Contract Breaches and Validation

In today’s business environment, it is crucial that managers become familiar with business law, especially for those who are responsible for making business decisions and agreements, overseeing employees, and protecting the property and rights of their organizations.

Many managers are unaware that their actions can be legally damaging to their own company’s interests as well as to the rights of employees and customers

This series introduces the fundamentals of business law specifically tailored to the needs and responsibilities of management, with an emphasis on practical strategies for conducting business legally and for avoiding costly litigation.

Question 1

List and discuss with examples all the main elements constituting a valid contract.

List of a valid contract

Agreements and contracts are two different things. It is important to know first what constitutes a contract and what constitutes an agreement. We will then study which agreements are contracts, their distinction different types of agreements and contracts.

Essentials Elements of a Valid Contract:

Different sections of the Indian Contract Act lay down the essential elements of the contract. They are as under:

1. Proposal and acceptance

2. Consideration – lawful consideration with a lawful object

3. Capacity of parties to contract – competent parties

4. Free consent

5. An agreement must not be expressly declared to be void.

6. Writing and Registration if so required by law

7. Legal relationship

8. Certainty

9. Possibility of performance

10. Enforceable by law.

Proposal and Acceptance:

When one person signifies to another his willingness to do or abstain from doing anything with a view to obtaining the assent of that other to such act or abstinence he is said to make a proposal.

The first step towards creating a contract is that one person shall signify or make a proposal or offer to the other, with a view to obtaining the acceptance of that another person to whom the offer is made. A proposal when accepted becomes a promise.

When the person to whom the proposal is made signifies his assent thereof the proposal is said to be accepted. A proposal when accepted becomes a promise.

Consideration:

When at the desire of the promisor the promisee or any other person has done or abstained from doing, or does or abstains from doing or promises to do or to abstain from doing something such act or abstinence or promise is called a consideration for the promise.

Every contract consist of two parts – (1) Promise and (2) Consideration for the promise. A promise is often made in return for a promise for example a buyer realizes the goods for the price. Price for goods is therefore, consideration here. Consideration is the cause of the promise. It is the most essential element of the contract. As a general rule, agreement without consideration is void. The promise for a promise in return is consideration.

Illustrations:

A agrees to sell his house to B for Rs 10,000. Here A’s promise to sell his house is for B’s consideration to pay Rs 10,000. Similarly B’s promise to pay Rs 10,000 is for A’s consideration to sell his house to B.

An agreement is a contract, only if it is made for a lawful consideration and with a lawful object.

The consideration or object of an agreements is unlawful if —

(1) it is forbidden by law; or

(2) is of such a nature that, if permitted it would defeat the provisions of any laws

(3) is fraudulent; or

(4) involves or implies injury to the person or property of another

(5) the court regards it as immoral or opposed to public policy

In each of these cases, the consideration or object of an agreement is said to be unlawful. Every agreement if which the object or consideration is unlawful is void.

Capacity of parties to contract – Competent parties:

Every person is competent to contract who is of the age of majority according to the law to which he is subject, and who is of sound mind, and is not disqualified from contacting by any law to which he is subject.

Free Consent:

Parties to a contract must give their consent. The parties must be ad idem, for example both the parties must agree upon the same thing in the same sense. Two or more persons are said to consent when they agree upon the same thing in the same sense. Mere consent is not enough. Consent of parties must be free, for example it must not have been obtained (1) coercion, (2) undue influence, (3) fraud, (4) misrepresentation, or (5) mistake.

An agreement must not be expressly declared to be void

A void agreement is not enforceable by law (Sec 2(g)). It has no legal sanctity. It does not give rise to any rights and obligations. Various agreements are expressly declared void under the Act.

Writing and registration:

Oral contract is a valid contact. However the contract must be in writing and registered, if so required by any law, for example, gift, mortgage, sale, lease under the Transfer of Property Act 1882, Memorandum and Articles of Association of a Company under the Indian Companies Act, contracts under sub sections (10 and 3) of section 25 of the Indian Contract Act, etc. Documents specified under section 17 of the Indian Registration Act, 1908, are required to be registered.

