1. Contract Law: Breach of Contract Douglas Wilhelm Harder, M.Math. LEL Department of Electrical and Computer Engineering University of Waterloo Waterloo, Ontario, Canada ece.uwaterloo.ca dwharder@alumni.uwaterloo.ca © 2013 by Douglas Wilhelm Harder. Some rights reserved.

2. Outline An introduction to the engineering profession, including: –Standards and safety –Law: Charter of Rights and Freedoms, contracts, torts, negligent malpractice, forms of carrying on business –Intellectual property (patents, trade marks, copyrights and industrial designs) –Professional practice Professional Engineers Act Professional misconduct and sexual harassment –Alternative dispute resolution –Labour Relations and Employment Law –Environmental Law 2 Breach of Contract

3. Definitions Terms of a contract that require performance on a party are said to be obligations Failure to perform an obligation is said to be a breach of the contract The party that breaches the contract is said to be the defaulting party Any other parties to the contract are said to be innocent parties Breach of Contract 3

4. Types of Breaches An essential obligation of a contract is said to be a condition of the contract Other obligations non-essential to the contract are said to be warranties Breach of Contract 4

5. Discharge by Performance The innocent parties may seek remedies for the breach The breach of a warranty may allow the innocent parties to sue for damages or specific performance –Such a breach is said to be an non-material breach If, however, it is a breach of a condition, the injured parties may be able to, in addition, consider the contract discharged by the breach –Such a breach is said to be a material breach Breach of Contract 5

6. Non-material Breach Consider the case of Pigott Construction Co. Ltd. v W.J. Crowe Ltd., 1963 where a subcontractor claimed that the contractor had breached terms in a contract: –The terms in question requested expeditious work on the part of the contractor and to provide heat during winter –Work had not begun by January 1 st, 1957 The case went to court: –The plaintiff argued that the contract should be discharged –The court said, however, that the breaches would not have prevented the subcontractor from substantial performance on the part of his obligations and thus the breaches are grounds for damages, but not for discharge of contract Breach of Contract 6

7. Non-material Breach In the decision: “A breach of contract is a cause of discharge only if its effect is to render it purposeless for the innocent party to proceed further with performance. Further performance is rendered purposeless if one party either shows an intention no longer to be bound by the contract or breaks a stipulation of major importance to the contract... “It may, indeed, be said in general that any breach which prevents substantial performance is a cause of discharge. Whether performance is substantially prevented or only partially affect is, of course, a question that depends upon the circumstances of each case.” Breach of Contract 7

8. Non-material Breach In Jacob & Youngs, Inc. v. Kent, 1921, the contractor used a different brand of pipe than was specified in the contract –The owner claimed a material breach and refused to make the last payment –The owner wanted to sue for the cost of removing the wrong piping and installing new piping –The court found that the breach was non-material, as the brand did not affect the value of the house and thus, the owner was only able to sue for the difference in the cost of the pipes—in this case, $0 Breach of Contract 8

9. Engineers How does one determine when one has a material breach versus one that is not material? –Due to the difficulty of determining this point, very often construction contracts will contain provisions for terminating a contract if a professional engineer has determined that a contractor’s performance was inadequate Breach of Contract 9

10. Repudiation When parties, either through explicit communications or through failure to perform, indicate that they will not perform obligations, they are said to have repudiated the contract –The party repudiating the contract is said to be the defaulting party –If there is no material change, it is possible for the defaulting party to retract the repudiation and continue with its contractual obligations –Non-defaulting parties have two options: Ignore the breach, or assume the contract is discharged Breach of Contract 10

11. Repudiation If non-defaulting parties wish to consider the contract discharged, they must communicate this to the defaulting party “with reasonable dispatch” –The non-defaulting parties may then sue for damages Breach of Contract 11

12. Remedies The non-defaulting party may be compensated for the breach through a number of possible remedies: –Damages for any injury –Quantum meruit remedies –Specific performance –Injunctions Breach of Contract 12

