Express Terms.

There may be disputes, however, as to whether the clause of the contract has been incorporated into the contract, as to its proper meaning, and as to the consequences of breaking it. In dealing with all these questions, the approach of the courts will again be professed to be that they are trying to determine the parties’ intention, from an objective viewpoint. The focus under classical theory is on the time of the original agreement, with later developments being ignored.

We have already discussed the rules which the courts adopt to decide whether pre-contractual statements should be regarded as having been incorporated into a contract. The situation under consideration here is slightly different, and will generally arise in relation to written contracts in a standard form which have not been signed. One party may object that a particular clause should not be regarded as being included in the contract, because they were unaware of it for some reason, and would have objected to it. In appropriate cases, they can apply to other types of clause, however, as is shown by the case of Interfoto Picture Library v Stiletto Visual Programmes.

The defendants were an advertising agency. They needed some photographs for a presentation. On 5 March 1984, they contacted the plaintiffs, who ran a library of photographic transparencies, to see if they might have anything suitable. The plaintiffs sent round a packet of 47 transparencies, together with a delivery note. The transparencies were, however, apparently overlooked and not used. They were eventually returned on 2 April, that is, nearly a month after they had been received. The plaintiffs then claimed the sum of £3,783 from the defendants as a «holding charge» for the transparencies. This was calculated in accordance with the terms laid down in the delivery note, which stated that, in relation to transparencies not returned within 14 days of receipt, a charge of £5 per day plus VAT would be made in respect of each transparency. The issue before the court was thus whether the terms of the delivery note formed part of a contract between the parties; and, if so, whether the plaintiffs could enforce these terms against the defendants. The Court of Appeal held that the clause could not be enforced. They did so by reference to the case law on exclusion clauses and when they are deemed to have been incorporated into a contract. In particular, they relied on Parker v South Eastern Railway Co and Thornton v Shoe Lane Parking. Parker established the principle that in order to rely on an exclusion clause in an unsigned contract, the defendant had to have taken reasonable steps to bring it to the attention of the claimant. Thornton added the gloss that the more unusual and onerous the clause, the more that the defendant had to do to draw it to the claimant’s attention. The court saw no reason why this approach should not apply to the case before them. The clause was particularly, and unusually, onerous in its effect. The plaintiffs had done nothing to draw it to the defendants’ attention. It should be regarded as not having been incorporated into the contract.

The approach taken in the Interfoto case is an unusual one in relation to a commercial agreement. This aspect of the rule of incorporation has tended to be used mainly as a means of protecting consumers, particularly in relation to exclusion clauses. Where parties are contracting at arm’s length, in a business context, it would more commonly be the case that the court would expect each party to take care over the obligations to which it was committing itself. If they agree to unfavourable terms, then that is their own fault. It is perhaps significant that the Interfoto decision has not so far led to many similar reported decisions.

It would seem then that even in consumer contracts, there is no necessary requirement to take special steps to draw attention to a clause which may have the effect of disappointing the expectations of the unwary contractor. The position would, however, presumably be different if the consumer had paid a significant sum for what he or she was expecting to obtain under the contract.

Even where there is no dispute as to whether a clause is incorporated, the parties may disagree as to what it was intended to mean. It will be necessary to try to construe the clause in order to give effect to it. The courts will adopt the approach of trying to assess objectively what the parties must be taken to have intended. If the contract is in the form of a written document, this will generally be regarded as very strong evidence of the parties’ intentions. The «parol evidence rule» will apply, with the effect that it will not normally be open to one of the parties to argue that some part of the written document should be disregarded, or interpreted in a way which is not consistent with its most obvious meaning. The Law Commission has doubted whether there is such a rule of law as the «parol evidence rule» – regarding it as being essentially a circular statement, to the effect that when it is proved that a written document was intended to set out all the express terms of an agreement, other evidence of what was intended will not be admissible. Nevertheless, as the Commission itself recognised since the «rule» has regularly been referred to by writers and judges, it provides a convenient shorthand for the approach to constructing contracts to which it applies. The rule, whatever its precise status, thus makes it very important for the parties to ensure that any written document forming part of the contract is clear and explicit as to the obligations which are being imposed on each side. The parol evidence rule is not, however, unchallengeable, and there are certain established exceptions to it.

