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A discussion of contractual relationships and breach of contract

Many commercial agreements contain express provisions forremedies. For example, in a contract for the sale of goods, thebuyer may be entitled to require the seller to make good orreplace defective items.

There may be a presumption which may beexpressed in the contract that all the terms which are to governtheir contractual relationship have been included by the partiesin express written form in the contract itself. In doing so theyintended a discussion of contractual relationships and breach of contract displace any rights and remedies provided by law such as the buyer's right to terminate the contract forfundamental breach which are not specified in the contract.

The purpose of a cumulative remedies clause is to ensure thatthe parties' rights specifically provided for in the agreementare in addition to their rights provided by the general law see inset box "Cumulative remedies clause". Anyparticular remedy that a party envisages it may need should bespecifically preserved in the contract. Damages Unlike the equitable remedies of specific performance andinjunction see "Specific performance" and "Injunctions"below damages for loss in a breach of contract claim areavailable as of right.

An innocent party may claim damages from the party in breachin respect of all breaches of contract. The damages may benominal or substantial. Nominal damages are awarded where theinnocent party has suffered no loss as a result of the other'sbreach and substantial damages are awarded as monetarycompensation for loss suffered as a result of the other party'sbreach.

For an innocent party to obtain substantial damages he mustshow that he has suffered loss as a result of the breach remoteness and the amount of his loss measure. It is up tothe party in breach to argue that the innocent party has failedto mitigate his loss. Remoteness of loss The innocent party may only recover damages for loss sufferedas a result of the breach provided it is not too remote.

The aimof damages is to put him in the position he would have been hadthe contract been properly performed. The principles of remoteness are given in Hadley vBaxendale [1854] 9 Exch. All loss which flows naturally from the breach. All loss which was in the contemplation of the parties at thetime the contract was made as a probable results of thebreach. If the loss does not fall within the a discussion of contractual relationships and breach of contract categories, then itwill be too remote and will not be recoverable.

The rule in Hadley v Baxendale has been interpretedto mean that only loss which is within the reasonablecontemplation of the parties may be recovered The Heron II[1969] 1 AC 350.

Note that when dealing with specific types of contract theremay be legislation that covers remedies under that particulartype of contract. For example, in a sale of goods contract, aparty may be able to recover special damages for example, fromunusual loss arising from special circumstances known thecontract breaker section 54, Sale of Goods Act 1979 SGA.

Remedies for breach of contract

Measure of damages This is the method for calculating the damages to which theinnocent party is entitled. It covers loss of bargain orexpectation loss. The usual aim of the court is to put theinnocent party in the position he would have been in had thecontract been properly performed Robinson v Harman [1848] 18LJ Ex 202. The two usual methods of assessing this aredifference in value or cost of cure. The court will generally usethe more appropriate. Sometimes reliance loss may be sought where loss ofexpectation is difficult to prove.

The aim of reliance loss is toput the innocent party into the position he a discussion of contractual relationships and breach of contract have been inhad the contract never been made, that is, an indemnity for hisout of pocket expenses incurred in reliance on the contract Anglia TV v Reed [1972] 1 QB 60.

There are many other types of loss that have been claimed byinnocent parties. Damages for disappointment or mental distressare not generally awarded Addis v Gramophone Co. Mitigation An innocent party cannot recover for loss that he could haveavoided by taking reasonable steps.

This is sometimes expressedas the duty to mitigate. This does not apply to actions for theprice of goods delivered. Such an action is an action for anagreed sum and not an action for damages.

Although there is no duty to mitigate before actual breachoccurs the innocent party should not aggravate his loss. It isfor the defendant to prove that the plaintiff has failed tomitigate his loss Pilkington v Wood [1953] Ch 770.

Advance payments If a party in breach has made advanced payments under thecontract his ability to recover that money depends upon whetherthat payment constitutes a deposit that is, a guarantee by himof due performance or merely a payment of the whole or part ofthe price in advance. If it is a deposit this depends on the intentions of theparties the general rule is that it cannot be recovered and itwill be set off against any damages awarded to the innocentparty.

Care should always be taken with deposits so that they donot amount to penalties see "Penalty clauses"below. However it may be possible to recover a deposit ifthe party has a lien over it for example, Chattey andAnother v Farndale Holding Inc. If the advance payment is not a deposit, the party in breachmay recover it, subject to any claim for damages by the innocentparty in respect of the breach.

