Contract Law Week 3
1. Termination
(i)
The meaning of termination/ discharge/ rescission for breach
Johnson v Agnew 1980
Although a vendor has, at trial, to elect whether to go for damages or specific
performance, if he chooses the latter and the order is not complied with, he can
still apply to the court to terminate the contract and is then entitled to damages
for its breach. The plaintiff vendors, being in arrears with mortgage repayments,
entered into a written agreement for the sale of the properties. The purchasers
failed to complete whereon the vendors obtained an order for specific
performance. The purchasers failed to carry out the order, and the mortgagees
duly enforced their securities by selling the properties. The proceeds of the sale
were insufficient to discharge the mortgage in full, and the vendors moved for an
order that the purchasers should pay the balance of the purchase price to the
vendors. The judge made no order, and the Court of Appeal allowed the vendor's
appeal. On appeal by the purchaser, held, dismissing the appeal that where
specific performance was ordered but not complied with, damages was still
available as an alternative remedy, and damages would be assessed on a
common law basis as at the date when the remedy of specific performance was
aborted.
Photo Production Ltd v Securicor Transport Ltd 1980
The so-called doctrine of fundamental breach does not operate so as to prevent
reliance upon an exclusion of liability clause upon the contract being brought to an
end. The defendants contracted with the plaintiffs to provide a night- patrol
service at the latter's factory premises. The contract excluded liability on the
defendants' part for "any injurious act or default of any employee of the
(defendants) unless such act or default could have been foreseen and avoided by
the exercise of due diligence on the part of the employer; nor in any event shall
the company be held responsible for any loss suffered through fire or any other
cause except in so far as is solely attributable to the negligence of the company's
employees acting within the cause of their employment." One of the defendants'
employees who had been satisfactorily employed by them for some three
months deliberately started a small fire in the factory, the fire getting out of
control and burning down the factory. The Court of Appeal reversed the trial
judge's ruling that the defendants could rely upon the contract as excluding their
liability.
Held, allowing the defendants' appeal, that whether an exclusion clause was apt
to exclude or limit liability was a matter of construction of the contract; that the
fact that a breach may be such as to justify the innocent party in terminating or
treating as repudiated the contract did not mean that the terms of the contract in
so far as they governed liability were not to be enforced; that, generally, parties
to a contract, when they bargained on equal terms, should be at liberty to
apportion liability in the contract as they saw fit; and that the wording of the
exclusion clause in the instant case was adequate to exclude liability for what
occurred.
(ii)
Conditions, warranties and innominate terms
Bunge Corporation v Tradax Export SA 1981
In general, time is of the essence in a mercantile contract, and a term as to time
of performance of an obligation by one party as a condition precedent to the
performance of an obligation by the other party will generally be treated as a
condition. By a contract dated January 30, 1974, buyers agreed to purchase
15,000 tons of soya bean meal, shipment to take place in consignments of 5,000
tons in May, June and July 1975. By cl.7 of the Grain and Feed Trade Association
Ltd.'s standard form contract 119, which was incorporated, it was provided that
"Period of delivery during May 1975 at buyers' call. Buyers shall give at least 15
days' notice of probable readiness of vessel." The buyers gave notice under cl.8
extending the period for delivery to one calendar month. The last day upon
which the sellers could ship the goods therefore became June 30, 1975, and the
last day for the buyers to give notice was June 12. The buyers did not give notice
until June 17. The judge held that the term as to the time for giving notice was
not a condition and that in any event there had been no breach. The Court of
Appeal allowed the sellers' appeal. On appeal to the House of Lords, held, that, in
general, time was of the essence in a mercantile contract; in such a contract,
where a term had to be performed by one party as a condition precedent to the
ability of the other party to perform another term, especially an essential term
such as the nomination of a single loading port, the term as to time for
performance of the former obligation would in general fall to be treated as a
condition. cl.7 was a condition since until notice was given the sellers could not
know which loading port to nominate.
Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd 1962
By a time charterparty, charterers hired a ship ". . . she being in every way fitted
for ordinary cargo service." The owners were to "maintain her in a thoroughly
efficient state in hull and machinery during service." The ship was delivered to
the charterers in February 1957 in reasonably good condition, but chiefly owing
to an inadequate engine room staff, there were serious breakdowns on the first
voyage, resulting in lengthy delays and considerable expense on repairs. In June
1957, the charterers, who had no reasonable grounds for thinking that the vessel
could be made seaworthy before September 1957, repudiated the contract. The
ship was in fact made thoroughly seaworthy by the middle of September, and the
owners sued the charterers for wrongful repudiation of the charterparty.
