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The Concept of Reliance Loss in Contract Law

  1. The issue in this case involves reliance loss and recovery of damages for loss suffered by reliance on contract.
  2. Reliance loss is payable by the party in breach of contract when the innocent party to the contract has suffered some loss due to actions done by him in reliance of the contract. In Anglia Television v Reed, Anglia Television claimed expenses loss of £2,750 from the actor Oliver Reed, who was to play the leading role in a television play being produced by Anglia Television, but later Reed pulled out and the show had to be cancelled. The court held that in the situation, Anglia television may elect to claim reliance loss and recover expenses incurred by them in preparation of the show. Anglia was able to recover their expenses from the defendant. However, only those expenses will be recoverable which were made in reliance of the contract.Under the contract law, a claimant can recover losses only where the defendant has received a benefit as a result of the work he has done and any reliance expenditure, such as expenses incurred in advertising are not recoverable by the plaintiff. In Taylor v Caldwell, the plaintiff sought to recover the amount that was spent in advertising for the concert which was cancelled. The court did not allow the plaintiff to recover the amount because advertisement expenditure does not lead to any valuable benefit to the defendant.
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  4. In this case, Simon Cuddle relied on the contract with BBL to complete the construction of the concert hall in time and by placing such reliance, Simon advertised the concert. Here Simon can only claim £15,000 from BBL because £5,000 he had spent on advertising before he entered into the contract with BBL. Therefore, this money was not spent in reliance of the contract.

2. a) The legal issue in this case relates to recovery of special damages.

b) When the plaintiff suffers some loss due to the special or unusual circumstances of the case, then he can claim special damages. For his claim to be successful, it

  • [1971] 3 All ER 690.
  • Ewan McKendrick, Contract Law: Text, Cases, and Materials (6th edition, Oxford: Oxford Univeristy Press 2014) 739.

must be shown that the loss suffered by him was not attributable to the natural and probable consequences of the breach of the contract. Therefore, such loss must not be a direct consequence of the breach of contract but should be an indirect loss for it to be considered a special damage. Special damages can be recovered from the party committing the breach of contract only when while signing the contract, that party was informed of the special circumstances which are responsible for the special losses. If the information about special circumstances is not given to the party in breach, then the party is only liable for the losses that he could have contemplated in general and not for the special losses.

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c) In the present case, Simon Cuddle had informed BBL at the time of entering into the contract that the grand opening of the concert hall would have a concert by the band ‘Dip Sticks’, which had already been hired for the opening before Simon entered into a contract with BBL. Therefore, the requirement as to the date of completion of the concert hall to be 1st September was known to BBL at the time of entering into the contract. Therefore, these special circumstances being known to BBL, Simon Cuddle is entitled to recover the special damages from BBL of £10,000 on advanced ticket bookings.

3. (a) This issue relates to recovery of lost profits as a consequence of a breach of contract.

b) Consequential damages include loss of profit or revenue due to the failure of the other party to the contract to fulfill the terms of the contract. Consequential damages are recoverable if such damages were reasonably foreseeable at the time of the formation of the contract. In Hadley v Baxendale, the Court of Appeal held that the plaintiff can be allowed to recover only those losses that were generally foreseeable. In Bacon v Cooper Medicals Ltd., the claimant was able to recover the loss of profits due to the breach of contract by the defendant. Therefore, the loss of profits that can be claimed by the plaintiff must be foreseeable loss.

c) In the present case, Simon had contracted with BBL for the construction of a concert hall at which the band ‘Dip Sticks’ was performing. As the purpose was known to BBL (concert hall and performance by a band), it could be foreseeable that

  • Hadley v Baxendale, [1854] EWHC J70.
  • [1854] EWHC J70.
  • [1982] 1 All ER 397.

Simon would sell tickets for the show. Therefore, this loss of profits from the ticket sales to the concert is a foreseeable loss as in general it can be foreseen that a concert organiser would sell tickets to the show in advance. Therefore, Simon can claim to recover this money from BBL.

  1. The legal issue in this case relates to remoteness of damages.
  2. In Hadley v Baxendale, the court held that a claimant may only recover losses which may reasonably be considered as arising naturally from the breach or those which may reasonably be supposed to be in the contemplation of the parties at the time the contract was made.IIn other words, where damages are remote, that is, loss is not foreseeable at the time of entering into the contract and it is not the direct consequence of the breach of contract, the defendant is not liable to pay damages for the same. The principle of remoteness basically applies to see which of the losses are recoverable through damages. Foreseeability of damages plays a big part in ascertaining the remoteness issue.
  3. In this situation, the loss of £750,000 from anticipated sales of music downloads of the group’s latest recording could not be foreseeable at the time of making the contract. This loss is remote and by applying the remoteness of damages doctrine, this loss is not recoverable.

