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EGB482 (Week 8)
Breach of contract – and other ways contracts can go bad
| Question | Answer |
|---|---|
| What is breach of contract? (1) | - Breach of contract occurs when a party to the contract fails to comply with their obligations under the contract |
| What is breach of contract? (2) | - In some cases a significant breach of contract may lead to termination of the contract, in other cases it may simply entitle the other party to a remedy |
| What is breach of contract? (3) | - The remedy may be set out in the terms of the contract, or it may be applied by a court - Where a breach occurs, the innocent party can enforce the contract in court |
| Breach of contract - To successfully enforce a contract and recover remedies, the plaintiff needs to prove: 1) Contract | There is a contract between the plaintiff and the defendant |
| Breach of contract - To successfully enforce a contract and recover remedies, the plaintiff needs to prove: 2) Breach | The defendant has breached a term of the contract |
| Breach of contract - To successfully enforce a contract and recover remedies, the plaintiff needs to prove: 3) Loss or harm | The breach has caused some loss or harm to the plaintiff |
| Establishing a cause of action for breach of contract - The first step is to establish a cause of action – the process of determining and being able to prove the contractual relationship and breach of the contract 1) Contract | There is a contract between the plaintiff and the defendant |
| Establishing a cause of action for breach of contract - The first step is to establish a cause of action – the process of determining and being able to prove the contractual relationship and breach of the contract 2) Breach | The defendant has breached a term of the contract |
| Cause of action for breach of contract Example - defective building work - To establish a cause of action for breach of contract by a contractor for carrying out defective building work, the principal needs to prove: 1) Contract | There is or was a contract between the principal and the contractor for carrying out the building work |
| Cause of action for breach of contract Example - defective building work - To establish a cause of action for breach of contract by a contractor for carrying out defective building work, the principal needs to prove: 2) Breach | The actions of the contractor amounted to a breach of a specific term of the contract regarding quality of materials or workmanship |
| Where the contract contains an express provision about the | quality of workmanship (e.g. work to be carried out in accordance with accepted trade practices) carrying out the work using substandard workmanship would be a breach of that provision |
| Where the contract contains an express provision about the quality of | materials to be used (e.g. materials to be reasonably fit for the purpose for which they are intended) carrying out the work using substandard materials would be a breach of that provision |
| Where the contract is not in writing, need to consider what implied terms will | apply, and whether those terms have been breached |
| Where there is a written contract, but it does not contain express provisions about the quality of materials or workmanship, or it contains terms which are less strict than the general common law standards, need to consider | what implied terms will apply in addition to the terms already in the contract, and whether those terms have been breached |
| Cause of action for breach of contract – Implied terms for Contractors - Implied terms in construct-only contracts (unless it is unreasonable in the circumstances to imply these terms) (1) | Construction work to be carried out with reasonable skill and care |
| Cause of action for breach of contract – Implied terms for Contractors - Implied terms in construct-only contracts (unless it is unreasonable in the circumstances to imply these terms) (2) | Materials supplied in relation to the work to be of good or merchantable quality and fit for the purpose for which they were supplied |
| Cause of action for breach of contract – Implied terms for Contractors (1) | Completed design and construction work to be reasonably fit for purpose |
| Cause of action for breach of contract – Implied terms for Contractors (2) | Contractor could be liable for defects arising from design and/or construction work if the completed work is not fit for purpose, even if cannot prove the contractor failed to exercise due skill and care expected of a professional in carrying out work |
| Merchantable quality = | materials are reasonably fit for the purpose for which such goods are normally used |
| Fit for purpose = | materials are reasonably fit for the particular purpose for which they are required |
| Unless the circumstances of a case make it unreasonable to do so, the common law will generally | imply terms into a contract for the supply of work and materials that the materials supplied will be reasonably fit for the purpose for which they are used |
| If a builder is installing materials specified by the principal, generally courts will only imply into the building contract a term of purpose | merchantable quality and not fitness for the particular |
