Discharge of contract and remedies - Damages

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Overview

Understanding the details of contract discharge and remedies, especially damages, is key for legal practitioners and SQE1 FLK1 exam candidates. This guide delves into contract termination methods, the principles behind damages, and their practical uses, essential for handling complex contractual disputes effectively.

Methods of Contract Discharge

Contracts can be ended through several mechanisms, each with distinct legal effects:

1. Performance

This straightforward method occurs when all parties fully meet their contractual obligations. Once complete, the contract is terminated, with no further duties remaining.

2. Breach

A breach happens when a party fails to fulfill their obligations. The severity of the breach affects the remedies available to the innocent party:

  • Material Breach: A serious failure affecting the contract's essence, allowing termination and a claim for damages.
  • Minor Breach: A less severe infraction that doesn't justify termination but may still allow for damages.

3. Agreement

Parties can mutually agree to end a contract before completion through:

  • Accord and Satisfaction: A new agreement replaces the original, usually involving a compromise.
  • Novation: A new contract supersedes the original, potentially with new parties.
  • Release: One party releases the other from their obligations, often for a consideration.

4. Frustration

Frustration occurs when an unforeseen event makes contract performance impossible or drastically different than intended. This applies to events that are:

  • Unforeseeable: Not reasonably anticipated at the time of contract formation.
  • Fundamental: Radically altering the contract, making performance impossible or very different.

The case Davis Contractors Ltd v Fareham UDC [1956] AC 696 established the modern doctrine of frustration.

Remedies for Breach: Damages

Damages are the most common remedy for contract breach, aiming to compensate the non-breaching party for losses incurred. The goal is to restore the innocent party to the position they would have been in if the contract had been fulfilled.

Types of Damages

  1. Expectation Loss (Expectation Damages)

    • Compensates for the anticipated contract benefit.
    • Calculated as the difference between the claimant's actual position and where they would have been had the contract been performed.

  2. Reliance Loss (Reliance Damages)

    • Covers expenses the innocent party incurred due to the contract.
    • Claimed as an alternative to expectation damages when they are hard to quantify.

  3. Restitution

    • Restores benefits the innocent party provided to the breaching party.

Example: The Manufacturing Contract

A manufacturing company orders components from a supplier, who breaches by failing to deliver. The manufacturer may claim:

  • Expectation damages: Lost profits from unproduced products.
  • Reliance damages: Costs of preparing production lines.
  • Restitution: Return of any advance payments.

Constraints on Damages

Claiming damages is subject to several constraints:

1. Causation

The loss must be directly caused by the breach, established through the "but-for" test.

Barnett v Chelsea & Kensington Hospital Management Committee [1969] 1 QB 428 illustrates this principle.

2. Remoteness

Only losses foreseeable at the contract formation time are recoverable, as established in Hadley v Baxendale (1854) 9 Exch 341.

3. Mitigation

The non-breaching party must take steps to minimize their losses.

The principle is shown in British Westinghouse Electric Co Ltd v Underground Electric Railways Co of London Ltd [1912] AC 673.

Calculating Damages

Damages can be calculated using various methods:

1. Cost of Cure

Calculates the cost to rectify the breach and restore the non-breaching party to their rightful position.

2. Difference in Value

Calculates the difference between expected contract value and actual value received.

3. Loss of Profit

Damages often include lost profits, requiring detailed analysis of projected revenues and costs.

Case Study: Ruxley Electronics

In Ruxley Electronics and Construction Ltd v Forsyth [1996] AC 344, the House of Lords considered cost of cure and difference in value methods, awarding a sum for loss of amenity.

Agreed Damages Clauses

Contracts may include liquidated damages clauses specifying compensation amounts for breaches. Valid clauses must:

  • Be a reasonable estimate of likely loss, not intended as a penalty.

The distinction between liquidated damages and penalties was refined in Cavendish Square Holding BV v Talal El Makdessi [2015] UKSC 67.

Example: The Construction Contract

A construction contract might state £500 per day for project delays. This is valid if it's a reasonable estimate of daily loss.

Conclusion

Knowing contract discharge methods and damage principles is fundamental for SQE1 FLK1 candidates and practicing lawyers. Essential points include:

  1. Contracts can end through performance, breach, agreement, or frustration.
  2. Damages are meant to compensate, not punish.
  3. Expectation, reliance, and restitution damages serve different purposes.
  4. Damages are limited by causation, remoteness, and mitigation.
  5. Various methods exist for calculating damages.
  6. Agreed damages must represent a genuine loss estimate.

Keeping current with these concepts is essential for legal professionals.