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You are here: BAILII >> Databases >> Scottish Court of Session Decisions >> Alexander Stephen (Forth) Ltd v JJRiley (UK) Ltd [1976] ScotCS CSOH_4 (02 March 1976)
URL: http://www.bailii.org/scot/cases/ScotCS/1976/1976_SC_151.html
Cite as: 1976 SC 151, 1976 SLT 269, [1976] ScotCS CSOH_4

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JISCBAILII_CASE_SCOT_CONTRACT

02 March 1976

ALEXANDER STEPHEN (FORTH) LIMITED
v.
J. J. RILEY (U.K.) LIMITED

LORD KINCRAIG'S OPINION:—[His Lordship gave the narrative quoted supra, and continued]—The debate before me was concerned solely with the applicability of these conditions to the contracts between the parties. The defenders moved me to repel at this stage the pursuers' fifth plea-in-law, by which the pursuers ask to be assoilzied from the conclusions of the counter-claim on the ground that the claim is excluded by the conditions, or at least to refuse probation to those averments which purport to exclude the pursuers' liability for damages for failing to complete the work on the ship timeously. The pursuers moved me to sustain their third plea-in-law so as to refuse probation to the defenders' claim for damages, except the claim for the cost of remedying defective workmanship (Item 2 above). This was on the submission that as the defenders admit the applicability of the conditions, their averments are not relevant to enable them to avoid exclusion of their claim for additional cost, loss of profits and incidental expenses but may be relevant to avoid exclusion of the claim for damages for defective work, notwithstanding Condition 2. Quoad ultra both parties wish a proof before answer.

[His Lordship then considered averments with which this report is not concerned, and continued]—The main submission for the defenders was that the pursuers could not rely on Condition 5 to avoid liability for breaches of contract because the particular circumstances averred by the defenders as justifying their actions were not expressly covered by the condition. It was said that as the defenders averred that the pursuers' failure in performance involved something wholly different from what the contract contemplated this was a situation not expressly covered by Condition 5 and therefore it could not be invoked. Before examining this argument further it is desirable I think to state the law relating to the applicability of so-called "exception clauses" in contracts.

The law looks with disfavour on clauses in contracts which purport to exclude or limit liability for breach. The courts have accordingly limited the scope of such clauses by applying to them a strict construction and contra proferentem and, where there is ambiguity, giving to them a construction which is against their applicability. In England there have been a number of cases in which effect was denied to such clauses where the breach of contract consisted of a failure to perform an obligation which went to the root of the contract, a so-called fundamental breach. Judicial expressions in these cases gave rise to a. doubt as to whether the clauses were not given effect to because there was a substantive rule of law that they could not be relied on in fundamental breach cases, or because on a proper construction of the contract being considered parties did not intend the clause to apply to such fundamental breaches. The matter was resolved in the case of Suisse Atlantique etc. v. N.V. Rotterdamsche etc . [1967] A.C. 361. The decision in the case did not depend on the resolution of the doubt, and the speeches of their Lordships in the House of Lords are not technically binding, but they are of such high authority that I must accept them as stating the law of Scotland. All of the Judges, except possibly Lord Wilber-force, express the view that there is no rule of law which prevents parties to a contract agreeing to limit their respective liabilities. It is a question of the construction of the particular clause as to whether it applies to a fundamental breach or not. The opinion of Lord Wilberforce on this point is to be found at page 432 of the report where his Lordship says:

"One may safely say that the parties cannot, in a contract, have contemplated that the clause should have so wide an ambit as in effect to deprive one party's stipulations of all contractual force: to do so would be to reduce the contract to a mere declaration of intent. To this extent it may be correct to say that there is a rule of law against the application of an exceptions clause to a particular type of breach. But short of this it must be a question of contractual intention whether a particular breach is covered or not and the courts are entitled to insist, ass they do, that the more radical the breach the clearer must the language be if it is to be covered."

Mr Cullen for the defenders argued only on the construction of Condition 5. He did not contend that he was entitled to succeed because there was a rule of law against the enforceability of exception clauses for fundamental breaches of contract.

