The expression ‘legal remedy’ usually refers to a form of relief granted by a court in the exercise of its jurisdiction. The object of most legal remedies is compensation for breach of contractual and tortious obligations, and other legal obligations and duties. This article will highlight some of the most common remedies granted by courts in a business setting.
After reading, you should understand the basics of the remedies for
- Breach of contract
- Tortious Claims
- Disputes among shareholders of a company
1. Compensating Breach of Contract
A party to a contract may be entitled to a legal remedy when the other party to a contract breaches an obligation under the contract. A party breaches the contract when he fails to perform the contract according to its terms. The three main types of remedies commonly sought by non-breaching party are :
- Reliance interests
- Liquidated Damages
The most common remedy available to the non-breaching party is damages (monetary compensation). The objective of damages is to put the non-breaching party in the position he would have been had the contract been performed according to its terms. The non-breaching party must prove that the breach of contract occurred, and that any loss he may have suffered was not too remote from the breach.
In certain cases, where loss cannot be proved, the innocent party cannot claim damages. Instead, he may be able to seek compensation for his expenditures incurred in performing the breached contract.
Action for Debt
Where a fixed sum of money is owed from the breach of contract, e.g. upon a failure to repay a sum on credit, the appropriate action is to sue for debt.
If the action is successful, the defendant will be ordered to pay the amount due plus any interest awarded by the court.
Unlike damages, the innocent party need not prove the loss and bears no responsibility to mitigate loss.
The parties to the contract may agree in the contract a specific amount payable to the innocent party in the event of a contractual breach.
Requirements for an effective liquidated damages clause
The amount specified must be a genuine pre-estimate of the loss which the innocent party will incur by reason of the breach.If the amount is deemed excessive, it will be held as a penalty clause and will not be enforceable.
Courts are more likely to uphold a liquidated damages clause in a commercial contract (between businesses.) In contrast, a consumer contract (between a consumer and a business) is likely to be regarded as an unenforceable penalty clause.
Note : If enforceable, the compensation will be limited to the agreed amount, even if the actual loss suffered by the innocent party is bigger / smaller than the agreed sum.
2. Compensating Tortious Liabilities
What is a tort?
Tortious liabilities arise without previous contractual relationship between parties, but the actions / omissions of the defendant (i.e. the tort) have caused loss to the plaintiff where there is some obligation not to cause such loss.
- Neither contractual nor criminal law
- Tort law entitles people to make claims for compensation when someone hurts them / their property.
Examples of Business-related Tort
- Employer responsible for personal injuries / property damages caused by its employees in the course of employment
- Negligence in goods production / in the course of service causing injury or property damages to customers
- Misrepresentation made during negotiation, inducing the other party to enter into contract
- Trade libel (publishing false statements that damages the business’s reputation)
2 Types of Remedies
A plaintiff in a tortious claim is entitled to :
- seek damages (monetary compensation); and/or
- apply for injunction from court (to compel the defendant in doing certain acts / refrain the defendant from certain acts)
Damages: Monetary compensation as most usual remedy
The main objective of tort damages is to place the plaintiff in the same position he would have enjoyed had the tort not been committed. The court has a larger discretion in assessing the amount of tort damages.
In some cases, injunction will be the only remedy available to either require the wrongdoer to do something, or stop doing something.
For example, an injunction may be available to stop a defendant from intentionally making false statements aimed at harming the plaintiff or his business.
The plaintiff must apply to the court for an order of injunction.
3. Remedies in Corporate Contexts
The Companies Ordinance (Cap. 622) provides two main remedies for shareholders to seek redress:
- Statutory derivate action
- Unfair prejudice action
Statutory derivative action (Companies Ordinance (Cap.622) s.732)
The statutory derivative action provides redress in situations where the company, represented by its directors, fails to take action against wrongs done to the company through the misconduct of a director. As a derivative action arises where a director has allegedly wronged the company, it is possible that the board will not exercise the company’s rights against the director. The statute thus provides a remedy in which the shareholder exercises a claim that “derives” from the company’s right to sue.
Unfair Prejudice Action (Companies Ordinance (Cap.622) s.724)
Such actions usually arise where the majority shareholders act unfairly prejudicial to the minority shareholder(s).
Unfair prejudice action provides redress in situation where the affairs of the company are being or have been conducted in a manner unfairly prejudicial to the interests of the members generally or of some part of the members.
Any shareholder of a company can bring an unfair prejudice action.
What is unfair prejudice?
Unfair prejudice” means that the conduct of the company has breached some equitable constraint established in the company among the members either by express agreement / a course of action.
- often arise in family firms / small firms where the members treat each other like partners
Usual remedies awarded
The court has wide discretion in awarding remedies. These include to :
- restrain the continuance of conduct of the company’s affairs
- appoint a manager over the company’s business
- order the company or any person to pay damages
- any other order that it sees fit e.g. buy-out remedy (ordering defaulting shareholders to purchase the shares of a distraught shareholder for him to leave the company immediately)