EXAMPLE OF AN EXCELLENT ANSWER WRITEN BY A STUDENT QUESTION 1: Brodie arranges for Rafael to deliver and install a new commercial-grade Wood Fired Oven CG-WFO in his Sicilian restaurant. An express term of the contract states that Rafael must deliver and install the CG-WFO oven by 1 July. However, Rafael is running behind schedule and does not deliver the oven until 14 July. As a direct consequence, the launch of the new oven and the glorious pizza that only it can create – the Sicilian mafiosa capricciosa pizza – was delayed. The delay meant the advertising leaflet (with a launch date of 1 July) that cost Brodie $1000 was useless. Brodie had to order a new set of advertising leaflets with the new launch date of 14 July. Many customers were disappointed. Brodie estimates approximately $12,000 of loss in profit because of the delay. Furthermore, Brodie could not cater for a traditional Sicilian wedding on 8 July and estimates a loss of $20,000 profit because of the cancellation. Advise Brodie (i) whether he could have terminated the contract for delay in the delivery and installation of the CG-WFO oven. (5 marks) (ii) if he may be entitled to any damages. (5 marks) ANSWER i) The legal issue here is whether or not the innocent party (Brodie) has the right to terminate the contract. To resolve this, the question is raised whether the term that has been breached by the defendant (Rafael) is a condition or a warranty, or in the case of an innominate term whether or not it has deprived the innocent party of substantially the whole benefit of the contract. The term in question is the express term that: ‘Rafael must deliver and install the CG-WFO oven by 1 July’. The courts would apply a test of essentiality in relation to this dispute, which involves assessing whether from the general nature of the contract as a whole that the particular contractual promise in question is of such high importance that the promisee wouldn’t have entered into contract unless absolutely assured of strict or substantial performance of the promise. The general rule for time clauses and issues involving time is that they are usually warranties, unless the time for performance is expressly said to be ‘of the essence’ in which case it would be regarded as a condition. Here, the installation of the oven by 1st of July is not made ‘of the essence’ and hence can be considered a warranty allowing damages only for breach. Authority for this is the case of Bettini vs Gye. The clause of the contract establishing that Bettini would attend rehearsals six days prior to the commencement of his engagement as an opera singer was deemed by the court as a warranty because the breach would only, realistically, affect the first week or so of performance which was rather insignificant in the context of a 15 week engagement. As a consequence, Gye was only able to seek damages and wasn’t granted the right to terminate the contract. Here, the two week delay in the delivery of the oven is similar in nature to Bettini’s breach in that it doesn’t cause irrecoverable loss to Brodie’s restaurant and he would still be able to reap the rewards of the newly installed oven and the glorious pizza it can create, albeit two weeks later than initially agreed. Further, the case of Hong Kong Fir Shipping vs Kawasaki provides valuable authority in the unlikely case that the court would deem this term in the contract as an innominate term. In instances where the term is hard to classify when the contract is made, the courts look at the consequences of the breach and to what extent they deprive the innocent party of substantially the whole benefit of the contract. In the grand scheme of the operation of Brodie’s restaurant, which is treated as an indefinite entity until operations are wounded up sometime in the future, the seriousness of the consequences of the pizza oven being delivered only two weeks late are minor. This would then direct the courts to regard the term as a warranty, hence depriving Brodie of the right to terminate the contract. ii) The legal issue here is whether or not the innocent party (Brodie) is entitled to any remedies to compensate him for Rafael’s breach of contract. In common law jurisdictions, remedies are generally available in the form of damages for every breach, no matter how large or small, provided the principles of causation, remoteness and mitigation are fulfilled. Firstly, the measure of damages rests upon the principle of Robinson vs Harman, that is, to put the innocent party in a position that he would have been expected to have been in if the contract had been performed properly. These are called expectation losses: the key being it is not the idea of the court to punish Rafael for his breach, not put Brodie in a better position than he would have been in if the contract ran smoothly. Moreover, the court would consider the hypothetical situation in which Rafael had delivered the pizza oven as agreed by the parties on the 1st of July and it was available for pizza production for all events that followed. The causation principle for damages states that losses must be caused by a breach of contract. Hence, Brodie will have the onus to prove that the defendant’s breach caused his loss in this situation. Reg Glass vs Rivers Locking provides authority for what is commonly known as the ‘but for test’, that is, damages are only available if ‘but for’ the breach, the loss would not have occurred. No doubt, Rafael’s breach which caused the pizza oven to be delayed has caused $1,000 of loss for the pamphlets, as well as $12,000 lost profits for the two week period plus the $20,000 lost profit from the cancelled Sicilian wedding. As was part of the ruling in Payzu vs Saunders, the plaintiff has a duty to mitigate their losses as far as possible. Whilst it would be incredibly difficult for Brodie to finalise an alternative supplier of a high quality pizza oven that would suit his needs in just two weeks, perhaps when he was infor
