9. DISCHARGE BY BREACH
1. INTRODUCTION
v A breach of contract always entitles the innocent party to claim damages but never automatically brings a contract
to an end. This will be determined by whether
the term broken is a condition, warranty or
innominate term.
v If a breach is sufficiently serious, the innocent
party has a right to cancel, or terminate, the
contract and refuse performance but he need
not exercise that right
Ø The innocent party has a choice, or
“election”. He can choose either to carry on
with the contract – “affirm” it, or be relieved
from further performance – “terminate” it.
Ø If the innocent party accepts the
repudiatory breach, his decision is
revocable. The contract is terminated and
cannot be re-created.
Ø If, however, the choice is to affirm the
contract, the position is less clear cut.
v The expression “termination by breach” is,
therefore, misleading in that it is not the breach
which discharges the contract but the
acceptance of the breach by the innocent party
and the exercise of his right to terminate.
Failure to performance in accordance with the terms of the contract is a breach unless there is some lawful excuse (the
most important such excuse is frustration). Breach may be “actual” or “anticipatory”.
Actual Breach: Where there is a failure to perform properly, or at all, on the date fixed for performance.
Anticipatory Breach: Where, before the required time of performance, one party clearly intimates by words or
conduct that he will not perform the contract or otherwise disables himself from performing
the contract.
v Whether it be actual or anticipatory, only a serious breach entitles the other party to terminate and in both cases
the contract only comes to an end if the innocent party exercises his right to terminate it
v If the innocent party elects to treat the contract as discharged, he must make his decision known to the party in
default.
v There is no formal procedure for doing so, whether the innocent party has clearly accepted the other party’s breach
is a matter of fact; everything depends on the circumstances of individual case and the mere refusal to carry on may,
or may not be enough.
Vital SA v Norelf Ltd (the “Santa Clara”) (1996)
Facts The plaintiffs sent a telex attempting to cancel a contract which the court held amounted to an anticipatory
repudiation. The defendants then took no further steps to perform.
Held The House of Lords held that this was capable of amounting to acceptance of repudiation.
Reason The mere inaction of the defendants could amount to unequivocal notification. Here an arbitrator had
found, as a fact, that repudiation had been accepted. The House of Lords held that, unless this was clearly
wrong, his finding should be upheld. There was no need for a particular form of acceptance of repudiation
but the language or conduct used had to be “clear and unequivocal”.
Chloe T 49
, Quote Lord Steyn: “a failure to perform may sometimes be given a colour by special circumstances and may only
be explicable by a reasonable person in the position of the repudiating party as an election to accept the
repudiation.”
2. ACTUAL BREACH
Actual breach is failure to perform properly, or at all, on the date fixed for performance. The consequences of breach
depend on whether the term broken is determined to be a condition, a warranty or an innominate term
2.1 BREACH OF CONDITION
Breach of a serious term, a “condition”, gives the innocent party the right to terminate the contract. However, the use of
the word “condition” by the parties is not conclusive and the courts will look behind the actual “label” used to find the
intention of the parties and, thereby, ascertain the status of the term concerned. (Schuler AG v Wickman Machine Tools
Sales (1973))
2.1.1 “TIME IS OF THE ESSENCE”
v Union Eagle Ltd v Golden Achievement Ltd (1997): Where a term states the serious consequences if breached, the
term will be treated as a condition.
Ø The plaintiff was 10 minutes lates in completing and the defendant forfeited the deposit. The contract stated
that “time was of the essence”
v Where a contract states that “time is of the essence” – take note!
Ø Lombard North Central v Butterworth: the defendant leased a computer from the plaintiff. The contract stated
that time was “of the essence” for the payment of installments and that failure to pay on time would entitle the
plaintiff to terminate the agreement. The defendant made several late payments and the plaintiff terminated
and sought damages for breach. The defendants argued that the effects of the breach here were not serious but
the English Court of Appeal stated that the payment clauses here were clearly conditions, in the strict sense and
clearly gave the plaintiff the right to terminate for breach.
