BREACH OF CONTRACT

Breach of Contract

• Anticipatory Breach: A party declares their intention not to perform the contract before the performance is due.
• Actual Breach: Occurs on the due date of performance or during the course of performance.
• Breach of contract = non-performance of an obligation under the contract.

Remedies

• The primary aim of contract law is to protect contractual expectations.
• These expectations are met when each party performs its promise.
• If a party fails to perform, the other party is entitled to remedies.
• A remedy is a court order that seeks to uphold someone’s right or to redress another’s illegal action.
• When one party breaches a contract, the other can ask a court for a remedy.
• Example: A contract with Amazon imposes delivery within 3 days, but it arrives in 5. This is a breach because the term to perform has expired.
• The counterparty is entitled to seek remedies before a court.
• A remedy is a legal tool to enforce the right, a means of enforcement.
• The innocent party (not in breach) can claim remedies for damages caused by the guilty party.

Three Remedies in Western Legal Systems

• Specific Performance: The breaching party can be forced by a court to perform the contract.
• Allows the innocent party to seek and force performance.
• Termination of Contract: The non-breaching party may ask for the dissolution of the contract.
• Refuse to perform their part or claim restitution of what has already been paid.
• Both parties are freed from the obligations of the contract.
• Damages: Monetary reward to bring the innocent party to the same utility level as if the breach hadn't occurred.
• Can be granted alone or with specific performance or termination.
• Award in money that puts the damaged party in the position they were in before the damage.
• Example: Buying flowers that are not delivered allows the buyer to ask for performance, termination, AND damages.
• If damages are the sole remedy, the value of the flowers + damages from loss of image/diminished sales is needed.
• Damages can be used autonomously or with actions for performance or termination.

Legal Systems and Contract Law

• Different remedies and their enforcement depend on the role a legal system assigns to contract law (civil vs. common law).
• Civil Law: Specific performance prevails due to pacta sunt servanda (promises must be fulfilled).
• Compliance with obligations is respected; moral duty to respect the contract (MORAL APPROACH).
• In case of non-performance, the legal system first imposes fulfillment of the debtor’s duty as a remedy.
• Common Law: Economic approach based on damages.
• No moral duty to perform; freedom to perform or not, but non-performance costs the amount of money for damages.
• ECONOMIC APPROACH.

Specific Performance

• Specific performance is a general remedy in civil law, not in common law.
• The obligation to perform can be enforced in court.
• Only exceptionally is this remedy barred.
• Different from common law, where compensation of damages (monetary reward) is the general remedy, and specific performance is exceptional.
• Non-performance, defective performance, and delay in performance are concerns.
• Each party holds an enforceable right to claim performance from the counterparty.
• If a party doesn't abide by the court decision, an official can seize the owned good and deliver it to the other party.

Exceptions to Specific Performance

• Impossibility to perform (whether or not due to the debtor’s fault)
• Personal obligations, obligations of ‘facere’ of a specific conduct by a specific subject
• Due to the principle of freedom and the fact that forced compliance results in poor performance.
• Forcing someone potentially contravenes the debtor’s personal freedom, and the debtor may not perform at their best.
• Disproportionate cost
• Disproportion in costs considering the interests of the innocent party.
• Performance is possible but would cause the debtor unreasonable effort or expense.
• Civil law will always be free to choose the remedy, but in these three specific cases, only damages are available.

Sources

• BGB, 241 Duties entailed in an obligation.
  • (1) In order to enforce an obligation, the creditor is entitled to claim for the performance from the debtor. The performance may consist in forbearance.
• Code Napoleon, Art.1221
  • “A creditor of an obligation may, having given notice to perform, seek performance in kind unless performance is impossible or if there is a manifest disproportion between its cost to the debtor and its interest for the creditor."

Common Law Approach

• Justice Oliver Wendell Holmes
  • “The only universal consequence of a legally binding promise is that the law makes the promisor pay damages if the promised act does not come to pass. In every case it leaves him free to break his contract if he chooses” .
• In common law jurisdictions, specific performance is a last resort.

