Contract Reading Session 3

1. Termination

(i) Condition, warranties, and innominate terms

Sale of Goods Act 1979 ss 12–15A: S.12: In a sale there are implied terms that the seller
has the right to sell, that the goods are “free” from any charges and encumbrances not
disclosed to the buyer before contract formation, and that the buyer will enjoy them in
quiet possession, except as it may be disturbed by the owner or another party entitled to
benefit from the goods. This doesn’t apply where there is an intention only to pass such
title as the seller has the right to pass (i.e. less than ownership). In such a case, the buyer
must stay in quiet possession, undisturbed by the owner, ay 3rd parties whose rights the
seller has sold to the buyer, or anyone acting through the seller to claim charges or
encumbrances not disclosed to the buyer prior to contract formation. Similarly The seller
has to disclose all charges/encumbrances before contract is made.

S.13 “Where there is a contract for the sale of goods by description, there is an implied
term that the goods will correspond with the description.”

S.14 There is no implied quality or fitness of the goods sold, though where goods are sold
“in the course of business” they have to be of a satisfactory quality, so that a reasonable
person, taking account of circumstances, price etc would say they are of a reasonable
quality. This doesn’t apply where the faults were revealed to the buyer before the sale,
where the buyer’s examination of the goods before sale should have revealed the defects
or where the buyer’s sampling of the product should have revealed the defects. Where the
buyer (B) tells the seller (S) that he is buying the goods for a particular purpose, there is
an implied term that the goods will be reasonably fit for that purpose except where B
doesn’t or shouldn’t rely on the skill/judgment of the seller. In a sale by sample, there is
an implied term that the goods will correspond with the sample in quality, and that the
goods will be free from any defect, making their quality unsatisfactory, which would not
be apparent on reasonable examination of the sample.

Hong Kong Fir Shipping v Kawasaki [1962] 2 QB 26: D chartered his ship to P and was
contracted to ensure that the vessel seaworthy and “in every way fitted for ordinary cargo
service”. D failed to provide competent personnel to maintain the ship so that it was only
at sea for 8 ½ weeks of the first seven months charter of the charter. CA held that the
contract would not be terminated since, given the time remaining on the charter and D’s
efforts to repair the ship, P had “not been substantially deprived of the whole benefit” of
the contract. The term of “maintenance” was held to be neither a condition nor a warranty
and was an “innominate” term that would only terminate the contract if its breach had
such consequences serious enough to amount to the frustration of the commercial purpose
of the venture.
Upjohn LJ: The parties can specify in a contract which terms are conditions and which
stipulations. He says seaworthiness cannot be a condition because the slightest thing can
lead to its breach (e.g. failing to hammer in a nail) and it cannot have been intended that
the contract should be terminated if any of these common/trivial things should happen.

The Mihalis Angelos [1971] 1 QB 164: P contracted D to transport materials to a port but
inserted a clause that allowed them to cancel the order 48 hours before due arrival of
goods if it became impossible for D to transport them i.e where the “expected readiness”
couldn’t be achieved. Due to war in the place where the goods were supposed to be
collected, the order was cancelled early on the wrong grounds of force majeure. D took
this to be a repudiation of the contract and sued for damages. CA held that the “expected
readiness” term was a condition and that P was entitled to terminate the contract on these
grounds and would inevitably have done so, even though it gave the incorrect reason of
force majeure as the reason for cancelling the contract. Once the grounds for termination
exist and termination occurs, it is irrelevant that the wrong grounds are stated. Also,
although the cancellation occurred before performance (i.e. it was an anticipatory
repudiation), damages can only be awarded for the true value of the contract lost. Since,
here, the value of the contract was nil (P could have legitimately used the expected
delivery clause when performance was due and terminated the contract) no damages
would be awarded. Megaw LJ says that damages are only for compensating the actual
lost value when a contract is wrongly terminated. Denning MR said that analogous cases
had found “expected delivery” to constitute a condition.

Megaw LJ: The expected delivery clause should be classified as a condition for 4
reasons: (1) it gives certainty to the parties; (2) It is just: the clause could be invoked
where there was no reasonable grounds for the boat owner to believe that he would arrive
on time and thus it would be very rare to produce injustice (it is not unfair that a person
who knows he cannot arrive by the specified term should release the other from the
contract); (3) this type of clause has been classified as a condition by precedent; (4)

Schuler v Wickman [1974] AC 235: P and D had an agreement for D to distribute and
sell P’s products. Clause 7 included conditions such as the fact that D had to visit a list of
potential buyers once every week and these were stated explicitly as conditions. There
was also a clause 11, which said that the agreement had to last until 31st December 1967
and thereafter could be ended by 12 months notice in writing. It also said that either party
could terminate the agreement if the other committed a material breach of its obligations
and failed to remedy them within 60 days of being required to do so in writing. D failed
to fulfil its clause 7 requirements and P terminated the agreement on the grounds that a
“condition” was breached. By majority, HL found in favour of D.

Lord Reid (majority): “remedy” means to put something right for the future, although not
all breaches can be remedied e.g. leaking confidential info cannot be put right by a
promise not to do so again. In this case, failure to visit a firm once out of the 200 times
that the contract required was not an irredeemable loss and could be remedied within
clause 11’s meaning. He says that what the contract deemed a “condition” was not using
the word in its strict legal sense since a condition in law is something that is so
fundamental to the contract that its breach merits termination. This was not the case here
since missing one visit was fairly irrelevant. This contradicts Upjohn LJ in Hong Kong
Fir that parties re free to decide what the conditions are: this is a key freedom in contract
because it is for the parties, not the courts, to say which terms are important enough to
make contracts worth entering. He says that “the more unreasonable the result, the more
unlikely the parties were to have intended it” i.e. the result of making clause 7 a
“condition” would be v.unfair and therefore they can’t have meant it to be a condition.
This is illogical reasoning and assumes that people are incapable of making bad
bargains.