No particular form of writing is required to constitute a contract. Intentions of the parties to enter into a particular contract and to give effect to it must be manifest in it, in order to constitute a valid contract.

Legal relationship:

Agreements which create legal relations or are capable of creating legal relations are contracts, for example, an invitation to a dinner does not create any legal relation and therefore is not a contracts.

Certainty:

The terms of a contract should be clear. In other words, the contract must not be vague. Contracts which are vague cannot be enforced.

Possibility of performance:

Contracts based on impossibility of performance are not valid. The contracts must be capable of being performed.

Enforceable by Law:

A contract in order to be valid must be enforceable by law which element distinguishes agreement and contract. It is enforceable by law it is contract otherwise it is an agreement. The aggrieved party should be able to obtain relief through law in the event of breach of contract. An agreement can also be inferred from correspondence exchanged between the parties.

Question 2

Write notes with examples on the three most important remedies for the breach of contract.

Many thousands of contracts are entered into every day in the Bahamas. They are not all performed according to their terms. Often discussions and negotiations can resolve matters. Sometimes the contract will itself provide some mechanism for resolving disputes. But in many cases the difficulties caused by breach of contract cannot be resolved informally. The law has to provide a range of remedies to enable the party aggrieved by the breach to obtain either the performance contracted for or some compensation for not receiving it. In the absence of such remedies one of the most basic of legal principles -that contracts must be kept -would be legally unsupported. Problems of breach of contract are by no means confined to large commercial contracts. They can affect anybody. In this article we consider the adequacy of the existing law on remedies for breach of contract.

We will use the term “aggrieved party” in this article. This is preferable to “innocent party” because the party aggrieved by a breach of contract is not necessarily innocent of contractual wrongdoing as he himself may be guilty of some breach himself.

The article deals with both non-judicial and judicial remedies for breach of contract. The non-judicial remedies covered are unilateral repudiation or suspension of performance (under which the aggrieved party can withhold performance temporarily until the party in breach performs or reject and cancel the contract outright and this can also be referred to as rescission (whereby the aggrieved party can bring the contract to an end so far as all future performance is concerned). The judicial remedies fall into two categories. Some, such as a decree for payment of what is due under the contract and a decree for specific performance, are designed to ensure that the aggrieved party receives the performance contracted for. An injunction may in practice serve the same function in certain circumstances. The second category consists of those remedies designed to ensure that the aggrieved party receives monetary compensation.

Compensation in the above context will invariably seek to put the party at the same position he would have been if the contract has been performed as the parties originally intended.

The main example is an award or payment of damages. An award of interest may serve the same function where the breach consists of the late payment of money.

One of the main practical problems in relation to remedies for breach of contract is caused by uncertainty as to whether the conditions required for the exercise of a particular remedy are fulfilled as the law does not operate in vacuum as it is an instrument of social engineering. The article discusses whether there would be advantages in a special procedure for obtaining a summary judgment in matters of breach of contract. It also discusses other ways of increasing certainty, such as giving the aggrieved party a right to set a further fixed time for performance, or to seek adequate assurances of performance, with appropriate sanctions in each case

A proper consideration of remedies for breach of contract requires us to consider whether, and to what extent, the normal remedies for breach of contract apply where both parties are in breach.

In this article we are not concerned, save incidentally, with the law on undue or unconscionable enrichment. A decree for the redress of unjustified enrichment is strictly speaking, not a remedy for breach of contract. However, incidental consideration of this subject is required where a contract is terminated by rescission but something has already been done under it. In this regard, a party may have obtained some benefit from the contract. In such a situation the remedy of rescission may have to be supplemented by some mechanism for the return of, or payment for, benefits already received. This is in the form of equitable remedy of restitution. We consider ways in which that can be done, and in that context we refer briefly to the law on unjustified enrichment, which is one way of dealing with the problem.

