Remedies for Breach - Nelson Mandela University

Faculty of Law CHAPTER 13 REMEDIES FOR BREACH  Introduction Full performance: natural termination of contract Breach of contract: interfere with natural life & result in early termination Choice: – Uphold [force to comply] – Cancel (if serious) Upholdin...

Faculty of Law CHAPTER 13 REMEDIES FOR BREACH  Introduction Full performance: natural termination of contract Breach of contract: interfere with natural life & result in early termination Choice: – Uphold [force to comply] – Cancel (if serious) Upholding contract [claim for performance] – natural remedy Cancellation – extra-ordinary remedy Parties can regulate consequences of breach – Lex commissoria – Penalty clause – Acceleration clause – Interest clause – Restitution clause  Types of remedies Remedies aimed at upholding Exceptio non adimpleti contractus Specific performance Interdict Remedies aimed at cancellation Cancellation Remedies aimed at compensation Damages (contractual or delictual) Interest o Mutually exclusive (one or the other) or can claim in the alternative  Contract or Delict B of C = unlawful infringement of party’s rights that arise from the contract Conduct constituting breach may also = delict →infringe on rights of other party that exist independently of the contract (eg. Right not to unlawfully injure through negligence) QUESTION 1: INJURED PARTY HAS A CHOICE OF REMEDIES FOR PATRIMONIAL LOSS? [base claim for damages = breach of contract or delict that has been committed] Claim for damages based on B of C limited to PL Any claim for NPL (eg pain & suffering) caused by breach framed as separate delictual claim.  Conduct that constitutes breach = 2 claims: PATRIMONIAL LOSS NON – PATRIMONIAL LOSS Contract Delict Reduction in someone’s patrimony e.g. pain and suffering, must be claimed (estate) with delictual action cannot be claimed with contractual action -Administrator, Natal v Edouard 1990 (3) SA 581 (A)  Breach of contract can lead to both contractual and delictual damages – Depending on situation can have both delictual (non-patrimonial) and contractual claim (patrimonial), but only if conduct complained of constitutes breach of contract and also infringes a legally recognised interest which exists independently from the contract in a wrongful and culpable manner – Contract with hospital for treatment or – have to choose either contractual or delictual claim to recover damages  QUESTION 2: CAN PATRIMONIAL LOSS CAUSED BY BREACH of CONTRACT BE RECOVERED BY EITHER CONTRACTUAL or DELICTUAL CLAIM? Lillicrap v Pilkington Bros – Innocent has choice where loss flows from injury to person or property, but – If loss is pure economic loss cannot claim in delict = damage which is not the result of an injury to property or personality [misrep or unlawful competition], or where it is not the plaintiff’s property or personality which has been injured, or it is not the defendant who caused the damage of injury  3rd party interferes with contractual rights of contracting party? Delictual claim against 3rd party – Atlas Organic v Pikkewyn Ghwano (sales manager(Atlas) induced salesman(Atlas) to start selling PG products – unlawfully inducing him to breach contract with Atlas)  Distinguish delictual claim because of breach and delictual claim based on pre- contractual misrepresentation – Pre-contractual misrepresentation can be delict on its own, but is not breach (i.e cannot found a contractual claim, unless incorporated into contract as warranty)  Remedies aimed at upholding contract Contracts must be honoured [pacta sunt servanda] Remedies to enforce: – Specific performance (and interdict) – Exceptio non adimpleti contractus  Exceptio Exceptio non adimpleti contractus Defence raised against claim for performance in reciprocal contract Permits party to withhold own performance and ward off claim for such performance until other party has performed/tendered proper performance Requirements 1. Reciprocity of performance – Reciprocal obligations: obligations created in exchange of each other (BK Tooling case) – Reciprocal contract aimed at accomplishing an exchange of obligations – Party A cannot claim performance unless A has performed or is tendering performance (principle of reciprocity) – Determining whether obligation is reciprocal or not: – Question asked: Did parties intend to create obligations in exchange for each other?? – Depends on the intention of the parties 2. Sequence of performance General rule: Parties must perform pari passu unless parties change by agreement or naturalia dictate (e.g. agreement of employment: first work, then pay!) Sequence of performance determined by (1) intention of parties which flows from interpretation of contract & (2) naturalia Determining intention supported by:- Presumed interdependent obligations are reciprocal (eg contract of sale, lease etc.) Presumed in reciprocal contract neither party can claim performance unless claimant has performed or tendered performance  Exception to 2nd presumption: – Contracts for work to be performed: employee must perform first unless clear indication to the contrary (same as lease) If at the time of action, Plaintiff’s duty to perform