12 Discharge and breach of contract
Learning Objectives
On completion of this Chapter, you should be able to:
- Discuss the doctrine of privity of contract.
- Describe the circumstances in which novation and assignment of rights and liabilities can change contractual obligations.
- List how a contract may be ended.
- Explain the situations in which a contract may be breached.
- Explain the common law remedies for breach of contract.
- Explain the steps in determining an award of damages at common law.
- List the main types of equitable remedies and explain where they may apply.
Key terms
You will notice these key terms, which are mentioned throughout the chapter, to help you to better understand and remember the material:
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- Actual breach: failure at the time required by the contract.
- Anticipatory breach: the threatened failure to perform and can occur expressly or by implication.
- Anton Piller order: an order that is available only where it can be shown that the defendant has incriminating evidence that is necessary to the plaintiff’s case and which may be destroyed before ‘discovery’ can be made.
- Assignment: transfer.
- Condition precedent: a precondition that, depending on its analysis, stops a contract from coming into existence until the occurrence of some specified event.
- Condition subsequent: a term of the contract that must be complied with after the contract is made, that is, in the future, or the other party can terminate for non-fulfillment.
- Damages: compensation in monetary form for the loss suffered by the plaintiff, which puts the plaintiff back in the position they would have been in had the breach not occurred.
- Divisible contract: a contract that is capable of being divided into separate parts.
- Exemplary damages: punitive damages.
- Expectation damages: (also known as ‘expectation losses’) arise from your expectation of prospective benefits arising out of or created by the contract.
- Force majeure: clause operates to suspend a party’s obligations under a contract when an event occurs that is outside their control, causing them to be incapable of carrying out their obligations under the contract for the period of the event.
- Frustration: the discharge of a contract rendered impossible to perform because of the operation of external factors beyond the contemplation of the parties.
- Injunction: a discretionary remedy in equity restraining a party from doing something.
- Innominate term: a term between a condition and a warranty and is used by the courts when it can’t be shown that a term is a condition or warranty.
- Legal tender: currency that may be lawfully tendered in payment of a debt.
- Liquidated damages: an agreed sum based on a genuine pre-estimate of the actual loss that would be suffered by the plaintiff in the event. of a breach of the contract.
- Mitigation: the steps taken by the plaintiff to minimize their loss.
- Nominal damages: compensation awarded where the plaintiff’s rights have been infringed but they have suffered no actual loss.
- Novation: the substitution of a new contract for an old one; the new contract extinguishes the rights and liabilities that were in effect under the old contract.
- Ordinary damages: the amount awarded by the court on its assessment of the loss suffered by the plaintiff as a result of the breach.
- Penalty: in contract, a damages clause that is not a genuine pre-estimate of the actual damage or loss suffered by a party as a result of the breach.
- Privity of contract: only those who are a party to the contract are affected by it.
- Quantum meruit: an equitable remedy that means as much as a person has earned or as much as that person deserves.
- Rectification: an equitable remedy to correct an omission in a written contract that both parties had failed to correct by mistake at the time of making the contract.
- Reliance damages: (or ‘wasted expenditure damages’) arise from expenditure incurred by you relying on the defendant’s promise and which is wasted because of the defendant’s breach.
- Rescission: a common law or equitable remedy that entitles the injured party to elect to rescind the contract and restores the injured party to their pre-contractual position.
- Specific performance: an equitable remedy compelling a person to carry out their contractual obligations where damages would be an inadequate remedy for breach of the agreement. It is not obtainable for contracts of personal service.
- Unliquidated damages: (also called ‘general damages’) damages for a loss, where the value of the loss cannot be accurately determined or exactly calculated.
- Waiver: one party leads the other to reasonably believe that strict performance will not be insisted on.
- Warranty: a term of a contract that is of lesser importance than a condition and for which an innocent party can only get damages. They cannot terminate the contract.
Introduction
Well done. This is the last chapter on Contract Law. You now know what is involved in creating a contract, how to determine its validity, and what are the terms of the contract that the parties have agreed to. However, this is not quite the end of the story. It is not unusual for one of the parties to want to assign their rights or obligations under the contract to a third party. Also, under what circumstances can a contract be ended? And what remedies are available to an innocent party if the other party breaches the contract?
In this chapter we will begin by looking first at the position of third parties and how they can acquire rights and incur liabilities under a contract before moving on to the circumstances under which the obligations of the parties to a contract can be discharged or dissolved, including the issue of breach and remedies at common law and equity. We finish with a brief overview of ethical considerations in contract law.
Section 1: Privity of contract
A basic rule of contract law is that only the parties to a contract can:
- acquire rights under it, and
- incur obligations under it (the doctrine of privity of contract).
The doctrine of privity only applies to contractual rights and obligations for the immediate parties to the contract. A point to remember about contracts is that they are considered to be private arrangements between the parties (the offeror and the offeree) and that the arrangements that they have made only affect them.
Other people who are not parties to the contract, that is, third parties or strangers, cannot acquire any rights or incur any liabilities under the ‘contract’. Remember that the basis of a contract is the ‘bargain’ that the parties have struck between themselves, where each party has bargained for or given something in return for the promise or performance of the other party. However, this may produce unfortunate consequences for a person who was not a party to the contract, but for whom the contract was intended to benefit.