| If a builder has designed the works and/or specified the materials, generally courts will imply into the building contract terms for both | merchantability and fitness for the particular purpose |
| Cause of action for breach of contract Consultants and Other Professionals - Implied terms in consultancy contracts for design (1) | Courts may take the view that the common law would imply a term into a consultancy agreement that the design must be fit (or reasonably fit) for its intended purpose |
| Cause of action for breach of contract Consultants and Other Professionals - Implied terms in consultancy contracts for design (2) | This means that the design is capable of being constructed and the finished product, when properly constructed, will be fit (or reasonably fit) for its intended purpose |
| Cause of action for breach of contract Consultants and Other Professionals - Implied terms for professionals (1) | Courts will generally imply a duty that a professional will exercise due skill and care when performing contractual obligations |
| Cause of action for breach of contract Consultants and Other Professionals - Implied terms for professionals (2) | The required level of skill and care is generally that used by the ordinary competent professional, or a significant number of professional peer |
| Remedies for breach of contract | The most common remedy for breach of contract is damages |
| Liquidated damages: | expressly provided for in the contract in the form of a pre-agreed, stipulated amount for a specific type of breach |
| General damages: | (also known as unliquidated damages) not expressly dealt with in the contract, but assessed by the court with respect to actual loss or injury suffered |
| Aim of general damages for breach of contract at common law is to | put the plaintiff in the position they would have been in if the contract had been properly performed |
| General damages for breach - Purpose is to compensate the | innocent party, not punish the defaulting party |
| Damages for breach of contract can be claimed for: | - Loss - Personal injuries - Disappointment and distress (in limited circumstances) |
| The primary basis the court will use in assessing damages for loss is what is known as expectation loss, or loss of bargain - This is the benefit lost to the plaintiff as a consequence of the contract not being performed to successful completion | - It includes cost plus expected profit (or minus expected loss) - To apply this basis of assessing damages, the court must be able to calculate the expected profit or loss with some certainty |
| General damages for loss - Where the expected profit or loss (loss of bargain) cannot be calculated, the court can use | alternative measures of damages |
| Where the plaintiff has suffered no actual loss, the plaintiff will be awarded | nominal damages only |
| Examples of expectation loss - Sale of goods contract - If the purchaser does not receive the item they purchased, the measure of damages will be the difference between the | contract price (the price the purchaser paid or expected to pay) and market price (the price the purchaser will have to pay to get the same item elsewhere) |
| Examples of expectation loss - Construction contract - Where the contractor is the plaintiff and the contract is wrongfully terminated, the measure of damages will be the difference between the contract | price and what it would have cost the contractor to carry out the works (the loss is the profits lost by not being able to carry out the works) |
| Examples of expectation loss - Construction contract - Where the principal is the plaintiff and the work was defective, the measure of damages will be the difference between the contract price of the work and the | cost of making the work conform to the contract (the cost of remedial work) |
| General damages for personal injury, disappointment or distress - A plaintiff can recover damages for personal injuries provided: | • The injuries were caused by the breach of contract, and • The damage is not too remote |
| General damages for personal injury, disappointment or distress - Courts will only award damages for disappointment and distress in | exceptional circumstances |
| Tests of causation, mitigation and remoteness 1 | Having established a cause of action (existence of a contract and breach of the contract), the plaintiff has to prove why it is appropriate for the court to award the damages the plaintiff is seeking |
| Tests of causation, mitigation and remoteness 2 | The three tests the court will apply in considering this question are causation, mitigation and remoteness |
| Tests to be applied in awarding damages - To successfully recover damages, the plaintiff needs to prove: 1) Causation | Did the defendant’s breach of contract cause the plaintiff’s loss? |
| Tests to be applied in awarding damages - To successfully recover damages, the plaintiff needs to prove: 2) Mitigation | Did the plaintiff try to mitigate the amount of loss? |
| Tests to be applied in awarding damages - To successfully recover damages, the plaintiff needs to prove: 3) Remoteness | Was the loss reasonably foreseeable to the defendant, i.e. not too remote? |
