FUNDAMENTAL BREACH OF CONTRACT: A POST-MORTEM

Benjamin James Dominikovich

A research paper presented in partial fulfilment of the requirements for Bachelor of Laws

(Honours) at the University of Auckland

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Table of contents

Title Page 2

Abstract of Research Paper 4

Acknowledgements 5

I. Introduction 6

II. The injustice of exception clauses 6

III. The doctrine: A rule of law 8

IV. The ancestors of fundamental breach 10

A. Deviation 10

B. Non-performance 12

V. So what was fundamental breach? 14

VI. Fundamental Terms 15

A. The dichotomy of terms 16

B. Something more fundamental than a condition 17

C. Defining the fundamental term 18

VII. Fundamental Breach 20

A. Discharge by breach 21

1. The election issue 22

2. The termination issue 22

3. From what point does termination operate? 22

B. Function of exception clauses 23

C. Deviation Distinguished 23

VIII. The First Fall of Fundamental Breach 24

IX. The Return of Fundamental Breach 26

X. Legislative Response 28

XI. The Superfluous Doctrine 29

XII. Is There Any Scope For Fundamental Breach To Be Argued? 30

A. New Zealand’s position 30

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B. Legislative developments 31

C. Canadian reserve 32

XIII. Conclusion 33

Appendix 1: Bibliography 34

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Abstract:

The University of Auckland Law School holds a proud history of scholarship with regards

to the doctrine of fundamental breach. Emeritus Professor Brian Coote’s critique of the

doctrine has been published widely and is considered seminal authority for its ultimate

demise.1 To the contrary, Professor Francis Dawson’s Law Quarterly Review thesis

promulgated the theory of interdependent promises in support of the doctrine.2 At the

height of debate as to the doctrine’s existence, the work of both Professors was recognised

in counsel’s argument before the House of Lords.3

To fast track three and a half decades is to recognise that the heat of this debate has

been and gone. In the words of the country’s leading text, “the doctrine can be consigned

to the archives of legal history.”4 However, the doctrine persists within our legal

vernacular. Within its reference, there is a lack of understanding as to what it entailed.

As a matter of legal history, there are many lessons to be adopted from the

development of the doctrine. Spanning a life of thirty years, the doctrine reflected the

development of contract law orthodoxy. It was adopted as a means of judicial discretion in

reaction to the unforgiving nature of exception clauses. The doctrine demonstrates

persistent misunderstanding of the operation of discharge by breach. Further it represents

the development of understanding as to the function of an exception clause. This article

desires to leave you with a greater appreciation of the mechanics underlying this means of

artificially bypassing an exception clause.

1 Brian Coote Exception Clauses (Sweet & Maxwell, London, 1964); Brian Coote, “The Rise and Fall of Fundamental Breach” (1967) 40 ALJ 336; Brian Coote, “The Effect of Discharge by Breach on Exception Clauses” (1970) 28 CLJ 221; Brian Coote, “Correspondence with Description in the Law of Sale of Goods” (1976) 50 ALJ 17. Brian Coote, “Discharge for breach and exception clauses since Harbutt’s ‘Plasticine’” (1977) 40 MLR 31; Brian Coote, “Unfair Contract Terms Act 1977” (1978) 41 MLR 312; and Brian Coote, “The Second Rise and Fall of Fundamental Breach” (1981) 55 ALJ 788. 2 Francis Dawson, “Fundamental Breach of Contract” (1975) 91 LQR 380. 3 Photo Production Ltd v Securicor Transport Ltd [1980] AC 827, [1980] 1 All ER 556. 4 John Burrows, Jeremy Finn and Stephen Todd Law of Contract in New Zealand (5th ed, LexisNexis NZ Ltd, Wellington, 2016) at 241.

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Acknowledgements

I dedicate my effort in completing this research paper to my Grandfather, Dennis

Dominikovich. Dennis passed away on 14 April 2016. He is loved and missed dearly. As

my father figure, my Grandfather repeatedly sacrificed for my education. The opportunities

I have held – among which include completing this research paper – may be directly linked

to my grandfather’s own work ethic and prioritising of the family unit.

I am privileged to have a family, in particular my Mother and Grandmother, that have

supported me throughout my time at law school. To them I am grateful.

I am blessed to have had the pleasure of learning from Mr Marcus Roberts throughout this

year. Having written this paper, I now hold a heightened appreciation when I read the

fluidity and ease with which his scholarly writing appears. Marcus, as far as teaching goes,

you strike the perfect balance between a friendly/outgoing disposition and professionalism.

Thank you.

To Professor Francis Dawson: your passion for the law of contract and legal reasoning is

infectious. The practical tips of ‘read every case three times’ and ‘you only learn from

engaging in case law’ remain with me. Thank you.

Having studied in a Law Faculty that I am extremely proud of, I have enjoyed the

opportunity to study among a smaller group of people. To my honours class: it has been a

pleasure.

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Fundamental Breach of Contract: A Post-Mortem Benjamin Dominikovich

I. Introduction

At one time it was thought there was a legal rule whereby no exclusion clause, no matter

how aptly worded, could protect a party for a “fundamental breach”.5 Fittingly named the

doctrine of fundamental breach, this rule was once described as “the most important

development in the modern law of contract”6 and “firmly entrenched”.7 However, today it

may be described as “dead”8 and “consigned to the archives of legal history”.9 This paper

will attempt to mend the gap between these two positions, methodically analysing the

doctrine’s introduction, development and subsequent demise. While serving a purpose in

overcoming the rigidity of exception clauses in standard form contracts, the doctrine never

held prior authority and was hopelessly ambiguous. The doctrine will be analysed in

accordance with the developing jurisprudence surrounding discharge for breach of

contract. This article will accordingly argue that the doctrine is today incapable of

successful argument in New Zealand courts.

II. The injustice of exception clauses

To walk in the shoes of a consumer prior to effective consumer legislation is to comprehend

the demand for the doctrine. The development of modern commerce in nineteenth and

twentieth centuries had necessitated a marked increase in the use of standard form

5 Laws of New Zealand Exclusion Clauses at [138]. 6 KW Wedderburn, “Contract—Exemption Clauses—Fundamental Breach—Main Objects of the Contract” [1957] CLJ 16 at 16. 7 Brian Coote, “The Rise and Fall of Fundamental Breach” (1967) 40 ALJ 336 at 336. 8 David G Pierce, “Contract: Of Cabbages and Fundamental Breach” (1982) 24 Mal LR 349 at 349. 9 John Burrows, Jeremy Finn and Stephen Todd Law of Contract in New Zealand (5th ed, LexisNexis NZ Ltd, Wellington, 2016) at 241.

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contracts.10 While such contracts held advantages for sophisticated commercial parties,

they held disadvantages unorganised consumers. Unlearned in the law, consumers may

sign the contract without appreciating its terms.11 If the commercial party had included an

exception clause, they may have purported to exempt themselves of all liability. As a

consequence of this power imbalance,12 freedom to contract through the standard form was

that of the commercial party only.13 Here lay a familiar tension between laissez-faire

philosophy, its underlying rationale of pacta sunt servanda, and consumer wellbeing.14

In the absence of statutory guidance, the court’s role was to construct the contract.15

The weight placed by this injustice was initially expressed through the method of

“regulatory” interpretation.16 Where the clause was ambiguous or capable of ambiguity,

the clause could be regulated through the exercise of interpretation.17 This may have

included application of rule of interpretation contra proferentem against the drafting

party.18 The court may otherwise have gone so far as to place an artificial misconstruction

of the clause in favour of consumer party.19 However, exclusion clauses of express terms

were legally permissible and the court could not expressly account for the injustice of the

behaviour.20

10 C Grunfeld “Reform in the Law of Contract” (1961) 24 MLR 62 at 64. 11 Alfred W Meyer (1964) 50 Va L Rev 1178 at 1179: otherwise refers to such contracts as ‘contracts of adhesion’: “[o]ne party ‘adheres’ to the terms prescribed by the other”. 12 C Grunfeld, above n 10, at 64. 13 C Grunfeld, above n 10, at 64. 14 LJ Montrose, “Some Problems About Fundamental Terms” [1964] CLJ 254 at 264. 15 C Grunfeld, above n 10, at 65. 16 Edwin Peel Treitel on the Law of Contract (13th ed, Sweet & Maxwell, London, 2011) at [7-023]; and Andrews Brothers (Bournemouth) Ltd v Singer Ltd [1934] 1 KB 17. 17 See Wallis v Pratt & Haynes [1910] 2 KB 1003 (CA). 18 In Alexander v Railway Executive [1951] 2 KB 882 at 893, Devlin J defines the rule of construction contra proferentem: “No principle is more firmly settled than that, when one is construing exceptions to the general liability… those exceptions are to be construed strictly, so that if a word is capable of bearing two meanings, the narrower meaning should be adopted.” 19 Alfred W Meyer, above n 11, at 1180; and in George Mitchell (Chesterhall) Ltd v Finney Lock Seeds Ltd [1983] QB 284 (CA) at 297, Lord Denning suggests that in the face of injustice, judges would place a “strained and unnatural construction” on exception clauses to achieve a just outcome. 20 In L’Estrange v F Graucob Ltd [1934] 2 KB 394, Miss L’Estrange contracted for a cigarette dispensing machine with Graucob Ltd. A wide exception clause in small print at