While no right of action in a contract exists against a person who is not a party to a contract, a third party who induces a breach of contract may find that they have committed a tort called inducement of breach of contract (an economic tort).
What is an assignment?
The term ‘assignment’ in contract law is a term frequently used by contracting parties in commercial contracts where there is a transfer of rights, obligations, or property from one party (the ‘assignor’) to a third party (the ‘assignee’ who was not a party to the original agreement). For the assignment to be enforceable, the original parties to the agreement must consent to the assignment.
The effect of assignment is that the assignor is no longer entitled to any benefits under the original agreement because they have all been passed to the assignee but check that there is not a negative clause that restricts the original parties’ rights to assign.
Common examples where you might encounter an assignment is in an asset sale where a corporation might sell part or all of its company, where a contractor subcontracts their work, or a borrower offers as security to a lender an interest in their assets.
Can you assign rights?
As we noted above, generally, only the persons who are parties to a contract can acquire rights and incur liabilities under it: Dunlop Pneumatic Tyre Co Ltd v Selfridge & Co Ltd [19156] AC 847. Strictly speaking, it is not possible at common law for a third party to overcome the doctrine of privity. However, there are some exceptions to the privity rule including agency, assignment and novation, rights held on trust for a third party, leases, estoppel, and unjust enrichment. Equity, on the other hand, permits the assignment of contractual rights, including debts. An equitable remedy is not available if the contract requires the performance of a personal service.
Can you assign liabilities?
Generally, a party who has contracted to perform obligations (liabilities) under a contract cannot transfer those obligations to another. The promisee cannot be forced to accept performance or a promise of performance from any person other than the promisor.
However, if the parties to the contract consent, liability may be transferred by way of ‘novation’. Generally, an assignor who has contracted to perform obligations (liabilities) under a contract cannot transfer those obligations to another unless the non-transferring party and the potential assignee agree. The parties should then enter into a novation agreement (which is a new contract between the non-transferring party and the assignee).
Section 2: What are the different methods of discharge of a contract?
What amounts to performance?
Performance is how most commercial contracts are discharged. A party’s duty under a contract is to discharge their obligations, or their promises, in full, that is, by total performance. Once they have done that, they are excused from further performance under the contract.
Performance may be:
- actual performance: where the promises by the parties under the contract have been properly performed. This rule is strictly interpreted at common law. If the variation is only minimal or trivial, then generally the courts will not worry about it. But each case is determined on its facts, and in each case, the question to ask is whether there has been a substantial departure from the contract. In the English case of Re Moore & Co Ltd and Landauer & Co [1921] 2 KB 519 an order was placed for canned fruit in cases of 30 tins but when the goods arrived, the correct quantity of tins arrived but they were packed 24 tins per case. The buyer was entitled to reject the order as the packaging method was an essential part of the contract description.
Does the decision in Re Moore & Co Ltd and Landauer & Co sound trivial? In this case, think about the storage costs and the profit margin. If cases containing 24 tins take up more storage room doesn’t that add to the buyer’s costs? And if the profit margin is small, the extra storage space could turn a profit into a loss.
- partial performance: where there has been a partial performance, payment does not automatically follow unless:
- the contract is divisible, that is, capable of being divided into separate parts which is a question of construction
- there has been a free and willing acceptance by the party receiving the benefit
- that there has been substantial performance, and
- the actions by the non-performing party prevent performance – for example, in building contracts where work and payment are done in stages.
If the contract is divisible, that is, it can be divided into parts which is atypical of many building contracts, it may be possible for the builder to seek payment for the work already done (called a quantum meruit claim or ‘what the person deserves’). This is based on an implied promise to pay a reasonable sum for work done.
If the contract is not divisible, that is, it is entire and cannot be divided into parts, entitlement to payment only happens upon completion of the task. The reason is that the consideration for the right to demand payment is based on the promise to complete the work. In this type of case, where there is still an express contract in force to pay the full amount, a quantum meruit claim will fail because the express promise takes precedence over the implied promise to pay a reasonable sum for work completed.
What if there is a free and willing acceptance of partial performance by the party receiving the benefit? In this case, the parties are agreeing to abandon their original agreement and substitute a new agreement. This is based on the partial performance of the original contract and the payment of a lesser amount than would have been due under that contract. But note, if the party accepting the changed circumstances has no option but to accept, then there is no free and willing agreement and therefore no acceptance of partial performance.
If one party is prevented from carrying out their part of the contract, the other party may regard the contract as at an end. But the party being prevented from performing will be released from any further obligations and can repudiate the contract, and/or claim damages for breach. If work has commenced under the contract but has not been completed, they may claim on a quantum meruit.
If the breach is minor, so that the cost of rectification is small when compared with the contract price, the doctrine of substantial performance may still permit the defaulting party to obtain the contract price. This is a question of fact and can be assessed by considering the nature of the defects and the difference between the cost of rectification and the contract price, the benefits obtained by the owner, whether the work is entirely different from that contracted for, and whether the contractor has abandoned the job.
In an ordinary lump sum contract, unless there is a clause in the contract to the contrary, a party cannot refuse to pay the full amount because there are defects in the work performed. In this case, the innocent party must pay the contract price less a deduction for the costs of rectification through a set-off or counterclaim.
