Remediesforbreachofcontract

Resourcetype:Article
Status:Publishedon01Oct1999
Jurisdiction:UnitedKingdom

Thisfinalpartofafourpartseriesonpracticalcontractlawconsidersremediesforbreachofcontract.
SamanthaCotton,PLC

Manycommercialagreementscontainexpressprovisionsforremedies.Forexample,inacontractforthesaleofgoods,thebuyermay
beentitledtorequirethesellertomakegoodorreplacedefectiveitems.Theremaybeapresumption(whichmaybeexpressedinthe
contract)thatallthetermswhicharetogoverntheircontractualrelationshiphavebeenincludedbythepartiesinexpresswrittenformin
thecontractitself.Indoingsotheyintendedtodisplaceanyrightsandremediesprovidedbylaw(suchasthebuyer'srighttoterminate
thecontractforfundamentalbreach)whicharenotspecifiedinthecontract.
Thepurposeofacumulativeremediesclauseistoensurethattheparties'rightsspecificallyprovidedforintheagreementarein
additiontotheirrightsprovidedbythegenerallaw(seeinsetbox"Cumulativeremediesclause").Anyparticularremedythataparty
envisagesitmayneedshouldbespecificallypreservedinthecontract.

Damages
Unliketheequitableremediesofspecificperformanceandinjunction(see"Specificperformance"and"Injunctions"below)damagesfor
lossinabreachofcontractclaimareavailableasofright.
Aninnocentpartymayclaimdamagesfromthepartyinbreachinrespectofallbreachesofcontract.Thedamagesmaybenominalor
substantial.Nominaldamagesareawardedwheretheinnocentpartyhassufferednolossasaresultoftheother'sbreachand
substantialdamagesareawardedasmonetarycompensationforlosssufferedasaresultoftheotherparty'sbreach.
Foraninnocentpartytoobtainsubstantialdamageshemustshowthathehassufferedlossasaresultofthebreach(remoteness)and
theamountofhisloss(measure).Itisuptothepartyinbreachtoarguethattheinnocentpartyhasfailedtomitigatehisloss.

Remotenessofloss
Theinnocentpartymayonlyrecoverdamagesforlosssufferedasaresultofthebreachprovideditisnottooremote.Theaimof
damagesistoputhiminthepositionhewouldhavebeenhadthecontractbeenproperlyperformed.
TheprinciplesofremotenessaregiveninHadleyvBaxendale([1854]9Exch.341)andprovidethatthefollowinglossesare
recoverable:
Alllosswhichflowsnaturallyfromthebreach.
Alllosswhichwasinthecontemplationofthepartiesatthetimethecontractwasmadeasaprobableresultsofthebreach.
Ifthelossdoesnotfallwithintheabovecategories,thenitwillbetooremoteandwillnotberecoverable.
TheruleinHadleyvBaxendalehasbeeninterpretedtomeanthatonlylosswhichiswithinthereasonablecontemplationoftheparties
mayberecovered(TheHeronII[1969]1AC350).
(Notethatwhendealingwithspecifictypesofcontracttheremaybelegislationthatcoversremediesunderthatparticulartypeof
contract.Forexample,inasaleofgoodscontract,apartymaybeabletorecoverspecialdamages(forexample,fromunusualloss
arisingfromspecialcircumstancesknownthecontractbreaker(section54,SaleofGoodsAct1979)(SGA).)

Measureofdamages
Thisisthemethodforcalculatingthedamagestowhichtheinnocentpartyisentitled.Itcoverslossofbargainorexpectationloss.The
usualaimofthecourtistoputtheinnocentpartyinthepositionhewouldhavebeeninhadthecontractbeenproperlyperformed
(RobinsonvHarman[1848]18LJEx202).Thetwousualmethodsofassessingthisaredifferenceinvalueorcostofcure.Thecourt
willgenerallyusethemoreappropriate.

Sometimesreliancelossmaybesoughtwherelossofexpectationisdifficulttoprove.Theaimofreliancelossistoputtheinnocent
partyintothepositionhewouldhavebeeninhadthecontractneverbeenmade,thatis,anindemnityforhisoutofpocketexpenses
incurredinrelianceonthecontract(AngliaTVvReed[1972]1QB60).
Therearemanyothertypesoflossthathavebeenclaimedbyinnocentparties.Damagesfordisappointmentormentaldistressarenot
generallyawarded(AddisvGramophoneCo.Ltd[1909]AC488)unlessthecontractis,forexample,aholidaycontract(JarvisvSwans
ToursLtd[1973]1QB233).

Mitigation
Aninnocentpartycannotrecoverforlossthathecouldhaveavoidedbytakingreasonablesteps.Thisissometimesexpressedasthe
dutytomitigate.Thisdoesnotapplytoactionsforthepriceofgoodsdelivered.Suchanactionisanactionforanagreedsumandnot
anactionfordamages.
Althoughthereisnodutytomitigatebeforeactualbreachoccurstheinnocentpartyshouldnotaggravatehisloss.Itisforthedefendant
toprovethattheplaintiffhasfailedtomitigatehisloss(PilkingtonvWood[1953]Ch770).

