Breach of a Contract and Its Remedies

1.1. Origin of the report

This study and the resulting report was conducted and submitted as a partial requirement for
the course Legal Environment of Business (BUS 3!"# The report was authori$ed by
%r#Sayed &obayet ferdous course instructor of BUS 3!' and (ssistant )rofessor'
*epartment of Business (dministration' East +est University#
1.2 Objective
The ob,ective of this report is to address the topic -Breach of .ontract and its remedies/# This
is a study to identify and observe the ma,or types and ways of breach of contract and its
possible way for appropriate remedies# To find out the solutions for this topic and also
e0plore its theme and content this report has been prepared# To discuss about its remedies and
ma1e it more specific with an appropriate case refference are the other ob,ectives of the
report#
.ontract is an essential part of business# (s being a business student it will be vulnerable if
we don2t gather appropriate 1nowledge in this vital part# 3or this purpose our report also
analy$es the effect of breach in different ways with various case references and ultimately
impact of all of this in our term paper#
!
1.3. Scopes and methodology
Since it2s not possible to conduct analysis on the large number data' some specified tables
and articles have been chosen for analysis# Throughout the study many things regarding
Breach of .ontract and its remedies which contributes very small part in development of
world2 trade was learnt#
Secondary research was conducted to identify present situation or position of
Bangladesh
.onsequently' this study is grounded in observation data obtained from recipients of
articles' statements and some research paper from different countries and different
authors#
1.4. Restrictions
To complete this term paper we found some limitations and restrains#
The main limitation of the study is the unavailability of all information# (t the
beginning stage of the study' the ma,or problem was found out the relevant
information# Sometimes after getting the information' it was found that data was not
completed#
(nother significant limitation was time constrain# 4t was difficult to perform all the
analysis about international trade within a shorter period of time#
There were also technical problems which includes computer problem' virus
problems' software problem and a ma,or problem Load shedding'
.ollection of data was more or less time consuming#
La1e of in5depth understanding of certain terms and concepts prevented us from going
into details#
6
2. Introduction
.onceptuali$ations and classifications are crucial for understanding and analysis of any
phenomenon' including legal ones including this breach of contract and its remedies#
.oncepts and categories shape the way we thin1 about anything' including legal doctrines
and ,udicial decisions# 7nce a certain classification ta1es root in our minds' however' it can
dominate our thin1ing and thus preclude us from seeing the entire' comple0 picture# 3or
e0ploring the whole idea in a nutshell this termpaper has been prepared#
3.1 hat is an !greement"
(n agreement between two or more competent parties in which an offer is made and
accepted' and each party benefits# The agreement can be formal' informal' written' oral or ,ust
plain understood# Some contracts are required to be in writing in order to be enforced# (6" (n
agreement between two or more parties which creates obligations to do or not do the specific
things that are the sub,ect of that agreement# E0amples of a contract are a lease' a promissory
note' or a rental agreement#
This term' in its more e0tensive sense' includes every description of agreement' or obligation'
whereby one party becomes bound to another to pay a sum of money' or to do or omit to do a
certain act8 or' a contract is an act which contains a perfect obligation# 4n its more confined
sense' it is an agreement between two or more persons' concerning something to be' done'
whereby both parties are hound to each other' or one is bound to the other# Blac1stone defines
it to be an agreement' upon a sufficient consideration' to do or not to do a particular thing# (
contract has also been defined to be a compact between two or more persons#
.ontracts are divided into e0press or implied# (n e0press contract is one where the terms of
the agreement are openly uttered and avowed at the time of ma1ing' as to pay a stated price
for certain goods#
4.1 #ischarge of a contract
The duties under a contract are discharged when there is a legally binding termination of such
duty by a 9oluntary (ct of the parties or by operation of law# (mong the ways to discharge a
contractual duty are impossibility or impracticability to perform personal services because of
death or illness8 or impossibility caused by the other party#
3
The two most significant methods of voluntary discharge are (ccord and Satisfaction and
novation# (n accord is an agreement to accept some performance other than that which was
previously owed under a prior contract# Satisfaction is the performance of the terms of that
accord# Both elements must occur in order for there to be discharge by these means#
( novation involves the substitution of a new party while discharging one of the original
parties to a contract by agreement of all three parties# ( new contract is created with the same
