English Law/Contract/Termination and remedies

Clauses governing when a contract can be terminated, and what remedies are available are particularly important in commercial contracts, such as for shipping and the sale of goods, to achieve business certainty.

Although promises are made to be kept, parties to an agreement are generally free to determine how a contract is terminated, can be terminated and remedial consequences for breach of contract, just as they can generally determine a contract's content. The courts have fashioned only residual limits on the parties' autonomy to determine how a contract terminates. The courts' default, or standard rules, which are generally alterable, are first that a contract is automatically concluded if it becomes impossible for one party to perform. Second, if one party breaches her side of the bargain in a serious way, the other party may cease his own performance. If a breach is not serious, the innocent party must continue his own obligations but may claim a remedy in court for the defective or imprecise performance he has received. Third, the principle remedy for breach of contract is compensatory damages, limited to losses that one might reasonably expect to result from a breach. This means a sum of money to put the claimant in mostly the same position as if the contract breaker had performed her obligations. In a small number of contract cases, closely analogous to property or trust obligations, a court may order restitution by the contract breaker so that any gains she has made by breaking the agreement will be stripped and given to the innocent party. Additionally where a contract's substance is for something so unique that damages would be an inadequate remedy courts may use their discretion to grant an injunction against the contract breaker doing something or, unless it is a personal service, positively order specific performance of the contract terms.

Performance and breach

Generally speaking, all parties to a contract must precisely perform their obligations or there is a breach of contract and, at the least, damages can be claimed. However, as a starting point, to claim that someone else has breached their side of a bargain, one must have at least "substantially performed" their own obligations. For example, in Sumpter v Hedges a builder performed £333 worth of work, but then abandoned completion of the contract. The Court of Appeal held he could not recover any money for the building left on the land, even though the buyer subsequently used the foundations to complete the job. This rule provides a powerful remedy in home construction cases to a customer. So in Bolton v Mahadeva Mr Bolton installed a £560 heating system in Mahadeva's house. However, it leaked and would cost £174 to correct (i.e. 31% of the price). Mahadeva did not pay at all, and the Court of Appeal held this was lawful because the performance was so defective that there could not be said to be any substantial performance. However where an obligation in a contract is "substantially performed", the full sum must be paid, only then deducting an amount to reflect the breach. So in Hoenig v Isaacs Denning LJ held a builder who installed a bookcase poorly, with a price of £750 but costing only £55 to correct (i.e. 7.3% of the price), had to be paid minus the cost of correction. If a contract's obligations are construed as consisting of an "entire obligation", performance of it all will be a condition precedent (a requirement before) to performance from the other side falling due, and allowing a breach of contract claim.

In the simplest case of a contractual breach, the performance that was owed will merely be the payment of a provable debt (an agreed sum of money). In this case, the Sale of Goods Act 1979 section 49 allows for a summary action for price of goods or services, meaning a quick set of court procedure rules are followed. Consumers also benefit under sections 48A-E, with a specific right to have a broken product to be repaired. An added benefit is that if a claimant brings an action for debt, she or he will have no further duty to mitigate his loss. This was another requirement that common law courts had invented, before a claim for breach of contract could be enforced. For instance, in contracts for services that spanned a long period of time (e.g. 5 years), the courts would often state that because a claimant should be able to find alternative work in a few months, and so should not receive money for the whole contract's duration. However, White & Carter (Councils) Ltd v McGregor an advertising company had a contract to display adverts for McGregor's garage business on public dustbins. McGregor said he wished to cancel the deal, but White & Carter Ltd refused, displayed the adverts anyway, and demanded the full sum of money. McGregor argued that they should have attempted to mitigate their loss by finding other clients, but the majority of the Lords held there was no further duty to mitigate. Claims in debt were different from damages.

