Contract Law 104

By Ross Dillon | Litigation

Losses and Enforcement

If a contract has been breached – not performed in accordance with its terms – then the aggrieved party has to decide what to do about it. This involves two distinct considerations – determining what has been lost, and determining what process to follow to recover that loss.

A. Losses

The general rule is that the aggrieved party is entitled to damages, which is an award of money designed to restore that party to the position it would have had if the contract had been performed.  This is called an expectation interest – what you expected to gain.

There are alternatives to an expectation interest.  There is the right to restoration of a valuable interest conferred on the other party, called the restitution interest. Or there is the right to compensation for the loss incurred in reliance on the existing contract, to restore the aggrieved party to the position it would have had if no contract had been formed. This is called a reliance interest.

To some extent, a claimant can “mix and match” between these alternatives, but you can not ever receive more than you have lost. 

To provide an example – in the schoolyard example of the swap of a donut for some drink, if the donut had been handed over and consumed but no drink provided, the claimant has lost the donut (a restitution claim) but has also not received the promised benefit (the drink). The drink is the expectation interest. The normal claim would be for the drink, because then the claimant would obtain what was contracted for. In that example, the reliance interest arises from the handing over of the donut, so would be the same as the restitution interest.

But the claimant must elect to either (i) get back the value of the donut, or (ii) get the value of the drink.  Not both. Because the loss is either one or the other.

The value of the damages claimed are assessed as at the date of breach. However, any claimant has a right to interest from that date, although you must make sure that your claim includes one for interest (there is, of course an Act governing this issue – Interest on Money Claims Act 2016).

There are three legal principles that will limit any claimed loss. These are called causation, remoteness and mitigation.

"There are three legal principles that will limit any claimed loss. These are called causation, remoteness and mitigation."

Causation means what it sounds like. A claimant has to prove that any loss was caused by the breach of contract. There must be a common sense link between the breach of contract and the harm caused. This is particularly important in expectation loss claims, as the expected benefit that was meant to flow from a contract might not be a “stand alone” question, but something that was an integral part of a series of other events, all of which failed due to the breach of contract.

Remoteness is similar to causation in the sense that the implications and effects of the breach of contract will eventually be limited by the Court.  For instance, a contract for sale of land fails and the deal is not performed by the Vendor. The Purchaser sues for its losses on the basis that it was a developer who expected to build on the site and sell at a profit. That profit would then be reinvested in a further project, which would then be reinvested in the next investment. The purchaser was a company and therefore this series of events could continue infinitely.  

A court would limit the extent of any such claim, possibly to only the profit on the first deal. But with sufficient evidence of that reinvestment cycle, a decreasing amount could be awarded for a limited number of cycles, reflecting the increasing uncertainty of outcome from each proposed reinvestment.

Mitigation is the principle that a claimant must do what it reasonably can do, to limit any loss. It reasonable mitigation steps are not taken, a court will reduce the damages awarded to take account of any such failure by the claimant.

In addition to all of the above principles, the Court has a discretion to award relief under s.43 of the Contract and Commercial Law Act 2017 where a contract has been validly cancelled. The Courts have held that relief under this section is in addition to anything that could be awarded under the existing contract law principles. However, the court does have to take into account any relief that is ordered under those principles. So relief under the Act can be regarded as “something more” – but it is not really clear what that might be.

Two other possible forms of relief should be mentioned. Both are equitable remedies, which is a branch of law based on fairness – as opposed to contract law, which is basically about what was agreed. Not all contracts are fair, but if they have been properly agreed, the court will still enforce them.

The first type of equitable relief is called Specific Performance. You can seek an order that the other party actually do what it promised to do. This is most often seen in contracts for the sale of land, where the vendor does not transfer the title. The purchaser can seek an order for specific performance and the Court will in effect make the transfer happen.

The second type of equitable relief is an Injunction. This is an order that will prevent a party doing something that they may otherwise do. To use the sale and purchase of land as an example again, an injunction would be available to a purchaser, to prevent a vendor selling the land to some other person.

There are all types of restrictions on the availability of equitable relief, but you should bear in mind that they may be available.

B. Enforcement

The options available when a breach of contract occurs include the following:

1. Do nothing: Sometimes this makes more economic sense than the time trouble and cost of pursuing a remedy.   Experience has a value and that may be all that should be taken from such an event.

"Do nothing: Sometimes this makes more economic sense than the time trouble and cost of pursuing a remedy."

2. Negotiate: Any contract can be varied by agreement between the parties.  A breach may arise from circumstances beyond any parties control.  Talking about it may resolve matters even if it means the original terms can not be performed.  The outcome of a successful negotiation is a new or varied agreement.

3. Mediate: This is a form of negotiation, but involves an independent third party who merely chairs the meeting and encourages the parties to resolve matters.  Some people are particularly skilled in that process and can work out what “levers” to pull, to get each party to agree.  That independent input helps both sides become realistic in their expectations for the resolution of the issue.  The outcome of a successful mediation is a new agreement.

4. Binding Expert Adjudication: This places the issue in the hands of an expert to determine an outcome.  It does not involve agreement by the parties as to the result, but does require agreement as to submitting the dispute to such a process, and to how the process is to be conducted.   The mai8n feature is that the process does not have to comply with the usual obligations found in a court or arbitration process. This allows for a “fast and dirty” (also cheap) process. There is usually no right of appeal or review. The result is something in the nature of a court order, but relies on the parties agreement to abide by whatever the expert determines. It is not an arbitration.

5. Adjudication: For a construction contract, there is a right of adjudication under the Construction Contracts Act. The process is designed to be fast, requires the “losing party” to pay the winner quickly, but also allows the entire case to be re-litigated in a normal court so that any difficult issues can be fully aired and finally resolved – with any monies paid under the adjudication refunded, if necessary. So it is a process peculiar to construction contracts – fast, but not necessarily final.

6. Arbitration: Arbitration is a process governed by the terms of the Arbitration Act 1996. It requires a formal process very similar to a court. The parties have to agree to this process and to the appointment of an arbitrator, but otherwise it is very similar to a court. However, the rights of appeal are quite restricted.

7. Litigation: This is the referral by either party of the dispute to a Court. Once a claim is submitted, the matter is in the hands of the Judge. Be aware that certain types of disputes have to be handled by certain types of court. Typical types of such disputes include: (i) Family property disputes which must go to the Family Court (ii) Residential tenancy disputes must be dealt with by the Tenancy Tribunal (iii) Employment disputes must go to the Employment Tribunal (iv) Motor Vehicle disputes with a licensed motor vehicle dealer must go to the Motor Vehicle Disputes Tribunal. Further, the most common normal courts (Disputes Tribunal, District Court) have jurisdictional limits as to the type of claim and the value of claim that each can deal with. The High Court can accept any type and value of claim (but the High Court may refer the claim to one of these other courts if that court has sufficient jurisdiction).

8. Settlement: Even in the course of any process, the parties can agree to settle the matter themselves, and in effect come to a new agreement.  Just because a process is embarked upon, does not mean that some alternative resolution is precluded.  But it does require the parties to, again, enter into a contract.

We have taken care to ensure that the information given is accurate, however it is intended for general guidance only and it should not be relied upon in individual cases. Professional advice should always be sought before any decision or action is taken.