Remedies for Breach of Contract PDF

4 Remedies for Breach of Contract LEARNING OUTCOMES When you have completed this chapter, you should be able to: explain, apply and discuss in depth the principles governing the availability of damages for breach of contra...

4 Remedies for Breach of Contract LEARNING OUTCOMES When you have completed this chapter, you should be able to: explain, apply and discuss in depth the principles governing the availability of damages for breach of contract, including agreed damages clauses; identify the other remedies which may be available if there is a breach of contract and explain the legal and equitable principles which govern them. In Chapter 3 you studied the rules relating to terms of a contract. We are now going to look at the remedies which may be available if a term of the contract is broken. For example, suppose you decide to have a new kitchen fitted. You select the kitchen units you want from a firm of kitchen suppliers and arrange for the firm to install the units. The firm starts to fit the units, but you feel that the workmanship is not up to standard and you want to know what you can do about it. First of all, you must establish that a term of the contract has been broken. Thinking back to the terms implied by statute that you looked at in Chapter 3, what term has the firm most likely broken here? The contract is one for work and materials, so you probably thought of the term implied by s 49 of the Consumer Rights Act 2015, ie the service/​work must be provided with reasonable care and skill. Having established the term broken, you will then want to consider the remedies which may be available. For example, can you tell the firm to stop work and employ someone else? Can you obtain damages and, if so, how will these be assessed? The main remedy for breach of contract is damages, but we are also going to look at the remedies of: action for an agreed sum; termination of the contract; specific performance and injunctions; and restitution. 4.1 Damages 4.1.1 Introduction Breach of any term of the contract gives the innocent party the right to claim damages, although if the claimant has not suffered any loss, damages will be nominal only. 89 Contract To recover damages, the claimant must prove that loss has been suffered as a result of the defendant’s breach, and the loss or damage must not be too remote a consequence of the breach. We shall be dealing with types of loss and remoteness later in this chapter. 4.1.1.1 Compensation not punishment The object of awarding damages is to compensate the claimant for their loss and not to punish the defendant. Although punitive or exemplary damages can be awarded in certain tort cases to punish the defendant, they cannot as a general rule be awarded in a purely contractual claim. Also, damages are based on the loss to the claimant and not on the gain to the defendant. This means that if the claimant has not suffered any loss, only nominal damages (usually about £5–​£10) will be awarded. For example, assume you agree that a decorator will paint your house for £1,000, starting in two months’ time. You agree to pay on completion of the work. Before the decorator is due to start work, they tell you that they will not be doing the painting for you. The decorator has found a more lucrative job elsewhere. The decorator is clearly in breach of the contract with you. However, you find someone else who will do the job for £800, starting at the same time. It would not be in your interests to sue the decorator for breach of contract as you have not suffered any loss. Any award would be for nominal damages only. A party should be wary of bringing a claim in these circumstances as it may result in having to pay all the costs of the proceedings. This is what happened in the commercial case of Obagi v Stanborough (Developments) Ltd TLR 646. The defendant was found to have broken a term of the contract which provided that the defendant must use best endeavours to obtain planning permission. However, it was shown that there was never any substantial chance of planning permission being granted and so the defendant’s breach did not cause any loss to the claimant. The judge at first instance awarded nominal damages of £5 and ordered the claimant to pay the defendant’s costs. This was upheld by the Court of Appeal. Therefore, it is not worth bringing a claim where only nominal damages will be awarded. 4.1.2 Assessment and measure of damages As you have seen, the object of awarding damages in contract is to compensate the claimant for loss suffered because of the defendant’s breach. The question is how can this be achieved? The normal aim of the court in assessing damages was stated in the judgment of Parke B in Robinson v Harman (1848) 1 Exch 850: The rule at common law is that where a party sustains loss by reason of a breach of contract, he is so far as money can do it, to be placed in the same situation with respect to damages as if the contract had been performed. The next question is how will the court measure damages in order to achieve this aim; in other words, how much is the court likely to award? 4.1.2.1 Measure of damages: expectation loss Generally, the claimant will be able to recover for loss of the benefit which the claimant would have obtained had the contract been properly performed. Damages assessed in this way are sometimes said to be worked out on an expectation loss basis as the claimant will be compensated for their lost expectation. 90  Remedies for Breach of Contract Examples 1. Ayesha sells a Ming vase to Barbara for The court is likely to award Barbara £59,000. £50,000. It is a term of the contract that the If the contract had been properly performed, vase is Ming. In fact, the vase turns out to be Barbara would have a Ming vase worth £60,000. a copy worth £1,000. Had it actually been In fact, she has a fake worth £1,000. She needs Ming, it would have been worth £60,000. £59,000 so that she can buy an equivalent vase. 2. Carol agrees to buy goods from David at a The court is likely to award damages of £200. If price of £1,000, payment on delivery. Delivery the contract had been properly performed, Carol to be on 1 October. David refuses to deliver. should have received the goods for £1,000. If (In fact he had sold the goods to someone she has to pay £1,200, she will have paid £200 else for £2,000.) On 1 October Carol can buy more, so she needs this amount in damages. similar goods elsewhere for £1,200. The fact that David makes a profit out of the breach is not relevant –​the court will compensate Carol, not punish David. 3. Esher & Co orders goods from Fields plc The court is likely to award £5,500. If the contract at a price of £8,000 to be paid on delivery. had been properly performed, Fields plc would Delivery to be 1 October. Fields plc tries to have received £8,000. Now the company can deliver on 1 October but Esher & Co refuses only sell for £2,500 –​so it needs £5,500 to put to accept the goods. Fields plc can sell it in the position it would have been in if the elsewhere but only for £2,500. contract had been properly performed. 4. Jason, sole owner of a gardening business, The court is likely to award Jason £220. If the agreed to cut down a tree in Carol’s garden contract had been properly performed, Jason and remove all timber from the premises for would have earned £250 altogether. However, £250. He agreed to do the work on 1 May. in order to earn that sum, he would have had to On 26 April Carol told Jason that she had pay out expenses amounting to £30, and these changed her mind and no longer wanted must therefore be deducted. him to cut down the tree. Jason could not find alternative work for 1 May. He tells you that he would have made a net profit of £220, taking into account the expenses he would have had to pay to do the job, including the fee to dispose of the timber. 5. Smith is a manufacturer of cables. With his Smith was £3,000 worse off using his new old machine: machine than if he had used his old one. But he made £10,000 of cables per week, his complaint is not that he bought the new he had costs of £5,000 per week (materials, machine and now wishes he had not done so; labour and servicing), his complaint is that the new machine did not giving him a profit of £5,000 per week. work as well as it should have. He recently bought a machine from Jones, What we need to find out is how much Smith which they calculated would enable him to: has lost compared with his position if the new make £10,000 worth of cables per week, machine had been working properly from with costs of £4,000 per week, the start. giving him a profit of £6,000 per week. So, what about giving him £9,000? Well, the In the first three weeks of its operation, the machine may have been operating at reduced machine only worked at 70% of its proper capacity for a while, but he was still making capacity because of a fault (which Jones £7,000 worth of cables per week. And it is true has now rectified). As a result, Smith could that over three weeks, he has made £9,000 only make £7,000 worth of cables per week. worth fewer cables than he did before. But over However, his costs were only £3,000 per week, those three weeks, he has also saved costs of as he used fewer materials. £3,000. If you awarded Smith £9,000 damages, What can Smith claim? you would actually be making him better off than 91 Contract if the contract had been properly performed. You would be giving him £9,000 to compensate his loss of production, but also letting him keep his £3,000 saved costs. The object is merely compensation, so he cannot have £9,000. What he should get is £6,000. Why? Well, if the contract had been performed properly, he would have been able to make £9,000 worth more of cables but would have incurred £3,000 more costs. Because of the breach, he is £6,000 worse off. Give him £6,000 and he is in the same financial position as he would have been if the contract had been properly performed. Put another way, Smith gets what he bargained for. We have looked at scenarios where goods turn out to be fake, and where goods are not delivered or not accepted. Next, we consider the situation where goods delivered under a contract are defective or services are defectively performed. Again, when assessing damages on an expectation loss basis, the court will try to put the claimant in the position the claimant would have been in if the contract had been properly performed, but how will this be achieved? Traditionally, the court would award either the difference in value or the cost of cure. This means