| Awarding damages – Causation - Causation – Did the defendant’s breach of contract cause the plaintiff’s loss? • Loss must be caused by the breach of contract | • The breach does not have to be the only cause, but it must be sufficiently important that without the breach, the loss would not have occurred • Sometimes described as the ‘but for’ test: but for the breach, the loss would not have occurred |
| Awarding damages - Mitigation - Mitigation – Did the plaintiff try to mitigate the amount of loss? 1 | • If the plaintiff does not take reasonable steps to mitigate (minimise) losses arising from breach, the plaintiff may not be able to claim the full losses from the defendant |
| Awarding damages - Mitigation - Mitigation – Did the plaintiff try to mitigate the amount of loss? 2 | • Cannot exploit the breach by sitting back and allowing losses to accumulate • Courts will not compensate a plaintiff for avoidable losses losses which could have been avoided if the plaintiff had taken reasonable steps |
| Awarding damages - Remoteness - Remoteness – Was the loss reasonably foreseeable? | • Was the loss too remote? • The test for remoteness was first set down in Hadley v Baxendale (1854) |
| Remoteness – Was the loss reasonably foreseeable to the defendant, i.e. not too remote? | The test for remoteness was first set down in Hadley v Baxendale (1854) |
| Remoteness – Was the loss reasonably foreseeable to the defendant, i.e. not too remote? - Later cases (e.g. Victoria Laundry Ltd v Newman Industries Ltd [1949]) clarified that the losses which arise naturally from | the breach, under the first limb of Hadley v Baxendale, are recoverable only to the extent that they were to be reasonably expected or foreseeable as resulting from the breach |
| The test as now used is that damages will only be awarded if the losses fall within one of the following two limbs: 1 | Reasonably foreseeable losses which may fairly and reasonably be considered as arising naturally (according to the usual course of things) from the breach, sometimes referred to as flowing naturally from the breach, or |
| The test as now used is that damages will only be awarded if the losses fall within one of the following two limbs: 2 | Although not arising naturally from the breach, may reasonably be supposed to have been in the contemplation of both parties, at the time they made the contract, as the probable result of the breach of the contract |
| Other remedies for breach of contract - equitable remedies - Order for injunction or specific performance | • Can be instead of damages or in addition to damages • Court must be satisfied that damages alone would not provide adequate remedy • Not as common as damages |
| Other remedies for breach of contract - equitable remedies - Injunction: | • Restraining a party from doing something, stopping them breaching the contract • e.g. to prevent a party calling a bank guarantee |
| Other remedies for breach of contract - equitable remedies - Specific performance: | • Compelling a party to do something, making them perform their obligations under the contract • e.g. ordering a party to go ahead with the sale of something unique |
| Limiting available remedies - The parties to a contract can choose to include terms in the contract which | restrict the remedies available in the event of a breach of contract |
| Limiting available remedies - These are called exemption clauses, exclusion clauses | or disclaimers |
| Limiting available remedies - They are often used in construction contracts as a way | of allocating risks between the parties |
| Exemption clauses enable a party to protect itself in the event of a breach by: | - Excluding a right the other party may have had, or - Limiting a party’s liability to a specified amount, or - Limiting a party’s right by placing conditions on how it can be exercised |
| Exemption clauses – Excluding a right the other party may have had - These clauses may be | general |
| Exemption clauses – Excluding a right the other party may have had - General exclusion of liability | “Homer’s liability for damage to Ned’s property while on Homer’s premises is excluded” |
| Exemption clauses – Excluding a right the other party may have had - Or they may exclude specific types of liability, such as | liability for consequential loss |
| Exemption clauses – Excluding a right the other party may have had - Exclusion of liability for consequential loss | “Homer’s liability to Ned excludes liability for consequential loss” |
| Exemption clauses – Excluding a right the other party may have had - Exclusion of liability for consequential loss - Courts have taken a variety of views on the meaning of consequential loss, so it is safest to spell out in | a consequential loss exclusion clause exactly what is to be excluded, e.g. “Homer’s liability to Ned excludes liability for loss of profits, loss of production, loss of use or loss of opportunity” |
| Exemption clauses – Limiting liability - These are commonly known as limitation of liability clauses - These clause limit a party’s liability to a | specified amount, most commonly as a cap on the damages which could be recovered under the contract for a specified breach - “Homer’s liability to Ned for breach of this contract is limited to $1000” |
