Breach, Damages and Equitable Remedies

Question 1

State and Explain the 3 key forms of breach of contract

Answer 1

• Actual Breach
• Repudiatory breach
• Anticipatory breach

Actual breach is where the breach occurs on the due date for performance.

Repudiatory breach is a breach of contract that gives the aggrieved party the right to choose either to end the contract or to affirm it. In either case, the aggrieved party may also claim damages. A breach of condition is normally repudiatory, as is breach of an intermediate term that deprives the other party of substantially the whole benefit of the contract.

Anticipatory breach occurs where, before the due date for performance, a party shows an intention not to perform his contractual obligations. It is referred to as renunciation. (This may be expressed or implied)

Express anticipatory breach occurs where one of the parties declares, before the due date for performance, that they have no intention of carrying out their contractual obligations.

Implied anticipatory breach occurs where one of the parties does something which makes subsequent performance of their contractual undertaking impossible.

Question 2

What are the effects of an anticipatory breach?

Answer 2

An anticipatory breach does not automatically bring the contract to an end.

The innocent party has two options:

1. Treat the contract as discharged and bring an action for damages immediately, without waiting for the contractual date of performance as in Hochster v De La Tour (1853)
   or

• Elect to treat the contract as still valid, complete his side of the bargain and then sue for payment by the other side.

Aside from exceptions like White & Carter (Councils) v McGregor (1961) There is an element of danger in not accepting the repudiation of the contract when it first becomes apparent.

For example, where the innocent party elects to wait for the time of performance, he takes the risk of the contract being discharged for some other reason and thus of losing his right to sue on the basis of the breach of contract.

Question 3

What are the effects of a Repudiatory breach?

Answer 3

The innocent party is at liberty to bring the contract to an end following a breach of condition, serious breach of a innominate term or a repudiation but is not obliged to do so.

However in practice the innocent party may have little option but to terminate the contract.

If the innocent party does not wish to terminate the contract, he is said to ‘reject’ the other party’s repudiatory breach, but this does not mean that he is waiving it entirely, in the sense of treating it as if it were not a breach for all purposes, because he may still claim damages.

In contrast, if the innocent party decides to terminate the contract, he is said to ‘accept’ the other party’s repudiatory breach.

So the two key options are either the innocent party;

1. Elects to ‘reject the breach’ and keep the contract alive

or

2. Elect to ‘accept the breach’ and discharge the contract

Generally, acceptance of a repudiation discharges the whole contract—in other words, all the outstanding primary obligations.

Question 4

Explain the aim of damages for breach of contract and cite the relevant authority

Answer 4

The aim of damages is to put the non-breaching party in the position they would have been in had the contract been performed as agreed (Robinson v Harman (1848).

In order to calculate damages we need to know the extent of the loss which results from the breach.

Question 5

Explain the two categories of Damages for breach

Answer 5

There are two different types of damages:

• Compensatory damages/Actual damages
• Non-compensatory damages

Question 6

Explain the key types of damages that may be awarded for breach of contract:

Answer 6

Key types of damages that may be awarded for breach of contract:

• Compensatory Damages (i.e. loss of expectation, profits etc)
• Liquidated Damages
  and Non-compensatory damages including:
• Nominal Damages

Nominal damages are awarded where a legal wrong has been committed but no consequential loss has been caused. The purpose of the award is vindicatory – to mark the existence of the right in question and to mark the fact of its violation by the wrongdoer.

• Restitutionary Damages

Restitutionary Damages which aim to strip from a wrongdoer gains made by committing a wrong or breaching a contract. The benefit gained by the wrongdoer may exceed the detriment or loss to the person wronged.

Question 7

Explain the two different ways that the damages for breach can be measured

Answer 7

There are two different ways in which this can be measured:

• Expectation measure
• Reliance measure

Expectation measure involves a comparison between the claimant’s current position, and the position they would have been in had the contract been performed correctly.

The first important rule of the expectation measure is that it is calculated on the expectation that the breaching party would have performed their obligations under the contract, but no more and no less (Lavarack v Woods of Colchester Ltd [1966]

The second key rule is cost of cure.

