BUSINESS TIPS: Remedies for Commercial Liability

BUSINESS TIPS: Remedies for Commercial Liability

May 30, 2017

This article considers two categories of remedy for commercial liability:  those where there is no agreement between the parties as to a remedy and to those where there is an agreement. The seven key remedies covered are summarised in the flow chart at the end of the article.

Category 1. No agreement between the parties as to a remedy 

 

Remedy 1: Contract based remedies

There are a number of possible common law contract-based remedies and they include:

General damages or “damages”: The broad rule at common law is, if there is a breach of contract the innocent party should be returned, as far as money can do it, to the position it should have at been had the breach not occurred. Such damages are compensatory and not exemplary and are subject to the rules of remoteness and mitigation. To successfully claim general damages the plaintiff needs to answer ‘yes’ to each of the following five questions:

  • ƒ Question 1 - Has there been a breach of the contract?
  • ƒ Question 2 - If there is a breach, did the breach cause the loss suffered?
  • ƒ Question 3 - Is the loss or injury not too remote?

Remoteness is the most difficult of the five questions and is a concept employed by the courts to identify the limits beyond which the defendant will not be held liable for the losses caused by its breach of contract.

In summary, the defendant will only be liable for losses that: 

-“arise naturally” from the breach. An example of this first “limb” of loss is failure by a boiler manufacturer to deliver a boiler on time to a laundry. It is foreseeable that the laundry cannot run its business without a boiler and thus it will be able to claim loss of profits for late delivery.
ƒ -are “actually contemplated” as a probable result from the breach. An example of this “second” limb of loss using the same laundry case is if the laundry does not tell the boiler manufacturer that it is starting a new dying business and the manufacturer does not deliver the boiler on time then it is not foreseeable to the manufacturer that the laundry will lose profits on the new dying business. Thus, to increase the probability of recovery the buyer should make it quite clear why it needed the goods and/or services and the consequence of nonperformance.
  • Question 4 - What is the amount of damage? The injured party must be able to show how much it lost, as nominal damages is the only remedy if there is no loss.
  • Question 5 - Have reasonable steps been taken by the plaintiff to minimise or mitigate their loss? Failure to do so can result in a reduction of the loss in full or in part.

Categories of damage include obtaining the profit that would have been earned (“expectation damages”) and money thrown away in reliance on the defendant’s promise (reliance damages). The advantage of general damages is that if the contract is silent as to a remedy it provides an automatic remedy for loss suffered, and thus it is the “default” remedy. The disadvantage is that a court process is needed to obtain this remedy, which can be very onerous, time-consuming and costly as one needs to answer “yes” to each of the above five questions, including Question 3, on remoteness. A further disadvantage is that damages are confined to financial compensation which is not always appropriate.

Misrepresentation: The apparent consent of the parties can be affected if it subsequently found that one party has misrepresented the facts to the other. Misrepresentation can be fraudulent, negligent or innocent. As it is difficult and costly to obtain an adequate remedy under the common law, litigants usually prefer to bring the statutory claim of Misleading and Deceptive Conduct contrary to Section 18 of the Australian Consumer Law (see below).

Quantum meruit: Under the common law, if a buyer repudiates then the seller has the option of suing under the general damages regime for breach of contract (see above) or seeking recovery for the work performed on a quantum meruit (“the amount which is deserved”) basis. Under quantum meruit the contractor is entitled to the reasonable cost of the work actually performed, even if it exceeds the original contract price, plus a reasonable profit margin. 

 

Remedy 2: Tort based remedies

The law of torts may also provide a remedy by compensating persons for harm they suffered by the conduct of others. Remedies include:

Negligence: This is the main tortious remedy and arises where there is a duty between parties and one party breaches the duty (by failing to discharge the required standard of care) causing foreseeable damage or injury.

The tort of inducing breach of contract: This is where a person induces another person to breach their contract with a third party.

Trespass to goods or chattels: This involves direct interference with the possessions of another person. There are two related categories:

  • Conversion is a deliberate dealing with a good or chattel in a manner inconsistent to the immediate right of possession of the true owner and may involve the selling, giving away, or lending of goods in which the wrongdoer has no legal title over. It is a tort of strict liability meaning that it can be committed even when a person has no intention to commit the tort.
  • ƒDetinue is the wrongful retention of goods which belong to another with the true owner being able to claim their immediate return.

