Breach of contract

The phrase "breach of contract" has been defined by D Chappell D Marshall, V Powell-Smith
and S Cavendar in Building Contract Dictionary (3rd edn) at p 56 as "… an unjustified failure
to carry out obligation under the contract or a repudiation of contractual obligation…". In
Malaysia, it is necessary to refer to section 40 of the Contract Act 1950 which indirectly explain
the phrase as a situation "[w]hen a party of a contract has refuse to perform, or disable himself
from performing, his promise in its entirety…". (Rajoo and Harbans Singh K. S, 2012) Breach
of contract occurs when a party fails to perform some primary obligation under the contract,
for example, when goods are not delivered on the date fixed, or when delivered work does not
conform to contractual requirement. Defective work will not necessarily be a breach of contract
when done if the contractor is not bound to execute work at a specified time. A breach would,
however, occur if work were not complete according to the contract by the date when it should
have been complete. (Uff, 2013) A breach of contract may entitle the innocent party to make a
claim for damages for the losses it has suffered. (Designingbuildings.co.uk, 2018)

Breach of contract comes in various type, such as conditions, warranties, anticipatory breach
and actual breach.

Condition is a term that is not defined in Contract Act 1950 nor common law but reference
can be done based on SOGO 1956 - Section 12(1) &(2). Condition breach is also known as
material breach, total breach, fundamental or repudiatory breach of contract. It is a term of
contract that goes to the root of the contract, an essential term of the contract, or a fundamental
term of the contract.

A material breach is a party’s failure to perform a major part of the contract. The breach is
substantial and prevents the contract from being completed or defeats the purpose of the
contract. A non-breaching party is thus no longer obligated to finish their performance under
the contract.
(Sewell, 2018)

Historically, the English courts tended to interpret the phrase as being tantamount to
"repudiatory breach" 1. However, over the last ten years the English courts have made it clear
that "material breach" has a meaning of its own that depends on the circumstances of each
individual agreement.(Lexology.com, 2018)

A breach of contract will constitute a material breach if the term of the contract that has been
breached is a condition. A term is a condition if it satisfies the test of essentiality. The test of
essentiality requires that the promise (term) was of such importance to the promisee that he or
she would not have entered into the contract unless he had been assured of strict or substantial
performance of the promise and this ought to have been apparent to the promisor. This is an
objective test of the parties' intention at the time of formation of the contract.(En.wikipedia.org,
2018) It allows the innocent party to terminate the contract is the terms and condition of the
contract is breached. Examples of conditions are refusal or disability, failure to give possession
of site, deliberate refusal to pay and refusal to issue interim certificate.

The English courts' interpretation of "material breach", and distinguishing it from the concept
from "repudiatory breach", means that English judges will have a considerable amount of
discretion when it comes to deciding whether a particular breach is material. Whilst this may
be in the interests of fairness and justice (enabling the court to give consideration to a wide
variety of factors before determining the appropriate decision in each case), it leaves
commercial parties in a position of some uncertainty if a clause simply provides that one party
may terminate the agreement if there has been a "material breach" by the other party.
(Lexology.com, 2018)

Faced with a breach of an agreement containing such a clause by its counterparty, an innocent
party will need to be careful before it decides that the breach is material and attempts to
terminate the contract. If the breach is deemed not to be material, then the purported termination
by the innocent party may in itself be regarded as being a repudiatory breach of the contract,
and the innocent party may find itself on the receiving end of a claim (or counter-claim) from
the counterparty for damages arising out of the early termination of the contract 7.
Consequently, parties involved in negotiations regarding the drafting of a termination clause
that includes "material breach" as an event of default that entitles a party to declare the contract
to be at an end must also be careful. (Lexology.com, 2018)

One way of reducing the uncertainty is to specify the kind of breaches which the parties agree
shall be material breaches (by reference to types of conduct or even by reference to specific
clauses in the agreement for which the parties consider any breach must be material). This will
reduce the level of uncertainty during the performance of the contract. However, in most
complex contractual arrangements, the parties will also wish to have a degree of flexibility over
what constitutes materiality and for this reason, even clauses that contain a list of the kinds of
conduct that shall amount to material breaches often do so on the basis that the list is non-
exhaustive. (Lexology.com, 2018)

