
It should be noted that I have used the rather clumsy expression ‘right to terminate
performance of the contract’. Contract scholars and judges have disagreed as to the
correct ‘title’ to be given to this right of the innocent party. Some scholars call this
right a ‘right to rescind’. This terminology is acceptable, if dangerous. The danger
lies in the fact that it tends to create confusion between ‘rescission for breach’ and
‘rescission
for
misrepresentation’.
Where
a
contract
is
rescinded
for
misrepresentation, it is set aside for all purposes. The contract is set aside both
retrospectively and prospectively and the aim is to restore the parties, as far as
possible, to the position which they were in before they entered into the contract (see
Section 13.8). But a contract which is ‘rescinded’ for breach is set aside
prospectively, but not retrospectively (Johnson v Agnew [1980] AC 367 and Photo
Production Ltd v Securicor Transport Ltd [1980] AC 827). Provided this fundamental
distinction is grasped, no substantial objection can be raised to the use of the term
‘right to rescind for breach’. That said, it is preferable to avoid any confusion by
referring to the right of the innocent party as a right to terminate further performance
rather than a right to rescind. We must now turn to give further consideration to the
consequences of the rule that breach operates prospectively but not retrospectively.
The prospective nature of breach
The point that breach operates prospectively but not retrospectively is an important
one. It is for this reason that I have termed the right of the innocent party a right to
‘terminate performance of the contract’ and not a right to terminate the contract. It is
the obligations of the parties to perform their future primary contractual duties which
are terminated. The contract is not set aside ab initio and so a contract term which is
intended to regulate the consequences of breach or the termination must be taken into
consideration by the court (Heyman v Darwins Ltd [1942] AC 356). The prospective
nature of a breach of contract becomes clearer if we adopt the language of primary
and secondary obligations. A primary obligation is an obligation to perform contained
in the contract itself, whereas a secondary obligation is one which is triggered by a
breach of a primary obligation.
The modern source of this distinction between primary and secondary obligations
is the judgment of Lord Diplock in Photo Production Ltd v Securicor Transport Ltd
(above). Lord Diplock stated that ‘breaches of primary obligations give rise to
substituted secondary obligations’. There are two principal types of secondary
obligation. The first is a ‘general secondary obligation’. In such a case the primary
obligations of both parties, in so far as they have not yet been fully performed, remain
unchanged, but the breach gives rise to a secondary obligation, imposed upon the
party in breach, ‘to pay monetary compensation to the [innocent] party for the loss
sustained by him in consequence of the breach’. Such a general secondary obligation
arises on the breach of a warranty; the primary obligations of the parties in so far as
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they have not been fully performed remain unchanged and a secondary obligation to
pay damages for the loss suffered as a result of the breach is created.
But, where the breach of a primary obligation entitles the innocent party to elect to
terminate performance of the contract, and he does so elect, all primary obligations of
both parties remaining unperformed are put to an end and:
there is substituted by implication of law for the primary obligations of the party in default
which remain unperformed a secondary obligation to pay monetary compensation to the
other party for the loss sustained by him in consequence of their non-performance.
This obligation Lord Diplock called an ‘anticipatory secondary obligation’. The
crucial feature of an ‘anticipatory’ secondary obligation is that it enables damages to
be assessed by reference to those obligations which would have fallen due for
performance at some time in the future (see Section 22.3). Although the judgment of
Lord Diplock is not entirely clear on this point, it is suggested that he intended that an
anticipatory secondary obligation should arise in every case of termination following
upon a breach of a condition (an interpretation which is supported by the approach of
the Court of Appeal in Lombard North Central plc v Butterworth [1987] QB 527,
discussed in Sections 10.3 and 22.3). English law does not generally distinguish
between a condition which is created by the general law and a condition which has
been expressly agreed by the parties (that is to say, it would not otherwise have
constituted a condition). The reason why parties choose to elevate a term to the status
of a condition is to emphasise the importance of the term and to give to the innocent
party not only the right to terminate performance in the event of breach, but also the
right to claim loss of bargain damages (see Opeskin, 1990).
The distinction between primary and secondary obligations is a useful one in that it
helps us to see why there is no inconsistency between electing to terminate
performance of the contract and, at the same time, claiming damages for the breach
which gave rise to the right to terminate performance. Rather, the exercise of the right
to terminate performance of the contract simply discharges the primary obligations of
both parties for the future and imposes on the party in breach, by way of substitution,
an anticipatory secondary obligation to pay damages to the innocent party.