Problem Question On Contract Law

QUESTION 2 - CONSIDERATION AND REMEDIES Sue owns a successful beauty salon and spa. She decided to expand her business premises and a few months ago she bought the adjoining premises which had been used as a newsagents. She entered into a contract with Steve, a builder, who agreed to convert the newsagents for £25,000. Steve agreed to start work on 1 May and said the job would take about six weeks. Sue agreed to pay Steve £5,000 on signing the contract with the next two instalments of £10,000 due on 1 June and on completion of the work. Advise Sue in each of the following alternative situations: (a) Sue paid the first instalment and Steve started work on 1 May. On 13 May he told Sue that he had underestimated the cost of the work and was having difficulty finding the money to buy the materials he needed. Sue had taken a booking for a large group for 1 July and needed to have the work finished before then as the party could not be accommodated in the treatment rooms at her original premises. She said she would give Steve an extra £3,000 if he guaranteed to have the work done by the end of June. Steve agreed. He finished the work on time and Sue paid the 2nd and 3rd instalments but has not paid the extra £3,000. She wants to know if she can be made to pay this. (b) Steve started work on the conversion but shortly after receiving the second instalment on 1 June, he told Sue that he was currently working on too many other building projects and that he would not be able to complete the job. Sue engaged another builder who finished the work for £14,000. She wants to know if she can claim compensation from Steve and whether Steve can recover any more money from her. (c) Sue became concerned that Steve's workmanship was of poor quality. On 27 May, she decided not to pay him anything further and asked him to stop work in order that she could seek an alternative builder to complete the work satisfactorily. She wants to know if she is entitled to do this. If not, can Steve claim any more money from her?

Q2. (a). A contract has been agreed in which Steve will provide the goods and services required to convert a newsagents for Sue. The express terms are that Steve will start the work on 1 May to be completed in approximately 6 weeks for a money consideration of £25,000 payable by Sue. The agreed payment plan requires Sue to pay Steve a £5,000 initial instalment, £10,000 on 1 June and the final instalment of £10,000 payable on completion.

A legally binding variation of an existing contract requires agreement, consideration and intention to create legal relations. On 13 May Steve states that he has financial difficulties in securing materials to finish the job. In response Sue offers Steve an extra £3000 to complete the job by the end of June, which Steve accepts, so there is agreement. It is a non domestic agreement so there is an intention to create legal relations. In consideration of Sue's promise to pay an extra £3000 Steve has promised to complete the conversion by the end of June[Dunlop Pneumatic Tyre Company Limited v Selfridge and Company, Limited[1915]AC 79 (HL)]. To be valid consideration Steve's promise must be something of value in the eyes of the law[Thomas v Thomas 1842 2 QB 851]and Steve's promise confers upon Sue the factual benefit of being able to fulfil a large booking at the start of July, so Steve's promise is highly likely to be considered good consideration[Williams v. Roffey Bros& Nicholls[1991]1 QB 1(CA)], as Sue's promise to pay more was not obtained by duress[Williams].

This means that Sue's promise to pay Steve an additional £3000 is a legally binding variation of their initial contract and failure by Sue to pay will amount to a breach of contract. As Steve has discharged his primary obligations under the contract, by completing the conversion, he can bring an action for an agreed sum in relation to the £3000 Sue owes him, which is highly likely to succeed.

(b). Steve breaches an express term of this contract by abandoning the job in early June. By breaching the innominate term requiring him to complete the conversion Steve has substantially deprived Sue of the whole benefit of the contract and has thus breached a contractual condition[Hong Kong Fir Shipping Co. Ltd v. Kawasaki Kisen Kaisha Ltd[1962]2 QB 26(CA)]. Such a repudiatory breach entitles Sue terminate or affirm. Sue cannot elect to affirm as Steve has already stated he will not complete the work. Sue must therefore accept this repudiatory breach as terminating the contract and she must communicate this decision to Steve[Vitol SA v.Norelf Ltd[1996]3 WLR 105(HL)].

