Lecture 7: Liability

Question 1

Define ‘Liability’.

Answer 1

In short: Responsibility and obligation to pay for damage, harm etc.

The legal responsibility of a party to compensate for harm or loss caused by a breach of contractual obligations.

It arises when a party fails to perform as agreed in a contract, potentially resulting in damages or other legal remedies.

Question 2

What are the pre-requisites in terms of determining liability?

Answer 2

Common law: Obligation, breach, causality and damage - always!

Civil law: Might be both obligation, breach, fault, causality and damage - this depends on the case.

Question 3

Explain the difference between common law and civil law - the path from contract to remedies.

Answer 3

Common law follows a linear path:

1. Contractual Obligation
2. Breach of Contractual Obligation
3. Causality
4. Damage

Once damage is proven from breach, the remedies available are:

• Damages
• Termination
• Other remedies (e.g. specific performance, injunction) only available at equity - granted at the court’s discretion.

Civil law allows multiple bases for liability:

1. Contractual Obligation
2. Statutory Obligation
3. Other Breach (e.g. tort)
4. Fault (often required)
5. Causality
6. Damage

Civil law systems are more flexible:

• Remedies like damages, termination, and other legal consequences are more broadly and systematically codified.
• Courts may apply different combinations of the elements based on the type of breach or obligation.

Key takeaways:

• Common law is stricter: Breach and damage must clearly follow from contractual obligation; only limited remedies unless equity applies.
• Civil law is broader: Multiple legal sources (statutory, contract, tort) can lead to liability, and more remedies are directly available by law.

Question 4

Define ‘Contractual Obligation’.

Answer 4

A legal duty that arises from a contract. It means each party must do what they promised in the agreement.

Question 5

Define ‘Statutory Obligation’.

Answer 5

A legal duty that comes from laws or regulations, not just the contract.

It may apply even if not written in the contract.

Question 6

Define ‘Breach of Contract’.

Answer 6

When a party fails to meet its contractual duty. In common law, this is the main basis for liability.

Question 7

Define ‘Fault’.

Answer 7

A concept mainly in civil law. It means a party is responsible only if they acted negligently or wrongfully - not if the problem was beyond their control.

Question 8

Explain the difference between fault-based liability and strict liability in contract law.

Answer 8

Fault-based liability (civil law): Requires proof of negligence or intent.

Strict liability (common law): Liability arises from breach, regardless of fault.

Question 9

Explain the key difference between common law and civil law in determining liability.

Answer 9

The key difference lies in the role of fault in establishing liability.

Common law: Liability for breach of contract is generally strict - fault is not required. If you fail to perform (e.g. no delivery), you are liable, even if it wasn’t your fault.

Civil law: Liability usually requires fault. If the breach occurred due to circumstances beyond your control, you may not be held liable.

Question 10

Define ‘Damage’.

Answer 10

Refers to the loss or harm caused by the breach. It’s what the affected party is usually compensated for.

Question 11

What is direct damage in contract law?

Answer 11

It is the immediate and natural result of a breach.

The primary consequence, easy to quantify and directly linked to the event.

Example: Car repair or medical costs after a collision.

Question 12

What is consequential (indirect) damage in contract law?

Answer 12

It is a secondary effect of the breach, not immediate, and harder to quantify.

Example: PTSD or emotional distress after a car accident.

Question 13

How can contracts manage risk of liability for damages?

Answer 13

By including a clause that limits liability to direct damages only, excluding indirect or consequential damages.

Question 14

Define ‘Causality.’

Answer 14

There must be a clear link between the breach of contract and the damage.

The damage must be a result of the breach.

Question 15

What is the ‘Causal Link (Equivalence)’ in contract law?

Answer 15

It means there must be a connection between the breach of contract and the damage.

Without the breach, the (particular) damage would not have happened (Condicio sine qua non).

Question 16

What is meant by ‘Foreseeability (Adequacy)’ in the context of damages?

Answer 16

Only damages that were foreseeable and proximate at the time of contracting can be claimed.

This limits recovery to predictable losses.

Question 17

What are the ‘two legs’ of the Hadley v. Baxendale rule?

Answer 17

1. Damages foreseeable by any reasonable person (objective test).
2. Damages foreseeable due to actual knowledge shared between the parties (subjective test).

Question 18

Why is foreseeability important in assessing contract damages?

Answer 18

It helps limit claims to damages that the breaching party could reasonably expect, ensuring fairness and predictability in contracts.

Question 19

What is meant by ‘Compensation’ in contract law?

Answer 19

The monetary amount awarded to a party who has suffered a loss due to the other party’s breach of contract.

The goal is to place the injured party in the position they would have been in if the contract had been properly performed.