that if goods are defective, the basic rule is that the amount of damages awarded will be the difference in value between the actual value of the goods and the value the goods would have had if they had not been defective. With contracts for services, the basic rule is that the amount of damages awarded will be the cost of putting the work right, ie cost of cure. However, the court would award the cost of cure for defective goods and the difference in value for defective services if reasonable to do so. So, at one time, it was thought that difference in value or cost of cure were the only potential awards of damages. It was one or the other. But what if neither award would compensate the claimant for their true loss as a result of the breach of contract? Is there an alternative measure that the court can award? This was the dilemma faced by the courts in Ruxley Electronics v Forsyth AC 344. Ruxley agreed to build a swimming pool for Mr Forsyth in his garden. Mr Forsyth stipulated that the deep end of the pool should be 7 feet 6 inches deep. In the event it was only 6 feet 9 inches deep. It was established there was no difference in value, but it was going to cost £21,560 to rectify the problem. The question before the House of Lords was whether Mr Forsyth should get nothing (representing the difference in value), £21,560 (representing the cost of cure) or a sum somewhere between those two figures. The original trial judge had awarded Mr Forsyth £2,500. Whilst cost of cure (here £21,560) is the normal measure in cases of defective work, the House of Lords did not consider it should be used where it was unreasonable in relation to the benefit to be obtained. So the House of Lords reinstated the original trial judge’s award 92  Remedies for Breach of Contract of £2,500 as representing the true loss suffered by Mr Forsyth; namely that his personal preference for a deeper pool had not been satisfied. The House of Lords referred to this loss as ‘loss of amenity’ and the ‘consumer surplus’. One significant aspect of the case was that it was all about a swimming pool –​something meant to provide pleasure and amenity. So the loss of amenity/​consumer surplus could be viewed as his ‘true’ loss. If the contract had been for a more mundane construction, Mr Forsyth might have received nothing, on the basis that there would have been no loss of value or amenity and that curing the defect would have been unreasonable. Conversely, if the depth of the swimming pool had been critical for some reason and consequently may well have been rebuilt, the full cost of cure (ie £21,560) may have been awarded. 4.1.2.2 Measure of damages: reliance loss We have seen that the claimant will normally ask for damages to compensate for the benefit the claimant would have obtained if the contract had been properly performed, including loss of profits. However, sometimes loss of expectation may be too speculative, and so instead the claimant may ask for damages to cover the expenses incurred in reliance on the contract. Damages assessed in this way are sometimes said to be worked out on a reliance loss basis. In the case of Anglia Television v Reed 1 QB 60, CA, Anglia engaged the defendant, an actor, to play the leading role in the production of a play for television. The defendant later refused to carry on with the contract and Anglia was forced to abandon the production as it could not get a substitute. Anglia claimed as damages all of the expenditure which they had wasted on the production, which included such things as director’s fees, designer’s fees and stage manager’s fees. Anglia TV did not claim damages on an expectation loss basis because they did not know what profit (if any) they would have made if the contract had been properly performed by the defendant. Counsel for the defendant argued that Anglia TV should not be able to recover expenditure incurred before the contract with the defendant was concluded on the ground that this part of the loss was too remote a consequence of the breach. (We will be looking at remoteness at 4.1.4 below.) However, the Court of Appeal disagreed and held that Anglia TV could recover all their wasted expenditure including expenditure incurred before they entered into the contract with the defendant. Lord Denning felt that the pre-​contract expenditure was not too remote because it should have been in Reed’s contemplation when he entered into the contract with Anglia TV that expenditure had already been incurred and that all the expenditure would be wasted if, at the last minute, he broke his contract with them. As we have just seen, in Anglia TV v Reed the claimant asked for damages on a reliance loss basis because the company did not know what profit the film would have made if the contract had been performed properly by the defendant. It will generally be for the claimant to decide whether to seek damages on an expectation or a reliance loss basis, but sometimes the court will decide that the reliance loss basis is the correct approach if the claim for damages on an expectation loss basis is too speculative. It is important to remember that in order to obtain damages (whether on a reliance or expectation loss basis), the claimant must prove that they have suffered loss due to the defendant’s breach. 93 Contract This was emphasised in the case of Omak Maritime Ltd v Mamola Challenger Shipping Co (The Mamola Challenger) EWHC 2026. Omak agreed to charter a vessel from the owners for a term of five years. Omak breached the contract, and the owners (rightfully) terminated the contract. The contract required the owners to make various modifications to the vessel, and the owners had incurred expenses in preparation for these modifications. These expenses were wasted, ie they had no residual value or benefit for the owners. The owners claimed damages for the wasted expenditure. It was found that the owners were able to re-​charter the vessel at a higher rate than under the original charter, and over the five-​year period they would earn more than they would have earned under the original charter. The High Court held that the owners could not recover damages for wasted expenditure. This decision seems logical as the owners had mitigated their loss by re-​chartering, and as a result they had not suffered any loss. (We will look at the mitigation rule later in this chapter.) We shall now go on to consider the types of loss or damage for which damages may be awarded in contract. 4.1.3 Types of loss Loss includes any harm to the person or property of the claimant and any injury to the claimant’s economic position. This means that the claimant can recover for personal injury, damage to property and also loss of profit. The restrictions that apply to recovering damages for economic loss in tort do not apply to contract claims. For example, suppose the claimant has purchased a machine for use in its business. The machine is defective and cannot be repaired. The seller has broken the term implied by s 14 of the Sale of Goods Act 1979 as the machine is not of satisfactory quality. The claimant would want to obtain damages for the cost of a new machine and for any profit it has lost due to the breakdown. Furthermore, if the defect causes the machine to catch fire and the fire damages the claimant’s factory and injures the claimant, the claimant would also be able to obtain damages in respect of the damage to the factory and for the personal injury. The claimant can obtain damages for all of these losses in an action for breach of contract. 4.1.3.1 Damages for a lost opportunity The court may award damages for a lost opportunity. In the case of Chaplin v Hicks 2 KB 786, the Daily Express ran a talent contest. The top 50 contestants had to attend an audition where 12 winners would be selected. The winners would be given theatrical engagements for three years. The claimant was one of the top 50, but the organisers failed to tell the claimant the time and place of the audition. The Court of Appeal decided that the claimant was entitled to damages to compensate for the loss of the chance of being one of the 12 winners. A more modern example of a lost opportunity is the case of Blackpool and Fylde Aero Club v Blackpool Borough Council 1 WLR 1195, CA, which you looked at in Chapter 1. Here the Court of Appeal held that the Council had a duty to consider all properly submitted tenders. The club had properly submitted its tender but it was not considered. The club had therefore lost the opportunity of being selected for the concession to run pleasure flights. 94  Remedies for Breach of Contract 4.1.3.2 Damages for mental distress and disappointment Damages will not normally be awarded for distress or disappointment. A certain amount of annoyance, distress and disappointment is usually felt by the innocent party when a breach of contract occurs. However, the courts have been very reluctant to award damages for such distress in contract cases, possibly because of a fear that it would open the floodgates for such claims. Traditionally, the courts have been more willing to award damages for mental distress in tort. The case of Addis v Gramophone Co Ltd AC 488, HL reflects the usual approach of the court when dealing with a claim for damages for distress in contract. The claimant was dismissed from their job and sought damages for the distress suffered because of the harsh and humiliating manner of the dismissal. The House of Lords refused to award damages for mental distress. However, the court has awarded damages for mental distress in situations where one of main objects of the contract was to have peace of mind, eg hospitality and holiday contracts. A case which illustrates this is Jarvis v Swans Tours 1 QB 233, CA. The defendants, a firm of travel agents, advertised a ‘houseparty’ holiday in Switzerland. The claimant, Mr Jarvis, booked two weeks’ holiday with the defendants and paid £63.45. The holiday was a catalogue of disasters. There was supposed to be a ‘houseparty’, but there were only 13 guests there during the first week and none during the second –​apart from Mr Jarvis. The holiday failed to comply with the description in the brochure in numerous other respects. For example, the skiing was some distance away, and in the first week there were no ordinary length skis to hire, only mini skis; in the second week longer skis were available, but the boots did not fit properly and Mr Jarvis’ feet became blistered so he could not continue even with the long skis. There was supposed to be a bar at the hotel, but it was in an unoccupied annex and only open for