on 05-Jul-2016 (Tue)

The modern definition of frustration is provided by Lord Radcliffe in Davis Contractors v Fareham Urban District Council [1956] AC 696:

Frustration occurs whenever the law recognises that, without default of either party, a contractual obligation has become incapable of being performed because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract ... It was not this that I promised to do.

The frustrating event that renders performance 'radically different' must occur after the formation of the contract. The more unforeseeable the event is, the greater the likelihood that it will be deemed to render the contract 'radically different' from that which was contracted for.

If a contract is frustrated, it is brought to an end automatically: the parties have no choice in the matter. Frustration may be raised as a defence to an action for breach of contract. A good example is provided by the case of Taylor v Caldwell (1863) 3 B & S 826.

The overarching principle is that the contract is frustrated because performance would now be 'radically different' from that which was contracted for. However, performance may be radically different for a number of reasons, three of which will be considered in this chapter. First, performance is impossible, second, performance is illegal or prevented by government intervention, and third, the common purpose of the contract is frustrated. It is important to note that this list of categories is not exclusive nor will all frustrating events fit neatly into one category or another.

Case law shows that the doctrine of frustration may be invoked in circumstances where the contract becomes impossible to perform due to the total or partial destruction of some object necessary to the performance of the contract. In Taylor v Caldwell, the subject matter of the contract, i.e. the music hall, was destroyed making performance impossible.

Impossibility can also apply where the frustrating event destroys an asset that does not form the subject matter of the contract in question, but rather is essential for the performance of the contract. For example, in Appleby v Myers (1867) LR 2 CP 651, a contract to install and maintain machinery in a factory was frustrated when the factory was destroyed by fire. The factory was not the subject matter of the contract, but was nevertheless essential to its performance.

Clearly death renders performance impossible, but what about unavailability because of illness? In Morgan v Manser [1948] 1 KB 183, the music-hall artist 'Cheerful Charlie Chester' was called up for military service and the contract was frustrated. Also, in Condor v The Barron Knights Ltd [1966] 1 WLR 87, the drummer in a pop group was taken ill and only capable of working three or four nights a week, whereas the group had engagements for seven nights a week, such that the contract was frustrated because the drummer was not capable of performing the contract in the way intended. Equally, in Robinson v Davison (1871) LR 6 Exch 269, the contract was frustrated when a pianist who was booked to perform a concert could not perform due to illness.

The concept of unavailability is common in shipping contracts. Even temporary unavailability may discharge a contract if the interruption is such as to make performance substantially different from what was originally undertaken. Thus, where a ship was requisitioned for a period of five months out of a year's charterparty, the contract was frustrated: Bank Line v Arthur Capel & Co [1919] AC 435.

In Jackson v Union Marine Insurance Co Ltd (1874) LR 10 CP 125, a ship was chartered to proceed with all possible dispatch from Liverpool to Newport and there to load a cargo to be shipped to San Francisco. The ship ran aground one day out of Liverpool and was not ready to load until eight months later. The contract had not imposed any particular time limit for performance but the court held there was an implied term regarding completion within a reasonable time so that the contract was frustrated because of such a long delay. However, the question is again one of degree and where a charterparty is to run for a specified period of time the contract will only be frustrated if the requisition takes up a disproportionate amount of the whole contract period.

The difficulties inherent in deciding whether frustration has occurred in these circumstances, particularly where there is still a period of the charterparty in the future, is illustrated by the case of Tamplin SS Co Ltd v Anglo-Mexican Petroleum Co [1916] 2 AC 397, where the court had to decide whether the requisitioning of a ship in February 1915 frustrated a five-year charterparty which was to last until December 1917. The court held that it did not on the basis that the war would soon be over and thus a considerable proportion of the charterparty would remain. In the circumstances, this was overly optimistic, but it nevertheless demonstrates the problems facing a court in reaching satisfactory conclusions.

For a recent case involving the temporary unavailability of a ship, see Edwinton Commercial Corporation v Tsavliris Russ (Worldwide Salvage & Towage) Ltd, The Sea Angel [2007] EWCA Civ 547, [2007] 2 All ER (Comm) 634. In this case, the court emphasised that the amount of time left to run in the contract is the starting point only in establishing frustration – all other relevant features need to be taken into account as well. Here, for instance, the contract involved a 20-day charterparty out of which there was very little time left to run. However, the work under the contract had been accomplished. As the purpose of the contract had been achieved, the contract was not, in fact, frustrated.

Frustration may also occur where a change in the law or state intervention renders performance illegal. A classic example is where war breaks out, and to continue performance would mean trading with the enemy, as in Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd [1943] AC 32, where a contract for the sale of machinery to be shipped to Gdynia was frustrated when that port was occupied by the enemy during World War II.

In Dick Kerr and Co v Metropolitan Water Board [1918] AC 119, contractors agreed to construct a reservoir in six years. The contract provided that, in the event of delay, 'whatsoever and howsoever occasioned', the contractors were to apply to the engineer for an extension of time. When the contractors were required by a government order to stop the work and sell their plant, it was held that the contract was frustrated because the delay clause was not intended to apply to such a fundamental change of circumstances. It was held that the clause was intended to cover only temporary difficulties and did not cover fundamental changes in the nature of the contract.

Where the common purpose for which the contract was entered into can no longer be carried out because of some supervening event, the contract may be frustrated despite the fact that it is still physically possible to carry out the contract. This is demonstrated by a number of cases know collectively as the 'Coronation Cases'. It is important to remember that it must be the joint purpose of the parties. It is not enough that it is the purpose of just one party.

Krell v Henry [1903] 2 KB 740 FACTS: By a written contract, the defendant agreed to hire a third floor flat on Pall Mall from the plaintiff for 26 and 27 June 1902. The purpose in hiring the room was to view the coronation procession that was to pass along the street below on those dates. However, no express mention was made of this in the contract. King Edward VII fell ill and processions did not take place on the days appointed. The defendant refused to pay the balance of the agreement, denied liability and counter-claimed the money paid as a deposit. The Court of Appeal held that the contract was frustrated. There was a necessary inference from the circumstances, recognised by both parties, that the coronation procession, and the relative position of the rooms was the foundation of the contract which was frustrated by the King's illness. Vaughan Williams LJ stated:

Each case must be judged by its own circumstances. In each case one must ask oneself, first, what, having regard to all the circumstances, was the foundation of the contract? Secondly, was the performance of the contract prevented? Thirdly, was the event which prevented the performance of the contract of such a character that it cannot reasonably be said to have been in the contemplation of the parties at the date of the contract? If all these questions are answered in the affirmative (as I think they should be in this case), I think both parties are discharged from further performance of the contract.

However, there must be an absolute non-occurrence of the event which is the common purpose or foundation of the contract. If some part of the contract remains possible to perform, then the contract will not be frustrated. In Herne Bay Steamboat Co Ltd v Hutton [1903] 2 KB 683, the plaintiff steamboat company contracted to place their steamboat The Cynthia at the disposal of the defendant on 28 June 1902, 'for the purpose of viewing the Naval Review and for a day's cruise round the fleet; also on Sunday 29 June 1902, for a similar purpose'. The Cynthia was fitted out for the trip but, on 25 June, the postponement of the Review was announced. The plaintiff telegraphed the defendant: 'What about Cynthia? She is ready to start at six tomorrow. Waiting cash.' There was no reply from the defendant. The plaintiff brought an action for damages for breach of contract. The Court of Appeal held that the defendant was not discharged from his obligations under the contract by the postponement of the Naval Review because: (a) the object in hiring the vessel was the defendant's alone and of no concern to the plaintiff; and (b) the viewing of the Naval Review was not the foundation of the contract as they could still have cruised around the fleet.

However, in the academic literature, there is a rival explanation that hinges, not on the damage to the bargain, but on the status of the contractors. Quite simply, in the Herne Bay Steamboat case, Hutton was a Southampton businessman who contracted for the hire of The Cynthia as a commercial venture. Hutton did not hire the vessel for his own pleasure; he was planning to take paying customers around the fleet; the contractual purpose was purely for profit. The position in Krell v Henry was quite different. Henry did not hire the room for business reasons; he wanted it in order to view the coronation procession. From a 21st century perspective, the reason for the different, and seemingly contradictory, outcomes in the two cases is glaringly obvious. The Herne Bay Steamboat case involves a business-to-business contract where the reasonable expectation is that the hirer takes the risk that there might not be as much profit in the venture as he hoped for. By contrast, in Krell v Henry, the deal is more akin to a consumer contract where the consumer-hirer can reasonably expect to enjoy a heightened level of protection against the unanticipated events that occurred.

The doctrine of frustration, as Viscount Simonds stated in Tsakiroglou Co Ltd v Noblee Thorl GmbH [1962] AC 93, 'must be applied within very narrow limits'.

While in Pioneer Shipping Ltd and Others v BTP Tioxide Ltd, The Nema [1981] 2 All ER 1030, Lord Roskill remarked that, 'the doctrine is not lightly to be invoked to relieve contracting parties of the normal consequences of imprudent commercial bargains'.

It is very rare for a contract to be held to have been frustrated by an event that leaves it possible to perform, but which simply makes it much more onerous to one party. This is illustrated by Davis Contractors v Fareham UDC. Consequently, it is accepted that it is unlikely that a contract will be frustrated merely because an event has occurred which renders that contracted for by one party worth less than he anticipated or where an unexpected event merely makes the contract more expensive to perform.

