Minor breaches may add up

For the London Free Press - September 13, 2010 Read this on Canoe

The concept they may accumulate to equal a material breach is consistent with our case law

The United Kingdom Court of Appeal recently held that many minor breaches of contract can combine to be treated the same as a single material breach.

The claimant gas supplier entered into an agreement with the defendant for installation and maintenance of a new IT system, including an automated billing. The agreement included a warranty provision requiring the defendant to take remedial action for a fundamental breach.

Fundamental breach is essentially a way for courts to ignore limitation of liability clauses in contracts where it feels the defendant's actions make it unfair for it to escape liability.

The rollout of one of the phases of the project was delayed following disputes over scope and performance. Although this was corrected, the new plan resulted in many problems, with increasing client dissatisfaction and customer accounts going unbilled. The claimant notified the defendant of what they perceived as amounting to a fundamental breach.

The defendant failed to correct the problems. A preliminary issue at trial was whether individual errors in the system could be aggregated to constitute a fundamental breach. The Court held that minor breaches of contract that might have no consequences individually can accumulate to equal a material breach that results in greater liability and more serious consequences.

This decision is consistent with Canadian case law.

In Canada the concept of fundamental breach has been replaced with a public policy test to determine if a strict reading of a contract in favour of a defendant should be set aside. Despite that, many of the principles established in previous fundamental breach case law will likely continue to be persuasive.

There are several cases in which fundamental breach was found as a result of an aggregation of small defects. An example is Lightburn v. Belmont Sales Ltd. (1969), in which the British Columbia Supreme Court found that over a period of some eight months a car which never gave satisfactory service and was returned to the vendor for repair some 17 times as a result of various defects constituted a breach of a fundamental term of the contract.

Another example is Knowles v. Anchorage Holdings Co. (1964), where the British Columbia Supreme Court found that where defects are so numerous that, taken en masse, they destroy the workable character of the thing sold, it may amount to a fundamental and total breach of the contract, so as to disentitle the defendant from taking refuge behind an exclusionary clause upon which, if the defects were considered singly, he might rely.

A third example can be found from the Court of Queen's Bench of Alberta where in dismissing a summary judgment application the court held that it is not "plain and obvious" or "beyond a doubt" that a trial judge would find that a series of breaches could amount to a fundamental breach.

So in the right circumstances it should still be possible to argue that a series of minor breaches may lead to limitation clauses being ignored based on public policy.