Efficient Breach

• A party should be allowed to break the contract signed and pay damages if it would be economically more efficient than performing the contract itself.
• The common law is a system that has efficiency at its core.
• In some situations, it is efficient not to perform a contract if the parties decide not to.
• Example: A farmer contracted to supply vegetables to a restaurant for two weeks finds a second restaurant willing to contract for two years. The farmer can pay damages to the first restaurant and carry on with the second.
• In purely economic terms, the creditor’s position is the same whether protected by compensation for damages or specific performance.
• The debtor may have an advantage by choosing to perform or not to perform the contract.
• They’re free not to perform the obligation because for the overall economy it can result in advantageous.
• Control over breaches is provided by the reputation of the parties; efficient breaches should be rare to avoid losing clients.

Specific Performance in Common Law

• Allowed when the contract has as subject matter a unique object.
• Interest of the party to purchase that specific good, personal close relationship over the objects that no sum of money as compensation for damages can replace.
• No specific performance in cases of sale of generic goods (easily replaceable at standard prices on the market).
• Societè des Industries Metallurgiques V Bronx Engineering Ltd
  • Seller of a machine wrongly refused to deliver it. The court denied the buyer specific performance, even though a substitute machine could be obtained only after 9-12 months delay.
• No performance is a general duty, BUT it is acknowledged that specific performance is available when damages are “inadequate.”
• In contracts concerning specific goods (such as land), courts allow the creditor to force either party to perform in kind.
• Inability of money, awarded as damages, to buy a duplicate or substantial equivalent of the performance promised by the party in breach.

Examples of Specific Performance

• Contract to sell 1000 bushels of wheat at 4 Euro per bushel.
  • If the seller repudiates, and there's an established market where the buyer can purchase similar wheat, money damages representing the buyer’s expectation will be adequate.
  • NO SPECIFIC PERFORMANCE.
• Contract to sell Van Gogh’s “Wheatfield with Crows” for 800,000 Euros.
  • If the seller breaches, a suit for specific performance by the buyer should be successful, as the buyer’s damages remedy is clearly inadequate.
  • SPECIFIC PERFORMANCE.

Termination of Contract

• Termination of contract exists in civil law, with specific performance and the payment of damages.
• Specific performance and termination of contract are ways to breach the contract.
• If a party claims performance and/or damages, it still has to perform its own obligations.
• The innocent party may be willing to terminate the contract: and if this remedy is allowed by the law, no performance is due by either party, and, in case performance already happened, it shall be given back by the recipient.
• Damages need to be paid also, but it is that coupled system we saw before.
• this is the case in which no interest in the performance is there, just the unwillingness to keep the contract alive
• In these matters civil and common law are similar, just the way there explained
• Termination of contract is allowed when its breach is material and fundamental.

Fundamental Breach

• A breach is fundamental when it jeopardizes the interest of the innocent party.

  • A owes B two tons of wheat, with delivery due on October 10, 2016. On that date, A delivers 1,999 tons > material but NOT fundamental
  • A baker is paid for a cake to be prepared for a wedding party (on October 10). He delivers the cake late (1 day) > material and fundamental.

• FUNDAMENTAL BREACH OF CONTRACT:

  • A minor failure to carry out “exact” performance (ex: non-performance of minor importance) exposes the party in breach to liability for damages but will not entitle the innocent party to seek dissolution of the contract for non-performance.

• Art. 8:103 PECL:

  • “A non-performance of an obligation is fundamental to the contract if:
    • strict compliance with the obligation is of the essence of the contract;
    • the non-performance substantially deprives the aggrieved party of what it was entitled to expect under the contract, unless the other party did not foresee and could not reasonably have foreseen that result;
    • the non-performance is intentional and gives the aggrieved party reason to believe that it cannot rely on the other party’s future performance”

Civil Law and Common Law Approaches to Breach

• ECONOMIC APPROACH: people conclude contracts to increase their welfare.
• Instead of performing, the debtor may prefer to bring the other party to the financial position which it would have had if the contract had been properly performed.
• It looks very similar, just the way of putting this is different. They are divided into conditions, warranties and innominate law.
• These are default rules, not mandatory.
• How can the party derogate them?
  • Certain obligations in the contract, if breaches, would give the right to the other party to claim termination of contract, no matter what, no matter the importance of the breach occurred, thus deleting the assessment of the judge in defining the break has fundamental or not.
• Explicit dissolution clauses. in the end the same facts would give the same legal result.

