The Advocate
Informing Marine Engineers about legal matters
Authored by: Darren Williams, Williams & Company
Brought to you by www.dieselduck.net, comments to [email protected]
Principles of Contract Law for Mariners
Obligations to Perform & Fundamental Breach Costly consequences
can flow from incorrectly assuming that another person's failure to
abide by a contract relieves you of your obligations under the same
agreement.
Whether you manage a multi-million dollar ship repair business, you
own and operate a single independent coastal tug, or you sell marine
gaskets over the telephone, it pays to understand when, as party to
a contract, you must honour your obligations under the contract even
though the other party appears not to be honouring theirs. Failing
to have this understanding, and saying "they didn't hold up there
end of the bargain, so I'm not going to hold up my end", can have
significant economic consequences even though your position may
appear reasonable. To this end, this month's "Advocate" will discuss
the principle of "fundamental breach of contract" and describe how
in most cases a fundamental breach of contract is necessary in order
for a party to be relieved of obligations under an agreement that is
breached by another party.
An Example: Purchase of a Vessel
In explaining fundamental breach, it is useful to start with a
common example, the purchase and sale of a vessel. Hypothetically,
Mr. Jones is looking to buy a landing craft on which he can load
fuel and supplies for delivery to various customers along the coast.
Mr. Jones locates a used landing craft for sale by Mr. Smith, who is
selling it "in seaworthy condition" for $300,000. Smith had bought
the vessel from his brother only a month earlier for $200,000.
Jones, in dire need of the vessel, completes a basic visual
inspection at the dock and offers to purchase the vessel for
$300,000 with delivery of the vessel to occur at Smith's dock the
following week. Jones pays the $300,000 to Smith and upon taking
delivery of the vessel learns the auxiliary engine requires a
rebuild, and several areas of the hull need replating - Jones is
quoted $150,000 to repair the engine and plating. Frustrated by the
cost and inconvenience, Jones offers to buy a different but similar
vessel the next day, calls Smith to tell him he has left the landing
craft at Smith's dock, and demands the return of his $300,000.
From Mr. Jones' perspective, he was being forced to spend $450,000
for a vessel he had originally agreed to pay $300,000 -the extra
expense is a deal breaker for him. Jones would rather have his money
returned and spend it on another vessel than undertake the repairs
on the vessel. From Mr. Smith's perspective, a deal is a deal -he
had delivered the vessel and it was capable of transporting goods.
Jones had his inspection and decided he wanted the vessel. Smith is
faced with having to take back the vessel and find a new buyer, and
return the $300,000 to Jones. If he is unable to find a new buyer
for the vessel at $300,000, and is forced to sell it for the
$200,000 he bought it for, he would lose the
$100,000 he would have made on the deal with Jones. Smith also has
the additional expense of marketing the vessel and paying the
insurance and moorage in the meantime.
The Law Supports Enforcement of Contracts
The law of contract generally supports the enforcement of contracts made between people because the purpose of contract law is not to interfere with business transactions, but to support and encourage them. The law recognizes that bargains may be struck that are more beneficial to some parties than to others, and the fact they are not equally beneficial is no reason to set the agreement aside. The law will be slow to protect someone who, by their own action, strikes a bad bargain.
The law has little sympathy for bad negotiators and careless purchasers.
For the law to take a different approach would mean almost every
agreement could be challenged because it was not equally fair to
both parties - it would be difficult to rely on the terms of any
agreement if this were the case.
In most cases, where a party breaches a term of a contract it is not
open to the other party to refuse to complete on their obligations
under the contract. There is no "you didn't hold up your end of the
bargain so I am not holding up mine". The remedy of the person who
finds another party breaching is to complete on the contract and sue
for the damages suffered as a result of the other party's breach. In
the above example, the remedy of Jones, the purchaser, is not to
refuse to take delivery of the vessel and demand his money back, but
rather he must take possession of the vessel and sue Smith for the
cost of the repairs.
The Exception to the Obligation to Perform: Fundamental Breach
"Fundamental breach" of a contract is an exception to the rule
that a party cannot refuse to complete their obligations under a
contract simply because the other party breaches the contract.
Courts have said a fundamental breach is a breach that "goes to the
root of the contract", "significantly effecting the very thing
contracted for", and "depriving the innocent party of substantially
all of the benefit of the contract".
The leading cases in Canada on fundamental breach is the Supreme
Court of Canada's 1989 decision in Hunter Engineering v. Syncrude.
In that case, Syncrude sued Hunter Engineering for supplying faulty
gear boxes that were used to drive the conveyors that carried sand
at Syncrude's tar sands project. The gear boxes were supplied as
part of a larger system of 14 conveyors provided by Hunter
Engineering. The gear boxes worked properly for about one year after
which they began to fail one by one, affecting four of the
conveyors. A design fault in the gear boxes was identified and
Syncrude sued to keep monies paid for the equipment. The Court found
that the failure of the gearboxes was not a fundamental breach
because Syncrude had taken substantially all of the benefit of the
conveyor system despite the failure of the gear boxes, and because
the gear boxes could be repaired.
In another example of faulty equipment, a Court refused to find a
vendor in fhdamental breach of a contract for sale of a used $12,000
car when the car was delivered requiring an engine rebuild costing
$4,000 - in that case the court found that the vehicle was still
substantially what had been contracted for, and purchaser was forced
to sue for damages to repair the engine rather than return the car
and demand their money back.
In the example of the landing barge, it is unlikely the court would
view the delivery of the vessel with engine and hull plate damage to
be a fundamental breach allowing Jones to refuse delivery of the
vessel. While the vessel required repairs to be in good shape, it
could be operated after repairs, and possibly before the repairs
were to be made. The vessel was not substantially different from
what Jones had bargained for - therefore, there was likely no
fundamental breach.
The remedy available to Jones would be to have the repairs made and
sue Smith for the cost of the repairs. Undoubtedly, the parties
would then argue about whether the reconditioning of the engine and
hull plate were necessary to make the vessel in seaworthy condition,
but it would not be open to the Jones to refuse to take the vessel.
If Mr. Smith were to buy the second vessel in expectation he would
have his $300,000 returned, he would likely end up owning two
vessels, and having to sue for the cost of repairing the first one.
The lesson here is, do not assume that because someone breaches a
term of an agreement with you, that you are not bound to complete
your obligations. Misjudging the significance of their breach, and
wrongfully refusing to complete on your obligations under the
agreement, can result in an even bigger problem than simply dealing
with the other person's breach.
Darren Williams is a Barrister and Solicitor (Lawyer) specializing in Admiralty Law, which has jurisdiction over maritime matters. Darren has worked extensively on the water as well as in the courtroom. He is a Barrister & Solicitor based out of Victoria, British Columbia, Canada, practicing at the Law Firm of "Williams & Company".
On this webpage, he brings us timely and relevant articles on the legal aspects of being a Marine Engineer in today's world. Although the articles have a predominately Canadian flavour, we are sure you will find his legal point of view enlightening where ever you ship sails. Darren has also published other legal articles on general admiralty law, view them all at the Williams & Company website. You can reach Darren for question or comment by phone at 250-478-9928 or by email.