terms as the original one' but the parties are different#
.ontractual liability may be voluntarily discharged by the agreement of the parties' by
estoppel' and by the cancellation' intentional destruction' or surrender of a contract under seal
with intent to discharge the duty#
The discharge of a contractual duty may also occur by operation of law through illegality'
merger' statutory release' such as a discharge in ban1ruptcy' and ob,ective impossibility#
%erger ta1es place when one contract is e0tinguished because it is absorbed into another#
4.2 ays of #IS$%!R&'
*ischarge of a contract refers to the way in which it comes to an end# .ontracts can come to
an end in the following ways:
!# by performance
6# by agreement
3# by frustration
;# by breach
Each one of these methods of discharge will be considered#
4.2.1 Discharge by performance
The contract comes to an end when both parties perform their contractual obligations#
)erformance must substantially correspond with what the parties agreed allowing for minor
or trivial defaults#
4.2.2 Discharge by agreement
The parties themselves can agree to end the contract' form a new contract or vary the original
one#)erformance of a contract may be sub,ect to a condition precedent allowing for
;
discharge upon the failure of a certain event < e#g# in a contract for the sale of land where the
purchaser has been unable to obtain finance#
( contract may contain a term that if some specified event occurs after the contract is formed
then it may be terminated at the option of either or one of the parties# This is a condition
subsequent e#g# the return of an item that is defective for a refund#
The parties may enter a new contract to end the old one# This is called novation# 7bviously
the new contract must satisfy all the usual rules for contractual formation#
The parties can also release each other from their remaining obligations < called release and
discharge8 or they may release each other from some of their obligations and retain or add
others < called variation#
4.2.3 Discharge by frustration
( contract automatically comes to an end if it is discharged by frustration#
3our conditions must be satisfied for frustration to discharge a contract:
!# an unforeseeable event < something that the parties did not e0pect to happen and
didn2t ma1e provision for in the contract
6# that is no fault of either party < it must not be a self5induced impossibility as in
Maratime National Fish v Ocean Trawlers
3# that makes performance impossible < i#e# death of one of the parties where personal
performance is necessary8 destruction of the sub,ect matter of the contract (as in
Taylor v Caldwell <"8 a change in the law ma1ing a previously legal contract illegal <
e#g# contracts with enemy aliens # The fact that the contract is more difficult or more
e0pensive to perform is not sufficient (.ontrast Cornish v Kanematsu <"8
;# or radically different than agreed< i#e# due to destruction of the ob,ect or purpose of
the contract
(t common law where there has been frustration the loss lies where it falls < i#e# only
obligations incurred prior to the frustrating event can be enforced < e#g# an e0isting liability to
pay for goods whether or not delivered# 3uture obligations are unenforceable# Each party
must suffer their own losses#
=
4.2.4 Discharge by breach
+here one of the parties fails to perform their side of the contract the innocent party may be
able to terminate the contract and commence proceedings for damages (or other appropriate
remedy"#
The effect of termination is to release both parties from future obligations' but not those that
have already been incurred (e#g# the obligation to pay for goods received or wor1 done"8 or
that are intended to continue after the contract has come to an end (e#g# restraint of trade
clauses in employment contracts"#
(. ays of )reach
>ot all breaches entitle the innocent party to terminate the contract# 4t is only breaches of
conditions (or essential terms" or fundamental breaches (of innominate terms" that allow for
termination# Breaches of warranties (or minor terms" do not allow for termination' however'
the innocent party is entitled to sue for damages#
*etermining whether a term is a condition or warranty depends on the objective intention of
the parties# .onditions are terms that go to the heart or root of the contract# They are terms of
such importance that the innocent party would not have entered into the contract unless
assured of a strict and literal performance of them < e#g# as in a contract for the sale of land
where the conditions include the purchase price' the description of the property and
settlement date# +arranties are terms of lesser importance < e#g# in the sale of a house the
removal by the vendor of fi0tures' that is' items that are intended to stay' such as the stove or
built in wardrobes#
Breach of contract may be either actual or anticipatory#
(ctual breach occurs where one party refuses to form his side of the bargain on the due date
or performs incompletely# 3or e0ample: )oussard v Spiers and Bettini v ?ye#
.1. !nticipatory breach
+here one party indicates that they are unwilling or unable to perform their side of the
contract the innocent party has two choices:

!# to accept the other party"s repudiation' terminate the contract forthwith and