We are not concerned in this article with the problems arising in cases where neither party is in breach. We are not, for example, concerned with the rules whereby pre-contractual impossibility of performance may in certain cases make a contract invalid or with the rules whereby supervening impossibility of performance may bring a contract to an end.

There can be gainsaying the fact that the topic of remedies for breach of contract has given rise to a great deal of academic discussion. The United Nations Convention on Contracts for the International Sale of Goods (commonly called the Vienna Convention or the CISG) is now in force in some 50 states and regulates a large proportion of international commerce. It already affects companies engaged in international trade because the Convention applies if the law governing the contract is the law of a Contracting State and contracts entered into by a company in a contracting state may well be governed by such a law. The United Kingdom has not ratified the Convention but may yet do so. With each year that passes, the United Kingdom courts lose opportunities to influence the interpretation of the Convention.

The Vienna Convention has had an influence on two other recent international instruments -the Principles of International Commercial Contracts drawn up by Unidroit and published in 1994 and the Principles of European Contract Law prepared by the commission on European Contract Law under the chairmanship of Professor Ole Lando of which the part on remedies was published in 1995.

All of these instruments were the product of comparative legal discussion. They involved a pooling of ideas from common law countries and civil law countries.

It would probably be easy for most common law countries to achieve full compatibility with international norms on remedies for breach of contract. The fact that the existing contract law of most common law jurisdictions is not entirely in statutory form but is derived largely from cases disguises the extent to which it is similar to the rules of the modern international instruments mentioned above.

There has in the past been confusion in the use of the words “resile”, “repudiate” and “rescind” in the context of contracts. In recent years a standard usage seems to have emerged, although variations are still encountered. We follow that standard usage in this article and use the terms in the following way.

To resile from a contract means to withdraw from it lawfully, in the exercise of a right to do so, but not in response to a repudiation or breach.

To repudiate a contract means to indicate clearly, by words or acts, that the repudiator will not perform it, having no right to withhold or refuse performance. A repudiation is a wrongful rejection or renunciation of the contract. It does not end the contract but gives the other party an option to rescind.

To rescind a contract means to bring it to an end, at least so far as concerns the future performance of primary obligations, in response to a repudiation or material breach by the other party.

It is inaccurate to talk of the aggrieved party “treating” the contract as rescinded, although this usage is sometimes encountered. What the aggrieved party does is rescind the contract, not treat it as rescinded. The Sale of Goods Act 1979 talks of the party aggrieved by a material breach being entitled to treat the contract as repudiated. That is different and is not inaccurate so much as incomplete. It leaves it to be implied that the aggrieved party can rescind in response to a repudiation. Nowadays it would be preferable to talk of the aggrieved party being entitled to rescind the contract.

A repudiation will often be accompanied by, or followed by, a breach of contract but is not, strictly speaking, itself a breach of contract. There can be a repudiation without a breach.

For example, a builder, in the course of a heated dispute about what a building contract requires, says “I’m finished with this contract. You can do what you like. I’m having nothing more to do with it. My men are walking off this site and not coming back.” The other party urges another attempt to sort matters out and suggests a compromise solution. An hour later, matters are resolved to the satisfaction of both parties. The contract is duly performed. We can rightly say in relation to the above scenario that there was a repudiation but no breach.

However, a repudiation gives the other party an option to rescind the contract and, if this option is exercised, the repudiation is treated as if it were a breach. Damages can be claimed accordingly. It is critical to note at what point in time a repudiation or rescission has occurred so as to know when a remedy is potentially triggered by such repudiation or rescission. A repudiation can be regarded as a sort of “inchoate breach”.

A material breach is not necessarily a repudiation.

A contract, for example, may give either party a right to resile if the consent of a third party to some step is not forthcoming when such consent is a condition precedent in such a contract. There is a helpful discussion of the concept of repudiation, and a review of earlier cases, in some leading text modern text books on the law of contract.

The word “renunciation” is used in some English cases. See eg Universal Cargo Carriers Corporation v Citati [1957] 2 QB 401 at 436.

