Download breach of contract

PART 3 – THE LAW OF CONTRACTS

Chapter 13 – Breach of
Contract
Prepared by Douglas H. Peterson, University of
Alberta
Copyright © 2004 McGraw-Hill Ryerson Limited
1
CHAPTER 13 – BREACH OF CONTRACT



The Nature of Breach of Contract
Remedies
Special Remedies
Copyright © 2004 McGraw-Hill Ryerson Limited
2
BREACH OF CONTRACT

The Nature of Breach of Contract

Express Repudiation





Implied Repudiation


Express Breach
Anticipatory Breach
Doctrine of Substantial Performance
Warranties vs. Conditions
A form of Anticipatory Breach
Fundamental Breach



Exemption clauses
Conditions vs. Warranties
Warranty ex post facto
Copyright © 2004 McGraw-Hill Ryerson Limited
3
BREACH OF CONTRACT

Remedies





Compensation
Extent of Liability for Loss
Duty to Mitigate
Liquidated Damages
Special Remedies



Specific Performance
Injunction
Quantum Merit
Copyright © 2004 McGraw-Hill Ryerson Limited
4
THE NATURE OF BREACH OF CONTRACT



Not all breaches give rise to the right to
discharge
Express or implied refusal to carry out a
promise is a form of discharge
Injured party can:



bring an action for damages
Bring the contract to an end
Court may:


Grant compensation for the injury
Issue an order requiring performance
Copyright © 2004 McGraw-Hill Ryerson Limited
5
CLASSIFICATION OF CONTRACTUAL TERMS

Condition - important term of a contract




Warranty




If breached gives innocent party right to terminate the
contract and claim damages
Terms essential to the substantial performance of the
contract
Essential terms of a contract
Minor term, if breached, gives innocent party right to
claim damages only
Insignificant or peripheral to central obligation of the
contract
A non-essential term of the contract
Issue is often if the term is a condition or a
warranty
Copyright © 2004 McGraw-Hill Ryerson Limited
6
EXPRESS REPUDIATION

Express repudiation is by:


Conduct
Form of communication


A declaration by one party to the other that it does
not intend to reply
Anticipatory Breach – an advance
determination that a party will not perform
his or her part of a contract when the time
for performance arrives
Copyright © 2004 McGraw-Hill Ryerson Limited
7
EXPRESS REPUDIATION

Anticipatory Breach – injured party has
option:



Treat the agreement as at an end
Continue with the agreement and wait for nonperformance and bring action at time of nonperformance
Assume risk contract discharged in some other
form between time of anticipatory breach and
time for performance

Agreement may become frustrated in some manner
Copyright © 2004 McGraw-Hill Ryerson Limited
8
EXPRESS REPUDIATION

If each party must perform independently of
the other, injured party may not be entitled
to treat the contract as discharged


Would still be able to get damages
Part performance - injured party may only
avoid the contract if the repudiation goes to
the root of the contract
Copyright © 2004 McGraw-Hill Ryerson Limited
9
EXPRESS REPUDIATION

Substantial Performance




Court looks at percentage completed
No repudiation if other party substantially
performed
Get reduction or damages
Can’t seize upon trivial failure of performance to
avoid obligations
Copyright © 2004 McGraw-Hill Ryerson Limited
10
EXPRESS REPUDIATION


Subsidiary Promise
Where a party repudiates a subsidiary
promise rather than an essential part of the
agreement



If sale of goods referred to as a warranty
If condition (essential term) injured party may
repudiate
If not condition (non-essential term) injured
party may only sue for damages
Copyright © 2004 McGraw-Hill Ryerson Limited
11
IMPLIED REPUDIATION

Repudiation is implied from conduct of
parties or statements made before the time
fixed for performance



If failure to perform falls so short of performance
required one can argue that performance of a
whole becomes impossible
Risky to treat the contract at an end
Better to sue for damages
Copyright © 2004 McGraw-Hill Ryerson Limited
12
FUNDAMENTAL BREACH

A breach of the contract that goes to the
root of the agreement.



