The Law of Damages and Uncertainty - Assignment Example

of Chosen Business Law Topic: It remains unsatisfactory that the law is unclear when an innocentperson can bring a contract to an end for breach, especially as damages are often uncertain or difficult to quantify. Discuss I. Introduction: This paper seeks to analyze and discuss whether there is basis to the statement that it remains unsatisfactory that the law is unclear when an innocent person can bring a contract to an end for breach, especially as damages are often uncertain or difficult to quantify. 2. Analysis and Discussion: 2.1 Is it difficult to quantity damages in contracts? Before we delved in to proving whether there is basis to proposition as posited in the introduction, let us first try to answer the question: “Is there a basis to the statement that there is uncertainty or difficulty in quantifying damages for purposes of breach?” Yes, there basis to say so. Wikipedia (2006) said in discussing loss of chance under English law said: “The primary difficulty in the calculation of damages is the question of causation. Remoteness will defeat a claim if it depends on very hypothetical possibilities. In McRae v Commonwealth Disposals Commission (1951) 84 CLR 377 relying on rumors, the Commission sold to McRae the right to salvage an oil tanker thought to be marooned at the specified location. Unfortunately, the tanker did not exist. The Commission argued the contract was void because of a common mistake as to the existence of the subject matter, but the court noted that the Commission "took no steps to verify what they were asserting and any mistake that existed was induced by their own culpable conduct.” McRae wasted money searching for the non-existent wreck. His claim for the loss of profits expected from a successful salvage was dismissed as too speculative, but reliance damages were awarded for wasted expenses. Nevertheless, the courts have been prepared to speculate.” On the basis of the above case, the court chose to speculate. Note that to speculate would seem equivalent to giving an award for damages even in the absence to an actual loss that is backed up by evidence. Wikipedia (2006) proceeded by further saying: “In Chaplin v Hicks (1911) 2 KB 786 the defendant in breach of contract prevented the claimant from taking part in the final stage of a beauty contest where twelve of the final fifty (out of 6,000 original entrants) would be rewarded with places in a chorus line. The claimant was awarded damages for the loss of a chance, assessed at 25% of winning the competition. The court seemed to proceed on the claimants statistical chance of winning (as if she were a lottery player) without any actual assessment of her physical attributes against any particular criteria of beauty. But Allied Maples Group Ltd v Simmons & Simmons (1995) 1 WLR 1602 has partly restricted Chaplin v Hicks. A solicitors negligence deprived the claimant of an opportunity to negotiate a better bargain. The Court of Appeal held that if the client could show on the balance of probabilities that: (a) they would have sought renegotiation with the third party, and (b) that they had a substantial chance of negotiating (not necessarily that they would on balance of probabilities have negotiated) a better deal from the third party, then the court should quantify and award compensation for their loss of chance of doing so.” The court in found in the various cases above did award damages on various occasion where there seem to be difficulty in ascertaining the amount of damages. But said courts worked under certain condition before it made the award to the aggrieved parties. Wikepedia (2006) further cited cases where loss of chances was proven although the claim would have been difficult to quantity. It said: “In Bank of Credit and Commerce International SA v Ali (2002) 1 AC 251 an employee made redundant by BCCI, claimed the usual statutory payments and, under the aegis of ACAS, signed an agreement to accept a sum "in full and final settlement of all or any claims of whatsoever nature that exist or may exist against BCCI.” The House of Lords held that this exclusion clause did not prevent employees from reopening their agreements when, following BCCIs collapse, it became clear that a significant part of the banks business had been run dishonestly and the employees found that they were stigmatized for having worked there. When the parties signed the release, they could not have realistically supposed that a claim for damages in respect of disadvantage and stigma was a possibility. Accordingly they could not have intended the release to apply to such a claim. But in earlier proceedings on the question of damages, the formidable practical obstacles presented by the limiting principles of causation, remoteness, and the duty of the claimant to mitigate any losses proved insurmountable. In 1999, Lightman J. tried five representative cases out of the 369 which had been initiated by former BCCI employees. None of them succeeded in proving that their unemployment was attributable to stigma. Indeed, subject to the anti-discrimination laws, a prospective employer is under no particular duty to employ anyone who attends for interview. Four of the cases tried by Lightman J. appear to have concerned employees who were dismissed by the liquidators when the bank collapsed in 1991. Those made redundant in 1990 faced the additional hurdle of having to explain why their unemployment was attributable to stigma when they were unable to find jobs for a year before any stigma attached to them.” 2. Will the uncertainty or difficulty or quantifying damages justify the not bringing a contract to an end for breach? Wikipedia (2006) in discussing the remedies in Contract under English law said: In contract cases, the court is usually interested in securing the performance of what was agreed. Where one party is about to or has suffered loss as a result of the others breach, the court offers practical protection to his or her expectations as to performance (in some cases, the use of injunction or specific performance may be