Lord Wilberforce (dissenting): clause 7 WAS a condition

Cehave v Bremer, The Hansa Nord [1976] QB 44: D agreed to sell B pellets for animal
feed, and a clause stated that they had to be in good condition. Some arrived in bad, but
still usable condition. B wanted to reject the pellets and terminate the contract. The CA
held that requirement of them being in “good condition” was not a condition since it
wasn’t at the heart of the agreement, but an indeterminate/innominate term. Since the
clause didn’t go to the root of the contract, it could not lead to termination (since the
pellets were still merchantable), but instead B would be able to claim for the difference in
value between the quality ordered and the quality delivered.

Lord Denning for the whole cargo to be rejected the condition would have to be “serious
and substantial” unlike here.

Bunge Corp v Tradax [1981] 1 WLR 711: D was shipping P’s goods and clause 7 of their
contract stated that D had to give notice of 15 days prior to shipping regarding readiness
of the ship. D gave late notification that his ship would not be ready, and P, stating that
clause 7 was a condition, argued that they could terminate the contract. HL held that P
was right.

Lord Wilberforce: this case is distinct from Hong Kong Fir since there the CA’s
reasoning was that a term which would almost certainly, and could very easily, be
breached was unlikely to be considered as a condition. However giving late notice can
only be committed in one way and is easily avoided. Therefore Hong Kong Fir reasoning
does not prevent clause 7 here from being regarded as a condition. On the facts it was
“clearly essential” that the notice be given in time.

(ii) The Meaning of Termination/Discharge/Rescission for Breach

Johnson v Agnew [1980] AC 367: P had contracted to sell their house to D for an amount
exceeding P’s mortgage. However D failed to go through with the transaction, even after
a court’s order of specific performance to do so. The bank then repossessed the houses
and sold them for an amount less than the total of P’s mortgage. P sued D for the
difference between the amount owed via the mortgage and the amount raised by the sale
of the house. HL allowed P’s claim for the damages. It held that where a vendor elected
for specific performance rather than damages the contract remained in force, but he could
nevertheless later elect for damages if the specific performance was not complied with
and this would terminate the contract.

Photo Production v Securicor [1980] 1 All ER 556, 562-563, 566-568: P paid S to patrol
its factory. One of S’s employees started a fire to keep warm and burnt down the factory.
There was a clause that under no circumstances would S be held liable for any injurious
act of its employees. HL held that by virtue of this clause S was excused from any claim
in negligence/breach of contract. The words and meaning of the clause were clear.

Lord Wilberforce (supported by all the others): The doctrine of fundamental breach (the
idea that if you do something obviously opposed to the contract then exemption clauses
should not shield you from liability) is dead law- overruled in recent cases. The parties
are free to negotiate whatever exemption clauses they like, no matter how unfair a court
might think them. The exemption clause negates the implies obligation of S to take
reasonable care in selecting its staff and in patrolling the factory.

(iii) Anticipatory Breach

Hochster v De La Tour (1853) 2 E&B 678: D contracted to employ H but before the
work was to begin renounced the contract. H sued D for breach. The court held that H
was entitled to claim damages since renunciation before the work was to begin was
nevertheless a breach since there is an implied agreement not to renege on the contract.
Provided H treats the contract as being in force and acts upon it on the prescribed date by
not accepting any other employment which would interfere with his promise then he may
claim damages. After D’s renunciation, H is free to accept new employment and can
claim damages.

White and Carter (Councils) Ltd. v. McGregor [1962] AC 413: A contracted with R’s
representative to advertise him for money, including a clause that if R failed to pay
money due for 4 weeks, then he had to pay the money that would be owed for the whole
duration of the contract. Once the contract was given effect, R asked A to cancel the
contract since his representative had misrepresented him and then, when A refused, he
failed to pay for 4 weeks. A sued for the whole amount that would be owed under the
clause. HL held that the contract was valid and A was entitled to take advantage of the
contract. A was not obliged to accept R’s renunciation and sue for damages.

IN OBITER: Lord Reid said that it may be that where the innocent party has no interest
in the contract being carried out as opposed to claiming damages he may be forced to
accept damages rather than carrying on with the contract. “If a party has no interest to
enforce a stipulation, he cannot in general enforce it: so it might be said that, if a party
has no interest to insist on a particular remedy, he ought not to be allowed to insist on it.”
This is dodgy: it would require a judgment call by courts as to whether an action is in a
party’s business interests + it allows a de facto effective repudiation of the contract by a
party who is not entitled to do so. However in this case it was clearly in A’s interest to
enforce the contract.
IN OBITER: Lord Hodson: Equity does not release a party from an improvident contract
and there is no duty on the innocent party to vary it at the behest of the other party.

The Alaskan Trader [1984] 1 All ER 129: A chartered B’s boat and crew for 24 months
but returned it after 12 since it needed extensive repairs that would take months and
therefore claimed to repudiate the remainder of the contract. B refused to accept this and
kept the boat available for A for the remainder for the period once the repairs were
complete. A claimed back the money for the final 12 months. The arbitrator allowed A to
claim back the money and then for B to claim damages. The court upheld this, since it
was of no interest to B to keep the contract alive rather than accept an award for damages.

2. Damages

(i) The General Principle

Robinson v Harman (1848) 1 Exch 850, 855: “As to the damages which plaintiff is
entitled to recover, the rule of the common law is, that a party who has sustained loss by
reason of a breach of contract is, with respect to damages, to be placed in the same
situation as he would have been in if the contract had been performed” (Parke B). This
was about a lease being cancelled. The key point is the dictum of Parke B.

Radford v de Froberville [1977] 1 WLR 1262: P sold D a plot of land on which she could
build a house, provided that she build and maintain a wall between their plots of land. D
failed to build the wall and P sued her for damages, which was allowed. The question was
how to calculate the damage. The court held that the damage paid would equate to the
cost of P building the wall himself and NOT the devaluation of P’s property , since the
court determined to look at the cost of cure. He says that to apply to the dictum of Parke
B (above), that P should be placed in the same situation as though the obligation had been
performed, demands that the cost of “cure” principle be applied. There should be a
remedy for the “performance interest” event though the breach has caused no economic
loss or loss of amenity to P.

