Contract Obligation
Robert is a house builder. In March 2009, he entered into a contract to build a 4 bedroom house for Louisa. Louisa was specific about her requirements and, amongst other matters she wanted the house painted blue externally. They agreed that Louisa would move in on 1 September 2009. As a consequence of this agreement, Louisa gave notice to the Landlord of her rented flat that she would move out on 31 August 2009.
In fact, Robert was not able to complete the building of the house until the end of October due to him failing to employ a sufficient number of workmen to build the house on time. Fortunately, Louisa was able to extend the tenancy of her flat by two months but at a cost of 2,000 in total. A cheaper flat was available to her to rent for those two months at a total cost of 1,000 but she did not want the upheaval of having to move twice in a short time period so she chose not to rent this cheaper flat.
Although Louisa lives alone, it had always been her intention to open a bed and breakfast in her new house. She anticipated that she would make about 500 per month from that venture. She had projected that she would start the business immediately she moved into her newly purchased house. However, as a result of Roberts delay, she was not able to open her new business until she eventually moved into the house on 1 November 2009. She had mentioned this business to Robert when she agreed to buy the house in March.
Roberts painter made a mistake as to the color of the house. Instead of painting it blue, he painted it yellow.Louisa wants to claim damages from Robert for the additional cost of renting her flat, the delayed opportunity with regards to her new business and the cost of repainting the exterior of the house.
Advice Louisa
With respect to the contract, Robert is in breach under various categories.
Firstly Robert was meant to complete the building of the house by the agreed time of September 2009 instead delaying up to the end of October. This delay not only caused inconveniences to Louisa but also added financial costs to her budget. The breach as pertains to the delay represents material breach of which Louisa is entitled to some form of damages. This delay had cost ramifications as to the extra money Louisa had to cut during this period of delay. Secondly there was breach as regards the specified paintwork whereby Louisa detailed that the house is to be painted blue, but Robertss painter went ahead and painted it yellow.
The paintwork represents a kind of breach known as minor breaches whereby a partial or immaterial breach occurs. In such cases the plaintiff is not entitled to an order for performance of the defendants obligations. He or she is however mandated to collect the actual amount of damages in respect to the breach. This implies that the difference in value between the specified obligation and the mistakenly performed obligation is the amount the plaintiff is entitled to. In Jacob Youngs V. Kent (1921), the plaintiff, that is Jacob Youngs, was contracted by Kent to build a house at a cost of upwards of 70, 000.The defendant declined to pay a balance of 3,438.46 of which the plaintiff sued to recover. This was as a result of a situation where the plaintiff specified some plumbing work with respect to the origin of the pipe. The defendant on occupying the house discovered that the pipes were not from the specified origin. The architect subsequently ordered the plaintiff to adjust this issue, but due to the involved expense the plaintiff left the work undone, and the architect withheld his certificate. At the trial the plaintiff presented evidence that the error was neither fraudulent nor willful and attempted to indicate that the pipe was essentially of the same quality. However, the court held in favor of the defendant. The case was appealed, on the question of whether the use of substitute material of equal or greater quality to the specified ones represented a violation of substantial performance. The court held that the evidence regarding the relative pipe quality was admissible and that an allowance should be made for the difference in value had the appropriate pipe been used.
In Louisa case it is thus apparent that the paint represents a minor breach, and her suit cannot be successful to have it undone and painted blue. Her option is to sue for damages only if there is a significant positive difference in value between the blue and yellow paintwork. Thus, the suit for cost of repainting the house exterior is bound to fail.
The breach as concerns the delay represents material breach of which Louisa is entitled to some form of damages. In theory the delay had cost ramifications as to the extra costs Louisa had to incur in the period of the delay. The economic loss wing to the inability of Louisa to undertake her venture is another element to the damage claims.
Damages are the commonly used remedy for breach of contract. It entails the payment of money, the sum of which is calculated to compensate the wronged party for the loss that arose from the breach. Damages aim at restoring the wronged party to the position they would have been had the contract been fully performed. The quantification of the amount of damages payable is based on the loss that the wronged party would be expected to suffer as a reasonable result of breach. Another requirement for the application of damages is the proof that the party in breach was aware that the wronged party would suffer a special loss in case of the breach of contract. There is also the consideration of the mitigation of loss on the part of the wronged party, that is he or she took all reasonable measures to minimize the loss suffered.
