Remedies FOR Breach OF Contract PDF

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REMEDIES FOR BREACH OF CONTRACT1. Consequences of BreachPhoto Production Ltd. v Securicor Transport Ltd [1980] AC 827: “Every failure to perform a primary obligation is a breach of contract. The secondary obligation on the part of the contract breaker to which it gives rise by implication of the com...

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REMEDIES FOR BREACH OF CONTRACT

1. Consequences of Breach Photo Production Ltd. v Securicor Transport Ltd [1980] AC 827: “Every failure to perform a primary obligation is a breach of contract. The secondary obligation on the part of the contract breaker to which it gives rise by implication of the common law is to pay monetary compensation to the other party for the loss sustained by him in consequence of the breach” [Lord Diplock at 849] George Mitchell v Finney Lock Seeds [1983] QB 284: This case concerned an exclusion clause which tried to remove responsibility for a breach of contract. Oliver LJ took the view that an exclusion clause that tries to limit the secondary obligation ought to be interested narrowly: “I find the analysis adopted by Lord Diplock in the Photo Production case [1980] A.C. 827 , 849, a helpful one, so long as it is borne in mind that the purpose of a contract is performance and not the grant of an option to pay damages….” (Oliver LJ, 304).

Marshall (Thomas) v Guinle [1978] Ch 227: The resignation of a managing director was not accepted by the company with the result that the contract continued in force. Only acceptance of a breach by the innocent party can give rise to termination. Hong Kong Fir Shipping v Kawasaki Kisen Kaisha [1962] 2 QB 26: Diplock LJ set out the concept that came to be known as the innominate term. This restricts the classification of terms as conditions. An innocent party can choose to terminate a contract for breach of condition. Breach of an innominate term will only give rise to a right to terminate of the consequences of the breach deprive the innocent party of substantially the whole benefit of the contract. 2. Anticipatory Breach Hochster v De La Tour (1853) ER 922: established the right to sue for damages immediately an anticipatory breach occurs – there is no need to wait for the date of performance. White and Carter (Councils) Ltd v McGregor [1961] 3 All ER 1178: Lord Reid (alone) referred to a need for a legitimate interest in continuing to perform in the face of a repudiatory anticipatory breach. Clea Shipping v Bulk Oil (The Alaskan Trader) [1984] 1 All ER 129: no legitimate interest found on the facts in this case. If there is a restriction on the right of the innocent party to elect to treat the 1

contract as still alive in the case of anticipatory breach (there needs to be a legitimate interest) should there be a similar restriction whenever the breach occurs? MSC Mediterranean Shipping Company S.A. v Cottonex Anstalt [2015] EWHC 283 (Comm): The claimant carrier brought a claim against the defendant shipper for container charges in relation to a shipment of raw cotton sold by the shipper to a buyer. The buyer never collected the goods, which remained at the port inside the containers in which they had been shipped. Held: The carrier's right to maintain the contract and claim charges, notwithstanding the shipper's repudiation, depended on whether it had any legitimate interest in doing so. Once it was clear that there was no prospect of the shipper redelivering the containers, the carrier had no reason to keep the contracts open in the hope of future performance and it was wholly unreasonable for it to keep the contracts alive. This case is not an anticipatory breach it is an actual breach but the High Court applies the White & Carter Councils idea to this. 3. Damages Function of an award of damages For breach of contract: the aim is to put the innocent party into the position they would have been in had the contract been carried out (forwards): The Albezero [1977] AC 774: “Their function is to put the person whose right has been invaded in the same position as if it had been respected so far as the award of a sum of money can do so….” Lord Diplock CIS v Argyll Stores [1998] A.C. 1, “…the purpose of the law of contract is not to punish wrongdoing but to satisfy the expectations of the party entitled to performance. A remedy which enables him to secure, in money terms, more than the performance due to him is unjust.” Lord Hofmann, 15 This is known as “expectation loss” – i.e. the innocent party had an expectation which has not been achieved. This is the usual breach of contract loss (see also “reliance loss” below). For misrepresentation the aim is to put the innocent party into the position they would have been in had no misrepresentation been made (backwards) Royscot Trust Ltd v Rogerson [1991] 3 All ER 294: – tort measure for misrepresentation. A lender advanced £6400 to a car dealer on the basis of a misrepresentation over the sale of a car. The purchaser of the car had paid back only £2775 when he then dishonestly sold it. Held: lender could recover £3625 – the position the lender would have been in – i.e. it would not have loaned any money at all.

