2
2
OBJECTIVES OF THE UNIT SECTION ONE: LECTURE
1:
LECTURE 2:
LECTURE 3:
ION TWO: LECTURE 4:
ION THREE: TABLE OF CONTENTS
DISCHARGE OF A CONTRACT DISCHARGE UNDER THE DOCTRINE OF FRUSTRATION
1.Historical Development of the Doctrine of Frustration 2.Modification of the Absolute Contract Rule SUMMARY APPLICATION OF THE DOCTRINE OF FRUSTRATION
1.Destruction of the Subject Matter 2.Non-occurrence of a Particular Event 3.Commercial Sterility 4.Escalation Causes 5.Supervening Illegality and Outbreak of War 6.Limitations on the Doctrine 7.Burden of Proof SUMMARY
V
EFFECTS OF FRUSTRATION
1.The Common Law Position 2.The Legal Position in Tanzania SUMMARY The Law Reform (Frustrated Contracts) Acts 1943 CONTRACT REMEDIES REMEDIES FOR BREACH OF A CONTRACT
1.Meaning of Remedies 2.Types of Remedies SUMMARY DAMAGES
il l
4
LECTURE 5:
REMOTENESS OF DAMAGES
1.Definition of Damages
33
2.Types of Damages
34
3.Principles of the Law of Damages
35
4.The Law on Remoteness of Damages
37
5.The Legal Position in Tanzania
48
SUMMARY LECTURE 6:
33
49 MEASURE OF DAMAGES OR ASSESSMENT OF DAMAGES
51
Measure of Damages
51
SUMMARY
55
V
ll how a contract can be terminated, tify methods of discharging a contract. ognize the rights and remedies of the injured party for
GENERAL INTRODUCTION This is the last portion of the study of the Law of Contract. It is being covered at a time'when you have gone through the entire process of how a contract is formed and the various ingredierits which constitute a contract. Since by this time you are supposed to have understood what is a valid contract, it is now opportune for you to study how a contract can be brought to an end. You should also note that rights and obligations created by a contract are not perpetual.
OBEJECTIVES OF THE UNIT
At the end of this unit you will be able to: breach of a contract.
SECTION ONE: DISCHARGE OF A CONTRACT LECTURE 1:
DISCHARGE UNDER THE DOCTRINE OF FRUSTRATION
INTRODUCTION In this lecture you will learn how a contract can be discharged by the operation of the doctrine of frustration. This will be achieved by discussing the nature and rationale of the doctrine of frustration, the operation of the doctrine of frustration and the legal effect of frustration.
OBJECTIVES
By the end of this lecture you should be able to:
•tell the historical development of the doctrine of frustration, •recognize and describe the emergence of the doctrine justification and modification of the Contract Rule.
1. HISTORICAL DEVELOPMENT OF THE DOCTRINE OF FRUSTRATION
After parties to a contract have made their agreement, unforeseen contingencies may occur which prevent the attainment of the purpose they had in mind. These arc sometimes called supervening events.
6
Do these events bring the contract to an end irrespective of the wishes of the parties? Emergence of the Doctrine In the 16th and 17th centuries judges laid down what is sometimes called the rule as to absolute contracts. The rule as to absolute contracts was to the effect that: If a person binds himself by contract absolutely to do a thing he cannot escape liability for damages by proof that as events turned out performance is futile or even impossible.1 Justification for this harsh Rule I am sure that you are wondering why on earth judges should have enshrined such a harsh rule. However, you may wish to know that the justification of this harsh rule laid in the fact that a party to a contract could and still can always guard against unforeseen contingencies by express stipulation; "but if he voluntarily undertakes an absolute and unconditional obligation he cannot complain merely because events turned out to his disadvantage."2 This rule on absolute contracts was enshrined in the case of Paradine v. Jane. 3 What then were the facts of the above mentioned case. Briefly stated, the facts were as follows. Jane, tenant ,took land on a lease from a landlord for a number of years. The contract of lease provided that the tenant undertook to pay a certain rent per year absolutely without exception. During the life of the lease England was invaded by Germany and an alien born hostile army of men entered upon the defendant's possession and had her expelled and held out of possession whereby she could not take profits. When the landlord sued for rent, the tenant (the defendant) argued that the rent was not due because by events beyond her control she was not in possession of the land as the King's enemy had occupied it. In arriving at a decision the court asked the question whether the tenant had undertaken ( o pay the rent absolutely. The answer was in the affirmative in the sense that the tenant did not mdcrtake to pay rent so long as she had the land in her possession. The Court held: When the party by his own contract creates a duty or charge upon himself, he is bound to make it good, if he may notwithstanding any accident by inevitable necessity, because he might have provided against it by his contract 4 (Emphasis provided).
1 Cheshire, Fi foot and
Furmston's Law of Contract. M.P.Furmston, 12th Edition, Butterworths, pg. 569. . See also Smith and Thomas. A Casebook on contract. J.C. Smith 8th Edition, 1987, Sweet & Maxwell pg. 406. G.H. Treitel The Law of Contract 7th Edition, 1987, Sweet & maxwell pg. 663.
2 Ibid. 3 1647) K.B.. Aleyn 26; 8? E.R. 897 V
This decision was made when the theory of absolute contract was accepted and hence the tenant was forced to pay the rent. We have seen how the absolute contract rule emerged. We have also seen how harsh that rule was. Let us now discuss the steps taken to mitigate the harshness of the absolute contract rule. 2.
Modification of the Absolute Contract Rule The first modification of the absolute contract rule concerned cases in which the
supervening event made the contract illegal, that is cases of illegality. The effect of this modification of the absolute contract rule was that even if a person had undertaken to perform a contract absolutely, in case a supervening event makes the contract illegal then the contract is frustrated and the parties are discharged of their respective* obligations. The second modification of the absolute contract rule concerned personal contracts. When the performance of a contract required performance by the promisor in person then if he died or was incapacitated by a supervening event the contract was said to have been frustrated. Examples of personal contracts include:
-Contract of a singer to sing in a concert. -Contract by a writer (author) to write a book for the Open University of Tanzania -A contract by C to marry D.
8
SUMMARY We have learnt that a contract can be discharged through the operation of the doctrine of frustration. The emergence and justification of the doctrine is based on the fact that if one binds him/herself by an absolute contract, he/she cannot escape liability for damages. However, there are some modifications to the rule.
EXERCISE
You are now in a position to answer the following questions:
a)What were the justifications of the absolute contract rule? b)Why and how was the absolute contract rule modified?
After answering these questions let us continue with the next lecture on the applicatio doctrine r»f frustration and the limitation of the application of the doctrine of frustration.
FURTHER READINGS Cheshire, Fifoot and Furmston's, Law of Confrere*, 12th. Ed. 199, Butterwoths. pp. 569/593. Treitel, G.H. Law of Contract, 8th Ed. 1991 Sweet & Maxwell, pp. 763-8181. Hodgin, R.W., Law of Contract in East Africa, (1975) Kenya Literature Bureau, Nairobi, pp. Anson's Law of Contract, 23rd Ed. 1969, Oxford University Press, pp. 353/481. LECTURE 2: APPLICATION OF THE DOCTRINE OF FRUSTRATION INTRODUCTION After introducing the doctrine of frustration in the previous lecture, this lecture will discuss the application of the doctrine under the Common Law and under the Law of contract Ordinance. 1
OBJECTIVES By the end of the lecture you should be able to: explain the scope of application of the doctrine of frustion ,
•illustrate application of the doctrine through case studies, •identify possible risks and supervening events in making absolute contracts.
9
1. DESTRUCTION OF THE SUBJECT MATTER
The major modification in the absolute contract rule occurred in the case of Taylor v. Caldwell2 concerning a supervening event causing total destruction of the subject matter of the contract. As a matter of fact this case evolved a substantive and particular doctrine whicn mitigates the rigours of the rule in Pradine v. Jane3 by providing that if the further fulfillment of the contract is brought to an abrupt stop by some irresistible and extraneous cause for which neither party is responsible, the contract shall terminate forthwith and the parties be discharged of their respective obligations.
Chapter 433 Ordinance No. 1 of 1961. 2
(1863) 3 B & S. 826 (1861-73) AH ER Rep. 24.
