C. The Rise and Fall of Fundamental Breach in English Law

AuthorJohn D. McCamus
ProfessionProfessor of Law. Osgoode Hall Law School, York University
Pages754-764

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The doctrine of fundamental breach, in its initial formulation, held that where a breach of contract constituted a radical or fundamental departure from the obligations set out in the contract, an exculpatory clause that would otherwise have insulated the party in breach from liability would not have that effect. An influential articulation of the doctrine by its leading proponent, Lord Denning, is found in Karsales (Harrow) Ltd. v. Wallis.10The defendant had agreed to purchase a secondhand automobile from a dealer on financing arranged through the plaintiff hire-purchase company. The plaintiff let out the car to the defendant on hire-purchase terms that included an exclusion of liability with respect to any defects in the car. When the defendant had initially inspected the car, it was in excellent condition. Upon delivery, however, it was in a deplorable state, having been substantially damaged by interven-

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ing events of some kind. The defendant refused to take delivery of the car and, in due course, was sued by the plaintiff finance company for non-payment of monthly hire-purchase charges. The Court of Appeal dismissed the claim. The hire-purchase contract contained an implied term that the car would be maintained in suitable condition pending delivery, a term that had obviously been breached. The exculpatory clause was unavailing, it was said, as a result of recent developments in the law. Lord Denning observed as follows:

The law about exempting clauses, however, has been much developed in recent years, at any rate about printed exempting clauses, which so often pass unread. Notwithstanding earlier cases which might suggest the contrary, it is now settled that exempting clauses of this kind no matter how widely they are expressed, only avail the party when he is carrying out his contract in its essential respects. ... They do not avail him when he is guilty of a breach which goes to the root of the contract.11Lord Denning further observed that the principle can be expressed as being applicable where a supplier provides something "different in kind" from that contracted for or has breached a "fundamental term" or a "fundamental contractual obligation."12All of these expressions were comprehended in his view, "by the general principle that a breach which goes to the root of the contract disentitles the party from relying on the exempting clause."13Support for this approach could be found in the context of a sale of goods contract where the goods delivered are "different in kind" from those contracted for,14in the bailment context where the bailee hands over the goods to someone other than the bail-or,15and in the context of carriage of goods where the carrier undertakes a substantial deviation from the agreed route.16In such settings, courts had held that the exculpatory clause in the agreement could

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not insulate the party in breach from liability for failing to perform such essential obligations. As envisaged by Lord Denning, the doctrine did not rest on construction of the particular clause or the agreement more generally. The doctrine applied as a "rule of law." The effect of the doctrine, it should be noted, was not to render the exculpatory clause generally unenforceable. Rather, the clause was inapplicable, as a matter of law, to the fundamental breach of contract.

The doctrine of fundamental breach was applied with some enthusiasm by English courts, especially in the context of consumer transactions.17The House of Lords had an opportunity to consider the soundness of the doctrine, however, in Suisse Atlantique Société d’Armement Maritime S.A. v. N.V. Rotterdamsche Kolen Centrale,18a commercial case involving the application of a demurrage clause in a charter party. The plaintiff had chartered a vessel from the defendant for the purpose of carrying shipments of coal across the Atlantic for a period of two years. The plaintiff claimed that as a result of the defendant’s failure to load and unload the vessel in timely fashion, it had been denied six additional voyages that should have been performed within the two-year period. The plaintiff claimed for the profits lost as a result of this breach of contract. The defendant relied on the demurrage clause, which stipulated that the defendant would only be obliged to pay one thousand dollars per day in the event of delay and that the plaintiff was therefore limited in its claim to this amount for each day of delay beyond that required for timely performance of its obligations. On the assumption that a demurrage clause can be characterized as an exculpatory clause,19the plaintiff invoked the doctrine of fundamental breach and urged that the claim could succeed, notwithstanding the apparent limitation on liability contained in the clause. The House of Lords rejected the rule of law approach of the Karsales case and held that the correct view was that the application of an exceptions clause to circumstances of fundamental breach was a matter to be determined on the basis of the true construction of the agreement. Lord Wilberforce did suggest that the rule of law approach might apply in a marginal case where the clause appears to "have so wide an ambit as in effect to deprive one party’s stipulations of all contractual force."20To construe the clause as having this effect

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would "reduce the contract to a mere declaration of intent"21and a court would not give the clause that effect. Apart from such cases, however, the construction approach would apply.

Viscount Dilhorne and Lord Hodson straightforwardly rejected the rule of law approach and asserted that the question of the applicability of the exceptions clause to a particular breach of contract was a straightforward matter of construction. The views expressed by Lords Reid and Upjohn were, however, more complex. Indeed, it may be said that both fell into error in confusing the doctrine of fundamental breach as it applies to exceptions clauses and the doctrine of repudiatory breach entitling the innocent party to disaffirm the contract.22As a result, both concluded that where the innocent party disaffirmed the contract, the contract came to an end and accordingly, in their view, the exceptions clause was no longer of any force and effect. Lord Reid reasoned as follows:

General use of the term "fundamental breach" is of recent origin and I can find nothing to indicate that it means either more or less than the well known type of breach which entitles the innocent party to treat it as repudiatory and to rescind the contract. ... If fundamental breach is established, the next question is what effect, if any, that has on the applicability of other terms of the contract. This question has often arisen with clauses excluding liability, in whole or in part, of the party in breach. I do not think that there is generally much difficulty where the innocent party has elected to treat the breach as a repudiation, bring the contract to an end and sue for damages. Then the whole contract has ceased to exist including the exclusion clause, and I do not see how that clause can then be used to exclude an action for loss which will be suffered by the innocent party after it has ceased to exist, such as loss of the profit which would have accrued if the contract had run its full term.23If, on the other hand, the innocent party affirms the contract, the contract remains in full force and effect and, in Lord Reid’s view, the exceptions clause is applicable, though subject to proper and narrow construction of its terms.

Similarly, Lord Upjohn explained the consequences of disaffirmation of the agreement for breach in the following terms: "[T]he principle upon which one party to a contract cannot rely on the clauses of

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exception or limitation of liability inserted for his sole protection, is ... if there is a fundamental breach accepted by the innocent party the contract is at an end; the guilty party cannot rely on any special terms in the contract."24This reasoning leads to the unsatisfactory conclusion that although the contract remains enforceable after disaffirmation, the exceptions clause is not enforceable. Accordingly, the effect of this analysis, whether intended or not, is to dramatically enhance the "rule of law" approach and apply it to every case in which a contract is disaffirmed for breach. Given that a repudiatory breach may be less severe than a "fundamental breach" in the Karsales sense, it follows that in the context of disaffirmation, exclusion clauses would be inoperative, as a matter of law, in a broader range of situations than those envisaged in the original Karsales doctrine. Indeed, a few years later, in Harbutt’s "Plasticine" Ltd. v. Wayne Tank & Pump Co. Ltd.,25Lord Denning seized upon this aspect of the reasoning of Lords Reid and Upjohn as...

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