Mercantile Law 102 - THEME 7: Breach Of Contract PDF

MERCANTILE LAW 102 THEME 7: BREACH OF CONTRACT Weekly Theme Activity List 1. Read the notes for that week’s Theme under the “MER102 Lessons” tool on iKamva. You will have to read these notes several times as law is a new subject for any students, especially for non-law students. 2. Read the re...

MERCANTILE LAW 102 THEME 7: BREACH OF CONTRACT Weekly Theme Activity List 1. Read the notes for that week’s Theme under the “MER102 Lessons” tool on iKamva. You will have to read these notes several times as law is a new subject for any students, especially for non-law students. 2. Read the relevant pages (indicated) in the textbook (details of textbook on your Module Outline) for an expanded explanation. 3. “TRACK YOUR UNDERSTANDING” activity. These are pauses in the Theme Notes. These pauses pose important questions at regular intervals and test your understanding of the key concepts being discussed in the notes. You will know early on at Step 3, whether to go back and repeat Steps 1 and 2. 4. Complete the E–Quiz activity, at the end of each theme. The E-Quiz is accessible online on iKamva in the ‘Tests & Quizzes’ tab.  What do we mean by ‘Breach of Contract’? Breach of contract is about the failure to perform by one of the parties to a contract. That is, one of the parties fails to adhere to the terms of a valid contract. Once a breach has occurred, the aggrieved party will, depending on the nature of the breach, rely on, one or more remedies, such as cancellation of the contract, specific performance and/ or damages. Serious breach that entitles termination/ cancellation of contract vs less serious breach that does necessitate cancellation of contract. Sometimes the breach is so serious it leads to termination of the contract. Sometimes the breach is less serious and you will not be able to cancel or terminate the contract (though there will be other remedies available to you). This topic of breach of contract will be approached by first identifying types of breach and then discussing remedies available to the “innocent” party. We will refer to the party who breaches the contract as the “guilty party”. The other party to the contract will be referred to as the “innocent party”/ “aggrieved party”. When we view contracts, remember the DEBTOR is the party to the contract who must perform. The nature of the performance can be many things – it is not necessarily the payment of a sum of money. It could be that the debtor owes the services of building a garage, or auditing books, or laying fibre cables. The CREDITOR is the party to whom the performance is owed. The creditor can claim performance from the debtor as promised in the contract. Thus in the context of contracts we define “creditor” and “debtor” in relation to the duty to perform and the right to claim performance. If you employ me to service your car, I am the debtor regarding the work of servicing your car while you are the creditor because you can claim that work to be done by me. I am the creditor regarding the money you owe me for the service on your car and you are the debtor regarding the money owed for the work I did servicing your car. So each party to a contract is usually both a debtor and a creditor as each one normally owes at least one duty to the other.  The Types of Breach of Contract: Repudiation. Repudiation occurs when the guilty party refuses to perform their contractual obligations, without lawful excuse for not performing indicates an intention not to perform either some or all of their duties required by the terms of the contract. We are specifically saying ‘without lawful excuse’ because at times a party to a contract may be legally entitled to repudiate a contract. For example where the contract is voidable due to misrepresentation, duress or undue influence or where the other party has committed a material breach of contract. In these circumstances it is indeed lawful to repudiate a contract, and such repudiation does not constitute a breach of contract. However, if there is no lawful reason to repudiate, such repudiation amount to a breach of contract. So, for example, in the case of an inoperative mistake. The law uses an objective test to decide whether the guilty party is refusing to perform: How would a reasonable person have understood the actions of the guilty party? The question is not how the innocent party interpreted the conduct of the guilty party (that would be a subjective test). Instead, the Court will use the objective test and ask how a “reasonable person would have interpreted the conduct or actions of the guilty party”. The repudiation can occur through words ( such as where the debtor says I will not; I would like to, but I cannot; Please cancel the order) OR conduct, through which the debtor indicates an intention not to comply with obligations. Also, the repudiation can occur before or after the due date for the performance. If it occurs before the due date, we call that anticipatory breach. If it occurs after the due date, then its normal repudiation. Where the repudiation is anticipatory, the innocent/ aggrieved party can choose to treat the repudiation as an anticipatory breach of contract and pursue the available remedies immediately or wait for the due