Advancepayments
Ifapartyinbreachhasmadeadvancedpaymentsunderthecontracthisabilitytorecoverthatmoneydependsuponwhetherthat
paymentconstitutesadeposit(thatis,aguaranteebyhimofdueperformance)ormerelyapaymentofthewholeorpartofthepricein
advance.
Ifitisadeposit(thisdependsontheintentionsoftheparties)thegeneralruleisthatitcannotberecoveredanditwillbesetoffagainst
anydamagesawardedtotheinnocentparty.Careshouldalwaysbetakenwithdepositssothattheydonotamounttopenalties(see
"Penaltyclauses"below).Howeveritmaybepossibletorecoveradepositifthepartyhasalienoverit(forexample,Chatteyand
AnothervFarndaleHoldingInc.,TheTimes,17thOctober,1996).
Iftheadvancepaymentisnotadeposit,thepartyinbreachmayrecoverit,subjecttoanyclaimfordamagesbytheinnocentpartyin
respectofthebreach.
Aninnocentpartymayonlyrecoveranadvancepaymentiftherehasbeenatotalfailureofconsideration.Thisisaquasicontractual
remedy.Ifthereisonlyapartialfailureofconsideration,thisremedyisnotavailable(RowlandvDivall[1923]2KB500).

Penaltyclausesandliquidateddamages
Itiscommonforthepartiestoexpresslystateinthecontractthatifthecontractisbreached,aspecifiedsumwillbepayableorthat
goodswillbeforfeited.Clausescoveringtheseareasareknownasliquidatedoragreeddamagesclauses.Theyfrequentlyappearin
commercialcontracts,whetherindividuallynegotiatedoronaparty'sstandardbusinesstermsand,mostcommonly,inrelationtolate
ratherthandefectiveperformance,particularlyinthefieldsofconstructionandengineeringandsupplyorsaleofgoods.Occasionally,
theyappearinleaseagreementsimposedbyakeyoranchortenantwho,forexample,needstobetradingfromthedemisedpremises
byacertaindeadline.Suchclausesdonotusuallyappearincontractsofemployment.
Thepurposesofsuchclausesaretomakerecoveryofdamageseasier,avoidingtheproblemsofprovingactuallosstoavoid
argumentsastotheremotenessofcertaintypesofconsequentialorindirectlossesandtoassuretheotherpartyoftheirintentiontobe
boundbythecontract.
Thenormalrulesapplicabletothedeterminationofwhetheraclauseoperatesasliquidateddamagesorapenaltyapplyirrespectiveof
thetypeofcontractinquestion.Adistinctionmustbedrawnbetweenclauseswhichpurporttoimposeapenaltyonthedefaultingparty
andclauseswhichlevyliquidateddamagesfromthatparty.Penaltyclausesaregenerallynotenforceable,whereasliquidateddamages
clausesare.

Penaltyorliquidateddamages?
Foraliquidateddamagesclausetobevalidthespecifiedsummustbeagenuinepreestimateoftheanticipatedlosswhichthe
claimantwouldbelikelytosufferintheeventofabreachoftheobligationinquestion.Ifthelossisdifficulttoquantifya"bestguess"
procedureshouldbeoperated,keepingarecordofthecalculationsunderlyinganyelementsofthedeterminedfigure.Providedthe

