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Discharge by fundamental breach and recitals in contract law

In contract law, a party is entitled to treat a contract as discharged by breach where the other party commits a fundamental breach of a term of the contract. This was the import of the decision by Justice Irene Mulyagonja in High Court Civil Suit No 752 of 2008: Media Airtime Limited v Uganda Broadcasting Corporation (UBC).

Media Airtime entered into a sales marketing and public relations agreement with UBC in February 2006. In filing suit, Media Airtime contended that under the agreement, it was to work exclusively for UBC with regard to all commercial activities and by terminating the agreement before the three-year term had lapsed, UBC committed a breach of contract. Media Airtime also alleged that UBC had breached an auxiliary written and oral agreement between the parties regarding broadcast rights and marketing and production obligations related to the 2006 FIFA World Cup. UBC denied the claim and argued in the main that it had a right to terminate the contract without notice for breach due to the plaintiff’s failure to perform its obligations under the contract.

In deciding in favour of UBC, Justice Mulyagonja cited Bunge Corporation v Tradax Export SA [1981] 2 ALL ER 523 with approval and emphasized that there are two alternatives tests for determining what amounts to fundamental breach. The decisive element may be found either in the importance the parties would seem to have attached to the term which has been broken or to the seriousness of the consequences that have in fact resulted from the breach. Regarding the first test, the court has to decide whether at the time when the contract was made, the parties must be taken to have regarded the promise which has been violated as of major or minor importance.

Breach of a fundamental term will entitle the innocent part to treat itself as being discharged by breach; discharged by breach being quite different, in the strict legal sense, from repudiation. In addition, if a party elects to treat the contract as discharged, that party must make its decision known to the party in default and once it has done this, its election is final and cannot be retracted.

Justice Mulyagonja decided that in view of the terms of the contract, accounting for the sales, proceeds and commissions by Media Airtime as well as paying over the balance to UBC were the most important terms in the entire contract. On failing to account and pay over the proceeds for the World Cup season as agreed in the initial contract, Media Airtime was in breach of a fundamental term of the contract and UBC was entitled to treat the contract as discharged by breach and terminate without notice.

Justice Mulyagonja also addressed the question of what takes precedence where there is a conflict between the operative part of the contract and the recitals, as there was in the agreement between Media Airtime and UBC. Where there is a conflict between the operative part of the contract and the recitals, the operative part must prevail. If the recitals are clear and the operative part is ambiguous, the recitals govern the construction. If the recitals are ambiguous and the operative part is clear, the operative part will prevail. If both the recitals and operative part are clear, but they are inconsistent with each other, the operative part is to be preferred (Re Moon Ex Parte Dawes (1886) 17 QBD 733 cited with approval).

This article is intended as a general overview and discussion of the case dealt with. This information is not intended to be, and should not be used, as a substitute for taking legal advice in any specific situation. Sebalu & Lule is not responsible for any actions taken or not taken on the basis of this article.