one evening. All in all, Mr Jarvis had a pretty miserable holiday and brought an action for breach of contract. The county court judge awarded £31.72 damages. Mr Jarvis appealed. Lord Denning MR held as follows: The one question in the case is: what is the amount of damages? The judge seems to have taken the difference in value between what he paid for and what he got. He said that he intended to give ‘the difference between the two values and no other damages’ under any other head. He thought that Mr Jarvis had got half of what he paid for. So the judge gave him half the amount which he had paid, namely, £31.72. Mr Jarvis appeals to this court. He says that the damages ought to have been much more … What is the right way of assessing damages? It has often been said that on a breach of contract damages cannot be given for mental distress … I think that those limitations are out of date. In a proper case damages for mental distress can be recovered in contract, just as damages for shock can be recovered in tort. One such case is a contract for a holiday, or any other contract to provide entertainment and enjoyment. If the contracting party breaks his contract, damages can be given for the disappointment, the distress, the upset and frustration caused by the breach. I know that it is difficult to assess in terms of money, but it is no more difficult than the assessment which the courts have to make every day in personal injury cases for loss of amenities. Take the present case. Mr Jarvis has only a fortnight’s holiday in the year. He books it far ahead, and looks forward to it all that time. He ought to be compensated for the loss of it. 95 Contract Here, Mr Jarvis’s fortnight’s winter holiday has been a grave disappointment. It is true that he was conveyed to Switzerland and back and had meals and a bed in the hotel. But that is not what he went for. He went to enjoy himself with all the facilities which the defendants said he would have. He is entitled to damages for the lack of those facilities, and for his loss of enjoyment. Looking at the matter quite broadly, I think the damages in this case should be the sum of £125. So, damages for distress and disappointment can be awarded where the contract is to provide pleasure, entertainment, enjoyment or peace of mind. In the case of Farley v Skinner 3 WLR 899, HL, the House of Lords made it clear that the sole object of the contract need not be to provide pleasure, enjoyment or peace of mind. It is sufficient if this is an important object of the contract. In the Farley case the claimant employed the defendant to survey a house the claimant was thinking of buying. The claimant particularly wanted to know if the house might be affected by aircraft noise as it was close to Gatwick airport. This was an important object of the contract. The surveyor said that it was unlikely to suffer greatly from noise. This turned out to be incorrect, and the House of Lords restored the trial judge’s award of £10,000 damages for non-​pecuniary loss. Types of loss –​summary The claimant may obtain damages for various kinds of loss including: loss of profit; damage to property; physical injury; loss of opportunity; and mental distress and disappointment, but only in limited situations. We have looked at how damages are assessed and at the types of loss for which the claimant might want to be compensated. However, a claimant may not be able to recover damages for all loss suffered as a result of the defendant’s breach. The loss or damage must not be too remote a consequence of the breach. We now go on to consider the rule relating to remoteness. 4.1.4 The remoteness rule A party will not be awarded damages for loss which is too remote a consequence of the breach. The remoteness rule exists because to make someone responsible for all the loss which might follow from their breach could lead to unfair results. 4.1.4.1 What is the remoteness rule? The remoteness rule in contract was established by the case of Hadley v Baxendale (1854) 9 Exch 341. In this case the claimants owned a mill. The mill shaft broke and so the claimants entered into a contract with the defendants for the defendants to take the mill shaft to Greenwich where it would be used as a pattern for a new shaft. The defendants delayed and the shaft was delivered late. The mill was idle during the delay because, unbeknown to the defendants, the claimants did not have a spare mill shaft that they could use in the meantime. The claimants sued for their loss of profit caused by the delay. Alderson B said that the damages the innocent party ought to receive in respect of a breach of contract should be such as may fairly and reasonably be considered either arising naturally 96  Remedies for Breach of Contract (ie according to the usual course of things) from the breach of contract itself, or such 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 because of special circumstances known to them. The claimants in Hadley v Baxendale could not recover their loss of profit for the period when the mill was idle because the loss did not pass the remoteness test. The loss of profit did not arise naturally from the defendants’ breach as many millers would have had a replacement shaft so the mill would not have been idle during the defendants’ delay. The claimants did not tell the defendants (who were only carriers) that they did not have a replacement shaft, so the defendants did not have knowledge of the special circumstances which would have brought the loss of profit within their reasonable contemplation. If the defendants had known that the mill would be idle then it is likely the decision would have been different and the defendants would have been liable to pay damages. The defendants would have known of special circumstances to bring the loss within their contemplation. Therefore, the remoteness rule in contract means that the loss must have been within the reasonable contemplation of the parties at the time of the contract as being a probable result of the breach. It is sometimes said that there are two limbs to the remoteness rule established in Hadley v Baxendale. Loss which arises naturally from the breach will normally be within the parties’ reasonable contemplation (Limb 1). Unusual loss will be within the parties’ reasonable contemplation only if the special circumstances which give rise to the loss are known to both parties at the time the contract is made (Limb 2). The other party should be told about the special circumstances before the contract is finalised. The reason for this timing is that knowledge of special circumstances may affect the terms of the contract. The party who finds out about special circumstances may want to charge more for providing a service or insert a clause limiting liability. Knowledge which the defendant acquires after the contract is formed is therefore irrelevant to the application of the remoteness rule. The defendant’s knowledge of the claimant’s business practices was considered in the case of Balfour Beatty Construction (Scotland) Ltd v Scottish Power plc 1994 SLT 807, HL. The House of Lords held that Scottish Power was not liable for the full loss suffered by the claimant as a result of an interruption in the electricity supply. The interruption in electricity supply happened when the claimant was in the middle of a construction project which required a continuous pour of concrete. Because of the interruption in supply, the work already done was worthless. The defendant did not know about the need for a continuous pour, and the House of Lords stated that there was no general rule that contracting parties were 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 knowledge. In this case, the construction project was complicated and Scottish Power was not deemed to know about it. The remoteness rule established by Hadley v Baxendale has been considered in a number of cases, and the relationship between the remoteness rule in contract and tort has also been explored. We will now consider subsequent interpretations of the rule in Hadley v Baxendale. 4.1.4.2 Subsequent interpretation of the remoteness rule The Court of Appeal considered the remoteness rule in the case of Victoria Laundry (Windsor) Ltd v Newman Industries Ltd 2 KB 528, CA. Here the claimants were launderers and dyers. They wanted to extend their business and bought a boiler from the defendant to be delivered on 5 June. The defendant did not deliver until 8 November. The defendant knew 97 Contract that the claimants were launderers and dyers and that they intended to put the boiler to immediate use in their business. The claimants claimed damages at the rate of: £16 per week for loss of ordinary profits, taking into account the extra customers they could have taken on had they received the boiler in time; and £262 per week for loss of profit on some highly lucrative dyeing contracts with the Ministry of Supply which they would have accepted had they received the boiler in time. Asquith LJ said that the innocent party could recover for loss which at the time of the contract was reasonably foreseeable as liable to result from the breach. (The use of the phrase ‘reasonably foreseeable’ suggested that the test for remoteness in contract was the same as in tort. Asquith LJ’s use of the phrase has been criticised and we will look at that criticism later.) Asquith LJ identified the defendant’s knowledge at the time the contract was formed as the crucial factor when deciding whether a particular type of loss was too remote. He said that the knowledge possessed by the defendant could be of two types: imputed knowledge, which everyone as a reasonable person is assumed to possess; and actual knowledge. If the loss arises in the usual course of things under Limb 1 in Hadley v Baxendale, the defendant will have imputed knowledge of it (ie they will be taken to know of it) and it will not be too remote. If the loss is unusual loss under Limb 2 of Hadley v Baxendale, then it will be too remote unless the defendant had actual knowledge of special circumstances. Bearing this in mind, what do you think the court decided in this case? The court decided: The defendant was liable for the loss of ordinary business profit. This was a reasonably foreseeable result of the late delivery as the defendant knew the nature of the claimants’ business and that they intended to put the boiler to immediate use. The defendant was not liable for the loss of profit on the highly lucrative contracts with the Ministry of Supply. This loss of profit went beyond ordinary profit, and, as the