Agreed remedies

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  • Created by: Nikki
  • Created on: 14-04-16 17:05

Remedies for breach if no agreement (summary)

Damages available in event of breach

  • Damages generally compensatory
  • Most common measure of damages is the 'expectation' of 'performance' interest
  • Gain-based damages (disgorgement) highly exceptional

Specific remedies

  • action for an agreed sum
  • specific performance is discretionary 

Termination

  • for breaches of conditions and serious breaches of 'innominate terms', the victim of breach can elect to terminate the contract
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For and against agreed remedies

For

  • default rules don't always suit parties' needs
  • both parties benefit ('ex ante')
  • a seemingly objectionable clause may be fair as part of a wider deal
  • agreed remedies provide certainty for parties
  • reduce litigation
  • freedom of contract

Against

  • only one party benefits
  • losing party felt she had no choice 
  • losing party didn't even know about the agreed remedy (standard form)
  • losing party would never have agreed if she had understood the real risks
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Termination clauses

Grant an express right to terminate the contract

2 ways to write a termination clause:
(1) state expressly that a term of the contract is a condition
(2) state expressly that one party has the right to terminate 

Oversight

  • courts use interpretive techniques to limit harsh results
  • (1) court may say parties didn't mean to use the word 'condition' in the technical sense of the word (Schuler AG v Wickman)
  • (2) courts may construe an express right to terminate narrowly (Rice v Great Yarmouth BC)
  • courts may treat termiantion under an agreed 'termination clause' as less remedially potent than breach of a conditon proper --> thereby restricting damages avaialble (e.g. Fianncings Ltd v Baldock)
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Deposits

A deposit is a fixed sum of money payable in advance, forfeitable on breach, as a guarantee of performance

Law will not order repayment of a deposit (so long as it's not excessive)

Law treats deposits differently from penal damages clauses --> yet a deposit looks like a penalty clause, except the money is paid before breach --> is that a relevant difference?

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Exemption clauses (1)

A exemption clause is a provision in a contract that:
- bars a suit for breach (exclusion clause)
- limits the extent of liability for breach (limitation clause)

Can be used for good and bad --> party may want to:
- provide certainty in advance
- allocate risk to a party better able to purchase insurance or bear the loss
- escape responsibility 

Common law regulation (indirect)
- is this clause really incorporated into the contract?
- does this clause really cover this kind of breach or loss?

Legislative regulation --> UCTA and CRA

Courts generally uphold commercial allocations of liability as reaosnable, but not always

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Exemption clauses (2)

Legislative regulation 

  • UCTA --> now applies only to non-consumer contracts
    • s3 - clauses exempting a party from liability via that party's standard terms
    • s6(1A);7(1A) - clauses exempting liability for selling/supplying defective goods
    • s2(2) - clauses exempting liability for negligence (apart from personal injury/death)
    • reasonableness --> s11, sch 2
      • judged at time of contract 
      • factor include:
        • parties' relative bargaining strength
        • did customer receive an inducement?
        • did customer know about term (or should they have known?)
  • Consumer Rights Act 2015
    • unfair terms not binding on consumer (s62(
    • terms defining main subject matter/price exempt if transparent & prominent (s63)
    • attempts to exclude implied terms & remedies in consumer sales are invalid (s31
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Specific enforcement

SPECIFIC PERFORMANCE and INJUNCTION

  • law only awards this remedy in narrowly defined circumstances
  • mandatory injunction --> compels D to undo effects of breaching a negative undertaking
  • prohibtory injunction --> specifically enforces a contractual obligation not to do something
  • courts tend to believe it's up to them, not the parties, to determine wehtehr specific performance is appropriate 
  • Quadrant Visual v Hutchinson Telephone --> CA held that discretion to grant SP belongs to courts and cannot be usurped by parties
  • injuctions are granted more liberally and clauses stipulating prohibitory injunctions are persuasive although not determinative (Warner Bros v Nelson 

GAIN-BASED DAMAGES

Invalid as penalty?

Reid-Newfoundland Co v Anglo-American Telegraph 

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Agreed sum

Contract may require D to pay a specific sum on D's breach, on occurrence of a specified event or condition that does not constitute breach, or as a deposit, pre-payment or instalment 

Distinguishable from claims for damages becaue C need not prove any loss caused by D's breach, merely that he has earned the sum by due performance (and his claim cannot be reduced for being too remote or for his failure to mitigate his loss)

Advantages for C --> availability of summary judgment; additional availability of damages

D's interests protected by --> strict interp of  pre-condition for payment; allowing D's set-off; restricting C's right to affirm

Courts reluctant to impose direct restriction on action for agreed sum because this would overtly control fairness of contract

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Liquidated damage and penalties (1)

'If you breach this term, you must pay £100k' 

Why would parties want to do that?
- provide certainty where law is often uncertain
- law's default damages rules don't always provide full compensation
- communicate credibility of commitment
- compensate for a high risk of default
- ensure that the contract is not breached

Scope of penalty rule

  • penalty rule only applies to payment on breach --> has been extended to a transfer of shares on breach
  • penalty rule can be evaded by redrafting the term in the following ways -->
    • stipulating sums payable on events other than breach
    • varying the payment due on events other than breach

Reasonableness of agree damages clause depends on following factors:
- proportionality
- extent of deviation from actual or compensable loss
- relative bargaining power of parties
- whether the amount stipulated is unconscionable

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Liquidated damage and penalties (2)

Traditional approach 

  • liquidated damages clauses = enforceable --> purpose to specific compensation in advance: a genuine pre-estimate of loss from breach
  • penalty clauses: unenforceable --> purpose to punish contract breaker and deter breach
  • parties label signfiicant but not conclusive
  • question judged at time contract was made
  • key question: relation between specified sum and loss resulting from breach of contract
  • courts' guidelines:
    • Dunlop Pneumatic Tyre v New Garage
      • sum is 'extravagant and unconscionable' in comparison to possible loss from breach --> penalty
      • oblgiation is just to pay money, and contract specifies a greater sum --> penalty
      • single lump sum covers several events, some causing serious loss, others causing trviial loss --> penalty presumed
      • courts give wide margin for error in pre-estimates of damage, especiall in conditions of uncertainty
    • courts more likley to uphold clause between commercial parties (Philips HK v AG of HK)
    • even where no pre-estimate of loss, courts sometimes find a (non-penal) 'commercial justification' 
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Should penalty clauses be enforced?

'The law of penalties is a blatant interference with freedom of contract' Makdessi v Cavendish New Square (CA) (Chrisopher Clarke LJ)

If parties toa commercial contract wish to bind themselves to a penalty clause, should the courts second-guess their decision?

Some jurisdictions, e.g. France enfore penalty clauses

Justification for penalty rule:

  • preventing over-compensation
    • agreed damages should only compensate C for failure to receive due performance of primary terms
    • FOC as applied to agreed damages amounts only to a margin of error for reaosnable estimations of common law damages when the contract is made, although a wide margin of error is allowed
  • prevention of punishment
    • law should not punish breach of contract and parties should not be permitted to punish each other --> compensation in excess of what court would award constitute punishment
  • prevention of indirect specific enforcement
    • parties should not limit court's discretion to grant SP by stiuplating such a punitive payment that it coerces performance
  • prevention of unfairness
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Penalty rule post-Makdessi

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