Exceptions to the parol evidence rule include:

• Ambiguity

Where a word or phrase contained in the written document is ambiguous, other evidence may be given as to what was actually intended.

• Written agreement incomplete

If either or both of the parties can show that the written agreement was not intended to contain all the terms of the contract, then oral or other extrinsic evidence may be used to fill it out. It will be more difficult where the written agreement contains some terms. The court will have to consider objectively whether it appears to be complete, or whether it is more likely that the parties intended it to be supplemented by other obligations. The insertion of a clause to the effect that «this document contains all the terms of the contract» will presumably make it difficult to rebut the presumption that it is complete, and that any other evidence of additional terms should be excluded.

Custom

Sometimes, a particular word or phrase is used in particular trade, market or locality, in a way which does not accord with its obvious meaning. Custom may also be used to fill out an aspect of the contract on which the written document is silent. This use of custom overlaps with the use of custom to imply terms, which is discussed further below. Custom may not be used, however, where it is clearly contradicted by the terms of the contract. Where, for example, a charter provided that the expenses of discharging a cargo should be borne by the charterer, it was not possible to override this by showing a custom that the expenses should be borne by the owner of the ship.

• Starting or finishing date

Extrinsic evidence may be used to establish the date on which a contract is intended to start to operate.

• Other exceptions

Where it can be argued that a written document was intended simply to record earlier oral agreements, but fails to do so accurately, extrinsic evidence may be allowed to prove this, and thus to «rectify» the written document. The parol evidence rule may also be circumvented by showing the existence of a collateral contract. This is perhaps not a true exception, since it concerns not the interpretation of one contract, but rather a decision as to the priority between two inconsistent contracts. Finally, as we have seen earlier, a pre-contractual statement may become part of the contract if the courts feel that it related to something of great importance to one or other of the parties.

Conditions, warranties and innominate terms. Not all terms within a contract are of equal importance. In a contract for the provision of a service, for example, terms specifying the dates on which the service is to be provided and the date for payment will be likely to be more important than, for example, a term requiring the supplier of the service to submit an annual account of the work done. The consequence of breach of one of the first two terms is probably going to be more serious than the latter, and may indeed result in the contract as a whole being terminated. The parties may attempt to give effect to such differences in the status of various contractual provisions by the way in which their agreement is drafted in respect of its «express terms». There is, in fact, a generally accepted hierarchy of terms, with «conditions» being more important than «warranties». Use of these labels may well indicate an intention by the parties as to the relative status of the terms concerned, though any presumption to this effect may be rebutted by other evidence. As indicated above, the distinction between the status of terms is of most importance when the consequences of a breach are being considered. Breach of «condition» may well lead to the other party having the right to treat the contract as being at an end as well as suing for damages. Breach of «warranty will probably only entitle the other party to claim damages. If no labels are used, and the tern is difficult to classify, it may be regarded as an «innominate» term, in relation to which the consequences of the particular breach which has occurred may determine whether the party not in breach has a right to bring it to an end. The context in which the breach occurred will be important, as will its effect on the rest of the contract. The details of the rules which the courts apply in this area are concerned specifically with the issues of performance and breach. It is important, however, that the parties should have such issues in mind when drafting their agreement, so that if they wish, they can include express terms dealing with the consequences of a breach of any particular obligation. They may also wish to agree in advance the amount of damages which will be recoverable in such circumstances.

Implied Terms. The express terms of an agreement may not tell the complete story, because in certain situations a term or terms may be «implied» into a contract, although neither party has made reference to it at the time of the agreement. This may arise from one or other of the parties to the agreement claiming that although a particular term has not been set out explicitly, either in words or writing, it should nevertheless be part of the contract. In addition, in some situations, a term will be implied because Parliament has by statute required that all contracts of a particular type should contain such a term.

The order of treatment here will be to look first at terms implied by the courts, which can be further divided into terms implied by custom, terms implied in fact, and terms implied by law.

