topic 3 Flashcards

Question

Frustration

Answer 1

[F]rustration occurs whenever the law recognises that, without default of either party, a contractual obligation has become incapable of being performed because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract. [...] It was not this that I promised to do.

Answer 2

(a) Performance is impossible; (b) Performance is illegal; or (c) The common purpose of the contract is frustrated.

Answer 3

the doctrine of frustration may be invoked in circumstances where the contract becomes impossible to perform due to the total or partial destruction of some object necessary to the performance of the contract.

Answer 4

Frustration may also occur where a change in the law or state intervention renders performance illegal.

Answer 5

Where the common purpose for which the contract was entered into can no longer be carried out because of some supervening event, the contract may be frustrated despite the fact that it is still physically possible to carry out the contract. It is important to remember that it must be the joint purpose of the parties. It is not enough that it is the purpose of just one party. Krell v Henry [1903] The Court of Appeal held that the common foundation of the contract was that the room was hired to view the king’s procession and this purpose had been frustrated. This is a highly unusual case. The rooms were hired out for the day only and both parties understood that the only purpose in hiring the rooms was to have a view of the procession - despite no express mention was made of this in the contract.

Answer 6

Self-induced frustration: Frustration will not apply where the event was induced by one of the parties, ie because the event was their fault or choice. It is for the party alleging self-induced frustration to prove that it is. If they succeed in showing the frustrating event is self-induced then the defence of frustration fails and the defendant will be in breach of contract. Foreseeable events: if you could have foreseen an event, but failed to make provision for it in your contract, the doctrine of frustration will be less likely to apply. Express contractual provision: The doctrine of frustration cannot override express and unambiguous contractual provision for the frustrating event. Commercial contracts often contain what is known as a force majeure clause, a clause that states what will happen to the contractual relationship between the parties should a particular set of circumstances (which could otherwise amount to frustrating events) materialise. It is very unlikely that a party would be allowed to rely on the doctrine of frustration in relation to a particular event when the risk has already been provided for by the parties through a force majeure clause.

Answer 7

If a frustrating event occurs all future obligations are automatically discharged by the common law. The Law Reform Act 1943 deals with obligations arising prior to the frustrating event.

Answer 8

The Act deals with obligations PRIOR to the frustrating event, it makes the following provisions: * Money paid before the frustrating event can be recovered. * Money that should have been paid before the frustrating event no longer needs to be paid. * Expenses incurred by the payee can be recovered out of the total sum paid/payable before the event.

Answer 9

The aim of an award of damages for breach of contract is to compensate the claimant for the damage, loss or injury they have suffered as a result of the defendant’s breach. Punishing the defendant is not the aim. A claimant who has not suffered any loss by reason of the breach is nevertheless entitled to a judgment; but the damages recoverable will be purely nominal. Nominal damages are a token amount (a very small amount eg £1) which are awarded to acknowledge that there has been a breach of contract in a case where no other remedy is available.

Answer 10

The default approach to compensating the innocent party means putting the innocent party in the same position post-breach that they should have been in had the contract been performed. This is sometimes called protecting the innocent party’s ‘expectation’ interest – putting them in the position they ‘expected’ to be in. Damages should be designed to put the innocent party in the same position as if the contract had been performed.

Answer 11

1. Cost of cure - the cost of cure represents the cost of substitute or remedial work required to put the claimant in the position they would have been in had the contract been properly performed. It should be noted that the claimant must act reasonably in relation to the defective works. 2. Diminution in value - calculated by reference to the difference in value between the performance received and that promised in the contract. 3. Loss of amenity - available remedy where their loss is not economic in value, but nevertheless has a value to them.

Answer 12

This measure of damages 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. It is backward looking (unlike the expectation measure, which is forward looking) and aims to put the claimant in the position they would have been in had they never contracted. the courts will not award expectation damages if they are highly speculative; instead, the claimant will be limited to their reliance loss.

Answer 13

The aim of an award of damages for breach of contract is to compensate the claimant for the damage, loss or injury they have suffered as a result of the defendant’s breach. Usually (but not always) this means that damages should aim to put the defendant in the position they would have been in had the contract been performed.

Answer 14

Damages for mental distress The general rule is that damages will not be awarded in relation to mental distress, anguish or annoyance caused by breach of contract. Exceptions have developed to this general rules: (a) Initially, such compensation was limited to cases involving contracts whose whole purpose was the provision of pleasure, relaxation and peace of mind. (b) More recently, the House of Lords has allowed damages for non-pecuniary loss (in this case loss of amenity) where a major object (though not the whole purpose) of the contract was to provide pleasure, relaxation and peace of mind. Damages for loss of reputation The general rule is that damages will not be awarded for loss of reputation. However, damages can be awarded limited to the claimant’s financial loss. Damages for mental distress 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.

Answer 15

Damages can only be recovered if they are caused by the breach. Damages cannot be recovered if they are too remote from the breach. Damages can be reduced if the claimant has failed to take reasonable steps to mitigate its losses. This section will consider the principles of causation, remoteness and mitigation. 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.