This can include:

• Expectation damages (lost profit)
• Reliance damages (wasted costs)
• Liquidated damages (pre-agreed sum)
• Quantum meruit (reasonable value of services)

Question 20

What are unliquidated damages?

Answer 20

Damages not pre-agreed in the contract. The court decides the amount based on actual harm caused by the breach.

These include:

• Expectation damages (lost profit)
• Reliance damages (wasted costs)

Question 21

What are expectation damages?

Answer 21

They aim to place the injured party in the position they would have been in if the contract was properly performed.

Question 22

What are reliance damages?

Answer 22

They aim to restore the injured party to the position they were in before the contract was signed
- recovering wasted costs.

Question 23

How can damage compensation be calculated?

Answer 23

1. Expectation-based: Compensate for predicted net profit lost due to the breach.
2. Reliance-based: Act as if no contract existed and recover costs incurred.

Question 24

What are liquidated damages?

Answer 24

A fixed amount agreed upon in the contract to be paid in case of a breach, often used when actual damages are hard to calculate.

Question 25

What is the legal effect of a liquidated damages clause, and when is it enforceable?

Answer 25

Enforceable if actual damages are hard to estimate and amount is reasonable. Unenforceable if it serves as a penalty.

Question 26

What is Quantum Meruit?

Answer 26

A principle meaning “as much as he has deserved.” It allows payment for services when no contract exists or price is not set, based on their reasonable value.

Question 27

Define 'Remidies'.

Answer 27

The legal solutions or actions available to a party when the other party breaches the contract. Remedies aim to either: 1. Compensate for the loss (e.g. damages), or 2. Enforce the contract (e.g. specific performance or injunction), or 3. Cancel the contract (e.g. termination or rescission). Main types of remedies include: 1. Damages (monetary compensation) 2. Termination (ending the contract) 3. Specific performance (forcing the party to fulfill the contract) 4. Injunction (ordering a party to do or stop doing something) 5. Rescission (cancelling and undoing the contract) Some are only available at equity and require court approval.

Question 28

Define 'Recission'.

Answer 28

The cancellation of the contract from the beginning.

Question 29

Define 'Termination' as a remidy for breach of contract.

Answer 29

Ending the contract in the future. Two types of clauses to determine termination: 1. Balanced termination clause 2. Asymmetric termination clause

Question 30

Explain the 'Balanced termination clause'.

Answer 30

Allows either party to terminate the contract if the other party commits a material breach (a serious violation of the agreement). Key features: * Applies equally to both sides (hence "balanced"). * Requires a written notice describing the breach. * The breaching party is usually given a chance to cure (fix) the breach within a specified period. * If not cured, the contract terminates automatically after that period. Example: “If one party materially breaches the contract, the other may give written notice. If the breach isn’t fixed within 30 days, the contract will terminate.” This clause ensures fairness and protects both parties.

Question 31

Explain the 'Asymmetric termination clause'.

Answer 31

Allows only one party to terminate the contract - typically the stronger party (e.g., the buyer or client). Key features: * Unequal rights: Only one party can end the contract for breach. * Often allows immediate termination if the other party breaches any listed terms. * No chance to cure (fix). * May include obligations for the breaching party (e.g., refund, penalty). Example: “If [Party A] breaches any clause, [Party B] may terminate this agreement immediately by written notice.” This clause favors the party with more bargaining power and is common in supplier or service contracts.

Question 32

Compare and contrast termination and rescission as legal remedies.

Answer 32

Termination ends contract from breach onward. Rescission cancels contract and restores original state (status quo ante).

Question 33

What happens if a contract does not define termination conditions?

Answer 33

A court will decide whether termination is allowed, based on the type and seriousness of the breached term.

Question 34

What is a 'Repudiatory breach' in common law?

Answer 34

Occurs when one party's actions (or failure to act) are so serious that they deny the other party substantially all the benefit they expected from the contract. In such cases, the non-breaching party may have the right to terminate the contract and seek remedies for any damages incurred due to the breach. No law stating when you are allowed to terminate a contract. But if one party violates a central/substantial part of a contract, the other party should have the right to terminate the contract.

Question 35

Classify the three clauses of reoudiatory breach in common law.

Answer 35

1. Material term 2. Intermediate term 3. Non-material term

Question 36

What is a material term (condition) in a contract?

Answer 36

A core term essential to the contract (e.g., payment, delivery). Breach always allows the other party to terminate.

Question 37

What is an intermediate (innominate) term?

Answer 37

A term that is not clearly material or minor. Termination is allowed only if the breach causes serious consequences or deprives the contract of its main benefit.

Question 38

What is a non-material term (warranty)?

