Chapter 2: Contract law

Chapter learning objectives

Upon completion of this chapter you will be able to:

• explain the essential elements of a contract
• explain what is and is not an offer
• explain the meaning and consequence of acceptance
• explain the meaning of consideration
• explain the doctrine of privity and the main exceptions
• distinguish the presumptions relating to the intention to create legal relations
• distinguish terms from mere representations
• define the various contractual terms
• explain the effect of exclusions and evaluate their control
• explain the meaning and effect of breach of contract
• explain the rules relating to the award of damages
• analyse the equitable remedies for breach of contract.

1 Essential elements of a valid contract

The following elements are needed to form a valid contract:

• Agreement, i.e. offer and acceptance.
• Consideration.
• Intention to create legal relations.
• Capacity and Legality

Form of the contract

General rule

A contract can be in any form - simple contract. It may be written, or oral, or inferred from the conduct of the parties. Most contracts are simple contracts.

Exceptions

Some contracts must be made in a particular form such as writing.

Contracts for the sale of land must be in writing.

Specialty contracts

Conveyances of land and leases for three years or more must be by deed - these are known as specialty contracts. Such contracts must be in writing, signed, witnessed and delivered (i.e. intended to take effect).

The limitation period for a contract made by deed is 12 years. For all other contracts, the limitation period is six years.

  Test your understanding 1

(1)The vast majority of contracts are 'simple'. What is the meaning of the word 'simple' in this context?

(2)What is the limitation period for a contract that is made by deed?

(3)The law of contract is of special importance in providing a legal framework within which businesses can operate.

2 Offer

What is an offer?

An offer is a definite and unequivocal statement of willingness to be bound on specified terms without further negotiations.

An offer can be in any form - oral, written or by conduct. However, it is not effective until it has been communicated to the offeree. For example, if a reward is offered for the return of a lost item, it cannot be claimed by someone who did not know of the reward before they returned the item.

An offer can be made to a particular person, to a class of persons or even to the whole world - Carlill v Carbolic Smoke Ball Co (1893).

What is not an offer?

(1)An invitation to treat is not an offer.

An invitation to treat means an invitation to the other party to make an offer; e.g. 'we may be prepared to sell' - Gibson v Manchester City Council (1979). An invitation to treat cannot be accepted to form a valid contract.

Examples of invitations to treat:

Most advertisements

General rule - an advertisement is an invitation to treat, not an offer, as shown in:

Partridge v Crittenden (1968)

Exception to an advertisement not being an offer

Note, however, that it would be an offer if no further negotiations were intended or expected. This is the position in Carlill v Carbolic Smoke Ball Co (1893), where the advertisers made it clear that they would pay money to anyone complying with the terms of the advertisement.

Carlill v Carbolic Smoke Ball Co (1893)

Shop window displays

Fisher v Bell (1961)

Goods on shop shelves

Pharmaceutical Society of Great Britain v Boots Cash Chemists (1953)

Tenders

A tender arises where one party issues a statement asking interested parties to submit the terms on which they are willing to carry out work or supply goods. The person inviting the tender is simply making an invitation to treat. The person submitting a tender is the offeror and the other party is free to accept or reject the offer as they please.

The effect of acceptance depends upon the wording of the invitation to tender. If the invitation states that the potential purchaser will require a certain quantity of goods, acceptance of a tender will form a contract and they will be in breach if they fail to order the stated quantity from the person submitting the tender.

If, on the other hand, the invitation states only that the potential purchaser may require goods, acceptance gives rise only to a standing offer. In this situation there is no compulsion on the purchaser to take any goods, but they must not deal with any other supplier. Each order forms a separate contract and the supplier must deliver any goods required within the time stated in the tender. The supplier can revoke the standing offer, but they must supply any goods already ordered (Great Northern Railway v Witham (1873)).

(1)  A mere statement of selling price in response to a request for information is not an offer.

Harvey v Facey (1893)

(2)  A mere statement of intention to sell is not an offer.

