Tuesday 6 March 2007

Our last vitiating factor is that of VAGUENESS. If people are going to enter into contracts with one another, they must be clear about what they are contracting for. The courts will not enforce a vague or ambiguous contract.

Scammel v Ouston [1941] – the parties had agreed to the supply of a lorry on ‘hire purchase terms’. In the absence of any other evidence of the higher purchase terms (duration, number of instalments, etc.) the term was too vague to be enforceable.

The courts, however, want to uphold a bargain where they can, and so if they feel able to clarify a point they will.

Hillas v Arcos [1932] – the contract was to supply timber ‘of fair specification’. Now that is certainly vague, but the courts found that the parties knew each other and had dealt with each other in the past, both knew the timber trade well. As there had already been part performance the phrase ‘fair specification’ must be capable of being given a reason by reference to the previous dealings.

If you were an unscrupulous trader you could try to avoid a contract which was going wrong on you by trying to insert some meaningless term which you could later hope the court would interpret as being too vague and bringing the contract to an end. This appears to be the case in:

Nicolene v Simmons [1953] – the contract contained the statement “we are in agreement that the usual conditions of acceptance apply”. There were no usual conditions of acceptance, but the defendant tried to use the phrase as evidence that the phrase was too vague and the contract was, therefore, unenforceable when he was sued for non-delivery of a quantity of steel bars. The phrase can be severed from the contract and what was left made sense. Thus the court can ignore it.

THE DISCHARGE OF A CONTRACT. Contracts do not go on forever, there must come a time when the parties have no further obligations. There are five main ways:

(1) Performance
(2) Agreement
(3) Accord and satisfaction
(4) Breach
(5) Frustration

PERFORMANCE. The most straightforward. “Here is the money - here is the newspaper”. It’s over, the contract has been performed by both parties undertaking what they contracted to do. The problem arises where:

One party has not performed his part of the bargain, or
He has tendered performance late and time was of the essence in the deal (supply ticket to a concert the day after the performance), or
He has only partially performed his obligations

The general rule is – “PART PERFORMANCE IS NO PERFORMANCE AT ALL”. To discharge a contract you must do all that you contracted to do. It may be harsh, but you should think carefully before entering into the contract ...

Cutter v Powell [1795] – the defendant agreed to pay Cutter thirty guineas provided that he served as second mate on a voyage from Jamaica to Liverpool. The voyage set off on 2/8 and Cutter died on 20/9, nineteen days short of Liverpool. His widow brought an action to recover a proportion of the thirty guineas. The contract was an ‘entire’ contract for a lump sum, with nothing payable until completion. He had not fulfilled his part of the bargain, so no payment was due.

If we left it at that it may seem very harsh on the widow Cutter indeed. However, that thirty guineas was about four times the going rate for the job it may not appear so harsh. Cutter was willing to gamble a weekly sum for the chance of a much greater prize and he lost.

Bolton v Mahadeva [1972] –the case makes two important points. The claimant agreed to install a central heating system for the defendant, for a lump sum of £560. He also agreed to supply a bathroom suite. On completion of the central heating installation it was inefficient, and cost of repairs was £174. The Court of Appeal held that the claimant had not substantially performed and was not entitled to payment in relation to the heating. The supply of the bathroom suite, however, was severable and an appropriate proportion of the contract price was recoverable in relation to this obligation.

The courts have brought in exceptions to mitigate the situations.

SUBSTANTIAL PERFORMANCE – where performance is nearly complete some payment is made to match the extent of the performance on a basis called quantum meruit (as much as he has earned).

Hoenig v Isaacs [1952] – there were found to be defects (repairable at a cost of £55) in work done in redecorating a flat. The total contract price was £750. There was substantial performance and the claimant could recover the contract price less the cost of repair.

SEVERABLE CONTRACTS –discussed in Bolton v Mahadeva [1972] (above). If a contract can be seen as a collection of smaller ones, e.g. instalment deliveries, then payment can be claimed for those actually delivered.

PREVENTING PERFORMANCE – one of the parties prevents the other from fulfilling his obligations, payment can be awarded up until that time. Contract with a decorator for the lounge to be decorated. He comes on day one and does the gloss work, and you find out he has a conviction for child molesting so you won’t let him in again. You owe him for the day’s work.

