Substantial Breach vs. Ancillary Breach
Written by Alex Milne, Construction and Planning Lawyer, Lovegrove Solicitors
It is common for building contracts to differentiate between breaches of a nature serious enough to justify termination of the Contract, and breaches which are not deemed serious enough to suffice as a basis upon which to terminate. Often Contracts will use a defined term, such as ‘substantial breach’, to try to differentiate between types of breach which do justify termination, and those which do not.
The demarcation between breaches which may justify termination and breaches which do not justify termination is not peculiar to building contracts. It is a general principle of contract law that a breach which is of a certain seriousness maybe sufficient to warrant a rescission of the contract.
A breach which is not sufficiently serious will only entitle the innocent party to damages, however a breach which is sufficiently serious will allow the innocent party to refuse to undertake any further performance of their own obligations – effectively terminating the contract (James Morrison & Co., Ltd v Shaw, Savill & Albion Co., Ltd.,  2 K. B. 783).
The concept of ‘substantial breach’ is a term which is at least partially defined in most building contracts. However these partial definitions are often fairly open ended and leave a lot open to interpretation.
A good example of a typical definition of substantial breach is as follows:
The Owner is in substantial breach of this Contract if the Owner:
- does not give the builder uninterrupted access to, and control of the land;
- does not pay a Progress Payment which is due and payable;
- takes possession of the Works before paying the final claim, without written consent from the Builder; or
- is otherwise in substantial breach of the Contract.
This type of definition is extremely helpful if the breach in question is one of those explicitly referred to, and in truth, these clauses are often specifically drafted to specifically reference the most commonly occurring breaches which lead a party to seek termination.
When considering whether another unspecified breach amounts to a ‘substantial breach’ the first advice which ought to be heeded is that a lawyer should be engaged. This type of legal analysis should not be undertaken by a casual observer or amateur legal enthusiast. Attempting to terminate a contract is an extremely serious step. If the termination is found to be based on a breach which is not ‘substantial’ the terminating party may itself have repudiated the contract, meaning that the other party may have the upper hand in any subsequent litigation, including having the right to claim damages for wrongful termination.
Courts have historically drawn a distinction between terms which are a condition, terms which are a warranty, and terms which are intermediate. Breach of a condition gives rise to a common law right of termination for the innocent party. Breach of a warranty does not give rise to a right to terminate, whilst breach of an intermediate term may or may not give a right to terminate, depending on the gravity of the breach. To determine which category a particular term falls into is a matter of contractual construction, looking at the terms of the contract to divine what the intention of the parties was at the time the contract was made.
Deciding on whether a breach is substantial may involve similar methods of contractual interpretation. A breach of a particularly critical clause may be grounds for termination prima facie, much like the breach of a condition at common law. However there are a number of clauses within a building contract which may or may not be grounds for termination, depending on the gravity of the breach in the particular circumstances.
For example the builder usually agrees to a clause committing to complete the works within the building period. This may be analogous to an intermediate clause. If the builder is running a few days late, this would generally not be grave enough to warrant termination. However if the building period has expired by 12 months, and the builder is yet to pour the slab, it may be argued that this is a breach of sufficient gravity.
The demarcation between a substantial breach and something less than a substantial breach is not always going to be clear cut. Some breaches are clearly substantial, others are clearly not substantial, and between the two categories lies a significant grey area. It is up to your solicitor to interpret the contract as best they can, and consider relevant precedent to advise you on whether or not a given breach is sufficiently grave. It cannot be stressed enough that termination of a building contract is a serious step, and should not be undertaken without consulting a construction solicitor first.
Written by Alex Milne, Construction and Planning Law Expert, Lovegrove Solicitors
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