86614456 No 17 Discharge of Contract

7/29/2019 86614456 No 17 Discharge of Contract

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DISCHARGE OF CONTRACT

To discharge a contract is to end it. If a contract has been discharged neither party has further obligationsunder it or defective performance of those obligations. A contract imposes obligations on the parties from whichthey may be discharged in various ways:

Discharge

ofcontract

Performance Breach Agreement Frustration

A contract may come to an end and the parties discharged from their obligations in four ways:1. By performance2. By breach3. By agreement4. By frustration

Discharged by PerformanceThe general rule is that the parties must carry out precisely what they agreed under their contract. If

one of the parties does something less than, or different from that which he agreed to do he is not dischargedfrom the contract and, moreover is not entitled for payment/performance from the other.

Case: Cutter v PowellFacts: Cutter agreed to serve on a ship sailing from Jamaica to Liverpool. He was to be paid on arrival at

Liverpool. The ship sailed on 2 August, arriving in Liverpool on 9 October. But Cutter died at sea on 20

September.Held: It was held that his widow could not recover anything for the work he had done before he died. Cutter

was obliged to complete the voyage before he was entitled to payment.

Case: Bolton v MahadevaFacts: Bolton installed a central heating system in Mahadevas house for an agreed price of 560. The work

was carried out defectively and it was estimated that it would cost 179 to put matters right.Held: The Court of Appeal held that since Bolton had not performed his side of the contract, he could recover

nothing for the work he had done.

1. Exceptions to the general rule1. Doctrine of substantial performance. Where a contract has been substantially performed an actionlies for the contract price less a reduction for the deficiencies. This exception only applies when the defectrelates to the quality of performance. If the defect concerns quantity, for example of goods supplied, thegeneral rule applies.

If the court decides that the plaintiff has substantially carried out the terms of the contract, he may recover forthe work he has done. The defendant can counter claim for any defects in performance.

Case: Hoenig v Isaacs

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Facts: The plaintiff agreed to decorate the defendants flat and fit a bookcase and wardrobe for 750. Oncompletion of the work the defendant paid 400 but he complained about faulty workmanship andrefused to pay the balance of 350.

Held: The Court of Appeal held that the contract had been substantially performed. The plaintiff was entitledto the outstanding 350, less the cost of remedying the defects, which was estimated at 56.

2. Acceptance of part ial performance. If one of the parties only partially carries out his side of thecontract but the other party exercising a genuine choice, accepts the benefit of the partial performance, thecourt will infer a promise to pay for the benefit received.

Case: Sumpter v Hedges.Facts: The plaintiff undertook to erect buildings on the land of the defendant for a price of 564. He partially

erected the buildings, then abandoned the work when it was only completed to the value of 332. Thedefendant completed the work using materials left on his land. The plaintiff sued for the value of hismaterials used by the defendant and for the value of his work.

Held: the defendant must pay for the materials since he had elected to use them but he had no obligation topay the unpaid balance of charges for work done by the plaitiff before abandoning it. It was not a caseof substantial performance of the contract.

3. Performance prevented by the promisee. A person who is prevented from carrying out his side ofthe bargain by the other party can bring an action to recover for the work he has done.

Case: Planche v ColburnFacts: The plaintiff agreed to write a book on Costume and Ancient Armour, on completion of which he was

to receive 100. After he had done the necessary research and written part of the book, the publishersabandoned the project.

Held: He recovered 50 guineas for the work he had done.

4. Divisible or severable contracts. Some contracts are said to be entire. This means that a party isnot entitled to payment until he has completely performed his part of the contract (e.g. Cutter v Powell). Othercontracts may be divisible, i.e. the obligations can be split up into stages or parts. Payment can be claimed foreach completed stage.

Case: Taylor v LairdFacts: The plaintiff agreed to captain a ship up to River Niger at a rate of 50 per month. He abandoned the

job before it was completed. He claimed his pay for the month completed.Held: he was entitled to 50 for each complete month. Effectively this was a contract that provided for

performance and payment in monthly instalments

5. Stipulation as to timeAt common law time is of the essence but not in equity. However, time is of the essence if it is expresslystipulated or upon giving reasonable time to perform. Where time is not of the essence the injured party may claim damages for loss or expense caused by the

delay but must accept late performance.

