Introduction

Karsales Ltd. v. Wallis, [1956] 1 W.L.R. 936 is an English court decision regarding contract law which established the rules of fundamental breach

Fundamental breach

A fundamental breach of a contract, sometimes known as a repudiatory breach, is a breach so fundamental that it permits the distressed party to terminate performance of the contract, in addition to entitling that party to sue for damages.-History:...

. The court was unanimous in the decision handed down by Lord Alfred Denning in replacing the Rule of Strict Construction, which stated that the contract was constructed to do only what it says it will do.

Karsales has been controversial because it set precedent which says judges can override contracts and create a "better" contract in equity, even though both parties agreed to the original contract.

Facts of the Case

Mr. Wallis viewed a used Buick car that was being sold by Stinton for ₤600. Wallis found the car to be in excellent condition, and agreed that he would buy the car if Stinton would arrange financing through a hire-purchase

Hire purchase

Hire purchase is the legal term for a contract, in this persons usually agree to pay for goods in parts or a percentage at a time. It was developed in the United Kingdom and can now be found in China, Japan, Malaysia, India, South Africa, Australia, Jamaica and New Zealand. It is also called...

 company. Karsales (Harrow) Ltd. bought the car and sold it to Mutual Finance Ltd., which then finally lent the car to Wallis on hire-purchase terms. Wallis had not seen the vehicle since his first viewing.

About a week later, the car was left outside, late at night. The following morning, Wallis inspected the car and found it to be in a substantially different state than it was when he first saw the vehicle: the bumper was being held on by a rope, the new tires were taken off and old ones put on, the radio had been removed, the chrome strips around the body were removed, and the car would not run. Wallis refused to pay for the car since it was not in the same condition as when he agreed to make the purchase.

Trial

Karsales sued Wallis for the remaining payments on the vehicle. Karsales relied on an exclusion clause

Exclusion clause

An exclusion clause is a term in a contract that seeks to restrict the rights of the parties to the contract.Traditionally, the district courts have sought to limit the operation of exclusion clauses...

 in their contract, which stated that

"No condition or warranty that the vehicle is roadworthy or as to its age, condition or fitness for any purpose is given by the owner or implied herein."

The trial judge held that this clause did allow Karsales to recover the remaining costs from Wallis, and entered a judgement against him.

On appeal, Lord Denning reversed the trial judge's decision. Denning's precedence is summarized as follows:

"Under a hire-purchase agreement of this kind, when the hirer has himself previously seen and examined the motor car and made an application for hire-purchase on the basis of the inspection of it, there is an obligation on the lender to the deliver the car in substantially the same condition as when it was seen."

Legal Precedence

This decision set precedence that goes against the Strict Construction rule. In Strict Construction, the rule is that the contract is intended to do what it says it will do, and that judges can only apply what the contract says within its own terms. Since the contract has been agreed upon by both parties, the contract is seen as representing both parties' interests. However, Denning ruled against this rule since it would not be equitable (or fair) for both parties.

This judgement caused outrage from those who believe in the Strict Construction rule. Since the contract was agreed upon by both parties, many commentators would have held the judge should have only applied the contract as it was laid out. Indeed, this case goes to the root of the question regarding whether the role of judges is to interpret law or is to make law.

Denning establishes precedence by declaring this a fundamental breach

Fundamental breach

A fundamental breach of a contract, sometimes known as a repudiatory breach, is a breach so fundamental that it permits the distressed party to terminate performance of the contract, in addition to entitling that party to sue for damages.-History:...

: that is, a breach that goes to the root of the contract, where the breach is so severe that there cannot be a contract after this breach.