2.2 BREACH OF WARRANTY
Breach of a lesser term, a “warranty”, does not give the other party the right to terminate but merely the right to seek
damages.
2.3 BREACH OF AN INNOMINATE OR INTERMEDIATE TERM
Where a term cannot be classified as either a condition or a warranty everything depends on the effect of the breach. If
the effect is serious the innocent party has a right to terminate; if not, the innocent party has a right only to seek damages.
The genesis of the innominate term is the Hong Kong Fir case.
Hong Kong Fir Shipping Ltd v Kisen Kaisha Ltd (1962)
Facts Ship owners let the vessel, Hong Kong Fir, to charterers for a period of 24 months. Clause 1 of the contract
obliged the owners to deliver a “seaworthy” vessel and Clause 3 further obliged them to maintain the
vessel’s seaworthiness and good condition. Upon initial delivery, the vessel’s machinery was described to
be in ‘reasonably good condition’, yet required constant maintenance due to its age. The vessel owner’s
chief engineer was inefficient and incompetent, and the vessel suffered numerous breakdowns and delays.
The charterer’s repudiated the contract, alleging a breach of the obligations to deliver and maintain a
seaworthy vessel.
Issue The questions arose as to (1) Whether the seaworthiness obligation constituted a ‘condition’ of the contract,
the breach of which entitles the party to repudiate; and (2) whether the breach caused delays of a sufficient
degree so as to entitle the chartered to treat the contract as repudiated.
Held 1) The Court held that in order to construe whether a contractual clause constitutes a condition precedent,
Reason the breach of which permits repudiation, or an innominate term, the breach of which permits damages,
depends on a holistic assessment of the contract’s surrounding circumstances in determining the
intention of the parties on their treatment of the clause. On the facts, the Court held that the
seaworthiness and maintenance clause was not viewed as so fundamental so as to amount to a
condition of the contract, but rather constitutes a term of allowing damages.
Chloe T 50
1. INTRODUCTION
v A breach of contract always entitles the innocent party to claim damages but never automatically brings a contract
to an end. This will be determined by whether
the term broken is a condition, warranty or
innominate term.
v If a breach is sufficiently serious, the innocent
party has a right to cancel, or terminate, the
contract and refuse performance but he need
not exercise that right
Ø The innocent party has a choice, or
“election”. He can choose either to carry on
with the contract – “affirm” it, or be relieved
from further performance – “terminate” it.
Ø If the innocent party accepts the
repudiatory breach, his decision is
revocable. The contract is terminated and
cannot be re-created.
Ø If, however, the choice is to affirm the
contract, the position is less clear cut.
v The expression “termination by breach” is,
therefore, misleading in that it is not the breach
which discharges the contract but the
acceptance of the breach by the innocent party
and the exercise of his right to terminate.
Failure to performance in accordance with the terms of the contract is a breach unless there is some lawful excuse (the
most important such excuse is frustration). Breach may be “actual” or “anticipatory”.
Actual Breach: Where there is a failure to perform properly, or at all, on the date fixed for performance.
Anticipatory Breach: Where, before the required time of performance, one party clearly intimates by words or
conduct that he will not perform the contract or otherwise disables himself from performing
the contract.
v Whether it be actual or anticipatory, only a serious breach entitles the other party to terminate and in both cases
the contract only comes to an end if the innocent party exercises his right to terminate it
v If the innocent party elects to treat the contract as discharged, he must make his decision known to the party in
default.
v There is no formal procedure for doing so, whether the innocent party has clearly accepted the other party’s breach
is a matter of fact; everything depends on the circumstances of individual case and the mere refusal to carry on may,
or may not be enough.
Vital SA v Norelf Ltd (the “Santa Clara”) (1996)
Facts The plaintiffs sent a telex attempting to cancel a contract which the court held amounted to an anticipatory
repudiation. The defendants then took no further steps to perform.
