Breach of Contract and Mutuality (L17)

Question 1

What are the 3 questions arising after a breach of contract?

Answer 1

Can the innocent party withhold performance?
Can the innocent party terminate the contract?
Can a party in breach enforce the contract?

Question 2

What are the remedies available after a breach of contract?

Answer 2

Self help remedies:
- Retention.
- Rescission.

Judicial remedies:
- Damages.
- Specific implement.

Question 3

What are self help remedies?

Answer 3

The legitimate actions by which an innocent party may respond to breach

Question 4

What is retention?

Answer 4

Withholding performance (available under principle of mutuality).

Question 5

What is rescission?

Answer 5

Termination of contract (available when material breach occurs).

Question 6

What did Erskine say about the principle of mutuality in Institute of the Law of Scotland 3.3.86?

Answer 6

No party in a mutual contract, where the obligations of the parties are causes of one another, can demand performance from the other, if he himself either cannot or will not perform the counterpart, for the mutual obligations are considered conditional.

Question 7

What is mutuality?

Answer 7

Mutuality applies when contractual obligations are ‘causes’ of each other (i.e. counterparts).

Means contracts governed by mutuality because they create reciprocal obligations.

Such mutual ‘counterpart’ obligations are conditional on each other, so performance cannot be demanded unless given in return.

Question 8

What is the authority for retention?

Answer 8

Turnbull v McLean & Co (1873) —- Lord Justice-Clerk Moncreiff:
“I understand the law of Scotland, in regard to mutual contracts, to be quite clear:-
1st, that the stipulations on either side are the counterparts and the consideration given for each other.
2nd, that a failure to perform any material or substantial part of the contract on the part of one will prevent him from suing the other for performance…”

Question 9

What happened in the case of Turnbull v McLean?

Answer 9

Turnbull was a merchant who purchased coal for export from McLean & Co.

Coal to be supplied up to a guaranteed amount each month, with monthly payment of price.

Turnbull stopped payment to McLean after a dispute, and McLean refused to deliver the next installment of coal. 

Was McLean’s suspension of performance lawful?

Question 10

What does Turnbull v McLean tell us about the scope of counterpart obligations?

Answer 10

Lord Justice-Clerk Moncreiff:
“Stipulations” on each side are counterparts of each other.
“All the conditions of a mutual contract are dependent on their counterparts, as a general rule”.
Failure to perform “material or substantial part of the contract” bars any action to enforce.

Seller was entitled to suspend delivery.

Question 11

Apart from Turnbull v McLean, which other case is useful authority on the scope of counterpart obligations?

Answer 11

Inveresk plc v Tullis Russell Papermakers Ltd.

Question 12

What is the authority on the enforcement of counterpart obligations by the contract breaker?

Answer 12

Graham & Co v United Turkey Red Co Ltd.
- A firm acted as a sales agent for a dealer in cotton goods and sued for payment of its commission, but was in breach of provisions of the agency contract requiring it to act on an exclusive basis.

Held:
“Having ceased to perform the stipulated services in terms of their contract they forfeited the right to call for commissions – the reward stipulated in the contract for those services – the one being the direct counterpart of the other.”

Question 13

What is the authority for the limit on the mutuality principle?

Answer 13

McNeill v Aberdeen City Council 2014 SC 335.
- Counterpart obligations relate to the substantive provisions of the contract which define performance.

Beyond the scope of counterpart obligations, innocent party is not relieved from the other obligations under the contract.

Obligations outside the substantive provisions of the contract therefore remain in force, and outside the protection of the mutuality principle, and failure by innocent party to perform may constitute a breach.

Question 14

For retention to be available, the obligations must be counterparts. What is the authority for this?

Answer 14

Macari v Celtic FC.
- Dismissal for breach of contract of football manager with no notice.
Macari sues for wrongful dismissal and damages for breach of employment contract, alleging Club also in breach.

Did mutuality principle prevent Club from dismissing Macari while it was itself in breach?
- NO - the obligations in issue were NOT counterparts.

Question 15

What was the issue in Inveresk v Tullis Russell?

Answer 15

Tullis Russell buys Inveresk’s printing business:
- Asset Purchase Agreement:
- Initial Consideration due to Inveresk (paid).
- Additional Consideration due to Inveresk (pending).
- Services Agreement:
- Payment due to Inveresk (pending).

Issue: Can Inveresk demand payment of the Additional Consideration from Tullis Russell under Asset Purchase Agreement while in breach of Services Agreement?

Question 16

What does Inveresk tell us about when retention is available?

Answer 16

“The question in each case of retention will be whether the obligations that are founded on, wherever they are to be found, are truly counterparts of each other.”

Counterpart obligations “must both be part of the same transaction”.

“There can be no mutuality between two or more transactions each of which has a life of its own.”  

Where more than one contractual document, counterparts may exist where parties intend the obligations in the contracts in question to be part of a single transaction.

Question 17

What was said in Inveresk about identifying counterparts?

Answer 17

“All the obligations that [the transaction] embraces are to be regarded as counterparts of each other unless there is a clear indication to the contrary”.

Question 18

What was said in Inveresk about the degree of contemporaneousness?

Answer 18

In terms of distinct stages of the transaction which structure performance obligations, may be “unrealistic” to treat transaction as “divisible into a series of separate and unrelated compartments. The obligations undertaken by Inveresk were all designed to serve the same end.”

Question 19

What did Lord Jauncey have to say in Bank of East Asia v Scottish Enterprise?

Answer 19

“In a contract to be performed by both sides in stages, the counter obligation and consideration for payment of stage one is the completion of the work for that stage”.
Retention “has no relevance to obligations duly performed”.

Question 20

What did McBryde say about the Bank of East India case and why is this important?

Answer 20

Bank of East Asia entitled to sums due to builder under first stage of construction contract, even though builder in breach of second stage.
i.e. ‘An instalment due under a building contract on May 15 could not be withheld because of a damages claim arising after that date’ (McBryde).

Why? Because obligations in question were not ‘contemporaneous’ and therefore not counterparts.

The principle of retention “cannot generally be invoked in respect of a breach of contract that has occurred in the past and is unlikely to be repeated” (Lord Drummond Young, McNeill v Aberdeen CC).