med of the delay in the delivery of the oven he should’ve made an effort to hire something like a portable oven for temporary use. In order to determine the losses available to Brodie, the remoteness principle states that only losses that were reasonably foreseeable at the time of contracting are recoverable. This is satisfied if the loss is within either of the two limbs of Hadley vs Baxendale: the first being that the loss must arise naturally from the breach and the second that only those losses are covered that are in the parties’ reasonable contemplation at the time the contract was made. Using the precedent of Victoria Laundry vs Newman Industries, it is likely that the lost profits of $12,000 caused by the delay will be deemed to have arisen naturally. This is provided the $12,000 two week profit figure is a reasonable estimate of his business’ output. However, similar to the lucrative government contract in Victoria Laundry vs Newman Industries that didn’t fall under either limb of the remoteness principle, the $20,000 proceeds lost as a consequence of the cancelled wedding did not arise naturally (first limb), nor were they actually contemplated (second limb) between Rafael and Brodie at the time of contracting. The reason for this is that there isn’t any evidence of Brodie giving Rafael notice of the wedding. As for the $1,000 expenditure on useless advertising leaflets, it is unlikely the court will deem this as having arisen naturally from the breach because a special advertising campaign for the pizza isn’t predictable unless Rafael was expressly aware. In the situation where Brodie informed Rafael of the expensive advertising campaign taking place that relied on punctual delivery of the oven, this $1,000 loss would fall under the second limb of remoteness. However, there is no evidence of this and as it stands, the loss would be too remote to be considered recoverable. Finally, it is generally accepted in common law that damages for disappointment (in this case to customers) are not recoverable. Reason being, they are too remote as don’t come under either of the two limbs of Hadley vs Baxendale. Here, the contract is not for the sole purpose of Brodie’s pleasure as was the case in Jarvis vs Swans Tours for a cruise holiday, and therefore Brodie can’t claim damages for any disappointment caused. In conclusion, Brodie can claim damages of $12,000 for loss of ordinary profit over the two weeks the oven was delayed, however he cannot claim them for the loss of $20,000 as a consequence of the cancelled wedding nor for the $1,000 advertising pamphlet. QUESTION 2: Assume, for part (b) only, that Rafael was unable to deliver the oven because of a new law (enacted after the contract) that prohibits the sale of wood-fired combustion stoves (like the CG-WFO) because of the toxic emissions they produce. Advise Rafael about this new legal development prohibiting the sale of CG-DFO ovens. (5 marks) FACTS REPEATED BELOW [Brodie arranges for Rafael to deliver and install a new commercial-grade Wood Fired Oven CG-WFO in his Sicilian restaurant. An express term of the contract states that Rafael must deliver and install the CG-WFO oven by 1 July. However, Rafael is running behind schedule and does not deliver the oven until 14 July. As a direct consequence, the launch of the new oven and the glorious pizza that only it can create – the Sicilian mafiosa capricciosa pizza – was delayed. The delay meant the advertising leaflet (with a launch date of 1 July) that cost Brodie $1000 was useless. Brodie had to order a new set of advertising leaflets with the new launch date of 14 July. Many customers were disappointed. Brodie estimates approximately $12,000 of loss in profit because of the delay. Furthermore, Brodie could not cater for a traditional Sicilian wedding on 8 July and estimates a loss of $20,000 profit because of the cancellation. ] The legal issue raised in this question is the effect of the supervening illegality that prevents the sale of CS-DFO ovens for environmental reasons on the contract between Rafael and Brodie. A contract can be terminated in a number of ways: by performance, by breach or by frustration. To resolve the issue, the most relevant question is whether or not this new law is a frustrating event that excuses both parties from their obligations under the contract. In the case of Codelfa Constructions vs SRA, the injunction issued by the court that made performance of a major portion of the contract legally impossible was accepted by the court as a frustrating event. Here, the new law is similar in nature to the injunction in that it is a supervening event outside of both parties’ control that makes performance of the delivery and installation of the oven illegal. At the time of contracting, such an event could not have been reasonably foreseen by either party and the length of time for which the law will exist is indefinite. The court would most likely deem it unfair for the contract to be enforced in the case that Brodie took legal action against Rafael and argued that the contractual obligations to deliver the oven still remained. Whilst the courts adopt a narrow view of frustration and are reluctant to allow a party to be excused, particularly in a commercial type transaction such as this where the contract is a product of lengthy negotiations and both sides are lawyered up and well resourced, the ruling in Davis Contractors vs Local Council as well as Tsakiroglou vs Noblee wouldn’t be applicable in this situation as the new law preventing the sale of these ovens extends beyond simply making performance of the contract more onerous or inconvenient, it makes the contract blatantly illegal and hence impossible for both parties to fulfil their obligations. Overall, there is a strong case to suggest that the contract between Rafael and Brodie will be destroyed entirely without consequence because of the frustrating event, meaning damages for any of Brodie’s losses are not recoverable.