Damages or Specific Performance: An Analysis of the Remedies
Introduction
A breach of sales contract primarily takes place when one party breaks the underlying and pre-established terms of agreement signed between two or more parties to carry out a sales transaction[1]. The implication is that breach of sales contract can take the form of non-payment in which one party fails to pay for the goods, non-delivery where the goods are not delivered to the buyer, and non-acceptance where the buyer fails to accept the goods or faulty goods[2]. Remedies are the best causes of action that are available to an innocent party when a contracted is breached. These remedies mainly include damages and specific performance[3]. In the same aspect, the United National Convention on Contracts for the International Sales of Goods (CISG) Article 71, asserts that “damages for breach of contract by one party consist of a sum equal to the loss, including loss of profit, suffered by the other party as a consequence of the breach.”[4] Damages can also be defined as a remedy that is in monetary form, given as a reward for the compensation of a loss incurred as a result of the wrongful act of one party of the contract[5]. Specific performance, on the other hand, seeks to solve problems that cannot be adequately addressed through the damages[6]. In this light, the essay is aimed at analysing whether damages are efficient in remedying a breach of contract for the sale of goods in business-to-business transactions or specific performance should be more readily available to the buyer as it is in the discretion of the court. In a bid to adequately discuss the thesis, the report will include a detailed explanation of the efficient breach theory.
Damages
As previously explained, damages are mainly aimed at placing the offended in the position he would have taken if the agreement was not broken as per the Section 51(SGA)[7]. It can be noted that the buyer can effectively sue for various damages if the seller’s refusal is not right. Other instances where damages can work include when the buyer is treating the contract as repudiated, or when the delivered goods are not as per the contract. In the example that a buyer sues for damages, the court adequately interprets the underlying measure of the damages. It establishes whether the buyer can purchase the same goods or if they have to pay extra money for the goods. At the same time, the court determines and confirms whether or not there are available markets for the goods where Section 51 (2) can apply as in the common law of Hadley v Baxendale Rule[8]. It can be noted that the case involved a mill owner who sued for particular damages but the defendant was innocent and was not responsible for the lost profits following his failure to deliver the mill instantly. In the case, the court established that it could not be presumed that the defendant knew that the mill could not operate until he had delivered the shaft. Regarding Section 36(2) of the Sales of Goods Act 1979, the seller is supposed to deliver the goods within a reasonable period. The buyer should, therefore, note that under this Section, the delivery time is not specified. Time is among the three main ways through which a contract may be breached. If the contract is completed in good time before the due date, both parties of the contract are likely to be satisfied. The fact the two parties have fulfilled their positions as per the agreement benefits both of them in the long term. Possibly, one party will be happy to have received the goods as agreed while the other party shall have built their reputation and will be in a position to attract more customers. The element of trust is cultivated in this agreement, and increased trust means more business transactions. There is improved confidence between the two contract parties when they both perform their duties properly.
Efficiency of damages in remedying a breach of contract
Some countries like the United States, Denmark, and Germany have all banned binary options to protect the consumers. Binary options refer to an exotic contract option where the payoff could be fixed monetary amount or nothing at all[9]. Such countries have found it proper to ban the specific performance in their territories as many providers seemed to neglect consumer rules, and most of the buyers are left at the discretion of the court. From the economic view, damages are comparatively more efficient form of remedy since they enable the seller to engage in efficient breaches of contract[10]. This mainly occurs following the efficient breach theory that incentivises various parties to breach a contract to serve their interests. In the event of non-delivery, the seller compensates the buyer typically through damages. This is practically efficient as it ensures that the wellbeing of the buyer is upheld similar to when the contract could not have been breached[11] . The situation also ensures a Pareto optimality in that the seller is made better off without disrupting the social wellbeing of the buyer, advancing the interests of the seller in relation to if the contract was performed.
Furthermore, compensatory damages are a form of payment that aims at putting the innocent party in the position he or she would have been had be contract been performed. Love supports this argument by postulating that various forms of efficient breach remain advantageous to the general society, in that it promotes different types of reinvestment of the gains in other sectors of the economy[12]. Thereby, it increases the production and output of the economy by allowing the producers to maximise profit subject to cost constraint. Another advantage of damages is that it reduces the transaction costs that different parties incur in the post-breach stage and at the same time eliminates the post-breach negotiation costs[13]. The main implication is that damages benefit both sellers by preserving the freedom of breach and buyers by accommodating their needs. In general, the implementation of damages as the primary remedy for various contract breaches uphold consistency that defines the principles of commercial laws. In the same light, the moral perspective holds that damages are preferred to specific performances in that it robustly support the dubious acts of keeping a promise.