- Performance and delivery of goods: If one party to a contract offers to perform their obligations under the contract and the other party refuses to accept the offer, the person offering the service will be discharged from further performance and the contract dissolved, provided that the attempted performance was exactly following the terms of the contract.
- Performance and the payment of money: where a contract is to be completed by the payment of money, it is necessary that the payment be made correctly. This may be by way of absolute discharge, that is, payment to the right person, at the right place, at the right time, and by legal tender (which includes a bill of exchange, promissory note, cheque, payment order, or online), as absolute satisfaction of the debt (payment in full). Payment should be made at the creditor’s normal place of business and during business hours.
Where payment is by cheque (this is a conditional discharge), the debtor will not receive an absolute discharge unless the creditor has asked for payment by cheque. A cheque is a conditional payment. The bank must honour the cheque before the creditor can get their money. If the creditor didn’t ask to be paid by cheque and the cheque is dishonoured, then the creditor can sue on the contract or the cheque.
If payment is made by post, then you need to ascertain whether the post office was an agent for the creditor, or the debtor should the cheque get lost. If the creditor requests payment by post, the post office is the agent of the creditor and if the letter is lost in transit, that is the creditor’s problem. If the creditor has not asked for payment to be made by post and the letter gets lost, then it is the debtor’s problem.
What is termination?
This is a self-help remedy available to an innocent party and is used if there has been a repudiation of the contract by the other party.
What is mutual agreement?
Here both parties abandon their original agreement while there is still something to be done. There are several ways this could take place including:
- alteration is where the parties agree to change the terms of the contract.
- merger is where two companies come together and operate as a single legal entity, combining their assets and liabilities.
- novation is where a new contract is created between the non-transferring party and the assignee without changing the obligations agreed to in the original contract. The assignor agrees to forgo any rights afforded to them in the original contract.
- remission occurs when one party voluntarily agrees to accept a lesser amount or lesser performance of the promise made by the other party – for example, when a creditor agrees to accept less than the full amount they are owed (perhaps to avoid going to court).
- rescission is a discretionary remedy in equity used by the courts when they have determined that a reason for one of the parties entering into the contract was unfair. This could be due to mistake, misrepresentation, duress, or error by the other contracting party.
What is repudiation?
Repudiation is where one party to a contract decides to terminate the contract because they no longer wish to carry out their obligations. This often takes place before the repudiating party has breached their obligations. This then leaves the other party with the choice of ending the contract (what is known as an anticipatory breach) or continuing and waiting for the repudiating party to fail to carry out their obligations and be in breach of the contract.
What is release?
This is similar to waiver (see below) but here, one party has performed their obligations but the other hasn’t. Such a release amounts to a unilateral discharge of the contract and will not be effective unless it is:
- under seal (often referred to as a deed of release); or
- supported by further consideration by the party who is yet to complete their obligations; or
- subject to the principle of promissory estoppel (which was covered in Chapter 7).
If a third party offers a smaller sum in the discharge of the whole debt, and the creditor accepts it, the creditor can’t then maintain an action for the balance from the debtor because they are bound by the agreement with the third party when they accept the smaller amount in discharge of the whole debt. It would be a fraud on the third party to proceed for the balance owed by the debtor.
How does waiver differ from release?
A waiver of contract occurs when one of the parties to the contract deliberately gives up their rights and leads the other party to reasonably believe that while strict performance can still technically be demanded, it will not be strictly insisted on. To constitute a waiver, the action of the party giving up their rights must be intentional, voluntary, and depend on what is outlined in the contract.
What is accord and satisfaction?
When one party has performed their obligations under a contract and the other has not, the defaulting party can be relieved of their obligations in return for doing something different from what they were bound to do originally (the ‘accord’ refers to the new agreement and the ‘satisfaction’ to the consideration for it which will be the performance of the new terms according to the agreement). You will often find an accord and satisfaction occurring in debt negotiations.
What is a substituted agreement?
This applies where the parties wish to continue with their contractual relationship but on different terms. What can be done by the parties with one agreement can be undone by them with another agreement (novation). Interestingly, the new agreement need not be in the same form as the old one, and a written contract, including a deed, can be discharged or varied orally, but make sure that the intention to rescind the original contract is clear.
What is the operation of law?
Here the contract is terminated independently of the wishes of the parties, for example, by bankruptcy, or the death or injury of either party if it is a contract for personal services.
When is time important?
An offer cannot remain open indefinitely and in most commercial contracts there will be a time stipulated, or the offer will only remain open for a reasonable time. The length of time depends on the type of contract – for example, are the goods perishable and what is reasonable will be determined by the reasonable person or industry practice.
What is the difference between a condition precedent and a condition subsequent?
A condition subsequent (or a ‘reversal clause’) is a term often found in commercial and property agreements or contracts that allow a party to terminate the agreement or contract at any time in the future, even where there may be no fault by the other party. It is a term that is often found in leases and loan agreements, for example, the lender reserves the right to terminate the loan agreement and demand repayment in full if the borrower fails to make their agreed repayments on the loan on time on prescribed in the contract. Just note that in the case of a condition subsequent, the contract is in existence but if the condition is not met, then the contract is void. The onus is on the defendant to demonstrate that conditions subsequent were met.