Held The House of Lords held that this was capable of amounting to acceptance of repudiation.
Reason The mere inaction of the defendants could amount to unequivocal notification. Here an arbitrator had
found, as a fact, that repudiation had been accepted. The House of Lords held that, unless this was clearly
wrong, his finding should be upheld. There was no need for a particular form of acceptance of repudiation
but the language or conduct used had to be “clear and unequivocal”.
Chloe T 49
, Quote Lord Steyn: “a failure to perform may sometimes be given a colour by special circumstances and may only
be explicable by a reasonable person in the position of the repudiating party as an election to accept the
repudiation.”
2. ACTUAL BREACH
Actual breach is failure to perform properly, or at all, on the date fixed for performance. The consequences of breach
depend on whether the term broken is determined to be a condition, a warranty or an innominate term
2.1 BREACH OF CONDITION
Breach of a serious term, a “condition”, gives the innocent party the right to terminate the contract. However, the use of
the word “condition” by the parties is not conclusive and the courts will look behind the actual “label” used to find the
intention of the parties and, thereby, ascertain the status of the term concerned. (Schuler AG v Wickman Machine Tools
Sales (1973))
2.1.1 “TIME IS OF THE ESSENCE”
v Union Eagle Ltd v Golden Achievement Ltd (1997): Where a term states the serious consequences if breached, the
term will be treated as a condition.
Ø The plaintiff was 10 minutes lates in completing and the defendant forfeited the deposit. The contract stated
that “time was of the essence”
v Where a contract states that “time is of the essence” – take note!
Ø Lombard North Central v Butterworth: the defendant leased a computer from the plaintiff. The contract stated
that time was “of the essence” for the payment of installments and that failure to pay on time would entitle the
plaintiff to terminate the agreement. The defendant made several late payments and the plaintiff terminated
and sought damages for breach. The defendants argued that the effects of the breach here were not serious but
the English Court of Appeal stated that the payment clauses here were clearly conditions, in the strict sense and
clearly gave the plaintiff the right to terminate for breach.
2.2 BREACH OF WARRANTY
Breach of a lesser term, a “warranty”, does not give the other party the right to terminate but merely the right to seek
damages.
2.3 BREACH OF AN INNOMINATE OR INTERMEDIATE TERM
Where a term cannot be classified as either a condition or a warranty everything depends on the effect of the breach. If
the effect is serious the innocent party has a right to terminate; if not, the innocent party has a right only to seek damages.
The genesis of the innominate term is the Hong Kong Fir case.
Hong Kong Fir Shipping Ltd v Kisen Kaisha Ltd (1962)
Facts Ship owners let the vessel, Hong Kong Fir, to charterers for a period of 24 months. Clause 1 of the contract
obliged the owners to deliver a “seaworthy” vessel and Clause 3 further obliged them to maintain the
vessel’s seaworthiness and good condition. Upon initial delivery, the vessel’s machinery was described to
be in ‘reasonably good condition’, yet required constant maintenance due to its age. The vessel owner’s
chief engineer was inefficient and incompetent, and the vessel suffered numerous breakdowns and delays.
The charterer’s repudiated the contract, alleging a breach of the obligations to deliver and maintain a
seaworthy vessel.
Issue The questions arose as to (1) Whether the seaworthiness obligation constituted a ‘condition’ of the contract,
the breach of which entitles the party to repudiate; and (2) whether the breach caused delays of a sufficient
degree so as to entitle the chartered to treat the contract as repudiated.
Held 1) The Court held that in order to construe whether a contractual clause constitutes a condition precedent,
Reason the breach of which permits repudiation, or an innominate term, the breach of which permits damages,
depends on a holistic assessment of the contract’s surrounding circumstances in determining the
intention of the parties on their treatment of the clause. On the facts, the Court held that the
seaworthiness and maintenance clause was not viewed as so fundamental so as to amount to a
condition of the contract, but rather constitutes a term of allowing damages.
Chloe T 50
