THE LAW OF CONTRACT REMEDIES FOR BREACH. Towards Codification of Israeli Civil Law

GABRIELA SHALEV YEHUDA ADAR THE LAW OF CONTRACT REMEDIES FOR BREACH Towards Codification of Israeli Civil Law

GABRIELA SHALEV YEHUDA ADAR THE LAW OF CONTRACT REMEDIES FOR BREACH Towards Codification of Israeli Civil Law DIN PUBLISHERS, LTD. 2009

Introduction by Aharon Barak..... Î Preface... Î Technical Notes... Ï List of Abbreviations.... Ï TITLE I: REMEDIES GENERAL PRINCIPLES Chapter 1: The Law of Remedies Today and Tomorrow.... 3 A. What is the Law of Remedies?............... 5 B. The Distinction between a Remedy and a Relief 11 C. Remedies in the Age of Codification: From Laws of Remedies to a Law of Remedies.... 16 1. Introduction.......................... 16 2. Definition of Obligation.... 18 3. The Basic Principle: Breach of an Obligation Entails a Remedy... 20 D. The Aims of the Law of Remedies............ 22 1. Corrective Justice and the Principle of Restitutio in Integrum... 22 2. Other Aims........................... 25 (a) Declaration............... 25 (b) Prevention of Breach................. 28 (c) Prevention of Unjust Enrichment.... 28 (d) Punishment: Retribution, Deterrence, Education......................... 31 (e) Private Enforcement and Self-Help Remedies 33 v

Chapter 2: The Protected Interests...................... 37 A. Introduction.......... 39 1. Historical Origin of the Classification........ 39 2. Modern Role of the Classification........... 40 B. The Performance (Expectation) Interest......... 44 1. Definition: The Right to Realize Profit from Performance... 44 2. Protection of the Performance Interest after Breach.... 45 C. The Reliance Interest....... 46 1. Definition: The Interest in not Being Harmed by One s Own Performance........... 46 2. Protection of the Reliance Interest after Breach 47 (a) Reliance Damages... 47 (b) Heads of Damage in a Suit for Reliance Damages........ 48 3. The Relationship between the Performance and Reliance Interests....... 50 4. To What Extent is Reliance Actually Protected? 52 (a) Introduction....................... 52 (b) The Narrow Approach: Reliance as an Approximation of the Performance Interest 53 (c) The Broad Approach: Reliance as an Autonomous Interest... 56 5. Conclusion.... 58 D. The Restitution Interest............ 60 1. Definition: The Interest in Preventing the Other Party s Unjust Enrichment............. 60 2. Restitution Strictu Sensu: Restoration of Value Transferred to Other Party........... 61 3. Restitution in the Wide Sense: Disgorgement of Profit Made from Breach................. 62 E. The Interrelation between the Restitution and the Performance Interests... 66 vi

Chapter 3: Accumulation and Private Ordering of Remedies... 69 A. Accumulation of Remedies... 71 1. Introduction.......................... 71 2. The Basic Principle: Plaintiff May Choose and Accumulate All Available Remedies......... 72 3. The First Exception: No Contradiction Allowed between Accumulated Remedies... 74 4. The Second Exception: No Double Recovery... 80 (a) General Rule... 80 (b) Accumulation of Remedies Protecting a Single Interest... 82 (c) Accumulation of Remedies Protecting Different Interests... 84 5. Accumulation of Remedies in the New Codification........ 89 B. Private Ordering of Remedies................ 90 1. Introduction.......................... 90 (a) The Problem.... 90 (b) The Tension between the Conservative Approach and the Liberal Approach...... 90 2. Limits on Private Ordering of Remedies.... 94 (a) Agreement Must Be Manifest.......... 94 (b) Extreme Asymmetry Not Allowed... 95 (c) Punitive Arrangements Not Allowed..... 97 (d) Restriction of Court Discretion Not Allowed 99 (e) Further Limitations.... 99 3. Private Ordering and the Codification........ 101 TITLE II: BREACH Chapter 4: Breach of Contract... 105 A. Introduction.......... 107 B. What is a Breach of Contract?............... 107 1. Definition of Breach... 107 2. A Valid Obligation A Precondition for Breach 111 vii