Salmon, J. held that the owners were entitled to damages. The charterers
appealed.
Held, although the owners were admittedly in breach of their obligation to
deliver a seaworthy ship, seaworthiness was not a condition of the charterparty
the breach of which entitled the charterers at once to repudiate; since, therefore,
the delays caused by the breakdowns and repairs were not sufficient for the
contract to be frustrated, the charterers' claim failed and the appeal must be
dismissed. Per Diplock, L.J.: The shipowner's undertaking to deliver a seaworthy
ship is neither a "condition" nor a "warranty" but one of that large class of
contractual undertakings one breach of which may have the same effect as that
ascribed to a breach of "condition" under the Sale of Goods Act 1893 and a
different breach of which may have only the same effect as that ascribed to a
breach of "warranty" under that Act.
Maredelanto Compania Naviera SA v Bergbau – Handel GmbH (The Mihalis
Angelos) 1971
A clause stipulating a date for expected readiness in a charterparty is a condition,
and a charterer may terminate forthwith on discovering the falsity of the
owner's assurance. On May 25, 1965, the owners let the vessel MA to charterers.
Clause 1 contained an expected readiness clause for "about July 1, 1965." There
was also a cancelling clause if the vessel was not ready to load by July 20, 1965.
The owners had no reasonable grounds to expect the MA to be ready to load on
July 1, or indeed until about July 14. Eventually the ship could not have been
ready for trading until July 25. Meanwhile, however, the charterers discovered
that they had no cargo for the vessel and they cancelled the contract on July 17 as
a case of force majeure. The owners accepted this as a repudiation. They did not
charter the vessel to anyone else, but sold her on July 29. The arbitrators found
that the charterers would beyond doubt have cancelled when the ship missed
her cancelling date, but the owners claimed damages for loss of the charter on
July 17.
Held, (1) that the expected readiness clause was a condition of the contract, the
breach of which entitled the charterers to cancel on July 17; (2) that even had
that not been the case, the charterer would have been entitled to cancel under
the cancellation clause, and the owners would have been entitled to nominal
damages only.
L Schuler A-G v Wickman Machine Tool Sales Ltd 1974
The mere fact that a commercial contract describes one of its terms as a
"condition" does not compel the court to hold that that term is a condition in the
strict sense; the question will be decided by construing the contract as a whole.
Per curiam: In construing a contract, the court could not take into account the
conduct of the parties subsequent to the execution of the contract. S Co., a
German company, entered into a contract with W Co., an English company, giving
W Co. the sole rights to sell S Co.'s panel presses in England. Clause 7 (b)
provided that "it shall be a condition of this agreement" that W Co.'s
representatives should visit six named firms each week to solicit orders. W Co.'s
representatives failed on a few occasions to do so. S Co. claimed to be entitled to
repudiate the agreement, on the basis that a single failure was a breach of
condition, giving them an absolute right to treat the contract as at an end.
Held, that such a breach did not entitle S Co. to repudiate, since such a
construction of the clause was so unreasonable that the parties could not have
intended it.
Sale of Goods Act 1979, ss 12-15 A
(Other doc)
(iii)
Anticipatory Breach
Hochster v De La Tour 1853
Hochster v De La Tour is a landmark English contract law case on anticipatory
breach of contract. It held that if a contract is repudiated before the date of
performance, damages may be claimed immediately.
In April, De La Tour agreed to employ Hochster as his courier for three months
from 1 June 1852, to go on a trip around the European continent. On 11 May, De
La Tour wrote to say that Hochster was no longer needed. On 22 May, Hochster
sued. De La Tour argued that Hochster was still under an obligation to stay ready
and willing to perform till the day when performance was due, and therefore
could commence no action before.
2. DAMAGES
(i)
The general principle
Jeancharm Ltd (t/a Beaver International) v Barnet Football Club Ltd
Abstract: A football club, B, appealed against a ruling that it was liable in
damages to a clothing manufacturer, J. B had previously entered into an
agreement with J pursuant to which J agreed to supply free training kit to the
team and replica kits at an agreed price for sale to the public. Under the terms of
the agreement, if the items in question were supplied late J would be obliged to
pay a penalty of 20 pence per garment per day. Conversely, if B were late in
making payment for the items supplied, interest would accrue at the rate of 5 per
cent per week. Following various difficulties over payment, J invoked the penalty
clause. At first instance the judge upheld the penalty clause which took B's
liability under the contract from approximately GBP 5,000 to GBP 20,000. B
contended that the clause was a penalty clause at common law as well as being
defined as such by contract, with the result that it was unlawful.