Shortcomings of damages in remedying a contract
Damages cannot be recovered in the instance that they lack effective foreseeability[14]. This implies that the breaching party may have to compensate the innocent party for a long chain of events to restore the party to the position they could have been had the contract been conducted. Notably, this could be unjust as it is challenging to take preventive measures when a person is not anticipating a specific event to occur in future. Also, the law has some loopholes that prevent the compensation of loss to the innocent party unless the breaching party was well aware of the consequences of the breach at the time of making the contract. Also, Damages do not always satisfy a breach of contract as we are made to see in the case of the machine delivery, where the machine would take nine to twelve months to manufacture, putting the buyers at an inconvenience. The most appropriate case in this regard is the Hadley v. Baxendale which occurred in England in 1854[15]. The case involved two brothers who owned a flour mill in Gloucester but whose machinery broke down in May 1853. This breakdown severely affected the production following the broken milling engine. This prompted one of the employees to go to Pickford and Company that was to ship the shaft to Greenwich, where it was to be used as a model to build a new one. The carrier’s agent promised to deliver the shaft in two days, but erroneously the shaft arrived after seven days, thus crippling the activities of the Hadleys who lost huge profits. As a result, Joseph and Jonah Hadley sued Joseph Baxendale for the earnings that they lost. Following the analysis of the Court of Exchequer, it was decided that Baxendale could not be held liable since he was not aware that the entire activity of the mill stopped. This reveals how disadvantageous damages can be in remedying a breach of contracts.
Every remedy to be adopted in the process of restoring the lost trust in the breached contract requires time to complete it. Be it on the context of damages, it is necessary that enough time is invested in the process of understanding the situation and taking the appropriate action. The time required to say in a court of law affects the default remedies for the breach.[16] Time is responsible for making a difference between paying for the damages in a court of law and immediate performance. If the court is on the side of the plaintiff, then the defendant will not enjoy the ruling if the constant element of time does not affect the situation in consideration. The damages remedy is not always accepted in a court of law. In the case of Farley v. Skinner (2001), Skinner contracts Farley to survey a potential house for aircraft noise. Based on his analysis, Skinner concluded that there was no likelihood for aircraft noise. After moving into the house, Farley realised that the house was constructed directly under Gatwick airport’s circuit. Farley then sued Skinner for the damage claiming that the noise caused him physical inconvenience and discomfort. The Court of Appeal reversed the trail judge’s decision as there existed no right to recover non-pecuniary damages. The damages remedy was not successful in this case. [17] The implication is that damages did not remedy the breach of contract by the breaching party (Skinner), thus showing how inefficient damages could be at times.
Specific Performance
The courts apply the remedy of specific performance where the damages have failed to apply as per Section 52(SGA 1979)[18]. In the case handled by The House of Lords, the Co-operative Insurance Society Limited v Argyll Stores case was refused.[19] In this case, Co-operative Insurance was the Landlord of Hillsborough Shopping Centre in Sheffield, which included twenty-five retail outlets. In the wake of 1979, Argyll Stores leased one of the units for thirty-five years to operate a Safeway Supermarket. In the lease, an agreement in which Argyll agreed to utilise the outlet as a supermarket and keep it open during the usual hours of business was kept. Nevertheless, in 1995, Argyll Store’s head office decided to close twenty-seven of their supermarkets, including the one at Hillsborough that was continuously incurring losses. In response, Co-operative Insurance sought specific performance of the covenant, fearing the impact that it would have on the traders at the site if the Supermarket were shutdown. I am not in agreement with the case law since the court made a mistake. The court was not keen on following the agreement reached earlier, and Lord Hoffman stated that “The purpose of the law of contract is not to punish wrongdoing but to satisfy the expectations of the party entitled to performance. A remedy which enables him to secure, in money terms, more than the performance due to him is unjust. From a wider perspective, it cannot be in the public interest for the courts to require someone to carry on business at a loss if there is any plausible alternative by which the other party can be given compensation.” The judge further stated that “it is not only a waste of resources but yokes the parties together in a continuing hostile relationship. The order for specific performance prolongs the battle. If the defendant is ordered to run a business, its conduct becomes the subject of a flow of complaints, solicitors’ letters and affidavits. This is wasteful for both parties and the legal system. An award of damages, on the other hand, brings the litigation to an end. The defendant pays damages, the forensic link between them is severed, they go their separate ways, and the wounds of conflict can heal.”[20] However, in some cases, the application of the remedy may be of significant impact if all measures are adhered to and upheld.
