Introduction
A contract creates binding legal obligations between the parties involved. When one party fails to honour these obligations, a breach of contract occurs. This essay will explain the legal principles surrounding breach of contract under the law of England and Wales. It will first define what constitutes a breach and outline the different ways in which a contract can be breached. It will then examine the classification of contractual terms, as this determines the immediate consequences of a breach. Finally, the essay will discuss the primary remedies available to the innocent party, focusing on the award of damages and the principles that govern its calculation, as well as briefly considering equitable remedies.
Defining and Classifying Breach of Contract
A breach of contract occurs when a party, without a lawful excuse, fails or refuses to perform their contractual obligations, performs them defectively, or incapacitates themselves from performing (Peel, 2020). The breach can be an 'actual' breach, which occurs on or after the date set for performance, or an 'anticipatory' breach, which occurs before the performance is due. In the case of an anticipatory breach, one party makes it clear, either by express words or by their conduct, that they will not perform their side of the bargain. The classic authority for this is Hochster v De La Tour (1853) 2 E&B 678, where a courier was told his services would not be needed before the date his employment was due to start. It was held that the innocent party does not have to wait for the actual date of performance to pass; they can treat the contract as terminated and sue for damages immediately.
However, not every breach of contract gives the innocent party the same rights. The remedies available depend heavily on the type of term that has been breached. Traditionally, contractual terms are classified as either conditions or warranties. A condition is a major term that goes to the root of the contract. If a condition is breached, the innocent party is entitled to both claim damages for their loss and, if they so choose, to terminate the contract and consider themselves free from any further obligations under it (Poussard v Spiers (1876) 1 QBD 410). In contrast, a warranty is a minor, less important term of the contract. A breach of warranty only entitles the innocent party to claim damages; they cannot terminate the contract, which remains in force (Bettini v Gye (1876) 1 QBD 183).
The courts recognised that this rigid two-part classification could be unjust, as some terms could be breached in both minor and major ways. This led to the development of a third category, the 'innominate' or 'intermediate' term. The leading case is Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1962] 2 QB 26. In this case, a term in a ship charter contract required the ship to be 'seaworthy'. The ship was delivered with an incompetent engine room crew and faulty engines, causing significant delays. The court held that the remedy for breaching an innominate term depends on the effect of the breach. The question to ask is: does the breach deprive the innocent party of substantially the whole benefit which it was intended they should obtain from the contract? If yes, the breach is treated as a breach of condition, and the contract can be terminated. If no, it is treated as a breach of warranty, and the only remedy is damages. This approach provides greater flexibility but can also create uncertainty, as parties may not know whether they have the right to terminate until a court has assessed the severity of the breach.
Remedies for Breach of Contract
Common Law Remedy: Damages
The most common remedy for a breach of contract is an award of damages. Damages are a common law remedy, available as of right following a proven breach. The fundamental purpose of damages is not to punish the party in breach but to compensate the innocent party for the loss they have suffered. The classic statement of this principle comes from Robinson v Harman (1848) 1 Ex 850, where Parke B stated that the aim is to place the innocent party "in the same situation, with respect to damages, as if the contract had been performed".
This is known as protecting the 'expectation interest'. It seeks to give the claimant the value of the benefit they expected to receive from the contract. This can be calculated in two main ways: either the 'difference in value' between what was promised and what was actually delivered, or the 'cost of cure', which is the cost of remedying the defective performance. However, the cost of cure will not be awarded where it is wholly disproportionate to the benefit to be gained, as shown in Ruxley Electronics and Construction Ltd v Forsyth [1996] AC 344, where the cost of rebuilding a swimming pool to the correct depth far exceeded any loss in value or enjoyment.
In some situations, it may be difficult for the claimant to prove what their expectation loss would have been. In such cases, the court may award damages based on the 'reliance interest'. This aims to put the claimant back in the position they were in before the contract was made by compensating them for expenses incurred in reliance on the contract. A key example is Anglia Television Ltd v Reed [1972] 1 QB 60, where an actor pulled out of a film at the last minute. It was impossible to calculate the profit the film might have made, so the television company was able to recover the money it had spent on production costs before the breach occurred.