Answer 38

A minor term not central to the contract. Breach of such terms does not allow termination - only damages may be claimed (defined by e.g. warrenty).

Question 39

Why is the classification of contract terms important in common law?

Answer 39

Because it determines whether a breach allows the injured party to terminate the contract or only seek compensation.

Question 40

How do common law and civil law systems differ in terms of available remedies?

Answer 40

Common law: Limited remedies (damages, termination); equitable remedies only if legal remedies fail. Civil law: Codified access to broader remedies.

Question 41

What are the primary remidies under common law?

Answer 41

Damages and termination are the primary remedies available under common law. Other remedies, such as specific performance or injunction, are only available at equity, meaning they are granted at the court's discretion and not as a matter of right.

Question 42

What are remedies “at equity”?

Answer 42

Remedies only granted by court discretion when damages and termination are insufficient to deliver justice. They include: * Specific performance * Injunction * Rescission & restitution

Question 43

Why are equitable remedies less common in common law than civil law?

Answer 43

They are not codified and only given at the court’s discretion. Civil law systems usually have these remedies clearly defined in legislation.

Question 44

Why must common law contracts specify additional remedies in writing?

Answer 44

Because courts won’t automatically grant non-monetary remedies. If parties foresee needing more than money, it must be written into the contract.

Question 45

What is rescission & restitution?

Answer 45

It cancels the contract and returns both parties to the status quo ante (their original state). Only granted if: * Damages/termination aren’t suitable * Return is still possible * Costs are not disproportionate There was no delay in seeking the remedy

Question 46

What is injunctive relief?

Answer 46

A court order requiring a party to do or not do something, enforced through court powers. Rarely awarded Used when other remedies are inadequate

Question 47

When are equitable remedies available, and how do they differ from legal remedies?

Answer 47

Granted when damages or termination are inadequate. Include specific performance, injunctions. Discretionary in common law.

Question 48

What is frustration in contract law? When can frustration be used as a defence?

Answer 48

Frustration occurs when further performance of the contract becomes impossible or pointless. In such cases, the contract may be terminated and the breaching party excused. When performance becomes impossible or the contract’s purpose has disappeared—without fault of either party. E.g., due to unexpected events like natural disasters.

Question 49

What is contractual estoppel? What are exceptions to contractual estoppel?

Answer 49

It means that if parties agree on a certain fact in a contract, they can’t later deny it or make claims based on the opposite. It does not apply in cases of fraud, deception, or deliberate concealment.

Question 50

What is meant by a 'limitation of liability'? Is it important in contract law?

Answer 50

A contract clause that restricts the amount or type of compensation one party must pay if they breach the contract. * It can cap total damages (e.g. not more than the contract price). * It may exclude certain types of losses, like consequential or indirect damages. * It can limit remedies, e.g. excluding termination or specific performance. It is of utmost importance! Because it helps: * Control financial risk for businesses. * Set clear expectations between parties. * Prevent excessive or unexpected claims in case of breach. Such clauses must be clearly worded and comply with legal limits, especially in consumer contracts or under mandatory laws.

Question 51

Describe the key features of a limitation of liability clause and its enforceability.

Answer 51

Limits liability exposure. Must be clearly worded, not violate law. Often excludes specific damages (e.g., consequential damages).

Question 52

Name some limitations of liability.

Answer 52

* Negligence: Liability may be limited, but only if deemed "reasonable". * Maximum Liability Amount: A pre-set cap on the amount a party can be liable for, often used in contracts to limit exposure to large claims. * Breach of Contract: For standard terms liability can be limited if reasonable, but for other cases liability is generally unlimited. * Indemnification: A contractual obligation where one party agrees to compensate the other for certain damages or losses, typically arising from third-party claims. * Warranty: A guarantee or promise regarding the quality or condition of goods/services, which may have limitations on liability for defects. * Implied Warranties: For statutory warranties there is no limitation in most cases, but for other implied warranties any limits may apply if reasonable. * Liquidated Damages (LAD) as a Penalty Charge: A pre-agreed fixed sum to be paid in case of a breach, but it is unenforceable if deemed excessive and considered a penalty rather than a reasonable estimate of damage. * Punitive Damages: No limitation for fraud or willful misconduct. * Remedies: Legal means for a party to enforce their rights, including damages, specific performance, and injunctive relief. * Public Policy: Certain limitations (e.g., for death or fraud) are prohibited based on public policy or statutory law. * Death/Personal Injury: No limitation allowed in most jurisdictions (UK, US, Continental Europe).

Question 53

What are the conditions for a valid indemnity clause in an international sales contract?

Answer 53

Must clearly define scope, cover specific risks, exclude fraud/gross negligence, and assign defense duties.