Planche v Colburn [1831] – an author was commissioned to write a book, and the contract was cancelled after he had half completed it. He recovered 50% of the contract.

PART PERFORMANCE ACCEPTED – okay, I’ll settle for what you have sent. You have to pay for it. Contract with someone to deliver a load from Dover to Newcastle and the lorry breaks down in Leicester. You agree to send another vehicle to carry on with the load, you will be liable to pay for the Dover to Leicester journey.
AGREEMENT. A contract is formed by an agreement, and so can be discharged in exactly the same way. Both parties agree to bring it to an end. In fact, both parties enter into an agreement not to sue each other for a breach of the contract, and this is a valuable consideration.

ACCORD AND SATISFACTION. A performs his part of the contract, but B has yet to perform his part of the bargain. A may release B from his obligations, but to do so this release must be:

By deed so requiring no consideration in order to be valid, or
With valuable consideration.

In the second instance A receives a benefit for giving up his rights against B. It is this agreement, coupled with valuable consideration, that is said to accord and satisfy, the original obligation becomes discharged.

The accord is the agreement by which the original agreement is discharged, the satisfaction is the consideration which makes the new agreement operative.

The agreement will provide accord and satisfaction if the creditor offers the debtor something different. This is known as the rule in -

Pinnels Case [1602] – Cole owed Pinnel £8/10/6d, due on 11th November. At Pinnel’s request, Cole paid £5/2/2d on 1st October, which Pinnel accepted in full settlement of the debt. We know that part payment in itself was not good consideration, there has to be the something extra, a chattel, or payment at a different place or on a different date. As payment had been made early this was valid consideration and met the requirements of accord and satisfaction.

Foakes v Beer [1884] – confirmed the rule in Pinnels Case. Dr Foakes owed Mrs Beer a sum of money in relation to a judgement debt. She agreed that he could pay off the debt in instalments, and when he had done so she sued for the interest on the debt that had been lost by waiting for the money. Dr Foakes claimed that she had agreed to the instalments and to forgo the interest, but even if that were true it was unenforceable as he had not provided consideration for the promise.

BREACH. The innocent party to a breach is entitled to recover damages. A serious breach also allows for the contract to be discharged as well, leaving him with no further obligations under it.

This would follow from the breach of a CONDITION, but not a WARRANTY.

If a party refuses in advance to keep his side of the contract it will be an ‘anticipatory breach’. The other party may then:

sue immediately – Hochster v De La Tour [1853]
wait until the performance date arrives to see what happens. Can then sue for an actual breach if no performance is made.

The danger in the latter is that the innocent party remains a party to the contract until the breach, a frustrating event means that he would then receive nothing.

FRUSTRATION. A contract, as a result of some event outside the control of the parties, becomes impossible to perform, at least in the way that was originally intended. What are the rights and liabilities of the parties?

The rule is that if you take on a contractual obligation you are bound absolutely.

Paradine v Jane [1647] – the court took the view that obligations were not discharged by a frustrating event, and that a party who failed to perform as a result of such an event would still be in breach of contract. The justification for such a harsh approach is because the parties could, if they had wished, provide for the eventuality within the contract itself.

This rule was considered too strict, even for 19th century courts, with the courts taking the view that it was not for them to interfere to remedy a perceived injustice resulting from a freely negotiated bargain. The modern law comes from the case of:

Taylor v Caldwell [1863] – Caldwell agreed to let a music hall to Taylor to hold concerts there. After the agreement, but before the first performance, the hall was destroyed by fire. The Music Hall having ceased to exist without the fault of either party, both parties are excused, the claimant from taking the premises and paying the money and the defendant from performing the promise to grant the use of the hall.

It was from this decision that the doctrine of frustration developed; where parties to a contract are excused from further performance of their obligations if some event occurs which, without the fault of either party:

makes further performance impossible, or
makes further performance radically different from what was originally undertaken, or
makes further performance illegal.

Condor v The Barron Knights [1966] – the drummer in the group became ill, and was available for only four nights of a seven night engagement. The contract was discharged by frustration.

