THE LAW OF OBLIGATIONS

TUTOR QUESTION STUDENT NOTES

The multi-task questions that appear in Section B of the exam contain several tasks based on the same scenario. Read through the background
and the first Task for this question.

Background for Tasks 1, 2 and 3 Task 1

Az Ltd operates a shipbuilding business which specialises in
constructing and modifying ships to order. In 2011, Az Ltd entered
into an agreement with Bob to completely rebuild a ship to Bob’s
specification for a total contract price of £7 million. However after
completion, Bob informed Az Ltd that, due to the downturn in the
world economy, he no longer needed the ship. Az Ltd had already
expended £5 million on altering the ship, and immediately started an
action against Bob for breach of contract.
Which TWO of the following statements explain the purposes of
awarding damages for breach of contract?
A Damages are a punishment for the party in breach
B Damages compensate the injured party for any financial loss
C Damages put the parties in the position they would have been
in had the contract been performed

However, in the week before the case was to be decided in the court, D Damages put the parties in the position they were in before the
Az Ltd sold the ship for the same amount of money that they would contract was formed
have received from Bob.

Although Task 1 is related to the background provided, it is able to be answered without considering the scenario.

You have been asked to identify TWO statements that correctly explain the purposes of damages.

Before looking at the options provided, think back to what you learnt about the purpose of damages during the course. During the course we
learned that damages may be awarded paid to party who has suffered a loss due to breach of contract. The purpose of damages is to
compensate the injured party and to put the parties in the position they would have been in had the contract not been breached. Therefore, the
two correct statements are: ​Damages compensate the injured parts for any financial loss​ and ​Damages put the parties in the position they would
have been had the contract been performed​.
Moving on to Task 2. The same background applies. Read through the requirement for Task 2.

Background for Tasks 1, 2 and 3 Task 2

Az Ltd operates a shipbuilding business which specialises in Which TWO of the following statements in relation to the duty to
constructing and modifying ships to order. In 2011, Az Ltd entered mitigate losses are correct?
into an agreement with Bob to completely rebuild a ship to Bob’s
specification for a total contract price of £7 million. However after A It reduces damages
completion, Bob informed Az Ltd that, due to the downturn in the
B It results in an increase of damages
world economy, he no longer needed the ship. Az Ltd had already
expended £5 million on altering the ship, and immediately started an C It lies with the party in breach of contract
action against Bob for breach of contract.
D It lies with the party who suffers the breach
However, in the week before the case was to be decided in the court,
Az Ltd sold the ship for the same amount of money that they would
have received from Bob.

Although Task 2 is related to the background provided, as with Task 1 it is able to be answered from knowledge, without needing to apply
knowledge to the scenario.

We have been asked to identify TWO statements that are correct when considering the duty to mitigate losses. Mitigate means ‘to lessen’ or to
‘prevent avoidable increase’. In the context of damages, during our course we learnt that following a breach of contract the injured party had a
duty to mitigate their losses. This duty is intended to prevent unnecessary loss, and therefore helps keep damages to a reasonable level. This
knowledge is sufficient to answer this question.

The options use the word ‘it’. You may find the question easier by replacing ‘It’ with ‘​The duty to mitigate’​. The two correct statements are then
clear. It (the duty to mitigate) reduces damages; and It (the duty to mitigate) lies with the party who suffers the breach.
Moving on to Task 3. Again, the same background applies. Read the requirement for Task 3.

Background for Tasks 1, 2 and 3 Task 3

Az Ltd operates a shipbuilding business which specialises in What level of damages can Az Ltd claim for breach of contract?
constructing and modifying ships to order. In 2011, Az Ltd entered
into an agreement with Bob to completely rebuild a ship to Bob’s A £5 million
specification for a total contract price of £7 million. However after
B £7 million
completion, Bob informed Az Ltd that, due to the downturn in the
world economy, he no longer needed the ship. Az Ltd had already C £0
expended £5 million on altering the ship, and immediately started an
action against Bob for breach of contract. D £2 million

However, in the week before the case was to be decided in the court,
Az Ltd sold the ship for the same amount of money that they would
have received from Bob.

Read through the background again, bearing in mind the need to identify factors relevant to the possible level of damages.

Remember, damages are intended to put the parties in the position they would have been had the contract been performed. Therefore, the key
piece of information in the background scenario is the final sentence. We are told that Az Ltd sold the ship for the same amount of money that
they would have received from Bob. This amount was the contract price of £7 million.

Therefore, although Bob breached the contract, Az Ltd has not suffered any loss as a result of the breach. Az Ltd are in the same position that
they would have been in had the contract been performed. Therefore, no loss has been suffered and no damages are able to be claimed so the
correct answer is zero.