FUNDAMENTAL BREACH OF CONTRACT The traditional principle was created by Lord Denning: “However extensive an exemption clause might be, it could not exclude liability in respect of the breach of a fundamental term or of a fundamental breach”. Fundamental breach treated as a rule of law and applied irrespective of the parties’ intention Lord Denning in Karsales (Harrow) Ltd. v. Wallis [1956] 1 W.L.R. 936 (C.A.). “Fundamental breach puts an end to the contract” If there was a fundamental breach the exclusion clause could have no application because the innocent party would have the right to repudiate the whole of the contract due to the fact that he had not received what he bargained for. Harbutt’s Plasticine Ltd. v Wayne Tank & Pump Co. Ltd. [1970] 1 Q.B. 447 (C.A.).

Modern approach: Fundamental breach is a matter of construction based on the intention of the contracting parties. It is open to interpretation whether where there had been a fundamental breach such that the exemption clause is inapplicable. U.G.S. Finance Ltd. v. National Mortgage Bank of Greece, [1964] 1 Lloyd’s Rep. 446 “there was no rule restricting the general principle of English law that parties are free to contract as they may see fit”) Suisse Atlantique v. N.V. Rotterdamsche Kolen Centrale [1967] 1 A.C. 361(Lord Reid) In 1977 the Unfair Contract Terms Act was enacted in the UK to deal with the doctrine of fundamental breach. The act invalidates certain kinds of exemption clauses in consumer transactions and subjects other exemption clauses to a requirement of reasonableness.

Modern approach (continued): Lord Wilberforce reaffirmed the principle that in the absence of an inequality of bargaining power, the parties are entitled to contract as they see fit. The task of the courts is to give effect to their agreements. Photo Production Ltd. v. Securicor Transport Ltd. [1980] 3 W.L.R. 163 Photo Production is a leading case which confirms that the term "fundamental breach" should only be used to describe breaches for which the innocent party is entitled under the contract to elect to put an end to all primary obligations of both parties remaining unperformed. This overrules Harbutt’s Plasticine Ltd. v Wayne Tank & Pump Co. Ltd

Photo Productions v. Securicor Ltd. [1980] All E.R. 556 The question of whether an exclusion clause applied when there was a fundamental breach of contract turned on the construction of the whole contract. The parties are free to modify, limit or reject by express works the content of their obligation Although Securicor was in breach of an implied obligation to perform the service with proper regard for the safety and security of the plaintiff's premises, the exclusion clause was clear and unambiguous and protected them from liability A fundamental breach occurs where the event resulting from the failure by one party to perform a primary obligation has the effect of depriving the other party of substantially the whole benefit of the contract. “Condition” in the nomenclature of the SGA: A breach of condition occurs where the contracting parties have agreed, whether by express words or by implication of law, that any failure by one party to perform a particular primary obligation irrespective of the gravity of the event that has in fact resulted from the breach, shall entitle the other party to put an end to all primary obligations of both parties remaining unperformed.

Lord Wilberforce in Photo Productions v. Securicor Ltd. [1980] All E.R. 556 The question whether, and to what extent, an exclusion clause is to be applied to a fundamental breach, or a breach of a fundamental term, or indeed to any breach of contract, is a matter of construction of the contract The rule of law approach of Lord Denning is based on faulty reasoning The courts should allow the parties to make their own bargain. The 1977 Unfair Contract Term Act made judicial intervention in this area obsolete (even though fundamental breach has served a useful purpose)

Lord Diplock in Photo Productions v. Securicor Ltd. [1980] All E. R An exclusion clause is one which excludes or modifies an obligation, whether primary, general secondary or anticipatory secondary, that would otherwise arise under the contract by implication of law Primary obligations are those contained in the contract Secondary obligations are those which arise automatically by law when a contract is breached For a breach of a contract which is not serious the outstanding primary obligations remain to be performed. The innocent party must continue to perform. There is a general secondary obligation on the breaching party to pay damages for the breach For a serious breach where repudiation is elected by the innocent party the outstanding primary obligations are all treated as being substituted for an anticipatory secondary obligation to pay damages for all the obligations that would have fallen due in the future (so the innocent party is relieved of future performance)

Conclusions regarding breach of contract If a contract is breached it is not automatically discharged even if the breach is fundamental. If the breach is fundamental the innocent party has the right to elect: Whether to affirm the contract (i.e. continue their performance) and claim damages, or To repudiate the contract (i.e. treat their future obligation to perform as discharged) and claim damages The consequences of a breach are thus prospective.

Hunter Engineering Co. v. Syncrude Canada Ltd. Supreme Court of Canada (1989) 57 D.L.R. (4th) 321 Wilson J.: The exclusion clause cannot be considered in isolation from the other provisions of the contract and the circumstances in which it was entered into. Exclusion clauses do not automatically lose their validity in the event of a fundamental breach by virtue of some hard and fast rule of law. They should be given their natural and true construction so that the meaning and effect of the exclusion clause which the parties agreed to at the time the contract was entered into is fully understood and appreciated. Even if the breach of contract was a fundamental one, there would be nothing unfair or unreasonable (and even less so unconscionable, if this is a stricter test) in giving effect to the exclusion clause. The contract was made between two companies who are of roughly equal bargaining power … both familiar and experienced with this type of contract

Hunter Engineering Co. v. Syncrude Canada Ltd. Supreme Court of Canada (1898) 57 D.L.R. (4th) 321 Dickson C.J.C: I am inclined to adopt the course chartered by the House of Lords in Photo Production Ltd. v. Securicor Transport and to treat fundamental breach as a matter of contract construction. The court should not disturb the bargain the parties have struck, and I am inclined to replace the doctrine of fundamental breach with a rule that holds the parties to the terms of their agreement, provided the agreement is not unconscionable. Only where the contract is unconscionable, as might arise from situations of unequal bargaining power between the parties, should the courts interfere with agreements the parties have freely concluded. Both Allis-Chalmers and Syncrude are large and commercially sophisticated companies…both parties knew or should have known what they were doing and what they had bargained for when they entered into the contract

IMPLIED TERMS TEST (FRIDMAN) Impact of exclusionary clauses in the context of implied statutory warranty: The implied conditions set out in the SGA apply (except where the proviso to that subsection operates). Where the buyer, expressly or by implication, makes known to the seller the particular purpose for which the goods are required so as to show that the buyer relies on the seller’s skills or judgment, then the goods shall be fit for purpose. Relevant factors: The course of the seller’s business The knowledge on the part the seller of the purpose of the goods Reliance on the seller’s skill or judgment Dickson C.J. application of the test: The design and manufacture of the gearboxes was in the course of Hunter U.S. business activities. Hunter U.S. new the purpose for which the gearboxes were being purchased. Syncrude, through its agent relied upon the skill and judgment of Hunter U.S. Dickson C.J conclusion: The gearboxes were not reasonably fit for the purpose for which they were required Hunter U.S. is in breach of the implied condition in s.15 (1) SGA (Ontario)