Chapter 14: Remedies Flashcards

Question

Malik v Bank of Credit and Commerce International [1998] AC 20

Answer 1

An employee had worked for the Bank of Credit and Commerce International (BCCI), which collapsed in 1991, amidst allegations that the bank had operated in a corrupt and dishonest manner. The employee claimed that having worked for BCCI had adversely affected his employment prospects. The House of Lords found that the employee did have the basis for a cause of action against his former employer for the loss caused by the way it was alleged that its business had been run. This was based on the fact that contracts of employment contain an implied term of trust and confidence such that the employer is under an obligation to carry out its work in an honest way. Judgement: Damages were awarded but were limited to the claimant’s financial loss, which was suffered due to an inability to obtain alternative employment resulting from breach of this implied term.

Answer 2

The loss of an opportunity is recoverable in damages if the lost chance is quantifiable in monetary terms and there was a real and substantial chance that the opportunity might have come to fruition. Otherwise, the loss of opportunity will be treated as too speculative. The courts are reluctant to treat the loss as too speculative and will award damages based on the expectation interest even if the precise quantification of loss may not be straightforward

Answer 3

The claimant was denied, in breach of contract, the chance to go through to the final round of a contest. The court held that she could be compensated for the loss of the chance of winning the competition. The courts have clarified that to claim loss of chance, the chance must be ‘real and substantial’. Applying Chaplin, awarding loss of chance may be appropriate in the context of losing the chance of ‘winning’ along with other competitors. Note also that in Chaplin, the claimant had a less than 50% chance of winning. Where the chance of winning or obtaining the benefit is 50% or greater, the claimant should seek to recover their expectation loss in full and they will succeed if this can be proved on the balance of probabilities.

Answer 4

The general rule is that damages cannot be recovered on behalf of another party/for losses suffered by another party. There are exceptions to this general rule, but they are not considered in this section. If you have studied/go on to study privity of contract, that material relevant to privity will clarify this issue.

Answer 5

The court has developed specific rules on the recoverability of particular kinds of loss. * Damages for mental distress, anguish or annoyance are not generally recoverable. * By way of exception, they may be recoverable where the whole, or perhaps a major purpose of the contract, is to provide pleasure, relaxation and peace of mind. * It will be rare that a purely commercial contract has such a major purpose. * Damages for loss of reputation are generally not awarded. * Damages for loss of a chance are recoverable if the lost chance is quantifiable in monetary terms and there was a real and substantial chance that the opportunity might have come to fruition.

Answer 6

4.1 Introduction 1. Damages can only be recovered if they are caused by the breach. 2. Damages cannot be recovered if they are too remote from the breach. 3. Damages can be reduced if the claimant has failed to take reasonable steps to mitigate its losses.

Answer 7

The claimant must establish a causal link between the defendant’s breach of contract and its loss in order to recover damages. This means assessing: (a) Whether infact the breach by the defendant has caused the loss suffered by the claimant (known as factual causation); and also (b) Whether as a matter of law the defendant should be held responsible for it (legal causation) Factual causation: Whether the breach by the defendant has, as a matter of fact, caused the loss suffered by the claimant. Legal causation: Whether the defendant should be held responsible for loss which has, as a matter of fact, been caused by its breach. Legal causation: Whether the defendant should be held responsible for loss which has, as a matter of fact, been caused by its breach.

Answer 8

In contract, the courts have treated the determination of factual causation in a broad way, advocating a ‘common sense approach’ (Galoo Ltd v Bright Grahame Murray [1994] 1 WLR 1360). The court in Galoo suggested that the defendant’s breach should be a ‘dominant’ or ‘effective’ cause of the loss if that loss is to be recoverable.

Answer 9

Even if factual causation is established, the claim will fail if legal causation is not established, in particular if there is a novus actus interveniens – a particular category of intervening event which will be treated as having broken the chain of causation.

Answer 10

A dealer supplied a defective trailer coupling to a customer who went on using it, after it was obviously broken, until there was an accident. The defect in the trailer coupling was an effective cause of the accident (so factual causation was established). But the question was whether, in terms of legal causation, the chain of causation was broken by the ‘intervening act’ of the customer’s use of an obviously broken coupling. It was held that the customer’s use of the coupling was not something which objectively one would deem ‘likely to happen’. It therefore was treated as breaking the chain of causation and the dealer was held not liable for the accident.

Answer 11

If the intervening event was ‘likely to happen’ (Monarch Steamship Co Ltd v A/B Karlshamns Oljefabriker [1949] AC 196), it generally will not be held to break the chain of causation.

Answer 12

The law of contract provides that not all losses flowing from (ie caused by) a breach of contract are recoverable. A line must be drawn somewhere dictating which loss is recoverable and which is not. The foundation of the law on remoteness in contract was set out by Baron Alderson in the decision of Hadley v Baxendale (1854) 9 Ex 341.

Answer 13

Where two parties have made a contract which one of them has broken, the damages which the other party ought to receive in respect of such breach of contract should be such as may [1] fairly and reasonably be considered either arising naturally, ie, according to the usual course of things, from such breach of contract itself, or [2] such as may reasonably be supposed to have been in the contemplation of both parties, at the time they made the contract, as the probable result of the breach of it.