In law damages seek to restore the wronged party to the position they would have been in absence of the breach. It is thus required that the wronged party takes measures to minimize costs arising from the breach. This is known as mitigation of costs. In Louisas case, however, she opted to extend the tenancy of her flat while there was a cheaper option available to her. It can thus be argued that she did not take necessary measures to mitigate the costs of the breach, thus she would be entitled to damages amounting to the costs of the cheaper option foregone.
On the other hand, her move to recover costs, as to her delayed opportunity in the bed and breakfast venture, represents a case of special damages. In this case, her supposed economic loss will undergo a test of remoteness as is the case in Hadley V Baxwendale.
The test for recoverable damages is as laid out in the test for remoteness as set forth in the leading decision of 1854 in the Hadley V Baxendale where case Mr. Hadley was a miller and agreed to have a new crankshaft made for the mills steam engine with W Joyce Co, who required that the broken crankshaft be sent to them for the purposes of making the new crankshaft. The plaintiff contracted Baxendale and Ors to deliver the crankshaft. The defendants failed to deliver by the due date causing Hadley to lose business and subsequently suing for the profits lost due to the late delivery. The Jury ruled in favor of Hadley. Baxendale appealed on the grounds that he was not aware that the plaintiff would suffer any particular loss as a result of late delivery. The question of the case was thus whether a defendant in breach of contract was liable in damages on the basis of lack of knowledge of the loss that would be incurred from the breach. Baxendale could only be held liable for losses that were reasonably foreseeable and Hadley had not mentioned his special circumstances in advance, thus the court declined to allow Hadley to recover lost profits.
The reasonably foreseeable loss depends on knowledge that is possessed by the defendant. In Victoria Laundry (Windsor) Ltd. V Newman Industries Ltd. (1949), Newman Industries was supposed to deliver a boiler to Victoria Laundry the plaintiffs. The defendants made the delivery five months late by which the plaintiff had lost a lucrative contract. Victoria Laundry sued for ordinary profits they lost as a result of the delay. The question was thus whether the plaintiff could also claim the extraordinary profits they would have made in the missed lucrative contract. Newman Industries were to compensate only for the ordinary profits. The extraordinary profits would only have been recoverable if the defendant had reasonable knowledge of such.
In some cases the remoteness test under contract is stricter. In H. Parsons (Livestock) Ltd. V. Uttley , Ingham Co Ltd, distinction is challenged but remains in effect. Parsons farmed pigs and bought bulk food storage hoppers from Uttley Ingham who installed them on the firm. In so doing the ventilator top was not sealed as should have been and the plaintiff did not notice. The pignuts hence became moldy of which parsons did not notice, thereby killing 254 pigs. It was held by the majority that the losses for the breach of contract recoverable are e likely result from the breach. Lord Denning MR, dissenting on the reasoning, held that there should be drawn a distinction between losses accruing to physical damage and economic losses.
In a case of which the defendant ought to have contemplated the type of damage that would arise of the breach then they cannot claim they could not have contemplated the extent of that specific damage, as Held in Parsons V Ingham Wroth v Tyler. (1974).
In the Heron II.Koufos V. Czarnikow Ltd. (1969) house of Lords, the defendants were late in the delivery of goods to a commercial port, which affected the resale value of the goods. It was Held that the owners of the goods could recover their loss of profit from the defendant ship owners. This is due to the act that the delay is something that would have the effect of depreciating the degrading resale value of the goods since their market price would inevitably fall in the period of the delay. The implications of the rules of remoteness in contract apply whereby the degree of foresight required in the first rule of Hadley V. Baxendale is a mandatory requirement. That is the liability of the defendant being dependent upon the presumed contemplation of the parties at the time of entering into the agreement. In this regard they would contemplate happening of loss within reasonable expectation.
In Transfield Shipping Inc. V Mercator Shipping Inc. (2008), Transfield Shipping was a charterer and hired Mercators ship. The Transfield was meant to have the ship for 5 to 7 months and meant to return it by the midnight of May the 2nd, 2004. Mercator thence arranged to let out the ship to another charterer on the 8th of May, but Transfield delayed in returning the ship. The new charterer agreed to take the ship, and for the delay reduced the amount paid to Mercator. Transfield argued to pay an amount reflecting the daily hire rate while Mercator asked to be paid the amount lost on the second chartering contract as well. Arbitration in favor of Mercator was in line with the first test of remoteness as in Hadley V. Baxendale. On Transfields appeal, the court of appeal upheld the arbitrators decision, prompting Transfield to appeal again. The House of Lords upheld the appeal, unanimously holding that the loss of profits accruing to the second charter was not within the ruling in Hadley V Baxendale.