Krell v Henry [1903] – the claimant hired a room to overlook the route of the Coronation procession. The procession was cancelled, and whilst it was possible to still hire the room and look out of the window the whole purpose of the contract was futile and discharged by frustration.

By contrast, another case involving the cancellation of the Coronation, is:

Herne Bay Steamboat Co v Hutton [1903] – here the contract was that the claimant’s boat should be ‘at the disposal’ of the defendant on the 25th June to take passengers from Herne Bay to watch the naval review, which the King was to conduct, and for a day’s cruise around the fleet. The King’s illness led to the review being cancelled. This contract was not frustrated. The fleet was still there, only the King was missing, and so the tour could still go ahead. The effect on the contract was not sufficiently fundamental to lead to it being regarded as frustrated.

The Super Servant Two [1990] – the defendant agreed to carry the claimant’s drilling rig from Japan to Rotterdam. It was to be delivered between 20/6/81 and 20/8/81, and was to be carried by what the contract described as the ‘transportation unit’. This was either Super Servant One or Super Servant Two. The defendant had intended to use Super Servant Two, but on 29/1/81 it sank. Super Servant One had already been contracted to a third party. The defendant decided not to break the contract with the third party and claimed that the contract to carry the claimant’s drilling rig was frustrated. The claimant alleged that the impossibility of performance arose from the defendant’s own acts, and that they should not, therefore, be discharged from performance. The matter ended up at the Court of Appeal who agreed with the claimant. Even though the defendants were not negligent, nor in breach of contract, in the way that they had allocated the vessels, they were still liable under the contract to the claimant.

Just because it becomes more expensive to perform the contract it will not amount to frustration: Davis v Fareham UDC [1956] – the claimant agrees to build seventy-eight houses in eight months at a fixed price. Bad weather and labour shortages extended this to twenty-two months, and ran £17,000 over budget. Builders claim the contract to be frustrated, court didn’t agree.

Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd [1943] – an English company made a contract to supply machinery to a Polish company, and they paid £1,000 on account. Germany invaded Poland, frustrating the contract and the Poles sought their £1,000 back. Since they had received nothing at all under the contract there had been a total failure of consideration, and recovery was therefore possible.

So the law at that time seemed to be in a mess, which is where statutory intervention was to come in. The LAW REFORM (FRUSTRATED CONTRACTS) ACT 1943 provides as follows:

The Fibrosa decision was extended by providing that money PAID BEFORE the frustrating event CAN BE RECOVERED even though the failure of consideration is only partial.
Money DUE but not paid before the frustrating event is not payable.
A party incurring expenses may be awarded them UP TO THE LIMIT OF THE SUMS PAID OR PAYABLE TO HIM ...
A party who has obtained a VALUABLE BENEFIT under the contract may be required to pay a just sum for it.

Gamerco SA v ICM [1995] – “Guns ‘n’ Roses” were booked to appear in a concert in Madrid, but a few days before the concert the venue was banned on safety grounds. The promoters claimed the fee back from the band’s agents, and they in turn counter-claimed for breach of contract. The High Court held that the contract was frustrated, allowing the promoter to recover their money, less “reasonable expenses” incurred by the band’s agent. In fact, the court ordered no expenses to be paid as the claimants had already suffered a considerable loss.

REMEDIES FOR A BREACH OF CONTRACT
The remedies available are:

Damages (the main remedy)
Specific Performance ]
Injunction ] equitable only
Rescission ]

DAMAGES. The basic principle of the award of damages is to put the parties in the position that they would have been had the contract been performed satisfactorily. Thus it is compensation, not punishment.

Victoria Laundry v Newman [1949] – a contract for a laundry boiler was breached because of late delivery. The loss claimed was twofold:

(1) loss of extra business profit and
(2) the loss of certain special Ministry of Supply contracts.