What constitutes a "material breach" in English law for the purposes of any particular contract
will depend on the circumstances of each case, and the English courts will look to the
consequences of the breach in order to determine its "materiality". In agreements that use
material breach as a trigger for termination rights, situations may arise in which it is unclear
whether a particular breach entitles the innocent party to terminate. (Lexology.com, 2018)

Accordingly, when drafting termination provisions that include "material breach" clauses,
consideration should be given to the following:

• the fact that "material breach" clauses will not be appropriate for all contracts – the
parties must consider whether or not a breach that has only a "serious effect" on the
benefit the innocent party was to receive under the contract (but does not substantially
deprive the innocent party of such benefit) should result in the innocent party having
the option to terminate the contract;
• minimising the uncertainty of "material breach" clauses by specifying the types of
conduct that will constitute a "material breach". (Lexology.com, 2018)

Warranties is also known as a non-material, minor, or partial breach. (Berkowitz, 2018) It is

a term that is not defined in Contract Act 1950, it is a term of contract that is not central to the
existence of contract. "A warranty is a stipulation collateral to the main purpose of the contract,
the breach of which gives rise to a claim for damages but not to a right to … treat the contract
as repudiated. Moreover, Gilbert-ash (Northern) Ltd [1973] 3 All ER 195 at pp 215-216 (HL),
Lord Diplock said in his judgement: " … it was in the first half of the nineteenth century when
this common law remedy of warranty was 'established' and in 1893 when its application to
contracts for sale of goods received statutory recognition in the Sale of Goods Act. Warranties,
otherwise commonly referred to as guarantees, define the liability and limitations of a
contractor for construction defects that arise during and after a construction project. A breach
of warranty occurs when a contractor is unwilling to fulfil their contractual warranty
obligations. A breach of warranty can include both express and implied warranties.
(Trentcotney.com, 2018)

Express warranties are warranties that are outlined within a construction contract that set forth
specific promises or guarantees of quality standards and workmanship. A typical express
warranty within a construction contract may include a guarantee that the work performed will
be free from defects for a certain period of time and conform to contractual obligations or the
contract may simply include a general warranty of quality. A general warranty of quality is a
guarantee that the proper materials and due care will be used to complete a project.
(Trentcotney.com, 2018)

Implied warranties apply to all construction contracts that are required by law, and are in
addition to any express warranties that are outlined within the construction contract.
(Trentcotney.com, 2018)

Anticipatory breach is a breach of contract that occur before the performance of contract is
due.
This may happened when either the promisor does an act that makes performance impossible;
or expressly renounces the contract before due date of performance(see also Cheng Chuan
Development Sdn Bhd V Ng Ah Hock[1982] 2 MLJ 222). The rights of promisee (the party
not in breach or the aggrieved party) in case of doctrine of anticipatory breach are:

• Treat the contract as discharge so that he is absolved of the performance of his part of the
promise, or
• Immediately take a legal action for breach of contract or wait till the time the act was to
be done. (Jandkicai.org, 2018)

Actual breach of contract will take place at the time when the performance is due or during
the performance of the contract, a party fails or refuses to perform his obligation under the
contract. The refusal to perform may lead to repudiation (Jandkicai.org, 2018)
The contract will set out behaviour that constitutes a repudiatory breach, and this might
include:

• Refusal to carry out work.

• Abandoning the site.
• Removing plant from the site.
• Failure to make payments.
• Employing others to carry out the work.
• Failure to allow access to the site.
• Failure to proceed regularly and diligently.
• Failure to remove or rectify defective works.

Where repudiation is considered to have occurred, the innocent party can either affirm that
the contract will continue or accept the repudiation and so terminate the contract. Either way,
it is important that there is some sort of response, as inaction may be considered to be an
affirmation of the contract. Whatever course of action is taken, the innocent party will have the
right to claim damages. (Designingbuildings.co.uk, 2018)

If the innocent part properly elects to treat the contract as discharged, they are relieve from
further liability. They may then claim damages, both as to loss flowing from the breach and
loss flowing from the termination. The latter will usually include the additional cost of
completing the contract. If the contract is not discharged, (whether or not they could have
elected to terminate) the innocent party may claim damages. The right to recover damages is
subject to a number of rules which restrict the monetary loss recoverable which are dealt as
below. Alternatively, in very limited circumstances, the court may order specific performance,
that is, it will compel the defendant to do what they have contacted to do. The Arbitration Act
1996 confirms that an arbitrator may also award specific performance. (Rajoo and Harbans
Singh K. S, 2012)
Remedies for breach of contract are : Damages, Quantum Meruit, Equitable Remedies.