Ruxley Electronics and Construction Ltd v Forsyth [1996] AC 344: F contracted R to

build him a pool for 317K, and R built the pool slightly shallower than specified
(although it made very little difference to F’s ability to use the pool). F then claimed £20k
in damages to demolish the pool and rebuild it to F’s desired specifications i.e. a cure. HL
rejected F’s claim for the cost of cure, since the cost of cure was “unreasonable”. This
was because the cost of cure exceeded the extent of F’s loss. This claim of
unreasonableness was supported by the fact that F had no intention of actually remaking
the pool, which is evidence that his loss of having a pool slightly shallower than he would
have liked is not so great as the value put on the cost of cure. To award the value of the
cost of cure when F does not care enough to effect the cure (i.e. where his loss has been
less than the value of curing the defect) would be to overcompensate him. They also said
that the cost of cure would be “disproportionate”, given that the pool was no less valuable
or workable for its being slightly shallower. The HL also rejected D’s proposed
“diminution in value” approach since it would under compensate P (since the pool was no
less valuable for its being shallower) and would mean that people’s specifications would
be illusory and unenforceable. Thus HL decided to make an award based on a “loss of
amenity” approach, where the value of the promise to the promisee exceeds the financial
enhancement that would have occurred had there been full performance i.e. an award can
be made for P’s personal dissatisfaction even if there is no economic loss.

Lord Lloyd: The court will not allow a plaintiff to “create a loss that does not exist in
order to punish the defendants.” He also says that Parke B’s dictum only applied in cases
where there was actually a loss and it does not necessarily impl that the “cost of cure”
should always apply, since in cases like this it would place F in a far better position than
if the pool had been built according to correct specifications.

NB The amenity damages are hard to quantify, since they are necessarily subjective and
the court ishaving to ask itself “how upset is P” at not having the exact specifications of
the contract. Secondly, it could lead to gross over-compensation where P is a sensitive or
neurotic person.

Chaplin v Hicks [1911] 2 KB 786: D’s breach of contract prevented P from taking part in
the final round of a beauty contest where 12 of the final 50 would win a prize. CA upheld
the finding that her chances of winning were 25% and she was made an award on this
basis. Where D has suffered harm from a breach of contract, it is necessary to provide
compensation, no matter how hard it may be to come up with the precise value of the
compensation.

Fletcher Moulton LJ: Where a man has an opportunity to win something from a limited
class of people, guaranteed to him by contract, he has something of value. Thus the jury
has a duty to estimate the value of this opportunity.

Williams LJ: He rejects the impossibility of assessment argument (that it is impossible to

say what harm has been done since there was no guarantee of her winning), saying that
“the jury must do the best they can, and it may be that the amount of their verdict will
really be a matter of guesswork”

Rather than approach by awarding her damages on the basis that she might have won
(which really is impossible and, if she wouldn’t have won, would cause D to pay for no
harm caused), they should ask what is the inherent value of being able to compete i.e.
take the “loss of amenity” approach from Ruxley: What was the value to P of being able
to partake in the final, in terms of enjoyment, regardless of whether or not she would
have won.

The Golden Victory [2007] 2 WLR 691: D hired a boat from P but breached the contract
by returning it 4 years before the charter was set to end. 14 months later, the Gulf war
broke out, which would have entitled D to end the contract anyway. P claimed for 4 years
of damages. HL ruled that only 14 months worth of damages were payable since the aim
was to put the claimant in the position that they would have been in had the contractual
performance been fulfilled, and in doing this it couldn’t shut its eyes to future events.
Lord Scott: He applies the dictum of Parke B and hence says that what loss is actually
caused is the relevant factor. Otherwise the courts would be giving people awards beyond
their loss i.e. overcompensating.

Lord Bingham (dissenting): Points in response to Lord Scott: (1) to make people pay for
the full amount is a deterrent to breach of contract; (2) Certainty is important in business,
so that if there is a breach, P must be able to work out, before entering the contract, what
he will be entitled to.

(ii) Restrictions on the General Principle

(a) Remoteness

Hadley v Baxendale (1854) 9 Exh 341: P operated a mill and paid D to deliver a faulty
part to an engineer by a certain time. D failed to do so and P lost some business as a
result. The court held that the harm was too remote to be claimed on. For a plaintiff to
claim damages for harm caused by D, the harm would have to be generally foreseeable to
D. In this case, D could not have foreseen the loss of profits that might come as a result
of his failure to deliver the faulty part on time and hence he was not liable (though this
would not have been the case had P explained his special circumstances.

Victoria Laundry v Newman Industries [1949] 2 KB 528: P contracted to buy a boiler off
D and D delayed in delivering the boiler by 5 months. As a result P lost out on contracts
for which it sued D. D knew that P ran a laundry and that P had asked for the boiler to be
delivered ASAP. Thus the CA held that D was liable for profits that would ordinarily
have been lost in the period and the loss was not too remote. However D was NOT liable
for the loss of a specific contract that would have been v profitable on the grounds that it
was not foreseeable to P.

Asquith LJ: Certain propositions of law are applicable to this case: (1) that the law aims
to put P in a position akin to that which he would have been in had there been no breach;
(2) that the harm caused by D has to be “reasonably foreseeable” i.e. not too remote,
which is determined by the knowledge of the parties at the time of the breach; (3) D is
imputed to have common knowledge of the ordinary course of things (e.g. that a laundry
company needs a boiler), whether they in fact know this or not; (4) So long as the loss
caused by the breach can be reasonably foreseen as a “serious possibility” or a “real
danger” or “on the cards” then D can be liable: actual knowledge is not needed. In this
case D did, or ought to have known that the laundry needed the boilers for its business
and it needed them ASAP. Also the risk of causing loss was reasonably foreseeable. Thus
D is liable.

The Heron II [1969] 1 AC 350: D was contracted to bring P’s sugar to Basrah where D
knew there was a sugar market but did not know that P intended to sell it. He brought the
sugar later than the contract stipulated, by which time the price of sugar had fallen and P
sued him for lost profits. HL allowed P’s claim, saying that the lost profits resulting from
the late delivery was NOT too remote.