Common Law: Conditions, Warranties, and Innominate Terms

• CONDITIONS: They are the most important. They make the consideration of the contract. They make the contract amount to that particular kind of contract, primary clauses. in a contract of sail i.e. the delivery of a specific good.
• WARRANTIES: minor terms, answering what is surrounding the core of the contract (they answer to where or when), secondary clauses. We are talking about where or when the goods have to be delivered: surroundings. not the heart of the contract. secondary clauses. by breaking that clause we have actually jeopardized that. Usually if you break by warranty you cannot ask for termination. unless the contract becomes useless for one part.
• INNOMINATE (intermediate) TERMS: the clauses that aren’t clear whether they belong to warranties or conditions → normally, the test is that of looking at the 44Alice Scocchi interests of the innocent party, were they jeopardised? → this category coincides with the test of civil law jurisdictions.

Intermediate Terms Case

• The ship ‘Hong Kong Fir’ was hired out under a two-year time charter-party to Kawasaki Kisen Kaisha, in order to sail from Liverpool to Osaka through Virgina and Panama. A term in the charter party agreement required the ship to be seaworthy and to be «in every way fitted for ordinary cargo service».
• However, the crew were both insufficient in number and incompetent to maintain her old-fashioned machinery; and the chief engineer was a drunkard.
• On the voyage, the engines suffered several breakdowns and fifteen weeks of repairs were needed before the ship was seaworthy again. By this time, barely seventeen months of the two-year time-charter remained.
• Hong Kong Fir Shipping v Kawasaki Kisen Kaisha [1962] 2 QB 26
• As the charterers still get to have the boat for 20 more months, the expected benefits can still be received. Therefore, this breach does not lead to termination, but only to damages.
• Lord Diplock Hong Kong Fir Shipping v Kawasaki Kisen Kaisha [1962] 2 QB 26

Termination of Contracts

• The idea is that termination of contracts can be asked but not for each breach of contract, only for those considered fundamental.
• Otherwise, we could have situations in which the patties could abuse it and the contractual system may be less reliable.
• The system needs to protect the contractual element, inserting a certain amount of flexibility in the performance, for example.
• When can a breach of contract be considered fundamental → can jeopardize the interests of the counterparty.
• We have to look at the interests of the innocent party and conclude whether or not their interests were jeopardised. Of course, there are some circumstances in which these instances are fundamental, always referring to the interests of the innocent party
• We have seen that in civil law jurisdiction, only those contracts w/fundamental breach could bring qualification to termination.
• We have to see if the breach really impacted on the “innocent” party.

Agreed Rights on Termination

• Therefore there is an assessment of the judge to see whether the party is allowed to seek for termination.
• So the party can derogate them, they can say that certain obligations if breached would give the opportunity to the other party to seek for termination.
• These agreements are called explicit dissolution clauses. Re-see an example: contract of lease.
• The threshold is not met. But it is a default rule, if in your contract it is said that if you carry a party you can dissolve the contract. you have decided that you can seek termination no matter what. a delay can be considered fundamental or not.
• Punctuality could become fundamental if you decide it, and it is the same thing in both common and civil law.
• Agreed rights of termination in both civil and common law:
  • Termination may occur irrespectively of a fundamental breach in specific circumstances, connected to a specific agreement of the parties.
  • In civil law termination happens if the breach is fundamental, in common law termination happens if there is a breach of conditions/warranties/innominate terms.
  • It might happen that both parties agree to terminate the contract in a different way > agreed rights of termination:
    • EXPLICIT DISSOLUTION CLAUSE: the contracting parties can explicitly agree that the contract will be dissolved if a specified obligation is not performed in the designated way. This clause allows contractual parties to attribute fundamental importance (in terms of the dissolution of the contract) to an obligation, the non-performance would otherwise be of “slight importance
    • TIME ESSENTIAL FOR ONE OF THE PARTIES: the contract is dissolved if the time fixed for performance has been contractually designated as essential in the interest of the other

