Contract Law Lecture Notes - Intervening Events, Breach, and Damages PDF

Week 5 Jaime de Jesus Lima, LLM WEEK 5 - INTERVENING EVENT, BREACH, AND DAMAGES Contract Law: Lecture 5  Contract Overview Acceptance Offer Intention Formality Capacity CONTRACT DISCHARG...

Week 5 Jaime de Jesus Lima, LLM WEEK 5 - INTERVENING EVENT, BREACH, AND DAMAGES Contract Law: Lecture 5  Contract Overview Acceptance Offer Intention Formality Capacity CONTRACT DISCHARGE Lack of vitiating factor 2  Contract – Bad stuff happens… Offer Acceptance Intention CONTRACT DISCHARGE Formality Capacity “ Signature” Vitiating Factors as Breach / Supervening ground for Nonperformance Event as ground Avoidance as grounds for for Frustration Remedies 3 What are we talking about? - AVOIDANCE Mostly originating before “signature”: Avoidance is the backwards unwinding of a contract because of a vitiating factor which “tarnishes”, spoils and make the formation of the contract defective. We also call “avoidance” the remedy granted by the court/arbitrator to the aggrieved party. It terminates the contract. Check our last lecture on the topic to be a rock star! What are we talking about? - FRUSTRATION Mostly originating after “signature”: We can frustration when an unexpected and very extreme event makes performance of the contract impossible. A frustrated contract is discharged because it comes to an end. Parties are released from obligations. Stay tuned! What are we talking about? - BREACH Originating after “signature”: Breach occurs when one party fails to perform a obligation under the contract. Remember: a contract is the vessel, obligations its content. A contract is the glass, and it is full of wine, obligations. Obligations can be of action or omission: of doing something or not doing something. A simple breach of contract does not entitle the non- guilty party to end/terminate/avoid contract. For the not to the root of the contract breaches, the legal system has REMEDIES! Stay tuned!  FRUSTRATION (SUPERVENING EVENTS) 7  Remember Performance? – Parties MUST PERFORM. Common Law - Strict Rule of Performance was that party must perform contract regardless of supervening events − Cutter v. Powell − Paradine v. Jane Civil Law - (exécution en nature, Erfüllung) − A party can go to Court and request enforcement and make the non-performing party to perform. − Art 1221 French Civil Code − Sect 214(1) German Civil Code 8  Mitigation of Strict Rule Performance: Doctrine of Frustration “A doctrine in English contract law that is used to set aside a contract in case an event makes performance impossible or radically changes a party’s principal purpose with the contract” (Smit, page 266) If a frustrating event occurs, the contract stops from that moment on. All obligations up to the moment of frustration are enforceable and all obligations relating to performance after that moment are no longer binding. The loss will fall where it lies. − Frustration is an EXTREME exception to the Performance Rule. − Different TYPES of frustration: 9  Mitigation of Strict Rule Performance: Frustration Parties to a Contract are released from contractual obligations where: − Intervening event makes performance of contract IMPOSSIBLE − Taylor v. Caldwell (music hall destroyed by fire) − Intervening event makes performance of contract ILLEGAL − Denny, Mott & Dickson Ltd v. Fraser & Co Ltd 1 All ER 678 (sale became illegal) − Non-occurrence of event DESTROYS THE FOUNDATION of contract − Krell v. Henry 2 KB 740 (Coronation of King Case) 10  Limitations to Frustration Doctrine of Frustration is LIMITED on many ways − Frustration is an EXTREME exceptions to the Performance Rule. - Case law in which frustration is recognised is extremely rare. - As a result, three features on a case lead to the NON-ACCEPTANCE of Frustration. − The cases below show what is NOT grounds for frustration: 11  Limitations to Frustration: self-induced Maritime National Fish Ltd v. Ocean Trawlers AC 524 A fishing company owned four fishing vessels and chartered one more from the defendant. All boats were fitting for a special type of fishing in Canada. The fishing company applied for five licenses, but was only granted three. The company had to allocate the licenses to the vessels. The company named its own vessels and excluded the vessel chartered from the defendant. The company claimed that the contract was frustrated. The Court held that the contract was not frustrated since the claimant had chosen which boats to use the licence for. 12  Limitations to Frustration: more difficult Davis Contractors Ltd. V. Fareham UDC AC 696 − A building, which was supposed to take 8 months to complete, took 22 because of unexpected difficulty in obtaining building supplies. The contractors claimed that their contract was frustrated because the extra time meant that they would lose the profit that they had expected to make. − The court disagreed and held that mere hardship or inconvenience was not sufficient grounds to declare the contract frustrated. 13  Limitations to Frustration: foreseeablity Amalgamated Investment Co. Ltd v. John Walker & Sons Ltd 1 WLR 164 − Contract to make development from old building. After the contract had been entered into the property was listed by the Local Council meaning that it could no longer be developed as a commercial property and the value of the property fell significantly. − In an action claiming that the contract was frustrated the courts held that the doctrine did not apply as in this instance the supervening event was one which the parties could have reasonably foreseen. 