Where it is expressly stipulated that time is of the essence then delays in performing will not discharge thecontract.

Where there is no express stipulation then the following rules apply:(a) In case of a commercial contract, time of performance is usually treated as an essentialcondition.

Case: Elmdore v KeechFacts: An advertisement was to be published within 120 days of delivery. Publication was eleven days late.Held: the party who had supplied the advertisement was entitled to refuse to pay for it. Time was ofessence.

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(b) In a contract for the sale of land a plaintiff may be granted an order for specific performanceeven if he is late.(c) A notice to complete within a reasonable time may be served at a later time.

Discharge by Breach.A party is said to be in breach of contract where he does not perform his contractual obligations precisely. As aconsequence of this failure the court may award remedies against the party in breach of the contract, themost usual of which is damages. Usually breach of contract only becomes apparent at, or after, the time setfor the performance of the contract.

A person has a lawful excuse not to perform primary contractual obligations in the following situations.

Performance is impossible

He has tended performance but this has been rejected.

The other party has made it impossible for him to perform

The contract has been discharged through frustration

The parties have by agreement permitted non performance

A repudiatory breach occurs where a party informs that he does not intend to honour his contractual obligations.

A repudiatory breach is a serious actual breach of contract. It does not automatically discharge the contract,

indeed the injured party has a choice.

He can elect to treat the contract as repudiated by the other, recover damages and treat

himself as being discharge from his primary obligations under the contract.

He can elect to affirm the contract.Ac tua l B reachThis occurs when a party without lawful excuse fails or refuses to perform what is due from him under thecontract, incapacitates himself from performing or performs defectively.

Ant i c i pa to r y b reach

Anticipatory breach is where before the time fixed for performance, one party indicates by words or conductthat he does not intend to carry out his side of the contract or puts himself in a position whereby he will beunable to perform. Examples:

(a) refusal to perform (renunciation). One party renounces his contractual obligations by showing thathe has no intention to perform them nor to be otherwise bound by the contract.(b) failure to perform an entire obligation.(c) Incapacitation: impossible to perform due to default by one party.

Anticipatory breach can take either of two specific forms: express anticipatory breach or impliedanticipatory breach.

Express anticipatory breach occurs where one of the parties declares, before the due date ofperformance, that they have no intention of complying with the terms of the contractual agreement.

The injured party may sue immediately for breach of contract or, alternatively, wait for the time forperformance to arrive to see whether the other party is prepared to carry out the contract.

Case: Hoschster v De La TourFacts: In Apr, De La Tour employed Hochester to act as atravel courier on his European tour, starting on 1

June. On 11 May, De La Tour wrote to Hochester stating that he would no longer be needing his

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services. Hochester started proceeding on 22 May. Defendant claimed there would be no cause ofaction until 1 June.

Held: Claimant was entitled to start action as soon as the anticipatory breach occurred.

Implied anticipatory breach does not arise from any direct indication from either of the parties that they

will not perform their contractual agreement, but results from the situation where one of the parties doessomething which makes subsequent performance of their contractual undertaking impossible.

Case: Omnium D.Enterprises v Sutherland (1919)

Facts: the defendant had agreed to let a ship to the plaintiff, but before the actual time for performance, heactually sold the ship to another party

Held: It was held that the sale of the ship amounted to a clear repudiation of the contract and that theplaintiff could sue for breach of contract from that date, without having to wait until the actual date ofperformance of the contract.

It can be dangerous to wait for the time for performance. The injured party may lose the right to sue forbreach of contract, if, in the meantime, the contracts is discharged for frustration.

A breach of contract does not discharge the contract, for either party. However a breach may entitle theinnocent party to terminate the contract, and thus treat himself as discharged from any outstanding obligationsthereunder. Whether the breach has this effect depends on the nature of the term broken and, in some caseson the effect of the breach.

The innocent party has the right to terminate the contract:(a) where the term broken is a condition; or(b) where an innominate term is broken and the breach deprives the innocent party of substantiallythe whole benefit which it was intended that he should receive; or(c) if the other party repudiates the contract, by indicating that he no longer intends to be bound by it.

