Legal Unit 15

Breach of contract

Anticipatory breach of contract: This occurs when a party declares in advance that they do not intend to perform their obligations under the contract. The breach happens before the performance is actually due.

Actual breach of contract: This occurs either on the date performance is due or during the course of performance, when a party fails to fulfill their contractual obligations.

Remedies of a breach def

Purpose of remedies: The main goal of contract law is to protect the parties’ expectations by ensuring that promises are fulfilled. If a party fails to perform, the law grants remedies to the other party.

Definition of a remedy: A remedy is a court order that upholds someone's right or compensates for an illegal act. It allows the aggrieved party to seek legal relief when the contract is breached.

Types of remedies

Specific performance: If a party does not perform, the court may force them to do so.

Termination of contract: The non-breaching party may seek to dissolve the contract, refuse to perform their own obligations, or request restitution for anything already paid.

Damages: A monetary award designed to place the aggrieved party in the position they would have been in had the contract been properly performed. Damages can be awarded alone or together with claims for performance or termination.

Theoretical foundation of remedies

The availability of remedies for breach of contract depends on the role that legal system assigns to contract law

Moral approach to contract law: Contracts must be honored (pacta sunt servanda). The legal system favors compelling performance to fulfill the debtor’s obligation.

Economic approach to contract law: Contracts serve to improve welfare. If performance isn’t viable, the law allows the debtor to pay compensation to restore the other party’s financial position.

Remedies: Comparison between legal systems:

Civil law approach: Specific performance is the general remedy. It is denied only in exceptional cases.

Common law approach: Damages are the default remedy (monetary reward). Specific performance is exceptional and typically reserved for unique goods or circumstances.

Civil law approach to remedies

Right to claim performance: Each party in a civil law contract holds an enforceable right to demand the other party’s performance. Non-performance, defective performance, or delay all trigger this right.

Specific performance as the general remedy: In civil law systems, the default response to breach is specific performance — the creditor can ask the court to compel the debtor to fulfill their obligation.

Enforcement by authority: If the debtor fails to comply with the court order, an official may seize the good owed and deliver it to the creditor.

Exceptions to specific performance:

Impossibility to perform: Performance is physically or legally impossible, regardless of whether the debtor is at fault.

Disproportionate cost: Performance is still possible but would cause unreasonable expense or effort for the debtor.

Contracts involving personal services: For example, a contract to paint a portrait. Enforcing such a service may violate personal freedom or result in subpar performance if forced.

Legal basis – German Civil Code (ß241 BGB): The creditor has the right to claim

performance from the debtor in order to enforce the obligation.

Legal basis – French Civil Code (Art. 1221): After having given notice to perform, the creditor may demand performance in kind unless: Performance is impossible; or here is a manifest disproportion between the cost to the debtor and the creditor’s interest in receiving the performance.

Common law approach to remedies

General principle – damages over performance: In common law, the default remedy for breach of contract is monetary compensation (damages). The promise is entitled to money rather than performance itself.

Efficient breach theory: According to Justice Oliver Wendell Holmes Jr., the law should allow a party to break the contract and pay damages if doing so is more efficient than performing it. This gives parties freedom to breach when economically justified.

No specific performance for generic goods: Courts deny specific performance if the goods are replaceable on the open market. 

Case – SociÈtÈ des Industries MÈtallurgiques v Bronx Engineering Ltd (1975):

A machine was wrongfully withheld. The court refused specific performance because the machine could eventually be replaced, even if it took 9–12 months.

Monetary damages suffice when a market substitute exists:

Example – wheat contract: If A repudiates a contract to sell B 1,000 bushels of wheat at market price, B can simply buy from the market. Damages are adequate — no specific performance.

Specific performance for unique goods:

Example – Van Gogh painting: If A agrees to sell B “Wheatfield with Crows” for €800,000 and breaches, B’s only way to get that specific artwork is through specific performance. Damages are inadequate due to theuniqueness of the item.

Exception – when damages are inadequate:

Specific performance is granted when no adequate market substitute exists.

Typical cases: Land, art, rare objects, or anything with unique qualities.

Termination As a Remedy:

If a party claims performance and/or damages, it must still perform its obligations. However, the innocent party may choose to terminate the contract if allowed by law. Dissolves the effects of the contract. No further performance is owed by either party. Any performance already rendered must be returned to the respective party.

Civil Law Approach to Termination:

Material Breach Required: In civil law, termination is permitted only if the breach is material (serious).

Example – Insignificant breach: A owes B 2 tons of wheat and delivers 1,999 tons. This does not justify termination.

Example – Significant breach: A baker delivers a wedding cake one day late. This is a fundamental breach justifying termination.

General Principle: Breach of contract may lead to termination only if the breach is fundamental.

Fundamental Breach of Contract:

A minor failure to fully perform results in liability for damages, but not necessarily in the right to terminate the contract.

Art. 8:103 PECL: A non-performance is fundamental if:

Strict compliance is essential to the contract.

Substantial deprivation: The breach deprives the aggrieved party of expected benefit, unless unforeseeable.

Intentional breach: The breach is deliberate and undermines trust in future performance.

Common Law Approach to Breach and Termination:

Types of contract terms: The ability to terminate depends on the nature of the term breached.

Conditions: Major terms. Breach allows for termination and damages.

Warranties: Minor terms. Breach allows for damages but not     termination.

Innominate (intermediate) terms: Whether termination is allowed depends on whether the breach deprives

Case Study – Hong Kong Fir v Kawasaki (1962):

The ship ‘Hong Kong Fir’ was hired out under a two-year time charter-party to Kawasaki Kisen Kaisha, in order to sail from Liverpool to Osaka through Virgina and Panama. A term in the charterparty agreement required the ship to be seaworthy and to be «in every way fitted for ordinary cargo service». However, the crew were both insufficient in number and incompetent to maintain her old-fashioned machinery; and the chief engineer was a drunkard. On the voyage, the engines suffered several breakdowns and fifteen weeks of repairs were needed before the ship was seaworthy again. By this time, barely seventeen months of the two-year time-charter remained. As the charterers still get to have the boat for 20 more months, the expected benefits can still be received. Therefore, this breach does not lead to termination, but only to damages.

Key takeaway: An intermediate term was breached, but the consequence wasn’t severe enough to justify termination. Only damages were awarded.

Contractual termination rights:

Termination may occur even in the absence of a

fundamental breach if the parties have contractually agreed upon specific

termination conditions.

Explicit dissolution clause: The contract may include a clause stating that it will be dissolved if a particular obligation is not performed in a specified manner. This allows parties to give fundamental importance to obligations that would otherwise be of minor importance.

Time essential for one party: The contract can be terminated if a fixed time for performance has been explicitly designated as essential to the interest of one of the parties.