Remedy 3: Judge made remedies

Equitable remedies: Equity provides a number of remedies and its advantage is that Equity provides a wider range of remedies than under the common law, but the award is discretionary. Equitable remedies take priority over common law remedies and include:
Specific performance: This is where the court directs a person to carry out their obligations under the contract, and is only used in contract actions where damages are inadequate.
Injunction: Where the court restrains a person from breaking their contract, or from committing an unlawful act, but this remedy will not be awarded if damages are available.
Quantum meruit: This is the equitable version of the common law quantum meruit remedy and relates to whether it is unjust for a party to retain money or a benefit. It arises in cases where work was performed but there is an unenforceable contract 11, or where the parties did not enter into a contract.
Promissory estoppel: The principle of promissory estoppel may prevent a person who makes the promise from going back on their word or actions and can be brought as an action in its own right against a person or to defend an action brought by another (a “sword or a shield”). It will apply to provide a promisee with a cause of action where:
  • the promisor makes a promise ƒ
  • the promisor creates or encourages an assumption that a contract will come into existence or a promise will be performed
  • ƒanother party relies on the promise causing a detriment of some kind; and
  • ƒit is unconscionable, having regard to the promisor’s conduct, for the promisor to ignore the promise.

Unconscionable conduct: If a party, and especially a person, was under a “special disability” in dealing with the other party such that there was no reasonable degree of equality between them and the disability was sufficiently evident to the other party so as to make it prima facie unfair or unconscientious to procure the vulnerable party’s consent in those circumstances then the contract may be vitiated.

Rectification: This is an order varying a contract to represent what was originally agreed.

Section 2 - Statutory remedies State and territory statutory remedies ordinarily take priority over judge-made remedies, and ordinarily Commonwealth statutory remedies take priority over state and territory statutory remedies. There are many remedies and they include:

Remedy 4: State and territory statutory remedies

Examples include:

  • ƒFair trading legislation - the state/territory’s version of the Australian Consumer Law;
  • ƒLimitation legislation – time limits when seeking a remedy for simple and formal contracts;
  • ƒSale of goods legislation - the sale of goods;

Remedy 5: Commonwealth statutory remedies

The main remedies here are those under the Australian Consumer Law (ACL). 16Even overseas corporations that have no physical presence in Australia except for selling online games to Australian customers are caught by the ACL. 17 Remedies include:

  • ƒ A cause of action in respect of any misleading and deceptive conduct in trade or commerce (Section 18 of the ACL);
  • ƒ The voiding of unfair contract terms in consumer contracts (Sections 23-28 of the ACL)

    Category 2. Remedies agreed between the parties

    Remedy 6: Liquidated Damages (LDs)

    Liquidated damages (LDs) and indemnities are a codification of what the parties have expressly agreed to and take priority over judge-made and statutory remedies. However they are still subject to any statutes that cannot be overridden, including Misleading and Deceptive Conduct (Section 18 of the ACL) and the Small Business Unfair Contract Terms law.

    LDs are an agreed fixed sum payable to a party to compensate it for a specific breach or failure by another party. For example every day the contractor is late in achieving the stipulated completion date of an office block the owner loses rent, and thus LDs are designed to compensate the owner for the loss but not more. To be enforceable LDs cannot be a dollar amount to deter the other party from breaching the contract, and need to be, at the date of signature, a genuine pre-estimate of the loss which the innocent party will suffer if the other party does not deliver as promised. Failure to do this results in the LDs amount being treated as a “penalty” and then whole LDs amount will be unenforceable. The High Court stated that the test for considering penalty clauses is, in any event, whether the amount claimed in default is ‘unconscionable or exorbitant’ and whether the penalty is ‘out of all proportion’ to the interests it is seeking to protect. Difficulty in calculating a precise LDs amount does not prevent its enforcement. 

    Advantages of LDs include that they can be capped, and are easier to quantify and recover than general damages. One can use an offset clause to allow the LDs amount to be offset against other funds owed to the contractor.

    Remedy 7: Indemnity

    An indemnity is a risk shifting mechanism where one party agrees to cover the loss and damage suffered by another. Although the various common law and statutory rights of recovery for damage can be extensive there are limitations on the type of loss or damage that are recoverable. Thus, it is in the buyer’s interests not to rely on the common law or statute but to craft individual indemnity clauses, as they provide a number of important advantages.

    Depending on how they are drafted, advantages for the buyer include:

    1. easier and quicker recovery of loss as a court process is not required to prove liability, causation, remoteness and mitigation issues
    2. indemnities are not subject to the remoteness and mitigation rules;
    3. indemnity clauses may extend the limitation period for a cause of action as an indemnity creates a separate contractual obligation on the party giving the indemnity with the limitation period commencing with the refusal to indemnify, which may occur long after the original breach of contract giving rise to the indemnified loss; and
    4. an indemnity clause may overcome the privity of contract doctrine by covering losses that would not normally have been recoverable under general damages.

