15. Breach of contract

Question 1

2 types of breach of contract

Answer 1

• Anticipatory breach of contract
• Actual breach of contract

Question 2

Anticipatory breach of contract

Answer 2

A party declares its intention not to perform the contract before the performance is due

Question 3

Actual breach of contract

Answer 3

It occurs on due date of performance or during the course of performance

Question 4

Reasons for breach of contract

Answer 4

• non-performance
• defective performance
• delay in performance

Question 5

What is a remedy in case of a breach of contract?

Answer 5

a court order that seeks to uphold someone’s right or to redress another’s illegal action

the re

Question 6

Why is remedy important?

Answer 6

Protection of contractual expectations is the primary aim of contract law. (These expectations are met when each party performs its respective promise.)

When one of the parties breaks a contract, the other can ask a court to provide a remedy for the breach

Question 7

2 roles that legal systems assigns to contract law

Answer 7

• Moral approach
• Economic approach

Question 8

Moral approach

Answer 8

promises must be fullfilled (pacta sunt servanda). In case of non-performance, the legal system firstly imposes the fulfilment of the debtor’s duty as a remedy

Question 9

Economic approach

Answer 9

Instead of performing, the debtor may prefer to bring the other party to the financial position which it would have had, had the contract been properly performed

enter contract to enhance welfare

Question 10

3 types of remedy

Answer 10

1. Specific performance: if a party does not perform, it can be forced to do so by a court of law
2. Termination of contract: the non-breaching party may ask for the dissolution of the contract, refuse to perform or claim the restitution of what it has already paid
3. Damages: monetary reward capable of bringing the aggrieved party in the same utility position in which it would have been, had the contract been properly performed
   
   • It can be autonomous or coupled with actions for performance/termination

Question 11

Different remedy approaches in civil and common law

Answer 11

• Civil law: Specific performance is a general remedy. Only exceptionally, this remedy is barred (moral)
• Common law: The general remedy is compensation of damages (monetary reward), specific performance being exceptional (economic)

Question 12

Remedy in civil law (Italy and Germany)

Answer 12

• Italian: A creditor of an obligation may, having given notice to perform, seek performance in kind unless performance is impossible or if there is a manifest disproportion between its cost to the debtor and its interest for the creditor.
• German: In order to enforce an obligation, the creditor is entitled to claim performance from the debtor. The performance may consist in forebearance.

In general, a party does not abide by the court decision to perform, an official has the power to seize the good owed and deliver it to the other party

Question 13

Exceptions to the avalaibility of specific performance as a remedy

Answer 13

1. Impossibility to perform (whether or not due to the debtor’s fault);
2. Disproportionate costs;
3. Contracts involving personal services: (e.g., painting a portrait). Not only specific performance would potentially contravene the debtor’s personal freedom, but, if forced, the debtor would possibly perform not to its best.

Question 14

Define efficient breach of contract

Answer 14

a party should be allowed to break the contract signed and pay damages, if that would be economically more efficient than performing the contract itself

Question 15

Common law approach

Answer 15

• No performance as general remedy but it is acknowledged that specific performance is available when damages are “inadequate”
• In particular, in case of contracts concerning specific goods (such as land, works of art, or other objects having unique qualities), courts allow the creditor to force the other party to perform in specie (in kind)
• No specific performance in cases of sale of generic goods (easily replaceable at standard prices on the market). E.g. Societé des Industries Métallurgiques
  vs Bronx Engineering Ltd

Question 16

Societé des Industries Métallurgiques vs Bronx Engineering Ltd (1975) (Facts)

Answer 16

• Seller of a machine wrongly refused to deliver it.
• The court denied the buyer specific performance, even though a substitute machine could be obtained only after a 9-12 month delay

Question 17

Differences between cases of damages and specific performance in common law

Answer 17

• no specific performance: A contracts to sell to B 1000 bushels of wheat at a price of 4 Euro per bushel. On the date set for delivery, A repudiates. Assuming that there exists an established market where B can purchase wheat of a similar nature and quality, monetary damages representing B’s expectation will be adequate to full and complete justice
• specific performance: A contracts to sell to B the “Wheatfield with Crows” by van Gogh for 800,000 Euros. If A breaches the contract, a suit for specific performance by B should be successful as B’s damages remedy is clearly inadequate. B’s expectation was to obtain the specific painting.