Lord Reid: he says that Lord Asquith’s use of the “reasonably foreseeable” is wrong,
since a result, however unlikely, might be reasonably foreseeable. What is really required
is that D did foresee the harm and that, had the defendant thought about it, he would have
seen the likelihood of it occurring as having a “very substantial degree of probability”.
He also says that the phrases such as “on the cards” or “serious possibility” etc are
unhelpful as they set the standard of risk of the harm occurring too low.

Lord Morris: as a reasonable businessman D must have known that late delivery of the
sugar would cause P some loss. He says that Lord Asquith’s phrase that a reasonable
preson would have foreseen that the breach was “liable to result” in harm was bad as it is
vague and doesn’t set a standard of likelihood.

Lord Hodson: the phrase “liable to result” is good and no more vague than the use of the
word “likelihood”.

Lord Pearce: “liable to result” = “serious possibility” or a “real danger”. These phrases
lower the standard of probability that the breach has to cause the loss and this is good
(unlike the requirement of Hadley that the breach had to be “probable” i.e. more likely
than not).

Lord Upjohn: “serious possibility” or “real danger” are good tests, but reasonable
foreseeability is not the test in contract.

Professor Burrows: the best explanation of the judgments is that whereas a slght risk of
harm occurring is all that’s needed in tort, a serious possibility of loss occurring is needed
in contract.

Parsons v Uttley Ingham [1978] QB 791: D was contracted to give P a container for
storing pig-feed, but they failed to put ventilation in it. As a result the food stored in it
turned mouldy and when given to the pigs it caused them E-Coli. Many pigs died and P
sued D for lost profits. CA allowed P’s claim.

Denning MR (minority approach to same conclusion): There is a distinction between

“loss of profit” cases and “physical damage” (whether to person or property) cases. In
loss of profit cases the test is whether D ought reasonably to have contemplated, at the
time of the contract, consequences which were a “real possibility” or a “serious danger”.
In physical damage cases D is liable for consequences which, at the time of the contract,
he ought reasonably to have foreseen, even if the possibility of their occurring was only
slight. He draws this distinction because this is used in tort and he says that the test for
remoteness should be the same (otherwise the amount recoverable in a situation where
there is a contract with no exemption clauses, where damage is inflicted, would differ
depending on the legal classification: unfair). This was a case of physical damage and the
foresight requirement was satisfied.

Scarman LJ (majority): There is no authority for the distinction between economic harm
and physical harm. To be recoverable, harm done to P may reasonably be supposed to
have been in contemplation as a serious possibility (Hadley). There is no real difference
between “reasonably foresee” and “reasonably contemplate” tests in contract and tort.
The difference is in the probability (which is what Denning objects to and hence makes
his distinction so as to reconcile contract and tort). In asking what it was reasonable for
D to have contemplated we are imputing to him foresight which may be contrary to fact.
Nevertheless we do it to maintain the “reasonableness” requirement.

Brown v KMR Services Ltd [1995] 4 All ER 598: B was advised on investing by K who,
in breach of contract, failed to advise him to limit the number of high risk syndicates in
which he was investing. When there was a market crash of unprecedented scale, B sued
K and K claimed that the damages were too remote. CA held that although the scale of
the crash was not foreseeable, the directly foreseeable loss of money was (i.e. the type of
loss was foreseeable and therefore not too remote). Also NB that where a contract
applies, even if the claim is brought in tort (as here), the contract standards apply.

Stuart-Smith LJ: He acknowledges the Victoria Laundry rule that ordinary loss is
compensable whereas exceptional or unforeseeable loss is not. However in this case there
is no way of dividing up total loss into that which is “ordinary” and that which is
exceptional and unforeseeable i.e. If B lost £1m, how much of that is “ordinary”. Any
figure would be arbitrary. WORNG: he could look to evidence to see how much of a loss
most advisors to investors would have considered normal during that period i.e. how
much of a loss would a reasonable advisor have foreseen as possible

Hobhouse LJ: Not only was the type of loss reasonably foreseeable, but to divide up
claims of financial loss into parts which are ordinary and parts which are not, we would
create bad consequences: An insurer could refuse to pay out part of claim on a contract
because it was not “reasonably foreseeable” that the claimant’s loss would be so big.

Jackson v Royal Bank of Scotland [2005] 1 WLR 377: J sold goods to X, until R
accidentally leaked information on the extent of J’s mark-up (in breach of J and R’s
confidentiality contract) and as a result X ceased to do business with J. J sued R. HL held
that J was entitled to claim for “loss of the chance or opportunity of repeat business” and
that the question of how much could be claimed was dependent on “how long it was or
should have been in reasonable contemplation of the parties that the trading relationship
would continue”.
Lord Walker: The quantification of damages depends on the judicial discretion of
working out how long the trading relationship would continue and in this case it was
likely to be for four years at decreasing profit margins.

Lord Hope: Where the parties do not provide what damages are payable in the contract,
and provided the Hadley rules are satisfied and it is not too remote, there is NO arbitrary
limit that can be set to the amount recovered.

(b) Mitigation

British Westinghouse Electric v Underground Electric Railways [1912] AC 673: P

bought defective turbines from D and for a while used them, before purchasing ones of a
superior quality, and which would have been of a superior quality, even if the defective
turbines had worked. P then sued for the extra petrol that the bad turbines had consumed
while in use AND the whole cost of replacing them. HL ruled that the extra benefit
gained from having superior quality turbines had to be taken into account in assessing the
damages since this extra benefit (and cost of acquiring it) had nothing to do with the
original contract. Where P took steps naturally arising from the breach, as here, it is
necessary to look at any additional benefits which he thereby acquired and to "balance
loss and gain.”- Viscount Haldane. He also states that in accordance with the principle
that P is supposed to be placed in as good a situation as if the contract had been
performed, the aim is to reverse the pecuniary loss flowing from the breach and discount
any incidental benefits. The plaintiff has a “duty of taking all reasonable steps to mitigate
the loss consequent on the breach,” and failure to do so will reduce the amount
recoverable by the plaintiff.

