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Section B
Question 46
Corporate and Business Law (LW-ENG)
ExitBackground
Az Ltd operates a shipbuilding business which specialises in constructing and modifying ships to order. In 2011, Az Ltd entered into an agreement with Bob to completely rebuild a ship to Bob’s specification for a total contract price of £7 million. However after completion, Bob informed Az Ltd that, due to the downturn in the world economy, he no longer needed the ship. Az Ltd had already expended £5 million on altering the ship, and immediately started an action against Bob for breach of contract.
However, in the week before the case was to be decided in the court, Az Ltd sold the ship for the same amount of money that they would have received from Bob.
Task 1 (2 marks)
Which TWO of the following statements explain the purposes of awarding damages for breach of contract?
1. They compensate the injured party for any financial loss
2. They are a punishment for the party in breach
3. They put the parties in the position they would have been in had the contract been performed
4. They put the parties in the position they were in before the contract was formedQ. Why is it 3 and not 4? – i thought the whole point was to put the person back to the state they were in before they experienced the detriment – Is it because it is tailored to the specific situation and he has already performed his part of the contract and incurred a cost? So remedy if given would be ask price? Getting what you were agreed to be paid for the service?
Thank you so much sir.
If the answer were 1 (I assume you agree with option 1) and 4, that would mean that Az had spent $5 million and would receive nothing as a result of Bob’s default
Think about tis logically! If you and I are in contract and you breach the terms of that contract, and then option 4 applied (damages put the parties in the position they were in before the contract was formed) there’s nothing in it for me!
So whenever a contracting person wishes to opt out of a contract, they would be happy to know that they would suffer no costs because (according to you!) they would be put back into the positions we were in before the contract was formed
Not really a sensible choice is it!
OK?
Ah now that you say it, that does make a lot of sense.. but he didn’t receive anything back because he already sold it elsewhere – why is that?
2. So when would putting them back to the position they were in before the contract was formed, be a sensible choice as a remedy for damages?
Thank you sir!
” but he didn’t receive anything back because he already sold it elsewhere – why is that?”
Because he’s lost nothing
However, in a case involving a Singer model of car, the breacher HAD to pay compensation because it was shown to the Court’s satisfaction that the subsequent sale of the Singer was not effected until a further 6 months after the breach … so costs HAD been incurred and the Court accepted that a sale had been lost
As a remedy for breach? “So when would putting them back to the position they were in before the contract was formed, be a sensible choice as a remedy for damages?”
This concept of restoring parties to their original pre-contractual positions is called rescission and would be available, for example, where a person has been misled by some other party making misrepresentations upon which the innocent party had relied
OK?
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