3
(1903) 2 K.B. 740 (C.A)
The most obvious cause which brings this doctrine into operation and the one which provided the issue in the above mentioned case is physical destruction of the subject matter of the contract before performance. Let us now recite the facts of the above case. The plaintiffs and the defendants in this case entered into a contract by which the defendants agreed to let the plaintiffs have the use of their Surrey Gardens and Music Hall on four days then to come for the purpose of giving a series of four grand concerts, and the plaintiffs agreed to take the Gardens and Hall on those days, and pay £100 for each day What then? What happened was that after the making of the agreement and before the first day on which a concert was to be given, the Hall was destroyed by fire. This destruction was without the fault of either party, and was so complete that in consequence the concerts could not be given as intended. The plaintiff sued the defendant arguing that the defendant should perform the contract for they have carried out an undertaking absolutely. Since there was no music hall (subject matter of the contract) on the first day when the concert was to commence they were in breach of contract. The question which the court had to decide was whether the loss which the plaintiff had sustained was to fall upon the defendant. The court held that the absolute contract rule did not apply here. The question we may wish to ask ourselves is why the court held that the absolute contract rule did not apply in this case. The court reasoned that both parties, that is the plaintiff and the defendant impliedly presumed that the contract will be carried out as long as the music hall was there. If the music hall,
10
that is, the subject matter of the contract is destroyed, the contract need not be carried out. We can vividly see here that the court imported the theory of implied term to hold that there was no breach of contract because there was a supervening event which had frustrated and discharged the contract. 2. Non occurrence of a Particular Event Apart from destruction of the subject matter of the contract or what is some times referred to as physical impossibility, it is said that non occurrence of a particular event may also frustrate a contract. This will become clear to you after we have discussed what are called coronation cases. In Krell v. Henry5 King Edward VII was to be coronated and his procession was to pass through certain roads The defendant noticed an announcement on the windows of the plaintiffs flat at 56A Pall Mall to the effect that rooms to view thecoronation procession could be obtained from the premises. The defendant agreed to take the rooms for June 26th and 27th, 1902, the days on which the coronation processions were to take place. On June 20th, the defendant agreed in writing to pay £75 for use of the rooms on the entire two days. The written agreement did not mention the procession. He paid £25 then and agreed to pay £50 on June 24th. The procession did not take place because the king fell seriously sick. The defendant declined to pay £50 the balance as per the written agreement. The plaintiff sued for that sum, and the defendant counterclaimed for the return of the £25 which he had paid. The following were the issues which the court framed. (i)
What having regard to all the circumstances was the foundation of the contract?
(ii)
Was the performance of the contract prevented? If yes.
(iii)
Was the event which prevented the performance of the contract of such a character that it could not have been reasonably said to have been in the contemplation of the parties at the time of the contract?
If yes, then both parties would be discharged from further performance of the contract. Let us now see what were the submissions of the plaintiff and the defendant and how the court went about resolving the three issues it had framed. The plaintiff argued that the rooms together with their windows were there and that they had
5(1903) 2 K.B. 740 (C.A) 11
not been destroyed as in Taylor v. Caldwell 6 and that the defendant had taken anabsolute obligation to pay for the rooms and not to pay subject to the procession taking place. The defendant on the other hand argued that the object of the contract was the royal procession which had become non-existent. Having heard the arguments of the plaintiff and the defendant, we are now better placed to follow the holding of the court which was as follows: • That the coronation procession was the foundation of this contract and that the non-happening of it prevented the performance of the contract.
•That the non-happening of the coronation procession was an event of such a character that it cannot reasonably be supposed to have been in the contemplation of the contracting parties when the contract was made. 7
•That physical destruction of the subject matter of the contract is not the only supervening event which frustrates a contract. If an event happens which makes the contract incapable of being performed because the root (basis) of the contract has been destroyed that event has rendered the contracted frustrated. 8 In other words what the court was saying was that apart from physical destruction of the subject matter, non occurrence of a particular event, a supervening event which makes the commercial object impossible to realise or a supervening event which causes what is called commercial sterility of the contract also renders the contract frustrated. Courts have said that a contract will become frustratedand discharged if it becomes impossible to perform it commercially or physically.
The Krell's case shows the latest modification of the absolute contract rule. But we must hasten to point out here that the absolute contract rule has not been swept away completely. The doctrine of frustration operates very rarely as cases below will demonstrate. 3. Commercial Sterility Hardships, inconveniences and increase in prices alone do not frustrate a contract. This was held in the landmark case of Davis Contractors Ltd v. Fareham Urban District Council. 9 The digested facts of this case were as follows:
6Op.cit. 7(1903) 2 K.B. 740 op.cit 8See Sir James Hannen in Daily v. De Crespigny (1869) L.R. 4 Q.B. 185 quoted in Smith, and Thomas A Casebook on Contract, 8th.. 19th Edition, Sweet & Maxwell, pg. 413. 9(1956) AC 696 (1956) 3 W.L.R. 37 (1956)2 All E.R. 145.
12
In July 1946 the Contractors entered into a contract with the Council to build seventy-eight (78) houses for the sum of £92,425 within a period of eight months. They had attached to their tender in March 1946, a letter stating that the tender was subject to adequate supplies of labour and building materials being available. No such'* provision was included in the written contract entered into in July. Owing to unexpected circumstances and without the fault of either party, there was a serious shortage of skilled labour and of building materials. The work took 22 months to complete, with the result that the contractors properly and unavoidably incurred additional expense amounting to £17,651. The contractors instituted a suit in a court of law contending the following: (i)
That the contract was subject to adequate supplies of labour being available, by reason of the letter of March 1946,
(ii) (iii)
That the contract was frustrated by reason of the long delay. And that they were entitled to a sum in excess of the contract price on a "quantum merit" basis.
On a case stated by an arbitrator, it was held that the contractors could recover because the letter was incorporated into the contract; and that the contract was not frustrated. The Court of Appeal held that the letter was not incorporated into the contract and that the contract was not frustrated. The House of Lords affirmed the decision of the Court of Appeal on both points 10 and held; Frustration occurs whenever the law recognizes that without the fault of either party a contractual obligation has become impossible of being performed because the circumstances in which performance is called for would render it radically different from that which was undertaken by the contract. 11 The Court stated emphatically that it is not hardships or inconvenience or m aterial loss itself which calls the doctrine of frustration into play. There must as well be such a change in the significance of the obligation that the thing undertaken would, if performed, be a different thing from that contracted for. The plaintiffs mounted the argument that the contract had become void because of frustration and hence asked the court to fix a reasonable amount as compensation for the higher expenses the contractors have incurred because of shortage of skilled labour and building materials. The House of Lords held that the contract had neither become void nor frustrated because the doctrine of frustration operates very narrowly. Simple increase in expenses or enormous
10These facts have been extracted from Smith & Thomas, A Casebook of Contract op.cit. at pg. 421. 11(1956) AC. 696.
13
burdensome does not frustrate a contract. 12 The plaintiff argued further that the commercial importance of the contract was sterile and that commercial sterility can frustrate the contar While the court agreed with this arguments it was quick to point our that commercial sterility operates to frustrate a contract in very special circumstances. The court also made it clear that whether a contract has been frustrated or not is a question of law and not of fact. 13 Consequently, it is for the court to decide and not the parties. All that the parties can do is to plead frustration. The issue of increase of expenses, burdensome and inconvenience came out again in the case of Tsakirogolou & Co. Ltd v. Noblee and Thorl G.M.B.H. 14 In this case by a written contract dated October 4th 1956, sellers agreed to sell to the buyers Sudanese groundnuts for shipment c.i.f. Hamburg during November/December, 1956. The seller was to bear the cost of the freight from Sudan to West Germany. It was assumed that the fr eight will pass through the Suez Canal. On November 2nd the Suez Canal was closed to navigation because of war situation. However, goods could have been shipped round the cape of Good Hope. This alternative route was more than twice as long and the freight charges by this route was far more costly by (1/3) one third. The sellers failed to ship the goods, and in arbitration proceedings the Umpire held that the sellers were in default. The Appeal Board found that the performance of the contract by shipping the goods on a vessel routed via the Cape of Good Hope was not commercially or fundamentally different from its being performed by shipping the goods on a vessel routed in the Suez Canal. 15 The seller argued that there was frustration because of commercial sterility of the subject matter of the contract. The Court once again emphasized that increase in price, expenses, hardships or inconveniences by themselves do not necessarily frustrate a contract. 16 4. Escalation Clauses Whenever a contract is made there are unexpected events which the parties must risk.
12Compare this holding with the decision in the Case of Metropolitan Water Board v. Dick, Kerr & Co. Ltd (1918) AC. 119. 13 See for instance Hirji Mulji v. Cheong Yue Steamship Co. Ltd (1926) A.C. 497, AT PG. 510. 14 (1962) A.C.23. 15'4 (1962) A.C. 23 at pg. See also Heme Bay Steam Boat Company v. Hulton (1903) 2 KB. 683 where the 16 defendant chartered a steam boat to take paying passengers to see the Royal Naval Review at Spithead which was subsequently cancelled. The plaintiffs were allowed to recover the balance of £ 200 less the profits they had made by the use of the ship on the two days in question. Read also Blackburn Bobbin Co.Ltd. V.T.W. Allen & Sons Ltd. (1981) 2 KB. 467.
14
9
How can parties to a contract apportion the risk amongst themselves?