A breach of contract, does not oblige the innocent party to terminate, but gives him the option to do so. Theinjured party may affirm the contract, then the right to terminate the contract is lost, though the innocent partymay still claim damages.

Case: White & Carter (Councils) v McGregorFacts: The plaintiffs supplied litter bins to local councils, and were paid not by the councils but by traders who

hired advertising space on the bins. The defendant contracted with them for advertising of hisbusiness. He then wrote to cancel the contract but the plaintiff elected to advertise as agreed, eventhough they had at the time of cancellation taken no steps to perform the contract. They performedthe contract and claimed the agreed payments.

Held: the contract continued in force and they were entitled to recover the agreed price for their services.Repudiation does not of itself, bring the contract to an end. It gives the innocent party choice ofaffirmation or rejection.

Alternatively the injured party may treat the contract as repudiated by the other party, recover damages andtreat self as discharged from contractual obligations.

Where following a breach the innocent party decides to terminate the contract, he must notify the other partyof his decision. The effects of termination for the innocent party is as follows:

1. He is not bound by his future or continuing contractual obligations, and cannot be sued on them2. He need not accept nor pay for further performance.3. He can refuse to pay for partial or defective performance already received

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4. He can reclaim money paid to a defaulter5. He is not discharged from the contractual obligations which were due at the time of termination.

The innocent party can also claim damages from the defaulter or a reasonable remuneration on a quantummerruit basis.

Discharge by agreement.There are three ways in which a contract can be discharged by agreement.

1. The parties may have agreed in their original contract that it should end automatically with the happening ofsome event or after a fixed period of time. Thus goods may be hired, premises may be leased, or a personemployed for a fixed term. On the expiration of the term, the contract will cease.The agreement may have included a term allowing either party to terminate the contract by giving notice. Acontract of employment, for e.g., can be brought to an end by either the employer or the employee givingreasonable notice to the other.

2. Novation: Discharge can also arise, not out of the original agreement, but by reason of a new, extraneouscontract. The new agreement will only discharge the old contract if it possesses all the characteristics of a validcontract; in particular, consideration must be present. when neither party has yet performed his side of the contract, there is no difficulty. Both sides, by waiving

their rights, are providing something of value which constitutes consideration. where one party has completely performed his original obligations, the agreement for discharge will only be

valid if, in return for the release, the other party does or promises something which he is not already boundto do e.g. payment of a cancellation fee. In the absence of such new consideration, the agreement forrelease will not be binding, and the original contract will stand. For this reason discharge by newagreement is sometimes called discharge by accord (agreement) and satisfaction (consideration).

3. Finally, one party can release the other unilaterally, without consideration, but only if he does so by deed orby fresh consideration. The fresh consideration is said to be accord and consideration

(i) The accord is the agreement by which the obligation is discharged.(ii) The satisfaction is the consideration which makes the agreement effective.(iii) The satisfaction may be executory.

Discharge by frustrationUntil the last century, the rule was that the parties were under an absolute duty to perform their contractualobligations. A person was not excused simply because outside events had made performance impossible.Case: Paradine v Jane

Facts: During the course of the English Civil War, a tenant was evicted from certain property by Prince Rupertand his army. In an action by the landlord to recover three years arrears of rent.Held: it was held that the tenant was not relieved from the obligation to pay rent simply because he had been

unable to enjoy the property.

Starting with the case of Taylor v Caldwell, the courts have developed the d o c t r in e o f f r u s tr a t i o n as anexception to this absolute rule. If some outside event occurs for which neither party is responsibleand which makes total nonsense of the origina l agreement , then the contrac t w il l bedischarged by frustration. The doctrine will apply in the following circumstances:

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Case: Taylor v CaldwellFacts: The plaintiff had hired the Surrey Gardens and Music Hall for a series of concerts. However, after

making the agreement and before the date of the first performance, the hall was destroyed by fire.Held: It was held that the contract was discharged and the parties released from their obligations

2 . Per sona l incapaci ty t o render a con tr ac t of per sona l se rv iceIf the presence of a particular person is necessary for the execution of the contract, the death of that personwill clearly discharge the contract. Frustration may also apply if a party is unavailable because of illness,internment or imprisonment.