Harris v Nickerson (1873)

Facts: The defendant placed an advertisement in London papers that certain items, including some office furniture would be placed up for auction over three days. The claimant obtained a commission to buy the office furniture and expended time and expense to travel to bid for the office furniture. On the third day, the lots for the office furniture were withdrawn. The claimant sued for loss of time and expense.

Held: An advertisement that goods will be put up for auction does not constitute an offer to any person that the goods will actually be put up, and that the advertiser is therefore free to withdraw the goods from the auction at any time prior to the auction.

Termination of an offer

Once an offer has been terminated, it cannot be accepted. An offer can be terminated by:

• revocation
• rejection
• lapse.

Revocation

Revocation by the offeror can be made at any time before acceptance, even if the offeror has agreed to keep the offer open.

Routledge v Grant (1828)

The revocation must be communicated to the offeree, i.e. it must be brought to his actual notice.

Byrne v Leon Van Tienhoven (1880)

The revocation can be communicated by the offeror or a reliable third party.

Dickinson v Dodds (1876)

There are two exceptions to the above rules on revocation:

• If the offeree pays the offeror to keep the offer open, any revocation will amount to a breach of that collateral contract. The offeree could claim damages for the loss of the opportunity to accept the offer, although he could not accept the offer itself.
• In the case of a unilateral/option contract, the offeror cannot revoke his offer once the offeree has begun to perform the acts which would amount to acceptance.

Errington v Errington (1952)

Rejection

Rejection by the offeree may be outright or by means of a counter-offer. A counter-offer is an offer made in response to an offer.

Hyde v Wrench (1840)

Note that a mere request for further details does not constitute a counter-offer.

Stevenson v McLean (1880)

Lapse

An offer will lapse on:

• the death of the offeror (unless the offeree accepts in ignorance of the death)
• the death of the offeree
• after the expiry of a fixed time (if any) or after a reasonable time. What is a reasonable time may depend on the subject matter of the contract.

Ramsgate Victoria Hotel Co v Montefiore (1866)

If the goods are perishable the time for lapse will be very short.

 Test your understanding 2

(1)What is the legal effect of the following statement in a newspaper?

(2)Simon offers to sell his car to Tony for £600. Tony is unsure but, as he is leaving the pub, asks Simon if he can tell him by 9am the next day. Simon agrees. Later that night Tony meets Rick, a reliable mutual friend, who tells him that Simon has decided to keep the car. Tony visits Simon at 8.30am and accepts the offer.

3 Acceptance

What is acceptance?

 Acceptance is the unqualified and unconditional assent to all the terms of the offer.

It can be oral, written or by conduct - Carlill v Carbolic Smoke Ball (1893).

The offeror can stipulate a particular mode of acceptance. However, if he merely requests a mode, the offeree is not limited to that mode.

Communication

As a general rule, acceptance is not effective until it is communicated to the offeror.

Entores v Miles Far Eastern (1955)

The following conclusions can be drawn from the Entores case:

• If a fax, telex or telephone message is received during normal business hours, that is when it is communicated even though it might not be read until later.
• If a fax, telex or telephone message is received outside normal business hours, it is deemed to be communicated when the business next opens.

Note, in addition, that the offeror can expressly or impliedly dispense with the need for communication - Carlill v Carbolic Smoke Ball (1893). However, he cannot stipulate that silence is acceptance.

Felthouse v Bindley (1863)

Facts: The claimant was interested in buying a horse and had discussed with his nephew the purchase of a horse belonging to him. The claimant wrote to his nephew and stated in this letter that he assumed the horse was his for £30.15 if he did not receive a response from his nephew. The nephew did not reply, and instructed the defendant, an auctioneer he had engaged to conduct a sale of his farming stock, to withhold the horse from the auction. By mistake, the defendant allowed the horse to be put up and sold. The claimant sued the defendant for damages.

Held: An acceptance of offer will not give rise to a binding agreement unless it is expressly communicated to the individual who makes the offer. Although the nephew had the intent to sell his horse to the claimant at the offered price, he did not communicate this intention to his uncle, or do anything to bind himself. Since property was not vested in the claimant, he had no right to bring action against the defendant.

