Contract Lecture 14

[ACTION FOR AN AGREED SUM & LIQUIDATED DAM AGES]

Action for agreed sum: enforces Ds primary obligation LD: secondary remedial agreed damages

What is an action for an agreed sum?

y y y y

Most common remedy: owe money, sue for the price unpaid, the agreed sum. The P is claiming for the price of the goods / services that had been rendered. Seeking to enforce the Ds contractualobligation to pay the agreed sum after P performed its own. Claim in debt rather than a claim in damages that represents a specific performance of the Ds obligation to pay.

Distinguished from damages

y y

No need to quantify the loss, not subject to the rule of remoteness nor to mitigation. Stipulated sum, a debt that is owed. (Court proceedings are carried out quite quickly. Summary judgment)

The law of contract draws a clear distinction between a claim for payment of the debt and a claim for damages for breach of contract. a debt is a definite sum of money fixed by the agreement of the parties as payable by one party to the other in return for the performance of the specified obligation by the other party or on the occurrence of some specified event or condition; whereas damages may be claimed from a party who has broken his primary contractual obligation in some way other than by failure to pay such a debt. The plaintiff who claims payment of a debt need not prove anything beyond the occurrence of the event or condition on the occurrence of which the debt became due. He need prove no loss; the rules as to remoteness of damage and mitigation of loss are irrelevant (per Millett LJ, Jervis v Harris)
Difficulties:

y y

Defence that the Ps performance is defective, thats why D withheld the sum, arguing that the responsibility is discharged. Where the D prevents the P from completing the performance. P can only claim when he performed his entire obligation. Cant claim the agreed price.

Limitations on continuing performance and claiming the agreed sum

y

What if before one party has performed his obligations, the other party informs him that he wants to discontinue the contract (anticipatory breach), can the innocent party continue with the contract and claim for the agreed sum? Is there a right to affirm the contract and claim for the agreed sum?

Ability to continue performance without co-operation of the other party

y y o o

Innocent party unable to continue performance if cooperation of breaching party is required **White & Carter (Councils) Ltd v McGregor White and Carter were advert contractors. McGregor was a garage owner. Contract: display Ms business at the front of little bins in the region for 3 years.

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[ACTION FOR AN AGREED SUM & LIQUIDATED DAM AGES]

On the same day before M has incurred any expenses, M informed W and C that they no longer wanted to go ahead with the contract. Sought to repudiate the contract. W and C refused and chose to affirm the contract, proceeded to make posters for the bins. Later on, they sued for the agreed price. HoLMajority: W and C were entitled to performance and claim the agreed price. Hounslow London Borough Council v Twickenham Garden Developments Ltd Building contractors were unable to continue with the performance of the building contract because it required them to access to property belonging to the local authority, which needed permission from the authority require cooperation.

Necessity to show a "legitimate interest"

y y y y y y o y

o y o o o o

D could argue that it would lead to a waste of resources if there was no substantial or legitimate interest P have to show there is legitimate interest in continuing to perform the contract and claim the agreed sum (Lord Reid) P has a choice: either accept the anticipatory breach and claim damages immediately or to affirm the contract and claim the agreed sum In cases where there is not much difference between them, damages will be a more adequate remedy White & Carter StoczniaGdanska SA v Lativian Shipping Co the innocent party must have reasonable grounds to keep the contract open (vs. The Odenfeld) Gator Shipping Corp v Trans-Asiatic Oil Co Ltd SA and Occidental Shipping Establishment (The Odenfeld) any factor/restriction on the innocent party's right to choose to affirm the contract and continue with performance will only be applied in extreme cases where it would be held wholly unreasonable to do so not particular difficult, quite easy to show legitimate interest **Ocean Marine Navigaiton Ltd v Koch Carbon Inc (The Dynamic) Lord Simon: established an exception to the general rule (innocent party can choose whether to affirm or not) burden on breaching party to show innocent party has no legitimate interest in continuing with performance rather than claiming damages the burden is not discharged merely by being able to show the benefit to the innocent is very small relative to the harm the breaching party would suffer, if performance is continued. only apply to extreme cases, where damages would be an adequate remedy and where an election to keep the contract alive would be unreasonable (The Odenfeld) (the word wholly does not add anything to the test) quite difficult to establish this exception

Disadvantageous for the innocent party if they were just to claim damages
y y

Might affect its reputation, this loss which cannot be accurately assessed by damages Upsetting complicated contractual relationship (owe obligations to third parties as well)