Effectiveness of Specific Performance in Remedying a Breach of Contract
It is not in all circumstances the buyer benefits from the damages remedy. In any action for breach of contract to deliver unique goods, the court may, if it thinks fit, on the plaintiff’s application, by its judgment or decree direct that the contract shall be performed accurately, without giving the defendant the option of retaining the goods on payment of damages as stipulated in Section 52(1). The sum of the lost cash will not be compensated, and will, therefore, seek the next alternative, which is a specific performance. In this case, the complaint will file a lawsuit in a court of law, and if the court finds it fit for the plaintiff to be compensated for the lost goods, it shall be done. Since damages are not entirely reliable and satisfactory in providing a remedy where a breach of contract is experienced, specific performance provides an alternative remedy. Specific performance should, therefore, be sought, and this is done when the damages have failed to work, or issues described in the particular agreement is unique in its way.[21]
Moreover, the party that did not breach the contract resorts to this form of remedy, which does not focus on monetary rewards that are common in the damages for the losses experienced. In specific performance, a magistrate is involved in a court of law, where the court has to force the breaching party to perform its obligations as per the agreement. The remedy does not in any way apply to the situation where the non-breaching party can be compensated even after the period of the contract.
Shortcomings of specific performance in remedying a breach of contract
Specific performance as a remedy for breach of contracts also has its limitations. For instance, it cannot work where the contract needs close supervision for a lengthy period with no well-defined rules to be met[22]. An example is given by an employee who failed to keep a shop open during the regular hours of work as previously agreed in the contract. Despite not being the case of a sale, Co-operative Insurance Society Limited v Argyll Stores case serves a perfect example showing how specific performance could at times be ineffective in remedying a breach of contract. As per the case, the House of Lords refused the case in Co-operative Insurance Society Limited v Argyll Stores as the court was not keen on following the agreement reached earlier. The court did not find it possible to have a close follow up of the running of the shop. It is now different as the judges are arguing that they need to supervise someone’s property closely, and the proceedings of the contract are not proper to the parties. Limitations for the specific performance are quite a handful. It is only applicable to building contracts since the contract only handles the outcomes of the deal and not how it is carried out. That is to say; it is result based and not activity-oriented because the end of the matter is determined by time which is a constant. To grant a party freedom, this remedy does not apply to contracts involving employment.
The court decrees specific performance where the third party is affected. In case the rights if the third party in the given contract is not well taken care of, the court will use their powers to ensure that the necessary action is taken.[23] Where the party required to make an inquiry of the order takes too much time to ask for the same, this remedy is applicable. Specific performance may not apply where the contract in question lacks adequate consideration, that is, where equity does not in any way help the volunteer[24]. It is also granted only if the party needing performance, as stipulated in the agreement, is very ready to perform his side and become responsible, thus limiting the scope of the remedy’s applicability.
The fact that specific performance is only granted when there is a perception that the compensation of the damages is inadequate is not satisfactory. There is a great need for the law enforcers to understand that specific performance is not to be treated as a right. It is therefore justified to argue that the plaintiff in the Co-operative Insurance Society Limited v Argyll Stores case had to fulfil his performances whether the specific performance could favour him or not. This significantly limits the remedy since it requires that a disappointed promisee can bring to light that he does not have an adequate remedy at law with no anticipation of the specific performance of the promisor.
Some of the awards fall in the same category as the specific performance. Such awards are like that of an objective monetary surrogate that is reconsidered.[25] The offended party is allowed by law to claim the surrogate remedy so that he or she is awarded the compensation for the loss that occurred. The loss that happened following the breach as the law states must be proven. In the event of deciding on the compensation terms, both rights of the parties must be taken into account. The law has to protect every party even though the party that failed on its part has to compensate for the breaking of the covenant that the two parties entered.
The rare form of remedy of specific performance can best apply to irreplaceable items or goods such as a piece of land.[26] These unique goods involved in a contract need a different way of dealing with them. Some of the products may be having liquidated damages that make the breach quite hard to happen. In the issue of where the goods involved are difficult to replace, a survey must be taken to determine whether the given item’s value has appreciated. Once these considerations are evaluated, the specific performance as a form of remedy is applied following the set rules. [27]Specific performance is an equitable remedy for a breach of contract. However, specific performance has no efficient breach of contract, and it does not provide for the social value of breach.
Conclusion
Based on the above discussion, it could be concluded that through the shortcomings of specific performance, the current law has adequately maintained an appropriate remedy that benefits all parties in a contract. This paper has also established that allowing parties with the underlying right to exercise their rightful discretion serves various parties in a contract well given the advantages of specific performance. Nevertheless, it is worth noting that the use of specific performance proves challenging due to the implications surrounding this particular type of remedy. Also, the remedy undermines the judicial system since it is only provided at the discretion of the courts, and this may not auger well in various business-to-business settings and transactions. Thus, damages being the primary remedy is considered to be the most effective and efficient option for remedying various breaches of contracts for contractual sales of goods. This is because damages are save on money and results in different monetary values for all parties involved in a contract. At the same time, with the concept of damages, the innocent party is usually compensated for the loss through a fair negotiation process[28]. In general, damages remain the best form of remedying breaches of contract as it meets economic and ethical issues simultaneously.
