Non-Performance of Contractual Duties - Essay Example

1. Section (a 1a Background 1a Amethyst, an Aberdeen based manufacturing firm of high specification racing cycles, wants French steel manufacturer, Metalique to pay £132,500 as damages for breach of contract. Amethyst had entered into a contract with Metalique from its London distribution centre, for 1000, 10 meter long tubular steel for increasing its production capacity, to be delivered by 1st April, 2006. Metalique was aware that Amethyst’s manufacturing factory is at Aberdeen but the goods were delivered at its London office on 1st April. 1.1a.2 Breach of contract is important legal right that empowers the victim to be vindicated and remedies provided when duties are breached1. Vindication becomes critical mechanism to compensate victims for dereliction of duty and examine contract for awarding appropriate damages2. The established clauses for breach of contract in sale of goods are: Non-performance of contractual duties, in terms of delivery of goods at the designated place. In the contract, the importance of implied terms becomes critical constituents of contract per se. They are not explicitly agreed upon by the parties but are implied by knowledge and therefore, legally binding3. Moreover, the interpretation of the statutes become hugely critical component that reflects the intentions of the parties involved at the time of making the contract. The implied term proposes that the agreement or contract enables the other party to benefit from the contract as intended4. In the case, the judge had ruled out that the general rule of the contract interpretation is not as important as the intention of the parties that is manifested within the contract. Indeed, parties’ duty to cooperate is fundamental obligation which entitles the other party to benefit from the contract. Thus, the seller must make efforts to comply with reasonable requests which is not written but implied explicitly orally and by expression. 1.1a.3 Prima Facie case Clause 20 of the contract states ‘Metalique Limited agrees to deliver to Amethyst Ltd. all said tubular metal sections by 1st April 2006.’ The contract was made between two parties which were based in two different countries. As such, the physical delivery of goods at the correct destination become important factor for the buyer for achieving desired business objectives that are intended to be served by the contract. Delivery details of the goods as proposed within the contract by Metalique are distinct in their date of delivery but not in the destination. The seller was aware of the plans of buyer and therefore, supply of the same should conform to the plans of buyer. As such, it can be correctly inferred that Metalique had prior knowledge of the manufacturing site of Amethyst at Aberdeen, where the goods were required to complete the production of sports cycles. Thus as per the contractual terms and destination of delivery as interpreted from prior knowledge, the physical supply of goods should have been at the site of manufacturing and not at the distribution office where the contract was formed and signed5. The terms of contract and the subtle knowledge known to the seller is vital element that reveals the fair intentions of the defendant. Thus, taking in account the ambiguity of destination site and the fact that Metalique was aware of the factory at Aberdeen, Amethyst has strong case against Metalique for breach of contract. By delivering the goods at the distribution site at London, Metalique had knowingly breached the contract terms. 1.1a.4 Remedies for Breach of contract The causes linked to the breach and consequential damages must be established for remedies6. All losses caused due to breach would not be compensated. If the loss is too remote to be linked directly with the breach, it may not be recoverable. In Hadley v Baxendale7, the judgment had established the principle of recoverable damage as: 1. Damages which reasonable occur from the breach 2. Damages which could be reasonably contemplated to occur in case of breach at the outset of the contract. Damages8 are main remedies that are available to the innocent party in breach of contract under SGA 1979. The major intention of law is to compensate the injured party with the financial position or remuneration as expected if the contract was not breached9. The pecuniary losses refer to expectation losses due to profits and earnings and reliance losses due to extra expenses involved due to breach of contract. SGA 1979 defines a warranty as ‘an agreement…collateral to the main purpose of [the] contract, the breach of which gives rise to a claim for damages, but not to a right to reject the goods and treat the contract as repudiated. SGA Section 51(2) also states that: ‘The measure of damages is the estimated loss directly and naturally resulting, in the ordinary course of events, from the seller’s breach of contract’. Restitution is critical legal paradigm that is intended to put the plaintiff back into the same position as to when the contract was performed to fulfil the fundamental requirement of the contract10. The loss is incurred by the plaintiff due to breach of contract and could comprise of reliance loss, extra expenses incurred due to reasons like transportation, loss of profit etc. In the case11, the court had upheld the claims of the plaintiff on the ground that the purchase of good required extra expenses. The court had highlighted the importance of risk on the part of the party which was providing the good because it had direct bearing on the performance of the other party or buyer. In Victoria Laundry case12 also, the defendant was aware that the plaintiff required the good for his business. Most importantly, he knew that the boiler was urgently required by the buyer. The court of Appeal had upheld that defendant is liable for damages or loss of the plaintiff. 