When a contract is breached, a series of remedies may become available, depending on the seriousness of the breach of contract.
Remedies for Breach of Contract
The primary remedies for breach of contract are:
The parties can also agree to reduce, expand or change the remedies available for breach of contract with, for example:
- Conditions Subsequent
- Limitation and exclusion clauses, or exclude or restrict the amount of damages payable for a breach or an indemnity
- Indemnities, to enhance damages claims
- Excluding misrepresentation as a remedy
- Sole or Exclusive Remedies
- Liquidated damages clauses, to set damages to a fixed or calculated amount
- Retention of Title clauses
- Time limitations on claims
Termination as a Remedy
Termination is itself a remedy for breach of contract.
When the defaulting party breaches the contract, the innocent party may have no intention of claiming damages, specific performance or any of the other remedies.
There's no compulsion or legal requirement to sue for damages.
Getting out of the contract itself is sometimes enough.
Aim of the Remedies for Breach
Other than termination, the remedies for breach of contract are designed to give effect to the deal or transaction which were voluntarily agreed by the parties by entering the contract.
The overarching policy of the law when deciding which remedies should be granted, is to substitute the performance agreed between the parties with such legal remedies as may be available to enforce what was agreed.
That way, the innocent party obtains a substituted performance of the contract - primarily and most often with a payment of damages.
But then if the contract has not been terminated, the remedies of specific performance or an injunction may be available to the innocent party to prevent future breach of contract.
First though, damages:
Damages: Basic Principles
The basic remedy for breach of contract is an award of damages. it's by far and away, the most common legal remedy for breach of contract.
Damages is the legal right substituted for performance, when the defaulting party fails to perform the contract, as referred to above.
It’s not a discretionary remedy, as some remedies for breach of contact are.
It’s a right.
Courts often put it like this (this is from a case from 1848):
where a party sustains a loss by reason of a breach of contract, he is, so far as money can do it, to be placed in the same position as if the contract had been performed
And the amount of compensation for the breach of contract is:
the measure of damages is to be, as far as possible, that amount of money which will put the injured party in the same position he would have been in had he not sustained the wrong
Damages as a remedy is primarily a compensatory remedy.
Generally speaking, damages:
- is not a punitive remedy. The compensation awarded isn’t designed to punish the defaulting party for breach
- provides fair compensation for a wrong done to the claimant caused by the breach
In most cases, that measure of damages is the amount of money required to put the innocent party into the position it would have been in, had the breach of contract not been committed.
Causation: "But For" test
To arrive at that result, courts:
reconstruct events which in fact never happened, but would have happened but for the wrong.
That’s the “but for” test: the innocent party is entitled to recover the loss suffered, “but for the breach”. That's the test for causation of loss.
This legal test embodies the way courts calculate the measure of damages for a breach of contract. In simple terms, you:
- assume that the breach didn’t take place
- work out what would have happened under the contract if the breach of contract did not take place, and was properly performed
- work out the lost profit to the innocent party which was caused by the breach of contract (any other loss which was caused by the breach is also recoverable, such as wasted expenditure).
That way, it's the difference between:
- what did happen under the contract (as at the time of the breach), can be contrasted to
- what would have happened if the breach had not taken place (and the contract was performed).
Beyond these fundamental rules for awards of damages, calculations to arrive at the measure of damages can get complicated.
The calculations involve factors designed to make award of damages fair to both parties, in the circumstances of the case, because these factors are in play:
- remoteness of damage: the damage must be reasonably foreseeable, assessed as at the date of the contract
- mitigation of loss: the innocent party can’t just sit back and allow damage to accrue at the expense of the defaulting party. It must take reasonable steps to mitigate their loss. When the innocent party doesn't those damages won't be recoverable
- terms of the contract: what the contract itself says to exclude or limit liability to the other parties.
These days, written contracts can materially affect:
- the remedies available, by excluding them in the terms of the contract, and
- the amount of damages which can be claimed for breach.