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Esso Petroleum v Mardon [1976] QB 801 – Mardon got his money back – in relying on the misrepresentation by Esso Mardon had invested his money in the station. Esso was not liable for any loss of expectation as to the amount of petrol sold – they had not contractually promised he would sell 100,00 gals. Damages for lost expectation Kwei Tek Chao v British Traders & Shippers Ltd [1954] 1 All ER 779:selling goods to a merchant means it is obvious that the buyer intends to re-sell them with a view to profit. If the goods are not delivered the buyer will go into the market to seek alternative supply. If the cost of the alternative is greater then that is the measure of damages (if the cost is lower then there is no loss and no need for damages). If goods are to be specially manufactured so there is no ready replacement in the market the buyer will seek damages for the loss of profit. Ruxley Electronics v Forsyth [1995] 3 All ER 268 HL: F contracted for swimming pool to be constructed. The finished pool had a maximum depth of 6 feet whereas the contract specified 7 feet 6 inches. The pool was however safe for all purposes and the value of the property overall had not been affected by the breach. Held: to have awarded the cost of rebuilding to the correct depth (£21,000) would have been so unreasonable that such an award should not be made.

Reasonable foreseeability Hadley v Baxendale (1854) 9 Exch 341: Two categories of loss are recoverable: (1) those ‘arising naturally, that is, according to the usual course of things, from such breach of contract itself’, and (2) ‘such [loss] as may reasonably be supposed to have been in the contemplation of both parties, at the time they made the contract, as the probable result of the breach of it.’ Baron Alderson Transfield Shipping Inc v Mercator Shipping Inc [2008] UKHL 48 ‘it is important not to lose sight of the basic point that, in the absence of special knowledge, a party entering into a contract can only be supposed to contemplate the losses which are likely to result from the breach in question - in other words, those losses which will generally happen in the ordinary course of things if the breach occurs. Those are the losses for which the party in breach is held responsible - the stated rationale being that, other losses not having been in contemplation, the parties had no opportunity to provide for them.’ 3

Lord Rodger at [53]

Victoria Laundry v Newman Industries [1949] 1 All ER 997: a supplier of a new boiler for an industrial laundry was held liable for loss of profits on ordinary contracts that were lost because of a delay in supplying the boiler. The defendant was not however liable for an extraordinarily profitable contract with the government of which it was wholly unaware. Koufos v C Czarnikow - The Heron II [1969] AC 350: a ship under charter arrived 9 days late having deviated from its route. In that time the market value of the cargo had fallen. Held: the ship owner was liable for the loss in value. HL state that it is not enough that it can be shown that the loss has arisen from a breach. D is only liable if the loss was sufficiently likely to result from a breach that it was proper to hold that the loss flowed naturally from it or should have been in D’s contemplation. There was however no consistent use of language to describe the likelihood needed ( “liable to result” “serious possibility” were phrases used.) NB The question of whether the loss ought to have been contemplated is a question to be answered at the time of making the contract not at the time of the breach. Parsons v Uttley Ingham [1978] 1 All ER 525: D supplied a pig food hopper and negligently installed it with the result that feed became mouldy and pigs died. Lord Denning MR and Scarman LJ differ here as to the right test. Lord Denning said that for physical damage (e.g. dead pigs) the test was whether that type of damage was a possibility in the contemplation of the parties. For loss of profits he said the type of loss had to be a serious possibility. Scarman LJ said that in either case the test was “serous possibility”. On the facts there was a serious possibility that pigs would be ill if fed mouldy nuts. It was not foreseeable that they would die but that was a matter of degree not type of damage. D was liable.