3. The Legal Effect of Breach: Entitlement to Remedies.... 112 C. Contractual Liability Absolute or Based on Fault? 113 1. The Problem............. 113 2. The Basic Principle: Liability is Absolute..... 113 3. Exceptions to the Principle................ 117 (a) Frustration of the Contract... 117 (b) Obligation to Make Best Efforts.... 118 (c) Suspension of Performance in Response to Breach... 120 (d) Suspension of Performance in Response to Frustration Caused by Other Party.... 122 (e) The De Minimis Rule..... 122 (f) Breach of Promise to Give a Gift..... 123 (g) The Impact of Fault on Remedies for Breach 124 (h) Good Faith and Interpretation as Means to Relax Absolute Liability...... 124 D. Conclusion... 127 Chapter 5: Anticipatory Breach............... 129 A. The Doctrine and its Justifications... 131 B. Anticipatory Breach of Contract When?... 135 1. Introduction.......................... 135 2. Subjective Anticipatory Breach (Repudiation)... 136 3. Objective Anticipatory Breach (Impossibility) 138 4. The Evidentiary Standard Required.... 140 5. Anticipatory Breach Fundamental Breach Only?............................... 144 6. Anticipatory Breach of a Conditional Contract 145 C. The Legal Effect of Anticipatory Breach... 148 1. The Choice between Ignoring the Breach and Relying on it.......................... 148 2. Ignoring the Breach..................... 149 3. Relying on the Breach... 152 4. Factors Influencing Plaintiff s Choice........ 155 viii

D. The Duty to Mitigate Damage from Anticipatory Breach..... 157 1. The Problem............. 157 2. The Position of the Law.... 158 3. A Critical Perspective....... 161 E. Anticipatory Breach in the New Codification... 164 F. Conclusion: Anticipatory Breach and the Principle of Good Faith....... 166 TITLE III: THE REMEDIES Chapter 6: Enforced Performance.... 169 A. The Nature of Enforced Performance...... 173 1. The Right to Enforced Performance......... 173 2. Forms of Enforced Performance.... 175 3. The Aim of Enforced Performance: Protection of the Performance Interest........ 177 B. Enforced Performance: Advantages, Justifications and Status in Israeli Law... 178 1. Practical Advantages of Enforced Performance 178 2. Justifications of the Remedy of Enforced Performance... 184 3. Reasons to Limit Availability of Enforced Performance... 187 (a) In General..... 187 (b) The Argument from Liberalism......... 187 (c) The Institutional Argument... 188 (d) The Efficient Breach Economic Argument 189 4. The Position of Israeli Law...... 191 C. Limits on the Right to Enforced Performance.... 194 1. Introduction.......................... 194 2. Impossibility of Performance... 196 3. Personal Service....................... 201 (a) In General..... 201 (b) Employment Contracts... 203 ix

(c) Non-Employment Service Contracts... 211 4. Onerous Supervision...... 213 5. The Justice Exception....... 217 (a) In General..... 217 (b) Justice Private or Public?........... 221 (c) The Private Justice Approach... 221 (d) The Public Justice Approach........ 227 (e) Private Justice Some Guidelines.... 231 (1) Fault Considerations.............. 233 (2) Balance of Convenience Considerations.... 235 6. Enforced Performance and Good Faith... 240 D. Conditional, Approximate and Postponed Enforced Performance... 243 1. Conditional Enforced Performance... 243 (a) In General..... 243 (b) Revaluation as a Condition for Enforced Performance.... 249 (1) The Problem of Revaluation General Comments..................... 249 (2) The Rule: Enforced Performance is Conditional upon Revaluation of Price 251 (3) Policy Issues and Their Impact on the Extent of Revaluation... 255 2. Approximated Enforced Performance (cy prés) 262 3. Postponed Enforced Performance..... 267 E. Enforced Performance in the Age of Codification 268 1. Introduction.......................... 268 2. Enforced Performance as a General Remedy... 269 3. Limits on the Right to Enforced Performance... 270 4. Other Innovations...................... 272 Chapter 7: Compensatory Damages..................... 275 A. Compensation General Overview........... 281 x

1. The Right to Compensation: Its Nature and Characteristics... 281 2. The Status of the Remedy of Compensation and its Subordination to the Principle of Good Faith 286 3. The Right to Compensation Expectation or Reliance Damages?... 291 4. Advantages of Compensation as Opposed to Enforced Performance... 292 5. Compensation With and without Proof of Actual Damage...... 294 B. The Elements in an Action for Compensatory Damages... 294 1. In General... 294 (a) The Four Prerequisites for an Award of Compensatory Damages... 294 (b) The Distinction between the Tasks of Determining the Scope of the Damage and of Quantifying it.... 296 2. Damage.... 297 (a) A Preliminary Note.................. 297 (b) Types of Damage: (1) Harm to the Person, Harm to Property, Economic Harm and Emotional Harm.... 298 (c) Types of Damage: (2) Pecuniary and Non- Pecuniary.... 299 (1) In General.... 299 (2) What is a Non-Pecuniary Loss?... 300 (3) Section 13 of the Remedies Statute Descriptive and Critical Analysis..... 302 (4) Section 13 Typical Categories and Guiding Principles.... 308 (d) Types of Damage: (3) Direct and Consequential..... 312 (e) Types of Damage: (4) General and Special 318 xi

