Breach Of Contract

Essential and Non-Essential Terms

Whether breach of contract leads to discharge depends on whether it is a major or minor breach, which, in turn, depends on whether the term breached is essential or non-essential.

A minor breach of contract is the “breach of a non-essential term of a contract or of an essential term in a minor respect,” while a major breach is a “breach of the whole contract or of an essential term so that the purpose of the contract is defeated.” In the case of a major breach, the innocent party may elect to treat the breach as a discharge of the contract and will then be free from her own obligations under the contract; she will also be entitled to claim damages. Alternatively, the innocent party may elect to continue with the contract but will still be entitled to claim for damages. In the case of a minor breach, the injured party is entitled only to claim damages; she must still fulfil her part of the bargain.

In distinguishing between a major breach and a minor breach, the law distinguishes among three types of contractual terms. A condition is “an essential term of a contract,” while a warranty is “a non-essential term. Breach of a condition would deprive the other party of the expected benefit of the contract, while breach of a warranty would not. An intermediate term is a “wait-and-see” term; depending on the circumstances, breach of it may or may not substantially deprive the innocent party of the expected benefit of the contract.

Ways to Breach a Contract

There are four different ways a breach of contract may occur: express repudiation, implied repudiation, self-induced impossibility, and failure of performance that constitutes a fundamental breach.

Express Repudiation

One of the parties to the contract declares that he will not perform under the contract as promised. Such a declaration may occur before (anticipatory breach) or after performance begins. The injured party may treat the contract at an end, find another party to perform, and sue for damages for breach. Alternatively, the injured party may continue to insist on performance and then sue for breach if the other party fails to perform; however, he risks that intervening events might provide the other party with an excuse for non-performance. The advantage of anticipatory breach to the breaching party is that it gives the other party a chance to mitigate his losses if the other party accepts the breach and reserves the right to claim damages. However, if the breach is not accepted, the duty to mitigate does not start until the breach actually occurs. One of the reasons the innocent party might not accept the breach is because he would lose the right to the remedy of specific performance. This remedy and others will be discussed later.

If repudiation relates only to a minor term of the contract, the other party is not entitled to treat the contract as discharged but will still be entitled to claim damages.

Implied Repudiation

This type of anticipatory breach has to be inferred from the actions of one of the parties or from statements made by her before the time fixed for performance of the contract. While it may not initially be permissible for the innocent party to treat the initial failure to perform as a breach of contract, continued failure to meet the requirements may permit her to do so. However, it is always risky to treat the contract at an end and stop performing one’s own obligations, since if the other party does end up performing, one may actually end up being in breach of contract.

Self-Induced Impossibility

A contract may also become impossible to perform because of a deliberate or wilful act by one of the parties. In effect, this is a self-induced frustration. The conduct that makes performance impossible may occur either before or during performance.

Failure of Performance (Defective Performance)

Failure of performance, or inadequate performance, occurs when one party fails to properly perform an obligation due under a contract. It can vary from slightly inadequate performance to grossly inadequate performance to total failure to perform. For example, failure of performance would occur if a wedding photographer did not show up for the wedding. Grossly inadequate performance might occur if only the outdoor pictures turned out, and there were no pictures of the ceremony. Finally, slightly inadequate performance might occur if the photographer took only 375 pictures instead of the promised 400. There can also be satisfactory performance on some terms of the contract but failure to perform on other terms. The extent of failure determines the remedies available to the other party.

Unlike the other types of breach discussed so far, failure of performance does not usually become apparent until the time for performance has come or until performance is already in progress. Therefore, it can be difficult for the other party to decide whether he or she should proceed with the contract. More will be said about this in the next section.

Effects of a Breach

If the breach is of a minor term (warranty), the injured party is entitled to damages for the amount of defective performance but cannot repudiate the contract and must complete his or her own obligations under the contract. This is according to the doctrine of substantial performance, which stipulates that where a contract is substantially performed but defective or incomplete in some minor respect, the other party must perform its part of the bargain.

If the breach is of the whole contract or of an essential/major term (condition), also known as a fundamental breach, the injured party can elect to treat the contract as discharged. If an injured party elects to proceed with the contract and take benefits under it despite a major breach, he or she may not later treat the contract as discharged.

If an injured party does not learn of a major breach until performance was complete, and he has received the benefit of the contract, he cannot treat the contract as discharged.

Often, it is difficult for the injured party to assess whether the breach is of a serious enough nature for her to consider her own obligations at an end, especially when the breach involves only one or two terms of the contract. If the injured party considers her obligations at an end, but the court later finds that it was only a minor breach, she risks being held liable for wrongful repudiation.

If a contract price is to be paid by instalments or goods are to be delivered by instalments, a missed payment or deficient delivery may not be serious enough to free the injured party unless he or she can establish a likelihood of further defective performance and a significant loss in relation to the whole contract. In an attempt to avoid such problems, a seller may include an acceleration clause that makes all future instalments immediately due upon the breach of any instalment, or a buyer may include a clause stipulating that one missed shipment entitles the business to treat the contract at an end. Consumer protection legislation in some provinces restricts the use of acceleration clauses in consumer contracts.

Exemption Clauses

Exemption clauses limit the liability of one party to the contract by either excusing liability completely for certain things or by limiting liability to a fixed dollar amount. Courts are wary of exemption clauses because of the advantageous position of the party creating a standard form contract. Therefore the courts try to circumscribe their application in several ways:

1. If there was inadequate notice of the term (and the onus is now on the defendant to prove that was the case), the injured party will not be bound by it.

2. An exemption clause will be very strictly construed against the drafting party.

3. An exemption clause will not excuse a fundamental breach, i.e., one so serious that it defeats the whole purpose of the contract, unless the clause directly excuses such a breach or unless the clause was intended by both parties to have such an effect.