Limitations on the Award of Damages
The right to claim damages is not unlimited. There are several principles that can limit the amount of damages a claimant can recover.
First, the loss must have been caused by the breach. This is a question of factual causation – the loss would not have occurred 'but for' the defendant's breach.
Second, the loss must not be too remote. The test for remoteness was established in Hadley v Baxendale (1854) 9 Ex 341. The court set out a two-limbed test. The claimant can recover for losses that are either:
- Arising naturally, "according to the usual course of things," from the breach; or
- 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.
The first limb covers losses that any reasonable person would expect to result from such a breach. The second limb covers unusual or special losses, which can only be claimed if the defendant knew of the special circumstances at the time the contract was formed. This test ensures that a party is not liable for unforeseeable losses.
Third, the claimant is under a duty to mitigate their loss. This means the innocent party cannot simply stand by and let their losses mount; they must take reasonable steps to reduce the loss caused by the breach. If they fail to do so, they will not be able to recover damages for any loss that could have been avoided (British Westinghouse Electric and Manufacturing Co Ltd v Underground Electric Railways Co of London Ltd [1912] AC 673). The burden is on the defendant to prove that the claimant failed to take reasonable steps.
Equitable Remedies
In some circumstances, damages are not an adequate remedy. In these cases, the court may be willing to grant an equitable remedy. Unlike damages, these remedies are discretionary and are not available as of right.
The most significant equitable remedy is specific performance. This is an order from the court compelling the breaching party to carry out their contractual promises. It is most often granted in contracts for the sale of unique items, such as a piece of land or a rare painting, where a monetary award would not be a suitable substitute. However, the courts will not grant specific performance for contracts involving personal services (as it would be akin to slavery) or for contracts that require constant supervision by the court, as demonstrated in Co-operative Insurance Society Ltd v Argyll Stores (Holdings) Ltd [1998] AC 1.
Another equitable remedy is an injunction, which is an order preventing a party from doing something. A prohibitory injunction can be used to stop a party from acting in breach of a negative promise in a contract, for example, a promise not to work for a competitor (Warner Bros Pictures Inc v Nelson [1937] 1 KB 209).
Conclusion
In conclusion, a breach of contract is a failure to perform a contractual duty without lawful excuse. The English legal system provides a structured response to such a breach, but the path to a remedy is not always straightforward. The ability of the innocent party to terminate the contract depends on the classification of the term breached, with the flexible but uncertain 'innominate term' approach playing a key role. While various remedies exist, the primary remedy is damages, which are designed to compensate the claimant by putting them in the position they would have been in had the contract been fulfilled. However, this right to compensation is constrained by important limiting factors, namely causation, remoteness, and the duty to mitigate. Where financial compensation is inadequate, the courts have the discretion to award equitable remedies like specific performance, ensuring that justice can be achieved in a wider range of circumstances.
References
Cases
- Anglia Television Ltd v Reed [1972] 1 QB 60
- Bettini v Gye (1876) 1 QBD 183
- British Westinghouse Electric and Manufacturing Co Ltd v Underground Electric Railways Co of London Ltd [1912] AC 673
- Co-operative Insurance Society Ltd v Argyll Stores (Holdings) Ltd [1998] AC 1
- Hadley v Baxendale (1854) 9 Ex 341
- Hochster v De La Tour (1853) 2 E&B 678
- Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1962] 2 QB 26
- Poussard v Spiers (1876) 1 QBD 410
- Robinson v Harman (1848) 1 Ex 850
- Ruxley Electronics and Construction Ltd v Forsyth [1996] AC 344
- Warner Bros Pictures Inc v Nelson [1937] 1 KB 209
Books
- Peel, E. (2020) Treitel on The Law of Contract. 15th edn. Sweet & Maxwell.