Case: Condor v Barron KnightsFcats: The plaintiff, aged 16, contracted to perform as drummer in a pop group. His duties when the group

had work, were to play on every night of the week. He fell ill and his doctor advised that he shouldrestrict his performance to four nights per week. The group terminated his contract.

Held: a contract of personal service is based on the assumption that the employees health will permit him toperform his duties. If that is not so the contract is discharged by frustration.

Case: Hare v Murphy BrosFacts: Hare was sentenced to 12 months imprisonment for unlawful wounding and was, therefore, unavailable

to carry out his responsibilities as a foreman.Held: It was held that this frustrated his contract of employment.

3. Government interventionCase: Metropolitan Water Board v Dick, Kerr & Co.Facts: A firm of contractors agreed in 1914 to build a reservoir. In 1916, under wartime emergency powers,

the government ordered the contractor to stop work and sell the plant.Held: This was held to frustrate the contract. Although it might eventually be possible to start work again

after the war, the enforced hold-up for an indefinite period made nonsense of the contract.

4. Supervening i l legalityA subsequent change in law or in circumstances may make performance of the contract illegal. An exportcontract will be discharged if war breaks out with the country of destination.

Case: Re Shipton, Anderson & Co and Harrison Bros & CoFacts: A contract was made for the sale of wheat stored in a Liverpool warehouse. It was requisitioned by the

government under emergency wartime legal powers.Held: it was no longer lawful for the seller to deliver the wheat. The contract had been discharged byfrustration.

5. Non-occurence of eventThe parties may have made their contract on the basis of some forthcoming event. If the event fails to takeplace and as a result, the main purpose of the contract cannot be achieved, the doctrine of frustration will

apply.

Case: Krell v HenryFacts: Henry hired a room overlooking the route of Edward VIIs coronation procession. The procession was

cancelled owing to the Kings serious illness. Although it would have been possible to come and sit inthe room, the main purpose of the contract, to view the procession, had been destroyed.

Held: The Court of Appeal held that the contract had been frustrated.

6. Inter rupt ion which prevents per formance in the form intended by the part ies

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Case: Jackson V Union Marine Insurance Co.Facts: The parties contracted in Nov 1871 for a charter of a ship to proceed immediately from Liverpool to

Newport, damages and accidents of navigation excepted, to load cargo for San Francisco. Havingsailed on 2 January, the ship went ashore off the coast of Wales on 3 January and could not berefloated for a month. Thereafter she needed repairs in Liverpool to make her fit for the voyage; Thesewere still in progress in August. Meanwhile the charterers hired another vessel. The plaintiff claimedon his policy of insurance.

Held: the interruption had put an end to the contract in the commercial sense. It was no longer possible toperform the contract intended. The charterer was discharged by frustration. The plaintiff had no claimagainst the charterer and could claim from the defendants.

Exceptions1. A contract will only be frustrated if the change in circumstances has had a substantial effect on the mainpurpose of the contract. The fact that it has become more difficult or expensive to carry out tthe contract willnot excuse the parties.

Case: Tsakiroglou & Co Ltd v Noblee & Thori GmbHFacts: In October 1956 sellers agreed to deliver nuts from Port Sudan in Hamburg, shipment to take place

during Nov/Dec 1956. On 2 Nov, the Suez Canal was closed to traffic. The sellers failed to deliver and,

when sued for breach of contract argued that the contract had been frustrated. Clearly, it had notbecome impossible to carry out the contract: shipment could have been made via the Cape of GoodHope - a longer and much more expensive operation.

Held: The House of Lords held that this was not sufficient to discharge the contract for frustration.

Case: Davis Contractors v Fareham UDC

2. If one party has accepted risk that he will be unable to perform.Case: Budgett & Co v Binnington & Co

3. Where one of the parties is responsible for the frustrating event (i.e. self-induced frustration)

Case: Maritime National Fish Ltd v Ocean Traders Ltd

Facts: The appellants chartered a trawler from the respondent which needed to be fitted with an otter trawl.It was illegal to operate with an otter trawl unless a licence had been obtained. The appellants appliedfor five licences to cover four trawlers of their own and the trawler on charter; however, they weregranted only three licences. They decided to nominate their own trawlers for licences rather than thechartered trawler.

