Breach of Contract and Substantial Performance

Discuss about the Report for Legal Opinion on Contractual Obligations.

In common law, each party to a contract must precisely perform their contractual obligations.[1] The implication of this requirement is that if either of the contracting parties fails to meet their contractual obligations, that failure would be regarded as a breach of contract. As a consequence, the victim party can raise a claim of damages against the defaulting party. Nevertheless, as a starting point, it is important to note that for a party to make a claim against the other party for breach of contract, it must at least demonstrate that it has performed a substantial portion of its obligations.[2] For instance in the English contract law case of Sumpter v Hedges[3], a builder performed a piece of work that was valued at £333 but never completed the contract. In its decision, the Court of Appeal held that even though the builder had done some work so far as the construction was concerned, he was not entitled to recover any money on the building he had constructed even though the buyer of the land subsequently used the existing foundation to complete the work. Accordingly, the rule developed by the Court in this monumental case law offers a significant remedy to an individual or land customer who engages in the construction of a home. In another English contract law case, Bolton v Mahadeva,[4] the claimant installed a heating system in the defendant’s home. The defendant and the claimant had both agreed that the cost for the said installation was £560. However, after the installation of the system was complete, the defendant was dissatisfied with the claimant’s work and refused to pay for the services. Ideally, the defect in the claimant’s work was valued at £174. Nonetheless, the claimant was not successful in enforcing the payment because the Court held that his performance was not substantial.

Incidentally, where it is demonstrated that an obligation in a contract has been performed substantially, the whole sum must be paid, only the subtracting the amount to reflect the subject breach.[5] For example in Hoenig v Isaacs,[6] the claimant agreed to furnish and decorate the defendant’s home for a total of £750 that was payable in two installments and the balance once the claimant completed the furnishing and the decoration. The claimant completed the agreed work but the defendant refused the final installment in full arguing that some of the claimant’s work was not satisfactory. The cost of the furniture’s defect was £56. Accordingly, the Court of Appeal held that the claimant had performed a substantial part of the agreed contract and thus, was entitled to be paid the full amount of the agreed price less the cost of the furniture’s defects. The Court’s ratio decidendi was that if the obligations in a contract are construed as comprising of an “entire obligation”, then its performance can be viewed to be a condition precedent to performance from the victim party, thereby allowing such party to make a claim for breach of contract. Subsequently, in a simple case that involves breach of a contract, the general rule is that the performance that is outstanding to the aggrieved party is often the compensation of the agreed some of money or provable debt. In such a circumstance, Section 49 of the Sale of Goods Act 1979 allows for an instant action for the price of services or goods, implying that the court has put in place appropriate procedural rules that facilitate the quick determination of cases involving the sale of goods and services.

Types of Breach of Contract

In both principle and practice, conditions and terms are an integral part of any enforceable contract.[7] The significance of these contractual elements is attributed to the fact that they provide a basis for the performance of the obligations by either party to a contract. Thus, this means that in case a party to a contract breaks any condition or term provided in the contract, there is breach of contract. Hence, the breaking of a term or condition of a contract by either of the parties may result in a fundamental, minor, anticipatory, or minor breach of the contract. A minor breach of a contract can be, for instance, a builder who substitutes their individual type of construction materials for particular materials. Although the substituted construction materials may work in the same manner as the specified ones, the substitution can still be viewed as a minor contractual breach. On the other hand, a material breach to a contract is described as one that contains serious impacts on the overall outcome of the contract. Incidentally, a fundamental breach is one that is extremely serious to the point that the subject contract has to be terminated. Conversely, an anticipatory breach is one in which a party to a contract makes it known to the other party that they are not going to perform their obligations and as a consequence, the contract may be terminated and the aggrieved party may seek damages in court.   

