Breach of a contract occurs where one of the parties to the agreement fails to comply, either completely or satisfactorily, with their obligations under it. A breach of contract may occur in three ways:
(i) where a party, prior to the time of performance, states that they will not fulfil their contractual obligation;
(ii) where a party fails to perform their contractual obligation;
(iii) where a party performs their obligation in a defective manner.
Any breach will result in the innocent party being able to sue for an appropriate remedy. In addition, however, some breaches will permit the innocent party to treat the contract as discharged. In this situation they can refuse either to perform their part of the contract, or to accept further performance from the party in breach.
The principal remedies for breach of contract are:
– damages;
– quantum meruit;
– specific performance;
– injunction.
Damages
Every failure to perform a primary obligation is a breach of contract. The secondary obligation on the part of the contract-breaker, by implication of the common law, is to pay monetary compensation to the other party for the loss sustained by him in consequence of the breach (Photo Productions Ltd v Securicor Transport Ltd (1980)).
Such monetary compensation for breach of contract is damages. There are two issues to consider: remoteness and measure.
(i) Remoteness of damage
This involves deciding how far down a chain of events a defendant is liable. The rule in Hadley v Baxendale (1854) states that damages will only be awarded in respect of losses which arise naturally, i.e. in the natural course of things; or which both parties may reasonably be supposed to have contemplated, when the contract was made, as a probable result of its
breach.
The effect of the first part of the rule in Hadley v Baxendale is that the party in breach is deemed to expect the normal consequences of the breach, whether they actually expected them or not.
Under the second part of the rule, however, the party in breach can only be held liable for abnormal consequences where they have actual knowledge that the abnormal consequences might follow. Thus in Victoria Laundry Ltd v Newham Industries Ltd (1949) the plaintiff was able to claim for damages with respect to the normal profits, but could not claim abnormal profits which would have resulted from an especially lucrative contract, which the defendant knew nothing about.
(ii) Measure of damages
Damages in contract are intended to compensate an injured party for any financial loss sustained as a consequence of another party’s breach. The object is not to punish the party in breach, so the amount of damages awarded can never be greater than the actual loss suffered. The aim is to put the injured party in the same position they would have been in had the contract
been properly performed.
Even damages of a non-financial nature can be recovered (Jarvis v Swan Tours Ltd (1973)).
It is possible, and common in business contracts, for the parties to an agreement to make provisions for possible breach by stating in advance the amount of damages that will have to be paid in the event of any breach occurring. Damages under such a provision are known as liquidated damages. They will only be recognised by the court if they represent a genuine pre-estimate of loss, and are not intended to operate as a penalty against the party in breach (Dunlop v New Garage & Motor Co (1915)).
Quantum meruit
Quantum meruit means that a party should be awarded ‘as much as he had earned’, and such an award can be either contractual or quasi-contractual in nature. If the parties enter into a contractual agreement without determining the reward that is to be provided for performance, then in the event of any dispute, the court will award a reasonable sum.
Payment may also be claimed on the basis of quantum meruit, where a party has carried out work in respect of a void contract (Craven-Ellis v Canons Ltd (1936)).
Specific performance An order for specific performance requires the party in breach to complete their part of the contract. The following rules govern the award of such a remedy.
(i) specific performance will only be granted in cases where the common law remedy of damages is inadequate. It is most commonly granted in cases involving the sale of land, where the subject matter of the contract is unique.
(ii) specific performance will not be granted where the court cannot supervise its enforcement. For this reason it will not be available in respect of contracts of employment or personal service (Ryan v Mutual Tontine Westminster Chambers Association (1893)).
(iii) specific performance, as an equitable remedy, will not be granted where the plaintiffs themselves have not acted properly.
Injunction
This is also an equitable order of the court, which directs a person not to break their contract. An injunction will only be granted to enforce negative covenants within the agreement, and cannot be used to enforce positive obligations (Whitwood Chemical Co v Hardman (1891)). However, it can have the effect of indirectly enforcing contracts for personal service (Warner Bros v Nelson
(1937)).
Quasi-contractual remedies are based on the assumption that a person should not receive any undue advantage from the fact that there is no contractual remedy to force them to account. An important quasi-contractual remedy is an action for money paid and received. If no contract comes into existence for reason of a total failure of consideration, then under this action, any goods or money received will have to be returned to the party who supplied them. |