A condition precedent is a term in the contract that must be fulfilled before the contract can come into existence and is used, for example, in real estate dealings to avoid a binding sale arising without the buyer’s express consent during the negotiation process. Two points to keep in mind where a condition precedent is concerned:
- either party can withdraw from the agreement at any time before the condition precedent is fulfilled
- a party that fails to perform the condition precedent is not in breach of contract because there is no contract at this stage.
Does breach end a contract?
Where one of the parties does not fulfill their obligations under the contract within the time required by the contract – for example, by failure to comply with a term of the contract. This is an actual breach and can be contrasted with an anticipatory breach which is where one party threatens not to perform. An anticipatory breach entitles the innocent party to repudiate the contract, sue for breach immediately, and treat the contract as at an end. It also allows the injured party to mitigate or minimise their loss by making alternative arrangements.
Reflection questions
Take a break a break, but read these questions first, and think about how you could answer them.
- If the creditor has not expressly indicated that payment must be by post – for example, if the account reads ‘Payment within 7 days’ rather than ‘Payment within 7 days by post’ – loss of the letter and its contents is borne by the debtor, irrespective of what past practice has been unless payment is in another city or a great distance away. Explain why.
- Where there has been partial performance of a contract, does payment still automatically follow for the party in breach? Explain why.
- The seller agreed to supply 4500 tonnes of wheat to the buyer. The contract allowed a variation of 2% on weight and a further 8% on contract quantity. The seller delivered 25 kg more than the maximum allowed under the contract but never claimed payment for the surplus. Can the buyer reject the whole cargo solely on the ground that the quantity tendered was 25 kg over the contract quantity? Explain.
- Hoenig was employed to redecorate and furnish Laura’s flat for K1500, to be paid as follows: ‘Terms of payment are net cash, in three instalments of K300 as the work proceeded; and balance of K600 on completion’. Laura paid K600 to Hoenig. The work was done poorly, and the cost of rectification was K350. Hoenig was not happy. Can he recover the balance of K900 from Laura?
What is the doctrine of frustration?
If a party promises to carry out a particular act, the law will hold them to their promise. This principle is commonly known as the doctrine of absolute liability. Because of the potential harshness of this doctrine, the doctrine of frustration was developed.
If the object or purpose of the contract is no longer attainable owing to something beyond the control and contemplation of the parties – for example, if you promised to sell your house to a friend and, unknown to either party, the house burns down making the contract impossible to perform, would it be unreasonable to hold the parties to the contract as it is no longer attainable owing to something beyond the control of either party? Just note that the event has to be unforeseen and make a radical change to the contract making it impossible to perform – it can be said to be frustrated. It is probably best to approach the question of frustration on a case-by-case basis given how uncertain it is.
Note that if a contract has two objectives, one of which becomes non-attainable because of a frustrating event while the other objective can be attained, the contract is not discharged.
There are situations where it is not possible to plead frustration, and these include:
- the parties have made specific provision in the contract for what might otherwise have been a frustrating event
- it should have been foreseen, but for some reason or another was not
- the frustrating event was self-induced by the party making the plea
- hardship
- inconvenience
- expense in performance, making the contract uneconomic
- impracticability of performance
- the contract has two objectives and only one is non-attainable; or
- a temporary injury or incapacity in a contract of employment.
Frustration can arise only where all of the following are satisfied:
- an unforeseen event outside the control of the contracting parties (a supervening event) has significantly or radically changed the obligations of the parties from their original intentions; and
- neither party caused the ‘supervening event’; and
- neither contemplated nor anticipated the supervening event, so there was no provision in the contract for it; and
- the new circumstances would make it unjust to hold the parties to their original contract because the obligations of the parties have become impossible or radically different to perform.
As noted above, the effect of a frustrating event is to discharge a contract immediately, but only in the future. The contract is not void ab initio, but void only from the time of the frustrating event. For the period that the contract is valid, any obligations that arise must be fulfilled. Money paid under the terms of the contract before the frustrating event occurs (for example, a deposit) cannot be recovered because at the time the money was paid the contract was valid. You would need to establish a total failure of consideration to be able to recover the money.
When can the doctrine of frustration apply?
Delays, hardship, fault, foreseeable events and inconvenience cannot frustrate a contract.
Cases that could involve the doctrine of frustration include:
- Physical impossibility because of the destruction of the subject matter –where the subject matter of the contract, whether for goods or services, is dependent upon the existence of the subject matter, the non-existence of the subject matter after the contract is entered into is sufficient to frustrate the contract.
- Physical impossibility under a contract of personal services –if the promisor dies, becomes sick, or incapacitated then performance is rendered impossible, and the contract is frustrated.
- Change in the law rendering performance impossible, such as the outbreak of war, terrorist attacks, or state intervention such as the imposing of an embargo on the export of certain goods or services of the parties.
- Impossibility owing to the non-occurrence of an event basic to the contract– where the entire basis of the contract is the occurrence of some event that doesn’t happen. In the English case of Krell v Henry [1903] 2 KB 740 Krell had hired a room specifically to watch the coronation of Edward VII. The procession was postponed because of the illness of the King and Krell successfully claimed the contract was frustrated by the non-occurrence of the event.