appropriate). Where a party proves that he or she has sustained loss flowing from any breach (potentially including non-pecuniary or intangible losses, e.g. for disappointment, damage to reputation, etc.), the purpose of damages is, so far as money can do it, to place the claimant in the same situation as if the contract had been performed. Thus, the most relevant basis upon which to calculate any loss is to examine the economic potential of the contract as worded. This will provide a measure of what the claimant expected to gain, and so quantify what has been lost by the breach. Significantly, where profits were expected, the award of damages can make the claimant "better off" rather than simply "no worse off". It appears that the law still provide remedy where a party proves that he or she has sustained loss flowing from any breach (potentially including non-pecuniary or intangible losses, e.g. for disappointment, damage to reputation, etc.), the purpose of damages is, so far as money can do it, to place the claimant in the same situation as if the contract had been performed. This means that as long as the aggrieve party the prove, hence there uncertaintaintly is cleared, then the court will not be precluded from awarding damages. Necessariy in case of uncertainty in proving the award of damages will be remote; Moreover, Wikipedia (2006) said: “As a matter of public policy, the law aims to respect the reasonable expectations of all parties involved in the dispute. The fundamental approach is therefore to uphold the validity of the contract wherever possible. Thus, there is no general protection offered to those who find they have entered into a bad bargain. All must accept the real outcomes of agreements entered into voluntarily (see freedom of contract). Even when there is a breach, the court will not penalise the "guilty" party (see Addis v Gramophone Co Ltd. (1909) AC 488 which prevents the award of punitive or exemplary damages in a purely contractual action), nor will it strip away all profits made at the expense of the other unless the breach is exceptional as in Attorney-General v Blake (2000) 3 WLR 635 which appears to create a wholly novel form of contractual remedy, namely the restitutionary remedy of an account of profits for breach of contract where the normal remedies are inadequate. The standard remedy is damages which are usually calculated by reference to the claimant only and do not reflect any form of penalty on the other(s) for exploiting the gullibility or innocence of the claimant. The law also recognises that unfairness may flow from inequality in bargaining power and addresses oppressive exemption clauses. Although there is a declared policy to respect the contract, the court could award damages where the normal remedies are inadequate in just allowing the contract in stand as is but the requirement of claim and proof of claims appear as requirements to be made. 2.3 What other remedies does the law provide in case in difficulty or uncertainty of quantifying the amount of damages? An article entitled Liquidated Damages (n.d.) said that liquidated damages (LDs) are set and agreed in advance in accordance with the following legal principles: a) they are an agreement, determined in advance, by the parties to the contract, and included as a provision in the contract, to pay a pre-estimated amount of damages for a particular breach; b) the party committing the breach will be liable to pay the other party a fixed or ascertainable sum; c) the party suffering from the breach only has to prove that a breach occurred, no proof of the loss is required; d) the agreed amount of damages will be payable whether the loss actually suffered is greater, smaller or even nil; and e) there is a duty on the injured party to mitigate his loss using all reasonable efforts. It appears that the uncertainty of ascertaining damages could be settled or agreed by the parties in contract so that its claim will not require too much proof so as to preclude claim for damages. The inclusion of the agreement on liquidated damages also justify not bringing the contract to an end since the contract is preserved by parties are compensated for violations which would otherwise be difficult to find out. The same article on liquidate damages (n.d.) further also said that the law on LDs and penalties is inextricably linked and the distinction between the two is of paramount importance in ensuring the successful operation of a LDs provision It said that the following statements on penalties must be taken into account when formulating a LDs provision. a) LDs are not enforceable under English law if the sum recoverable is a penalty (although this would not rule out a court awarding General Law damages to the claimant). b) Classification of a provision as LDs goes beyond the words and depends upon its purpose and substance; otherwise it may be interpreted as a penalty condition. c) The provision will be a penalty if the sum stipulated is extravagant and unconscionable compared with the greatest loss that could conceivably be proved to have followed from the breach. d) It is presumed that a provision is penal when a single lump sum is made payable on the occurrence of one or more or all of several events, regardless of the seriousness of the damage, but especially if the events have disproportionately different consequences. e) If the breach consists only of not paying a sum of money, and the sum stipulated is a sum greater than the sum which ought to be paid, then the provision will be held to be a penalty - this is just the situation when it is probable that pre-estimated damage is the true bargain between the parties. f) The court looks at the position at the time of making of the contract not at the time of the breach when considering whether a provision is penal. g) Although the courts will pay more attention to the substance and effect of a LDs provision rather than the language used, it would be sensible not to use the word penalty in a LDs provision. The English law does not however allow the parties to profit unjustifiably by permitting them to agree unabatedly on liquidated damages. The law puts limits as indicated above when liquidated damages will conflict with penalties. Still the law has the object of attaining and promoting justice. 