(c) Contributory Negligence

Vesta v Butcher [1988] 2 All ER 43, CA (affd on a different point by HL): D, a

brokerage firm, negligently failed to take action on instructions given to them by P, a
firm of insurers, following which P suffered loss (they failed to obtain a valid contract of
reinsurance from P’s own insurer OR to ascertain that the insured party was capable of
keeping a 24hr watch on the insured property, which was a requirement for P’s own
insurer to pay out). However P had had plenty of time to resolve the failure but failed to
do so. CA held that here P’s claim for damages was to be reduced by reason of
contributory negligence by the proportion of the loss for which he was responsible. It was
held that the Law Reform (Contributory Negligence) Act 1945 only applies to claims for
breach of contract where contractual duties coexist with tortious duties of care. They do
not apply to purely contractual duties.
Barclays Bank Ltd v Fairclough Building Ltd [1994] 3 WLR 1057: P had allowed
asbestos to permeate its roof and hired D to remove it, using a high-quality roof
specialist. D breached the contract and caused asbestos dust to seep through the building
and P claimed damages. D claimed contributory negligence. CA held that where the
breach has come from strict contractual breach (where there is no tortious duty of
reasonable care, as here) then contributory negligence doesn’t apply.

Bedlam LJ: the three categories are: (1) where a contractual and tortious duty co-exist,
contributory negligence DOES apply; (2) where a contract stipulates a duty to take
reasonable care, which would not exist but for the contract, it DOESN’T apply; (3) where
the duty is strictly contractual (i.e. no reasonable care requirement) it DOESN’T apply.
This fits into scenario 3.

(d) Mental Distress; Loss of Reputation

Addis v Gramophone Co [1909] AC 488: An employee who was paid a small salary and
a larger commission was wrongfully dismissed. (He should have been entitled to 6
months' notice, and was actually given 6 months' notice, but was prevented from working
it out because his successor was appointed to take over immediately). The issue was as to
quantum of damages. HL held that he was entitled to his salary and reasonable
commission (the latter based on what his successor had actually earned) for the 6 month
notice period. He was not entitled to (i) damages for the humiliating manner of his
dismissal, or (ii) any loss of reputation leading to future difficulty in employment.

Jarvis v Swan’s Tours [1973] QB 233: P was advertised a holiday by a brochure and the
service he received was much worse than that which he was induced to believe and CA
accepted that he could claim damages. The question was what damages he could claim:
He was able to recover damages for mental distress (he had only 2 weeks holiday per
year and they were ruined) since this was the type of contract where “inconvenience” and
“lack of enjoyment” are relevant to the service provided and therefore an award greater
than the overall cost of the holiday was made.

Watts v Morrow [1991] 1 All ER 937: A surveyor, D, told P of the value of a house, but
failed to report many defects, causing them to undertake costly repairs and suffer
inconvenience when the repairs were occurring. CA said that the aim of compensation
was to put the owners in as good a position as they would have been, had there been no
breach of contract. Therefore D had to pay the difference between the actual value of the
house and the value as D represented it to be. On the question of inconvenience-based
damages, CA said that in the case of the ordinary surveyor's contract general damages
were recoverable only for distress and inconvenience caused by physical consequences of
the breach of contract and that the compensation for the physical inconvenience should
be a modest sum.
Bingham LJ: In general, for policy reasons, "A contract-breaker is not in general liable
for any distress, frustration, anxiety, displeasure, vexation, tension or aggravation” that
his breach causes, except where the contract’s purpose is to “provide pleasure, relaxation,
peace of mind or freedom from molestation”. A surveyor’s contract does not fall within
that category. However for cases not falling within that category, “physical
inconvenience and discomfort caused by the breach and the mental suffering directly
related to that inconvenience and discomfort” can be compensated, albeit with “modest”
awards.

Ruxley v Forsyth [1996] AC 344 – see above

Malik v BCCI [1998] AC 20: Ds were employed by BCCI, a bank whose collapse was
disastrous and by being associated with it their future job prospects were worsened i.e
they claimed for “stigma” being attached to them. HL allowed their claims.

Lord Nicholls: Addis only applied to cases of “injured feelings”, whereas Malik was a
case of financial loss, caused by a stigma (i.e. that the stigma per se was not
compensable, but its effects were).

Lord Steyn: Damages are recoverable for a breach of contract, which occurred here since
there was an implied contractual obligation on the part of D not to run a “corrupt and
dishonest business” (Lord Nicholls agreed with this point). However he distinguished
Addis on the basis that that case was really about saying that the “manner” in which an
employee is sacked cannot give rise to damages, whereas this case is about the breach of
contract itself (not loss caused by the manner of the breach as was the case in Addis).
Loss of reputation IS generally compensable where it is caused by the breach, and not
simply the manner of the breach.

Johnson v Gore Wood [2001] 1 All ER 481, 504-506, 515-517: X, a company in which P
was majority shareholder, sued D (solicitors) who gave them bad advice about the length
of litigation, so that by the time the litigation was finished, the purpose of the litigation
(to buy property) was made useless due to the fall in value. P, as a result, claimed
separately from X for the diminution of the value of his pension and shares, which HL
rejected since it was merely a reflection of X’s loss, for which D had already had to pay
damages. P also claimed for mental distress and anxiety which the majority of lords
rejected, saying it was not usually possible to claim for these.

Lord Bingham: Addis sets out the general rule that anxiety and distress are generally not
compensable (rejecting Lord Steyn’s assertion in Malik), subject to the Watts
qualification and therefore the claim must be struck out.

Lord Cooke (dissenting): As a general rule he accepts that “Contract-breaking is treated

as an incident of commercial life which players in the game are expected to meet with
mental fortitude.” However in this case P suffered extreme financial embarrassment and,
from initially being wealthy, ended up on benefits which caused a breakdown in his
family relationships. Although these are described as “anxiety”, they really come under
the classification of “inconvenience and discomfort” under Watts and should therefore
attract damages.

Johnson v Unisys Ltd [2001] 2 WLR 1076: D was summarily dismissed and sued for
unfair dismissal. He had claimed under the statutory scheme which led to him being
awarded a small amount, but also appealed under a general common law duty of “trust
and confidence” owed to employees, since, due to the manner of his dismissal, he
suffered a mental breakdown. However HL said that this was a duty that only existed
while D remained in employment and did not relate to the manner in which he was
sacked, because inevitably, when an employee is being sacked, it is because an employer
no longer has trust and confidence in him. Furthermore, given the statutory scheme, it is
parliament that has decided what an employee should receive. NB, although Lord Steyn
agreed with the outcome (since D had not proven his claim) he disagrees with the
majority since (1) the scheme’s tiny awards are clearly not intended to cover all cases; (2)
duty and trust doctrine should apply to sacked employees, lest employers are better off
suspending employees rather than sacking them; (3) Addis is outdated and fails to
acknowledge the importance of a person’s job to their life.

