breach of contract

A party to a contract is entitled to perfect performance of the terms of the contract. Where performance is not in accordance with the contractual terms, the party failing to perform will be in breach of the contract. The innocent party's rights which arise as a result of the breach of contract depending on whether the breach was of a warranty or a condition of the contract.

A breach of a condition of the contract entitles a party to terminate it, provided it has not made an election, waived its rights or other compromised its position before giving notice. Whether or not breach of a term or terms of the contract depends upon the relative importance of the term. A breach of a condition of a contract is known as a repudiatory breach.

The most common forms of breaches of contract are:

1. non-performance of a term;
2. delayed performance; and
3. defective performance of an obligation.

Breaches result in loss of any of money, property or services which is compensated by damages.

Breach of Conditions and Warranties

Where the defaulting party has breached a warranty, innocent party is entitled to claim damages against the defaulting party for a breach of warranty, but is not entitled to terminate the contract. If the defaulting party has breached a condition of the contract, the innocent party is entitled to terminate the contract by notifying the defaulting party.

In many cases, the innocent party may not wish to terminate, and rather elect to continue (or 'affirm') the contract by not accepting the repudiatory breach. If the breach is not accepted, the innocent party cannot then go on and change its mind at a later date, unless the defaulting party commits another repudiatory breach. If the innocent party does nothing, having regard for the terms of contract, there may come a time when the law deems the innocent party to have affirmed the contract.

When considering the respective parties' rights in respect to breach of contract, complexities often arise. Whether to not a party is entitled to terminate may depend upon whether:

1. the contract is an entire contract or divisible;
2. the proper construction of the contract and the facts of the case are also highly material to the right to terminate.
3. whether the application of these general principles such as these may be displaced by statute.
   An example of this arises from the operation of the Sales of Goods Act.
   When a buyer has accepted goods subject to a condition, and the goods are not supplied in accordance with the condition, the buyer may not reject the goods and terminate the contract unless an express or implied term applies to the contract.

Consequences of Termination

When a contract is terminated, the parties no longer have any obligation or right to perform the contract, and both are excused from further performance of the contract. Accordingly, assuming a supplier continues to supply goods after the contract has been terminated, the buyer is not required to accept them (if the buyer does, the goods would be accepted under a fresh contract of indeterminate terms).

After termination, the obligation of the defaulting party to perform the contract is replaced by the obligation to pay monetary compensation in the form of damages which has been caused by its failure to perform the contract to the innocent party, or an account of profits to the innocent party.

This is what the innocent party sues for. The innocent party is entitled to chose whether to claim damages or an account of profits as the measure compensation to be paid. There may be cases where a contracting party does not wish to terminate, but rather apply for specific performance of the contract.

The legal rights of the parties which existed prior to termination continue to exist where they were acquired unconditionally.

For example, where a buyer has paid for goods, but the contract was terminated prior to delivery through no fault of its own, the buyer is entitled to recover the sums paid over (such as prepayment or a deposit), as it has not received anything in return, subject to the operation of the Sales of Goods Act - there would have been a total failure of consideration on the part of the supplier.

In respect to supply of services, if party has performed its part of the bargain and performed the services, and the contract is terminated before the time for payment, that party as the innocent party would be likely to be entitled to recover a fair price for the services performed subject to any set-off or counterclaim for defective performance.

Repudiatory Breach of Contract

In order to be a breach of a condition, the term must go to the root of the contract, affect the very substance of the contract, or frustrate the commercial purpose of the contract. If the term is not a condition of the contract, it will be a warranty unless the 'term' is unenforceable because it lacks contractual meaning. A frequently adopted test is that from Hongkong Fir Shipping Co Ltd v Kawasaki Kisen Kasisha Ltd. In that case Diplock LJ said:

Does the occurrence of the event deprive the party who has further undertakings to perform substantially the whole benefit which it was the intention of the parties as expressed in the contract that he should obtain as the consideration for performing those undertakings.

When deciding whether or not a contract has been breached and whether it is entitled to terminate, the innocent party would do well to:

1. ascertain the precise term or terms of the contract which the defaulting party has not complied with;
2. where there has been breach of a term or terms, identify when, where and how the defaulting party was in breach in each case.

Anticipatory Breach

A breach may also take place before the time for performance has arrived, and is referred to as an anticipatory breach of contract.