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Breach of Contract & Remedies
1 Breach of contract
Nature of breach
A breach of contract occurs where a party to a contract
fails to perform,
precisely and exactly, his obligations under the contract. This can take various forms for example, the failure to supply goods or perform a service as agreed.
Breach of contract may be either;
actual
or
anticipatory
Actual breach
- occurs where one party refuses to form his side of the b
argain on the due date or performs incompletely. For example:
Poussard v Spiers and
Bettini v Gye
Anticipatory breach
- occurs where one party announces, in advance of the due
date for performance, that he intends not to perform hi
s side of the bargain. The innocent party may sue for damages immediately the breach is announced.
Hochster v De La Tour is an example.
Effects of breach
A breach of contract, no matter what form it may take,
always entitles theinnocent party to maintain an action for damages, but the rule established by along line of authorities is that the right of a party to treat a contract as
discharged arises only in three situations.
The breaches which give the innocent party the option
of terminating the
contract are:
(a)
Renunciation
Renunciation occurs where a party refuses to perform his
obligations under the contract. It may be either express or implied.
Hochster v De La Tour is a case law example of express renunciation.
Renunciation is implied where the reasonable inference from the defendant’s conduct is that he no longer intends to perform his sid
e of the contract. Forexample:
Omnium D’Enterprises v Sutherland
.
(b)
Breach of condition
The second repudiatory breach occurs where the party in d
efault has committed a breach of condition. Thus, for example, in
Poussard v Spiers
the employer had a right to terminate the soprano’s employment when she failed to arrive for performances.
- 2 -
(c)
Fundamental breach
The third repudiatory breach is where the party in breac
h has committed a serious (or fundamental) breach of an innominate term or totally fails to perform the contract.
A repudiatory breach does not automatically bring the con
tract to an end. The innocent party has two options:
He may treat the contract as discharged and bring an a
ction for damages for breach of contract immediately. This is what occurred in, for example,
Hochster v De La Tour
.
He may elect to treat the contract as still valid, co
mplete his side of the bargain and then sue for payment by the other side. For example,
White and
Carter Ltd v McGregor
.
2 Introduction to remedies
Damages is the basic remedy available for a breach of
contract. It is a common law remedy that can be claimed as of right by the innocent party.
The object of damages is usually to put the injured p
arty into the same financial
position he would have been in had the contract been
properly performed.Sometimes damages are not an adequate remedy and this is where the equitable remedies (such as specific performance and injunction) may be
awarded.
3 Damages
3.1
Nature:
The major remedy available at common law for breach of
contract is an award of damages. This is a monetary sum fixed by the court to compensate the injured
party.
In order to recover substantial damages the innocent part
y must show that he has suffered actual loss; if there is no actual loss he will only be entitled to nominal
damages in recognition of the fact that he has a valid cause of action.
- 3 -
In making an award of damages, the court has two major considerations:
Remoteness
– for what consequences of the breach is the defendan
t legally responsible?
The measure of damages
– the principles upon which the loss or damage is evaluated or quantified in monetary terms.
The second consideration is quite distinct from the first, and can be decided by the court only after the first has been determined.
3.2 Remoteness of loss
The rule governing remoteness of loss in contract was
established in Hadley v Baxendale. The court established the principle that where one party is in breach of contract, the other should receive damages which can fairly and reasonably
be considered to arise naturally from the breach of contract itself (‘in the normal course of things’), or which may reasonably be assumed to have been within the
contemplation of the parties at the time they made the contract as being the probable result of a breach.Thus, there are two types of loss for which damages may be recovered:
1.
what arises naturally; and
2.
what the parties could foresee when the contract was made as the likely result of breach.
As a consequence of the first limb of the rule in
Hadley v Baxendale, the party in breach is deemed to expect the normal consequences of the breach, whether he actually expected them or not.Under the second limb of the rule, the party in breach
can only be held liable for
abnormal consequences where he has actual knowledge that the abnormalconsequences might follow or where he reasonably ought
to know that theabnormal consequences might follow – Victoria Laundry v
Newman Industries.
