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BREACH OF CONTRACT
A breach of contract occurs where a party does not comply with one or more of the terms
of contract, express or implied.
Breaches are very common in the construction industry. The date for completion is an
important term in a contract. However, it is mostly missed out. Indeed how many
construction projects can be completed within the stipulated time? Basically none! A
program delay is already warranted to be called a breach of contract.
Where the parties have agreed on a genuine pre-estimate of the loss which would occur in
the event of a particular breach, the pre-estimated amount is called the liquidated
damages; otherwise all damages are unliquidated. If damages for delay are not liquidated,
the employer may sue for his actual loss, that is, they are up to the court to decide on the
amount.
A DAMAGES
Damages are the most common form of remedy for breach of contract. There are two
different words. The word damage must not be confused with damages. Damage is the
loss or injury caused by the breach of contract and damages is the amount of
compensation awarded by the court.
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claiming damages for the gains he could have reasonably expected from the execution of
the contract.
The rule of the common law is, that where a party sustains loss by reason of a breach of
contract, it is so far as money can do it, to place the injured party in the same position he
would have been in had the contract been carried out. [per Parke B.]
Such damages are often claimed where the innocent party cannot clearly identify what
profit he would have made had the contract been honoured.
The Anglia television case is also an authority for the fact that the courts will not allow
the injured party to claim for both the expectation and reliance losses.
Its amount is calculated by reference to the contract breakers project and reflects the
amount by which Defendants profit at Claimants expense (either by the failure to
provide consideration or by a deliberate wrongful act, in breach of contract, on
Defendants part).
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Steyn LJ in Bredero Homes strongly disapproved of any moves towards such a
development of restitutionary damages. This would go a long way towards preventing
deliberate breaches of contract.
In McRae v Commonwealth Disposals Commission [1951] 84 CLR 377, where the court
considered that the claim for loss of profits was incapable of calculation since there was
nothing in the contract to indicate the size of the tanker in question nor the approximate
quantity of oil on board. The court decided that only a claim for reliance loss (type b)
would be entertained.
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3 Factors Determining the Quantum (the amount) of Damages
A number of principles operate to determine the extent of Defendants liability.
(a) Causation
The general means by which causation serves to constrain the amount of damages
payable is best explained by example of:
In a similar line, damages in the construction contract will only allow direct loss and /or
expense to be claimed (See Clause 27.1 of the Standard Form of Building Contract) as a
compensation for damages. Consequential losses resulted beyond the NAI, like loss of
profit, loss of opportunities to make contracts with others, etc. are not allowed.
(b) Mitigation
According to this principle, the claimant, though innocent, is under a general duty to keep
to a minimum the losses flowing from Defendants breach of contract by taking
reasonable steps available to him. For example:
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In the Standard Form of Building Contract, Clause 25.1 (4) provides that the Contractor
has to demonstrate his intention for mitigation.
The Contractor shall continuously use his best endeavors to prevent or mitigate delay of
the progress of the Works, however caused, and to prevent the completion of the Works
being delayed or further delayed beyond the Completion Date,
Before any claim for loss and/or expenses can be processed, it is the Contractor who
should show an effort, using his best possible endeavors, to mitigate losses pursuant to
the events occurring giving rise to this claim. This also complies with the rule of equity,
he who seeks equity must do equity.
Philips Hong Kong Ltd v Attorney-General of Hong Kong [1993] 9 Const LJ 202
A flexible approach was adopted. The facts of the case showed that the parties did not
intend the L.D. clause to apply. The L.D. clause is a hypothetical situation, Philips was
therefore not liable to pay the Hong Kong Government L.D. for delays.
Dunlop Pneumatic Tyre Co. Ltd v New Garage and Motor Co. Ltd. [1915] AC 79
There was a contract for the supply and purchase of tyres. The agreement was said to be a
price maintenance agreement under which the defendants were not to sell the tyres below
certain prices, nor to sell to persons on a black list, not to exhibit or export the tyres
without consent and lastly, not to tamper with certain marks on the tyres. The defendants
had to pay 5 by way of liquidated damages for every tyre cover or tube sold or offered
in breach of the agreement. The defendants sold a tyre below the plaintiffs current list
price, and he claimed the 5 damages. Held, the clauses has been agreed to be liquidated
damages clauses.
The House of Lords set out a four-part test for distinguishing the L.D. and the penalty
clauses:
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1. If the sum is extravagant and unconscionable by reference to the greatest
conceivable loss that might arise in the particular kind of case it will be held to be
a penalty clause despite the words used by the parties.
2. If the breach amounts to failure to pay a sum of money owed and the clause
states that such failure shall incur the debt of a much greater sum, it will again be
treated as a penalty clause.
3. There is a presumption (but only a presumption) that where a fixed sum shall be
payable for any of a number of breaches (some serious, some trivial) that the
clause is a penalty clause.
4. If the sum stipulated in the clause is a genuine pre-estimate of the amount of loss
that will be suffered, but an accurate pre-estimate is almost impossible to compute,
then the clause will be a L.D. clause.
The liquidated damages and extension of time clauses in printed forms of contract must
be construed strictly contra proferentem. If the employer wishes to recover liquidated
damages for failure by the contractors to complete on time in spite of the fact that some
of the delay is due to the employers own fault or breach of contract, then the extension of
time clause should provide, expressly or by necessary inference, for an extension on
account of such a fault or breach on the part of the employer.
The reasons of the above decision were that L.D. may be recovered only from a date
fixed under the contract. If no date can be fixed, time will be at large (no bounds).
Therefore L.D. and time extension are intimately related.
B QUANTUM MERUIT
A quantum meruit claim is a claim for reasonable remuneration for work done or services
supplied. The entitlement is called the contractual quantum meruit. This is a convenient
remedy in two cases. Firstly, a claim is available where there is a contract for the supply
of services but no express agreement for payment; in such cases there is an implication
that reasonable remuneration will be paid. In the event of non-payment, the plaintiff may
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sue on the quantum meruit. Secondly, a quantum meruit claim will lie where an original
contract containing terms for payment is discharged and replaced by a new contract.
British Steel Corporation v Cleveland Bridge and Engineering Co. Ltd. [1984] 1 All ER
504
British Steel Corporation supplied steel nodes (structural steel members) to the sub-
contractor Cleveland Co. for a construction in Saudi Arabia. The fabrication of some
steel nodes were contracted based on a letter of intent. A negotiation on the variation
rates has broken down making the contract unable to be continued. The supplier and the
sub-contractor were claiming and counter-claiming each other. The court ordered a
compensation basing on the quantum meruit to the supplier.
1 Introduction
In the rule of equity, the courts have power to award the decree of specific performance,
that is to say, the court may order a defaulter to comply with his contractual promise.
This remedy will never be available where damages would be regarded as a satisfactory
remedy.
5 Negative Covenants
Often, employees are required on taking a job to covenant not to do certain things such as
work for a competitor within a fixed radius or within for a fixed time after quitting.
In most cases of this kind, an injunction will be granted to enforce the undertaking.
Dr Eric Cheng
City University of Hong Kong
9 February 2015