UNIT 8 (2014)

Apunte Inglés
Universidad Universidad Pompeu Fabra (UPF)
Grado Derecho - 2º curso
Asignatura Contracts
Año del apunte 2014
Páginas 22
Fecha de subida 20/01/2015
Descargas 6
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UNIT 8: REMEDIES FOR BREACH Remedies - Definition: mechanisms that define the character and extent of relief (alcance de la reparación) to which an individual who has brought a legal action is entitled (tiene derecho) once the appropriate court procedure has been followed, and the claimant (reclamante) has established that he or she has a substantive right that has been infringed by the other party.
This remedies are applies when there’s a breach of a contract.
- The list of remedies for breach of contract is not uniform across legal traditions and jurisdictions different between countries and dependant on each legal system.
- It is also dependent on the type of performance and contract that were breached, since there are some special remedies that are available for some subset of contracts.
- Private remedies: modern legal systems do not impose criminal penalties on one who refuses to perform one’s obligations.
Spanish Contract Law provides a wide range of general remedies for breach of contract: - Specific performance (including repair and replacement in consumer contracts) - Damages o Expectation damages o Reliance damages - Liquidated damages or penalty clauses - Termination (also known as rescission in other legal systems, not in Spanish law) - Reduction of price in some contracts (sales, leases) - In some cases: interim remedies, such as the possibility of the non-breaching party of withholding (retención) its own performance if the contract was one with mutual obligations on both sides.
the other party is in breach of the contract, because he’s not delivering the goods he promises, and that’s why the party doesn’t pay.
Actio redhibitoria A hierarchy of remedies at least with respect to specific performance and damages is traditionally presented as a major difference between the Common Law and the Civil Law systems of Contract Law.
- Common Law: damages are preferred to specific performance (it’s a support, it’s secondary: when damages are not fair), which is only applied when damages would prove to be inequitable or terribly unsatisfactory - Civil Law (“Germanic continental law”): Specific performance is the main remedy and damages are relegated to a subordinate position.
- In Spanish Civil Law, we don’t have a decision about it. Parties can choose.
- More recent systems of Contract Law have adopted a non-hierarchical view of remedies, and present them on equal footing (igualdad de condiciones), often providing for rules of accumulation when there is no incompatibility between the remedies sought (buscado).
- The choice of the aggrieved party (parte perjudicada) –with some limitations- seems to be the preferred criterion in legal literature, although this is unclear in Case Law of the Spanish Supreme Court (all remedies are valid).
SPECIFIC PERFORMANCE: Specific performance (“cumplimiento específico”; “cumplimiento forzoso”; “reparación in natura”) is a remedy for breach characterized by failed performance or departure from the required action in the contract, which is then imposed upon breaching party by the adjudicator.
Specific performance simply consists in granting (concesión) the aggrieved party the right to request from the Court the performance of the contract (ejecución del contrato) which was not performed (que no se llevó a cabo), the completion (terminación/realización) of what had been performed only in part, or the correction of what had been inadequately performed.
Generally, specific performance or enforcement (aplicación) of monetary obligations is easier than non-monetary obligations enforcement costs (simple transfer of money v. ex post verification of performance).
Several material variants of the remedy: - Forced delivery (entrega forzada) - Forced action (acción forzada) - Injunction not to do (orden judicial de no hacer) - Repair defective performance (reparar cumplimiento defectuoso) - Replace non-conforming good (reemplazar un bien) in some cases, we’ll see that the Court may ask the debtor to replace a defective good.
Spanish regulation: articles 571 and ff. Civil Procedure Act (Ley 1/2000, de 7 de enero, de Enjuiciamiento Civil).
Example: article 46.1 CISG: “The buyer may require performance by the seller of his obligations unless the buyer has resorted (haya ejercido) to a remedy which is inconsistent (incompatible) with this requirement”.
In some cases, forcing an action by debtor in order to obtain specific performance will not work. In such cases, injunctions not to do coupled with penalties (“multas coercitivas”) may be helpful.
Example: Lumley v. Wagner [1852] EWHC (Ch) J96.
Johanna Wagner was engaged by Benjamin Lumley to sing exclusively at Her Majesty’s Theatre in London from 1 April 1852 for 3 months, two nights a week. Frederick Gye, who ran Covent Garden Theatre, offered her more money to break her contract with Mr. Lumley and sing for him.
A judge granted an injunction to restrain (restringir) Wagner to perform at the Covent Garden.
She appealed. The Court rejected the appeal: “It was objected that the operation of the injunction in the present case was mischievous (dañoso, malicioso), excluding the Defendant J. Wagner from performing at any other theatre while this Court had no power to compel (obligor) her to perform at Her Majesty's Theatre. It is true that I have not the means of compelling her to sing, but she has no cause of complaint if I compel her to abstain from the commission of an act which she has bound herself not to do, and thus possibly cause her to fulfill her engagement (cumplir su compromiso)”.
