Contract Law For CSE 40419 PDF

Contract Law For CSE 40419 Department of Civil and Environmental Engineering The Hong Kong Polytechnic University Ir. Harrison Cheung Barrister-at-law, Arbitrator, Adjudicator & Mediator Dispute Resolution Advisor FCIArb, MHKIE, RPE Note: This set of notes has been prepared according to t...

Contract Law For CSE 40419 Department of Civil and Environmental Engineering The Hong Kong Polytechnic University Ir. Harrison Cheung Barrister-at-law, Arbitrator, Adjudicator & Mediator Dispute Resolution Advisor FCIArb, MHKIE, RPE Note: This set of notes has been prepared according to the authors’ interpretation of the relevant law and practice and is intended for educational purpose only. While every care has been taken in the assembly of this material, no responsibility for loss occasioned to any person acting or refraining from action occasioned by or as a result of any material included herein can be accepted by the authors. 2 3  TYPES OF CONTRACT 1. Simple contract A valid simple contract can be made: i)orally, ii)In writing iii)By conduct 2.Contract under seal(deed) / Specialty Contract A written promise which is signed sealed and delivered and which can be enforceable without consideration. 4 Essential Elements Required to Form a Contract  Capacity of Parties  Intention to create a legal relationship  Offer and Acceptance  Form and/or consideration  Reality of consent  Legality of object 5 Capacity of Parties  In order for a valid contract to exist, the parties to the contract must have the required capacity or ability to make the contract. The following types of people have a limited capacity to contract. These include:  Minors  Persons of unsound mind or intoxicated (alcohol, drugs) 6 Formation of contract  For a simple contract to be enforceable, the following conditions must be fulfilled :-   (i) There must be offer and acceptance of that offer.   (ii) There must be an intention to create legal relations.   (iii) There must be consideration.  7 Offer An offer is a statement to the effect that the person making it is willing to contract on the terms stated, as soon as these are accepted by the person to whom the statement is addressed. 8 Invitation to treat Invitation to treat  An invitation to treat is an invitation to make an offer. It is incapable of being accepted.  In law, some established categories are normally treated as an invitation to treat rather than an offer: auctions, advertisement , tenders, shops displayed However, the following case is an exception: Case :Carlill v. Carbolic Smoke Ball Co. (1893) 9  T Carlill v. Carbolic Smoke Ball Co. (1893)  The defendants manufactured a carbolic smoke ball, which they claimed could prevent anyone who used it from catching influenza. They published an advertisement which promised to give £100 to ‘anyone who caught influenza after using the smoke ball three times a day for two weeks’. The defendants also claimed to have deposited £1,000 at the Alliance Bank to show their sincerity in the matter.  Mrs Carlill used the smoke ball but caught influenza. She sued the manufacturers who had placed the advertisement in the newspaper for £100. The manufacturers argued that they had never expected anyone to take their advertising ‘puff’ and promises as a binding offer.  It was held that The advertisement was an ‘offer to the whole world’. Anyone who came forward and used the smoke ball, under the conditions stated in the advertisement, had accepted and performed the contract. 10  Revocation of offer  An offer can be revoked at any time before acceptance.  To be effective, revocation of an offer must be communicated to the other side, either directly or indirectly Case :Dickinson v. Dodds (1876)  An agreement was made to sell property with the offer to be kept open until Friday. On Thursday, the buyer learned that the seller was intending to sell the property to a third party and accepted the offer on that day. It was held that he could not accept the offer because he knew by then that it had in effect been revoked. 11  Revocation of Offer (cont.)  To be effective and binding, an agreement to keep it an offer open for a specific time must be supported by consideration.  Like an offer, an invitation to tender may be revoked at any time, just as a tender may be withdrawn at any time before acceptance, unless the offeror or offeree is bound by agreement which is supported by consideration to remain open for a period of time.  The requirement for the tender to remain open: City University of Hong Kong v Blue Cross {Asia-Pacific} Insurance Ltd HKEC 266 was valid if consideration was provided. 