When a liquidated damages clause appears in the contract, it may serve to circumvent the level of damages recoverable.
We come onto some of the terms of contracts which affect recovery of damages below.
Injunctions and Specific Performance
An award of damages is assessed by reference to financial loss. It’s not always 'adequate' or sufficient as a remedy to compensate the innocent party for a breach of contract.
That’s when injunctions come into play to restrain further breaches of contract.
But injunctions aren't available when the innocent party terminates the contract for repudiatory breach: because termination brings the contract to an end.
So if there has been a breach of contract, and it hasn’t been terminated, the innocent party may prefer to continue the contract. For instance, the breach may cause:
- the innocent party to be in breach of other contracts,
- financial loss which is not easily calculated in damages, or
- other serious continuing damage to the business, such as continuing breaches of restrictive covenants.
It's this "inadequacy of damages" which underlies the court's power to grant injunctions and specific performance.
Injunctions: The Usual Form
On one classification, injunctions are either mandatory or prohibitive:
- prohibitory injunctions stop, restrain or prevent behaviour
- mandatory injunctions force or compel behaviour. As the name suggests, a person subject to a mandatory injunction must positively do something to avoid breaching the court order, rather than not do something
Courts prefer to make prohibitory injunctions. It leaves less doubt as to what the person needs to do to comply with the terms of the court order. It’s an important factor, because non-compliance with the court order may lead to a sanction for contempt of court. The possibilities include fines, sequestration (ie permanent confiscation) of property, custodial sentences, and perhaps a visit by the Tipstaff.
When a person is positively told to do something in a court order, all sorts of complaints can arise, including:
- whether the person did what was ordered properly
- whether the person did it in a way which wasn’t intended
And then doing the (specified) act itself may not have the intended outcome.
With a negative stipulation in a prohibitory injunction, it’s far easier to tell whether the order has been complied with or not: Did they do the prohibited act, or not?
In other words, courts take the view that it is better to stop a person from doing specified acts, rather than to force them to do specified acts where that is possible.
The Remedy of Specific Performance for Breach
Specific performance is a form of mandatory injunction.
Contractual obligations most often require a contracting party to positively do something, rather than refrain from doing something.
And that is the nature of most contractual obligations.
Specific performance compels a person to do the acts specified in the court order. Those acts are likely to mirror the contractual terms or will be designed to bring about performance of the contract.
Specific performance, like all injunctions are “discretionary” remedies.
They’re not available as of right, such as the right to damages.
To have a reasonable prospect of success obtaining specific performance, a judge must be satisfied that their discretion should be exercised in favour of the innocent party.
Where those factors not satisfied the remedy of specific performance will not be granted, but the innocent party will still have their right to recover damages for the breach.
Scope of Specific Performance
In summary, the remedy of specific performance:
- is a court order, usually endorsed with a penal notice
- has effect as a mandatory injunction to give effect to the contractual obligations which have been breached
- is designed to require the defaulting party to perform specific contractual obligation(s), to prevent breach(es) of the contract in the future
- will spell out precisely what performance is required of the defaulting party, to give the order effectiveness
This is because a person subject to a mandatory order may be punished by a contempt sanction ought to know with precision what is required to be done.
Availability of Specific Performance
Whether or not a court would be minded to award an injunction for specific performance depends on a series of factors.
In favour of granting specific performance are:
- Damages are likely to be difficult or impossible to calculate
- Damages are an unsuitable remedy on the facts of the case, in that the damages will not adequately do justice between the parties. It’s a strong indication that specific performance a suitable and appropriate remedy
- The breach involves unique property and there is no readily available substitute, such as:
- intellectual property rights, whether protected by confidential information, copyright, design rights, patents or a trade mark
- unique products or custom-made products
- an overriding “balance of convenience” test weighs in favour of making the injunction.
Financial inability to do the work will not generally be a defence to a claim for specific performance
Restrictions to Availability of Specific Performance
Specific performance is not likely to be granted where:
- Damages Adequate: damages are seen as an adequate remedy.