defendant had no knowledge of these special circumstances, the loss was too remote. The decision in Victoria Laundry Ltd v Newman Industries Ltd and the comments of Lord Asquith were considered by the House of Lords in Koufos v C Czarnikow Ltd, The Heron II 1 AC 350, HL. Here, the House of Lords, whilst approving the decision in Victoria Laundry, disapproved of the phrase ‘reasonably foreseeable’. The House of Lords said that the test in contract is not the same as that used in tort and reinstated the phrase ‘within the reasonable contemplation of the parties’ used in Hadley v Baxendale. In The Heron II, Lord Reid said that the remoteness test in tort imposes a wider liability than the test in contract. In tort, a defendant will be liable for any damage which is reasonably foreseeable, even in the most unusual case. Can you think of a reason for having different remoteness tests in contract and tort? In contract, you are normally aware of the identity of the other contracting party. You can therefore take steps to ensure you can recover for unusual loss by pointing out the possibility of such loss to the other party before the contract is made. In tort, there is usually no opportunity to draw to the attention of the party who injures you the possibility of unusual loss or damage. In The Heron II, the House of Lords considered the degree of probability needed in order for the loss to be within the reasonable contemplation of the parties. Lord Reid said the question to ask is whether the loss in question is ‘of a kind which the defendant, when he made the contract, ought to have realised was not unlikely to result from [the] breach …’. 98  Remedies for Breach of Contract The relationship between the remoteness rules in contract and tort was discussed again, this time by the Court of Appeal, in Parsons (Livestock) Ltd v Uttley Ingham Ltd 1 QB 791. The claimants were pig farmers. They bought a hopper from the defendants for storage of pig food. The defendants agreed to erect the hopper at the claimants’ farm. The defendants forgot to unseal the ventilator at the top of the hopper, and, because of this, pig food stored in the hopper became mouldy. As a result of eating the mouldy food, many of the pigs contracted a rare infection and died. The claimants brought an action for damages for breach of contract. The judge at first instance found in favour of the claimants. The defendants appealed to the Court of Appeal. One question the Court of Appeal had to decide was whether the illness and death of the pigs was too remote a consequence of the breach. Lord Denning suggested (obiter) that the contract test of remoteness, ie reasonable contemplation, should be limited to cases of economic loss, and that where there has been physical damage (eg, as here loss of the pigs) the tort test of reasonable forseeability should apply. In this case, the defendants ought reasonably to have foreseen the possibility that the pigs might become ill and were accordingly liable to pay damages for the loss of the pigs. The other two judges reached the same conclusion on damages but gave different reasoning, with Scarman LJ stating: My conclusion in the present case is the same as that of Lord Denning MR but I reach it by a different route. I would dismiss the appeal. I agree with him in thinking it absurd that the test for remoteness of damage should, in principle, differ according to the legal classification of the cause of action … I differ from him only to this extent: the cases do not, in my judgment, support a distinction in law between loss of profit and physical damage. Neither do I think it necessary to develop the law judicially by drawing such a distinction. Of course (and this is a reason for refusing to draw the distinction in law) the type of consequence, loss of profit or market or physical injury, will always be an important matter of fact in determining whether in all the circumstances the loss or injury was of a type which the parties could reasonably be supposed to have in contemplation. I would agree with Mr McGregor in his work on Damages that –​‘in contract, as in tort, it should suffice that, if physical injury or damage is within the contemplation of the parties, recovery is not to be limited because the degree of physical injury or damage could not have been anticipated.’ This is so, in my judgment, not because there is, or ought to be, a specific rule of law governing cases of physical injury but because it would be absurd to regulate damages in such cases on the necessity of supposing the parties had a prophetic foresight as to the exact nature of the injury that does in fact arise. It is enough if on the hypothesis predicted physical injury must have been a serious possibility. Though in loss of market or loss of profit cases the factual analysis will be very different from cases of physical injury, the same principles, in my judgment, apply. Given the situation of the parties at the time of contract, was the loss of profit, or market, a serious possibility, something that would have been in their minds had they contemplated breach? It does not matter, in my judgment, if they thought that the chance of physical injury, loss of profit, loss of market, or other loss as the case may be, was slight or that the odds were against it provided they contemplated as a serious possibility the type of consequence, not necessarily the specific consequences, that ensued upon breach. Making the assumption as to breach that the judge did, no more than common sense was needed for them to appreciate that food affected by bad storage conditions might well cause illness in the pigs fed on it. 99 Contract So Scarman LJ agreed with Lord Denning in thinking it absurd that the test for remoteness of damage should in principle differ according to the legal classification of the cause of action (ie contract or tort). However, he did not think the cases supported a distinction in law between loss of profit and physical damage, and he did not think it was necessary to develop the law by drawing that distinction. The court decided that if the defendant can contemplate the type of loss as a serious possibility, then all loss of that type is recoverable even though the extent of the loss could not have been contemplated. Therefore, in Parsons v Uttley Ingham, the defendants were liable for the death of a large number of the claimants’ pigs as some harm to the pigs was within the reasonable contemplation of the parties as a result of the defective installation of the hopper used for storing the pigs’ food. Since some harm to the pigs could be contemplated, it did not matter that the death of so many pigs was not within the contemplation of the parties. In Parsons v Uttley Ingham, the court said that, if a particular type of loss is within the parties’ contemplation as a serious possibility, then all loss of that type is recoverable even if more serious than could be contemplated. Although the Parsons case involved physical injury, Scarman LJ said that the same principles applied in loss of profit cases. In Victoria Laundry v Newman Industries, the claimants recovered for their normal business profits but not for the profit on the highly lucrative dyeing contracts. To reconcile this decision with Parsons v Uttley Ingham, the normal business profits and the profit on the highly lucrative contracts would have to be treated as different types of loss. The problem of distinguishing between different types of loss was recognised by Stuart-​Smith LJ in Brown v KMR Services Ltd 4 All ER 598, CA. The claimant had been underwriting as a Lloyd’s name and brought proceedings against the claimant’s former agent, alleging the agent had acted negligently and in breach of contract in failing to warn the claimant of the dangers of joining high-​risk syndicates. The claimant wanted damages for the loss suffered. The Court of Appeal held that, in this case, the underwriting losses, although of far greater magnitude than contemplated, were nevertheless of the same type as ones that were contemplated and so were not too remote. Stuart-​Smith LJ said, obiter, that although in practice it may be difficult to categorise loss into types or kinds, especially where financial loss is involved, he did not see any difficulty in holding that loss of ordinary business profits is different in kind from that flowing from a particular contract which gives rise to very high profits. It is clear from this that Victoria Laundry might well be decided in the same way if the facts were to occur today. Remoteness –​summary Looking at all of the cases that you have considered so far, can you draw the key points together in order to formulate a test for remoteness? You could say that loss will not be too remote a consequence of the breach if it is of a kind which would have been within the reasonable contemplation of the parties at the time the contract was made as being not unlikely to result. The remoteness rule was considered by the House of Lords more recently in Transfield Shipping Inc v Mercator Shipping Inc (The Achilleas) UKHL 48. The defendant had chartered a ship from the claimant but was late returning the ship to the claimant. This amounted to a breach of contract. Because of the breach, the claimant had lost the opportunity to re-​charter the ship at a very lucrative rate, although it was able to re-​charter at a lower rate. The problem arose because, at that time, the market rate for chartering such vessels was fluctuating wildly. Essentially the House of Lords had to decide whether the claimant could recover damages in respect of the extra profit it would have earned on the lucrative lost charter. 