Essentially, the terms in a contract may be express or implied.[8] Accordingly, express terms are those that parties to a contract have set out in their agreement. In most instances, business transactions may involve the parties to a contract recording what they have agreed, and hence, the recordings become the express terms of their contractual relationships. The recording may be done in a single document or more than one document. Moreover, the parties may choose to incorporate these express terms by reference into the contract, for example where a contract is made based on the standard terms that have been drawn and adopted by a particular trading association. On the other hand, the parties to a contract may decide to incorporate the express terms by making reference to other documents, for example the master contract may contain the layout of the major underlying terms upon which the parties are dealing, while particular terms such as price are contained in the individual contracts for each of the specified trade.[9] Overall, the incorporation of the terms without express references relies on the parties’ intention, determined in consistent with the agreement’s objective test. Fundamentally, one important aspect in contract law is that express terms must be interpreted from an objective perspective as opposed to the objective viewpoint. Therefore, unless the words used in a contract yield an ambiguous meaning to a reasonable person, they should be interpreted in reference to their implication in ordinary usage. In other words, contractual terms must be interpreted against the “factual matrix.”

Express and Implied Terms in Contracts

Incidentally, implied terms in a contract are those that are not explicit in the contract, but instead, are implicit from the conduct of the parties, by custom usage, or as a result of an operating law.[10] Therefore, in a nutshell, terms may either be implied in fact, in law and by statute, or by usage or custom.[11] The terms that are implied by fact are those that the parties have not expressly provided in the contract but must have intended to include them in the contract. The terms implied in fact are those that are not expressly set out in the contract, but which the parties must have intended to include. To determine whether a contractual term is implied, the common law courts have often adopted two tests: the “officious bystander” test and the “business efficacy.” the “officious bystander” test involves the determination as to whether a term of a contract is obvious and would have sufficed had an officious bystander asked the contracting parties during the formation of the contract if they deemed fit to include the term. In contrast, the “business efficacy,” test is used in determining if the contract would have been enforceable without the term. On the other hand, the terms implied in law and by statute are those arising by operation of law. For example, under sections 12-15 of the Sale of Goods Act 1979, several important terms are said to be implied into contracts involving the sale of goods. Subsequently, the evidence of a custom is admissible to be an implied term. However, it is important to observe that such evidence of custom should not contradict a written document.  

Overall, under Common Law, remoteness refers to a set of rules in a contract, which incidentally restrict the amount of compensation to be paid for a particular wrong.[12] On the other hand, causation is the direct link between a claimant’s damage and loss and the defendant’s negligence.[13] Overall, the rules of causation and remoteness under Common Law focus on promoting fairness when it comes to the payments of damages by a defendant. Accordingly, based on the preceding discussion, and also in reference to the case scenario involving A Ltd and B Ltd, it is clear that A Ltd was not in breach of its contract with B Ltd because it had performed a substantial part of its obligation. In the case scenario, A Ltd promised to deliver B Ltd with five hundred crates of tomatoes of  “Grade A” and ‘of “French origin,” whereas  B Ltd promised to  pay A Ltd £50,000 for this consignment. However, on arrival at the Port of London, B Ltd discovered that 10% of the tomatoes delivered by A Ltd in the consignment was from Holland and that a further 10% Grade B type.

Remoteness and Causation

Therefore, it is implied that in this delivered consignment, 90% of the supplied tomatoes tomatoes were of “Grade A” type. Moreover, 90% of the supplied tomatoes were of “French origin.” Clearly, by any standard, a significant part of the A Ltd’s consignment satisfied the express contractual obligation that it was to supply B Ltd with tomatoes of “Grade A” and ‘of “French origin,”. Hence, on the basis of the Court’s ratio decidendi in Hoenig v Isaacs, A Ltd had performed a substantial part of the agreed contract and thus, was entitled to be paid the full amount by B Ltd of the agreed price less the cost of the tomatoes that failed to meet the specified requirement. Ideally, A Ltd’s breach of contract is minor in nature and more importantly, the its entitlement to be paid full the full amount by B Ltd of the agreed price less the cost of the tomatoes that failed to meet the specified requirement in the contract appreciates the rules of causation and remoteness in contract law. Incidentally, even if the contract between A Ltd and B Ltd contained a clause in which A Ltd accepts no liability for breach of any term of the contract, express or implied; the legal positions on the subject parties would remain the same. The rationale for this assertion is that such a clause is considered to be an unfair term and therefore, voidable in nature. The existence of such a clause would make the contact nugatory because A Ltd would not have any obligation under the contract.