The courts have not allowed the defence of frustration to be used by a party trying to escape from a contract because of an unexpected event which is to their disadvantage. This can be seen by the next case, Amalgamated Investment and Property Co Ltd v John Walker & Sons Ltd [1976] 3 All ER 509. In this case, the defendants advertised a property as being suitable for redevelopment. The plaintiffs negotiated the purchase of the property and the defendants knew they intended to redevelop it, although it was clear that they would have to get planning permission. In their enquiries before purchase, the plaintiffs asked the defendants whether the building was designated as being of special architectural or historic interest to which they replied in the negative. However, unknown to the parties, officials at the Department of the Environment included the building on a list which was proposed to be listed under the Town and Country Planning Act 1971, as being of architectural or historic interest. The parties did not know this on 25 September when they entered their contract. On 27 September, the property was listed resulting in the property, now having no development potential, and being worth about £1,500,000 less than the contract price of £1,710,000. The plaintiffs brought an action for rescission on the ground of common mistake or, in the alternative, claimed that the contract was frustrated. It was held by the Court of Appeal that: (a) the doctrine of common mistake did not apply because the mistake did not exist at the date of the contract, the property not being under any fetter until a date after the date of contract; and (b) the doctrine of frustration did not apply since listing was an inherent risk of which every purchaser of property should be aware. It could not be said, therefore, that the performance of the contract that would be called for would, in consequence of the listing, be radically different from that which had been undertaken by the contract. The contract was, therefore, not frustrated

In Maritime National Fish Ltd v Ocean Trawlers Ltd [1935] AC 524 the plaintiffs chartered a steam trawler, the St Cuthbert, to the defendant, which was useless for fishing unless fitted with an otter trawl. Such a trawl could only be fitted if a licence had been obtained to do so, a fact of which both parties were aware. The defendant applied for five licences for the five trawlers they operated, including the St Cuthbert. It was indicated that they would only be granted three licences and they were asked to nominate the three trawlers to which the licences would attach. The three named trawlers did not include the St Cuthbert. The plaintiffs sued for the charter hire (i.e. the price the defendants had agreed to pay for hiring the vessel) and the defendants argued that the charterparty was frustrated because it was impossible to perform. It was held that the charterparty was not frustrated because it was the defendant's own act which prevented the St Cuthbert from being licensed for fishing with an otter trawl. The defendants were liable for the hire.

The general rules applicable to the doctrine of frustration only apply if something happens where the contract is silent on the point. The doctrine of frustration is a means of allocating unforeseen risks. If you could have foreseen an event, but failed to make provision for it in your contract, the doctrine of frustration will not apply.

In Walton Harvey Ltd v Walker & Homfrays Ltd [1931] 1 Ch 274, the defendants agreed to allow an advertising sign to be displayed on their hotel for a period of seven years. Before the seven years had expired, the local authority demolished the hotel. The defendants maintained that this event frustrated the contract. It was held that the defendants were liable in damages. They knew of the risk of the local authority demolishing the hotel and could have made provision for that in the contract.

In Edwinton Commercial Corporation v Tsavliris Russ (Worldwide Salvage & Towage) Ltd, The Sea Angel [2007] EWCA Civ 547, [2007] 2 All ER (Comm) 634, Rix LJ summarised the relationship of foreseeability to the doctrine of frustration at [127]:

In a sense, most events are to a greater or lesser degree foreseeable. That does not mean that they cannot lead to frustration. Even events which are not merely foreseen but made the subject of express contractual provision may lead to frustration: as occurs when an event such as a strike, or a restraint of princes, lasts for so long as to go beyond the risk assumed under the contract and to render performance radically different from that contracted for. However … the less that an event, in its type and its impact, is foreseeable, the more likely it is to be a factor which, depending on other factors in the case, may lead on to frustration.

National Carriers should be treated with some caution as their Lordships expressly stated that the circumstances in which a lease might be frustrated would be rare. For example, Lord Hailsham noted: 'I am struck by the fact that there appears to be no reported English case where a lease has ever been held to have been frustrated. I hope this fact will act as a suitable deterrent to the litigious, eager to make legal history by being first in this field.

The doctrine of frustration cannot override express and unambiguous contractual provision for the frustrating event. Commercial contracts often contain what is known as a force majeure clause, a clause that states what will happen to the contractual relationship between the parties should a particular sets of circumstances (which could otherwise amount to frustrating events) materialise. Force majeure clauses often refer to acts of terrorism, war and 'Acts of God'. The inclusion of a force majeure clause enables the parties to allocate risks in relation to these events at the outset and may allow for the continuance of the contractual relationship in circumstances that would otherwise amount to frustration of the contract.

The default position is that the consequences of frustration are determined according to the provisions of the Law Reform (Frustrated Contracts) Act 1943. However, it is worth noting that, where the contract contains provisions dealing with the consequences of frustration, the Act will apply only to the extent that it is consistent with the contract (s 2(3)). It is therefore possible for contracting parties to exclude the operation of the Act by prior agreement.

you should be aware of the common law rules for two reasons. First, certain types of contracts are not governed by the Act (s 2(5)), and would therefore still be subject to the common law (unless the parties had made express contractual provision for the frustrating event, see section 18.4.5 above). Second, in order to understand the key provisions of the Act, it is useful to understand the common law position prior to the Act.

At common law, when a frustrating event occurs, the contract is terminated at the date of the frustrating event, irrespective of the wishes of the parties. Consequently, rights which accrued before the frustrating event are enforceable, but no liability arises for obligations that would otherwise have accrued after the frustrating event took place. The operation of the rules at common law is perfectly illustrated by looking again at the 'Coronation Cases' Krell v Henry and Chandler v Webster.

At common law, the ability of a party to retain sums not yet paid would be determined by how the obligations were previously agreed. Clearly, this was a most unsatisfactory and arbitrary manner in which to deal with parties to a frustrated contract, and the need for reform of the common law position was widely recognised, but not addressed until the House of Lords decision of Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd [1943] AC 32.

In Fibrosa the House of Lords addressed the apparent injustice of this situation and stated that where there had been a total failure of consideration, then money already paid could be recovered and money due and payable need not be paid. In Stocznia Gdanska SA v Latvian Shipping Co [1998] 1 WLR 574, Lord Goff explained the test for total failure of consideration:

I start from the position that failure of consideration does not depend upon the question whether the promisee has or has not received anything under the contract … In truth, the test is not whether the promisee has received a specific benefit, but rather whether the promisor has performed any part of the contractual duties in respect of which the payment is due.

Where there is a partial failure of consideration, the common law rules in Krell and Chandler would still apply.

Law Reform (Frustrated Contracts) Act 1943 s 1(2) extends the decision in Fibrosa by providing that money paid before the frustrating event (the time of discharge) can be recovered, even though the failure of consideration may only be partial. It further provides that money payable (i.e. which became due on a date prior to the frustrating event but was not in fact paid) ceases to be payable.

However, s 1(2) also gives the court a discretionary power to order such retention or recovery of money as it thinks just in all the circumstances to account for expenses incurred by the payee. The expenses incurred by the payee must be directly related to an attempt to perform the contract. The amount retained or recovered cannot exceed 1. the actual expenses incurred; and 2. the amount paid or payable prior to the frustrating event. It is for the payee to establish that the expenses were incurred and that it is just for the court to deduct them from the sums paid or payable to him before the frustrating event.

On the basis of these rules, it is important to note the following: that sum retained or recovered to account for the expenses may not be the actual expenses incurred but only what the court considers to be a just sum having regard to all the circumstances of the case. Note also that the sum awarded cannot exceed the amount of the actual expenses incurred. Furthermore, if nothing was paid or payable before the frustrating event, the party will not be able to get any expenses at all.

Now consider the leading case on the Law Reform (Frustrated Contracts) Act 1943 s 1(2): Gamerco SA v ICM/Fair Warning (Agency) Ltd [1995] 1 WLR 1226. Mr Justice Garland's, decision was unsurprising for its conventional approach to the burden of proof, stating that it lies with the payee (that is, the party seeking to retain or recover their expenses from the sum of money paid or payable in advance) to show that it is 'just' for him so to do. On the subject of apportionment, he considered alternative approaches, but concluded that the court has a 'broad discretion'.

The court therefore has a 'broad discretion' when considering whether and how much to allow the payee to retain or recover to account for his expenses under the Law Reform (Frustrated Contracts) Act 1943 s 1(2) (provided it does not exceed the actual expenses incurred or the sums paid or payable in advance of the frustrating event).

Where the benefit conferred before the frustrating event occurs is a non-monetary benefit, the Law Reform (Frustrated Contracts) Act 1943 s 1(3) may be of some assistance. It provides that a party who has gained a valuable benefit under the contract before the frustrating event, may be required to pay a just sum for it. The task for the court when applying this subsection is, first, to identify and value the benefit conferred, and then, second, to make an assessment of the just sum that should be awarded. The amount awarded cannot exceed the value of the benefit obtained. Provided the court does not award more than this amount, the court may award whatever sum is just having regard to all the circumstances of the case and, in particular s 1(3)(a) and (b).

The leading case on the interpretation of the Law Reform (Frustrated Contracts) Act 1943 s 1(3) is BP Exploration Co (Libya) Ltd v Hunt (No 2) [1982] 1 All ER 925.