    A disadvantage for the party drafting the contract is that an indemnity clause is subject to the ‘contra proferentem’ rule and therefore may be construed against that party. This rule can be contracted out, and should be if the purchaser drafted the contract. The buyer normally seeks to push risks onto the seller by obtaining a full indemnity for “all” of its losses and the indemnity is also backed up with security and/or insurance (if it responds which it may not if the risk is ‘contractually assumed risk’ common for indemnities and commonly excluded by policies of insurance). The seller normally seeks to avoid the indemnity clause, but if it cannot, which is often the case then the vendor should:

    1. agree to only be liable for the damage it directly causes (negligently or due to breach) and was foreseeable at the time of the contract, (and that the vendor’s liability will decrease according to the damage caused/contributed by the purchaser or any of its agents);
    2. not agree to any liability for loss of profits, extra costs to repair defective work etc;
    3. seek to put a cap on the liability (dollar amount and/or time limit), and where necessary back it up with insurance and/or a clause that the only amount paid is the amount of insurance that can be recovered).

    Tips and Takeaways

    When you have suffered a liability for which you have a legal remedy it is important to understand which remedies as well as the ways in which they may be interpreted and any limits on the available damages.

    This article is written by Scott Alden and Cyril Jankoff. 

     

    Scott Alden, Partner Holding Redlich practices for in both the private and public sector, working on large strategic projects and infrastructure projects, and advises clients in relation to commercial contracts, procurement and probity. Scott has specific expertise in government and commercial law, infrastructure projects, general contractual and legislative advice and the tendering process and commercial contracts of all kinds and sizes and for all industries. As a Metis Course Director, Scott teaches:

    - Effective Contract Management 

    - Contract Law Fundamentals

     

    Dr Cyril Jankoff FCPA is a sought after speaker and course facilitator of buy-side/sell-side contracting courses in Australia and overseas. He is also a sessional university lecturer in graduate courses in Finance, Procurement and Contract Management. Cyril draws his expertise from his multi- perspective background. In his 35-year professional career, he practised as a forensic accountant and expert witness, solicitor, and business consultant. As a forensic accountant and expert witness, he worked extensively on the resolution of contract breaches and disputes that arose from poorly drafted, negotiated and managed contracts. Cyril, is Metis Course Director of: 

    -Mastering Negotiations

    -Business Finance for Managers 

     

    DISCLAIMER

    This article is for general education purposes only. If you need specific advice see an experienced commercial solicitor.

     

    • 1 Robinson v Harman (1848) 154 ER 383 2 Hadley v Baxendale (1854) 156 ER 145
    • 3 H. Parsons (Livestock) Ltd v Uttley Ingham & Co Ltd [1978] QB 791
    • 4 Victoria Laundry v Newman Industries [1949] 2 KB 528
    • 5 Victoria Laundry v Newman Industries [1949] 2 KB 528
    • 6 Commonwealth of Australia v Amann Aviation Pty Ltd (1991) 174 CLR 64
    • 7 Kane Constructions v Sopov (2005) VSC 237; and Sopov v Kane Constructions (No 2) [2009] VSCA 141
    • 8 Donoghue v Stephenson [1932] AC 563.
    • 9 Qantas Airways v Transport Workers’ Union of Australia [2011] FCA 470
    • 10 Chep v Bunnings [2010] NSWSC 301
    • 11 Pavey & Matthews v Paul (1987) 162 CLR 221
    • 12 Monarch Building Systems v Quinn Villages [2005] QSC 321
    • 13 Waltons Stores v Maher (1988) 164 CLR 387
    • 14 Commercial Bank of Australia v Amadio (1983) 151 CLR 447
    • 15 MacDonald v Shinko Australia Pty Ltd [1998] QCA 053
    • 16 Schedule 2 to the Competition and Consumer Act 2010 (Commonwealth)
    • 17 ACCC v Valve Corporation (No 3) [2016] FCA 106
    • 18 This consumer protection legislation has been expanded to protect of commercial contracts involving small business from 12 November 2016. It is known as the Small Business Unfair Contract Terms law. See separate article by the authors.
    • 19 The law surrounding LDs principles was summarised by Lord Dunedin in the Dunlop Pneumatic Tyre Company Ltd v New Garage and Motor Company Ltd [1915] AC 79 case and have been applied with broad consistency ever since.

    IMAGE SOURCE: ABC Online