(f) Typical Heads of Damage in an Action for Compensatory Damages... 320 (1) In General.... 320 (2) Harm to the Person... 322 (3) Harm to Property.... 323 (4) The Prototypical Contractual Suit: Compensation for Pure Economic Loss 324 (5) Pure Emotional Loss... 326 3. Factual Causation.... 327 4. Legal Causation: Foreseeability of Damage.... 332 (a) The Foreseeability Test In General..... 332 (b) Applying the Foreseeability Test Guiding Principles.......... 336 (1) In General.... 336 (2) Foresight By the Defendant..... 336 (3) Foresight Actual or Implied...... 337 (4) Foreseeability Upon Formation.... 338 (5) The Object of Foresight The Damage and its Causal Process....... 340 (6) The Degree of Probability... 342 (7) A Critical Remark: Foreseeability is Subordinate to the Contractual Allocation of Risk... 343 5. Quantification of the Damage.......... 345 (a) The Question..... 345 (b) The Rule: Plaintiff Must Prove and Quantify the Damage...... 345 (c) The Degree of Proof Required: Reasonable Certainty........... 349 C. Defenses: Mitigation of Damage and Contributory Negligence... 351 1. Introduction.......................... 351 2. The Mitigation Principle............... 357 (a) General Overview..... 357 xii

(b) What Amounts to a Failure to Mitigate Damage?......................... 361 (c) The Legal Effects of Failing to Mitigate Damage... 366 (d) Recovery for the Costs of Mitigation... 367 (e) Mitigation Resulting in Economic Benefit to Plaintiff.... 370 3. Contributory Negligence... 374 (a) The Legal Basis for Dividing Responsibility 374 (b) Dividing Responsibility to Damages Guiding Principles... 378 (c) The Methods of Dividing Responsibility Conclusion............. 381 4. The Interrelations between the Mitigation Principle and Contributory Negligence... 384 (a) The Problem.... 384 (b) The Substantial Difference between the Two Defenses... 385 (c) Differences Concerning the Scope of the Two Defenses... 386 (1) The Object of the Defense Negligent Act or Omission?.... 386 (2) Applicability to Other Remedies?..... 387 (3) Time Phase for Applying the Defense 388 (d) A Critical Viewpoint: The Mitigation Doctrine Should Be Abolished...... 393 D. Assessment of Compensatory Damages: Guiding Principles and Special Problems.............. 396 1. Assessing Compensatory Damages Preliminary Remarks... 396 (a) The Basic Principle for Assessment: Restoration of the Status Quo Ante... 396 (b) The Limits of the Restoration Principle.... 398 (c) The Difficulty to Distinguish between xiii

xiv Determining the Scope of Damage and Quantifying it... 401 (d) Judicial Discretion in Applying the Restoration Principle and the Tension between Objective and Subjective Tests of Assessment..... 403 (e) The Distinction between Loss of Value and Loss of Profit...................... 406 2. Assessing Loss of Value: Difference in Value or Cost of Cure?..... 409 (a) Introduction....................... 409 (b) The Difference in Value Method... 411 (1) In General.... 411 (2) Loss of Value Caused by Physical Damage to Property........ 414 (3) Pure Economic Loss of Value... 414 (c) Difference in Value Damages Typical Examples..... 415 (1) Defective Performance (Non- Conformity)... 415 (2) Total Non-Performance............ 418 (3) Belated Performance......... 420 (4) Failure to Pay Money.... 422 (5) A Proposed Formula for Assessing Loss of Value Using the Difference in Value Method....................... 425 (d) Compensation for the Cost of Cure....... 427 (1) Curing the Breach: Repair or Replacement?... 427 (2) Compensation for the Cost of Repair..... 428 (3) Compensation for the Cost of Replacement... 429 (4) The Interrelation between the Two Methods... 432