An innocent party may only recover an advance payment if therehas been a total failure of consideration. This is aquasi-contractual remedy. If there is only a partial failure ofconsideration, this remedy is not available Rowland v Divall[1923] 2 KB 500.

Penalty clauses and liquidated damages It is common for the parties to expressly state in thecontract that if the contract is breached, a specified sum willbe payable or that goods will be forfeited. Clauses coveringthese areas are known as liquidated or agreed damages clauses. They frequently appear in commercial contracts, whetherindividually negotiated or on a party's standard business termsand, most commonly, in relation to late rather than defectiveperformance, particularly in the fields of construction andengineering and supply or sale of goods.

Occasionally, theyappear in lease agreements imposed by a key or anchor tenant who,for example, needs to be trading from the demised premises by acertain deadline.

Such clauses do not usually appear in contractsof employment. The purposes of such clauses are to make recovery of damageseasier, avoiding the problems of proving actual loss; to avoidarguments as to the remoteness of certain types of consequentialor indirect losses; and to assure the other party of theirintention to be bound by the contract.

The normal rules applicable to the determination of whether aclause operates as liquidated damages or a penalty applyirrespective of the type of contract in question. A distinctionmust be drawn between clauses which purport to impose a penaltyon the defaulting party and clauses which levy liquidated damagesfrom that party. Penalty clauses are generally not enforceable,whereas liquidated damages clauses are. Penalty or liquidated damages?

For a liquidated damages clause to be valid the specified summust be a genuine pre-estimate of the anticipated loss which theclaimant would be likely to suffer in the event of a breach ofthe obligation in question. If the loss is difficult to quantifya "best guess" procedure should be operated, keeping a record ofthe calculations underlying any elements of the determinedfigure.

Provided the selected figure is not vastly in excess ofthe greatest loss which could be suffered, the clause is likelyto be enforceable. The essence of a penalty is that the moneyspecified is in terrorem of the defaulting party, inother words, it is intended to apply undue force to the otherparty to perform his side of the contract.

The use of the words "penalty" or "liquidated damages" are notconclusive. It is necessary to examine whether the amountspecified is in fact a penalty or liquidated damages.

Remoteness of loss

The leading case of Dunlop Pneumatic Tyresestablishes the tests to distinguish penalties from liquidateddamages: A clause will be construed as a penalty clause if the sumspecified is "extravagant and unconscionable" in comparison withthe greatest loss that could possibly have been proved as aresult of the breach.

It is likely to be a penalty if the breach of contractconsists of not paying a sum of money and the sum stipulated asdamages is greater than the sum which ought to have beenpaid. There is a presumption that if the same sum is stated toapply to different types of breach of contract, some of which areserious and others not, it is likely to be a penalty clause. It is not a bar to the operation of a liquidated damagesclause that a precise pre-estimation is impossible.

C 79 There is no public policy issue in relation to the upper limitof damages to which parties can contract to be liable. The UnfairContract Terms Act 1977 will in certain circumstances impose atest of reasonableness in relation to exclusion clauses whichpurport to limit or exclude liability but this is unlikely toapply to a genuine liquidated damages clause.

If the clausespecifies a sum which is more than a genuine pre-estimate andtherefore a penalty the clause will be unenforceable. The courtswill not benefit the party claiming damages by imposing a a discussion of contractual relationships and breach of contract figure. To claim on a genuine liquidated damages clause, the claimantmerely has to show breach of contract, whether or not there hasbeen any actual loss and regardless of the extent of anyloss.

It is not entirely clear whether a liquidated damages clauseis intended to be a mutually binding limitation on the amount ofdamages payable.

It is likely that it is intended to be mutuallybinding in the field of building and engineering contracts. A contract can, however,expressly provide for the party seeking to impose the clause tohave a choice whether to operate it or not. Certain charterpartycases suggest that the claimant may have a choice either to sueunder the liquidated damages clause or to ignore it and claimgeneral damages without limitation although these cases areprobably limited to that area of law.