Answer 14

The first limb – loss of a type ordinarily and naturally arising from the breach – is not based on actual knowledge of the particular parties. It looks at ‘the usual course of things’ and consequently what loss is liable to result from a breach of contract in that ‘usual course’. If the loss is deemed a normal type of loss which would follow from the breach then it will be recoverable under the first limb of the Hadley v Baxendale test.

Answer 15

If losses are too unusual and far reaching to satisfy the first limb, then in order to recover those losses the claimant will have to establish, under the second limb of the Hadley v Baxendale test, that the particular defendant had sufficient actual knowledge of the particular and special circumstances to be aware of the risk of those losses.

Answer 16

Facts: The claimant, who was a mill owner, contracted with the defendant carrier to take a broken mill-shaft to the makers as a pattern for a new one. Owing to the carrier’s neglect, there was a delay in the transport of the broken mill-shaft, which resulted in considerable losses for the mill owner, because no spare shaft was available.

Answer 17

Held: Applying the above two-stage test, the court held (considering the first limb) that in most cases of a breach of this kind, no such losses would have followed (as a spare shaft would be available), so it could not be said that the losses followed naturally from the breach.

Answer 18

Nor (considering the second limb) was the defendant aware, at the time of the contract, that the mill would not be able to function at all without this particular shaft, and so the loss could not ‘reasonably be supposed to have been in the contemplation of both parties’. Therefore, the losses were not recoverable. The losses might have been recoverable under the second limb if the special circumstances (that delay would cause a loss of profit) had been communicated to the defendant at the time of contracting, but they had not been.

Answer 19

It seems to me logical to found liability for damages upon the intention of the parties (objectively ascertained) because all contractual liability is voluntarily undertaken First Limb = Identification of Risks Second Limb = Pointing towards those Risks

Answer 20

Confirmed that what was in the contemplation (or knowledge) of the parties was to be judged at the time of contracting, as opposed to the time of the breach.

Answer 21

Victoria Laundry wished to expand their business, and they ordered a large boiler from the defendants, Newman Industries. Delivery was to take place on 5 June. The boiler was damaged before delivery, and delivery was delayed until 8 November. The claimant claimed for the profit that they would have earned with the boiler in the time between 5 June and 8 November. In particular, they claimed for the loss of, first, the extra laundry business that they could have taken on with immediate use of the new boiler, and, second, the loss of a number of highly lucrative dyeing contracts which they could have obtained with the Ministry of Supply.

Answer 22

The Court of Appeal held that the claimant could recover for the ordinary extra laundry business that they would have taken on. As the defendant knew at the time of contracting that the claimant was a launderer and dyer and required the boiler for immediate use in its business, these were losses occurring in the ‘usual course of things’ and satisfied the first limb of the Hadley v Baxendale test. The defendant must be presumed to have anticipated that some loss of profits would occur by reason of its delay, and these ordinary business profits were therefore recoverable

Answer 23

It was therefore necessary for the claimant to prove that the defendant had sufficient actual knowledge of the particular and special circumstances to be aware of the risk. No notice had been given of the possible, highly lucrative, dyeing contracts. In the absence of special knowledge on its part, the defendant could not have reasonably contemplated the additional losses suffered by the claimant’s inability to accept the highly lucrative dyeing contracts, and so these losses also failed to satisfy the second limb of the Hadley v Baxendale test and were therefore irrecoverable.

Answer 24

Where one party has suffered loss resulting from the other party’s breach of contract, the injured party should take ‘reasonable steps’ (British Westinghouse Electric and Manufacturing Co v Underground Electric Rail Co [1912] AC 673) to minimise the effect of the breach. Technically, there is no obligation to mitigate, but losses attributable to a failure to do so are not legally recoverable. The innocent party cannot, therefore, seek compensation by the party in default for loss which is really due not to the breach itself, but its own failure to behave reasonably after the breach.

Answer 25

The question of what steps are ‘reasonable’ is one of fact. In Pilkington v Wood [1953] CH 770, it was held that there was no expectation that the claimant should embark on ‘a complicated and difficult piece of litigation’ in order to minimise the effects of the defendant’s breach.

Answer 26

The case of Payzu v Saunders [1919] 2 KB 581 demonstrates that reasonable steps to mitigate may, in some circumstances, include accepting the performance offered by the defendant under a new contract even when that performance amounts to a breach of the original contract. If the defendant’s offer of performance remains the best substitute performance (as it was in Payzu) then it would seem unreasonable not to go to that source.

Answer 27

Establishes that when considering whether the claimant has taken reasonable steps to mitigate, the claimant’s actions ‘ought not to be weighed in nice scales at the instance of the party whose breach of contract has occasioned the difficulty. There is no duty to mitigate a claim for a payment of a debt. This includes a claim for liquidated damages. This is because the amount is payable as a contractual right rather than as damages.

Answer 28

* Damages can only be recovered if ‘factual causation’ can be established – if the defendant has, as a matter of fact, caused the loss suffered by the claimant. * In addition, ‘legal causation’ must be established – there must be no unlikely, intervening act which breaks the chain of causation. * Even if factual and legal causation are established, damages cannot be recovered for losses which are ‘too remote’ – ie losses which neither (1) arise naturally according to the usual course of things from the contract; nor (2) were or should have been in the contemplation of both parties. * A party cannot recover losses which would have been avoided if that party had taken reasonable steps to mitigate its losses.