Spanish similar case: Talking Machine Co. c. Compañía Española del Gramófono, S.A. y Márquez López (a.k.a. Raquel Meller), Supreme Court Decision, March 23rd 1921 (Col. Leg. núm. 90, pág. 585).
Perverse incentives and bargaining in the shadow: Sometimes specific performance may be used strategically or opportunistically (perverse).
In some situations, specific performance may be used in a negative way.
Example: Jacobs & Youngs v. Kent, 230 N.Y. 239 (Court of Appeals of New York, 1921) Jacobs & Youngs built a house for Kent under contract. Kent learned that some of the piping (tubería), instead of being made in Reading, was Cohoes piping, contrary to one of the conditions in the contract. However, both pipes were of the same quality. Kent asked Jacobs & Youngs via the architect to do the work all over again and to replace the Cohoes pipes.
Because the pipes had already been encased within the walls (encajadas en las paredes) except in a few places where it had to be exposed, to replace the Cohoes Pipe with the contracted for Reading Pipe would have meant more than the substitution of other pipe.
Jacobs & Youngs would have had to demolish, at great expense (en un gran coste), substantial parts of the completed structure. Because of that, it left the work untouched, and asked for a certificate that the final payment was due which was refused by Kent.
Jacob & Youngs, then filed suit (presentaron una demanda) to collect the remaining balance (saldo sobrante). The trial court ruled in favour (falló a favor) of Kent, which was reversed on appeal (revocada en apelación) and a new trial was ordered.
Justice Cardozo (Benjamin N. Cardozo (1870-1938)): “In the circumstances of this case, we think the measure of the allowance (indemnización) is not the cost of replacement, which would be great, but the difference in value, which would be either nominal or nothing”.
2 possibilities: Specific performace: if he wins the case, the Court said that J&Y has to replace the piping.
Amount of damages: for the judge 0 or 10 units.
Kent is not really interested in pipes, but, if he tries the specific performance, he can negotiate outside of the Court.
Similar Spanish case: “Hormidur” Case (Spanish Supreme Court Decision, January the 14th 2010; J.: Encarna Roca Trías): The parties to a contract to supply construction materials had agreed to the use of concrete branded as “Hormidur” in the construction of a warehouse (almacén). Instead of that specific brand, concrete marked as “Oxigrans” was used. “Oxigrans” was of the same quality as “Hormidur” and, apparently, it was produced by the same manufacturer. As in the American case, the principal noticed it and refused to pay the outstanding amount. The supplier brought a lawsuit against the principal.
According to the Spanish Supreme Court, the defendant had not supplied a different good tan the one promised in the contract (aliud pro alio) pursuant to art. 1166 CC: “1º El material (…) fue de la misma calidad que el pactado, aunque de distinta marca.
Por tanto, si el primero, el acordado, era idóneo para el fin previsto, también lo era el que le sustituyó.
2º Esta identidad en la calidad no produjo la insatisfacción, medida en términos objetivos, del dueño de la obra, que no puede, por tanto, reclamar cuando lo ejecutado coincide con lo pactado, puesto que no se trata de cuestiones de marca, sino de calidades de los materiales que permiten que no se frustre el fin del contrato”.
Other relevant cases: - Peevyhouse v. Garland Coal & Mining Co., 382 P.2d 109 (Okl. 1962) - Spanish Constitutional Court in 1991 (STC 194/1991, 17.10.1991 (RTC 194) MP: Fernando García-Mon y González Regueral) DAMAGES Concept: payment of a sum of money by the defaulting party (parte incumplidora) to the aggrieved party (parte perjudicada) in order to compensate the loss resulting from the breach of contract (“indemnización de daños y perjuicios”; “cumplimiento por equivalente” in some cases).
Problem: to establish which factors may be taken into account in order to establish what can be paid as damages.
The amount or type of the award (adjudicación) of damages may vary and may result in different measures of damages or approaches to assess (enfoques para evaluar) damages.
Broadly speaking, one may conceive the coverage of loss (concebir la cobertura de la pérdida) with a retrospective approach (damages should eliminate the negative consequences from the breach measured from the welfare situation (situación de bienestar) of the aggrieved party prior to the contract) or with a prospective approach (damages should replace the increase in welfare (aumento del bienestar) that performance would have produced (que hubiera producido) but that breach has deprived (ha privado) the aggrieved party from).
This leads to the traditional distinction between expectation damages and reliance damages.
Expectation v. reliance damages Example: Hawkins v. McGee, 84 N.H. 114, 146 A. 641 (N.H. 1929).