Note that in the case of Krell, the contract only had one objective. But if there are two or more objectives, one of which becomes non-attainable because of an unforeseen or frustrating event, the contract is not discharged.
- Where the particular state of affairs ceases to exist– if the circumstances upon which the contract is based cease to exist or have been substantially changed without the fault of either party, making performance radically different from that originally contemplated by the parties, the contract can be said to be frustrated.
What is the effect of frustration on a contract?
The effect of frustration on a contract is to discharge the contract immediately, but only as to the future. The contract is not void ab initio (void from the beginning) but void only from the time of the frustrating event and this distinguishes it from a force majeure clause.
For the time that the contract is valid, any obligations that may have arisen must be fulfilled. Money paid under the terms of the contract, such as a deposit, before the contract is frustrated cannot be recovered. Why? Because at the time the money was paid, the contract was valid and if you wish to get your deposit back you are going to have to establish that there has been a total failure of consideration, and you got nothing under the contract. Assistance may be available under the Frustrated Contracts Act 1978 (NSW).
Force majeure
A better option for an innocent party than frustration may be to include a force majeure clause in the contract. This relieves a party from performing their contractual obligations and possibly being sued for breach of contract where they are unable to perform their contractual obligations because of an unforeseen and disruptive event that is beyond the control of one or both parties for the period of the event, includes, for example, COVID–19, war, ‘acts of God’ such as fires, earthquakes and cyclones.
Unlike frustration, which discharges the contract from the time of the frustrating event, a force majeure clause suspends the operation of the contract until cessation of the unforeseen event. The force majeure clause is interpreted objectively based on what a reasonable person would have understood at the time the contract was made. It can provide the parties to the contract with an option to suspend the operation of the contract for the period of the event or terminate the contract if the event looks as though it is going to be drawn out.
A force majeure generally requires three conditions to be met if it is to be effective:
- it could have occurred with or without human intervention.
- it could not have been reasonably foreseen by the parties; and
- it could not reasonably have been prevented by the parties because it was completely beyond their control.
A problem with a force majeure clause is the need for care in its drafting. The wording must be precise and clear so that the parties understand what events will trigger the provision and then what steps you are required to follow. The clause should set out specific details on notification (by the affected party), specific details of the event, anticipated length of time, mitigation, obligations of the parties, and suspension or termination of the contract.
Example
An example of a force majeure clause
This force majeure clause is from a Property Management Framework Agreement by China Southern Airlines Company Limited and China Southern Airlines Group Property Management Company Limited in 2017:
Force Majeure
1. In the case of failure to perform this Agreement due to any force majeure, neither party shall be liable for such failure, and this Agreement shall be terminated automatically. In the case of failure to perform any part of this Agreement due to any force majeure, the party suffering from such force majeure may be exempted from corresponding liability to the extent of the impact of such force majeure. However, such party shall continue to perform other obligations under this Agreement which have not been affected by such force majeure. If such force majeure occurs after such party delays to perform this Agreement, it shall not be exempted from its corresponding liabilities.
Force Majeure may refer to an unforeseeable, unavoidable and unconquered objective situation, including but not limited to war, plague, strike, earthquake, flood, etc.
2. Any party failing to perform this Agreement due to any force majeure shall notice the other party within forty-eight (48) hours so as to reduce the possible loss caused to the other party and provide the proof of such force majeure within fifteen (15) working days. If it fails to perform its such obligations within the required time for rational reasons, such required time may be extended according to the actual conditions.’
Fairness of Transactions Act 1993 in Papua New Guinea
Section 4 of the Fairness of Transactions Act 1993 attempts to ensure that no party is unfairly advantaged or disadvantaged as the result of entering into a contract (s 4(1)), and to this end, the court has been given wide powers to ensure an equitable adjustment is achieved between the parties.
Reflection questions
Take a break and attempt these 2 problems (that are already decided cases):
- An English firm agreed to sell and deliver machinery to a Polish company, which paid £1000 (approximately K5000) in advance. The English firm commenced work on the machine, but because of the outbreak of war and the German occupation of Poland, the contract was frustrated. The question of frustration was not in issue; the Polish company claimed the right to recover the deposit it had paid before the frustrating event. The English firm claimed that it had done a considerable amount of work on the machine. What is the effect of frustration in this case?
- Imagine you wanted to hold a concert and an express term as to the purpose for which the hall you wanted to use was that it was in a fit state for a concert. Unknown to the parties the hall burnt down without their knowledge while they were still negotiating. A contract was subsequently entered into and both parties at the time of entering into a contract believed that the hall still existed. Has the contract been frustrated? Explain why or why not.
Section 3: What remedies are available for breach of contract?
The usual remedy for a breach of contract is an award of damages, which is a common law remedy. However, if a monetary remedy is not satisfactory, the court may exercise its discretion and order any one of several equitable remedies, including restitution, specific performance, an injunction, quantum meruit, or an Anton Piller order. It should be remembered that equitable remedies are based on the concept of fairness and are discretionary.
What are the steps in determining an award of damages?