Lord Dunpark had said that a repudiation was in itself a breach but, for the reasons given in the text, the idea of an inchoate breach seems more accurate.

Example. A is a young man who is just setting up in the computer maintenance business. He enters into a contract with B to maintain a system which is unfamiliar to him. He has every intention of performing, being anxious to do a good job, build up his reputation and acquire useful experience, but his performance is disastrous. His early attempts to rectify a minor problem make matters worse and cause B great loss. There is a material breach of contract. B rescinds the contract while A is still trying to repair the system and asks A to leave. A pleads for another chance to rectify the problem. He has to be escorted forcibly from the premises, protesting all the way that he can solve the problem. There was a material breach but no reasonable person could conclude that A was at any time indicating an unwillingness to perform. There was a material breach but no repudiation.

The term “repudiatory breach” is sometimes used. It is a useful enough term in certain contexts but not precise enough for general use. A breach can have all the effects of a material breach and, in particular, can justify rescission, even although it would be straining language to say that it indicated an intention to repudiate.

At one time contracts would be “avoided” or declared null and void and of no effect ab initio because of a material breach, such as a failure to pay the price for land which had been bought, want of due execution or improper execution of a deed or failure to comply with a statutory requirement for the contract and lack of contractual capacity or failure to obtain the consent of a party to a contract where such consent is necessary etc. This usage reflects an earlier conceptual framework and is not now appropriate. It is noteworthy, however, that the Vienna Convention talks of contracts being “avoided” for breach in contexts where we would say “rescinded”. The European Principles and the Unidroit Principles talk of contracts being “terminated” for breach, a more understandable usage.

In general “breach” in relation to a contract means a failure, without legal justification, to perform an obligation under the contract as required by the contract. Legal justification may take various forms. For example a party may be justified in withholding performance if the other party is already in breach of a countervailing obligation. Supervening impossibility may justify a party in not performing. These may be in the form of circumstances not within the contemplation of the parties at the time they entered into the contract. A statute may make it unlawful to perform and thereby justify non-performance. For instance, A contracts to import cement from Thailand from B on June to be performed within three months and two months later the Thai government or the Bahamas government passed a law banning the sale and importation of cement to and or from Thailand and the Bahamas. Non-performance of an obligation may be justified if performance requires the co-operation of the other party and the other party obstructs performance.

So far as we are aware, the only difficulty in relation to the definition of breach of contract which might lend itself to a legislative solution is a slight uncertainty about the nature of a breach of a contractual warranty. Is a breach of a warranty about past, present or future facts, which is not an obligation to do or pay anything, a breach of contract which can trigger the normal remedies for breach of contract so far as applicable? The fact that breach is commonly defined by reference to a failure to “perform” may give rise to a doubt. If, for example, X enters into contract to sell land and warrants that there has been no adverse planning decision affecting the property, and it turns out that there has been such an adverse planning decision, it would be straining language to say that X has failed to “perform” an obligation. And yet there is no doubt that breach of a contractual warranty ought to be treated as a breach of contract. The parties in this situation cannot proceed to the conveyance stage of their transaction.

Generally, remedies for breach of contract cannot be pursued until the time for performance of the contract has arrived and a breach has occurred. The doctrine of anticipatory breach, however, provides a well-known exception to the above principle. The essence of this doctrine is that if one party repudiates the contract the other party has an option to accept the repudiation, rescind the contract and claim damages immediately without waiting for the date when performance would have been due. In effect the repudiation, once accepted, is treated as if it were an actual breach. The aggrieved party is not obliged to take action in response to the anticipatory breach and may choose to wait until the date of performance before seeking available remedies. If, however, the repudiation is not accepted, the contract remains in force and the repudiating party retains the option, and indeed the obligation, of performing at the due date.

The doctrine of anticipatory breach by repudiation derives from English law and is found in all common law systems.

