General Principles of English Law (GPEL) Contract Lecture 3: Discharge and Remedies

Theresa Lynch (Law School: Room 118) [email protected]

Contract Law: GPEL

Contract Law Elements GPEL module: The essential features in the formation of a contract (offer, acceptance, consideration, intention to create legal relations and privity). Dr. Sanders has covered these elements of contract law with you in Lectures 1 and 2 on Contract Law). Over the next three weeks the remaining contract lectures will focus on: The different types of contractual terms and their significance; Defects and vitiating factors Discharging a contract (through performance, agreement and frustration. The available remedies following breach of contract.

Change to Lecture Schedule

You will attend a Seminar 3 in either week 9/10 on discharging contracts and remedies for breach of contract.
NB. The supervision sheet for Seminar 3 is now on WebCT.

Therefore todays lecture (so as to ensure that you have been lectured on the seminar topic before you have the seminar), will be on discharge and remedies.

New Lecture Schedule

So your new lecture schedule is: Contract Lecture (3): Week 8 (wk/b 15th November 2011) Discharge and Remedies Contract Lecture (4): Week 9 (wk/b 21st November 2011) Terms/Content of a Contract Contract Lecture (5): Week 10 (wk/b 15th November 2011) Defects and vitiating factors. NB. TIMES AND VENUES OF LECTURES DO NOT CHANGE

Lecture Overview

A contract establishes the rights and duties of the parties and where successfully completed the parties will be considered to have discharged their responsibilities. However, this is not the only way in which the contract may be discharged and this lecture will discuss these other ways. This lecture will also importantly, identify the remedies available when a party has breached a contract.

Lecture Overview Contd.

This lecture will be split into two halves:

Discharging a Contract 2. Remedies for Breach of Contract

1.

Learning Outcomes
Following this lecture you should be able to:

List and discuss the ways in which a contract may be discharged; Identify the remedies available for breach of contract; and Have an understanding of the implications of the equitable remedies available for breach of contract.

Part 1 Discharging a Contract

There are 4 ways in which a contract may be discharged:

Agreement 2. Performance 3. Frustration 4. Breach

1.

1. Agreement
Both parties agree to end the agreement. The parties may agree between themselves that they no longer wish to continue with the contract, and therefore release each other from their obligations. As this is in effect a new contract, and varying a contract requires formalities to make it valid, the elements of agreement and consideration are necessary.

2. Performance

Normally, for a contract to be discharged by performance complete performance of all obligations is required. The most obvious form of discharge is through the parties completion of their obligations (the contract performed). Where complete performance has not been achieved, the courts have developed rules on what implications such a situation will have for the parties.

Cutter v. Powell [1975] 6 Term Rep 320

Jamaica, Kingston Harbour.

Cutter v. Powell [1975] 6 Term Rep 320

Captain Powell engaged Cutter as part of his crew in a voyage from Jamaica to Liverpool. The contract stipulated that the contract was only fulfilled when the entire contract was performed and payment was only due when the voyage was completed. Mr Cutter died 19 days before the vessel arrived in Liverpool and his widow claimed for his owed wages. It was held that the claim must be denied as it was a condition of the contract that payment would be made on completion of the voyage, and this had not been complied with.

Cutter v Powell established that for a contract to be discharged by performance complete performance of all obligations is required.

General Rule on Performance: Exceptions

The general rule is that for a contract to be discharged by performance complete performance of all obligations is required (Cutter v Powell).

However, there are exceptions to this general rule. These are:

a. b. c.

d.

where contract is divisible. where substantial performance has been carried out. Hoenig v Isaacs [1952] 2 All ER 176 where the performance of the obligation in question has been prevented by the other party to the contract. Planch v Colburn [1824-34] All ER 94 where the other party has accepted part performance instead.

a. Where the contract is divisible

This means that the contract is broken into smaller units.
Example A contract for the shipment of cargo was agreed at a price of 5 per ton. Not all of the cargo was delivered; therefore the owners claimed a breach. Further, they asserted that they were not obliged to pay an amount as the entire contract has not been completed. It was held in Ritchie v Atkinson [1808] 10 East that there was a breach, but as this was divisible contract payment was due on the basis of the number of tons of cargo actually delivered.

b. Substantial Performance

If, on the other hand, a substantial proportion of the contract has been completed, the innocent party has an obligation to pay, taking into account the short comings of the contract. This was demonstrated in Hoeing v Isaacs [1952] 2 All ER 176.

