Ch 7: Breach of Contracts

Question 1

Breach of Contract: Overview

Answer 1

• A breach of contract occurs when one of the parties fails to meet its obligations under the contract
• Damages are the most common remedy for breach of contract
• After a breach occurs, if the parties are unable to negotiate a settlement, a third party (e.g., judge, arbitrator) will decide the matter

Question 2

Breach: Inability:

Answer 2

Inability: inability to perform is not a justification for breach of contract

Question 3

Inadvertence:

Answer 3

intention is not relevant to whether a contract was breached

Question 4

Disagreement:

Answer 4

if parties disagree over the interpretation of the contract, the party who is later determined to have been wrong will be liable if they breached the contract based on their wrong understanding of it

Question 5

Breach: Disagreement to Performing Under Protest

Answer 5

• Under the common law, harsh consequences can result for a party who misconstrues the contract then acts upon that false belief
• In many provinces, legislation allows parties to continue performing under protest, reserving the right to claim additional payment later

Question 6

Breach: Anticipated Financial Losses

Answer 6

• A party may intentionally breach a contract where the consequences for doing so will be less severe than for completing it
• Owners often address this risk by asking contractors to provide a performance bond

Question 7

Name 3 Remedies for Breach of Contract

Answer 7

1. Damages = compensation the court orders the at fault party to pay the innocent party
2. Specific performance = a court order requiring completion of the contract
3. Injunction = a court order requiring a named party to do, or not do, something
4. Declaratory order = statement by the court of the rights and obligations of the parties

Question 8

Damages are the most common breach of contract remedy and they are calculated __

Answer 8

as the compensation required to put the innocent party in the financial position they would have been in but for the breach of contract

Question 9

Damage Mitigation:

Answer 9

• The innocent party MUST Take reasonable steps to mitigate and minimize the loss

Question 10

Damage Causation:

Answer 10

The innocent party can only recover losses that were caused by the breach of contract, speculative losses cannot be recovered

Question 11

Damage Remoteness:

Answer 11

• only damages that are reasonably proximate to (not too remote from) the breach can be recovered

Question 12

Consequential damages:

Answer 12

• cover indirect losses, such as business interruption losses

Question 13

Liquidated damages:

Answer 13

• compensation agreed to by the parties at the time of contract formation

* must be a genuine pre-estimate of the damages
 * if excessive, will likely be an unenforceable penalty

Question 14

Why are courts hesitant to award damages?

Answer 14

Courts are hesitant to award damages unless it is clear that the money was, or will be, spent on rectifying the breach

• Quantification: typically damages are based on the cost of performance

• Diminution of value: where the cost of rectification will be excessive compared to the benefit rectification will bring, damages may be based on diminution of value

Question 15

Contract Termination: Name 4 ways a contract may be terminated

Answer 15

1. Complete performance
2. Frustration
3. Mutual agreement
4. Breach
   • Fundamental Breach
   • Simple Breach

Question 16

Fundamental Breach of Contract

Answer 16

• Goes to the root of the contractdeprives the innocent party of all or substantially all of the benefit of the contract
• Gives the innocent party two options:
  1. Continue the contract and sue for damages
  2. Declare the contract terminated and sue for damages

Question 17

Simple Breach of Contract

Answer 17

• Less significant than a fundamental breach

•  Does not entitle the innocent party to put an
end to the contract

•  Does entitle the innocent party to sue for damages

•  If the innocent party terminates the contract
because of a simple breach, that will be a
fundamental breach by the “innocent” party

Question 18

Repudiation Breach

Answer 18

Repudiation: When one party, by words or actions, makes it known that it does not intend to perform its fundamental obligations under the contract

Question 19

Anticipatory Breach

Answer 19

Anticipatory Breach: When one party lets the other know, before the time for performance, that it will not be performing its obligations. If the obligation is a fundamental one, the anticipatory breach will be a repudiation

Question 20

Termination Clauses

Answer 20

• Different courses of action are justified for fundamental and simple breaches
•  To help distinguish between fundamental and simple breaches, the parties may incorporate a termination clause into the contract
•  Termination clauses specify acts that justify termination of the contract