Criticisms of allowing continuance of unwanted performance Wasteful performance

Contract Lecture 14
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[ACTION FOR AN AGREED SUM & LIQUIDATED DAM AGES]

o o

y o

o o

o y o o o o o

White & Carter (Councils) Ltd v McGregor (above) Lord Keith (dissenting judge in White & Carter): by allowing the W & C to succeed will be contrary to the rule that, where the party is in breach of contract, the other must take steps to mitigate the loss sustained by the breach Incurred unnecessary expense Did appellants mitigate their loss? They could have relet the advert place to someone else. But the burden of proving this should be on the respondents and they failed to do so. Never became an issue of the case. (The Puerto Buitrago) Attica Sea Carriers Corp v Ferrostaal a Charter party hired a ship and the contract required the charterer to repair the ship before returning it back to the owner Owners entitled to refuse unless the repairs were carried out held: could not insist on the charterer to repair the ship and claim the agreed price as there was no legitimate interest (repairing costs far exceeded the value of the ship even after repairing) still a remedy in damages (certainly still a breach of contract) The Alaska Trader charterers repudiated the contract but the owners affirmed, keeping the ship at charterers disposal owners also spent some money on repairing the unwanted ship spent more than the ship was actually worth sought to claim the hire fee from charterers held: wholly unreasonable, no legitimate interest, not entitled to agreed price

Hardship?
y y y y

unfair to pay for unwanted performance strike a balance between the agreed sum and performance. There may be cases where the agreed sum is high than damages want to sue for agreed price no conclusive authority W and C: damages would have been nominal because the contract was breached on the same day. Better to claim the profit: in their interest to do that.

Liquidated damages
y y y

where the parties agreed on the a definite sum: if there were a breach of contract, the sum would be paid genuine pre-estimation of loss in the event of breach sum payable regardless of actual loss

The law generally permits the parties to fix their contractual liabilities by agreement. They can, for instance, agree that if certain breaches occur, the party in breach is to pay to the other party a definite sum by way of liquidated damages. Stipulations for liquidated damages focus on the loss considered likely to result from foreseeable breaches and aim to quantify in advance the damages payable. They establish an agreed measure of damages payable after breach. Where a breach is covered by a liquidated damages clause, the amount prescribed by that clause represents the agreed sum of damage payable, regardless of the quantum of actual loss. This applies where the actual loss is in fact less than the liquidated damages amount (provided of course the clause represents a genuine

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[ACTION FOR AN AGREED SUM & LIQUIDATED DAM AGES]

pre-estimate of loss and has not been invalidated as a penalty). This also applies where the actual loss exceeds the amount payable under the clause. (perRibeiro PJ, Polyset Ltd v Panhandat Ltd)

Advantages of liquidated damages

y o y y

RobophoneFacilities Ltd v Blank (Diplock LJ): know in advance their extent of liability risk assessment if there were a breach, might not have to go to court

Liquidated damages v. Penalties

y

y y y y

penalty if the sum was disproportionately high (Dunlop: extravagant and unconscionable in comparison with greatest loss that could conceivably be proved) (punitive session to deter/discourage someone from breach of contract) no punitive damages in contract law damages is to compensate the innocent party should not uphold the penalty clause because it would be contrary to the theory of efficient breach does not have to be precise (actual loss incurred and pre-estimation loss)

The Question: a genuine pre-estimate of loss? A question of construction

y o

y o o

**Dunlop Pneumatic Tyre Co Ltd v New Garage & Motor Co Ltd: general rules to aid the court in determining whether the clause is a valid damages clause or a penalty 1. although parties in a contract may use labels(damages/penalty), but mere labels are not conclusive (some evidence only) 2. absence of a penalty is something to deter the parties from breach of contract 3. judge at the time of making the contract, not at time of breach **PhilipsHong Kong Ltd v Attorney-General of Hong Kong this principle does not mean what happens subsequently is irrelevant what happens after as a result of the breach is valuable evidence of what could reasonably expected to be in the loss at the time of contract formation (the status of the clause might not be known until breach) 4. it would be a penalty if the sum is extravagantly or unconscionable high 5. it would be a penalty if the breach consists only in not paying a sum of money that is greater than the sum that ought to be paid  contrast that with some clauses known as acceleration clause (accelerate the payment - remain of balance due immediately) Dunlop: presumption that there would be a penalty when a single lump sum is payable on the occurrence of one or more or all events without discriminating between them (some breaches severe, some little in consequence)  Philips: can be rebutted (p. 282)  not be penalty when sum stipulated is proportionate to the severity of the breach  non-completion is just one single event though there may be a lot of causes for noncompletion (delay)

