Module 2 - Understanding Contract Terms
and Consequences of Breach of Contract


By: Robert M. Parson


Breach of Contract and Damages

We have seen earlier that under English law different classes of contract terms are recognized. It follows that different breaches of contract have different results. Breach of a "condition" will enable the innocent party to repudiate the contract. Breach of a "warranty" will enable the innocent party only to claim damages.

Breach of an "intermediate term" may result in repudiation as only a claim in damages depending on the effect of the breach on the substantial performance of the contract.

Let us look briefly at some of the classic areas of breach of contract in FOB and CIF contracts and the consequences of those breaches:-

(1) Failure to ship the required quantity

Unless the contract provides for delivery by installments or some other form of allowance to deal with the delivery of a lessor quantity of cargo then the Buyer is not required to accept documents or goods of a greater or lessor amount than provided for in the contract. Faced with presentation of documents in a CIF contract which evidence a short fall outside the contractual limits then the Buyer is entitled to reject the documents and hold the Seller in repudiatory breach.

(2) Failure to ship goods of the required quality

In some cases contracts will provide that breaches of the specification as to quality of the goods will not entitle the Buyer to reject the documents or the goods but to pay a form of allowance. Generally, however, a breach of a term of the quality will entitle the Buyer to reject the documents and or the goods. It is to be noted that because of the nature of a CIF contract which involves delivery of documents representing the goods in advance of arrival of the goods themselves, the Buyer has two rights of rejection:

(1) the right to reject the documents if non-conforming; and

(2) a separate right to reject the goods, notwithstanding prior acceptance of the documents, if on arrival it is clear that they did not meet with the contract description or quality or it is clear that they were not shipped in good condition.

(3) Failure to ship goods of the contract description

If the goods do not meet the contract description then the Buyer is entitled to reject them and to reject any documents which plainly disclose that the goods do not meet the contract description.

(4) Failure to ship or deliver goods within the shipment or delivery period

Again this is a fundamental breach of the contract and will entitle the Buyer to reject both documents and goods.

(5) Goods arriving in damaged condition

If the goods suffer loss or damage after delivery in a FOB contract or after shipment in a CIF contract then the risk of that damage will have passed to the Buyer and/or his insurers. The Buyer will have no right to reject the goods and will have to pursue his remedy against his insurer or the shipowner.

(6) Loss in market value of the goods due to delay in arrival of the vessel

Unless the goods have been sold with a cast iron guaranteed arrival date under a CIF shipment contract then any delay in the vesselís arrival attributable to the normal perils of an ocean voyage are at the risk of the Buyer. If the shipowner has been guilty of failing to prosecute the voyage properly than a claim may lie against him but in any event the risk of any delay will have passed from the Seller to the Buyer as of the time of shipment.

(7) Failure to open a letter of credit or provide a payment guarantee where required under the contract

Where the contract provides for payment by a documentary credit or provides that some other form of guarantee must be put in place prior to shipment or delivery then failure to put such credit or guarantee in place by the specified time will be a repudiatory breach of the contract entitling the Seller to refuse further performance of the contract.