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The Essence of the Contract

Published online by Cambridge University Press:  16 January 2009

Dafydd Jenkins
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Extract

There can hardly be any aspect of the law of contract which has in recent years exercised the ingenuity of the courts and the academic lawyers more than the effect of fundamental breach on exemption clauses. The doctrine which seemed to be emerging, that no exemption clause could relieve a party who was in fundamental breach, has been discredited by the House of Lords in Suisse Atlantique, but though the speeches in that case have clarified the position, there is still room for a general statement of the law. The present article is concerned with clear presentation of principle rather than exhaustive examination of authority, whether academic or judicial; and though most of the points have been anticipated at some time or another, it has not seemed desirable to clog the argument by discussing these anticipations. There may also be some value in considering, as aspects of a single problem, some features of the law of contract which are usually discussed in the books under different and widely separated heads such as “Conditions and Warranties,” “Exemption Clauses,” “Discharge by Performance,” and “Discharge by Breach.”

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Articles
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The Cambridge Law Journal , Volume 27 , Issue 2 , November 1969 , pp. 251 - 272
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Copyright © Cambridge Law Journal and Contributors 1969

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References

1 Suisse Atlantique Société D'Armement Maritime S.A. v. N.V. Rotterdamsche Kolen Centrale [1967] 1 A.C. 361Google Scholar; [1966] 2 All E.R. 61. The observations on fundamental breach and exemptions are obiter, for it was doubtful whether there was a fundamental breach and certain that the clause in question was not an exemption clause. The contract was a charterparty which provided for liquidated damages for delay; the appellants, having alleged that excessive delays by the respondents amounted to fundamental breach, nevertheless continued with the contract, and sued for the whole of the estimated loss caused by failure to complete enough voyages.

2 It appears that there are at present very few such herds: this makes the contract rather more improbable, but perhaps more valid as an illustration. It will be convenient to use the word certified hereafter as shorthand for “certified as coming from herds known to be free from virus pneumonia.”

3 Atiyah, P. S., An Introduction to the Law of Contract (Oxford, 1961), p. 210.Google Scholar

4 One can quite properly speak of rescission by agreement, but not of repudiation by agreement; repudiation is essentially unilateral.

5 Op. cit., p. 210.

6 Much litigation, of course, involves this point: see, for instance, Denmark Productions Ltd. v. Boscobel Productions Ltd. [1969] 1 Q.B. 699Google Scholar; [1968] 3 All E.R. 513.

7 Op. cit., p. 210.

8 This was the position in Oscar Chess Ltd. v. Williams [1957] 1 W.L.R. 370Google Scholar; [1957] 1 All E.R. 325, according to the majority of the Court of Appeal.

9 Lord Devlin, [1966] C.L.J. 192 at p. 194. The article contains the substance of two lectures delivered at Cambridge before the Suisse Atlantique decision, but has some references to the decision subsequently added.

10 If I order potatoes to be delivered to a specific store of mine, and coal is dumped there instead, that is a trespass, which must entitle me to sue the other party just as I could sue a total stranger who dumped coal (or stones) in that store. Cf. the explanation by Brian, Coote, Exception Clauses (1964), pp. 89–93Google Scholar of the apparently anomalous rule “that a shipowner who deviates loses the protection of his exception clauses as from the moment the deviation commences, whether the cargo-owner ‘accepts the repudiation’ or not” (ibid. p. 81).

11 Karsales (Harrow) Ltd. v. Wallis [1956] 1 W.L.R. 940Google Scholar; [1956] 2 All E.R. 868. The plaintiff company sued on a hire-purchase contract for a Buick car, which when examined by the defendant was in good condition, but when left at his premises was a wreck which could not be made to go. The plaintiff company relied on an exemption clause as relieving it from all obligation to supply a roadworthy vehicle or one of merchantable quality.

12 [1956] 1 W.L.R. 942; [1956] 2 All E.R. 870.

13 [1956] 1 W.L.R. 943; [1956] 2 All E.R. 871.

14 Lord Devlin, [1966] C.L.J. 214: “If a car is delivered in as bad a condition as that, you can say that there has been no delivery of the thing contracted for.” See also the discussion by Coote, op. cit., Chap. 3.