12  City University of Hong Kong v Blue Cross {Asia-Pacific} Insurance Ltd [200 I] HKEC 266  The University invited tenders and the defendant, Blue Cross, was one of eight companies which bid for the contract. The tender documents included certain conditions, one of which was:  “I/We agree to abide by this tender for a period of three (3) months from the date fixed for receiving same and it shall remain binding upon me l us and may be accepted at any time before the expiration of the period”  The deadline for latest receipt of tenders was 24 May. Blue Cross submitted its bid before this time but purported to withdraw it before it was accepted. A letter of acceptance from the City Polytechnic followed; Blue Cross, however, refused to issue any policies. In mitigation, the City Polytechnic arranged cover with another insurer and then shortly commenced proceedings against Blue Cross, claiming damages for breach of contract.  It was held that 'the expectation that the plaintiff would consider all conforming and timely tenders was sufficient consideration to hold the defendant to its promise to keep the offer open for three months. And it was further held that generally, withdrawal of a tender in these circumstances would constitute a breach of obligations. 13 Acceptance of Offer  General Rules  Acceptance may be oral, written or implied by conduct,  It must be absolute and unqualified and, once acceptance is complete, it cannot be withdrawn.  A counter offer or a conditional acceptance automatically destroys the original offer which cannot be revived by a purported subsequent acceptance.  Case: Hyde v. Wrench (1840)  A farm was offered for sale at £1000. A counter offer was made at £950, but two days later the intending buyer offered the original £1000. The seller refused to sell.  It was held that no binding contract had been formed because the counter offer of £950 had destroyed the original offer to sell which could not be revived by the 14 second offer to buy for the original price. ACCEPTANCE OF OFFER (CONT.)  If a contract is made face to face, then the rule is that the acceptance must reach the person making the offer. This has been extended to those cases where, with the aid of technology, the parties effectively negotiating face to face with each other. Case: Entores Ltd v. Miles Far East Corpn, 1995  A London company telexed another company in Amsterdam with an offer to buy goods from the latter which accepted the offer also by telex received in London.  Held : The contract was formed in London because that was where the acceptance was received. 15 ACCEPTANCE OF OFFER (CONT) Exceptions Offer to the whole world : No personal reply is necessary, acceptance of offer is by conduct  Case :Carlill v. Carbolic Smoke Ball Co. (1893) Postal Rule : Where communication is through the post, acceptance is complete when the letter is posted even though it might not reach its intended destination. 16 Intention to Create Legal Relations  It must be clear from the terms of the agreement that the parties intended to create a binding legal relationship  If an agreement is of a social or domestic nature, then the law presumes that there is no intention to create legal relations.  However, this presumption can be rebutted if evidence shows there was an intention to create a legally binding agreement.  This presumption was rebutted in Wu Chiu Kuen v. Chu Shui Ching (1991) 17 Case :Wu Chiu Kuen v. Chu Shui Ching (1991)  The plaintiff and defendant shared the cost for buying tickets for Mark Six. The plaintiff bought the tickets and handed them to the defendant. When they subsequently won in one of the tickets, the defendant refused to share the prize of $990,000.00with the plaintiff. The plaintiff reported this to the police and later also rejected an offer of $100,000.00 from the defendant. 18  The trial judge said :“Like many other people, they do not usually organise their pastime hobbies as businessmen or lawyers. Arrangements of this sort are very often informal and even loose at times. What is important is that the persons involved have acted on the informal arrangements and conducted themselves in such a way that it is clear from all the circumstances that they have agreed and intended to buy the tickets together and share the winnings, if any, together….”  It was held that there was an intention to create legal relationship and the plaintiff was entitled to half of the prize plus interest of the half from the date the defendant received the winnings. 19  presumption  The implications of entering into commercial agreements are quite different from those of domestic or social arrangements. If the parties are acting in the course of business and in accordance with standard commercial arrangements, the law presumes that both parties intend to enter into a legally binding contract and that the court can intervene to enforce their agreement.  