A breach of a major term (essential term) such
that the purpose of the contract is defeated
Breach of the whole of the contract
Major terms of contracts referred to as
conditions
Copyright © 2004 McGraw-Hill Ryerson Limited
13
FUNDAMENTAL BREACH

Exemption Clauses - a clause in a contract that
exempts a party from liability for failing to perform
some or all of its contractual obligations




unequal bargaining power often exists between sellers
and buyers
Exemption clause will not apply when the party trying to
enforce it is in fundamental breach
Effect of exemption clause depends on construction of
the contract not upon a rule of law
Court looks to the wording of the exemption clause
Copyright © 2004 McGraw-Hill Ryerson Limited
14
CONDITIONS AND WARRANTIES

Condition – essential or major terms of a
contract


Breach of gives rise to the right to treat the
contract at an end
Warranty – non-essential or minor terms of a
contract



In the sale of goods, a minor term in a contract
Not the same as a warranty provided by a
manufacturer
Breach of allows the injured party to damages,
but not to rescission of the agreement
Copyright © 2004 McGraw-Hill Ryerson Limited
15
CONDITIONS AND WARRANTIES

A condition may become a mere warranty if
the injured party:



Delays in seeking redress
Continues to receive benefits under the contract
– known as a warranty ex post facto
Injured party’s actions constitute a waiver of the
right to avoid the agreement
Copyright © 2004 McGraw-Hill Ryerson Limited
16
REMEDIES: COMPENSATION



Injured party has a right to sue for
compensation for losses suffered flowing
from the breach
Loss or injury as a result of the breach must
be proven
Compensation is usually in the form of
monetary damages

Can also be specific performance or quantum
merit (quasi-contractual remedy)
Copyright © 2004 McGraw-Hill Ryerson Limited
17
REMEDIES: COMPENSATION

Monetary damages – most common form


Object of contract usually something that can be
measured in a monetary amount
Restitutio in integrum – basic principle of
damages



To restore or return a party to an original
position
Courts attempt to put party into position had the
contract been performed
“Make the party whole”
Copyright © 2004 McGraw-Hill Ryerson Limited
18
THE EXTENT OF LIABILITY FOR LOSS



General rule – party is responsible for damages
that flow naturally from the breach
Exception – a party cannot recover damages that
are too remote
Remoteness: 2 part test


Reasonable Forseeability: Party can recover damages
that are those that the parties may reasonably
contemplate as flowing from the breach
Special Circumstances: any loss that might occur from
special circusmstances relating to the contract that both
parties might reasonably be expected to contemplate at
the time the contract is made
Copyright © 2004 McGraw-Hill Ryerson Limited
19
THE EXTENT OF LIABILITY FOR LOSS



Compensation may also be extended to
cover damages in nature of mental stress
Aggravated damages for mental suffering
can be awarded
Such damages are compensatory rather than
punitive
Copyright © 2004 McGraw-Hill Ryerson Limited
20
THE DUTY TO MITIGATE LOSS




Action by an aggrieved party to reduce the extent
of loss caused by breach of the other party
Award will not include what plaintiff could have
reasonably avoided
Plaintiff has duty to take all reasonable steps to
mitigate the loss consequent of the breach
Examples:




Rejection of goods, must try to sell them elsewhere
Seller refuses to deliver, buy elsewhere
Lose job, look for a new one
Rule - only recover damages for losses that plaintiff
could not avoid by acting reasonably
Copyright © 2004 McGraw-Hill Ryerson Limited
21
LIQUIDATED DAMAGES

A bona fide estimate of the monetary damages
that would flow from the breach of a contract






An agreement in advance of amount to be paid in
damages is a breach occurs
Relationship of actual loss and agreement may not be
the same
E.g. Deposit
If sum unreasonable in relation to damage
suffered, the sum may be treated as a penalty
clause rather than liquidated damages
Penalty clause - a term in a contract specifying an
unreasonable amount for breach, intended to
frighten a party into performance
courts will often disregards such clauses
Copyright © 2004 McGraw-Hill Ryerson Limited
22
LIQUIDATED DAMAGES



Part payment versus deposit
Money paid could be deposit, part payment, or
both
Deposit – something that binds the contract and
guarantees its performance



A form of liquidated damages
If contract is rescinded then deposit does not have to be
returned if the rescission was due to his or her fault
Part Payment – merely money pre-paid on account
of the purchase price

Part payment and does not have to be returned even if
the rescission is their fault
Copyright © 2004 McGraw-Hill Ryerson Limited
23
SPECIFIC PERFORMANCE