It is clear whether it should be made clear that the aggrieved party has similar remedies where there is not total repudiation but where there is nonetheless something which indicates conclusively that there will be a fundamental or material breach. On principle, anything which makes it clear that there will be a material breach of the whole contract ought to give the aggrieved party the option to rescind the contract and exercise other available remedies. If, for example, a builder who has contracted to build a house says that he will be able to lay the foundations but not to do anything else, it seems clear that the other party to the contract should be able to treat this as a repudiation of the contract and act accordingly. This is in accordance with the rules in international conventions. The Vienna Convention provides that

“If prior to the date for performance of the contract it is clear that one of the parties will commit a fundamental breach of contract, the other party may declare the contract avoided.”

The Unidroit Principles and the European Principles have very similar rules.

But it is not clear whether the aggrieved party’s remedies for anticipatory breach arise not only when there is a total repudiation of the contract but also when it is clear that there will be a material breach of the contract.

Anticipatory breach of severable part of contract.

There may also be a need for clarification of the law on the effect of a repudiation or anticipated breach of a severable, but perhaps small, part of a contract. Suppose that a builder who has contracted to build a house says that he will not be able to supply a particular kind of window lock which is specified, and charged for separately, in the contract. It seems clear that that should not entitle the other party to bring the whole contract to an end.

This will be considered a minor breach and as such does not entitle the other party to repudiate the contract or rescind it. He may seek for monetary damages where and if necessary. There could also be difficulty in allowing a claim for damages so long as the contract continues unchanged. The builder might be able to obtain the window locks and may tender performance notwithstanding his earlier statement. Damages might prove to be premature. On the other hand it would seem reasonable to give the aggrieved party the option to bring the part of the contract relating to the window locks to an end (but not to rescind or reject or cancel the entire contract]

This is where we consider the concept of material breach or fundamental breach that goes to the root of the contract as opposed to a minor breach that does not affect the substratum of the contract as previously mentioned. The two kinds of breach have no doubt differing effects.

It is inherently the nature of the breach that determines the appropriate remedy for a party to a contract.

The Vienna Convention uses the expression “declare the contract avoided” where we would use “rescind the contract” or “treat the contract as having come to an end”.

A breach of contract may be material or not material. The main importance of the distinction is that only a material breach will justify the other party in rescinding the contract. There is no doubt that some distinction of this kind is essential. Judges have described the concept of “material breach” in various ways – a failure to perform the obligations under the contract “in any material respect”;a violation of stipulations which are “material or essential” as opposed to “minor and incidental”;”substantial failure”; a breach of stipulations going “to the root of the contract”;a breach which is “of the essence of the contract”;or which affects “the root and substance of the contract”.

In today’s commercial world, the tendency is normally to concentrate on the materiality of the breach rather than the term but clearly the two are related and whether a breach is material is a question of fact and degree.

A breach could be important enough to give rise to a large claim for damages but yet might not be “material” enough to justify rescission. International rules on contract law use the terms “fundamental breach” or “fundamental non-performance”.

“A breach of contract committed by one of the parties is fundamental if it results in such detriment to the other party as substantially to deprive him of what he is entitled to expect under the contract, unless the party in breach did not foresee and a reasonable person of the same kind in the same circumstances would not have foreseen such a result.”

It should be noted that this formula leaves it open to the parties to fix the nature of the breach in the contract. They can provide, for example, that failure to perform by a stipulated time is to be a fundamental breach.

“A non-performance of an obligation is fundamental to the contract if:

(a) strict compliance with the obligation is of the essence of the contract; or

(b) the non-performance substantially deprives the aggrieved party of what he was entitled to expect under the contract, unless the other party did not foresee and could not reasonably have foreseen that result; or

(c) the non-performance is intentional and gives the aggrieved party reason to believe that he cannot rely on the other party’s future performance.”

Conclusion

In conclusion Hospitality law is the body of law relating to the foodservice, travel, and lodging industries. That is, it is the body of law governing the specific nuances of hotels, restaurants, bars, spas, country clubs, meeting and convention planners, and more. Hospitality law doesn’t just involve one area of law. It encompasses a wide variety of practice areas, including contracts, antitrust, tort law, and more.

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