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III. The doctrine: a rule of law

Where methods of construction faltered, the doctrine of fundamental breach was employed

and served its greatest role.21 The background to which it was created meant it initially

received an enthusiastic welcome.22 As it first operated, the doctrine was a substantive rule

of law, overriding the operation of an exception clauses. In the words of Professor Guest:

“[a] party who has been guilty of a fundamental breach of contract cannot rely on an

exemption clause inserted in the contract to protect him.”23 It was this mandatory nature

that distinguished it from construction of the contract: it was not possible to contract out of

fundamental breach, no matter how aptly worded the exception clause.

The terminology of ‘fundamental breach’ and ‘fundamental terms’ was first

articulated in the maritime deviation case, Hain Steamship v Tate & Lyle.24 However, if we

are to demarcate a doctrinal birthdate, it was Mr Justice Devlin’s trilogy of cases that

conceived the terms as a substantive rule of law.25 In Alexander v Railway Executive26 and

Chandris v Isbrandtsen-Moller Co,27 the learned Justice referred back to the language in

Hain Steamship28 but continued to engage in construction of the exception clause itself.

The possibility of a more carefully drafted clause could have precluded the resulting

inapplicability of the exception clause. It was not until Smeaton Hanscomb that Devlin J

provided obiter remarks29 that a true fundamental breach could not be avoided by an

exclusion clause.30

the bottom of an order form was held effective in limiting liability when an inoperable machine was delivered. Maugham LJ opined: “I regret the decision to which I have come, but I am bound by legal rules and cannot decide the case on other considerations.” 21 AG Guest, “Fundamental Breach of Contract” (1961) 77 LQR 98 at 98. 22 Brian Coote Exception Clauses (Sweet & Maxwell, London, 1964) at 108. 23 AG Guest, above n 21, at 98. 24 [1936] 2 All ER 597 (HL) [Hain Steamship]. 25Alexander v Railway Executive, above n 18; Chandris v Isbrandtsen-Moller Co Inc [1951] 1 KB 240; and Smeaton Hanscomb & Co Ltd v Sassoon I Setty Son & Co (No 1) [1953] 1 WLR 1468 [Smeaton Hanscomb]. 26 At 890-893. 27 At 243-248. 28 Above n 24. 29 At 1470. 30 Alfred W Meyer, above n 11, at 1179.

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If Devlin J may be credited with having conceived the doctrine, it is Denning LJ

who must be credited with its development as substantive law. He first described this as a

‘proviso’ overriding construction in J Spurling v Bradshaw:31

“These exempting clauses are nowadays all held to be subject to the

overriding proviso that they only avail to exempt a party when he is carrying

out his contract, not when he is deviating from it or is guilty of a breach

which goes to the root of it. Just as a party who is guilty of a radical breach

is disentitled from insisting on the further performance by the other, so also

he is disentitled from relying on an exempting clause.”

In Karsales (Harrow) Ltd v Wallis, the Lord Justice went further, and issued a warning to

draftsmen, explaining:32

“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.”

He went on to provide the mechanics for bypassing the clause and imply the dominant

perspective of an exception clause’s function:33

“The thing to do is to look at the contract apart from the exempting clauses

and see what are the terms, express or implied, which impose an obligation

on the party. If he has been guilty of a breach of those obligations in a respect

which goes to the very root of the contract, he cannot rely on the exempting

clauses.”

31 [1956] 1 WLR 461 at 465. 32 [1956] 1 WLR 936 at 940-941. 33 At 940.

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IV. The ancestors of fundamental breach

In an attempt to justify the implementation of the doctrine, its architects sought to ground

it in past authority. This past authority may be simplified into two broad categories: (a)

deviation and (b) non-performance. However, the doctrine was of doubtful parentage:

neither line of cases supported the introduction of a rule of law that operated in spite of the

effective construction of an exception clause.34 Both instances of avoiding effective

construction may be explained by reference to construction of the contract. The doctrine

may thus, at best, be described as an extension and restatement of this prior law.35

A. Deviation

The origin of the doctrine is often said to lie in cases concerning deviation in charterparty

agreements.36 In contracts for carriage of goods by sea, an implied obligation rests on the

carrier to proceed by a usual and reasonable route without unjustifiable deviation.37 From

the moment the ship departs from the contract route, the carrier cannot rely on an

exceptions clause. Consequently, any loss incurred while deviating is entirely at the

carrier’s risk.38 From maritime deviation spawned deviation in carriage of goods by land39

and to bailment in general (‘quasi-deviation’). From deviation the analogy is close between

carrying goods on a route other than that specified and storing goods in a place40 or

34 Jerry Hubbard, “Deviation in contracts of sea carriage: after the demise of fundamental breach” (1986) 16 VUWLR 147; Brian Coote, “The Second Rise and Fall of Fundamental Breach” (1981) 55 ALJ 788 at 791. 35 Grunfeld, above n 10, at 72. 36 LW Melville, “The Core of a Contract” (1956) 19 MLR 26 at 32; JF Wilson, “Fundamental Breach: The Plot Thickens” (1971) 4 NZULR 254 at 254; and F Dawson, “Contract” [1991] NZ Recent Law Review 18 at 31. 37 Davis v Garrett (1830) 6 Bing 716 at 724, 130 ER 1456 at 1459; Bernard Eder and others Scrutton on Charterparties and Bills of Lading (22nd ed, Sweet & Maxwell and Thomson Reuters, London, 2011) at 265; AG Guest, above n 21, at 106. 38 Joseph Thorley Ltd v Orchis SS Co [1907] 1 KB 660 per Fletcher Moulton LJ at 669. 39 London & North Western Railway v Neilson [1922] 2 AC 263. 40 Lilley v Doubleday (1881) 7 QBD 510; and Davies v Collins [1945] 1 All ER 247.

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manner41 outside the prescribed mandate. Once the goods are held outside this mandate,

the protection of the exception clause ceases.

The underlying justification for this phenomenon may be explained according to

the four corners rule42 or the principle in Gibaud’s case:43

“The principle is well known, and perhaps Lilley v Doubleday44… is the best

illustration, that if you undertake to do a thing in a certain way, or to keep a

thing in a certain place, with certain conditions protecting it, and have

broken the contract by not doing the thing contracted for in the way

contracted for, or not keeping the article in the place in which you contracted

to keep it, you cannot rely on the conditions which were only intended to

protect you if you carried out the contract in the way in which you had

contracted to do it.”

A party may only rely on exception clauses while operating within the contractual purview

and not on some independent adventure.45 If we consider a contract according to its

metaphysical ‘four corners’, we envisage deviation and quasi deviation as adventures

outside the contract’s scope. However, this is not justification for a rule operating in spite

of the contract’s construction. The ‘four corners’ of the contract are to be ascertained by

reference to the terms of the contract itself.46 Consequently, the exceptions clause may

directly qualify the terms of bailment, e.g. by providing a ‘liberty clause’ to authorise

deviation or the option of sub-bailment to a third party.47

41 Alexander v Railway Executive, above n 18; and Spurling v Bradshaw, above n 31. 42 Alderslade v Hendon Laundry [1945] All ER 244 (CA) per Lord Green MR at 245: “A limitation clause of this kind only applies where the damage in respect of which the limitation clause is operative, takes place within the four corners of the contract. A contracting party who goes outside his contract cannot rely upon the clause if the loss occurs during operations outside the contract, as distinct from operations which the contract contemplates.” 43 [1921] 2 KB 426 per Scrutton LJ at 435. 44 Above n 40. 45 JF Wilson, above n 36, at 255. 46 C Grunfeld, above n 10, at 68. 47 Davies v Collins [1945] 1 All ER 247 at 249 and 251.