Terms implied by the courts. The general approach of the courts is that they are reluctant to imply terms. The parties are generally expected to take the trouble to set out the provisions of their agreement in full. A contract in which certain terms are implicit clearly gives great opportunities for dispute, and the courts have been reluctant to give any encouragement to parties to try to escape from contractual obligations on the basis of some term which was not stated, but which is now alleged to be of great significance. There are certain situations, however, where this reluctance is overcome, and terms are implied. When the courts do this, they run the risk of suggesting that all contractual issues can be resolved by deciding what the Parties must have agreed at the time of the contract - that is, the myth of presentation». A «relational» approach would recognise that not all issues can be solved in that way, in particular where a contract or a contractual relationship develops over time. This would allow a more flexible approach to the implication of terms to deal with particular situations.

The first basis on which the courts, applying the classical approach, will imply terms is where the implication of the term derives from a local or trade custom.

Terms implied by custom. Provided that there is sufficient evidence to establish the custom, the courts will be prepared to interpret the contract in the light of it.

The person wishing to rely on the custom must produce convincing factual evidence of its existence and general acceptance. Assuming that there is sufficient evidence, the courts will imply a term to give it effect.

Such implication will not be possible, however, if the contract contains an express term which is inconsistent with the custom.

Terms implied in fact. The approach here is based on the attempt to determine the true intention of the parties. The courts will imply a term if they consider that it represents the true intention of the parties on a particular issue. In other words, the term is implied not as a matter of law, but on the basis that as a matter of fact, this is what the parties had agreed, though the agreement was implicit rather than explicit. The courts will not easily, however, be convinced that such implication should take place. It is certainly not sufficient that a particular clause would appear to be «reasonable». Nor will a term be implied to deal with an eventuality which the parties had not anticipated. If they had not expected a particular circumstance to happen, they cannot be said to have intended that a particular term would apply to the situation.

Terms implied by law. The distinction between terms implied in fact, and terms implied by law, was well explained by Lord Denning in Shell v Lostock Garage. The case concerned a contract under which a garage owner agreed to buy petrol exclusively from Shell. Subsequently, at a time when there was a petrol «price war», the garage owner discovered that Shell was supplying other petrol stations in the area at a lower price. This was having a disastrous effect on his business. The garage owner was arguing that a term should be implied to the effect that Shell would not discriminate against him in the terms on which it supplied the petrol. The majority of the Court of Appeal (Bridge LJ dissenting) held that no such term could be implied. In coming to this conclusion, Lord Denning emphasised the difference between terms implied in fact, and those implied by law. As regards the first category, as we have seen, this involves deciding what the parties themselves would have put into the contract had they addressed themselves to the issue. Lord Denning thought that the required term could not be implied on this basis, because it was highly unlikely that Shell would have agreed to the inclusion of such a term if this had been requested by the garage owner. Terms implied by law, however, do not depend on determining the intention of the parties. The court in this case will impose the term on them, whether they would have agreed to it or not. Two conditions need to be satisfied before this can be done, however. First, the contract has to be of a sufficiently common type (for example, seller/buyer, owner/hirer, employer/employee, landlord/tenant) that it is possible to identify the typical obligations of such a contract. Secondly, the matter to which the implied term relates must be one which the parties have not in any way addressed in their contract. There must be a clear gap to be filled. In Shell v Lostock Garage, the garage owner failed on the first test. Lord Denning was not prepared to hold that exclusive dealing contracts of this kind were sufficiently common that typical terms could be identified.

Terms implied by statute. There are two reasons why it may be appropriate for Parliament to enact that certain provisions should be implied into all contracts of a particular type. One relates to efficiency. If it is virtually universal practice for certain terms to be used in particular contractual relationships, there is no need for the parties to state them specifically every time. In terms of economic analysis, there is a saving in «transaction costs». Rather than having to agree an appropriate wording on each occasion, the parties can rely on the statutory formulation as representing their obligations. In such a situation, however, there should be the possibility of the parties being able to agree to depart from the statutory wording, if they so wish.

The second reason why terms might need to be implied by statute is for the protection of one of the parties. It may be thought that a particular type of contractual relationship is likely to involve inequality of bargaining power, so that, unless protective provisions are implied, the weaker party may be forced into a very disadvantageous bargain. If this is the reason for the implication, then it may well be that the obligation to include the term should be absolute, without any possibility of its being excluded, or amended, in particular contracts.