Five (5) steps must be taken to determine whether the injured party will recover damages:
- Step 1: the onus is on you if you are the injured party (the plaintiff), to first establish that there has been a breach by the other party, which may be a breach of:
- condition (sometimes referred to as an ‘essential term’)
- warranty (sometimes referred to as a ‘non-essential term’); or
- innominate term.
- Step 2: having proved breach, the onus is on you as the plaintiff, to now establish causation, that is, that the loss or damage that you suffered was caused by the defendant’s breach of contract. That is, the loss or damage would not have been suffered ‘but for’ the defendant’s breach, and is established by reference to documents, records, and so on, and as this is a civil case, proved on the balance of probabilities.
- Step 3:remoteness of damage, that is, losses suffered by you must be a reasonably direct consequence of the breach of contract, and this is a question of fact. Losses that are too far removed from the wrongful act are regarded as not reasonably foreseeable and therefore too remote from the breach to be recoverable.
- Step 4: amount and type of damages, that is, the general principle concerning damages is that you as the injured party should be to put you in a position you would have been in had the breach never occurred. You must be able to show that they have suffered some loss if you are to recover ordinary damages. If you can’t, then at best you may be able to recover nominal damages(a sort of token loss because while there has been a breach of contract, the loss you have suffered is minimal). But you also need to be careful, because while you may have won the case, the judge may be annoyed that you have wasted the court’s time and order you to pay the costs of the other side which may be much higher than the token award you received).
The courts will allow claims for damages by a plaintiff (assume you are the injured party) for:
-
- expectation damages (losses) arising from your expectation of prospective benefit arising out of or created by the contract – for example, loss of a commercial opportunity and loss of profit occurring from the loss of the defendant’s performance.
- reliance damages (or ‘wasted expenditure damages’) arising from expenditure incurred by you relying on the defendant’s promise and which is wasted because of the defendant’s breach.
- Other losses
- injured feelings and anxiety
- inconvenience
- frustration
- discomfort
- mental distress; and
- disappointment, distress, and hurt feelings.
- Step 5: mitigation (minimisation) of damages, that is, in addition to the questions of remoteness and measure, the law imposes a duty on you as you are the person claiming damages (the injured party) to take all reasonable steps to reduce or minimise (mitigate) your loss. If you fail to take this step, for example, where an employer dismisses you as an employee for no reason, the amount of damages you can expect to recover will be reduced by an amount representing the value of any failure to take reasonable steps to find new employment. The burden of proof is on the defendant to show that you failed to mitigate your losses, and this is a question of fact.
- Whether there is a need to mitigate is a question of law. Thus, if a person such as yourself is wrongfully dismissed from your job, you must take reasonable steps to find other employment.
Business tip
Minimise the loss:
Whether it be anticipatory or actual breach, as the injured party, you should take immediate steps to minimise the loss or face the prospect of having the court reduce the amount of damages that you can recover.
What types of damages are available to you if you are an injured plaintiff?
Once it has been established that you are as the plaintiff entitled to compensation, it will have to be determined what type of damages you will be awarded. This means looking at two issues:
- the seriousness of the breach; and
- whether the contract has specified the amount of damages to be paid in the event of a breach.
Nominal damages are awarded where the court feels that your legal rights have been infringed, but you have suffered no actual loss. The court may therefore decide to award you a token amount.
Ordinary damages (as they are typically called) are the usual remedy in contract law. This is the amount awarded by the court on its assessment of the loss suffered by you as a result of the breach. They are a means of compensation for you and can take two forms:
- general damages: in contract they follow as a general consequence from the breach and include the difference between contract and market prices for the goods or services or the value of goods delivered and services carried out and as warranted.
- special damages: are asked for in addition to general damages. If they are to be claimed, they must be specially proved in court – for example, loss of profits that result from the failure of the seller to deliver goods to a buyer.
Exemplary damages are generally not awarded in contract (although they may be awarded in tort) unless the court feels that it should punish the party in default, for example, where the breach of contract has resulted in inconvenience, disappointment, or discomfort to you (the innocent party), such as cases involving holiday packages where, for example, the facilities or accommodation have been misrepresented by the travel agent or the person they represent. Here, the courts have been prepared to award what are termed ‘aggravated damages for non-pecuniary losses’.
What is the difference between liquidated damages, unliquidated damages and penalty?
In brief
Liquidated and unliquidated damages and penalty
| TYPE | DESCRIPTION |
|---|---|
| Liquidated | Fixed amount. Must be a genuine or reasonable pre-estimate of actual loss flowing from the breach or, the court may treat it as a penalty and then there will be no remedy. |
| Unliquidated | Left to the court to determine. Not fixed in the contract as the loss cannot be accurately determined. |
| Penalty | A clause, intended to deter, penalise or threaten a party, which is out of proportion with the loss that could be suffered from a breach. |
Reflection questions
Time for a break and, a good time for you to check on how you are doing by reflecting on these questions
- Why do the courts refuse to enforce penalty clauses in contracts?
- Explain the difference between liquidated and unliquidated damages and a penalty.
- Explain why an injured party to a contract should have to mitigate their loss.
