Damages

Where a party performing a contract doesnt do so to the standard required by the contract or within the timeframe set, we have a breach of the contract. There are several remedies available, which fall under 3 heads: 1. Every breach of contract entitles the injured party to damages compensation for the loss suffered. 2. In some cases, the injured party may obtain specific performance 3. In certain circumstances, the parties may be entitled to the return of the money paid or restitution of the value of services rendered or goods transferred. These are restitutionary remedies for the independent cause of action of unjust enrichment. They are not remedies for the breach of contract. Exceptionally, an injured party may be granted an award reflecting the gain made by the contract-breaker from the breach of contract. This is again, a restitutionary remedy for breach of contract. The development of the law has been marked by a broadening approach to the concept of loss and thus in its ability to protect the claimants interest in the performance by the other party of the contractual obligations. Except in the case of debt (the repayment of which may be specifically enforced at common law by an award of the agreed sum), the common law remedy for breach of a contractual promise is that of damages. If the claimants interest in the performance of the contractual obligations cannot adequately be protected by an award of damages, there are has been greater willingness to order that the contract be specifically performed where this is possible and practicable.

Compensatory Nature of Damages

Compensation for Loss Damages fro breach are normally designed to compensate for the damage suffered through that breach. A claimant who suffers no loss will be entitled to nominal (2-10) damages. Damages are not limited to compensation of financial loss alone, they may also be awarded for physical damage, even where this has not affected its value. Damages are not punitive Damages for breach of contract are given to compensate for loss suffered by the innocent party, not to punish the contract-breaker. Punitive / exemplary damages have no place in contract law as affirmed in Addis v Gramophone Co Ltd. Difficulty of Assessment is no bar Difficulty in assessing damages does not disentitle a claimant from having an attempt made to assess them, unless they depend on entirely speculative possibilities. This is can be seen in Simpson v LNWRC or Chaplin v Hicks, where the loss of a chance of winning a beauty contest was compensated. This applies particularly to obligations to consider all tenders. Date for Assessment The date of assessment is normally thought to be the date when the course of action arose, ie the date of the breach, as seen in Dodd Properties v Canterbury CC. However, more recently, a more flexible approach has been adopted, where a later date is used so that compensation can be more accurately calculated, as in The Golden Victory, when the Iraq war breaking out meant that the contract would have been cancelled some time after the breach anyway. In that case compensation was only given for the time between the breach and the outbreak of war. Compensation for Inconvenience or Mental Distress

Contractual damages may be recovered for substantial physical inconvenience or discomfort arising from a breach. However, damages are not generally recoverable for distress, vexation, tension etc, even where it was in the contemplation of the parties that the breach would expose the parties to distress. The reparation of these harms poses problems of incommensurability and subjectivity, and difficulties of proof. There are two exceptions to this rule, though. Damages for mental distress directly consequential on physical inconvenience caused by the breach can be awarded, and also where an important purpose of the contract is to provide enjoyment or peace of mind, or to prevent distress, as in Jarvis v Swan Tours. These damages are compensatory, not retributive. In recent years, the requirement that the sole object of the contract needed to be enjoyment or peace of mind has been relaxed, with the requirement now only that it is an important object of the contract, as seen in Farley v Skinner. Loss of Reputation Although damages cannot be recovered in a contractual action for injury to reputation per se, they may be where the loss of reputation causes financial loss, such as in Malik (stigma attached to former employees of BCCI after its collapse). However, a claim for wrongful dismissal will still not trigger damages for loss of reputation, so that the statutory regime and the levels of compensation laid down are not undermined.

