B262F - BUSINESS LAW
TUTORIAL 5
SUGGESTED SOLUTIONS
Exercise 5.1
Frustration arises when something occurs, which are due to the fault of neither party,
after the formation of the contract which makes performance impossible. Examples
are change of the law: Baily v. De Crespigny (1869), destruction of subject matter:
Taylor v. Caldwell (1863), and failure of the whole purpose of the contract: Krell v.
Henry (1903).
Here, Thomas's claim against Great Flag Ltd for the repayment of HK$30,000 on the
basis that the contract is frustrated would no doubt be resisted by way of counterclaim
by Great Flag Ltd for the contract price on the basis that the race taking place on July
1 was not the basis or foundation of the contract as far as Great Flag Ltd was
concerned. Obviously this is not a case where the statutory powers had made the race
impossible to perform. It was the large number of withdrawals which caused the race
impossible to perform. Therefore the thing in issue here is whether the
non-occurrence of some event (i.e. public holiday on July 1) must reasonably be
regarded as the basis of the contract for both parties. This is well illustrated by the
coronation cases in 1903. In Krell v Henry, the English Court of Appeal inferred
from the circumstances that viewing the proposed coronation procession was the
basis/foundation of the contract as far as both parties were concerned but in Herne
Bay Steamboat Co. v Hutton, the same Court held that viewing the fleet's inspection
by King Edward VII were not the basis/foundation of the contract as the fleet was still
there and the cruise around it could still be made.
No doubt a public holiday July 1 was the basis or foundation for organizing the race
as far as Thomas was concerned, but can the same be said for Great Flag Ltd? In
particular, it is a well settled law that an intervening event which makes a contract
more expensive or onerous to perform is not a frustration event: Tsakiroglou & Co Ltd
v. Noblee and Thorl GmbH (1962).
If the contract were not frustrated, Thomas has to pay the balance of the contract price.
However, if the contract were frustrated, the parties' financial positions will be
determined by the provisions of the Law Amendment and Reform (Consolidation)
Ordinance, Cap.23 (“LARCO”).
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Section 16 of the LARCO provides, in relation to a frustrated event, that:
1. Money paid before the frustrating event is recoverable;
2. Money payable before the frustrating event ceases to be payable (seems none
in this case);
3. If a party has incurred expenses before the frustrating event, then the court
may allow that party to retain or recover the money paid or payable from the
other party;
4. The court can order a party who has obtained a valuable benefit under the
contract to pay whatever the court thinks that valuable benefit is worth to the
other party.
Therefore, Thomas has a prima facie right to recover his HK$30,000 pre-payment but
it is subject to Great Flag Ltd's possible retention of up to HK$30,000 for its expenses
so incurred. The sum retainable rests at the discretion of the court.
We are told that 7,000 sheets of flags were delivered to Thomas. If the HK$30,000
were unable to cover Great Flag’s expenses, it would have to pursue a claim for a ‘just
sum’ in respect of the valuable benefit obtained by Thomas. Again the court has
discretion to award such sum as is just. In calculating the 'just sum', the court is
required to take into account all the circumstances giving rise to the frustration of the
contract, e.g. the fact that the sheets of flags after the cancellation may well be
virtually useless to Thomas. This may lead to a much reduced 'just sum', although the
principles behind such a calculation cannot be precisely defined.
For the contract between John and Thomas, whether this contract was frustrated or not
would depend again upon the Krell v Henry and Herne Bay Steamboat Co. v
Hutton distinction. If it were frustrated, then under the LARCO, John's right to
recover his HK$100 entry fee might be set off against the expense to be retained by
Thomas.
If the contract were not frustrated, then Thomas is in breach of contract. However,
damages for 'loss of enjoyment' are generally not recoverable save and except that
the object of the contract is one of conferring a pleasurable experience: Jarvis v
Swans Tours (1973) and Jackson v Horizon Holidays (1974). Since a contract to
run a marathon is hardly akin to a holiday contract and a reasonable person might not
regard this as a loss of enjoyable experience, save the $100 paid, there is nothing that
John can claim.