Exceptions to presumption :  ‘Subject to contract’ , which means that whatever has been agreed is not binding until a formal contract is drawn up. 20  Consideration  A contract must be supported by consideration. Each party must give something, or do something, to or for the other.  Consideration is a necessary requirement to found a valid contract save where the contract is made under seal or by deed. General Rules:  i)Consideration must be something of economic value in the eyes of the law. For example, a smile is insufficient.  ii)However, it needs only be sufficient and needs not be adequate, which means that the consideration provided by one party need not be anything like commensurate in value with the consideration received. Case:Thomas v. Thomas, 1845  A widow had been promised by her husband that she could either have the house in which she lived or £100. The executors promised to convey the house to her provided she paid £1 a year in rent and kept the house in good repair. The executors breached this agreement later on.  The court held that £1 a year rent was ‘something of value in the eyes of the law’. 21  CONSIDERATION (CONT.) iii)Past consideration is not consideration  An act done in the past for which a promise of payment or reward of today is past consideration is not consideration at all because there is no simultaneous exchange of promise. Case: McArdle (1994)  Under their father’s will, a number of children were entitled to a house after their mother’s death. During the mother’s lifetime, one of the children and his wife lived with her in the house. The wife made some improvements to the house, and all the children subsequently signed a document addressed to her, stating that ‘in consideration of your carrying out certain alterations and improvements to the property, we hereby agree that the executors shall repay to you from the estate, when distributed, the sum of £488 in settlement of the amount spent on such improvements’..  It was held that as all the work on the house had actually been completed before the document was signed, this was a case of 22 past consideration and that the document could not be regarded as a binding contract. CONSIDERATION (CONT.)  iii)Performance of existing duties does not amount to consideration.  If a party agrees no more than to do what he is already contractually bound to do, or is obliged to do by law, then this promise to do such thing is not consideration.  However, if something more is promised then that will amount to consideration. Case :[Collins v. Godfroy, 1981]  A defendant was sued by the plaintiff, an attorney, for 6 guineas which he alleged had been promised to him for attending as a witness in a case.  It was held that the duty to attend was imposed by law and therefore no consideration had been given for the promise. 23  CONSIDERATION(CONT.) Cases of exceptions to performance of existing duties is no consideration 1)Williams v Roffey Bros & Nicholls (Contractors) Ltd I All ER 512 (CA) The defendant was the main contractor for renovation work on a block of 27 flats. Part of the work was subcontracted to the plaintiff who was able to complete nine flats before falling into financial difficulties. As a result, the main contractor was exposed to the potential for considerable liquidated damages for delay if the completion date passed. The main contractor promised additional sums per flat in return for completion on time. Work was completed by the subcontractor on a further eight flats but when the main contractor failed to make any of the additional payments, the subcontractor stopped work and sued for the additional amounts allegedly owing in respect of the eight flats subsequently completed. The main contractor argued there was no valid consideration to support the promise. The Court of Appeal held generally that the performance of a pre- existing contractual obligation can constitute good consideration when 24 the promisor receives a practical benefit for his promise. CONSIDERATION (CONT.) Williams v Roffey Bros & Nicholls (Contractors) Ltd I All ER 512 (CA)(cont.) One of the judges concluded with the following summary of the law: 1) if A has entered into a contract with B to do work for, or to supply goods or services to, B in return for payment by B; 2)and at some stage before A has completely performed his obligation under the contract B has reason to doubt whether A will, or will be able to, complete his side of the bargain; and 3) B thereupon promises A an additional payment in return for A's promise to perform his contractual obligations on time; and 4) as a result of giving his promise, B obtains in practice a benefit, or obviates a disbenefit; and 5) B's promise is not given as a result of economic duress or fraud on the part of A; then the benefit to B is capable of being consideration for B's promise so that promise will be legally binding. Local commentators are divided over the result in the Williams case 25 Doctrine of Privity of Contract  Only parties to a contract can sue and be sued. The doctrine of privity of contract not only inhibit third party enforcement of contract but also ensures that third parties may not force a breach of the obligations under contract. This is important in cases where government departments attempt to influence contracts entered into by publicly regulated bodies such as schools. 