Hoeing v Isaacs [1952] 2 All ER 176.

Problems with a book shelf/cupboard that was left unfinished/not in working order.

Hoeing v Isaacs [1952] 2 All ER 176.

In this case a contract was established for the decorating and furnishing of a flat for a fee of 750.The work was done but it contained some defects ( book shelf/cupboard was left unfinished/not in working order). The cost of putting right the defects was no more than 55. The defendant claimed that the contract was an entire contract and that since the plaintiff had not fully completed the work he was not entitled to any payment. However, the Court of Appeal held that since the defect was very minor, there had been substantial performance of the contract. The defendant was therefore bound to pay the contract price less the cost of rectifying the defect. This result in this case is fair because to uphold the defendants argument would have resulted in the defendant retaining the benefit of the plaintiffs work without paying anything for it.

c.

One Party Prevents the Other from Completing Performance

There is also a claim for partial or substantial performance of the contract if the full and complete performance of the contract was prevented through the other partys actions.
In Planche v Colburn [1831] 5 C & P 58, a book was commissioned (for a fee of 100) and the author had partially completed this when the contract was cancelled. It was held that 50 was to be paid to the claimant for the work already completed (known as quantum meruit assessment).

d. Part Performance

There may exist in situations where a contract is not fully completed, and the other party voluntarily accepts the partial performance. It must be noted at this stage that the acceptance must undertaken voluntarily for it to be valid. In the case of Sumpter v Hedges [1898] 1 QB 673, it was decided that where the innocent party has no choice but to accept the part performance the party in breach is not entitled to payment for the work completed on the contract. The acceptance of the partial performance discharges the party from any further obligation under the contract and the innocent party must pay an appropriate proportion of the price.

3. Frustration
Where subsequent events outside the parties control render the performance of contract impossible or futile, the contract is said to have been frustrated.

Frustration has been found to discharge a contract on three main grounds. These are: a. impossibility of performance (destruction of subject matter of contract ), b. supervening Illegality (change in the law) or, c. Frustration of Purpose (purpose of contract no longer available).

a. Impossibility

In a situation where the subject matter of the contract has ceased to exist before the contract has been performed, and its neither partys fault that this has occurred, then the courts consider this to be frustration. For example, in Taylor v Caldwell [1861-73] All ER Rep 24: T and C had entered into a contract on 27th May 1861 where C had agreed to let T have the use of the Surrey Gardens and music Hall at a rate of 100 per day. This hire was to take place for four days for the purpose of giving a series of grand concerts. The contract was established, but before the first performance the Music hall was destroyed by fire and therefore the contracts could not take place. Taylor claimed damages for the money spent on the advertising and preparation for the concerts. The decision of the High Court was ... the Music Hall having ceased to exist, without fault of either party, both parties are excused, the plaintiff from taking the gardens and paying the money, the defendants from performing their promise to give the use of the Hall and Gardens and other things.

b. Supervening Illegality

If the parties have agreed a contract, but before the contract is due to be performed it subsequently becomes illegal, then the contract is frustrated. This was the case in Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour [1943] involving the outbreak of hostilities between England and Germany. Here Fairbairn based in England could not legally supply good to Fibrosa, based in Poland, as Germany had occupied Poland in 1939 and England had declared war on Germany. There was a provision preventing British companies from supplying, inter alia, machinery to an enemy-occupied country, and consequently the contract was frustrated. Any attempt to deliver the goods under the contract would result in supervening illegality.

c. Frustration of Purpose
If parties contract for a specific event, and for some reason this event does not take place, the contract will be frustrated. For example In Krell v Henry [190003] All ER Rep 20:

K left instructions with his solicitor to rent out his suite of chambers located at 56a Pall Mall. On 17 June 1902 H responded to an advertisement for the hire of the flat) from which it was possible to view the procession of the Kings coronation). H agreed to take the suite, and paid a deposit, but the King became ill before the coronation and hence the procession was cancelled. Henry refused to pay the balance due and K began an action to recover the sum. It was argued by K that the contract could still continue as the flat was still in existence, and H could still have the use of it for the days for the days identified in the contract. The Court of Appeal held that the contract was frustrated. It took a broader view that the entire purpose of hiring the flat was to view the coronation (evidenced from the price paid to hire the premises). The Kings illness was the fault of neither party but its effect was to make the contract radically different from what was agreed. Hence the contract was frustrated.