They can do this by inserting in their contract what are called escalation clauses. Escalation clauses are clauses in a contract which limit the going up of prices. For instance parties to a contract may provide that if prices of the subject matter of the contract go up by more than 20% there will be renegotiations. 5. Supervening Illegality and Outbreak of War A contract may also be frustrated by reason of supervening illegality. What does this mean? By this we mean that a contract could be valid at the time the parties enter into it, but »s\ibsequent_thercafter a legislation is passed by parliament which m akes the performance of the contract legally impossible either by a change in the law or by a change in the operation of the law by reason of new facts supervening.17 The charge in the law must be such as to strike at the root of the agreement, not merely to suspend or hinder its operation in part. 18 Supervening illegality can also arise on outbreak of war resulting in declaration of no agreements between the fighting parties. Such a declaration will make all contracts entered before that declaration illegal hence frustrated. 6. Limitations On the Doctrine A party to a contract .may not rely on self-induced frustration. By that we mean that the event alleged to have frustrated the contract should not arise from the acts and/or omissions of one of the parties to the contract. For the doctrine to apply, frustration of the contract must occur without the fault of either party and that the frustrating event should defeat the intentions of both parties. The above stated limitation on the operation of the doctrine of frustration was affirmed in the case of Maritime national Fish Ltd. v. Ocean Trawlers Ltd.19 The appellants in this case renewed an existing charter - party of the respondents trawler - The St. Cuthbert - In July, 1932 for 12 months from October, 25 th, 1932. It was expressly agreed that the trawler should be employed in the fishing industry only. At the time of renewal of the charter-party in 1932 both parties were well aware of a Canadian Statute which in substance, made in an offence to leave a Canadian port with intent to fish with a vessel using an otter trawl, except under licence from the Minister, who issued such licences as he thought fit.
The St. Cuthbert was a vessel which was fitted with, and could only operate as a trawler with an otter trawl. The appellants, who were operating five trawlers in all, applied for five licences. The Minister granted only three and asked the appellants to name the three trawlers which they desired
17 Anson's Law of Contract 23rd Ed. 1969 Oxford University Press, pg. 462. 18 Ibid. pg. 463 19 (1935) AC. 524 (PC). 15
to have licenced. The appellants named three trawlers other than the St. Cuthbert. They then claimed that they were no longer bound by the charter. The Supreme Court of Nova Scotia held that if there was a frustration of the adventure it resulted from the deliberate act of the appellants. Lord Wright is on record to have said: The essence of "frustration is that it should not be due to the act or election of the party." ^ Their Lordships were of the opinion that the loss of the St. Cuthbert's license coulc correctly be described as "a self-induced frustration". Lord Summer in Bank Line Ltd v. Arthur Capel & Co.20 is reported to have said. "... I think it is now well settled that the principle of frustration of an adventure assumes that the frustration arises without blame or fault on either side. Reliance cannot be placed on a self-induced frustration. (Emphasis mine)". 7. Burden of Proof One of the cardinal rules of evidence is that he who alleges must prove. This rule applies also in allegations that frustration is self- induced, in the sense that the onus of proving that frustration is self-induced is on the party who alleges that this is the case. 21 In Joseph Constantine SS Line v. Imperial Smelting Corporation Ltd22 a ship was disabled by an explosion from performing her obligations under a charter-party. When sued for damages the owners pleaded that the explosion frustrated the charter-party. The charterers on their party argued that the owners had the burden of proving that the explosion was not due to their fault. The House of Lords rejected this argument and affirmed that the onus is on the party alleging that frustration is self-induced.
It may be important to point out here that frustration does apply to negligent acts and that although the doctrine can apply to a lease in practice that will be relatively rare.
20(1935) A.C 524 at pg. (1919) A.C. 435 at pg. Read also Lord Summer in Hirji Mulji v. Cheong Yue Steamship Co. Ltd (1926) A.C. 497 at pg. who refers to "frustration" as being a matter" caused by something for which neither party was responsible." Quoting from Lord Blackburn in Dahl v. Nelson, donkin & Co. (1881) 6 App. Cas. 38 at 93. 21Treitel Law of Contract 8th Edition, 1991 Sweet & Maxwell, pg. 807.
16
22
(1942) A.C. 154
1 jnJJnfiJzno'J fi;
SUMMARY
_________________________________ ii hate it ' i r i \ notzoloxs art? JEfil babsoio zisnwo adJ sa^crunb *ioi bov In this lecture we have discussed through the various cases cited
and recognizedd that : • the doctrine of frustration can be applied when the fulfilment of the contract is stopped by an irresistable and extraneous cause such as the destruction of the subject matter, nonoccurence of a particule revent, supervening illigality and outbreak of war,
•however it should be noted that hardships, inconveniences of increase in prices done cannot frustrate a contract.
•whenever a contract is made there are unexpected events which the parties must risk, and therefore the parties can share the risks if they insert escalation clauses in the contract.
EXERCISE
We have seen how the doctrine of frustration was established through case law and its application in the Common Law. You should now compare and contrast the facts and holdings of Krell v. Henry (1903) 2 K.J3. 740 and Heme Bay Steam Boat Company v. Hulton (1903) 2 K.B. 683 all of them being Court of Appeal cases. FURTHER READINGS
Cheshire, Fifoot and Furmston's
Law>of Contract 12th Ed. 1991 Butterworths pp. 569-593. Smith and Thomas, A Casebook on Contract 8th. Ed. 1987 Sweet & Maxwell, pp. 406-436. Treitel., Law of Contract, 8th Ed. 1991 Sweet & Maxwell, pp. 763-818. Hodgin, R.W., Law of Contract, in East Africa (1975) Kenya Literature Bureau Nairobi, pp. 178187.
Law Reform (Frustrated Contracts) Act, 1943, England, SS. 1(2) Joining^) leH Anson's Law of Contract, 23rd Ed. 1969 Oxford University Press, pp. 453/481. Cases: Maclaine Watson & Co. Ltd v. Shah 23 E.A.C.A. 366. Victoria Industries v. Ramanbhai Bros (1961) E.A. 11. Twentsche Overseas Trading Co Ltd v. Uganda Sugar Factory Ltd 12 E.A.C.A I. Howard & Co. (Africa) Ltd. v. Burton (1964) E.A. 42. Neen Norto Signs (Kenya) Ltd v. Alarkhia and Others (1970) E.A. 82.
17
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LECTURE 3: EFFECTS OF FRUSTRATION INTRODUCTION
In the previous lectures you have learnt the historical development of the doctrine of frustration, its application and its limitations. In the following lecture we intend to make you understand and appreciate the legal effects of the operation of the doctrine of frustration. Frustration determines a contract automatically without any election by either of the parties. That is why discharge by frustration differs from discharge by breach because in the former case the contract terminates automatically while in the later case the innocent party can choose whether to treat the contract as discharged or not.22 It follows from the above that the court may hold that the contract was frustrated even though the parties for some time after the event went on behaving as if the contract still existed.
23
In
fact whatever the consequences of frustration may be upon the conduct of the parties, its legal effect does not depend on their opinions, or even knowledge, as to the event. 24 We have already stated that frustration operates automatically. As a result of this, frustration can be invoked by either party and not only by the party likely to suffer from the frustrating event. An example of this situation is where the owner of a ship can claim that a charter party is frustrated by requisition though the charterer is perfectly willing to pay the agreed hire, for if the rate of compensation for requisition exceeds the agreed hire, the shipowner will actually make a profit out of frustration.
22» Hirji Mulji v. Cheong Yue SS. Co. Ltd. (1926) AC 497. 23 G.H. Freitel, Law of Contract 8th Edition, 1991 Sweet & Maxwell, pg. 807. 24 Hirji Mulji Case op.cit. at pg. 509. 18
OBJECTIVES
By the end of the lecture you should be able to: explain the position of the common Law as regard to the rule of frustration, enlist the effects of frustrated contracts, recognize remedies to frustrated contracts, • familiarize the doctrine of frustration vis-a-vis the legal position in Tanzania.
The Commoiv Law Position As a general rule two results follow from the rule that frustration determines the contract at the time of the frustrating event. First, rights accrued before frustration remain enforceable and Secondly, rights not yet accrued at the time of frustration remain unenforceable 1.1
Rights accrued before frustration
That at least until 1943 meant that each party had to fulfill his contractual obligations so. far as they had fallen due before the frustrating event, but was excused from rjerforming those that fell due later. This common law principle meant that any loss arising from the termination of the contract must lie where it had fallen. This principle caused general dissatisfaction because of the fact that it more often than not caused hardships to one or other of the parties as was shown in the case of Chandler v. Webster.25 In this case the defendant agreed to let to the plaintiff a room for the purpose of viewing the coronation process of June 26, 1902, for the sum of £141 15s payable immediately. The procession subsequendy became impossible owing to the illness of the King. The
5
Plaintiff had paid £100 on account and the balance remained unpaid. The plaintiff sued to recover the £100 paid by him as on a total failure of consideration and the defendant counter-claimed for the sum of £41 15s. The Court of Appeal held that the plaintiffs action failed and the defendant's counterclaim succeeded. The defendant's right to payment of the whole sum had accrued before the procession became impossible, and the effect of frustration was not to wipe out the contract altogether but only to release the parties from further performance and did not make the contract void ab initio. The dissatisfaction of the decision in Chandler v. Webster26 and its judicial criticism of the rule that the contract remained in full force up to the m oment of frustration was addressed by the House of Lords in the case of Fibrosa Spolka Akcjna v. Fairbairn, Lawson, Combe, Barbour Ltd.27 In this case an English Company had agreed to sell machinery to a Polish Company for £ 4,800, of which £1,600 was to be paid in advance. When £1,000 had been paid, the contract was frustrated by the German occupation of Gdynia after the outbreak of the war in 1939.