Remedies are often agreed in a contract, so that if one side fails to perform the contract will dictate what happens. A simple, common and automatic remedy is to have taken a deposit, and to retain it in the event of non-performance. However, the courts will often treat any deposit that exceeds 10 per cent of the contract price as excessive. A special justification will be required before any greater sum may be retained as a deposit. The courts will view a large deposit, even if expressed in crystal clear language, as a part payment of the contract which if unperformed must be restored in order to prevent unjust enrichment. Nevertheless, where commercial parties of equal bargaining power wish to insist on circumstances in which a deposit will be forfeit and insist precisely on the letter of their deal, the courts will not interfere. In Union Eagle Ltd v Golden Achievement Ltd a purchaser of a building in Hong Kong for HK$4.2 million had a contract stipulating completion must take place by 5 pm on 30 September 1991 and that if not a 10 per cent deposit would be forfeited and the contract rescinded. The purchaser was 10 minutes late only, but the Privy Council advised that given the necessity of certain rules and to remove business' fear of courts exercising unpredictable discretion, the agreement would be strictly enforced. Agreements may also state that, as opposed to a sum fixed by the courts, a particular sum of "liquidated damages" will be paid upon non-performance. The courts place an outer-limit on liquidated damages clauses if they became so high, or "extravagant and unconscionable" as to look like a penalty. Penalty clauses in contracts are generally not enforceable. However this jurisdiction is exercised rarely, so in Murray v Leisureplay plc the Court of Appeal held that a severance payment of a whole year's salary to a company's Chief Executive in the event of dismissal before a year was not a penalty clause. Additionally, the ability of courts to strike down clauses as penalties only applies to clauses for payment of money upon the breach of the contract rather than events during its performance, though the Unfair Terms in Consumer Contracts Regulations 1999 confers jurisdiction to interfere with unfair terms used against consumers.

Frustration

The burning down of the Surrey Music Hall in Taylor v Caldwell frustrated the contract to hire it.

Early common law cases held that performance of a contract always had to take place. No matter what hardship was encountered contracting parties had absolute liability on their obligations. In the 19th century the courts developed a doctrine that contracts which became impossible to perform would be frustrated and automatically come to an end. In Taylor v Caldwell Blackburn J held that when the Surrey Gardens Music Hall unexpectedly burnt down, the owners did not have to pay compensation to the business that had leased it for an extravagant performance, because it was neither party's fault. An assumption underlying all contracts (a "condition precedent") is that they are possible to perform. People would not ordinarily contract to do something they knew was going to be impossible. Apart from physical impossibility, frustration could be down to a contract becoming illegal to perform, for instance if war breaks out and the government bans trade to a belligerent country, or perhaps if the whole purpose of an agreement is destroyed by another event, like renting a room to watch a cancelled coronation parade. But a contract is not frustrated merely because a subsequent event makes the agreement harder to perform than expected, as for instance in Davis Contractors Ltd v Fareham UDC where a builder unfortunately had to spend more time and money doing a job than he would be paid for because of an unforeseen shortage of labour and supplies. The House of Lords denied his claim for contract to be declared frustrated so he could claim quantum meruit. Because the doctrine of frustration is a matter of construction of the contract, it can be contracted around, through what are called "force majeure" clauses. Similarly, a contract can have a force majeure clause that would bring a contract to an end more easily than would common law construction. In The Super Servant Two Wijsmuller BV contracted to hire out a self-propelling barge to J. Lauritzen A/S, who wanted to tow another ship from Japan to Rotterdam, but had a provision stating the contract would terminate if some event made it difficult related to the 'perils or dangers and accidents of the sea'. Wijsmuller BV also had a choice of whether to provide either The Superservant One or Two. They chose Two and it sank. The Court of Appeal held that the impossibility to perform the agreement was down to Wijsmuller's own choice, and so it was not frustrated, but that the force majeure clause did cover it. The effect of a contract being frustrated is that it is that both parties are prospectively discharged from performing their side of the bargain. If one side has already paid money over or conferred another valuable benefit, but not got anything in return yet, contrary to the prior common law position, the Law Reform (Frustrated Contracts) Act 1943 gives the court discretion to let the claimant recover a 'just sum', and that means whatever the court thinks fit in all the circumstances.

In Bell v Lever Bros Ltd, a golden parachute deal struck over dinner at the Savoy Hotel was held to still be enforceable despite a mistake about the crooked director's involvement in a cartel.

