Breach of contract and remedies

Syllabus Guide Detailed Outcomes

Having studied this chapter you will be able to:
• Explain the meaning and effect of breach of contract.
• Explain the rules relating to the aware of damages.
• Analyse the equitable remedies for breach of contract.

Exam Context
A commonly examined area, with a heavy focus on the rules in the case of Hadley v Baxendale.
In June 2008 one of the scenario questions concerned actual and anticipatory breaches of contract incorporating the
common law and equitable remedies available.
Ordinary and anticipatory breaches of contract were examined in December 2008.
A scenario question on anticipatory breach of contract along with the law of damages was set in June 2009.
Penalty clauses and mitigation of losses were examined in December 2009.
 Overview

Breach of contract and remedies

Types of breach Damages Equitable remedies

Straightforward breach Remoteness of damage Specific performance

Anticipatory breach Measure of damages Injunctions
Liquidated damages Rescission
 1 Types of breach
1.1 When one party fails to comply fully with all of the terms of a contract they are deemed to be
Q10 Study Text in breach of contract. Any breach of contract gives the innocent party the common law
right to claim damages. As discussed in Chapter 5 breaches can either be fundamental
(breach of a condition), or minor (breach of warranty).

1.2 A further classification of breach of contract is as follows:

(a) Straightforward breach – where one party actually fails to comply with a contractual
term
or
(b) Anticipatory breach – where one party gives notice of their intention not to comply
with a contractual term. This type of breach gives the innocent party the option to:
• sue immediately on notice of breach
• perform their contractual obligations and sue afterwards for the full amount due
from the party in breach – White and Carter v McGregor (1)

2 Remoteness of damages
2.1 ‘Every failure to perform a primary obligation is a breach of contract. The secondary
obligation … is to pay monetary damages’ per Lord Diplock.

2.2 However not every breach of contract will give rise to a successful claim for damages, as
the conditions of ‘Remoteness of Damages’ must first be satisfied. These dictate that for
damages to be claimed they must comply with the two rules established in the case of
Hadley v Baxendale (2), namely that the damages must:
First Rule Arise naturally from the breach OR ELSE
Second Rule Be reasonably foreseeable in the eyes of both parties at the time the
contract was formed
The second rule was affirmed by the case of Victoria Laundry v Newman Industries (3).

2.3 In essence therefore damages cannot be claimed where the consequences of breach of
contract are deemed ‘too remote’.

3 Measure of damages
3.1 The awarding of damages is said to be compensatory in nature, in line with the ‘Doctrine
of Restitution’. The aim is to put the parties in the position they would have been had the
breach of contract not been performed, otherwise known as ‘expectation interest’

3.2 In certain circumstances the innocent party may wish to sue for the costs and lost profits
incurred due to breach of contract, and this is known as ‘reliance interest’ per Anglia
Television v Reed (4).
3.3 When awarding the monetary amount the courts will consider the following rules:
(a) Only actual financial losses may be recovered. Where a breach results in no loss
nominal damages may be awarded, generally fixed at £2
(b) The market rule – if goods are not delivered, the buyer may seek similar
replacements and sue for the difference in cost
(c) Non-financial losses may be claimed where the contract is one for the provision of
enjoyment – Jarvis v Swan Tours (5) or where the cost of restitution is too high –
Ruxley Electronics v Forsyth (6)
(d) The injured party must take all reasonable steps to mitigate their losses – Payzu v
Saunders (7)

4 Liquidated damages
4.1 It is not uncommon for parties, between them in contract, to agree compensation for breach
of contract in advance. Such agreements are known as ‘liquidated damages’ clauses. The
courts will only uphold these where these are felt to be ‘a genuine pre-estimate of the
loss’, as opposed to a penalty for breach – Dunlop v New Garage (8).

5 Equitable remedies
5.1 As discussed in Chapter 2 equity as a source of law is concerned with fairness, and where
there is a dispute between equity and the common law, equity will prevail. Equitable law is
dispensed at the discretion of the courts, and in order for such a remedy to be sought two
conditions must be met:
(a) The claimant must be a truly innocent party as, ‘he who comes to equity must do so
with clean hands’
(b) The court must be convinced that damages alone will not be an adequate remedy

5.2 Where these two conditions are met the following three equitable remedies may be granted
in addition to damages:
(a) Rescission – this order returns the parties to their pre-contractual position
(b) Injunction – this is a court direction ordering a party not to breach a contract Warner
Bros v Nelson (9)
(c) Specific Performance – where the court directs a party to complete their contractual
obligations (often granted in land disputes), though this will not be awarded in the
following circumstances:
• where the courts cannot supervise enforcement
• where a contract is for personal service
• where minors are involved
 Lecture example 1 Scenario practice

John went on a holiday booked with "Supersavers Travel". He paid £500 for an all inclusive seven
night holiday in Cyprus. The hotel was specified to be 3*, what really attracted John to the holiday
was the inclusion of a free introduction to scuba diving course worth £150.
When John arrived at the hotel he discovered that the hotel really was only 1* and had few of the
facilities described in the brochure. It also only provided two meals a day instead of three and did
not run the promised scuba diving course. John spent extra money on food and the diving course
whilst away.
Required
Advise him whether a breach of contract occurred and if it did what can be recovered by way of
damages.