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However, where a liberty clause was provided, there were certain circumstances

where the court would refuse to apply it. Glynn v Margetson, a liberty clause provided a

ship with the ability to deviate from its route, carrying oranges from Malaga to Liverpool.48

When the consignment was delivered in a perished state, the House of Lords refused to

allow a construction of the liberty clause that would defeat the ‘main object’ of the

contract.49 Their Lordships held a construction where liberty to deviate was only

permissible where it did not defeat the delivery of oranges to Liverpool. It is submitted that

this is simply a manner of interpreting the clause; from the terms of the contract, the parties

could not have intended to reduce the contract to a mere declaration of intent.50

B. Non-performance

‘Non-performance’ entails the application of the principle in Gibaud’s case the sale of

goods context.51 Where goods contracted are distinct from goods delivered, the contract

has not been performed and the exception clause does not operate. Thus it may be said that

the vendor has not entered the periphery of contractual performance. Paradigm examples

of this include the instances when a vendor fails to provide good title to the goods sold52

or provided different goods to those contracted for.53 As long ago as 1838, Lord Abinger

articulated this in the often cited ‘peas and beans’ example:54

48 [1893] AC 351. 49 Per Lord Halsbury at 357: “Looking at the whole of the instrument, and seeing what one must regard… as its main purpose, one must reject words, indeed, whole provisions, if they are inconsistent with what one assumes to be the main purpose of the contract.” This was later applied as an example of fundamental breach in Sze Hai Tong Bank v Rambler Cycle Co [1959] AC 576. 50 AG Guest, above n 14, at 106; Jerry Hubbard, “Deviation in contracts of sea carriage: after the demise of fundamental breach” (1986) 16 VUWLR 147 at 155; PN Legh-Jones & MA Pickering, “Fundamental Breach” (1971) 87 LQR 515 at 530. 51 The underlying principle is referred to through a variety of terminology, including ‘supply of the wrong thing’, ‘the difference-in-kind doctrine’ and ‘total breach’ of contract. 52 Rowland v Divall [1923] 2 KB 500. 53 Chanter v Hopkins (1838) 4 M & W 399. 54 At 404.

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“If a man offers to buy peas of another, and he sends him beans, he does not

perform his contract. But that is not a warranty; there is no warranty that he

should sell him peas; the contract is to sell peas, and if he sends him anything

else in their stead, it is a non-performance of it.”

Difficulty arises in this line of cases when attempting to ascertain a clear boundary line

between defective performance and non-performance. The qualities of products at the time

of the doctrine’s creation were more sophisticated than ‘peas and beans’.55 Consequently,

courts held the discretion defining non-performance. The court may be willing to equate

grossly defective performance with non-performance. In Pinnock Brothers v Lewis & Peat

Ltd, where a delivery of ‘copra cake’56 included a mixture of castor beans so as to render

it poisonous to cattle, Roche J held: “the delivery in this case could not be properly

described as copra cake at all.”57 Further, in certain instances, the court may be willing to

construct an accumulation of defects as non performance. In W & S Pollock v Macrae, the

House of Lords found considerable defects in the manufacture of two boat engines: “Now,

when there is such a congeries of defects as to destroy the workable character of the

machine, I think this amounts to a total breach of contract.”58 Proponents of fundamental

breach later seized upon the uncertainty of this boundary line to create the doctrine.59

However, this rule, it will be later submitted, remains founded on construction.

55 C Grunfeld, above n 10, at 77. 56 Copra cake is the dried meat or kernel of coconut, often used to feed cattle. 57 [1923] 1 KB 690 at 697. 58 [1922] SC 192 (HL) at 200. 59 In Karsales (Harrow) Ltd, above n 32, at 870: Birkett LJ describes, “the thing delivered was not the thing contracted for,” while Parker LJ employed similar language, “the vehicle delivered is not properly described as a motor vehicle.” In Yeoman Credit Co Ltd v Apps [1962] 2 QB 508 Harmed LJ cited Pollock v Macrae when describing the case as one of fundamental breach.

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V. So, what was a fundamental breach?

In order to overcome the injustices of exception clauses in standard form contracts, the

courts had thus created a new rule of law – a piece of judicial legislation. The effect of this

was doubtless: the exception clause could not be relied upon in an instance of fundamental

breach. However, one is still left with a perplexed feeling as to how this was achieved: “so

what on earth is a fundamental breach?” This feeling is a result of a failure to provide an

adequate conceptual framework to identify the doctrine’s process.60 Regardless of the merit

in the doctrine’s outcome, this lack of “elegantia” rendered it “inadequate to comprehend

the complexities of actual situations.”61

The doctrine has been referred to in a wide variety of terms, examples of which

include: “fundamental breach of contract”,62 “fundamental breach which went to the root

of the contract”,63 “breach of a fundamental term”,64 “breach of a fundamental term which

is in the nature of a deviation”,65 “breach of a fundamental term akin to deviation”,66 “total

breach”,67 “the main object and intent of the contract”,68 “one of the prime obligations of

the contract”69 and a breach that “evinces a deliberate disregard of… bounden

obligations”.70 All of these terms were suggested to refer to the same principle. This

conceptual uncertainty leads the unsuspecting jurist into a rabbit warren of interconnected

but ambiguous legal reasoning. It is this illusion of reason that provided the opportunity

60 JL Montrose, above n 14, at 60. In Photo Production Ltd v Securicor [1980] 2 WLR 283 per Lord Wilberforce at 289: “a legal complex so uncertain as the doctrine of fundamental breach must be… [leads to] analysis, which becomes progressively more refined, of decisions in other cases leading to inevitable appeals”. 61 JL Montrose, above n 14, at 268. 62 Alexander v Railway Executive, above n 18, at 888-889. 63 Alexander v Railway Executive, above n 18, at 887; J Spurling v Bradshaw, at 465; and Karsales (Harrow) Ltd v Wallis at 940-941. 64 Alexander v Railway Executive, above n 18, at 888; Smeaton Hanscombe v Setty, above n 25, at 1470; Karsales v Wallis, above n 32, at 941. 65 Swan Hunter v France Fenwick Tyne [1953] 1 WLR 1026 [The Albion] at 1030-1032. 66 Spurling v Bradshaw, above n 31, at 469. 67 Yeoman Credit Co Ltd v Apps [1961] 2 All ER 281 per Harman LJ at 292. 68 Sze Hai Tong Bank v Rambler Cycle Co, above n 49, at 587. 69 Sze Hai Tong Bank v Rambler Cycle Co, above n 49, at 587. 70 Sze Hai Tong Bank v Rambler Cycle Co, above n 49, at 587.

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for judges to usurp their function of interpreting contracts in favour of achieving justice.71

Fundamental breach was a formulae of judicial discretion. The formulation of a rule with

no clear reasoning maximises the flexibility of the law.72

One consequence of this, was the later debate as to whether ‘fundamental terms’

were distinct from ‘fundamental breach’. Denning LJ suggests there is no distinction:

“these are all comprehended by the general principle that a breach which goes to the root

of the contract disentitles the party from relying on the exempting clause.”73 However, to

the contrary, Professor Montrose explains the difference, “[t]here may be a fundamental

breach though there is no breach of a fundamental term, and it may well be that a breach

of a fundamental term should be placed in a separate category from a fundamental

breach.”74 It is submitted that analysis is best served according to these two concepts and

parts VI and VII proceed accordingly. After all, discharge by breach may entail reference

to the term broken and the nature and effect of breach itself.

VI. Fundamental terms

The concept of a ‘fundamental term’ indicates the way in which the doctrine was

understood in the period from 1953 to 1966.75 Contract law orthodoxy held that repudiation

was assessed by reference to a condition in the contract. Consequently, Devlin J attempted

to create something more refined. A fundamental term is best understood as a term, the

breach of which would always be so serious that an exemption clause could not deny

liability.76 To interpret the exception clause as exempting liability for a fundamental term

would otherwise reduce the contract to a mere declaration of intent. All exception clauses

71 Alfred W Meyer, above n 11, at 1198-1199. 72 C Grunfeld, above n 10, at 74. 73 Karsales (Harrow) Ltd v Wallis, above n 35, at 941. 74 JL Montrose, above n 14, at 65. 75 Brian Coote, “Correspondence with Description in the Law of Sale of Goods” (1976) 50 ALJ 17 at 21. 76 In Karsales (Harrow) Ltd v Wallis, above n 35, per Parker LJ at 943: “However extensive the exclusion clause may be, it has no application if there has been a breach of a fundamental term.”