Specific performance is seen as a “heavy handed nature of the enforcement mechanism”
Specific performance is a significant order for a court to make. If damages are seen to adequate compensate the party, the discretion to grant the remedy won't be exercised in favour of the innocent party
- Unwilling Parties: It isn’t desirable to order unwilling parties to work together, as such an order would interfere with the party’s personal liberty.
Contracts of personal service of consultants and employees are rarely enforced, unless there are exceptional circumstances are required. So specific performance isn't usually available if:
- it would require an employee to carry out work under a contract of employment
- it would require an employer to employ someone in whom they no longer had the trust and confidence
- Supervision: The contract would require:
- constant supervision of a contract by a court
- constant reference to the court to ensure performance of the contract, or
- repeated applications for rulings on compliance
There is a difference between constant superintendence by a court and the supervision of a final result (such as a building contract).
That’s not to say that just because the parties need to come back for further directions the remedy won’t be granted
- Hardship: Severe hardship would be caused to the defaulting party, such as where losses sustained by the defaulting party would be well in excess of the loss suffered by the innocent party
- Clean Hands: The innocent party has acted unconscionably, although not to the extent that he should be deprived of its legal rights (such as damages)
- Own Wrong: The remedy is sought to avoid a set-off which would be available in a claim for damages for their own breach.
For instance, the innocent party:
- acted unfairly in the performance of the contract, or
- induced the party in breach by misrepresentation to enter the contract, such as taking advantage of superior knowledge
- Want of consideration: a gratuitous contractual promise is relied on, whether by deed or nominal consideration
- Vague Contractual Terms: The contract is so vague that it cannot be enforced at all, because the obligation cannot be expressed precisely for a court order.
Changes to Availability of Remedies (by agreement)
A series of clauses and techniques may affect availability of remedies under a contract.
- Conditions Subsequent are express terms of contract which entitle a party to terminate when the specific conditions named in the contract are satisfied.
They usually appear in long term contracts, but can appear in any sort of contract.
If the defaulting party is in repudiatory breach, and has a condition subsequent available to them:
- they may be able to terminate the contract, and prevent damages which would accrue from increasing, by exercising that right to terminate
That also means that the right to terminate for repudiatory by the innocent party is lost. The innocent, party may retain its right to damages up to the point of termination.
The same applies when the defaulting party has a right available to terminate the contract at will (that is, an unconditional right to terminate).
- Limitations and Exclusions of Liability, as their title suggests, these provisions are aimed at limiting liability for damages:
- as a whole under the contract,
- for a specified period, usually for 12 months of the contract term, and/or
- for a specified event or series of events
Whether they're effective in any particular contract depends on a wide variety of factors, but most importantly:
- the terms of the clause itself, and
- the particular facts of the case
- Indemnities are free standing contractual obligations which promise to pay the other party for damage suffered by the other.
The coverage to pay on an indemnity (depending on the terms of the indemnity):
- doesn't necessarily require a breach of contract, because it’s an express term promising to pay under the contract
- is usually (way) more extensive than what would be recovered by the law of damages.
In commercial contracts, indemnities are often given to support breaches of specified warranties such as infringement of third parties’ intellectual property rights and data protection legislation.
Whether it's a good idea to give an indemnity in the first place is ... another matter (most businesses don't once they know what they mean).
Indemnities introduce significant risk to a contracting party, especially when:
- the circumstances indemnified are outside the control of the party giving the indemnity
- the value that can be recovered under the indemnity is not restricted by limitation of liability clauses
- Set-offs, which reduce the sum payable by the defaulting party to the innocent party. It’s a “cross-claim” by the defendant (the defaulting party to the breach) against the claimant (the innocent party to the breach)
- Sole or Exclusive Remedies clauses limit the remedies for breach which would otherwise be able at general law by:
- excluding general law remedies which are available, altogether
- restricting damages for a specified breach to a formula (ie liquidated damages), and then excluding all other remedies
- Restricting remedies to those stated in the agreement such as:
- a refund of sums paid
- a reduction in sums payable
- replacing offending material at no cost. A classic example is material which infringes a third party’s intellectual property rights in the context of a software licence.
