Will a court force a party to perform its contractual obligations?
08 April 2021
As businesses start to get back to some kind of normality, they must be alive to their options if faced with a counterparty unable to comply with its contractual obligations in an uncertain economy. The usual remedy in such a scenario would be for the innocent party to sue the defaulting party for the loss and damage suffered as a result of the other party’s failure to fulfil its obligations.
In some situations, damages may not be regarded by the innocent party as an adequate remedy and they may wish to consider seeking an order from the court to force the party in default to provide what they agreed when the contract was formed. Courts have the power to order specific performance of contractual obligations – but it is a difficult process.
Is specific performance feasible?
There is no general ‘right’ to specific performance. It is a discretionary and exceptional remedy, the basic requirements for which are:
1. there must be a valid, enforceable contract (i.e. offer, acceptance, consideration, intention to create legal relations and certainty of terms); and
2. damages would not be an adequate remedy.
Are damages an adequate remedy?
In most cases, damages will be an adequate remedy if the innocent party could readily enter into a substitute contract for a performance which is equivalent to that promised by the defaulting party. The innocent party would then be adequately compensated by damages based on the difference between the price of performance in the original contract and the price agreed in the substitute contract.
In order to establish that damages are not adequate, the innocent party will generally have to evidence either that a) the subject matter of the contract is rare or unique or b) damages would be financially ineffective.
Examples of rare or unique subject matters might be the sale of an interest in land (as no two pieces of land are the same) or a one-off antique vase. In both scenarios, damages may not be an adequate remedy because no market substitute exists, and the innocent party would therefore be unable to secure equivalent performance (no matter what the price).
Examples of circumstances where damages may be financially ineffective might be where the defaulting party is insolvent and unable to pay; if damages would be difficult to quantify (e.g. a contract to indemnify); if an order for the payment of damages would be difficult to enforce (e.g. because any enforcement would need to be in a foreign country); or if an express term of the contract restricts or limits the damages recoverable for that particular breach.
Grounds to refuse specific performance
It should be noted that even if a party can satisfy the requirements of:
1. having a valid, enforceable contract; and
2. showing that damages would not be an adequate remedy
it does not automatically follow that an order for specific performance will be granted. There are a number of circumstances in which specific performance is not generally permitted and can be used as grounds to refuse such an application. The most common circumstances are:
- Negative obligations
Where a party promises not to do something, this is enforceable only by prohibitory injunction.
- Personal obligations
The court is reluctant to interfere with personal liberty by compelling a continued relationship between unwilling parties (e.g. for personal services/ employment contracts).
- Obligations requiring ongoing supervision by the court
The court will be reluctant to supervise continual obligations in contracts such as, to keep a shop open, or to deliver goods over a period of time by instalments.
- Conditional obligations
If there is a condition precedent/subsequent to the obligation in question, then specific performance cannot be granted until this condition is satisfied.
The court will not order performance where it would be futile or impossible to do so (e.g. forcing a party to sell something which the party does not own).
- Uncertain terms
The party must know precisely what is required of them.
- Terms contrary to public policy
The performance in question must not be illegal. This is of particular relevance to the restrictions imposed by the Government during the lockdown periods and the roadmap for easing those restrictions.
- Availability of counter-performance
The claimant must be ready and willing to perform (or have already performed) their own obligations.
- Severe hardship
This must be extraordinary hardship and not simply that one party has made a bad bargain (e.g. the cost of performance to the defaulting party is wholly out of proportion to the benefit which performance will confer on the innocent party).
- Exclusive remedy clauses
Parties are free to contract on express terms that specific performance will be excluded as a remedy and the court will be very reluctant to interfere with such express terms.
- Where the applicant is guilty of inequitable conduct
This is based on the proviso that those who come to equity must do so with clean hands.
- Where the applicant delays making the application for specific performance
There is no period of limitation for a specific performance claim, but practice suggests that the innocent party should issue the application as soon as possible. The court will consider the reasons and cause of the delay as well as any prejudice caused to the defaulting party.
Damages versus specific performance?
Specific performance will not always be the best remedy and should only be resorted to where a remedy in damages is not adequate.
There is a key advantage of a remedy in specific performance where a breach is pre-empted but has not yet occurred, and the innocent party wishes the existing contract to be performed rather than to seek damages and enter into a substitute contract. Where a breach is anticipated, the innocent party can seek an order for specific performance before the contract has been breached. By comparison, a claim for damages can generally only be made after there has been a breach. The exception here is where an anticipatory breach is accepted by the innocent party, although this has the effect of bringing the contract to an end (allowing the innocent party to claim for damages but preventing it from later calling for performance by the guilty party).
Another advantage of a remedy in specific performance is that the innocent party need not prove any loss caused by the breach; it simply needs to be evidenced that the obligation has not been (or will not be) performed.
Finally, the usual rules of remoteness and mitigation apply only to a remedy in damages, not to specific performance.
Specific performance is a discretionary remedy and there are many grounds for refusal even where a contract is binding at law and damages are not an adequate remedy. However, where the exceptions do not apply, it is a useful remedy to compel a party to comply with its obligations where damages would not be adequate.
We have created an initiative called “LS Unlock” to help businesses access legal advice during these uncertain times. LS Unlock comprises a free initial assessment of significant commercial claims together with a menu of alternative fee arrangements which can reduce and, in certain cases, eliminate the upfront cost of pursuing a claim. This initiative has been designed specifically to assist clients in this uncertain economic climate and is part of our commitment to working with clients to help them survive the effects of the Covid-19 crisis.