Contract Lecture 14 

[ACTION FOR AN AGREED SUM & LIQUIDATED DAM AGES]

y y

not a case of different causes of loss being compensated by same figure of liquidated damages  no obstacles for the sum being found to be valid  pre-estimated loss is the true bargain between the parties Dunlop: valid liquidated damage clause even though it was of uncertain nature (cannot be accurately ascertained) Philips: no obstacles to find the sum valid liquidated damages even though it is virtually impossible to calculate in advance

A restrictive approach to the rule against penalties

depend on the number of circumstances, existence of disproportionate sum, nature of the relationship between contracting parties not ready to find unless it intervene the freedom of contract y Philips Hong Kong Ltd v A-G of Hong Kong o the general rule against penalties is very difficult to establish (particularly in commercial contracts, where parties have more access to lawyers/means) o (p. 279) tried to argue that the stipulated sum was penal o Not in relation to the actual loss that was suffered by the HK government o But rather in relation to a number of hypothetical situations (broad range of situations where in some, sum stipulated in the contract would be accepted and would constitute a penalty) o However the Privy Council took the view that although the injured party might in certain circumstance (unlikely illustration) derive a benefit totally out of proportion to the total loss actually incurred, it is not sufficient to establish that a provision is objectionably penal o (p. 283) error to assume :because in some hypothetical situations, the loss suffered would be less than the sum quantified as liquidated damages, that provision must be a penalty (not enough -> penalty) o general test: genuine? but not question of hypothetical situations o if such hypothetical situations could be taken in account, it would be extremely difficult for the contract draftsman to draw the liquidated clause that would not become the penalty clause y Elsey v JG Collins Insurance Agencies Ltd o the power to strike down penalty is blatant interference with freedom of contract o only there to provide relief against oppression for parties having to pay the agreed sum o only be applied where there is evidence about oppression y Re Mandarin Container o stressed the commercial nature of the contract (more equal bargaining power) o court should be slow to find it a penalty

Q: What about consumer contracts?

y y o o y y

consumer contracts: excess high liquidated damages Shum Kit Ching v Caesar Beauty Centre paid to join as gold member of beauty salon, then wanted to repudiate the contract violated the rule of penalty not to set too stringent standards bearing in mind what parties agreed should normally be upheld

Contract Lecture 14
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[ACTION FOR AN AGREED SUM & LIQUIDATED DAM AGES]

otherwise leads to uncertainties, especially in commercial contracts (the need for commercial certainty)  test for distinguishing: whether the sum was a genuine pre-estimate of the likely loss? or is there evidence of oppression and domination coupled with a stipulated sum which is extravagant/highly disproportional to the reasonable conceivable losses?

Q: does the rule against penalties only apply to stipulated sums of money?
y

also apply to transfer of property

Some controversial questions Q: Does the plaintiff have a duty to mitigate the loss?
y y y

no duty as legal obligation would not be compensated for the part of damages that plaintiff could have prevented desirability of avoiding waste (plaintiff has incentive to mitigate anyways)

Q: Can a stipulated sum which turns out to be lower than the actual loss constitute a penalty
y y y y

actually have to pay lessbut still possible when originally an extravagant sum becomes inadequate after a change in circumstances the provision is valid as the rule against penalty is to prevent oppression against the devoting party unclear: LD should be assessed at the time when the contract was made Do stipulated sums which aim to be lower than the actual loss constitute limitation clauses?  must have known that the actual loss suffered would exceed the amount stipulated payable  not a limitation clause  account limited is fake

Q: Is a stipulated sum payable on an event other than breach subject to the rule against penalties?
y y o o o

does not apply *Alder v Moore insurance company paid an injured football player the football player agreed to repay if he resumed playing again held: this requirement to pay the amount did not amount to penalty 1. not extravagant 2. the rule against penalty would not apply anyways dissenting:

Q: What about a stipulated sum payable either on breach or on an event other than breach
y o o o o

Bridge v Campbell Discount Co Ltd rule against penalties should be applied (orbita by Lord Denning) otherwise lead to an absurd paradox do not want to extend the restrictive approach (if they do, only for commercial certainty) anticipatory breach: mitigate from time of actual breach (clear that she would not pay)

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[ACTION FOR AN AGREED SUM & LIQUIDATED DAM AGES]

if it was accepted it was anticipatory breach, nominal damages would be awarded. (not yet started preparing the dish)

debt: limitation with continuing performance - can he perform without cooperation? yes - is there legitimate interest? burden on Lucinda to show (benefit would be small in relation to the loss she would suffer - would discharge the burden) - is this an extreme case? own conclusion