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would accordingly be considered conditional upon the fundamental term.77 This concept

held great appeal in the sense that to both create and destroy an obligation in the same

document is a contradiction in terms.78 This was particularly relevant in the sale of goods

and hire-purchase context, as judges attempted to provide a baseline quality for goods

sold.79 At the height of the concept, the stage was reached where a fundamental term could

be implied into the contract, despite express terms to the contrary.80

A. The dichotomy of terms

The Sale of Goods Act 1893 (UK) had provided a dichotomy of contractual terms into

conditions and warranties.81 A condition was defined as a stipulation “the breach of which

may give rise to a right to treat the contract as repudiated”,82 while a warranty was defined

as that “the breach of which may give rise to a claim for damages but not to a right to reject

the goods and treat the contract as repudiated.”83 Prior to Hong Kong Fir, this informed the

orthodox view that that discharge for breach was always evaluated by reference to breach

of a condition.84 As was stated that the beginning of the paper and perhaps the raison d'être

for the doctrine’s being: it was legally permissible for draftsmen to exclude conditions,

even those express.85

77 Lord Devlin, “The Treatment of Breach of Contract” [1966] CLJ 192 at 208. 78 Alfred W Meyer, above n 11, at 1198. 79 JL Montrose, above n 14, at 67. 80 In Yeoman Credit Ltd v Apps [1962] 2 QB 608 and Charterhouse Credit Co Ltd v Tolly [1963] 2 QB 683, the English Court of Appeal implied fit for purpose terms into hire purchase agreements for cars, despite wide exception clauses that no warranty was given. 81 JL Montrose, above n 14, at 75. 82 Section 11(1)(b). 83 Section 62(1). 84 Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1962] 2 QB 26 (CA) [Hong Kong Fir]. 85 L’Estrange v Graucob, above n 12.

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B. Something more fundamental than a condition

Devlin J sought to overcome this in Smeaton Hanscomb, providing that there are some

terms more fundamental than conditions, in a passage worthwhile repeating:86

“It is no doubt a principle of construction that exceptions are to be construed

as not being applicable for the protection of those for whose benefit they are

inserted if the beneficiary has committed a breach of a fundamental term of

the contract… I do not think that what is a fundamental term has ever been

closely defined. It must be something, I think, narrower than a condition of

the contract, for it would be limiting the exceptions too much to say that

they applied only to breaches of warranty. It is, I think, something which

underlies the whole contract so that if it is not complied with the

performance becomes something totally different from that which the

contract contemplates. If, for example, instead of delivering mahogany logs

the sellers delivered pine logs, and the buyers inadvertently omitted to have

them examined for fourteen days, it might well be that the sellers could not

rely on the time clause.”

The apparent logic of the learned Justice was that for this was that while exception clauses

applied to conditions, “fundamental terms” were not covered.87 By providing the

mahogany and pine log example, Devlin J was attempting to assimilate the previously

mentioned non-performance cases into the doctrine.88 It was posited that it was a

‘fundamental term’ to deliver goods of the ‘kind’ contracted for. Although defective

performance is not the same as ‘non-performance’, in the sense that it is not an independent

adventure, it was argued to amount to a constructive deviation.89

86 Above n 25, at 1470. 87 JL Montrose, above n 14, at 77. 88 In Smeaton Hanscomb v Sassoon I Setty, above n 25, at 1470 Devlin J refers to Pinnock Brothers v Lewis & Peat Ltd, above n 58, above as an example of fundamental breach. 89 JF Wilson, above n 36, at 255.

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However, it was widely viewed as difficult to imagine a term more fundamental

than a condition.90 The breach of a condition already entitled the injured party to repudiate

the contract. This view had been affirmed by the court. In Wallis v Pratt, Fletcher Moulton

LJ, whose judgment was adopted on appeal by the House of Lords, regarded a breach of a

condition as “a substantial failure to perform the contract” in one passage and as “total

failure” in another.91 This was widely considered as a finding that a condition was as

‘fundamental’ as any term could be92 or equating fundamental terms with conditions.93

Further, it is not clear that Lord Wright and Lord Maugham intended to distinguish

‘fundamental terms’ from ordinary conditions in Hain Steamship, from where the phrase

was initially derived.94

Even assuming that this difficulty could be overcome to create a new category of

contractual terms, grave theoretical concerns were held for the concept. Like the difficulty

in ascertaining the boundary between non-performance and defective performance, it was

difficult to precisely define the fundamental term. In the sale of goods context, greater

difficulty was created by s 13 of the Sale of Goods Act 1893 (UK), which limited the

‘description’ of goods to the status of condition of the contract. Commentators sought to

overcome this by distinguishing the ‘definition’ from the ‘description’, which could

accordingly become a ‘fundamental term’.95

C. Defining the fundamental term

Lord Denning had encouraged commentators to provide a formula by which goods could

be defined and the ‘fundamental term’ could be ascertained.96 Indeed, commentators had

90 FMB Reynolds, “Warranty, Condition and Fundamental Term” (1963) 79 LQR 534 at 541. 91 [1910] 2 KB 1003 (CA) at 1012. 92 LW Melville, above n 36, at 27. 93 FMB Reynolds, above n 90, at 541. 94 Above n 24, at 607-608 and 614. 95 LW Melville, above n 36, at 34. 96 AG Guest, above n 14, at 98: “In his address to the Society of Public Teachers of Law at their Meeting held in Oxford in September, 1959, Lord Denning called for a definitive formulation of the scope, limits and application of the new doctrine.”

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already begun attempting to attain such a mechanically applicable criteria. Mr Melville

attempted to define the “core” of a contract, “a central or main promise, which must be

performed”.97 While Professor Montrose suggested, “[o]ne must look to all the terms and

circumstances of a contract to discover what is the parties’ definition of the contract

goods.”98 But, with respect to the learned writers, it is submitted that both methods were

executed with reference to the construction of the contract. Consequently, neither rule lent

support to the doctrine of fundamental breach.

To adopt a generalised rule to determine when peas become beans or copra cake

becomes something else is otherwise dangerous. Mr Wedderburn (as he then was) explains:

“There is no ‘definite answer’ to the ‘question how many parts a thing can have or how

much it can change without altering its identity.’”99 Without the support of construction of

the contract, the outcome would become arbitrary.100 If a term was to be considered

fundamental in one situation then, it would be considered fundamental in all.101 The

consequence of this was that however trivial the consequences of a breach, the injured party

was entitled to all remedies. For example, roadworthiness became considered as a “core”

contractual element in the sale and purchase of vehicles. Under this principle, the provision

of an unroadworthy car costing a small amount to repair may be caught,102 while a

roadworthy car costing a large amount to be repaired might not.103 Further, determining

breach by reference to some core of the contract would present draftsmen the opportunity

to avoid liability by simply “shrinking the core of the contract to minute proportions.”104

Such an outcome would render the whole operation futile.

97 LW Melville, above n 36, at 37. 98 JL Montrose, above n 14, at 13. 99 KW Wedderburn, above n 6, at 18. 100 Brian Coote, “The First Rise and Fall of Fundamental Breach” (1967) 40 ALJ 336 at 338; and SJ Stoljar, “Conditions, Warranties and Descriptions of Quality in Sale of Goods” (1952) 15 MLR 425. 101 JF Wilson, above n 36, at 258. 102 In Unity Finance v Hammond [1953] 1 WLR 1468, a defect costing £14 to repair was characterised as a fundamental breach. 103 Astley Industrial Trust v Grimley [1963] 1 WLR 584 (CA). 104 KW Wedderburn, above n 6, at 20.

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VII. Fundamental breach

In the 1960s, there was a growing trend to analyse breach of contract according to the

nature of the breach as opposed to the term broken.105 The dichotomy of terms approach

was suggested to be confusing and misleading.106 Analysis according to the breach held

the merit of avoiding reference to the classification of terms and limited the remedy of

fundamental breach to instances that deserved it.