Answer 29

5.1 Introduction This section will address some more advanced points concerning remedies available for breach of contract. We will address: (a) The reliance interest, and limits on the extent to which wasted expenditure can be recovered. (b) An alternative way of measuring damages – the restitution interest. (c) Basic principles of restitution and unjust enrichment. (d) A different approach to remoteness.

Answer 30

You may recall that whilst damages are normally claimed based on the ‘expectation interest’, an alternative basis for the assessment of damages is the reliance measure. This measure allows the claimant to recover the expenses which have been incurred in preparing for, or in part performance of, the contract which have been rendered pointless by the breach.

Answer 31

Facts: C & P Haulage contracted to allow Mr Middleton to use their premises for a vehicle repair business. Under the terms of the agreement (i) Mr Middleton’s licence was renewable every six months, and could be cancelled with one month’s notice, and (ii) any fixtures put into the premises by Mr Middleton were to be left on the premises. Mr Middleton carried out substantial work on the premises to make them suitable for use as a garage. The parties fell out and, on 5 October 1979, Mr Middleton was ejected from the premises and had to carry on his business from the garage at his house. Mr Middleton claimed £1,767.51 damages, to cover the money spent on putting the premises in a fit state to use as a garage (ie damages based on his reliance interest).

Answer 32

It was accepted by Mr Middleton that, under the contract, he was not entitled to take out any of the fixtures he had installed, and that he would not have been entitled to payment for the work he had done in relation to the premises. He also accepted that the agreement could have been lawfully terminated ten weeks after it was actually ended.

Answer 33

[…] an aggrieved party cannot recover for expenses that would have been wasted whether or not the breach of contract occurred. The losses must flow from the breach, not from making a bad bargain. […] Mr Middleton had made a bad deal – he spent a great deal of money improving premises that he had only a limited right to occupy. Mr Middleton was only entitled to stay for six months at a time, and had no right under the contract for compensation for the money he spent improving the premises as […] all fixtures and fittings were to be left on the premises. Mr Middleton’s loss therefore came from making a bad bargain, not from the breach. […] no award of damages can put the claimant in a better position than he would have been in had the contract been performed.

Answer 34

The claimant was seeking its reliance loss (in a situation where it had no expectation loss); however, it did not succeed as it failed to show that, had the contract gone ahead properly, it would have been able to recoup this expenditure in any event. The claimant was therefore limited to recovering a nominal amount of damages in recognition of the technical breach it had sustained.

Answer 35

This is a logical resolution to the problem: it is a good example of the court resolving a case by reference to a key principle: the purpose of contractual damages is compensatory, no award of damages can put the claimant in a better position than it would have been in had the contract been performed

Answer 36

Until quite recently it was assumed that in the event of a breach of contract, it was only the reliance and the expectation interests that were recognised for compensatory purposes. However, there now seems to be a third possibility: compensation for the ‘restitution’ interest. Stated shortly, the restitution interest represents the interest a claimant has in the restoration to them of benefits which the defaulting party has acquired at their expense. In general, the gain to a defendant from a breach of contract is irrelevant to the quantification of damages. However, as a result of the decision of the House of Lords in Attorney-General v Blake [2001] 1 AC 268, it is now clear that there are at least certain circumstances in which a claimant can recover the profit which the defendant has made from its breach of contract.

Answer 37

Facts: Blake, a former member of the intelligence services, undertook not to divulge any official information gained as a result of his employment and broke the undertaking by publishing his memoirs, No Other Choice. The Crown sought to recover the royalties he was to be paid by his publishers. Held: Their Lordships confirmed that, in general, damages were measured by the claimant’s loss, but held that in an exceptional case the court can require the defendant to account to the claimant for benefits received from a breach of contract.

Answer 38

An account of profits will be appropriate in exceptional circumstances. Normally the remedies of [compensatory] damages, specific performance and injunction, coupled with the characterisation of some contractual obligations as fiduciary, will provide an adequate response to breach of contract. It will only be in exceptional cases, where those remedies are inadequate, that any question of accounting for profits will arise. No fixed rules can be prescribed.

Answer 39

The claimant must also show that he has a ‘legitimate interest’ in depriving the defendant of his profit. The Crown was held to have such a ‘legitimate interest’ in Blake and no other remedy was adequate on the facts. If restitutionary damages had not been awarded, the Crown would have recovered nothing, since they had suffered no loss.

Answer 40

An ‘efficient breach’ is one where: (a) the breach was cynical and deliberate; (b) the breach enabled the defendant to enter into a more profitable contract elsewhere; and (c) by entering into a new and more profitable contract, the defendant put it out of his power to perform the contract with the claimant. An efficient breach puts the breaching party in a better position than if there had been no breach. It is therefore efficient for the breaching party to breach the contract. An efficient breach alone will not justify the award of damages on a restitutionary measure. Subsequent case law is so far equivocal as to the circumstances in which courts will find situations sufficiently ‘exceptional’ to justify using the Blake approach.

Answer 41

An example which fell short of the requirements is Experience Hendrix LLC v PPX Enterprises Inc (2003) EWCA Civ 323 in which the dispute concerned improper granting of licences in relation to recordings made by the guitarist Jimi Hendrix. The court decided that it was not an ‘exceptional’ case within the meaning of Blake, and the court therefore refused to order an account of profits (ie a claim based on the restitution interest to take away the profit made by the party in breach).