1.1b Settlement Amount The loss incurred by the plaintiff and the settlement amount due on defendant due to breach are important legal points that need to be evaluated justifiably and in conformation to the wider principles of the contract. Section 51(2) of SGA says that measure of damages is directly estimated loss occurring naturally due to breach of contract. In Hadley v Baxendale, the actual loss incurred was taken as damages. But Attorney-General v. Blake13, has set precedent for new stakes. The House of Lords had maintained that ‘law does not adhere slavishly to the concept of compensation for financially measurable loss’. The damages as awarded by the court consisted of profits as obtained if breach of contract had not occurred. Vindicatory damages are recognized as constitutional rights and help the innocent party to get the remedies as per their rights14. This helps the claims for remedial damages to become more realistic, thereby largely preserving the relevance of compensation and restitution. The overall damages therefore must take into account the actual loss occurred due to transportation of steel tubes to Aberdeen factory and the loss of sale for two days. The court had adhered that liability of contract exists within the act of agreement15 and therefore vindictive claim becomes important to act fairly in contractual agreements. The sum must reflect genuinely estimated likely loss16. It upheld the relevance of liquidated damages as emerged from the pre-estimate of probable loss and not unconscionable loss. It showed that consequences of breach could have wider ramification resulting directly and indirectly in damages. In yet another case, damages were distinguished against penalty as covenanted pre-estimate of damage which needs to be constructed as per the circumstances of the contract when the contract was made and not when it was breached17. 1.1b.1 Reasonableness of damages Sections 51(2) and 53(2) of the SGA provide for the assessment of damages. English contract law has developed specific rules for calculating the buyer’s damages. The basic rule for damages in Sections 51(2) or 53(2) of the SGA applies for measuring buyer’s damages or loss resulting directly or indirectly from the breach of contract18. But it also recognizes the prima facie market value of ensuring rightful damages to the buyer or plaintiff under Section 53 of SGA, amounting to the difference between the value of goods at the time of delivery and the value of the same if the contract or delivery terms were not breached19. Restitution becomes critical issue that entitles plaintiff to recover the losses from the defendant on breach of contract. It ensures that plaintiff can combine the claims thereby allowing him for consequential losses like loss of profit, reliance loss etc. that are incurred after breach has occurred20. In Cellulose Acetate Silk Co. Ltd. v Windes Foundry21, stipulates that actual is recoverable thereby creating precedent for claiming loss on more than one front resulting due to breach of contract. Amethyst has incurred loss not only from extra transportation in taking the steel tubes from London distribution centre to Aberdeen factory but it has also suffered two days loss of sales that had resulted when contract was breached. The claims for damages by Amethyst are therefore reasonable and not excessive as claimed by Metalique. 1.1c Dispute resolution Clause 100 of the contract is explicit in its statement, ‘In the event of any dispute arising out of the terms of this contract which cannot be resolved between the parties, the dispute shall be referred to arbitration in the International Chamber of Commerce in Paris according to their standard rules, and is to be conducted by an arbitrator chosen jointly by the parties, whom failing, by the ICC itself.’ In international sales agreements and contracts, due to complexities and conflicting interests, the dispute resolution clause within contract between parties hugely helps to resolve disputes through mutually satisfying mechanisms and neutral bodies22. The specified jurisdiction bounds the parties to conform to the contractual terms that necessitate resolution of any dispute in the pre-specified venue. It is important issue which is designed to provide neutral platform for dispute resolution in cross border business dealings. The exclusive jurisdiction under the contract or agreement ensures that disputes and arbitrations must be brought up in that place only23. The dispute clause is also vital to maintain confidentiality of the concerned parties, while considerably reducing the overhead cost of litigation 1.1c.1 Metalique’s rights The Clause 100 of the contract is exclusive in its jurisdiction and arbitration authority where the resolution of any dispute related to the contract can be made. It is also succinct in its wording. ‘Dispute arising out of the terms of contract’ is important as it needs to be interpreted objectively and within the broader precinct of intentions of the parties manifested within the contract. The clause is vital element of the contract and encourages dialogue between the parties to resolve differences before taking any legal actions. Most importantly, it restricts Amethysts’ rights to challenge Metalique in local court of Aberdeen where its manufacturing site is located and where the goods were intended to be supplied. Arbitration in ICC in Paris is the only option left if the dialogue to resolve dispute fails. The Aberdeen Sheriff Court is therefore not the right place to resolve any dispute arising out of contractual dealings. The court cannot impose either remedial measures or decide on the damages for breach of contract by the seller, Metalique. As per the clause, the dispute can only be resolved through arbitration in International Court of Chambers in Paris. 2. Section (b) 2.1 Background 2.1.1 The firm had to urgently transport the steel pipes to its Aberdeen factory and at an extra cost of £10,000. It led to two days loss of sales in production of 350 cycles, totaling total loss to £132,500. 2.1.2 The settlement of damages as claimed by the buyer is important for the fair execution of the contract. 2.1.3 The amicable settle of dispute would significantly reduce the overall cost of litigation and save time that could be better utilized in improving the business outcome. 2.2 Measuring damages or loss 2.2.1 Damages are mainly based on the actual loss incurred due to breach. This would allow Amethyst to claim transportation cost of £10,000 which it had incurred. 2.2.2 The difference in the market price of goods at later date due to breach of contract and the price of goods when delivery should have been performed as per the contract is also recoverable24. Indeed, it is important but in this case, it gives rise to ambiguity as production of cycles does not give correct indication to its sale. 2.2.3Section 51 of SGA 1979 states that when the seller wrongfully neglects to deliver goods as required, then buyer can claim damages under breach of contract for the incurred. But it cannot recover anything more than the differences between the market value and contract value as estimated. Thus the prevailing market value could be used as damages to be claimed. 2.2.4 The issue of timing is important to show that plaintiff had determined the loss as per the market rate not the time contract was breached25. The case shows that price of lost portrait at the time of breach of contract was £132,000 in 2004 and at the time of hearing was around £354,375. The plaintiff was awarded the latter amount as the prevailing market rate. 2.2.5In the present case, the loss of sale for two days is claimed for the estimated number of cycles which would correctly reflect the loss of the buyer had the contract not been breached. But at the same time, sale is not guaranteed and therefore may be challenged. 2.3 The loss or damages 2.3.1 While Amethyst is justified in claiming for the consequential losses but they can be mutually bargained to make settle mutually beneficial. Amethyst is entitle to full claim of transportation cost as the goods should have been delivered at the manufacturing site as intended. 2.3.2 Since the sales cannot be accurately predicted, Amethyst can reduce the consequential losses. Hence, both the parties must negotiate for the amount that is mutually acceptable and promote settlement of dispute. 2.4 Settlement 2.4.1 The damages are not treated as punishment but as compensation for the loss due to breach. The transportation cost is direct loss and therefore is recoverable due to breach of contract. At the same time, liquidated damages due to loss of sale of cycles for two days need to be bargained for amicable settlement of dispute. 2.4.2 The remoteness rule in the SGA can be manipulated and should therefore become major tool for settling the dispute26. It should be used to categorize the compensable losses and limiting the liability of the breaching party. 2.4.3The mitigation is another important legal framework that encourages mitigation of loss and prevents the aggrieved party in anticipating and escalating the loss due to breach27. Thus, Amethysts’ claim for £122,000 can be construed as anticipated and escalated. 2.5Conclusion 2.5.1 Metalique therefore should reimburse the actual loss (£10,000) as incurred in terms of extra cost incurred in transportation of tubular pipes from London to Aberdeen. 2.5.2 The loss of two says sales amounting to £122,000 as estimated by Amethyst should be brought down to 50% of that amount because in the current economic downturn, the projected loss could be bargained and settled to pave for smoothing future business relationship. 