The claimant had not told the boilermakers of these special contracts, but could have foreseen the normal business loss. Asquith LJ said:

“It is well settled that the governing purpose of damage is to put the party whose rights have been violated in the same position, so far as money can do so, as if the rights had been observed... This purpose, if relentlessly pursued, would provide him with a complete indemnity for all loss de facto resulting from a particular breach, however improbable, however unpredictable. This, in contract at least, is recognised as too harsh a rule. Hence, in cases of breach of contract the aggrieved party is entitled to recover such part of the loss actually resulting as was at the time of the contract reasonably foreseeable as liable to result from the breach. What was at the time reasonably foreseeable depends on the knowledge possessed by the parties or, at all events, by the party who commits the breach.”

The rule on remoteness of damages, as this is called, came from the case of:

Hadley v Baxendale [1854] – a replacement crankshaft for a mill was very late in being delivered. No damages were recoverable because the carriers were unaware that no spar shaft was kept, or that the mill was at a standstill.

A claimant is always expected to mitigate his loss. So if you cancel a hotel booking the hotel should try to re-let the room, even at a discount if necessary. You will be liable for the difference. The hotel loss would be the ordinary, reasonably foreseeable, loss. Any extra loss could only be claimed if you were made aware of it at the time that the contract was formed.

QUANTUM OF DAMAGES. Before an award of damages can be made, you look at remoteness and causation as we have already seen. The main issue relates to the quantum, which simply means being put in the same position he would have enjoyed had the promise been fulfilled.

No loss leads to only nominal damages.

Damages may be recovered for physical injury but not usually for injury to feelings. There is an exception to this, where the provision of enjoyment is a purpose of the contract.

Addis v Gramophone Co. Ltd [1909] – the claimant was wrongfully dismissed by the defendants. As well as claiming for his dismissal he claimed for injured feelings. It was held that such damages are not recoverable.

Johnson v Unisys Ltd [2001] the claimant sought damages from his former employer for suffering a nervous breakdown as a result of the manner of his dismissal. Both the High Court and Court of Appeal dismissed the claim on the basis of the Addis decision. The House of Lords also dismissed the claim, but stated that to allow the claim would side-step the statutory scheme for unfair dismissal and its statutory maximum.

Jarvis v Swan Tours [1973] – a package holiday fell below the standard promised, and damages were awarded for the distress and disappointment caused.

SPECIFIC PERFORMANCE. Forces the party in breach to perform what he has agreed to perform. This is only granted where the subject matter of the contract cannot be expressed in monetary terms, e.g. Van Gogh painting, Stradivarius violin. As the law considers all land as unique commodities it is very commonly used as a remedy where contracts for sale of land go wrong.

INJUNCTIONS. These are to stop a breach from occurring, e.g.:

Warner Brothers v Nelson [1937] – a strange decision in some ways, and has been disapproved of in later cases (although not overturned). Bette Davis had been restrained for working in films or theatre companies. The court held that this didn’t mean that she was compelled to work for Warner Brothers because she could have found work in professions other than acting!

RESCISSION. It undoes a contract and puts the parties, as far as it is possible, back to their pre-contractual positions.

QUANTUM MERUIT. The performance is rewarded according to worth - ‘as much as he has earned’.

TIME LIMITS
On a simple contract - six years.
On a deed – twelve years.

Don’t take this long over an equitable remedy: “Delay defeats equity”.
LIQUIDATED DAMAGES CLAUSES. Most arguments do not involve whether or not there has been a breach of the contract, rather how much the breach will cost. This assessment takes a lot of court’s time and is, therefore, expensive for the parties. The way around this is to include ‘liquidated damages’ clauses into the contract to pre-determine the amount payable in the event of a breach. The law requires this to be a fair and genuine assessment of the loss, but if it is not and the amount actually exceeds the loss suffered it is called a penalty and is not enforceable.

Kemble v Farren [1829] where an actor’s contract provided that a party in breach must pay £1,000 in “liquidated damages”. This was held to be a penalty clause, as the actor’s daily fee was £3.33, out of all proportion to the clause.

If the parties are of equal bargaining power, as is normal in commercial contracts between businesses, then other factors may outweigh a plea that a term is, in reality, a penalty.

Philips Hong Kong Ltd v A. G. of Hong Kong [1993] –unless the parties were on very unequal terms, the desirability of achieving certainty in a commercial contract was paramount. Thus a term normally considered to be a penalty can become a perfectly valid liquidated damage clause.