Cumulative rights clauses though are more common.
- Liquidated Damages set damages for breach to a pre-agreed amount in the contract itself. The pre-agreed amount can be fixed:
- to a specific sum for the specified breach, or
- by a formula.
The general intention of liquidated damages clauses is that:
- the parties (and a court) are saved the trouble of assessing the actual loss suffered by the breach
- the amount of compensation payable is fixed. It may be greater or less than the damage which was actually suffered
- they avoid entirely arguments as to the amount of compensation should be paid for the breach, subject to the rule against penalties
- they minimise or avoid situations where specific types of breaches are repudiatory breaches
Liquidated damages clauses are unenforceable when they are properly characterised as penalty clauses.
- Retention of Title Clauses
Retention of title clauses create a security device, so that an unpaid seller can recover goods supplied if they’re not paid for by the buyer.
Without Retention of Title
In contracts for delivery of goods, ownership of the goods passes to the buyer when they are delivered to the buyer. "Delivery" usually means received by the buyer, but it may be an earlier time.
That’s whether the goods are paid for or not.
This means that ownership of the goods has passed, the seller is owned money for the goods. The seller no longer owns the goods.
In ongoing supply agreements, some time can go on before non-payment amounts to a repudiatory breach, to give rise to a right to terminate the contract.
But then the seller would need to sue the buyer for the debt if the buyer refused to pay. Or even can’t pay.
Chasing debts through courts means spending money to get money which is already owed. And then there’s the time element of going through the court process for debt recovery ... more time without money for goods which have already been supplied.
It’s a drain on the business. Particularly when it’s unexpected.
But then, the buyer might never pay for the goods and go into liquidation, administrative receivership or administration. Basically, bankruptcy for companies.
After that, the seller may receive a small number of pence in the pound for the value of the goods which have been delivered. Often creditors get nothing.
With Retention of Title
Retention of title clauses change all that.
They change the default rules so that:
- ownership of the goods does not pass on delivery of the goods
- the seller retains ownership of the goods until the buyer has actually paid for the goods.
In this way, in a liquidation situation, the seller has better title (ie ownership rights) to the goods than a liquidator, administrator or administrative receiver.
The consequence is that the seller of the goods can get the goods back from the purchaser prior to payment.
That means that if a company does become insolvent, the seller:
- can recover the goods from the buyer when they haven’t paid for them
- does not need to sue the buyer for the value of the goods which is owed
- can demand the return of its own property, and if the contract says so perhaps enter onto premises of the buyer where the goods are stored and collect them if they haven't been paid for
In one sense, that makes Retention of Title Clauses in contracts worth the value of the goods which the seller is prepared to deliver to the buyer on credit.
There also referred to as "Romalpa" clauses. The first decision dealing with this sort of clause was Aluminium Industrie Vaasen BV v Romalpa Aluminium Limited (1976).
- Time Limitations:
Usually the limitation period to sue under a 6 years and for deeds, 12 years from the date of the breach.
It’s set in the Limitation Act.
When legal proceedings are commenced outside the limitation period, an absolute defence is made available to the person being sued.
Time limitations written into contracts reduce the time within which claims may be made.
They're designed to shorten the statutory limitation period:
- to bar or extinguish any right of legal action for the breach; or
- deprive a party of a means of recourse (such as arbitration),
which would apply without them.
Contractually agreed time limitation clauses:
- may be subject to Unfair Contract Terms Act (1977), where enforcement of liability under the contract is made subject to restrictive conditions, or excluding or restricting any right or remedy in respect of the liability
- may be subject to time limitations may be subject to the Misrepresentation Act (1967)
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