5. What conclusions have you arrived at from the discussion of the above legal issues?

  • [1854] EWHC J70.
  • The Achilleas Transfield Shipping Inc v Mercator Shipping Inc [2008] UKHL 48.

When a party to the contract breaches the contract, the other party needs to be put in the place where he would have been had the breach of contract not occurred. For this purpose, where there is an economic loss suffered by the innocent party, the breaching party needs to compensate for the loss suffered. This may involve payment of damages or special damages, as the case demands. For the payment of damages, the loss suffered by the plaintiff must be foreseeable by the defendant at the time of entering into the contract, otherwise he does not need to pay for those losses that were remote or not foreseeable. In case of special damages, special circumstances must be informed to the other party at the time of entering into the contract for special damages to be payable in case of breach of contract.

Mistake

The legal issue that is involved in this situation is repudiation of contract due to mistake. Mistake forms an excuse for the repudiation of contract, whereby the mistake leads to the contract being either void ab initio or voidable.

A breach of contract occurs when a party to the contract fails to perform a contractual obligation that was imposed by the terms of the contract. A breach of an obligation in its entirety constitutes a repudiatory breach of contract. However, if there is a mistake, then the contract becomes void and the parties can be excused from performing the contract. Mistake can be unilateral or bilateral. Mistake can also be that of law or fact. Mistake of fact renders a contract void ab initio.

A common mistake can render the contract void if the mistake involves the subject-matter of the agreement and is of such a fundamental character to the contract that it creates an underlying assumption without which is the basis for entering into the agreement.

In Solle v Butcher, the court held that the contract could be set aside if mistake of one party was induced by the material misrepresentation of another even if such misrepresentation was not intentional or fraudulent.

  • Jill Poole, Textbook on Contract Law (13th edition, Oxford: Oxford University Press 2016) 287.
  • Ibid.
  • Bell v Lever Brothers Ltd [1931] UKHL 2.
  • [1950] 1 KB 671.

In the present case, Jane entered into the contract with Alexander under the mistaken notion that the painting was not a Rembrandt, whereas she was informed by an art critic before delivering the painting in exchange for payment, that the painting was a Rembrandt and therefore, worth £500,000. This was a common mistake by Alexander and Jane and because it relates to the subject matter, this mistake would render the contract void.

2. Incorporation of terms

a) The specific legal issue that is involved in this case relates to incorporation of terms.

b) Incorporation of terms can be done by signature on a written document or by reasonable notice to the party. Where the terms of the oral contract are written in a document as contractual terms, reasonable notice of the same must be given to the other party. Reasonable notice is a prerequisite for such incorporation as held in Olley v Marlborough Hotel. The effect of a signature on a written document is that the term is incorporated in the contract and the parties are bound by the same as held in L'Strange v E Gracoub.

c) Alexander will be able to claim from Heatex the amount of £1,000 a day for not painting the entrance hall. The contract clearly states that Heatex will pay the stated amount for ‘any work’ not completed by 15th December. As the term is written in the contract and the contract is signed by the parties, this is an incorporated term in the contract. Alexander can claim £5,000 from Heatex. However, Alexander may have to show that reasonable notice of incorporation was given by him to Heatex.

3. Incorrect paint

a) The specific issue involved in this case is breach of a term of contract and whether such term is a condition, warranty or innominate term and what would the impact of the breach be on the contract.

b) A breach of condition involves breach of a fundamental term in the contract, which is essential to the performance of the contract. Warranty is not a fundamental term of

  • Jill Poole, Textbook on Contract Law (13th edition, Oxford: Oxford University Press 2016) 206.
  • Ibid.
  • [1949] 1 KB 532.
  • [1934] 2 KB 394.

the contract. Breach of condition leads to breach of contract and the innocent party is entitled to repudiate the contract whereas breach of warranty does not entitle the innocent party to repudiate the contract but can claim damages for the same. The difference between the two is the effect on the contract. If breach goes to the root of the contract, it is breach of condition.

c) In the present case, the use of wrong paint leading to toxic smells emanating through the main hall of the gallery is a breach of condition because it goes to the root of the contract, that is holding the exhibition at the particular venue. Therefore, Alexander can claim breach of contract for which he can ask for damages from Heatex.