Held: The Judicial Committee of the Privy Council held that contract was not frustrated as the appellants haddecided quite deliberately not to nominate the respondents trawler and were, therefore, responsible forthe frustrating event.

The consequences of frustration.At common law, a frustrating event has the effect of bringing the contract to an immediate end. The rights andliabilities of the parties are frozen at the moment of frustration. The rule was that money payable beforefrustration remained payable and money paid before frustration could not be recovered. Any money which didnot become payable until after frustration ceased to be payable. The harsh consequences of this rule weremodified by the House of Lords in the Fibrosa case and wider changes were introduced under the Law Reform(Frustrated Contracts) Act 1943.The Act made two important changes:

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1. Money payable before frustration ceases to be payable and money paid before frustration can be recovered.The court may in its discretion allow the payer to recover or retain all or part of the sums to cover any expensesincurred.2. A party who has carried out acts of part performance can recover compensation for any valuable benefit(other than a payment of money) confered on the other party.

REMEDIES FOR BREACH OF CONTRACT

Breach of a contract occurs where one of the parties to the agreement fails to comply, either completely orsatisfactorily, with their obligations under it. A breach of contract may occur in three ways:

(i) where a party, prior to the time of performance, states that they will not fulfil their contractual obligation;(ii) where a party fails to perform their contractual obligation;(iii) where a party performs their obligation in a defective manner.

Any breach will result in the innocent party being able to sue for an appropriate remedy. In addition,however, some breaches will permit the innocent party to treat the contract as discharged. In this situationthey can refuse either to perform their part of the contract, or to accept further performance from the partyin breach.

In appropriate cases the party who has suffered a breach of contract may have any of the following remedies:: damages; quantum meruit; specific performance; injunction.

DAMAGESDamage is the common law remedy and is available as of right for every breach of contract. The aim ofdamages in contract is usually to put the injured party into the position he would have been had the contract

been properly performed. Damages are compensatory. They are not usually intended to be punitive.

REMOTENESS OF DAMAGES

This involves deciding how far down a chain of events a defendant is liable. When assessing the measure ofdamages payable, one of the important factors to consider is the concept of remoteness of damages. It relatesto the relationship between a wrongful act and the resulting damage which determines whether or notcompensation may be recovered. A damage will be considered on proximate only if it is within thecontemplation of both parties as the likely outcome of the breach. If there are specific circumstances known toone party only, and if it is not communicated to the other party then there would be no damages resulting as aconsequence of the breach. The damage is then too remote. To make it proximate it should have beencommunicated to be within the contemplation of parties and the other party contracts in reliance on that

prospective reliability.

Hadley V BaxendaleThe claimants owned a mill, which came to a standstill because the main crank shaft had broken. Thedefendant contracted to transport the broken shaft to the makers the following day, to serve for a pattern formaking a new shaft. Owing to neglect by the defendant, delivery was delayed and the mill was out of action fora longer period than expected. The defendant did not know that the mil would be idle during the interval. Theclaimant claimed for loss of profits suffered during that period. Although the failure of the carrier to perform thecontract promptly was the main cause of the stoppage, the claim failed since the defendant did not know thatthe mill would be idle until the new shaft was delivered. Moreover it was not a natural consequence of delay in

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transport of a broken shaft that the mill would be out of action. The importance of the shaft was not obvious;the miller might have a spare.

Conclusion: The rule in Hadleyv Baxendale (1854) states that damages will only be awarded in respect oflosses which arise naturally, i.e. in the natural course of things; or which both parties may reasonably besupposed to have contemplated, when the contract was made, as a probable result of its breach.

The effect of the first part of the rule in Hadleyv Baxendale is that the party in breach is deemed to

expect the normal consequences of the breach, whether they actually expected them or not.

Under the second part of the rule, however, the party in breach can only be held liable for abnormalconsequences where they have actual knowledge that the abnormal consequences might follow.

