LAWS10078 Contract Seminar 4 Semester 2 Breach of Contract – Mutuality, Study notes of Law

Download LAWS10078 Contract Seminar 4 Semester 2 Breach of Contract – Mutuality and more Study notes Law in PDF only on Docsity! Seminar 4- Week 4- Semester 2 Breach of Contract – Mutuality MacQueen and Thomson There are perhaps two inroads upon the unity of the concept of breach. First, with regard to the defensive or self-help remedies available to an aggrieved party, there are requirements of materiality in relation to the breach. A non-material breach will not give rise to these remedies although others may be available. These remedies and the requirements of materiality will be elaborated further later in this chapter [2]. Second, as will also be discussed in more detail below[3], a party's refusal to perform is not by itself a breach of contract; breach only arises when the other party accepts the refusal. This is the only category of breach in which the actions of both parties are relevant. In the absence of contractual provision on the matter, the remedies available fall into two main categories. One involves going to court, seeking judicial assistance either to compel payment or performance (specific implement or interdict) or to obtain a substitute for performance (damages). The other can be described as self-help or defensive measures, exercisable without the assistance of a court. The essence of these defensive measures is that the aggrieved party does nothing in a situation where the contract calls upon him to do something. There are two possibilities: either retention under which performance is withheld until the contract-breaker repairs his breach (ie the contract is suspended pending resolution of the dispute) or rescission under which the contract is terminated altogether. In theory, the approach of the Scots law of remedies for breach of contract is to favour performance of the contract. This is most obvious given the basic premise that the primary judicial remedy for breach of contract is specific implement, an order for performance. In this Scots law is like most Civilian systems but contrasts with English law in which specific performance is an equitable remedy awarded only if damages are not adequate compensation. Again, in Scots law the aim of an award of damages for breach is to put the aggrieved party in the same position as if the contract had been performed or to protect the performance or expectation interest of the aggrieved party. The leaning towards performance can also be detected in the availability of retention as a remedy which brings pressure to perform to bear upon the contract-breaker, while even a party aggrieved by the other's breach can only free itself from the contract if that breach has been material. In Scots law remedies for breach of contract are cumulative. This means that more than one can be exercised in respect of any breach provided the remedies are not inconsistent with each other. Take for example, a contract for the sale of goods under which I am due to pay the seller for the goods in instalments which fall due on the first of the month. The seller does not deliver the goods; I withhold payment on the first of the following month. Still the seller does not deliver the goods. I terminate the contract. The non-delivery has meant that I have lost an opportunity to resell the goods at a profit. I can now go on to sue for damages in respect of that loss. But having terminated the contract, I could not now turn round and seek specific implement of the seller's obligation to deliver the goods. That would be a cumulation of inconsistent remedies. It may be possible to cumulate judicial remedies. I might seek specific implement of a contract to sell a house to me plus damages for the loss caused to me by the delay in delivering it to me; or I might obtain interdict against my former employee continuing to break his restrictive covenant and seek damages for the losses which I have suffered as a result of his breach. Mutuality of contract 5.8 In modern Scots law, the self-help remedies rest upon the concept of the mutuality of contract, sometimes also described as the interdependence or unity of contract. Several ideas can be found within the concept of mutuality. A crucial one is that where both parties have rights and duties under the contract, these rights and duties are interdependent or reciprocal and the enforceability of one party's rights is conditional upon the same party performing its own duties. This has two major consequences:  if one party does not perform, the other need not perform;  a party which has not performed or is not willing to perform its obligations cannot compel the other to perform. An important limitation upon mutuality is that, before its consequences come into play, it must be shown that the obligations in question are indeed interdependent or, in Erskine's phrase, 'are the causes of one another' [9]. Accordingly, there cannot be withholding of performance under one contract for claims arising under non- contractual relationships between the parties (eg a delictual claim for fraud inducing the contract under which payment is now withheld). There is sometimes said to be a presumption that a contract is to be regarded