When Does the Frustration Rule Not Apply?

If event should have been foreseeable when contract made; If the party causes the frustrating event; When an alternative method of performance is still possible; If the contract is simply too expensive to perform.

The Effect of the Frustration Rule

The effect of frustration result in the parties being discharged from any further performance in the contract and any money paid is returned (at the discretion of the court). It should be noted at the that this known as a doctrine of last resort and will therefore only be used where the parties have not made their own arrangement for a frustrating event. The courts have encouraged the parties to make provisions in the contract on the basis of such eventualities.

The Effect of the Frustration Rule Contd.

If no provisions are contained in the contract, assistance has been provided through the Law Reform (Frustrated Contracts) Act 1943. This statute provides that:

Any money paid is recoverable; Any money to be paid in the future ceases to be payable; A party who received a valuable benefit from other partys performance before the frustrating event may have to pay for that benefit. These provisions do not apply if the parties make their own provisions for the effect of frustration.

4. Breach

Any breach will allow an innocent party to claim damages; BUT not every breach is capable of resulting in discharge of contract. This will depend upon the type of contractual term that has been breached. Next weeks lecture is on terms/content of a contract but it is useful to set out two of the main terms at this stage also.

Terms of a contract: Conditions and Warranties

Conditions are important terms of a contract often described as a term that goes to the heart of a contract (ie. that the term could be said to be what the contract is all about). Warranties are lesser or subsidiary terms of a contract distinct from the vital terms which are the conditions. Typically breach of a condition will result in the discharge of a contract, but only if the injured party wishes to do so. On the other hand, one cannot discharge a contract for breach of a warranty.

Anticipatory Breach

An anticipatory breach occurs where one party indicates before performance is due that they do not intend to perform their obligations. In this type of situation the other party may cancel the contract and sue for damages at this point or wait until it is time for performance then cancel and sue.

Overview: Discharging a Contract

1. 2.

a.
b. c.

d.
3. a.

b.
c. 4.

Agreement Performance Exceptions where contract is divisible. where substantial performance has been carried out. where the performance of the obligation in question has been prevented by the other party to the contract. where the other party has accepted part performance instead. Frustration Types of Frustration impossibility of performance (destruction of subject matter of contract ), supervening Illegality (change in the law) or, Frustration of Purpose (purpose of contract no longer available). When does the Frustration Rule not apply? The Effects of Frustration Breach Terms of a Contract Anticipatory Breach

Part 2 Remedies for Breach of Contract

In the next part of this lecture we will be looking at remedies for breach of contract. The lecture will focus on: Damages 2. Measure of Damages 3. Equitable Remedies for Breach of Contract
1.

1. Damages

Damages are monetary compensation for loss or damage arising from breach. The aim is not to punish, but to compensate.
Damages are intended to put the innocent party, so far as money can do it, in the position in which he would have been in if the contract had been performed. This includes loss of profits which the innocent party would have made if the contract had been performed.

2. Measure of Damages
Limitations on the Damages Recoverable

Remoteness of Damage b. Duty to Mitigate c. Penalty Damage d. Non Pecuniary Losses

a.

a. Remoteness of Damages

Whether the resulting damage should be attributed to a party is determined by a remoteness test; that is the court will determine whether the possibility of such damages occurring were reasonably foreseeable by the person causing the damage. Usual damage: might reasonably anticipate/in the natural course of things likely to be liable Non-usual damage: circumstances not necessarily known to other party unlikely to be liable (too remote)

Remoteness of Damages Contd.

Hadley v Baxendale [1843-60] All ER Rep 461

H owned a flourmill and in May the mill was stopped due to a breakdown of the crankshaft (the only one it had). H was to send the crankshaft to a third party for it to be replaced, B informed H that delivery would be made the following day. However, delivery was delayed seven days and this led to a loss of profits that H attempted to recover. B argued that it had no knowledge that H would have sent the only crankshaft and hence a delay would have completely stopped production. The court concluded that there had been a breach of contract, but damages should be based on what may fairly and reasonably be considered arising naturally from the breach. A complete cessation of work due to the delay would have not been reasonably foreseeable by B.

Remoteness of Damages Contd.