Examples of both these bases for implying terms by statute can be found in the history of the implied terms as to quality under the Sale of Goods Acts. The original Sale of Goods Act (SGA) 1893 was intended to represent a codification of current commercial law and practice. Thus, the implied terms as to quality, contained in ss 13-15, were those which merchants of the time would have expected to appear in any contract for the sale of goods. This was an example of the first ground for implying terms, that is, business efficiency. In line with this approach, s 55 of the SGA 1893 allowed the parties to agree to different terms as to quality, or to exclude them altogether, if they so wished. By the time of the enactment of the revised version of the SGA in 1979, however, the atmosphere had changed. The provisions as to quality had come to be regarded as important elements in the law of consumer protection. Their role was therefore at least in part to provide protection for the weaker party in a sale of goods contract. As a result, the Unfair Contract Terms Act (UCTA) 1977 made it impossible in situations where the contract is made between a business and consumer for the business to exclude the implied terms. Even as between business parties, the exclusion will be subject to a test of «reasonableness». The terms implied by the Supply of Goods and Services Act 1982 also seem to be based on principles of protection, rather than the avoidance of transaction costs.

A further example of a term implied on the grounds of protection is to be found in the Equal Pay Act 1970. Section 3 implies into every employment contract an «equality clause» which has the effect of ensuring that as between men and women employed on «like work», there is equal treatment in relation to all terms of their contracts.

The implication of terms on this basis runs counter to the normal philosophy of classical English contract law, which is to make the intentions of the parties paramount. Here the clause is imposed on the parties, whether they like it or not. Even if they expressly agree that it is not to operate, the courts will still give effect to it. This is an area where there is clearly a tension between the «classical» and «modern» law.

Lecture 6. Remedies (2 hrs)

1. Damages: purpose and measure

· Expectation interest

· Reliance interest

· Restitution

· Consequential losses. Supervening events

· Non-pecuniary losses

2. Limitations on recovery

· The rule of remoteness

· Degree of risk

· Mitigation

· Contributory negligence

3. Liquidated damages and penalty clauses

4. Adequacy of damages

In general, as we shall see, the common law aims to put the parties into the position they would have been in had the contract been performed by ordering one party to pay money to the other. Where one of the parties has performed its side of the bargain and is awaiting payment from the other party, this can be achieved by the 'action for an agreed sum', or in sale of goods contracts the 'action for the price'. In other words, the party who has promised to pay for goods or services which have been transferred or performed by the other party, can be required to make good that promise. In other situations, the normal requirement will be for the payment of compensatory damages. An order to perform part of the contract, other than paying money that is owed, is much more unusual.

We start, therefore, by considering the remedy of 'damages', and will then look at specific performance and injunctions.

Damages: Purpose.

The basic principle of contractual damages is that of restitutio in integrum, or full restitution, which involves putting the innocent party into the position it would have been in had the contract been performed.

The basic principle of damages for breach of contract is that the injured party is entitled, so far as money can do it, to be put in the position he would have been in if the contractual obligation had been properly performed. He is entitled, that is to say, to the benefit of his bargain.

The main objective of contract damages is therefore compensation, not punishment. Although, of course, in some situations, a party thinking about breaking an agreement may be deterred by the prospect of having to pay damages, or a party who has broken an agreement may suffer considerably from having to pay compensation, nevertheless these consequences are not the purpose of the award. This is shown by the fact that if the party not in breach has suffered no quantifiable loss, only nominal damages will be awarded. If, for example, there is a failure to deliver goods, and the buyer is able to obtain an alternative supply without a problem, and at a price which is the same or lower than the contract price, no substantial damages will be recoverable.

In relation to this aspect of contract damages, it is important to note the concept of the 'efficient breach'. Looking at the law of contract from the economic point of view, as a means of wealth maximisation, it may make sense for a party to break a contract. The typical example given is where the seller (S) has contracted to sell an item to a buyer (B1) for £100. Before the transaction takes place a second potential buyer (B2) offers S £200 for the item. If S sells to B2, S will receive £200, but may have to pay compensation to B1 for not fulfilling the original contract. But as long as that compensation is below £100, S will still have made a profit. All parties are in theory happy. S has sold the item at a higher price, to B2, to whom the item is obviously more valuable than it would be to B1. B1 has not received the item, but has received damages which fully compensate for any losses.