is not yet due & enforceable, Def cannot raise exceptio against Plaintiff Example: cash or credit sale – Cash sale: delivery and payment at same time - if buyer sues seller for delivery without paying/tendering payment - exceptio – Credit sale: (payment postponed) - buyer sues for delivery, seller cannot raise exceptio 3. Incomplete performance Can use exceptio not only in case of no performance (mora debitoris) but also for defective/partial performance Even if defect is minor (but not in de minimus case) Factors affecting application of exceptio 1. Acceptance of part-performance Exceptio is aimed at upholding contract Accepting part/defective performance indicates election to keep contract alive (even if aware) Cannot later cancel Limited to remedies aimed at fulfilment & damages + Can use exceptio 2. Defective performance & cancellation BK Tooling: Distinguish between circs where contract cancelled due to breach and situations where contract is kept alive and exceptio raised to fend off claim for performance If contract is cancelled for material breach, exceptio cannot be raised Claim for performance defended on basis that contract is terminated (no performance due), not exceptio Restitution to be made (arises from fact that there was contract, ie, contractual in nature Sometimes not possible to make restitution (e.g services rendered), then there may be an unjustified enrichment claim.  Courts’ equitable discretion Party can take delivery and use defective goods but raise exception against claim for payment – unfair Court has equitable discretion to relax the principle of reciprocity and reduce contract price depending on factors such as nature of defect; cost of repair etc BK Tooling v Scope Precision Engineering Take note of factors Pl has to prove in terms of Smith v Van den Heerver case  Scope of the exceptio Right to withhold ito principle of reciprocity is temporary & aimed at getting other party to perform, i.e. must allow other party time to perform Common law: up to party in breach can decide how to effect proper and full performance S56(2) CPA: consumer decides – repair/replace or refund Cannot be used where (1) law excuses ‘improper’ performance or risk is with party wanting to use exceptio – E.g. risk passes on sale being perfecta, vis maior damages goods in hands of seller – buyer must perform – cannot raise exception (2) Party has elected to cancel the agreement  Specific performance Pacta sunt servanda: parties must comply with obligations Each party entitled to insist on full & proper performance subject to willingness to perform reciprocal obligations Primary remedy = specific performance Claimable as soon as obligation to make performance due & enforceable Parties have a right to specific performance subject only to court’s discretion to refuse in appropriate cases Haynes v King Williams Town Municipality Benson v SA Mutual Life Assurance Society  Scope Claim for SP may take any one of the following 3 forms: 1. Claim for payment of sum of money – Claim for specific performance even though treated as claim for damages in practice 2. Claim for performance of positive act 3. Claim to enforce a negative obligation – Takes the form of an interdict – Eg: restraint of trade  Requirements Plaintiff must have performed or tendered performance Defendant must be in position to perform (objectively + subjectively possible to perform) Order not be against public policy (e.g. restraint of trade) Court will not order SP if debtor not possible to perform, even in case of subjective impossibility (eg sold same item to different people) debtor insolvent (not prefer creditors)  Discretion of the courts Point of departure: Plaintiff always entitled to specific performance General equitable discretion to refuse SP Courts follow certain guidelines when deciding not to order SP Circumstances include: undue hardship / personal services – Undue hardship to DP/3P – Haynes v KWT Municipality – Personal service English law: courts will not enforce an agreement for the rendering of personal services or employment – Benson v SA Mutual Life Assurance Society Rejected in Nat Union of Textile Workers v Stag Packings No reason to deviate from general rule of ordering specific performance even in case of personal service, subject to court’s discretion  Masetlha v Pres of the RSA: CC refused to reinstate Head of NIA because of special relationship of trust. Santos v Igesund Ordered to return as no hardship / inequity in forcing coach to fulfil obligations in terms of contract Labour Court has power to make an order for specific performance – provisions strengthen direction courts have taken since Stag Packings case  Execution of order for SP Ordinary rules of procedure Sum of money: Writ of execution, attachment and sale Perform an act/refrain from acting: Contempt of court Enforce by ordering 3rd party to make performance – Registrar to sign docs – Sheriff to remove property and hand to creditor, etc  Cancellation Extra-ordinary remedy Unless lex commissoria, can cancel only if breach is material Act of cancellation Material breach – choice: uphold or cancel Within reasonable time Once exercised – choice is final (unless consent) Elect