Fundamental breach posited the effect that upon sufficient breach, the exception

clause becomes a thing writ in water. The underlying logic for this was appealingly simple:

breach of a sufficient character destroys the contract; once the contract is destroyed, the

exceptions clauses are destroyed; and finally, as the exceptions clauses are destroyed, there

is nothing to limit or bar the injured party’s recovery.107 Devlin J alluded to in Alexander v

Railway Executive:108

“[W]here there has been a breach of a fundamental term of a contract giving

the other party the right to rescind it, then, unless and until, with full

knowledge of all the facts, he elects to affirm the contract and not to rescind

it, the special terms of the contract go and cannot be relied upon by the

defaulting party.”

The Justice outlined this principle with reference to Hain Steamship.109 Hain Steamship

provided the impetus for the later development of the doctrine because of its corruption of

the law surrounding discharge by breach. In an attempt to explain the phenomenon of

deviation, the House of Lords had assimilated it with the incidents of discharge by

breach.110 As has been explained, upon deviation in ocean carriage contracts, the carrier

105 Lord Devlin, “The Treatment of Breach of Contract” [1966] CLJ 192; and Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1962] 2 QB 26 per Diplock LJ [Hong Kong Fir]. 106 FMB Reynolds, above n 92, at 534. 107 Alexander v Railway Executive, above n 11, at 889-890. 108 Alexander v Railway Executive, above n 11, at 889-890. 109 Above n 20, at 889. 110 Per Lord Atkin at 601.

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loses the benefit of exception clauses. In order to achieve this assimilation, termination had

to be immediate from the point of deviation. However, on the facts, the charterer had

reacted to the deviation by affirming the contract and thus waiving the charterer’s breach.

Their Lordships accordingly made affirmation a key part of discharge by breach: if the

injured party treats the contract as ended, he is not bound by the exceptions clauses; on the

other hand, if the injured party affirms the contract, he is bound by the exceptions clause.111

A. Discharge by breach

In order to assess the merit of the decision in Hain Steamship, we must take a step back

and observe its repercussions for discharge by breach. Discharge by breach conceptualises

the situation whereby one party to a contract breaches and provides the other party with the

opportunity to end contractual performance. This area of the law, like fundamental breach,

has been the subject of conceptual and operational uncertainty.112 This section will assess

the central propositions of Hain Steamship according to Professor Coote’s theory of the

doctrine.

1. The election issue

The first issue is whether the contract is automatically discharged or is in the election of

the innocent party.113 In Hain Steamship, it was suggested that the injured party’s

acquiescence was enough to discharge the contract. The language of Devlin J in Alexander

Railway indicated that he supported this: “unless and until… he elects to affirm”.114 To add

further difficulty to this proposition, the English Court of Appeal later held that regardless

of an injured party having affirmed the contract, a hire purchase company in breach could

not rely on an otherwise applicable exception clause.115 There had, however, been strong

111 Per Lord Atkin at 601. 112 Brian Coote, “The Effect of Discharge by Breach on Exception Clauses” [1970] CLJ 221 at 222. 113 Brian Coote, above n 112, at 222. 114 Alexander v Railway Executive, above n 11, at 889-890. 115 [1963] 2 QB 683.

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suggestions that an election was required to end the contract.116 To do otherwise would

allow the wrongdoer to unilaterally terminate the contract. Further, it makes practical sense

to provide the injured party with the option.

2. The termination issue

To suggest that the contract terminated upon breach was an oversimplification.117 If that

was the case, the injured party would have nothing upon which they could sue for damages.

In Heyman v Darwins Ltd, Lord Porter outlined the operation of discharge by breach when

considering the continuing application of an arbitration clause:118

“Strictly speaking, to say that on acceptance of the renunciation of a contract

the contract is rescinded is incorrect. In such a case the injured party may

accept the renunciation as a breach going to the root of the whole of the

consideration. By that acceptance he is discharged from further performance

and may bring an action for damages, but the contract itself is not

rescinded.”

Professor Coote explains this in greater depth, suggesting that the contract is ‘truncated’ as

opposed to ‘terminated’: “[i]ts function is, notionally at least, to take the parties direct from

the point of termination to the point where completion is due.”119

3. From what point does termination operate?

Assuming that the contract does terminate, we must next consider from what point

termination is effective. Professor Coote outlines four options, including: (1) termination

from the moment the contract was entered into; (2) the moment of breach; (3) the moment

116 Heyman v Darwins [1942] AC 356 (HL); Mason v Clouet [1924] AC 980 (HL); and Thorpe v Fasey [1949] Ch 649. 117 Alfred W Meyer, above n 11, at 1197. 118 [1942] AC 356 per Lord Porter at 399. 119 Brian Coote, above n 112, at 226.

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of election; and (4) the moment of communicating the election.120 Further assuming that

an election is required, it must be retrospective to the point of breach to deprive the

wrongdoing party the benefit of an exception clause. However, this could not be correct as

there was widespread authority to suggest that an election was only prospective in effect.121

The exception clause would thus operate as at the point of termination and protect liability

of the wrongdoing party.

B. What is the function of an exception clause?

To overcome the prospective nature of discharge, the fundamental breach principle had to

rely on the premise that an exception clause was merely ‘procedural’.122 Denning LJ

affirms this in Karsales (Harrow) Ltd v Wallis when he suggested to look at the contract

aside from the exempting clauses when considering fundamental breach.123 Exempting

clauses then operate, if at all, as a defence to breaches of the obligation determined at point

of adjudication. However, Professor Coote proposed that a different approach was required

whereby exception clauses substantively delimited the rights themselves. On this basis

there could be no concept of breach defeating exception clauses as there was no breach of

obligation in the first place.124

2. Deviation distinguished

On the basis of the arguments mentioned above, deviation represents an exception to the

general rule that termination does not retrospectively deprive a party of the benefit of

exception clauses without the need for an election. One of the reasons that the development

fundamental breach was so remarkable was that just four months prior to Devlin J’s

120 Brian Coote, above n 112, at 227. 121 Brian Coote, above n 112, at 227; Yeoman Credit v Apps [1962] 2 QB 508 (CA); Hirji Mulji v Cheong Yue SS Co [1926] AC 497 at 510; and Heyman v Darwins [1942] AC 356. 122 Brian Coote, above n 25, 788 at 792. 123 Above n 22. 124 Brian Coote, above n 34, at 7-11.

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fundamental term pronouncement in Smeaton Hanscomb,125 the Court of Appeal had

confined the phraseology to bailment.126 Closer inspection indicates that this exception can

only apply to service relationships of certain kinds. In the bailment context, the fact of

‘deviation’ or ‘quasi deviation’ may precede the cause of action itself. Consequently, the

wrongdoing party is deprived of the exception clause prior to the cause of action. Professor

Coote suggests this accords with the nature of bailment itself:127

“When a bailee’s authority to hold the bailed goods has been limited in

particular ways and he then fails to observe those limitations, he ceases to

hold the goods within the ambit of the bailment and is reduced to the status

of mere detainor.”

Another explanation of this arises out of the nature of shipping contracts. Historically,

marine insurance was lost from point of deviation, and it was thus viewed as equitable that

the carrier should hold risk from that point.128 This would justify breach operating

retrospectively. Accordingly, Professor Coote argued that “deviation and quasi-deviation

are sui generis and to be kept distinct from discharge by breach.”129

VI. The first fall of fundamental breach

Absence of a clear previous judicial warrant and theoretical shortcomings created

considerable doubt as to the doctrine’s existence and feasibility.130 Pearson LJ131 and

125 Above n 24. 126 Above n 65 at 1030-1032. 127 Brian Coote, above n 112; Brian Coote, above n 15, at 789; and AG Guest, above n 14, at 103. 128 A/S Rendall v Arcos Ltd (1937) 43 Com Cas 1 per Lord Wright at 15. 129 Brian Coote, above n 112, at 240. 130 M Bridge (ed) Benjamin’s Sale of Goods (9th ed, Sweet & Maxwell, London, 2014) at [13-045]. 131 UGS Finance v National Mortgage Bank of Greece [1964] 1 Lloyds Rep 446 (CA) at 543.

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Diplock LJ132 were the first to dissent in England, while the High Court of Australia also

refused to apply the doctrine and reaffirmed principles of construction.133

The House of Lords heeded this sentiment in in Suisse Atlantique Société

d’Armement Maritime v NV Rotterdamsche Kolen Centrale, which was their first

opportunity to consider the doctrine.134 The case concerned a two-year consecutive voyage

charterparty. It was alleged that excessive delays beyond lay days amounted to a

fundamental breach and prevented the charterer from relying on the demurrage clause.