(5) Cost of Cure Hypothetical or Actual Cost?......... 434 (e) Difference in Value versus Cost of Cure Which is Preferable?... 436 3. Assessing Loss of Profit.................. 442 (a) Introduction....................... 442 (b) Problems with Establishing Factual Causation.......... 445 (c) Problems with Establishing Legal Causation 450 4. Further Problems in Assessing Compensatory Damages... 452 (a) Determining the Date of Assessment..... 452 (1) The Problem... 452 (2) The Law s Position... 455 (b) Revaluation of Damages...... 459 (c) Insured Damage...... 462 (d) Taxation......................... 465 E. Compensation without Proof of Damage........ 467 1. Introduction.......................... 467 2. Statutory Compensation Section 11 of the Remedies Statute... 470 (a) In General..... 470 (b) Section 11(a) Breach of Obligation to Provide Service or Supply a Thing....... 472 (1) Aim and Rationale of the Rule..... 472 (2) Preconditions for Recovery......... 474 (3) Assessment of the Damages.... 477 (4) Revaluation.... 480 (c) Section 11(b) Breach of Obligation to Pay Money..... 482 (1) In General.... 482 (2) Interest Rate.... 483 (d) The Relation between Section 11 and the Ordinary Action for Compensatory Damages 484 3. Liquidated Damages......... 486 xv

xvi (a) In General..... 486 (b) Aims, Justifications and Interpretation of a Liquidated Damages Clause.... 487 (c) The Validity of a Penal Liquidated Damages Clause... 491 (d) Judicial Intervention... 495 (1) Discretion to Reduce Damages In General....................... 495 (2) The Test for Determining Whether Intervention is Warranted.......... 496 (3) The Test for Determining the Extent of Reduction...... 499 (4) Factors influencing Judicial Decision... 500 (5) Judicial Intervention is the Exception, Not the Rule.... 504 (e) Periodic Liquidated Damages Impact of Plaintiff s Contributory Negligence...... 508 (f) A Sweeping Clause of Liquidated Damages 511 (g) Revaluation of Liquidated Damages...... 513 (1) The Problem... 513 (2) Revaluation before Breach..... 514 (3) Revaluation after Breach........... 518 (h) The Relationship between Liquidated Damages and Other Remedies.......... 519 (1) Substituting Other Remedies for Liquidated Damages.............. 519 (2) Adding Other Remedies to Liquidated Damages..... 521 (i) Forfeiture and Liquidated Damages...... 524 F. Compensatory Damages in the New Codification... 526 1. In General... 526 2. General Principles............. 527 3. The New Structure of the Law of Damages.... 530 4. Damages for Personal Injury... 531 5. Damages for Injury to Property............ 531

6. Damages for Emotional Distress............ 533 7. Compensation without Proof of Damage.... 534 Chapter 8: Rescission of the Contract... 535 A. The Remedy of Rescission Its Nature and Characteristics... 541 1. The Right to Rescind The Basic Legal Framework............ 541 2. Rescission and its Different Forms... 542 3. The Distinction between a Void and a Voidable Contract.... 545 4. Rescission A Self-Help Remedy......... 546 5. Can One Waive the Right to Rescind?........ 550 B. Legal Effects of Rescission........... 553 1. Expiration of Primary Obligations Only... 553 2. Expiration In Whole or in Part?... 556 3. Mutual Right to Restitution....... 558 4. Effects of Rescission are Mutual...... 558 5. Effect of Rescission on Third Party s Rights... 559 (a) The Problem.... 559 (b) Cancellation following Defective Formation 560 (c) Rescission following Breach........ 562 C. The Decision to Rescind Policy and Practical Considerations... 564 1. Plaintiff s Perspective: The Practical Advantages of Rescission... 564 (a) In General..... 564 (b) In a Losing Contract........ 565 (c) In a Profitable Contract... 566 2. Society s Perspective... 569 (a) Justifications of the Right to Rescind..... 569 (b) Reasons to Limit the Right to Rescind.... 572 (c) Interim Conclusions: The Law of Rescission as a Compromise between Conflicting Values 575 D. Rescission Following a Fundamental Breach..... 576 xvii

xviii 1. Fundamental and Non-Fundamental Breach: The Distinction and it s Role in the Law of Rescission 576 2. Agreed Fundamental Breach... 578 (a) Definition......................... 578 (b) Sweeping Clause.... 580 3. Implied Fundamental Breach..... 584 (a) Definition and Relevant Factors......... 584 (b) The Foreseeability Requirement......... 592 (c) Late Payment Fundamental Breach?... 594 (d) Extension Following a Fundamental Breach When and for What Purpose?........ 599 (1) In General.... 599 (2) Extension of Grace...... 599 (3) Extension as a Precondition for Rescission The Renovation Rule and its Critique..................... 601 E. Rescission following a Non-Fundamental Breach 607 1. In General... 607 2. The Duty to Grant Extension.... 607 (a) The Rule and its Justification... 607 (b) How to Give a Notice of Extension?..... 608 (c) The Content of a Notice of Extension..... 609 (d) Length of the Extension.... 612 (e) First Extension Notice Only within a Reasonable Period of Time?... 614 (f) Second Extension Notice Only within a Reasonable Period of Time from the End of the First Extension?... 616 (g) Extension as a Means of Preserving the Right to Rescind Interim Conclusions....... 618 (h) The Granting of an Extension: An Absolute Duty?........ 619 (i) May One Withdraw from a Notice of Extension?... 622 (j) May One Waive the Right to an Extension? 625