- Joad Tyres sold car covers and other motor accessories to Casey under a contract which provided that Casey would not sell any of the items below certain listed prices. In the event of breach of the agreement, Casey agreed to pay K50 in liquidated damages for every item it sold below the listed price. Casey subsequently sold a tyre below the listed price and was sued by Joad Tyres. Would you classify the sum as a penalty or liquidated damages? Explain why.
- You arranged a 2-week holiday in Switzerland through a brochure from Swans Tours. The brochure claimed the accommodation was close to the ski fields, its owner spoke English, and there would be a welcome party on arrival and a farewell party on departure at the bar. However, few of the statements proved to be correct and the trip turned into a disaster. What would you do?
- The defendant leased a racehorse to you for 3 years. After 6 months, the defendant took the horse back. As part of the damages claim for breach of contract, you sued for loss of potential prize money and profits that you would have made from betting on the horse. Do you think you would succeed in your claim? Why?
Equitable remedies
In addition to the common law remedies mentioned above, there are a number of equitable remedies available to address breach of contract. These are remedies awarded at the court’s discretion (called discretionary remedies) and include:
- Rescission: it is a remedy that the court grants if it orders that the transaction be set aside. The court has a discretion whether to grant it or not. It may be sought on grounds including undue influence, unconscientious bargains, innocent misrepresentation, and mistake.
- Specific performance: an order directing a person to carry out their obligations under the contract and is only ordered when damages are not an adequate remedy, and it is just and equitable to do so under the circumstances. It is not usually awarded in contracts that require personal services for another party because of problems with supervision.
- Rectification: a court order altering or amending a written contract where the parties have used words that do not express their intention.
- Injunction: a court order restraining a party from breaking their contract or from committing a wrongful act. It will not be awarded if damages are an adequate remedy. Interestingly, an injunction is often used to enforce contracts of personal services by enforcing a negative promise – for example, employment contracts that contain a restraint of trade clause in them.
- Anton Piller order: an order that is available only where it can be shown that the defendant has incriminating evidence that is necessary to the plaintiff’s case and which may be destroyed before ‘discovery’ can be made.
- Quantum meruit (‘as much as the person has earned’): an equitable claim for restitution for the unjust enrichment of the defendant and means, and often used by contractors. Essentially, it is an action for payment of the reasonable value of services performed.
The contract may be discharged by breach, but where the contract is for goods or services there is a new implied contract imposed by law on the party taking the benefit that they will pay a reasonable amount for the quantum or portion given. It is not available to the party in breach.
When an innocent party chooses to sue on the quantum meruit, and the claim is assessed only based on work done, the party is obliged to:
- prove the value of the work
- show that the work was completed with proper skill; and
- show that it was completed within a reasonable time.
The amount recovered depends on whether the contract price is divided between stages or on completion. If you as the plaintiff only partially fulfill your obligations under the contract and payment is made based on the completion of each stage, then there will not be a total failure of consideration and quantum meruit is usually only available to recover payment for what you have done. For the incomplete stages, there will be a total failure of consideration.
What is the importance of the Statute of Limitations?
As an injured party, you must remember you only have a certain period of time to bring your action. To prevent the possibility of civil actions remaining open indefinitely, the Frauds and Limitation Act 1988 determines the time limit within which you must commence your action for breach of contract. You have 6 years commencing on the date which the cause of action arose (s 16(1)).
Reflection questions
Take a look at these questions to assess your progress. Plus, the good news is that you are almost finished the Contracts section.
- Explain under what circumstances a quantum meruit claim would arise.
- Henrietta engaged a firm of solicitors to obtain an injunction to prevent a former friend from visiting her and making a nuisance of himself. An unqualified litigation clerk was given the matter to handle, but his incompetence created further embarrassment for Henrietta. Does Henrietta have any claim against the firm for ‘mental distress and upset’?
- Josef, a well-known film actor, entered into a contract with Frère Bros for a period of 5 years, where he agreed to give his services exclusively to them and not act in films for any other company during this period. During the first year of the agreement, Josef entered into a contract to star in a film being made by Pretty Pictures. Do Frère Bros have any remedy? Explain why.
Section 4: Is there a place for ethics in contract law?
Before we leave contract law, it is worth reflecting on those aspects which contain an ethical element. We can see that the common law of contract provides strict rules relating to the creation and construction of contracts but, at the same time, there are areas of contract law that allow remedies to people where a strict interpretation of those legal rules would be unfair.
We saw that, in a limited way, contract law allows people who may not truly understand the terms and nature of the contract they have entered into, to be released from that contract. So, people under the age of 18 have rights to avoid their legal obligations in certain circumstances. And people who have been affected by drugs or alcohol or have an intellectual impairment, and where the other party sought to take advantage of their situation, also have rights to avoid their legal obligations.
We can see too that contract law will consider the circumstances in which a contract has been entered into to see if there was equality between the parties and that there was a fair bargain created by a contract. The law recognises where one weaker party may have been threatened with actual or possible physical or verbal violence, or where the relationship between the parties may have been such that one has a powerful influence over the other. Contracts created under these circumstances may be cancelled. Then there can be the extreme situation where the behaviour of one party is so bad that the law allows the more vulnerable party to be excused from an unreasonable contract. In many jurisdictions, including Papua New Guinea, there is legislation which will consider the essential fairness of a contract.