4. Mitigation of damages

The issue involved in this case is that of mitigation of damages. Mitigation of damages doctrine is applied in case of ascertainment of damages that are to be paid to the plaintiff in case of breach of contract by the defendant.

The mitigation of damages doctrine allows a person to mitigate or lessen his losses caused by the other party’s breach of contract by taking reasonable steps in that direction.

In Bulkhaul Ltd v Rhodia Organique Fine Ltd, it was held that a failure to mitigate losses would lead to failure to claim damages from the defendant for the losses that could have been mitigated. In Linklaters Business Services v Sir Robert McAlpine Limited, the doctrine of mitigation of damages was used by the court to ascertain the damages that were to be paid by the defendant to the plaintiff.

In this case, the doctrine of mitigation of damages is engaged. Alexander could have continued the exhibition in his gallery basement, where due to space restrictions he could only accommodate 50 guests. However, he chose to cancel the exhibition because he had originally invited 200 guests. Had he continued with the exhibition, Alexander would have mitigated his losses to some extent. Therefore, applying the principles of the doctrine, Alexander can claim damages for loss of

5. The conclusion that can be drawn from these legal issues are:

  • Bettini v Gye, (1876) 1 QBD 183.
  • [2008] EWCA Civ 1452.
  • [2010] EWHC 3123 (TCC)
  • that even despite the correct formation of the contract, a contract may be void due to a mistake;
  • terms can be incorporated into the written contract even after the oral contract was formed and that incorporation of terms is by signature and notice. Incorporation leads to binding obligations under the term;
  • despite being the injured party, plaintiff can only claim damages to the extent that he could not mitigate the same. If the plaintiff is capable of mitigation of damages, then he cannot claim for the same.

Seminar 17 – Remedies Part 3 (Assessed seminar)

1. In this case, the plaintiff is asking for damages based upon the losses suffered by him due to the delay in construction of the pool. With regard to disappointment and anxiety, damages recoverable for this are called non-economic damages and these are payable by the breaching party. With regard to the cost of rebuilding the diving pool to the specified depth of 32 ft., the damages of £90,000 are payable by CC because this is a consequence of breach of contract condition.

With regard to the loss of income that GEL would have received from ticket sales if a main pool had been open to the public during the first three weeks of August, this is a foreseeable loss that CC could have conceived of at the time of entering into the contract as per the rule in Hadley v Baxendale.

With regard to the loss of £5,000 from a corporate customer who wanted exclusive use of the main pool for one evening in early August, this is a remote damage that could not have been conceivable by CC at the time of entering into the contract due to which he is not responsible for the loss or payment of damages for the same. Damages are payable only for those economic losses which were foreseeable at the time of entering into the contract as per the rule in Hadley v Baxendale.

With regard to the payment of £50,000 damages for the failure to clear materials and rubbish, even though the actual cost only came to £700, this is as per the liquidated clause in the contract between the two parties which specified that the compensation of £50,000 will have to be paid by CC if it failed to clear the site of unused materials and rubbish at the end of the project. In general, the courts enforce the liquidated

  • Bacon v Cooper Medicals Ltd [1982] 1 All ER 397.
  • [1854] EWHC J70.
  • [1854] EWHC J70.

clause even if the clause is unfair provided that the payment of liquidated damages do not amount to a penalty. Whether the clause is a penalty, will have to be proved by the party resisting it, in this case CC. As per the judgement in Dunlop Pneumatic Tyre Co Ltd v New Garage Motor Co Ltd, the test as to whether a clause is penal is that the liquidated damages must not be extravagant and unconscionable in amount in comparison with the greatest loss that the plaintiff could have suffered. Therefore, CC can claim that the compensation of £50,000 as liquidated damages in penal in nature.

Week 18 – Formative assessment and independent study (no classes)

1. The Consumer Rights Act 2015, part 2 provides that any unfair terms made in a contract between a trader and consumer, where the latter is acting for the purposes that are mainly outside the individual’s trade, business, craft or profession, shall not be binding on the consumer. The Unfair Contract Terms Act 1977 concerns unfair terms such as exemption or limitation clauses that may be contained in contracts such as standard form contracts. The Consumer Rights Act 2015 allows exemption of liability for fitness of purpose but only if the trader can show the reasonableness of the clause (s.6).

With respect to the special convector oven, Chaucer’s specific requirements are not met by the replacement oven as he needs an oven which cooks large joints quickly. With respect to the cupboards, teak is a better quality wood as compared to oak but Chaucer ordered the pale oak and the dark teak would not suit his purposes.