As can be seen from BP v Hunt, the practical application of the Law Reform (Frustrated Contracts) Act 1943 s 1(3) is limited by the definition of valuable benefit given by Goff J. In particular, where the value of the benefit has been reduced to nil by the frustrating event, the provider of the 'benefit' has no claim. The defendant’s benefit under s 1(3) is clearly not necessarily the value of the claimant's performance.

A contract might be discharged in one of the following ways:
1. performance;
2. agreement;
3. breach;
4. frustration (dealt with in Chapter 18).

A contractual obligation is discharged by a complete performance of the undertaking. The promisee is entitled to the benefit of complete performance exactly according to the promisor's undertaking. Where the promisor is unable or unwilling to give more than partial performance, the general rule is that there is no discharge of the contract.

This rule is well illustrated by the case of Cutter v Powell (1796) 6 Term Rep 320. Cutter agreed to serve on a ship from Jamaica to Liverpool. The defendant, Powell, agreed in return to pay Cutter 30 guineas (which was four times the going rate) 'provided he proceeds, continues and does his duty … from hence to the port of Liverpool'. Cutter died at sea some seven weeks into the voyage and 19 days short of Liverpool. An action by Cutter's widow to recover a proportion of the agreed contract price failed. The contract was said to be entire. Cutter was obliged to perform the given duty fully before he could demand payment. As the contract had not been completely performed, the widow was entitled to nothing.

Where one party has given only partial performance of the contractual obligations, it is possible that the innocent party, rather than reject the work done, might accept that part of the performance. However, it should be noted that such an acceptance of partial performance is at the discretion of the innocent party. If the innocent party voluntarily accepts partial performance, then the party in default will be entitled to a quantum meruit.

It is clear from a reading of Sumpter v Hedges that there had not been a voluntary acceptance of partial performance. For this to have occurred, the innocent party must have had the option to take or not to take the benefit of the work done. In Sumpter v Hedges, because the work had been done on the innocent party's land, the court felt that the innocent party had no choice but to complete the work. He was in possession of what he could not fail to keep. If the court had found otherwise, however, the builder would have been entitled to a quantum meruit to compensate him for the value of the work done. In the event, he was entitled to compensation for the value of the materials that he had left on site that had not been incorporated into the building and which the innocent party used to complete the work. This was because the innocent party had the choice as to whether or not to use these as they could have been returned.

Where a contract has been substantially performed, it may be possible for the party who rendered such substantial performance to obtain the contract price subject to a deduction to reflect the cost of remedying the defect. When considering such a plea, the court considers the nature and extent of the defect, which is done by measuring the cost of remedying the defect against the contract price. If the defect is too serious, the party who rendered the defective performance will not be entitled to recover any money. However, if substantial performance is found to have been rendered, then the party will be entitled to the contract price subject to a deduction.

The case of Hoenig v Isaacs might be compared with the decision of the Court of Appeal in Bolton v Mahadeva [1972] 1 WLR 1009 where, by a contract with the defendant, the claimant undertook to install a central heating system in the defendant's house at a cost of £560. The system did not work and the defendant refused to pay any money. The cost of remedying the defects would have been £174. The Court of Appeal held that the claimant was not entitled to recover any of the contract price but, had he offered to remedy the defects, and had then done so, he would be justified in claiming the contract price.

in consumer contracts for the sale of goods, which are governed by, among other sections, the Sale of Goods Act s 13, where the goods do not correspond exactly with their description there is a breach of this implied condition.

Some contracts are clearly intended to be divided into parts, e.g. the payment of a salary under a fixed contract of employment. Look at Rose & Frank v Crompton Bros [1923] 2 KB 261 as a case where the contract was divisible. This division may also be implied if not specifically referred to. However, the question as to whether a contract is divisible or entire depends upon the intention of the parties.

Where one party performs part of the agreed obligation, and is then prevented from completing the rest by some fault of the other party, the innocent party has two options: 1. to sue for damages for breach of contract; 2. alternatively, claim a quantum meruit.

In an action for breach of contract, it is a good defence for the defendant to show that he tendered performance. In order for a plea of tender to be successful, the promisor must show that he unconditionally offered to perform his obligations in accordance with the terms of the contract, but that the promisee refused to accept such performance. For instance, if the seller delivered goods but the purchaser refused to accept delivery, the seller would be relieved of liability for breach. In relation to payment of a debt, a plea of tender does not discharge the debt. However, it would prevent the creditor from claiming interest or damages on that debt subsequent to the tender of performance.

Where a contract involves the performance of a service, it is possible that the service will be provided by a third party to the contract.

In Robson and Sharpe v Drummond (1831) 2 B & Ad 303 a person had agreed to keep a carriage in repair for five years and to paint it from time to time. It was held by the court that he was not entitled to delegate performance of the contract to his partner. This was seen as a contract of personal service and it might neatly be contrasted with British Waggon Co v Lea & Co (1880) 5 QBD 149, where a contract to let out railway wagons and to keep them in repair for seven years could be vicariously performed since it did not matter to the hirer who kept the wagons in repair so long as the work was properly done. Here the judge emphasised that the work was of an ordinary nature which could be accomplished by the average workman.

On the basis that something may be destroyed in the same manner by which it was created, a contractual obligation may be discharged by agreement.

The essence of this concept is the formation of a new contract, and this may occur in several ways. For instance, where both parties have obligations that remain unperformed, the contract may be discharged by mutual waiver. This is a new contract by which each party agrees to waive their rights under the old contract in consideration for being released from their obligations under the old contract: see Wilson (Paal) & Co A/S v Partenreederei Hannah Blumenthal, The Hannah Blumenthal [1983] 1 AC 854.

Where one party has performed his obligations in their entirety but something remains to be done by the other party, the party to whom the obligation is owed may release the other party by a subsequent agreement under seal. Furthermore, the party to whom the obligation is owed may agree with the other party to accept something different in place of the former obligation. This is known as accord and satisfaction: the subsequent agreement is the accord, and the new consideration is the satisfaction. Where there has been accord and satisfaction, the former obligation is discharged. However, where the subsequent agreement by which one party consents to accept something different in place of the original obligation is obtained under the threat that he will otherwise get nothing at all, there is no true accord and, consequently, the original obligation remains undischarged. The essential point is that, unless there is a new consideration, there can be no satisfaction, i.e. there can be no discharge of the previous agreement and no formation of an agreement in new terms.

There was a preliminary issue of accord and satisfaction in a case to which reference was made in Chapter 6 on promissory estoppel, namely D & C Builders v Rees [1966] 2 QB 617. In that case, the defendant owed the plaintiffs £482 for work they had done. The defendant's wife telephoned the plaintiffs and said: 'My husband will offer you £300 in settlement. That is all you'll get. It is to be in satisfaction'. The defendant gave the plaintiffs a cheque for £300, asking for a receipt, and insisting on the words, 'in completion of account'. The plaintiffs then brought an action to recover the balance of £182. On a preliminary point whether there was accord and satisfaction, it was held by the county court judge that taking the cheque for £300 did not discharge the debt of £482. The defendant appealed and the Court of Appeal held that there was no accord and satisfaction because the defendant's wife had pressured the plaintiffs to accept the £300 in settlement by threatening that nothing would be paid. As a consequence, there was no true accord and satisfaction and the plaintiffs were entitled to recover the balance. As Danckwerts LJ, stated:

The giving of a cheque of the debtor for a smaller amount than the sum due is very different from "the gift of a horse, hawk, or robe, etc." mentioned in Pinnel's Case. I accept that the cheque of some other person than the debtor, in appropriate circumstances, may be the basis of an accord and satisfaction, but I cannot see how in the year 1965 the debtor's own cheque for a smaller sum can be better than payment of the whole amount of the debt in cash. I agree also that, in the circumstances of the present case, there was no true accord.

The cases show that equity has been more successful than the common law in the enforcement of a waiver or promise of forbearance. In Birmingham and District Land Co v London & North Western Railway (1888) 40 Ch D 268, Bowen LJ, explained the position as follows:

If persons who have contractual rights against others induce by their conduct those against whom they have such rights to believe that such rights will either not be enforced or will be kept in suspense or abeyance for some particular time, those persons will not be allowed by a court of equity to enforce the rights until such time has elapsed, without at all events placing the parties in the same position as they were in before.

Although the principle is not entirely clear, it seems that a concession, waiver, variation, or forbearance promised by one party to the other will be enforced in equity subject to proper notice being given to the other party of the resumption of the strict contractual provisions. Proper notice will involve the honouring of any time period contained in the original concession, otherwise, equity will insist on a reasonable period of notice: Charles Rickards Ltd v Oppenheim [1950] 1 All ER 420. There would appear to be a high degree of similarity between waiver and promissory estoppel, the general view being that they are related, yet distinct, doctrines that produce the same effects.