| Exemption clauses – placing conditions on a party’s right under the contract - These clauses limit a party’s right by placing conditions on how | that right can be exercised |
| For example, a clause which states that a claim one party has a right to make under the contract must be made within a certain time or the right will be lost, often known as a ‘time bar’ clause | “Ned must make any claim for damage to his property under this contract within 5 business days of the damage occurring; Ned will have no right to make a claim for damage after this time” |
| Exemption clauses – placing conditions on a party’s right under the contract - This is often used in construction contracts to require the contractor to make a claim for an extension of time within a certain time after the contractor became aware of the | delaying event; if the claim is not made within that time, the clause states that the contractor will lose its right to an extension of time |
| Rules for exemption clauses - Rule 1 | For an exemption clause to be effective, the person seeking to rely on the clause must have given sufficient notice to the party whose rights will be limited by the clause |
| Exemption clauses – notice Signed contracts - Signing the contract is usually taken as receipt of notice | Even where the clause was in small print on poor quality paper, it was effective (L’Estrange v F Graucob [1934]) |
| Exemption clauses – notice Signed contracts - But signing the contract will not be enough if the clause was misrepresented | Where a dry cleaner lied about what the clause said when the customer asked, the court refused to allow the clause to operate (Curtis v Chemical Cleaning and Dyeing Co [1951]) |
| Exemption clauses – notice No signed contract | The party seeking to rely on the clause must give constructive notice to the other party (must have done all reasonably necessary to bring the clause to the attention of a reasonable person) |
| Rules for exemption clauses - Rule 2 | Where there is any confusion or ambiguity about the meaning of the clause, the court will interpret it against the interests of the party who put forward the clause in the contract |
| Termination of a contract - Discharge of contracts | How does a valid contract come to an end? |
| Termination of a contract - Vitiation of contracts | What happens when the court decides that the contract is no longer valid – or was never valid? |
| Termination => | Discharge of a contract |
| Discharge of contracts | - Discharge (termination) of a contract occurs when the parties are relieved of their obligations to perform under the contract - When a contract is discharged it comes to an end |
| A contract may be discharged by: | - Performance - Agreement - Frustration - Breach or repudiation |
| Discharge of contract by performance | If both parties complete all their obligations under the contract, they will be discharged from the contract and the contract will come to an end |
| Discharge of contract by agreement 1 | A contract can be brought to an end before full performance by mutual agreement |
| Discharge of contract by agreement 2 | Note that an agreement to end the contract is itself a legal agreement, requiring the essential elements of a contract (including consideration) |
| Discharge of contract by agreement 3 | Some contracts contain terms which allow a party to terminate the contract when certain events happen, or even for no reason |
| Discharge of contract by frustration - Frustration of a contract occurs where a contract was capable of performance at the time of | formation (or both parties genuinely believed at formation that it was capable of performance) but the contract subsequently becomes impossible to perform or radically different in nature for some reason beyond the control of the parties |
| Discharge of contract by frustration - The contract will be terminated from the date of the | event which made performance impossible |
| Discharge of contract by breach or repudiation | A contract can be discharged if one party acquires the right to terminate and chooses to exercise that right |
| Discharge of contract by breach or repudiation - At common law a party may terminate a contract where there has been: | - Breach of an essential term - Breach of a non-essential term which substantially deprives the innocent party of the benefit of the contract - Repudiation of the contract |
| What is repudiation? - Repudiation of a contract is when a party indicates, through actions or words, that they are unwilling or unable to substantially perform the contract | e.g. a principal shutting the contractor out of the site to prevent the contractor continuing with the contract works |
| The court will apply an objective (reasonable person) test, asking whether the | conduct of one party was such as to suggest to a reasonable person that the party is renouncing the contract (either the whole contract or a fundamental obligation under the contract) |
| Discharge by breach or repudiation - When a substantial breach or repudiation occurs, the innocent party has the | option to terminate (end) or affirm (continue) the contract |
