2.3 Privity and a duty of care
There is a large body of law built around a case decided almost a century ago in Britain, known as the case of the “Paisley Snail.” It is worth briefly considering this case for the effect it has had on the doctrine of privity.
The case involved a woman who had purchased a bottle of ginger beer, which turned out to contain a decomposed snail. Because her contract was with the store where she bought the drink and not with the manufacturer of the ginger beer (i.e., there was no privity between the woman and the manufacturer), the woman could not claim compensation from the manufacturer for her suffering. (See section 3.1 for a detailed discussion of compensation.)
To avoid the apparent injustice that the situation created, the court, hearing the woman’s case, awarded her compensation from the manufacturer in any event and in the process established the legal principle of a duty of care which it said was owed by the manufacturer even in the absence of privity. This decision helped to create the modern law of negligence.
It is not within the scope of this book to examine the law of negligence in relation to contracts, nor is it necessary. Negligence is ultimately a component of tort law which provides remedies for civil wrongs that do not arise out of contractual obligations. Because our focus in this book is on contractual obligations and how to spell them out (literally speaking) we will have to leave discussion of tort law for another occasion.
For now, it is enough to know that the doctrine of privity is still alive and kicking where contractual obligations are concerned. However, there are rare circumstances in which certain types of claims for compensation may be available on the basis of a duty of care owed by one person to another, regardless of any contractual relationship. Those circumstances relate almost exclusively to personal injury (such as what happens when you consume a decomposed snail). They rarely apply to pure economic or monetary losses. Those are the kinds of losses that most often occur in business and, hence, concern us.
For a further discussion of negligence in a contractual setting, see Chapter 7.
3. Breach
To breach a contract is to fail to perform one or more of the obligations it imposes on you, regardless of whether you do so deliberately or inadvertently. You breach a contract when, through your actions or omissions (intentional or otherwise), you prevent the other party from being able to assert or reap the benefit of one or more of its contractual rights against you.
Breach is an element of every contractual relationship because the occurrence of a breach creates the basis on which the law, and in particular our judicial system, can be called on by the non-breaching party to provide a remedy, usually in the form of compensation (see section 3.1).
Even where it has not occurred, breach is still part of every contractual relationship because it guides the parties’ actions regarding what they can and cannot legally do.
In this way, it is possible to think of breach like a detective lurking in the shadows of every contractual relationship, waiting to step into the light at the first sign of wrongdoing and bring the breaching party to justice.
To illustrate what we mean, return to the example in which someone comes into your factory and purchases a forklift. In exchange for that forklift, she agrees to pay you $10,000 each month over the next six months. Knowing that it will constitute a breach not to make those payments when due, she will take care to perform her contractual obligations.
Suppose she simply chooses not to pay you the final installment of $10,000. In other words, she breaches the contract. By making the decision not to comply with her contractual obligations, you are now in a position to call on the law and courts to provide a remedy for that breach.
3.1 Compensation
Every breach of a contract entitles the injured party, at law, to compensation for the losses that party has suffered as a result of the breach. That compensation will take the form of an award of damages, which refers to an award of money.
To obtain an award of damages, the party suffering the loss must bring a lawsuit (also known as a legal claim or simply, suit) against the party in breach. The party does so by formally petitioning a court through the preparation of the necessary documents and by pleading his or her case to render judgment in his or her favour.
The court, through its award of damages, will then seek to put the injured party in the same position it would have been had the contract been performed (i.e., had the breach never occurred). In legal terms, that means that the court will award compensatory damages.
Note that it is generally not the goal of a court to penalize the breaching party or to provide a windfall for the injured party. This may come as a surprise to those who, through the media, have heard much made of punitive damages (sometimes also called exemplary damages). As the name suggests, punitive damages are intended to punish the person against whom they are awarded. However, punitive damages are rarely (if ever) awarded in instances of contractual breach in Canada. That is because, as a matter of public policy, most jurisdictions do not wish to play moral arbiter in contractual disputes. Punishment, when inflicted by the law, is generally reserved to regulate social and not commercial behaviour. Therefore, in the few instances where punitive damages are awarded in a contractual setting, it is usually done with a societal goal in mind (e.g., where fraud is involved). For a further discussion of punitive damages, refer to Chapter 7.
Punitive damages aside, compensation for breach is further limited by three more factors affecting damages awards: remoteness, mitigation, and contributory behaviour.
3.1a Remoteness
In order to be recoverable, damages cannot be too remote. Remoteness is a rather abstract legal concept so an example will help to explain its meaning.
Suppose your contract said that the forklift was in good working condition with functioning brakes, but it turns out that the brakes were defective. As a consequence, the buyer loses control of the forklift and drives it into a fuel storage unit. In turn, this causes an explosion, which causes a fire, which burns down the buyer’s place of business and injures several of her employees.
Putting the buyer in this position she would have been through an award of damages (i.e., awarding compensation) would in those circumstances clearly pose quite a challenge to a court. In addition to calculating the replacement cost of everything destroyed, there are the lost profits, personal suffering (of the injured employees), and lost work time, to name just a few of the types of losses one could imagine resulting from the defective brakes. In fact, the chain of loss or harm could conceivably go on forever, depending on how far along you decided to measure it. In trying to compensate persons for contractual breaches, courts exercise their judgment to draw a fence around what is compensable. That fence is the concept of remoteness.
To be compensable, damages cannot be too remote. That means that any losses would have to have been in the reasonable contemplation of the parties at the time the contract was entered into. In the example, that would mean that the parties would have had to reasonably contemplate that the forklift was going to be used around fuel storage units and perhaps result in an entire place of business burning to the ground if it were defective in some way. Is it reasonable for them to have done so? That is ultimately what a court will have to decide. That means uncertainty for both parties because nobody can predict with certainty what a court will do.
To help protect yourself against that uncertainty, it is important that you address the issue of liability in your contracts. Liability refers to your legal responsibility to pay damages. By defining this responsibility as a term in your contracts, it will go a long way to determining what damages you will ultimately be responsible to pay in the event that you breach a contract, and which damages will be too remote to be recovered. This is yet another reason you should learn how to write your own business contracts.