commence legal proceedings for damages (or another appropriate remedy8 5 e#g# the
purchaser of a property indicates to the vendor that they are unable to obtain finance
to meet the settlement date8
6# to continue to perform the contract #affirm$ and wait until the other party has
breached the contract' then commence legal proceedings < e#g# the vendor of property
waits until the purchaser breaches the settlement date then commences legal
proceedings#
@ochster v *e La Tour is an e0ample#
*. 'ffects of breach
( breach of contract' no matter what form it may ta1e' always entitles the innocent party to
maintain an action for damages' but the rule established by a long line of authorities is that
the right of a party to treat a contract as discharged arises only in three situations# The
breaches which give the innocent party the option of terminating the contract are:
%.1 &enunciation
&enunciation occurs where a party refuses to perform his obligations under the contract# 4t
may be either e0press or implied# @ochster v *e La Tour is a case law e0ample of
e0pressrenunciation# &enunciation is implied where the reasonable inference from the
defendant2s conduct is that he no longer intends to perform his side of the contract# 3or
e0ample: 7mnium *2Enterprises v Sutherland#
%.2 'reach of condition
The second repudiatory breach occurs where the party in default has committed a breach of
condition# Thus' for e0ample' in )oussard v Spiers the employer had a right to terminate the
soprano2s employment when she failed to arrive for performances#
%.3 (undamental breach
The third repudiatory breach is where the party in breach has committed a serious (or
fundamental" breach of an innominate term or totally fails to perform the contract#
A
( repudiatory breach does not automatically bring the contract to an end# The innocent party
has two options:
@e may treat the contract as discharged and bring an action for damages for breach of
contract immediately# This is what occurred in' for e0ample'
@ochster v *e La Tour#
@e may elect to treat the contract as still valid' complete his side of the bargain and then sue
for payment by the other side# 3or e0ample' +hite and .arter Ltd v %c?regor#
( fundamental breach also refers to a breach of a term that is not a condition' but the
consequences of the breach are so serious as to give the innocent party a right to terminate the
contract < e#g# Baltic Shipping v Dillon (?raw !#;#A"# 4n this case it was a minor term of the
contract between the cruise operators and the passengers that the ship would be seaworthy
(although this would have been a ma,or term between the cruise operators and the ship
ownersB" The term was breached with grave consequences# The passengers were entitled to
terminate their contracts with the cruise operators and sue for damages#
+. Observations through breach of contract and its remedies
*amages are the basic remedy available for a breach of contract# 4t is a common law remedy
that can be claimed as of right by the innocent party# The ob,ect of damages is usually to put
the in,ured party into the same financial position he would have been in had the contract been
properly performed# Sometimes damages are not an adequate remedy and this is where the
equitable remedies (such as specific performance and in,unction" may be awarded#
7! "emedies availa#le
( number of possible remedies are available for breach of contract# The most available
remedy to be awarded' of course# +ill be a sum of money compensation in the form of
unliquidated damage# @owever' the other damage may be awarded according to the
appropriate circumstances of the particular case#
Broadly' a remedy may be awarded either under
-The Common Law; or
-Equitable in character.
.ommon law remedies are of four main types8
C
Dunliquidated damage E these are assessed by the court according to the breach itself and the
losses arising from it#
There are two tests are to be satisfied in order to unliquidated damage:
I. The loss in respect of which the claimant can recover (for what can the
claimant recover?)
II. The quantit of !ama"es available (how much can the claimant recover?)
@owever' the two question (+hat and how" actually concerns of causation#
)ausation of loss
3act: ( decorator was entrusted with 1eys to the premises in which he was contracted to
wor1# +hen he left the premises unloc1ed' a thief entered and stole property#
@eld: The decorator was liable for the loss that was the result of his failures to comply with
his contractual duty to secure the premises properly on leaving#
7.2 Observations regarding causation of loss
The thief was the direct cause of the loss but the theft could not have occurred but for the
breach of duty by the decorator#
So here we observe that remedies for the loss will only be provided if the victim was the
direct cause for the certain loss or breach of the contracts#
&emoteness of damage:
The general principal is that damages will never be awarded for a loss that is too remote a
consequence of the beach# There are two test still remain in order to start out the remoteness
of damage#
i. #easure! ob$ective (what loss is a natural consequence of the breach)%
i. #easure! sub$ectivel an! base! on the specific &nowle!"e of potential
losses that is in the min!s of both parties at the time the contract is forme!.