Solution
6 Chapter summary
Section Topic
1 Types of breach
2 Remoteness of
damage
3 Measure of damages
4 Liquidated damages
5 Equitable remedies
Summary
Breach of contract can be either straightforward or
anticipatory.
Damages will only be awarded where they are not
deemed ‘too remote’ per the two rules in Hadley v
Baxendale, affirmed by Victoria Laundry v Newman
Industries.
Damages are a common law remedy intended to
compensate the injured party for actual financial losses
suffered. The innocent party must take reasonable
steps to mitigate losses.
Any contractual agreement to agree liquidated
damages must be a genuine pre-estimate of losses.
Equitable remedies, such as rescission, injunction,
or specific performance will only be awarded where
monetary compensation alone is not deemed adequate.

7 Case Summaries
1 White and Carter (Councils) Ltd v McGregor
Contract entered into to advertise M’s garage on litter bins for 3 years.
Contract repudiated by M.
W & C refused to cancel and carried contract out. Court held W & C was entitled to recover
the contract price as were not obliged to accept the repudiation.

2 Hadley v Baxendale
H, the owners of a flour mill, contracted with B who were couriers to deliver to a crank shaft
to Greenwich where it was to be used as a template for a new one. It was delivered late, so
that the new one was also delayed.
H claimed loss of profits during the period of the delay and it was held that this loss was not
recoverable. At that time it was customary for flour mills to store a spare crank shaft and the
couriers had not been made aware of the fact that H did not.
Damages would only compensate for losses which may fairly and reasonably be considered
as arising naturally from the breach or might reasonably be expected to be in the
contemplation of both parties at the time they made the contract as the probable result of
breach.
3 Victoria Laundry v Newman Industries
The defendants contracted to sell a boiler to the claimants ‘for immediate use’. The
defendants were late in delivering the boiler. The claimants claimed:
(1) Normal loss of £16 per week.
(2) Loss of a particularly lucrative contract worth £262 that the claimant would have
entered into if the boiler has been delivered on time.
The court held that the profits of £16 per week were recoverable as they arose naturally.
The profit on the lucrative contract could not be recovered as it was not in the reasonable
contemplation of the defendants when the contract was made.

4 Anglia Television v Reed

Anglia contracted with Reed to be in a TV movie. Reed breached after he found out he was
double-booked. Anglia sued for reliance damages, including expenses incurred before the
contract was made. At trial, the full measure of damages was awarded.

5 Jarvis v Swan Tours

Damages were awarded both for the cost of a holiday and disappointment following a
discrepancy between the holiday and the brochure description. Subsequent case law
appears to confine this element of damages to holiday cases only.

6 Ruxley Electronics v Forsyth

In this case builders had agreed to construct a swimming pool with a diving area 7 feet 6
inches deep. The pool when constructed had a depth of only 6 feet. The cost of rebuilding
the pool to the contractual depth would have been £21,560. But the trial judge, having heard
the evidence, concluded that the pool owner did not have the intention of using the damages
to reconstruct the pool. He found also that the residential property of which the pool formed
part had suffered no diminution in value by reason of the lack of one foot of depth in the
pool's diving area. Nonetheless the pool owner claimed the £21,560 as damages. The
builders, on the other hand, contended that, on the facts as found, the pool owner had
suffered no loss and the damages should be nil. The trial judge accepted neither contention
but instead awarded the £2,500 expressed as compensation for "a loss of amenity brought
about by the shortfall in depth". The Court of Appeal set aside the £2,500 award and
substituted an award of the cost of rebuilding, i.e. the £21,560. The House of Lords later
restored the trial judge's order.

7 Payzu v Saunders
Parties had entered into a contract to supply goods to be paid in instalments.
P failed to pay for the first instalment consequently S refused to make any further deliveries
unless P paid in cash in advance of the delivery.
P refused to accept delivery on S’s terms.
 Court held S had no right to repudiate the contract, but also that P should have mitigated
their loss by paying cash in advance. Damages were limited to the amount of loss if P had
paid in advance.

8 Dunlop v New Garage

A contract for the sale of tyres imposed a minimum resale price. The contract included a
fixed payment in the event of breach, at £5 per tyre. NG sold at less than the minimum
resale price and, when D sought to recover the fixed sum, argued it was a penalty. It was
held that this amount was a genuine attempt at pre-estimate of loss and would be upheld.

9 Warner Bros v Nelson

Nelson was Bette Davis
N agreed not to work for any other studio – only WB
N commenced work for a British film producer in the UK
Court imposed an injunction on N stopping her working for the British producer.