Breach of contract

• Published date: 03 August 2021
• Subject Matter: Corporate/Commercial Law, Contracts and Commercial Law
• Law Firm: Timothy Loh
• Author: Mr Timothy Loh and Gavin Cumming

A breach of contract arises where one party, known as the defaulting party, fails to perform a term of the contract. The failure may arise from either:

• Actual Breach - In an actual breach, without lawful excuse, the defaulting party either does not perform a contractual obligation at all or performs the obligation in a way that falls below the required standard.
• Anticipatory Breach - In an anticipatory breach, without lawful excuse, before the time arrives at which the defaulting party is bound to perform a contractual obligation, the defaulting party either disables himself from performing the obligation or by words or conduct evinces an intention to refuse to perform the obligation. Where a breach of contract occurs, the party not in breach, known as the innocent party, is entitled to damages to compensate him for the loss of his bargain and, in some cases, may be entitled to terminate the contract.

What is Repudiation of a Contract?

A repudiation of the contract refers to the non-performance of contractual obligations that goes to the root or essence of the contract. Repudiation may be either justified or wrongful. Where wrongful, the innocent party may terminate the contract. Not every breach of contract amounts to a repudiation that gives the innocent party a right to bring the contract to an end. Only a repudiatory breach, meaning a breach where the failure of the defaulting party to perform is substantial, gives rise to such a right.

The right to bring a contract to an end as a result of a repudiatory breach should be distinguished from an express contractual right of termination.

Substantial Non-Performance

In determining whether a non-performance is sufficiently substantial to amount to a repudiation, the court usually considers whether the consequences of the failure to perform are "so serious as to justify the innocent party in bringing the contract to an end" at the time when the innocent party purports to end the contract. For this purpose, the court looks both at the proper interpretation of the contract and the relevant circumstances.

Interpretation of Contract

For interpretation purposes, Hong Kong law classifies contract terms into 3 broad categories, namely:

• Conditions - Conditions are terms going to the substance or foundation of the matter to which the contract relates. A breach of a condition is considered as a repudiatory breach regardless of its substantiality or level of prejudice done to the innocent party.
• Warranties -...