14  Frustration as an EXTREME exception Under English Law Frustration is a very extreme remedy. Nicolene Ltd v Simmonds (1953) Nicolene Ltd ordered a large amount of steel from Simmonds. Parties had no business relationship before. The contract had some vague wording on 'usual conditions of acceptance’. Simmonds didn't deliver the steel, so Nicolene sued for breach of contract. Did mentioning 'usual conditions of acceptance' make the contract unenforceable/ frustrated? Court says no. Breach is real here: “It does not matter whether the failure to fulfil the contract by the seller is because he is indifferent or willfully negligent or just unfortunate. It does not matter what the reason is. What matters is the fact of performance. Has he performed or not?” (apud Smit 214) 15  Civil Law: Unforeseen circumstances Frustration exists in Civil Law but it has different characteristics. French, German, and Dutch law recognize unforeseen/supervening circumstances as valid grounds for contract termination or modification. “Imprévision" in French law, and "Störung der Geschäftsgrundlage" (interference with the basis of the contract) in German law. It allows the court to TERMINATE or AMEND the contract. Compare: English law's frustration automatically terminates the contract regardless of parties' intentions. Law requires parties must initially engage in negotiations about adapting or terminating the contract. Court comes to play if parties cannot reach a common ground. 16  German Law – Civil Code § 313 BGB: 1. If circumstances upon which a contract was based have significantly changed since the contract was entered into and if the parties would not have entered into the contract or would have entered into it upon different terms if they had foreseen this change, adaptation of the contract may be demanded to the extent that, taking account all the circumstances of the specific case, in particular the contractual or statutory distribution of risk, one of the parties cannot reasonably be expected to continue to be bound to the contract without adaptation. 2. It is equivalent to a change of circumstances if material assumptions that have become the basis of the contract turn out to be incorrect. 3. If adaptation of the contract is not possible or cannot reasonably be imposed on one party, the disadvantaged party may terminate the contract. In the case of a contract for the performance of recurring obligations, the right to terminate with notice takes the place of the right to terminate.’ 17  French Law – Civil Code Art. 1195 CC: ‘If a change of circumstances unforeseeable at the time of the conclusion of the contract renders performance excessively onerous for a party who had not accepted the risk of such a change, that party may ask the other contracting party to renegotiate the contract. The first party must continue to perform his obligations during renegotiation. In case of refusal or failure of renegotiations, the parties may agree to terminate the contract from the date and on the conditions which they determine, or by a common agreement ask the court to adapt the contract. In the absence of an agreement within a reasonable time, the court may, on the request of a party, revise the contract or put an end to it, from a date and subject to such conditions as it shall determine.’ 18  FORCE MAJEURE 19  Civil Law: Force Majeure – Dealing with unforeseen circumstances at the time of contracting Force majeure (Article 1218) is a type of unforeseen event which is defined as: ✓ external, ✓ unpredictable, ✓ and irresistible. Please note: it must be unavoidable by the parties taking some extra measures. The force majeure event must be the DIRECT reason (casual link) to the party’s failure to perform. The parties must act in good faith. The party who suffers the event must inform the other party as soon as possible. 20  French Law – Civil Code Art. 1218 CC: ‘In contractual matters, there is force majeure where an event beyond the control of the debtor, which could not reasonably have been foreseen at the time of the conclusion of the contract and whose effects could not be avoided by appropriate measures, prevents performance of his obligation by the debtor. If the prevention is temporary, performance of the obligation is suspended unless the delay which results justifies termination of the contract. If the prevention is permanent, the contract is terminated by operation of law and the parties are discharged from their obligations under the conditions provided by articles 1351 and 1351-1.’ 21  French Law – A practical examplecase Sagaz SaRL is a French company and it has a contract to deliver goods to a Burroz GmbH a German company. As a sudden and unexpected outbreak of a new pandemic starts, French authorities install a lockdown, and Sagaz cannot fulfill its obligation to deliver the goods. The French company invokes force majeure. The lockdown is an external, unpredictable, and irresistible event and it makes impossible to perform the contract’s obligation. 22  Civil Law: Force Majeure – Dealing with unforeseen circumstances at the time of contracting Force majeure as an expression are not to be found on the German Civil Code. Fear not: by reading Section 275 (impossibility of performance) and Section 313 of the German Civil Code (interference with the basis of the transaction) we get almost the same result. German case law defines force majeure as an "external, unavoidable, and unforeseeable event." In the same manner: the party who suffers the event must inform the other party as soon as possible. 