date of the performance and if the performance is not forthcoming, then the innocent party can pursue the available remedies at that time. Examples of repudiation: a seller informing the purchaser that he has changed his mind and decided to keep the goods; an employee fails to report for duty and instead starts employment elsewhere; a landlord refuses to repair a broken toilet or geyser or leaking roof when he is obliged to do so. A agrees to start working for B employment on 1 July. On 1 July A starts working for C. A reasonable person would interpret A’s conduct (by starting to work for someone else) as a refusal to work for the innocent party B. Tuckers Land& Development Corporation v Hovis: ––in this case Hovis bought a piece of land from Tuckers. Hovis chose his piece of land off a township plan Tucker presented to him. ––After several delays in transferring the plot of land into Hovis name, Hovis made enquiries at the Surveyor General’s Office. There he found out that his plot of land no longer existed on the township plan that was waiting for approval. His plot of land had been changed to a school site. Hovis alleged breach of contract in the form of repudiation (refusal to perform). The Court used the objective test: how would a reasonable person interpret Tucker’s conduct in changing Hovis’s plot to a school site? Any reasonable person would interpret this as a refusal to transfer the original plot into Hovis name. It is breach of contract in the form of repudiation.  The Types of Breach of Contract: Mora Debitoris MORA DEBITORIS: (that is, default by the debtor) In the law of contract, the word ‘mora’ means to delay without a lawful justification/ excuse, the performance of a contractual duty. Stated differently, ‘mora’ is the wrongful failure to perform timeously. So, when we speak of mora debitoris, it is when the debtor is late with performance. He fails to perform in terms of the time requirements set out in the contract. In other words, we are saying performance is possible, but the debtor, aware that the performance is required, fails to perform on time. Being late must be due to the fault of debtor (note: it is not supervening impossibility - revise your notes on possibility). The debtor can only be late if the performance was due. For example, if there is still a condition to be met or fulfilled before the debtor is obliged to perform, then the debt is not yet due. When is the debtor “late”? To answer this question, we distinguish contracts the date for performance is specified vs where there is no such fixed date. (i) Failure to perform where the date is fixed in the contract= mora ex re, while failure to perform upon demand by the credit = mora ex persona If there was a fixed date on which the debtor had to perform, and he does not do so on that date this is called “mora ex re” No extra steps are required – the other party (creditor regarding the performance owed) need not demand performance from the debtor.e.g.: A agrees to pay for the textbook he bought from B on 31 July. A does not pay on that date. A is in mora ex re. B does not have to warn him or give him extra time to pay. (ii) If the contract did not have a fixed date for performance by the debtor, then the creditor must indicate a date for performance to the debtor. Note there is an extra step here – the creditor must indicate or select a date on which the debtor must perform. The date should allow the debtor a reasonable time to perform. If the debtor does not perform by that date, he will be in mora ex persona. What is a “reasonable time”? The law states that there are no fixed number of days or weeks to evaluate a “reasonable time”. It will depend on the circumstances. Example: A sells to horses to B. No date is agreed to regarding delivery of the horses. B is the creditor regarding the delivery of the horses while A is the debtor regarding the delivery of the horses. B then contacts A and requests delivery within 14 days – he selects a date. Is 14 days a reasonable time? The circumstances such as transporting live animals, vet’s certificates and the distance the horses need to travel will all be circumstances that determine whether the 14 days is a “reasonable time”. Assume that 14 days is a reasonable time. If A does not deliver the horses in 14 days, he will be in breach of the contract, specifically mora ex persona. Note: if A sold the horses and the parties decided on a date at conclusion of the contract i.e. that the horses had to be delivered by 10 July. If A did not deliver the horses on 10 July he would have been in breach of the contract, specifically mora ex re on 11 July.  