Brikom Investments Ltd v Carr [1979] QB 467 FACTS: The landlords of certain flats offered leases to sitting tenants. By these leases, the landlords undertook to maintain the structure of the blocks and the tenants undertook to contribute to the cost. Before the leases were executed, the landlords stated orally to the tenants' association and to some individual tenants that they would repair the roofs at their own expense. At this time, the roofs were in need of repair. The landlords carried out the repairs and claimed payment according to the terms of the leases. The first defendant was an original lessee who admitted that she would have taken the lease regardless of the landlords' statement. The second and third defendants were assignees from original lessees. HELD by the Court of Appeal: the claim against the first defendant failed because the principle of promissory estoppel applied to all cases where a party to whom a representation or promise had been made had in fact relied on it, e.g. by going ahead with a transaction under discussion, and that the claim against the second and third defendants failed because the estoppel raised against the landlords was an equity intended to be for the benefit of those from time to time holding the leases (Lord Denning). Per Roskill and Cumming-Bruce LJJ (with whom, however, Lord Denning also concurred), the claim against all three defendants failed because the landlords had waived their right to claim the cost of repairs from the tenants and their assignees. In the case of the first defendant, there was a collateral contract since she had given consideration for the landlords' promise by entering the lease in reliance on that promise.

A condition precedent is a condition that must be satisfied before any rights come into existence. Where the coming into existence of a contract is subject to the occurrence of a specific event, the contract is said to be subject to a condition precedent. The contract is suspended until the condition is satisfied. Where a condition precedent is not fulfilled, there is no true discharge because the rights and obligations under the contract were contingent upon an event which did not occur, i.e. the rights and obligations never came into existence: Pym v Campbell (1856) 6 El & Bl 379.

A condition subsequent is a term providing for the discharge of obligations outstanding under the contract, in the event of a specified occurrence: Head v Tattersall (1871) LR 7 Ex 7.

Apart from commercial contracts, contracts of employment generally contain clauses providing for the termination of employment by notice given by either party.

There is no presumption that a commercial contract with no express power of determination is intended to be perpetual. In appropriate cases, the court will imply a term to empower a party to determine the contract on giving reasonable notice to the other party.

The usual remedy for breach of contract is an award of damages, i.e. monetary compensation. However, in certain circumstances, the innocent party may, in addition, treat the contract as having been repudiated by the breach. In such cases, the innocent party is discharged from further liability under the contract and may sue for damages.

The general rule is that, where there is breach of a primary obligation, the other primary obligations of both parties, so far as they have not been fully performed, remain unchanged. However, to this general rule there is an important exception – where the primary obligation which has been breached is a condition or there is a breach of an innominate term with serious consequences, such breach shall entitle the innocent party to elect to put an end to all primary obligations remaining unperformed.

In the event of a breach of condition or a breach of an innominate term with serious consequences, the innocent party has a right to elect whether to affirm or terminate the contract. In either case, the innocent party can claim damages also.

The innocent party must therefore make his decision to terminate the contract known to the party in default (Vitol SA v Norelf Ltd, The Santa Clara [1996] 3 All ER 193). The point was made strikingly by Asquith LJ, in Howard v Pickford Tool Co Ltd [1951] 1 KB 417, where he observed that: 'An unaccepted repudiation is a thing writ in water and of no value to anybody: it confers no legal rights of any sort or kind.'

Where a person has a right to elect whether to affirm or to terminate the contract, he will only be bound by the course he takes if, in deciding upon that course, he was aware not only of the facts giving rise to the right to elect, but also that the right existed: Peyman v Lanjani [1985] Ch 457.

Although the right of election is well established in the law, a question about its across-the- board application was raised in Société Générale v Geys [2012] UKSC 63, where Geys’ employers were in repudiatory breach of contract in dismissing him. Despite having been taken at once to clear his desk and escorted from the building, Geys declined to accept the contract as at an end. On the facts, this made a difference of several million euros to the ‘compensation payment’ to be made to Geys. However, the employers argued that the usual ‘elective’ rule does not apply to employment contracts; rather, in the event of a repudiatory breach of such a contract, and irrespective of the innocent party’s wishes, it was argued that the contract is automatically at an end. While support for both views—both for and against the application of the elective rule to employment contracts—could be found in an extensive and inconsistent case-law, the majority of the Supreme Court (Lord Sumption dissenting) preferred to treat the usual rule as applicable. Lord Hope, capturing the majority’s thinking, observed (at para 15): ‘The automatic theory can operate to the disadvantage of the injured party [i.e. Geys] in a way that enables the wrongdoer to benefit from his own wrong. The law should seek to avoid such an obvious injustice. Where there is a real choice as to the direction of travel, the common law should favour the direction that is least likely to do harm to the injured party.’

Where a party indicates, in advance of the date for performance, that he will not perform his contractual obligations, this is known as anticipatory breach. A right of action will immediately accrue to the innocent party (Hochster v De la Tour (1853) 2 E & B 678).

In Hochster v De la Tour the defendant agreed to employ the plaintiff as a courier on foreign tours for a period of three months starting from 1 June. But on 11 May the defendant wrote and told the plaintiff that his services were no longer required. The plaintiff immediately sued the defendant. The defendant argued that the plaintiff should not succeed in his action unless he could show that he was ready and able to perform his obligations on 1 June. The court found in favour of the plaintiff. He had a choice as to whether to wait for the date of performance, in which case he would need to be ready to perform his obligations, or to treat the contract as immediately repudiated.

Anticipatory breach may be express or implied by words or conduct.

An implied anticipatory breach can be seen in the case of Frost v Knight (1872) LR 7 Exch 111 where the defendant promised the plaintiff that he would marry her when his father died. While his father was still alive, the defendant broke off the engagement. It was held that the plaintiff could immediately sue the defendant on the promise, even though the father was still alive and thus the date for performance had not yet arrived.

For example, in the case of Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1962] 2 QB 26, the charterers of a ship informed the owners of their intention to repudiate the charterparty on the grounds that the ship was not 'seaworthy' (the ship was indeed unseaworthy) and that ongoing repairs had caused serious delays (which they certainly had). The owners replied that they would treat the contract as wrongfully repudiated and that they would claim damages accordingly. The Court of Appeal found in favour of the owners: neither the unseaworthiness by itself, nor the delay caused by the owners' breach of contract, entitled the charterers to treat the charterparty as repudiated – the court took the view that the charterers could have been adequately compensated by a claim in damages. Ironically, the owners, despite their own serious breaches of contract, were then entitled to damages for the wrongful repudiation by the charterers.

When an innocent party is faced with a repudiatory anticipatory breach (i.e. an anticipatory breach of a condition or a serious anticipatory breach of an innominate term) he is under no obligation to sue at once, but can elect to affirm the contract and wait for performance on the due date. The innocent party is allowed a period of time in order to decide between these two alternatives (Stocznia Gdanska SA v Latvian Shipping Co (No 3) [2002] EWCA Civ 889).

There is some judicial dispute as to whether, once the innocent party has affirmed the contract, his affirmation is irrevocable. Treitel prefers the view expressed obiter in Stocznia Gdanska SA v Latvian Shipping Co (No 3) that if, after the innocent party's affirmation, the party in default continues to refuse to perform, the innocent party should not be precluded from terminating the contract.

If the innocent party elects to affirm the contract, the contract survives and the rights of the innocent party are preserved. There must be evidence of a very clear and unequivocal commitment to continuing with the contract (Yukong Line Ltd of Korea v Rendsburg Investments Corporation of Liberia [1996] 2 Lloyds Reps 604).

There is no duty on the innocent party to vary the terms of the contract, and he can, accordingly, carry out his own obligations under the contract after his election to affirm: White and Carter (Councils) Ltd v McGregor [1961] 3 All ER 1178. Once the date for performance arrives, and the guilty party still does not perform, the injured party may then accept the repudiatory breach as terminating the contract and seek the contract price.

In White and Carter (Councils) Ltd v McGregor the appellant company's business was the supply of litter bins to local authorities in urban areas. It was the company's practice to attach advertisement plates to the bins, for which the advertisers would pay according to the terms of a standard form of contract. The respondent, who carried on a garage business, entered into a contract through his sales manager by which the appellant company undertook to prepare and exhibit plates advertising McGregor's business for a period of three years. The contract form was headed by a notice that it was not to be cancelled by the advertiser and one of the express conditions provided to the same effect. Immediately after this contract was signed, a letter containing the following was sent to the appellant company: 'We regret that our Mr Ward signed an order today continuing the advertisements for a further period of three years. He was unaware that our proprietor Mr McGregor does not wish to continue this form of advertisement. Please therefore cancel the order.' The appellant company did not accept the attempted cancellation and displayed the advertisements during the ensuing three years. The respondents refused to pay and the appellant company sought to recover the sum due under the contract. It was held by the House of Lords that the contract remained unaffected by the unaccepted repudiation and the appellant company was entitled to recover the sums due under the contract. Lord Hodson stated:

It is settled as a fundamental rule of the law of contract, that repudiation by one of the parties to a contract does not itself discharge it ... It follows that, if, as here, there was no acceptance (of the breach), the contract remains alive for the benefit of both parties and the party who has repudiated can change his mind but it does not follow that the party at the receiving end of the proffered repudiation is bound to accept it before the time for performance and is left to his remedy in damages for breach.

It remains unclear what will constitute a legitimate interest. However, in one of the more recent authorities that discuss this criterion, Ocean Marine Navigation Ltd v Koch Carbon Inc (The Dynamic) [2003] EWHC 1936 (Comm); [2003] 2 Lloyd's Rep. 693, Simon J said that it will only be in extreme cases that the innocent party will not have a legitimate interest in affirmation. He stated:
(i) The burden is on the contract breaker to show that the innocent party has no legitimate interest in performing the contract rather than claiming damages.
(ii) This burden is not discharged merely by showing that the benefit to the other party is small in comparison to the loss to the contract breaker.
(iii) The exception to the general rule applies only in extreme cases where damages would be an adequate remedy and where an election to keep the contract alive would be unreasonable.