Cost of cure: This method involves determining the cost required to remedy the breach of contract or to restore the injured party to the position they would have been in if the contract had been adequately performed. It typically involves assessing the cost of completing or rectifying the performance of the contract.

Reliance measure:
The reliance measure aims to put the claimant back in the position he was before the contract was made. This is relevant for where one of the parties has incurred expenditure in preparing for their side of the bargain. At this point you need to remember that only one measure of damages can be relied on, expectation or reliance.

This principle was confirmed as fundamental in Golden Strait Corporation v Nippon Yusen Kubishika Kaisha, The Golden Victory [2007]

Question 8

State and Explain the key things that someone can claim damages for and what they can NOT claim damages for

Answer 8

What can a party claim damages for?

The claimant CAN claim for:

• loss of finances i.e. profits (pecuniary losses)
• losses for injury suffered as a consequence of the breach (which usually leads to pecuniary losses i.e. not being able to work and earn money)
• Loss of expectation etc.
• Wasted expenditure

The claimant CANNOT generally claim for:

• Non-pecuniary losses are generally not recoverable in a claim for breach of contract.

A claimant cannot recover more than its actual loss, and if the claimant suffers no loss, the claimant will be constrained to recovering only nominal damages.

The justification for this rule is that the courts are unwilling to put the parties in a better position that they would have been in had the contract been properly performed.
Wasted expenditure

Whilst someone can generally claim for wasted expenditure The claimant cannot claim damages for wasted expenditure if this would amount to compensating the claimant for having made a ‘bad bargain’.

Question 9

Explain the exeption to the general principle that Non-pecuniary losses are generally not recoverable in a claim for breach of contract.

Answer 9

Non-pecuniary losses are generally not recoverable in a claim for breach of contract.

However, in some circumstances, a modest sum may be awarded for the disappointment suffered as a result of not receiving the promised performance. Thus things like mental distress, disappointment and mental distress are typically not able to be compensated for - Addis & Gramophone Co. Ltd (1909)

However there are exceptions to this general rule where we have a contract whereby the main purpose of aim of that contract is to have a good time or aid someone in having a good experience i.e. holidays, weddings, haircuts - they can qualify as a proper contract for the award of damages for mental distress.

There are some cases where the law regards it as appropriate to make non pecuniary loss i.e. for disappointment and this type of award is most evidently depicted in Jarvis v Swans Tours Ltd (1973).

Question 10

Explain the concept of ‘performance interest’ and why it is relevant when claiming damages

Answer 10

The ‘performance interest’ or contractual expectation is based on identifying and assessing the value of certain ‘benefits’ that the claimant expected to receive under the contract.
These benefits may not be limited to an expectation of financial benefits, but can include anticipated subjective benefits (known as ‘the consumer surplus’)

Damages for breach of contract should give effect to this ‘performance interest’ by awarding damages to compensate for:

• the loss of the expected financial benefit; and
• the loss of ‘subjective benefits’ (the consumer surplus) or preferences that are considered to be part of the contractual expectation - Ruxley Electronics v Forsyth and Farley v Skinner

Question 11

Explain damages for loss of expectation

Answer 11

Expectation loss will normally be compensated on the basis of the difference in value measure, i.e. the difference in value between the promised performance and the actual performance.

The measurement of expectation loss may be a speculative and uncertain process, especially in cases in which it must be assessed by reference to difference in value and in which the assumed value of the market price is unavailable as a guide.

Nevertheless, as a general principle, damages for lost expectation may always be recovered, subject to the various limitations considered - Watts v Morrow [1991] 1 WLR 1421. Thus, the court will attempt to put some value on an expectation even when what is lost is no more than an opportunity to take the risk of making a profit, rather than a certain loss of a speculative profit.

Question 12

State the definition of Liquidated Damages

Answer 12

A Liquidated damages clause allows contracting parties to agree in advance the amount of damages that should be paid if a particular contractual obligation is subsequently breached. It is a contractual provision which sets such an amount of damages.