100  Remedies for Breach of Contract Their Lordships were unanimous in deciding that the claimant could not be awarded damages for loss of the lucrative charter as this loss was too remote, although there were some differences in approach in the reasoning. Baroness Hale had doubts and said that the case could be an examination question –​one where there is no obviously right answer! Lord Hoffman took the view that the court should decide objectively what the intentions of the parties were at the time of entering the contract. Had the charterers assumed the risk of the claimant’s losses in respect of the re-​charter of the ship? He thought they had not, taking into account the type of contract and its commercial background. Lord Hope gave a similar judgment. Lord Rodger of Earlsferry took a more orthodox approach and said that neither party would reasonably have contemplated that the delay would ‘in the ordinary course of things’ cause the owners the kind of loss for which they claimed damages. That was not ‘an ordinary consequence’ of a breach of that kind. It occurred because of the extremely volatile market conditions and was too remote to give rise to damages. The differences in the reasoning in this case make it difficult to find the ratio decidendi. Lord Hoffman considered assumption of responsibility and was clearly departing from the orthodox approach to remoteness as established in Hadley v Baxendale. Lord Hoffman wrote a comment on the case in the Edinburgh Law Review (2010) in which he said: The orthodox approach produces a high degree of indeterminacy because it relies on only two concepts: kind of loss and degree of probability. But the cases show that these are open to very considerable manipulation to achieve what the court considers to be a fair result. … It seems to me that the time has come to look for a broader principle which can explain not only the, so to speak, run of the mill cases like Hadley v Baxendale but also the more puzzling cases like The Achilleas. Lord Hoffman went on to say that the cases are explicable ‘if one examines the nature of the obligation assumed by the contracting party and asks: for what kind of loss would he reasonably be taken to have accepted liability?’ In The Achilleas Lord Hoffman felt that the commercial background to the agreement made it clear that the charterer could not reasonably be regarded as having assumed the risk of the owner’s loss of profit on the re-​charter of the ship. So, the question is how will the courts treat remoteness issues in future cases? In John Grimes Partnership Ltd v Gubbins EWCA Civ 37, the Court of Appeal said that the test for remoteness (ie whether the loss claimed was of a kind which would have been within the reasonable contemplation of the parties at the time that the contract was made as being not unlikely to result) was ‘the standard rule’. However, there might be unusual cases, such as The Achilleas, in which the particular commercial context and surrounding circumstances make it necessary to consider whether or not a party had assumed responsibility for losses of that particular kind. The remoteness rule is really a way in which the law limits the amount of damages which may be recovered for a breach of contract. We shall now go on to consider two more ways in which damages may be limited, namely the mitigation rule and contributory negligence. 4.1.5 Mitigation As you have seen, the claimant can claim damages for loss suffered due to the defendant’s breach, provided that loss is not too remote. However, there is also a requirement that the claimant should mitigate their loss. This was explained by Viscount Haldane LC in British Westinghouse Electric & Manufacturing Co Ltd v Underground Electric Railway Company of 101 Contract London Ltd AC 673. It means that the claimant should take reasonable steps to ensure that losses are kept to a minimum. The claimant cannot recover damages for losses which the claimant could have avoided by taking reasonable steps. If the claimant does take reasonable steps to mitigate, the claimant can claim any expenses incurred in trying to mitigate even if the attempt is unsuccessful. The onus of proof is on the party in breach to show that the claimant could have mitigated, but they did not do so. If the defaulting party can do this then the court will not award damages for that part of the loss which was caused by the claimant’s failure to mitigate: that loss was not caused by the breach. So let us now have a look at what a claimant might reasonably be expected to do to mitigate their loss in certain situations. Examples Situation Mitigation 1. Sheila is dismissed from her job as a dental Sheila should look for suitable alternative assistant in breach of contract. employment as a dental assistant. 2. In breach of contract, Ellery refuses to deliver Nasser should go into the marketplace straight goods to Nasser. away and try to buy similar goods elsewhere. 3. Arjuna tries to deliver goods to Pauline, but in Arjuna should go into the marketplace straight breach of contract she refuses to accept delivery. away and try to sell the goods elsewhere. 4. Hugh agrees to paint all the rooms in Elnora’s Elnora should look for someone else to finish house. He paints the kitchen, but then abandons the painting at a reasonable price. (She should the job because he can earn more money obtain two or three comparable quotations and elsewhere. accept the cheapest.) 4.1.6 Contributory negligence In tort, it is well established that a claimant’s damages may be reduced due to contributory negligence under the Law Reform (Contributory Negligence) Act 1945. If the only cause of action for breach of contract is a negligent breach (eg breach of the term implied by s 13 of the Supply of Goods and Services Act 1982 that services performed in the course of a business will be carried out with reasonable care and skill) and this would also give rise to a claim in the tort of negligence, then the Law Reform (Contributory Negligence) Act 1945 would apply. In this case, the claimant’s damages may be reduced on the basis of contributory negligence. 4.1.7 Time for assessment of damages The basic rule is that damages are assessed by reference to the time of the breach. For example, assume that the claimant had agreed to buy goods from the defendant for £5,000. The goods were to be delivered on 31 January. The defendant refused to deliver the goods. On 31 January the claimant could have purchased similar goods for £7,000. At the time of the hearing, the goods cost £10,000. The claimant would be awarded £2,000 damages based on the cost of the goods at the date of the breach. This relates to the principle of mitigation which we considered earlier. The claimant should take reasonable steps to mitigate their loss, and if a seller refuses to deliver goods this usually means that the buyer should act quickly and buy replacement goods rather than delaying and risking a rise in prices. 102  Remedies for Breach of Contract There are exceptions to the basic rule, but a discussion of these is beyond the scope of this textbook. Also, in the case of Golden Strait Corporation v Nippon Yusen Kubishiki Kaisha (The Golden Victory) 1 CLC 352 HL, the majority of the House of Lords said that the most important principle is that damages should reflect the loss suffered, and, although the assessment at the date of breach rule would normally achieve this, it should not be applied where it did not. We have now considered all issues which may be relevant in the assessment of damages, ie aim or purpose in assessing damages and quantification, types of loss, remoteness rules, mitigation, contributory negligence and time of assessment. Bringing a claim for damages can be costly and time-​consuming, and so the parties may put a clause in their contract stating the amount of compensation to be paid if there is a breach. This is so particularly in commercial contracts. We now go on to consider the validity of such clauses. 4.1.8 Specified damages and penalty clauses The parties may include a provision in the contract which states the amount of compensation which will be paid if the contract is broken. Stating in the contract the amount of compensation to be paid helps to provide certainty. A party can see by looking at the contract the amount that will be paid or received in the event of a particular breach. If the contract is broken and both parties are willing to abide by the clause, the cost of going to court will be avoided. Also, depending on how the clause is drafted, the innocent party may not have to prove the extent of its loss, only that the breach has occurred. 4.1.8.1 The distinction between a specified (liquidated/​agreed) damages clause and a penalty clause A specified damages clause may be defined as a genuine attempt to pre-​estimate the loss which is likely to be caused by the breach. Such a clause is binding, and the sum specified is the amount that will be paid regardless of the actual loss which the claimant has suffered. The usual rules of measure of damages, remoteness and mitigation do not apply, and the claimant may receive more or less than the loss suffered. The crucial figure is the amount of compensation stated in the clause. (Note that a specified damages clause is often referred to as a ‘liquidated damages’ or ‘agreed damages’ clause.) A penalty may be defined as an attempt to put pressure on a party to perform the contract. A penalty is unenforceable. Where the clause is a penalty, the court is free to assess damages in the usual way and the usual principles of measure of damages, remoteness and mitigation will apply. If both parties are happy to abide by the clause, the issue will not come before the court. However, one party might want to avoid the operation of the clause, and if this happens the court will then have to decide whether the clause is a specified damages clause or a penalty clause. From what we have just seen of the distinction between a specified damages clause and a penalty clause, when might the innocent party want to argue that the clause is a penalty clause and not binding? When might the party in breach want to argue that the clause is a penalty? The innocent party might want to argue that the clause is a penalty and not binding if the claimant’s actual loss is greater than the amount stated in the clause. The intended aim of the clause (ie to compensate for genuine loss or to put pressure on a party to perform) is judged by reference to circumstances at the time of the contract. At that time, the sum stated may well have been meant to have a punitive effect, but in the end turns out to be less than the actual loss suffered. If the clause is a penalty, it will be invalid, and the court is free to award damages for the full amount of the innocent party’s loss. 103 Contract The party in breach might want to argue that the clause is a penalty and not binding where the amount stated in the clause is greater than the actual loss of the innocent party. If the court is free to assess damages in the usual way, the innocent party would receive less than the sum stated in the clause. 