25(1904) 1 KB. 493, C.A. 26U904) I K.B. 493 op.cit. 27(1943) AC 32; (1943) 2 All ER 122. 19
The House of Lords held that the Polish Company could recover back the £ 1,000 as the consideration for the payment had wholly failed. No part of the machinery had been delivered. It could therefore recover in quasi-contract.28 It is opined that although the rule established by the Fibros case has diminished the unjustice of the former law, it does not remove every hardship since it operates only in the event of a total failure of consideration. The Law Reform (Frustrated Contracts) Act 1943, s. 1(2) lays down 3 rules to remedy the defects of Fibrosa's case: (i)
Sums Payable: All sums payable under the contract before the time of discharge cease
to be payable ori frustration. (ii) (iii)
Sums actually paid: The right to recover money paid. Expenses: If the parly to whom sums were paid or payable in pursuance of the contract has before the time of discharge incurred expenses in or for the purpose of the performance of the contract, the court may allow him to retain or recover the whole or any part of the sums so paid or payable; But the court cannot allow him to retain or recover more than the actual amount of expenses. The court can only make an award in respect of expenses under this head, if the contract
contains a stipulation for prepayment. A part who incurs expenses without asking for prepayment, or who incurs greater expenses that the amount of the prepayment, does so at his own risk. It is important to note here that the Court is not bound to award anything in respect of expenses and has a discretion as to the amount awarded. However, the court's discretion is subject to two upper limits.
a)It cannot award more than the amount of the expenses actually incurred or b)More than the amount of the stipulated prepayment. 1.2
Rights Not Yet Accrued Rights not yet accrued at the time of frustration were at common law unenforceable. For
instance if a builder agrees to build a house for £100,000 payable on completion he cannot recover the £100,000 if the contract is frustrated before completion. Further, at common law the builder could not recover any thing at all for partial performance before frustration.29 The common law rule stated above has been modified by S. 1(3) of the Law Reform (frustrated Contracts) Act 1943 creating the right to recover compensation for partial performance. This section provides. "Where any party to the contract has, by reason of anything done by
28Chandler v. Webster (1904) 1 K.B. 493 op.cit. was effectively overruled by this decision. 29Treitel. Law of Contract 8th Edition, 1987, Sweet & Maxwell, pg. 811. 20
vepavd even
any other party thereto in, or for the purpose of, the performance of the contract obtained a valuable benefit (other
than a payment of money to which (S. 1(2)) applies) before the time of discharge, there shall be recoverable from him by the said other party such sum (if any) not exceeding the value of the said benefit to the party obtaining it, as the court considers just, having regard to all the circumstances of the case and, in particular-
a)the amount of any expenses incurred before the time of discharge by the benefited party in or for the purpose of the performance of the contract, including any sums paid or payable by him to any other party in pursuance of the contract and retained or recoverable by that party under the last foregoing subsection, and
b)the effect, in relation to the said benefit, of the circumstances giving rise to the frustration of the contract. You can see Jhat s. 1(3) creates a right to recover compensation for partial performance, such a right will arise in a case where for instance a builder agrees for a lump sum to erect a warehouse, and when he has completed a part of the work further construction is prohibited by the government owing to the outbreak of war. The builder may in the discretion of the court be awarded a sum commensurate with the value of the benefit conferred upon the other contracting party. 11 Similarly if A agrees to decorate B's house for £1,000 payable on completion by dies after decorating half the house, A's personal representatives can recover under this section.
Let it be noted however, that S. 1(3) applies only where a valuable benefit has been obtained before the time of discharge.
To conclude, one can say that the Law Reform (Frustrated Contracts) Act 1943 makes two fundamental changes in the law.
Cheshire, Fifoot and Furmston's Law of Contract op.cit. pg. 589.
22 , it amplifies the decision in Fibrosa's rosa's case by permitting the recovery of money vnere has been no UAa\ failure of u * \ue dwve of f ruslvauon inere consideration. Secondly, it allows a party who has done something in performance of the contract prior to the frustrating event to claim compensation for any benefit thereby conferred upon the other. however be noted that certain types of contracts are not covered by this Act. Common Law. Let us now come back home.
21
13
12
It should
So much for the
2. The Legal Position in Tanzania
The doctrine of frustration in Tanzania is enacted in 3 S. 56(2) of the Law »f Contract Ordinance14 which reads.
A contract to do an act which, after the contract is made becomes impossible or by reason of some event which the promisor could not prevent, unlawful, becomes void when the act becomes impossible or unlawful. It is our submission that this section reads together with s. 65 with the proviso make what amounts to a frustrating event under the Law of Contract Ordinance, the same as in Uganda and Kenya. 15 In other words S. 56(2) exacts the common law position relating to frustration. As to the effects of frustration, s. 65 read together with the proviso is important. We therefore reproduce it here in extenso.
When an agreement is discovered to be void, or when a contract becomes void, any person who has received 1 2
13
Cheshire Fifoot and Furnston's Law of Contract, op.cit. pg. 587.
See S. 5(a) (b) of the Law Reform (Frustrated Contracts Act of 1943 op.cit.
14
Chapter 433, Ordinance No. 1 of 1961 as amended by the Magistrates' Courts Act,
Uganda and Kenya apply the Common Law of England by virtue of the Law of Contract Act Cap: 75 of 1963 S. 3(1) and the Law or Contract Act of Kenya Cap. 23 of 1961, S. 2(1) respectively. advantage under such agreement or contract is bound to restore it or to make compensation for it, to the person from whom he received it.
Provided that where a contract becomes void by reason of the provisions of subsection (2) of section 56, and a party thereto incurred expenses before the time when that occurs in, or for the purposes of, the performing of the contract, the court may, if it considers it just to do so in the circumstances of the case, allow such party to retain the whole or any part of any such advantage as aforesaid, received by him, or discharge him wholly or in part from making compensation therefor, or may
22
make an order that such party recover the whole or any part of any payments or other advantages which would have been due to him under the contract had it not become void, being in any such case, an advantage or part thereof, discharge or payment, not greater in value than the expenses incurred, (emphasis provided). The net effect of the proviso to s. 65 of the Law of Contract Ordinance 30 is that frustration makes a contract void and the effect in the Law Reform (Frustrated Contracts) Act31 of England applies in Tanzania mutatis mutandis, with the difference that the list of exceptions to be found in the Law Reform (Frustrated Contracts) Act of England do not appear in the Law of Contract Ordinance.
It is therefore safe to assume that much as the proviso to s. 65 of the Law of Contract Ordinance reproduces the same effect as the Law Reform (Frustrated Contracts) Act of England, the list of exceptions iound in this Acl are presumably not exception? in the Law of Contract Ordinance. 14
SUMMARY
We have learnt that frustration of contracts operates automatically without the intent of the parties. And the effects of such frustration can be strenuous and damaging. Common law states that r ights accrued before frustration remain enforceable while those not accrued at the time of of frustration remain unenforceable. The doctrine of frustration is embodied in the Law of contract Ordinance s. 56 (2).
EXERCISE
At this juncture you should be able to answer the question as to what extent the Law Reform (Frustrated Contracts) Act, of 1943 has diminished the injustice of the former law on the legal effects of frustration.
30 Op. cit. 31 Op.cit. 23
19
Ibid.
FURTHER READINGS
The Law Reform Acts 1943 is reproduced here below for your reading and reference.
THE LAW REFORM (FRUSTRATED CONTRACTS) ACTS 1943 (as amended by Sale of Goods Act 1979) 1.
Adjustment of rights and liabilities of parties to frustrated contracts:-
1)Where a contract governed by English law has become impossible of performance or been otherwise frustrated, and the parties thereto have for that reason been discharged from the further performance of the contract, the following provisions of this section shall, subject to the provisions of Section two of this Act, have effect in relation thereto.
2)All sums paid or payable to^any party in pursuance of the contract before the time when the parties were so discharged (in this Act referred to as "the time of discharge") shall, in the case of sums so paid, be recoverable from him as money received by him for the use of the party by whom the sums were paid, and, in the case of sums so payable, cease to be so payable: Provided that, if the party to whom the sums were so paid or payable incurred expenses before the time of discharge in, or for the purpose of, the performance of the contract, the court may, if it considers it just to do so having regard to all the circumstances of the case, allow him to retain or, as the case may be, recover the whole or any part of the sums so paid or payable, not being an amount in excess of rhe expenses so incurred. (3)
Where any party to the contract has, by reason of anything done by any other
party thereto in, or for the purpose of, the performance of the contract, obtained a valuable benefit (other than a payment of money to which the last foregoing subsection applies) before the time of discharge, there shall be recoverable from him by the said other party such sum (if
26 any), not exceeding the value of the said benefit to the part obtaining it, as the court considers just, having regard to all the circumstances of the case and, in particular-
a)the amount of any expenses incurred before the time of discharge by the benefited party in, or for the purpose of, the performance of the contract, including any sums paid or payable by him to any other party in pursuance of the contract and retained or recoverable by that party under the last foregoing subsection, and
24
b)the effect, in relation to the said benefit, of the circumstances giving rise to the frustration of the contract.
4)In estimating, for the purposes of the foregoing provisions of this section, the amount of any expenses incurred by any party to the contract, the court may, without prejudice to the generality of the said provisions, include such sum as appears to be reasonable in respect of overhead expenses and in respect of any work or services performed personally by the said party.