Farley v Skinner [2001] 3 WLR 899: F employed S to go to a house that F intended to

buy for relaxing weekends and to report on noise levels. S said no noise. In fact house
was by a runway and the noise was v loud. HL awarded F £10,000 compensation for
“distress and inconvenience”. HL accepted that the contractual breach no longer had to
relate to the “sole object” of the contract but to a “distinct and important obligation”

Lord Steyn: Bingham LJ’s dicta in Watts were merely broad guidelines, not rules. Also
that case was about defects and general information, whereas this case is about one
specific question: noise levels. He agrees with Bingham LJ’s assertion that in general the
contract breaker is not liable for frustration, anxiety etc. However there are exceptions:
where D has been caused pain, suffering or loss of amenity (this exception defies the
rule!). He refutes the assertion that the breach has to relate to “the very object” of the
contract (as required in Watts): if a “major or important part” of the contract is to give
pleasure or peace of mind, then this is enough. NB though, the only real distinction
between this an Watts is the fact that the surveyor was asked about noise specifically here
i.e. it was the object of the contract. If Lord Steyn is right about the word “object” then
Watt is really being overruled.

Lord Scott: The word “physical” in Bingham LJ’s guiding principles refers to the cause
of the discomfort (e.g. being woken up by a plane) i.e. a sensory discomfort, as distinct
from a feeling of unhappiness provoked by being sacked, for example.
Hamilton Jones v David & Snape [2004] 1 All ER 657: D’s negligence led to C’s
children being kidnapped by their father and being taken to Tunisia. The court held that
although the protection of the children was not the sole object of the contract with C, it
was a “significant reason” for C’s entering the contract. I.e. upholding Lord Steyn’s view
in Farley.

(iii) Reliance Damages

Anglia TV v Reed [1972] 1 QB 60: Anglia contracted with Reed to be in a TV movie.
Reed breached after he found out he was double-booked. Anglia sued for reliance
damages, including expenses incurred before the contract was made. CA ruled that
expenses made on reliance could be claimed, even though the expenses occurred prior to
making the contract. The CA said that Ps cannot claim both lost profits and expenses, but
can claim reliance-expenses where lost profit cannot be proven.

C&P Haulage v Middleton [1983] 3 All ER 94: D rented offices from P for a period and
in the contract it said that he could not remove any fixings that D added to P’s office even
after the cotract expired. D made improvements before being kicked out illegally, which
the courts dealt with. Later on he claimed damages for the fixings. CA dismissed his
claim. Ackner LJ said it was not the place of the court to put P in a better position than he
would have been in had the contract been fulfilled, as would happen if they made an
award for the fixings.

McRae v Commonwealth Disposals Commission (1951) 84 CLR 377: D, relying on

anecdotal evidence, believed there to be a marooned oil tanker and sold it to P, who after
searching, found that it did not exist. It claimed for the value of an oil tanker (i.e. had
there been one) and the capital expenses spent for trying to find the oil tanker and
shipping supplies. CA rejected these and instead damages were awarded based on money
the search vessel might have made if it had not been engaged in the futile search for the
nonexistent tanker. This was because the commission had merely promised that the
tanker would be where they claimed, and NOT that it would be salvageable. D had tried
to escape all compensation by claiming that the tanker’s existence was one of “mutual-
mistake” and therefore they should not be punished. However CA said “a party cannot
rely on mutual mistake where the mistake consists of a belief which is…entertained by
him without any reasonable ground”.

CW’s conclusions: Physical impossibility is not

(iv) Restitutionary Damages

Attorney-General v Blake [2001] 1 AC 268: B was a former MI6 officer who published a
book in breach of the Official Secrets Act, divulging state secrets and making a large
profit from it. AG made a private claim against him for the whole of the profits, since B
had signed an official secrets act and was therefore under contractual obligation to the
state not to publish these facts. HL allowed the AG to claim the “whole profit” as
damages. The damages awarded had to meet the “practical justice” demands, but HL was
keen to emphasise that this was an exceptional case.

Experience Hendrix LLC v PPX Enterprises Inc [2003] 1 All ER (Comm) 830: D had a
contract with P governing the royalties and use of material of Jimi Hendrix. It was
impossible to quantify the claimant’s financial loss, so the court ordered him to pay a
“reasonable sum” that P could have charged for the use of the material. Despite this also
being a case, like Blake, where the profit was made from breach of contract, the court did
not order all the profits to be awarded in damages, since the subject matter was far less
serious in its nature than the national security concerns in Blake.

Whincup v Hughes (1871) LR 6 CP 78: P paid D to teach his son for 6 years, but after
one year D died and P claimed the remaining money for then next 5 years back from the
executors. The court rejected his claim on the grounds that money paid under a contract
for which some (although not all) consideration has been given cannot generally be
reclaimed and that partial failure does not allow for recovery. Bovill LJ said that in some
situations it might be e.g. if I pay for 5 eaves of corn but only 3 are delivered- How is this
any different to the present case!!!??

Surrey County Council v. Bredero Homes Ltd. [1993] 3 All ER 705: Two plaintiff
councils owned of land. The councils contracted to sell the entire site to D for £1.52m,
subject to development covenants, which required development in accordance with a
brief which had been submitted. D subsequently completed the development by building
more houses than had been approved and without obtaining modification of the
covenants. Ps had been aware of the breach but did not seek injunctions or specific
performance. Instead they raised an action for damages. P sought damages for the amont
that they would reasonably have charged for the modification. CA held that since
damages were used for placing P in the position that they would have been in had the
contract been fulfilled, the damages here could only be nominal.