Damages

Damages are monetary loss which can be separated into liquidated damages and unliquidated
damages.

Contracts generally include a provision for the contractor to pay liquidated damages (LD,
sometimes referred to as liquidated and ascertained damages - LADs) to the client in the event
that the contract is breached. In building contracts, liquidated damages usually relate to the
contractor failing to achieve practical completion (i.e. completing the works so they can
handover the site to the client) by the completion date set out in the contract. They are often
calculated on a daily or weekly rate.

Liquidated damages are not penalties, they are pre-determined damages set at the time that a
contract is entered into, based on a calculation of the actual loss the client is likely to incur if
the contractor fails to meet the completion date. They might include; rent on temporary
accommodation, removal costs, extra running costs, and so on. They are generally set as a fixed
daily or weekly sum, although there may be a more complicated formula where the works are
phased, where may be partial possession and so on. It is important that the method of
calculation is precisely and formally documented. (Designingbuildings.co.uk, 2018)

If the contract prevents the client claiming liquidated damages, or if actual losses are
significantly different to those that were estimated at the time the contract was entered into,
then the client may pursue a claim for unliquidated (i.e. actual) damages through the courts.
Unliquidated damages are damages, the exact amount of which has not been pre-agreed, and
are typically determined by the courts. (Designingbuildings.co.uk, 2018)

As liquidated damages are not a penalty, they must have been based on a genuine calculation
of damages when they were set. If they are not genuine, they may be considered a penalty by
the courts and so will be unenforceable (see Dunlop Pneumatic Tyre Co Ltd v New Garage and
Motor Co Ltd). (Designingbuildings.co.uk, 2018)
Calculations might include, amongst other things:

• Loss of rent
• Loss of income
• Fees
• Storage costs.
• Rental costs.
• Fees and fines imposed by third parties.
• Finance costs.

There be a causal link between all the losses the contract foresees are likely to be suffered, and
the breach of contract - ie the damages flow naturally from the delay and must not be 'remote'.
The principle of 'remoteness' is established in the case of Hadley v Baxendale in 1854.
(Designingbuildings.co.uk, 2018)

Liquidated damages can be beneficial for the client, as the remove their obligation to prove
actual losses in the event of delay occurring. They can also be beneficial to the contractor as
they limit their liability to a known amount in the event of delay.(Designingbuildings.co.uk,
2018)

However, in some circumstances, the parties to the contract will wish to exclude liquidated
damages. In this case, they should not simply insert 'nil' as the rate of liquidated damages, as
this can imply that the loss for unliquidated damages is also nil. Instead, they should make clear
that unliquidated damages apply, or delete the clause for liquidated damages.
(Designingbuildings.co.uk, 2018)

Unliquidated damages are damages that are payable for a breach of contract, the exact amount
of which has not been pre-agreed. This is in contrast with liquidated damages which are a pre-
agreed when the contract is entered into.

Construction contracts generally include a provision for the contractor to pay liquidated
damages (or liquidated and ascertained damages, sometimes referred to as LADs) to the client
in the event of a breach of contract - typically failing to complete the construction works by
the completion date set out in the contract. (Designingbuildings.co.uk, 2018)
Unliquidated damages are a form of compensation which is said to be ‘at large’, that is, the
amount is not predetermined with the contract is entered into, but is determined by a court
(either a judge or jury) after the breach has occurred. (Designingbuildings.co.uk, 2018)

The advantage of unliquidated damages is that it allows for the recovery of losses that may
have been impossible to foresee or to estimate with any certainty before the breach.
(Designingbuildings.co.uk, 2018)

The disadvantage is that it leaves the client having to prove their actual losses in the event of a
breach, which can be very complex, and it leaves the contractor with an unknown liability.
(Designingbuildings.co.uk, 2018)

The client must also prove that losses flow naturally from the breach and are not 'remote'.

