Discharge by Breach

A breach of contract occurs where one party fails to fulfill his contractual obligations, or does not intend to fulfill such contractual obligations under the contract. A breach of contract entitles the innocent party to sue for damages against the guilty party. However, the innocent party has a choice to treat the contract as still being alive in some cases of breach, even after suing for damages, while the innocent party may treat the contract as discharged in some other cases.

Repudiation

Repudiation occurs where one party declares before the date of performance that he does not intend to perform his own part of the contract. Repudiation is sometimes described as “anticipatory breach”. This repudiation May either be expressly, by words, or by conduct, once the party shows that he does not intend to perform his own part of the contract. Once one party has through his own words or conduct shown that he would be unable to perform his contractual obligations through a fault of his, the innocent party may treat the contract as discharged and bring an action for damages for whatever loss was suffered from the wrongful rescission. However, if the innocent party decides to treat the contract as still being in force, the innocent party must wait until the date the contract was to be performed before bringing an action for breach of contract. This principle was stated in Johnson v Milling.

As already stated, such wrongful repudiation may either be express, where one party states that he does not intend to perform his contractual obligations, or it may be implied from the party’s conduct. If A enters a contract to sell a house to B at a later date, but instead sells to C before that date, the repudiation of the contract may be implied from A’s conduct. Where the repudiation is to be implied from conduct, the court would look into what a reasonable person would conclude from the actions of the repudiating party. Such actions must show that the party intends to violate a substantial part of the agreement.

Fundamental breach

Another instance in which one party may treat himself as being discharged from further obligations under a contract is when the other party commits a fundamental breach. A fundamental breach is a breach which goes to the root of the contract to deprive the innocent party of substantially what he contracted for. In Photo Productions Ltd v Securicor Transport Ltd., Lord Diplock defined a fundamental breach of a contract as an event resulting from the failure of one party to perform a primary obligation which has the effect of depriving the party of substantially the whole benefit of the contract which was the intention of the parties that he should obtain from the contract.

A problem which arises out of the discharging of a contract solely on a fundamental breach is deciding what constitutes a fundamental breach. It has already been stated that it is when a party is deprived of the reason that party entered the contract. Still, at the end of the day, it is still the court’s view of what is important that matters.

The breach of a condition will also make a party entitled to treat the contract as discharged. It should be noted that this is one of the main aspects which differentiate a condition from a warranty.

Effect of discharge by breach

The effect of repudiation of a contract or a fundamental breach is that such a party is discharged from the performance of all future obligations. The rationale for an award of damages in the case of a breach is restoration. Unlike the damages awarded in restitution for misrepresentation which puts the innocent party in the position he would have been if he had never entered the contract, the damages for breach puts the innocent party in the position he would have been in if the breach had not occurred and the contract had been carried out.

The consequences of a discharge by breach would have to be examined in two different situations. One of these situations is where the innocent party treats the contract as still being in force, while the other situation is when the innocent party treats the contract as having come to an end.

1. Where the innocent party treats the contract as still being in force.

Where the innocent party treats the contract as still being in force, the parties retain all of their rights and obligations under the contract. In Modern Publications Ltd v Academy Press Publications Ltd, the defendant undertook to print magazines for the plaintiff, and the defendant ended up printing inferior magazines than specified in the contract. Nevertheless, the plaintiff accepted the magazines and distributed for sale without objections. The plaintiff sued for breach of contract. The court held that where one party is in breach of a contract, the other party is not obliged to accept the breach as repudiation and he may waive the breach and sue instead for damages. The court awarded damages in favour of the plaintiff.

2. Where the innocent party treats the contract as discharged.

In a situation where the innocent party treats the contract as discharged by the breach, the party who is at fault is liable for all the breaches committed. In Moschi v Lep Air Services Ltd, the court stated the legal consequences of repudiation when it stated the following.

When a contract is brought to an end by repudiation accepted by the innocent party, all the obligation in the contract come to an end and they are replaced by operation of law by an obligation to pay damages. The damages are assessed by reference to the old obligations, but the old obligations no longer exist as obligations. Were it otherwise, there would be in existence simultaneously two obligations, one to perform the contract, and the other to an award of damages. But that could not be right. The only legal nexus remaining is the obligation to pay damages.

A party to a breach of contract cannot approbate and reprobate. According to Bayo Kuku v Permroof Contractors Ltd., once the injured party has decided to accept repudiation, he cannot later change his mind and treat the contract as subsisting. Once he has decided to treat the contract as subsisting, he cannot treat the contract as terminated unless there are subsequent breaches.