Damages and Liquidated Damages

• This is the last part of contractual remedies, which are specific performance, termination of contract or damages.
• We are always in the field of breach of contract, what have we done specific performance, and termination, this is the third remedy.
• It leads us to torts.
• Damages is the 3rd remedy in case of breach of contract.
• If performance of the contract does not take place at all, or is late or defective, the creditor may have the possibility to claim damages. This remedy is in line with the principle that an aggrieved party should be brought back as much as possible to the pecuniary position in which it would have been in if the contract had been properly performed (so called “positive interest”)
• If I am a judge and do not comply w/ my obligations, i.e. let’s say that I have to ship, as a company in Algeria, to Italy through a delivery at the harbor in Genova. During the ship the boat sinks and I do not comply w/ the contract, so termination of contract and compensation of damages. What would you compensate for?
  • If I am supposed to sell the goods that I had to receive, to a million dollars, this is how much they own me.
  • The profit that you had lost.
  • For example, now I need to buy the same goods but to another company that costs more, you have to compensate for it.
• What I have to do to solve the problem.
• General principle: full compensation of the damages deriving from the breach of contract.
• !! Where a party sustains a loss by reason of a breach of contract, the party is, as far as money can achieve, to be placed in the same situation, with respect to damages, as if the contract had been performed (expectation damages).
• Compensation covers:
  • Loss which the aggrieved party has suffered.
  • Gain which it has been deprived of
• Unidroit PICC - 7.4.2 (FULL COMPENSATION):
  • The aggrieved party is entitled to full compensation for harm sustained as a result of the non-performance. Such harm includes both any loss which it suffered and any gain of which it was deprived, taking into account any gain to the aggrieved party resulting from its allowance of cost or harm. Such harm may be non-pecuniary and includes, for instance, physical suffering or emotional distress.

Foreseeability

• HOW FAR SHALL THE COURTS GO IN CHARGING THE DEFAULTING PROMISOR THE CONSEQUENCES OF HIS BREACH?
• Economically speaking the idea of full compensation is that a party, which is the victim of a breach of contract, should be put back into the economical condition they would have been in if the contract was concluded. What if it cannot be solved? My limp has to be cut off, it cannot be compensated with money, this principle would not hold. This principle is stated in all civil code and in English and common law. This is typical in the western jurisdiction, but it is a point of commune.
• (both common and civil law countries) how far do we need to go to compensate for these damages, how far?
• Foreseeability does not require actual foresight but only reason to foresee.Some damages can be a bit unusual, they cannot be foreseen
• I need to estimate the cost of performance and of breach → the legal system should repay me for the costs that I was able to foresee.
• Damage should be foreseeable, I cannot pay an amount that is completely out of what normally happened.
• Who decides what is foreseeable?
  • It is an objective estimation and needs to consider the innocent party of an average man, not the particular case.
  • Would a normal person, at the moment of the conclusion of the contract, foresee that specific damage?
  • Before entering a contract I need to foresee the problems. Allocate only the costs that can be foreseen at the moment of the contract. i.e. I’m a company and I enter several contracts; I need to understand the risk of the contract and the cost of it.

Foreseeability Case

• Famous case: there is a miller that breaks down; but usually it should work even without it. But in that specific mill it stopped working, because it is special. The company that was supposed to repair it delayed the party one week after So the mill had to stop for a long time. Was the company liable?
• No,because an average person, put in the position of the fixing company they would not be able to foresee that it was a special mill and it would stop. They did not know it.
• That cannot be seen as a damage foreseeable. Therefore those damages were not covered by the fixing company.
• Hadley v. Baxendale
  • The claimants, Mr Hadley and another, were millers and mealmen and worked together in a partnership as proprietors of the City Steam-Mills in Gloucester. They cleaned grain, ground it into meal and processed it into flour, sharps, and bran. The mill stopped by a breakage in a crank shaft. Hadley enters into a contract with Baxendale, a carrier, to have the shaft carried to the manufacturer for repair. Baxendale is not told that the mill will be stopped until the shaft is repaired, nor does he have reason to believe that this is the case. In breach of the contract, the latter delays in delivering the shaft. As a result, Hadley loses business profits because of the stoppage of the mill. Hadley cannot recover the lost profits because Baxendale did not have reason to know that his delay would cause Hadley to lose profits.