Causation It must be shown that the loss was caused by the breach: Lambert v Lewis [1982] 1 All ER 978: a trailer became detached from a vehicle because of the failure of a coupling supplied by D. the coupling was defective but it was to the knowledge of Cl also damaged when he used it. Held: D not liable. The loss arose because Cl continued to use the coupling knowing it was defective. Swincastle Ltd v Alistair Gibson (1991) The Times April 19: A lender loaned £10,000 at a very high interest rate relying on an inaccurate valuation of the value of property by D. Borrower defaulted on the loan. Held: D was not liable for the interest Cl would have earned had the borrower not defaulted. D was liable for 4

the loss of interest at the ordinary bank rate as Cl would not have loaned the money had the valuation been accurate. The loss of interest at the very high rate was caused by the borrower defaulting not by the valuer’s inaccuracy. The inaccuracy caused the loan only. Reliance loss An alternative to claiming expectation loss is to claim for lost expenditure. This requires the claimant to prove that the expenditure has been lost because of the breach of contract. Anglia Television v Reed [1972] 1 QB 60: An actor in breach of contract refused to complete a TV film. The TV company successfully sued for its expenditure incurred even before the contract was made. It was reasonably foreseeable that that expenditure would be lost if D broke the contract. Why did Anglia not sue for loss of expectation? That would require them to prove that the film would have been profitable. The film was never made and it was not possible to show that it would have been profitable. Bad bargains The court will not knowingly put the claimant in a better position than they would have been in had the contract been carried out. So if it is proved by the defendant that had the contract been performed the claimant would have lost money the claimant will fail in a claim for reliance loss. The claimant has made a “bad bargain”. C & P Haulage v Middleton [1983] 3 All ER 94: D claimed for the cost of improvements he had made to Cl’s premises which had been occupied by him under a contract with CL. The Cl had later in breach of contract removed D from the premises. Held: Had the contract been performed D would have been paying rent. As it was he continued to work from his own garage at no cost and was therefore better off as a result of the breach. As to the cost of improvements he would not have recovered the cost from Cl even if he had stayed in occupation until the expiry of the contract and could not therefore claim that cost I damages. He would in effect have made that loss even where there was no breach by Cl. CCC Films v Impact Quadrant Films [1984] 3 All ER 298: In breach of contract D failed to send films to Cl by secure means. The films did not arrive. Held: Cl could recover the $12,000 paid to D for a licence to exploit the films. Because of D’s breach it could not be shown whether the exploitation would have been profitable – it was for D to prove that it would not have been. Distress Damages are not available for the distress caused by breach of contract –e.g. the anxiety caused by a breach of contract that resulted in a business failing Hayes v 5

James & Charles Dodd [1990] 2 All ER 815. But if the purpose of a contract is to provide enjoyment then damages will be available for disappointment if a breach means the enjoyment is not achieved: Jackson Horizon Holidays [1975] 3 All ER 92: Damages were recovered for the disappointment of the failed holidays because the purpose of a holiday is the provision of enjoyment. Mitigation A claimant will not recover damages for a loss that could have been avoided by taking reasonable steps. (This rule is usually known as the “duty to mitigate”). No sunbathing - Denmark Productions Ltd v Boscobel Productions Ltd [1968] 3 All ER 513: an employee dismissed in breach of contract was not permitted to keep the contract alive and effectively do no work saying he was ready and able to do work. He had to terminate the contract, mitigate his loss and sue for damages. Geys v Société Générale [2013] 1 A.C. 523: “The law takes the view that it is better for the employee (as well, of course, as for the employer) that his claim for loss of wages or salary should be confined to a claim for damages and therefore be subject to his duty to mitigate them by taking all reasonable steps to find other work.” Lord Hope, 553 Sotiros Shipping v Sameiet Solhott [1983] 1 Lloyd's Rep. 605: Sellers of a ship delivered it late. Under the contract the buyer was entitled to reject the contract and did so. They sued for the difference between the price that would have been paid ($5m) and the value of the ship at the date it should have been delivered ($5.5). Held: the buyer could still have bought the ship at the original price from the sellers. Their failure to do so was a failure to mitigate loss and D was not liable in damages.

Allowance for benefits arising from the breach Lavarack v Woods of Colchester [1967] 1 QB 278: (benefits arising directly from the breach) Cl was dismissed in breach of contract. The contract had provided that whilst employed Cl could not work for any other competing company. As soon as Cl was dismissed he went to work for another company in which he bought a 50% share holding. He was paid for his work for that new company and his shareholding increased in value. Held: his new earnings and the value to Cl of his interest in the new company had to be taken into account in any claim for damages. He could not have had such an interest but for the breach of contract. British Westinghouse v Underground Electric Railway Co [1912] AC 673: Cl replaced defective machines supplied to it by D. The replacements were so 6