Answer 42

We are not concerned with a subject anything like as special or sensitive as national security. The State’s special interest in preventing a spy benefiting by breaches of his contractual duty of secrecy, and so removing at least part of the financial attraction of such breaches, has no parallel in this case.

Answer 43

The exceptional nature of Blake was again emphasised, and the key point made by Lord Reed: Common law damages for breach of contract cannot be awarded merely for the purpose of depriving the defendant of profits made as a result of the breach, other than in exceptional circumstances

Answer 44

The law of restitution addresses the unjust enrichment of the defendant at the expense of the claimant. We have just considered that the courts will exceptionally compensate the claimant based on the defendant’s unjust enrichment by holding the defendant to account for profit they have made as a result of breach.

Answer 45

Restitution provides a remedy when there is a total failure of consideration. A total failure of consideration occurs where one party has provided something of value under the contract but has received nothing in return. In such circumstances, the court may use the principles of restitution to prevent a party from benefiting from the lack of consideration. In such a case restitution will operate to reverse the unjust enrichment of one of the parties.

Answer 46

You will be familiar with the approach to remoteness set out in Hadley v Baxendale, that a party: can only recover damages caused by the breach and which can reasonably be considered either: (a) arising naturally, ie, according to the usual course of things, from such breach of contract itself; or (b) such as may reasonably be supposed to have been in the contemplation of both parties, at the time they made the contract, as the probable result of the breach of it.

Answer 47

Transfield chartered ‘The Achilleas’ from Mercator. Transfield were late in the redelivery of the vessel. Mercator had entered into a subsequent charterparty to follow immediately upon the return of The Achilleas. Due to extreme volatility in the shipping charter market, the price of charters had fallen quickly and due to Transfield’s late return Mercator were forced to take a much lower price for The Achilleas for the subsequent charter than had previously been agreed. Mercator argued that they should be entitled to claim for the reduction in the rate of hire for the duration of the subsequent charter. Transfield argued that Mercator should be limited to the reduced rate of hire for the period of late delivery and that losses for the full period of the subsequent charter were too remote

Answer 48

All found that a claim for a reduced rate of hire during the duration of the subsequent charter fell within the first limb of Hadley v Baxendale (normal loss) and within the reasonable contemplation/imputed knowledge of the parties

Answer 49

However, subsequent cases have shown that the courts remain committed to the rule in Hadley v Baxendale as the default or normal way of establishing ‘remoteness’. Transfield should be seen in the context of specific industries (Supershield Ltd v Siemens Building Technologies FE Ltd [2010] EWCA Civ 7), where on examining the approach and the commercial background it becomes clear that the Hadley approach would not ‘reflect the expectation or intention reasonably imputed to the parties’ (John Grimes Partnership Ltd v Gubbins [2013] EWCA Civ 37). The normal test for remoteness therefore appears to remain the approach explained in Hadley v Baxendale.

Answer 50

* When a party claims on the basis of its ‘reliance’ interest, it can only recover losses that could have been recouped had the contract been properly performed. * As well as the possibility of damages being awarded on the basis of the ‘expectation’ interest or ‘reliance’ interest, exceptionally damages have been awarded on the basis of the ‘restitution’ interest instead. This measures damages on the basis of ‘restoring’ to the claimant a benefit which the defaulting party acquired at their expense. This will only be awarded in exceptional cases, when other remedies are inadequate: beyond this, the case law in this area is unclear and evolving. * A restitution claim may arise where there is a total failure of consideration. One way to approach remoteness is not to adopt the two-limb test in Hadley v Baxendale but rather to ask whether in objective terms the defendant had ‘assumed responsibility’ for the loss in question. This approach has some merits, but should not be considered the default way of considering damages.

Answer 51

6.1 Introduction: The Consumer Rights Act 2015 is a crucial piece of legislation regulating contracts between businesses and consumers. You may already have come across it in the context of: (a) Terms which it implies into certain contracts; (b) The way it regulates unfair terms. Part 1 of the Act, which deals with consumer contracts for goods, digital content, and services, also provides certain remedies to consumers when those implied terms are breached.

Answer 52

The Consumer Rights Act 2015 provides that where goods sold to a consumer fail to meet any of the requirements in s 9 (satisfactory quality), s 10 (reasonably fit for their particular purpose) or s 11 (correspondence with description) then the goods are regarded as non-conforming. Where the goods are non-conforming, there are three remedial options available to the consumer, namely: (a) The short-term right to reject (b) The right to repair or replacement (c) The right to a price reduction or the final right to reject.

Answer 53

Broadly speaking, the short-term right to reject is available to the consumer for 30 days running from the time (i) that ownership has passed (or, in the case of contracts for hire or the like, possession has been transferred) and (ii) the goods have been delivered and (iii) in cases where the trader is required to install the goods or to take other action to enable the consumer to use the goods, the trader has notified the consumer that the required steps have been taken (s 22).

Answer 54

The right to repair or replacement is available unless repair or replacement is either impossible or disproportionate (in the sense that it imposes an unreasonable cost on the trader relative to the other remedies and the interests of the consumer) (s 23).

