Contract WS4-5 Remedies for Breach of Contract Structure PDF

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Remedies for Breach of Contract Structure WHAT’S THE PROBLEM? – May go with exemption clauses Establish term of contract has been broken - Express - Implied by statute Identify the type of contract: SGA, SGSA or CRA Identify the term in dispute – The term will be a condition, warranty or an innomina...

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Contract WS4&5

Remedies for Breach of Contract Structure

1. WHAT’S THE PROBLEM? – May go with exemption clauses Establish term of contract has been broken - Express - Implied by statute

1) Identify the type of contract: SGA, SGSA or CRA 2) Identify the term in dispute – The term will be a condition, warranty or an innominate term. Certainty when identifying terms – Know from outset remedy available

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Statute may express a particular term to be condition/warranty - Terms implied by s13 & s14 SGA 1979, S3 & 4 SGSA 1982 = Conditions - Term implied by s13-15 SGSA 1982 = Simply described as a term – So treated as INNOMINATE

Term Condition Warranty Innominate term

Definition Term going to the root of the contract (Major term of contract) Less important term (Minor term) Neither condition nor warranty Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd

Generally, if the effect of a breach of term deprives the innocent party of the whole benefit of the contract, the term is a condition; If not it is a warranty.

Contract WS4&5 To determine whether the term is a condition, warranty or innominate term, the court will use an objective test – WOULD A REASONABLE PERSON THINK PARTIES INTENDED TERM TO BE A CONDITION OR WARRANTY? Take into account:  Circumstances surrounding the making of the contract  The contract as a whole  Whether the parties described the term as a condition or warranty (N.B. This can be rebutted from evidence of contract as a whole) – Schuler v Wickman - Even if word condition is used – Presumption it is a condition can be rebutted. Court will look at contract as a whole and determine the intention of the parties. Emphasise = Deciding importance of term which has been broken at time contract was made RATHER THAN looking at effects of breach and loss/damage which has resulted from breach

3) Identify the monies paid/owed 2. HOW WAS THE CONTRACT DISCHARGED? CONSIDER: (1) DOCTRINE OF BREACH (2) DOCTRINE OF COMPLETE PERFORMANCE (3) DISCHARGE BY AGREEMENT A contract can be discharged by breach, complete performance, agreement or frustration. Establish term of contract has been broken - Express - Implied by statute

If breach does entitle party to terminate – Breach often described as REPUDIATORY NOTE: If breach of contract – Only necessary to decide kind of term broken if innocent party wants to TERMINATE the contract - If wants other remedy – Immaterial if term broken is condition/warranty/innominate term If in contract – Term stated to be of importance = Suggests it is a condition and innocent party will have right to terminate if breached

1) Doctrine of breach The effect of the breach will depend on the term breached.

Term Condition

Effect of breach Can terminate future performance and sue for damages - If contract fully performed = Not possible to terminate - Terminated = Contract at end & future obligations of each party discharged - Suing for damages if suffered additional loss

Contract WS4&5

Warranty Innominate term

- Can terminate even if minor breach - MUST NORMALLY BE COMMINCATED Can sue for damages for loss suffered - Cannot terminate – Even if serious loss/damage If the breach deprives the innocent party of substantially the whole benefit of the contract, the innocent party can: 

Terminate the contract and sue Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd

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Affirm the contract and sue for damages

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If they affirm the contract: - Contract not over - Parties should continue to perform their obligations - If innocent party decides to affirm contract – Should make it clear he is treating contract as continuing - Can still claim damages for any loss suffered Note: May be no choice if other party refusing to perform his obligations – especially if continuation of contract involves his cooperation Note: Parties may agree beforehand if they can terminate an innominate term - Hong Kong Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd

…Unless Parliament (e.g. SGA & CRA) or the parties have made their intention to do otherwise clear. If contract has been fully performed – Usually not possible to terminate – BUT special rules apply to sale of goods contracts:  If seller breaches s9-11 CRA 2015 or s14-14 SGA 1979 – Buyer usually can reject the goods – Even if contract has been fully performed - I.e. Buyer has received goods and paid for them – He may give them back and get his money back  BUT – Buyer may lose right to reject - E.g. under s35 SGA 1979 – If he as ‘accepted’ the goods (within meaning of this section)