As H sent its only crankshaft to be delivered by B, it had an obligation to inform B of this fact and a delay would have prevented any work being completed. B would then have realised the consequences of any delay that is a total loss of business and consequent loss of profits. This legal reasoning was continued in: Victoria Laundry v. Newman Industries [1949] 2 KB 528 In this latter case a delay in delivering an industrial boiler for commercial launderers would allow damages to be claimed for the subsequent lost profits, but this did not extend to possible lucrative contracts that could have been won had the boiler been delivered as expected.

b. Duty to Mitigate

Duty to mitigate: injured party has duty to take all reasonable steps to minimise their loss. Where an innocent party has failed to mitigate his/her losses following breach they may be awarded nominal damages. The award of nominal damages essentially reflects that the claimant has won the case, but he/she may not have acted reasonably in the circumstances (see Brace v Calder [1895] 2 QB 253).

c. Penalty Damages

Liquidated damages occur when there is a provision in contract stating in advance what damages will have to be paid if a breach occurs.

Only enforced if genuine pre-estimate of loss.

Where the amount agreed is exorbitant and not a genuine pre-estimate of the anticipated loss, the courts will treat the agreement as a penalty and will refuse to enforce it (see Dunlop Pneumatic Tyre Company v New Garage and Motor Company [1915] AC 79).

d. Non Pecuniary Loss

Non pecuniary losses for example, damages for mental distress, hurt feelings, disappointment, loss of reputation or loss of amenity. The General Rule The traditional view of the courts when determining the level of damages applicable in such cases has been to ignore any injured feelings or loss of enjoyment suffered (see Addis v Gramophone [1909] AC 488). This is due to the problem inherent in quantifying such damages and the potential opening of the floodgates for claimants.

Non Pecuniary Loss Contd.

The Exceptions There are 2 main exceptions to the general rule. 1. Damages for distress may be awarded where the distress arises from physical inconvenience caused by the breach of contract (e.g. see Watts v Morrow [1991] 1 WLR 1421. 2. Damages for non-monetary losses such as mental distress may be recovered in cases where the main object of the contract was to provide pleasure, relaxation and enjoyment. This is the case, for example, with a contract for the provision of a relaxing holiday.

Non Pecuniary Loss Contd

Although damages are awarded for nonmonetary losses in the case of these exceptions, the amounts awarded as usually very modest. The courts have stated that they are not keen to see huge US-style awards for non-monetary losses on this side of the Atlantic

Jarvis v Swan Tours [1972] 3 WLR 954

Holiday to Switzerland. The whole purpose of the contract was for pleasure, relaxation and enjoyment.

Jarvis v Swan Tours [1972] 3 WLR 954

The plaintiff booked a winter holiday which the defendants promised in their brochure would be like a house party, with special entertainment and proper facilities for skiing. In fact the facilities were inadequate. In the second week the house party consisted of the claimant alone. The court awarded him damages for the cost of the holiday and in addition for the disappointment suffered and the loss of entertainment he had been promised in the brochure.

Mental Distress: Farley v Skinner [2001] UKHL 49; [2002] 2 AC 732.

Aircraft Noise. House located 15miles from Gatwick Airport. Surveyor asked whether house would be affected by aircraft noise.

Farley v Skinner [2001] UKHL 49; [2002] 2 AC 732.

In this case the claimant employed the defendant to survey a gracious country residence which he wished to purchase. The House was situated some 15 miles from Gatwick airport. Given its proximity to the airport the claimant expressly asked the defendant to report on whether or not aircraft noise was likely to be a problem. The defendant stated that the noise was unlikely to be a problem, although some planes will inevitably cross the area, depending on the direction of the wind positioning of the flight paths. The claimant purchased the house. After he had spent more than 100,000 on improvements to it, he discovered that the aircraft noise was a problem and interfered with his enjoyment of the house. The trial judge found that the defendant was in breach of contract and awarded the claimant 10,000 for the distress and inconvenience caused to him by the aircraft noise (the noise from the aircraft did not affect the value of the property). The House of Lords upheld the award (notwithstanding the fact that the award was, in their view on the high side).

House of Lords Decision in Farley v Skinner [2001] UKHL 49; [2002] 2 AC 732.