23  German Law – Civil Code § 313 BGB: 1. If circumstances upon which a contract was based have significantly changed since the contract was entered into and if the parties would not have entered into the contract or would have entered into it upon different terms if they had foreseen this change, adaptation of the contract may be demanded to the extent that, taking account all the circumstances of the specific case, in particular the contractual or statutory distribution of risk, one of the parties cannot reasonably be expected to continue to be bound to the contract without adaptation. 2. It is equivalent to a change of circumstances if material assumptions that have become the basis of the contract turn out to be incorrect. 3. If adaptation of the contract is not possible or cannot reasonably be imposed on one party, the disadvantaged party may terminate the contract. In the case of a contract for the performance of recurring obligations, the right to terminate with notice takes the place of the right to terminate.’ 24  German Law – A practical case Frupp GmbH is a German construction company specialized in the iron structures. It is now working on a new iron tower for the French city of Chartres. During the construction, a severe storm damages the structure and the extreme weather caused significant delays and additional costs. Frupp argues force majeure because the storm is an external, unavoidable, and unforeseeable event that makes it impossible to perform its obligation within the agreed timeframe and budget. 25  Civil Law: Force Majeure – Dealing with unforeseen circumstances at the time of contracting Force majeure events which have been broadly recognized by courts and abritrators: ✓ Natural disasters such as earthquakes, hurricanes, and floods. ✓ Acts of war, terrorism, or civil unrest. ✓ Pandemics or epidemics such as COVID-19. ✓ Strikes or labor disputes that affect the ability to perform contractual obligations. ✓ Government actions such as expropriation, nationalization, or changes in regulations that make performance impossible. ✓ And others… 26 Termination  Risk Management - Force Majeure clause The Use of a Force Majeure Clause ‘balances businessmen's legitimate expectations of performance with the harsh reality that circumstances do change to make performance so hard that the contract simply must change.’ Sample Force Majeure Clause Neither party shall be liable in damages or have the right to terminate this Agreement for any delay or default in performing hereunder if such delay or default is caused by conditions beyond its control including, but not limited to Acts of God, Government restrictions (including the denial or cancellation of any export or other necessary license), wars, insurrections and/or any other cause beyond the reasonable control of the party whose performance is affected 27  REMEDIES AND DAMAGES 28  Remember Performance? Common Law - Strict Rule of Performance was that party must perform contract regardless of supervening events − Cutter v. Powell − Paradine v. Jane Civil Law - (exécution en nature, Erfüllung) − A party can go to Court and request enforcement and make the non-performing party to perform. − Art 1221 French Civil Code − Sect 214(1) German Civil Code 29  Breach and Remedies ▪ Breach: the act or omission of one party who fails to perform its obligations under the contract. ▪ Remedy: is a court-ordered resolution/compensation for the breach ▪ Remedies for breach of contract can generally be divided into two groups: legal and equitable. ▪ Legal remedies allow the non-breaching party to recover monetary damages ▪ Equitable remedies are non-monetary solutions to resolve the disputed issue.. ▪ The judge will use a remedy to the advantage of the “ non-breaching party”, also known as the "injured party“. The goal is to put such party in the closest situation/position as if the contract had been performed. 30  REMEDIES 31  Remedies for Non-Performance? Specific Performance Reform the Contract - Change Damages the contract terms REMEDIES for Non-Performance/ Breach Withhold Price reduction performance Termination (Non-breaching party may cancel the contract and sue for restitution) 32  DAMAGES 33  French Law – Civil Code – What are damages for? Art. 1231-2. – In general, damages due to the creditor are for the loss that he has incurred or the gain of which he has been deprived, with the following exceptions and qualifications. German Law – Civil Code - What are damages for? Section 249 - Nature and extent of compensation of damages (1) A person who is liable in damages is to restore the position that would exist if the circumstance obliging them to pay damages had not occurred. 34  Damages: Purpose of Damages Common Law Robinson v. Harman 154 ER 363 The rule of the common law is, that where a party sustains a 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. Addis v Gramophone Co Ltd AC 488, per LJ Atkinson “I have always understood that damages for breach of contract were in the nature of compensation, not punishment.” 