to cancel – must notify other party – Notice of cancellation must be clear and unequivocal – Takes effect from time it is communicated (Swart v Vosloo) – Cannot be worded to take effect from a future date (ex nunc) Ganief v Hoosen – No formalities (oral or written notice will suffice)  Swart v Vosloo 1965 (1) SA 100 (A) Lease with option to buy Option exercised but other party alleged the lease was cancelled as provided for by contract – “the lessor shall be entitled to … declare this lease cancelled and terminated…” Court: … if one party wishes to exercise his right to cancel this mutual contract, he must convey his decision to the mind of the other, unless they have agreed otherwise …” “declare” means to make known, which necessarily means a person … to whom something is made known …in the context of lease can only be lessee … you cannot make something known to him unless it reaches his mind Ganief v Hoosen 1977(4) SA 459 CPD H issued summons to eject G from leased premises for failing to pay rent + order granted On appeal: Letter of cancellation (dated 10 Feb) because non-payment of Feb rental provides for cancellation from 1 March Court: For notice of cancellation to be effective it must clearly and unambiguously convey to the guilty party the election of the innocent party to bring contract to end It must embody an unqualified, immediate and final decision to treat contract as at an end The right to resile from a contact is one that must be exercised ex nunc (from now on) Party cancelling is not entitled to declare contract cancelled as from some future date and hold other party bound to contract until arrival of that date  Elect to uphold contract – lose right to cancel – Express/tacit manifestation of intention to abide by contract despite breach – waiver – Tacit election not to cancel – inferred from conduct of IP – Even if no intention to waive right – if created in mind of other party the reasonable impression that elected to affirm – may be estopped from asserting right to cancel Unreasonable time to exercise option? – does not automatically lose right to cancel – inference that party is tacitly upholding contract (estoppel) Legal effects of cancellation – Cancellation – primary obligations extinguished Indivisible (whole termination) /divisible (parts that still need to be performed are terminated – Ancilliary obligations remain in force E.g. penalty & arbitration clauses  Restitution Cancellation creates duty to restore [restitutio in integrum] Remedy in its own right [not enrichment claim] MEC for Economic Affairs, Environment and Tourism v Kruisenga Purpose: to place IP in position occupied before contract Ability to make restitution by innocent party is usually a requirement for cancellation, but not absolute Party claiming cancellation & restitution must tender return of performance received UNLESS: 1. impossible to restore AND 2. not the fault of party exercising right to cancel, e.g. Inherent defect Vis maior or 3rd party responsible Goods used in manner as contemplated by parties (discover defect during/after use)  Where performance was in form of services – must tender monetary equivalent If full restoration not possible, but shortfall can be made up with money Must tender restoration of full performance – Cannot use as set-off against unliquidated damages claim  Damages Always claim damages in case of breach, if financial loss suffered Quantifying damages difficult – Penalty clause (in lieu, not in addition to damages) – Fixed sum in event of breach – If disproportionate to prejudice suffered, amount of penalty may be reduced  Nature & purpose of contractual damages General rule regarding award for contractual damages: – Plaintiff to be placed in position as if contract was properly performed (i.e. as if breach did not occur) as far as this can be done by payment of money and without undue hardship to defaulting party Aim: fulfilment position (would have occupied had there been no breach) DIFFERENCE THEORY: method of quantifying damage caused by breach Compare two financial positions of plaintiff: – Actual position after breach and hypothetical position he would have been in had there been no breach Applies equally in law of delict – How does Pl’s present position compare with hypothetical position he would have occupied had the delict not been committed  Contractual damages measured according to Plaintiff’s positive or expectation interest (incl. loss of profit) – (difference between actual position and position would have been in if contract fulfilled, i.e. no breach) Delictual damages measured by Plaintiff’s negative or reliance interest (wasted expend) – expenses and losses caused by relying on contract (i.e. difference between actual position and one if contract not concluded) Person concludes contract with expectation of profit To prepare for performance, incur expenditure relying on contract and that this will pay for itself from profit made Eg building contract – will suffer both reliance + expectation loss  P.I damages – FORWARD LOOKING – Place Pl in position he would have been had contract been fulfilled (fulfilment pos.) N.I damages – BACKWARD LOOKING – Place Pl in position he