5)In considering whether any sum ought to be recovered or retained under the foregoing provisions of this section by any party to the contract, the court shall not take into account any sums which have, by reason of the circumstance giving rise to the frustration of the contract, become payable to that party under any contract of insurance unless there was an obligation to insure imposed by an express term of the frustrated contract or by or under any enactment.
6)Where any person has assumed obligations under the contract in consideration of the conferring of a benefit by any other party to the contract upon any other person, whether a party to the contract or nc', the court may, if in all the circumstances of the case it considers it just to do so, treat for the purposes of subsection (3) of this section any benefit so conferred as a benefit obtained by the person who has assumed the obligations as aforesaid. 2. Provision as to application of this Act.- (1) This Act shall apply to contracts, whether made before or after the commencement of this Act, as respects which the time of discharge is on or after the first day of July, nineteen hundred and forty-three, but not to contracts as respects which the time of discharge is before the said date. (2) This Act shall apply to contracts to which the Crown is a party in like manner as to contracts between subjects.
3)Where any contract to which this Act applies contains any provision which, upon the true construction of the contract, is intended to have effect in the event of circumstances arising which operate, or would but for the said provision operate, to frustrate the contract, or is intended to have effect whether such circumstances arise or not, the court shall give effect to the said provision and shall only give effect to the foregoing section of this Act to such extent, if any, as appears to the court to be consistent with the said provision.
4)Where it appears to the court that a part of any contract to which this Act applies can properly be severed from the remainder of the contract, being a part wholly performed before the time of discharge, or so performed except for the payment in respect of that part of the contract, the court shall treat that part of the contract as if it were a separate contract and had not been frustrated and shall treat the foregoing section of this Act as only applicable to the remainder of that contract.
5)This Act shall not applya)to any charter party, except a time charter party or a charter party by way of demise, or to any contract (other than a charter party) for the carriage of goods by sea; or
25
b)to any contract of insurance, save as is provided by subsection (5) of the foregoing section; or (c)
to any contract to which section 7 of the Sale of Goods Act, 1979 (which avoids Pcontracts for the sale of specific goods which perish before,the risk has passed to the buyer) applies, or to any other contract for the sale, or for the sale and delivery, of specific goods, where the contract is frustrated by reason of the fact that the goods have perished.
3. Short title and interpretation.- (1) This Act may be cited as the Law Reform (Frustrated Contracts) Act, 1943. 2) In this Act the expression "court" means, in relations to any matter, the court or arbitrator by or before whom the matter falls to be determined. Note:
For a detailed examination of the Act, See Glanville Williams, The Law Reform (Frustrated Contracts) Act 1943.
SECTION TWO: CONTRACT REMEDIES LECTURE 4: REMEDIES FOR BREACH OF A CONTRACT INTRODUCTION This lecture intends to make students learn remedies which are available to the injured or aggrieved party for breach of a contract. To achieve this objective this lecture will concentrate on meaning and types of remedies, rights and remedies of the injured party. Right to perform the co-tract or to claim damages and Rescission.
OBJECTIVES
This lecture will enable you to identify and explain the meaning and types ofremidies that arise from breach of contract.
1.
Meaning of Remedies The latin maxim "ubijus ibi remedium" literally translated means 'where there is a right there
is a remedy.' Parties conclude coinracts in order to make sure that their legitimate interests or rights given under the contract are realised or protected. Sometimes these legitimate rights or interests can only be realised with recourse to the courts. 1
26
Breach of a contract is one of the ways of discharging a contract.
N.N.N. Nditi A Guide to the General Principles of Contract Law in East Afrca. Part One University of Dar es Salaam Faculty of Law, Department of Economic Law. 2.
Types of Remedies
Usually breach of a contract leads to either of the following remedies: 2.1
Damages
Normally breach of a contract leads to damages as a matter of right. The party who has suffered damage (i.e the party whose rights have been infringed) claims compensation in money to cover the damage suffered. Damages are compensation or indemnity for loss suffered owing to breach of contract. The purpose of awarding damages is to put the injured party as near as possible in the same position so far as money can do it, as if he had not been injured i.e to put the injured party in the same position as if the contract had been performed accordingly.32 The damages awarded may be either nominal or substantial. In the former only a small sum is awarded which reflects the plaintiffs right to success but has suffered no real financial loss. On the other hand substantial damages is in effect indicative of the financial loss suffered by the innocent party. It is upon the plaintiff to take all reasonable steps to prove the damages he has suffered. 33 2.2
Restitution
The innocent party may have performed part of the contracfwhich the breaching party has not. The innocent party may claim back his performance or its recoverable value. Restitution in integrum. In other words, parties restore things they have received under the contract.
It should be emphasised nere that the innocent party has the right to rescind the contract In case the innocent party decided to rescind the contract such cause of action must be clear and certain and must be communicated to the other party in no uncertain terms either expressly or by conduct. 2.3 Equitable Remedies or Specific Reliefs
Although the original common law remedy is available to the innocent party as to damages, this did not always prove to be satisfactory hence equitable remedies were developed by the courts of equity to supplement the common law remedy of damages.
32 Hodgin R.W. Law of Contract in East Africa, 1975 EALB pg. 198. 33 Mukisa Biscuit Manufacturing Co. Ltd. v. West End Distributors Ltd (No.2) [1970] E.A. 469 at 474. 27
2.4
Specific performance
In this case the innocent party doesn't want compensation but a court's order for specific performance. In other words the party whose right has been violated will ask the court to order the breaching party to do according to the terms of the contract. Specific performance being an equitable remedy is given at the discretion of the court and not as of right. Normally the court will grant a specific relief where damages prove inadequate compensation for the breach; like in contracts of sale of land or unique goods which are not easily available on the market or where the subject matter of the contract has some intunsic value to a party to that contract. 2.5
Injunction
In this case the innocent party asks the court to order the other party not to break the contract. SUMMARY
____________________________________________________________________ Parties to a contract normally demand a remedy when there is a breach of contract. Remedy, depending on circumstances, can be through damages, restitution, specific reliefs, specific performance and an injunction.
EXERCISE
Discuss in detail what remedies are available to the injured party for breach of a contract as of right and which remedies are awarded at the discretion of the court.
FURTHER READINGS
G.H. Treitel, The Law of Contract, 7th Ed. Sweet of Maxwell 1990 pp. 717 815 Anson's Law of Contract A.G. Guest 232d Edition Oxford University Press, 1973 pp. 505 - 540. A Casebook on Contract 26th Ed. J.C. Smith & J.A.C. Thomas Sweet & Maxwell pp 465-508.
SECTION THREE DAMAGES LECTURE 5: REMOTENESS OF DAMAGES INTRODUCTION
28
6th Edition 1977
In this lecture we shall deal with the rules relating to remoteness of damages. From it we will find out which loss is recoverable in case of breach of a contract. The lecture starts with defining what are damages, the historical development of the rules relating to remoteness of damages, and types of damages. It concludes by expounding the legal position in Tanzania relating to remoteness of damages. OBJECTIVES By the end of the lecture you should be able to: (i)
explain what damages are;
(ii)
describe the various types of damage;
(iii)
identify the application of the rule of remoteness of damages;
(iv)
tell the principles of the Law of damages;
(v) analyze court cases in accordance to the law of damages; (vi)
1.
interpret positively the Tanzania Law of conttract Ordinance.
Definition
Compensation is a matter of right even if no loss is suffered, whenever there is a breach of contract. The purpose of awarding damages, for breach of contract is to compensate the plaintiff in such a manner as if the contract has been carried out. Since the purpose of damages is compensation by and large, generally speaking punitive or exemplary damages are not awarded for breach of contract. These are normally awarded in tort so as to deter defendants from repeating committing the same tort. In contract the aim of the law of damages is not to deter parties from breaching the contract. In fact, parties are allowed to breach a contract as one of the ways of discharging it. 2.
Types of Damages
When a contract is breached the innocent party suffers the following losses. (i)
Expectation Loss, or Loss of bargain
When a contract is made, the plaintiff (innocent party) expects that the contract will be performed. If it is not performed then, he suffers expectation loss of two kinds:-
a)He fails to received the promised performance e.g. not getting the goods ordered; b)He is denied to put it to some particular use e.g. when a contractor agrees to purchase or order something he wants it for a particular purpose(s).
29
Hops ordered for making beer, if not delivered no beer can be made. (ii)
Reliance Loss
For instance, sending lorries to fetch hops only to be told there are none. In this case the lorries were sent on reliance that the contract will be carried out; i.e. hops to load the lorries will be available. (iii)
Restitution Loss
This loss is suffered where for instance, the plaintiff pays some money in advance say for buying hops, but the goods (hops ) are not delivered. He will therefore have to demand that the money which he paid in advance be refunded to him. (iv)
Incidental Loss
This is loss which the plaintiff incurs when he learns about the breach of the contract. For instance, administrative expenses after the breach like returning already delivered goods or advertising for new goods instead of the deffective ones. Sometimes this loss is called "consequential loss" i.e. further harm which is occassioned as a result of the breach. This arose as a consequence of the breach. For instance: Buying a cow which is infectious - that is a breach of contract. If the infectious cow infects others, one has to incur expenses for treating them. This is consequential loss.
Can the plaintiff (innocent party) combine all the losses in one suit?
As a general rule the plaintiff cannot he compensated for all the losses. The law does not permit one to claim twice or thrice for the same breach of contract.