Facts - The Plaintiff, Hawkins, had a bad scar (cicatriz) resulting from burns he sustained (quemaduras sufridas) from contact with an electrical wire (contacto con un cable eléctrico) 9 years before.
- Defendant solicits Plaintiff’s father for the opportunity to perform plastic surgery on the scarred hand.
- Defendant says to Plaintiff and father: o Boy will be in the hospital 3 or 4 days o I will guarantee to make the hand a 100% perfect hand - Plaintiff undergoes (someterse) surgery, consisting of removal of scar tissue (tejido) from palm of hand and grafting (injertar) skin from his chest to his hand.
- Surgery was entirely unsuccessful and Hawkins is left with a hairy hand (mano peluda), which requires additional surgery to restore.
- Plaintiff seeks (solicita) damages for breach of contract.
Problem: which is the amount of damages he has to pay? Expectation damages: return the person to the place he will have been if the surgery was successful (the hand has to work 100% if the surgery was OK, now it works 25% returns to 100%) Reliance damages: need to give him a sum of money that would put him in the situation of utility that he has before the particular surgery (return to 50%) Opportunity damage: another doctor promises 75%. Only possible if he didn’t undergo the procedure of the other doctor (now is possible to pay from 25% to 75%) 1) Expectation damages: amount of money that brings the aggrieved contractual party in the situation of utility or welfare in which he/she would be if the contract had been perfectly performed: - It would amount to the valuation (equivaldría a la valoración) –by the creditor- of the good or service minus the contractual price (bien o servicio – precio contractual = expectation damaces) - It traditionally –and currently- includes damnus emergens (loss caused) and the lucrum cessans (lost profit) incluye pérdida causada + lucro cesante (pérdida de beneficios) o Traditionally lost profit is compensated restrictively by Spanish Courts o Hypothetical loses has not to be compensated.
Article 9: 502 PECL: “The general measure of damages is such sum as will put the aggrieved party as nearly as possible into the position in which it would have been if the contract had been duly performed (debidamente realizado). Such damages cover the loss which the aggrieved party has suffered and the gain of which it has been deprived (perdidas sufridas + ganancias de las que se le ha privado).” Article 74 CISG: “Damages for breach of contract by one party consist of a sum equal to the loss, including loss of profit, suffered by the other party as a consequence of the breach […]”.
Article 1106 Civil Code: “La indemnización de daños y perjuicios comprende, no sólo el valor de la pérdida que hayan sufrido, sino también el de la ganancia que haya dejado de obtener el acreedor, salvas las disposiciones contenidas en los artículos siguientes”.
Expectation damages is the general rule in Spanish Law for breach of contract: - It is the damage measure that accompanies termination for breach (terminación por incumplimiento) - It is the replacement measure of specific performance (“cumplimiento por equivalente”).
- It is awarded (se otorga) when there is a breach of representations and warranties (declaraciones y garantías), advertising (publicidad) and promotional communications (comunicaciones promocionales) or pre-contractual documents (documentos precontractuales).
- It is awarded in cases of pre-contractual fraud that, according to the most recent case law, are equivalent to breach of contracts.
Plaintiffs who seek for damages have to provide evidence of both the existence and amount of damages. Evidence is not usually assessed (evaluada) by the Supreme Court when examining appeals for cassation.
- This requirement has some exceptions of: o Harm in re ipsa: illegitimate use of a productive good (bien productivo), deprivation (privación) of a productive good, and few other examples.
o Facilitated proof of harm (substitute transaction as current market practice, market for similar goods or services): Substitutive transaction (operación de reemplazo) approach Market damages approach Substitutive transaction approach to damages When goods or services admit substitute or cover transactions to avoid the negative consequences of the other party’s breach of contract, the price of these transactions is relevant, and proof of damages is eased (se facilita): - If the seller breaches the contract and the buyer has bought a good, generally fungible or generic, but not necessarily, to a substitutive contracting party: Expectation damages = Psub – Pc - If the buyer breaches the contract and the seller celebrates a cover sale (venda cubierta): Expectation damages = Pc – Psub Market damages approach (for fungible, generic goods with a market price): - Buyer will receive expectation damages consisting of the difference between the market price when the breach of contract took place (Pm) and the contract price (Pc).
Expectation damages = Pm-Pc - Seller will receive the opposite difference. Expectation damages = Pc-Pm - Market damages are foreseen and applied in Spanish Law.
Limitations that can reduce its scope and amount: - Foreseeability rule - Duty to mitigate damages - Comparative fault (i) Foreseeability rule Article 1107 CC limits damages for which the debtor in good faith shall be liable to those which are foreseen (previstos) or which could have been foreseen at the time of contracting and which are a necessary consequence of his failure to perform (incumplimiento) → it induces to reveal possible extraordinary damages at the time of contracting.
