Define: Breach of Contract

UK Accounting Glossary

Definition: Breach of Contract



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Full Definition of Breach of Contract


Any breach of contract gives rise to a cause of action; not every breach gives a discharge from liability. This will depend on whether the term breached is a condition or a warranty or whether there has been a repudiatory breach.

Damages

Damages are intended to compensate the innocent party for the loss that he has suffered as a result of the breach of contract. In order to establish an entitlement to substantial damages for breach of contract the injured party must establish that:

  • actual loss has been caused by the breach; and
  • the type of loss is recognised as giving an entitlement to compensation; and
  • the loss is not too remote; and
  • the quantification of damages to the required level of proof.

A breach of contract can be established even if there is no actual loss. In that case, there will only be an entitlement to nominal damages.

Proof of Actual Loss – Records

In most cases, the burden of proving any given claim rests with the claimant, he who asserts must prove. Claims must be adequately documented which means that appropriate records must have been kept at the time the relevant work was executed. Proof will be discharged by the contractor or subcontractor proving his case on the balance of probabilities. This, however, must not be taken to mean that amounts arrived at by theoretical or notational calculations can be acceptable. Ascertainment involves the ordinary meaning of the word, i.e. to find out as a matter of fact.

A claim for extra cost is the means of putting a Claimant back into the position in which he would have been but for the particular event complained of. Claims are not a means of turning a loss into a profit or obtaining a windfall. The level of recovery is the loss to the victim of the breach, not the gain by the defendant Teacher -v- Calder (1899).

In Surrey County Council -v- Bredero Homes TLR April 1993 CA the Developer purchased land from the Council and covenanted to develop it in a certain way. In breach of the covenant, he did not do so, but obtained planning permission to develop in a different way. The Council sued for the amount they might have received for agreed modifications to the covenant. The starting point or the conventional rule was that the remedy for breach of contract was an award of damages and damages at common law were intended to compensate the victim for his loss, not to transfer to the victim, if he had suffered no loss, the benefit which the wrongdoer had gained by his breach of contract. The Council had suffered no loss and therefore was only awarded nominal damages.

In D. O. Ferguson & Associates -v- Mr M Sohl (1992) the Employer only obtained nominal damages for the same reason but was able to recover in restitution.

Remoteness of Damage

The law allows only those losses which are not too ‘remote’. The rules stated in Hadley -v- Baxendale (1854) 9 Ex 341 are:

‘Such losses as may fairly and reasonably be considered as either arising –

(1st rule) ‘naturally’, i.e. ‘according to the usual course of things’ form the breach of contract; or

(2nd rule) ‘such as may reasonably be supposed to be in the contemplation of both parties at the time they made the contract, as the probable result of breach of it’.

This is perhaps, the most important of all the rules. Its application depends upon the particular circumstances of each case. The first limb of the rule relates to ‘general’ damages, whereas the second limb deals with abnormal or ‘special’ damages.

The rule was discussed and expressed in another way by Lord Justice Asquith in 1949 in the case of Victoria Laundry -v- Newman Industry Ltd in terms of ‘reasonable foreseeability’.  This depends on the knowledge then possessed by the parties, or, at all events, by the party who later commits the breach. Knowledge is of two kinds -one imputed, the other actual. Everyone is taken to know what loss is liable to result from a breach of the ordinary course of things. This is the subject-matter of the “first rule” in Hadley -v- Baxendale. A contract-breaker also possess knowledge of special circumstances outside the “ordinary course of things” which would give rise to more loss. Such a case attracts the operation of the “second rule” so as to make additional loss also recoverable.

There are three possible measures of loss. The first is the loss of bargain. The second is wasted expenditure or reliance loss and the third is a claim in restitution. The normal measure for breach of contract is the loss of bargain. This measure of damages is intended to place the injured party in the same situation, as far as money can do it, as if the contract had been performed Robinson -v- Harman(1848).