Answer 55

The consumer is not entitled to both a price reduction and final rejection; and, in either case, the remedy may only be exercised where: (a) After one repair or one replacement, the goods do not conform to the contract; (b) The consumer can require neither repair nor replacement of the goods (because it is impossible or disproportionate); or (c) The consumer has required the trader to repair or replace the goods, but the trader is in breach of the requirement to do so within a reasonable time and without significant inconvenience to the consumer (s 24). It should also be noted that s 24(10) provides that the general rule is that, where the final right to reject is exercised within six months (the clock running—as with the short term right to reject—from the time that ownership has passed, and so on), there should be a full refund with no deduction for use—but this does not apply to motor vehicles or any other goods that may be specified by statutory order.

Answer 56

Section 42 provides that, where the digital content is non-conforming, there are two remedial options available to the consumer, namely: (a) The right to repair or replacement (b) The right to price reduction In relation to these remedies, s 42(9) provides that ‘digital content which does not conform to the contract at any time within the period of six months beginning with the day on which it was supplied must be taken not to have conformed to the contract when it was supplied’.

Answer 57

Section 43 elaborates and qualifies the right to repair or replacement in the way that we have seen already in relation to contracts for goods. In particular, s 43(2)(a) requires the trader to repair or replace the digital content ‘within a reasonable time and without significant inconvenience to the consumer’; s 43(3) precludes the consumer from requiring repair or replacement where this would be impossible or disproportionate; and s 43(5) identifies the nature of the digital content together with the purpose for which the digital content was obtained or accessed as material to judging ‘what is a reasonable time or significant inconvenience’

Answer 58

Similarly, s 44 qualifies the right to price reduction, this right being exercisable only where the consumer either cannot require repair or replacement (because this is impossible or it would be disproportionate) or where the trader has failed to repair or replace the digital content within a reasonable time and without significant inconvenience to the consumer.

Answer 59

Where the trader had no right to supply the digital content that it supplied, s 45 gives the consumer the right to receive a refund of all money pay for the digital content. A refund must be given within 14 days. The trader must give a refund using the same payment method that the consumer used to pay for the digital content, without imposing any fee in respect of the refund.

Answer 60

What is the legal position if non-compliant digital content causes damage to a device or to other content? According to s 46, where: (a) A trader supplies digital content to a consumer under a contract; (b) The digital content causes damage to a device or to other digital content; (c) The device or digital content that is damaged belongs to the consumer; and (d) The damage is of a kind that would not have occurred if the trader had exercised reasonable care and skill, then the consumer is entitled to repair or to a compensatory payment.

Answer 61

Section 54 provides that, where the services are non-conforming, there are two remedial options available to the consumer, namely: (a) The right to require repeat performance (b) The right to a price reduction

Answer 62

The right to require repeat performance is elaborated and qualified in ways that are analogous to the parallel provisions in relation to goods and digital content. In particular, s 55(2)(a) requires the supplier to provide the repeat performance within a reasonable time and without significant inconvenience to the consumer (s 55(4) offering the usual guidance on what, for this purpose, is reasonable and significant); and s 55(3) states that the consumer cannot require repeat performance if completion in conformity with the contract is impossible.

Answer 63

According to s 56(3), a price reduction becomes available only where repeat performance is impossible or where the trader has failed to provide repeat performance within a reasonable time and without significant inconvenience to the consumer.

Answer 64

Clearly, the kettle is non-compliant (s 9) and it follows that, in principle, the consumer may (within 30 days) simply reject the kettle and get a refund of the purchase price, or accept a replacement (exchange) or insist on repair (unless it would be impossible or disproportionate). In practice the consumer is likely to be happy with either an exchange or a refund. In this scenario, the consumer’s remedial rights are a bit more constrained. Here, the consumer must first give the trader the opportunity to repair or replace the kettle. Provided that the consumer is happy with this - and it is reasonable to assume that replacement will be an acceptable option - there is no problem.

Answer 65

In this more complex case, resolution depends on standards of reasonableness and proportionality. So, for example, s 23(2)(a) requires the trader to repair or replace the goods ‘within a reasonable time and without significant inconvenience to the consumer’. If the goods under repair are a consumer’s one and only laptop, what would be a reasonable time for undertaking the repairs and at what point would the inconvenience to the consumer be significant? According to s 23(5) these questions of reasonableness and significance are to be determined by taking into account ‘(a) the nature of the goods; and (b) the purpose for which the goods were acquired’— considerations which, while relevant, are hardly determinative. In our hypothetical laptop case, before we can determine what is reasonable or significant, we need to know more about the particular context

Answer 66

* The remedies available depend on whether the contract is for goods, services or digital content. * The remedies are summarised in the diagrams you have been provided with above.

Answer 67

7.1 What is a liquidated damages clause? Contracts arise from the agreement of the parties – the starting point of contract law is to support parties’ agreements on as many matters as possible. In this context, it is unsurprising that the parties can in principle agree not only the terms of the contract, but also the nature and scope of the consequences of a breach of contract. The starting point is that the court will uphold such agreements. You may already have come across this in studying exemption clauses which limit or exclude liability in the event of breach. An alternative approach is for the parties to agree that a certain sum will be payable on a particular breach of contract – no more and no less. This is called a ‘liquidated damages’ clause. Liquidated damages clause: A clause which stipulates a certain sum which is to be payable on a particular breach of contract.