Their Lordships did not engage in a radical overhaul of this area of law. They accepted the traditional starting point, namely that the law of contract does not compensate a claimant for mere disappointment or annoyance suffered as a result of the defendants breach of contract. Prior to Farley v. Skinner the courts had recognised that damages for mental distress could be awarded firstly where the breach of contract caused physical inconvenience and distress to the claimant (Watts v Morrow). Secondly where the predominant object of the contract was to obtain some mental satisfaction (Jarvis v Swan Tours). What the House of Lords did however was to expand the scope of the exceptions to the general rule.

House of Lords Decision in Farley v Skinner [2001] UKHL 49; [2002] 2 AC 732. Contd.

The House of Lords expanded the scope of liability in two respects. 1. They dispensed with the predominant object test in the second exception. It sufficed that the term broken was one was which was known by both parties to be an important term of the contract: whether the contract as a whole was one to provide peace of mind or not was not the decisive factor.

House of Lords Decision in Farley v Skinner [2001]

UKHL 49; [2002] 2 AC 732. Contd.

The claimant in Farley v. Skinner had specifically asked the surveyor to report on the level of aircraft noise. As Lord Clyde observed, it was the specific provision relating to the peacefulness of the property in respect of the aircraft noise which makes the present case out of the ordinary. In the absence of a specific question to the surveyor, it would appear that a surveyor will not ordinarily be liable to a house purchaser for the disappointment or distress which he suffers in the event that the House suffers from a defect. The elimination of the predominant object test may result in a gradual but controlled expansion of the ambit of liability for mental distress damages.

House of Lords Decision in Farley v Skinner [2001] UKHL 49; [2002] 2 AC 732. Contd.
2.

It was established in Farley that the claimant can recover damages on the ground that the defendants breach of contract resulted in inconvenience and discomfort for the plaintiff. The Lords adopted a very broad view of inconvenience and it was held that the noise from the aeroplanes caused the claimant to suffer real discomfort, in that it interfered with the enjoyment of his property.

House of Lords Decision in Farley v Skinner [2001] UKHL 49; [2002] 2 AC 732. Contd

A finding that the noise interfered with the claimants use of the property seems rather marginal in that no other house owner appeared to suffer in the same way.
But the fact was that the noise did interfere with the claimants: quite reflective breakfast, morning stroll in the garden and pre dinner drinks on the terrace all spoilt by the noise. There is a definitional problem here because it may not always be easy to distinguish between inconvenience which (which falls within the scope of this category) and disappointment (which does not).

House of Lords Decision in Farley v Skinner [2001] UKHL 49; [2002] 2 AC 732. Contd

It may be that the difference is that inconvenience affects the senses. Lord Scott stated: If the cause is no more than disappointment that the contractual obligation has been broken damages are not recoverable even if the disappointment has led to a complete mental breakdown. But if the cause of the inconvenience is discomfort or,sensory (sight, touch, hearing smell etc) experience, damages can, subject to the remoteness rules, be recovered.

NB. For further discussion of Farley v Skinner see: E.McKendrick (2011) Contract Law. (This forms part of the recommended reading for seminar 3 and you can find the relevant extract on WebCT after the lecture.

3.

Equitable Remedies for Breach of Contract

Equitable remedies are discretionary this means that the court is not obliged to grant them, but can do so at its discretion if counsel makes a convincing argument. The party claiming the equitable remedy must show that:

Damages would not be an adequate remedy; and They acted completely honestly. There is an equitable maxim, or rule, that he who comes to equity must come with clean hands.

Equitable Remedies for Breach of Contract Contd.

Equitable remedies for breach include:
a. b.

c.

Rescission the court sets aside contract and restores parties to pre-contractual position. Specific performance the court orders the breaching party to perform their contractual obligations. If the party continues to refuse after the court order, it will be guilty of the criminal offence of contempt of court. Injunction the court directs a party to refrain from doing something that would act as a breach of the contract (see: Warner Bros v Nelson [1937] 1 KB 209).

Overview: Remedies for Breach of Contract

1. 2. a.

b.
c. d. 3. a. b. c.

Damages Measure of Damages Limitations on the Damages Recoverable Remoteness of damage Duty to Mitigate Penalty Damages Non Pecuniary Losses Equitable Remedies for Breach of Contract Rescission Specific Performance Injunction

Next Lecture:

Contract Lecture (4): Week 9 (wk/b 21st November 2011): Terms/Content of a Contract

Either: Tuesday (10-12: AW WG5); or, Friday (4-6: Howarth 101).