Art. 1107 Spanish Civil Code: - The damages for which the debtor in good faith shall be liable are those which are foreseen or which could have been foreseen at the time of contracting the obligation and which are a necessary consequence of his failure to perform.
- In the event of wilful misconduct (dolo) the debtor shall be liable for all damages which are known to have arisen from the failure to perform the obligation.
Article 74 CISG: “Damages for breach of contract by one party consist of a sum equal to the loss, including loss of profit, suffered by the other party as a consequence of the breach.
Such damages may not exceed the loss which the party in breach foresaw or ought to have foreseen at the time of the conclusion of the contract, in the light of the facts and matters of which he then knew or ought to have known, as a possible consequence of the breach of contract”.
Notable exception is Germany, where foreseeability rule is replaced by a duty to provide notice (obligación de dar aviso)–which may be discharged post-contract- of increased harm Example in Common Law: Hadley v. Baxendale, [1854] EWHC J70 - A shaft (asta) in Plaintiff’s (Hadley) mill (molino) broke down, which made the mill incapable of operating, and thus brought production to a halt.
- A plaintiff’s agent hired the Defendant (Baxendale) to ship (transporter) the broken mill shaft to an engineer in Greenwich for producing a duplicate - Plaintiff’s agent instructed defendant that mill was stopped and immediate shipment was required, and inquired about time of transportation - Defendant informed that if brought before noon (mediodía), it would be delivered by next day - Price was agreed and shaft placed in hands of defendant - The shipment was negligently stopped in Greenwich for several days - Mill’s operations were closed until the duplicate returned - Plaintiff sues (demanda) for lost profits and obtains £25 from the jury - Defendant appeals Damages should be restricted (deben limitarse a) to the consequences of breach that naturally derive from it, or that may reasonably be supposed to have been in the contemplation of the parties - Defendants, although knew of what was shipped and the purpose of shipment (making a new shaft), did not know, and were not informed about the fact that delay in delivering the model would stop the mill and cause loss of profit.
This rule reduces transaction costs.
Example: Company such as Dropbox Customers: - Low damages: 90% (200u) documents… High damages: 10% (1000u) those people that have in Dropbox photographs, a writer that have a roman In case of a problem (Dropbox lose the information) the company only think in those costumers which the loses can be foreseen: - Supplier of services would have to pay to all of them 200u (included the high damages, because it’s someone he can not foreseen) - If the high damages inform previous to the contract that in case of a problem he’s going to lose 1000u, the company has to pay 1000 (only to him). A unforeseeable event have become foreseeable.
(art. 1107 CC) Exception: Intentional breach CC) remoteness in causation? (criteria to avoid the second paragraph 1107 In cases in which a party goes to the Court to say there was a breach of the contract and he’s harm. The defendant can say there is no causation between the intentional breach and this enforceable payment.
(ii) Duty to mitigate damages: When a party suffers a damage, has a duty to mitigate this damages.
The aggrieved party is under the duty to mitigate damages that the other contracting party has caused with his breach of contract (Supreme Court’s case Law Court).
Article 77 CISG: “A party who relies on a breach of contract must take such measures as are reasonable in the circumstances to mitigate the loss, including loss of profit, resulting from the breach. If he fails to take such measures, the party in breach may claim a reduction in the damages in the amount by which the loss should have been mitigated”.
III. – 3:705 DCFR: 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.
(2) The creditor is entitled to recover any expenses reasonably incurred in attempting to reduce the loss." Example 1: substitutive transactions.
When a party suffers a breach, in order to mitigate losses, duty to make a cover transaction.
Example 2: “Monte Oiz” Plane Crash, 19.2.1985 (Judgment of the Supreme Court, November the 15th 1994 (Ar. 8488), J: Francisco Morales Morales) Juan Manuel R.G. bought a plane ticket in travel agency for the route Madrid-Bilbao. Juan Manuel R.G. wanted to pay the ticket by credit card but he had to pay in cash since his bank (“Banco Hispano Americano, SA”) had mistakenly rescinded his credit card and in fact he had requested a new one.
The plane crashed and the purchaser of the ticket died without his widow and children having been granted (concedido) the compensation of up to 20 million pesetas – 120,202.42€ emerging from the insurance contract in public means of transport which the Bank had entered into with “La Estrella, S.A. de Seguros” in favor of its clients, holders of VISA credit cards.
The widow filed a lawsuit against the Bank, “VISA España” and “Sistema 4B” seeking compensation of damages in the amount of 20 million pesetas that she would had obtained from there insurer in case the credit card had not been rescinded (anulada).