The Types of Breach of Contract: Mora Creditoris MORA CREDITORIS (that is, default by the creditor) This breach is about the failure to by the creditor to co-operate with the debtor in order to ensure that the debtors can properly perform in terms of the contract. So, mora creditoris refers to the delay on the part of the creditor to render such assistance as the law requires of him in cooperating with the debtor so as to enable to debtor to give his performance.. The delay is caused by creditor. The debtor (one who is ready to perform i.e. the builder) is held up by the creditor. The creditor is at fault for not accepting or allowing proper performance by the debtor. However, even though mora creditoris, the creditor is basically the debtor is not excused from performing, unless the creditor’s actions amount to repudiation. At the same time a creditor in mora may not use the debtor’s non-performance as grounds for claiming that debtor is in breach of the contract for failing to perform timeously, since the debtor’s timeous performance was dependent on the creditor’s performance. Two conditions need to be met: (a) the time for the debtor to perform must have arrived. If the time is not stipulated/ agreed upon, the creditor must be given reasonable notice to make arrangements to accept performance; AND (b) the debtor must have offered the creditor proper (correct) performance in terms of the contract, that is, the performance must accord with the terms of the contract. Example: the builder is ready to start the renovations for the homeowner. The homeowner (creditor regarding the performance of the builder) does not hand plans to builder. Without plans, the builder cannot begin.  The Types of Breach of Contract: Positive Malperformance POSITIVE MALPERFORMANCE As a breach of contract, It occurs where one of the parties to a contract performs in a way that is against the agreed terms. It is called malperformance and is considered the most common form of breach of contract. So, although the debtor performs, such performance is incomplete or defective in that it is below the standard required by the contract or is contrary to the terms of the contract. So, it’s ‘positive’ malperformance because the guilty party actively commits an act, and that act is in contradiction to the terms of the contract. Malperformance comes in two guises: A party commits an act he agreed not to do: so here the debtor does something which the contract prohibits him or her from doing. For example, the debtor sublets premises where the contract specifically prohibits it. Or the debtor competes in a business with a former employer where there is a valid restraint of trade in force. OR A party delivers defective performance So here, the debtor’s performance is incomplete or defective (sub-standard). For example, you buy 20 burglar bars, and the seller delivers only 10; or an inferior grade of steel is used other than what was agreed upon by the parties. Example: George works as a mechanic at Toyota. In terms of his contract of employment with Toyota, George has agreed not to do private mechanical jobs after hours without the permission of the company. He has also agreed that he will only use new, genuine parts to fix vehicles at work. If George does private jobs over weekends without permission, then he has breached the contract by doing what he promised not to do. If George uses second-hand parts to repair vehicles at work, he has breached the contract by rendering defective performance..  The Types of Breach of Contract: Positive Malperformance (Cont…) Some Observations on defective performance Before it can be breach, The defect must affect an essential (material or important) term of the contract. The test if the defect is material would be to ask, “would the party have contracted if he knew he would be getting this type of defective or imperfect performance?”. If the answer is that the party would not have contracted, then the defect is material. Courts in many cases have defined a material defect as one that is so serious it “goes to the root of the contract”. Strachan v Prinsloo: ––a dairy farmer hired a farm manager. The most important task for the manager would be to get the dairy operating at 4am in the morning so that a second milking could also take place late in the afternoon. In addition, the manager had to repair fences, dredge farm dams and do general maintenance work. The manager did everything very well, but he could not get up early enough to ensure the dairy was operating at 4am. The farmer argued it was breach of contract in the form of defective performance. The manager stated he did all the other things well and this slight defect was not material. The Court found that starting dairy operations at 4am was material as it went to the “root of the contract” and was therefore malperformance in the form of defective performance. Would the farmer have employed the manager if he knew the manager would not be able to get the dairy operations started by 4am? Answer is no.  The Types of Breach of Contract: Positive Malperformance (Cont…) PREVENTION OF PERFORMANCE This type of breach occurs when a party deliberately prevents performance. The actions by the party can be intentional or due to his negligence. Example: Skyriders sell helicopters to the SANDF. Skyriders are unable to assemble and deliver the helicopters because they are unable to get propeller blades. Why? Skyriders cannot find a supplier of propeller blades because they owe the supplier money from other accounts and are failing to pay so the supplier will no longer do business with Skyriders. Note: this is Skyriders own fault they can’t get parts --- it is breach of contract called prevention of performance. It is the personal action or conduct of Skyriders in not paying outstanding debts that is preventing them from performing to SANDF..  