In the speeches in Suisse Atlantique the meaning of the expression "fundamental breach" was considered. Lord Reid, who was the only Scottish Judge involved in the decision, said at page 397:

"General use of the term ‘fundamental breach’ is of recent origin and I can find nothing to indicate that it means either more or less than the well-known type of breach which entitles the innocent party to treat it as repudiatory and to rescind the contract."

In Gloag on Contract at page 602 it is stated:

"It is not every breach of a contract which will justify rescission. A remedy so drastic requires a breach which is in the circumstances material. A minor breach may give rise to a claim of damages but to a claim of damages only. It is familiar law and quite well settled by decisions that in any contract which contains multifarious stipulations there are some which go so to the root of the contract that a breach of those stipulations entitles the party pleading the breach to declare that the contract is at an end. There are others which do not go to the root of the contract but which are part of the contract and which would give rise if broken to an action of damages."

This is a quotation from the speech of Lord President Dunedin in Wade v. Waldon 1909 SC 571 at page 576. Gloag goes on:

"Or as it has been put by Lord Blackburn, the question is whether a particular stipulation goes to the root of the matter so that a failure to perform it would make the performance of the rest of the contract a different thing from what the other party had stipulated for, or whether it merely partially affects it, so that compensation may be adequately given in damages. The question whether a particular obligation or condition is material is of importance, not only in cases where a right to rescind the contract has been claimed or exercised, but also where one party maintains the minor right of refusing to perform the obligations incumbent upon him until the other has fulfilled his part. As materiality is a question of degree there may be cases of failure sufficiently material to justify a claim of retention or lien, without amounting to such a repudiation as would sanction the rescission of the contract."

Further down on page 603 Gloag states:

"Where there is a total failure of performance, or a refusal to perform by one party, there is no doubt that the other is entitled to treat the failure or refusal as a repudiation of the contract, and to declare it at an end except in so far as regards his own claim for damages."

The contract here is governed by the law of Scotland. Sitting in a Scottish Court it is difficult to do other than accept Lord Reid's opinion as to what constitutes a fundamental breach of contract in Scotland, and it appears to me that it is the same as the breach of a material condition of the contract which justifies the other party in rescinding it. Moreover, it seems to me that Lords Upjohn and Hodson had precisely the same notion in mind as to what constitutes a fundamental breach of contract. Thus Lord Hodson at page 410 said:

"As has been recognised at the bar on both sides the expression fundamental breach is of comparatively recent origin and has seemed to have attained some mystical meaning in the law of contract. For my part I doubt whether anything is to be gained by analysing the various expressions which have been used to describe breaches of contracts so serious as to justify the injured party in throwing up the contract if he so chooses."

Lord Upjohn at page 421 said:

"I believe that all of your Lordships are agreed, and indeed it has not seriously been disputed before us, that there is no magic in the words ‘fundamental breach.’ This expression is no more than a convenient shorthand expression for saying that a particular breach or breaches of contract by one party is or are such as to go to the root of the contract which entitles the other party to treat such breach or breaches as a repudiation of the whole contract. Whether such breach or breaches do constitute a fundamental breach depends upon the circumstances of the contract and on all the facts and circumstances of the case. The innocent party may accept that breach or those breaches as a repudiation and treat the whole contract at an end and sue for damages generally or he may at his option prefer to affirm the contract and treat it as continuing on foot, in which case he can sue only for damages for breach or breaches of the particular stipulation or stipulations in the contract which has or have been broken."

Where therefore parties use the words "fundamental breach" in a written contract, which is to be governed by the law of Scotland, the phrase must be taken to have been intended to have the same meaning as "material breach."