26 REALITY OF CONSENT Misrepresentation Duress Undue influence 27 MISREPRESENTATION  Representation refers to statements that are not terms of the contract but are made before the conclusion of a contract to induce someone to enter into that contract.  A misrepresentation is a representation which is untrue. Elements of Misrepresentation  The statement was a statement of fact, not an expression of opinion or a statement of law.  That statement was made to induce him to enter into the contract.  That he, in fact, relied on the statement, although there may be other factors on which he also relied, such as price or availability.  That the statement was untrue 28 MISREPRESENTATION (CONT.) Fraudulent Misrepresentation  Leading authority : Derry v Peek (1889) 14 App Case 337 (HL), per Lord Herschell at p 374: “…. fraud is proved when it is shown that a false representation has been made (1) knowingly. or (2) without belief in its truth, or (3) recklessly, careless whether it be true or false....”  However, it is difficult to establish intention. Negligent Misrepresentation  A representation is made negligently where it is made by a person who believes it to be true without good reasons for that belief.  The leading authority on negligent misstatement is Hedley Byrne & Co Ltd v Heller & Partners LId AC 465 (HL) 29 MISREPRESENTATION Innocent Misrepresentation  An innocent misrepresentation is a false statement made by someone who had reasonable grounds for believing that the statement was true, both at the time the statement was made and at the time the contract was made. Misrepresentation by conduct  Green Park Properties Ltd v Dorku Ltd I HKC 121  This case involved a vendor illegitimately including a common yard into the property he was conveying. Although that representation was included only in a tenancy plan and not directly incorporated into the sale and purchase agreement, the Court of Final Appeal found that the purchaser was entitled to rely upon it and thus at liberty to rescind the agreement. 30 DURESS  By duress is meant the compulsion under which a person acts through fear of personal suffering as from injury to the body or from confinement, actual or threatened. Economic duress relates to a situation where a person feels compelled to act in a certain way because of financial pressure. Case:D & C Builders v. Rees (1966)  Builders carried out work for the defendants who held up payment knowing that the builders were close to bankruptcy. The defendants offered £482. The builders accepted this and then sued for the balance.  Held : By putting unfair pressure on the builders, the defendants could not hold that there was consideration for accepting the smaller sum, and so the builders were entitled to the balance. 31  UNDUE INFLUENCE  A contract may be avoided or set aside by one of the parties to it on the ground that his consent thereto has been obtained by undue influence. Undue influence may be defined as the unconscientious use by one person of his/her power over another person in order to induce the other to enter into a contract.  Case: Bank of China (Hong Kong) Ltd v Wong King Sing (2002)in which it was held that the defence of undue influence will operate if the defendant did not consent freely and with full knowledge of the transaction's consequences  It will be established where the party seeking to set the transaction aside establishes four things:  (1) the other party or another who induced the transaction had the capacity to influence the first party;  (2) that influence was exercised;  (3) the exercise of influence was undue; and 32  (4) the exercise of influence induced the transaction LEGALITY OF CONTRACT  Certain types of contract are held by the court to be illegal because they are against public policy:  contracts to commit a crime or a tort  contracts to defraud the Inland Revenue  contracts prejudicial to public safety  contracts prejudicial to the administration of justice  contracts which are sexually immoral 33  PRIVITY OF CONTRACT  Those who are not the actual parties to the contract have no right to sue on it. Case:Tweddle v. Atkinson, (1981)  A father entered into an agreement with his son’s father-in-law whereby each was to pay a sum of money to the son. The father-in-law never paid and the son brought an action against the executors of his father-in-law’s estate.  