Breach of contract is a legal cause of action and a type of civil wrong, in which a binding agreement or bargained-for exchange is not honored by one or more of the parties to the contract by non-performance or interference with the other party's performance. Breach occurs when a party to a contract fails to fulfill its obligation(s), whether partially or wholly, as described in the contract, or communicates an intent to fail the obligation or otherwise appears not to be able to perform its obligation under the contract. Where there is breach of contract, the resulting damages have to be paid to the aggrieved party by the party breaching the contract.
If a contract is rescinded, parties are legally allowed to undo the work unless doing so would directly charge the other party at that exact time.
What constitutes a breach of contract
There exists two elementary forms of breach of contract.
The first is actual failure to perform the contract as and when specified constitutes the first and most obvious type of breach. A contract lays down what must be done, what cannot be done, and when it must be done. If what was prescribed has not been done within the stipulated or reasonable period, there has been a breach of contract.
A further form of breach of contract is conduct indicating an unwillingness or inability to perform an obligation arising from that contract.
As noted by Seddon et al, these forms of breach of contract overlap, and an actual failure to perform may manifest an unwillingness or inability to perform. This is not always the case: an individual may fail to perform a contractual obligation even when willing or able.
These classifications describe only how a contract can be breached, not how serious the breach is. A judge will make a decision on whether a contract was breached based on the claims of both parties.
The first type above is an actual breach of contract.
The two other types are breaches as to the future performance of the contract and are technically known as renunciatory breaches. The defaulting party renunciates the contract in advance of when it is required to performs its obligations. Renunciatory breach is more commonly known as "anticipatory breach."
Classifications of breaches of contract
The general law has three categories of breaches of contract, which measure of the seriousness of the breach.
In the absence of a contractual or statutory provision, any breach of contract is categorized:
- breach of warranty;
- breach of condition; or
- breach of an innominate term, otherwise known as an intermediate term.
There is no "internal rating system" within each of these categories (such as "a serious breach of warranty"). Any breach of contract is of a breach of warranty, condition or innominate term.
In terms of priority of classification of these terms, a term of a contract is an innominate term unless it is clear that it is intended to be a condition or a warranty.
Case law
<span lang="en">English</span>
New Zealand
- Clasper v Lawrence [1990] 3 NZLR 231
- J & B Caldwell Ltd v Logan House Retirement Home Ltd [1999] 2 NZLR 99
- Jack v Guy [2004]
- Schmidt v Holland [1982] 2 NZLR 406
- Soccer Nelson Inc v Soccer NZ Inc [1997]
- Walsh v Kerr [1989] 1 NZLR 490
- Woods v N J Ellingham & Co Ltd [1977] 1 NZLR 218
Rights to damages for breach
Any breach of contract (warranty, condition or innominate term) gives rise to a right in the hands of the innocent party to recover their damage suffered which caused by the breach of contract by the defaulting party. Damages in the UK are the only remedy available for breach of a warranty. Those damages can come in different forms such as an award of monetary damages, liquidation damages, specific performances, rescission, and restitution.
Damages are classified as being compensatory or punitive. Compensatory damages are rewarded in an attempt to make place the innocent party in the position that would have been occupied "but for" the breach. Those damages are most often awarded as payments. Punitive damages are given to "punish or make an example of a wrongdoer who has acted willfully, maliciously or fraudulently". Punitive damages are awarded only in extreme cases and usually along with compensatory damages.
Damages for disappointment
Damages for distress or disappointment are not generally allowed by the courts, but cases where the award of such damages has been considered and agreed include Jarvis v Swans Tours Ltd (1972) and Farley v Skinner (2001).
Right to terminate for breach
A right to terminate a contract arises for:
- breach of a condition of the contract, no matter how trivial the breach of the condition may be;
- repudiatory breach, that is an actual breach of an innominate term, where the consequence of the breach is sufficiently serious to give rise to a right to terminate; or
- renunciatory breach (aka anticipatory breach), where the other party makes clear to the innocent party that it:
- is not going to perform the contract at all, or
- is going to commit a breach of a condition, or
- is going to commit a breach of an innominate term,
:: and the consequences will be such as to entitle the innocent party to treat the contract as at an end.
An innocent party is therefore entitled to elect to terminate a contract only for breach of a condition of the contract, repudiatory breach or renunciatory breach.
To terminate a contract for repudiatory breach, the innocent party must tell the defaulting party. Many commercial contracts include clauses that set out a process whereby notice must be given and in what form. Consequently, if there is a written contract, care should be taken to check the contract terms and to ensure compliance notwithstanding that the other party may, on the face of it, have committed a clear and repudiatory breach. It is only when the defaulting party is told that a repudiatory breach has been "accepted" that the contract is terminated. If the defaulting party is not told the repudiatory breach has been accepted, the contract continues in force. An innocent party is not compelled to exercise its right to terminate, and accept a repudiatory breach. Otherwise, the contract continues in force.
Repudiatory breaches
Conduct is repudiatory if it deprives the innocent party of substantially the whole of the benefit intended to be received as consideration for performance of its future obligations under the contract. Different forms of words are used by courts to express this central concept. The most prominent is whether the breach goes to the root of the contract. Those forms of words are simply different ways of expressing the "substantially the whole benefit" test.
Sometimes the innocent party may be deprived of its entitlement to damages for repudiatory breach of contract:
- if the innocent party is irremediably disabled from performance, provided that that inability to perform on the part of the innocent party is not itself attributable to the repudiatory breach;
- if the innocent party has a settled intention not to perform.
Renunciatory breaches
Conduct is renunciatory if it shows an intention to commit a repudiatory breach. The conduct would lead a reasonable person to conclude that the party does not intend to perform its future obligations when they fall due.
Showing an intention to perform a contract in a manner which is inconsistent with the terms of the contract also shows an intention not to perform the contract. Whether such conduct is so severe so as to amount to a renunciatory breached depends upon whether the threatened difference in performance is repudiatory. An intention to perform connotes a willingness to perform, but willingness in this context does not mean a desire to perform despite an inability to do so. To say "I would like to but I cannot" negatives intent just as much as "I will not".
In Rice (t/a The Garden Guardian) v Great Yarmouth Borough Council (2000), the UK Court of Appeal decided that a clause which provided that the contract could be terminated "if the contractor commits a breach of any of its obligations under the contract" should not be given its literal meaning: it was considered "contrary to business common sense" to allow any breach at all, however trivial, to create grounds for termination.
Material breach
A material breach has been held to mean "a breach of contract which is more than trivial, but need not be repudiatory" and confirmed as meaning "a breach which is substantial. The breach must be a serious matter, rather than a matter of little consequence." A breach of contract will likely constitute a material breach if the term of the contract which has been breached is a condition of the contract. A variety of tests may be applied to terms of contracts to decide whether a term is a warranty or a condition of the contract.
In respect to the EPC Agreements, material breach is defined as "shall mean a breach by either Party of any of its obligations under this Agreement which has or is likely to have a Material Adverse Effect on the Project and which such Party shall have failed to cure".
Other UK cases which relate to the concept of a material breach include:
- National Power plc v United Gas Company Ltd. (1998), where Colman J considered wording relating to "a material breach of any of [the guilty party's] obligations", allowing termination of the contract if remedy of such breach had not been commenced within seven days. The judge ruled that recognition that a material breach might be remedied distinguished the concept from a repudiatory breach, and there was no commercial sense in a clause restricting the common law rights of the innocent party, in relation to a repudiatory breach, and therefore "material breach" must refer to a form of breach which is not repudiatory. and that