.ase: 9ictoria Laundry (+indsor" Ltd# 9s >ewman 4ndustries Ltd
3act: * sold a large boiler to the laundry company and fail to deliver in due time' deliver five
months later from the date of contact# * Fnew that ) wanted the boiler for immediate use in
G
their business# Laundry .ompany sues for usual profits of ! pounds per wee1 from the date
of the breach#
@eld: Laundry .ompany recovers for loss of profits on the ordinary business but not damages
for the loss of profits' because * did not 1now of these contracts at the time they entered into
the contract with Laundry .ompany#
7.3 Observations regarding Remoteness of damage:
4n this specific case of remoteness of damage we have observe that after getting any 1ind of
claim regarding the breach of contract when its come towards court the at first ma1e the
ob,ective test and then later on the ma1e sub,ective test#
They do ob,ective test for to identify the point of view of remedies in the voice of the
claimant and later on the ma1e a sub,ective test to find out does the other people will taught
in the same way or they have any different suggestions regarding the claimant claim about
the remedies for the damage#
7.4 Observations regarding Nature
The ma,or remedy available at common law for breach of contract is an award of damages#
This is a monetary sum fi0ed by the court to compensate the in,ured party# 4n order to recover
substantial damages the innocent party must show that he has suffered actual loss8 if there is
no actual loss he will only be entitled to nominal damages in recognition of the fact that he
has a valid cause of action#
4n ma1ing an award of damages' the court has two ma,or considerations:
&emoteness < for what consequences of the breach is the defendant legally
responsibleH
The measure of damages < the principles upon which the loss or damage is evaluated
or quantified in monetary terms#
The second consideration is quite distinct from the first' and can be decided by the court only
after the first has been determined#
!I
7.! Observations regarding Remoteness of loss
The rule governing remoteness of loss in contract was established in @adley v Ba0endale#
The court established the principle that where one party is in breach of contract' the other
should receive damages which can fairly and reasonably be considered to arise naturally from
the breach of contract itself (Jin the normal course of things2"' or which may reasonably be
assumed to have been within the contemplation of the parties at the time they made the
contract as being the
)robable result of a breach# Thus' there are two types of loss for which damages may be
recovered:
!# What arises naturally; and
2. What the parties could foresee when the contract was made as the likely result of breach.
(s a consequence of the first limb of the rule in @adley v Ba0endale' the party in breach is
deemed to e0pect the normal consequences of the breach' whether he actually e0pected them
or not#
Under the second limb of the rule' the party in breach can only be held liable for
abnormal consequences where he has actual 1nowledge that the abnormal consequences
might follow or where he reasonably ought to 1now that the abnormal consequences might
follow < 9ictoria Laundry v >ewman 4ndustries#
*he measure #or quantum$ of damages
4n assessing the amount of damages payable' the courts use the following principles:
The amount of damages is to compensate the claimant for his loss not to punish the
defendant#
*amages are compensatory < not restitutionary#
The most usual basis of compensatory damages is to put the innocent party into the same
financial position he would have been in had the contract been properly performed# This is
sometimes called the Je0pectation loss2 basis# 4n 9ictoria Laundry v >ewman 4ndustries' for
e0ample' 9ictoria Laundry were claiming for the profits they would have made had the boiler
been installed on the contractually agreed date#
Sometimes a claimant may prefer to frame his claim in the alternative on the Jreliance loss2
basis and thereby recover e0penses incurred in anticipation of performance and wasted as a
!!