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Exercise 5.2
A contract can be beached in 3 ways: (1) by anticipatory breach, (2) by doing
something voluntarily which makes the contract impossible to perform, or (3) by
failure to perform in the agreed manner. Here, Alton Ltd breaches the contract by
anticipatory breach because Alton has informed Bisco that it will not be able to supply
the apples on the date of delivery.
However, Alton may try to prove that the contract is not breached but discharged by
frustration. A contract is said to be frustrated when: 1. There is an intervening event;
2. It is entirely beyond the control of the parties and is not self-induced; and
3.
It destroys a fundamental assumption on which the contract is based.
However, the application of the doctrine of frustration is very limited. According to
Taylor v Caldwell (1863), a contract could be frustrated if the subject matter is
destroyed or ceases to exist but with a caveat, i.e. the subject matter must be unique.
Here, if the contract made between Alton and Bisco has specified that the apples must
be from Garden Orchard in California, the subject matter should be unique. Otherwise,
there is no frustration and Alton is liable to the breach.
In most circumstances, the remedy would be damages, i.e. monetary compensation. It
is to put the innocent party, so far as money can do it, in the same position he would
have been in if the contract had been performed. However, the defaulting party would
not be liable for all those losses which are too remote. The principle relating to
remoteness of damages laid down in Hadley v Baxendale (1854) is that: 
In normal circumstance, the plaintiff will be compensated for his loss which
arises according to the usual course of things from the breach as the loss is
presumed to be within the contemplation of the contractual parties.

The plaintiff is entitled to further damages if and only if the defendant was aware
or is presumed to have been aware of those losses which would arise from
special circumstances at the time of contracting.
Bisco therefore can treat the contract as discharged and sue for damages immediately.
Thus, Bisco would probably receive a refund of $100,000. Further, Bisco is entitled to
recover damages equivalent to the amount of loss that was reasonably foreseeable.
Normally it would be the difference in value between the contract price and the
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market price of the goods as at the date of delivery (s.53 SOGO).
However, at common law, the innocent party has a duty to take reasonable actions to
minimize the extent of his loss. It is known as the plaintiff’s duty to mitigate.
Therefore, Bisco must take reasonable steps to find another source of supply after 18
June 1999. Of course, Bisco may refuse to accept Alton’s “anticipatory breach”. In
this circumstance, Bisco has no duty to mitigate until after 24 June 1999: White &
Carter (Councils) Ltd v McGregor (1962).
Exercise 5.3
Michael v. Terry
There is no doubt that the contract has been breached by Terry and the appropriate
remedy is damages. The general purpose of damages in contract is to put the injured
party in the position that he would have been in as if the contract were preformed. The
central issue in this part of question is whether the losses (or some of the losses) that
Michael has suffered are too remote.
The basis rules for remoteness of damage in law of contract were stated in Hadley v
Baxendale (1845). In short, a contracting party is liable for his opposite party’s losses
which are:
1. arising naturally; or
2. if they were arising in special circumstance, in the contemplation of the parties
at the time of contracting.
The Hadley was about the Defendant’s actual knowledge in exceptional loss. In
Victoria Laundry (Windsor) Ltd v Newman Industries Ltd (1949), the 2nd limb of
the test was extended to the Defendant’s imputed knowledge in the Plaintiff’s
business.
Having said that, whether the loss of salaries and the costs for extra treatment in this
case are normal losses or special losses is unclear. Of course, if Terry were told about
Michael’s symptoms, Michael should have more chance of recovering his losses.
Nevertheless, Michael has a legal duty to take reasonable steps to minimize his loss
(i.e. duty to mitigate) by seeing another doctor without delay.
