Question

Explain what a plaintiff needs to establish in order to be able to sue a defendant for a breach of contract and what types of remedies are generally available to a plaintiff for breach of contract. Please illustrate your answer with applicable case law examples.

(country of law: Australia)

Answer 1

Many commercial agreements contain express provisions forremedies. For example, in a contract for the sale of goods, thebuyer may be entitled to require the seller to make good orreplace defective items. There may be a presumption (which may beexpressed in the contract) that all the terms which are to governtheir contractual relationship have been included by the partiesin express written form in the contract itself. In doing so theyintended to displace any rights and remedies provided by law(such as the buyer's right to terminate the contract forfundamental breach) which are not specified in the contract.

The purpose of a cumulative remedies clause is to ensure thatthe parties' rights specifically provided for in the agreementare in addition to their rights provided by the general law(see inset box "Cumulative remedies clause"). Anyparticular remedy that a party envisages it may need should bespecifically preserved in the contract.

Damages

Unlike the equitable remedies of specific performance andinjunction (see "Specific performance" and "Injunctions"below) damages for loss in a breach of contract claim areavailable as of right.

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

For an innocent party to obtain substantial damages he mustshow that he has suffered loss as a result of the breach(remoteness) and the amount of his loss (measure). It is up tothe party in breach to argue that the innocent party has failedto mitigate his loss.

Remoteness of loss

The innocent party may only recover damages for loss sufferedas a result of the breach provided it is not too remote. The aimof damages is to put him in the position he would have been hadthe contract been properly performed.

The principles of remoteness are given in Hadley vBaxendale ([1854] 9 Exch. 341) and provide that thefollowing losses are recoverable:

• All loss which flows naturally from the breach.

• All loss which was in the contemplation of the parties at thetime the contract was made as a probable results of thebreach.

If the loss does not fall within the above categories, then itwill be too remote and will not be recoverable.

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

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

Measure of damages

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

Sometimes reliance loss may be sought where loss ofexpectation is difficult to prove. The aim of reliance loss is toput the innocent party into the position he would have been inhad the contract never been made, that is, an indemnity for hisout of pocket expenses incurred in reliance on the contract(Anglia TV v Reed [1972] 1 QB 60).

There are many other types of loss that have been claimed byinnocent parties. Damages for disappointment or mental distressare not generally awarded (Addis v Gramophone Co. Ltd [1909]AC 488) unless the contract is, for example, a holidaycontract (Jarvis v Swans Tours Ltd [1973] 1 QB 233).

Mitigation

An innocent party cannot recover for loss that he could haveavoided by taking reasonable steps. This is sometimes expressedas the duty to mitigate. This does not apply to actions for theprice of goods delivered. Such an action is an action for anagreed sum and not an action for damages.

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

Advance payments

If a party in breach has made advanced payments under thecontract his ability to recover that money depends upon whetherthat payment constitutes a deposit (that is, a guarantee by himof due performance) or merely a payment of the whole or part ofthe price in advance.

If it is a deposit (this depends on the intentions of theparties) the general rule is that it cannot be recovered and itwill be set off against any damages awarded to the innocentparty. Care should always be taken with deposits so that they donot amount to penalties (see "Penalty clauses"below). However it may be possible to recover a deposit ifthe party has a lien over it (for example, Chattey andAnother v Farndale Holding Inc., The Times, 17th October,1996).

If the advance payment is not a deposit, the party in breachmay recover it, subject to any claim for damages by the innocentparty in respect of the breach.

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

Penalty clauses and liquidated damages

It is common for the parties to expressly state in thecontract that if the contract is breached, a specified sum willbe payable or that goods will be forfeited. Clauses coveringthese areas are known as liquidated or agreed damages clauses.They frequently appear in commercial contracts, whetherindividually negotiated or on a party's standard business termsand, most commonly, in relation to late rather than defectiveperformance, particularly in the fields of construction andengineering and supply or sale of goods. Occasionally, theyappear in lease agreements imposed by a key or anchor tenant who,for example, needs to be trading from the demised premises by acertain deadline. Such clauses do not usually appear in contractsof employment.

The purposes of such clauses are to make recovery of damageseasier, avoiding the problems of proving actual loss; to avoidarguments as to the remoteness of certain types of consequentialor indirect losses; and to assure the other party of theirintention to be bound by the contract.

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

Penalty or liquidated damages

For a liquidated damages clause to be valid the specified summust be a genuine pre-estimate of the anticipated loss which theclaimant would be likely to suffer in the event of a breach ofthe obligation in question. If the loss is difficult to quantifya "best guess" procedure should be operated, keeping a record ofthe calculations underlying any elements of the determinedfigure. Provided the selected figure is not vastly in excess ofthe greatest loss which could be suffered, the clause is likelyto be enforceable. The essence of a penalty is that the moneyspecified is in terrorem of the defaulting party, inother words, it is intended to apply undue force to the otherparty to perform his side of the contract.

The use of the words "penalty" or "liquidated damages" are notconclusive. It is necessary to examine whether the amountspecified is in fact a penalty or liquidated damages. It is forthe party in breach to show that the sum is a penalty(Robophone Facilities Ltd v Blank [1966] 3 All ER128).

The leading case of Dunlop Pneumatic Tyresestablishes the tests to distinguish penalties from liquidateddamages:

• A clause will be construed as a penalty clause if the sumspecified is "extravagant and unconscionable" in comparison withthe greatest loss that could possibly have been proved as aresult of the breach.

• It is likely to be a penalty if the breach of contractconsists of not paying a sum of money and the sum stipulated asdamages is greater than the sum which ought to have beenpaid.

• There is a presumption that if the same sum is stated toapply to different types of breach of contract, some of which areserious and others not, it is likely to be a penalty clause.