Bibliography
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Roach, K., 2019. The disappointing remedy? Damages as a remedy for violations of human rights. University of Toronto Law Journal, 69, pp.33-63.
Sale of Good Act 1979
Samuel, G., 2018. Table of common law cases and practice directions. In Rethinking Legal Reasoning. Edward Elgar Publishing.
Schwartz, A., 1979. The case for specific performance. Yale Lj, 89, p.271.
Smith S, ‘Remedies For Breach Of Contract’ [2014] One Principle or Two?
‘Societe Des Industries Metallurgiques SA V Bronx Engineering’ (2020)
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[1]. Andrews, N.H., 2018. Breach of Contract: A Plea for Clarity and Discipline.
[2] Ibid.
[3] Ibid.
[4] Amin N, and Mohd Nor R, ‘E-Consumer Protection In A Contract For The Sale Of Goods: A Malaysian Perspective’ (2013) 4 International Journal for Digital Society
[5] Eisenberg, T. and Miller, G.P., 2015. Damages versus specific performance: lessons from commercial contracts. Journal of Empirical Legal Studies, 12(1), pp.29-69.
[6] Jajodia G, ‘Remedies For Breach Of Contract’ [2012] SSRN Electronic Journal.
[7] Akrami, F., Yusoff, S.S.A. and Isa, S.M., 2018. Open Price Term under the United Kingdom Sale of Goods Act 1979. Jurnal Undang-undang dan Masyarakat.
[8] Sale of Good Act 1979
[9] Jaycobs, R., Bradshaw, T.D. and Poulos, J., CFPH LLC, 2017. Binary options on selected indices. U.S. Patent Application 15/159,775.
[10] Eisenberg, Theodore, and Geoffrey P. Miller. “Damages versus specific performance: lessons from commercial contracts.” Journal of Empirical Legal Studies 12.1 (2015): 29-69.
[11] Katz, Avery. “Virtue ethics and efficient breach.” Suffolk U.L. Rev. 45 (2011): 777.
[12] Love, J.C., 1979. Damages: A Remedy for the Violation of Constitutional Rights. Calif. L. Rev., 67, p.1242.
[13] Adler, Barry E. “Efficient Breach Theory Through the Looking Glass.” NYUL Rev. 83 (2008): 1679.
[14] Roach, K., 2019. The disappointing remedy? Damages as a remedy for violations of human rights. University of Toronto Law Journal, 69, pp.33-63.
[15] Barnes, Wayne. “Hadley v. Baxendale and Other Common Law Borrowings from the Civil Law.” Tex. Wesleyan L. Rev. 11 (2004): 627.
[16] Jacobi O, and Weiss A, ‘The Effect Of Time On Default Remedies For Breach Of Contract’ (2013) 35 International Review of Law and Economics
[17] ‘House Of Lords – Farley V. Skinner’ (Publications.parliament.uk, 2020)
[18] Sale of Good Act 1979
[19] ‘Societe Des Industries Metallurgiques SA V Bronx Engineering’ (2020)
[20] Samuel, G., 2018. Table of common law cases and practice directions. In Rethinking Legal Reasoning. Edward Elgar Publishing.
[21] Eisenberg T, and Miller G, ‘Damages Versus Specific Performance: Lessons From Commercial Contracts’ (2015) 12 Journal of Empirical Legal Studies
[22] Ulen, T.S., 1984. The efficiency of specific performance: Toward a unified theory of contract remedies. Michigan Law Review, 83(2), pp.341-403.
[23] Pietrini‐Sanchez M, ‘A Case For The Asymmetric Enforceability Of Surrogacy Contracts’ [2020] Journal of Political Philosophy
[24] Schwartz, A., 1979. The case for specific performance. Yale Lj, 89, p.271.
[25] ‘Legality Of Surrogacy With Special Reference To Surrogacy Bill 2019’ (2019) 8 International Journal of Innovative Technology and Exploring Engineering
[26] Ganglmair B, ‘Efficient Material Breach Of Contract’ [2017] Journal of Law, Economics, and Organization
[27] Smith S, ‘Remedies For Breach Of Contract’ [2014] One Principle or Two?
[28] Wilkinson-Ryan, Tess, and David A. Hoffman. “Breach is for Suckers.” Vand. L. Rev. 63 (2010): 1001.