(v) Agreed Damages: Liquidated Damages and Penalties

Dunlop v New Garage [1915] AC 79: P made a contract with D to sell P’s goods. Within
the contract was a requirement that the goods aren’t sold below a certain price and for
every good that is sold below that price, £5 is payable to P by D as “liquated damage”
and “not as a penalty”. D breached this and P sued D for damages. D defended this as a
penalty clause, in which case P could only claim nominal damages. P said it was a
liquidated damage clause, meaning that P could enforce it according to its own terms. HL
agreed with P.
Lord Dunedin: there a re 6 guiding principles to decide if a clause is a penalty: (1) The
parties’ description is not conclusive: it is for the courts to decide; (2) A penal clause is
one with disproportionality between the sum payable and the seriousness of the breach;
(3) All circumstances of the contract at the time of making should be taken into account
in determining if it is a penalty; (4) An agreed damages clause is enforceable even if it is
far more or less than the loss suffered, provided the court believe it is genuinely made as
an assessment of damages (NB if the court do not so believe, then it will be a penalty);
(5) the court will grant a wide margin of tolerance to pre-determined damages and will
not rule them to be penalties unless to do so would be “unconscionable”; (6) the clause is
always a penalty where the only wrongdoing is to pay a failure of money i.e. where the
money stipulated is larger than the money owed.

Philips Hong Kong Ltd v Attorney-General of Hong Kong (1993) 61 BLR 41: D was
building a highway for the HK govt and had a fine of £500 for every week delayed. He
argued that this was a penalty. CA said it was liquidated damages since the courts should
adopt a “hands off” approach unless the amount demanded was “obviously extravagant”.

3. Action for the Agreed Sum

White & Carter v McGregor [1962] AC 413: M contracted with W for W to advertise
him, and then wrongfully tried to repudiate it on the same day (i.e. before W had spent
anything on the contract). W continued to advertise M and then sued for the price when
M refused to pay. HL majority said W had the right to continue with the contract and
claim for the price.

Lord Reid (majority): only circumstances where P will be barred from enforcing a
contract, as opposed to a simple claim for damages, that D wrongly repudiates is (1)
where there is an inherent need for cooperation, or (2) where P has a legitimate interest in
performance over damages. Problem: what is the legitimate interest here- there doesn’t
seem to be one: possibly this is because the burden is on the contract breaker to show no
legitimate interest which may not have been done here. Also it arguably increases the
burden on the breaker, since it allows the innocent party spend money and claim a larger
amount than simple damages prior to expenditure. However the decision protects the
sanctity of contract.

Clea Shipping v Bulk Oil International [1984] 1 All ER 129: This involved a charter
starting on 19 Oct 79 for 24 months. Exactly one year later the ship broke down and
charterer decided to end the contract. There was a break down of the engine, but this was
not serious enough to warrant termination. In fact, the rate for chartering had dropped,
and the charterer wanted to charter elsewhere more cheaply. The shipowner said the ship
was ready, the charterer said "no thanks". The owner held the ship ready for the balance
of the period. The charterer did pay the hire for that period, "under protest", and sought to
recover the money. QBD said that there was no legitimate interest in keeping the ship on
hand. The ship-owner should have claimed damages for breach rather than the hiring
charge.

Hoenig v Isaacs [1952] 1 TLR 1360: Heonig agreed to decorate Isaacs's flat for £750.
Isaacs was not satisfied with the work, and offered only £400, so Hoenig sued for the
balance. Isaacs claimed that the contract was for the whole job, and Hoenig had not
finished it properly. At most, it was argued, he was entitled to an award of
QuantumMeruit for the work done. However, the court ruled that the contract was
substantially complete, and the Hoenig should be paid the full price less the amount it
would cost to finish the job (estimate at £55).

4. Specific Performance

NB- CW: requirements for specific performance are generally the components of the
“adequacy” requirement (i.e. that damages is insufficient): “Unique goods” (i.e. where
the subject matter has strong sentimental values e.g. heirlooms); “specific or ascertained
goods” (as opposed to generic goods); NB this bar doesn’t operate in land sales, where
specific performance is more commonly used.

Beswick v Beswick [1968] AC 58: A sold his business to B on the condition that B help
maintain his widow, C, once A had died. B reneged on the promise and C sued him. HL
held that 3rd party beneficiaries of a contract cannot sue on it, due to privity of contract.
However C was able to sue for specific performance of the duty as the executrix of A’s
will. HL said specific performance should be used if it would provide a “more perfect
justice”

Sky Petroleum v VIP Petroleum [1974] 1 WLR 576: claimant would buy all its petrol
from the defendant who agreed to supply all the claimant’s needs. The defendants
purported to terminate the contract at a time when supplies were limited and an interim
injunction was granted to restrain the withholding of supplies. The judge accepted that
this amounted to specific performance of a contract to sell chattels although they were not
specific or ascertained. Nonetheless, his decision was based on the inadequacy of
damages as a remedy, as an injunction was the sole means of keeping the claimant’s
business going. I.e. a “grave threat to business” is an alternative for the adequacy
requirements mentioned above.

Co-operative Insurance Soc Ltd v Argyll Stores (Holdings) Ltd [1998] AC 1: A leased
the largest unit in its shopping centre to C for 35 years, with a requirement that C keep
the store open during usual office hours. C started to make a loss and stopped operating
the unit, stripped it out and ceased trading. As the largest unit and largest attraction of the
store it was likely to have a massive impact on the business of the shopping centre. HL
denied a claim for specific action. HL refused to accept CA’s claim that damages were
inadequate due to difficulty of proving what loss had been caused by A’s departure and
denied the relevance of C’s cynical nature. Instead HL said that there was a general rule
of not ordering specific performance where it would involve the carrying on of a duty
rather than one single act. It also said that it was oppressive to force C to run a business
under threat of imprisonment from contempt of court. Thirdly it would require constant
supervision which is a waste of resources; Fourthly the contract itself was fairly uncertain
so it is hard to tell what C should do (e.g. requirement to maintain a good-quality shop
window display); Fifthly it would force C to accept enormous losses. Seems to put the
balance too far in favour of the contract breaker.

Trade Union and Labour Relations (Consolidation) Act 1992 s 236:

 No court shall, by injunction or order of specific performance, compel an employee to
do any work or attend at any place for the doing of any work.