As I have said the defenders' main submission was that the pursuers could not rely on Condition 5 because the pursuers' failure in performance involved something wholly different from what the contract contemplated, and as this was not a situation expressly covered in Condition 5 it could not be invoked. This argument was based upon passages in the speech of Lord Wilberforce in the case of Suisse Atlantique at page 431. These passages are as follows:

"Next for consideration is the argument based on ‘fundamental breach’ or, which is presumably the same thing, a breach going ‘to the root of the contract.’ These expressions are used in the cases to denote two quite different things, namely, (1) a performance totally different from that which the contract contemplates; (2) a breach of contract more serious than one which would entitle the other party merely to damages and which (at least) would entitle him to refuse performance or further performance under the contract. Both of these situations have long been familiar in the English law of contract and it will have to be considered whether the conception of fundamental breach extends beyond them. What is certain is that to use the expression without distinguishing to which of these or to what other situation it refers, is to invite confusion. The importance of the difference between these meanings lies in this, that they relate to two separate questions which may arise in relation to any contract. These are as to (1) whether an exceptions clause contained in the contract applies as regards a particular breach and as to (2) whether one party is entitled to elect to refuse further performance. The appellants in their submission that exceptions clauses do not apply to fundamental breaches or repudiations confuse these two questions. There is in fact no necessary coincidence between the two kinds of so-called fundamental breach. For though it may be true generally, if the contract contains a wide exceptions clause, that a breach sufficiently serious to take the case outside that clause will also give the other party the right to refuse further performance, it is not the case necessarily that a breach of the latter character has the former consequence. An act which, apart from the exceptions clause, might be a breach sufficiently serious to justify refusal of further performance may be reduced in effect or made not a breach at all by the terms of the clause."

Counsel for the defenders argued that while Condition 5 may apply to such a fundamental breach as entitled the customer to rescind, it is not made to apply to the other type of fundamental breach, i.e., where the performance is so totally different from that which the contract contemplates. I do not think that the passages from Lord Wilberforce's speech helps the argument of counsel for the defenders. As I understand Lord Wilberforce, he is dealing with two situations in the context of a wide exceptions clause in the contract, one where the breach is so serious as to take the case outside the clause because it is so serious that the parties cannot be presumed to have intended the exceptions clause to apply to it, and the second where there is such a breach of contract as would entitle the other party to rescind but to which nevertheless the exceptions clause may apply so as to reduce the effect of the breach and make it not a breach of contract at all. The difference, however, between the two cases depends upon whether the exceptions clause has been so framed as to be incapable of being applied literally, that is to say where the courts must presume that the parties did not have in contemplation the particularly serious breach to which the exceptions clause is pleaded to apply. In my judgment if, as averred by the defenders here, either the pursuers' conduct was a breach of their contract with the defenders in a respect in which performance was essential to the carrying out of the purpose of the contract, or if the extent and effect of the work done by the pursuers was fundamentally different from that contemplated by the contract, the breaches were such as to entitle the defenders to rescind and I do not understand Lord Wilberforce to be saying that one was not a fundamental breach when the other was. In my judgment both are such breaches of contract as would justify rescission whether they are called fundamental breaches or not and it is precisely, I think, to a situation where the pursuers have been in breach of contract which would justify rescission that the terms of Clause 5 are intended by the parties to apply.

In my judgment there is no ambiguity in Condition 5. It expressly deals with two situations (1) where the defenders are entitled to terminate the contract by reason of a fundamental or other repudiatory breach on the part of the pursuers; and (2) where the defenders have in fact terminated the contract on the ground of the breach of contract by the pursuers. There can be no rule for presuming that the parties have not contemplated the situation where the pursuers have been in fundamental breach of contract and for thus denying effect to the condition. Such a situation has in fact been contemplated and provisions agreed to be applicable to it. If the principle upon which the courts will deny to exceptions clauses their effect is based upon the presumed intention of the parties and thus makes way for the application of implied terms, this principle can have no relevance to this case where it is clear that the parties have expressly provided for a situation where the pursuers have been in fundamental breach of contract.

If, therefore, the defenders did in fact treat the pursuers' failure to perform their obligations under the contracts as so material as to justify rescission by the defenders, and did in fact rescind and withdraw their vessel, the situation expressly provided for by Condition 5 materialised. If the extent and effect of the work done by the pursuers was fundamentally different from that contemplated by the contract as the defenders aver and if this means something different from mere failure to do the work in time, it was a breach of contract which was so material as to entitle the defenders to rescind the contract whether or not they did in fact do so. Again Condition 5 expressly covers this situation.