If, however, the clause is invalidated because it is a penaltyclause or due to acts of the claimant such as requiring theother party to perform additional work without a contractualmechanism to grant that party further time to perform thecontract or breach of contract by the claimant, then the limitspecified in the unworkable clause will operate as a limitationon the amount of damages which can be claimed although in thecase of a penalty the limit is unlikely to be reached because byits nature, it will be higher than the loss could ever be.

As regards enforcement, many contracts will specify that thedamages can be deducted from subsequent sums due. This isparticularly the case for building contracts where interimpayments to the contractor are usual. Many contracts will alsoprovide for the claimant to be able to recover liquidated damagesas if they were a debt due by the other party. If possible, whendrafting a penalty clause, you should try to ensure that you candeduct or recover damages in these ways as they are a moreeffective way of ensuring that you will be able to recover themoney due.

Otherwise the usual rules of enforcement would apply and aclaim form would be issued in the normal manner without, ofcourse, having to prove actual loss. Note that it will be a defence to a claim for liquidateddamages that the claimant has prevented the other party fromcompleting his obligations either by the claimant's own breach ofcontract or by other acts a discussion of contractual relationships and breach of contract prevention in circumstances wherethere is no provision in the contract to make an allowance orgive a time extension to the party from whom damages are claimedfor these circumstances.

It is important to observe all relevant proceduralrequirements in the contract such as notice periods andprovisions requiring the liquidated damages to be assessed anddeducted within certain time periods, otherwise the defendantwill not be required to pay the damages. Specific a discussion of contractual relationships and breach of contract This is an equitable remedy granted at the court'sdiscretion. Specific performance is a decree by the court to compel aparty to perform his contractual obligations.

It is usually onlyordered where damages are not an adequate remedy for examplewhere the subject matter of the contract is unique for example,Chinese vases in Falcke v Gray [1859] 4 Drew651 but not if a replacement of the subject matter could beobtained even after a long delay Societe des IndustriesMetallurgiques SA v Bronx Engineering Co Ltd [1975] 1 Lloyds Rep465.

It is a general rule that specific performance will not beordered if the contract requires performance or constantsupervision over a period of time and the obligations in thecontract are not clearly defined. For example, specificperformance of a covenant to keep a shop open during normalbusiness hours was refused by the House of Lords in Co-opInsurance v Argyll Stores [1997] 3 All ER 297 onthe grounds that enforcement of a covenant to carry on a businesswould require constant supervision of the courts with the courtresorting to criminal punishment for contempt of court if theorder was not complied with.

However, a recent case has reversedthis rule in relation to a tenant's repair covenants RainbowEstates Limited v Tokenhold Limited and another [1998] NewProperty Cases 33. The judge in this case concluded thatthe old law of refusing specific performance if it would involveconstant supervision was no longer good or at least that therewere exceptions.

It may be that only in the most exceptionalcircumstances such as in this case specific performance will beavailable to the landlords; however the arguments advancedindicate that it should be available in other situations. Factors militating infavour of this remedy were that the landlord had no right ofentry to repair in default of the tenant; that the lease had noforfeiture clause and that the building was listed so that repairas distinct from redevelopment was the most appropriateoutcome.

Specific performance is often ordered in relation to buildingcontracts because the contract deals with results rather than thecarrying on of an activity over a period of time and it usuallydefines the work to be completed with certainty Jeune vQueens Cross Properties Ltd [1973] 3 All ER 97.

Specific performance is not available for contracts requiringpersonal services such as employment contracts because such anorder would restrict an individual's freedom Chappell vTimes Newspapers Ltd [1975] 1 WLR 482.

contractual relationship

The court has broad discretion to award specific performanceand in exercising this discretion it takes into account factorssuch as: Whether the person against whom the order is sought wouldsuffer hardship in performing Patel v Ali [1984] 1 All ER978. The difference between the benefit the order would give toone party and the cost of performance to the other Tito vWaddell No 2 [1977] Ch 106.

Whether any third party rights would be affected. Injunction Like specific performance, an injunction is an equitableremedy and therefore only granted at the discretion of the court. It is awarded in circumstances where damages would not be anadequate remedy to compensate the claimant because the claimantneeds to restrain the defendant from starting or continuing abreach of a negative contractual undertaking prohibitoryinjunction or needs to compel performance of a positivecontractual obligation mandatory injunction.