Types of Contract Breaches
Posted on December 19, 2020 | ⌚ 3 min read
A contract is said to be breached when one party performs defectively, differently from the agreement, or not at all (actual breach), or indicates in advance that they will not be performing as agreed (anticipatory breach).
Following from this definition, it follows that there are two kinds of contract breaches:
As the name suggests, an anticipatory breach occurs when one party indicates in advance they will not perform the contract as agreed. Although actual breach has not occurred, the other party can sue for breach straight away when an anticipatory breach occurs.
The innocent party may elect to repudiate the contract in case of anticipatory breach.
On the contrary, an actual breach occurs when one party performs defectively or differently from the agreement. This entitles the innocent party to damages or to discharge from the contract depending on the importance of the contract term breached.
Contract terms can be classified into Conditions & Warranties, according to their importance:
Breach of a Condition
A condition is an important term that is material to the contract, that if breached, would have severe consequences on the innocent party. For example, a condition could be a payment to the contractor, or quality of work done by the contractor.
A breach to a condition may entitle the contractor to terminate the contract, i.e. be discharged from performance of further obligations, and may claim damages.
Breach of a Warranty
A warranty is a less important term of the contract, that if breached does not have severe consequences on the innocent party. For example, a warranty could be an obligation on the contractor to submit a time programme on time.
A breach to a warranty does not entitle the contractor to terminate the contract, but may entitle the contractor to damages.
It is noteworthy that in case of breach, the contract is not immediately discharged/terminated. The innocent part may elect to either terminate it or not.
Relation with Sub-Clause 15.1 of the FIDIC 99 Conditions of Contract
Accordingly, in construction contract administration, the word breach may hold a lot of meaning depending on the context, and its usage does not necessarily mean, as commonly thought, a material breach (breach of condition) has taken place.
Moreover, while Sub-Clause 15.1 in FIDIC Redbook 99 implies that the Engineer could serve a Notice to Correct to the Contractor on any failure to comply with any obligation no matter how insignificant it could be, recent case law has highlighted that the Notice to Correct should relate to material breaches (breaches of conditions) related to the Contract, not merely any obligation as implied in the Sub-Clause. In particular, in the case of Obrascon Huarte Lain SA v Her Majesty's Attorney General for Gibraltar, the Judge stated that:
... (a) Clause 15.1 relates only to more than insignificant contractual failures by the Contractor. It could be a health and safety failure, bad work, serious delay on aspects of the work or the like. It will need to be established as a failure to comply with the Contract. Something may have not yet become a failure; for instance the delivery to site of the wrong type of cement may not become a failure until the cement is or is about to be used ...... It follows that, in construing both Clauses 15.1 and 15.2 of the Contract, a commercially sensible construction is required. The parties can not sensibly have thought (objectively) that a trivial contractual failure in itself could lead to contractual termination. Thus, there being one day's culpable delay on a 730 day contract or 1m of defective paintwork out of 10,000m good paintwork would not, if reasonable and sensible commercial persons had anything to do with it, justify termination even if the Contractor does not comply with a Clause 15.1 notice. What is trivial and what is significant or serious will depend on the facts.
The editors of Hudson's Building and Engineering Contracts (Twelfth Edition) also say at Para 8.056:
Termination clauses occasionally allow termination on the ground of "any breach" or "any default". Although in principle, parties may agree whatever they wish, the courts will generally be reluctant to read such wording literally. "Default" will be read as meaning a default relevant to the contract, and the courts will treat matters which are not a breach of contract as excluded from the meaning of default. "Any breach" will be held to refer only to important breaches, to exclude minor breaches, and to include only such breaches as are of substantial importance.
Furthermore, Article 5 of the Egyptian Civil Law states that:
The exercise of a right is considered unlawful in the following cases:
- if the sole aim thereof is to harm another person;
- if the benefit it is desired to realize is out of proportion to the harm caused thereby to another person;
- if the benefit it is desired to realize is unlawful.
which, in my opinion, agrees with the reasoning of Mr. Justice Akenhead above, which limits the type of obligations Sub-Clause 15.1 relates to to conditions rather than warranties.
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