Track Your Understanding. Can You Answer the Following? ☞ Describe what “prevention of performance” is. ☞ There are 2 ways in which malperformance arises. Explain. Use an example for each one. ☞ Defective performance requires that the defect is serious enough. How do the Courts approach judging whether a defect is serious enough? ☞ The Courts use an objective test to evaluate whether a party to a contract is repudiating the contract. Explain the test used. ☞ If a contract has no fixed date for performance, the creditor must take an “extra step” to enforce his right to claim performance. What is this extra step? Explain how this can end up being breach of contract: by who and how? ☞ Mora creditoris is breach of contract by the creditor. What conduct of the creditor makes it breach of contract? ☞ For each type of breach discussed, draw up a list of requirements in bullet form. ☞ EXTRA REVISION:FORMS OF BREACH OF CONTRACT ☞ See Table 15.1 p170 of text book.  Remedies for Breach of Contract When breach of contract occurs, the law protects the innocent party by providing legal remedies. Once there has been a breach, the innocent party must assess the situation and choose a course of action that is best suited to their circumstances and needs. When one party breaches the contract, the law provides remedies by which the other party can try and rectify the situation, either by getting what was promised, or by claiming money compensation (damages).Without remedies, there would be no way to enforce contracts and parties would not take their contractual obligations seriously. Various factors including the type and seriousness of the breach will determine which remedies will be available for the harmed party. We make a distinction between two categories of remedies: primary remedies and secondary remedies. Primary remedies: aimed at completing the contract in spite of the breach. These are: (i) Specific performance (plus the additional remedy of general damages) and (ii) Damages as surrogate (plus the additional remedy of general damages) Secondary remedies: aimed at ending or cancelling the contract. (i) Cancellation (plus additional remedy of general damages). Note that the secondary remedy of cancellation is only available if the breach was serious. ––General damages (monetary compensation) are an additional remedy (whether main remedy is a primary or secondary one). ––There is also a remedy that the parties can agree to at the conclusion of the contract namely a penalty clause. We will examine the following 5 remedies: specific performance, damages as surrogate, cancellation, general damages and penalty clauses.  Track Your Understanding. Can You Answer the Following? ☞ Advise your client A on possible remedies in the scenario below: ––A concludes a contract with B. A will swop his motorbike for B’s boat. (Called a contract of barter or a “swop”). Before the swop can take place, B’s boat is stolen. B was too lazy to put the boat in the garage – he left it on the pavement outside his house overnight. B will not be able to “perform” i.e. deliver the boat. It has been stolen and not recovered. ☞ Will B be in breach of contract? ☞ If so, what kind of breach is this? ☞ What remedy/s would A have? (primary or secondary? Any additional remedies?)  Remedies for Breach of Contract: Primary Remedies Specific performance (aimed at completing the contract exactly in its original form).This is a primary remedy aimed at completing performance i.e. completing the contract, whereby the innocent party is entitled to demand the original (specific) performance from the guilty party. This remedy requires the guilty party to perform the positive duty as stipulated in the contract. If the breaching or guilty party refuses? That would amount to contempt of court and he could be jailed for ignoring a court order to specifically perform in terms of the contract he concluded. Although as a general rule, the innocent party can always claim specific performance, our Courts have a discretion or choice (i.e. the Court is not compelled to give this remedy to innocent party). The exercise of this discretion will require the court to consider all relevant circumstances + facts so that the result is not unjust. If damages provides adequate compensation, court may not order specific performance. Court will not order specific performance if it will lead to an unfair result, but instead order damages Court will also look at the possibility of performance. Court For example, where the Court is of the view that damages (a monetary amount) will provide adequate compensation, they may decide not to give an order for specific performance but rather to grant an amount of money as compensation for the innocent party. Or if the Court is of the view that to grant specific performance would produce an inequitable(unfair) result, they may refuse an order for specific performance and grant an amount of money as “damages” to compensate the innocent party.  