This type of clause is enforceable providing it does not exceed a genuine attempt to estimate in advance the loss which the claimant would be likely to surfer form the breach of the obligation in question - Chitty on contracts

Question 13

Explain the distinction between Liquidated Damages/ a liquidated damages clause vs Unliquidated damages

Answer 13

The contractual provision which is contained within a contract sets out such an amount of damages that would be paid in the event of a breach - so its expressly incorporated within the contract.

In contrast Unliquidated damages are damages that the court work out and award based on various factors because there is no stipulated amount set out in the contrast for if breach occurs.

Question 14

Explain and state the criteria necessary for a Liquidated Damages Clause to be Valid and Enforceable

Answer 14

For a liquidated damages clause to be enforceable it must be;

1. Genuine Pre-Estimate of Loss:

The sum stipulated must represent a genuine attempt to estimate in advance the loss likely to be suffered in the event of a breach. It should not be extravagant or unconscionable in amount in comparison with the highest conceivable loss that could follow from the breach.

2. Intention to Compensate:

The primary intent behind the clause must be to compensate the injured party, rather than to deter the other party from breaching the contract or to punish them for a breach.
(it must be proportionate and certainty must be present)

3. Not a Penalty:

English law distinguishes between liquidated damages and penalty clauses. A penalty clause is not enforceable because it is punitive in nature. The test for whether a clause is a penalty was traditionally whether the sum stipulated for was extravagant and unconscionable in comparison with the greatest loss that could conceivably be proved to have followed from the breach

4. Compliance with Legislation:

The clause must comply with any relevant statutory requirements, such as those set out in the Unfair Contract Terms Act 1977, which may render an excessively harsh liquidated damages clause unenforceable.

A liquidated damages clause will not be enforceable if a court determines that it amounts to a penalty. If a clause is deemed to be a penalty, the non-breaching party will not be able to recover the specified sum and will instead have to prove their actual loss and seek unliquidated damages.

The criteria for whether a damages clause amounts to a penalty is stipulated in Dunlop Pneumatic Tyre Co v New Garage and Motor Co (1915).

A clause is presumed to be a penalty clause if:

• the stipulated sum is extravagant in comparison with the maximum loss that could be incurred
• the same sum is payable in respect of one or more breaches, both trifling and serious
• the sum stipulated is larger than the amount which would actually be payable if the contract were performed.

Question 15

Explain the criteria the court uses in assessing a claim for unliquidated damages

Answer 15

There are two factors to consider in determining the amount of unliquidated damages:

• remoteness of loss (i.e. what losses can be claimed for?) and
• measure of damages (i.e. how much are those losses worth?)

Question 16

Explain what is meant by the ‘remoteness of loss’ and how the court assess wether a claim for damages is too ‘remote’

Answer 16

Damages cannot not be recovered for all losses suffered. Some losses are too remote.
There are two key limbs/conitions - A loss is not too remote:

if it arises naturally from the breach (general damages or normal loss) If it is an inevitable consequence that flows naturally from the breach of the contract - if they are then they are recoverable.

it may reasonably be supposed to be within the contemplation of the parties, at the time they made the contract, as a probable result of the breach (special damages or abnormal loss). (Was the defendant aware of it)

Hadley v Baxendale (1854) and Victoria Laundry v Newman Industries (1949) are the key cases regarding remoteness of loss.

These cases emphasise forseeability. The Overarching principle established in Victoria v Newman - if the loss suffered or harm was foreseeable or predictable then the liable party must compensate for the full extent of the damage even if the precise extent of the damage was not foreseeable. If they reasonably know that it would cause damage/loss then they are likely to succeed in their claim for damages.

Question 17

Explain the major factors which the court considers when assessing/ measuring a claim for damages

Answer 17

1. Recognition of ‘the consumer surplus’

The ‘consumer surplus’ is defined as ‘the excess utility or subjective value over and above the market value of the performance contracted for’, and which would have been secured had the contract been properly performed.

For example, the subjective benefits derived from the purchase of an item of clothing may well, in the mind of the purchaser, exceed the market value. The measure of cost of cure may be significantly greater than the measure of difference in value.

2. The rule of mitigation

The claimant must take reasonable steps to mitigate (i.e. reduce) their loss.

If a defendant can provide the claimant failed to mitigate their loss and the onus and responsibility is on the defendant to prove that the claimant failed to mitigate their loss - then in this case it can jeopardize the claimant’s ability to claim damages.