4.1.8.2 How does the court decide whether the clause is a specified damages clause or a penalty clause? As we have seen, if one of the parties wants to avoid the operation of the clause, the court will have to decide whether the clause is binding. The distinction between specified damages and penalty clauses was traditionally a question of construction, depending on the parties’ intentions, judged in the light of all the circumstances at the time of the contract. In Dunlop Pneumatic Tyre Co Ltd v New Garage & Motor Co Ltd AC 79, Lord Dunedin set out the following guidelines for the courts to consider when deciding whether a clause is a specified damages clause or a penalty: (a) If the sum stated in the clause is extravagant and unconscionable in amount in comparison with the greatest loss that could conceivably be proved to have followed from the breach then it will be a penalty. Notice that whether, or not, the amount is extravagant and unconscionable is not judged by comparing it with the actual loss suffered. The amount specified in the clause must be compared with the loss that might have followed from the breach, which of course could be much greater than the loss which was actually incurred. (b) If the breach consists only in not paying a sum of money then if the sum stated in the clause is greater than the amount which ought to have been paid it will be a penalty. (c) If a single lump sum is payable on the happening of one or more of several events, some of which may cause serious and some minor damage, it is presumed to be a penalty. Note that if (a) or (b) apply the clause will certainly be a penalty and so be unenforceable. Guideline (c) only raises a presumption that the clause is a penalty and this can be rebutted. This is illustrated by the Dunlop case itself, which is considered in more detail after the next guideline. (d) The clause can be a specified damages clause even if it is difficult or impossible to pre-​ estimate precisely the loss which might be caused by the breach. In fact, in the Dunlop case, it was difficult to pre-​estimate the loss. The claimant agreed to supply tyres to the defendant dealers. The defendant agreed not to tamper with the marks on the tyres, not to sell the tyres below the claimant’s list price and to certain other restrictions. The defendant agreed to pay the sum of £5 for each tyre sold in breach of the agreement. The defendant sold a tyre below the list price. The House of Lords found that the clause was a specified damages clause and not a penalty. Although a single lump sum was payable on the happening of several events, the presumption that this was a penalty was rebutted because the damage or loss that might be caused on the happening of each of these events could not easily be ascertained and the amount (£5) was relatively small. In the Dunlop case the House of Lords also said that although the parties may use the words penalty or specified/​liquidated damages, this wording is not conclusive. Therefore, a clause may be described as a penalty in the contract, but the court may decide that really it is a specified damages clause, and vice versa. In the case of Philips Hong Kong Ltd v Attorney-​General of Hong Kong (1993) 61 BLR 41, the Privy Council stressed that certainty is important in commercial contracts. The Privy Council thought that specified damages clauses could be valuable because they enabled the parties to know, with a reasonable degree of certainty, the extent of their liability and the risks they would run as a result of entering the contract. 104  Remedies for Breach of Contract The Privy Council also said that although the clause must be judged by considering the terms and circumstances of the contract at the time of formation, looking at subsequent events and what had actually happened could be valuable evidence as to what could reasonably be expected to be the loss at the time the contract was made. Commercial considerations were also found to be important in the case of Azimut-​Benetti SpA (Benetti Division) v Healey EWHC 2234 (Comm). The claimant entered into a contract to build a luxury yacht for the defendant. The price was €38 million, payable in instalments. The buyer breached the contract, and the claimant lawfully terminated the contract. A clause in the contract provided that, in these circumstances, the yacht builder could retain out of payments made by the buyer and/​or recover from the buyer an amount equal to 20% of the contract price by way of liquidated (specified) damages as compensation for its estimated losses. The clause also provided that, subject to this, the yacht builder would return any balance of instalments paid by the buyer. The buyer argued that this clause was a penalty. The court decided that the clause was a liquidated (specified) damages clause. The evidence made it clear that the purpose of the clause was not deterrent, and that it was commercially justifiable as providing a balance between the parties upon lawful termination by the builder of the yacht. The court took into account that both parties had the benefit of expert representation at the conclusion of the contract. The judge emphasised that the clause sought to balance the rights of the parties, ie it meant the buyer would be entitled to the immediate return of instalments paid over the 20% of the contract price figure. As the judge said, the alternative would have been that if the buyer defaulted, the claimant might continue to build the yacht and then sell it, with any remaining sums being returned only after the sale when the extent of the loss had been ascertained. The leading case on penalty clauses is now Cavendish Square Holding BV v Makdessi; ParkingEye Ltd v Beavis 3 WLR 1373, in which the Supreme Court recognised the broader contractual issues and reformulated the test for a penalty. The Supreme Court said that the penalty rule was concerned with two questions. The first was the circumstances in which the rule was engaged. The Supreme Court said a provision could not be a penalty unless it provided an exorbitant alternative to ordinary damages. The second question was concerned with whether the clause was penal and not whether it was a pre-​estimate of loss (which had traditionally been one of the main guidelines). The fact that the clause was not a genuine pre-​estimate of loss did not necessarily mean it was penal. The Supreme Court said that the real test of a penalty clause turned on whether the means by which the contracting party’s conduct was to be influenced were unconscionable or extravagant. This was formulated as a test of whether the clause imposed a detriment on the contract-​breaker out of all proportion to any legitimate interest of the innocent party in the enforcement of the contract. In ParkingEye Ltd v Beavis, Mr Beavis had parked in a car park operated for the landowner by ParkingEye. There were prominent notices in the car park which said parking was limited to two hours and that a fee of £85 would be imposed for overstaying. Mr Beavis parked for three hours and ParkingEye demanded payment of the £85 fee. Mr Beavis argued it was unenforceable as a penalty. The Supreme Court dismissed his appeal. Although ParkingEye was not liable to suffer loss as a result of overstaying motorists, it had a legitimate interest which involved receiving income to meet the legitimate costs of running the car parking scheme. This in itself was a legitimate way for the landowner to regulate the efficient use of the car park. 105 Contract Where compensation for breach, however, is the only legitimate interest, the Supreme Court said that the guidelines in Dunlop v New Garage would usually suffice to decide whether the clause was penal. But in a commercial context where compensation might not be the only legitimate interest of the innocent party and the contract was negotiated between properly advised parties of comparable negotiating power, the Supreme Court said the presumption had to be that the parties themselves were the best judges of their interests. Damages is the most common remedy for a breach of contract. We are now going to consider other remedies which may be available, starting with an action for an agreed sum. 4.2 Action for an agreed sum 4.2.1 Introduction If the contract provides that one party shall pay a definite sum of money to the other, then if the duty to pay has arisen but the payer refuses to pay, the payee can bring a claim for the agreed sum. This is not a damages claim so the remoteness and mitigation rules do not apply. It is a very straightforward claim for the amount due, ie a debt action. 4.2.2 The duty to pay must have arisen To bring a claim for an agreed sum, the duty to pay must have arisen. Please read clauses 6.1 and 6.2 in the Specimen Conditions of Sale (Reading 1 in the Appendix). Suppose the seller sent the buyer an invoice a week ago. The buyer has not yet paid and the seller has a cash flow problem. Could the seller bring an immediate action for the agreed sum? The seller could not bring an immediate action for the agreed sum as the buyer’s duty to pay has not yet arisen. The terms of the contract provide that the buyer has 21 days from issue of the invoice to make payment. 4.3 Termination of the contract 4.3.1 When can a party terminate the contract? We saw in Chapter 3 that a breach of contract by one party sometimes gives the other party the right to terminate the future performance of the contract, ie end the contract. In order to decide whether this right exists, it is necessary to consider the kind of term in the contract which has been broken. The right arises in two main circumstances: where there is a breach of condition (a particularly important term of the contract), and where there is a very serious breach of a term classed as an innominate term (see Figure 4.1). These are called repudiatory breaches –​breaches that allow the non-​defaulting party to treat the breach as having brought the contract to an end. Generally, the innocent party will have a choice: affirm the contract (ie treat the contract as ongoing); or discharge the contract. So, the breach itself does not terminate the contract automatically. It is up to the innocent party whether, or not, to treat the contract as at an end. But if they affirm the contract, they cannot then change their mind. Affirmation is a bar to terminating a contract. (See 4.3.2 below for more detail.) 