selectedfigureisnotvastlyinexcessofthegreatestlosswhichcouldbesuffered,theclauseislikelytobeenforceable.Theessenceof
apenaltyisthatthemoneyspecifiedisinterroremofthedefaultingparty,inotherwords,itisintendedtoapplyundueforcetotheother
partytoperformhissideofthecontract.
Theuseofthewords"penalty"or"liquidateddamages"arenotconclusive.Itisnecessarytoexaminewhethertheamountspecifiedis
infactapenaltyorliquidateddamages.Itisforthepartyinbreachtoshowthatthesumisapenalty(RobophoneFacilitiesLtdvBlank
[1966]3AllER128).
TheleadingcaseofDunlopPneumaticTyresestablishestheteststodistinguishpenaltiesfromliquidateddamages:
Aclausewillbeconstruedasapenaltyclauseifthesumspecifiedis"extravagantandunconscionable"incomparisonwiththe
greatestlossthatcouldpossiblyhavebeenprovedasaresultofthebreach.
Itislikelytobeapenaltyifthebreachofcontractconsistsofnotpayingasumofmoneyandthesumstipulatedasdamagesis
greaterthanthesumwhichoughttohavebeenpaid.
Thereisapresumptionthatifthesamesumisstatedtoapplytodifferenttypesofbreachofcontract,someofwhichareseriousand
othersnot,itislikelytobeapenaltyclause.
Itisnotabartotheoperationofaliquidateddamagesclausethataprecisepreestimationisimpossible.
(DunlopPneumaticTyreCoLimitedvNewGarage&MotorCoLimited[1915]A.C79)
Thereisnopublicpolicyissueinrelationtotheupperlimitofdamagestowhichpartiescancontracttobeliable.TheUnfairContract
TermsAct1977willincertaincircumstancesimposeatestofreasonablenessinrelationtoexclusionclauses(whichpurporttolimitor
excludeliability)butthisisunlikelytoapplytoagenuineliquidateddamagesclause.Iftheclausespecifiesasumwhichismorethana
genuinepreestimate(andthereforeapenalty)theclausewillbeunenforceable.Thecourtswillnotbenefitthepartyclaimingdamages
byimposingalowersubstitutefigure.
Toclaimonagenuineliquidateddamagesclause,theclaimantmerelyhastoshowbreachofcontract,whetherornottherehasbeen
anyactuallossandregardlessoftheextentofanyloss.
Itisnotentirelyclearwhetheraliquidateddamagesclauseisintendedtobeamutuallybindinglimitationontheamountofdamages
payable.Itislikelythatitisintendedtobemutuallybindinginthefieldofbuildingandengineeringcontracts.ACourtofAppealcase
heldthatwhere"nil"wasinsertedastheamountofliquidateddamages,thengeneraldamagesforbreachofcontractwerenot
recoverableinthealternative(TemlocvErrillProperties,198739BLR.30).Acontractcan,however,expresslyprovidefortheparty
seekingtoimposetheclausetohaveachoicewhethertooperateitornot.Certaincharterpartycasessuggestthattheclaimantmay
haveachoiceeithertosueundertheliquidateddamagesclauseortoignoreitandclaimgeneraldamageswithoutlimitationalthough
thesecasesareprobablylimitedtothatareaoflaw.
If,however,theclauseisinvalidatedbecauseitisapenaltyclauseorduetoactsoftheclaimant(suchasrequiringtheotherpartyto
performadditionalworkwithoutacontractualmechanismtograntthatpartyfurthertimetoperformthecontract)orbreachofcontract
bytheclaimant,thenthelimitspecifiedintheunworkableclausewilloperateasalimitationontheamountofdamageswhichcanbe
claimed(althoughinthecaseofapenaltythelimitisunlikelytobereachedbecausebyitsnature,itwillbehigherthanthelosscould
everbe).
Asregardsenforcement,manycontractswillspecifythatthedamagescanbedeductedfromsubsequentsumsdue.Thisisparticularly
thecaseforbuildingcontractswhereinterimpaymentstothecontractorareusual.Manycontractswillalsoprovidefortheclaimantto
beabletorecoverliquidateddamagesasiftheywereadebtduebytheotherparty.Ifpossible,whendraftingapenaltyclause,you
shouldtrytoensurethatyoucandeductorrecoverdamagesinthesewaysastheyareamoreeffectivewayofensuringthatyouwill
beabletorecoverthemoneydue.
Otherwisetheusualrulesofenforcementwouldapplyandaclaimformwouldbeissuedinthenormalmanner(without,ofcourse,
havingtoproveactualloss).
Notethatitwillbeadefencetoaclaimforliquidateddamagesthattheclaimanthaspreventedtheotherpartyfromcompletinghis
obligationseitherbytheclaimant'sownbreachofcontractorbyotheractsofpreventionincircumstanceswherethereisnoprovisionin
thecontracttomakeanallowanceorgiveatimeextensiontothepartyfromwhomdamagesareclaimedforthesecircumstances.
Itisimportanttoobserveallrelevantproceduralrequirementsinthecontractsuchasnoticeperiodsandprovisionsrequiringthe
liquidateddamagestobeassessedanddeductedwithincertaintimeperiods,otherwisethedefendantwillnotberequiredtopaythe
damages.

Specificperformance
Thisisanequitableremedygrantedatthecourt'sdiscretion.
Specificperformanceisadecreebythecourttocompelapartytoperformhiscontractualobligations.Itisusuallyonlyorderedwhere
damagesarenotanadequateremedy(forexamplewherethesubjectmatterofthecontractisuniqueforexample,Chinesevasesin
FalckevGray([1859]4Drew651)butnotifareplacementofthesubjectmattercouldbeobtainedevenafteralongdelay(Societedes
IndustriesMetallurgiquesSAvBronxEngineeringCoLtd[1975]1LloydsRep465).
Itisageneralrulethatspecificperformancewillnotbeorderedifthecontractrequiresperformanceorconstantsupervisionovera
periodoftimeandtheobligationsinthecontractarenotclearlydefined.Forexample,specificperformanceofacovenanttokeepa
shopopenduringnormalbusinesshourswasrefusedbytheHouseofLordsinCoopInsurancevArgyllStores([1997]3AllER297)
onthegroundsthatenforcementofacovenanttocarryonabusinesswouldrequireconstantsupervisionofthecourtswiththecourt
resortingtocriminalpunishmentforcontemptofcourtiftheorderwasnotcompliedwith.However,arecentcasehasreversedthisrule
inrelationtoatenant'srepaircovenants(RainbowEstatesLimitedvTokenholdLimitedandanother[1998]NewPropertyCases33).
Thejudgeinthiscaseconcludedthattheoldlawofrefusingspecificperformanceifitwouldinvolveconstantsupervisionwasnolonger
goodor(atleast)thattherewereexceptions.Itmaybethatonlyinthemostexceptionalcircumstances(suchasinthiscase)specific
performancewillbeavailabletothelandlordshowevertheargumentsadvancedindicatethatitshouldbeavailableinothersituations.
Specificperformancewasorderedrequiringtenantstospend300,000onrepairstotheflats.Factorsmilitatinginfavourofthisremedy
werethatthelandlordhadnorightofentrytorepairindefaultofthetenantthattheleasehadnoforfeitureclauseandthatthebuilding
waslistedsothatrepairasdistinctfromredevelopmentwasthemostappropriateoutcome.
Specificperformanceisoftenorderedinrelationtobuildingcontractsbecausethecontractdealswithresultsratherthanthecarryingon
ofanactivityoveraperiodoftimeanditusuallydefinestheworktobecompletedwithcertainty(JeunevQueensCrossPropertiesLtd
[1973]3AllER97).
Specificperformanceisnotavailableforcontractsrequiringpersonalservicessuchasemploymentcontractsbecausesuchanorder
wouldrestrictanindividual'sfreedom(ChappellvTimesNewspapersLtd[1975]1WLR482).
Thecourthasbroaddiscretiontoawardspecificperformanceandinexercisingthisdiscretionittakesintoaccountfactorssuchas:
Delayinaskingfortheorder(LazardBrothers&CoLtdvFairfieldPropertiesco(Mayfair)Ltd[1977]121SJ793).
Whetherthepersonseekingperformanceispreparedtoperformhissideofthecontract(ChappellvTimesNewspapersLtd[1975]1
WLR482).
Whetherthepersonagainstwhomtheorderissoughtwouldsufferhardshipinperforming(PatelvAli[1984]1AllER978).
Thedifferencebetweenthebenefittheorderwouldgivetoonepartyandthecostofperformancetotheother(TitovWaddell(No2)
[1977]Ch106).
Whetheranythirdpartyrightswouldbeaffected.
Whetherthecontractlacksadequateconsideration(therule"equitywillnotassistavolunteer"appliessothatspecificperformance
willnotbeorderedifthecontractisfornominalconsiderationevenifitisunderseal(JeffrysvJeffrys[1841]1Cr&Ph138)).