The postal rule

The postal rule is an exception to the rule that acceptance must be communicated.

The postal rule states that acceptance is complete as soon as the letter is posted.

Adams v Lindsell (1818)

Facts: The case involved two parties in the sale of wool. On 2 September, the defendants wrote to the claimants offering to sell them certain fleeces of wool and requiring an answer in the course of post. The defendants, misdirected the letter so that the claimants didn't receive it until 5 September. The claimants posted their acceptance on the same day but it was not received until 9 September. Meanwhile, on 8 September, the defendants, not having received an answer by 7 September as they had expected, sold the wool to someone else.

Held: The question for the court was whether a contract of sale had been entered into before 8 September when the wool was sold to the third party. If the acceptance was effective when it arrived at the address or when the defendant saw it, then no contract would have been made and the sale to the third party would amount to revocation of the offer. However, the court held that the offer had been accepted as soon as the letter had been posted. The defendant was therefore liable in breach of contract.

However, the postal rule only applies if:

• the letter is properly stamped, addressed and posted, and
• post is a reasonable method of communication.

It applies even if the letter is never received by the offeror.

Household Fire Insurance v Grant (1879)

However, the postal rule does not apply if the offeror states that he must actually receive the acceptance – Holwell Securities v Hughes (1974).

 Test your understanding 3

(1)On 1 September, Seller Ltd sent a fax to Buyer Ltd offering to sell a machine at a price of £10,000, and stating that Buyer Ltd must accept by 10 September. On 3 September, Buyer Ltd sent a fax to Seller Ltd asking 'Will you accept payment over three months?'.

On 5 September, Seller Ltd sold the machine to New Ltd, and on 6 September received a second fax from Buyer Ltd accepting the offer and offering to make immediate payment.

Which one of the following is correct?

AThere is no contract between Seller Ltd and Buyer Ltd because the offer was withdrawn on 5 September when the machine was sold to New Ltd.

BThere is no contract between Seller Ltd and Buyer Ltd because Buyer Ltd's fax of 3 September amounted to a counter-offer which destroyed Seller Ltd's original offer.

CSeller Ltd and Buyer Ltd contracted on 3 September.

DSeller Ltd and Buyer Ltd contracted on 6 September.

(2)A Ltd placed the following advertisement in a local newspaper:

'We are able to offer for sale a number of portable colour television sets at the specially reduced price of £5.90. Order now while stocks last.'

The advertisement contained a mistake in that the television sets should have been priced at £59.00. B Ltd immediately placed an order for 100 television sets.

Which one of the following statements is correct?

AB Ltd has accepted an offer and is contractually entitled to the 100 television sets.

BA Ltd can refuse to supply B Ltd as the advertisement is not an offer, but an invitation to treat.

CA Ltd can only refuse to sell the television sets to B Ltd if it has sold all its stock.

DAs B Ltd has not yet paid for the television sets, the company has no contractual right to them.

(3)Alf sends a letter to Bert on 1 January offering to buy Bert's antique Ming vase for £1,000. On the same day Bert sends a letter to Alf offering to sell to Alf the same antique Ming vase for £1,000.

Alf now changes his mind and wishes to know the likely legal position.

AThere is a valid contract; Alf and Bert have reached agreement and waived the need for acceptance.

BBoth have made offers on the same terms and no acceptance is necessary

CThere is agreement, but no contract since neither Alf nor Bert knew that their offers had been accepted.

DThere is a contract but is lacks consideration since neither Alf nor Bert has paid a price for the other's promise.

An offer was made by letter posted in London and delivered in Birmingham. A reply was made by facsimile machine in Manchester and received by the offeror's machine in Liverpool.

Where is the contract made?

AWhere the offer was made – in London.

BWhere the acceptance was put into the facsimile machine – in Manchester.

CWhere the acceptance was received on the facsimile machine – in Liverpool.

DWhere the letter making the offer was received – in Birmingham.

