04. breach

The question

A contract is a set of obligations to perform; the law of breach concerns the failure to perform them. When one party does not do what the contract requires, the law must determine the consequences: whether the innocent party may merely claim compensation, or may also bring the contract to an end, and whether, in some circumstances, the failure to perform is excused altogether. This sub-unit examines breach, the failure to perform a contractual obligation, asking what constitutes a breach, how breaches are distinguished by their gravity, and when the law excuses a failure to perform. The answer connects the classification of terms examined earlier to the remedies examined next, and it identifies the limited circumstances in which a party who fails to perform is nonetheless not in breach.

What constitutes a breach

A breach of contract is a failure, without lawful excuse, to perform an obligation that the contract imposes, whether by not performing at all, by performing late, or by performing defectively. The obligation breached may be an express term or a term implied by law, and the breach consists simply in the divergence between what the contract required and what the party did. The law of contract is, in this respect, a regime of strict obligation in many of its applications: a party who has promised a result is ordinarily liable for failing to achieve it, whether or not the failure was that party's fault, although some obligations are obligations only to take reasonable care, in which case the breach consists in the failure to take such care.

This connects to the analysis of obligation in Course 1, for the breach is the non-performance of the obligation the contract created, and the consequence of breach is a secondary obligation, to make good the consequences of the failure, that arises from the first. The breach gives the innocent party a remedy, examined in the next sub-unit, and may, if it is sufficiently serious, also give that party the right to terminate the contract, examined below. Every breach, of whatever gravity, gives rise to a claim for compensation for the loss it causes; the gravity of the breach determines whether the innocent party also acquires the further right to bring the contract to an end.

Consider a seller who delivers goods that do not conform to the contract, being of lower quality than the contract required. The seller has breached the contract, because the goods delivered diverge from the goods promised, and the breach gives the buyer a remedy for the loss the non-conformity causes, irrespective of whether the seller was at fault in the defect arising. Whether the buyer may also reject the goods and terminate the contract depends on the seriousness of the breach. The example shows breach as the simple divergence between performance promised and performance rendered, giving rise in every case to a claim for compensation.

A breach of contract is therefore the unexcused failure to perform a contractual obligation, giving the innocent party in every case a claim for the loss caused, and giving the further right to terminate only where the breach is sufficiently serious, a question the classification of breach determines.

The classification of breach and the right to terminate

The central question raised by a breach is whether it entitles the innocent party to terminate the contract, to treat itself as discharged from further performance and to refuse the other's further performance, or whether it confines the innocent party to a remedy in damages while the contract continues. The answer connects directly to the classification of terms examined in the sub-unit on terms, and it turns, across the traditions, on the seriousness of the breach.

In the common law analysis, the right to terminate arises where the term broken is a condition, or where an innominate term is broken in a manner that deprives the innocent party of substantially the whole benefit of the contract; the breach of a warranty, or a trivial breach of an innominate term, gives a remedy in damages only. The civil law traditions and the international instruments reach the same result through the concept of fundamental breach, the principle that the innocent party may terminate only where the breach is so serious as to defeat the purpose of the contract or to deprive the innocent party of what it was entitled to expect. The connecting idea, common to all the traditions, is that termination, the drastic remedy that destroys the contract, is reserved for serious breaches, and that lesser breaches leave the contract on foot and yield only compensation, a rule that protects the stability of commercial bargains against destruction for trivial failures.

Suppose a buyer of machinery finds that the machine delivered suffers a minor defect easily remedied, and suppose in another case that the machine is wholly incapable of performing its essential function. In the first case the breach is not serious, the buyer must accept the machine and claim damages for the defect, and the contract continues. In the second case the breach is fundamental, depriving the buyer of substantially the whole benefit of the contract, and the buyer may terminate, reject the machine, and claim damages. The example shows the seriousness of the breach determining whether the innocent party may terminate or must be content with compensation.

