Remedies 3 Flashcards
Parties may agree to what the remedial consequences of breach are. Should the courts enforce these clauses?
Policy considerations:
- Inequality of bargaining power
- Freedom of contract
- Commercial certainty
- Avoiding the costs of litigation
- Facilitating transactions
The most common agreed remedy clauses relate to payments of money. They specify:
- Upper limits on compensation for breach (exemption clauses)
- Specific sum payable on breach (agreed damages)
- Forfeit of a pre-paid sum on breach (deposit)
- Forfeit of an instalment on breach (forfeiture)
Agreed Damages
Liquidated Damages and Penalties
Parties may insert a clause into the contract that specifies a sum to be paid on breach.
General rule:
- Enforceable if liquidated damages, ie, genuine pre-estimate of the likely real loss on breach
- Unenforceable if penalty clause, ie, not a genuine pre-estimate
Agreed Damages
Penalty clauses
Dunlop Pneumatic Tyre Co Ltd v New Garage & Motor Co Ltd quote
A sum is a penalty if it is ‘extravagent and unconscionable in amount in comparison with the greatest loss that could conceivably be proved to have followed from the breach’.
Factors relevant to determining whether a clause is a penalty per Lord Dunedin
• Description not conclusive
• Lack of proportionality between sum payable and how serious the breach was (CMC Group Plc and others v Michael Zang [2006] EWCA Civ 408)
• Reasonableness of estimate of loss at time of contract formation
• Sum must be ‘unconscionable’
o Difficulty of estimating loss relevant (Murray v Leisureplay [2005] EWCA Civ 963 (CA))
• Where breach is not paying a sum of money, if the specified damages higher than that sum then penalty
Justifying the Penalties Jurisdiction
Main justifications:
1) Compensatory principle
a) Photo Production Ltd v Securicor Transport Ltd [1980] AC 827 (HL) 850
i) Agreed damages clause should not impose on party in breach ‘of a primary obligation a general secondary obligation to pay… a sum… that is manifestly intended to be in excess of the amount which would fully compensate the other party for the loss sustained by him in consequence of the breach of the primary obligation’.
b) But see US v Bethlehem Steel Co 205 US 105 (1907)
2) Preventing Punishment
3) Preventing Indirect Specific Performance
4) Unconscionability
Requirement of Breach
Alder v Moore [1961] 2 QB 57 (QB)
Professional footballer received £500 from an insurance company when he suffered an injury that meant he couldn’t play football
he said if he resumed he would pay back the £500
4 months later he started playing football again
the insurer wanted the £500 back
the footballer said that the penalties rule should apply as paying back the £500 over-compensated the insurer
Court said the penalties rule didn’t apply here
This was bc the promisor had not promised never to play football again and the breached that obligation
he had not breached any obligation
he just said if he played again he would pay £500
was not promising not to pay so no BoC, so no penalties rule.
Why is there a requirement for breach?
Bc the pealties rule applies to protect the compensatory priinciple. If there is no breaking of primary obligations then this doesn’t apply
Forfeiture
Deposits and Part-Payments
Parties may agree that money paid in advance is forfeit on breach.
General rule is that advance payments:
o Not recoverable if deposit, ie, a payment made as ‘a guarantee that the contract shall be performed’ (Howe v Smith (1884) LR 27 Ch D 89 (CA) 95)
o Recoverable if part-payment (Dies v British International Mining Corp [1939] 1 KB 725 (KB))
Matter of interpretation whether deposit or part-payment.
Deposits regulated in Workers Trust and Merchant Bank Ltd v Dojap Investments Ltd [1993] AC 573 (PC)
Cf Union Eagle Ltd v Golden Achievement Ltd [1997] AC 514 (PC)
Workers Trust and Merchant Bank Ltd v Dojap Investments Ltd [1993] AC 573 (PC)
Contract for sale of land stipulating that buyer put down deposit of 25% of purchase price. Contract stipulated that time was of the essence. Rest of money should be paid within 14 days. If not the 25% should be forfeit. The 75% was paid a weak late. Vendors returned the 75% and said the 25% was forfeit. Vendors seem massively over-compensated.
PC says a deposit can only be retatined where it is reasonable. Said in this case that it is the custom in land contracts to put down 10%. For that reason the deposit was regulated by the court. Said this amounted to a part-payment and was recoverable
Cf Union Eagle Ltd v Golden Achievement Ltd [1997] AC 514 (PC)
10% deposit put down
buyer 10 minutes late
Was ruled as a deposit and Sellers kept the 10%
Said it was important for commercial certainty and that 10% is the custom.
Instalments
Contract price may be paid in instalments, and parties may agree that they are forfeit if D fails to pay one instalment. Clear danger of unfairness to the buyer
Re Dagenham (1873) LR 8 Ch App 1022 (Ch)
Stockloser v Johnson [1954] 1 QB 476 (QB)
Jobson v Johnson [1989] 1 WLR 1026 (CA)
Stockloser v Johnson [1954] 1 QB 476 (QB)
Difference between a buyer defaulting after having paid 5% and 90% and Denning points this out as blatantly unfair.
If not ready and willing to resume, not all instalments must be retained, if retainmennt would be unconscionable.
Re Dagenham (1873) LR 8 Ch App 1022 (Ch)
Court says where a buyer has missed an installment but is ready and willing to resume performance then the court can grant the buyer some extra time to make the payments
What though if not ready and willing to resume
Jobson v Johnson [1989] 1 WLR 1026 (CA)
Contract for the sale of some shares by instalments which said that the uyer would have to sell back the shares for £40,000 if he defaulted on any instalment
He defaulted after making instalments of over £140,000
CofA refused to enforce the clause, said it was penal and unenforceable. Both instalments and advance payments are regulated by the courts but the regulations are not as strict as for agreed damages clauses