4 Consideration

The basic rule

Every simple contract must be supported by consideration from each party. However, contracts made by deed (specialty contracts) do not require consideration unless the terms of the agreement require it.

Definition

'Consideration is an act or forbearance (or the promise of it) on the part of one party to a contract as the price of the promise made to him by the other party to the contract': Dunlop Pneumatic Tyre Co v Selfridge & Co Ltd (1915).

'Some right, interest, profit or benefit accruing to one party, or some forbearance, detriment, loss or responsibility given, suffered or undertaken by the other': Currie v Misa (1875).

Types of consideration

Executory consideration is given where there is an exchange of promises to do something in the future.

Executed consideration means that the consideration is in the form of an act carried out at the time the contract is made.

Sufficient consideration

Consideration must be sufficient but need not be adequate.

Sufficient means that:

• there must be some monetary value to the consideration
• it must be capable in law of amounting to consideration.

The words 'need not be adequate' mean that there is no need for each party's consideration to be equal in value.

Chappell v Nestle Co Ltd (1959)

Thomas v Thomas (1842)

White v Bluett (1853)

A son's promise to stop complaining did not amount to consideration as it had no monetary value.

Past consideration

Past consideration is insufficient and therefore is not valid.

Consideration is past if the consideration is an act which has been wholly performed before the other party gives his promise.

Re McArdle (1951)

However, the situation in Re McArdle (1951) can be contrasted with that in Re Casey's Patent (1892).

Performance of an existing duty

As a general rule, performance of an existing statutory duty is not sufficient consideration.

Collins v Godefroy (1831)

Similarly, performance of an existing contractual duty is not consideration.

Stilk v Myrick (1809)

However, there are three exceptions:

(1)If the existing contractual or statutory duty is exceeded, there is sufficient consideration.

Glasbrook Bros Ltd v Glamorgan County Council (1925)

Hartley v Ponsonby (1857)

(2)The performance of an existing contractual duty may be sufficient if it confers some benefit of a practical nature on the other party.

Williams v Roffey Bros (1990)

(3)The performance of an existing contractual obligation is sufficient consideration to support a promise from a third party.

Shadwell v Shadwell (1860)

Illegal acts

An illegal act is insufficient to amount to consideration.

 Test your understanding 4

(1)Which of the following examples of performance amount(s) to good consideration?

(2)The law enforces bargains not bare promises. The presence of which of the following indicates the former?

(3)Consideration need not be adequate but must be:

The part-payment problem

The problem – if A accepts £400 from B in full and final settlement of a debt of £500, can A sue for the remaining £100?

General rule – the rule in Pinnel's case (1602) states that payment of a smaller sum does not discharge a debt of a greater amount. This has been affirmed in Foakes v Beer (1884).

Exceptions

There are four exceptions to the rule in Pinnel's case:

• Where the part payment is made by a third party
• composition with creditors (i.e. the creditors all agree to accept a sum which is less than they are owed)
• accord and satisfaction
  • accord means that both the parties agree freely to the part payment.
  • satisfaction (i.e. consideration) might be payment at an earlier date, payment at a different place, payment in a different currency, etc.
• the equitable doctrine of promissory estoppel.

D & C Builders v Rees (1966)

Promissory estoppel

The doctrine of promissory estoppel is based on the principles of fairness and justice. It prevents a person going back on his promise to accept a lesser amount.

The principle was established in Central London Property Trust v High Trees House (1947).

Central London Property Trust v High Trees House (1947)

The principle is subject to the following conditions:

• There must be an existing contract between the parties.
• The claimants must voluntarily waive their rights under the contract.
• There must be an intention that the defendants should rely on the waiver.
• The defendants must alter their legal position because of the waiver.

The doctrine has a number of limitations:

• It is a shield not a sword, i.e. it is a defence not a cause of action.
• It may only have a suspensory effect, as shown in the High Trees case. (The claimant's rights were suspended during World War II, but reinstated for the future once the war had finished.)
• The party seeking to use it as an equitable defence must also have acted fairly in their dealings with the claimants.