Michael v. Danny
In this case, the promisee (Michael) suffers no pecuniary or other loss himself.
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Although in Jackson v Horizon Holidays Ltd (1975), a plaintiff promisee could
obtain damages on behalf of the loss suffered by his family members, it is clear from
Woodar Investment Development Ltd v Wimpey Construction UK Ltd (1989) that
damages for breach of a contract for the benefit of a 3rd party cannot, as a general rule,
be recovered by the promisee. However, there may still be circumstances that the
court is ready to give special treatment, such as booking for family holidays or
ordering meals in restaurants. It seems the facts of the present problem do not appear
to fall within such categories.
Although Michael may not be able to claim damages for the loss suffered by his girl
friend, he is, of course, entitled to sue for any loss that he has suffered himself. This
will be the case if Michael has arranged another contractor to do the renovation for
Fanny and has paid/is contracted to pay for it.
As an alternative, Michael can claim for the money (if any) that he had spent in
respect of the setting up the new accounting information system as in Anglia
Television Ltd v. Reed (1972).
The best remedy of course is to obtain a decree of specific performance against Danny.
Unfortunately, specific performance is an equitable remedy and will not be granted if
it would be impossible for the court to supervise the performance. This would be the
case in contracts for personal services: Page One Records Ltd v Britton (1967).
Fanny v. Danny
This part is about privity of contract. According to Dunlop Pneumatic Tyre Co Ltd v
Selfridge & Co Ltd (1915), Fanny being a third party to the contract is not entitled to
sue Danny for her loss.
Exercise 5.4
a. An order for specific performance is an equitable remedy. It will only be granted
in cases where the common law remedy of damages is inadequate. Here, it
appears that an order for damages is an adequate remedy. Also, it is trite law that
specific performance will not be granted where the court cannot supervise its
enforcement, such as building contracts: Ryan v Mutual Tontine Westminster
Chambers Association (1893). Therefore, it is clear that Nancy cannot force
B&C Builders to carry out the work if they do not want to. Her remedy will be
an order for damages. [Please refer to textbook pp.99-100 for details.]
b.
No doubt B&C Builders have breached the contract and the appropriate remedy
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is damages. The general purpose of damages in contract is to put the injured
party, so far as money can do, in the same position that she would have been in
as if the contract were preformed. The central issues in this part of question are
(1) whether the kind of loss that Nancy wishes to claim is too remote (i.e.
remoteness) and (2) how much the loss is worth in money (i.e. quantification or
measurement).
The basic rule of remoteness stated in Hadley v Baxendale (1845) is that
damages will only be awarded in respect of losses which are: 1. arising naturally; or
2. if they were arising in special circumstance, in the contemplation of the
parties at the time of contracting.
The effect of the first limb of the above test is that the party in breach is deemed
to expect the normal consequences of the breach, whether he actually expected
them or not. Under the second limb of the test, however, the party in breach can
only be held liable for abnormal consequences where he has actual or imputed
knowledge that the abnormal consequences might follow: Victoria Laundry
(Windsor) Ltd v. Newman Industries Ltd (1949).
Here, either the different in value of the tower ($10,000) or the cost of making
good the defect ($350,000) are “normal” loss. It follows that which amount can
Nancy claim against B&C Builders?
Normally the injured party will be entitled to damages equal to the costs of
making good the defects (this is sometimes referred to as the costs of
reinstatement). However, where the cost of reinstatement is out of all proportion
to the advantage to be gained by the injured party from reinstatement, it would
not be reasonable to award damages for the costs of reinstatement other than the
difference in value of the property (if any) and modest damages for loss of
amenity. Thus, in Ruxley Electronics and Construction Ltd v Forsyth (1995), the
plaintiff contractor was engaged to build a swimming pool for Mr. Forsyth which
was to have a diving area 7ft 6ins deep, whereas the pool which was built had a
diving area with a depth of 6ft. The pool was suitable for diving and the failure
to follow the requirement as to depth was found to have had no effect on the
value of Mr. Forsyth’s property. The House of Lords (U.K.) awarded an amount
of £2,500 as damages for loss of amenity but rejected Mr. Forsyth’s claim for the
cost of re-building the pool to the depth specified in the contract.