Common mistake

A doctrine related to frustration is "common mistake", which since the decision of Lord Phillips MR in The Great Peace is essentially the same in operation as frustration, except that the event making a contract impossible to perform takes place before, not after, a contract is concluded. A "common mistake" differs from the "mistakes" that take place between offers and acceptance (that mean there is no agreement in the first place), or the so-called "mistake about identity" cases that follow from a fraudulent misrepresentation (which typically makes a contract voidable, not void, unless in a written document and concluded at a distance), because it is based on performance becoming seriously difficult to perform. For instance, in Courturier v Hastie a corn shipment had decayed by the time two businesspeople had contracted for it, and so it was held (perhaps controversially) that the seller was not liable, because it was always physically impossible. And in Cooper v Phibbs the House of Lords held that an agreement to lease out a fishery was void because it turned out the lessee was in fact the owner. It is legally impossible to be leased something one owns. Again, the doctrine of common mistake may be contracted around, so in McRae v Commonwealth Disposals Commission it was held that despite the fact that a wrecked ship off the Great Barrier Reef never in fact existed, because a salvage business was actually promised by the Australian government that it was there, there was no common mistake. Like frustration, the doctrine operates only in narrow confines. In Bell v Lever Bros Ltd Lord Atkin stated that a mistake must be of such a 'fundamental character as to constitute an underlying assumption without which the parties would not have entered into the agreements'. Post-war, Denning LJ added to the doctrine, beyond its narrow legal confines, in line with the more permissive approach recognised throughout civil law countries, most of the Commonwealth and the United States. In Solle v Butcher he held that in equity a contract could be deemed voidable (rather than outright void) if it would be 'unconscientious' for a court to hold someone to a bargain. This gave the courts some flexibility in the kind of remedy they would grant, and could be more generous in the circumstances they allowed escape. But in The Great Peace, Lord Phillips MR said that this more permissive doctrine had been contrary to the House of Lords authority in Bell v Lever Bros Ltd. Although it probably would not have been avoidable under the mistake in equity doctrine anyway, Lord Phillips MR held that a rescue company could not escape from an agreement to save a ship because both parties were mistaken that the distressed vessel was further than they originally thought. The result is that English contract law jealously prevents escape from an agreement, unless there is a serious breach because of the conduct of one party, which gives rise to the right to terminate.

Termination

The third in a series of cases involving the Royal Opera House manager, Frederick Gaye, Bettini v Gye held that the right to terminate is a question of construction.

The main way contracts are brought to an untimely end is when one party does not perform the major primary obligations on their side of the bargain. As a rule, if a breach is small the other party must still go ahead and perform his obligations, but will then be able to claim compensation, or a "secondary obligation" from the party in breach. If, however, the breach is very big, "fundamental" or goes "to the root of the contract", then the innocent party gets the right to elect to terminate his own performance for the future. The same goes where one party makes clear they have no intention of performing their side of the bargain, in an "anticipatory repudiation", so the innocent party can go straight to court to claim a remedy, rather than waiting till the contract's date for performance which never arrives. The test for whether a term's breach will allow for termination essentially depends on construction of the contract's terms as a whole by the court, following the same rules as for any other term. In Bettini v Gye, Blackburn J held that although an opera singer arrived 4 days late for rehearsals, given that the contract was to last three and a half months, and only the first week of performance would be slightly affected, the Opera House owner was not entitled to turn the singer away. The opera owner could have withheld some payment to reflect his loss from the breach, but should have let the show go on. The intentions of the parties manifested in the contract showed that such a breach was not so serious as to give rise to the right to terminate. As Lord Wilberforce said in The Diana Prosperity the Court must, 'place itself in thought in the same factual matrix as that in which the parties were.'

Inspired by Frederick Pollock, the drafter of the Sale of Goods Act 1893 and the Marine Insurance Act 1906, Mackenzie Chalmers distinguished conditions and warranties as two main kinds of term.