Counsel for the defenders submitted that where a contract is terminated by the innocent party electing to treat it as repudiated by the party in breach, the exclusion of liability clause cannot be founded on as a defence to a claim for damages for future loss, however the exclusion clause is worded. The clause goes with the contract. This argument, if right, would only affect the defenders' claim here for loss of profits and loss of use of the vessel. It would still leave unaffected the applicability of the exclusion clause to the claim for damages quantified by reference to the increased cost of the work done to the vessel in Rotterdam. The argument was supported by reference to the speeches of Lords Reid and Upjohn in Suisse Atlantiqueand to the case of Harbutt's Plasticine v. Wayne Tank Company [1970] 1 Q.B. 447. The passage in Lord Reid's speech in Suisse Atlantique is at page 398 and is in the following terms:

"If fundamental breach is established the next question is what effect, if any, that has on the applicability of other terms of the contract. The question has often arisen with regard to clauses excluding liability, in whole or in part, of the party in breach. I do not think that there is generally much difficulty where the innocent party has elected to treat the breach as a repudiation bringing the contract to an end, and sue for damages. Then the whole contract has ceased to exist including the exclusion clause, and I do not see how that clause can then be used to exclude an action for loss which will be suffered by the innocent party after it has ceased to exist, such as loss of the profit which would have accrued if the contract had gone its full term."

The passage from Lord Upjohn's speech is at page 425 and is as follows:

"If I am right in drawing this conclusion then the necessary result in my opinion is that the principle upon which one party to a contract cannot rely on the clauses of exception or limitation of liability inserted for his sole protection, is not because they are regarded as subject to any special rule of law applicable to such clauses as being in general opposed to the policy of the law or some other reason but, just as in the deviation cases, it is the consequence of the application of the ordinary rules applicable to all contracts that if there is a fundamental breach accepted by the innocent party the contract is at an end. The guilty party cannot rely on any special terms in the contract. If not so accepted the clauses of exception or limitation remain in force like all the other clauses of the contract."

I do not regard the passages relied upon as support for the proposition that parties to a contract cannot agree to exclude the liability of one for breach of contract, although the consequences of such breaches are loss in the future. In my judgment it is possible in law for parties to regulate their rights on the basis that the contract has been terminated and to provide in the same agreement for that situation. That is what the parties have done here in Condition 5 which is expressly said to come into operation only after a breach of contract by the pursuers.

What I think Lords Reid and Upjohn were dealing with was the applicability of the exclusion clause solely to a claim for damages for a failure on the part of the guilty party to perform an obligation after the repudiation and rescission, i.e., an obligation which was not due to be performed until after the fundamental breach. Further, I think that their Lordships were considering exceptions clauses couched in terms which were so wide that parties could not be held to have contemplated them as applying to a fundamental breach. They were not, I think, laying down as a proposition in law that in whatever terms the exceptions clause is worded it can never be applied to a loss suffered after the contract has come to an end. It is clear from later passages in the speeches that both Lord Reid and Lord Upjohn do consider that a clause can be so devised, if the words used are clear and unambiguous, which will apply to at least some cases of fundamental breach. If so it surely must be possible, unless there is a substantive rule of law to the contrary, for parties to agree how their rights are to be regulated if one of the parties is in such fundamental breach of contract as entitles the other to rescind and thus end the contract, and to do so in the same document which embodies the obligations of the parties during the subsistence of the contract. I was referred to no such substantive rule in the law of contract in Scotland, and in my judgment that law allows parties to contract as they may see fit, and to contract in such a way as to limit their liability, even in cases of so-called fundamental breach or, to put in phraseology more familiar to Scots lawyers, in cases where there has been a material breach of contract by one of the parties which entitles the other to rescind the contract.