The equitable remedies of specific performance and rectification are further examples where the law will try to ‘right’ what might be an injustice where a party to a contract is not standing by his or her side of the bargain.
All of these factors are areas where we would say that there is an overlap between law and ethics; where the law is looking beyond what appears to be legal from documents or on a strict application of the common law, to see what the right and ethical outcome should be.
So, when considering legal problems in this subject, as well as identifying and applying relevant legal principles, we should also examine these to question their underlying fairness and whether their application will provide an ethical outcome.
Key points
An understanding of the following points will help you revise material in this chapter.
- What is the doctrine of privity of contract? Under the doctrine of privity, only a party to the contract gains rights and incurs liabilities under it. Obligations cannot be transferred to a third party unless all of the parties agree (novation).
- What circumstances permit rights and obligations under a contract to be transferred? At common law, assignment of rights is not possible. However, assignment of rights is possible under equity where the intention of the parties is clear, by statute and by operation of law.
- What are the methods by which a contract is ended?
- By termination. A self-help remedy used by an innocent party if there has been a repudiation of the contract by the other party.
- By performance. Where the promises made by the parties under an agreement have been properly performed by the parties – that is, completely and precisely performed – the contract is said to be discharged by performance. Note that there are exceptions to the rule of precise performance – for example, where the contract is divisible, where there has been acceptance of partial performance, where performance is prevented by the other party, and where there has been substantial performance.
- By agreement. The original agreement can be cancelled by mutual discharge, release (or abandonment), waiver, substituted agreement, accord and satisfaction, or failure of a condition precedent or condition subsequent.
- By frustration. Performance of the contract may become impossible because of the occurrence of something over which the parties have no control.
- By operation of law. A contract may be terminated by operation of law, including bankruptcy, material alteration, merger, death of either party (if it is a contract for personal services), or within the time specified by relevant state and territory statutes of limitation legislation.
- By lapse of time at common law. A contract doesn’t remain open indefinitely but will remain open for a reasonable time.
- By virtue of a term in the contract. These terms may have the effect of either preventing the contract from coming into force (condition precedent) or bringing the contract to an end on the occurrence of a certain event (condition subsequent).
- By breach. Where a party fails to perform their obligations as agreed, they are in breach. This may be actual breach, where there has been a failure to perform at the time required by the contract, or anticipatory breach, where there is a threatened failure to perform at the time required by the contract.
- What is the doctrine of frustration, and what are its effects on a contract? Performance of the contract may become impossible because of the occurrence of something over which the parties have no control. As a result, the parties are discharged from further performance as regards future liability.
- What is force majeure and why might it be a better option for a party than frustration? A force majeure clause relieves a party from performing their contractual obligations where they are unable to do so because of an unforeseen and disruptive event beyond the control of either party. Unlike frustration, which discharges the contract from the time of the frustrating event, a force majeure clause suspends the operation of the contract until cessation of the unforeseen event, leaving the parties to terminate if they should so desire.
- What are the remedies for breach of contract? The main remedies for breach of contract include the common law remedies of rescission, restitution and damages, and, in equity, specific performance, injunction (including a Mareva injunction), an Anton Piller order and quantum meruit.
- What remedies are available to an injured party at common law? The normal remedy at common law is damages. However, two other more limited remedies are rescission, where the injured party can set aside the contract for breach of
condition, and restitution, which is based on the concept of unjust enrichment. These remedies are also available in equity. - On what principles are damages decided? For an innocent party to recover damages it must be established by them that there has been a breach of contract that has resulted in them suffering an amount of losses reasonably related to the contract, and that they have taken immediate steps to try to minimise the loss.
- What are the types of damages? Damages may be classified as nominal (where no actual loss is suffered by the plaintiff), ordinary or ‘real’ (where the innocent party has suffered an assessable loss – and which may take the form of general damages, following as a general consequence from the breach or special damages that have been specially proven in court), or exemplary (where the court feels that it is necessary to punish the party in default, although these are very rare).
- In which situations may an equitable remedy be used? An equitable remedy, which is discretionary, may be used where monetary compensation is not an adequate remedy for the innocent party. Contracts of personal service aside, the innocent party may wish to compel performance of the contract because the subject matter is unique (specific performance), or they may wish to restrain a party from breaking their contract (an injunction). If the innocent party believes that the defendant is going to remove or dispose of assets in the jurisdiction before the court can decide, they may seek a Mareva injunction to prevent that from happening. Similarly, if the innocent party believes that the defendant has incriminating evidence in their possession that supports their case and they believe that the defendant will destroy it, they may seek an Anton Piller order. Where there has been part performance of a contract involving goods or services, the party not in breach may be able to recover a reasonable amount from the party receiving the benefit (quantum meruit).
Summary
Congratulations, you have made it through the large volume of material that makes up contract law. You have progressed from learning how to make a contract, how to check that it is valid, what it is that you and the other party to a contract have agreed upon, and now assessed what happens at the end of a contract: You then finished with looking at the remedies available to the innocent party for breach and we concluded with a brief overview of some of the ethical considerations involved in contract law.
What’s next?
In the next, and last 2 chapters, we will look at something related to contract law, contracts for the sale of consumer goods and services, and agency. A basic understanding of both topics is very useful for you, not only when you go into business but in your personal lives as well.