Remedies for Breach of Contract: Primary Remedies (Cont…) Specific performance (aimed at completing the contract exactly in its original form) (Cont…) Haynes v King Williams Town Municipality The municipality concluded a contract with farmer Haynes regarding the supply of water from a newly built dam. The municipality promised to supply 220 000 gallons of water per day in exchange for building the dam on Haynes’ farm. There was a severe drought after a few years and Haynes began receiving only 15 000 gallons of water per day. The inhabitants and industries of King Williams Town were struggling under severe water restrictions. Haynes argued there was breach of contract and demanded specific performance of 220 000 gallons per day. Court: Specific performance as a remedy would produce an inequitable result. The inhabitants of the town would suffer even more and the industries would be crippled further if Haynes was given 220 000 gallons per day as the people and industries would have even less water to use. The Court used its discretion and refused to order specific performance. The alternative remedy granted to Haynes was damages, an amount of money to compensate him for any crop losses he could prove as a result of only receiving 15 000 gallons of water per day.  Remedies for Breach of Contract: Primary Remedies (Cont…) Damages as surrogate (money as a substitute in the place of the original performance): aimed at completing the contract Damages as surrogate is an amount of money the innocent party accepts in the place of the original performance. Both parties thus complete the contract – just not in the original way they agreed upon. Example: A --- sells horse ---- to B for R5000 (horse is valued at R8000). A breaches the contract by prevention of performance as due to his negligence, the horse died before A could deliver the horse to B. B could cancel the contract due to the prevention of performance OR he could decide to “complete” the contract by using the remedy of damages as surrogate. In that case, B claims R8000 (the money value of the horse). B must complete his side of the contract i.e. pay R5000 (In the end B claims R3000).  Remedies for Breach of Contract: Secondary Remedies Cancellation (remedy aimed at ending the contract) This is considered a radical remedy as cancellation is aimed at terminating or ending the contract. Cancellation is therefore only available as a remedy for the innocent party for a material (serious enough) breach. We therefore need to look at each form of breach and ask if cancellation a possible remedy. Mora debitoris (late performance by the debtor) As a rule, Simple late performance by a debtor will not be serious enough for cancellation. Only if the contract is a special type of contract (“time of essence” contract) will mora debitoris be serious enough to offer cancellation as a remedy. The “time of the essence” contract has 2 features: *there is a fixed date for performance agreed to at the time of conclusion of the contract the items sold are subject to price fluctuations (rapid price drops). Example: You own a clothing store selling fashion goods. DJ Zinhle wore striped socks to the recent MTV Awards. Striped socks are now a hot fashion item. You order 200 pairs of striped socks from WeLoveSocks with a delivery date of 28 September. You anticipate a big profit of R15 per pair of socks sold. However, if the socks are delivered late, they will be out of fashion (considering its not winter) and you can only make a profit of R6 per pair of socks sold. This is a “time of the essence” contract. There is a fixed date for performance or delivery (28 September) and these fashion goods are subject to price drops or price fluctuations. If the socks are delivered late by WeLoveSocks, it will be breach of contract by WeLoveSocks in the form of mora debitoris. Because the contract is a “time of the essence contract, the loss of profit on sock sales due to the late delivery is sufficiently serious for you to use cancellation as your remedy.  Remedies for Breach of Contract: Secondary Remedies Defective performance If there has been defective performance the innocent party may only have cancellation as a remedy if the defect is serious enough. The defect is serious enough if it is material i.e. it affects the “root of the contract” (that means it affects a vital part of the contract) Mora creditoris: cancellation may be available in similar circumstances to mora debitoris. Prevention of performance Prevention of performance occurs either when the debtor or creditor in a contract makes the performance impossible. They make the performance impossible either deliberately or negligently, so they are at fault and have breached the contract. Cancellation as a remedy is always available for the innocent party. It is not necessary to consider whether the contract was a time of the essence contract or whether the breach affected a vital part of the contract. Repudiation This kind of breach occurs when the guilty party refuses to perform (see notes above). When a party either by their words or conduct indicate they will not be performing, the innocent party may cancel the contract. Example: A organises big soccer matches and contracts with Ace Security to provide security guards for the match between Orlando Pirates and Kaiser Chiefs at Soccer City Stadium. They expect a crowd of 90 000 spectators. Ace Security inform A the day before the match that they have staff problems and will not be sending any security guards to Soccer City on match day. The innocent party can cancel the contract.  