Answer 68

Company A hires a van from Company B. The contract provides that if Company A is late in returning the van to Company B, Company A will pay damages of £160 for each day that it is not returned. This clause is a liquidated damages clause. If Company A breaches the contract by returning the van three days late and the court upholds this clause, it will award Company B damages totalling £480 (3 × £160). In contrast, if there had been no liquidated damages clause, Company B would need to prove its losses, most likely by showing how it would have been better off had the van been returned on time (perhaps because it would have been able to lease the van out to someone else)

Answer 69

It can be commercially advantageous for a party because it fixes the amount that will be due for breach as a debt arising under the contract without the claimant having to deal with the uncertainty of establishing its case for damages in accordance with the principles that apply to damages generally. Equally, a liquidated damages clause makes clear to a party what is at stake if it fails to comply with its obligations ie the risks involved in the contract. A party can then take the risk into account when determining the price for the contract. Liquidated damages clauses are very common in the construction and technology industries to deal with the consequences of non-performance such as delay (eg you will pay £x for every day you are late in delivering the building).

Answer 70

Whilst the starting point of contract law is to support parties’ agreements on as many matters as possible, there are instances where the court will intervene. You may already have come across the various statutory and judicial limitations on clauses which limit/exclude liability in the event of breach.

Answer 71

In a similar vein, the courts have, over time, developed a jurisdiction to intervene in a contract to strike down a liquidated damages clause which requires the party in breach to pay an excessive sum such that it becomes a ‘penalty’. This is known as the law on penalties or penalty clauses. If a clause is regarded as a penalty then it will be struck out by the Court and the claimant will only be entitled to ‘unliquidated’ damages (ie damages assessed in the normal way) as compensation for the breach. Penalty clause: A liquidated damages clause which requires the party in breach to pay an excessive sum, such that it becomes a penalty, and therefore the clause will not be upheld.

Answer 72

The test for determining whether a clause is a valid ‘liquidated damages’ clause or a ‘penalty’ is derived from the Supreme Court decisions of Parking Eye Limited v Beavis [2015] UKSC 67 and, in particular, Cavendish Square Holdings BV v Talal El Makdessi [2015] UKSC 67. These two cases were based on the same legal issue and were therefore heard together

Answer 73

(a) Is the clause a primary or secondary obligation? (i) A clause will be primary if it is part of the primary obligations in the commercial context of the contract, ie furthers the commercial objective of the contract. (ii) A clause will be secondary if it is an obligation triggered by breach of contract to compensate the innocent party.

Answer 74

(b) If secondary, the clause will be a penalty if it imposes a detriment out of all proportion to any legitimate interest of the innocent party in the performance of the primary obligation. To determine this the Supreme Court gave two steps: (i) What (if any) legitimate business interest is served and protected by the clause? (ii) Is the detriment imposed to protect that interest extravagant, exorbitant or unconscionable?

Answer 75

In terms of applying this test, the court made it clear that the law on penalties is an interference with freedom of contract, so will not be invoked lightly by the court to strike down a clause in a contract freely negotiated between parties of equal bargaining power.

Answer 76

It explains the test for deciding whether the damages stipulated in the clause in question are excessive. Via this second criteria, Makdessi made clear that that a party can sometimes have a legitimate interest in enforcing performance which goes beyond simply being compensated for losses, and that a clause which was not disproportionate to that protection of that legitimate business interest would be upheld.

Answer 77

Facts: Mr Makdessi agreed to sell Cavendish a substantial stake in his advertising company in the Middle East, but the contract provided that Mr Makdessi would retain a 20% shareholding in the holding company after the acquisition. Cavendish had an option to purchase this retained shareholding subsequently as part of the deal. Part of the purchase price was to be paid by Cavendish in instalments after completion (known as deferred consideration). Mr Makdessi had built a considerable amount of personal goodwill through the company over the years, which meant that the company would be worth less to Cavendish if he competed against it. Accordingly, the sale and purchase agreement contained a clause (a ‘restrictive covenant’), which prevented him competing with the business following completion of the sale. (a) Mr Makdessi would not be entitled to receive the final two instalments of the deferred consideration; and further (b) Cavendish could exercise the option of purchasing Mr Makdessi’s retained shareholding but at a much reduced price.

Answer 78

Held: The Supreme Court determined that the default clauses were not penal. It considered first whether the clauses in question were primary or second obligations. It held that, notwithstanding that they were triggered by ‘breach’, they were in effect primary obligations – the withholding of the final payments was a ‘price adjustment’ mechanism adjusting the price payable to Mr Makdessi, and the transfer of shares was a way for the company and Mr Makdessi to part company in circumstances when Mr Makdessi started competing with it

Answer 79

Facts: ParkingEye managed a car park for the owners of a riverside retail park. ParkingEye displayed numerous signs at the entrance to the car park and at frequent intervals throughout it. The notices stated that a failure to comply with a two-hour time limit would result in a parking charge of £85. Mr Beavis parked his car at the car park; he exceeded the two-hour limit. ParkingEye demanded payment of the £85 charge. Beavis refused to pay on the basis that the £85 charge was unenforceable as a penalty.