Held, allowing the appeal, that the leading authority in relation to the
determination of whether a clause was a penalty clause at common law was still
the case of Dunlop Pneumatic Tyre Co Ltd v New Garage & Motor Co Ltd [1915]
A.C. 79. The courts had continued to apply the principles therein but had also
warned that caution was required before categorising a clause as such when the
parties were of equal bargaining power. In order to be upheld such a clause had
to contain a genuine pre estimate of the damage likely to result from breach,
Dunlop and Robophone Facilities Ltd v Blank [1966] 1 W.L.R. 1428 applied and
Philips Hong Kong Ltd v Attorney General of Hong Kong 61 B.L.R. 41 considered.
An increased rate of interest might constitute a valid clause in certain
circumstances where such an increase still represented a genuine pre estimate of
the damage suffered; however 5 per cent per week represented a yearly interest
rate of 260 per cent. Such a sum did not amount to a genuine pre estimate but
was a penalty clause in the Dunlop sense and consequently unenforceable,
Lordsvale Finance Plc v Bank of Zambia [1996] Q.B. 752 considered.
Alfred McAlpine Capital Projects Ltd v Tilebox Ltd
Summary: Pre-estimated damages calculated for the purposes of a liquidated
damages clause in a contract did not have to be reasonable to be enforceable, and
the court would be predisposed, where possible, to uphold contractual terms
that fixed the level of damages for breach, particularly in the case of commercial
contracts freely entered into between companies of comparable bargaining
power.
Abstract: The applicant (M) applied for a declaration that a liquidated and
ascertained damages clause contained in a construction contract between M and
the respondent (T) was in fact a penalty clause and unenforceable. T had
engaged M as the main contractor on a commercial development and clause 24.2
of the contract provided for a fixed weekly sum of GBP 45,000 in damages in the
event of any delay. T had also entered into a development funding agreement
(DFA) with a third party (S), which was to fund the development up to an agreed
maximum figure in return for T's leasehold interest. T argued that the DFA
required it either to ensure completion by the date stipulated in the DFA or by
the date for completion in the JCT contract with M, failing which it would be
liable to S. T submitted that its potential liability was therefore a foreseeable
loss, included in the liquidated damages clause to provide a genuine estimate of
its losses. M maintained that there was no obligation on T to complete the works
by the date specified, but only to do so within a reasonable time. It fell to be
determined whether the liquidated damages clause was valid and enforceable.
Application refused. Pre-estimated damages did not have to be right to be
reasonable. There had to be a substantial discrepancy between the level of
damages stipulated in the contract and the level of damages that was likely to be
suffered before it could be said that the agreed pre-estimate was unreasonable.
The test for a genuine pre-estimate did not turn on the honesty or genuine
nature of a party: it was primarily an objective one, even though the court would
have regard to the thought processes of the parties at the time of contracting.
Because the rule about penalties was an anomaly within the law of contract, the
courts would be predisposed, where possible, to uphold contractual terms that
fixed the level of damages for breach. That predisposition would be even
stronger in the case of commercial contracts freely entered into between parties
of comparable bargaining power, Law v Redditch Local Board [1892] 1 Q.B. 127,
Clydebank Engineering & Shipbuilding Co Ltd v Don Jose Ramos Yzquierdo y
Castaneda [1905] A.C. 6, Dunlop Pneumatic Tyre Co Ltd v New Garage & Motor
Co Ltd [1915] A.C. 79, Bridge v Campbell Discount Co Ltd [1962] A.C. 600, Philips
Hong Kong Ltd v Attorney General of Hong Kong 61 B.L.R. 41 applied. In the
instant case, under the DFA, T had been required to secure completion by the
date required under the building contract, and at the time the contract was
made, losses flowing from a delay in completion at the level specified in the
liquidated damages clause were foreseeable. In those circumstances, cl.24.2 of
the building contract was not unenforceable as a penalty. It was clearly an
enforceable provision for liquidated damages and not a penalty clause.