Cost of Cure

This principle arises from the nature of contracts. Contracts involve the making of bargains and create expectations on each side which are intended to be fulfilled by the performance of the contract obligations. If, for instance, the sub-contractor does not complete his part of the development, then the measure of damages, in this case, will be the cost of completing the project in a reasonable manner less the contract price Mertens -v- Home Freeholds Co (1921) CA. This measure of damages, therefore, protects the expectations of the parties arising from the contract. Allowance must be made for the expense which may have been saved by the contractor not having to complete his side of the bargain.  Where the breach of contract involves defective work the normal measure of damages is the cost of reinstatement taken at the time when the defect was discovered East Ham Corporation -v- Bernard Sunley (1966). The claimant will not necessarily lose his entitlement to damages if he waits for the outcome of the case before carrying out the remedial works, it all depends upon the circumstances of the case William Cory & Son Ltd -v- Wingate Investment (London Colney) Ltd (1980) 17 BLR 104 CA

Loss of Market Value

In some cases, the measure of damages for defective work may instead be the reduction in the market value of the development. This will be the case when it is unreasonable for the defects to be put right, particularly where the value of remedial works is out of proportion to the value of the development and only affects the “amenity value” of the development G W Atkins Ltd -v- Scott (1980) 7 Const LJ 215 CA.  The overriding requirement in the loss of bargain measure of damages is that actual loss should have occurred. Damages are based on the loss incurred by the injured party and are not based on the gain by the party in breach Surrey CC -v- Bredero Homes Ltd (1992) 3AllER 302.

Loss of Profit

In Obagi v Stanborough (Developments) Ltd (1993) TLR Dec 15 the Defendants had been in breach of contract in failing to apply for planning permission. The plaintiff sought recovery of his loss of profit measured as the difference between the value of the site and what he would have had to pay for it. Mr Justice Blackburne considered there was no essential difference between the evaluation of the defendant’s chances of getting planning permission and the plaintiff`s chances of winning a prize in Chaplin v Hicks or of the chance of success in the Fatal Accident claim in Kitchen v RAFA. He was, therefore, prepared to make an estimate of what were the chances and to reflect those chances in the amount of damages that might be awarded. There was however also another principle, which was whether that chance or probability was substantial. If it was it had to be evaluated. If it was a mere possibility it must be ignored.  It was held that on the evidence the plaintiff had failed to establish that their chance of obtaining planning permission was more than a merely speculative possibility. The plaintiffs were therefore awarded only nominal damages of £5 and had to pay the Defendant`s costs.

Reliance Loss

In some circumstances, the claimant may have difficulty in proving loss of profit. He may then elect to claim for wasted expenditure, that is expenditure rendered futile by the defendant`s breach. This can include expenditure incurred before the contract was made CCC Films (London) -v- Impact Quadrant Films(1985)Anglia Television -v- Reed (1972). He cannot claim this reliance loss if he has made a bad bargain since the courts will not put him in a better position than he would have been if the contract had been performed. However, it is for the defendant in breach to show that the claimant made a bad bargain since it is the defendant who has made the matter an issue by his breach.

Restitution

The two measures of damage, loss of bargain and wasted expenditure, are alternatives and mutually exclusive, at least so far as to prevent double recovery. The third measure of damages arises if there has been a total failure of consideration. The injured party can then make a claim in restitution. So for instance, if the sub-contractor has not performed at all, the contractor can claim for the return of monies paid. If the sub-contractor has been overpaid and has failed to complete, the contractor can recover the overpayment even if he has managed to have the work completed without in fact incurring any loss despite the overpayment D O Ferguson Associates -v- Sohl (1992) TLR Dec CA.

Quantum Meruit

The expression quantum meruit means “the amount he deserves” or “what the job is worth” and in most instances denotes a claim for a reasonable sum.