The clause providing that if Franklyn are unable to supply a particular item for a kitchen, they will replace it with an item of equivalent or superior standard or value, is not an unfair term prima facie, but when applied to the particular case of Chaucer, the term is unfair because the replacements offered by Franklyn even though of equal or superior quality, do not suit Chaucer’s needs.

  • [1915] AC 79.
  • Jill Poole, Textbook on Contract Law (13th edition, Oxford: Oxford University Press 2016) 255.

Seminar 19 - Exemption clauses Part 1 (Assessed seminar)

Problem Question

1. An exclusion or exemption clause is a clause in the contract, the purpose of which is to exclude or limits the liability of the party making the clause under the contract.

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Michael will not be successful in arguing that the exemption clauses were incorporated into the contract because he has not given sufficient notice to the other party. An exclusion clause must be displayed prominently so as to not escape the attention of the other party. In this case, Jasmin has purchased the ticket where the exemption clause is provided in small print therefore it does not satisfy the clear test and the proper incorporation test.

There can be no exemption from a fundamental condition of the contract. In this case, the “Thriller” nightclub is supposed to have a “Hallowe’en Night Party” with five courses of top quality food served by ‘vampires’, all dressed in the appropriate costumes. When the waiters serve sub standard food in their ordinary clothes, the theme of “Hallowe’en Night Party” is no longer provided to the guests who have booked their tickets for the sole purpose of enjoying such a theme. Therefore, an exclusion clause that excludes liability for not performing condition of the contract is not valid.

Under the Unfair Contract Terms Act 1977 as well as the Consumer Rights Act 2015, exclusion and limitation clauses that exclude the liability for death or personal injury arising from negligence will not be valid. The CRA 2015, section 65(1) provides: “trader cannot by a term of a consumer contract or by a consumer notice exclude or restrict liability for death or personal injury resulting from negligence.” Therefore, exclusion clause providing that management of Thriller’s nor any of its employees or contractors, accept any liability for any injury to visitors is not valid.

  • Parker v South Eastern Railway Co., [1877] 2 CPD 416.
  • McCutcheon v MacBrayne, [1964] UKHL 4; Thornton v Shoe Lane Parking Co., [1970] EWCA Civ 2.
  • R Stone and J Devenney, The Modern Law of Contract (Oxon: Routledge 2015).

If at the time Jasmin booked her ticket, the ticket seller had informed her she will be entitled to a full refund if there are any changes to the itinerary, then the clause would have been valid.

Seminar 20 - Exemption clauses Part 2

Problem Question

1. Heather can claim damages from Wyedale for defects in the goods supplied. Exclusion clauses are subject to the applicability of the statutory tests contained in Unfair Contract Terms Act,1977 and Consumer Rights Act 2015. The UTCTA 1977 prohibits some kinds of exemptions altogether and subjects others to the requirement of reasonableness. However, it only applies to exemption clauses, whereas the scope of the Consumer Rights Act 2015 is broader and it relates to any unfair terms. The Act specifically concern the consumer contracts between trader and consumer, provided that the consumer is acting outside her business purpose (ss. 2(4) and 76 (3)). In this case, as Heather is involved in a charity event, she can be a consumer for the purpose of the Act.

Finally, it is pertinent to mention that there can be no exemption from a fundamental condition of the contract. Where the breach of term is of such nature that it destroys the whole contract, the courts apply the doctrine of fundamental breach in order to not give validity to such exemption clause. Here the doctrine of fundamental breach is applicable and its focus is not on the term that is breached, but on the effect of the breach on the contract.

Bibliography

  • McKendrick E, Contract Law: Text, Cases, and Materials (6th edition, Oxford: Oxford Univeristy Press 2014)
  • Poole J, Textbook on Contract Law (13th edition, Oxford: Oxford University Press 2016)
  • Stone R and Devenney J, The Modern Law of Contract (Oxon: Routledge 2015).
  • Jill Poole, Textbook on Contract Law (13th edition, Oxford: Oxford University Press 2016) 273.
  • Overy v Paypal Europe Ltd [2012] EWHC 2659 QB.
  • R Stone and J Devenney, The Modern Law of Contract (Oxon: Routledge 2015).
  • Photo Production Ltd v Securicor Transport Ltd [1980] UKHL 2; Harbutt’s Plasticine Ltd v Watne Tank and Pump Co Ltd [1970] 1 Lloyd's Rep.15.

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