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Remedies available for partial failure of performance

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Garvey Sarah
Sarah Garvey

Counsel

London

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02 November 2010

In Giedo Van Der Garde & anr v Force India Formula One Team, [2010] EWHC 2373 (QB), 24 September 2010, Stadlen J provides important guidance on the subject of partial failure of performance of contract, and the remedies available.

It considers the availability of restitution where there has been partial performance of some aspects of a contract, a controversial subject based on "deep and choppy jurisprudential waters". It also analyses the basis for damages based on the loss of value attributable to the unperformed part of a contract. This basis is a useful approach where it is difficult to show consequential loss because the potential losses are too speculative. This lengthy decision draws together the different strands of thinking on this area. The judgment also looks at the subject of "gentlemen's agreements".

The first claimant, Mr Van Der Garde had, via his management company (the second claimant) contracted with the defendant, a Formula One racing team, whereby the defendant agreed to provide the claimant with, inter alia, 6000 kilometre (km) driving per year, in return for a payment by the claimant of $3.1 million. In addition, the contract contained rights for the claimant to do certain different types of driving (in particular Grand Prix training), contingent on him obtaining a "Super Licence". The claimant sued, claiming that the defendant had only provided him with 2400 km. As he never obtained his Super Licence, he had been unable to exercise the contingent rights.

The claimant based his claim on four alternative grounds:

  • restitution;
  • loss of future career earnings;
  • loss of value of the performance due under the contract; and
  • damages based on the "Wrotham Park" approach.

Restitution

A party to a contract is entitled to restitution of the contractual price paid if there has been a total failure of consideration. The defendant argued that as the claimant had received some benefit under the contract (ie some of the driving time) then restitution was not available on the basis that there had been no total failure of consideration.

A key issue considered by Stadlen J was the extent to which a party, who had received some benefit under a contract (such as the driving time that the claimant had been provided with), could nevertheless recover some of the price paid on the basis of the total failure of performance of another part of the contract. Did the fact that the defendant permitted Mr Van Der Garde to drive some of the mileage kilometres mean that the failure of consideration was partial rather than total such as to exclude the availability of restitution?

Stadlen J posed two critical questions:

Is the contract severable or divisible such that apportionment can be carried out? This question had to be considered as at the time the contract was concluded, not at the time that restitution is sought.
Do certain benefits received by a claimant preclude there having been a total or partial failure of consideration?

Apportionment

Where it is possible to apportion different parts of a contract price to the performance of different contractual duties under a contract, even though there has been performance of a divisible (or "apportioned") part there can still be a total failure of consideration, provided that part of the consideration or money paid can be attributed to the unperformed part of the contract.

The principle of apportioning or dividing a contract is not limited to cases where the parties have expressly or impliedly acknowledged that the consideration may be apportioned by the structure of the transaction. For example, it is not dependent on the parties having agreed on a price per km of driving time, rather than an overall price of $3 million.

Whether apportionment of a contract can be carried out turns on whether, as a matter of practical common sense, the court considers that it is able to apportion on an objective analysis of the nature of the contract and consideration. It is open to a court to hold that part of a consideration can be attributed to part of a contract, even if that attribution is not spelled out in the contract itself. The mere fact that the contract specified a global fee of $3 million for 6000 km rather than $500 per km would not mean that, where 3600 km have not been provided, part of the $3 million cannot be attributed to that unperformed part.

Other factors which the court must consider include whether the services to be performed are evenly spread throughout the term of the contract. For example, in a contract for the supply of ten bags of wheat at £10 in total, the process of apportionment is easy because the delivery of one sack is not more onerous than the delivery of each of the other sacks. By contrast, in a six-year apprenticeship contract, where the trainer no longer performed his duties after one year, it was more difficult for the court to apportion the contract because the teaching would be more onerous in the early years, and the service provided by the apprentice greater in the latter part of the apprenticeship, ie the nature of the service to be provided (the teaching) would be uneven during the contractual term thus making it more difficult for the court to apportion the consideration to the unperformed services.

Stadlen J noted that the courts have taken a "flexible and robust" approach to the question of apportionment so as to avoid leaving a victim of unjust enrichment without an effective remedy.

Effect of the partial benefits received

The receipt of a benefit under a contract, which is not any part of the essential bargain contracted for, is not a bar to restitution on the basis of total failure of consideration (as per Lord Goff in Stocznia Gdanska S.A. v Latvian Shipping Co & ors [1998] 1 WLR 574).

The test for whether a benefit received is an essential part of the contract is not whether it is large or small in the context of the entirety of the benefits to be conferred, but whether it is the whole or part of the main or essential benefit expected or bargained for, or instead merely incidental or collateral thereto (as per Finnermore J in Warman v Southern Counties Car Finance Corp. Ltd [1949] 2 KB 576, as applied by Kerr LJ in Rover International Ltd v Cannon Film Sales Ltd [1989] 1WLR).

The court must therefore identify the essential purpose of the contract, from the perspective of the payer rather than the payee, although objectively rather than by reference to evidence of his/her subjective motives.
Stadlen J helpfully illustrated this concept by reference to two factual scenarios:

  • The airline passenger who bought a Sydney to London ticket, but the flight was turned back after the meal and film due to negligent maintenance of the aircraft; and
  • A cruise passenger who bought a 14-day cruise from Sydney to London, but where the cruise had to terminate after several days.

Both passengers had received some benefit. In the first example, where the essential purpose of the contract was to transport from Sydney to London, the in-flight service was merely an incidental benefit. In the second example, the cruise passenger had paid for other benefits too, such as food, entertainment and port stop-offs, all of which were part of the essential bargain (as in Baltic Shipping v Dillon 176 CLR 344).