Ss 48A–F Sale of Goods Act 1979, introduced by Sale and Supply of Goods to
Consumers Regulations 2002 (SI 3045/2002), Reg 5:
 Where goods don’t conform to those in the contract, the buyer can force the seller to
repair or replace them in reasonable time, but without causing significant
inconvenience to the buyer, at the seller’s own expense. Alternatively the buyer may
force the seller to reduce the goods to an appropriate price or to rescind the contract.
However this is not allowed where replacement/repair would be impossible or
disproportionate to an award of damages or a rescission or reduction to appropriate
price.
 disproportionate = a remedy that imposes an unreasonable cost on the seller compared
to other remedies, taking into account—
(a) the value which the goods would have if they conformed to the contract of sale,
(b) the significance of the lack of conformity, and
(c) whether the other remedy could be effected without significant inconvenience to
the buyer.
(5) Any question as to what is a reasonable time or significant inconvenience is to be
determined by reference to the purpose of the goods and the nature of the goods.
 If the buyer decides on repair/replacement, he must give the seller
reasonable time before deciding on rescission or a reduction in price.
 If a buyer has rescinded a contract and claims for reimbursement, the
claims will be reduced if he has had any use of the defective goods.

5. Injunctions

CW : a prohibitory injunction orders a person not to do something, whereas a mandatory

injunction orders someone to act: courts are reluctant to impose mandatory injunctions.

Lumley v Wagner (1852) De GM & G 604: A singer Johanna Wagner, Df, entered into a
simple contract to perform at Her Majesty’s Theatre, for a period of three months,
covering a certain number of nights and nowhere else during that period. Question was
whether a court ought to grant an injunction ordering specific performance of the
defendant to sing at Her Majesty’s Theatre and nowhere else. The court held that it can
issue an injunction barring her to abstain from the commission of an act which she has
bound herself not to do, lest she break the contract. However this can be distinguished
from specific performance since, although D was prevented from singing for other
people, she was nevertheless not coerced into singing for L.

Warner Bros v Nelson [1937] 1 KB 209: Bette Davis (D), a well known film actor,
contracted for one year to render her exclusive services to P. The contract contained a
clause prohibiting D from rendering her acting services to any other company. However
before the year expired D did perform for another company. P sought an injunction
preventing D from performing elsewhere. The court held that while the general rule is
that an injunction is not ordered when its effect is to enforce a contract for personal
services, in this case D could do work other then acting and was not thereby compelled to
work for P i.e. this would not be regarded as indirect specific performance. Also,
damages were not an appropriate remedy. Dodgy: is she really free to quit her profession
and take up something else? CW thinks not and that in reality this amounted to an order
of specific performance.

Warren v Mendy [1989] 1 WLR 853: B, a boxer, had a contract to be exclusively

managed, promoted and trained by P for 3 years, but later lost confidence in B and
decided to find a new manager. P sought an injunction against D who was in talks to take
over as B’s manager, preventing D from doing this. Where a contractual obligation
involved the continuing exercise of some special skill or talent and a high degree of
mutual trust and confidence, the court would not issue injunctions to tie one party to the
other. To do so would de facto be compelling a positive obligation, which courts are
reluctant to do. Also in this case, because of the trust fund arrangements to which P had
access, damages would be ineffective as a remedy.

Nourse LJ: general principles of injunctions: court ought not to enforce the performance
of the negative obligations if their enforcement will effectively compel the servant to
perform his positive obligations under the contract; compulsion is to be decided on the
effects it will have on the tied in party e.g. psychological, physical, material etc; “An
injunction will less readily be granted where there are obligations of mutual trust and
confidence, more especially where the servant's trust in the master may have been
betrayed or his confidence in him has genuinely gone.” However, with regard to the
sanctity of contract, judges will regard with scrutiny a claim by a servant that they are
under a need to leave the arrangement so as to maintain their skill; generally also there
has to be an inadequacy of damages as a remedy. He was also keen to avoid indirectly
permitting specific performance, which is the effect a prohibitory injunction on D would
have had on B. He also describes the Nelson case as “extremely unrealistic,” a decision
this case would seem to contradict (since B is free to quit boxing).

Lauritzencool AB v Lady Navigation Inc [2005] 1 WLR 686: P were the contractual
managers of boats as part of a fleet and CA granted them an injunction against D from
employing two of the ships managed by P. CA said that even where granting an
injunction will effectively be a specific performance order where the subject matter is of
particular value to P so that damages would be inadequate. This was the case here. Mance
LJ: The presence of a “fiduciary relationship of mutual trust and confidence” does not
provide a valid objection.

6. Consumers’ New Remedy where Goods are Non-Conforming

Part 5A, Sale of Goods Act 1979, introduced by Sale and Supply of Goods to Consumers
Regulations 2002 (SI 3045/2002), Reg 5: Goods which don’t conform with the contract
within 6 months of delivery at any time are taken not to have conformed on that date.

7. Restitution after Termination

Once a contract has been terminated for breach, the parties may be entitled to standard
restitutionary remedies (e.g. the recovery of money paid for a total failure of
consideration or a quantum meruit for services rendered). These restitutionary remedies
are triggered not by the cause of action of breach of contract but by the cause of action of
unjust enrichment. They lie outside the law of contract and within the law of restitution.

8 Affirmation: CW:

 If P elects to continue the contract he has “affirmed” and primary

obligations continue regardless and P can still claim damages (though
obviously not loss of a bargain)
 It requires an unequivocal intention to continue with the contract and
continues to press for performance. – see the White & Carter case
 White and Carter sets limitations on the right to affirm: that the contract
can still go ahead without the need for cooperation AND that the claimant
has a “legitimate” interest in continuing the contract.
 See the Alaskan Trader case

Articles and Casenotes

Ogus, Harris and Phillips, “Contract Remedies and the Consumer Surplus” (1979) 95
LQR 581

Friedmann, “The Performance Interest in Contract Damages” (1995) 111 LQR 628

Fuller and Perdue, “The Reliance Interest in Contract Damages” (1936) 46 Yale LJ 52,
373