Injunction
Likespecificperformance,aninjunctionisanequitableremedyandthereforeonlygrantedatthediscretionofthecourt.Itisawardedin
circumstanceswheredamageswouldnotbeanadequateremedytocompensatetheclaimantbecausetheclaimantneedstorestrain
thedefendantfromstartingorcontinuingabreachofanegativecontractualundertaking(prohibitoryinjunction)orneedstocompel
performanceofapositivecontractualobligation(mandatoryinjunction).
Inexercisingitsdiscretionthecourtwillconsiderthesamefactorsasaboveforspecificperformanceandwillusethebalanceof
conveniencetest(weighingthebenefittotheinjuredpartyandthedetrimenttotheotherparty).Aninjunctionwillnotbegrantedifits
effectwouldbetocompelapartytodosomethingwhichhecouldnothavebeenorderedtodobyadecreeofspecificperformance
(LumleyvWagner[1852]1DM&G604).
Inurgentcasesaplaintiffmaybeabletoobtainaninteriminjunctiontorestrainanact.Specialtypesofinjunctionmaybegrantedto
preservepropertyandassetspendingtrial(MarevainjunctionsandAntonPillerorders).

Quasicontract:otherremedies
Quasicontractcreatesobligationsatcommonlaw,distinctfromobligationsunderacontract.Itisanareaoflawinitsownright.
Quasicontractualremediesaresometimesavailableeitherasanalternativetoaremedyforbreachofcontractorwherethereisno
remedyforbreachofcontract.Forexample,aclaimforquantummeruit(areasonableremunerationforworkdoneofgoodssupplied
underacontractwhichislaterdiscoveredtobevoid).

Limitationofactions
Aninnocentpartywilllosehisrighttobringaclaimforbreachofcontractifhedelaysforacertainlengthoftime.
TheLimitationAct1980providesstatutorylimitationperiods.Thesesdonotapplytoequitableremedies,however,inpractice,equity
usuallyappliesthestatutoryrules.
TheLimitationAct1980distinguishesbetweensimplecontractsanddeeds.Itprovidesthefollowinglimitationperiods:
Forsimplecontracts,sixyearsfromwhenthecauseofactionaccrued.
Fordeeds,twelveyearsfromwhenthecauseofactionaccrued.
Iftherehasbeenfraudormistake,thelimitationperioddoesnotbegintorununtiltheinnocentpartyhasdiscoveredthisorshouldhave
discoveredthis.Thereisathreeyeartimelimitinrespectofdamagesforpersonalinjuriesarisingfrombreachofcontract.
Inacquisitionagreements(whichmaybedeeds)thesellermaywantashorterlimitationperiod(commonlysixyearsfromthedateof
thecontract)ThisshorterperiodrelatestotheInlandRevenue'stimelimitformakingtaxassessments.Alternatively,thesellermay
wantanevenshorterperiodinrelationtonontaxmatters(perhapstolinkinwiththeauditofthetargetcompany).

Selfhelpremedies
Ratherthanbringinganactionforbreachofcontract,partiescanmakeuseonsomeselfhelpremediessuchasretentionoftitle
clauses,enforcementofsecurity,withholdingpaymentsandsetoffandrightsagainstthegoodsthemselves.