In applying the above principles to the facts of this case, Stadlen J paid particular attention to the contingent rights under the contract, which never came to fruition because the claimant never obtained his Super Licence.

The claimant argued that, for apportionment, the court should disregard the contingent rights as the contract only actually definitely promised the 6000 km driving time. Stadlen J disagreed. The time for assessing the possibility of apportionment was the time when the contract was entered into. Where a contract provides for a single fee or price in consideration for an absolute right together with a contingent right, the presumption is that the price is referable to both rights and does not cease to be so referable if at a later stage, when the benefit of the absolute right or part of it has been wrongfully withheld, the contingent right has become unable to be taken advantage of. If a claimant has paid a single price for a mixture of rights and if, at the time of contracting, it is impossible simply to apportion the contract price as between the absolute and contingent rights, the contract price does not change its nature and become apportionable in its entirety as between the absolute rights just because the contingency on which the enjoyment of the benefit of the contingent right depended does not materialise.

The court held that the claim for restitution must fail as it was impossible to apportion the contract price between the absolute and contingent rights in this case. The judge reached this conclusion "with considerable regret, joining as I do the growing list of judges and academic writers who have expressed the view that the requirement of proof of total failure of consideration as a necessary condition for an award of restitution is unsatisfactory and liable in certain cases to work injustice".

Damages for loss of the value of the performance due under the agreement

The claimant's claim for loss of future career earnings was judged to be largely too speculative. As an alternative, the claimant sought damages for breach of contract on the basis of the value of the defendant's promised performance which the claimant was wrongfully denied.

Stadlen J found that in a contract for services, where there is no proof of consequential loss (such as here), a claimant is nevertheless entitled to damages for breach of contract, the measure of which is the value to the claimant of the services which were not provided. Unlike in a claim for restitution, the contract price in such a claim forms no part of the relief or remedy to which the claimant is entitled. Insofar as it is relevant, its relevance is evidential in the sense that, in an appropriate case, an inference may be drawn from the contract price as to the value of the services to which the claimant was entitled.

Stadlen J agreed with the claimant that the fact that the best evidence of value may lie in evidence as to what it would have cost the claimant to purchase the withheld services elsewhere does not mean that, if the claimant does not in fact purchase the services elsewhere, that he has suffered no loss. This latter point was the topic of much debate, and detailed analysis of existing authority (Linden Gardens Ltd v Lenesta Ltd [1994] 1 AC 85, Alfred McAlpine Construction v Panatown Ltd [2001] 1 AC 518, Darlington Borough Council v Wiltshire Northern Ltd [1995] 1 WLR 68).

The judge listened to expert evidence on the value of the driving time due to the claimant, and awarded US$1,865,000.

Wrotham Park damages

Stadlen J would have also been prepared to award the same amount as Wrotham Park damages (based on Wrotham Park Estate Company Ltd v Parkside Homes Ltd [1974] 1 WLR 798). These damages are based on the notional price that a defendant would have had to pay in order to escape from its obligation to perform the unperformed aspects of the contract complained of.

Gentleman's agreement

One of the other issues considered in this case was whether a written agreement should be read in light of an earlier (alleged) oral agreement entered into between the parties, and relied on by the claimant.

In HIH v New Hampshire [2001] Rix LJ expressed the view that (although the parol evidence rule excludes mere negotiations) it is permissible to look at prior contracts as part of the matrix or surrounding circumstances of a later contract.

In this case, Stadlen J said that those comments were obiter dicta. Accordingly, there was no authority binding on him either for or against the proposition that a prior written agreement is admissible for the purpose of construing a later one. Nevertheless, the judge held that the views expressed by the Court of Appeal in HIH v New Hampshire did represent the current state of the law.  The alleged prior agreement in this case was oral rather than written. However, on the facts, it was found that no legally binding agreement had been reached between the parties prior to the written agreement. Instead, there had been a gentleman's agreement.

Did HIH v New Hampshire therefore apply to a gentleman's agreement? Stadlen J thought not. A non-binding gentleman's agreement or agreement in principle is akin to or to be treated as part of the pre-contractual negotiations leading up to a written agreement, which are inadmissible for the purpose of construing the later written agreement. If he was wrong in that conclusion and a prior gentleman's agreement is admissible for the purpose of construing a later written agreement, Stadlen J stressed the need for caution since there would be a strong inference, if the earlier agreement is different from the later agreement, that the parties intended to depart in their written agreement from their earlier gentleman's agreement.

Even if there had have been an earlier binding oral contract, it was superseded by the later written agreement which contained a clause specifying that it was the "entire agreement" between the parties.

Sarah Garvey, PSL Counsel, Litigation and Dispute Resolution, comments: This lengthy judgment confirms that, under English common law, a partial failure of consideration will be a bar to restitution. Stadlen J states "Entitlement to restitution depends on proof that the claimant has received no consideration for the payment he made and which he seeks to recover. Receipt of even a small part of that consideration is inconsistent with such proof". However, the judgment is interesting for its explanation of how a court can "apportion" a contract into separate parts in certain cases, and then look at whether there has been a total failure of consideration in respect of one "apportioned" part. The judgment also provides useful guidance on alternative approaches to framing a damages claim where there has been a breach of a contract for services, but where there has been no consequential loss, or the consequential loss is simply too speculative to be recoverable. Finally, Stadlen J reaches the interesting conclusion (albeit obiter) that if it had been necessary, he would have awarded damages on the Wrotham Park basis (an approach traditionally applied to restrictive covenant cases and cases involving damages in lieu of an injunction) by asking what price would be paid in a hypothetical negotiation to release the defendant from his (unperformed) obligations.