Held : Even though the contract was for the benefit of the son, he was not a party to the contract and could not sue on it. Case:Beswick v. Beswick (1968)  A coal merchant contracted to sell his business to his nephew, one of the terms of sale being that the nephew would pay his wife, if she survived him, £5 a week. The nephew paid just one week’s installment to the widow then refused to pay.  Held : She had no personal right to sue on the contract to which she was only a third party. 34 35 Terms of Contract Express Terms They are terms expressly agreed upon by the contracting parties, whether orally or in writing. Implied Terms Terms can be implied into contracts by : Statute e.g. sale of Goods Ordinance (to be further discussed). Trade usage - A particular practice is known to exist, and the parties to the contract are proved to have relied on it. In the course of time it is assumed by the courts to be so prevalent in a trade or locality as to form the foundation of all contracts made within that trade or locality, unless expressly excluded. Finally it is often adopted by the legislature as the standard rule for the conduct of the business in question. Previous dealings - if the parties have done business on the same or similar terms previously, the court will assume that they intended the same terms to apply even though some of the terms36 were not specified. TERMS OF CONTRACT(CONT.)  Business efficacy - this term of a contract makes it effective and workable, ie it is so obvious that it does not need to be specified in the contract. Case:British School of Motoring v. Simms, (1971)  Under doctrine of business efficacy, the courts held that it had been implied into a contract between a driving school and a customer that any car provided would be covered by insurance. 37 TERMS OF CONTRACT (CONT.)  The 'officious bystander' test  Another test which is often used to answer the question of whether a term will be implied is referred to as the 'officious bystander' test and comes from the case of Shirlaw v Southern Foundries (1926)  “... prima facie that which in any contract is left to be implied and need not be expressed is something so obvious that it goes without saying: so that, if. while the parties were making their bargain, an officious bystander were to suggest some express provision for it in their agreement, they would testily suppress him with a common 'Oh, of course!”  A combination of the leading tests can be seen in the leading case of BP Refinery (Westernport) Pty Ltd v President, Councillors & Ratepayers of Shire of Hastings 52 ALJR 20; ALR  “... for a term to be implied, the following conditions (which may overlap) must be satisfied: (1) it must be reasonable and equitable; (2) it must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it; (3) it must be so obvious that 'it goes without saying'; (4) it must be capable of clear expression; (5) it must not contradict any other express term of the contract.” 38 TERMS OF CONTRACT (cont.) Conditions ,Warranties and Innominate terms  Condition : It is a major term and goes to the heart of the contract.  Warranty : It is a minor term.  Innominate terms ( ‘not having a name’): It is unclassified or uncategorised. 39 TERMS OF CONTRACT (CONT.)  Effect of breach of  Conditions  The innocent party is entitled  (i) To treat the contract as having ended. (ii) To be refunded money paid out and other expenses incurred.  However,  (iii) the parties must expressly specify that if there is a breach of a particular condition , the innocent party will be entitled to be discharged from the contract.  (iv) If the parties do not specify this consequence for the breach of a particular condition, then the court can disregard the label ‘condition’ used by the parties to the contract and interpret the wording as it sees fit. What the court sees fit will depend on the circumstances of the particular contract and how serious an effect the breach of condition has had 40 on the innocent party. TERMS OF CONTRACT Effect of breach of Warranties  The injured party has the right to sue for damages but the contract is still valid and binding on the parties. Effect of breach of innominate terms (meaning ‘not having a name’)  The court will interpret whether or not its breach justifies termination of the contract. An innominate term could therefore be interpreted either as being a condition or a warranty, depending on the particular circumstances of the case. Case:HK Fir Shipping Co Ltd v Kawasaki Kisen Kaisha (1962)  “Has the innocent party been deprived of most of the benefit he expected to get from the contract?” If the answer to this question is ‘yes’, then the breach is treated as though it were a breach of condition. If the answer is ‘no’, then it is treated as a breach of warranty”. 