Refuting the doctrine of fundamental breach, their Lordships unanimously held that there

was no special rule of law applicable to exception clauses and the matter was one of the

true construction of the contract.135 Lord Wilberforce also appeared to acknowledge

Professor Coote’s suggestion that an exception clause substantively modified primary

obligations.136 Unfortunately, however, their Lordships were far from clear, leaving the

door ajar for the re-emergence of the doctrine.137 None of the earlier cases were overruled,

their Lordships preferring to explain them on the basis of construction. Thus the possibility

of a ‘rule of construction’ was still apparent. Further, there was no denial that there were

such things as “fundamental terms” or “fundamental breaches”. This gave grounds for

thinking that the phrases held continuing relevance. Most importantly, however, their

Lordships appeared to uphold the doctrine according to the conception in Hain

Steamship.138 In terms of the law of discharge by breach, a pivotal point of the case was

the vessel owner’s affirmation of the contract. Lord Reid and Lord Upjohn suggested that

if the injured party had treated the contract as repudiated by the breach, the whole contract

would have ceased to exist, including the exception clause.139

132 Hardwick Game Farm v Suffolk Agricultural and Poultry Producers’ Association [1966] 1 WLR 287. 133 Council of the City of Sydney v West (1965) 114 CLR 481 at 488. 134 [1967] 1 AC 361 [Suisse Atlantique]. 135 JF Wilson, above n 36, at 260; Brian Coote, above n 34, at 793. 136 At 431. 137 Jerry Hubbard, “Deviation in contracts of sea carriage: after the demise of fundamental breach” (1986) 16 VUWLR 147 at 152. 138 Above n 24. 139 Per Lord Reid at 398 and Lord Upjohn at 419 and 425.

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VII. The return of fundamental breach

In a series of judgments from the English Court of Appeal, the doctrine was reincarnated

as a rule of construction.140 The court’s willingness to continue applying the doctrine can

be regarded as a result of continuing disquiet at the unfair nature of exception clauses.

In Harbutt’s Plasticine,141 the English Court of Appeal seized upon the

shortcomings of the House of Lords in Suisse Atlantique.142 The effect of this case was to

make the election of the injured party the focal point for application of the exception clause.

If an election was made to discharge the contract, the wrongdoer would lose the benefit of

exceptions clauses, regardless of the nature of the breach. However, where the contract was

affirmed, the exception clause continued to apply as a matter of construction. On the facts,

the Court of Appeal bypassed the issue of election, holding that the nature of the breach

was so severe as to automatically terminate the contract.

While the Court of Appeal admitted to applying a ‘rule of construction’ in Harbutt’s

Plasticine, this rule operated despite the exceptions clause being capable of effective

application.143 It can thus be described as a reversion to the pre Suisse Atlantique rule of

law and contrary to the unanimous finding of the House of Lords that no such rule existed.

Further, although this was consistent with the statements of Lord Reid and Lord Upjohn,

its basis in Hain Steamship demonstrated the doctrine’s continued vulnerability. Those

statements made by their Lordships were based on counsel’s concession that upon breach,

the clauses ceased to apply. Moreover, if Professor Coote’s arguments were upheld, the

law according to fundamental breach would collapse.

In subsequent cases, the courts continued to revert to the pre Suisse Atlantique law

in an increasingly extreme manner.144 In Wathes (Western) Ltd v Austins (Menswear) Ltd,

the Court of Appeal held that the exceptions clause could not apply even in the event of

140 Harbutt’s “Plasticine” Ltd v Wayne Tank & Pump Co [1970] 1 QB 447, [1970] 1 All ER 225 [Harbutt’s Plasticine]; Farnworth Finance Facilities Ltd v Attryde [1970] 2 All ER 774, [1970] 1 WLR 1053; Wathes (Western) Ltd v Austins (Menswear) Ltd [1976] 1 Lloyd’s Rep 14; and Photo Production Ltd v Securicor Transport Ltd [1978] 1 WLR 856. 141 Above n 140. 142 Above n 134. 143 Per Widgery LJ at 470 and per Cross LJ at 474. 144 Brian Coote, above n x, at 795.

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affirmation.145 The court relied upon Charterhouse Credit v Tolly on the ground that it had

not been overruled in Suisse Atlantique.

In this period, there was a continued current in favour of Professor Coote’s thesis.

In accordance with the view in Heyman v Darwins, the English Court of Appeal held that

the contract does not terminate on discharge for breach, in the sense that primary

obligations to perform are replaced by secondary obligations to pay damages.146 Further,

there was increased recognition of the Professor’s conception of exception clauses. In an

attempt to distinguish Harbutt’s Plasticine, Donaldson J distinguished between three types

of exception clause, depending on whether they excluded the primary obligation, excluded

liability or limited liability.147 He held that if the clause qualified the primary obligation, it

must be taken into account in assessing a potential breach. Kerr J went further in The

Angelia, holding that an event covered by an exception of liability was not and could never

be a breach at all, let alone a fundamental breach.148 This meant only a limitation of liability

could be relegated to the status of procedural mechanism.

In 1975, Professor Dawson attempted to lend support to the doctrine as it appeared

in Harbutt’s Plasticine.149 The Professor adopted the three types of exceptions according

to Donaldson J in order to support his proposed doctrine of interdependent promises.150 By

contrast to Professor Coote’s view of exception clauses, Professor Dawson suggested that

the second and third of Donaldson J’s exception clauses could be interpreted as dependent

promises of immunity made to the proferens. Those promises of immunity were

accordingly dependent on substantial performance by the proferens.

With respect, however, it is submitted that this is not the function of an exception

clause. Exception clauses are not promises made to the proferens, but qualifications to what

the proferens promises to undertake. Professor Dawson cited New Zealand Shipping Co

Ltd v AM Sattherwaite & Co Ltd as sole authority in support of the proposition that an

145 [1976] 1 Lloyd’s Rep 14. 146 LEP Air Services Ltd v Rolloswin Investments Ltd [1971] 1 WLR 934 at 943-944. 147 Kenyon, Son & Craven v Baxter Hoare & Co Ltd [1971] 1 WLR 519 at 522. 148 Trade and Transport Inc v Iino Kaiun Kaisha Ltd [1973] 1 WLR 210 [The Angelia] at 228-231. 149 Francis Dawson, “Fundamental Breach of Contract” (1975) 91 LQR 380 at 381. 150 Kenyon, Son & Craven v Baxter Hoare & Co Ltd, above n 147, at 522.

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exception clause could be a promise. However, Professor Coote distinguishes that case as

arising in tort, not contract.151

VIII. Legislative response

In Suisse Atlantique, Lord Reid had recommended a legislative response to the unfair

nature of exception clauses:152

“This is a complex problem which intimately affects millions of people and

it appears to me that its solution should be left to Parliament. If your

Lordships rejectthis new rule there will certainly be a need for urgent

legislative action but that is not beyond reasonable expectation.”

This eventuated in the form of the Supply of Goods (Implied Terms) Act 1973 (UK) and

the Unfair Contract Terms Act 1977 (UK) (UCTA). The former provided discriminating

control in contracts of sale and hire-purchase, while the latter held a much wider scope,

vastly reducing the need for such a doctrine.153 The UCTA deals almost exclusively with

exception clauses in contracts; it makes some such clauses ineffective in all circumstances

and others ineffective unless they comply with a requirement of reasonableness. The

UCTA defined and protected persons dealing as consumers, yet did not legislate over

commercial contracts. This left commercial parties of equal bargaining power free to

apportion the risks as they think fit.

It is sometimes suggested that this legislation is a result of the attention that the

doctrine of fundamental breach brought to exception clauses.154 However, it may otherwise

151 Brian Coote, “Discharge For Breach and Exception Clauses Since Harbutt’s ‘Plasticine’” (1975) 40 MLR 31 at 41-42. 152 Above n 134, at 406. 153 Later in Securicor, Lord Wilberforce gave some prominence to the view that the UCTA had made the doctrine superfluous. 154 LS Sealy, “Contract—Farewell to the Doctrine of Fundamental Breach” [1980] CLJ 252 at 253.