5 Privity of contract

The general rule

Only the parties to a contract:

• acquire rights and obligations under it
• can sue and be sued on it.

Exceptions

There are a number of exceptions to the general rule regarding privity of contract:

• The Contracts (Rights of Third Parties) Act 1999 allows a person who is not a party to a contract to enforce it so long as the contract was for his benefit and he was expressly identified, by name or description.
• Under the rules of land law, restrictive covenants run with the land to which they relate i.e. that a future owner will be subject to restrictions made in previous contracts.

Tulk v Moxhay (1848)

• Insurance law allows a third party to take the benefit of a contract of insurance for example where the policy is for life insurance which will pay out to a third party in the event of the policy holder's death.
• Trust law allows a beneficiary to enforce a trust.
• Agency law allows an agent to make a contract between his principal and a third party, even though the third party may be unaware that he is acting as an agent. Agency is covered later in chapter 5.
• An executor can enforce contracts made by the deceased for whom he is acting.

Beswick v Beswick (1967)

6 Intention to create legal relations

Introduction

In order to create a contract, both parties must intend to enter into a legal relationship. If it is not clear from the contract that the parties intended legal consequences then the law presumes the intention of the parties based on the type of agreement.

Domestic or social agreements

It is presumed that there is no intention to be legally bound, unless it can be shown otherwise.

Balfour v Balfour (1919)

The usual presumption that agreements between spouses living happily together are not legally enforceable does not apply when they are about to separate, or have already separated. In such instances the circumstances of the case can be shown to rebut the presumption.

Merritt v Merritt (1970)

The presumption that there is no intention to be legally bound will also be rebutted where the evidence shows that the parties made formal and/or detailed financial arrangements.

Simpkins v Pays (1955)

Jones v Vernon's Pools Ltd (1938)

Commercial agreements

It is presumed that there is an intention to be legally bound, unless it can be shown otherwise.

This is a strong presumption that can only be rebutted by clear evidence to the contrary.

 Test your understanding 5

(1)Which of the following statements is/are correct?

7 Capacity and legality

Capacity

Each party must have the legal power to bind itself contractually. For example persons under the age of eighteen (minors) and persons of unsound mind or under the influence of alcohol have limitations on their power to contract.

Legality

The courts will not enforce a contract which is deemed to be illegal.

8 Contractual terms

Terms versus representations

A statement, written or oral, made during the negotiations leading to a contract, may be a term of the contract or merely a representation inducing the contract.

A representation is something that is said by the offeror in order to induce the offeree to enter into the contract. It may or may not become a term of that contract.

The distinction between terms and representations is important because, if a statement is untrue, the remedies available to the innocent party differ:

• if the representation becomes a term of the contract, the innocent party has remedies for breach of the term as well as for misrepresentation
• if, however, the representation does not become a term of the contract, the innocent party will have remedies only for misrepresentation which are based on equitable remedies (see section 11).

Sources of terms

Terms may be express or implied.

Express terms are those specifically inserted into the contract by one or both of the parties. They must be clear for them to be enforceable.

Scammell v Ouston (1941)

Implied terms are not expressly included in the contract, but they are nevertheless still part of the contract. They may be implied by statute or by the courts, or rarely by custom. An example of this is a contract of employment which has implied terms such as an employee's duty to obey lawful and reasonable orders (see Chapter 4).

Express terms will generally override implied terms. However, some statutory terms cannot be overridden by express agreement (for example, terms inserted by the Sale of Goods Act 1979).

The sources of terms are summarised in the following diagram:

The Moorcock (1889)

There was an agreement by a wharf owner to permit a shipowner to unload his ship at the wharf. The ship was damaged when, at low tide, it was grounded on the bottom of the river on a hard ridge.

The court implied a term into the agreement that the river bottom would be reasonably safe for ships to dry out on.

Types of terms

There are three types of terms:

• conditions
• warranties
• innominate terms.

The distinction between the types of term is important because it determines the remedies that may be available in the event of a breach.