15 (1838) 4 M. & W. 399.

16 The later distinction between warranty and condition was not then drawn.

17 4 M. & W. 404–405; cf. Coote, op. cit., p. 51.

18 4 M. & W. 404.

19 4 M & W. 406.

20 But in any circumstances, in order to decide whether A has performed, it may be necessary to examine clauses which are really definitions of A's obligation though superficially they seem to be exemption clauses: vide infra, p. 266.

21 [1967] 1 A.C. 431A; [1966] 2 All E.R. 91G.

22 Vide supra, n. 9.

23 Cheshire and Fifoot, The Law of Contract (7th ed.), p. 121.

24 Lord, Greene M.R. in Alderslade v. Hendon Laundry Ltd. [1945] K.B. 189Google Scholar, 193, adopted by Lord Devlin, [1966] C.L.J. 205, n. 16.

25 Lord Halsbury in Glynn v. Margetson [1893] A.C. 351, 357, adopted by Lord, Wilberforce in Suisse Atlantique at [1967] 1 A.C. 430Google Scholar; [1966] 2 All E.R. 91.

26 Lord Devlin, [1966] C.L.J. 205.

27 The adjective is inserted because repudiation of the contract does not per se put an end to the secondary obligations of the contract, which may become effective only as a result of the breach: these secondary obligations may include subsidiary promises (e.g., to pay liquidated damages).

28 See, for instance, Lord, Upjohn in Suisse Atlantique at [1967] 1 A.C. 421Google Scholar G; [1966] 2 All E.R. 86A: “there is no magic in the words ‘fundamental breach’; this expression is no more than a convenient shorthand expression for saying that a particular breach or breaches of contract by one party is or are such as to go to the root of the contract which entitles the other party to treat such breach or breaches as a repudiation of the whole contract.”

29 [1967] 1 A.C. 422A; [1966] 2 All E.R. 86A.

30 If the contract were not silent, there would hardly be room for argument before the court.

31 Sale of Goods Act 1893, s. 11.

32 [1967] 1 A.C. 422C; [1966] 2 All E.R. 86C.

33 [1966] C.L.J. 204.

34 [1938] 2 All E.R. 788.

35 Millner, M. A., Negligence in Modern Law, p. 135.Google Scholar

36 [1962] 2 Q.B. 26 at pp. 70 and 62–63 respectively.

37 The Law of Contract (7th ed.), p. 132.

38 Ibid. p. 135.

39 Lord Devlin, [1966] C.L.J. 192, following Diplock, L.J. in Hong Kong Fir.Google Scholar

40 Not necessarily the actual effect: there may in the particular case be circumstances which make the actual effect more serious than could reasonably be foreseen

41 [1950] 1 K.B. 616; [1950] 1 All E.R. 420.

42 [1966] C.L.J. 192.

43 [1966] C.L.J. 211–212. Cf. the words of Lord, Greene M.R. in Alderslade v. Hendon Laundry Ltd. [1945] K.B. 189, 193Google Scholar: “What I may call the hard core of the contract, the real thing to which the contract is directed, is the obligation of the defendants to launder. That is the primary obligation.… That is the essence of the contract, and in addition there are certain ancillary obligations into which the defendants enter if they accept goods from a customer to be laundered.”

44 [1966] C.L.J. 208.

45 [1966] C.L.J. 208–209.

46 Lord Devlin criticises the slovenly way in which in English law “we talk about a contract as being frustrated when what we really mean is that the contract has been dissolved by a frustrating event,” and distinguishes between “true frustration” and “discharge by impossibility of performance.” But it can surely be argued that the contract has been made in vain in both cases—and frustration is hardly more than the abstract noun for the adverb in vain, as a comparison of the Vulgate and Prayer Book versions of Psalm 126/127 will show.

47 Avery v. Bowden (1855) 5 E. & B. 714.

48 The kind of provision envisaged is one that if either A or B gives up farming entirely the pig contract shall be at an end.

49 [1956] 1 W.L.R. 936, 941; [1956] 2 All E.R. 866, 869.