2.4. If liquidated damages could substitute for otherwise difficult to ascertain damages for purposes of breach, how are liquidated damages calculated? The above question is answered is the article on “Liquidated Damages” (n.d.) as follows: The pre-estimate of the potential financial loss likely to be suffered by MOD in the event of a breach of contract is a vital element in an effective LD provision. A term can be a genuine pre-estimate of likely damage even where exact calculation is impossible but it must be reasonably well-founded with evidence of what can reasonably be expected to be the loss at the time the contract was made. In calculating the potential loss account must be taken of the point in time from which it is foreseen that the loss will occur. If there is likely to be any delay between the actual breach and the actual loss, then this should be taken account of in the way in which the LDs are calculated and the date of the breach is set. In the past, MODs business sometimes made it difficult to establish a genuine pre-estimate of loss. This difficulty will ease as the full benefits of Resource Accounting Budgeting (RAB) flow through. RAB will provide better visibility of the consequences of delay although it does not change the need for LDs to be calculated robustly so as to stand up to any challenges from contractors. The utility of a LDs calculation based on a sum of money expressed as a percentage rate of the contract price per month of delay up to a maximum amount is only supportable provided that it is not applied to contracts in an arbitrary way regardless of the known consequences of breach. Such use could put MOD in a vulnerable position because it might be in danger of being a penalty. The amount of money calculated as LDs should be ascertainable and a fixed amount. Therefore, whilst it is possible for the amount to be represented as a percentage with a limit on it, it must be credible and the process used to determine it must be rigorous enough to stand up to scrutiny. (Numbering omitted) 2.5 What other remedy the law has provided to protect the parties in case of difficulty to quantity damages? The law classified breach into material and not material and it prescribed the remedies in case of breach for each type in the case of Sale of Goods Act of 1994 as follows: 11F. (1) Where in a contract for the transfer of goods a transferor is in breach of any term of the contract (express or implied), the other party to the contract (in this section referred to as "the transferee" ) shall be entitled— (a) to claim damages; and (b) if the breach is material, to reject any goods delivered under the contract and treat it as repudiated. (2) Where a contract for the transfer of goods is a consumer contract and the transferee is the consumer, then, for the purposes of subsection (1)(b) above, breach by the transferor of any term (express or implied)— (a) as to the quality of the goods or their fitness for a purpose; (b) if the goods are, or are to be, transferred by description, that the goods will correspond with the description; (c) if the goods are, or are to be, transferred by reference to a sample, that the bulk will correspond with the sample in quality, shall be deemed to be a material breach (Crown (2000) The definitions given by law aside from pointing the difference of one from the other further promoted justice by classing the transferee where or not he is consumer and the consequences are different. It is obvious that the consumer gets more protection than a transferee that is engaged in buying and selling goods. Conclusion and Recommendation There seems to be basis to agree that it remains unsatisfactory that the law is unclear when an innocent person can bring a contract to an end for breach, especially as damages are often uncertain or difficult to quantify. However, the law has its purpose that is to serve the interest of justice. The reason for the uncertainty because of the difficulty of proving causation for which the present policy of on award of damages may be justified but if proven by evidence that there is in fact causation , the ward of damages may be justified. Further in the interest of justice the law seem not ignore the call to ward fro damages where one suffered damages. By the law defining what is material and immaterial breach , Under the former, the aggrieved party is only allowed to recover damages but if the breach is material, the law has a way of voiding or not making the contract valid and therefore entitled the aggrieved party to cancel the contact. The parties are not also without remedies if uncertainty to quantity is the issue, they can agree on liquidated damages of which the need to prove further could be eliminated as long as the conditions under which liquidated damages could be claimed are established. The difficulty of ascertaining damages did not leave the law too uncertain as to preclude the pursuit of justice. The courts in its power to adjudicate rights and obligation of the parties have the duty to administer justice where it is due. Bibliography: Work Cited 1. Crown, Sale and Supply of Goods Act 1994 (c. 35) 1994 c. 35 - continued, (2000) {www document} URL http://www.opsi.gov.uk/acts/acts1994/Ukpga_19940035_en_3.htm, Accessed June 15,2006 2. Liquidated Damages (May, 2004) {www document} URL http://www.ams.mod.uk/ams/content/docs/toolkit/gateway/guidance/ld.htm, Accessed June 15, 2006 3. Wikipedia, Loss of chance in English law, (2006) {www document} URL http://en.wikipedia.org/wiki/Loss_of_chance_in_English_law, Accessed June 15,2006 Cases Cited 1. Addis v Gramophone Co Ltd. (1909) AC 488 2. Allied Maples Group Ltd v Simmons & Simmons (1995) 1 WLR 1602 3. Attorney-General v Blake (2000) 3 WLR 635 4. Bank of Credit and Commerce International SA v Ali (2002) 1 AC 251 5. In Chaplin v Hicks (1911) 2 KB 786 6. McRae v Commonwealth Disposals Commission (1951) 84 CLR 377 Read More