While when a contract is silent a court must essentially make an informed choice about whether a right to terminate should exist, if a contract deals with the matter the courts' general approach is to follow the parties' wishes. The drafters of the old Sale of Goods Act 1893 distinguished between "conditions" (major terms, which when breached confer a right to terminate) and "warranties" (minor terms, which do not), and under the present Sale of Goods Act 1979 some terms, such as descriptions about quality, are conditions by default. A third kind is an "innominate term", which is typically a vague term like citrus pulp pellets being "in good condition", or a ship having to be "seaworthy". Because such a term could be breached in both a major way (e.g. the ship sinks) or a trivial way (e.g. a lifejacket is missing) the court will determine whether the right to terminate arises based on how serious in fact the consequences of the breach were. So in The Hong Kong Fir, Lord Diplock held that a ship crew being too incompetent to properly operate the vessel did not breach the contract's "seaworthiness" term in a serious enough way as to allow for termination, because the charterers still got a working boat and could have replaced the crew. If a contract specifies that a particular obligation is a "condition" the dominant approach of the courts is to treat it as such. Nevertheless, concerned with the ability of a stronger party to specify the terms it finds most convenient as "conditions" at the expense of the weaker, courts retain the ability to construe an agreement contra proferentum. In L Schuler AG v Wickman Machine Tool Sales Ltd the majority of the House of Lords held that clause 7 of a contract, stating it was "a condition of this agreement" that Mr Wickman would visit 6 major car companies "at least once in every week" to try selling panel presses, was not really a condition in the technical sense. So when Mr Wickman was found to have visited much less, Schuler AG could not dismiss him. This was because clause 11 said that 60 days of warning was needed before Schuler AG could terminate, so the whole contract read together meant the clause 7 had to be subject to clause 11. The language in the contract is not decisive. If the word "condition" is not used, but the contract describes a right to terminate, such as the contract being terminable for "any breach" of obligation, the issue is, again, one of construction and the courts may be reluctant to give effect to the plain meaning if it would have "draconian consequences" for the weaker party. By contrast, in Bunge Corporation v Tradax SA the Law Lords held that giving notice for a ship to start loading the cargo four days late, when the contract expressly stipulated the date, should allow the right to terminate regardless of the actual consequences of the breach. In mercantile contracts, 'broadly speaking time will be considered of the essence', and so it is highly likely the courts will enforce obligations strictly.

Damages

Whether or not a contract is terminated, every breach of a substantially performed contract gives rise to the right to a remedy. A court's power to award remedies is the final sanction against non-performance and, unless the defendant is insolvent, the objective is to achieve full compensation for the innocent party as if the contract were performed. This measure of the remedy to protect "expectations" forms a principal distinction between contracts as obligations from torts or unjust enrichment.

In cases where performance is defective, the courts generally award money for the cost of curing the defect, unless the sum would be disproportionate and another sum would adequately achieve the same compensatory objective. In Ruxley Electronics Ltd v Forsyth although a £17,797 swimming pool was built 18 inches too shallow, the land's market value was exactly the same. The House of Lords' solution, rather than awarding the cost of rebuilding it at £21,560 and rather than reject any award at all, was to reflect the forgone "consumer surplus" or the "loss of amenity" with an award of £2,500. Greater recognition of benefits in contracts other than purely financial ones has also been seen in cases concerning contracts where pleasure, enjoyment, relaxation or the avoidance of stress are construed as being "important terms".

In Jarvis v Swans Tours Ltd Lord Denning held that a council worker could get not just his money back, but also a small sum to reflect his disappointment after his dream-holiday to the Swiss Alps, contrary to the promises in Swan Tours' travel brochure, proved a boring disaster, complete with sub-standard yodelling. And in Farley v Skinner the House of Lords held that a homebuyer close to Gatwick airport could recover money for lack of peaceful enjoyment, and the disruption of what would otherwise be his "quiet contemplative breakfast" from the house surveyor who assured there would be no noise. The market value of the property was unchanged, but ensuring peace and quiet had been an important term in their agreement. The courts have, however, remained reluctant to allow recovery for disappointment over any breach of contract, particularly in employment where a flood of people might claim damages for stress and upset after a wrongful dismissal.

The famous case of Hadley v Baxendale about the lost profits of a flour miller at Gloucester's docks, was updated in The Achilleas, so the extent of damages reflect the "background of market expectations".

In addition to damages for not getting the thing promised itself, a contract breaker must compensate for the costly consequences of the breach that one would reasonably expect to exist. There must be a causal connection between the breach and the consequence complained of. In Saamco v York Montague Ltd it was held a bank could not recover damages from property valuer for all of the difference in what the properties it bought after getting the valuations were assured to be and actual property values, because a large part of the difference resulted from generally depressed market prices following "Black Wednesday" in 1992.