ANTICIPATORY BREACH = If party gives ADVANCE warning he is not going to perform his contractual obligations when they become due. If one party does indicate he is not going to perform the contract before the date due

Contract WS4&5 for performance to begin – the other party can:  

Terminate the contract and sue for damages immediately Treat contract as continuing and wait until time fixed for performance in the hope that party in breach will change his mind and perform the contract

Common law remedies: Available as of right provided any relevant conditions are fulfilled  Damages  Action for the agreed sum  Termination of the future performance of the contract Equitable remedies: Discretionary Granted when damages would be an inadequate remedy

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Specific performance Injunction

2) Doctrine of complete performance GENERAL RULE: A party only has to perform their obligations when the other party has performed their part of the contract. Performance must be precise and exact Cutter v Powell EXCEPTIONS: o Wrongful prevention of performance by the other party  Can recover damages including lost profit Robinson v Harman  Quantum meruit i.e. a reasonable amount for the work done Planché v Colburn  Quantum valebant i.e. a reasonable sum for goods supplied o Voluntary acceptance of partial performance by the other party Sumpter v Hedges  The defendant must have option to take or not take the work done  Can claim quantum meruit o Substantial performance  Work is finished but defective  Consider the nature and extent of the defects  Where the defects are slight, contract will be substantially performed (remedy will be cost of cure). Consider cost of cure in relation to overall cost Hoenig v Isaacs – Cost of cure was 1/14 of total contract price  Where the defects are extensive, contract will not be substantially performed Bolton v Mahadeva – Cost of cure was 1/3 of total contract price o Divisible obligations: Parties have agreed payments for a distinct part or stage of the work 3) Discharge by agreement The parties to a contract may agree to release one another from outstanding obligations, thus ending the contract. To be binding, the three elements of a contract must be present:

Contract WS4&5 o Intention to create legal relations o Agreement o Consideration 4) Discharge by frustration (see WS6) 3. IF THERE HAS BEEN A BREACH OF CONTRACT, WHAT REMEDIES ARE AVAILABLE? 1) Damages 

Breach of any term of contract = Gives innocent party right to claim damages - Claimant not suffered any loss = Damages will be nominal only (£5-£10) – As recognition contract has been broken

To recover damages = Claimant must prove he has suffered loss/damage as a result of defendant’s breach – Loss/damage must not be too remote a consequence of the breach Assessing compensatory damages = Often speculative TYPES Of LOSS Claimant can obtain damages for: - Personal injury - Damage to property - Loss of profit - Loss of opportunity - Mental distress & disappointment – Limited circumstances (non-pecuniary losses)

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Loss of opportunity Chaplin v Hicks; BFAC v Blackpool Borough Council  Claimant in top 50 – Not told time and place of audition by organisers – Missed out chance of being one of 12 winners;  Council had duty to consider all properly submitted tenders – Club properly submitted tender BUT not considered – lost opportunity from being selected Loss of pleasure: Usually cannot claim for loss of pleasure Addis v Gramophone Co Ltd;  Cannot recover damages for injured feelings  Distress from harsh & humiliating manner of his dismissal however, if the contract’s purpose was the claimant’s enjoyment, you can claim for loss of enjoyment Jarvis v Swans Tours.  Damages for distress and disappointment can be recovered where contract is for holiday/to provide pleasure/entertainment/enjoyment/peace of mind. Just because such damages are difficult to assess in monetary terms should not prevent the court from making an award  Does not apply to commercial contracts – Only consumer contracts for enjoyment Note: The claimant’s enjoyment need not be the sole purpose of the contract, sufficient it is important object of contract Farley v Skinner  Claimant bought house – Asked before buying if affected by

Contract WS4&5 aircraft noise (important object of contract)– Told unlikely = FALSE

BROAD ETHOS = Compensatory: The goal is to compensate the claimant for loss as far as money can, not punish the defendant; General rule: Punitive/exemplary damages cannot be awarded in purely contractual claims (only awarded in tort cases)