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Here, there is a significant difference between Nancy and Mr. Forsyth’s case that
Nancy’s tower is now of no practical use to her whereas the swimming pool
could still be used for diving. Therefore, Nancy may be able to claim the
damages for the complete reconstruction of the tower, i.e. the $350,000.
c.
As B&C Builders was not aware of the agreement with Monday, they could not
be liable for the “special” loss sustained by Nancy: Victoria Laundry (Windsor)
Ltd v. Newman Industries Ltd.
Exercise 4.1
c. Almighty might have 2 claims. One is for repudiation and damages for breach of
contract, and the other is for rescission and damages for misrepresentation.
As regards breach of contract, we are given to know that the breach was so
serious that amounted to a breach of conditions. Therefore, Almighty is entitled
to repudiate the contract and claimed against C-Soft for damages. At common
law, damages are awarded to compensate the innocent party as if the contract
has been duly performed. However, the defaulting party would not be liable for
all those losses which are too remote.
According to Hadley v. Baxendale (1854), the plaintiff can be compensated for
the following 2 types of loss:
(1)
Normal loss – this refers to loss which arises according to the usual course
of things from the breach and which is presumed to be within the
contemplation of the parties.
(2)
Special loss – this is loss which arises from special circumstances of which
the defendant was aware or is presumed to have been aware at the time of
contracting.
In other words, the knowledge (either presumed or special) that the parties had
at the time of contracting is crucial.
In this particular case, there are 4 potential heads of loss suffered by Almighty:
(1)
(2)
the under-estimation of charges for advertisement banners;
loss of orders from potential customers;
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(3)
the cost for commissioning an expert to determine the cause of the
(4)
problem; and
the price difference for hiring another software developer (if higher).
It seems that Almighty is able to claim for items (1), (3) and (4) as they are more
than not normal losses. Whether Almighty can also recover its loss of orders in
item (2) much depends on C-Soft’s knowledge at the time of contracting and is
not conclusive from the facts given.
Nevertheless, Almighty has a legal duty to take reasonable steps to minimize it
loss caused by C-Soft (i.e. the duty to mitigate), for example, to commission an
expert to examine the problem without delay.
As regards misrepresentation, Almighty is entitled to rescind the contract. In
either cases of fraudulent or negligent misrepresentation, Almighty is also
entitled to damages. The damages, being a claim in tort, will be assessed on the
basis that Almighty be restored to the position that he would have been as if the
representation had not been made. In Doyle v. Olby (Ironmongers) Ltd. (1969), it
was held that in cases of fraud the plaintiff was entitled to damages for any such
loss which flowed from the defendant’s fraud and that normal tort rules as to
remoteness were inapplicable. For negligent misrepresentation, it is now settled
by Royscott Trust Ltd. v. Rogerson (1991) that measure of damages under s.3(1)
of MO is the same as the measure of damages for fraud.
Therefore, in either case, Almighty is entitled to items (1) and (3) above. As
regards item (2), according to East v. Maurer, Almighty is only entitled to loss
of normal profit directly caused by the misrepresentation (known as loss of
opportunity) but not the higher amount Almighty might have earned (known as
loss of bargain). Item (4) is peculiar. If the representation had not been made,
Almighty might have engaged another more competent software developer
which may be more expensive than C-Soft. Based on this assumption, item (4)
might not be recoverable. Also according to Doyle v. Olby, Almighty must take
all reasonable steps to mitigate its loss once it has discovered the fraud or
negligence.
In case of innocent misrepresentation, under s.3(2) of the MO, the court may
award damages in lieu of rescission (extremely unlikely here) but not the both.
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