41 TERMS OF CONTRACT (CONT.)  Special conditions  (a) Conditions precedent  A condition precedent is an express or implied condition that the contract will not bind one or more of the parties unless and until some stated event has happened.  (b) Condition subsequent  This means that the agreement will continue to be a binding contract unless and until the condition occurs. If it does occur, either the contract will cease to bind or one party will have the right to annul it, depending on the wording used in the contract. 42 Special Term : Exclusion and Limitation Clauses  An exclusion clause is a clause by which a party seeks to exclude his liability for breach of contract.  A limitation clause is one whereby a party seeks to limit his liability in the event of breach. 43 TERMS OF CONTRACT (SPECIAL TERMS CONT.)  Common Law position : Rules on incorporation signed documents Case :L. Estrange v. Graucob 1934  A contract for ordering an automatic slot machine was signed by a customer. It was held that she was bound by the terms even though she had not read them. If the document containing the terms is unsigned, then it is necessary to show that the other party had had notice of the terms. unsigned documents  (i) It is not necessary to reproduce the full, or any, terms of the contract on the particular document. Terms can be incorporated by reference.  (ii) It is insufficient if they are reproduced on a document which cannot be regarded as contractual. 44 DISCHARGE OF CONTRACT 45 DISCHARGE OF CONTRACT  4 WAYS :  By Agreement  By Performance  By Breach  By Frustration 46 DISCHARGE OF CONTRACT(CONT.) By Performance  Performance must be precise and exact. A contract is fully discharged when both parties fully and precisely perform their obligations as set out in the contract.  Partial Performance :  Performing some, but not all contractual obligations  1.General Rule : Performance of half of the contract does not entitle a party to claim half the price. (applies to an entire contract) 47 CONT.)  Partial Performance :  Performing some, but not all contractual obligations  1.General Rule : Performance of half of the contract does not entitle a party to claim half the price. (applies to an entire contract) 48  DISCHARGE OF CONTRACT(BY PERFORMANCE CONT.) 2.Qualifications  (i)Severable contract  An entire contract must be fully performed, whereas a severable contract can be divided up into parts so that performance of one part entitles the performer to a pro- rata (meaning the ‘equivalent’ or ‘in proportion’) counter- performance.  Case:Bolton v. Mahadeva (1972)  The plaintiff installed a central heating system in the defendant’s house, and the price agreed upon was a lump sum of £560. The plaintiff did not do the work properly, and the cost of putting the system right would amount to some £179. It was held by the court that this was an entire contract to do the work properly for one lump sum. Since there was no substantial performance on the part of the Plaintiff, he could not recover money for the partial performance. 49 CONT.) (ii) Substantial performance  If there is a substantial enough performance by a party, the other party cannot treat himself as discharged’. He can sue on the contract but is liable in damages for his partial non-performance. Case:Hoenig v. Isaacs (1952)  An interior designer and decorator was employed to decorate the defendant’s flat. The defendant made two payments in April and the plaintiff completed the work in August, but when he asked for the balance of his money, the defendant refused to pay the balance ,arguing that the work was done badly.  The defendant then paid a small part of the balance and moved into the flat, defending his refusal to pay the full balance by arguing that the plaintiff had done his work unskillfully and in an unworkmanlike manner.  An independent assessor was engaged to examine the quality of the work - one bookshelf was too short, and a wardrobe door needed to be replaced. The defendant claimed that the contract was an entire contract and that the plaintiff must therefore perform it entirely before he could be entitled to full payment. The independent assessor’s view was that there had been a substantial performance. 50  It was held that the full price, minus the cost of putting right the minor defects, should be awarded to the plaintiff. DISCHARGE OF CONTRACT (CONT.)  By breach of contract  A breach of contract (or more accurately breach of a term(s) of a contract) is the failure of one party to carry out an obligation assumed by it under the contract.  The breach may be either total or partial. A repudiation amounts to a total breach.  