3. Section (c) 3.1 Background The contract was between two parties from different countries. There were one major flaws and one minor flaw: the major flaw was that the contract had not clearly defined the destination for delivery of goods, leading to dispute. The jurisdiction or venue for arbitration for resolution of dispute was Paris, which could leverage to one of the party which was French by origin. 3.2 Contract Contract is legally binding agreement between two parties for exchange of promise. The contract defines relationship and terms of executing set of agreements those are mutually acceptable and agreed upon. The legal parameter therefore must be comprehensive in defining the details clearly so that there is no ambiguity. The contract in the sale of good should ensure that destination and time of delivery of goods is well defined in the contract. 3.3 Remedies The contract should also define the remedies and damages well in advance so that it can serve as incentives for the parties to execute their duties and functions efficiently and fairly within the broader constraints of contractual terms. 3.4 Dispute resolution The dispute resolution clause significantly enhances the chances of achieving peaceful resolution of dispute, if it arises. It describes the various imperatives and mechanisms that can be used to resolve the dispute between the parties bound within a legal contract28. It incorporates clauses like arbitration, negotiation techniques, litigation process, jurisdiction, expert mediators and arbitrators which are mutually acceptable. The jurisdiction or venue becomes vital issue in dispute resolution which could provide undue advantage to parties concerned29. 3.4.1Stringent terms to avoid future disputes Thus, ICC as arbitrator would be good choice but the jurisdiction must be neutral like Geneva rather than Paris. In case, the dispute cannot be resolved through ICC, the aggrieved party must be in a position to file litigation in the domestic court against the party which has breached the contract. This would prevent the parties to violate contract. The contract should also define the language and clearly define the laws that would govern it. In this case ICC would be the arbitrator which is deemed impartial tribunal for international dispute resolution. The intervention of courts is not desirable unless the arbitration fails. The clause should also clarify the number of arbitrators. The neutral arbitrators would facilitate amicable settlement of dispute and maintain the confidentiality of the case if arbitration fails. 3.5 Conclusion The well-defined and comprehensive contract ensures easy compliance of terms of the contract. The stringent remedies and damages which are pre-defined serve as deterrent tools for breach of contract and thereby considerably reduce the chances of breach. The rule of contract interpretation is important constituent of law that must reflect the intentions of the parties that is manifested within the contract and not the wordings per se. This allows the parties to benefit from the contract. Most importantly, contract is valid exchange of offer and acceptance that shows the intentions of the parties to create legally bounding relations. The objective approach to the interpretations of the terms of contract not only allows parties to benefit but also challenge the subjective interpretations which tend to hinder the implied benefits to the parties as intended. The dispute resolution clause in international contracts enables the parties to be fair and motivate them to follow the contract per se. It is also vital mechanism of legal course of action which provides them with neutral platform to sort out their legal problems. (words: 3125) (total words including bibliography: 3416) Bibliography Case Law Attorney General v Blake (2001) 1 AC 268. British Westinghouse Co v Underground Ry [1912] A.C. 673 at 689. Cartwright, Remoteness of Damage in Contract and Tort: A Reconsideration (1996) 55 CLJ 488. Cellulose Acetate Silk Co. Ltd. v Windes Foundry [1933] AC 20. Chester v. Afshar [2004] UKHL 41; [2005] 1 A.C. 134 at para. 87 per Lord Hope of Craighead. Dunlop Pneumatic Tyre Co. Ltd. v. New Garage and Motor Co. Ltd. [1915] A.C. 79. Hadley and Another v Baxendale and Others (1854) 9 Exch 341. Law Society v. Sephton & Co. [2006] UKHL 22; [2006] 2 A.C. 543. Merson v. Cartwright [2005] UKPC 38; [2006] 3 L.R.C. 264. Miller’s Machinery Co v David Way (1935) 40 Com Cas 240. Minster Trust Ltd v Traps Tractors Ltd [1954] 1 W.L.R. 963, 988-989. Ofir Scheps v Fine Art Logistics Ltd. [2007] EHWC 541. Public Works Commissioner v Hills [1906] AC 368 and Webster v Bosanquet [1912] AC 394. Secured Income Real Estate (Australia) Limited v St Martins Investments Pty Limited [1979] 144 CLR 596 Ultraframe (UK) Ltd. V Tailored Roofing Systems Ltd. [2004] EWCA Civ 585. Victoria Laundry (Windsor) Ltd. v Newman Industries Ltd. [1949] 2 KB 528. Books AGO, Dispute Resolution Commitment – Guidance for Government Departments and Agencies, (Ministry of Justice, 2011). Chitty, Joseph, Chitty on Contracts, 30th ed., London: Sweet & Maxwell, 2008. 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