Conditions

  A condition is an important term going to the root of the contract.

Breach can result in damages or discharge or both. Discharge entitles the innocent party to repudiate the contract and claim damages.

Poussard v Spiers & Pond (1876)

Warranties

A warranty is a less important term, which is incidental to the main purpose of the contract.

Breach of warranty results in damages only.

Bettini v Gye (1876)

Innominate terms

An innominate or indeterminate term is neither a condition nor a warranty.

The remedy depends on the effects of the breach:

• if trivial – damages only i.e. term is treated as if it were a warranty.
• if serious – damages, discharge or both i.e. term is treated as if it were a condition.

The Hansa Nord (1976)

 Test your understanding 6

(1)Which one of the following is incorrect?

(2)Dee Ltd has broken one of the terms of its contract with E Ltd. If that term is a warranty, which of the following is correct?

(3)'An obligation, which though it must be performed, is not so vital that a failure to perform it goes to the substance of the contract' describes a:

(4)Which of the following statements is incorrect?

9 Exclusion clauses

Definition

An exclusion clause (or exemption clause) is a term that seeks to exclude or limit a party's liability for breach of contract.

Common law rules

In order to be valid an exclusion clause must satisfy two conditions:

• it must be incorporated into the contract
• its wording must cover the loss.

An exclusion clause can be incorporated into a contract by:

• signature
• notice
• previous dealings.

Signature

The case of L'Estrange v Graucob (1934) established that a clause is incorporated by signature even if the signatory did not read or understand the document.

However, the situation in L'Estrange v Graucob (1934) can be contrasted with Curtis v Chemical Cleaning (1951) in which it was held that a signature does not incorporate the clause if the effect of the term was misrepresented.

Curtis v Chemical Cleaning (1951)

Liability for damage to a wedding dress was not excluded due to misrepresentation of the clause.

Notice

For an exclusion clause to be incorporated by notice, reasonable steps must have been taken to bring it to the attention of the other party at the time the contract was made. What are 'reasonable steps' depend on the circumstances.

Thompson v LMS Railway (1930)

Olley v Marlborough Court (1949)

A clause can be incorporated by notice, provided it was given before making the contract. A notice in a hotel room did not exclude liability as the contract was made at the reception desk.

Previous dealings

For an exclusion clause to be incorporated by previous dealings, there must have been a consistent course of dealings between the parties.

Spurling v Bradshaw (1956)

However, Spurling v Bradshaw (1956) can be contrasted with Hollier v Rambler Motors (1972) in which three or four deals between a garage and a private customer over a five-year period were held to be insufficient to constitute a course of dealings.

The wording must cover the loss

Under the contra proferentem rule, the courts interpret the words narrowly against the interests of the person seeking to rely on the clause.

Photo Productions Ltd v Securicor (1980)

Statutory rules

Even if a clause passes the common law test, it must also satisfy the statutory rules. These are contained in:

• UCTA 1977
• UTCCR 1999.

Unfair Contract Terms Act (UCTA) 1977

UCTA 1977 applies to exemption clauses in contracts made in the course of business.

It states that a clause exempting liability for:

• death or personal injury due to negligence is void
• other loss due to negligence is void unless reasonable.

Where there is any standard form contract (which could be between two businesses) or any contract between a business and a consumer, any attempt by a business to exclude or restrict liability for breach depends on whether the clause is reasonable.

The burden of proving reasonableness is on the party seeking to rely on the clause. In assessing whether a term is unfair or unreasonable, the court has regard to:

• the strength of the bargaining positions of the parties
• whether the buyer received an inducement to agree to the term
• whether the buyer knew or ought to have known of the existence and extent of the term
• the ability of the party to insure against the liability.

St Albans City and District Council v International Computers Ltd (1994)

Unfair Terms in Consumer Contract Regulations (UTCCR) 1999

UTCCR 1999 applies to contracts where:

• the seller is acting in the course of business
• the other party is a consumer and
• the terms have not been individually negotiated.