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have been because of the undesirability of methods employed to bypass the clause being

further developed without parliamentary guidance.155

IX. The superfluous doctrine

In Photo Production Ltd v Securicor Transport Ltd,156 the House of Lords corrected the

previous insolence of the Court of Appeal, holding that no rule of law existed preventing

the application of an exemption clause where there has been fundamental breach. Whether

an exclusion clause was to be applied to any breach of contract was a matter of construction

of the contract.157

In the course of his judgment in the case, Lord Wilberforce gave some prominence

to his view that the passing of the UCTA had made the doctrine of fundamental breach

superfluous.158 A lingering criticism of the doctrine was its failure to distinguish between

consumer and commercial contexts.159 If fundamental breach was a reaction to the

inequality of bargaining power in standard form contracts, there was no reason why it

should apply to a contract entered into by commercial parties of equal bargaining power.

British Parliament evidently shared this view as the discretion afforded to the court under

the UCTA was limited to consumer contracts. In Photo Production Ltd, the parties had

entered into a contract made between business concerns of equal bargaining power, each

able to insure against risk at a modest charge.160 The House of Lords accepted Parliament’s

intention to uphold freedom to contract in such instances.

Lord Diplock confirmed that the effect of electing to terminate a contract for breach

is not to bring the contract to an end. The parties are released from performance of any

future “primary” obligations, but the contract itself continues, including any exception

clauses. It could not retrospectively deprive the defendants of the protection of the clause

with respect to loss suffered before the election had been made. To allow otherwise would

155 David G Pierce, above n 9, at 349. 156 [1980] 2 WLR 283 [Securicor]. 157 [1980] 2 WLR 283 in headnote. 158 At 289 and 291. 159 David G Pierce, above n 9, at 353. 160 At 296 and 297.

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provide for the reintroduction of the substantive doctrine after its rejection in Suisse

Atlantique.

X. Is there scope for fundamental breach to be argued?

The continuing scope for the doctrine in New Zealand will be assessed by reference to (a)

New Zealand’s historical position with regards the doctrine; (b) Parliament’s willingness

to legislate over consumer contracts; and (c) Canada’s continued willingness to reserve

judicial discretion. In addition to the theoretical flaws illustrated in the English context, it

is submitted that the doctrine is incapable of application in New Zealand courts.

A. New Zealand’s position

It seems that New Zealand was never as daring to engage the doctrine as the English courts

were. In Kaniere Gold Dredging Ltd v Dunedin Engineering & Steel Co Ltd, Holland J

doubted if the doctrine had ever been a part of New Zealand law.161 However, there is clear

evidence of application in Cornwall Properties Limited v King162 and at first instance in

Devonport Borough Council v Robins.163 In DHL International (NZ) Ltd v Richmond

Ltd,164 Richmond J adopted the House of Lords’ position in Securicor.165 This position has

since been firmly upheld in cases where fundamental breach has been argued.166 It may

even be said that there is antipathy towards the use of the phrase ‘fundamental breach’.167

161 (1985) 1 NZBLC 102,223. 162 [1966] NZLR 239 at 245-246. 163 [1979] 1 NZLR 1 at 16. 164 DHL International (NZ) Ltd v Richmond Ltd [1993] 3 NZLR 10 at 17. 165 Above n 157. 166 Victor Hydraulics Ltd v Engineering Dynamics [2006] 2 NZLR 235 at 240-241; Seaview Marina Ltd v Burgess DC Lower Hutt CIV-2008-032-386, 17 December 2008 at [43]-[46]; Dorchester Finance Ltd v Deloitte [2012] NZCA 226 at [27]; and i-Health Ltd v Isoft NZ Ltd [2011] NZCA 575, [2012] 1 NZLR 379 per Asher J at [18]. 167 i-Health Ltd v Isoft NZ Ltd, above n 160, per Asher J at [18].

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B. Legislative development

Previously, in the absence of a statutory equivalent of the UCTA, an argument existed for

reserving judicial discretion via the doctrine.168 The New Zealand Law Commission

considered whether reform was needed in its 1990 paper Unfair Contracts, deciding not to

pursue the initiative.169 However, it is submitted that New Zealand consumers now hold

sufficient legislative protection to meet the rigidity first envisaged by fundamental breach.

Consumers hold the protection of statutory guarantees as to quality where goods and

services were provided in trade.170 Further, New Zealand now holds a statutory equivalent

to the UCTA. The Commerce Commission may thus apply to the court for a declaration

that a term in a “standard form consumer contract” is an “unfair contract term”.171 In June

2010, the Ministry of Consumer Affairs considered the appropriateness of implementing

legislative protection for consumers against such unfair terms.172 In September a second

paper was issued, recommending that provisions should be added to the Fair Trading Act

1986 declaring such provisions void.173 Consequently, the Fair Trading Act Amendment

Act 2013 was passed, reflecting these recommendations.174

C. Canadian reserve of judicial discretion

Of the Commonwealth courts, Canadian judges have been the most reluctant to disengage

the doctrine. Up until 2010, the doctrine continued to exist in Canada.175 However, in

168 Kaniere Gold Dredging Ltd v Dunedin Engineering & Steel Co Ltd, above n 162, per Holland J at 102,228; and F Dawson “Contract” [1991] NZ Rec Law Rev 19 at 33. 169 Unfair Contracts (NZLC PP11, 1990); McLachlan [1991] NZ Rec Law Rev 311. 170 Consumer Guarantees Act 1993, s 41. 171 Fair Trading Act 1986, ss 46H-46M. 172 Ministry of Consumer Affairs Consumer Law Reform – A Discussion Paper (June 2010) (www.consumeraffairs.govt.nz/legislation-policy/policy-reports-and-papers) at [6.2.1]. 173 Ministry of Consumer Affairs Consumer Law Reform Additional Paper –Unfair Contract Terms (September 2010). 174 John Burrows, Jeremy Finn and Stephen Todd, above n 9, at 246 175 Hunter Engineering Co Inc v Syncrude Canada Ltd [1989] 1 SCR 426; and Alexander J Black “Enforceability Following the Decline of Fundamental Breach” (2015) 44(2) The Advocates’ Quarterly 139 at 139.

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Tercon Contractors Ltd v British Columbia (Ministry of Transport and Highways), the

Canadian Supreme Court attempted to “shut the coffin on the jargon associated with

‘fundamental breach’”.176 Perhaps as a result of the conceptual uncertainty with the

doctrine, Binnie J explained that classifying “a contractual breach as ‘fundamental’ or

‘immense’ or ‘colossal’ is not particularly helpful”.177 The court also recognised residual

discretion in the court to refuse to enforce exclusion clauses. The court adopted Justice

Binnie’s three step approach. The first step is to construct the contract. If the clause applies,

the second step is to assess whether it was unconscionable at the point it was made. If the

clause was valid, the third step might undertake a third inquiry, as to whether an overriding

public policy could justify a refusal to enforce the terms of the contract. While the Supreme

Court moved away from notions of fundamental breach to focus on concerns of policy, the

exercise “necessarily entails a wide discretion” with issues of certainty and consistency

remaining.178 Burrows, Finn and Todd suggest that this decision could prove to be

influential in New Zealand.179 However, with respect, Canada is a federal country of 14

jurisdictions, with little prospect of uniform consumer legislation.180 By contrast, New

Zealand has dealt with the issue by the legislation mentioned. Consequently, Canada is an

exception where the court’s discretion is necessary to remedy injustice.

XI. Conclusion

To revisit the doctrine of fundamental breach in the twenty first century is to engage in a

post-mortem examination. The doctrine illustrates the court’s practical willingness to

reserve judicial discretion in the face of injustice. Reflecting on the doctrine in 2001, Lord

Hoffman opined:181

176 [2010] 1 SCR 69, (2010) 315 CLR (4th) 385 at [82]. 177 At [82]. 178 McInnes (2010) 126 LQR 365 at 368. 179 John Burrows, Jeremy Finn and Stephen Todd, above n 5, at 244. 180 Hunter Engineering Co Inc v Syncrude Canada Ltd [1989] 1 SCR 426 at [154] per Justice Wilson; and McInnes (2010) 126 LQR 365 at 365. 181 Bank of Credit and Commerce International SA v Ali [2002] 1 AC 251 at [60].

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“My Lords, the lesson which I would draw from the development of the

rules for construing exemption clauses is that the judicial creativity,

bordering on judicial legislation, which the application of the doctrine of

fundamental breach involved was a desperate remedy, to be invoked only if

necessary to remedy widespread injustice.”

While the doctrine was capable of achieving this outcome, its crude manner of doing so

must be remembered. The process through which it overlooked construction of the contract

lacked coherent principle. It corrupted the law of discharge by breach. However, with

legislative assistance, the doctrine has been rendered superfluous. With that in mind the

doctrine may be observed but not reincarnated.