In the case of Harbutt's Plasticine Lord Denning M.R. said, at p. 464 in dealing with the effect and consequences of a fundamental breach of contract:

"In cases where the contract is still open to be performed, the effect of a fundamental breach is this: it gives the innocent party, when he gets to know of it, an option either to affirm the contract or to dis-affirm it. If he elects to affirm it then it remains in being for the future on both sides. Each has a right to sue for damages for past or future breaches. If he elects to dis-affirm it (namely, accepts the fundamental breach as determining the contract) then it is at an end from that moment. It does not continue into the future. All that is left is the right to sue for past breaches or for the fundamental breach but there is no right to sue for future breaches."

(I pause to observe that there can be no future breaches. Once the contract is at an end there are no obligations on either party to be performed and therefore there can be no breaches of such non-existing obligations.) Lord Denning, after considering the case where a fundamental breach itself brings the contract to an end, goes on to pose the question:

"When a contract is brought to an end by a fundamental breach by one of the parties, can the guilty party rely on an exclusion or limitation clause so as to avoid or limit his liability for the breach?"

He then answers that question in the negative in a case where the innocent party rescinds the contract. His authority for doing so are the passages from the speeches of Lord Reid and Lord Upjohn in Suisse Atlantique which I have quoted. Lord Denning then proceeds to say that the position must be the same when the defendant has been guilty of such a fundamental breach that the contract is automatically at an end. Later in his opinion at page 467 Lord Denning says as follows:

"Before leaving this part of the case I would just like to say what in my opinion is the result of the Suisse Atlantique case. It affirms the long line of cases in this court that when one party has been guilty of a fundamental breach of the contract, that is a breach which goes to the very root of it and the other side accepts it so that the contract comes to an end or if it comes to an end anyway by reason of the breach, then the guilty party cannot rely on an exception or limitation clause to escape from his liability for the breach."

The matter is dealt with by Lord Justice Widgery at the foot of page 470 where he says:

"It is not disputed that if the defendants committed a fundamental breach of the contract which the plaintiffs accepted as amounting to a repudiation thereof, the result has been to put an end to the whole contract and deprive the defendants of the protection of Clause 15 (the limitation clause)."

Lord Justice Cross at page 475 says:

"In considering whether or not the party who has been guilty of a fundamental breach of contract can nevertheless rely on a clause excluding or limiting his liability for damage flowing from it, the courts have drawn a distinction between cases in which the innocent party elects to hold the other party to the contract notwithstanding the breach, and cases in which he accepts the fundamental breach as putting an end to further performance of the contract. In the former class of case the question whether an exclusion clause will be held to apply to the breach depends on the construction of the clause in the light of the particular circumstances. If on the other hand the innocent party elects to treat the contract as at an end the other party cannot claim that the exclusion clause applies to the fundamental breach. See the Suisse Atlantiquecase."

With respect to these eminent judges I cannot agree that a party guilty of a fundamental breach which the other party accepts as repudiating the contract cannot rely on an exceptions clause to escape from liability, if that proposition is intended to apply in all cases no matter how the exceptions clause is worded. I note Lord Justice Widgery's opinion that the matter was not in dispute in the argument before the Court of Appeal in Harbutt, perhaps because of the width of the clause.

I was also referred to the decision of Donaldson J. in Kenyan Ltd. v. Baxter Whoare & Co. [1971] 1 W.L.R. 519. The exceptions clause there being considered was quite different from Condition 5 here. Donaldson J. was able to hold on the facts that there was no fundamental breach of contract and accordingly to apply the exceptions clause.

For the reasons which I have above given I shall accede to the pursuers' motion. I shall sustain the pursuers' third plea-in-law to the effect of excluding from probation the defenders' claim for damages for breach of contract except the claim related to defective workmanship. I shall exclude from probation the pursuers' averments on page 36 dealing with Conditions 4(b) and (c) of the contract. Quoad ultra I shall allow a proof before answer.

[1976] SC 151

The permission for BAILII to publish the text of this judgment
was granted by Scottish Council of Law Reporting and
the electronic version of the text was provided by Justis Publishing Ltd.
Their assistance is gratefully acknowledged.


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