The regulations apply to ALL terms of a contract not just exclusion clauses.

A term is unfair if:

• it is not expressed in plain, intelligible language
• contrary to the requirement of good faith, it causes a significant imbalance in the parties' rights and obligations and this is to the detriment of the consumer.

A term is unfair if it allows the seller to alter the terms of the contract unilaterally without a valid reason which is specified in the contract: Sched 3 UTCCR 1999.

If a term is unfair, it is not binding on the consumer, though the rest of the contract can stand.

Summary

 Test your understanding 7

(1)By virtue of the UCTA 1977, an attempt by any person to exclude or restrict liability for damage to property caused by negligence is:

(2)Dave went to drop off his watch for repair. He was handed a note to sign that contained the words, amongst many lines of text, 'the management are not liable for loss or damage to your watch howsoever caused'. He did not read the note but signed it. His watch, worth £350, was lost in transit by the jeweller.

10 Breach of contract

What is meant by breach of contract?

Breach of contract occurs where one of the parties to the agreement fails to comply, either completely or satisfactorily, with their obligations under it.

Actual breach is where the breach occurs on the due date for performance.

Anticipatory breach occurs where, before the due date for performance, a party shows an intention not to perform his contractual obligations. It is referred to as renunciation.

Anticipatory breach may be express or implied.

Express anticipatory breach occurs where one of the parties declares, before the due date for performance, that they have no intention of carrying out their contractual obligations.

Hochster v De La Tour (1853)

Implied anticipatory breach occurs where one of the parties does something which makes subsequent performance of their contractual undertaking impossible.

Omnium D'Enterprises v Sutherland (1919)

What are the effects of anticipatory breach?

Anticipatory breach does not automatically bring the contract to an end. The innocent party has two options:

• treat the contract as discharged and bring an action for damages immediately, without waiting for the contractual date of performance as in Hochster v De La Tour (1853)
• elect to treat the contract as still valid, complete his side of the bargain and then sue for payment by the other side.

White & Carter (Councils) v McGregor (1961)

The effect of White & Carter (Councils) v McGregor (1961) apparently runs contrary to the duty to mitigate losses, as it involves the party in breach paying for more than the mere profit on the contract. There is, however, an element of danger in not accepting the repudiation of the contract when it first becomes apparent. For example, where the innocent party elects to wait for the time of performance, he takes the risk of the contract being discharged for some other reason and thus of losing his right to sue on the basis of the breach of contract.

 Test your understanding 8

(1)Dee Ltd has broken one of the terms of its contract with E Ltd. If that term is a condition, which of the following is correct?

(2)Renunciation occurs when:

(3)A Ltd contracts with B Ltd to supply 1½ tonnes of cement each day for a 100 day period. The thirteenth delivery is defective. Which of the following is correct?

11 Damages

Introduction

Damages are a common law remedy. They are available as of right for breach of contract.

Damages are intended to be compensatory not punitive.

Liquidated damages and penalty clauses

Where a contract provides for the payment of a fixed sum on breach, it may either be a liquidated damages clause or a penalty clause.

Liquidated damages are a genuine pre-estimate of the expected loss. The amount stated is the amount of damages claimable. The clause is enforceable by the court.

Dunlop Pneumatic Tyre Co v New Garage and Motor Co (1915)

A penalty clause threatens large damages for breach. The amount is often very large in relation to the expected loss. It is unenforceable.

A clause is presumed to be a penalty clause if:

• the stipulated sum is extravagant in comparison with the maximum loss that could be incurred
• the same sum is payable in respect of one or more breaches, both trifling and serious
• the sum stipulated is larger than the amount which would actually be payable if the contract were performed.

Assessment of unliquidated damages

Where the contract does not make any provision for damages, the court will determine the damages payable. These are known as unliquidated damages.

There are two factors to consider in determining the amount of unliquidated damages:

• remoteness of loss (i.e. what losses can be claimed for?) and
• measure of damages (i.e. how much are those losses worth?).

Remoteness of loss

Damages cannot not be recovered for all losses suffered. Some losses are too remote.