What loss therefore is recoverable for breach of contract?
3.
Principles of the Law of Damages The principles of the law of damages were enunciated in the case of Victoria Laundry
(Windsor) LIT v. Newman Industries Ltd. where Lord Asquith said: "It is well settled that the governing purpose of damages is to
30
put the party whose rights have been violated in the same position, so far as money can do so as if his rights had been observed .... This purpose, if relentlessly pursued, would provide him with a complete indemnity for all '.oss de facto resulting from a particular breach however improbable, however
unpredictable.
This,
in
contract
at
least,
is
recognized as too harsh a rule".
To appreciate the above quotation let us consider a situation where a person contracts to sell to a shopkeeper pure simsim oil but delivers impure staff which is certainly a breach of that contract. Thereafter the oil is seized by an inspector of the National Food Control Commission and destroyed. The shopkeeper is arrested, charged, prosecuted and convicted. In this hypothetical case the shopkeeper suffers the following losses. (i)
He suffers loss of th& good (i.e. the destroyed oil).
(ii)
Loss of profit to be gained on selling it.
(iii)
Loss of social prestige and business reputation.
(iv)
Time, moneys, energy wasted to defend the criminal offence.
(v)
Mental agony and torture of the prosecution.
Is the aggrieved party (innocent party) to be compensated for all of these losses arising out of breach of this contract?
Courts have developed certain rules which guide them when dealing with cases on recovery of damages. Three questions are asked and answered:
For what kind of damage is the plaintiff entitled to recover compensation?
This question is important because it is not every kind of damage which will entitle the plaintiff to recover damages. Some kinds of damage are too remote to entitle the plaintiff to recover damages. In this first question the court considers the question of remoteness of damages. Generally, the plaintiff cannot be compensated for loss which is remote. The law does not
31
allow compensation for all the losses - It draws a line.
What loss is therefore remote?
Any loss can be recovered provided it is within the reasonable contemplation of the parties. But if it was not within reasonable contemplation of the parties at the time they entered into the contract then it is remote. After the court has satisfied itself and decided that a particular kind of damage is sufficiently proximate to enable the plaintiff to recover compensation then the third question follows:
How is that damage to be evaluated or quantified in monetary terms?
In this second question the court considers measure of damages. Let us now discuss in detail the questions in a sequence. 4.
The Law on Remoteness of Damages
4.1
Historical Development The rule that governs remoteness of damage was stated by Alderson, B. In Hadley v.
Baxendale, as follows: Where two parties have made a contract which one of them has broken, the damages which the other party ought to
receive in respect of such breach of contract should be so as may fairly and reasonably be considered either arising naturally, i.e. according to course of things, from such breach of contract itself, or such as may reasonably be supposed to have been in contemplation of both parties, at the time they made the contract, as the probable result of the breach of it [Emphasis supplied]. Let us now look at the facts of this case. The facts of this case simply stated were as follows: The plaintiff had a mill. Its crankshaft got broken. It became necessary to send it as a pattern to Engineers so that they could make a new one. The defendant, who was a common carrier promised to deliver the broken shaft to the Engineers on the following day.
32
Owing to the defendant's neglect the shaft was unduly delayed in transit. As a result, the mill remained idle for longer than it would have done had there been no breach of the contract of carriage. The plaintiff claimed to recover damages for loss of profit caused by the delay. According to the evidence given and accepted by the court the only information given to the carrier was "that the article to be carried was the broken shaft of a mill and that the plaintiff were the millers of that mill."
The court had to decide whether the damage suffered by the plaintiff was the kind of damage which entitled them to compensation for the loss of profit they had suffered.
According to the rule emunciated by Alderson, B. in this case, there were two possible grounds upon which the plaintiff could sustain their claim. The first ground could be that the defendant ought to know that delay to deliver the shaft to the Engineers would naturally cause loss of profit - that in the usual course of things the work of the mill would cease altogether for want of the shaft.
38 receive in respect of such breach of contract should be so as may fairly and reasonably be considered either arising naturally, i.e.
according to course of things, from such breach of contract itself, or such as may reasonably be supposed to have been in contemplation of both parties, at the time they made the contract, as the probable result of the breach of it [Emphasis
supplied]. Let us now look at the facts of this case. The facts of this case simply stated were as follows: The plaintiff had a mill. Its crankshaft got broken. It became necessary to send it as a pattern to Engineers so that they could make a new one. The defendant, who was a common carrier promised to deliver the broken shaft to the Engineers on the following day.
Owing to the defendant's neglect the shaft was unduly delayed in transit. As a result, the mill remained idle for longer than it would have done had there been no breach of the contract of carriage. The plaintiff claimed to recover damages for loss of profit caused by the delay. According to the evidence given and accepted by the court the only information given to the carrier was
33
"that the article to be carried was the broken shaft of a mill and that the plaintiff were the millers of that mill."
The court had to decide whether the damage suffered by the plaintiff was the kind of damage which entitled them to compensation for the loss of profit they had suffered.
According to the rule emunciated by Alderson, B. in this case, there were two possible grounds upon which the plaintiff could sustain their claim. The first ground could be that the defendant ought to know that delay to deliver the shaft to the Engineers would naturally cause loss of profit - that in the usual course of things the work of the mill would cease altogether for want of the shaft. time of the contract reasonably foreseable as liable to result from the breach. In essence therefore according to him both branches of the rule form part of a single general principle. His Lordship went on to say that what was at that time reasonably so foreseable depends upon the knowledge then possessed by the parties or at all events by the party who commits the breach. For this purpose knowledge "possessed" is of two kinds. One, is imputed or assumed knowledge. The other is actual knowledge. With imputed or assumed knowledge everyone, as a reasonable person is taken to know the "ordinary course of this," and consequently what loss is liable to result from a breach of a contract in that ordinary course. (This is the subject matter of the first rule" in Hadley v. Baxahdale) Actual knowledge, on the other hand, is knowledge which the contract breaker is assumed to possess,, whether he actually possesses it or not, there may have to be added in a particular case knowledge which he actually possesses of special circumstances outside the "ordinary course of things" of such a kind that a breach in these special circumstances would be liable to cause more loss. Such a case attracts the operation of the "second rule" so as to make additional loss also recoverable. To appreciate what Asquith L.J. attempted to do in Victoria Laundry's case it is important to recite its facts. In this case the plaintiff laundress and dyers decided to extend their business. For this purpose and for the purpose of obtaining certain dyeing contracts of an exceptionally profitable character, they required a large boiler.
The defendant who were a firm of engineers contracted to sell and deliver the boiler on 5th June. They delayed delivery of the boiler for about 20 weeks.
34
The plaintiff had told and the defendant was aware of the nature of the plaintiffs business. Moreover, the plaintiff had on several occasions before the conclusion of the contract informed the defendants that they were most "anxious" to put the boiler into use i n the shortest possible space of time.
The plaintiff sued the defendant for breach of the contract and claimed the following damages. (a)
damages for loss of profit at £16 a week which they would have earned by extending their business but for the delay in the delivery of the boiler, and
(b)
damages assessed at £ 262 a week for the loss of the exceptional profits that they would similarly have earned on the "highly lucrative dyeing contracts." The court of Appeal considered whether or not damage suffered by the plaintiff was the kind of
damage which could entitle them to recover c ompensation. In the light of the facts and the reformulation of the rule in Hadley v. Baxendale, the court held: (i)
That the defendants with their engieneering experience and with the knowledge possessed of them could not reasonably contend that the
likelihood
of
some
loss
of
business
was
beyond
their
provision, i.e. the engineers ought to know that in the usual course of things delay in supplying the boiler would lead to loss of business. (ii)
The defendant could not be said to reasonably know, of the "highly lucrative" dyeing contracts because information about the contracts was not specifically communicated to them.
(iii) The plaintiff could recover from the defendant damages for loss of profit at £16 a week which they would have earned by extending their business. Moreover, they could recover from the defendant a sum which might represent the normal profit to be expected from the completion of the dyeing contracts but not the "highly lucrative' dyeing contracts at £262 a week.
4.3
The House of Lords and The Rule in Hadley v. Baxendale
The House of Lords in the case of The Koufos v. C. Czacnikom Ltd 34 popularly known as the Heron II, expressed disfavour with the use of the phrase "reasonably foreseeable as liable to result from the breach" as a test for remoteness of damages in contract. In fact they made it pointedly clear that Lord Asquith's exposition of the rule in Hadley v. Baxendale 1^ did not change the law as expounded by
34 [1969] A.C. 350, (1967) 1 A.C. 350, [1967] 3 wlr 1491 [1967]3 All E.R. 687. 35
Alderson B. The facts of the Heron II were as follows: The plaintiff chartered a ship from the defendant to carry their sugar from Constant to Basrah The ship's name was the Heron II. The ship left Constanza in November, 1st and arrived at Basrah on December 2nd. Normally the voyage from Constanza to Basrah would take 20 days. The defendant was late by nine days due to deviation in breach of the contract. The plaintiff charterers had intended to sell the sugar in Basrah promptly afier its arrival. The defendant was not aware of this intention. However, at the time of making the contract the defendant was aware of the fact that there was a market for sugar at Basrah. When the sugar arrived at Basrah, its market value had dropped. The plaintiff sold the sugar at a lower price and sued the defendant in damages for the difference. The dispute was first submitted to an Umpire who awarded damages to the plaintiff because of the fall in the value of the sugar due to the delay. The shipowner appealed against the award. The trial judge disavowed the award of damages on the ground that in the circumstances of the case it seemed almost impossible to say that the shipowner must have known that the delay in reaching Basrah would probably result or would be likely to result in loss of this kind. The charterers appealed to the court of Appeal which by majority reversed the decision of the trial judge and restored the Umpire's award. The defendant shipowners aggrieved by the court of Appeal's decision appealed to the House of Lords. On remoteness of damages, the question before their Lordships was whether or not the damage caused by the delay of the ship was too remote to entitle the plaintiff to damages. The House of Lords was of the view that the loss suffered by the plaintiff was not too remote, 10
having arisen in the usual course of things. First, the defendant knew, at the time of the contract, that there was a sugar market at Basrah. Secondly, the defendant must be held to have known that in any ordinary market, prices are apt to fluctuate
from day to
day (and even change fluctuations might be upwards or downwards).