Victoria Laundry V Newman IndustriesThe defendant contracted to sell a large boiler to the claimants for immediate use in their business oflaunderers and dyers. The delivery was somehow delayed. The defendants were aware of its importance andthey were sued for the loss suffered and the contract of dyeing forgone during that period. The court held thatthe loss of normal profits were recoverable since in the circumstances failure to deliver a major industrialequipment ordered for immediate use prevented the operation of the plant. However the claim for loss of

special profits failed because the defendant had no knowledge of the dyeing contracts.

The Herron II

K, a ship-owner entered into a contract for the shipment of a bulk cargo of sugar belonging to C. the shiparrived 9 days late and in that time the price of sugar had fallen in the market. C sued for damages for losssuffered due to the delay. The claim succeeded since the value of commodities fluctuate.

(ii) Measure of damagesThe courts use a number of rules and principles to determine the actual extent of monetary damages owed.

The general rule is that damages in contract are intended to be compensatory rather than punitive. The aim isto put the injured party in the same position they would have been in had the contract been properlyperformed. As the object is not to punish the party in breach but to compensate the injured party for anyfinancial loss sustained as a consequence of the other partys breach, so the amount of damages awarded cannever be greater than the actual loss suffered. It should be noted that the exact amount of the loss may differdepending on whether the innocent partys reliance interest or expectation interest is used as the criterionagainst which damages are measured. In practice it is usually the expectation loss that is compensated exceptwhere this permits the innocent party to escape responsibility for any loss they would have made in the contractin the absence of breach (see CCC Films (London) Ltdv Imperial Quadrant Films Ltd(1985)).

Where the breach relates to a contract for the sale of goods, damages are usually assessed in line with themarket rule. This means that if goods are not delivered under a contract, the buyer is entitled to go into themarket and buy similar goods, and pay the market price prevailing at the time. They can then claim the

difference in price between what they paid and the original contract price as damages. Conversely, if a buyerrefuses to accept goods under a contract, the seller can sell the goods in the market, and accept the prevailingmarket price. Any difference between the price they receive and the contract price can be claimed in damages.

The injured party is under a duty to take all reasonable steps to mitigate their loss. So in the above examples,the buyer of goods which are not delivered has to buy the replacements as cheaply as possible; and the sellerof goods which are not accepted has to try to get as good a price as they can when they sell them. In such away they are expected to minimise the actual loss they sustain, as may be seen in Payzuv Saunders(1919).

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The foregoing has dealt with losses that are relatively easily quantified in monetary terms but matters are morecomplicated when it comes to assessing damages for non-pecuniary loss.

At one time, damages could not be recovered where the loss sustained through breach of contract was of anon-financial nature. The modern position is that such non-pecuniary damages can be recovered. Thus in Jarvisv Swan Tours Ltd(1973) it was held that the plaintiff was entitled to recover, not just the substantial financialloss he suffered, but also for loss of entertainment and enjoyment which amounted to an even greater sum.

The job of estimating damages may be made much simpler where the parties to an agreement make provisionsfor possible breach by stating in advance the amount of damages that will have to paid in the event of anybreach occurring. Damages under such a provision are known as liquidated damages. They will be recognisedby the court as long as they represent a genuine pre-estimate of loss, and are not intended to operate as apenalty against the party in breach. If the court considers the provision to be a penalty, it will not give it effect,but will award damages in the normal way (Dunlopv New Garage & Motor Co(1915)).

The duty to mitigate lossesThis rule relates to the rule that the injured party in the situation of a breach of contract is under a duty to takeall reasonable steps to minimise their loss. The operation of the rule means that the buyer of goods that are notdelivered, as required under the terms of a contract, has to buy the replacements as cheaply as possible.Correspondingly, the seller of goods that are not accepted in line with a contractual agreement has to try to getas good a price as they can when they sell them.

In Payzuv Saunders(1919), the parties entered into a contract for the sale of fabric, which was to be deliveredand paid for in instalments. When the purchaser, Payzu, failed to pay for the fi rst instalment on time, Saundersrefused to make any further deliveries unless Payzu agreed to pay cash on delivery. The plaintiff refused toaccept this and sued for breach of contract. The court decided that the delay in payment had not given thedefendant the right to repudiate the contract. As a consequence, he had breached the contract by refusingfurther delivery. The buyer, however, should have mitigated his loss by accepting the offer of cash on deliveryterms. His damages were restricted, therefore, to what he would have lost under those terms, namely, interest

over the repayment period.