The concept of 'efficient breach' is most commonly discussed in terms of the advantage to the party breaking the contract in 'maximising gain'. As Campbell has pointed out, however, it should also be recognised as encompassing the situation where the party in breach acts to 'minimise loss'. This may arise, for example, where circumstances change in a way that increases the costs of performance to an extent that the increase exceeds the damages which would be payable to the other party. Here again, the economic answer is that the efficient result is not to enforce the contract, but to allow the party whose costs have increased to escape from it by paying appropriate compensation.

The concept of the efficient breach goes some way to explaining why the law of contract is generally more disposed to award damages than to insist on performance. The analysis works best, however, in relation to discrete business contracts which are fully executory. Once the parties are in a long term relationship, either in respect of the contract under consideration, or as regards a series of contracts, then the economic analysis of the possible advantages of breach becomes much more complex. The risks of endangering the future relationship need to be added in to the equation. Similarly, if one party has already performed part of its obligations (particularly if these are in the form of services, rather than goods or money, thus making restitution difficult), allowing breach plus compensation may not be straightforward. Finally, in relation to consumer transactions, it may well be felt that the need to protect the consumer means that the economically efficient answer is not the one which the courts should support. In addition, consumers may well place a value on what they are seeking to receive under the contract which is higher than the market value - thus giving rise to the concept of what has been called the 'consumer surplus'. It is also important to remember that parties will not always act in the most economically efficient way in relation to a particular transaction: for example, being seen as a firm which honours its contracts may be more 'valuable' (though difficult to quantify) than making a bigger profit on a particular deal. Nevertheless, provided that its limitations are recognised, the concept of the efficient breach is a useful tool to apply in the analysis of the law of damages for breach of contract.

This economic analysis is based on the assumption that, as stated at the beginning of this section, the purpose of contract damages is to compensate. It should be noted, however, that a possibly significant exception to the solely compensatory nature of contract damages has been opened up by the decision of the House of Lords in Attorney General v Blake. It was held there that a defendant could in certain circumstances be required to hand over to the claimant a benefit acquired by breaking a contract, even where there is no corresponding loss to the claimant.

Damages: Measure.

Within the general principle of compensation, there are three basic methods by which damages may be calculated. These are conveniently labelled as 'expectation', 'reliance' and 'restitution'. Some consideration also needs to be given to consequential losses and non-pecuniary losses.

Expectation interest. This is the approach which most clearly relates to putting the innocent party into the position he or she would have been in had the contract been performed. It is concerned with fulfilling the expectations of that party as to the benefits that would have flowed from the successful completion of the contract. In particular, where the innocent party, as will commonly be the case, was expecting to make a profit as a result of the contract, that will generally be recoverable, as well as any other consequential losses flowing from the breach.

In general, the calculation of the expectation interest is simply a matter of looking at where the claimant would have ended up if the contract had been performed properly. In making that calculation, account must of course be taken of any costs which the claimant may have saved by the defendant's non-performance. It is the claimant's profit on the contract that is recoverable, which will not necessarily involve the defendant in paying the full price of the missing performance.

There are two situations which may cause particular difficulty for calculation of the expectation interest, and which merit further consideration. First, where the profit was not certain; secondly, where the cost of fulfilling the claimant's full expectation may be disproportionate to the eventual benefit.

In the situation where the profit was not certain to be made, there may be a partial recovery, on the basis that the claimant has lost the chance to make it.

The second area of difficulty in finding the appropriate award to meet the claimant's expectations arises in connection with the situation (usually occurring in construction contracts) where the cost of providing the claimant with exactly what was bargained for may be out of all proportion to the benefit which would thereby be obtained.

The value of the benefit lost is by definition something personal to the claimant, yet the claimant's subjective view cannot be allowed to be the determining factor. It may be that all that can be done is to wait for practice to develop (as it has done in other areas of non-pecuniary loss) so that a standard level for this type of award gradually becomes established.

Finally, it should be noted that the award for loss of amenity is most likely to arise in non-business contracts.

In some situations, it may not be easy for the claimant to calculate the profits that would have been made. Here it may prove more sensible to abandon the attempt, and instead to seek recovery of the expenditure which has been incurred in anticipation of the contract. This is what is referred to as the 'reliance' interest. The result of this type of award is that the claimant is put back to the position prior to the contract being made, rather than in the position if the contract had been performed properly.