When a breach is partial, the breach may be of varying degrees of seriousness depending on the term or terms of the contract that have been breached  While there are various forms of breach of contract, two in particular should be noted - failure to perform and anticipatory breach. 51 DISCHARGE OF CONTRACT(BY BREACH CONT.) Anticipatory Breach :  A party indicates before the time of performance has arrived that he will not or will not be capable of performing the contract.   In this situation, the innocent party has two choices :-  to ignore the notice of the anticipatory breach and wait until the time for performance arrives and then sue for breach of contract.  to sue at once for the anticipatory breach of contract on receipt of the notice.  the innocent party will apply to the court for a ‘declaration’ that the anticipatory breach does entitle him to treat the contract as discharged.  (iv) Not every breach entitles the innocent party to treat the contract as discharged. It must be shown that it is a breach of condition, rather than a breach of warranty. 52 DISCHARGE OF CONTRACT (BY BREACH CONT.) 2.Repudiatory Breach :  A repudiatory breach is any breach where the conduct or words of one of the parties shows a clear intention not to be bound by the contract.  (i) The innocent party is entitled to treat the contract as at an end and to claim the appropriate damages for any losses incurred.  (ii) Whether the breach is so serious as to amount to a “repudiatory breach”, which entitles the innocent party to treat the contract as cancelled or discharged, will depend entirely on whether the term that has been breached is so serious that it goes to the heart of the contract. 53 DISCHARGE OF CONTRACT(BY BREACH CONT.)  Anticipatory breach can arise where, prior to the time appointed for performance by the promisor (the party with the obligation in question to perform), the promisee (the party who will receive the benefit of performance of the obligation) justifiably terminates the performance of the contract. The latter's termination will be justified if the words or conduct of the promisor gave rise to such repudiation or otherwise indicated that the promisor was wholly and finally incapable or unwilling to perform his contractual obligations.  The principal difference between failure to perform and anticipatory breach pertains to the timing of their occurrence. Failure to perform can only occur after the time for performance has expired , whereas anticipatory breach precedes the expiry of the time for performance. The onus of proof in both cases rests upon the party who alleges that there has been a breach. An innocent party is not bound to accept the 54 repudiation, but if he does, he may sue for damages. DISCHARGE OF CONTRACT (CONT.) By Frustration  The general rule is that contractual obligations are absolute, so that party cannot argue that events which have happened after the contract was agreed on have had the effect of ending all obligations under the contract.  However, unforeseen events may occur which make the contract impossible to perform, while other events may simply make it more expensive or more difficult to perform. The courts will hold that a contract is frustrated only when an event which was unforeseen by the parties, and for which the contract makes no provision, has occurred.  If a court holds that a contract has been frustrated, the contract is terminated from the date of the court’s decision, and the parties are relieved of all future obligations.  Case:Taylor v. Caldwell ( 1863)  A music hall was hired to the plaintiff but was destroyed before it was put into use. The contract was held to be frustrated. 55 DISCHARGE OF CONTRACT (C0NT.) Effects of frustration Statute  The Law Amendment and Reform (consolidation) Ordinance provides :-  Money paid before the frustrating event is recoverable.  Money payable before the frustrating event ceases to be payable.  The court can order a party who has received a valuable benefit under the contract to pay whatever the court thinks that valuable benefit is worth to the other party.  If a party has incurred expenses before the frustrating event, then the court may make an order for that person to recover or be repaid those expenses. 56 57 Liquidated Damages  1. Contracts often contain clauses which lay down a fixed amount of damages to be paid in the event of a breach. If these clauses genuinely try to estimate the loss, they are known as liquidated damages clauses and are valid.  2 Penalty Clauses : Are meant to act as a penalty in the event of a breach and cannot be enforced 58  REMEDIES(LIQUIDATED DAMAGES CONT.)  Case :Dunlop Pneumatic Tyre Co. Ltd v. New Garage and Motor Co. Ltd 1915  Manufacturers supplied tyres to dealers under an agreement whereby the defendants agreed not to sell below list price, nor to supply certain persons, and to pay £5 for each breach.  