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Claimant should be wary bringing a claim where only nominal damages will be awarded (i.e. he suffered no loss) as he may have to pay ALL the costs of the proceedings (including defendant’s costs) Obagi v Stanborough (Developments) Ltd a) Expectation loss: Normal aim of damages is to put the claimant in the position he would have been in had the contract been properly performed Robinson v Harman. - Claimant compensated for his lost expectation.  Note: It is not relevant if defendant makes a profit from his breach – Aim of damages is to compensate the victim NOT punish the defendant  Plus NOT comparing position if one hadn’t entered into the contract at all Examples:  C agrees to buy goods from D for 1k – D refuses to deliver on specified date – D sold goods to another for 2k – C buys similar goods elsewhere for 1.2k – Court likely to award damages of £200 – Because: If contract had been properly performed C would have received goods for 1k – Now has to pay £200 more  A sells Ming vase to B for 50k – Term of contract vase is Ming – Vase a copy work 1k – If it were Ming would be worth 60k – Court likely to award B 59k – Because: If contract had been properly performed B would have a Ming vase worth 60k

The following are take into account when quantifying the damage. o If performing a service – Court would award net profit worker would have received – Deducting expenses  When calculating benefit claimant would have obtained from performance of contract – Court takes into account costs he would have incurred to obtain the benefit  Compensated for loss of net profit o Difference in value (defective goods)  Actual value – And value goods would have been if they were not defective o Cost of cure (services)  Cost of putting work right

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NOTE: Court will award cost of cure for defective goods and difference in value for defective services if reasonable to do so Loss of amenity – Ruxley Electronics and Construction v Forsyth: Pool was only nine inches too shallow. The difference in market value was £0 (shortfall did not decrease value of pool), whereas the cost of cure was £21,560 (existing pool demolished and new one built to fix problem)  [Analyse is it] Unreasonable to recover cost of cure = Very gratuitous benefit (pool and damages) not compensation for loss (i.e. aim for damages) as pool still usable (wholly disproportionate in the circumstances)  Test of reasonableness (central to determining recovery) = Should be linked directly to loss sustained – If there has been SUBSTANTIAL PERFROMANCE of contract and OBJECTIVE fulfilled – Unreasonable to claim cost of cure = Punitive on defendant  Intention of claimant to CORRECT mistake with damages – Relevant to reasonableness (not normal case) – May indicate depth of feeling about it – Could be reasonable to award full cost of cure  But intention to carry out work = not pre-condition to recover full cost of cure – Court felt Forsyth would not bring it to fruition.  Value put on claimant’s disappointment compared to cost of cure is so small = UNREASONABLE to award cost of cure  Damages of 2.5k were awarded for loss of amenity  Reflecting monetary value of disappointment as householders may not do work with objective of increasing value of property – BUT to make home more comfortable, convenient and aligned to his tastes (personal preference) = CONSUMER SURPLUS  BECAUSE – Term was breached so still deserved compensation even if not capable of precise valuation as represents personal, subjective & nonmonetary gain – MUST STILL BE RECOGNISED BY LAW IF DEFECTIVE PERFORMANCE TAKES IT AWAY  Policy reasons  DISTINGUISH – RUXLEY = CONSUMER CONTRACT NOT COMMERCIAL

If you can’t quantify expectation loss, consider reliance loss. b) RELIANCE LOSS:

Contract WS4&5 Damages to cover the expenses incurred in reliance on the contract  Courts may use reliance loss basis if expectation loss = Too speculative  Generally claimant can seek on either basis (unless too speculative)  Cannot put claimant in better position than they would have been

Anglia Television v Reed - Didn’t claim damages on expectation loss – As did not know what profit film would have made if contract had been properly performed – Too speculative Reliance loss damages covers expenditure wasted as a result of the breach – This can include expenditure incurred before they entered into contract with defendant if not too remote – I.e. was in defendant’s contemplation when entered into contract expenditure had already been incurred and would be wasted if contract broken. Damages are subject to several other considerations. 

Omak Maritime Ltd v Mamola Challenger Shipping Co (The Mamola Challenger) To obtain damages (whether expectation/reliance loss), claimant must prove he has suffered loss due to the defendant’s breach. o Claimant not awarded damages for loss which is too remote a consequence of the breach – Or = Unfair (prevents unlimited damages) 

Remoteness rule – Hadley v Baxendale Loss must be within the reasonable contemplation of the parties at time of the contract as a probable result of breach. This will be the case where:  Loss expected to arise naturally from breach OR – Usual losses normally within parties’ reasonable contemplation  The special circumstances causing the loss are known to parties at time contract is made (i.e. communicated). – Unusual losses Knowledge defendant acquires after contract is formed = Irrelevant to the application of the remoteness rule

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Balfour Beatty Construction (Scotland) Ltd v Scottish Power No general rule that contracting parties are presumed to have knowledge of all techniques in each other’s business practices. However, the simpler the activity the easier it would be to imply the knowledge.