Court of First Instance and Court of Appeals ordered compensation (although “VISA España” was absolved in the appealing instance). However, the SC reduces the compensation to 10 million pesetas (60,101.21€) based on the fact that the victim, in order to mitigate potential damages (inability to receive insurance compensation) could have entered into a travel insurance contract and had not done it because he hasn’t contract the insurance with the flight ticket.
(iii) Comparative fault (“concurrencia de culpas”) Section 254 BGB: Contributory negligence (1)Where fault on the part of the injured person contributes to the occurrence of the damage, liability in damages as well as the extent of compensation to be paid depend on the circumstances, in particular to what extent the damage is caused mainly by one or the other party.
Spain: Supreme Court’s case Law Court.
2) Reliance damages Amount that intends to restore the injured party to the situation of utility that enjoyed before the celebration of the contract.
It would cover: - Expenses for the injured party derived from concluding the contract - Specific investments that the injured party has made in reliance of performance of the contract by the other party.
- In some cases, opportunity cost of entering/negotiating the contract.
In Spanish legal system, reliance damages are awarded in the following cases: - Defects in consent (unless pre-contractual fraud) that render a contract void - Pre-contractual liability (culpa in contrahendo) Damages for pain and suffering (“daño moral”) - Pain and suffering: dommage morale, daños morales, danno non patrimoniale, danno biologico.
- The traditional position of the Spanish Supreme Court and Spanish Courts is: o To accept damages for pain and suffering or emotional distress (angustia) for breach of contract.
o To award (conceder) damages for pain and suffering with a relative amplitude and generosity judges are quite generous in compensating damages for pain and suffering o To award damages for pain and suffering with several functions: To avoid the problems of calculating and justifying the amount of the damage award. Evidence is not really necessary, pain and suffering are presumed in many cases, so less efforts for the judges.
To compensate harm in personality rights (right to life, liberty, honor, etc.).
To compensate non-patrimonial values joined to economic goods and rights (discomfort, inconvenience, disappointment, frustration).
To punish intolerable or egregious behaviours of breach of contract. In some cases, we may find pain and suffering as a way of punishing the breach of a contract. The judge considers this breach very harm.
Compensation of damages cannot have a punishing role, but in fact judges used this mechanism to do that.
In non-economic damages a situation changes its live, and the part cannot restore its live to the previous situation (e.g.: a son dies in an accident). Involve to find a point on the curve in which the value C coincide, this is impossible. Moral damages in order to be compensated have to be infinite, something impossible, there’s no way to provide evidence or an specific amount of pain and suffering damages. Judges has no way to calculate this amount.
Usual examples: breach of air transport contract (delayed flight, cancelled flight, overbooking) frustrates honeymoon; food poisoning in wedding banquets; Example: ECJ Judgment of 12 March 2002, Case C-168/00, Simone Leitner v TUI Deutschland GmbH & Co. KG.
The Plaintiff (Simone Leitner) goes on holiday with her parents to a resort in Turkey where a package holiday had been bought from TUI, the Defendant, for 2 weeks: - In the resort, after a week, Plaintiff suffers salmonella poisoning - For the rest of the holiday she was sick with high fever and had to be taken care of by her parents.
- Plaintiff’s parents send a letter of complaint to defendant, with no response.
- Plaintiff sues (demanda) for damages in the amount of €2,000.
- First instance Court awards €1,000 for the physical pain and suffering, but reject any compensation for loss of enjoyment of the holiday.
- Appeals Court refers the case to ECJ for preliminary ruling.
Compensation for loss of enjoyment as non-economic loss.
ECJ finds that art. 5 of Council Directive 90/314/EEC of 13 June 1990 on package travel, package holidays and package tours includes compensation for non-economic loss resulting from breach of contract in a package holiday contract important point in European law.
- Support that the situation has to be compensation See in Spain: articles 150 and ff. TRLGDCU.
Damages for pain and suffering - Damages for pain and suffering allow avoiding –without a serious justificationrestrictions to the scope of damages established by Section 1107 CC.
A good example: In the Decision of the Spanish Supreme Court, 1st Chamber, of 28.3.2005, Aurelio asked for a compensation of 150 million of pesetas (~900.000 €) for damages suffered when he travelled to Cincinnati (Ohio, USA) and deposited counterfeit (falsificado) money in a local bank. Aurelio was arrested, booked and interrogated by agents of the US Treasury Department, “causing” a breakup with his American girlfriend→ the Spanish Supreme Court awarded (conceder) 360.000 € in damages for pain and suffering.
- Clear that it was a breach of contract - Damages: o Ask for 900.000€: one of the reasons = loss of his girlfriend.
o The Court considered that the loss of his girlfriend has to be compensated too curious because it was something unforeseeable.
Damages for loss of chance Although Spanish Supreme Court had been traditionally restrictive in assessing (evaluar) the existence and scope (alcance) of the lucrum cessans, since some years ago it awards damages for loss of a chance (of obtaining profits or avoiding harm).