Retentionoftitle
Asellercanavoidtheproblemsofhavingtosueabuyerineventofthebuyer'sdefaultundertheagreementbyinsertingaretentionof
titleclauseintothecontract.
Aretentionoftitleclause(sometimesreferredtoasaRomalpaclause,afterthefirstleadingcaseonthesubject,AluminiumIndustrie
VaasenBVvRomalpaAluminiumLtd[1976]1WLR676)aimstogivethesupplierofgoodspriorityoversecuredandunsecured
creditorsofthebuyerifthebuyerfailstopayforthegoodsbecauseitisinsolvent,orforsomeotherreasonwhichmaybespecifiedin
theclause.
Inabasicretentionoftitleclausethesupplierreservesownershipofthegoodssuppliedtothebuyeruntilthebuyerhaspaidforthose
particulargoods.Whendrafting,itisimportanttoensurethatlegalandbeneficialtitleareretained:thereservationofequitableor
beneficialtitlealonewillnotdo(ReBondWorth[1979]3AER919).Theclauseshouldbesupplementedbystandardclauses
containing:
Arightforthesuppliertoenterthebuyer'spremisesinordertorepossessthegoods(sothatthesupplierwillnotcommitatrespass
whendoingso).
Anobligationonthepartofthebuyertostorethesupplier'sgoodsseparatelyfromgoodsbelongingtothirdparties,tomarkthemas
thesupplier'spropertyandtoallowthesupplieraccesstothebuyer'spremisestoverifythatthishasbeendone.Thiswillenablethe
suppliertoidentifyitsowngoodsifarepossessionofthegoodsbecomesnecessary.
Alistofinsolvencyrelatedeventswhichwilltriggerthesupplier'srighttodemandpaymentforthegoods(ifnotalreadydue)andto
repossessthem.
Inaddition,althoughnotastandardclause,ifthegoodssuppliedmightbeattachedtothebuyer'spremises(forexample,inthecaseof
heavyplantormachinery),itisworthincludingaprovisionprohibitingthebuyerfromannexingthemtosuchpremiseswithoutthe
supplier'sconsent.Ifgoodsdobecomeannexedtothebuyer'spremises,theconsentoftheownerofthosepremiseswillbenecessary

ifthesupplieristobeentitledtorepossessthemintheeventofnonpaymentbythebuyer.
Thisbasicclauseisoftenbackedupbycertainotherstandardclausessuchasclausesforallmonies,proceedsofsaleandmixed
goods:

Allmoniesclause
Inthisofclause,thesupplierreservesownershipofthegoodssupplieduntilthebuyerhaspaidnotonlyforthoseparticulargoods,but
alsoforanyothergoodssuppliedbythesuppliertothebuyer,andhasrepaidallothermoneysowedtothesupplier,regardlessofhow
suchindebtednessarose.
Alimitationuponthepracticaleffectivenessofthisclauseisthatthesupplierretainstitletogoodsonlyuntilthosespecificgoodshave
beenpaidfor.Thebuyerwillthereforeobtaintitletothosegoodsuponpayingforthemevenifothergoodsreceivedfromthesupplier
havenotbeenpaidfor.Theeffectoftheallmoniesclauseisthatallofthegoodssupplied,whetherpaidforornot,belongtothe
supplieruntilthebuyerhassettledallinvoices.Inpractice,theclausethereforeavoidstheneedtorelatespecificgoodsatthebuyer's
warehousewithspecificunpaidinvoices.
Ithasbeensuggestedthatanallmoniesclausecreatesachargebythebuyerinfavourofthesupplier,whichwouldbevoidagainsta
liquidatororadministratorandanycreditorofthebuyerunlessregisteredatCompaniesHouseinaccordancewiththeCompaniesAct
1985.TheHouseofLords,onappealfromaScottishdecision,hasheldthatsuchaclausedoesnotcreateacharge,butthedecision,
whileofstrongpersuasiveauthority,isnotbindingontheEnglishcourts(ArmourvThyssenEdelstahlwerkeAG,PLC,1990,I(5),51).
Itisthereforeadvisabletoincorporatetheallmoniesclauseinaseparatesubclausefromthebasicretentionoftitleclausessothatit
couldbeseveredfromthemifitwereeverheldinvalidbyacourtforlackofregistrationasacharge.Althoughpossibleintheory,the
registrationbyasupplierofallitssalescontractsatCompaniesHouseincasetheycontainretentionoftitleclauseswhichcreate
chargesis,foranumberofpracticalreasons,unlikelytobearealisticoption.