result of the breach < (nglia Television v &eed# 4n a contract for the sale of goods' the
statutory (Sale of ?oods (ct !GAG" measure of damages is the difference between the mar1et
price at the date of
the breach and the contract price' so that only nominal damages will be awarded to a claimant
buyer or claimant seller if the price at the date of breach was respectively less or more than
the contract price#
4n general' damages are not awarded for non5pecuniary loss such as mental distress and loss
of en,oyment# E0ceptionally' however' damages are awarded for such losses where the
contract2s purpose is to promote happiness or en,oyment' as is the situation with contracts for
holidays < Karvis v Swan Tours# The innocent party must ta1e reasonable steps to mitigate
(minimise" his loss' for e0ample' by trying to find an alternative method of performance of
the contract: Brace v .alder#
7." Observations regarding #i$uidated damages clauses and %enalt& clauses
4f a contract includes a provision that' on a breach of contract' damages of a certain amount
or calculable at a certain rate will be payable' the courts will normally accept the relevant
figure as a measure of damages# Such clauses are called liquidated damages clauses#
The courts will uphold a liquidated damages clause even if that means that the in,ured party
receives less (or more as the case may be" than his actual loss arising on the breach# This is
because the clause setting out the damages constitutes one of the agreed contractual terms <
.ellulose (cetate Sil1 .o Ltd v +idnes 3oundry Ltd#
@owever' a court will ignore a figure for damages put in a contract if it is classed as a penalty
clause < that is' a sum which is not a genuine pre5estimate of the
7.7 Observations regarding e'%ected loss on breach
This could be the case where:
!# The prescribed sum is e0travagant in comparison with the ma0imum loss that could follow
from a breach#
6# The contract provides for payment of a certain sum but a larger sum is stipulated to be
payable on a breach#
!6
3# The same sum is fi0ed as being payable for several breaches which would be li1ely to
cause varying amounts of damage#
(ll of the above cases would be regarded as penalties' even though the clause might be
described in the contract as a liquidated damages clause# The court will not enforce payment
of a penalty' and if the contract is bro1en only the actual loss suffered may be recovered
(3ord %otor .o (England" Ltd v (rmstrong"#
7.( Observations regarding )$uitable remedies
+pecific performance
This is an order of the court requiring performance of a positive contractual obligation#
Specific performance is not available in the following circumstances
*amages provide an adequate remedy#
+here the order could cause undue hardship#
+here the contract is of such a nature that constant supervision by the court would be
required' eg' &yan v %utual Tontine (ssociation#
+here an order of specific performance would be possible against one party to the
contract' but not the other#
+here the party see1ing the order has acted unfairly or unconscionably# @e is barred
by the ma0im J@e who comes to Equity must come with clean hands2#
+here the order is not sought promptly the claimant will be barred by the ma0ims
J*elay defeats the Equities2 and JEquity assists the vigilant but not the indolent2#
4n general the court will only grant specific performance where it would be ,ust and equitable
to do so
!3
7.* Observations regarding In+unction
(n in,unction is an order of the court requiring a person to perform a negative obligation#
4n,unctions fall into two broad categories:
)rohibitory in,unction' which is an order that something must not be done#
%andatory in,unction' which is an order that something must be done' for e0ample to
pull down a wall which has been erected in breach of contract#
Li1e specific performance it is an equitable remedy and the court e0ercises it discretion
according to the same principles as with specific performance' eg' )age 7ne &ecords Ltd v
Britton and +arner Brother2s v >elson#
Termination for repudiatory breach releases the parties from all future obligations under
the contract# ( repudiatory breach can occur in relation to a condition or warranty#
4f the innocent party does something which indicates their intention to affirm (or confirm"
the contract' they cannot later terminate < e#g# a contract for the sale of land where the vendor
1nows that the purchaser is unable to meet the settlement date but is prepared to give the
purchaser more time to obtain the necessary purchase price# The vendor cannot now
terminate the contract and sue for damages#
&eferences
!# http:LLen#wi1ipedia#orgLwi1iLBreachEofEcontract
6# www#lectlaw#comLfilesLbulIC#htm
3# law#freeadvice#com M Law (dvice M .ontract Law
;# www#law#harvard#eduLprogramsLolinEcenterL###L pdf LShavellE=3!# pdf
=# www#goldsmithibs#comL###L 'reach,of,)ontract L###L 'reach,of,)ontract 5
# frontpage#cbs#d1LlawLcommissionEon###contract###L
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