Most frequent cases in tort law: - Diagnosis or medical treatment failures that reduce the opportunities of avoiding further harm loss of the opportunity to have an alternative treatment.
- Professional liability of lawyers and attorneys (procurador) that frustrates a judicial action (because they do not observe claims or appeals’ exercise periods) for your fault the client losses an opportunity of winning the case.
- Undue (indebido) lack of information that prevents decision making in medical cases.
For instance: birth of children with serious malformations after the omission of information that would have allowed the parents to decide upon an abortion. It’s more easy for parties to use pain and suffering instead of damages for loss of chance.
LIQUIDATED DAMAGES OR PENALTY CLAUSES Liquidated damages (or penalty clauses) are damages for breach that are not determined ex post breach by a Court or arbitration panel, but ex ante by the contract parties themselves into the contract. Damages calculated in advance in case for if a future breach of contract occurs.
Example: rescission clauses in professional soccer. it is usual that professional players agree when hired to pay an award of damages in case they decide to leave the team before the expiration of the contract term.
Liquidated damages are not accepted in B2C transactions because it’s considered unfair.
Such possibility of “privately stipulated” remedies for breach is acknowledged by most legal systems. In Spanish Contract Law they are allowed by art. 1152 and following CC: Article 1152 CC: “En las obligaciones con cláusula penal, la pena sustituirá a la indemnización de daños y al abono de intereses en caso de falta de cumplimiento, si otra cosa no se hubiere pactado. Sólo podrá hacerse efectiva la pena cuando ésta fuere exigible conforme a las disposiciones del presente Código”.
Article 1153 CC: “El deudor no podrá eximirse de cumplir la obligación pagando la pena, sino en el caso de que expresamente le hubiese sido reservado este derecho. Tampoco el acreedor podrá exigir conjuntamente el cumplimiento de la obligación y la satisfacción de la pena, sin que esta facultad le haya sido claramente otorgada”.
Categories of liquidated damages: - Typically they replace Court award of damages (“pena sustitutiva”) interpretation (article 1152 CC).
Default - They can be agreed as an added “penalty” for breach (Damages + penalty). (“pena cumulativa” or “sancionadora”) (article 1153.II CC). Penalties are added to damages. In cases of breach of contract, the victim can ask for an award of damages plus the application of a penalty.
- They can be agreed as a “withdrawal or escape clauses” it provides a way out of the agreement (“pena facultativa” or “penitencial”) (article 1153.I CC). This is the role of rescission clauses in football player’s contracts.
Common Law’s view on liquidated damages as penalties is negative: Liquidated damages plus penalties are forbidden. If you write a penalty clause in the contract that, this clause will become invalid and excluded of the contract.
Not only when you ask for damages with penalties, but also if you restrict some rights to the party, it can be interpreted as a way to establishes the forbidden penalty.
§ 356 Restatement: Liquidated Damages and Penalties “(1) Damages for breach by either party may be liquidated in the agreement but only at an amount that is reasonable in the light of the anticipated or actual loss caused by the breach and the difficulties of proof of loss. A term fixing unreasonably large liquidated damages is unenforceable on grounds of public policy as a penalty.
(2) A term in a bond providing for an amount of money as a penalty for non-occurrence of the condition of the bond is unenforceable on grounds of public policy to the extent that the amount exceeds the loss caused by such non-occurrence”.
The most important issue across jurisdictions is whether Courts are forced to enforce (hacer cumplir) liquidated damages, or they may disregard, or reduce, the amount of the liquidated damages award.
- - General reasons for allowing liquidated damages clauses in excess of estimated damages from breach (support or defend that this penalties should be enforced): o Freedom of contract (people voluntary enter into the contracts) o Parties are in a better position than Courts to assess or understand benefits and costs of determining a given amount o Liquidated damages compensate systematic underestimation of damages by Courts. Lawyers know that judges tend to infracompensate damages, so establishing a liquidated damages clause in the agreement avoids this.
o Control of agreed damages terms reveals paternalism towards contract parties, especially sophisticated ones (large firms operating with the advice of experts and legal counsel). Allowing that a judge decides the amount of damages to be compensated can be understood as a form of paternalism.
Arguments that may lead to reduce or at least to control the level of liquidated damages clauses (defend the other position): o Incorrect predictions or forecasts (pronóstico) about future outcomes o External shocks unforeseen by parties that produce an unexpected increase in the damages payment o True “uncertainty” about future costs for one party o Over-optimism concerning future performance and costs o Liquidated damages as barriers to entry: an excessive amount is beneficial for the parties to the detriment of a third party who may bid for the services of breaching party can limit competition.