The sum was held to be enforceable as a genuine pre-estimate of loss, as the fixed figure was not excessive 59 Unliquidated Damages  Contractual damages are based on putting the injured party in the position he would have occupied if the contract had been properly performed. If the damages are not a fixed sum and require further assessment by the Court, they are known as unliquidated damages.  Burden of Proof  The claimant has to prove:  He/she in fact suffered some loss or damage as a result of the breach of contract.  That the loss was caused by the defendant’s breach, and not for some other reason.  That the loss was not too remote from the breach of contract. 60 REMEDIES (UNLIQUIDATED DAMAGES CONT.)  Case:Hadley v. Baxendale (1854)  The plaintiffs owned a mill. They contracted with the defendants to take a broken shaft to London as a pattern for a replacement. The defendant delivered the shaft late, and the plaintiffs sustained loss because they did not manage to complete orders for customers as a result of the delayed delivery of the replacement. The question to be answered by the court is whether the Defendant should be held liable for this loss of profit.  It was held that :  (i) A defendant will always be liable for the usual or normal consequences of a breach of contract.  (ii) A defendant will not be liable for abnormal or unusual consequences, unless at the time of making the contract both parties knew that the consequences were likely in the event of breach. 61 REMEDIES CONT. Specific Performance  It is a discretionary order by the court ordering a person to carry out obligations under a contract. It is rarely awarded, as damages are usually sufficient compensation for the innocent injured party. It is usually given only when the subject matter of the contract is unique  Generally speaking, specific performance will not be ordered until a breach of contract has occurred.  In fact, damages may sometimes be inadequate compensation for breach of contract.  However, the courts continue to insist, for a variety of reasons, that specific performance is not appropriate in a large number of situations where the continued supervision of the court is necessary in order to ensure the fulfilment of the contract. For instance, the court will normally not compel the building of a house. In fact, few building contract cases result in orders of specific performance without more. 62 REMEDIES (SPECIFIC PERFOMANCE CONT.) Case : Price v Strange 1 Ch 337,359  The rule has now been settled that the court will order specific performance of an agreement to build if :  the building work is sufficiently defined by the contract, for example by reference to detailed plans  ii ) the plaintiff has a substantial interest in the performance of the contract of such a nature that damages would not compensate him for the defendant's failure to build;  the defendant is in possession of the land so that the defendant cannot employ another person to build without committing a trespass.  Specific performance outside of these circumstances is more likely to be achieved by seeking a mandatory injunction 63 REMEDIES CONT.  Injunctions are an equitable remedy given by order of the court.  The order may compel a person to perform some act or restrain them from so doing. A prohibitory or negative injunction orders a person to not breach a term of contract by which he has agreed not to do some act.  A mandatory or positive injunction requires a person to do some act he has agreed to do, or to undo an act which is a breach of contract.  Mandatory injunctions are granted comparatively rarely in relation to prohibitory injunctions. One reason for this is that the grant of a mandatory injunction is tantamount to specific performance.  Injunctions may be either interlocutory, interim or final, depending upon the stage of the proceedings at which they are sought. Injunctions, as an equitable remedy, are normally granted only if the applicant's common law remedies are inadequate. 64 REMEDIES (INJUNCTIONS CONT.)  In essence, if damages would be an adequate remedy, then an injunction ought not to be granted.  However, if damages would not be an adequate remedy, then it is necessary to consider whether more harm will be done by the grant when compared with the refusal of the injunction.  This weighing of the competing interests involved is referred to as 'the balance of convenience test. Case : American Cyanamid v Ethicon Ltd AC 396, 408 (HL).  As a general rule, the court will not order an employer to employ a person under protest to perform a contractual obligation, inasmuch as the order would amount to specific performance 65 Questions & Answers - The end - Thank you 66