Answer 80

Held: the obligation to pay the sum of £85 was a secondary obligation – it was triggered by breach of the contract. This meant that the court had to consider whether the clause was penal. The court concluded that the £85 charge was not a penalty. The Lordships agreed that ParkingEye had a legitimate interest in charging motorists for any period they occupied the car park beyond the two hours. Although the amount of the charge exceeded any likely loss (the loss was whatever a motorist would need to pay to use the parking space for the extra time – much less than £85), Parking Eye had a responsibility to manage the car park effectively and it was legitimate to use the charges as a means of influencing the conduct of motorists in order to ensure they did not overstay. In this context the £85 charge was proportionate to that interest.

Answer 81

In light of the decision in Makdessi, it seems that where parties have negotiated a contract, on a level playing field and with the assistance of professional advisors, it will be hard for the party paying liquidated damages to challenge the validity of those provisions on the basis that they are a penalty. If a clause is a primary obligation, it will not be a penalty clause. If a clause is a secondary obligation, the clause will not be a penalty if it protects a legitimate business interest and imposes a detriment which is not disproportionate to protect the legitimate interest. The courts will hold this to be a valid liquidated damages clause.

Answer 82

* A liquidated damages clause is a clause which stipulates a certain sum which is to be payable on a particular breach of contract. * A penalty clause is a liquidated damages clause which requires the party in breach to pay an excessive sum, such that it becomes a penalty. The court will not uphold a penalty clause, and will assess the claimant’s damages on normal principles instead. * The Makdessi approach to determining whether a clause is a penalty clause is: - Is the clause a primary or secondary obligation? If primary, it will not engage the penalty rule at all (so it will be valid). - If secondary, the clause will be a penalty if it imposes a detriment out of all proportion to any legitimate interest of the innocent party in the performance of the primary obligation. Identify the legitimate business interest, then consider whether the detriment imposed is extravagant, exorbitant or unconscionable * The burden of proof is on the person alleging that the clause is a penalty to prove this.

Answer 83

An award of damages is not the only remedy potentially available in the case of breach of contract. This section looks at two other remedies: orders for specific performance and prohibitory injunctions. In order to understand the remedies of specific performance and prohibitory injunctions, you need to first understand that the terms of a contract can be classified as negative terms or positive terms Positive term: A term which requires a party to do something. Negative term: A term which requires a party not to do something.

Answer 84

1. Party A must work between the hours of 9am and 5pm. 2. Party A must paint the outside of her house every 24 months or more frequently 3. Party A must purchase at least 25 tonnes of steel from Party B each month.

Answer 85

1. Party A must not work for a named competitor 2. Party A must not use her garden for parties on weekdays 3. Party A must not purchase steel from any party other than Party B.

Answer 86

An order (or ‘decree’) of specific performance is issued by the court to the defendant, requiring it to carry out its obligations under a positive term of the contract. What is the advantage of the court telling a party to do something which the contract already tells them to do? Breaching a court order for specific performance has more severe consequences than breaching a contract: it can be treated as contempt of court and lead to imprisonment. These serious consequences make it unlikely that a party will refuse to comply with an order for specific performance. Specific performance: An order (or ‘decree’) issued by the court to the defendant, requiring it to carry out its obligations under a positive term of the contract.

Answer 87

A prohibitory injunction is a court order restraining a party from breaching a negative term. As with an order for specific performance, breach of a prohibitory injunction can be punished as contempt of court. Prohibitory injunction: A court order restraining a party from breaching a negative term.

Answer 88

The most important point is that an order for specific performance or a prohibitory injunction will not be granted if damages are an appropriate and adequate remedy: Adderley v Dixon (1824) 3 S & S 607. To show that damages are inadequate in the specific performance context, it will need to be proved that the subject matter of the contract is unique or irreplaceable, or that an award of damages would be ineffective to provide adequate compensation. On the other hand, specific performance might be an appropriate remedy in cases of breach of a contract for the sale or lease of land, because in many cases land is unique. Damages can usefully be seen as the ‘default’ remedy (and by far the most common remedy). In addition, both specific performance and a prohibitory injunction are discretionary and equitable remedies.

Answer 89

In this context, discretionary means the court can consider all relevant circumstances and there are no clear criteria which, if satisfied, entitle a party to an injunction. The discretion is, however, exercised on certain well-established principles.

Answer 90

Equitable means that the remedies originate from the courts of equity, and equitable principles apply, including: (a) The court will take into account the conduct of the claimant – because ‘he who comes to equity must come with clean hands’: Coatsworth v Johnson (1886) 55 LJQB 220. For example, a claimant which is itself also in breach of contract, or which gives an incomplete account of events to the court, is less likely to succeed in obtaining an order for specific performance or prohibitory injunction. (b) The action must be brought with reasonable promptness, as ‘delay defeats the equities’: Eads v Williams (1854) 4 De G Mac & g 674.

Answer 91

(a) Specific performance will not be awarded where it would cause undue hardship on the defendant: Patel v Ali [1984] Ch 283. (b) A promise given for no consideration is not specifically enforceable, even if made as a deed. (c) Specific performance will not be awarded for breach of contracts of employment: s 236 Trade Union and Labour Relations (Consolidation) Act 1992 (d) Specific performance will not be awarded for breach of an obligation to perform a series of acts which would need the constant supervision of the court (Co-operative Insurance Society Ltd v Argyll Stores (Holdings) Ltd [1998] AC 1) (e) Specific performance will not be awarded for breach of a contract which is not binding on both parties.