The decision as to whether to seek expectation or reliance damages will generally lie with the claimant.

The burden of proving that the bargain was 'bad' in this sense falls, however, on the defendant. The claimant does not have to prove that sufficient profit would have been made on the contract to cover the expenses incurred.

Although in general a choice must be made as to which measure of damages is being sought, in certain circumstances it may be possible to recover both expectation and reliance losses, as long as this does not lead to double recovery.

Restitution. 'Restitution' in relation to contract damages traditionally refers to the return of money paid, such 'damages' being largely a corollary of termination following a repudiatory breach. If such a breach has been accepted, and the claimant has returned any benefits received, or is willing to do so, then he or she will also be entitled to claim the restitution of anything which has been given to the defendant. The easiest example is the situation of defective goods. The buyer returns the goods and expects the refund of the price. In many situations, and in particular in relation to consumer contracts, that may be all that can be recovered by way of damages. The buyer may not have been expecting to make a profit out of the use or resale of the goods, and there may be no other losses resulting from the breach. In appropriate circumstances, however, it is possible to combine a claim for restitution with one for the reliance or expectation damages.

Restitution also has a more general role to play in relation to contracts which are void, or rescinded (for example, for mistake or misrepresentation), or where no contract has ever come into existence. These situations are not ones which arise on breach, and so are not discussed further here.

There is, however, another meaning to 'restitution', which refers to the rectification of a situation which has led to the 'unjust enrichment' of a party. Contract damages have not traditionally been awarded on this measure, and the idea that there could be recovery not only for the claimant's loss, but also for the defendant's gain.

Consequential losses. There are some losses which flow from the breach, but which cannot be put into the category of 'expenses' (that is, reliance) or thwarted expectations. Provided the causal link can be established, and they are not too remote, then they will be recoverable. If there is a contract for the purchase of a piece of machinery, for example, and it is defective, then the expectation interest may allow the recovery of lost profits that would have been gained by using the machine. If, however, the defect causes the machine to explode, which results in damage to the buyer's premises, or personal injury to the buyer, compensation in relation to these consequential losses can also be recovered.

Non-pecuniary losses. Contract damages are primarily concerned with economic losses of one kind or another, which are more or less quantifiable in money terms. In some situations, however, non-pecuniary losses will be caused. If, for example, a defective product results in personal injury to the purchaser, there is no reason why damages should not be recovered in relation to the pain and suffering so caused. Of course, third parties who are injured will have to rely on tortious remedies at common law or under the Consumer Protection Act 1987.

A more difficult question arises in relation to mental distress, anguish or annoyance caused by a breach of contract. The courts have tended to be wary of awarding compensation under this heading, but the whole area has recently been reconsidered in a number of House of Lords decisions.

As Staughton LJ held:

... damages for mental distress in contract are, as a matter of policy, limited to certain classes of case. I would broadly follow the classification by Dillon LJ in Bliss v South East Thames RHA:'... where the contract which has been broken was itself a contract to provide peace of mind or freedom from distress.' It may be that the class is somewhat wider than that. But it should not, in my judgment, include any case where the object of the contract was not comfort or pleasure, or the relief of discomfort, but simply carrying on a commercial activity with a view to profit.[9]

Subsequent cases have taken a similar line. In Watts v Morrow, the general rule and its exceptions were restated by Bingham LJ, in a passage which has subsequently been approved by the House of Lords:

A contract-breaker is not in general liable for any distress, frustration, anxiety, displeasure, vexation, tension or aggravation which his breach of contract may cause to the innocent party ... But the rule is not absolute. Where the very object of the contract is to provide pleasure, relaxation, peace of mind or freedom from molestation, damages will be awarded if the fruit of the contract is not provided or if the contrary result is procured instead ... A contract to survey a house for a prospective purchaser does not fall within this exceptional category. In cases not falling within this exceptional category, damages are in my view recoverable for physical inconvenience and discomfort caused by the breach and mental suffering directly related to that inconvenience and discomfort.[10]

Limitations on Recovery. There are two main limitations on the amount of damages which can be recovered for a breach of contract, namely, the rule of remoteness and the requirement of mitigation. The issue of contributory negligence will also be considered below.

