ICAEW BL · Chapter 4
Breach of contract and remedies MCQs with Answers
10 multiple-choice questions on Breach of contract and remedies for ICAEW BL Business Law. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
What is the general aim of an award of damages for breach of contract?
- A) To return the claimant to the position it was in before the contract was made, in every case
- B) To put the claimant in the position it would have been in if the contract had been performed
- C) To punish the defendant for breaking its promise
- D) To share the loss equally between the parties
Show answer & explanation
Answer: B) To put the claimant in the position it would have been in if the contract had been performed
Contract damages protect the expectation interest. They aim to put the innocent party, as far as money can, in the position it would have been in had the contract been performed (Robinson v Harman). Reliance-based damages may sometimes be claimed instead, but they are not the general aim. Damages are compensatory, not punitive, and the loss is not split between the parties.
Question 2
Tallis Bakery Ltd orders a new industrial oven from Vane Engineering, which delivers it six weeks late. As a result Tallis loses (1) its normal profit on routine bread orders for those six weeks and (2) an exceptionally lucrative one-off contract to supply a national sporting event, which Tallis never mentioned to Vane. Applying Hadley v Baxendale, which losses can Tallis recover?
- A) Loss (2) only
- B) Both losses (1) and (2)
- C) Loss (1) only
- D) Neither loss, because late delivery is not a breach of condition
Show answer & explanation
Answer: C) Loss (1) only
Under the first limb of Hadley v Baxendale, losses arising naturally in the usual course of things are recoverable, and lost ordinary profits from a late oven fall within this. Under the second limb, unusual losses are recoverable only if they were in the reasonable contemplation of both parties when the contract was made, which usually means the defendant was told of them. Vane did not know of the event contract, so that loss is too remote (compare Victoria Laundry v Newman Industries).
Question 3
Fenwick Events cancels a block booking of 40 hotel rooms in breach of contract, three months before the event date. The hotel accepts the cancellation as ending the contract and claims damages. Although it has a waiting list of guests looking for rooms on that date, it turns them away, hoping to recover the full price from Fenwick. What is the effect of the hotel's conduct?
- A) The hotel cannot recover loss it could have avoided by taking reasonable steps to relet the rooms
- B) The hotel can recover the full contract price because Fenwick was the party in breach
- C) The hotel's whole claim fails because it did not relet the rooms
- D) The hotel can recover the full price but must pay any rent it receives from other guests to Fenwick
Show answer & explanation
Answer: A) The hotel cannot recover loss it could have avoided by taking reasonable steps to relet the rooms
An innocent party must take reasonable steps to mitigate its loss. It cannot recover for loss that reasonable mitigation would have avoided. The hotel can still recover the loss it could not have avoided, such as any rooms that would have stayed empty, so the claim does not fail entirely. It just cannot recover the avoidable part.
Question 4
A software licence obliges the licensee to pay £50,000 if it breaches a non-disclosure clause. The licensor's business depends on the confidentiality of its source code. Under the modern test in Cavendish Square Holding v Makdessi, how will the court decide whether the clause is an unenforceable penalty?
- A) By asking only whether £50,000 was a genuine pre-estimate of the licensor's loss at the date of the contract
- B) By asking whether the clause was negotiated by lawyers on both sides
- C) By asking whether £50,000 is more than the licensor's actual loss after the breach
- D) By asking whether the clause imposes a detriment out of all proportion to any legitimate interest of the licensor in having the obligation performed
Show answer & explanation
Answer: D) By asking whether the clause imposes a detriment out of all proportion to any legitimate interest of the licensor in having the obligation performed
The Supreme Court in Cavendish v Makdessi held that the test is whether the clause is a secondary obligation that imposes a detriment out of all proportion to the innocent party's legitimate interest in performance. A genuine pre-estimate of loss will usually be enforceable, but it is no longer the only test. A party may have a legitimate interest beyond compensation, such as protecting confidential code. Legal advice and the size of the actual loss are relevant facts but are not the test.
Question 5
On 1 March, Danby Ltd tells Ellery Ltd that it will not deliver goods due on 1 September. Ellery Ltd chooses to affirm the contract and wait. In June, before the delivery date and through no fault of either party, a new law makes it illegal to export the goods to Ellery's country. Can Ellery Ltd recover damages from Danby Ltd for non-delivery?
- A) No, because by affirming, Ellery kept the contract alive for both parties, and the later frustrating event discharged Danby as well
- B) Yes, because Danby's statement on 1 March was a breach, and the right to damages is fixed at that date whatever happens later
- C) Yes, but only by an order for specific performance once the law is repealed
- D) Yes, because a party who has repudiated a contract can never rely on frustration
Show answer & explanation
Answer: A) No, because by affirming, Ellery kept the contract alive for both parties, and the later frustrating event discharged Danby as well
Danby's statement was an anticipatory breach. Ellery could have accepted the repudiation and sued at once (Hochster v De La Tour). Instead it affirmed, so the contract remained in force for both parties, with the risks that brings. In Avery v Bowden the innocent party affirmed and the contract was then frustrated by the outbreak of war, which discharged both parties, so no damages were recoverable. Here the supervening illegality frustrates the contract in the same way, and Ellery has lost its claim for the earlier repudiation.