Having done this the contract will be discharged and all prospective primary obligations under the contract will come to an end for both parties. Secondary obligations remain and Sue is entitled to pursue a claim in damages for breach of contract against Steve. The court will seek to award compensation to put Sue in the position she would have been in had the contract been performed[Robinson v.Harman(1848)1 Ex 850]. The judge is highly likely to rule that the cost of Sue having to employ another contractor is loss arising naturally from Steve's abandonment[Hadley v.Baxendale(1854)9 Ex 341]. By employing another contractor to complete the outstanding work at a cost of £14,000 it is likely the court will hold she took reasonable steps to mitigate her loss[British Westinghouse Electric and Manufacturing Co.Ltd v Underground Railways Co[1912]AC 673]as long as this payment reflects the market price at the time. As Sue has incurred £29,000 of expense in completing a conversion which should have cost £25,000, her expectation loss will be calculated at £4,000 for which Steve will be liable as Steve's breach of contract caused this loss.

Sue's primary obligation to pay Steve £10,000 is discharged when she accepts his repudiatory breach but Sue may still be liable for a secondary obligation to pay Steve a reasonable sum under a quantum meruit. Steve has already received £15,000 in relation to this job and would need to prove that he performed work in excess of this amount and that he is entitled to some proportion of the final payment of £10,000 which according to the contract is an entire obligation payable on completion. By failing to complete this entire obligation Steve will be entitled to no further payment[Cutter v.Powell(1795)6 TR 320]unless he can bring himself under an exception to this rule or prove substantial performance. Sue has not wrongfully prevented Steve from completing the work[Planche v.Colburn(1831)8 Bing 14]and there is not an implied or express acceptance of Steve's partial performance by Sue as she clearly has no option but to take the benefit of the work[Sumpter v.Hedges[1898]1 QB 673(CA]. Steve is only entitled to a quantum meruit for any of his unused building materials used by Sue[Sumpter]. As Steve has abandoned the contract he cannot claim to have substantially performed[H Dakin &Co Ltd v Lee[1916]1 KB 566(CA)]as abandonment is a breach which goes the very root of the contract[Hoenig v.Isaacs[1952]2 All ER 176(CA)]. As Steve cannot evade the entire obligation rule he is entitled to no further payment from Sue.

(c). Steve has agreed a contract to supply building services to Sue in the course of a business so there is a statutory implied term that he must carry out his work with reasonable care and skill[s13 Supply of Goods and Services Act 1982]. s13 is an implied term so its status is innominate term which means Sue's liability will depend on the consequences of any breach. The possible scenarios will be explored. Breach of s13 condition. To establish a repudiatory breach of contractual condition Sue will not only need to prove that Steve failed to exercise reasonable care and skill[s13]but that Steve's workmanship was of such poor quality that it was seriously defective and therefore deprived her of substantially the whole benefit of the contract[Hong Kong]. If she manages to prove this, Sue will have been legally entitled to terminate her contract with Steve for his repudiatory breach by sending him home, thereby discharging her remaining primary obligations to pay Steve two further instalments of £10,000. Sue will also be entitled to bring a claim in damages for breach of contract against Steve for any pecuniary loss she suffers[Robinson]that is not too remote[Hadley]subject to an obligation to take reasonable steps to mitigate her loss[British Westinghouse].

As Steve's work was seriously defective it is highly unlikely that any claim by Steve for a quantum meruit would succeed.

Breach of s13 warranty or no breach. The judge may find that Steve has breached s13 but that the consequences of the breach are not serious. It may be held that Steve's work is of a poor standard but not so bad that it would substantially deprive Sue of the whole benefit of the contract, with the result that Steve's breach would amount to a breach of warranty rather than condition[Hong Kong]. Sue has no legal right to terminate for a breach of warranty, instead she is only entitled to sue for damages while her obligations under the contract remain. Allowing Steve access to the newsagents so that he can complete the conversion is clearly a stipulation that goes to the very root of the contract and by sending Steve home and denying him such access Sue has breached a contractual condition[Glaholm v.Hays(1841)2 Man.&G.257]. In response to Sue's repudiatory breach Steve will terminate as affirmation will be physically impossible and no specific performance will be granted. Steve will be entitled to claim for any pecuniary loss he suffers[Robinson]that is not too remote[Hadley]subject to an obligation to mitigate[British Westinghouse]. Sue will therefore be liable to pay Steve damages of £20,000 for the two outstanding payments minus any damages she is awarded in her counterclaim for Steve's breach of warranty. If the judge rules that there was no breach of s13 then Sue will be liable to pay Steve £20,000.