The rule of remoteness. At various points in this chapter, it has been mentioned that the award of damages under a particular head will be subject to the rule of remoteness. This is a rule which basically prevents consequential losses extending too far, and placing unreasonable burdens on the defendant. It should also be noted that in relation to the tort of deceit, and the remedy for negligent misrepresentation under s 2(1) of the Misrepresentation Act 1967, all consequential losses are recoverable without limitation. This is exceptional, however, and in general, in both tort and contract, damages are only recoverable in relation to losses which are not too remote.

The type of recovery the rule is designed to prevent is as follows. Suppose that a contract for the hire of a car is broken, because the one supplied is unfit for its purpose and breaks down. The hirer may as a result fail to arrive at a sale where he would have been able to buy a valuable painting which he could have resold for a £100,000 profit. Should the hire company be liable for the £100,000? English law will normally regard this loss as too remote from the breach to be recoverable. This approach ties in with the view of contract law as a mechanism by which the parties to an exchange transaction allocate the risks of their enterprise. In order to be able to do this properly, they must be aware of the risks at the time of contracting, so that they can be properly catered for in the contract price, exclusion clauses, or other terms of the contract. If unforeseen losses were recoverable, this would unbalance the contractual relationship.

Mitigation. Once a breach of contract has occurred, the claimant is not entitled to sit back and do nothing while losses accumulate. There is an obligation to take reasonable steps to mitigate losses.

This obligation imposes on a plaintiff the duty of taking all reasonable steps to mitigate the loss consequent on the breach, and debars him from claiming any part of the damage which is due to his neglect to take such steps.

This principle does not impose on the plaintiff an obligation to take any step which a reasonable and prudent man would not ordinarily take in the course of his business. But when in the course of his business he has taken action arising out of the transaction, which action has diminished his loss, the effect in actual diminution of the loss he has suffered may be taken into account even though there was no duty on him to act.

In other words, the court will look at what the claimant's actual losses are, rather than what they might hypothetically have been had the claimant not acted, even though the claimant's actions in reducing the loss have gone beyond what might reasonably have been required. If the claimant has done nothing, however, the court will consider what steps might reasonably have been taken to reduce the losses. The claimant will be debarred from claiming any part of the damage which is due to a failure to take such steps. So, if the seller fails to deliver in a sale of goods contract, the buyer will be expected to go into the market and attempt to obtain equivalent goods. If such are available at, or below, the market price, then only nominal damages will be recoverable. If the buyer fails to enter the market until the price has risen, or pays over the odds, these increased losses will not be recoverable. Similarly, a reasonable offer of performance following a breach should not be spurned.

Mitigation only requires the claimant to act 'reasonably' in all the circumstances.

The principle of mitigation raises particular problems in cases of anticipatory breach. If the claimant accepts the breach, and the contract terminates immediately, then the normal rules will apply. If, however, the claimant does not accept the breach, but elects to affirm the contract and wait for the other party to perform, it seems that in some circumstances there is not any duty at that stage to reduce losses.

Contributory negligence. In tort, it is well established that the damages recoverable may be reduced by the claimant's own, contributory, negligence. Does the same principle apply in contract? The Law Reform (Contributory Negligence) Act 1945 did apply where there was concurrent liability in tort and contract (that is, where the breach of contract consisted of negligent performance, in a situation where there was also a tortious duty of care). Where, on the other hand, the breach of contract is based on strict liability, there is no scope for contributory negligence, and the 1945 Act is irrelevant. Where, however, the contractual liability is based on 'negligence', but there is no concurrent tortious duty, there is no clear authority.

The area is thus in some confusion, and a clear ruling from the House of Lords would be helpful. The Law Commission has recommended that contributory negligence should always be available to apportion losses where there has been breach of a contractual duty to take reasonable care, whether or not there is an overlap with tort, and this seems the most sensible solution.

One issue which has been considered by the House of Lords is the way in which contributory negligence should be dealt with in cases of overvaluation of property. Whether contributory negligence applies where the claimant's 'negligence' is different from the defendant's negligence; and, secondly, if it does, to what sum any reduction should be applied.

The analogy is used of the seat belt cases in tort; not wearing a seat belt will not contribute to the negligence of the driver, but it can be used as a reason for reducing the claimant's damages.