A loss is not too remote:

• if it arises naturally from the breach (general damages or normal loss)
• it may reasonably be supposed to be within the contemplation of the parties, at the time they made the contract, as a probable result of the breach (special damages or abnormal loss).

Hadley v Baxendale (1854)

Victoria Laundry v Newman Industries (1949)

Jarvis v Swans Tours (1973)

Damages cannot usually be recovered for loss of enjoyment, unless the contract is one designed to give enjoyment. In this case, it was a holiday.

Measure of damages

The measure of damages is the amount which will put the claimant in the position he would have been in had the contract been properly performed.

This is sometimes described as damages for loss of bargain.

It is particularly difficult to measure damages in cases involving building contracts as there are two ways in which the damages could, in theory, be measured:

Athe damages could be the difference in value between the building as it has been completed and its value if it had been properly completed, or

Bthe cost of rebuilding so that it meets the required specifications.

The usual measure of such damages is the cost of repairing the faulty work. However, this may not be the case where the costs of remedying the defects are disproportionate to the difference in value between what was supplied and what was ordered.

Ruxley Electronics and Construction Ltd v Forsyth (1995)

Reliance damages enable the claimant to recover compensation for expenses incurred in performing his part of the contract before its breach. Where applicable, they are given in place of damages for loss of bargain; the claimant cannot receive both.

Anglia TV Ltd v Reed (1972)

Further points:

• If there is no actual loss, the claimant can recover only nominal damages.
• The claimant must take reasonable steps to mitigate (i.e. reduce) their loss.

Brace v Calder (1895)

• A notional deduction may be made to reflect taxation.

BTC v Gourley (1956)

• Difficulty in evaluating losses does not prevent their recovery. In Chaplin v Hicks (1911), an amount was awarded representing the loss of opportunity to audition for a theatre role even though there was no guarantee of the claimant being awarded the role.

 Test your understanding 9

In the event of a breach of contract, what is the purpose of damages?

ITo punish the contract breaker.

II To compensate the innocent party.

IIITo put the innocent party in the same position as if the contract had been carried out correctly.

A(I) only.

B(II) and (III) only.

C(III) only.

D(I), (II) and (III).

12 Equitable remedies

Equitable remedies are only available at the discretion of the court. They are not granted if:

• damages are an adequate remedy
• the claimant has acted unfairly (i.e. he who comes to equity must come with clean hands)
• the order would cause undue hardship
• the order would require the constant supervision of the court
• there is undue delay in seeking the remedy (i.e. delay defeats the equities).

Warner Brothers Pictures Inc v Nelson (1936)

Page One Records v Britton (Trading as The Troggs) (1967)

 Test your understanding 10

(1)Which of the following statements is correct?

(2)Which one of the following contracts might be specifically enforceable?

(3)Which one of the following is not an equitable remedy?

(4)In breach of contract, C Ltd refused to sell a motor car to D Ltd at the agreed price of £10,000. If the type of motor car is readily available on the market at a price of £9,000, which one of the following is correct?

13 Chapter summary

Test your understanding answers

 Test your understanding 1

(1)B

2.  C

3.  A

 Test your understanding 2

(1)D

(2)B

 Test your understanding 3

(1)D

(2)B

(3)C

(4)C

 Test your understanding 4

(1)B

(2)B

(3)B

 Test your understanding 5

(1)A

 Test your understanding 6

(1)C

(2)C

(3)A

(4)A

 Test your understanding 7

(1)A

(2)D

 Test your understanding 8

(1)D

(2)B

(3)B

 Test your understanding 9

B

The aim of damages in contract is usually to put the injured party into the position he would have been in if the contract had been properly performed – often referred to as bargain loss. However, in some cases, the courts award 'reliance losses', i.e. losses incurred in trying to perform the contract prior to the breach. Both (ii) and (iii) are therefore purposes of awarding damages. Damages are not intended as a punishment of the person in breach of the contract.

 Test your understanding 10

(1)C

(2)A

(3)A

(4)C

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