Track Your Understanding. Can You Answer the Following? ☞ Example 1: A organises big soccer matches and contracts with Ace Security to provide security guards for the match between Orlando Pirates and Kaiser Chiefs at Soccer City Stadium. They expect a crowd of 90 000 spectators. Ace Security send 15 security guards to the stadium on match day. Does this defect (insufficient number of guards) go to the “root of the contract”? ☞ Example 2: You rent a furnished flat from Larry landlord. When you move in you notice one of the chairs in the lounge is broken. Does the defect go to the “root of the contract”? ☞ Example 3: You rent a furnished house from Larry landlord and when you move in you see that there is no longer a roof over the kitchen. Does the defect go to the “root of the contract”? ☞ Revise: Strachan v Prinsloo case we dealt with above.  Remedies for Breach of Contract: Secondary Remedies Can you lose the remedy of cancellation? YES: you can lose the remedy of cancellation if you keep and use the defective performance SA Wood v Price: SA Wood ordered 1000 pamphlets from Price. The pamphlets had photographs of furniture and price lists. SA Wood only received 890 pamphlets. In addition, some photographs were upside down and the price lists were illegible. Clearly at that point, this was defective performance that went to the “root of the contract”. BUT SA Wood chose to keep the pamphlets and use them by distributing them to clients. When Price demanded payment, SA Wood refused to pay, citing a serious breach and wanting to use their remedy of cancellation. The Court decided that they originally had the remedy of cancellation due to the serious nature of the breach, but had lost their remedy of cancellation because they kept and used the defective pamphlets. The Court ordered SA Wood to pay a reduced price as they only received 890 of the 1000 pamphlets.  Track Your Understanding. Can You Answer the Following? ☞ What 2 features make a contract a time of the essence contract? ☞ Why is it important to know if the contract is a “time of the essence” contract? ☞ If defective performance is the form of breach by the guilty party, how serious must the breach be before cancellation is a remedy for the innocent party? Give an example to explain. ☞ Can you lose the remedy of cancellation? If so, explain how, or by doing what. Use a case as an example.  Remedies for Breach of Contract: Additional Remedy GENERAL DAMAGES General damages is an additional remedy. If the innocent party uses specific performance (or damages as surrogate or cancellation) as his remedy, he also has the additional remedy of general damages. General damages is an amount of money the innocent party can claim from the party who breached the contract, on condition he did indeed suffer financial l loss. The onus of proof (i.e. the burden of proving financial loss) is on the innocent party. The aim of general damages is to compensate the innocent party by putting the innocent party in the financial position he would have been in if there was no breach i.e. if the contract had been completed normally. What must the innocent party prove to be able to claim “general damages”? ––There was a valid contract. ––Some form of breach of contract was committed by the guilty party. ––He, the innocent party, suffered damages i.e. suffered money loss) as a direct consequence of the breach. ––These financial losses must not be “too remote”. They must be the type of money losses foreseen by guilty party at time of conclusion of contract OR have been the type of money losses a reasonable person would have foreseen or expected. ––The losses must be financial losses - measurable in money. There is no claim under general damages for the inconvenience, annoyance or delays caused by the breach of contract. ––The law states that under the additional remedy of general damages”, the innocent party can claim his “positive interest”. Positive interest covers actual monetary losses (formal word is patrimonial losses) AND anticipated profits or gains not made. ––Anticipated profits: this involves an estimate. The loss of profits claimed by the innocent party must however be highly probable profits. The innocent party cannot just thumb suck an amount of what he thinks his profits would have been. Example: A and B conclude a contract of partnership. A buys the racehorse, and B will train the racehorse. A and B will share the prize money when the horse wins the race. A decides after a few weeks to take the racehorse to his farm for his grandchildren to ride. As a result, the horse never competes in races and therefore there is no prize money. B sues a for breach of contract. Whatever B claims, there will be no general damages claim for loss of profits there is no evidence of how much the racehorse may have won if he competed. These profits are not highly probable. It would be guesswork (thumb sucking).  