In Western Web Offset Printers Ltdv Independent Media Ltd (1995), the parties had entered into a contractunder which the plaintiff was to publish 48 issues of a weekly newspaper for the defendant. In the action, whichfollowed the defendants repudiation of the contract, the only issue in question was the extent of damages to beawarded. The Court of Appeal decided that as the claimant had been unable to replace the work due to therecession in the economy and, therefore, had not been able to mitigate the loss, it was entitled to receive thefull amount that would have been due in order to allow it to defray the expenses it would have had to payduring the period the contract should have lasted.

However, in relation to anticipatory breach of contract the injured party can wait until the actual time forperformance before taking action against the party in breach. In such a situation, they are entitled to makepreparations for performance, and claim the agreed contract price, even though this apparently confl icts with

the duty to mitigate losses (White and Carter (Councils)v McGregor(1961)).

(LIQUIDATED, UNLIQUIDATED) DAMAGES & PENALTY CLAUSE

LIQUIDATED DAMAGES

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It is possible, and common in business contracts, for the parties to an agreement to make provisions forpossible breach by stating in advance the amount of damages that will have to be paid in the event of anybreach occurring. Damages under such a provision are known as liquidated damages.

If the clause is a genuine attempt at estimating the loss in advance of the breach it is a liquidated damagesclause and will be valid and enforceable by either party of the contract. Thus, if the actual damages suffered bythe innocent party are greater than the damages provided for, he can only claim the liquidated amount. Inother words, liquidity damages are those damages which the parties have already agreed upon the amount in

the contract agreement.

UNLIQUIDATED DAMAGESWhere the contract does not provide for damages while making the contract, it is left to the court to determinethe damages payable. In other words, these are damages which the parties have not specified in the contractagreement if there is a breach and damages are payable, the amount to be paid is left to the court to decide.

NOMINAL DAMAGESThese are damages which have a nominal value only. They are granted only to give efficiency to the decision ofthe court.

PENALTY CLAUSEWhere the clause is expressed to force a party to perform his obligations under the contract, it will be penal andthe clause will be of no effect.It will be held to be a penalty if:

(a) the sum stipulated is extravagant and unconscionable(b) the sum is payable on the occurrence of one or more breaches

However, a penalty is not necessarily penal merely because the stipulated sum is more than the loss actuallysuffered. As long as the stipulated figure is a genuine attempt to pre-estimate the loss it will be permissible. Theburden of proof is on the party alleging that the clause is a penalty.

PENALTY AND LIQUIDATED DAMAGESIt is important to differentiate between a penalty and liquidated damages. If it is a penalty the court will reduceit to what is considered as a reasonable amount whereas if it is a liquidated damage, it is considered to be a

genuine pre-estimate of the lost that has been sustained. Penalty on the other hand is a gross exaggeratedamount as compared to the lost that could have been sustained.

The c r i t e r ia t o d e t e rm i ne whe the r t h e r e i s a p ena l t y o r n o t . The use of the word penalty or liquidated damage in itself is not conclusive. It is the amount, which is

material not the wording. The essence of a penalty is a payment of money to the offending party; liquidated damage is a

genuine pre-estimate of the damage that could have been sustained.

Case: Dunlop v New Garage and Motor Co (1915),

Facts: the plaintiffs supplied the defendants with tyres, under a contract designed to achieve resale pricemaintenance. The contract provided that the defendants had to pay Dunlop 5 for every tyre theysold in breach of the resale price agreement. When the garage sold tyres at less than the agreedminimum price, they resisted Dunlops claim for 5 per tyre, on the grounds that it represented a

penalty clause.Held: the court decided that the provision was a genuine attempt to fi x damages, and was not a penalty. It

was, therefore, enforceable.

In deciding the legality of such clauses, the courts will consider the effect, rather than the form, of theclause.

Case: Cellulose Acetate Silk Co Ltd v Widnes Foundry (1925) Ltd (1933)

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Facts: the contract expressly stated that damages for late payment would be paid by way of penalty at therate of 20 per week. In fact, the sum of 20 was in no way excessive and represented a reasonableestimate of the likely loss.

