For the London Free Press – October 29, 2007

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For more than fifty years, contract law has been haunted by the spectre of fundamental breach.

From its inception in the law courts of the United Kingdom in the 1950s it was controversial. In essence, it is a way for courts to look beyond a contract, or at least not to enforce limitation of liability clauses contained in a contract, to provide a remedy for very serious contractual breaches.

Regardless of the theory, we simply need to remember that no-one can hide behind a limitation of liability clause in a contract if they don’t perform at all, or fail miserably — even if the limitation clause is a typical one.

In more technical terms, if a party commits a radical breach of a contract — then uses an exculpatory clause to take all the benefits of the contract but none of the burdens — the courts will prohibit that party from relying on that exculpatory clause irrespective of how clearly it is drafted, because to do so would be unfair to the other contracting party.

To this day, legal theorists and even judges are unable to agree exactly what amounts to a fundamental breach of contract, or if such a thing should even exist.

In a recent article in the Canadian Bar Review entitled Return of the undead: fundamental breach disinterred, Richard F. Devlin, Associate Dean at Dalhousie Law School, looks at how the principle seems to stick around despite efforts by some judges to eliminate fundamental breach as a concept of Canadian contract law.

While judges, academics and lawyers struggle with the differences, theories, and appropriateness of the concept of fundamental breach, or alternate concepts such as unconscionability or good faith – the practical effects on the enforcement of contracts are virtually the same.

In one instance the doctrine of fundamental breach was used to prevent a storage company from relying upon a limitation of liability clause. Under questionable circumstances, after the rent on a storage locker fell behind, the storage company sold the goods contained within, valued at $60,000, to an auctioneer for $800. The court held this action amounted to a fundamental breach of the contract.

In another case, a company was hired to move household possessions. They left the moving truck parked on the street overnight without any security or monitoring and the goods were stolen. The court found they could not rely upon their limitation of liability clause as their breach of contract was unconscionable.

As the courts struggle with the concept of fundamental breach and some judges try to get rid of the concept entirely, the reality is that courts will find a way to provide remedies for significant breaches of contract by whatever legal theory is available to them.

Despite the uncertainty provided by the presence of the doctrine of fundamental breach, there is little question that limitation of liability clauses will remain standard fare. In most cases they serve a useful purpose and can be applied quite successfully. In the end, however, no one can safely hide behind a limitation clause in situations where they don’t perform their obligations under a contract at all, or fail miserably to do so.