• It is not a bar to the operation of a liquidated damagesclause that a precise pre-estimation is impossible.

(Dunlop Pneumatic Tyre Co Limited v New Garage & MotorCo Limited [1915] A.C 79)

Specific performance

This is an equitable remedy granted at the court'sdiscretion.

Specific performance is a decree by the court to compel aparty to perform his contractual obligations. It is usually onlyordered where damages are not an adequate remedy (for examplewhere the subject matter of the contract is unique for example,Chinese vases in Falcke v Gray ([1859] 4 Drew651) but not if a replacement of the subject matter could beobtained even after a long delay (Societe des IndustriesMetallurgiques SA v Bronx Engineering Co Ltd [1975] 1 Lloyds Rep465).

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

The court has broad discretion to award specific performanceand in exercising this discretion it takes into account factorssuch as:

• Delay in asking for the order (Lazard Brothers & CoLtd v Fairfield Properties co (Mayfair) Ltd [1977] 121 SJ793).

• Whether the person seeking performance is prepared to performhis side of the contract (Chappell v Times Newspapers Ltd[1975] 1 WLR 482).

• Whether the person against whom the order is sought wouldsuffer hardship in performing (Patel v Ali [1984] 1 All ER978).

• The difference between the benefit the order would give toone party and the cost of performance to the other (Tito vWaddell (No 2) [1977] Ch 106).

• Whether any third party rights would be affected.

• Whether the contract lacks adequate consideration (the rule"equity will not assist a volunteer" applies so that specificperformance will not be ordered if the contract is for nominalconsideration even if it is under seal (Jeffrys v Jeffrys[1841] 1 Cr & Ph 138)).

Injunction

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

In exercising its discretion the court will consider the samefactors as above for specific performance and will use thebalance of convenience test (weighing the benefit to the injuredparty and the detriment to the other party). An injunction willnot be granted if its effect would be to compel a party to dosomething which he could not have been ordered to do by a decreeof specific performance (Lumley v Wagner [1852] 1 DM & G604).

In urgent cases a plaintiff may be able to obtain an interiminjunction to restrain an act. Special types of injunction may begranted to preserve property and assets pending trial (Marevainjunctions and Anton Piller orders).

Quasi contract: other remedies

Quasi-contract creates obligations at common law, distinctfrom obligations under a contract. It is an area of law in itsown right.

Quasi-contractual remedies are sometimes available either asan alternative to a remedy for breach of contract or where thereis no remedy for breach of contract. For example, a claim forquantum meruit (a reasonable remuneration for work done of goodssupplied under a contract which is later discovered to bevoid).

Limitation of actions

An innocent party will lose his right to bring a claim forbreach of contract if he delays for a certain length of time.

The Limitation Act 1980 provides statutory limitation periods.Theses do not apply to equitable remedies, however, in practice,equity usually applies the statutory rules.

The Limitation Act 1980 distinguishes between simple contractsand deeds. It provides the following limitation periods:

• For simple contracts, six years from when the cause of actionaccrued.

• For deeds, twelve years from when the cause of actionaccrued.

If there has been fraud or mistake, the limitation period doesnot begin to run until the innocent party has discovered this orshould have discovered this. There is a three year time limit inrespect of damages for personal injuries arising from breach ofcontract.

In acquisition agreements (which may be deeds) the seller maywant a shorter limitation period (commonly six years from thedate of the contract) This shorter period relates to the InlandRevenue's time limit for making tax assessments. Alternatively,the seller may want an even shorter period in relation to non-taxmatters (perhaps to link in with the audit of the targetcompany).

Self-help remedies

Rather than bringing an action for breach of contract, partiescan make use on some self-help remedies such as retention oftitle clauses, enforcement of security, withholding payments andset off and rights against the goods themselves.

Retention of title

A seller can avoid the problems of having to sue a buyer inevent of the buyer's default under the agreement by inserting aretention of title clause into the contract.

A retention of title clause (sometimes referred to as a Romalpa clause, after the first leading case on the subject,Aluminium Industrie Vaasen BV v Romalpa Aluminium Ltd [1976]1 WLR 676) aims to give the supplier of goods priority oversecured and unsecured creditors of the buyer if the buyer failsto pay for the goods because it is insolvent, or for some otherreason which may be specified in the clause.

In a basic retention of title clause the supplier reservesownership of the goods supplied to the buyer until the buyer haspaid for those particular goods. When drafting, it is importantto ensure that legal and beneficial title are retained: thereservation of equitable or beneficial title alone will not do(Re Bond Worth [1979] 3 AER 919). The clause should besupplemented by standard clauses containing:

• A right for the supplier to enter the buyer's premises inorder to repossess the goods (so that the supplier will notcommit a trespass when doing so).

• An obligation on the part of the buyer to store thesupplier's goods separately from goods belonging to thirdparties, to mark them as the supplier's property and to allow thesupplier access to the buyer's premises to verify that this hasbeen done. This will enable the supplier to identify its owngoods if a repossession of the goods becomes necessary.

• A list of insolvency related events which will trigger thesupplier's right to demand payment for the goods (if not alreadydue) and to repossess them.

In addition, although not a standard clause, if the goodssupplied might be attached to the buyer's premises (for example,in the case of heavy plant or machinery), it is worth including aprovision prohibiting the buyer from annexing them to suchpremises without the supplier's consent. If goods do becomeannexed to the buyer's premises, the consent of the owner ofthose premises will be necessary if the supplier is to beentitled to repossess them in the event of non-payment by thebuyer.

This basic clause is often backed up by certain other standardclauses such as clauses for all monies, proceeds of sale andmixed goods: