1. Copyright © 2004 McGraw-Hill Ryerson Limited 1 PART 3 – THE LAW OF CONTRACTS  Chapter 13 – Breach of Contract Prepared by Douglas H. Peterson, University of Alberta

2. Copyright © 2004 McGraw-Hill Ryerson Limited 2 CHAPTER 13 – BREACH OF CONTRACT The Nature of Breach of Contract Remedies Special Remedies

3. Copyright © 2004 McGraw-Hill Ryerson Limited 3 BREACH OF CONTRACT The Nature of Breach of Contract Express Repudiation Express Breach Anticipatory Breach Doctrine of Substantial Performance Warranties vs. Conditions Implied Repudiation A form of Anticipatory Breach Fundamental Breach Exemption clauses Conditions vs. Warranties Warranty ex post facto

4. Copyright © 2004 McGraw-Hill Ryerson Limited 4 BREACH OF CONTRACT Remedies Compensation Extent of Liability for Loss Duty to Mitigate Liquidated Damages Special Remedies Specific Performance Injunction Quantum Merit

5. Copyright © 2004 McGraw-Hill Ryerson Limited 5 THE NATURE OF BREACH OF CONTRACT Not all breaches give rise to the right to discharge Express or implied refusal to carry out a promise is a form of discharge Injured party can: bring an action for damages Bring the contract to an end Court may: Grant compensation for the injury Issue an order requiring performance

6. Copyright © 2004 McGraw-Hill Ryerson Limited 6 CLASSIFICATION OF CONTRACTUAL TERMS Condition - important term of a contract If breached gives innocent party right to terminate the contract and claim damages Terms essential to the substantial performance of the contract Essential terms of a contract Warranty Minor term, if breached, gives innocent party right to claim damages only Insignificant or peripheral to central obligation of the contract A non-essential term of the contract Issue is often if the term is a condition or a warranty

7. Copyright © 2004 McGraw-Hill Ryerson Limited 7 EXPRESS REPUDIATION Express repudiation is by: Conduct Form of communication A declaration by one party to the other that it does not intend to reply Anticipatory Breach – an advance determination that a party will not perform his or her part of a contract when the time for performance arrives

8. Copyright © 2004 McGraw-Hill Ryerson Limited 8 EXPRESS REPUDIATION Anticipatory Breach – injured party has option: Treat the agreement as at an end Continue with the agreement and wait for non- performance and bring action at time of non- performance Assume risk contract discharged in some other form between time of anticipatory breach and time for performance Agreement may become frustrated in some manner

9. Copyright © 2004 McGraw-Hill Ryerson Limited 9 EXPRESS REPUDIATION If each party must perform independently of the other, injured party may not be entitled to treat the contract as discharged Would still be able to get damages Part performance - injured party may only avoid the contract if the repudiation goes to the root of the contract

10. Copyright © 2004 McGraw-Hill Ryerson Limited 10 EXPRESS REPUDIATION Substantial Performance Court looks at percentage completed No repudiation if other party substantially performed Get reduction or damages Can’t seize upon trivial failure of performance to avoid obligations

11. Copyright © 2004 McGraw-Hill Ryerson Limited 11 EXPRESS REPUDIATION Subsidiary Promise Where a party repudiates a subsidiary promise rather than an essential part of the agreement If sale of goods referred to as a warranty If condition (essential term) injured party may repudiate If not condition (non-essential term) injured party may only sue for damages

12. Copyright © 2004 McGraw-Hill Ryerson Limited 12 IMPLIED REPUDIATION Repudiation is implied from conduct of parties or statements made before the time fixed for performance If failure to perform falls so short of performance required one can argue that performance of a whole becomes impossible Risky to treat the contract at an end Better to sue for damages

13. Copyright © 2004 McGraw-Hill Ryerson Limited 13 FUNDAMENTAL BREACH A breach of the contract that goes to the root of the agreement. A breach of a major term (essential term) such that the purpose of the contract is defeated Breach of the whole of the contract Major terms of contracts referred to as conditions

14. Copyright © 2004 McGraw-Hill Ryerson Limited 14 FUNDAMENTAL BREACH Exemption Clauses - a clause in a contract that exempts a party from liability for failing to perform some or all of its contractual obligations unequal bargaining power often exists between sellers and buyers Exemption clause will not apply when the party trying to enforce it is in fundamental breach Effect of exemption clause depends on construction of the contract not upon a rule of law Court looks to the wording of the exemption clause

15. Copyright © 2004 McGraw-Hill Ryerson Limited 15 CONDITIONS AND WARRANTIES Condition – essential or major terms of a contract Breach of gives rise to the right to treat the contract at an end Warranty – non-essential or minor terms of a contract In the sale of goods, a minor term in a contract Not the same as a warranty provided by a manufacturer Breach of allows the injured party to damages, but not to rescission of the agreement

16. Copyright © 2004 McGraw-Hill Ryerson Limited 16 CONDITIONS AND WARRANTIES A condition may become a mere warranty if the injured party: Delays in seeking redress Continues to receive benefits under the contract – known as a warranty ex post facto Injured party’s actions constitute a waiver of the right to avoid the agreement

17. Copyright © 2004 McGraw-Hill Ryerson Limited 17 REMEDIES: COMPENSATION Injured party has a right to sue for compensation for losses suffered flowing from the breach Loss or injury as a result of the breach must be proven Compensation is usually in the form of monetary damages Can also be specific performance or quantum merit (quasi-contractual remedy)

18. Copyright © 2004 McGraw-Hill Ryerson Limited 18 REMEDIES: COMPENSATION Monetary damages – most common form Object of contract usually something that can be measured in a monetary amount Restitutio in integrum – basic principle of damages To restore or return a party to an original position Courts attempt to put party into position had the contract been performed “Make the party whole”

19. Copyright © 2004 McGraw-Hill Ryerson Limited 19 THE EXTENT OF LIABILITY FOR LOSS General rule – party is responsible for damages that flow naturally from the breach Exception – a party cannot recover damages that are too remote Remoteness: 2 part test Reasonable Forseeability: Party can recover damages that are those that the parties may reasonably contemplate as flowing from the breach Special Circumstances: any loss that might occur from special circusmstances relating to the contract that both parties might reasonably be expected to contemplate at the time the contract is made

20. Copyright © 2004 McGraw-Hill Ryerson Limited 20 THE EXTENT OF LIABILITY FOR LOSS Compensation may also be extended to cover damages in nature of mental stress Aggravated damages for mental suffering can be awarded Such damages are compensatory rather than punitive

21. Copyright © 2004 McGraw-Hill Ryerson Limited 21 THE DUTY TO MITIGATE LOSS Action by an aggrieved party to reduce the extent of loss caused by breach of the other party Award will not include what plaintiff could have reasonably avoided Plaintiff has duty to take all reasonable steps to mitigate the loss consequent of the breach Examples: Rejection of goods, must try to sell them elsewhere Seller refuses to deliver, buy elsewhere Lose job, look for a new one Rule ‑ only recover damages for losses that plaintiff could not avoid by acting reasonably

22. Copyright © 2004 McGraw-Hill Ryerson Limited 22 LIQUIDATED DAMAGES A bona fide estimate of the monetary damages that would flow from the breach of a contract An agreement in advance of amount to be paid in damages is a breach occurs Relationship of actual loss and agreement may not be the same E.g. Deposit If sum unreasonable in relation to damage suffered, the sum may be treated as a penalty clause rather than liquidated damages Penalty clause ‑ a term in a contract specifying an unreasonable amount for breach, intended to frighten a party into performance courts will often disregards such clauses

23. Copyright © 2004 McGraw-Hill Ryerson Limited 23 LIQUIDATED DAMAGES Part payment versus deposit Money paid could be deposit, part payment, or both Deposit – something that binds the contract and guarantees its performance A form of liquidated damages If contract is rescinded then deposit does not have to be returned if the rescission was due to his or her fault Part Payment – merely money pre-paid on account of the purchase price Part payment and does not have to be returned even if the rescission is their fault

24. Copyright © 2004 McGraw-Hill Ryerson Limited 24 SPECIFIC PERFORMANCE Equitable remedies – when common law money damages is inadequate Specific Performance – an equitable remedy of the court that may be granted for breach of contract where money damages would be inadequate, and that requires the defendant to carry out the agreement according to the terms A discretionary remedy

25. Copyright © 2004 McGraw-Hill Ryerson Limited 25 SPECIFIC PERFORMANCE Order by the court for one party to perform under the agreement Only available in limited circumstances Failure to obey the order is contempt of court Most common when goods are unique such as the sale of land No two parcels of land are entirely the same Plaintiff must show: They were willing and able at all times to perform under the contract The other party refused to perform Court orders the party to do something

26. Copyright © 2004 McGraw-Hill Ryerson Limited 26 INJUNCTION An equitable remedy of the court that orders the person or persons named therein to refrain from doing certain acts Usually when there is a breach by a party to perform a promise to forbear from doing something Restrictive covenants

27. Copyright © 2004 McGraw-Hill Ryerson Limited 27 INJUNCTION Court orders the party to refrain from doing something (opposite of specific performance) Non competition clauses in employment contract and the sale of businesses In essence the injunction is an order of specific performance of the entire contract Often issued to enforce a negative covenant, if covenant not contrary to public policy

28. Copyright © 2004 McGraw-Hill Ryerson Limited 28 QUANTUM MERIT An alternative remedy When contract repudiated and is for services, or goods and services Not a remedy arising out of the contract but a remedy based on quasi-contract Courts imply an agreement Party must pay a reasonable price for the benefit obtained Available as a remedy if contract has been partly performed by the injured party

29. Copyright © 2004 McGraw-Hill Ryerson Limited 29 SUMMARY Breach of contract is the express or implied refusal of one party to perform Anticipatory breach – when express or implied repudiation takes place before the date fixed for performance Fundamental breach gives rise to repudiation Minor breach gives rise only to damages Substantial performance – an exception to the rule that one can repudiate for breach

30. Copyright © 2004 McGraw-Hill Ryerson Limited 30 SUMMARY Remedies Monetary damages (common law) Specific performance (equitable) Injunction (equitable) Quantum merit (quasi-contractual)

31. Copyright © 2004 McGraw-Hill Ryerson Limited 31 Copyright © 2004 by McGraw-Hill Ryerson Limited. LAW OF CONTRACT BREACH OF CONTRACT NATURE OF BREACH RIGHTS OF INJURED PARTY EXCEPTIONS IMPLIED REPUDIATION EXPRESS REPUDIATION FUNDAMENTAL BREACH Released from Future Performance Damages for Loss Option to Wait Until Date Fixed for Performance Then Take Action for Non Performance Entitled to Treat Contract as at An End. Exemption Clauses Will Not Protect Party in Breach Injured Party Must Not Continue to Accept Benefits Under Contract After Fundamental Breach Discovered Where Party Has Substantially Performed Contract — Only Entitled to Damages for Loss

32. Copyright © 2004 McGraw-Hill Ryerson Limited 32 Copyright © 2004 by McGraw-Hill Ryerson Limited. LAW OF CONTRACT REMEDIES FOR BREACH BREACH OF CONTRACT DAMAGES LIQUIDATED DAMAGES SPECIFIC PERFORMANCE INJUNCTION QUANTUM MERUIT — Discretionary Remedy — Used to Enforce Negative Covenant in Agreement — To Prevent Continuing or Impending Injury — Estimate of Loss in Event of Breach — Provided for in Contract — To Compensate for Loss by Money Payment — To Place Party in Same Position as if Agreement Fulfilled REMEDY EXTENT OF REMEDY — Normally Only Available in Land Transactions or Where Goods Unique — Discretionary Remedy — Only Available Where Money Compensation Inadequate — Where Services or Goods Requested — Quasi-Contract Remedy — Reasonable Price-Damages RANGE OF REMEDIES AVAILABLE