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Appendix 1: Bibliography A Cases 1 New Zealand A M Bisley & Co Ltd v Thompson [1982] 2 NZLR 696 (CA). Attorney-General v Seven Electrical ltd HC Wellington CIV-2000-485-787, 8 October 2003. Brennan International Transport Hong Kong Ltd v Blue Q Corporation [2009] NZCCLR 21. Cornwall Properties Ltd v King [1966] NZLR 239. DHL International (NZ) Ltd v Richmond Ltd [1993] 3 NZLR 10 (CA). Dorchester Finance Ltd v Deloitte [2012] NZCA 226. Graham v Attorney-General [1966] NZLR 946. Harper v South Island Holdings Ltd [1959] NZLR 629. Kaniere Gold Dredging Ltd v Dunedin Engineering & Steel Co Ltd (1985) 1 NZBLC 102,223. Livingstone v Roskilly [1992] 3 NZLR 230 (HC). Richmond Ltd v DHL International (NZ) Ltd (1991) 3 NZBLC 102,118. SGS (NZ) Ltd v Quirke Export Ltd [1998] 1 NZLR 52 (CA). The McKenzie Institute International v ARCIC (1997) 8 TCLR 329. Victor Hydraulics Ltd v Engineering Dynamics Ltd [1996] 2 NZLR 235. 2 Canada

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Hunter Engineering Co Inc v Syncrude Canada Ltd [1989] 1 SCR 426; 57 DLR (4th) 321. Tercon Contractors Ltd v British Columbia [2010] 1 SCR 69. Tor Line AB v Alltrans Group of Canada Ltd [1984] 1 WLR 48 (HL) [The TFL Prosperity]. 3 England and Wales Alderslade v Hendon Laundry [1945] KB 189 (CA). Alexander v Railway Executive [1951] 2 KB 882. Andrews Brothers (Bournemouth) Ltd v Singer Ltd [1934] 1 KB 17. Bank of Credit and Commerce International SA v Ali [2002] 1 AC 251. Chandris v Isbrandtsen-Moller Co Inc [1951] 1 KB 240. Chanter v Hopkins (1838) 4 M & W 399. Charterhouse v Tolly [1963] 2 QB 683. Davis v Garrett (1830) 6 Bing 716, 130 ER 1456. Farnworth Finance Facilities Ltd v Attryde [1970] 2 All ER 774, [1970] 1 WLR 1053. George Mitchell (Chesterhall) Ltd v Finney Lock Seeds Ltd [1983] QB 284. George Mitchell (Chesterhall) Ltd v Finney Lock Seeds Ltd [1983] 2 AC 803. Gibaud v Great Eastern Railway Company [1921] 2 KB 426 (CA). Hain Steamship Co Ltd v Tate and Lyle Ltd (1936) 155 LT 177 (HL). Harbutt’s “Plasticine” Ltd v Wayne Tank & Pump Co [1970] 1 QB 447, [1970] 1 All ER 225.

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Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1962] 2 QB 26; [1962] 1 All ER 474. J Spurling Ltd v Bradshaw [1956] 1 WLR 461. Joseph Thorley Ltd v Orchis SS Co [1907] 1 KB 660 Karsales (Harrow) Ltd v Wallis [1956] 2 All ER 866. L’Estrange v Graucob [1934] 2 KB 394. Lilley v Doubleday (1881) 7 QBD 510. Photo Production Ltd v Securicor Transport Ltd [1980] AC 827, [1980] 1 All ER 556. Photo Production Ltd v Securicor Transport Ltd [1978] 3 All ER 146 (CA). Pinnock Brothers v Lewis & Peat Ltd [1923] 1 KB 690. Rose and Frank v Crompton and Bros [1925] AC 445 (HL). Smeaton Hanscomb & Co Ltd v Sassoon I Setty Son & Co (No 1) [1953] 1 WLR 1468. Suisse Atlantique Socíeté d’Armement Maritime SA v NV Rotterdmsche Kolen Centrale [1967] 1 AC 361; [1966] 2 All ER 61. UGS Finance v National Mortgage Bank of Greece [1964] 1 Lloyds Rep 446 (CA). Wallis v Pratt & Haynes [1910] 2 KB 1003 (CA). Wathes (Western) Ltd v Austins (Menswear) Ltd [1976] 1 Lloyd’s Rep 14. Yeoman Credit Ltd v Apps [1962] 2 QB 508, 517; [1961] 2 All ER 281. B Legislation 1 New Zealand Consumer Guarantees Act 1993.

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Fair Trading Act 1986. Fair Trading Amendment Act 2013. 2 United Kingdom Consumer Rights Act 2015. Sale of Goods Act 1893. Unfair Contract Terms Act 1977. C Books and Chapters in Books Brian Coote Exception Clauses (Sweet & Maxwell, London, 1964). Bernard Eder and others Scrutton on Charterparties and Bills of Lading (22nd ed, Sweet & Maxwell and Thomson Reuters, London, 2011). Edwin Peel Treitel on the Law of Contract (13th ed, Sweet & Maxwell, London, 2011) at ch 7. John Burrows, Jeremy Finn and Stephen Todd Law of Contract in New Zealand (5th ed, LexisNexis, Wellington, 2016) at ch 7. Laws of New Zealand Contract at [138]. M Bridge (ed) Benjamin’s Sale of Goods (9th ed, Sweet & Maxwell, London, 2014). D Journal Articles AG Guest, “Fundamental Breach of Contract” (1961) 77 LQR 98. Alfred W Meyer, “Contracts of Adhesion and the Doctrine of Fundamental Breach” (1964) 50 Va L Rev 1178. Andrew Nicol and Rick Rawlings, “Substantive Fundamental Breach Burnt Out: Photo Production v Securicor” (1980) 43 MLR 1980. Brian Coote, “The Rise and Fall of Fundamental Breach” (1967) 40 ALJ 336.

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Brian Coote, “The Effect of Discharge by Breach on Exception Clauses” (1970) 28 CLJ 221. Brian Coote, “Correspondence with Description in the Law of Sale of Goods” (1976) 50 ALJ 17. Brian Coote, “Discharge for breach and exception clauses since Harbutt’s ‘Plasticine’” (1977) 40 MLR 31. Brian Coote, “Unfair Contract Terms Act 1977” (1978) 41 MLR 312. Brian Coote, “The Second Rise and Fall of Fundamental Breach” (1981) 55 ALJ 788 C Grunfeld, “Reform in the Law of Contract” (1961) 24 MLR 62. CP Walker, “Substantive Fundamental Breach Burnt Out: Photo Production v Securicor” (1980) 43 MLR 567. David G Pierce, “Contract: Of Cabbages and Fundamental Breach” (1982) 24 Mal LR 349. F Dawson, “Contract” [1991] NZ Recent Law Review 19. FMB Reynolds, “Warranty, Conditions and Fundamental Term” (1963) 79 LQR 534. Francis Dawson, “Fundamental Breach of Contract” (1975) 91 LQR 380. JA Weir, “Nec Tamen Consumebatur— Frustration and Limitation Clauses” [1970] CLJ 189. Jerry Hubbard, “Deviation in contracts of sea carriage: after the demise of fundamental breach” (1986) 16 VUWLR 147. JF Wilson, “Fundamental Breach: The Plot Thickens” (1971) 4 NZULR 254. JH Baker, “Suisse Atlantique Confounded?” (1970) 33 MLR 441. JL Montrose, “Contract—Exemption Clauses—Description or Condition” [1957] CLJ 12.

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KW Wedderburn “Contract – Exemption Clauses – Fundamental Breach – Main Objects of Contract” [1957] CLJ 16. KW Wedderburn, “Contract—Exceptions Clause—Fundamental Breach—Agents” [1960] CLJ 11. LJ Montrose “Some Problems About Fundamental Terms” [1964] CLJ 60. Lord Devlin, “The Treatment of Breach of Contract” [1966] CLJ 192. LS Sealy, “Contract – Farewell to the Doctrine of Fundamental Breach” [1980] CLJ 252. LW Melville, “The Core of a Contract” (1956) 19 MLR 26. Michael Wagener, “Fundamental Breach: Has the Baby Gone Out with the Bathwater” (2004) 29 Tul Mar LJ 45. Mitchell McInnes "Fundamental Breach in the Supreme Court of Canada" (2010) 126 LQR 365. PN Legh-Jones & MA Pickering, “Fundamental Breach” (1971) 87 LQR 515.