35  Types of Compensatory Damages Delay Damages / Consequential Damages Nominal Compensatory Liquidated Damages Damages Damages Unliquidated Damages 36  1. Nominal Damages Remi agrees to buy stamps from Annabelle. Remi failed to buy the stamps. The demand for those stamps is high among collectors so Anabelle can easily sell them to another person without any financial loss. She has suffered no real damage and is only entitled to nominal damages for Remi’s breach of contract. − Her loss is technical rather than actual. − Court nonetheless awards a nominal sum as damages. Nominal damages awarded as there is no real financial loss suffered. Essentially a promise was not kept. − Important because it represents the important legal position that: − A contract has been breached − That a party is in the wrong and has not performed obligations under the contract − This legal position can be used to support a claim in another civil action such as a claim in tort. 37  2. Liquidated Damages Liquidated Damages − Compensation for breach fixed by parties to the contract before formation of contract. − Must represent an accurate and proper assessment of loss. − If sum fixed bears no relationship to loss then it is a penalty. − Must be representative and not be punishment − An agreement to pay a greater sum than the actual loss is prima facie a penalty clause. − Penalties for breach of contract are NOT ALLOWED 38  Dunlop Pneumatic Tyre v New Garage (1915) AC 79 Dunlop supplied tyres to New Garage who were dealers, selling to the public. Contract prohibited New Garage from selling tyres below the list price. Each sale under the list price as per contract “the sum of £5 for each and every tyre … sold in breach of this agreement, as and by way of liquidated damages and not as a penalty agreement.” Contract language was confusing. Sometimes using the words “penalty” or “liquidated damages” The Court found that this was not a penalty but a genuine liquidated damages clauses and laid down a series of test to distinguish between liquidated damages and a penalty. 39  Dunlop Pneumatic Tyre v New Garage Ltd (1915) AC 79 General Rule: If a clause provides for “a payment of money stipulated as in terrorem of the offending party”, (i.e. a payment of a sum of money intended to frighten or intimidate the offending party) then it is penal and void. It will be held to be a penalty if the sum stipulated is extravagant and unconscionable in amount in comparison with the greatest loss that could conceivably be proved to have followed from the breach. There is a Presumption of Penalty where 'A single lump sum is made payable by way of compensation, on the occurrence of one or more or all of several events, some of which may occasion serious and others but trifling damage.' 40 41 Remedies  3. Delay / Consequential Damages Not the same, but similar. Delay: incurred by the non-breaching party due to the delay caused by the breaching party. − Ex: One party must take a taxi as the contracted rental car business did not make the car available on time as per legal agreement. Consequential: consequential damages are damages that occur because of a breach of a contract (or multiple contracts) which creates consequences. − Ex: A hotel hires a contractor to renovate its lobby in up to six months. The contract does not complete the project on time and this results in lost revenue. The lost revenue is claimed in court as consequential damages. It is an indirect loss that goes beyond the value of the contract itself but it is caused (causal link) by the breach. − See (FR) Art1231-1&2 and (DE) Section 249 and 280 42  4. Unliquidated Damages Unliquidated damages are not assessed by the parties to the contract in advance. Unliquidated damages are assessed by the court to compensate a party who has suffered loss as a result of non-performance of a contractual obligation. 43  How are unliquidated damages assessed? Not all damages resulting from a breach of contract are recoverable. Remember it is a REMEDY! A sufficient connection between the breach and the loss must be established in order to recover damages for the breach of contract. Loss must be CAUSED by the Breach (at least predominant cause) Damage suffered by reason of an intervening act by a third party which the defendant could not have reasonably foreseen will not be recoverable from the defendant. Judge/Arbitrator normally begin by determining the consequential damages (as previously explained) and will add as the case requires. 44 Remedies  ‘How much can be claimed? If a breach of the contract is the cause (causal link) of a loss how much can be recovered? Amount of damages limited to Damages the defendant could have reasonably expected for a breach at the time the contract was entered into. Claimant entitled to - Losses that flow naturally from the breach - Losses where defendant had special knowledge of the claimants circumstances at the time the contract was entered into. 45  Hadley v. Baxendale (1854) 9 Exch 341 Hadley owned a mill with a broken part and he hired Baxendale to transport the part for repair workshop, back and forth. By a series of mistakes, Baxendale's caused a one-week delay, and such delay kept the mill not operational. Hadley claimed Baxendale was negligent and sought compensation for lost profits due to the unexpected closure. Baxendale argued Hadley was making an unfair claim He [Baxendale ]couldn't have known the delay would cause the mill to close. 46  Hadley v. Baxendale (1854) 9 Exch 341 The general rule is that the plaintiff should be placed in the same position he or she would have been in had the breaching party performed. However, the court held that damages are restricted to those that can reasonably be considered to have arisen naturally from the breach itself, or such as may be reasonably supposed to have been in the contemplation of both parties when the contract was made. Court secured the CAUSAL LINK as essential to assess damages. If there were special circumstances under which the contract was made known to both parties then losses that are a consequence of such special circumstances can be claimed by a plaintiff. However, in this case Baxendale did not know that the mill would remain shut until a new shaft arrived. As such the loss of profits was not reasonably within the contemplation of both parties at the time the contract was entered into and Baxendale was not liable for the lost profits. 47 THANK YOU!