In the Victoria Laundry (Windsor) Ltd. V Newman Industries Ltd. (1949) as reported above Newman Industries were supposed to deliver a boiler to Victoria Laundry the plaintiffs. The defendants made the delivery five months late by which the plaintiff had lost a lucrative contract. Victoria Laundry sued for ordinary profits they lost as a result of the delay. The question was thus whether the plaintiff could also claim the extraordinary profits they would have made in the missed lucrative contract. Newman Industries were to compensate only for the ordinary profits. The extraordinary profits would only have been recoverable if the defendant had reasonable knowledge of such.
In Transfield Shipping Inc. V Mercator Shipping Inc. (2008), Lord Hoffman noted that the trend was to assume that the damages for late delivery were represented by the difference between the market and charter rate. He was of the opinion that the arbitrators had applied a rather crude test as to the type of foreseeable loss. He posed that the industrys common understanding was indeed important to the nature of the business transaction, asking what reasonable persons expectations of responsibility would be. He stated the need to look at the background of market expectations and that the liability for the next contract was in context, entirely unquantifiable.
In this regard the two test criteria are that the damages must flow naturally from the breach of contract and that the damages, albeit complex in prediction, were reasonably foreseeable as a result of communication to the defendant. For these damages to be ordered it is required that these tests of remoteness be passed. This is to further cement the fact that the special circumstances need to have been in the contemplation of both parties at the time of entering the contract.
Banque Bruxelles Lambert SA V. Eagle Star Insurance Co. Ltd. (1997) is a case in the backdrop of the early 1990s property crash in which banks were suing property values on account of overpricing real estate. This was in a move to recover the lost market value. The banks were unable to take action against the owners who having fallen victim to negative equity had no money, thus the suits against valuers to recover some of the loss. In general, the valuers were said to have negligently advised the banks that the property that was offered as security for loans was worth much more than the market value. This was in breach of an implied term exercise reasonable care and skill towards the banks as their clients. The question was whether they should be held liable for losses attributed to the deficient security, and subsequent losses owing to the collapse of the property market. The house of Lords ruled in favor of the defendants, that they should not be held responsible for the special losses arising from the property market fall.
In another case, Horne V. Midland Railway (1873) the defendants were one day late in delivery of shoes but were unaware in advance that the delay would cause the plaintiff not to sell the shoes at an unusually high price. Thus there would be award of damages for loss of ordinary profits but unusual profits require that the case pass the second test for remoteness. However, had the breaching party been informed in advance that there existed potential loss of unusual profits, then the defendant would be liable for such loss unless the contract contained a specific exemption clause.
In this respect per Louisas scenario, when put to the acid test as to remoteness, it arises that the loss of opportunity did result directly from the breach. Secondly, Louisa had mentioned to Robert regarding her bed and breakfast aspirations thus the issue was in contemplation of both at the time of entering the contract. In this regard Louisa is entitled to compensation for damages as to the loss of economic opportunity owing to the delay and her claim will be held in court.
Conclusion
The test for remoteness of damages is the main legal concept that has been applied in advising this case. The plaint is under obligation to prove that the special or extraordinary loss that occurred was in the contemplation of both parties at the time of entering the contract.
The contract breaker is not inevitably liable for all the loss which his breach has caused. Loss of the type in question has to be within the contemplation of the parties at the time when the contract was made.
Per Baroness Hale in Transfield Shipping Inc v Mercator Shipping Inc 2008 UKHL 48 at 91
Discuss how the law of contract restricts the amount of damages payable in the event of a breach of contract.
Damages are classified into pecuniary damages which are financial in nature and non pecuniary damages that are non-financial in nature. The damages in question are pecuniary and for them to be ordered the test for remoteness the damages must flow naturally from the breach of contract or the damages, however difficult to predict, were reasonably foreseeable since the unusual circumstances were communicated to the defendant. This is in a bid to avoid unlimited liability. The second remoteness test that entails unusual circumstances gives the respective parties to turn down the offer or take insurance measures against the risk of breach and payment of higher damages. This would also enable them to ask for higher price in performing the contract.