Thirdly, the defendant knew that the plaintiff intended to sell the sugar in Basrah on its arrival. Their Lordships, however, found no special circumstances in this case to entitle the award of special damages to the plaintiff due to the very favourable sugar market in Basrah at the time of the contract because such information was not communicated to the deffendants." 11
36
The House decided that the plaintiff was entitled to damages for the loss suffered by reason of the fall in the market for sugar between the date the ship was expected to arrive and the date of its arrival, for this damage or loss arose naturally from the breach. On the test of remoteness of damages in contract, the House of Lords pointed out that the test is not one of "reasonable foreseeability" as in tort, the test in contract is one of "serious possibility" or "real danger" or, "not unlikely" or easily foreseeable to happen.
So the test of remoteness of damages in contract is a high degree of probability to happen.
See Woodruff v. Dupont [1964] E.A. 404 where the court of Appeal explained that it is not sufficient merely that the defendant knew of special conditions attaching to the contract to make him liable for the ensuing damage, it must be shown that he had agreed to accept the contract with that extra condition attached. 4 . 4 The Controversies of the test of remotes of damages in Contract under the Common Law
In has been opined that the law of damages in contract is not yet settled, and that the speeches of their Lordships in H. Parsons (Livestock) Ltd v. Uttley Ingliamd & Co. Ltd I35 renders credence to this opinion. In this case the plaintiffs were owners of an intensive pig farm with a top grade herd. They fed their pigs (about 700) on special nuts. They used about 10 tons a month. There was need therefore to have efficient storage facilities for the pignuts. In 1968 they bought a big hopper called "a bulk feed storage hopper" from the makers, Uttley Ingham & Co. Ltd, the defendants. The plaintiffs paid £270. In 1971 need for another hopper arose. The plaintiffs decided to order the second hopper from the defendants and wanted it to be just the same as the first. It cost £275. The second hopper, like the first was to be fitted with ventilated tip. The hopper was delivered and erected, but the defendants forgot to adjust the ventilator. It was left closed. The plaintiffs began to use the hopper to store pignuts. After some time, some of the nuts Were noticed to be mouldy. The plaintiffs nevertheless went on to feed the pigs with the mouldy nuts; the reason being that as a general rule mouldy nuts do not harm pigs. Later a bigger portion of the nuts turned mouldy, some of the pigs began to show signs of illness. With time matters became worse. The plaintiffs telephoned the suppliers of the nuts and a
3512
[1978] Q.B. 791 [1978] 1 All E.R. 525 [1977] 3 W.L.R. 990 - 1007 (C.A.).
37
veterinary surgeon. They came. The plaintiffs stopped feeding the pigs with the mouldy nuts. Instead, the plaintiffs bought bagged foods and fed the pigs from bags. The plaintiffs then telephoned the defendants. Their representative came and discovered that the cause of the problem was the closed ventilator. He rectified it. However, because of eating the mouldy nuts a large number of pigs suffered an attack, called E. Coli. Due to this disease 254 pigs valued at £10,000 died. The plaintiffs also lost sales and turnover resulting in big financial loss. They claimed damages of more than £36,000 for breach of contract. The defendants admitted breach of contract but said that the plaintiffs were entitled to no more than a sum of £18.02, the extra cost of the bagged food. What the defendants argued in effect, was the damage suffered by the plaintiffs was too remote because the possibility of serious illness arising from the mouldy pignuts was not known or appreciated by any one save perhaps very few experts at the time of the contract. Findings of the Trial Court The trial judge found that the cause of the death of the pigs was the closed ventilator. He, however ,found the damage too remote on the ground that at the time of the contract neither a farmer in the position of the plaintiffs nor a hopper manufacturer jn the position of the defendants would reasonably have contemplated that there was either a subtantial degree of possibility or a rear danger or serious possibility that the feeding of mouldy nuts to pigs would lead to their death. On this ground he held the hopper manufacturer not liable for the death of the pigs. The learned trial judge, however, found for the plaintiffs on the ground that the contract was one of the sale of goods by description, and that the defendants had breached the provisions relating to fitness for purpose.^ The hopper manufacturer appealed. The Court of Appeal dismissed the appeal. Lord Denning argued that the damage suffered by the plaintiffs was not remote. He expounded, what he thought is the proper test of remoteness of damage where there is physical as opposed to economic loss (emphasis mine) He held the defendants liable because... "they ought reasonably to have foreseen that, if the mouldy pignuts were fed to the pigs, there was a possibility that they might become ill. - Nat a serious possibility, nor a real danger - but still a slight possibility J 4 Lord Searman on the other hand did not agree with Lord Denning's distinction between breach of contract leading to physical loss/damage and breach causing economic
13
S. 14 (1) of the now repealed sale of Goods Act, 1892; now it is the Sale of Goods Act,
14
1979.
At pg. 804.
loss/damage and the different tests of remoteness of damage as suggested. He dismissed the appeal
38
because he agreed with the trial judge that the defendants breached sale of goods provisions relating to fitness for purpose. 15 Their Lordships exposition of the law on remoteness of damage where there is physical loss in H. Parson's case tend to suggest that the law on this point is not yet settled.
However, in the Heron II 16 the House of Lords pointed out that the formulation of the remoteness test in contract is not the same as in tort. The test in tort is one of reasonable foreseability, while the test in contract is one of reasonable contemplation (emphasis mine). Lord Denning Was not happy with the House of Lord's fine demarcation between the test of remoteness in contract and in tort. He said: I find it difficult to apply those principles universally to all cases of contract or to all cases of tort: and to draw a distinction between what a man "contemplates" and what he "foresees" I soon begin to get out of my depth. I cannot swim in this sea of semantic exercise -to say nothing of the different degrees of probability especially when the cause of action can be laid either in contract or in tort. I am swept under by the conflicting currents. I go back with relief to th*. distinction drawn in legal theory by Professors Hart and Honore in their book Causation in the Law (1959) at pp. 281-287. They distinguish between those cases in contract
in which a man has suffered no damage to person or property, but only economic loss, such as loss of profit or loss of opportunities for gain in some future
transactions and those in which he claims damages for an injury actually done to his person or damage actually done to his property (including his livestock) or for ensuring expense (damnum ermegens) to which he has actually been put. (emphasis provided).
At pg. 802.
The Heron II [1967] 1 A.C. 350.
in the law of tort, there is emerging a distinction between economic loss and physical damage: see Spartan Steel & Alloys Ltd. v. Martin & co. (Contractors) Ltd [1973] Q.B. 27. at pp. 36-37. It underlines the words of Lord Wilberfore in Anns v. Merton London Borough Council [1977] 2 W.L.R. 1024, 1039 recently, where he classified the- recoverable damage as "material, physical damage." In has been much considered by the Supreme court of Canada in Rivtow Marine Ltd v. Washington Iron Works and Wallen Machinery & Equipment Ltd [1973] 6 W.W.R. 692 and by the High Court of Australia in Caltex Oil (Australia) Pty Ltd. V. Dredge Willenstad (1976) 51 A.L.G.R. 270. It seems to me that in the law of contract too, similar distinction is emerging. It is between loss of profit consequent on a breach of contract and physical damage consequent on it."'' Lord Denning was of the view that in cases of economic loss the test should be whether or not at the time of making the contract, a reasonable man would contemplate a serious possibility or real danger of damage arising because of the breach. But where the breach leads to a physical damage, he
39
maintained, the defaulting party should be held liable for any loss or expense which he ought reasonably to have foreseen at the time of the breach as a possible consequence, even if it was only slight possibility. ^ Lord Denning therefore on applying the physical damage test held the defendants liable and hence dismissed the appeal. Lord Scarman on his part dismissed the appeal because the hopper manufacturers breached a fitness for purpose warranty. He went on to say that the plaintiffs were entitled to damages under the rule in S.53(2) of the (repealed) Sale of Goods Act, 1893 which appears to be a codification of the rule in Hadley v. Baxendale. In an attempt to justify the application of the first rule in Hadley v. Baxendale Lord Scarman said: The assumption is of the parties asking themselves not what is likely to happen
(1977) 3 W.L.R. 990-1007 op.cit at p. 9.