as a whole and that all the stipulations on either side are interdependent for the purposes of mutuality [10]. In complex contracts, however, it will not necessarily be the case that each and every obligation on the one side is to be treated as the counterpart of each and every obligation on the other side [11]. The difference can be illustrated by way of the following diagrams where X and Y are the contracting parties, the boxes listed as a, b, c, and so on are their respective obligations, and d-1 is the obligation on which X has defaulted: (i) All obligations on either side interdependent In theory Y can withhold performance of all its obligations if X's breach at d-1 is sufficiently significant. But if Y has performed, say, obligations g and h before d-1 occurs, then only obligations i-l can be withheld. (ii) Each obligation on one side has its specific counterpart on the other Here, however, Y can withhold only performance of the obligation which is the counterpart of X's obligation d- 1 (that is, in the diagram, obligation j). 5.10 While typically mutuality applies within the confines of a single contract, it may also do so where two or more contracts form part of a single transaction between the parties, with the obligations in each being inter- related as a result. So in one case buyers of two ships under two separate contracts for which only a single price was payable were allowed to refuse to pay the whole price in respect of a breach in relation to only one of the contracts[12]. Where one business (A) sold assets to another (B) with two agreements giving effect to the transaction - one the asset transfer, the other a services agreement under which A undertook to continue production, sale and distribution for a period post-sale to ensure business continuity - it was held that there could be mutuality between the obligations under the two contracts so that B could withhold payments due under the asset transfer agreement in respect of A's defective performance under the services agreement [13]. Materiality of breach The application of the mutuality principle may also be limited by the requirements of materiality in relation to the initial non-performance. At least two levels of materiality of breach have been identified in Scots law: that required for the less drastic remedy of withholding performance or suspension of the contract (retention) being lower than that for the more far-reaching action of terminating it altogether (rescission) (Inveresk case) [15]. A party may therefore choose only to withhold or suspend performance in respect of a material breach for which she could terminate; but not the other way around.The exact nature of the difference between these two levels of materiality has not been much explored nor has there been identification of the level at which not even retention is allowed. the contract to say that you will not do what the contract requires. Repudiation differs from other breaches of contract, material or otherwise, inasmuch as both parties are involved in the constitution of the breach: namely, the refusal of the one to perform and the acceptance thereof by the other. Before acceptance, the refusal has an inchoate character. It can be withdrawn or performance can actually be commenced or carried out despite the initial refusal; in which case, it would seem, there is no breach and no remedy at all for the other party. Acceptance therefore converts refusal to perform into breach. This also means that, when the aggrieved party does not accept the refusal, but affirms and seeks specific implement or payment, the breach for which a remedy is sought is not the refusal to perform but the actual non-performance which has followed thereupon. Acceptance of a refusal to perform also fixes the point of time at which the acceptor's obligations under the contract come to an end giving it the same effect as rescission for other material breaches of contract. But failure to commence performance on the due date coupled with a contemporaneous or later indication of intention never to perform will be repudiation. The aggrieved party has two choices either to treat the contract as ended by accepting repudiation or insist on performance by seeking specific implement. Further, there is no requirement that the decision to affirm the contract rather than to accept the repudiation be reasonable. In White & Carter Councils v McGregor[55] a contract to place advertisements was repudiated by the customer but the advertising company affirmed the contract, placed the unwanted advertisements and sued for payment. The House of Lords held by three to two that even though the performance was wasteful the aggrieved party was entitled to be paid. The case may have been exceptional in that the aggrieved party could perform its side of the bargain without the co-operation of the other party; had co-operation been necessary, it might have been much more difficult to affirm the contract. Scots have followed this decision as per Salaried Staff London Loan Co v Swears & Wells1985 SC 189. There may be extreme cases where the aggrieved party is bound to accept that the contract is at an end; and a dictum by Lord Reid in the White & Carter case that the non-breaching party must have a 'legitimate interest' in the performance rather than the termination of the contract has sometimes been seen as a possible limitation upon unreasonable behaviour. The Scottish Law Commission has recommended that the law of White & Carter be changed so that a party will not be entitled to recover payment for performance occurring after intimation that further performance is unwanted if (i) that party could have entered into a reasonable substitute transaction without unreasonable effort or expense, or (ii) proceeding with the performance was unreasonable.  