106  Remedies for Breach of Contract Figure 4.1 Consequences of breach of contract –​summary Breach of contract Innominate Condition Warranty term Contract Very serious Breach is Damages discharged or Damages breach not serious affirmed and damages Damages Contract Damages discharged or affirmed and damages Example Barot has engaged Attwal to build a house for her. Attwal has to carry out four stages of building, and Barot has agreed to pay for each stage in advance. Barot pays the price for Stage 1 and Attwal completes Stage 1. Barot pays for Stage 2 and Attwal completes it. Barot pays for Stage 3, but then something goes badly wrong and Attwal breaches a condition of Stage 3. Barot has the choice whether to treat the contract as terminated. She does not have to. She could affirm the contract and limit herself to a claim for damages for the breach. But if she does treat the contract as at an end then both parties are discharged from future performance of the contract. Barot does not have to pay any more but, equally, Attwal does not have to do any more building work. Furthermore, if the breach of contract causes Barot any loss, she can sue for damages. For example, if it will cost her more than the outstanding payment for Stage 4 (the money she has saved to get the work completed) she is entitled to the excess as damages –​though, as we have seen, she has to mitigate (take reasonable steps to reduce) her loss. For example, she would be expected to get a few quotes to complete the work from reputable builders and then accept the cheapest. It is important to note that termination only operates to discharge parties from future contractual obligations: if there are none (eg because the contract has been performed), termination will be impossible. (Note: the rights and remedies for breach of contracts for the sale of goods are governed by the SGA 1979 and the CRA 2015 –​see Chapter 3.) It is important to note too that if there has been a breach of contract, it is only necessary to decide on the kind of term broken if the innocent party wants to terminate the contract. If the 107 Contract innocent party wants some other remedy, or if termination of the contract is not possible, then it is immaterial whether the term broken is a condition, a warranty or an innominate term. When drafting a commercial contract, it is always useful to consider when a party might want to be able to terminate the contract if there is a breach and make this clear in the contract. If you look at clause 6.3 of the Specimen Conditions of Sale (Reading 1 in the Appendix) you will see that the seller has stipulated that time for payment shall be of the essence. This means that the time for payment is a condition of the contract. If the buyer fails to pay on time, the seller may terminate the contract. 4.3.2 Right of election of the innocent party If a contract has been fully performed by both parties, it will not usually be possible to terminate, although there are special rules which apply to sale of goods contracts (see 4.3.5 below). If the innocent party has the right to terminate the future performance of the contract, the innocent party does not have to do so. The innocent party has a choice. It can either terminate the contract or affirm it, although in reality there may be no choice if the other party is refusing to perform its obligations. We shall now consider the effects of termination and affirmation. 4.3.3 Effect of termination If the innocent party terminates, the contract is at an end and future obligations will be discharged. This means that neither party need perform any future obligations under the contract. The innocent party can also sue for damages for any loss suffered. The decision to terminate must normally be communicated to the other party. 4.3.4 Effect of affirmation If the innocent party affirms the contract then the contract is not over and both parties should continue to perform their obligations. If the innocent party does decide to affirm the contract, the innocent party should make it clear that they are treating the contract as continuing. The innocent party can still claim damages for loss suffered. In some situations, affirmation may not be a realistic option. For example, if the continuation of the contract depends on the co-​operation of the other party who is refusing to perform, eg the party is refusing to deliver goods or do work under the contract. 4.3.5 Special rules for sale of goods contracts Usually, if a contract has been fully performed, it will not be possible to terminate; however, special rules apply to sale of goods contracts. We saw in Chapter 3 that if the seller breaches ss 9–​11 of the Consumer Rights Act 2015 or s 13 or s 14 of the Sale of Goods Act 1979, the buyer may be entitled to reject the goods. So even though the contract has been fully performed (ie the buyer has received the goods and paid for them) the buyer may give them back and get a refund. Remember though that a buyer may lose the right to reject –​eg under the Sale of Goods Act 1979 –​if the buyer has ‘accepted’ the goods (within the meaning of s 35 of the Act) or otherwise if the breach is so slight it would be unreasonable for the buyer to reject the goods. 4.3.6 Anticipatory breach The breach which gives the innocent party the right to terminate the contract may be an anticipatory breach. What do you think is meant by an anticipatory breach of contract? A breach will be anticipatory if a party gives advance warning that they are not going to perform their contractual obligations when they fall due. 108  Remedies for Breach of Contract For example, suppose Raminder, a painter and decorator, agreed to decorate Martha’s restaurant. Two weeks before he is due to start work, he telephones to say that he will not be doing the decorating for Martha. The breach is an anticipatory breach. Raminder has indicated in advance that he does not intend to perform his contractual obligations. If one party does indicate they are not going to perform the contract when the time for performance falls due, then the other party can: terminate the contract and sue for damages immediately; or treat the contract as continuing and wait until the time fixed for performance in the hope that the party in breach will change their mind and perform the contract. So far, we have looked at common law remedies, ie damages, an action for the agreed sum and termination of the future performance of the contract. We are now going to look at two equitable remedies –​specific performance and injunction. 4.4 Specific performance 4.4.1 Introduction Specific performance is an order of the court which requires a party to perform its contractual obligations. Failure to comply with the order will be contempt of court. Specific performance is an equitable remedy and therefore discretionary. By contrast, common law remedies are available as of right provided any relevant conditions are fulfilled. For example, a claimant is entitled to the agreed sum where the duty to pay has arisen. Specific performance can be combined with a claim for damages. For example, the claimant could ask for specific performance to compel the defendant to perform its contractual obligations and damages to compensate the claimant for the loss it has suffered already. 4.4.2 Restrictions on the availability of specific performance Although specific performance is a discretionary remedy, the discretion is not supposed to be exercised in an arbitrary fashion. There are certain principles which govern the award of specific performance. We are going to look at some situations where specific performance will not usually be granted. 4.4.2.1 Damages is an adequate remedy Traditionally, specific performance has not been granted where an award of damages is an adequate remedy. For example, if a seller refuses to deliver the goods, the buyer is unlikely to get specific performance where substitute goods can be purchased. Damages would be adequate compensation for any loss the buyer suffers. However, if substitute goods are not available, eg the contract is for the sale of a unique item such as a valuable painting, then specific performance may be granted. 4.4.2.2 Contracts requiring continuous supervision by the court Specific performance may not be granted where the court would have to supervise the parties over a period of time because of the difficulty of continuous supervision. 4.4.2.3 Specific performance will not usually be granted for contracts involving services An example of a contract involving services is an employment contract. Also, if you think back to the case of Ruxley Electronics v Forsyth, which we considered when looking at the remedy of damages earlier in the chapter, the contract there was a contract for services. The reason for the restriction on the grant of specific performance in relation to contracts for services is 109 Contract because such contracts usually depend on a certain amount of trust and confidence. If the relationship between the parties has broken down, it would not be advisable to force them to work together. 4.4.2.4 Specific performance will be granted only if it is just and equitable to do so As specific performance is an equitable remedy, it follows that it will be awarded only when it is just and equitable to do so. The court will consider whether the claimant has acted equitably and will also look at whether the order would cause disproportionate hardship to the defendant. For example, if the claimant is seeking to take advantage of a mistake made by the defendant, specific performance may be refused. 