Held: the House of Lords enforced the clause in spite of its actual wording.

SPECIFIC PERFORMANCEThis is an equitable remedy whereby the court orders the defendant to carry out his obligations under thecontract. Like other equitable remedies it is at the discretion of the court to grant it and cannot be obtained asof right. It is only given where it is just an equitable to do so. The main principles which determine whenspecific performance is ordered or refused are:

Where damages are an adequate remedy, specific performance will not be ordered BeswickV Beswick

A contract provided for Peter Beswick to transfer property to his nephew and in return, the nephew would makepayments to Beswicks wife after his death. The nephew failed to make the payments and he was sued.Damages were an adequate remedy as the estate itself had suffered no loss, since the payments were due tomade to the widow in a personal capacity. Therefore, the court made an order for specific performance,compelling the nephew to carry out his obligations.

Specific performance will not be given where it would cause undue hardship. Thus specific performancewill not be ordered of a contract of personal services, such as an employment contract, on the basisthat it is contrary to public policy to compel an unwilling party to maintain continuous personal relationswith another.

The remedy will only be given on the basis of mutuality, i.e., the remedy will only be granted if bothparties could, if necessary, seek the protection of the court. For this reason an infant cannot obtain anorder for specific performance since the court would not be able to enforce an order against him.

INJUNCTIONAn injunction is an order of the court, which either requires a person to do something or prohibits a person fromdoing something.

The court will grant an injunction to restraint a party from committing a breach of contract. Although it is saidthat an injunction will be granted to enforce a negative stipulation in a contract it may be extended to caseswhere a negative term may be inferred.

Metropolitan Electric SupplyV Ginder

The contract obliged the defendant to take all his electricity from the plaintiff; the obligation was in substancenot to take electricity from another supplier. An injunction to that effect was issued.

An injunction will not be granted if it would have the effect of requiring specific performance in circumstanceswhere the latter would be refused. However an injunction may be granted in the circumstances such as in thecase ofWarner Bros v Nelson.

The film star Miss Nelson entered into a contract for a term of one year but giving the plaintiff the option ofextending it, whereby she agreed that she would not accept any work outside without obtaining their writtenconsent. The plaintiff sought an injunction to restrain her from doing film work for another company in breachof this agreement. It was held that the injunction would be granted. However, no injunction would be grantedto prevent her engaging in other occupations as this would force her to work for the plaintiffs.

An injunction would be granted only where it is just and convenient to do so and if it is inappropriate the courtcan award damages in lieu of injunction. There are various types of injunctions among which we have theAnton Pillar Order and The Mareva Injunction.

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ANTON PILLAR ORDER

It was granted in the case of Anton pillar against Manufacturing Processors Ltd. It provides that a defendant isunder a duty to allow a plaintiff to enter his premises, inspect, remove or make copies of documents belongingto him or relating to his property. It is generally obtained ex-parte where the plaintiff shows that there is adamage of property being smuggled away or vital evidence being destroyed.

THE MAREVA INJUNCTIONIt was granted in the case of Mareva Companies v International Bulk Carriers. Under such an injunction, theapplicant will normally ask the court to prevent the defendant from disposing the assets as long as the hearingof the main case is pending and thus becoming unable to meet any judgment which he is likely to get againsthim.

QUANTUM MERRITQuantum meruitmeans that a party should be awarded as much as he had earned, and such an award can beeither contractual or quasi-contractual in nature. If the parties enter into a contractual agreement withoutdetermining the reward that is to be provided for performance, then in the event of any dispute, the court willaward a reasonable sum.The plaintiff can be rewarded for his work or his goods as much as they are worth in the sense of a reasonable

value.

Planchv Colburn

Planch agreed to write a book for a series of books to be published by Colburn, but the series wasdiscontinued before completion of the work by the author. The original contract had been discharged by thedefendants breach, but reasonable remuneration was recoverable on a quantum merit basis independently ofthe original contract.

Payment may also be claimed on the basis ofquantum meruit, where a party has carried out work in respect ofa void contract (Craven-Ellisv Canons Ltd(1936)).

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Documents

86614456 No 17 Discharge of Contract