Anson W and others, Anson’s Law Of Contract (Clarendon Press 2016)

Atiyah P, Smith S and Atiyah P, Atiyah’s Introduction To The Law Of Contract (Clarendon Press 2005)

Beale H and Tallon D, Contract Law (Hart Pub 2002)

Bellia A, ‘Promises, Trust, and Contract Law’ (2002) 47 The American Journal of Jurisprudence

Benson P, The Theory Of Contract Law (Cambridge University Press 2001)

Dobbs D and Dobbs D, Law Of Remedies (West Pub Co 1993)

Forray V, ‘Property Structures Underlying Contract’ (2013) 9 European Review of Contract Law

Furmston M, Cheshire G and Fifoot C, Cheshire, Fifoot And Furmston’s Law Of Contract (Oxford University Press 2007)

Hogg M, ‘Duties Of Care, Causation, And The Implications Of Chester V Afshar’ (2005) 9 Edinburgh Law Review

Jerrold L, ‘Understanding Foreseeability And Causation’ (2006) 130 American Journal of Orthodontics and Dentofacial Orthopedics

Marchetti C, ‘Ignoring The Parties’ Silence: The Controversial Borders Of Implied Terms’ (2012) 12 Global Jurist

Middlemiss S, ‘The Psychological Contract And Implied Contractual Terms’ (2011) 53 International Journal of Law and Management

Murphy E and Speidel R, Studies In Contract Law (Foundation Press 1970)

CASES

Bolton v Mahadeva [1972] 2 All ER 1322

Hoenig v Isaacs [1952] 2 All ER 176

Sumpter v Hedges (1898) 1 QB 673

STATUTES

Sale of Goods Act 1979

[1] P. S Atiyah, Stephen A Smith and P. S Atiyah, Atiyah’s Introduction To The Law Of Contract (Clarendon Press 2005).

[2] William Reynell Anson and others, Anson’s Law Of Contract (Clarendon Press 2016). See also A. J. Bellia, ‘Promises, Trust, And Contract Law’ (2002) 47 The American Journal of Jurisprudence.

[3] [1898] 1 QB 673.

[4] [1972] 2 All ER 1322.

[5] H. G Beale and Denis Tallon, Contract Law (Hart Pub 2002)

[6] [1952] 2 All ER 176

[7] Peter Benson, The Theory Of Contract Law (Cambridge University Press 2001). See also Peter A Alces, A Theory Of Contract Law (Oxford University Press 2011). See also Vincent Forray, ‘Property Structures Underlying Contract’ (2013) 9 European Review of Contract Law.

[8] M. P Furmston, G. C Cheshire and C. H. S Fifoot, Cheshire, Fifoot And Furmston’s Law Of Contract (Oxford University Press 2007).

[9] Edward J Murphy and Richard E Speidel, Studies In Contract Law (Foundation Press 1970).

[10] Sam Middlemiss, ‘The Psychological Contract And Implied Contractual Terms’ (2011) 53 International Journal of Law and Management.

[11] Carlo Marchetti, ‘Ignoring The Parties’ Silence: The Controversial Borders Of Implied Terms’ (2012) 12 Global Jurist.

[12] Dan B Dobbs and Dan B Dobbs, Law Of Remedies (West Pub Co 1993).

[13] Laurance Jerrold, ‘Understanding Foreseeability And Causation’ (2006) 130 American Journal of Orthodontics and Dentofacial Orthopedics. See also Martin Hogg, ‘Duties Of Care, Causation, And The Implications Of Chester V Afshar’ (2005) 9 Edinburgh Law Review.