3. The Justice Exception....... 625 (a) Introduction....................... 625 (b) Procedural Aspects.................. 626 (c) Substantive Aspects: The Content of the Justice Test........................ 628 (d) Other Aspects......... 635 F. Notice of Rescission....... 637 1. The Requirement of a Notice of Rescission.... 637 2. The Rationale of the Requirement... 638 3. How to Give a Notice of Rescission?... 639 4. The Duty to Give Reasons for Rescission..... 643 5. When Does Rescission Come into Force?..... 645 6. The Reasonable Time Requirement.......... 649 (a) The Rule and its Justification... 649 (b) When Does the Reasonable Time Begin to Run?.......................... 651 (1) Rescission without an Extension... 652 (2) Rescission after an Extension..... 652 (c) When Does the Reasonable Time End?.... 654 7. Mistaken Notice of Rescission... 659 8. Withdrawal from a Notice of Rescission...... 664 G. The Principle of Good Faith and its Impact on the Right to Rescind..... 667 1. Introduction.......................... 667 2. Good Faith and Justice The Distinction and its Significance.......................... 669 3. Rescission in Bad Faith: The Narrow Approach and the Liberal Approach........ 672 4. Rescission in Bad Faith: Specific Categories... 675 (a) Rescission after Cure or Tender to Cure Breach... 675 (b) Rescission Motivated by Will to Reap Economic Benefits........ 682 (c) Impossibility to Restore Benefits Received 691 H. Restitution following Rescission... 694 xix

xx 1. Introduction.......................... 694 2. The Right to Demand Restitution: It s Origin, Justification and Purpose......... 695 (a) A Contractual or Extra-Contractual Right? 695 (b) The Justification of the Right to Restitution 697 (c) The Purpose of Restoring Benefits following Rescission: Restoration of the Status Quo Ante or Prevention of Unjust Enrichment? 700 (d) The Formal Basis of the Right: The Remedies Statute or the General Law of Restitution? 703 3. The Status of the Right to Restitution and its Forms..... 705 (a) Restitution Following Rescission: An Absolute Right or a Discretionary Remedy? 705 (b) Forms of Restitution.... 708 (1) Restitution in Kind and Restitution in Money....... 708 (2) The Aggrieved Party s Privilege to Prefer Restitution in Money... 709 (3) Impossibility of Restitution... 711 4. The Object of Restitution and its Scope.... 712 (a) The Problem.... 712 (b) Thing Received Tangible Property or Any Advantage?... 712 (c) Thing Received Pecuniary Benefits Only?........ 713 (d) Thing Received Reward in the Narrow Sense and in the Broad Sense.... 713 (e) Benefit Received from Defective Performance.... 715 (f) Thing Received Subjective or Objective Enrichment?... 717 (g) Thing Received Direct and Indirect Benefits from Performance... 725 (h) Reception of Benefits after Rescission... 729

5. Revaluation: Changes in Value and Their Impact on Restitution... 731 (a) Changes in the Value of Money: Nominal or Real Restitution?... 731 (b) Changes in the Value of Tangible Assets... 734 (1) The Problem... 734 (2) Market Fluctuations..... 736 (3) Betterment... 740 (4) Damage and Depreciation.......... 741 6. Conclusion: Justice Considerations and Their Effect on Restitution.................... 743 I. Rescission and Restitution in the New Codification 746 APPENDICES AND INDEXES A. Appendices..... 751 The Remedies Statute (1970)... 753 The Remedies Chapter of the Draft Civil Code (2006) 757 B. Indexes........ 767 Table of Legislation (Local).... 769 Table of Legislation (Foreign)..... 787 Table of Cases (Local)... 791 Table of Cases (Foreign)... 837 Bibliography Books (Hebrew)... 841 Bibliography Articles (Hebrew).... 847 Bibliography Books (Foreign).... 857 Bibliography Articles (Foreign)... 865 Index... 877 xxi