In standard form construction contracts, parties will sometimes insert ‘NIL’ or ‘n/a’ for the rate
for liquidated damages, if they do not wish to claim liquidated damages, however, this can
imply that losses for unliquidated damages are also nil. If parties wish to exclude liability for
liquidated damages, they must state this clearly in the contract to avoid ambiguity, either stating
that unliquidated damages apply, or deleting the clause altogether. (Designingbuildings.co.uk,
2018)

Quantum Meruit

Quantum meruit means the "reasonable value" of services. The Latin term quantum meruit,
translates to “as much as he has earned,” and refers to the actual value of services rendered.
The legal theory of quantum meruit holds that a person should not be obliged to pay, nor should
the other party receive, more than the value of the services exchanged. This concept may be
used as an equitable remedy in a civil lawsuit, often where the transaction for goods or services
was done without a written contract specifying the amount due. (Legal Dictionary, 2018) A
court can award payment to the innocent party for what they deserve for any works that is
partially done before the another party breach the contract. In another words, the innocent party
can claim for the work that he has done before the another party terminate the contract.
Acceptance of Services

A formal, written agreement is not required for a contractual relationship to exist. When one
individual provides services to another, who has either requested those services, or freely
accepted them, knowing they are not performed free of charge, a contract is seen to exist. In
the event the person receiving services refuses or fails to pay, the provider of services may file
a civil lawsuit seeking payment. (Legal Dictionary, 2018)

In the term of Acceptanve of services, the plaintiff (provider) would need to show the court
that the defendant (receiver) requested the services, or that he had an opportunity to decline the
services if he did not want to pay for them. The rendering of services without giving the
defendant an opportunity to decline does not generally constitution acceptance under the theory
of quantum meruit. (Legal Dictionary, 2018)

For example:

Immediately following a hurricane that swamped the city, many residents found their
basements flooded, and heating systems inoperable, as the storm left a cold front in its wake.
Ronald, a contractor, was going door to door in the neighborhood offering his services as a
contractor to get people’s furnaces going again. Mary gratefully accepts Ronald’s services, for
which he had tentatively quoted a price of $500 plus parts. Ronald patched up Mary’s system,
then moved on to the next house without waiting to get paid.

About a week after the storm, the city instituted a program to repair or replace residents’
damaged heating systems for a very low flat rate, in an effort to get people back on their feet.
When Ronald’s bill arrived in Mary’s mailbox, she didn’t think it was fair to have to pay nearly
$600, when Ronald’s fix was temporary, and the city had stepped up to replace her system.
Ronald files a small claims lawsuit requesting payment for the services he performed, and the
parts he provided.

At the trial, Ronald tells the judge that he was offering his services as a contractor in the wake
of the hurricane. Mary agrees that he had quoted her a tentative price, which proves she did not
expect to receive those services free of charge. The judge rules in Ronald’s favor, ordering
Mary to pay for the parts and services she received. Otherwise, she would have received a
benefit at someone else’s expense. The fact that the repairs were a temporary fix is not relevant,
as that was the nature of the services offered and accepted. (Legal Dictionary, 2018)

Quantum Meruit When Work is Incomplete

In a situation in which a contract is entered into, but the services are not completed, the question
of fair payment may be brought to the court. Incomplete performance on the part of the service
provider may be due to many reasons, including something happening that makes performance
of the service impossible. In a case of incomplete work, the theory of quantum meruit is used
to determine whether payment is due, in what amount payment should be made, and which
party should be paid. (Legal Dictionary, 2018)

The court’s decision in such a case depends on the specifics of the contract, what services were
actually performed, and the circumstances which caused the termination of the work. (Legal
Dictionary, 2018)

For example:

Harold and Maureen hire Jack to strip and re-seal their wood deck, accepting his bid of $3,000,
and giving him a down payment of $1,500. When Jack is about three-fourths finished with the
project, another contractor discovers damage to the house where the deck is connected, and
advises the couple that the repairs will require removal of the deck. Harold immediately tells
Jack to stop his work, and says he will let him know when they can continue.(Legal Dictionary,
2018)