Efficient breach: sometimes breaches of a contract can be efficient from the society perspective (E.g.: we have 2 parties. A has a good (10u) and B values this good in 15u. They decide to enter to a sales contract. They agree on a price of 12u. A has a surplus of 2 and B has a surplus of 3. Social value of 5 [Sa=2 + Sb=3 W=5]. There’s a third party (C) that values the product in 20u. A decides to start a contract with C. They stablishes a price of 18u. For A it’s more beneficial than 12u, for C is more beneficial than 20u he was going to pay for the good. [(Sa=8 + 2) + Sc=2 + Sb=-3 W=9].
Spanish law on reduction of liquidated damages: Article 1154 CC: “El Juez modificará equitativamente la pena cuando la obligación principal hubiera sido en parte o irregularmente cumplida por el deudor”.
Pursuant (de conformidad) to this provision, if breach is partial and not fraudulent the Judge is forced to reduce the conventional penalty.
The main problem concerns determination of when breach is partial or irregular. According to the traditional SC’s case-law, if the breaching party, considering his overall behavior, has performed part of his due obligations, then breach may be deemed (se considera) partial and courts would have to reduce the penalty.
Some nuances: (a) Parties are allowed to write conventional penalties linked with individual obligations.
Therefore, if the party fails to perform this individual obligation at stake (juego) but performs the rest of the obligations included in the contracts, courts shall not reduce the conventional penalty.
Example: Company A and Company B establish a conventional penalty according to which Company A will have to pay 1,000 Euro per day of delay in supplying a commissioned work.
Parties also establish that a delay of more than six months from deadline would entitle Company B to rescind the contract with a right to a compensation of a million Euros.
If Company A supplies the commissioned work with a delay of 3 months from the promised date, we may consider that the contract was not correctly performed, but this would not allows courts to reduce the liquidated damages awards: they would have to apply a conventional penalty of 90,000 Euro (90 days x 1,000 Euro).
(b) Parties may establish a waiver (renuncia) according to which judges would not be permitted to reduce the amount of the conventional penalty.
Example: Judgment of the Spanish Supreme Court, October 10th 2010: - On May the 16th 1991, pop star Marta Sánchez enters into agreement with Ediciones Zeta, S.A. (publishing company of Interviú). Contract established the following conventional penalty: "La publicación de cualquier fotografía del reportaje objeto de este contrato, que no haya sido previamente aprobada por Marta Sánchez, así como su divulgación en cualquier otro medio de comunicación distinto de Interviú generará para Ediciones Zeta S.A. la obligación de indemnizar a Marta Sánchez por el daño a su imagen e intimidad, pactando como cláusula penal inmoderable la cantidad de cincuenta millones de pesetas (50.000.000 pesetas)”.
- 6.6.1991: Interviú published the agreed pictures.
- On that same date, newspaper “Claro de Madrid” published a picture on its front page in which the celebrity was completely nude.
- Marta Sánchez brought a lawsuit against Ediciones Zeta S.A. and asked application of the conventional penalty.
- According to the Supreme Court: Interviú breached the contract in negligence: “Claro de Madrid” had obtained the picture from a copy of the magazine, which had been circulated by Ediciones Zeta as a promotional strategy.
Penalty shall not be reduced since the parties agreed that it had to apply strictly.
(c) Early-termination options or unilateral termination in indefinite contracts. According to the Supreme Court (e.g.: Judgment of March the 10th 2014), if a contracts established an earlytermination option with a penalty, judges shall not reduce the amount of the penalty in consideration that the contract was performed during the period before the termination notice.
Example: STS 10.3.2014: "en los contratos por negociación, en los que expresamente se prevea una pena convencional para el caso del desistimiento unilateral de las partes, la valoración o alcance patrimonial de la pena establecida no puede ser objeto de la facultad judicial de moderación, cuestión que pertenece al principio de autonomía de la voluntad de las partes". - TERMINATION (or rescission, or cancellation, as it may also be called in Common Law jurisdictions): - This remedy entitles the aggrieved party to cancel the contractual relationship with the breaching party, eliminating the obligations arising from the terminated contract.
- No more obligations towards the other party.
Article 1124 CC: “La facultad de resolver las obligaciones se entiende implícita en las recíprocas, para el caso de que uno de los obligados no cumpliere lo que le incumbe.
El perjudicado podrá escoger entre exigir el cumplimiento o la resolución de la obligación, con el resarcimiento de daños y abono de intereses en ambos casos.
También podrá pedir la resolución, aun después de haber optado por el cumplimiento, cuando éste resultare imposible […]” Compatible with termination: - Specific performance is not simultaneously compatible with termination.
- Damages are compatible with termination.
Once the contract is terminated: - The parties should give back what was received under the contract, unless the goods are now in lawful (legal) possession of a third party (restitution) o - The value of the goods would replace the goods themselves (=restitutionary damages).
