Chapter 7 Outline answers to essay questions

Chapter 7 Outline answers to essay questions

Chapter 7 – Remedies for breach of contract

Essay question

Critically discuss the impact of Makdessi v Cavendish Square Holdings BV and ParkingEye Ltd v Beavis (2015) on agreed damages clauses.

Essay question answer guidance

Damages for breach of contract are generally compensatory in nature.  In other words they aim to compensate the other party for loss suffered as a result of the breach of contract.  However, there are a number of limitations on the ability of the other party to claim compensation for loss (remoteness etc.), and sometimes the assessment of damages can be quite complex (see, for example, Morris-Garner v One Step (Support) Ltd (2018)).  To try to avoid such issues the parties may insert an agreed damages clause into the contract which sets out the amount of damages payable on breach and thus seeks to avoid the need for litigation.  In line with principles of freedom of contract, such clauses are not objectionable per se.  However, the courts have been concerned about the use of such clauses to punish the party in breach thereby going against one of the fundamental principles of contractual damages.  Therefore the courts have traditionally made a distinction between liquidated damages clauses (which are valid) and penalty clauses (which are not valid).  For many years the distinction between these two types of clause was built around the guidelines given by Lord Dunedin in Dunlop Pneumatic Tyre Co. Ltd v New Garage & Motor Co. Ltd (1915).  You will find it useful to set out those guidelines.  More recently in Makdessi v Cavendish Square Holdings BV and ParkingEye Ltd v Beavis (2015) the Supreme Court recast the penalty rule: essentially a penalty clause is a secondary obligation which bears no proportion to the legitimate interest, if any, which the innocent party has in the enforcement of the primary obligation(s).  You should outline your thoughts on this development.  Is it an improvement?  What is meant by ‘legitimate interest’?

Problem question

Theresa is a famous film star. She recently purchased a large house in Devon as her country retreat. She subsequently asked Nick, a builder, to build a tennis court on a particular spot in the grounds of this house. The spot was chosen as it was the most private part of the grounds and Theresa did not want the paparazzi watching her play tennis. She also asked Nick to build a swimming pool, of a specified depth and suitable for diving, in the grounds. Unfortunately, Nick built the tennis court in slightly the wrong spot meaning that it can just about be seen by the paparazzi. The tennis court is perfect in every other way, but Theresa demands that Nick rebuilds it in the correct position. Theresa also demands that Nick rebuilds the swimming pool as Nick has not built it quite deep enough for it to be safely used to dive into.

Advise Theresa.

Problem question answer guidance

Theresa might, essentially, wish to seek a form of specific performance of her contract with Nick. However, specific performance is not available as of right following a breach of contract. It is a discretionary remedy and, in a broad sense, will not be available if damages are an adequate remedy (compare Beswick v Beswick (1968)). Theresa might consider claiming damages for the ‘cost of cure’ (the cost of correcting Nick’s work). Damages for breach of contract are generally compensatory in nature (Robinson v Harman (1848)) and are subject to a number of limitations (remoteness etc.). The usual measure of contract damages is the expectation measure assessed by reference to the difference in value between what a party expected to receive and what that party actually received. Such a measure may not be attractive to Theresa as it may be that there is not much difference in value between the tennis court and swimming pool as promised and as delivered. Theresa might therefore argue for a different compensatory measure: the cost of cure. In Ruxley Electronics and Construction Ltd v Forsyth (1996) the House of Lords, while affirming that such a measure was possible, subjected it to a test of reasonableness. In other words, Theresa would need to show that the benefit gained by correcting Nick’s work was not out of all proportion to the cost.

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