For the test in Tort see: The Wagon Mound I [1961] A.C. 358. The Wagon Mound II [1967] 1 A.C. 617.
if the nuts are mouldy but what is likely to happen to the pigs if the hopper
is
unfit for storing
nuts suitable to be fed to them. While nobody at the time of making the contract could have expected the disease to ensure from eating mouldy nuts, everybody as a matter of common sense would contemplate that if the hopper was unfit for storing nuts, "a serious possibility of injury or even death among the pigs would arise."' 9 Then coming close to Lord Denning's approach on the test where there is physical damage, he said quoting Mc. Gregor on Damages. .... In contract as in tort, it should suffice that, if physical injury or damage is within the contemplation of the parties, recovery is not to be limited because the degree of physical injury or damage could not have been anticipated... To justify his position, the Learned Lord Justice, said: This is so, in my judgment, not because there is, or ought to be. a specific rule of law governing cases of physical injury but because it would be absurd to regulate damages in such cases upon the necessity of supposing the parties had a prophetic foresight as to the exact nature of the injury that does in fact arise.20 5.
The Legal Position in Tanzania
Part VI of the Law of Contract Ordinance^ deals with the consequences of breach of contract. S. 73 (1) & (2) are an attempt to codify the rule as to remoteness of damages as
40
19
(1977) 3 E.R. 990-1007
20
13th Edn. (1972) pp. 131-132.
2«
Cap. 433 op.cit.
enunciated in Hadley v. Baxendale-Tlie Section provides (in part): 73 (I) where a contract has been broken, the part who suffers by such breach is entitled to receive, from the party who has broken the contract, compensation for any loss or damage caused to him thereby, which aturally arose in the usual course of things from such breach or which the parties knew, when they made the contract, to be likely to result from the breach of it. (2; Such compensation is not to be given for any remote and indirect loss or damage sustained by reason of the breach. h is quite clear that S. 73 of the Law of Contract Ordinance does not give two categories of physical and economic loss. So Lord Denning's proposition dose not apply in Tanzania. Consequently, in Tanzania compensation is recoverable for loss or damage which cither (i) arises naturally in the usual course of things from the breach or (ii) the parties knew at the time of the contract as likely to result from the breach. Damages are recoverable only where the loss or damage is a direct result of the breach of the contract.23 SUMMARY
_____________________
A breach of contract calls for compensation or damages. The law of damages protects the right of all parties involved in a contract. Through breach of a contract an innocent party may suffer any of the following losses: expectation, reliance, restitution and incidental losses. The law provides rules to guide recovery of damages by courts. Remote damages are unrecoverable. Certtain circumstances presume that the parties are aware of foreseeable risks or supervening events. However, the questions of remoteness of damages is sensitive and not easily settled by law.
op.cit See Alibhai, Ghulam v. Mohamed Yusuf (1946) 13 E.A.C.A 25. Hotels Ltd v. Theodor Antony Koenia ( 1 9 4 6 )
41
East African
EXERCISE
Carefully read the cases of: (i) Hadley v. Baxendale (1854) 9 Exch. 341 (ii)Victoria Laundry (Windsor) Ltd v. Newman Industries, Ltd [1949] 2 KB. 528. (iii) The Koufos v. C. Czarrvikow Ltd (The Heron II) [1969] IA.C. 350. (iv) Parison v. Utley Ingham & Co. Ltd [1978] All E.R. 525. and discuss what the courts say are the principles of assessing damages.
Q.B.
791,
[1978]
1
FURTHER READINGS
i. Anson's Law of Contract
i -
Macneil, I.R. Contracts: Instruments for Social Cooperation in
2
f
East Africa, 1968
3. Cheshire & Fifoot's Law of Contract 4. Treitel, G., Law of Contract
LECTURE 6: MEASURE OF DAMAGES OR ASSESSMENT OF DAMAGES INTRODUCTION After the court has satisfied itself that the loss or damage suffered by the plaintiff is sufficiently proximate to the breach as to entiUe award of damages, then it has to decide on the amount of damages award^Me. Courts do this while keeping in mind the purpose of damages, that is, to compensate the plaintiff for the loss suffered and not to punish the defendant for breaching the contract. Damages are as such compensatory not punitive. They are not intended to make the plaintiff richer. The loss or damage suffered has to be evaluated in monetary terms. Let us now study in this lecture how damages are assess before they are awarded. OBJECTIVES
The lecture will help you to recognize the way the court assesses the amount of damages and why taxation is also involved.
42
MEASURE OF DAMAGES: WHERE LOSS HAS ARISEN NATURALLY The sale of goods law will be applied to illustrate the rules of assessment of damages where loss has arisen in the usual course of things from the breach. The basis of assessment is usually the "difference in value." 1.
Where
the
seller
has
breached
the
contract
by
non-develivery
of
the
gdods:
Where the seller has not delivered the goods, in the usual course of things the buyer is deprived of the value of the goods at the time and place of develivery less the price payable by him under the contract.
The rule is that damages awardable in case of non-delivery of goods are the difference between the contract price and the market price upon the day appointed for delivery or on the date of refusal to deliver if no time of delivery was fixed. 2.
Where
seller
has
delayed
delivery
of
the
goods
with
knowledge
of
a
market in those goods:
This is the difference between the market value of the goods at their destination on the date when they arrive and the value at the date when they should have arrived if there had been no breach of contract. The loss so measured is that which arises naturally in the usual course of things. The right to recover does not depend upon special knowledge on the party in breach. 3.
Where buyer has breached the contract by refusing to accept the goods:
If the seller is a non-dealer measure of damages, the basis is the difference between the contract price and the price of the goods fetched in a subsequent sale if it happens to be less. If the seller is a dealer in the particular type of goods, the law protects his business.
Where there is wrongful refusal by the buyer to accept and pay for the goods, the loss arising naturally is that the seller loses the profit he would have made had the sale to the particular buyer been completed. So the seller becomes entitled to be compensated for that loss. It is no defence to say that the seller could have easily sold the goods to another person. The seller has lost his bargain. Instead of two sales he has made only one. The measure of damages is the profit the seller could have made by completing the sale. 4.
Measure of damages where loss is due to special circumstances:
Where loss is owing to special knowledge possessed by the contract breaker at the time of breaking the contract the extent of liability varies with the extent of knowledge possessed. The plaintiff must prove tnat tne special circumstances were within the knowledge of the defaulting party. 5. Measure of damages "Cost of cure" basis: Sometimes the "difference in value" basis of assessing damages may not be appropriate.
43
The court uses the "cost of cure" basis in measuring damages e.g. where a defect in the goods sold is curable then the court would award damages to meet the cost of curing, the defect. Or where a contractor fails to complete the work as agreed or to perform according to the contract specifications, the court may award damages to meet the cost of completing the work.
In building contracts, there may be a breach which may not make the. work appreciably less useful but expremely expensive to cure. In such cases the court may apply the "difference in value" basis in assessing damages. 6.
Measure of damages: Taxation and Duty to mitigate: In assessing damages the amount which would be payable as tax by the plaintiff has to be
deducted. Despite the fact that it is the defendant who is in breach of his obligations, it does not release the plaintiff from all further duties. The main burden placed on the plaintiffs shoulders is that he must make an effort to minimise his losses. In other words, the plaintiff has to do what is reasonably possible to be done by him to mitigate his losses. For instance, the plaintiff seller must try to sell the goods on the open market, just as a plaintiff buyer must endeavour to buy elsewhere. Only after these efforts have been made will the court attempt to assess the damage. The test is what the reasonable man would have done in a particular circumstance of the case. The Court does not demand that the innocent party involves himself in a considerable expense in order to mitigate his losses. 1 Mitigation may entail the innocent party accepting certain alternative proposals from the person in breach. In Iron and Steel Wares Ltd. v. C.w. Martyt and Co.1 The plaintiff contracted to buy bicycle forks from the defendants. What was delivered did not fit the frames. The plaintiff attempted to reject the consignment as unmerchantable but the court held that the defendant did offer to replace the faulty parts and this the plaintiffs had failed to accept. The Court stated: •
See Mussa Hassan V. Hunt & Another (1964) E.A. 201, 1964(2) A.L.R. Comm. 94 2
7
U.L.R. 146
I consider that the plaintiffs ought to have mitigated their loss by accepting the defendant's offer to supply fresh forks which fitted the frames. The plaintiffs having refused to accept this offer are only entitled to recover damages for such loss as they would have suffered had they accepted the defendants offer.
3
Section 74(3) of the Law of contract Ordinance requires an injured party to mitigate his losses. It provides:
In estimating the loss or damage arising from a breach of contract the means which existed of remedying the inconvenience caused by the non-performance of the contract must be taken into account.
44
7.
Damages for Injured feelings
Initially damages for injured feelings or mental distress were not awarded in contract. In recent years courts have allowed recovery of damages in contract for mental distress. 36 In East Africa a case involving damages for mental distress and disappointment is Chande v. East African Airways Corp. The Court in this case allowed damages for disappointment and assessed
the amount at shs. 400/=, a very small amount compared with the disappointment suffered by the plaintiffs.
3
Cap. 344 of the Laws of
36 See Jackson v. Horizon Holidays Ltd. [197513 All E.R. 92. 45