The classification of breach by seriousness is therefore the means by which the law determines the innocent party's right to terminate, reserving termination for the fundamental breach that defeats the purpose of the contract and confining lesser breaches to a remedy in damages, so that the contract is destroyed only where its central purpose has failed.

Anticipatory breach

A breach need not await the time fixed for performance, and the law recognises the anticipatory breach, which occurs where one party, before performance is due, indicates by words or conduct that it will not perform, or disables itself from performing. The innocent party need not wait until the time for performance arrives to discover the failure it has already been told will occur; the law allows it to act upon the renunciation at once.

This connects to the value of commercial certainty, for a party told in advance that the other will not perform must be free to make alternative arrangements without waiting for a performance it knows will not come. Upon an anticipatory breach that is sufficiently serious, the innocent party has a choice, recognised broadly across the traditions. It may accept the renunciation, terminate the contract immediately, and claim damages at once, freeing itself to arrange a substitute; or it may decline to accept the renunciation, keep the contract alive, and await the time for performance, holding the other to the contract in case it should change its position. The choice has consequences, since a party that keeps the contract alive remains bound by it and bears the risk of supervening events, and the law in some circumstances limits the innocent party's freedom to keep alive a contract the other has renounced.

Imagine a supplier who, a month before the date fixed for delivery, informs the buyer that it will not deliver the goods. The buyer faces an anticipatory breach and may choose to accept the renunciation, terminate, and immediately seek the goods from another supplier while claiming damages, or to insist that the supplier perform and await the delivery date. The buyer's interest ordinarily lies in accepting the renunciation and securing a substitute, and the law permits it to do so without waiting. The example shows anticipatory breach allowing the innocent party to act upon a renunciation before performance is due.

Anticipatory breach is therefore the breach committed in advance of performance by a party's renunciation of the contract, giving the innocent party the choice to terminate and claim damages at once or to keep the contract alive and await performance, a choice that serves the innocent party's need to respond to a failure it has been told will occur.

The excuse of performance: frustration and force majeure

The law recognises, finally, that a party's failure to perform may be excused where performance has been prevented by a supervening event for which neither party is responsible, so that the failure is not a breach at all. The common law develops this excuse through the doctrine of frustration, under which a contract is discharged where, after its formation, an event occurs, without the fault of either party, that renders performance impossible or radically different from what was undertaken, so that it would be unjust to hold the parties to the bargain. The civil law traditions reach comparable results through doctrines of impossibility and of changed circumstances, and commercial contracts very commonly provide for the matter expressly through a force majeure clause, a term that defines the supervening events that will excuse performance and the consequences that follow.

This excuse connects to the limits of obligation, for the law does not hold a party to perform what an unforeseen and unattributable event has made impossible or pointless, yet it confines the excuse narrowly to protect the certainty of contracts. Frustration is not established merely because performance has become more difficult or more expensive; it requires an event that destroys the basis of the contract, and a party who has simply made a bad bargain, or who could have provided against the event, is not excused. The force majeure clause allows commercial parties to define for themselves, with the certainty the general doctrine lacks, which events will excuse performance and how the risk of such events is to be allocated, and it is a standard and important feature of commercial contracting precisely because it converts the uncertain general doctrine into a defined allocation of risk.

Consider a contract to supply goods from a particular source that, through no fault of either party, becomes unavailable after the contract is made because the source is destroyed by a natural disaster. If performance from that source was the basis of the contract and has become impossible, the contract may be frustrated and the parties discharged. Had the contract contained a force majeure clause naming such a disaster, the clause would govern, defining the consequences the parties had agreed. Mere increase in the cost of obtaining the goods elsewhere, by contrast, would not frustrate the contract. The example shows the excuse of performance operating narrowly, for genuine supervening impossibility rather than mere hardship.

The excuse of performance through frustration and force majeure is therefore the law's recognition that a supervening and unattributable event may discharge a party from performance, an excuse confined narrowly by the general law to events that destroy the basis of the contract, and defined precisely by the parties themselves through the force majeure clause that commercial practice has developed.