3.3 The measure (or quantum) of damages
In assessing the amount of damages payable, the courts
use the following principles:
The amount of damages is to compensate the claimant
for his loss not to punish the defendant.
Damages are compensatory – not restitutionary.
- 4 -
The most usual basis of compensatory damages is to put
the innocent party into the same financial position he would have been in had the contract been properly performed. This is sometimes called the‘expectation loss’
basis. In Victoria Laundry v Newman Industries, for example, Victori
a Laundry were claiming for the profits they would have made had the
boiler been installed on the contractually agreed date.
Sometimes a claimant may prefer to frame his claim in the alternative on the‘reliance loss’ basis and thereby recover expenses incurred in anticipation of performance and wasted as a result of the breach – Anglia Television v Reed.
In a contract for the sale of goods, the statutory (Sal
e of Goods Act 1979)measure of damages is the difference between the market price at the date of the breach and the contract price, so that only nominal damages will be awarded to a claimant buyer or claimant seller if the price at the date of breach was respectively less or more than the contract price.In fixing the amount of damages, the courts will usually deduct the tax (if any)
which would have been payable by the claimant if the
contract had not been broken. Thus if damages are awarded for loss of earnings, they will normally be by reference to net, not gross, pay. Difficulty in assessing the amount of damages does not prevent the injured party from receiving them: Chaplin v
Hicks.
In general, damages are not awarded for non-pecuniary loss such as mentaldistress and loss of enjoyment. Exceptionally, howe
ver, damages are awarded for such losses where the contract’s purpose is to promote happiness or
enjoyment, as is the situation with contracts for holidays – Jarvis v Swan Tours.
The innocent party must take reasonable steps to mitigate (minimise) his loss, for example, by trying to find an alternative method of performance of the contract:
Brace v Calder.
3.4 Liquidated damages clauses and penalty clauses
If a contract includes a provision that, on a breach o
f contract, damages of a certain amount or calculable at a certain rate will be payable, the courts will normally accept the relevant figure as a measure of damages. Such clauses are
calledliquidated damages clauses
.
The courts will uphold a liquidated damages clause even
if that means that the
injured party receives less (or more as the case may be
) than his actual loss
arising on the breach. This is because the clause sett
ing out the damages
constitutes one of the agreed contractual terms – Cellulo
se Acetate Silk Co Ltd v
Widnes Foundry Ltd.
However, a court will ignore a figure for damages put in a
contract if it is classed
as a
penalty clause
– that is, a sum which is not a genuine pre-estimat
e of the
expected loss on breach.
- 5 -
This could be the case where:
1.
The prescribed sum is extravagant in comparison with t
he maximum loss that
could follow from a breach.
2.
The contract provides for payment of a certain sum but a
larger sum is
stipulated to be payable on a breach.
3.
The same sum is fixed as being payable for several brea
ches which would be
likely to cause varying amounts of damage.
All of the above cases would be regarded as penalties
, even though the clause
might be described in the contract as a liquidated dam
ages clause. The court
will not enforce payment of a penalty, and if the co
ntract is broken only the
actual loss suffered may be recovered (Ford Motor Co (En
gland) Ltd v
Armstrong).
4
Equitable remedies
4.1
Specific performance
This is an order of the court requiring performance of a po
sitive contractual
obligation.
Specific performance is not available in the followi
ng circumstances:
Damages provide an adequate remedy.
Where the order could cause undue hardship.
Where the contract is of such a nature that constant sup
ervision by the court
would be required, eg, Ryan v Mutual Tontine Association.
Where an order of specific performance would be possi
ble against one party
to the contract, but not the other.
Where the party seeking the order has acted unfairly or un
conscionably. He
is barred by the maxim ‘He who comes to Equity must com
e with clean
hands’.
Where the order is not sought promptly the claimant wi
ll be barred by the
maxims ‘Delay defeats the Equities’ and ‘Equity assis
ts the vigilant but not the
indolent’.
In general the court will only grant specific performance
where it would be just
and equitable to do so.
- 1 -
Breach of Contract & Remedies
1 Breach of contract
Nature of breach
A breach of contract occurs where a party to a contract
fails to perform,
precisely and exactly, his obligations under the cont
ract. This can take various
forms for example, the failure to supply goods or perform
a service as agreed.