would have occupied had he not entered in contract Applying Difference Theory: Claim for damages for breach of contract: forward looking result BUT for the breach, Pl would have been in fulfilment position – and if he would have made a profit, damages would include expectation loss in addition to reliance loss [expectation + reliance loss] Claim for delictual damages (eg fraud- pre-contractual): backward looking result BUT for the fraud, there would have been no contract Had Pl not entered into contract, he would not have incurred the expenditure that is now wasted and could not have made a profit. Damages restricted to reliance alone  Generally, expectation loss cannot be recoverable by delictual action BUT Commission of delict may result in a loss of profit – expectation loss will be recoverable in delictual claim for damages: Transnet v Sechaba Photoscan but it does not mean that negative interest cannot be recovered by contractual action TENDANCY: to associate particular type of loss with particular type of claim Loss of profit = contractual claim Wasted costs = delictual claim Led to misconception: loss of profit never recoverable in delict (argued in Transnet) but also contractual claim for positive interest damages compensates only for loss of profit  Delictual claim for loss of profit? Transnet v Sechaba Photoscan 2005 (1) SA 299 (SCA) – Contract not awarded because of tender fraud – Claim in delict for loss of profit (+ reliance/wasted costs) – Argued by appellant that cannot claim for ‘bargain to be made good’, i.e. expectation losses as it is only recoverable under contract – Court: loss of profit not limited to contractual claims – “The respondent is entitled to be placed in the position it would have been in but for its having been fraudulently deprived of the purchase that it was destined to be awarded.” Requirements for damage claim 1. Breach by defendant 2. Suffered financial or patrimonial loss 3. Causation  Requirements for damage claim Breach – discussed forms 2. Financial loss Actual loss – no nominal damages If clear that loss has occurred, fact that extent of loss cannot be precisely calculated – best evidence reasonably possible Not leave court with guess work – then absolution of the instance Only claim financial / patrimonial losses, delictual claim for non-patrimonial damages (pain & suffering; mental stress, etc) Future loss: once-and-for-all-rule Must claim all losses in one action Prevent multiplicity of actions If not all loss has been suffered at time of claim – include claim for prospective (future) losses Failure to do so, not allowed to claim such losses in future Application of difference rule: concrete approach Difference rule Patrimony (or estate) includes all assets & liabilities incl. personal rights & obligations acquired in terms of a contract Concrete approach: to determine quantum by focusing on the actual element of patrimony affected. damage is calculated by comparing the value of the asset/obligation if properly performed, with actual value after breach (focus on specific asset/right) Use mechanisms such as eg: market value of defective goods compared to market value of goods without defect (market-value approach) Cost of completing incomplete performance Interest paid in overdraft in case of late payment, etc 3. Causation Damage must be caused by the breach 2 stage enquiry: 1. As matter of fact, breach causally contributed to loss – Factual causation 2. If so, as matter of law, is the breach and loss sufficiently close that party in breach should be held responsible (remoteness) – Legal causation  Factual causation – Conditio sine qua non (‘but-for’ test) – If, but for the breach, the loss would not have been suffered, breach is factual cause of the loss – Balance of probabilities – if fail, end of enquiry – no damages Legal causation – Aim: Protect party in breach of too wide liability & unreasonable – Test for remoteness: Is causal connection between breach & loss sufficiently close to impose liability? – In contract law the question of remoteness is General damages: damages that flow naturally, not too remote & recoverable from the particular breach Foreseeable to reasonable person in ordinary course of events Liable for such damages See examples p338 – Holmdene Brickworks v Roberts Construction deliver poor quality bricks: damages – cost of demolishing building and reconstruction, but not loss of profit due to delay in completing building  Special damages: damages that would not normally be expected to flow from this type of breach, but arise due to special circumstances of the case GR: Not (normally) liable for these damages Exceptions: 1. Damages were actually foreseeable at time of contract (contemplation principle); and 2. Parties knew and contracted on basis of special circumstances & taken to have agreed (express/tacit) to be liable for special damages arising in case of breach – (convention principle) » [-too strict, but part of law] Apportionment Plaintiff need only prove that breach was a cause of loss – not dominant cause Throroughbred Breeders’ Association v PriceWaterhouse: Apportionment of Damages Act does not apply to contractual damage claims – Party in