Performance and Breach of Contract

Basic Principles of Contract: Performance and Breach of Contract  

Once a contract is entered into, all parties must observe the terms of the contract or the innocent party may be entitled to a number of measures and legal redress. This article will provide an overview of the issues that could potentially arise in relation to an unjustified failure to fulfil contractual obligations as well as the options available to the non-breaching party should such failure occur.

Key issues:
1. Failure to perform
a) Seriousness of the Breach
b) Repudiatory Breach vs. Anticipatory Breach
2. Option available to  non-breaching party
  1. Failure to Perform
  • Performance means fulfilment of the obligations by the parties in accordance with the terms laid down in the contract. The effect of successful performance is to discharge the person bound to do the act from any future contractual liability, but note it the party is still liable to obligations arising prior to the discharge
  • Situations which a breach of contract occurs
  • When a party fails or refuses to perform his contractual obligation without lawful excuses
  • When a party performs defectively or incapacitates himself from performing

a) Seriousness of the Breach and Remedies Available

  • Where there has been a breach of contract, it is important to determine whether the breaching term is a condition or a warranty in order to establish the remedy available.
  • Whether a term is a condition or a warranty depends on the intention of the parties and seriousness of the infringement. Trade custom or previous dealings between the parties would also be considered

Condition

  • A condition is a central term and the breach of which would go to the root of the contract
  • If a party breaches a condition, the other party has the right to be discharged from the contract and to claim damages (compensation).
  • Situations which a breach of condition may occur:
    • A breach of a term expressly described as a condition will give a right of termination to the non-breaching party unless such a result is wholly unreasonable
    • Examples of breach of implied conditions under the Sales of Goods Ordinance (Cap.26)
      • A seller’s right to sell the goods
      • Seller’s obligation to sell the goods by description
      • Seller’s obligation to sell goods with merchantable quality and fitness for any particular purposes
      • If a contract of sale is a contract for sale by sample, the bulk should correspond with the sample in quality

Warranty

A warranty is a minor term. A breach of a warranty by a party gives the other party the right to claim compensation, but not to be discharged from the contract. In other words, the non-breaching party must continue to perform its obligations under the contract.

b) Repudiatory Breach vs Anticipatory Breach

Repudiatory Breach (Actual Breach)

With respect to repudiatory breach, the test whether an event discharges one of the parties from further performance of its undertakings is this: does the occurrence of the event deprive the party who has further undertakings still to perform, of substantially the whole benefit, which it was the intention of the parties as expressed in the contract that he or she should obtain as the consideration for performing those undertakings.

One must look at the actual circumstances of the case in order to see whether the one party to the contract is relieved from its future performance by the conduct of the other. What must be examined is whether that conduct amounts to an absolute refusal to perform the contract, such as would amount to repudiation. For instance, a deliberate refusal to make an interim payment is capable of amounting to a repudiation of the contract. Again, this requires a highly fact-sensitive analysis.

Anticipatory Breach

Sometimes a party, by its words or behavior, clearly expresses that it does not intend to perform its contractual obligation before its performance is due, or acts in such a way as to show its intention to break the contract before performance is due, the party has committed an anticipatory breach of the contract. However, what amounts to an anticipatory breach is highly fact-sensitive.

2) Options Available to Non-Breaching Party

Generally speaking, the innocent party can choose to take the following measures

  1. Treat the contract as discharged and sue for compensation (if a condition has been breached, or if there has been an anticipatory breach);
  1. Continue to act on the contract but sue for compensation; or
  2. Request the court to grant an order for specific performance, injunction, rectification or rescission, provided that no third party’s rights are affected.
    (See further elaboration on legal redress available)

Lastly, you are reminded that any purported acceptance of repudiatory breach must be clearly and unequivocally communicated. Non-performance of a contractual obligation on your part may itself constitute a repudiation capable of being accepted by the other party. Moreover, a mistaken assessment of a breaching party’s conduct could also have the same effect.

You should seek legal advice before alleging any breach of contract to evaluate your position and merits.

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