Substantial, Material and Fundamental Breaches of Contract

In business contracts, a breach of the obligations imposed by the contract must be in respect to a condition of the contract (as opposed to a warranty) to permit the innocent party to terminate the contract. The right to terminate allows the innocent party to not only end the contract, but sue for damages for the breach. 

Breaches of this kind and of this seriousness are repudiatory breaches of contract, however the agreement itself may refer to 'material', 'substantial', or 'fundamental' breach in the termination clauses.

Conditions of Contract

In Bettini v Gye, Mr Justice Blackburn ruled that in the absence of an express intention of the parties, the test to ascertain whether a term of a contract was a condition of it where “whether the particular stipulation goes to the root of the matter, so that the failure to perform it would render performance of the rest of the contract a thing different in substance from what the defendant has stipulated for”.

A frequently adopted test is that from Hongkong Fir Shipping Co Ltd v Kawasaki Kisen Kasisha Ltd. In that case Diplock LJ stated:

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.

Peregine Systems Limited v Steria Limited concerned the interpretation of a clause that allowed the innocent party to terminate the contract in the event of breach of any term of the contract. Mr Justice Seymour ruled that although the contract stated that the innocent party may terminate for ‘any breach’ the court would require that a repudiatory breach was required prior to the right to terminate arising in the innocent party. There is authority to say that a material breach of contract does not equate to the seriousness of a repudiatory breach; it is nevertheless a breach of a term that would have serious consequences for the innocent party.

Material Breaches

‘Material’ is used in the context of breaches of contract in English law as a reference to a repudiatory breach of contract: Suisse Atlanique Societe d’Armement Maritime SA v NV Rotterdamsche Kolen Centrale, unless the contract expresses a different intention. Simply because contracts contain termination clauses that define the bases upon which a party may terminate a contract (such as for “material breach” or “substantial breach”) does not prevent a party terminating a contract under the general law.

Fundamental

The term ‘fundamental breach’ or breach of a ‘fundamental term’ may used in a contract, and is construed as a reference to a repudiatory breach of contract: Suisse Atlanique Societe d’Armement Maritime SA v NV Rotterdamsche Kolen Centrale, unless the contract expresses a different intention.

The surrounding circumstances will be of assistance in determining this question of construction of the contract, and how the term in question affects the substance and foundation of the transaction that the contract is intended to carry out – that is, whether breach is a breach of a material term. In essence, the breach must go to the effect root of the contract, or at least affect the very substance of the contract, or frustrate the commercial purpose of the venture.