CITY UNIVERSITY OF HONG KONG Breach and Remedy Refer to Richards, P. Law of Contract Chapters 16-18 Uff, J. Construction Law 9 th Edition Chapter 9 BREACH OF CONTRACT A breach of contract occurs where a party does not comply with one or more of the terms of contract, express or implied. Breaches are very common in the construction industry. The date for completion is an important term in a contract. However, it is mostly missed out. Indeed how many construction projects can be completed within the stipulated time? Basically none! A program delay is already warranted to be called a breach of contract. Where the parties have agreed on a genuine pre-estimate of the loss which would occur in the event of a particular breach, the pre-estimated amount is called the liquidated damages; otherwise all damages are unliquidated. If damages for delay are not liquidated, the employer may sue for his actual loss, that is, they are up to the court to decide on the amount. REMEDIES FOR A BREACH A DAMAGES Damages are the most common form of remedy for breach of contract. There are two different words. The word damage must not be confused with damages. Damage is the loss or injury caused by the breach of contract and damages is the amount of compensation awarded by the court. 1 The Purpose of Damages The function of an award of damages in contract is to compensate the party not in breach. 2 The methods of calculating Damages There are five possible measures of damages in contract. (a) Expectation Damages Expectation damages are intended to put the innocent party in the position he or she would have been in had the contract been properly performed. The injured party is thus 1
claiming damages for the gains he could have reasonably expected from the execution of the contract. Robinson v Harman [1848] 1 Exch. 850 The defendant agreed to grant a lease, having full knowledge he has no title (because of a defect of the title). This results in the loss of the bargain. The rule of the common law is, that where a party sustains loss by reason of a breach of contract, it is so far as money can do it, to place the injured party in the same position he would have been in had the contract been carried out. [per Parke B.] (b) Reliance Damages Damages under this head are provided to compensate innocent parties by placing them in the position they would have been in had they not entered the contract with the wrongdoer and then acted in reliance on that contract. Such damages are often claimed where the innocent party cannot clearly identify what profit he would have made had the contract been honoured. Anglia Television Ltd v Reed [1972] QB 60 The defendant, an actor, had entered into a contract with the plaintiffs to produce a film. At the last moment the defendant withdrew from the contract with the result that the plaintiffs had to abandon the whole project. They decided not to sue for expectation losses since these would be clearly purely speculative, but loss of expenses, or reliance losses, in respect of moneys expended hiring other actors, finding locations and engaging script writers. The courts allowed the claim for these items of expenditure. The Anglia television case is also an authority for the fact that the courts will not allow the injured party to claim for both the expectation and reliance losses. (c) Restitutionary Damages Restitution does not amount to compensation at all but a method of returning both parties to the pre-contract status quo. Its amount is calculated by reference to the contract breaker s project and reflects the amount by which Defendant s profit at Claimant s expense (either by the failure to provide consideration or by a deliberate wrongful act, in breach of contract, on Defendant s part). Surrey County Council v Bredero Homes Ltd Two planning permissions were obtained for increasing the earlier 72 houses to 77 houses. The plaintiff claimed damages for breach of contract. The damages are related to the additional profits made by the defendant. The court held that only nominal damages are allowed so as not to share the additional profit. Damages are intended to compensate victim for the loss. 2
Steyn LJ in Bredero Homes strongly disapproved of any moves towards such a development of restitutionary damages. This would go a long way towards preventing deliberate breaches of contract. (d) Nominal Damages Sometimes, Defendant will be responsible for only a slight, technical breach in which Claimant s loss is minimal. In such cases, the courts award merely nominal damages of $1, creating a sufficiently minimum of consideration. (e) Speculative Damages Occasionally, there is no clear method by which Claimant s loss can be computed. The courts approach in such cases is to speculate as to the quantum of loss. In McRae v Commonwealth Disposals Commission [1951] 84 CLR 377, where the court considered that the claim for loss of profits was incapable of calculation since there was nothing in the contract to indicate the size of the tanker in question nor the approximate quantity of oil on board. The court decided that only a claim for reliance loss (type b) would be entertained. ** 3 Factors Determining the Quantum (the amount) of Damages A number of principles operate to determine the extent of Defendant s liability. (a) Causation The general means by which causation serves to constrain the amount of damages payable is best explained by example of: Wagon Mound No. 1 ( 1966) This is a case about the burning down of the Sydney harbour wharf in Australia and is a landmark case in causation. A ship owner was sued who had allowed the careless discharge of used oil into the Sydney harbour. However, a new act (Novus Actus Intervieniens, NAI) intervened by a welder who created sparks when welding has caused the fire and finally burnt down the whole wharf. The careless act of the welder is viewed by the court as an NAI which has protected the ship owner from liabilities. In a similar line, damages in the construction contract will only allow direct loss and /or expense to be claimed (See Clause 27.1 of the Standard Form of Building Contract) as a compensation for damages. Consequential losses resulted beyond the NAI, like loss of profit, loss of opportunities to make contracts with others, etc. are not allowed. (b) Mitigation According to this principle, the claimant, though innocent, is under a general duty to keep to a minimum the losses flowing from Defendant s breach of contract by taking reasonable steps available to him. For example: 3