Proceedsofsaleclause
Thisiswherethegoodssuppliedaretobesoldonbythebuyerandthesupplierseeksrightsintheproceedsofsaleinordertosatisfy
thepurchasepriceofthegoods.
AclausegivingthesupplierrightsoverthesaleproceedsofgoodsresoldbythebuyerwasheldtobevalidintheRomalpacase,onthe
basisthattherewas,onthefactsbeforethecourt,afiduciaryrelationshipbetweenthebuyerandthesupplier,andthebuyerasa
fiduciarywasunderadutytoaccountforthesaleproceedstothesupplierasbeneficiary.SincetheRomalpadecision,thecourtshave
distinguishedthefactsofthecasesbeforethemfromthefactsintheRomalpacase,andhaveinaseriesofcasesheldthatclausesof
thiskindcreateachargebythebuyerinfavourofthesupplierwhichwillbevoidifnotregisteredatCompaniesHouse.
Asaresult,itisnowextremelydifficult,ifnotimpossible,todraftaproceedsofsaleclausewithoutitsbeingconstruedasachargeover
thegoodswhichwill,therefore,beunenforceableunlessregisteredassuch.Oneofthemaindifficultiesinpracticeisthat,inorderto
relyontheequitableremedyoftracing,thesuppliermustcreateafiduciaryrelationshipwiththebuyerand,inordertoachievethat,the
buyermustresellthegoodsasthesupplier'sagent.Thiswouldmeanthebuyer'scustomersholdingthesupplierdirectlyliableforany
defectsinthegoods,whichisunlikelytobedesirablefromthesupplier'spointofview.If,ontheotherhand,theauthorityofthebuyer
asagentiscutdown,sothatitcannotcreateprivityofcontractbetweenthesupplierandthebuyer'scustomers,theresultisthatthere
isunlikelytobeatrueagency.
Theinclusionofaproceedsofsaleclauseinstandardtermsisinadvisablewithoutspecialistadviceorathoroughreviewofthelatest
relevantcaselaw.Ithasbeenarguedthatifacourtweretoholdthattheproceedsofsaleclausecreatedachargewhichwasinvalidfor
nonregistration,itmightalsodecidethattheinvalidityoftheproceedsofsaleclauseextendedtothebasicretentionoftitleandall
moniesprovisions,withtheresultthattheytoowouldberenderedinvalidfornonregistration.Itisconsideredmorelikelythat,ifthe
proceedsofsaleclauseiscontainedinaseparateclauseorsubclauseandthestandardtermscontainaseveranceprovision,the
courtwillsevertheproceedsofsaleclauseleavingtheremainingprovisionsunaffected,buttheneedforcautioninthisareaisclear.

Mixedgoodsclause
Thisisusefulwherethegoodssuppliedhavebeenmixedorcombinedinamanufacturingprocesswithothergoodsownedbythe
buyerorthirdparties.Inthisclausethesupplierseeksrightsofownershipinanynewproductresultingfromthemanufacturingprocess.

Thesuppliermaybesellinggoodsforuseinamanufacturingprocess,ratherthanforresaleintheiroriginalcondition(if,forexample,it
isasupplierofcomponentsratherthanfinishedproducts).Thecaselawdistinguishesbetween:
Goodswhichmaintaintheiridentity(andwhich,ifattachedtoothergoods,canbeseparatedwithoutcausingdamage).Suchgoods
willcontinuetobelongtothesupplierwherethereisabasicformofretentionoftitleclauseasdescribedabove,sonoadditional
provisionsarenecessary.
Goodswhichlosetheiridentityinthemanufacturingprocessforexample,thesaleofresinwhichisusedinthemanufactureof
chipboard.Theresultingnewproduct(thechipboard)willbelongtothebuyerandthecourtshaveheldthatifaretentionoftitle
clausepurportstoreserverightsinthenewgoodstothesupplier,theclausewillcreateachargewhichwillbeineffectiveifnot
registered(Borden(UK)LimitedvScottishTimberProducts[1979]3AER961).
Itisclearfromthecaselaw,therefore,thattheuseofamixedgoodsclausewillachievenothingforthesupplieronthecontrary,itmay
doharmif(followingthesameargumentasdescribedaboveinthecaseofaproceedsofsaleclause),itsinvalidityalsorenderedthe
basicandallmoniesclausesinvalidfornonregistrationascharges.Suppliersofproductswhicharequicklyconsumedwithina
manufacturingprocessshouldthereforeconsideralternativemeansofsecuringtheirpurchaseprice,suchascreditinsurance.

Limitationsoneffectiveness
Thefollowingactualorpotentiallimitationsupontheeffectivenessofretentionoftitleclausesshouldbeborneinmind:
Ifthebuyerisacompanyagainstwhichanapplicationforanadministrationorderhasbeenmade,nostepsmaybetakenwithout
theconsentofthecourt(whichinpracticeisunlikelytobeforthcoming)torepossessgoodssuppliedpursuanttoaretentionoftitle
clauseuntilthehearingoftheapplicationand,ifanadministrationorderismade,whiletheorderremainsinforce(section11,
InsolvencyAct1986).
Theretentionoftitleclausemustbeproperlyincorporatedinthecontractbetweenthesupplierandthebuyerinordertobe
enforceableasacontractterm.Aretentionoftitleclauseisnot,however,sounusualthatspecialnoticeneedstobegivenofit(John
Snow&CompanyLimitedvDBGWoodcroft&CompanyLimited[1985]BCLC54).
Retentionoftitlewillbeoflittleornopracticalbenefitwherethegoodssuppliedareperishableorhavealowscrapvalue.
Retentionoftitleisanareawhichgeneratesarapidlychangingbodyofcaselaw.Particularclausesareliabletoberendered
ineffectivebyacourtdecisionatanytime,soareviewofretentionoftitleclausesisaparticularlyimportantaspectoftheoverall
reviewofstandardtermswhichsuppliersshouldbecarryingoutonaregularbasis.
Decisionsofthecourtshaveseverelyrestrictedtheeffectivenessofcomplexmixedgoodsandproceedsofsaleclauses.Themostthat
awelldraftedretentionoftitleclauseislikelytoachieveforasupplieris:
Therighttoenterthebuyer'spremiseswithouttrespassing.
Theabilitytorecovergoodsstoredatthebuyer'spremiseswhichcanbeidentifiedasthesupplier's,possiblytotheextentofall
sumsowedbythebuyertothesupplier.
Apossibleactionfordamagesforconversionagainstareceiverorliquidatorpersonallywhosellsgoodswhichwereidentifiablythe
supplier's.
Aretentionoftitleclauseshouldberegardedasanadjuncttoapropercreditcontrolsystem,notasasubstituteforit.Wherethe
supplierhasdoubtsastothefinancialstandingofthebuyer,thesuppliershouldconsider:
Reducingtheperiodofcreditallowedtothebuyer,ortheamountofcredit,orboth.
Takingalternativeformsofsecurity,suchasabankguaranteeorletterofcredit.
Obtainingcreditinsurance.Thishasbecomemorereadilyavailableinrecentyears,withagreaterchoiceoftailormadeproductson
offer.Theexistenceofasatisfactorysetofstandardtermsofbusinessislikelytobeapreconditiontoobtainingsuchinsurance.

Riskandinsurance
Theriskinthegoodswillpassatthesametimeastitletothempassesunlessotherwiseagreed(section20,SGA).Instandardtermsof
saleriskisusuallystatedtopassatthetimeofdeliveryofthegoods.Thisisonthebasisthatthesupplierwillnotwishtoremain
responsibleforlossordamagetothegoodsuptothetimewhentitlepasses,giventhattheeffectofthebasicretentionoftitleclauseis

thattitledoesnotpassuntilthebuyerhaspaidforthegoods.Theresultisthatifthegoodsaredestroyedafterdeliverythebuyerwill
remainliablefortheprice.
Toguardagainsttheriskofthebuyerbeingunabletopay,thesuppliershouldincludeaprovisionrequiringthebuyerupondeliveryto
insurethegoodswithareputableinsurancecompany(thesuppliermayreservearightofpreapproval)andtoensurethatthe
supplier'sinterestinthegoodsisnotedonthepolicy.

Takingsecurity
Ifalenderhasloanedmoneytoapersonandtakensecuritytosupporttheloan,thisenablesthelendertoappointareceivertoenforce
hissecurityifthepersondefaultsontheloan.Securitycantaketheformofafixedchargeoverspecificassetsorafloatingchargeover
thewholeofpartofanundertaking.

Withholdingpaymentandsetoff
Whereadebtorhasacrossclaimagainstacreditor,arightofsetoffenableshimtoreduceorextinguishthecreditor'sclaimbythe
amountofhiscrossclaim.Therearefourtypesofsetoff(thefirstthreeofwhichmaybeextendedbycontract):
Legalsetoff.LegalsetoffisaproceduralremedywhichevolvedfromtheStatutesofsetoffandanumberof18thand19thcentury
cases(seealsoBennettvWhite[1910]2QB643CA).Itcanonlyberesortedtoasadefencetoacourtactionand,unlikeother
typesofsetoff,isnotavailableasa"selfhelp"remedy.Legalsetoffisalsoonlyavailablewherethetwoclaimsareliquidatedor
ascertainablewithcertaintyandarebothdueandpayableatthecommencementoftheaction.However,unlikeequitablesetoff,the
twoclaimsdonothavetoarisefromthesametransactionorcloselyconnectedtransactions.
Equitablesetoff.Thisisavailabletoadebtoroutsidethecontextoflitigationwherehiscrossclaimarisesfromthesame
transaction(oracloselyrelatedtransaction)asthedebtowed.Eitherandprobablybothoftheclaimsmaybeforanunliquidated
sum,suchasaclaimfordamages(HanakvGreen[1958]2AllER141CAandMcCreaghvJudd[1923]WN174DC).Asitisa
selfhelpremedy,adebtorcan,withoutformality,simplydeducttheamountofhismutualcrossclaimfromthedebtheowesand
tenderthebalanceofthedebt(ifany)tothecreditor.However,aswithlegalsetoff,thesumsinquestionmustbedueandpayable
or,inthecaseofunliquidateddamagesmustbeareasonableassessmentofthelossmadeingoodfaith(TheNanfri[1978]Lloyd's
Rep132CA).
Banker'ssetoff.Banker'ssetoffarisesinasituationwhereacustomerhasmorethanoneaccountwithhisbank,atleastoneof
whichisindebitandoneofwhichisincredit.Itisalsoknownastherighttocombineaccounts.Banker'ssetoffisarguablyofwider
commercialapplicationandcouldbeavailableinanysituationwhereonepartyhastwoormoreaccountswithanother,forexample
betweenprincipalsandtheiragentsorbetweenasupplierandhiscustomer,butthepositionhasnotbeenexplicitlyjudicially
determined.Adebtorcanonlyinvokebanker'ssetoffifthetwoaccountsarecurrentorrunningaccounts,thatis,wherethebalance
ontheaccount,whetheritbepositiveornegative,ispayableondemandoronreasonablyshortnotice(ReWillis,Percival&Coex
parteMorier[1879]12ChD491CA).Aswithequitablesetoff,theremedyisoneofselfhelpandcanbeautomaticallyexercised
withoutformality.
Insolvencysetoff.Whileeachoftheabovecategoriesofsetoffmaybevariedbycontract,eitherbyextendingorrestrictinga
party'srightsunderthegenerallaw,therulesofinsolvencysetoffaremandatoryandmaynotbevariedbycontract(Halesown
PressworkandAssembliesLtdvWestminsterBank[1972]AC785).Contractualrightsofsetoffdonotsurvivetheliquidationor
bankruptcyofeitherthecreditororthedebtor.
Anycreditorprovinginaliquidationorbankruptcymustdeductfromhisclaimtheamountofanyliabilitiesincurred:
Priortothecompanyorindividualgoingintoliquidationorbankruptcy.
Atanytimewhenthecreditorhadnoticeofeitheraresolutionorapetitiontowindupthecompanyorbankrupttheindividual.
Allliabilities,includingfuture,contingentandunliquidatedsumsmustbebroughtintoaccount(Rule4.90,InsolvencyRules1986for
companyliquidationssection323,InsolvencyAct1986forbankruptcies).
Sinceanyattempttovarytheserulesbycontractwillbevoid,partieswouldneedtouseindirectmeanstoavoidtheirapplication.They
could,forexample,enterintoanagreementwhichprovidesthatoneorbothofthemshouldnotproveinanyliquidationorbankruptcyof
theotherorthatanysuchclaimswillbesubordinatedtothoseofothercreditors.
Rightsofsetoffarefrequentlyvariedbythetermsofacontract.Forexample,inacommercialcontract,abuyermaywanttheabilityto
setoffclaimsfordebtsorclaimsunderothercontractsagainstpaymentsthatheowesforgoodsorservicesunderthatcontract.