Foreseeability and Duty to Mitigate Damages

• Foreseeability works similarly in common and civil law. This is because when it comes to foreseeability, certainty and protection of free will converge.
• My will is free, but I need to fully understand what I’m entering into. Connected to this concept, the foreseeability is really connected to the idea that the innocent party should be compensated fully for the damages that occurred, but not about the ones that are outside their control. Those consequences, innocent parties had agreed on a contract can be compensated.

Duty to Mitigate Damages

• BUT: there is a limitation → what damages can be compensated? The ones above. Only the ones that can be foreseen, and the limitation that comes from the duty to mitigate damages.
• Back to the case of the doctor w/the bad diagnosis. In such a context, on the first doctor the bills (payment of damages) should be allocated.
• On them I can allocate the cost of surgery and that I will not be able to work for a month. But the new doctor says that now you have to do surgery within a week, but I decide to not get the surgery and medication and eventually then I have to cut off my leg after a month. The compensation for damages for having to have a surgery or to lose a leg is very different. The question is: should the legal system allow me to ask for damages even for the loss of my leg? NO.
• The idea is that at the end the point is to establish a causation link between the conduct and the damages. The damages caused by the bad conduct of one party should be compensated, but not the other damages that are caused from other things.
• It is a limitation. Damages have to be made for the breach of contract, not for others. If the doctor just made a bad diagnosis I should only have a surgery a few later; but I lost the leg because I made the condition worse. The other party should minimize the damages, taking care of himself. If I do not comply with this it is my problem. The doctor cannot foresee that the patient would prefer not to have a surgery and lose a leg.
• Compensation for damages requires a full one (principle of performance of obligation and non perforation). It also requires to compensate only the damages that can be attributed to the liable party and therefore only the ones that were foreseeable and not the one caused by the innocent party.
• A cardinal rule of contract damages is that the aggrieved party cannot recover those losses which the party could have avoided by reasonable effort and without undue expense by virtue of opportunities that the party would not have had but for the breach.
• Consequences of failure to comply with the duty:
  • The gains that the aggrieved party could have made by reasonable effort are deducted from the amount that it could otherwise recover.
• REASONABLE EFFORT

Duty to Mitigate Example

• X enters into a contract with Y, a licensed nurse, under the terms of which Y will live with and take care of X’s aged father for a three month period while X goes on vacation. Y is to be paid 4.000 Euro for his services. X repudiates the contract before Y performs any services or is paid any money.
• In an attempt to mitigate damages, Y places an advertisement in two local newspapers indicating that his private nursing services are available. No one responds to his ad; and consequently Y is unemployed for the entire three month period. Y sued for 4.000 Euro plus the cost of advertisements.
• X argues that Y did not fulfill his duty to mitigate damages > Y may recover the entire amount Only a reasonable effort to mitigate damages is required. The doctrine does not require that his efforts be successful.
• DCFR: III. – 3:703: Foreseeability
  • The debtor in an obligation which arises from a contract or other juridical act is liable only for loss which the debtor foresaw or could reasonably be expected to have foreseen at the time when the obligation was incurred as a likely result of the non-performance, unless the non-performance was intentional, reckless or grossly negligent.
  • 3:705: Reduction of loss
    • 1) The debtor is not liable for loss suffered by the creditor to the extent that the creditor could have reduced the loss by taking reasonable steps.
    • 50Alice Scocchi
    • 2) The creditor is entitled to recover any expenses reasonably incurred in attempting to reduce the loss

Scope of Obligation to Mitigate Damages

• To which point does it goes an obligation to mitigate damages?
• I should have to get surgeries and bla bla and I did not even take the medications (free) and not call the doctor. BUT What if those drugs are not available in my country, and the surgery has to be taken in another state.
• The point here is that only a reasonable effort can be taken into consideration. If it is easy to mitigate damages, I would be guilty If I do not do anything for it. But if it is very difficult, I am not required to do a huge effort (selling a house to have the surgery).
• Normally in the law, we should use an “average” person as a reference.
• Because going back to the idea that the law is based on incentives, we should be objective. We try to put everything in a logical metric, because of legal democracy. Certain schemes are fundamental. We know that everything is a mess, but it is a matter of check and balances. Try to understand each other w/ a common ground and so that everyone has something accountable to refer to.