13. Damages The term damages refers to monetary compensation for any losses that affect the innocent party –The amount of damages is determined by a court –What can the injured party claim as damages? Breach of Contract 13

14. Damages In Hadley v Baxendale, 1854, the plaintiff operated a mill and required the defendants to transport a broken crankshaft for repairs –Through negligence on the part of the carriers, the deliver was delayed –The crankshaft was essential to the operation of the mill, but this was not impressed upon the defendants at the time the contract was established –The plaintiff was seeking damages for lost productivity Breach of Contract 14

15. Damages The justice indicated “Where two parties have made a contract which one of them has broken, the damages which the other party ought to receive in respect of such breach of contract should be such as may fairly and reasonably be considered either arising naturally, i.e., according to the usual course of things, from such a breach of contract itself, or such as may be reasonably be supposed to have been in the contemplation of both parties, at the time they made the contract, as the probable result of the breach of it.” The defendants must be told of the consequences if the plaintiffs seek damages as a result of any breach Breach of Contract 15

16. Direct and Indirect Damages Damages may be a direct consequence of the breach: –Any immediate costs that the injured party must incur to complete the terms of the contract –This may include any additional costs, over-and-above the costs of the current contract to find another party to complete the terms of the contract Breach of Contract 16

17. Direct and Indirect Damages Damages may also result indirectly from the breach: –This includes any other losses that are a consequence of the contract obligations not being performed –In the case of Hadley v Baxendale, the shutdown of the mill was an indirect damage resulting from the breach Many contracting parties will often attempt to limit damages to those that directly result from any breach “In no event whatsoever will the manufacturer be responsible for any indirect or consequential damages howsoever caused.” Breach of Contract 17

18. Duty to Mitigate When a party is injured as a result of a breach of contract, the party must still take steps to prevent further damage –In a construction that is partially completed, the injured party would have to, for example, guard against possible water damage –The courts will consider compensating the party for any costs incurred in protecting the structure, but they will not consider water damage to the structure if the injured party took no reasonable steps to protect it Breach of Contract 18

19. Penalty Clauses If a contract includes a penalty clause, that is, one indicating damages to be paid in the event of a breach must be commensurate with the actual damage –Such clauses that are purely punitive will not be upheld by courts Such clauses must reasonable consider actual losses that will be incurred as a result of any breach Breach of Contract 19

20. Penalty Clauses Consider a subcontracted software system that must be installed by a certain date, otherwise, the contracting party will be in breach of its contract –The liquidated damages are those that the contractor will incur if the contract is breach –If a breach of the contract was $1000 per day, it would be unreasonable to have a penalty clause that indicates $5000 per day –The court would not lower the damages to more reasonable levels, but instead simply void the term Breach of Contract 20

21. Quantum Meruit Suppose prior to a breach of a contract, performance had occurred, but the contract did not specify the benefits that would result from the performance In the case where the breach is the result of the party that is to pay Breach of Contract 21

22. Substantial Compliance Consider a subcontracted software system that must be installed Breach of Contract 22

23. Specific Performance Consider a subcontracted software system that must be installed Breach of Contract 23

24. Injunction Consider a subcontracted software system that must be installed Breach of Contract 24

25. References [1]D.L. Marston, Law for Professional Engineers, 4th Ed., McGraw Hill, 2008. [2]Julie Vale, ECE 290 Course Notes, 2011. [3] Wikipedia, http://www.wikipedia.org/ These course slides are provided for the ECE 290 class. The material in it reflects Douglas Harder’s best judgment in light of the information available to him at the time of preparation. Any reliance on these course slides by any party for any other purpose are the responsibility of such parties. Douglas W. Harder accepts no responsibility for damages, if any, suffered by any party as a result of decisions made or actions based on these course slides for any other purpose than that for which it was intended. 25 Breach of Contract