efficient that Cl saved in running costs more than the cost of replacement. Held: the savings had to be brought into account in any assessment of damages. Fulton Shipping Inc of Panama v Globalia Business Travel SAU [2017] UKSC 43: Globalia (G) in repudiatory breach returned the ship it had chartered two years before the end of the charter. Fulton (F) the owner of the ship sold it at the time of breach for $23m. At the time of expiry of the charter (2 years alter) the ship would only have been worth $7m. F sued G for the loss of income for the 2 year period. G argued that an allowance had to be made against damages to reflect the $20m difference in value of the ship. Held: The benefit to be brought into account had to have been caused either by the breach or by a successful act of mitigation. There was no such causation here. The premature termination of the charterparty had not made it necessary to sell the vessel, either at all or at any particular time. As to mitigation - the loss was of an income stream from the charterparty and a reasonable mitigation would have been to find an alternative income stream such as by short term charterparties if available in the market. Selling could not mitigate an income stream so was not mitigation.

Anticipatory breach See White & Carter (Councils) v McGreggor (above) “…it cannot be said that there is any duty on the part of the [claimant] to mitigate his damages before there has been any breach which he has accepted as a breach.” Shindler v Northern Raincoat Co. Ltd. [1960] 1 W.L.R. 1038 (Diplock J, 1048)

4. Liquidated Damages and Penalty Clauses Dunlop Pneumatic Tyre Co v New Garage [1915] AC 79: Dunlop supplied tyres to New Garage under a contract prohibiting NG from tampering with the marks on the tyres, selling below list price or supplying to persons on a suspension list. The contract provided for a payment of £5 for every sale in breach. Held: Liquidated damages clause not a penalty. The amount was low and actual losses would be difficult to assess. Guide-lines: a) if the sum is extravagant and unconscionable in amount in comparison to the greatest loss which could follow from a breach then it is a penalty; b) if the sum is payable for breach of an obligation to pay a lesser sum then it is a penalty; c) if a single lump sum is payable on the occurrence of one or more of several 7

events , some of which may cause serious and others minor damage, it is a penalty Kemble v Farren (1829) 6 Bing 141: D agreed to be principal comedian for four seasons at a rate of £3 a night. The contract stated that if either party was in breach of any part of the contract they will pay £1000 as liquidated damages. D refused to play the second season. Held: penalty and invalid. The obligation to pay £1000 could have arisen for any breach, however small, for example a failure to make one £3 payment. That a very large sum would be payable for failure to pay a very small sum meant it was a penalty. Lamdon Trust v Hurrell [1955]: A contract for the hire-purchase of a car stated that if the contract was terminated for breach by the customer the customer must pay 75% of the sum loaned. Held: penalty and invalid. A failure to pay the first instalment would enable termination for breach. The car would have to go back with little loss in value but the customer would have to pay 755 of the loan as well. That could not be a genuine estimate of any loss suffered and it also put the company in a better position if the contract was breached than if it was carried out.. ParkingEye Limited v Beavis [2015] UKSC 67: An £85 parking charge was imposed by the manager of a car park on those who, in breach of a condition on signs in the car park, overstayed. Held: The real test was 'whether the impugned provision is a secondary obligation which imposes a detriment on the contract-breaker out of all proportion to any legitimate interest of the innocent party in the enforcement of the primary obligation'. While the innocent party ‘can have no proper interest in simply punishing the defaulter’, seeking to deter the counterparty from breaching its primary obligations can be acceptable. In a negotiated contract ‘between properly advised parties of comparable bargaining power, the strong initial presumption must be that the parties themselves are the best judges of what is legitimate in a provision dealing with the consequences of breach’. ParkingEye (as manager) and the owners had legitimate interests in charging overstaying motorists and the £85 charge was proportionate to those interests.

5. Quantum Meruit The law of restitution provides for those who receive a benefit from another to pay a reasonable sum for that benefit if it would be unjust for them to keep the benefit without payment. Such a remedy is not strictly available where there is a contract because if there is a contract the remedy is damages. Planché v Colburn (1831) 8 Bing 14: D published a periodical “the juvenile library” and commissioned Cl to write a volume for it. The contract provided for payment 8

of £100 on completion. When Cl had partly completed the volume D cancelled the publication. Held: the original contract had been discharged by D’s breach and Cl could recover a quantum meruit since no other contract had replaced t...