| The option to terminate will be lost if the innocent party impliedly affirms the contract by: | • Continuing to perform the contract after the right to terminate arises; or • Unreasonable delay in notifying the defaulting party of the decision to terminate |
| The effect of substantial breach or repudiation, once the innocent party terminates, is that the contract is terminated as at the date of breach: | • Contractual rights and obligations prior to the breach stand • The parties are discharged from their rights and obligations after the breach |
| Termination => Vitiation of | a contract |
| Vitiation of contracts | - In some situations contracts can be vitiated (the legal validity of the contract can be destroyed) - Only a court can vitiate a contract – by declaring the contract either => Void or => Voidable |
| Where a contract is declared void: • It is viewed by courts as not existing • It will generally will be void from the beginning, as if it had never existed | • ACL gives courts the power to declare the contract void from a later point • Once the court has declared it void, the parties to the contract cannot change that |
| Where a contract is declared voidable: 1 | Courts view it as a valid contract |
| Where a contract is declared voidable: 2 | Courts consider one party (the innocent party) not bound by the contract –the innocent party has a ‘window of opportunity’ to elect to avoid (get out of) the contract by rescinding (cancelling) it |
| Where a contract is declared voidable: 3 | If the innocent party chooses to rescind the contract, the contract will then become void from the beginning |
| Where a contract is declared voidable: - The opportunity to rescind the contract will expire if the innocent party indicates (expressly or impliedly by conduct) intention to affirm (continue) the contract, i.e. by doing or saying | something which suggests the innocent party is happy to continue |
| When can a court vitiate a contract? - Contract formed under duress | Common law - court can declare the contract voidable |
| When can a court vitiate a contract? - Contract formed under mistake | Common law - court can declare the contract void |
| When can a court vitiate a contract? - Contract formed as a result of unconscionable conduct by one party | • Common law – court can declare the contract voidable • ACL s21 - remedies include damages, court varying the contract and court declaring part or all of the contract void |
| When can a court vitiate a contract? - Contract formed as a result of misleading or deceptive conduct by one party | ACL s18 - remedies include damages, court varying the contract and court declaring part or all of the contract void |
| When can a court vitiate a contract? - A term of a standard form consumer or small business contract is declared to be unfair under the ACL, in circumstances where the remainder of the contract cannot continue without that term | ACL s23 to s25 – court can declare the contract void |
| Recap - Day to day obligations - What constitutes completion of the work? | It is important that the contract clearly identifies what constitutes completed work |
| Practical completion - work completed to a stage where remaining defects and omissions: | • do not prevent reasonable use of the works • do not significantly inconvenience the principal • can reasonably be remedied in the future rather than immediately |
| Defects liability period | fixed period of time for remedying the remaining defects and omissions |
| Final completion | • defects liability period has expired, and • all defects have been remedied |
| AS 4902 – 2000 | • Practical completion (cl 34) • Defects liability period (cl 35) • Final completion (cl 37) |
| AS 4000 – 1997 | • Practical completion (cl 34) • Defects liability period (cl 35) • Final completion (cl 37) |
| Contractor’s liability after final completion - Breach of contract | • The contractor may still be liable to the principal for breach of contract if latent defects are identified after final completion • How long does that liability last? |
| Limitation of Actions - Does liability for breach of contract or liability for the tort of negligence go on for ever after the work has finished? - NO | - In Australia, legislation imposes a limit on the time period between the date when a cause of action accrues and the date that action can be brought to court - This concept is known as limitation of actions, and the time limit is the limitation period |
| Limitation of Actions for breach of contract - The limitation period is the period between the | date when a cause of action accrues (arises) and the latest date that action can be brought to court |
| Limitation of Actions for breach of contract - In contract law, a cause of action for breach of contract arises when the | breach of contract occurs |
| In Queensland, the relevant legislation is the Limitation of Actions Act 1974 (Qld) | • For most contracts (known in law as ‘simple contracts’), the limitation period is 6 years from the date the cause of action arose – which means 6 years from the date of the breach of contract • There are some exceptions to this basic 6 year period |
| Limitation of Actions for breach of contract - Other states and territories have varying | limitation of action periods |
Created by:
Asher - S