Business Law Part 4 – Remedies for Breach of Contracts
1 Overview
Previously, we looked at how to discharge a contract. Next, we will be learning about remedies after a breach of contract. Note that claiming for multiple losses is possible, but some costs are naturally exclusive (e.g. cost of cure vs diminution of value).
2 Limitations Period
2.1 The Limitation Act
Limitation Period: A party cannot claim more than 6 years from the date of the breach of contract. - Section 6(1)
Knowledge of Breach: The limit will be counted from when the party acquired knowledge of the breach. Section 24A(3)(b)
3 Liquidated Damages
When the contract contains a clause that specifies the amount to be paid in case of a breach, the only question is whether the clause is enforceable. If the clause is classified as a penalty clause (i.e. serve to penalise instead of covering losses), then the clause is not enforceable. It is important that relevant facts in this case have to be known at the time of making of the contract to be considered. We apply the Dunlop or Cavnedish test to determine whether a clause is a penalty clause.
3.1 Penalty Clauses
Liquidated Damages Clause: States that if Party X breaches the contract, Party X will pay Party Y a specific amount.
Penalty Clauses: Liquidated damage clauses that the court finds to be “penal”. Penalty clauses are unenforceable by the parties.
- A liquidated damages clause is a penalty clause if the agreed sum is not a genuine pre-estimate of loss and punitive.
- Whether a liquidated damages clause is a penalty clause will be decided based on the facts of the case at the time of the making of the contract.
3.2 The Dunlop Test
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Presumption: Liquidated damages clause is penal if single lump sum is payable on occurrence of one or more events (some of which may occasion serious and others trifling damage).
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Likely Penal
- The sum stipulated for is extravagant and unconscionable in amount in comparison with the greatest loss that could conceivably be proved to have followed from the breach.
- The breach consists only in not paying a sum of money, and the sum stipulated is a sum greater than the sum which ought to have been paid.
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A liquidated damages clause is not to be considered penal just because it is almost impossible to precisely pre-estimate the true loss suffered.
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3.3 The Cavendish Test
- Does the clause impose “a detriment on the contract-breaker out of all proportion to any legitimate interest of the aggrieved party in the enforcement of the primary obligation”
- Legitimate Commercial Interests: First, a court must see whether any (and, if so, what) legitimate commercial interests are served and protected by the clause.
- Proportionality: Secondly, if there are such interests, the court must see whether the provision was extravagant or unconscionable in the circumstances
- Bargaining Power: In negotiated contracts between properly advised parties of comparable bargaining power, the parties themselves are the best judges of what is legitimate in a provision dealing with the consequences of breach. - iTronic Holdings
3.3 Dunlop vs Cavendish in Singapore
Singapore courts have been applying the Dunlop test before the UK Supreme Court introduced the new Cavendish test. The issue is that there are no Court of Appeal ruling after 2016 that used the Cavendish test.
UK Decision
- Dunlop test for straightforward cases
- If difficult to determine genuine pre-estimate of costs, resort to Cavendish test
Singapore
- Dunlop test (Court of Appeal) - Xia Zhengyan v Geng Changqing (2015)
- Before Cavendish test was introduced
- Dunlop over Cavendish (High Court) - iTronic Holdings v Tan Swee Leon (2016)
- Cavendish test (High Court) - Leiman, Ricardo v Noble Resources Ltd (2018)
- Reason being “genuine pre-estimate of loss” a bit difficult to apply
Exam
- Default to Dunlop - stare decisis
- Practically if case is significantly different, justify why Cavendish is considered (because High Court used it when “genuine pre-estimate of loss” a bit difficult to apply) and apply Cavendish test also
4 Unliquidated Damages
For liquidated damages (i.e. not quantified in the contract), the burden is the the aggrieved party to prove his losses. It can be done through either Expectation Loss (forward-looking) or Reliance Loss (backward-looking).
4.1 Expectation Loss
Expectation loss is the default mode of quantification of loss unless the aggrieved party chooses to plead reliance loss. An aggrieved party who cannot show that he occupies a worse financial position after breach than he would have occupied had the contract been performed can ordinarily recover only nominal damages.