Basis of Assessment of Damages

How do we arrive at the amount that the claimant is entitled to recover in respect of its loss? The Performance or Expectation Measure The object of an award of damages for breach of contract is to place the claimant, so far as money can do it, in the same situation, with respect to damages, as if the contract had been performed. Claimants are thus enabled to recover damages in respect of the loss of gains of which they have been deprived by the breach, such as loss of profits. Contract law goes further than tort law, as it entitles claimants to damages for the loss of the bargained-for performance, ie the loss of the particular benefit that it was expected would be received by the broken contract. Damages must be assessed by reference to the terms of the contract sued upon, and the Court cannot take account of the expectation of one contractor that the other will do something that it has assumed no legal obligation to do. Thus, an ex-employee cannot sue for the loss of the fringe benefits that an employer provided, when wrongfully dismissed. Also, where the defendant has a choice of two methods of performance, damages will be assessed on the basis of the minimum legal obligation. In many cases, the assessment will be the difference in value between the performance received and that promised in the contract. However, in some cases, damages may be assessed on the basis of what it has cost / will cost the claimant to have the contract performed by a third party. This assessment is called the cost of cure assessment, but is not always applicable, as in the case of the swimming pool built too shallow in Forsyth. There, the defendant was entitled to compensation for the distress, but not for the cost of rebuilding the pool. This is seen by economists as a recognition of Fs non-monetary consumer surplus the law recognises that pacta sunt servanda would be undermined if it didnt take into account that the consumer often demands specifications that are valuable to him, but have no economic value. The Reliance Measure At first sight, an alternative basis for the assessment of damages is that the claimant should recover its reliance loss, ie expenses that it has incurred in preparing to perform the contract

and which have been rendered futile by the breach. Furthermore, even expenses incurred before the creation of the contract could be recovered under this model, provided that it was reasonably in the contemplation of the parties that they would be wasted if the contract were broken. However, under this model, if the defendant can prove that the claimant would not have benefited financially had the contract been performed, the claimant will not be permitted to escape from a bad bargain by recovering as damages sums spent in reliance on the contract instead of loss of expectancy, as the reliance losses are considered to flow from entering into a losing contract and not from the defendants breach.

Causation
Establishing but for causation is not enough, the breach must be shown to be the effective cause of the loss, as opposed to an event that merely gives the opportunity for the claimant to sustain the loss.

Remoteness
The law doesnt require the defendant to assume liability for all the loss that the claimant may have suffered as a consequence of the breach, since some losses will be too remote. The Basic Two-Branched Rule The foundation of the law on this subject is contained in the judgement in Hadley v Baxendale. From the French civil code, damages are recoverable for breach of contract (1) when they are fairly and reasonably to be considered to have arisen naturally and (2) when they are such as may reasonably be supposed to have been in the contemplation of both parties, at the time they made the contract, as the probable result of the breach. Liability under the second branch will depend upon the special circumstances made known to the party in default at the time the contract was made. Thus in the case itself, the defendant couriers were not held liable for the mills lost profits due to their delay in carrying the shaft to the repairman, as they didnt know, nor reasonably could have known that a loss of profit was a possibility. We have now a situation where a variation on foreseeability becomes the test. According to Asquith LJ, the general principle is that the aggrieved person is only entitled to recover such part of the loss as was at the time of the contract reasonably foreseeable as liable to result from the breach. What was at that time reasonably so foreseeable depends on the knowledge then possessed by the parties or, at all events, by the party who later commits the breach. For this purpose, knowledge possessed is of two kinds: one imputed, the other actual. The former covers the first branch, the latter the second branch. Note that even the second one is objective it is basically what a reasonable person in that situation would conclude. The specificity of knowledge is important in The Heron II, the shipowner contended that he did not know about the ins and outs of the sugar market, but a reasonable person was held to have known that prices of commodities are liable to fluctuate. The Impact of The Achilleas The law on remoteness has arguably been altered by The Achilleas. By adding an extra requirement, that the defendant must have accepted liability, Lord Hoffman and Lord Hope threw the law on remoteness in contract into confusion. The courts have previously rejected the view that loss should be regarded as too remote unless the defendant has accepted liability for it as a term of the contract, but this is exactly what Lord Hoffman and Lord Hope seem to be advocating.