The elimination of the effects of the contract is retroactive: it is considered that the contract did not exist. Exceptions: o Long-term contracts: sometimes it’s impossible to put the parties in the situation they have before the contract.
o Rights transferred to third parties: one of the goods is in possession of a third party (A sell to B sell to C). If A wants to terminate the contract, B has to pay the price of the good because he cannot rectitude the good because C has it.
o Some provisions in the contract may subsist: sometimes the parties agree that some provisions may subsist, in order to the parties to have opportunities to go to the court.
When a party cannot give the good back, he has to compensate with money the other party.
A (seller) B (buyer): B pays nothing to A, and A ask for the good and for money, because B had take profit of the good for a period of time.
- Termination does not go alone: it is usually coupled with a damages award (=expectation damages).
- It is clear that not every breach or non-performance allows the aggrieved party to terminate, but a qualified breach (incumplimiento resolutorio) is required.
“III. – 3:502 DCFR: Termination for fundamental non-performance (1) A creditor may terminate if the debtor’s non-performance of a contractual obligation is fundamental.
(2) A non-performance of a contractual obligation is fundamental if: (a) it substantially deprives the creditor of what the creditor was entitled to expect under the contract, as applied to the whole or relevant part of the performance, unless at the time of conclusion of the contract the debtor did not foresee and could not reasonably be expected to have foreseen that result; or (b) it is intentional or reckless and gives the creditor reason to believe that the debtor’s future performance cannot be relied on”.
- In an enormous amount of decisions, the Spanish Supreme Court has been struggling with the notion and contours (límites, contornos) of it. According to the Supreme Court, the breach must be: o “persistent and repeated” o “serious and essential” o “real, unjustified, and based on facts” o “frustrating the specific aim of the parties, or their legitimate expectations” o “of a fundamental contractual duty” o “important to the economics of the contract” o “of essential obligations affecting the core (núcleo) of the contract” These may be summarized by the following features: - Relevance: the breach must affect the central obligations or duties under the contract and not merely ancillary (auxiliares) or incidental duties; - Duration: the breach should not be merely sporadic or transitory, but likely to be repeated or continuing; - Importance: the breach must substantially affect the interests of the nondefaulting party; - Innocence of the party terminating the contract: the non-performance on which the terminating party relies must not be a proper or acceptable response to previous nonperformance committed by the terminating party. He should have performed all his obligations.
Change of the doctrine: However, two recent judgments by the Supreme Court have established that termination may be available in cases in which breach of contract is not essential or it involves secondary obligations in the contract (Supreme Court Judgments of November the 18th 2013, and January the 29th 2014. Justice: Francisco Javier Orduña).
According to this new doctrine, termination as a remedy may be used in two sorts of breaches: - Fundamental breaches (“incumplimiento esencial”) - Breaches of secondary obligations that result in the other party getting no satisfaction (“incumplimiento prestacional resolutorio”).
Traditionally, with (b) breaches it was necessary for the parties to stipulate in the agreement that a breach of a secondary obligation may result in termination. For instance, parties had the opportunity to express that a violation of a confidentiality duty in a distribution agreement entitled the owner of the confidential information to terminate the contract.
With this new doctrine, a breach of a secondary obligation may result in the other party getting no satisfaction. Lack of satisfaction may frustrate the purpose of the contract and thus be a sufficient basis for termination.
Example: A (seller) and B (buyer) enter into a sales contract according to which A has to transfer possession of a renovated apartment in Passeig de Gràcia to B. A transfer possession of the apartment to B, who discovers that entrance to the building is not on Passeig de Gràcia but on València Street. B was highly interested in showing off and telling his acquaintances that he was living on Passeig de Gràcia and also includes this address in presentation cards.
Traditionally, this would be a breach of a secondary duty and B cannot ask for termination, and the seller can only give damages or reduction of the price; however, according with this new doctrine, the buyer will be entitled to enter a termination of the contract.
Exceptions/Defenses Both parties non performing their obligations.
- According to Buyer, Seller does not perform Ob1, and thus Buyer refuses to Ob2.
- Seller brings a lawsuit against Buyer for non-performance of Ob2. Seeks specific performance + damages.
- Buyer replies to the lawsuit alleging that he was excused to perform Ob2, because: - o Non-performance by Seller of Ob1 (Exceptio non adimpleti contractus) the seller didn’t perform and, for this reason, the buyer decided not to perform.
o Defective performance by Seller of Ob1 (Exceptio non rite adimpleti contractus) problem in the performance of the seller and, for this reason, the buyer decided not to perform.
Buyer brings a counter-lawsuit (“reconvención”) against Seller for non-performance of Ob1. Seeks termination + damages.