In the Standard Form of Building Contract, Clause 25.1 (4) provides that the Contractor has to demonstrate his intention for mitigation. The Contractor shall continuously use his best endeavors to prevent or mitigate delay of the progress of the Works, however caused, and to prevent the completion of the Works being delayed or further delayed beyond the Completion Date, Before any claim for loss and/or expenses can be processed, it is the Contractor who should show an effort, using his best possible endeavors, to mitigate losses pursuant to the events occurring giving rise to this claim. This also complies with the rule of equity, he who seeks equity must do equity. (c) Liquidated Damages and Penalty Clauses Sometimes, the amount of damages payable on breach are specified in the contract itself. Such liquidated damages clauses (L.D. clauses) determine the quantum of damages payable but only so long as the clause in question is valid. The validity depends on two situations: (i) The L.D. Clause is not a penalty clause The contract law is premised on the laissez-faire economy and on the rules of equity. No party should be higher than the other. An excessively high L.D. clause will become a penalty intended to intimidate a contractual party into performing the contract in a particular manner. A contract with a penalty clause is therefore not enforceable in the court. The following are two examples: Philips Hong Kong Ltd v Attorney-General of Hong Kong [1993] 9 Const LJ 202 A flexible approach was adopted. The facts of the case showed that the parties did not intend the L.D. clause to apply. The L.D. clause is a hypothetical situation, Philips was therefore not liable to pay the Hong Kong Government L.D. for delays. Dunlop Pneumatic Tyre Co. Ltd v New Garage and Motor Co. Ltd. [1915] AC 79 There was a contract for the supply and purchase of tyres. The agreement was said to be a price maintenance agreement under which the defendants were not to sell the tyres below certain prices, nor to sell to persons on a black list, not to exhibit or export the tyres without consent and lastly, not to tamper with certain marks on the tyres. The defendants had to pay 5 by way of liquidated damages for every tyre cover or tube sold or offered in breach of the agreement. The defendants sold a tyre below the plaintiff s current list price, and he claimed the 5 damages. Held, the clauses has been agreed to be liquidated damages clauses. The House of Lords set out a four-part test for distinguishing the L.D. and the penalty clauses: 4
1. If the sum is extravagant and unconscionable by reference to the greatest conceivable loss that might arise in the particular kind of case it will be held to be a penalty clause despite the words used by the parties. 2. If the breach amounts to failure to pay a sum of money owed and the clause states that such failure shall incur the debt of a much greater sum, it will again be treated as a penalty clause. 3. There is a presumption (but only a presumption) that where a fixed sum shall be payable for any of a number of breaches (some serious, some trivial) that the clause is a penalty clause. 4. If the sum stipulated in the clause is a genuine pre-estimate of the amount of loss that will be suffered, but an accurate pre-estimate is almost impossible to compute, then the clause will be a L.D. clause. (ii) The L.D. clause and the extension of time relation In the Standard Form of Building Contract, clause 24.2 (1) L.D. and time extension must be closely related. When the delay is caused partly by the employer s default, it has been decided that no L.D. may be recovered unless the contract allows an extension of time to be granted on the ground of the default, and such extension is in fact granted. This has been illustrated in the following case: Peak Construction v McKinney Foundations (1970)69 LGR 1; 1 BLR 111 The building works were suspended after the discovery of defective piles, for which the contractor was responsible. The employer caused further delay before work restarted. The contract used was not a standard form and did not allow an extension of time clause to absorb the employer s breach of contract. It was held that no L.D. could be recovered for any of the delay. Salmon L.J. held: The liquidated damages and extension of time clauses in printed forms of contract must be construed strictly contra proferentem. If the employer wishes to recover liquidated damages for failure by the contractors to complete on time in spite of the fact that some of the delay is due to the employer s own fault or breach of contract, then the extension of time clause should provide, expressly or by necessary inference, for an extension on account of such a fault or breach on the part of the employer. The reasons of the above decision were that L.D. may be recovered only from a date fixed under the contract. If no date can be fixed, time will be at large (no bounds). Therefore L.D. and time extension are intimately related. B QUANTUM MERUIT A quantum meruit claim is a claim for reasonable remuneration for work done or services supplied. The entitlement is called the contractual quantum meruit. This is a convenient remedy in two cases. Firstly, a claim is available where there is a contract for the supply of services but no express agreement for payment; in such cases there is an implication that reasonable remuneration will be paid. In the event of non-payment, the plaintiff may 5
sue on the quantum meruit. Secondly, a quantum meruit claim will lie where an original contract containing terms for payment is discharged and replaced by a new contract. British Steel Corporation v Cleveland Bridge and Engineering Co. Ltd. [1984] 1 All ER 504 British Steel Corporation supplied steel nodes (structural steel members) to the subcontractor Cleveland Co. for a construction in Saudi Arabia. The fabrication of some steel nodes were contracted based on a letter of intent. A negotiation on the variation rates has broken down making the contract unable to be continued. The supplier and the sub-contractor were claiming and counter-claiming each other. The court ordered a compensation basing on the quantum meruit to the supplier. C SPECIFIC PERFORMANCE AND INJUNCTIONS 1 Introduction In the rule of equity, the courts have power to award the decree of specific performance, that is to say, the court may order a defaulter to comply with his contractual promise. This remedy will never be available where damages would be regarded as a satisfactory remedy. 2 Unavailability of Equitable Remedies if Damages Would be Adequate The court will normally only grant equitable remedies where they feel them to be both just and necessary because damages alone would not suffice. 3 Specific Performance not Given if Constant Supervision Required The principle is best explained by example. Ryan v Mutual Tontine Association [1893] 1 Ch 116 Co-operative Insurance Society v Argyll Stores [1998] AC 1 4 Personal Services are not Specifically Enforceable In effect, this rule means that if someone wants to quit their job, they cannot be forced to carry on working. 5 Negative Covenants Often, employees are required on taking a job to covenant not to do certain things such as work for a competitor within a fixed radius or within for a fixed time after quitting. In most cases of this kind, an injunction will be granted to enforce the undertaking. Dr Eric Cheng City University of Hong Kong 10 January 2014 6