In White and Carter (Councils) Ltd v McGregor Lord Reid qualified his decision by stating that a claimant would not be entitled to affirm and would be confined to a claim in damages for the anticipatory breach if he had no 'legitimate interest, financial or otherwise', in affirming the contract and continuing with performance. Although Lord Reid's qualification was not accepted by the other members of the House of Lords, it was applied in the case of Clea Shipping Corporation v Bulk Oil International Ltd, The Alaskan Trader [1984] 1 All ER 129, where the charterers of a ship informed the owners that they had no further use for it but the owners kept the ship at readiness and fully crewed. The court held that the owners were not entitled to the hire money under the contract but only to damages for the charterer's breach as they had no legitimate interest in affirming the contract.

Furthermore, as Lord Reid stated in White and Carter (Councils) Ltd v McGregor, the need for co-operation of the other contracting party will usually act as a further limitation on the scope of the decision. In other words, if the innocent party requires the co-operation of the other contracting party in order to fulfil their obligations under the contract, this will prevent the innocent party claiming the contract price. Indeed, it has been confirmed by Megarry J, that co-operation in this context means passive as well as active co-operation: Hounslow London Borough Council v Twickenham Garden Developments Ltd [1970] 3 WLR 538.

Affirming the contract represents a risk for the innocent party as subsequent events may destroy his right of action. If, for example, the contract is frustrated (see Chapter 18) in the period between the affirmation and the due date for performance, the frustration will discharge the contract and the non-breaching party will lose the remedy of damages for breach of contract. This is clearly demonstrated by the case of Avery v Bowden (1855) 5 E & B 714. Here, Bowden chartered Avery's ship and agreed to load the ship with a cargo at Odessa within 45 days. During that period, Bowden repeatedly advised Avery that he would be unable to provide such a cargo and that Avery should sail away. This was undoubtedly a breach of contract by Bowden, giving Avery the option of accepting the repudiation and suing for damages at once. However, he chose to ignore the advice and kept the ship at Odessa. Before the end of the 45-day period, the Crimean War broke out, Odessa became an enemy port and the contract became illegal and was therefore frustrated. As a consequence, Avery lost his right to sue for the breach of contract at the time when performance was due as the effects of frustration took over.

It is also clear that where the innocent party affirms the contract in response to an anticipatory breach and subsequently commits a breach of contract himself, the repudiating party may escape liability. This is illustrated by the case of Fercometal SARL v Mediterranean Shipping Co SA, The Simona [1988] 2 All ER 742. The House of Lords made it clear in this case that if an innocent party elects to affirm a contract, they are not absolved from further performance of their obligations under the contract. Consequently, if the innocent party fails to comply with those obligations, they will be in breach of contract and the repudiating party can escape liability for their own wrongful repudiation.

The aim of an award of damages for breach of contract is to compensate the claimant for the damage, loss or injury he has suffered as a result of the defendant's breach. The aim is not to punish the defendant – exemplary damages are not available in the law of contract.

In order to avoid the costs of litigation where the only issue for the court is to assess the precise amount of damages flowing from a breach of contract, the parties may write into their contract an ‘agreed damages’ clause (such a clause specifying the amount of damages to be paid in the event of breach).

Where the agreed damages clause represents a genuine pre-assessment of the loss that would flow from any particular breach, and the parties stipulate accordingly in their contract that this sum shall be payable in the event of a breach, the courts will hold this to be a valid liquidated damages clause.

However, where the sum inserted in the clause is intended to deter breach or as a punishment on the contract-breaker and is not connected with the amount of loss which could be contemplated by the parties at the time of contracting, the sum is treated as a penalty. Penalty clauses are unenforceable and the injured party may bring an action for unliquidated damages (to be assessed in the usual way).

The leading case on the distinction between liquidated damages and penalty clauses is Dunlop Pneumatic Tyre Co v New Garage and Motor Co [1915] AC 79. The appellant, Dunlop Pneumatic Tyre Co, sold motor tyre covers to the respondent, New Garage and Motor Co. The respondent contracted not to sell the tyre covers, or offer them for sale, at a price below the appellant's list prices. There was a term in the contract that £5 was payable by the respondent to the appellant for every breach of this agreement. The respondent sold a tyre cover at less than the list price and was sued by the appellant for damages for breach of contract. The House of Lords held that the sum stipulated by the parties was a genuine pre- estimate of the loss which might result and was not a penalty. In the course of giving his speech, Lord Dunedin laid down the following guidance:

• 1. The use by the parties of the words penalty or liquidated damages is not conclusive.
• 2. The essence of a penalty is a payment stipulated as in terrorem (for the purpose of intimidation of the offending party); the essence of liquidated damages is genuine pre-estimate of loss.
• 3. The issue is one of construction of each particular contract, judged at the time of making the contract, and not at the time of the breach. In construing the contract, the following tests may be used:
  • (a) If the sum stipulated is extravagant or unconscionable in amount compared with the greatest loss which could conceivably be proved to have followed from the breach, it is a penalty.
  • (b) If the breach consists only of the non-payment of money, and the sum stipulated is greater, it is a penalty.
  • (c) Where a single lump sum is payable on the occurrence of one or more of several events, some of which may occasion serious and others but trifling loss, there is a presumption that it is a penalty.
  • (d) It is no obstacle to the sum stipulated being a genuine pre-estimate of loss that the consequences of the breach are such as to make precise pre-estimation almost an impossibility.

in Makdessi v Cavendish Square Holdings BV [2013] EWCA Civ 1539—it has been emphasised that the guidelines should be read as presumptions, that each case needs to be assessed in its own context and, in particular, that caution needs to be exercised before jumping to the conclusion that a clause is a penalty simply because it is not in the nature of a genuine pre-estimate of loss. If there is a ‘new approach’ in the jurisprudence, it is that even clauses that seem to agree sums that are unreasonable and disproportionate might still be commercially justified; and that, where the contractors are commercial people with professional advice, the courts should be slow to disallow an agreed sum as penal (although, on the facts in Makdessi, the Court of Appeal ruled that the clauses at issue were penal).

In a seminal article, Fuller and Perdue (Lon L Fuller and William Perdue, 'The Reliance Interest in Contract Damages' (1936) 46 Yale Law Journal 52 and 373), highlighted the two principal compensatory objectives for an award of damages. One measure protects the innocent party's so-called 'reliance' interest, covering their out-of-pocket expenses. It follows that, where a party's reliance interest is properly compensated, they are in the same position post-breach as they were pre-contract; the breach notwithstanding, they are no worse off. The alternative measure protects the innocent party's so-called 'expectation' interest. This measure aims to cover the innocent party's loss of profit; in other words, the aim is to put the innocent party in the same position post-breach that they should have been in had the contract been performed. In commercial dealing, where profit is the point of the exercise, it is particularly important that the expectation interest is protected; and this is indeed the default measure in the general law of contract.

The aim of the expectation measure award of damages for breach of contract is to place the claimant, so far as money can do it, in the position they would have been in had the contract been properly performed. Claimants are therefore able to recover damages in respect of the loss of gains which they have been deprived of by the breach. In the leading authority, Robinson v Harman (1848) 1 Ex 850, Parke B stated: The rule of the common law is, that where a party sustains a loss by reason of a breach of contract, he is, so far as money can do it, to be placed in the same situation, with respect to damages, as if the contract had been performed.

Claimants will generally be seeking compensation for their expectation interest and it is by far the most commonly awarded measure in the law of contract.

The courts have developed three alternative mechanisms for calculating the expectation interest: cost of cure, diminution in value, and loss of amenity.

The usual method of calculating the expectation interest in contracts involving defective works (e.g. where a building is not built to the contract specification), is the cost of cure (Birse Construction Ltd v Eastern Telegraph Co Ltd [2004] EWHC 2512). The cost of cure represents the cost of substitute or remedial work required to put the claimant in the position he would have been in had the contract been properly performed.

Alternatively, the claimant's expectation interest may be calculated by reference to the difference in value between the performance received and that promised in the contract (diminution in value).

In a commercial setting, it would be 'unusual, if not impossible' for damages to be awarded for loss of amenity (Regus (UK) Ltd v Epcot Solutions Ltd [2007] EWHC 938 (Comm)).

An alternative basis for the assessment of damages is the reliance measure. This measure allows the claimant to recover the (wasted) expenses that have been incurred in preparing for, or in part performance of, the contract.

As a general rule, the claimant has an unfettered choice when electing which measure to claim. As Lord Denning MR stated in Anglia Television Ltd v Reed [1972] 1 QB 60:

It seems to me that a plaintiff in such a case as this had an election: he can either claim for his loss of profit; or for his wasted expenditure. But he must elect between them. He cannot claim both.

However, the courts will not award expectation damages if they are highly speculative; instead the claimant will be limited to his reliance loss. In McRae v Commonwealth Disposals Commission (1951) 84 CLR 377 the speculative nature of the salvage expedition made it impossible for the claimants to quantify their expectations with any degree of precision. The court confined the claimants to the recovery of their expenses incurred in mounting the salvage expedition, i.e. their reliance losses.