Answer 16

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 17

The law of contract provides that not all losses flowing from (ie caused by) a breach of contract are recoverable. The foundation of the law on remoteness in contract was set out by Baron Alderson in the decision of Hadley v Baxendale (1854): 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. The rule as stated in Hadley v Baxendale has two parts: 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. 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. In the case of Jackson v Royal Bank of Scotland [2005] UKHL 3, the House of Lords, in applying Hadley v Baxendale, 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 18

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. 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. Banco de Portugal v Waterlow & Sons [1932] AC 452 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 19

it is for the defendant to prove that the claimant would have have recouped the expenditure had the contract gone ahead

Answer 20

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. Key case: Attorney-General v Blake [2001] 1 AC 268 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. Although their Lordships in Blake declined to give more clear guidance as to when an account of profits would be awarded, they did indicate that the existence of a so-called ‘efficient breach’ would not alone justify allowing an account of profits. 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. In Morris-Garner v One Step (Support) Ltd [2018] UKSC 20 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 21

Total failure of consideration: 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 22

The case set of Transfield Shipping Inc of Panama v Mercator Shipping Inc of Monrovia, The Achilleas [2009] 1 AC 61 takes a different approach to remoteness to remoteness set out in Hadley v Baxendale. The initial arbitrator, High Court and the Court of Appeal 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. However, the House of Lords found for Transfield. The precise basis on which the majority did so is a matter of some uncertainty. The principle described by Lord Hoffman was that a key question for remoteness in contract was whether in objective terms the defendant had ‘assumed responsibility’ for the loss in question (as opposed to whether the losses are ‘normal’ under Hadley v Baxendale). In this case the evidence was that it was not normal in the specific industry for a party to pay for losses for late redelivery for the full term of the subsequent charter, and therefore Transfield had not assumed the risk of liability in relation to this sum and would not be liable for the reduction in the rate of hire for the full duration of the subsequent charter. The principle used in Transfield would mark a significant departure from the rule in Hadley v Baxendale. 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’.

Answer 23

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 24

three remedial options available to the consumer: 1. The short-term right to reject 2. The right to repair or replacement 3. The right to a price reduction or the final right to reject.

Answer 25

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/possession 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 26

when its impossible or disproportionate.

Answer 27

the remedy may only be exercised where: After one repair or one replacement, the goods do not conform to the contract The consumer can require neither repair nor replacement of the goods (because it is impossible or disproportionate) or 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

Answer 28

two remedial options available to the consumer: 1. The right to repair or replacement 2. The right to price reduction 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 29

the trader to repair or replace the digital content ‘within a reasonable time and without significant inconvenience to the consumer the nature of the digital content together with the purpose for which the digital content was obtained or accessed as material will influence this.

Answer 30

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 31

Where the trader had no right to supply the digital content that it supplied, 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 32

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 33

where the services are non-conforming, there are two remedial options: 1. The right to require repeat performance 2. The right to a price reduction

Answer 34

A clause which stipulates a certain sum which is to be payable on a particular breach of contract.

Answer 35

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. 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.

Answer 36

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’. 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 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 37

Key case: Cavendish v El Makdessi [2015] UKSC 67 (a) Is the clause a primary or secondary obligation? 1. 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. 2. A clause will be secondary if it is an obligation triggered by breach of contract to compensate the innocent party. If primary, the clause will not engage the penalty rule at all (so it will be valid). (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: 1. What (if any) legitimate business interest is served and protected by the clause? 2. Is the detriment imposed to protect that interest extravagant, exorbitant or unconscionable? The burden of proof is on the person alleging that the clause is a penalty to prove this. 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. Criteria 2 above is at the heart of the test – 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 38

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 39

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 e.g. party A must work between the hours of 9am and 5pm. Negative term: A term which requires a party not to do something e.g. Party A must not work for a named competitor.

Answer 40

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.

Answer 41

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.

Answer 42

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. So, for example, an order for specific performance is unlikely to be appropriate for the failure to deliver a commonly available car – damages will be perfectly adequate to allow the innocent party to purchase a practically identical car elsewhere. 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. 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 43

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’ (b) The action must be brought with reasonable promptness, as ‘delay defeats the equities’. The principles above apply to both prohibitory injunctions and to orders for specific performance.

Answer 44

1. Specific performance will not be awarded where it would cause undue hardship on the defendant: Patel v Ali [1984] Ch 283. 2. A promise given for no consideration is not specifically enforceable, even if made as a deed. 3. Specific performance will not be awarded for breach of contracts of employment: s 236 Trade Union and Labour Relations (Consolidation) Act 1992. For other contracts involving services, specific performance will not be awarded if there has been a breakdown of trust and confidence between the parties, or if the court would need to consider subjective opinions regarding performance: CH Giles & Co Ltd v Morris [1972] 1 WLR 307. 4. 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). 5. Specific performance will not be awarded for breach of a contract which is not binding on both parties. Thus where a contract is voidable at the option of party A, party B will not get specific performance against Party A. This principle is of particular importance in connection with minors’ voidable contracts.

Answer 45

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 46

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 47

Guarantee: A promise by a party to ensure that another party carries out its obligations, or a promise to fulfil those obligations itself if that other party does not do so. Indemnity: A promise to reimburse someone in the event that they suffer a stated loss. there is a further difference if there is a change to the contract between A and B after the guarantee/indemnity is given. In those circumstances, a guarantee would almost always be discharged. However, an indemnity would remain in force. 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.