When he hadn’t heard anything from Harold and Maureen a month later, Jack called, and was
told they had decided not to finish the deck. Jack sent a bill, specifying the number of hours he
had already put into the job, and asking for payment of $700 in addition to the down payment
already received. Harold becomes angry and refuses to pay even a dime more.(Legal
Dictionary, 2018)

At trial in small claims court, Jack shows the judge the contract, which consists of a written
estimate for the time to complete the job, and the price for labor. Harold had filed a
counterclaim asking for return of his $1,500 deposit. In ruling that quantum meruit necessitates
that Jack be paid for the services he rendered, and as he had proven he did more than half of
the contracted job, the judge agrees that the amount billed for the additional labor is fair.
Harold’s counterclaim for the return of his down payment is not fair, as it would result in the
couple receiving Jack’s services free of charge.(Legal Dictionary, 2018)

Difference between quantum meruit and unjust enrichment

It is not uncommon for people to confuse the principles of quantum meruit and unjust
enrichment. Both theories have the goal of preventing one party from taking advantage of
another, receiving services without paying their fair value. The difference between the two is
that, while unjust enrichment addresses the issue of failure to pay for services rendered,
quantum meruit addresses the fair amount that should be paid.(Legal Dictionary, 2018)

To be successful in a quantum meruit claim, the service provider (plaintiff) must prove that the
service recipient (defendant) agreed to the provided services, knowing that the plaintiff
expected to be paid, and that the defendant was unjustly enriched, which means he received
something for nothing, which was not the agreement. The amount awarded in a quantum meruit
case, especially where there is no written contract specifying an amount, is generally based on
the fair market value, or going price, for the services rendered.(Legal Dictionary, 2018)

Equitable remedies

Equitable remedies is an court order that forces a defendant to perform his or her part of a
contract, instead of imposing a fine (for non-performance or breach of contract) that lets the
defendant 'buy' himself or herself out of his or her obligations under the contract. Courts take
this step when they are of the opinion that a payment of damages only is not good enough for
a just settlement of the case.(BusinessDictionary.com, 2018) Equitable remedies can be
classified into specific performance and injunction.

Specific performance is an order by the court, to compel a party to undertake their performance
to a term of the contract. This is only applicable to cases where the subject matter is unique,
and for that reason is seldom used. (Anon, 2018) Specific performance is applied in breach of
contract actions where monetary damages are inadequate. Specific performance is being a
discretionary remedy, may not be granted where damages will provide an adequate remedy or
where terms of the contract are uncertain or where there has been delay in bringing the action
or where there was fraud. Suit for specific performance is by compelling the parties to perform
exactly what they had agreed in the agreement. (Lawteacher.net, 2018)

When this option is selected, the party that broke the contract is taken to court, with the plaintiff
requesting that the court force the defendant to perform the specific contract terms that have
not been performed or to refrain from engaging in some activity that is prohibited by the
contract. For example, Lucas wanted to purchase a land to build a shopping mall, so he has
signed an agreement with the real estate brokers to purchase the vacant land nearby the town
area. But at the last minute is told that Lucas will not be granted the land because of the real
estate brokers has got another potential client who is interested in this land and willing to pay
a higher price as well. In this case, Lucas could bring legal action to force the real estate brokers
to keep its promises and grant the land. (Lawteacher.net, 2018)

Injunction is an order issued by the court directing a party to take some action or prohibiting
them from engaging in specific conduct. Injunctions may be issued through the judgment order
in connection with a lawsuit. They can sometimes be filed as a separate request directly with
the court. (LaMance, 2018)

There are many different types of injunctions, which are categorized according to how long
they are enforceable. For example, there are:

• Temporary Injunction: These may be enforceable immediately, but typically last only for
a short period of time, usually 10 days
• Preliminary Injunction: These are also enforceable immediately, but are usually
enforceable during the duration of trial until a more permanent order can be secured
• Permanent Injunction: These are usually issued at the end of a trial as part of the judgment
order. A temporary injunction often gets converted to a permanent injunction after all the
evidence is weighed during trial.(LaMance, 2018)

Injunctions are frequently awarded in cases involving breach of contract. The injunction may
be issued instead of a monetary damages award. This is common where the value of a certain
item can’t be determined, or when monetary damages are not a suitable remedy for the non-
breaching party’s losses. (LaMance, 2018)