Question 18

What does termination do?

Answer 18

• If a party claims performance and/or damages, it still has to perform its own obligations.
• However, the innocent party may be willing to repudiate instead the contract: if this remedy is allowed by the law, no performance is due by either party and, in case performance already happened, it shall be given back by the recipient

Breach of contract -> termination -> dissolution of effects

Restitutions of what has been paid -> termination -> no duty to perform

Question 19

Notable characteristics of termination

Answer 19

• may occur irrespectively of a fundamental breach in specific circumstances
• can just be connected to a specific agreement of the parties

Question 20

Agreed rights of termination

Answer 20

1. Explicit dissolution clause: The contracting parties can explicitly agree that the contract will be dissolved if a specified obligation is not performed in the designated way. This clause allows contractual parties to attribute fundamental importance (in terms of the dissolution of the contract) to an obligation, the non-performance of which would otherwise be of “slight importance”
2. Time essential for one of the parties: If the time fixed for performance by one party which has been contractually designated as essential in the interest of the other is not complied with, the contract is dissolved

Question 21

Civil law approach towards termination

Answer 21

• Termination of contract is allowed, when its breach is material
• Breach of contract may lead to termination if it is fundamental

Question 22

Define fundamental breach of contract

Answer 22

A minor failure to carry out “exact” performance, i.e. a non-performance of minor importance, exposes the party in breach to liability for damages, but will not entitle the innocent party to seek dissolution of the contract for non- performance.

Question 23

Art. 8:103 PECL on fundamental breach

Answer 23

A non-performance of an obligation is fundamental to the contract if:

• strict compliance with the obligation is of the essence of the contract;
• the non-performance substantially deprives the aggrieved party of what it was entitled to expect under the contract, unless the other party did not foresee and could not reasonably have foreseen that result;
• the non-performance is intentional and gives the aggrieved party reason to believe that it cannot rely on the other party’s future performance

Question 24

Contract terms in common law approach

Answer 24

CONDITIONS

• Major terms of the contract: if breached, the innocent party is entitled to terminate the contract (and claim damages)

WARRANTIES

• Minor terms of the contract: if breached, the innocent party is entitled to claim for damages (but not to claim termination)

INNOMINATE (INTERMEDIATE) TERMS

• Terms which are not classified per se as major or minor. Upon breach, the innocent party’s remedy is confined to damages, unless the effect of the breach is to deprive the other party of the whole benefit of the contract, in which case termination is allowed

Question 25

Intermediate terms: Hong Kong Fir Shipping v Kawasaki Kisen Kaisha (Facts)

Answer 25

• The ship ‘Hong Kong Fir’ was hired out under a two-year time charter-party to Kawasaki Kisen Kaisha, in order to sail from Liverpool to Osaka through Virginia and Panama.
• A term in the charter-party agreement required the ship to be seaworthy and to be «in every way fitted for ordinary cargo service».
• However, the crew were both insufficient in number and incompetent to maintain her old-fashioned machinery; and the chief engineer was a drunkard.
• On the voyage, the engines suffered several breakdowns and fifteen weeks of repairs were needed before the ship was seaworthy again.
• By this time, barely seventeen months of the two-year time-charter remained.

Question 26

Hong Kong Fir Shipping v Kawasaki Kisen Kaisha (Judgement)

Answer 26

As the charterers still get to have the boat for 20 more months, the expected benefits can still be received. Therefore, this breach does not lead to repudiation, but only to damages.