Equitable remedies – when common law
money damages is inadequate
Specific Performance – an equitable remedy
of the court that may be granted for breach
of contract where money damages would be
inadequate, and that requires the defendant
to carry out the agreement according to the
terms

A discretionary remedy
Copyright © 2004 McGraw-Hill Ryerson Limited
24
SPECIFIC PERFORMANCE

Order by the court for one party to perform under
the agreement





Only available in limited circumstances
Failure to obey the order is contempt of court
Most common when goods are unique such as the sale
of land
No two parcels of land are entirely the same
Plaintiff must show:



They were willing and able at all times to perform under the
contract
The other party refused to perform
Court orders the party to do something
Copyright © 2004 McGraw-Hill Ryerson Limited
25
INJUNCTION

An equitable remedy of the court that orders
the person or persons named therein to
refrain from doing certain acts


Usually when there is a breach by a party to
perform a promise to forbear from doing
something
Restrictive covenants
Copyright © 2004 McGraw-Hill Ryerson Limited
26
INJUNCTION




Court orders the party to refrain from doing
something (opposite of specific performance)
Non competition clauses in employment contract
and the sale of businesses
In essence the injunction is an order of specific
performance of the entire contract
Often issued to enforce a negative covenant, if
covenant not contrary to public policy
Copyright © 2004 McGraw-Hill Ryerson Limited
27
QUANTUM MERIT

An alternative remedy





When contract repudiated and is for services, or
goods and services
Not a remedy arising out of the contract but a
remedy based on quasi-contract
Courts imply an agreement
Party must pay a reasonable price for the benefit
obtained
Available as a remedy if contract has been partly
performed by the injured party
Copyright © 2004 McGraw-Hill Ryerson Limited
28
SUMMARY


Breach of contract is the express or implied
refusal of one party to perform
Anticipatory breach – when express or
implied repudiation takes place before the
date fixed for performance



Fundamental breach gives rise to repudiation
Minor breach gives rise only to damages
Substantial performance – an exception to
the rule that one can repudiate for breach
Copyright © 2004 McGraw-Hill Ryerson Limited
29
SUMMARY

Remedies




Monetary damages (common law)
Specific performance (equitable)
Injunction (equitable)
Quantum merit (quasi-contractual)
Copyright © 2004 McGraw-Hill Ryerson Limited
30
LAW OF CONTRACT
BREACH OF CONTRACT
Copyright © 2004 by McGraw-Hill Ryerson Limited.
NATURE OF
BREACH
EXPRESS
REPUDIATION
RIGHTS OF
INJURED PARTY
Released from
Future Performance
Damages for Loss
IMPLIED
REPUDIATION
Option to Wait Until Date
Fixed for Performance Then
Take Action for Non Performance
FUNDAMENTAL
BREACH
Entitled to Treat Contract
as at An End. Exemption
Clauses Will Not Protect Party in
Breach
Copyright © 2004 McGraw-Hill Ryerson Limited
EXCEPTIONS
Where Party Has
Substantially Performed
Contract — Only Entitled
to Damages for Loss
Injured Party Must Not
Continue to Accept Benefits
Under Contract After
Fundamental Breach
Discovered
31
LAW OF CONTRACT
REMEDIES FOR BREACH
REMEDY
BREACH
OF
CONTRACT
RANGE OF REMEDIES AVAILABLE
Copyright © 2004 by McGraw-Hill Ryerson Limited.
DAMAGES
LIQUIDATED
DAMAGES
SPECIFIC
PERFORMANCE
INJUNCTION
QUANTUM
MERUIT
EXTENT OF
REMEDY
— To Compensate for Loss by Money Payment
— To Place Party in Same Position
as if Agreement Fulfilled
— Estimate of Loss in Event of Breach
— Provided for in Contract
— Normally Only Available in Land
Transactions or Where Goods Unique
— Discretionary Remedy
— Only Available Where Money Compensation
Inadequate
— Discretionary Remedy
— Used to Enforce Negative Covenant in
Agreement
— To Prevent Continuing or Impending Injury
— Where Services or Goods Requested
— Quasi-Contract Remedy
— Reasonable Price-Damages
Copyright © 2004 McGraw-Hill Ryerson Limited
32