A fundamental breach of a contract, sometimes known as a repudiatory breach, is a breach so fundamental that it permits the distressed party to terminate performance of the contract, in addition to entitling that party to sue for damages.
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History
The law of fundamental breach was historically treated as an extension of the doctrine of deviation. The development of this doctrine can be traced down to the first half of the 19th century, when Tindal C.J. stated in Davis v. Garrett that deviation made by the carrier from the agreed voyage route brings the latter outside of contract and therefore outside of exceptions or limitation clauses provided by such a contract. This harsh attitude to deviation cases originated from the earlier marine insurance practice when cargo insurance policy was lost in case of deviation. Thereby strict obligations imposed to the carrier were designed to afford protection to the cargo owner.
English law
The doctrine of fundamental breach further developed in numerous cases and by the second half of the nineteenth century was extended far beyond of the deviation cases and cases related to the carriage of goods by sea. Lord Greene M.R. in Alderslade v. Hendon Laundry Ltd. labelled the fundamental term as ‘the hard core of the contract'. Lord Reid in Suisse Atlantique Societe d'Armement Maritime S.A. v. N.V. Rotterdamsche Kolen Centrale defined fundamental breach as a
‘well-known type of breach which entitles the innocent party to treat it as repudiatory and to rescind the contract’.
As a matter of law, under the doctrine of fundamental breach of contract, exclusion clauses were deemed not to be available to a party in fundamental breach of the contract. In particular, the common law approach that the carrier deviated from his contractual voyage has been deprived of the defence available under the Hague Rules, even if the bill of lading contract of carriage was governed by the Rules, was unchanged and unchallenged for many years when in Tate & Lyle, Ltd. v. Hain Steamship Company, Ltd. the ordinary law of contract was applied to the deviation case for the first time. In the second half of the 20th century, first in Maxine Footwear and Suisse Atlantique and then in several posterior cases, principally in Photo Production Ltd. v. Securicor Transport Ltd, the unavailability of exclusion clauses to the party in fault in cases of fundamental breach was doubted in favour of such cases as falling within authority of the ordinary law of contract .
Several statutory changes such as passing by the Parliament of the Carriage of Goods by Sea Act 1971 and the Unfair Contract Terms Act 1977, further affected the law position on the doctrine of fundamental breach and liability limitations. Former by giving the force of law to the Hague-Visby Rules and later by providing the rules to regulate the contracts between the parties with the different bargaining strength.
This law was successfully applied in two most recent cases related to carriage of goods by sea and application of limitation clauses under the Hague and The Hague-Visby Rules: Daewoo Heavy Industries Ltd. v. Klipriver Shipping Ltd. and The Happy Ranger
In English law, fundamental breach was first examined by the House of Lords in the Suisse Atlantique case, wherein they decided that a contract can be voided if a breach of a fundamental term can be found. That is, a breach of a condition that "goes to the root of the contract". This approach is known as the Rule of Law doctrine.
At the Court of Appeal level in Photo Productions Ltd. v. Securicor Transport Ltd. Lord Denning championed the Rule of Law doctrine and extended the rule in Suisse Atlantique case to apply to all exemption clauses. However on appeal to the House of Lords Lord Wilberforce effectively overturned the Rule of Law doctrine and instead maintained a strict Rule of Construction approach whereby a fundamental breach is found only through examining the reasonable intentions of the parties at the time of the contract.
Canada
The doctrine of fundamental breach has been “laid to rest” by the Supreme Court of Canada in Tercon Contractors Ltd. v. British Columbia (Transportation and Highways). In its place, the Court has created a three-step test to evaluate the application of exclusion clauses. The first step is to evaluate the exclusion clause in the factual context of each case to determine if it applies to the material circumstances. The second step is to evaluate if the exclusion clause was unconscionable at the time of incorporation. The final step is to evaluate whether the exclusion clause should not be enforced on public policy grounds.