breach is liable for full loss even if plaintiff’s fault was dominant cause of loss (not breach) – Party in breach (defendant) is liable for full loss even if plaintiff’s fault was dominant cause of loss Mitigation rule In case of breach, plaintiff must take reasonable positive steps to mitigate damage Failure may result in claim reduced Reasonable expenses incurred may be claimed as part of damages  Penalty clauses To provide easy & quick relief for breach – penalty clauses Types: 1. Pre-estimate Pre-determined sum as rough estimate of damages 2. Penalty Penalty payable in case of breach (deterrent) 3. Forfeiture Party in breach forfeits right to restitution  Penalty clauses Conventional Penalties Act 15/1962 penalty provisions enforceable [s 1] Requirements: 1. clause must apply in respect of breach of contract 2. clause must impose obligation to pay money or deliver or perform something, or provide for forfeiture of something performed in terms of the agreement [s 4] 3. clause must have intended to operate as penalty or liquidated damages  Reduction of penalty [s 3] Court may reduce penalty if out of proportion to prejudice suffered by creditor Onus on debtor but court has discretion to reduce of its own accord Factors to be considered when determining prejudice – Wide discretion – Van Staden v Central South African Lands and Mines: See p343 everything that can reasonably be considered to harm, injure creditor in his property, person, his reputation, his word, his activities, his convenience, his mind, or in any way whatever interferes with his rightful interests as a result of the act or omission of the debtor  Specific performance & penalty clauses S 2(2): cannot claim performance and penalty (i.e. if contract is upheld no penalty, normal damages Penalty clause operates generally in case of cancellation Penalty clause exclude claim for damages Cannot have penalty & damages Cannot claim damages in stead of penalty (unless specifically so agreed)  Interest Interest on late payment - GD Common law Liquidated debt :mora interest due from date debt is due Unliquidated debts: from date of judgment Prescribed Rate of Interest Act 55/ 1975 Liquidated debts: unless agreed or trade custom provides otherwise at prescribed rate from date due, subject to NCA Unliquidated debts: unless agreed or custom dictate otherwise at prescribed rate from date of demand or summons (whichever earlier) subject to NCA Judgment debt: (incl costs) will bear interest from date judgment debt is payable (if it would not have borne interest)  Other remedies Interdict, used as form of specific performance – to do/not to do something protection of ancillary rights – prevent money due to be taken out of country, etc prevent 3rd parties to interfere in contractual relations Requirements: 1. Clear right must exist 2. Injury must be shown (breach & possibility of damage) 3. No other (effective) remedy to protect applicant  Declaration of rights S19(1)(a)(iii) Supreme Court Act: – Court has discretion to determine any existing, future or contingent rights or obligation at instance of interested party, despite the fact that person cannot claim relief as result of such determination – In case of uncertainty – can approach court – But court not there for ‘legal advice’ – must show that a dispute will be resolved  Damages- Summary Hutchison 2004 SALJ p51: “Back to basics: Reliance damages for breach of contract revisited” Question: Whether, and to what extent, a victim of a breach of contract may elect to claim damages according to its negative rather than positive interest? “... the body of case law on the topic... represents a confusing and almost impenetrable mass for most students, and no doubt for many practitioners, law teachers and even judges.”  Fundamental rule The victim of a breach of contract is to be placed in the position he would have occupied had there been no breach – = entitled to damages measured according to positive or expectation interest – i.e. must be given benefit of bargain he contracted for Damage with reference to difference theory: comparing position after damage causing event and position had event not occurred – used in delict and contract  Distinction between positive & negative interest Distinguish position of pre-contractual wrong (misrepresentation or duress) and post-contractual breach – Applying differential theory to pre-contractual wrong: place victim in position he would be in had he not concluded the contract (but for the duress he would not have concluded the contract) – Applying theory to post-contractual breach: place victim in position he would have been in had contract been properly performed Therefore distinction between 2 forms of (contractual) damages: negative interest for pre-contractual damages & positive interest damages for breach  Positive & negative interesse Distinction between Neg (backward looking) and Pos interest (forward looking) results not from delict and contract but from applying difference theory to different wrongs However, because pre-contractual wrongs are delicts in our law – negative interest became associated with delict [and out-of pocket loss] and positive interest with contract [and