Types of Expectation Losses
- Pecuniary: All financial and material loss incurred such as business profits or expenses of medical treatment.
- Non-pecuniary: All losses which do not represent financial losses, such as injured feelings, or physical pain.
4.1.1 Pecuniary
Loss of Profits: Depends on whether loss of profits can be ascertained.
- If the loss of profits can be ascertained, that should determine the amount of damages.
- If loss of profits cannot be ascertained, the expenses incurred in reliance of the other party’s promise (reliance loss) is recoverable as damages on the rebut-table presumption that if the contract has been properly performed, the plaintiff would have at least made a profit to recoup the expenses incurred.
Cost of Cure vs Diminution of Value: The courts will consider both proportionality and the intention of the party claiming damages It follows that if cost of cure is cheaper than diminution in value, the courts will very likely grant cost of cure.
- Context: Ruxley agreed to build a swimming pool in Forsyth’s garden for £17,797.40. The contract specified that the pool should have a diving area 7’ 6" deep. However, the pool was only 6’ deep. Forsyth sought to recover the cost of demolishing the existing pool and constructing a new one with the required depth. The estimated cost of rebuilding the pool to the specified depth was estimated to be £21,560. There didn’t seem to be any diminution in value of the pool due to the breach of contract.
- Holding: Forsyth could not recover the cost of cure. Nominal damages were awarded (because there was no real diminution of value to speak of). Crucially, the pool as constructed was perfectly safe to dive into; there was no evidence that the shortfall in depth had decreased the value of the pool; and Forsyth had no intention to build a new pool at such a cost.
- Reason: If it is unreasonable to insist on reinstatement (eg, where the expense of the work involved would be out of all proportion to the benefit to be obtained), then damages are confined to the difference in value. The intentions of the parties should also be considered.
- Context: Radford sold an adjacent land to DF on the condition that DF would build a wall (ala Donald Trump) on the land so as to divide it from Radford’s land. DF failed to do so. In this case, the cost of cure (ie, the cost of building the wall) was much higher than the difference in value in Radford’s property with and without the wall.
- Holding: Radford was entitled to the cost of cure. The judge was entirely satisfied that Radford genuinely wanted the work done, and that he intended to expend any damages awarded on carrying it out.
4.1.2 Non-pecuniary Loss
Loss of Amenity: Generally, a contract breaker is NOT liable for any distress, frustration, anxiety, displeasure, vexation, tension or aggravation which his breach of contract may cause to the innocent party. - Watts v Morrow (1991), Arul Chandran v Gartshore (2000) says mental suffering is a fact of life
Loss of Amenity - Exception: When it is clear from context and conduct that the loss is a clearly contemplated objective of the contract.
- Context: Skinner, a surveyor, was asked to survey a house and tell Farley (a prospective buyer of the house) if the property would be affected by aircraft noise Skinner said that it was unlikely, which turned out to be untrue. Skinner was thus in breach of contract. Farley sought to claim for non-pecuniary loss.
- Holding: The claim was allowed, since an important object of the contract was to provide pleasure, relaxation or peace of mind (i.e. relief from noise).
- Train company breached contract and caused Mr and Mrs Hobbs to alight at a different place. They had no place to stay and fell sick due to a drizzle that night. Mrs Hobbs was also very tired since she had to walk a long way back to her home. They were awarded damages.
4.2 Reliance Loss
Pre-contractual Expenses
- Expenses incurred in preparing to perform or in part performance of the contract, which in the circumstances has been rendered useless by the breach .
- This head of claim is typically relied on where loss of profit is speculative or cannot be determined.
- However, claiming on the reliance measure of loss will not work if the defendant can prove that the contract would not have been a profitable one if it had been properly performed.
- Context: Anglia asked Reed to star in a television play which they were producing. A few days later, Reed repudiated the contract. Anglia could not get a substitute for Reed and accepted the repudiation. They abandoned the production and sued Reed for wasted expenditure.
- Holding: Because Anglia elected to claim wasted expenditure instead of loss of profits, they were allowed to claim the expenditure incurred before the contract, provided that it was reasonable that both parties knew it would be wasted if the contract was broken.