In pecuniary damages that compensate monetary losses in breach, consideration is categorized as restitution, for instance, return of money paid by the aggrieved party to the party that breached the contract reliance as exemplified by a tender process whereby in regard to the costs incurred by the tenderer in submitting the tender, a contractual obligation arises on the part of the process owners to consider the tender and expectation whereby most contracts entail expectations on both sides to benefit financially from the contract..
There is also the element in pecuniary damages known as special damages, for instance, to address the cost of getting another person to make the delivery in the place of the breaching party. The issue of mitigation in pecuniary damages is also important in that failure to mitigate results in reduction of the damages awarded. Liquidated damages are damage levels payable that are stipulated in the contract.
As established by Hadley v Baxendale the second remoteness test states that the damages should be reasonably assumed to have been within the contemplation of the parties at the time entering into the contract. This means that the liable party can only be held liable for abnormal consequences that he was reasonably expected to be aware of as illustrated in Victoria Laundry V Newman Industries. In this case Mr. Hadley was a miller and agreed to have a new crankshaft made for the mills steam engine with W Joyce Co, who required that the broken crankshaft be sent to them for the purposes of making the new crankshaft. The plaintiff contracted Baxendale and Ors to deliver the crankshaft. The defendants failed to deliver by the due date causing Hadley to lose business and subsequently suing for the profits lost due to the late delivery. The Jury ruled in favor of Hadley. Baxendale appealed on the grounds that he was not aware that the plaintiff would suffer any particular loss as a result of late delivery. The question of the case was thus whether a defendant in breach of contract was liable in damages on the basis of lack of knowledge of the loss that would be incurred from the breach. Baxendale could only be held liable for losses that were reasonably foreseeable and Hadley had not mentioned his special circumstances in advance thus the court declined to allow Hadley to recover lost profits
Test for remoteness takes root in English law whereby it applies to both tort and contract in limiting the amount of compensatory damages for a wrongdoing or breach of contract. In tort the test requires that the defendant be the cause in negligence. Secondly, it requires that the damage suffered by the plaintiff is not to be too remote. In tort remoteness is thus designed to further limit the cause of action in ensuring fairness on the liability imposed on the defendant.
In contract however, the test for remoteness deals with compensatory damages. It is reiterated that compensatory damages seek to restore the aggrieved party in as good a state as he or she would have been had the contract had been fulfilled. It is required that the damages awarded be certain rather than estimates of the benefits that would have accrued from the performance of the contract. Prior to the test for remoteness, it is a requirement that the aggrieved party has mitigated that damages, that is had he or she foreseen the damages and had the ability to avoid them within reasonable effort. These mitigated damages include damages that specifically include losses that could not reasonably have been prevented through cover or other means.
Hadley V. Baxendale dictates what determines general and consequential damages. Damages that flow naturally from the breach of a contract are referred to as general damages. On the other hand, consequential damages represent damages that albeit not flowing naturally from the breach of contract, they are naturally assumed to happen in the awareness of both parties at the time of entering into the contract. For instance, if someone hires a car to attend to a business appointment and on arriving to collect the car discovers that it is not available, the general damages would entail the expenses incurred in hiring another car. Consequential damages on the other hand would include the business that the hirer lost in missing the appointment. This is in the event that the reason for the car hire was knowledgeable to both parties.
There is a joined English contract law case referenced as South Australia Asset Management Corporation V. York Montague Ltd and Banque Bruxelles Lambert SA V. Eagle Star Insurance Co. Ltd. (1997) expound on causation of remoteness of damage. In the early 1990s there was a property crash in which banks were suing property valuers on account of overpricing real estate. This was in a move to recover the lost market value. The banks were unable to take action against the owners who having fallen victim to negative equity had no money, thus the suits against valuers to recover some of the loss.
In the South Australia case the valuer had negligently advised the bank that the property hat was offered as security for a loan, worth much more than the market value.. The question was whether he should be held liable for losses attributed to the deficient security, and subsequent losses owing to the collapse of the property market. It was stated that he should not be held responsible for the special losses arising from the property market fall.
The Bank Bruxelles case reports the same scenario of breach and special losses arising, of which it was held that the defendant was not liable in respect to such consequential damages. These cases in effect excluded from liability damages that were linked to the property market collapse.
Conclusion
Such losses were to a foreseeable extent, since it is not likely for the property market to fluctuate, and were caused by negligent valuation since the bank would not have lent money on the premise, thus would not have incurred losses. The exclusion was on the grounds that the liability was not within the scope of what was reasonably expected of the valuers.
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