Breach of contract may be either
actual
or
anticipatory
.
Actual breach
occurs where one party refuses to form his side of the b
argain on
the due date or performs incompletely. For example:
Poussard v Spiers and
Bettini v Gye
.
Anticipatory breach
occurs where one party announces, in advance of the due
date for performance, that he intends not to perform hi
s side of the bargain. The
innocent party may sue for damages immediately the bre
ach is announced.
Hochster v De La Tou
r is an example.
Effects of breach
A breach of contract, no matter what form it may take,
always entitles the
innocent party to maintain an action for damages, but
the rule established by a
long line of authorities is that the right of a party
to treat a contract as
discharged arises only in three situations.
The breaches which give the innocent party the option
of terminating the
contract are:
(a)
Renunciation
Renunciation occurs where a party refuses to perform his
obligations under the
contract. It may be either express or implied.
Hochster v De La Tour
is a case law
example of express renunciation.
Renunciation is implied where the reasonable infere
nce from the defendant’s
conduct is that he no longer intends to perform his sid
e of the contract. For
example:
Omnium D’Enterprises v Sutherland
.
(b)
Breach of condition
The second repudiatory breach occurs where the party in d
efault has committed
a breach of condition. Thus, for example, in
Poussard v Spiers
the employer had
a right to terminate the soprano’s employment when she
failed to arrive for
performances.
- 2 -
(c)
Fundamental breach
The third repudiatory breach is where the party in breac
h has committed a
serious (or fundamental) breach of an innominate term or
totally fails to perform
the contract.
A repudiatory breach does not automatically bring the con
tract to an end. The
innocent party has two options:
He may treat the contract as discharged and bring an a
ction for damages
for breach of contract immediately. This is what occ
urred in, for example,
Hochster v De La Tour
.
He may elect to treat the contract as still valid, co
mplete his side of the
bargain and then sue for payment by the other side. F
or example,
White and
Carter Ltd v McGregor
.
2 Introduction to remedies
Damages is the basic remedy available for a breach of
contract. It is a common
law remedy that can be claimed as of right by the inn
ocent party.
The object of damages is usually to put the injured p
arty into the same financial
position he would have been in had the contract been
properly performed.
Sometimes damages are not an adequate remedy and this
is where the
equitable remedies (such as specific performance and in
junction) may be
awarded.
3 Damages
3.1
Nature:
The major remedy available at common law for breach of
contract is an award
of damages. This is a monetary sum fixed by the court
to compensate the injured
party.
In order to recover substantial damages the innocent part
y must show that he
has suffered actual loss; if there is no actual loss
he will only be entitled to nominal
damages in recognition of the fact that he has a val
id cause of action.
- 3 -
In making an award of damages, the court has two maj
or considerations:
Remoteness
– for what consequences of the breach is the defendan
t legally
responsible?
The
measure of damages
– the principles upon which the loss or damage is
evaluated or quantified in monetary terms.
The second consideration is quite distinct from the fi
rst, and can be decided by
the court only after the first has been determined.
3.2 Remoteness of loss
The rule governing remoteness of loss in contract was
established in Hadley v
Baxendale. The court established the principle that wh
ere one party is in breach
of contract, the other should receive damages which can
fairly and reasonably
be considered to arise naturally from the breach of co
ntract itself (‘in the normal
course of things’), or which may reasonably be assumed t
o have been within the
contemplation of the parties at the time they made t
he contract as being the
probable result of a breach.
Thus, there are two types of loss for which damages m
ay be recovered:
1.
what arises naturally; and
2.
what the parties could foresee when the contract was ma
de as the likely
result of breach.
As a consequence of the first limb of the rule in
Hadley v Baxendale
, the party in
breach is deemed to expect the normal consequences of
the breach, whether
he actually expected them or not.
Under the second limb of the rule, the party in breach
can only be held liable for
abnormal consequences where he has actual knowledge th
at the abnormal
consequences might follow or where he reasonably ought
to know that the
abnormal consequences might follow – Victoria Laundry v
Newman Industries.