Remedies for Breach of Contract: Additional Remedy GENERAL DAMAGES (Cont…) PRACTICAL EXAMPLE: “highly probable profits” W buys 1000 live chickens from Z add R2.50 each. He pays the R2500 in cash to Z. W tells Z that he is going to slaughter the chickens and sell them to a supermarket for R5 each (R2.50 profit on each chicken sold to the supermarket). Z sells to another buyer and fails to deliver the chickens to W. W cancels the contract. So, Z must return what W paid for the chickens i.e., R 2500. In addition, W claims R2 500 for the loss of profit. These are highly probable profits. How does W prove the lost profits are highly probable? He presents the court with proof of the contract with the supermarket. It is not guesswork by W. General damages and the Mitigation Rule Although the innocent party may claim the additional remedy of “general damages”, he cannot sit back and let those damages increase unnecessarily. The law requires the innocent party to “mitigate” or limit his financial losses as a result of the breach. He is expected, even though he is the innocent party, to control or limit his financial losses. The innocent party must take reasonable steps to minimize his financial losses (make them less severe). Example: A takes his car in for repairs. There is “late performance” i.e. mora debitoris by the mechanic. He only gets his car back a week later. He must take the bus to work in that week. He cannot refuse to go to work and claim the income lost as general damages. He should have “mitigated” his losses by catching the bus to work and continuing to earn an income.  Track Your Understanding. Can You Answer the Following? ☞ General damages are an “additional remedy”. Additional in what way? ☞ The amount of general damages is calculated according to “positive interest”. What does that include? ☞ “Highly probable” profits can be claimed as part of general damages. What does that mean? Think up your won example to illustrate “highly probable” profits. ☞ Who does the “mitigation rule” apply to? What must this person do? Give an example.  Remedies for Breach of Contract: Penalty Clause Penalty Clause A penalty clause (or penalty amount) is about a payment of an amount of money, agreed to by the parties at conclusion of contract, for breach that might occur in the future. They predict the amount of damages at the start of the contract. Note: the amount the parties agree to is fixed (final). If the real amount of general damages is actually more when the breach takes place, the innocent party is stuck with smaller penalty amount they agreed to at the start. Advantage of a penalty clause? The innocent party only need prove breach of contract occurred. He does not have to prove the exact amount of financial losses, and he doesn’t have to prove that the damages are not too remote. The law acknowledges that penalty clauses are valid: Conventional Penalties Act 15/1962. Courts may however reduce the penalty amount if the GUILTY PARTY can show that the “penalty amount is disproportionate to the prejudice suffered”. “disproportionate” means markedly, or surprising MUCH more than the real damages suffered by the innocent party. Factors the Court will consider when deciding to reduce the penalty amount are drawn from a wide pool. The Court will look at “all the harm to the innocent party including his actual financial losses, any inconvenience and delays…”. NOTE: for calculating general damages, the Court only looks at financial losses (no amount is granted for inconvenience or delays). When a Court is considering reducing a penalty clause amount, the Court looks at a wider pool of factors which include financial loss, delays, inconvenience. The penalty clause replaces the claim for general damage. The innocent party cannot claim both. He can only claim the penalty amount agreed upon (unless the Court reduces the amount as described above)..  Remedies for Breach of Contract: Penalty Clause Penalty Clause (Cont…) Van Staden v Central SA Lands V bought land from C. the contract stated that if the guarantee for the purchase price was not met by V, he would be in breach of contract and the penalty amount was set at R20,000. V breached the contract (no guarantees despite period of grace). V alleges the penalty amount of R20 000 is “excessive” is the actual money loss suffered by C is minimal. C had in fact already found a new buyer. Court looks add the wide pool of factors. The court considers “all the harm and hurt to the property, person, reputation, work, mind, activities, and inconvenience suffered by the innocent party. (Reducing a penalty is not just about money loss). Court finds that the R20 000 is NOT excessive in this case and does not reduce the penalty. The inconvenience to C was huge, long delays were caused, C incurred big expenses doing renovations for the new buyer.  Track Your Understanding. Can You Answer the Following? ☞ Are penalty clauses valid? Cite your authority. (“cite” means show where you get your information from) ☞ How does a penalty clause amount differ from general damages? ☞ Can an innocent party claim both general damages and a penalty amount? Give reasons. ☞ Distinguish between the factors relevant for calculating general damages and the factors a Court will look at when reducing a penalty clause amount. Sources Consulted in Compiling these Notes ✓ Prescribed Textbook: ✓ Kopel S Guide to Business Law 7th Edition (2022) Oxford University Press. ISBN 9780190748463 –Chapter 15. ✓ Recommended Textbooks: ✓ Collier-Reed D & Lehman K Basic Principles of Business Law 2nd Edition (2010) LexisNexis. ISBN 9780409049381 – Chapter 4. ✓ Govindjee A et al Commercial Law: Fresh Perspectives 3rd Edition (2019) ISBN 9781485702092 –Chapter 10–11.