It is for the defendant to prove that the claimant would not have recouped the expenditure had the contract gone ahead (Omak Maritime Ltd v Mamola Challenger Shipping Co Ltd [2010] EWHC 2026).

In Anglia Television Ltd v Reed, the claimants engaged the defendant to star in a film which they were making. At the last moment, in breach of contract, the defendant refused to perform in the film and the claimants had to abandon the film because they were unable to find a replacement actor. Expectation losses were too speculative to prove. Instead, the television company obtained damages in respect of expenses of £2,750 that had been wasted by reason of the defendant's refusal to perform, even though these expenses had been incurred before the contract was made.

In C & P Haulage v Middleton, the plaintiff was seeking its reliance loss (in a situation where it had no expectation loss), however, it did not succeed as it failed to show that, had the contract gone ahead properly, it would have been able to recoup this expenditure in any event. The plaintiff was therefore limited to recovering a nominal amount of damages in recognition of the technical breach it had sustained. This case shows that it will only be possible for the claimant to claim his reliance interest if the contract would have enabled him to recoup those expenses had it been properly performed.

As a final and important point, reliance losses are losses incurred prior to breach, not those incurred as a consequence of breach. Losses incurred remedying defective performance are not, therefore, reliance losses.

Until quite recently, it was assumed that, in the event of a breach of contract, it was only the reliance and the expectation interests that were recognised for compensatory purposes. However, there now seems to be a third possibility, compensation for the 'restitution' interest. What makes this third interest particularly controversial is that it can arise where the innocent party has no financial losses relative to either the reliance or the expectation interest. Nevertheless, on the facts, it is arguable that the contract-breaker has been unjustly enriched.

Briefly stated, the restitution interest represents the interest a claimant has in the restoration to him of benefits that the defaulting party has acquired at his expense. In general, the gain to a defendant from a breach of contract is irrelevant to the quantification of damages. However, as a result of the decision of the House of Lords in Attorney-General v Blake [2001] 1 AC 268, it is now clear that there are at least certain circumstances in which a claimant can recover the profit which the defendant has made from his breach of contract. Blake, a former member of the intelligence services, undertook not to divulge any official information gained as a result of his employment and broke the undertaking by publishing his memoirs, No Other Choice. The Crown sought to recover the royalties he was to be paid by his publishers. Their Lordships confirmed that, in general, damages were measured by the claimant's loss but held that in an exceptional case the court can require the defendant to account to the claimant for benefits received from a breach of contract. In determining whether to order an account for profits, Lord Nicholls (with whom Lord Goff and Lord Browne-Wilkinson agreed) stated:

An account of profits will be appropriate in exceptional circumstances. Normally the remedies of [compensatory] damages, specific performance and injunction, coupled with the characterisation of some contractual obligations as fiduciary, will provide an adequate response to breach of contract. It will only be in exceptional cases, where those remedies are inadequate, that any question of accounting for profits will arise. No fixed rules can be prescribed. The court will have regard to all the circumstances, including the subject matter of the contract, the purpose of the contractual provision which has been breached, the circumstances in which the breach occurred, the consequences of the breach and circumstances in which relief is being sought. A useful general guide, although not exhaustive, is whether the plaintiff had a legitimate interest in preventing the defendant's profit-making acitivity and, hence, in depriving him of his profit. The inadequacy of other remedies thus appears fundamental to the award of an account of profits. The claimant must also show that he has a 'legitimate interest' in depriving the defendant of his profit.

The Crown was held to have such a 'legitimate interest' in Blake, and no other remedy was adequate on the facts. If restitutionary damages had not been awarded, the Crown would have recovered nothing since they had suffered no loss.

AB Corporation v CD Company (The 'Sine Nomine') (2002) 1 Lloyd's Rep 805. In breach of contract, the owners of a vessel withdrew it from the charterers. The owners then chartered it out to some else. The charterers attempted to recover profits made by the owners from the second charterparty. The claim failed as damages were deemed a perfectly adequate remedy and the charterers had no legitimate interest in preventing the owners from retaining their profits gained from the breach. The 'exceptional' nature of Blake was emphasised. It was made clear that restitutionary damages are not available in unexceptional cases of commercial breach. It is recognised that in many cases, particularly commercial cases, the breach is in fact deliberate in the sense that it is knowingly done for commercial reasons. To allow restitutionary claims in such cases would revolutionise contractual remedies and would represent an undesirable shift from the compensatory nature of contractual damages.

The second case to consider is Experience Hendrix LLC v PPX Enterprises Inc (2003) EWCA Civ 323. The dispute arose out of a settlement of an earlier case between the parties, under which the defendant had agreed not to grant further licences in relation to recordings made by the guitarist, Jimi Hendrix. The defendant did issue such licences and the claimant sought compensation. The Court of Appeal considered whether it would be appropriate to award an account of profits, on the basis of Blake. It decided, however, that this was not an 'exceptional' case within the meaning of Blake. In particular, Mance LJ pointed out that:

We are not concerned with a subject anything like as special or sensitive as national security. The State's special interest in preventing a spy benefiting by breaches of his contractual duty of secrecy, and so removing at least part of the financial attraction of such breaches, has no parallel in this case.

The final case to consider is WWF World Wide Fund for Nature and Another v World Wrestling Federation Entertainment Inc [2007] EWCA Civ 286. The case arose out of various breaches of an agreement between the parties whereby the Wrestling Federation's use of the initials WWF was restricted. An attempt was made to include a claim for Blake 'restitutionary damages' in respect of the profits made as a result of the breaches of the contractual restriction. This was rejected by the Court of Appeal, and the exceptional nature of the Blake remedy was emphasised.

The general rule is that damages will not be awarded in relation to mental distress, anguish or annoyance caused by breach of contract (Addis v Gramophone Co Ltd [1909] AC 488). In Addis, the House of Lords refused to uphold an award that had been made in relation to the 'harsh and humiliating' way in which the plaintiff had been dismissed from his job in breach of contract.

Johnson v Unisys Ltd [2003] 1 AC 518 confirmed that damages for distress and injury to feelings resulting from the manner of dismissal are unavailable in the law of contract.

However, exceptions have developed to this general rule so that in a limited number of situations mental distress will be compensated. Initially, such compensation was limited to cases involving contracts whose whole purpose was the provision of pleasure, relaxation and peace of mind (Jarvis v Swan Tours [1973] QB 233). More recently, the House of Lords has allowed damages for non-pecuniary loss where a major object (though not the whole purpose) of the contract was to provide pleasure, relaxation and peace of mind (Farley v Skinner (No. 2) [2001] UKHL 49).

Damages for mental distress will generally be unavailable in a 'purely commercial contract' (Hayes v Dodd [1990] 2 All ER 815).

The general rule is that damages will not be awarded for loss of reputation. However, in Malik v Bank of Credit and Commerce International [1998] AC 20, an employee had worked for the Bank of Credit and Commerce International, which collapsed in 1991 amid allegations that the bank had operated in a corrupt and dishonest manner. The employee claimed that having worked for BCCI had adversely affected his employment prospects. The House of Lords found that the employee did have the basis for a cause of action against his former employer for the loss caused by the way it was alleged that its business had been run. This was based on the fact that contracts of employment contain an implied term of trust and confidence such that the employer is under an obligation to carry out its work in an honest way. Damages were awarded but were limited to the claimant's financial loss that was suffered due to an inability to obtain alternative employment resulting from breach of this implied term.

The loss of an opportunity is recoverable in damages if the lost chance is quantifiable in monetary terms and there was a real and substantial chance that the opportunity might have come to fruition. Otherwise, the loss of opportunity will be treated as too speculative. The leading case is Chaplin v Hicks [1911] 2 KB 786 in which the defendant, Hicks, was a theatre producer. He advertised a competition in a national newspaper for young women to send in photographs to be shortlisted by readers for a prize. The winner of the competition would be offered a part in one of the defendant's plays. Six thousand photographs were sent in, each woman paying one shilling to take part in the competition. For the purposes of the competition, the country was divided into four areas, and the winners from each were to attend the final round. The plaintiff, Chaplin, came top in her area but was only informed of this at a very late stage, and was then unable to attend the final round. She sued for loss of the chance to win the competition. The jury awarded her £100 to represent her loss of chance and the Court of Appeal upheld the award.

It was established by the House of Lords in St Martin's Property Corporation Ltd and Another v Sir Robert McAlpine & Sons Ltd [1994] 1 AC 85, that the non-owner of property is able to recover substantial damages for breach of contract in relation to that property. The point was limited to a degree in Panatown Ltd v Alfred McAlpine Construction Ltd [2001] 1 AC 518, where it was held that a ’duty of care' deed in the contract operates to oust the principle in Linden Gardens, because the injured party should instead sue on the basis of the deed, rather than have another party sue on their behalf.

The claimant must establish a causal link between the defendant's breach of contract and his loss in order to recover damages. The courts have treated the determination of whether a breach was a cause of the loss in a broad way, advocating a 'common sense approach' (Galoo Ltd v Bright Grahame Murray [1994] 1 WLR 1360). The court in Galoo suggested that the defendant's breach should be a 'dominant' or 'effective' cause of the loss.

In terms of a novus actus interveniens, if the intervening event was 'likely to happen' (Monarch Steamship Co Ltd v A/B Karlshamns Oljefabriker [1949] AC 196) it generally will not be held to break the chain of causation.