Liquidated Damages and Penalty Clauses. The parties to a contract may decide to include provision as to the compensation which is to be paid in the event of a breach. This is known as a liquidated damages' clause, and is generally a perfectly acceptable arrangement, to which the courts will happily give effect. It is an example of the parties deciding between themselves not only where the risks should lie, but the extent of such risks. Economic analysis is likely to conclude that such clauses are an efficient mechanism, in that they reduce the transaction costs which might otherwise follow a breach of contract, in terms of negotiating compensation or, in the worst case, having to take legal action to recover it.

The limitation which English law imposes on this approach is that the sum specified in the contract must be a 'genuine pre-estimate' of the plaintiff's loss, and not a 'penalty'. If it is the latter, then it will be unenforceable. . It may therefore be acceptable to use a single figure for compensation as a type of 'averaging' of the likely losses resulting from a range of breaches, the precise effects of which may be difficult to quantify.

Specific Performance. As noted at the beginning of the chapter, the only situation where the common law required performance of a contractual obligation was in relation to the action for an agreed sum, following performance by the claimant. The other aspect of what some commentators refer to as 'literal enforcement’ that is, the power to order a party to perform a non-monetary obligation, was left to the Chancery courts. The remedy of specific performance involves the court in issuing an order directing one of the parties to a contract to carry out his or her obligations. The sanction for a failure to comply is that the person concerned will be in contempt of court, and liable to fines and imprisonment as a consequence. Since the remedy is an equitable one, developed by the Chancery courts, it is discretionary, unlike damages, which are available as of right. This means that a claimant is not entitled to the order simply as a result of proving that the other party is in breach of its obligations. Once this has been established, the court will then decide whether it is appropriate in this particular case that the order should be made. For example, one way in which the courts will allow a party to escape the consequences of a mistake concerning the terms of the contract is by refusing to order specific performance. Similarly, the order may not be granted if the claimant has taken advantage of the defendant, for example, because he or she was drunk.

Although this discretionary element inevitably attaches a degree of uncertainty to the remedy, in fact, the courts have developed a number of rules about its use, which mean that in many cases, it will be fairly easy to determine whether or not the order is likely to be granted.

Adequacy of damages. One of the reasons why the remedy of specific performance developed is that, in certain situations, damages will be an inadequate remedy. If no pecuniary loss can be established, or if it is impossible to quantify, this would mean that there would be no effective sanction for a breach of contract, in the absence of the order for specific performance.

Now, of course, the remedy is available in all courts, and the question to be asked is: when will damages not be regarded as an adequate remedy?

If there is a contract for the sale of goods in which there is an active market, then it is very unlikely that an order for specific performance will be granted. The party not in breach can buy or sell in the market, and be compensated by way of damages for any financial loss resulting from a difference between the contract and market prices. If, on the other hand, what is being sold is a valuable antique, or some other item which is not generally available, specific performance may well be the appropriate remedy. This distinction is supported by s 52 of the Sale of Goods Act 1979, which allows for specific performance in relation to 'specific' or 'ascertained' goods, but not 'generic' goods. Even where the goods are 'specific', however, the discretion to order performance will not be exercised unless they are something out of the ordinary. It is not appropriate to order performance where the goods in question are 'ordinary articles of commerce and of no special value or interest'.

Similarly, it is normally the case that the order will be available to enforce contracts for the sale of land, since every piece of land is regarded as unique. This applies in favour of the seller as well as the purchaser, because it is a general principle that there should be mutuality in the availability of the remedy.

Injunctions. In some situations, the courts will be prepared to grant an injunction restraining a person from acting in a way which will amount to a breach of contract. The injunction may be 'interlocutory', that is, temporary, pending a full trial, or permanent. One example of a situation where this may be a valuable remedy is in relation to restrictive covenants relating to the sale of a business, or competing employment. In any contract in which a party promises not to do something, there will be potential scope for the use of an injunction. An injunction, however, like the order for specific performance, is an equitable remedy, and thus subject to the discretion of the court.

The courts will not allow an injunction to be used as an indirect means of specifically enforcing a contract for which a direct order to perform would not be granted.

Date: 2015-01-02; view: 824