4.5 Injunctions An injunction may be prohibitory (which forbids a person doing a particular act) or mandatory. A mandatory injunction requires a person to put right a breach of contract. A mandatory injunction is rare in practice. An injunction, like specific performance, is an equitable remedy and therefore available at the discretion of the court. An injunction will not be granted if the effect would be to compel the defendant to do acts which the defendant could not have been ordered to do by specific performance. We saw at 4.4.2.3 above that the court will not grant specific performance of a contract involving services such as an employment contract. The same restrictions apply in relation to injunctions, in that the court will not grant an injunction to force an employee to work for a particular employer. However, a contract may contain a negative promise which can be enforced without directly compelling the employee to work for the employer. This occurred in the case of Warner Brothers Pictures Incorporated v Nelson 1 KB 209. In 1934 Nelson (known professionally as Bette Davis) entered into a contract with Warner Brothers, and one clause of the contract stipulated that ‘she will not, during the term of the contract render any services for or in any motion picture production or productions of any other person … or engage in any other occupation without the written consent of the producer being first had and obtained’. The contract could run until 1942. In 1936 the defendant agreed to appear in a film for another film company. The claimants asked the court to grant an injunction to enforce that part of the negative stipulation printed in italics. They did not ask for an injunction preventing the defendant engaging in any other occupation. Branson J granted the injunction, saying: … The case before me is one in which it would be proper to grant an injunction unless to do so would in the circumstances be tantamount to ordering the defendant to perform her contract or remain idle or unless damages would be the more appropriate remedy. With regard to the first of these considerations, it would, of course, be impossible to grant an injunction covering all the negative covenants in the contract. That would, indeed, force the defendant to perform her contract or remain idle; but this objection is removed by the restricted form in which the injunction is sought. It is confined to forbidding the defendant, without the consent of the plaintiffs, to render any services for or in any motion picture or stage production for anyone other than the plaintiffs. It was also urged that the difference between what the defendant can earn as a film artiste and what she might expect to earn by any other form of activity is so great that she will in effect be driven to perform her contract. That is not the criterion adopted in any of the decided cases. The defendant is stated to be a person of intelligence, 110  Remedies for Breach of Contract capacity and means, and no evidence was adduced to show that, if enjoined from doing the specified acts otherwise than for the plaintiffs, she will not be able to employ herself both usefully and remuneratively in other spheres of activity, though not as remuneratively as in her special line. She will not be driven, although she may be tempted, to perform the contract and the fact that she may be so tempted is no objection to the grant of an injunction. The result of this case then was that Nelson could not act in any film or stage production for any other film company for a number of years. The court was prepared to grant an injunction in this case because it felt that, although the defendant would probably earn more money as a film actress than working in some other capacity and might therefore be tempted to act for the claimants, she was not being forced to do so. There were other ways she could earn money. This does not seem to be very realistic, as a person who has a particular talent is unlikely to take up a new area of work. This is illustrated by the case Page One Records v Britton WLR 157. The claimant was the manager of a pop group, ‘The Troggs’. The group had appointed the claimant as their manager for a period of five years and in their contract they had agreed not to engage any other person, firm or corporation to act as managers or agents or to act themselves in such capacity. The group dismissed the claimant as their manager. The claimant applied for an injunction to prevent the group employing another person to act as manager. The court refused to grant the injunction because if the group could not employ someone else, in practice this meant it would have to employ the claimant. Pop groups need managers. The court said it would be wrong to put pressure on the defendants in this way as the manager had duties of a personal and fiduciary nature to perform and the defendants had lost confidence in him. In Page One Records v Britton, the court seemed to be taking a more realistic approach to the likely effect of an injunction than in Warner Brothers v Nelson, although the cases can be distinguished as trust and confidence was less of an issue in Warner Brothers v Nelson. In summary, when deciding whether to grant an injunction enforcing a term of a contract whereby a party agrees not to work for someone else or in a particular capacity for a period of time, the court will consider such matters as: length of time –​if the injunction will last for only a relatively short time (eg a few weeks), it is more likely to be awarded; whether granting the injunction will have the effect of seriously affecting the party’s career –​if so, it is unlikely to be granted. An injunction will not be granted if the court feels that the inevitable result would be to compel the party to work for the original employer. We have considered the remedies of damages, action for an agreed sum, specific performance and injunction. In the next section, we consider one final remedy which may be available –​restitution. 4.6 Restitution 4.6.1 Introduction A claim in restitution may arise in a number of different situations. The general idea behind a restitution remedy is to prevent one party being unjustly enriched at the expense of the other. However, it is important to note that a claim in restitution is not available in every case where there has been an element of unjust enrichment. 111 Contract A claim may arise as a result of a breach of contract, or where no contract has come into existence. We are going to consider the following situations where a claim may arise: where money has been paid by one party to another under a contract and there has been a complete failure of the consideration; and where one party has done work for the other, or supplied goods to the other, and wants to be compensated for the work done or goods delivered. 4.6.2 Recovery of money which has been paid where there has been a total failure of consideration If one party (the payer) has paid money to the other (the payee) under a contract, the payer can bring an action in restitution to recover the money if the payee is in breach and there has been a total failure of the consideration. A total failure of consideration is where the payee has not done any part of what the payee was supposed to do under the contract or what has been done is completely useless. Examples Situation Total failure of consideration? 1. Shakira has paid £500 in advance A total failure of consideration would arise if the seller for goods. The seller has agreed to refuses to deliver the goods –​for example if the seller deliver them. knows they can sell the goods for more money to someone else. 2. Bill has paid £800 in advance to There will be a total failure of consideration if the painter get his house painted. The painter is does not turn up to paint Bill’s house. supposed to start work next week. In both of the above situations, the payer will have received nothing at all for their money and so could bring a claim in restitution to recover the money. So, in situation 1, Shakira could bring a claim in restitution and recover the £500. If she can buy similar goods for £500 or less, she will not need any other remedy. If she has to pay more, though, then she will need to bring a damages action either as well as, or instead of, restitution. Similarly, in situation 2, Bill could bring a claim in restitution and recover the £800. If Bill could then get his house painted by someone else for £800, or less, he will not need any other remedy. But if Bill has to pay more than £800 then he will need to bring a damages action. Note that, in situation 2, if the painter had started the job and then abandoned it, this would not amount to total failure of consideration. So, Bill’s only remedy would be damages for the amount he has to pay a new painter to finish off the work. 4.6.3 Compensation for work done or goods supplied It is important to note that a party who has done work for another or supplied goods to another will not always be able to bring a claim in restitution for compensation. We shall look at two examples where this claim might be relevant: first where the contract has been broken, and then where a contract was never formed. 112  Remedies for Breach of Contract 4.6.3.1 The contract has been broken If one party has supplied goods or done work for the other and the other party is in breach of contract, the party supplying the goods/​doing the work may be able to bring a claim in restitution for a reasonable sum for work done or goods supplied as an alternative to a claim for damages. Consider the following situation: Gavin agrees to build a garage for Ray. Gavin does some work and then Ray tells him to stop as he has changed his mind. Ray no longer wants the garage. Ray is in breach of contract. Gavin can sue for damages or he can bring a claim in restitution. If a claim is made in restitution then Gavin will receive what is called a ‘quantum meruit’, ie a reasonable sum for work done. We shall consider this again in Chapter 5. 4.6.3.2 A contract was never formed In some cases, a party may do work for another before a contract has been formed, but expecting that a contract will come into existence. This sometimes happens for building work, where the negotiations between the parties may be complex and time-​consuming but there is a desire to start the work as soon as possible. If a contract is not formed, can the party who has done the work recover payment for what has been done? To answer this question, we will consider the facts and decision in British Steel Corp v Cleveland Bridge and Engineering Co Ltd 1 All ER 504. The claimants were iron and steel manufacturers. The defendants asked the claimants to produce a variety of steel nodes for a construction project they were engaged in. The parties had not finalised the contract, but the defendants asked the claimants to start manufacturing the nodes straight away. The claimants prepared the nodes and delivered them to the defendants. The parties were unable to agree on some key terms of the contract. The claimants asked for a quantum meruit payment for the nodes. Robert Goff J held as follows: … In my judgment, the true analysis of the situation is simply this. Both parties confidently expected a formal contract to eventuate. In these circumstances, to expedite performance under that anticipated contract, one requested the other to commence the contract work, and the other complied with that request. If thereafter, as anticipated, a contract was entered into, the work done as requested will be treated as having been performed under that contract; if, contrary to their expectation, no contract was entered into, then the performance of the work is not referable to any contract the terms of which can be ascertained, and the law simply imposes an obligation on the party who made the request to pay a reasonable sum for such work as has been done pursuant to that request, such an obligation sounding in quasi contract or, as we now say, in restitution. Both parties had expected a contract to be formed, and to expedite performance under that anticipated contract the def