Question 6
In which of the following situations is a court most likely to order specific performance?
- A) A company seeks an order compelling its former finance director to return to work for the rest of his fixed-term contract
- B) A retailer seeks an order compelling a supplier to deliver 2,000 standard USB cables that are widely available from other suppliers
- C) A business seeks an order compelling a customer to pay an overdue invoice that the customer can easily afford
- D) A museum seeks an order compelling a dealer to deliver a unique eighteenth-century ship's chronometer that the museum has agreed to buy
Show answer & explanation
Answer: D) A museum seeks an order compelling a dealer to deliver a unique eighteenth-century ship's chronometer that the museum has agreed to buy
Specific performance is an equitable, discretionary remedy granted only where damages would be inadequate. That is typically so where the subject matter is unique, such as land or a rare item that cannot be bought elsewhere (s52 Sale of Goods Act 1979 allows it for specific goods; compare Behnke v Bede Shipping). Courts will not compel personal services such as employment. Where substitute goods are readily available, damages are adequate, and an unpaid invoice is recovered by an action for the agreed sum, not specific performance.
Question 7
Corvan Ltd hires Isla to redesign its website for a fixed fee payable on completion. Halfway through, Corvan wrongfully tells Isla to stop work and refuses to pay anything. On what basis can Isla recover payment for the work she has done?
- A) Nothing, because the contract was entire and she has not completed it
- B) A quantum meruit claim for a reasonable sum for the work done
- C) The full fixed fee, as liquidated damages
- D) Only her out-of-pocket expenses, but not the value of her time
Show answer & explanation
Answer: B) A quantum meruit claim for a reasonable sum for the work done
Isla could not complete the work because of Corvan's breach. In that case the innocent party may claim on a quantum meruit, a reasonable sum for the work done (Planché v Colburn). The entire-performance rule does not help the party whose breach caused the non-completion. The full fixed fee was payable only on completion, and she can recover the value of her work, not just her expenses.
Question 8
A contract made by deed required Norland Ltd to carry out works for Pike Ltd. Norland breached the contract eight years ago and Pike Ltd has only now discovered the breach. Assuming no special rules on concealment apply, is Pike Ltd's claim for breach of contract time-barred under the Limitation Act 1980?
- A) Yes, because the limitation period for all contract claims is six years from the breach
- B) Yes, because the limitation period runs from when the contract was made, not from the breach
- C) No, because the limitation period for a contract made by deed is 12 years from the breach
- D) No, because there is no limitation period for claims under a deed
Show answer & explanation
Answer: C) No, because the limitation period for a contract made by deed is 12 years from the breach
Under the Limitation Act 1980, an action on a simple contract must be brought within six years of the breach. An action on a specialty (a contract made by deed) has a 12-year period. The breach was eight years ago, so Pike Ltd is still within time. The period runs from the breach, not from when the contract was made.
Question 9
Lowther Ltd hires a conference centre for a three-day trade fair. A week before the event, through no fault of either party, the centre is badly flooded and cannot be used for months. What is the most likely legal effect on the contract?
- A) The centre is in breach and must pay Lowther Ltd damages for lost profits
- B) Lowther Ltd must pay the full hire fee because the risk passed when the contract was signed
- C) The contract continues and must be performed at the next available dates
- D) The contract is frustrated and both parties are discharged from further obligations
Show answer & explanation
Answer: D) The contract is frustrated and both parties are discharged from further obligations
A contract is frustrated where, without the fault of either party, a supervening event makes performance impossible or radically different from what was agreed. Destruction of the subject matter is the classic example, here the venue being unusable. Both parties are discharged from future obligations, and money paid before the event may be dealt with under the Law Reform (Frustrated Contracts) Act 1943. There is no breach, and the court will not rewrite the contract for new dates.
Question 10
Harrow Ltd contracts to buy 500 units from a supplier at £40 each. The supplier fails to deliver. On the delivery date the same units are freely available in the market at £46 each. Harrow waits a week and then buys replacements at £49 each, although nothing stopped it buying earlier. Applying the market price rule, how much can Harrow recover as damages for non-delivery?
- A) £4,500
- B) £20,000
- C) £3,000
- D) £23,000
Show answer & explanation
Answer: C) £3,000
Where there is an available market, damages for non-delivery are normally the difference between the contract price and the market price at the date when delivery should have been made. Here that is (£46 − £40) × 500 = £6 × 500 = £3,000. The extra £3 per unit from waiting a week was avoidable and is not recoverable. £4,500 uses the later £49 price, and £20,000 and £23,000 wrongly use the whole contract price or the whole market price.