3.3 The measure (or quantum) of damages
In assessing the amount of damages payable, the courts
use the following
principles:
The amount of damages is to compensate the claimant
for his loss not to
punish the defendant.
Damages are compensatory – not restitutionary.
- 4 -
The most usual basis of compensatory damages is to put
the innocent party into
the same financial position he would have been in ha
d the contract been
properly performed. This is sometimes called the
‘expectation loss’
basis. In
Victoria Laundry v Newman Industries, for example, Victori
a Laundry were
claiming for the profits they would have made had the
boiler been installed on
the contractually agreed date.
Sometimes a claimant may prefer to frame his claim i
n the alternative on the
‘reliance loss’ basis and thereby recover expenses incurre
d in anticipation of
performance and wasted as a result of the breach – Angl
ia Television v Reed.
In a contract for the sale of goods, the statutory (Sal
e of Goods Act 1979)
measure of damages is the difference between the mark
et price at the date of
the breach and the contract price, so that only nomina
l damages will be
awarded to a claimant buyer or claimant seller if the p
rice at the date of breach
was respectively less or more than the contract price.
In fixing the amount of damages, the courts will usua
lly deduct the tax (if any)
which would have been payable by the claimant if the
contract had not been
broken. Thus if damages are awarded for loss of earning
s, they will normally be
by reference to net, not gross, pay. Difficulty in ass
essing the amount of
damages does not prevent the injured party from receivin
g them: Chaplin v
Hicks.
In general, damages are not awarded for non-pecuniary los
s such as mental
distress and loss of enjoyment. Exceptionally, howe
ver, damages are awarded
for such losses where the contract’s purpose is to prom
ote happiness or
enjoyment, as is the situation with contracts for holi
days – Jarvis v Swan Tours.
The innocent party must take reasonable steps to miti
gate (minimise) his loss, for
example, by trying to find an alternative method of p
erformance of the contract:
Brace v Calder.
3.4 Liquidated damages clauses and penalty clauses
If a contract includes a provision that, on a breach o
f contract, damages of a
certain amount or calculable at a certain rate will be pa
yable, the courts will
normally accept the relevant figure as a measure of dam
ages. Such clauses are
called
liquidated damages clauses
.
The courts will uphold a liquidated damages clause even
if that means that the
injured party receives less (or more as the case may be
) than his actual loss
arising on the breach. This is because the clause sett
ing out the damages
constitutes one of the agreed contractual terms – Cellulo
se Acetate Silk Co Ltd v
Widnes Foundry Ltd.
However, a court will ignore a figure for damages put in a
contract if it is classed
as a
penalty clause
– that is, a sum which is not a genuine pre-estimat
e of the
expected loss on breach.
- 5 -
This could be the case where:
1.
The prescribed sum is extravagant in comparison with t
he maximum loss that
could follow from a breach.
2.
The contract provides for payment of a certain sum but a
larger sum is
stipulated to be payable on a breach.
3.
The same sum is fixed as being payable for several brea
ches which would be
likely to cause varying amounts of damage.
All of the above cases would be regarded as penalties
, even though the clause
might be described in the contract as a liquidated dam
ages clause. The court
will not enforce payment of a penalty, and if the co
ntract is broken only the
actual loss suffered may be recovered (Ford Motor Co (En
gland) Ltd v
Armstrong).
4
Equitable remedies
4.1
Specific performance
This is an order of the court requiring performance of a po
sitive contractual
obligation.
Specific performance is not available in the followi
ng circumstances:
Damages provide an adequate remedy.
Where the order could cause undue hardship.
Where the contract is of such a nature that constant sup
ervision by the court
would be required, eg, Ryan v Mutual Tontine Association.
Where an order of specific performance would be possi
ble against one party
to the contract, but not the other.
Where the party seeking the order has acted unfairly or un
conscionably. He
is barred by the maxim ‘He who comes to Equity must com
e with clean
hands’.
Where the order is not sought promptly the claimant wi
ll be barred by the
maxims ‘Delay defeats the Equities’ and ‘Equity assis
ts the vigilant but not the
indolent’.
In general the court will only grant specific performance
where it would be just
and equitable to do so.