In Lambert v Lewis [1982] AC 255, the intervening act was not deemed 'likely to happen' and so broke the chain of causation. In this case, a dealer supplied a defective trailer coupling to a customer who went on using it, after it was obviously broken, until there was an accident. It was held that the dealer was not liable as the accident had been caused by the customer's use of the coupling when he knew that it was broken, and not by the fact that it was defective when sold.

As is the case in the law of tort, the law of contract accepts that not all losses flowing from a breach of contract are recoverable. A line must be drawn somewhere dictating which loss is recoverable and which is not. The foundation of the law on remoteness in contract is the decision of the Exchequer Chamber in Hadley v Baxendale (1854) 9 Ex 341 in which Baron Alderson set out the test to be applied:

Where two parties have made a contract which one of them has broken, the damages which the other party ought to receive in respect of such breach of contract should be such as may [1] fairly and reasonably be considered either arising naturally, ie, according to the usual course of things, from such breach of contract itself, or [2] such as 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 it.

The rule as stated in Hadley v Baxendale has two parts (as indicated by the numbers in the square brackets in the above quotation). The first limb – loss of a type ordinarily and naturally arising from the breach – is based on imputed knowledge rather than the actual knowledge of the parties. Everyone is taken to know what happens in 'the usual course of things' and, consequently, what loss is liable to result from a breach of contract in that 'usual course'. If the loss is deemed a normal type of loss which would follow from the breach then it will be recoverable under the first limb of the Hadley v Baxendale test.

In the case of Hadley v Baxendale, the plaintiff, who was a mill owner, contracted with the defendant carrier to take a broken mill-shaft to the makers as a pattern for a new one. Owing to the carrier's neglect, there was a delay in the transport of the broken mill-shaft, which resulted in considerable losses for the mill owner because no spare shaft was available. Applying the above two stage test, the court held that in most cases of a breach of this kind, no such losses would have followed (as a spare shaft would be available) so that it could not be said that the losses followed naturally from the breach. Nor were the defendants aware, at the time of the contract, of the circumstances, which meant that the mill would not be able to function at all without this particular shaft and so the loss could not 'reasonably be supposed to have been in the contemplation of both parties'. Therefore the losses were not recoverable.

In the case of Jackson v Royal Bank of Scotland [2005] UKHL 3, the House of Lords, in applying Hadley v Baxendale, confirmed that what was in the contemplation (or knowledge) of the parties was to be judged at the time of contracting, as opposed to the time of the breach.

That said, the decision in Victoria Laundry follows the spirit of contract by distinguishing two heads of loss of profit, those profits arising as a result of the expansion of the business in the post-war years and those profits arising on a one-off contract, and disallowing recovery of the latter.

The House of Lords, in Koufos v C Czarnikow Ltd, The Heron II [1969] 1 AC 350, established that the remoteness test in contract is narrower than the remoteness test in tort. In The Heron II, the respondents chartered the appellant ship owner's vessel, The Heron II, for the carriage of sugar by sea to the port of Basrah. It was predicted with a reasonable degree of certainty that the voyage would take 20 days. In breach of contract, the vessel made deviations en route resulting in a delay of nine days. Without the delay, the sugar would have sold for £32 10s. per ton, instead of the £31 2s. 9d. per ton that was received. The ship owner did not know of the charterer's intention, but was aware that there was a market for sugar at Basrah. The charterer issued a writ claiming for the lost profits. The issue for the House of Lords was whether the damage was too remote. It was held by their Lordships, using the rule in Hadley v Baxendale, that the lost profit was recoverable as damages for breach of contract because, on the knowledge available to the ship owner when the contract was made, the sale of sugar at Basrah on the ship's arrival was something of which there was such probability that it should be regarded by the court as arising in the usual course of things.

In the later Court of Appeal decision, H Parsons (Livestock) Ltd v Uttley Ingham & Co Ltd [1978] QB 791, Lord Denning MR suggested that the tests in contract and tort were the same, at least as far as physical damage is concerned. Although the other members of the court did not endorse this suggestion, the court's overall approach is quite tort-like in the sense that it holds that, once a particular type of loss is within the parties' reasonable contemplation, all losses in that class are recoverable. Applying this approach, it was held that, once the defendants could reasonably anticipate that the claimants' pigs might get ill (and die) if they failed to install a food storage hopper so that it was properly ventilated, they were liable for the death of the pigs – that is, for all the many pigs that did die, and even though the particular disease that caused the death was rare. To avoid this result, the Court could have copied across the thinking in Victoria Laundry so that sub-types of pig illness and disease were differentiated, leading to less exposure for the defendants.

The ratio decidendi of The Heron II was accepted and explicitly followed by the House of Lords in Balfour Beatty Construction (Scotland) Ltd v Scottish Power plc [1994] SLT 807. The case concerned the construction of an aqueduct as part of the Edinburgh city by-pass. In order to carry out the work, Balfour Beatty entered into a contract with Scottish Power for the supply of electricity to the site. At a critical moment in construction, the electricity supply ceased, and the concrete being poured began to harden. The break in supply was greater than 30 minutes, with the consequence that the poured concrete could not be added to after the supply of electricity resumed as there was a chance that the aqueduct would not be watertight. The poured concrete had to be demolished and re-poured. Balfour Beatty claimed damages for breach of contract. The issue was whether the loss was too remote. In finding for Scottish Power, the House of Lords held that the crucial question was whether the demolition and reconstruction of the aqueduct consequent upon the failure of the power supply was within Scottish Power's contemplation as likely to occur with a 'very substantial degree of probability'. In answering that question in the negative, their Lordships stated (applying Hadley v Baxendale and The Heron II) that Scottish Power could not be expected to know the technical details of concrete construction. They had no reason to be aware of the importance of time in the process of pouring, and as a consequence could not be liable. The court did not find it necessary to say whether Parsons correctly stated the law or not.

In the more recent House of Lords case of Transfield Shipping Inc of Panama v Mercator Shipping Inc of Monrovia, The Achilleas [2009] 1 AC 61, Transfield chartered The Achilleas from Mercator. Transfield were late in the redelivery of the vessel. Mercator had entered into a subsequent charterparty to follow immediately upon the return of The Achilleas. Due to extreme volatility in the shipping charter market, the price of charters had fallen quickly and Mercator were forced to take a much lower price for The Achilleas for the subsequent charter than had previously been agreed due to Transfield's late return. Mercator argued that they should be entitled to the reduced rate of hire for the duration of the subsequent charter. Transfield argued that Mercator should be limited to the reduced rate of hire for the period of late delivery. The House of Lords found for Transfield. It is not yet clear how the case will affect the rules relating to remoteness as two of their Lordships seemed to place emphasis on the fact that Transfield did not assume responsibility for the drop in market rate. Perhaps the best way to view the case, until clarification is received as to its interpretation, is that it confirms the 'not unlikely' test of The Heron II as this is the language used in the case.

The logic of contextualism is that, in either case, the implicit understanding should prevail. And, following the decision of the Court of Appeal in Supershield Ltd v Siemens Building Technologies FE Ltd [2010] EWCA Civ 7, this does indeed seem to be the legal position.

According to Toulson LJ (at para 43), giving the judgment of the Court of Appeal, Transfield Shipping (and, similarly, the earlier decision of the House of Lords in South Australia Asset Management Corporation v York Montague Ltd [1997] AC 191) had modified the standard rule of Hadley v Baxendale in the following way:

Hadley v Baxendale remains a standard rule but it has been rationalised on the basis that it reflects the expectation to be imputed to the parties in the ordinary case, i.e. that a contract breaker should ordinarily be liable to the other party for damage resulting from his breach if, but only if, at the time of making the contract a reasonable person in his shoes would have had damage of that kind in mind as not unlikely to result from a breach. However, South Australia and Transfield Shipping are authority that there may be cases where the court, on examining the contract and the commercial background, decides that the standard approach would not reflect the expectation or intention reasonably to be imputed to the parties.

Of course, in both South Australia and Transfield Shipping, the effect of bringing in the commercial background is to reduce the contract-breaker's liability for consequential loss below the level that the standard rule in Hadley v Baxendale would recognise. In these cases, the new contextual (and 'assumption of responsibility') approach is 'exclusionary'. By contrast, in Supershield v Siemens, the question is whether the new approach may also operate with 'inclusionary' effect, opening up the contract-breaker's liability beyond what Hadley v Baxendale would recognise. To this, Toulson LJ confirmed that 'the same principle may have an inclusionary effect. If, on the proper analysis of the contract against its commercial background, the loss was within the scope of the duty, it cannot be regarded as too remote, even if it would not have occurred in ordinary circumstances' (para 43). On the facts, it was not strictly necessary for Siemens to show more than that the terms of its settlement with the upstream claimants was within the bandwidth of reasonableness. However, Toulson LJ made it clear that he regarded the loss that eventuated – even though unlikely because both the valve and the drains failed – as falling within the responsibility assumed by Siemens to the upstream contractors and by Supershield to Siemens. Certainly, as Toulson LJ remarked, 'it would be a perverse result if the greater the number of precautionary measures, the less the legal remedy available to the victim in the case of multiple failures' (para 44).