Liquidated Damages Clauses

• Parties to a contract agree, as one of the terms of their agreement, that, in the event of breach, the culpable party should pay a specified amount to the injured party.
• Liquidated damages provision anticipates a breach, setting the amount to be recovered before any party fails in his obligation under the contract.
• Because the actual damages, which will result from the potential breach, are often unknowable at the time of contracting, liquidated damages represent the parties pre-estimate of the extent of probable damages.
• Often this pre-estimate will turn out to be an inaccurate forecast of the harm actually caused by the breach. Are contracting parties free to determine the amount of liquidated damages?

Functions of Liquidated Damages Clauses

• Convenient method of determining the amount to be paid in the event of breach (good faith pre-estimate of the probable actual damages) > value of the liquidate damages is equal to the actual value of the damages.
• Coercing a party to perform its obligation (liquidated sum will generally provide for liquidated damages which is in excess of the probable actual damages) > also called “penalty clause” (the value of the liquidated clause is higher than the actual value of the damages).
• Diminish the amount of loss to be borne by a party in breach (the sum will be less than the probable amount of damages).

Liquidated Damages and Certainty

• If I sink my boat and do not have it the methodology that we had seen before would apply. Otherwise you just pay the amount that was previously established. Usually one reason for that is because the party wants certainty: it inspired this discipline.
• In our previous classes we have seen that the most important remedy, for breach of contract, is damages. The idea here is that the parties will be submitted to the decision of the judge to decide how much is the liquidated damages. However, this is a default rule. To some extent the parties can agree - in a clause of the contract- upon the amount that a party should give to the other in case of breach of contract.

Purposes of Liquidated Damages Clauses

• Certainty: most of the time the parties want to pre-estimate the cost of the contract (good faith pre-estimate of the probable actual damage).
• Compelling the party to comply w/ the contract: whether the amount of money is higher than the expected liquidated damages that a judge would consider. If this amount is higher, it is coupled with the function of “compelling the other party to comply with the contract” → liquidated sum will generally provide for a liquidated damages which is in excess of the probable actual damages.
• The criteria that we need to consider is loss and gain in case of liquidated damages; the judge would use those. But the decision is still unknown until it happens. The parties may be willing to know in advance how much money they have to give in case of breach of contract.
• Let’s say we have a contract, we discuss some situations that may happen such as the non delivery of the goods. In this case a judge establishes the loss in which the buyer incurred OR we can say: in case of breach of contract we make a clause for which in case of breach of contract the seller has to pay 100.

Penalty Clause in Liquidated Damages

• If the amount of money is approximately equal to the foreseeable (which we can pre-estimate) so only certainty applies; but usually the amount is higher → it is called “penalty clause” . It is a way to promote certainty + compelling the party to comply with the contract. Usually it is provided by the parties.
• Having a lower expected liquidated damages: certainty + limitation of liabilities of the parties. Diminish the amount of loss to be borne by a party in breach → the sum will be less than the probable amount of damages.

Approach to Liquidated Damages Clauses

• COMMON LAW: When it comes to liquidated damages clauses, according to common law, the clauses that can be enforceable are the ones whose value is either equal or below what the judge would estimate. No penalty clauses, or at least they are not enforceable. Only point 1 and 3 can be enforced in common law jurisdiction. Because there is a risk of abuse.

• Civil Law:We do allow parties to compensate with a higher amount of money than the ones that would have been assessed by the judge for the compensation of the damages. But we do have some legal protection to avoid abuse. The judge can reduce the amount whether “it is manifestly excessive” → there are criteria to establish that. If they are above a certain threshold they are considered excessive. It is the way in which the civil law jurisdiction can allow the possibility of penalty clauses

  • Clauses that are not pre-estimate of damages are enforceable
  • Civil law legal system usually do not distinguish between “penalty” and “liquidated damages clauses
  • Civil law jurisdictions provide only for one type of clause which is called in different ways: clausola penale
  • Civil law jurisdiction usually provides for the power of the judge to reduce the amount determined by the parties if it is manifestly excessive or in case of partial execution of the contractual obligation. The rule is mandatory: any agreement that has the effect of excluding the power of reduction is invalid.