Case law examples:

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Koufos v C Czarnikow Ltd, The Heron II Ratio: Hadley v Baxendale – “Within reasonable contemplation of the parties” not the same as “reasonably foreseeable” in tort which imposes wider liability. The degree of probability needed for loss to be within reasonable contemplation of parties – Courts must consider “Whether loss in question is of a kind which defendant when he made the contract ought to realised was not unlikely to result from breach.

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Normal profits foreseeable, but profits from a special highly lucrative contract are not (Beyond ordinary profit & no knowledge of special circumstances = Too remote) Victoria Laundry (Windsor) Ltd v Newman Industries Ltd  If loss arises in the usual course of things under limb 1 Hadley v Baxendale – Defendant will have imputed knowledge of it (taken to know of it), thus won’t be too remote.  If unusual loss under limb 2 Hadley v Baxendale – It will be too remote unless defendant had ACTUAL KNOWLEDGE of the special circumstances If a particular TYPE of loss is within parties’ reasonable contemplation as a serious possibility then the culpable party is liable for the FULL SCALE of that loss, even if extent of loss could not have been contemplated contemplated Parsons (Livestock) Ltd v Uttley Ingham Ltd  e.g. thought some physical harm would take place – didn’t expect death = damages recoverable for death  Use when analysing second limb of Victoria Normal profit is a different type of loss to high profits resulting from a specially lucrative contract (obiter) Brown v KMR Services Ltd  Losses which are of the same type as the ones contemplated will be recoverable, even if the full extent was not contemplated In complex financial cases where loss is difficult to quantify, you can look at the commercial context, not simply reasonable contemplation as a broader principle may be needed for puzzling cases Transfield Shipping Inc v Mercator Shipping Inc (The Achilleas).  By examining the nature of the obligation assumed by contracting party and asking what kind of loss would he reasonably be taken to have accepted liability. – May not have contracted if knew of particular loss In John Grimes Partnership Ltd v Gubbins it was said by Court of Appeal that there might be unusual cases, like The Achilleas, in which the particular circumstances and context and make it necessary to consider whether or not a party had assumed responsibility for losses of that particular kind.

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But usually use the standard rule for the test of remoteness

Note: Students should take care not to confuse foreseeability in contract with that in tort 

Mitigation Claimant must take reasonable steps to mitigate his loss (i.e. kept to a minimum) – Even if his attempts are unsuccessful = Able to claim any expenses incurred trying to mitigate. British Westinghouse Electric & Manufacturing Co Ltd v Underground Electric Railway Company of London Ltd  Cannot recover damages for losses which he could have avoided by taking reasonable steps 

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Onus of proof = Party in breach – Must show claimant could have mitigated but did not do so - If successful – Court will not award damages for that part of the loss which was caused by the claimant’s failure to mitigate (as really that loss not caused by the breach)

 Contributory Negligence Only cause of action for breach of contract = Negligent breach (e.g. breach of term implied by s13 SGSA 1982 – Services performed in the course of a business will be carried out with reasonable care and skill) and would give rise to a claim in tort of Negligence – Innocent party contributed/caused their own loss The claimant’s damages can be reduced in accordance with Law Reform (Contributory Negligence) Act 1945

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Partial defence Time for assessment of damages Basic rule = Damages are assessed by reference to the time of breach  E.g. cost of goods at date of the breach not at date of hearing  Relates to principle of mitigation = Claimant should take reasonable steps to mitigate his loss – E.g. seller refuses to deliver goods – Usually means buyer should act quickly and buy replacement goods rather than delaying & risking rise in prices But the key principle is that damages must cover the loss suffered, so the normal rule (which usually achieves this) should not be applied if this key principle is offended Golden Strait Corporation v Nippon Yusen Kubishiki Kaisha (The Golden Victory) Specified damages/penalty clauses Parties may include a provision in contract which states amount of compensation which will be paid if contract is broken  Clauses that state an amount...