Some common uses of in injunction in connection with a contracts claim may include:

• Requiring the breaching party to perform contract terms that they violated- for example,
delivering goods or paying for services.
• Preventing parties from taking further action, for example, prohibiting them from selling
goods that they have promised to sell to the plaintiff party.
• Ordering the breaching party to return goods that they are not entitled to.
• Requiring a sale to be completed at the contract price.
• Prohibiting one party from seeking employment elsewhere.(LaMance, 2018)

Thus, an injunction is often an efficient way to remedy a breach without requiring the parties
to pay damages. In many instances, the non-breaching party is required to choose between a
monetary damages award and equitable relief such as an injunction. (LaMance, 2018)

Injunctions are also used in other areas of law besides contract law. Some common examples
include domestic abuse injunctions in family law and gang injunctions in the area of criminal
law. (LaMance, 2018)

The breaching party may sometimes be entitled to raise a defense if the plaintiff is seeking an
injunction against them. Since an injunction is an equitable remedy, equitable defenses may be
available for the defendant. Some of these may include:

• “Unclean Hands”: A plaintiff cannot obtain an injunction if they have engaged in similar
misconduct as the defendant.
• Laches: If the plaintiff intentionally delayed in filing for the injunction, and the delay
negatively affected the defendant, it may serve as a defense.
• Hardship: An injunction may not be enforceable if it causes the defendant extreme or
undue hardships that they can’t avoid.(LaMance, 2018)
Thus, when requesting for an injunction, the non-breaching party must also be aware of any
possible defenses that might be raised by the defendant. (LaMance, 2018)
Reference :

1. Rajoo, S. and Harbans Singh K. S (2012). Construction law in Malaysia. Petaling Jaya:
Sweet and Maxwell Asia.Uff, J. (2013). Construction law. London: Sweet & Maxwell.

2. Jandkicai.org. (2018). [online] Available at:

http://www.jandkicai.org/pdf/16817Discharge.pdf [Accessed 29 Mar. 2018].

3. Designingbuildings.co.uk. (2018). Repudiatory breach in construction contracts - Designing

Buildings Wiki. [online] Available at:
https://www.designingbuildings.co.uk/wiki/Repudiatory_breach_in_construction_contracts
[Accessed 29 Mar. 2018].

4. Trentcotney.com. (2018). Breach of Warranty | Cotney Construction Law. [online] Available

at: http://trentcotney.com/construction/breach-of-warranty/ [Accessed 29 Mar. 2018].

5. Designingbuildings.co.uk. (2018). Liquidated damages in construction contracts - Designing

Buildings Wiki. [online] Available at:
https://www.designingbuildings.co.uk/wiki/Liquidated_damages_in_construction_contracts
[Accessed 29 Mar. 2018].

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[online] Available at: https://www.designingbuildings.co.uk/wiki/Unliquidated_damages
[Accessed 29 Mar. 2018].

7. Berkowitz, G. (2018). The Differences Between Material and Non-Material Breach of

Contract. [online] Berkowitz Klein LLP. Available at:
http://www.berkowitzkleinllp.com/2013/the-differences-between-material-and-non-material-
breach-of-contract/ [Accessed 30 Mar. 2018].

8. Sewell, T. (2018). Material Breach of Contract | LegalMatch Law Library. [online]

Legalmatch.com. Available at: https://www.legalmatch.com/law-library/article/material-
breach-of-contract.html [Accessed 30 Mar. 2018].
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https://en.wikipedia.org/wiki/Breach_of_contract [Accessed 30 Mar. 2018].

10. Lexology.com. (2018). Terminating contracts for "material breach" | Lexology. [online]
Available at: https://www.lexology.com/library/detail.aspx?g=0ba12ac9-c079-4c2f-b905-
473302867187 [Accessed 30 Mar. 2018].

11. Lawteacher.net. (2018). Remedies for Breaches of Contract. [online] Available at:
https://www.lawteacher.net/free-law-essays/contract-law/remedies-for-breaches-of-contract-
law-essay.php [Accessed 31 Mar. 2018].

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13. Legal Dictionary. (2018). Quantum Meruit - Definition, Examples, Cases, Processes.
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