A claim on a quantum meruit does not usually arise if there is an existing contract between the parties to pay an agreed sum. But there may be a quantum meruit claim where there is:

  1. an express agreement to pay a reasonable sum.
  2. no price fixed. If the contractor does work under a contract express or implied, and no price is fixed by the contract, he is entitled to be paid a reasonable sum for his labour and the materials supplied.
  3. a quasi-contract. This may occur where, for instance, there are failed negotiations. If work is carried out while negotiations as to the terms of the contract are proceeding but an agreement is never reached upon essential terms, the contractor is entitled to be paid a reasonable sum for the work carried out – see British Steel -v- Cleveland Bridge (1984) 1 All ER 504.
  4. work outside a contract. Where there is a contract for specified work but the contractor does work outside the contract at the Employer’s request the contractor is entitled to be paid a reasonable sum for the work outside the contract on the basis of an implied contract. In Parkinson -v- Commissioners of Works (1949) 2 KB 632 the contractor agreed under a varied contract to carry out certain work to be ordered by the Commissioners on a cost-plus profit basis subject to a limitation as to the total amount of profit. The Commissioners ordered work to a total value of £6,600,000 but it was held that on its true construction the varied contract only gave the Commissioners authority to order work to the value of £5,000,000. It was held that the work that had been executed by the contractors included more than was covered, on its true construction, by the variation deed, and that the cost of the uncovenanted addition had, therefore, to be paid for by a quantum meruit.

Judge Bowsher QC in his judgment in the case of Laserbore Ltd -v- Morrison Biggs Wall Ltd (1992) had to decide the meaning of “Fair and reasonable payments for all works executed”.    He considered that the costs plus basis were wrong in principle even though in some instances it may produce the right result. The appropriate approach was to adopt general market rates.

Civil Liability (Contribution) Act 1978

At English common law the right of contribution is based on unjust enrichment in which there is a liability to a common demand. An award of contribution is not an award in damages but in restitution.  The most common situations of concurrent liability in construction projects is where two persons are independently liable, whether in contract or tort, for the same damage. The measure of damages may be different in each case, but each would be liable in judgment for the full loss. Judgment against one person would release the other, and a defence would be to show that the judgment had been satisfied by payment against the other person. The Civil Liability (Contribution) Act 1978 extends and confers rights of contribution in English Law.

The Act is complicated and creates difficulties of analysis, but in summary, it applies whatever the legal liability, whether tort, breach of contract, breach of trust or otherwise. The person who is liable is entitled to claim contribution [Section 1(1)]. If a claim has been settled or compromised either before or after the proceedings commenced, the settlor can claim contribution for a bona fide payment, provided he can show that he would be liable if the factual basis of the claim against him could be established [Section 1(4)]. A contribution is recoverable from anyone who is liable for the “same damage” [Section 1(1)].

In Birse Construction Ltd v Haiste Ltd and Others( 1996) 76 BLR 26 CA the meaning of “same damage” was examined. Birse was the contractor employed to design and construct a storage reservoir and employed Haiste as its designer. The Employer, Anglian, retained Newton, joined to the action, to advise him. The reservoir was defective and a claim by the Employer against Birse was settled by agreement on the basis that Birse would construct a new reservoir at its own expense. Haiste sought a contribution from Newton.    It was held that damage in “same damage” does not mean damages but is the harm suffered by “another person”. His Honour Roch LJ held that for there to be an entitlement to claim contribution the damage for which the person who claims contribution and the person from whom contribution is claimed has to be the damage suffered by the same person.  This is because the person who is entitled to recover compensation for the damage has to be the person who suffered the damage.  It was held that the damage suffered by Anglian, in this case, was the physical defects in the reservoir. The damage suffered by Birse was the financial loss of having to construct a second reservoir for Anglian. Anglian and Birse did not suffer the same damage.  It was held therefore that Haiste was not entitled to a contribution from Newton.

The amount of contribution is not based solely on either causation or culpability, but these are factors in deciding the person’s responsibility and deciding what would be just and equitable.


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Definition Sources


Definitions for Breach of Contract are sourced/syndicated and enhanced from:

  • A Dictionary of Economics (Oxford Quick Reference)
  • Oxford Dictionary Of Accounting
  • Oxford Dictionary Of Business & Management

This glossary post was last updated: 25th February 2020.