Performance or payment not made at the due date- Unfortunately, the cases provide little specific guidance as to when non-performance on the due date is a material breach justifying rescission. There is no general rule.  Defective performance- Defective performance occurs where performance is tendered but is not of the standard required by the contract. Probably the commonest example in practice is the supply of goods which are not of satisfactory quality under the implied terms of the SGA 1979, s 14. Since 1994, satisfactory quality has included freedom from minor defects such as, for example, an easily repairable fault in the power steering unit of a new car[62].But under the statute it is only in consumer contracts that the existence of such minor defects would immediately entitle the customer to rescind the contract of supply. In commercial contracts it would have to be demonstrated that the breach was material before rescission became an available remedy[63]. This can be illustrated by The Hansa Nord[64], where a consignment of citrus pulp pellets was sold for use to make cattle feed but upon delivery was found to be partially defective. The buyer purported to reject the goods; the seller, under reservation of rights, resold the pellets on the open market, where they were purchased by the original buyer for rather less than half the initial selling price. The buyer then used the pellets for the purpose for which he had first bought them. It was held that the buyer had not been entitled to reject and had to pay the initial contract price: the breach was minor in relation to the performance required under the agreement and the buyer was only entitled to damages representing the difference in value between the pellets as they should have been and as they were at the time of delivery  The ultimate procedure- If the contract does not define what breaches are material justifying rescission, the uncertainty of the common law may be avoided to some extent by the use of the 'ultimatum procedure'. The leading case is Rodger Builders Ltd v Fawdry[82], in which the purchaser of heritable property did not pay the price on the due date of 11 November 1947. On 25 November the seller gave the purchaser three days within which to pay, intimating that if he did not pay the seller would regard the contract as void and himself as free to resell. On expiry of the three-day period, the seller resold. The purchaser sought reduction of the resale. It was held that unless time was made of the essence of the contract, failure to pay was not a material breach entitling the seller to rescind. But if payment was delayed, the seller could limit the time to pay to a reasonable period after which failure to pay would become a breach of a material condition entitling the seller to rescind. Under the principle of mutuality, which prevents a party in breach seeking the counterpart performance from the other party, the contract-breaker X may be barred from action in relation to its performance of post- breach obligations. Thus in Graham v United Turkey Red[92] a commission agent was dismissed for material breach of contract but was able to recover from his principal what he was owed under the contract in respect of his performances up to the breach, although the mutuality principle disabled him from contractual action in respect of commission earned between the initial breach and the principal's rescission two years later when he found out about the agent's misconduct Remedies for breach of contract- Hector MacQueen (1) Unified concept of breach The first point to make is that in Scots law breach of contract is now a unitary concept; that is, it applies to any failure to perform in accordance with the contract, whetherbytotal or partialnon- performance, delayed or late performance, defective performance or anticipatory non-performance. (2) Specific implement the creditor's right Our next point is that the creditor in the breach obligation has a right to performance of the contract, generally through specific implement in the case of non-money obligations (orobligations adfactumpraestandum). Pacta sunt servanda or, as Stair translated it, every paction produceth action. Two key ideas from early times ofwhich sighthas been lost in more recent practice are: (a) that the real significance of the primacy ofspecific implement was that the debtor could not simplyoffer to pay damages instead ofperformance—the option was the creditor's; and (b) that specific implement would be granted unless performance was impossible, in which case locumfacti imprestabilis subit damnum et interesse (an impossible obligation to do something is replaced by damage and interest).