The relationship between contextualism, The Achilleas, and the standard rules of remoteness has been further clarified by the Court of Appeal in John Grimes Partnership Ltd v Gubbins [2013] EWCA 37. Briefly stated, the standard rules of remoteness (from Hadley v Baxendale through to The Heron II) apply unless they have been displaced – for example, by express provision or, after The Achilleas, by the particular understanding in the relevant business sector.

Finally, it should be noted that, until firm clarification from the Supreme Court is received, it is unclear whether the tests for remoteness in contract and tort are the same but, in light of The Heron II and Transfield Shipping, it seems unlikely that they are. The test for remoteness in contract appears to be that the loss must have been in the reasonable contemplation of the parties as 'not unlikely' to occur.

Where one party has suffered loss resulting from the other party's breach of contract, the injured party should take 'reasonable steps' (British Westinghouse Electric and Manufacturing Co v Underground Electric Rail Co [1912] AC 673) to minimise the effect of the breach. Technically, there is no obligation to mitigate, but losses attributable to a failure to do so are not recoverable. The innocent party cannot, therefore, claim to be compensated by the party in default for loss which is really due, not to the breach, but its own failure to behave reasonably after the breach.

The question of what steps are reasonable is one of fact. In Pilkington v Wood [1953] CH 770, it was held that there was no expectation that the plaintiff should embark on 'a complicated and difficult piece of litigation' in order to minimise the effects of the defendant's breach.

The case of Payzu v Saunders [1919] 2 KB 881 demonstrates that reasonable steps to mitigate may, in some circumstances, include accepting the performance offered by the defendant under a new contract even when that performance amounts to a breach of the original contract.

Banco de Portugal v Waterlow & Sons [1932] AC 452 provides an example of a case where the expenditure was held to have been reasonable, and Lord Macmillan stated that the injured party's actions 'ought not to be weighed in nice scales at the instance of the party whose breach of contract has occasioned the difficulty'.

The duty to mitigate does not, however, preclude a party, when suing on a debt, from going to the expense of performing his side of the contract after the other party has wrongfully repudiated the contract: White & Carter v McGregor [1962] AC 413.

the party performing must have a legitimate interest in doing so (Clea Shipping Corporation v Bulk Oil International Ltd, The Alaskan Trader [1984] 1 All ER 129) and must be able to perform without the co- operation of the other contracting party (Hounslow London Borough Council v Twickenham Garden Developments Ltd) [1971] Ch 233.

Where the claimant's fault has contributed to the loss he has suffered, then the amount of damages he can recover for the breach of contract may be reduced on account of his contributory negligence.

Where the claimant's fault is not sufficient to break the chain of causation, the question then arises whether the damages payable to the claimant can be reduced under the Law Reform (Contributory Negligence) Act 1945. The answer to this question depends upon the nature of the contractual obligation which the defendant has breached.

In Forsikringsaktieselskapet Vesta v Butcher [1986] 2 All ER 488, Hobhouse J identified the following categories of obligation:
1. Where the defendant's liability arises from a breach of a strict contractual duty.
2. Where the defendant's liability arises from a contractual obligation which is expressed in terms of taking care (or its equivalent), but does not correspond to a common law duty to take care which would exist in the given case independent of contract.
3. Where the defendant's liability in contract is the same as his liability in the tort of negligence which arises independently of the contract.

The distinction between a quantum meruit and a claim for damages is that the former is a claim for reasonable remuneration, while the latter is a claim for compensation for a loss.

If the claimant has performed all, or a substantial part of, his obligations to render a service under a contract, he seems to have an unconstrained choice as to whether to sue for damages in contract or to seek a quantum meruit. If the actions yield different results, the claimant will obviously opt for the more favourable remedy. In cases of partial performance, where the defendant has voluntarily adopted the claimant's performance, a quantum meruit award may be made (See Sumpter v Hedges (1898) 1 QB 673

Where, under a contract of sale, the buyer wrongfully neglects, or refuses to pay for, the goods according to the terms of the contract, the seller may maintain an action against him for the price of the goods: Sale of Goods Act 1979 s 49. Where the price is ascertainable in a manner provided in the Sale of Goods Act 1979 s 8, the appropriate claim is a liquidated demand: the remedy is the award of the liquidated sum. But where the price is not determined in accordance with s 8, the buyer must pay a reasonable price. What is a reasonable price is a question of fact dependent on the circumstances of each particular case: s 8. The action for a reasonable price for goods is a claim for an unliquidated sum.

As a matter of law, a deposit is not normally recoverable, even if the payee has not suffered any loss as a result of the breach. However, in Workers Trust and Merchant Bank Ltd v Dojap Investments Ltd [1993] AC 573, the Privy Council imposed a limitation on this general rule. The general rule only applies if the deposit was given in earnest of performance. A deposit of 25 per cent had been demanded when the prevailing local rate was 10 per cent. The Privy Council advised that the deposit should be repaid subject to a set-off for any loss actually sustained. The court will not re-write the contract by inserting a reasonable figure and allowing the payee to retain the sum. So, the courts are willing to regulate contracts which specify unreasonable deposits.

In relation to a part payment, on the other hand, the general rule is that the part payment may be recovered by a party in breach of contract. In Dies v British and International Mining and Finance Co [1939] 1 KB 715, the claimant entered into a contract for the purchase of rifles and ammunition and made a part payment of £100,000. In breach of contract, the claimant refused to accept delivery, and the court held that he was able to recover the part payment from the defendants, even though this was subject to the defendants' right to recover damages for breach of contract. In reviewing the decision some 40 years later, the House of Lords, in Hyundai Shipbuilding and Heavy Industries Co Ltd v Papadopulos [1980] 1 WLR 1129, stated that in Dies the defendants, who had to return the part payment, had not incurred expenditure performing their contractual obligations. However, had they incurred expenditure, their Lordships suggested that the party in breach may not be able to recover the part payment.

A decree of specific performance is issued by the court to the defendant, requiring him to carry out his undertaking exactly according to the terms of the contract. Specific performance is an equitable remedy and is available only where there is no adequate remedy at common law or under a statute. Generally, this means that specific performance is available only where the payment of a sum of money would not be an adequate remedy. Specific performance is, therefore, an appropriate remedy in cases of breach of a contract for the sale or lease of land, or of breach of contract for the sale of something that is not readily available on the market, e.g. a rare book.

Specific performance will never be granted where damages or a liquidated demand is appropriate and adequate: Adderley v Dixon (1824) 3 S & S 607.

The action must be brought with reasonable promptness, for delay defeats the equities. Undue delay sufficient to cause the court to withhold an equitable remedy is known as laches: Eads v Williams (1854) 4 De G Mac & g 674.

Specific performance will not be awarded where it would cause undue hardship on the defendant: Patel v Ali [1984] Ch 283.

Specific performance will not be awarded for breach of a contract of personal services, e.g. contracts of employment: De Francesco v Barnum (1890) 45 Ch D 430.

Specific performance will not be awarded for breach of an obligation to perform a series of acts that would need the constant supervision of the court. Thus building contracts are specifically enforceable only in certain special circumstances: Co- operative Insurance Society Ltd v Argyll Stores (Holdings) Ltd [1998] AC 1.

The Judicial Committee of the Privy Council has stated that in respect of specific performance, the court must first consider whether there has been any want of good faith, honesty or righteous dealings on the part of the applicant and then consider whether to exercise the discretion to grant the remedy in all the circumstances of the case, which may include any misconduct on the part of the defendant: Sang Lee Investment Co v Wing Kwai Investment Co (The Times, April 14 1983).

In Evening Standard v Henderson [1987] ICR 588, a newspaper company was granted an interlocutory injunction to restrain an employee production manager from working for a rival newspaper during his contractual notice period as long as the company continued to provide him with remuneration and other contractual benefits without insisting that he perform any services for it.

The court has a discretionary power to grant an injunction to restrain the breach of a negative term of a contract even though the positive part of the contract is not specifically enforceable, e.g. in the case of a contract of personal service. The rationale of the jurisdiction to grant an injunction to restrain a breach of contract was explained by Lord St Leonards LC, in Lumley v Wagner (1852) 1 De GM & G 604:

Wherever this court has not proper jurisdiction to enforce specific performance, it operates to bind men's consciences, so far as they can be bound, to a true and literal performance of their agreements; and it will not suffer them to depart from their contracts at their pleasure, leaving the party with whom they have contracted to the mere chance of any damages which a jury may give. The exercise of this jurisdiction has, I believe, had a wholesome tendency towards the maintenance of that good faith which exists in this country to a much greater degree perhaps than in any other; and although the jurisdiction is not to be extended, yet a judge would desert his duty who did not act up to what his predecessors have handed down as the rule for his guidance in the administration of such an equity.

Where a contract of personal service contains a negative term, the enforcement of which would amount either to a decree of specific performance of the positive part of the contract or to a decree under which the defendant would have to choose between complying with the positive terms or remaining idle, the court will not grant an injunction.

Since an injunction is a discretionary remedy, the court may limit it to what the court considers reasonable in all the circumstances of the case. For example, where a negative term forbade the defendant to engage in, 'any trade, business, or calling, either relating to goods of any description sold or manufactured by the plaintiff or in any other business whatsoever' the court severed the negative term. An injunction was granted, not to restrain the defendant from engaging in 'any other business whatsoever', but framed so as to give the claimant a reasonable protection and no more: William Robinson & Co Ltd v Heuer (1898) 2 Ch 451.