Civil Law and Common Law approach of Liquidated Damages Clauses

• Those approaches, when it comes to this matter, have 2 different ways to act. Here are 2 examples. DCFR (Civil law) (guarda soft law instruments per capire cosa sia)
• III. 3:712:Stipulated payment for non-performance
  • (1) Where the terms regulating an obligation provide that a debtor who fails to perform the obligation is to pay specified sum to the creditor for such non-performance, the creditor is entitled to that sum irrespective of the actual loss.
  • (2) However, despite any provision to the contrary, the sum so specified in a contract or other judicial act may be reduced to a reasonable amount where it is grossly excessive in relation to the loss resulting from the non-performance and the other circumstances. “Despite any provision to the contrary” → even if they agreed upon it that clause would have been void. So the judge can reduce it to a reasonable amount.

Enforceable Liquidated Damages in Common Law

• Liquidated damages clause, Function: to pre-estimate the probable extent of damages
• The court affixes labels after it has made a determination as to whether or not the stipulated sum represents a good-faith pre-estimate of potential damages
• Unenforceable Liquidated Damages in Common Law: Penalty clause, Function: coerce the defaulting party to perform his/her obligation.

U.S. v Bethlehem Steel Co.

• The government contracted with Manufacturer to supply gun carriages. Haste was extremely important to the government, and it had therefore passed up lower bids on the gun carriages because Manufacturer had promised the fastest delivery.
• Government and Manufacturer agreed that for each day a given delivery of the gun carriages was delayed, a sum of 35 would be imposed on Manufacturer, payable to Government. This sum was reached by a computation based on the average difference in price between Manufacturer and cheaper, but slower, suppliers. Manufacturer delayed the delivery of some of the gun carriages. Is the clause enforceable?
• YES. The aim of the clause was to compensate the government, by means of a reasonable formula (loss sustained: higher price for a speedy delivery).
• There was a clause providing that in case of delay (specified in the contract) for each day of delay a precise amount of money was to be given to the government as compensation damages. But it is not allowed in the common law system, the amount was calculated with the difference in price from the most expensive company and that company: difference in value.
• I picked you because you said that you could deliver in time, otherwise I would pay someone else and pay less
• According to the court it was fine, precisely because it was not a penalty clause but a clause for compensation of damages.

Tort Law

• The area covered by the rules on tort law encompasses those situations in which victims suffer a harm, relevant in economic terms, and wants someone else to compensate for her loss.
• In substantial terms, tort law consists of remedies granted to the injured persons by those who have caused the harm.
• In basic private law terms “torts are considered among the sources of legal obligations” (see art. 1173 Italian Civil Code: where they are numbered together with contracts, and any other act of fact provided for by the law).
• The fundamental content of the ’tortfeasor (wrongdoer) – injured party (victim)’ relationship is the duty to provide relief for the harm suffered by the latter (by way of payment of a pecuniary sum, or through material restoration of the status quo).
• The idea is that in certain specific cases (which are part of tort law) the loss suffered by one person is transferred to somebody else.

Tort Law and Compensation

• Tort law is one of the most ancient institutions of private law, tort law is that branch of private law that imposes one party to compensate damages to another independently to any legal relation.
• There are situations in which one party has to compensate damages even without a contract between the two of them. Either an intentional core or not → it causes damage. i.e. I crashed your car, I have to pay you because I did not respect the traffic light - even if there was no previous legal relationship. It is pure compensation for damages.
• The problem here, in an economic sense, there are situations in society in which people/subjects are subjected to loss. The general law is that you will bear your loss. The law sometimes decides to allocate the cost of this loss to someone else. It transfers the cost of the loss from the victim to someone else, i.e.
  • you crash your car in a tree because you are stupid → your loss.
  • If you crashed it because there were no signs on the road → you will be compensated.
• The compensatory damages are