Purposeofexclusionofsetoffclause
Commercialagreementsfrequentlyrestrictrightsofsetoff.Forexample,asellermaywishtoensurethatabuyerispreventedfrom
settingoffamountsowedtoitorclaimsregardingallegeddefectsintheseller'sperformanceagainstthesumsduetobepaidbyitto
thesellerundertheagreement.Anexclusionofsetoffrightsisparticularlycommoninanagreementwhichprovidesforpaymentsover
aperiodoftime.Aborrowers'rightofsetoffwillinvariablybeexcludedinloanandsecuritydocumentation.
Whilesuchaclausedoesnotsurvivetheinsolvencyofeitherparty,theCourtofAppealhasconfirmedthatsuchaclauseisenforceable
andnotcontrarytopublicpolicy(CocaColaFinancialCorporationvFinsatInternational,TheTimes,1stMay,1996).However,as
againstapartycontractingonitsstandardtermsorwithaconsumer,theclauseconstitutesalimitationofliabilitywhichwillbesubject
tothereasonablenesstestsetoutintheUnfairContractTermsAct1977(StewartGillvHoratioMyerCo[1992]2AllER257).

SGAandrightsagainstgoods
TheSGAprovidesfortheconsequencesofdisputesarisingincontractsforthesaleofgoods.Forexample,ifasellerdeliversa
quantityofgoodslessthanhecontractedtosell,thebuyercaneither:
Rejectthegoodsandsueforanylossoccasionedbythebreach,andifthepricehadbeenpaid,recoverthepriceor
Retainthegoods,payforthematthecontractrate,recoversuchpartofthepricefortheundeliveredquantityandclaimdamagesfor
thebreach.
Therearerestrictionsonthebuyer'srighttorejectthegoods.First,atcommonlaw,iftheshortfallisdeminimis,hewillnotbeallowed
torejectthegoods.Second,section30(2A)providesthatabuyerwhodoesnotdealasaconsumermaynotrejectthegoodsifthe
shortfallissoslightthatitwouldbeunreasonableforhimtodoso.
Ifathebuyerisinbreachofatermofasaleofgoodscontract,forexampleinrelationtothepaymentterms,theunpaidsellerhas
rightsagainstthegoodsthemselvesinadditiontorightsagainstthebuyer.Theserightsmayproveusefulonthebuyer'sinsolvency.If
someorallofthepriceofthegoodsisoutstandingthesellerwillbeanunpaidseller(section38(1),SGA).Thisgivesthesellertheright
to:
Retainthegoods.Thiscanbedoneifthesellerisstillinpossessionofthegoodsandthebuyerhasnotbeengivenaperiodof
credit,orthecreditperiodhasexpiredorthebuyerisinsolvent.Thesellercanretainthegoodsuntilthebuyerpaysforthem(the
seller'slien).Thesellerloseshislienwhenthegoodsaredeliveredtoanindependentcarrierorthebuyerlawfullytakespossession
ofthem.
Stopthegoodsintransit.Ifthebuyerisinsolventtheunpaidsellermaystopthegoodsintransitandretainthemuntilthebuyerpays
forthem(section44).Sections45and46providerulesasthedurationoftransitandhowtoeffectstoppage.
Resellthegoods.Section48(3)allowsthesellertoreselltheperishablegoodsifhenotifiesthebuyerofhisintentiontosellandthe
buyerdoesnotpaywithinareasonabletime.Thesellermayclaimdamagesfromthebuyerforlossontheresale(section48(3)).
SamanthaCottonisaPLCtrainer.

Cumulativeremediesclause
"TherightsandremediesprovidedbythisAgreementarecumulativeand(subjectasotherwiseprovidedinthisAgreement)arenot
exclusiveofanyrightsandremediesprovidedbylaw."
Resourceinformation
ResourceID:71010603
Published:01Oct1999
Products:IP&IT,PLCMagazine(UK),PLCUKCommercial,PLCUKCorporate,PLCUKEmployment,PLCUKLawDepartment
Series:Features

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