In a business deal, calculation will typically be based on the forgone profits that one could reasonably have expected to make. This could also include the "loss of a chance" to profit, so in Chaplin v Hicks an entrant in a beauty contest wrongfully excluded from the final round was awarded 25% of the final prize money to reflect her 1 in 4 chance of having won. One limit lies at consequential losses that are too "remote", or are not a natural result of the breach, and are not in the parties' contemplation. In Hadley v Baxendale a miller tried to recover damages from Baxendale's delivery company for the lost profits from his mill grinding to a halt, after they were late delivering a crankshaft back from being fixed. But Alderson B held that because millers would usually be expected to keep spare crank shafts, and because he had not informed Baxendale of the importance of the timely delivery, an award for profits could not be compensated.

More recently in The Achilleas the majority of the House of Lords preferred to express the remoteness rule as one of construing the contract to reflect the parties' "background of market expectations". Transfield Shipping returned The Achilleas late to its owner, Mercator, which led Mercator to lose a lucrative contract with Cargill that would make over $1.3 million, an occurrence that was plainly a natural consequence of the breach and easily foreseeable. Yet because the standard practice and expectation in the shipping industry was that if a ship were returned late only the ordinary sum for hire would be due, this was the limit on recovery. It is also possible to lose one's entitlement to damages if steps are not taken to mitigate further losses, that any prudent person would, rather than sitting back and letting losses run up. But the burden of proof of a failure to mitigate is on a contract breaker, to whom the courts are unlikely to be sympathetic. A contract breaker could may also, if a concurrent liability arises in tort, argue a claimant's damages should be reduced to reflect their contributory fault, and the courts can reduce an award to achieve a just and equitable result.

Sometimes potential profits will be too uncertain, or a general fall in market prices means that even claiming damages for the thing itself would leave one in a negative position, and so the courts allow a claimant to choose whether to sue, not for a failure in expectations, but to cover her expenses in preparing for the contract, or the "reliance interest". In Anglia Television Ltd v Reed a TV channel successfully sued Robert Reed for not turning up for shooting a film. It was unclear whether the film would make any profits at all, and so Anglia TV got compensated for its wasted expenses in preparing the set. The level of damages is generally assessed at the date of the breach, but this is variable if the court thinks another time would be fairer.

Injunctions

When compensatory damages are an inadequate remedy, restitution may be awarded as where a record company exploited a licence to Jimi Hendrix records in breach of contract.

By way of exception, alternative remedies to compensatory damages are available depending on the contract's nature. If damages would be an inadequate remedy, for instance, because the subject matter was a unique painting, or a piece of land, or was to deliver petrol during an oil crisis, a court may compel literal or specific performance of the contract's terms. It can also compel a defendant to refrain from actions that would continue a breach of contract. Injunctions are discretionary remedies, and so they are not awarded in cases where it might cause hardship, like compelling conveyance of property when it would mean an unexpectedly disabled inhabitant would lose her home.

Additionally, the courts have, at least since the Slavery Abolition Act 1833, refused to grant specific performance of contracts involving personal services. This is part of a more general principle that two (potentially hostile) parties to litigation should not be made to work in a long term relationship. In Cooperative Insurance Ltd v Argyll Ltd although a shop broke its contract with a shopping centre to keep its business operating, and actual performance was important to keep flagship businesses and so attract more customers to the centre generally, specific performance was not granted because compelling a potentially loss making business to keep operating was draconian and probably not capable of being policed by the court.

No award can be made which punishes, or makes an example of a defendant, even for a cynical and calculated breach of contract. However, in limited situations, a claimant may succeed in a claim for restitution of the contract breaker's gains, as is routinely available in cases involving trustees or other fiduciaries who profit from transactions where they have a conflict of interest. In the leading case, Attorney General v Blake a former secret service agent's profits from book sales, which recounted government information in breach of Blake's employment contract, were stripped. While Lord Nicholls stated, other than compensatory damages are not an adequate remedy, that "no fixed rules can be prescribed" and their Lordships were eager to not hamper the development of the law, the cases where such awards have been made in contract have all involved some quasi-proprietary element.

In an earlier case, Wrotham Park Ltd v Parkside Homes Ltd, Brightman J awarded a percentage of gains resulting from building a lot of homes in breach of a restrictive covenant, based on a sum that the parties would have been likely to contract for had they struck a bargain. More recently in Experience Hendrix LLC v PPX Enterprises Inc Mance LJ held that a percentage of profits made by PPX breaching the intellectual property rights on songs by Jimi Hendrix would have to be paid up. So if in the course of a contract one party is in a position to take advantage of another's rights without their fully informed consent, a restitutionary remedy can be awarded.