Saturday, August 06, 2005

Contract Law - Breach of Contract & Misrepresentation


If any party to a contract fails to stick to its part of the bargain, there is a breach. A breach of contract occurs when:

  1. One party to a contract makes it impossible for the other parties to the contract to perform;
  2. A party to the contract does something against the intent of the contract; or
  3. A party absolutely refuses to perform the contract.

Not all breaches of contract are necessarily "contract killers" which would end up in a lawsuit. Much would depend on whether the breach is "material" or "immaterial" and who the parties are. What makes sense for you will depend on the facts. Where the matter is substantial, the advice of an attorney can help you.

Standard Forms of Contract may have its provisions as to the measure of damages in the event of a breach, such as determination of the contract, liquidated damages for delay in completion and the direct loss and/or expenses.

In the event of abandonment of contract or a total failure to complete performance, the promisee can elect to determine the contract. In the event of delay in completion due to inexcusable reasons, any liquidated ascertained damages specified in the contract will be treated as an promisee’s pre-estimate of all his damages arising from delay in completion.

In the case of defective works, the measure of damages recoverable by the promisee is the difference between the contract price of the work and the cost of making good in conformance to the contract.

General Damages

Any breach of contract will give the aggrieved party a right to damages at common law, unless expressly agreed (e.g. a liquidated damages clause).

The general rule on recoverability of damages will be what the other party ought to receive in respect of such breach of contract should be such as may fairly and reasonably be considered as either arising naturally or such as may reasonably be supposed to have been in the contemplation of both parties, at the time they made the contract, as the probable result of the breach of it [see: Hadley v. Baxendale 1854 & Victoria Laundry (Windsor) Ltd. V. Newman Industries Ltd. 1949].

In principle, most loss, which flows as a consequence from the breach, is recoverable unless it is not considered to have been within the reasonable contemplation of the parties.

It must be emphasized that the purpose of an award of damages is to put the plaintiff in the position he would have been had the breach of contract or duty not occurred.

So far as money is concerned, the party that sustains a loss by reason of a breach of contract is to be placed in the same situation as if the contract had been performed.

The key factor in an action for general damages is the need to be able to support the claim with evidence of the loss suffered as a result of the breach. Vague allegations of loss suffered are unlikely to be recognized in law.

As for the interest charges, in the absence of a contractual agreement to pay interest, it may not be payable.

Financial charges are recoverable under usual contractual provisions (e.g. under Direct Loss and/or Expense claim).


For breach of contract, the innocent party is entitled to terminate the contract if the breach is a breach of condition. For breach of warranty, he is only entitled to damages. For breach of an innominate term, he is only entitled to termination if that breach is so serious as to deprive him of substantially the whole benefit of the contract. The contract is not automatically terminated by the breach; the innocent party must indicate his acceptance of the breach and then he can rescind the contract. Otherwise, he will be taken to have affirmed the contract, and his obligation under it will continue (see: Photo production Ltd v Securicor Transport Ltd). Termination for breach discharges the innocent party from any further performance, and the contract will then be brought to an end prospectively.

A misrepresentation is a statement of fact made by one party to the contract to the other, which induces the other party to enter into the contract which is less advantages to him. In order to determine whether the statement made amounts to misrepresentation, they must be:

  1. a statement of facts, not of opinion, intention or law
  2. the statement was addressed to the innocent party, and that
  3. it did induced the party to enter into the contract which is less beneficial to him.

Half-truth are also amounts to misrepresentation (Dimmock v Hallet).

As for misrepresentation, the remedy of rescission may be available to the innocent party.

The bars to rescission are: affirmation of contract, impossibility of restitution, and third party rights or delay.

Rescission sets the contract aside both retrospectively and prospectively, that is, the parties are put in the position, as far as possible, to where they were in before they entered into the contract.

Rescission may be available whether the misrepresentation is fraudulent, negligent (under s. 2(1) Misrepresentation Act 1967) or wholly innocent (s. 2(2) Misrepresentation Act 1967). Under s. 2(2) MA, the court could award damages in lieu of rescission.

For a breach of warranty, only damages would be available. For misrepresentation, s. 1 of MA 1967 provides that, if the innocent party would have been entitled to rescind the contract, he shall be so entitled notwithstanding that the misrepresentation has become a term of the contract. Thus, if the term, even when the term of the misrepresentation is only regarded as a warranty, the right to rescind remains.

The governing purpose of an award of damages for breach of contract is to put the plaintiff in the same position, as far as money can do so, as if the contract had been performed (Robinson v Harman). The limitation to this is when the damages are too remote in which case, the contract breaker will only be liable for loss that was in the reasonable contemplation of the parties (Hadley v Baxendale).

The right to damages for misrepresentation depends on the nature of the misrepresentation. If it is fraudulent, the remedy is in the tort of deceit, and the measure of damages is tortuous, which is to put the plaintiff in the he would have been in if the statement had not been made. Thus, there would not be entitlement to expectation loss.

In contrast, for contractual measure, the damages for fraud are that the defendant is bound to make reparation for all the actual damages directly flowing from the fraudulent inducement – the expectation loss (see: Doyle v Olby). A striking example of the application of this rule is the case of Smith New Court Securities Ltd v Scrimgeour Vickers where the defendants were held liable for a fall in the value of the shares which is unconnected with the fraud.

Fraud may be difficult to prove. But even if the misrepresentation was not fraudulent, the defendant may incur liability for misrepresentation under s. 2(1) MA 1967 which has the effect of imposing liability for negligent misrepresentation. Applying this section, the CA had held that the measure of damages under s. 2(1) MA is the same as for fraud, that is, the reliance measure, and not expectation measure (Royscott Trust v Rogerson). To avoid such liability, the defendant has the burden to prove that he had reasonable grounds to believe and did believe up to the time the contract was made that the facts represented were true. If the defendant succeeds, then he will only be liable for an indemnity (Whittington v Scale Hayne).


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Jake Alexander said...

Thank you for sharing this post. I found it very informative and helpful. My company just recently had a contract breached when one of our clients refused to pay for the services we rendered. We are now engaged in a commercial litigation suit.

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