Answer 92

The court has the power to decide the extent of any prohibitory injunction it wishes to grant, and accordingly, the court may limit an injunction to what the court considers reasonable in all the circumstances of the case. Prohibitory injunctions are granted only where ‘just and convenient’ (s 37 Senior Courts Act 1981).

Answer 93

A term forbade the defendant to engage in ‘any trade, business, or calling, either relating to goods of any description sold or manufactured by the claimant or in any other business whatsoever’. The court granted an injunction but on more limited terms: it did not restrain the defendant from engaging in ‘any other business whatsoever’, it only restrained the defendant from engaging in a narrower class of business. That gave the claimant reasonable protection but no more.

Answer 94

The court will look at the substance of the proposed remedy when deciding whether it would amount to a prohibitory injunction or specific performance, not the superficial wording of the injunction

Answer 95

The defendant agreed to supply petrol to the claimant for a set period of time. In breach of contract, the defendant terminated the agreement early. The claimant sought an interim injunction preventing the defendant from terminating and withholding the supply. the defendant agreed to supply petrol to the claimant for a set period of time. In breach of contract, the defendant terminated the agreement early. The claimant sought an interim injunction preventing the defendant from terminating and withholding the supply.

Answer 96

The court held that although the injunction requested appeared to be in ‘negative’ terms (broadly, the defendant must not terminate the agreement/withhold supply), the effect of the injunction would be to require the defendant to supply petrol to the claimant. This is a requirement that the defendant should do what the contract says it must do, and so in substance is an order for specific performance. Accordingly, the court decided the case according to the principles that apply to orders for specific performance, not those that apply to interim injunctions (and on the particular facts, the court found in the claimant’s favour).

Answer 97

* An award of damages is not the only remedy potentially available in the case of breach of contract. Two other remedies to be considered are prohibitory injunctions and orders for specific performance * A positive term in a contract is a term which requires a party to do something, and a negative term is a term of a contract which requires a party not to do something. * An order for specific performance requires a defendant to carry out its obligations under a positive term of the contract. * A prohibitory injunction is a court order restraining a party from breaching a negative term. * Breaches of these orders can be punished as contempt of court. * These remedies are only available when damages are not an appropriate remedy. * These are discretionary and equitable remedies.

Answer 98

9.1 Introduction Guarantees and indemnities have something in common. Assume that A owes an obligation, generally a contractual obligation, to B. Guarantees and indemnities given by C can both be ways of C supporting that obligation and providing additional protection to B.

Answer 99

Guarantee: A promise by a party to ensure that another party carries out its obligations, or a promise to fulfill those obligations itself if that other party does not do so. A has an obligation to repay a loan to B. If C provided a guarantee, this would mean C promising that A will repay the loan, and that if A does not do so, C will perform this obligation on A’s behalf ie will make the payment to B. Note that C’s obligation is effectively defined by A’s obligation: so C cannot face any obligation that is greater than A’s obligation. Example wording: ‘C guarantees to B that if A fails to pay the loaned sum when due, C will pay the loaned sum on demand.’

Answer 100

Indemnity: A promise to reimburse someone in the event that they suffer a stated loss. If C provided an indemnity in relation to this, C would be saying that in the event that B suffers the non-payment of the loan, C will reimburse B in relation to this loss. Note that C’s obligation is a primary obligation. C’s obligation is legally independent of A’s obligation, although what C has to pay will be affected by what A pays. C’s obligation stands by itself, so to speak, which is what we mean by it being a primary obligation, and this could mean. C’s liability might ultimately be even more than A’s was. Again, this provides greater protection for B – ultimately, it can look to either A or C for payment. Example wording: ‘Party C agrees to indemnify Party B from any losses which arise from the failure to recover the sum loaned to Party A. Finally, there are certain formalities that need to be followed to execute a guarantee – it must be in writing and signed by the guarantor. This is not the case in relation to an indemnity. Do remember that C could give both an indemnity and a guarantee in relation to the loan by B to A, in which case B has the benefit of both!

Answer 101

This is still a promise to reimburse someone for loss, but the obligation to deliver and the indemnity are coming from the same party. B would be entitled to damages from A anyway, but an indemnity can be drafted in a way that avoids some of the rules of causation, mitigation, remoteness and proof that might limit a claim for damages – much will depend on the drafting (which should be more detailed than our example!).

Answer 102

* Where A owes an obligation, generally a contractual obligation, to B, guarantees and indemnities given by C can both be ways of C supporting that obligation and providing additional protection to B. * A guarantee is a promise by C to ensure that A carries out its obligations, or a promise to fulfil those obligations itself if A does not do so - If A’s obligation ceases, C’s obligation also ceases. - If there is a change to the contract between A and B, the guarantee will almost always be discharged. - A guarantee must be in writing and signed by the guarantor. * An indemnity is a promise by C to reimburse B in the event that they suffer a stated loss, for example because A fails to carry out its obligations. - If A’s obligation ceases, C’s obligation remains in place. - If there is a change to the contract between A and B, the indemnity will remain. - An indemnity can also arise in a two-party context.