50 Suisse Atlantique at [1967] 1Google Scholar A.C. 399; [1966] 2 All E.R. 71. This statement is applied by Lord Reid only to the case where the wrongful repudiation has not been accepted by the innocent party, so that the contract is still on foot; for in an earlier paragraph ([1967] 1 A.C. 398B; [1966] 2 All E.R. 71A) he had said that “where the innocent party has elected to treat the breach as a repudiation, bring the contract to an end and sue for damages … the whole contract has ceased to exist including the exclusion clause, and I do not see how that clause can then be used to exclude an action for loss which will be suffered by the innocent party after it has ceased to exist, such as loss of the profit which would have accrued if the contract had run its full term.” Lord Upjohn ([1967] 1 A.C. 425F; [1966] 2 All E.R. 88D) makes a similar point: the inoperativeness of exception or limitation clauses “is the consequence of the application of the ordinary rules applicable to all contracts that if there is a fundamental breach accepted by the innocent party the contract is at an end; the guilty party cannot rely on any special terms in the contract.” It is submitted that this reasoning proves too much: if the whole contract had ceased to exist, how could the innocent party rely on the contract to prove his loss of profit? Again, if the whole contract had ceased to exist, liquidated damages clauses would have ceased to exist, just as much as a limitation clause; and since total failure to perform is the most obvious case of fundamental breach, it would seem that there would seldom be any opportunity for the application of a liquidated damages clause.

51 [1966] C.L.J. 210–211. Why should you “still have to pay,” if “no one would suggest that a man who refuses to deliver can insist on payment” (ibid. 210)?

52 [1956] 1 W.L.R. 936, 937; [1956] 2 All E.R. 866, 868.

53 [1967] 1 A.C. 431F; [1966] 2 All E.R. 92B. Such a clause is of Coote's Type A, “exception clauses whose effect, if any, is upon the accrual of particular primary rights” (op. cit., p. 9).

54 [1966] C.L.J. 212. Lord Devlin's discussion suggests that he would not accept this interpretation, but it is clear that he accepts the possibility of “a contract for peas, beans or anything else ejusdem generis”: the problem is simply one of wording.

55 1941 S.C. 125

56 By Lord Mackay at p. 142.

57 Per the Lord Justice-Clerk at p. 135.

58 The general opinion is that in an agreement so limited the promisor “is, by the act of destroying his sanctioning duty, preventing primary contractual rights and duties from arising” (Coote, op. cit., p. 153). The agreement is perhaps best analysed into a continuing offer by the buyer, accepted by the seller every time he tenders a consignment of pigs.

59 The buyer will not lose by the limitation clause unless the market price of similar pigs is more than double the contract price, for he would be required to mitigate his loss by buying in the market and the measure of damages would be the difference between the market and contract prices.

60 This suggests an answer to the criticism aimed at the decision in Hunt and Winterbotham (West of England) Ltd. v. B.R.S. (Parcels) Ltd. [1962] 1 Q.B. 617Google Scholar; [1962] 1 All E.R. 111, by Wedderburn ([1962] C.L.J. 17) and Aikin (26 M.L.R. 98). That case and Alexander v. Railway Executive [1951] 2 K.B. 882Google Scholar; [1951] 2 All E.R. 442, are not discussed here, because they are so clearly distinguishable from each other on their facts that they provide no test for our argument.

61 [1966] C.L.J. 210.

62 [1953] 1 W.L.R. 1468; [1953] 2 All E.R. 1471.

63 He had said that it was “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” (at W.L.R. p. 1470, All E.R. p. 1473). In the light of Suisse Atlantique this must now be regarded as going too far.

64 In most of the cases in which exemption clauses are considered, the buyer is the under-dog who attracts sympathy, but in the pig contract the seller is likely to be in the weaker position (as a farmer or small group of farmers), and the limitation clause is likely to be attacked by a large buyer, whose subordinates have accepted unsatisfactory pigs and failed to make complaint in due form and time. It must be emphasised that the seller is not likely to misuse the exemption clause by invoking it where the buyer clearly has grounds for complaint, for to do so could be fatal to his reputation with other buyers.

65 The conclusions of this article might have been anticipated by many years if more attention had been paid to J. L. Montrose's case-note on Andrews v. Singer [1934] 1 K.B. 17Google Scholar in (1934) 5 C.L.J. 275–277.