4.3 Limits to Claiming Unliquidated Damages
Calculating the exact amount of loss is not a focus of the Contract Law class. The focus is on whether the aggrieved party is able to claim unliquidated damages (and if so, what proportion, because the breach might not be responsible for the entire amount of loss). There are three criteria:
4.3.1 Causation
General Rule: The default test for showing causation is the “but for” test (i.e. but for the breach of contract, I would not have suffered XYZ loss). Failure to show causation means your claim for unliquidated damages fails. (no need full IRAC, just a but for)
Exception: Did not cause the full loss.
- Context: A valuer overvalued certain properties in a valuation report on certain properties to the bank. Relying on the report, bank lent money to borrowers (with these properties as security) who defaulted. The bank sold the properties but the proceeds were not enough to cover the loan amount as there was a general fall in the market.
- Holding: The valuer did not cause ALL the loss to the bank; only the loss resulting from the overvaluation was to be recovered. The valuer could not be held liable for loss arising from market fluctuations.
4.3.2 Remoteness
Two-limbed Test for Remoteness (not too remote if:)
- Ordinary Damage: They are fairly and reasonably considered to arise naturally, in the usual course of things, from the breach itself.
- Extraordinary Damage: They result from special circumstances that the parties had actual knowledge of.
Analytical Framework for Remoteness of Damage
- What are the specific damages that have been claimed? - What are the facts that would have had a bearing on whether these damages would have been within the reasonable contemplation of the parties had they considered this at the time of the contract? - What are the facts that have been pleaded and proved either to have in fact been known or to be taken to have been known by the defendant at the time of the contract? - What are the circumstances in which those facts were brought home to the defendant? - Finally, in the light of the defendant’s knowledge and the circumstances in which that knowledge arose, would the damages in question have been considered by a reasonable person in the situation of the defendant at the time of the contract to be foreseeable as a not unlikely consequence that he should be liable for?
4.3.3 Mitigation
When it comes to mitigation, it is important to know that the aggrieved party cannot recover what he could have reasonably mitigated. It is okay not to spend effort to mitigate the losses fully, but then you can only claim a portion of the suffered losses.
General Rule: “The fundamental basis is thus compensation for pecuniary loss naturally flowing from the breach; but this first principle is qualified by a second, which 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” - British Westinghouse Electric and Manufacturing Co Ltd v Underground Electric Railways Company of London Ltd (1912)
- The aggrieved party must take all reasonable steps to mitigate the loss consequent on the defaulting party’s breach, and cannot recover damages for any loss which it could have avoided but failed to avoid due to its own unreasonable action or inaction.
- The aggrieved party who goes beyond what the law requires of it and avoids incurring any loss at all will not be entitled to recover any damages.
- The aggrieved party may recover any expenses incurred in the court of taking reasonable steps to mitigate its loss.
5 Non-compensatory Remedies (FYI)
Damages are granted as of right to the aggrieved party for all breaches of contracts. However, other remedies are discretionary. These remedies are typically given when the idea of “compensating” the aggrieved party with damages isn’t applicable or logical on the facts.
5.1 Specific Performance
Essentially an order of court directing the breaching party to do what he has promised.
- The contract must be alive for specific performance to be granted.
- In other words, the aggrieved party who seeks specific performance should not terminate the contract or accept a repudiation.
- Awarded where “damages are inadequate” or “where it is just and equitable to do so”
- Historically related to transactions in land.
- No singular overarching test for when specific performance is to be awarded.
- There are certain “bars” to specific performance (i.e. situations where the court will not grant it); everything depends on the facts of the case.
- e.g. specific performance is impossible, severe hardship caused to the breaching party.
5.2 Injunctions
Essentially an order of court directing the breaching party to stop doing something (prohibitory injunction), or to do something (mandatory injunction).
- Award of injunction must not indirectly result in specific performance.
- Some have argued that a mandatory injunction is essentially specific performance (but this debate is definitely out of your syllabus).
- The general test is that an injunction must not cause hardship to defendant that would be oppressive, an it will be awarded on a “balance of convenience”.