The rule of mitigation requires a claimant to take steps to minimise its loss and to avoid taking unreasonable steps that increase its loss. An injured party cannot recover damages for any loss (whether caused by a breach of contract or breach of duty) which could have been avoided by taking reasonable steps.

3. Contributory negligence

Contributory negligence can be a complex issue, but a simple example of this is in road traffic accident claims where the claimant has failed to wear a seatbelt. The court will deduct 25 per cent for contributory negligence if it’s agreed the claimant would not have suffered any injury had they been wearing a seatbelt.

Therefore Mitigation, remoteness and Contributory negligence are all factors which place further limitations on the claimant’s ability to be fully compensated.

Question 18

Define an Equitable remedy

Answer 18

A discretionary judicial remedy based on notions of fairness and justice. Equitable remedies can be distinguished from common law legal remedies, which are available as of right to a successful applicant whereas in contrast Equitable remedies are often only granted if compensatory damages (which aim to restore the applicant to its position before the breach) would not be an adequate remedy, or in the alternative to damages.

Question 19

Explain the criteria for an Euitable remedy to be granted by the courts

Answer 19

Equitable remedies are aside from common law remedies (damages). Equitable remedies are only available at the discretion of the court.

They are not granted if:

• damages are an adequate remedy
• the claimant has acted unfairly (i.e. he who comes to equity must come with clean hands)
• the order would cause undue hardship
  the order would require the constant supervision of the court
• there is undue delay in seeking the remedy (i.e. delay defeats the equities).

Question 20

State the 3 key/most common types of Equitable remedies

Answer 20

• Specific Importance
• Injunction
• Rescission

Question 21

Explain an order of Specific importance

Answer 21

An order of specific performance is a court order compelling actual performance of the substantive primary obligations under the contract. However, damages in lieu of specific performance may be awarded in circumstances in which common law damages would not be, although instances are likely to be rare.

The availability of specific performance is subject to a number of restrictions, including that damages be an inadequate remedy.

As specific performance is an equitable remedy, it has the following features:

• it is an order in personam;
• it is discretionary;
• the appropriate remedy at law must be inadequate.

Mutuality:

Specific performance may also be refused where there is no mutuality of remedy between the parties. It was once thought that this requirement meant that specific performance would not be available if, at the time of contracting, it could not also have been available to the other party.

Question 22

Explain an the concept of an Injunction and the 3 different types

Answer 22

An injunction is a court order restraining the defendant from a specified activity. Its use extends far beyond the law of contract but, in this context, it may be used to prevent the breach of a negative stipulation in the contract.

The requirement that damages need to be shown to be inadequate before specific relief will be granted does not apply strictly to ordinary injunctions.

Types of injunction

• Prohibitory injunctions: granted to prevent future breach of contract. Such injunctions are particularly useful where a potential future breach will lead to difficulty and expense for the claimant.
• The ‘anti-suit’ injunction: available where the parties have agreed that they will resolve their disputes in the English courts or in arbitration but one of them commences proceedings in an overseas court: the English court may grant an injunction to prevent the defaulting party from maintaining the foreign action.The effect of such an injunction is to compel the defendant to undo work that has been done in breach of a negative stipulation in the contract.
• A mandatory injunction: may be granted to compel the defendant to cut down trees that had been planted in breach of a covenant not to restrict the claimant’s view - Wakeham v Wood (1982) 43 P & CR 40. Mandatory injunctions are subject to the same rules as specific performance. Damages must be an inadequate remedy and grant of the injunction must not cause undue hardship to the defendant.

Question 23

Explain Rectification/ Rescission

Answer 23

Rectification is an equitable remedy by which the court can correct an error of expression where a written document does not match the parties’ intention. It is only available for written contracts and other documents (not oral agreements)

The burden of proof is on the party seeking rectification who must be able to produce convincing proof that the agreement does not reflect the intentions of the parties and the agreement as rectified will reflect those intentions.

The essential condition to be satisfied before an instrument can be rectified is that there should be proof that the true intention of the parties has not been expressed in the instrument due to fraud or mutual mistake.