loss of profit] Interest served by contractual damages Three interests: – 1. Restitution interest contract cancelled – must make restitution (contractual remedy) Contract not cancelled – restitution interest (financial equivalent of restitution, i.e. difference in value in performance made and counter- performance received) will be part of both positive and negative interest damages – 2. Reliance interest In relying on contract, incur expenses This is to be made good: aim of reliance interest is to place victim in position as if contract not concluded: reliance interest same as negative interest – Includes consequential loss if not too remote – 3. (Gross) Expectation interest Expectation interest entails being placed in position as if breach had not happened (positive interest) Includes loss of profit (net expectation interest)  Example A buys stud racehorse from B, who assures no disease, for R100k. This is a bargain as A has already on-sold horse to C for R150k, delivery at some future date after stud has done its job for A. Horse is diseased and value is now only R1k. It has infected A’s mare of value R60k, which now dies. C refuses delivery and cancels contract. A does not cancel contract but wants to claim damages. He has following choices: – Price reduction because of latent defect – difference between price paid and actual value = R99k Innocent misrep: no consequential damages Negligent misrep: can claim consequential damages (delict) [no contract would have resulted – negative interest] – Delictual action (assume that B knew of disease and lied to A, who would not have bought horse): Recover R99k (price less value) & R60k (consequential loss) = R159k Reliance or negative interest (cannot claim loss of profit, because would not have bought horse if not for fraud) – Contractual claim for breach: (assume B guaranteed horse free of disease) – if no breach, guarantee is true then would not have suffered following losses: R99k – loss on ‘defective goods’ R60k – for consequential loss R50k – loss of profit (net expectation interest) Total (gross) expectation: R209k  Overlapping of interests Restitution and reliance – Restitution is special form of reliance; reliance include restitution interest but is wider to include also wasted costs; consequential loss and opportunities foregone Reliance and expectation interest – Gross expectation (positive) interest include reliance (neg) interest, but includes also loss of profit (net expectation)  Important implications: 1. Positive interest = sum of restitution, reliance and net expectation interest 2. A claimant who believes that it will be too difficult to prove loss of profit may decide to only claim out-of-pocket expenses. This does not mean that there is deviation from general rule and he is now claiming negative interest – still claiming positive interest. Overlap between pos & neg interest Consequential losses [the mare that died] – Consequential loss can be claimed in Delict : no contract would have resulted and therefore no loss – negative interest Contractual: if no breach (i.e. stud healthy) – no loss  Wasted expenditure – Wasted expenditure is suffered as result of breach – Loss features as element of A’s negative interest (loss would not have resulted if contract was never concluded), but also part of positive interest, because expenses go towards placing him in financial position he would have been in had the contract been performed – Positive interest include both reliance and net expectation losses – Net loss on contract? Difference between actual and hypothetical positions would be wasted costs minus loss (i.e. positive interest is limited by contractual loss) Reliance loss is limited by (negative) expectation interest  Opportunities forgone Opportunity costs of the transaction – Loss suffered as result of contracting with one and not able to contract with another is a reliance interest (definite inflow into estate is sacrificed = detrimental reliance) – Opportunities lost is part of reliance (neg interest): place person in position he would now be in had contract not been concluded (i.e. would have taken other contract) – In case of fraud etc, should be able to claim ‘lost opportunity’ as part of negative interest, but... – Can you claim it as part of positive interest, like wasted expenses? No  Reasons: – Positive interest – will claim for profit lost on contract A, cannot also claim lost profit on contract B, as he would not have contracted with both A and B Cannot claim profit on contract B (in place of profit on contract A) as the basis for the damages claim and its calculation assumes fulfilment of contract A (there is no contract with B at all). Negative interest for breach of contract? Allowing contractual claim based on negative interest compensates the plaintiff for losses caused by concluding a contract, rather than the breach of the contract It places plaintiff in position as if contract was not concluded rather than position had breach not occurred The idea behind an award for damages is to allow compensation for loss resulting from a wrong that was committed – in case of breach of contract the breach is the wrong and not entry into the contract.