Mitigation
A person who has suffered loss from a breach of contract must take any reasonable steps that are available to mitigate the extent of the damage caused by the breach. It is often said that this is a duty to mitigate their loss, but this is misleading the claimant cannot itself be sued for failure to comply with its duty; rather the consequence is simply that no damages are given for the avoidable losses. Acting Reasonably An employee who is wrongfully dismissed must make reasonable efforts to obtain, and must accept an offer of, suitable alternative employment. A failure to do so may mean that the employee is, in certain circumstances, entitled to nominal damages only, as in the case of Beckham v Drake. However, there is no compulsion to accept an offer of work that is far inferior to the previous occupation, and it is a question of fact in each case whether the claimant has acted as a reasonable person might have been expected to act. A claimant that has taken unreasonable steps cannot hold the defendant liable for loss which has thus been suffered. Compensating Advantages May Reduce Damages Where a person mitigates loss and obtains a compensating advantage, the advantage will be deducted from the damages provided it arose directly from the breach and the act of mitigation and is not merely an indirect or collateral benefit. Thus in British Westinghouse, turbines that were less efficient than the contract specification were installed by the defendant, and used more coal than was desired. The claimant replaced these with much better turbines, which resulted in an overall saving of coal over the whole period. Thus, the damages had to be reduced by the savings achieved. However, where the benefit is independent of the act of mitigation, damages will not be reduced, such as in the case of sums due under an insurance policy. The fact that replacement property bought is better than the original property, damaged as a consequence of the breach, will not in itself reduce damages, rather it must be shown that the claimant will derive a real pecuniary advantage from the better property.

Assessment of damages in Contracts for the Sale of Goods

Non-Delivery Suppose that A promises to see B 112k worth of coal, doesnt, and then the value rises such that the value would now be 120k, B can recover 8k damages. This is the case even if he had already contracted to sell the coal for 117k. Late Delivery Where the seller is late in delivering the goods, the damage is normally the difference between the market value at the time they ought to have been delivered and the market value at the time when they actually were delivered. Difficulties clearly arise here when goods have been sold for a higher-than-market value. In Wertheim, coal was delivered late, such that the market value dropped by 27s 6d, however, the buyer was still able to resell the coal for 5s less than he paid for it. Therefore, in this case, the damages were held to be only 5s. This is in order to prevent the claimant being compensated for losses that they never suffered. The counter-argument to this is that the buyer is not obliged to fulfil the contract by delivering the specific goods received, and the late delivery deprived them of the opportunity to play the market. Non-Acceptance Although then normal rule is that the measure of damages is the difference between the contract and market prices on the day fixed for acceptance, in modern trading conditions the retail price is frequently that recommended by the manufacturers, so that there is no

difference between the contract and the market price. The question then arises whether a seller/dealer can recover its loss of profit on the sale. In Thompson v Robinson, D contracted to buy a car from T, with a price fixed by the manufacturers. D refused to accept the car, but T managed to persuade the wholesalers to take it back. T nonetheless claimed for the loss of profit from D. Held that the rule was only prima facie and that it was displaced by the fact that the supply of the model of car currently exceeded demand. T therefore acted reasonably by returning it to the wholesalers, but could still claim the loss of profit. On the other hand, in Charter v Sullivan, because D > S, it was held that nominal damages only would be awarded, because the seller had suffered no loss of profit, and the market price was therefore artificial. Breach of Warranty Where goods are delivered in breach of warranty, s53 of SoGA 1979 provides prima facie that the buyer is entitled to the difference between the value of the goods at the time of delivery to the buyer and the value that they would have had if they had fulfilled the warranty. Sub-sales: If it was in the reasonable contemplation of the parties at the time that they made the contract that the goods would probably by re-sold to sub-purchasers on the same or very similar terms, either as they were or after manufacturing them into another product, the Court may have regard to the sub-sale. For example, the buyer will be able to recover damages it was forced to pay to those purchasers, along with any costs reasonably incurred in defending an action against him by them. This latter award was held in Hammond v Bussey to come within the second branch on the rule in Hadley v Baxendale. Note that where the buyer has not been faced with claims by the sub-purchasers, they may not be able to recover from the seller for the difference between the value of the goods delivered and the value that they would have had if they had fulfilled the warranty. This willingness to depart from the general rule has been criticised. Loss of Profit: If at the time of making the contract, the seller knew or may be presumed to have known that goods were to be used to produce a profit, and the breach of warranty precludes or reduces the profit likely to have been made, the buyer may recover damages for the loss of profit caused by the breach. Such a buyer who brings an action for breach of warranty cannot recover both the whole capital loss in the value of the goods and also the whole of the profit which it would have made this would be to allow the recovery of double damages.

Contributory Negligence
No Apportionment at Common Law As a general rule, where the claimants loss has been caused partly by the defendants breach of contract and partly by the claimants own blameworthy conduct, the damages are not reduced unless the claimants conduct breaks the chain of causation or constitutes a failure in the claimants duty to mitigate its loss or itself amounts to a breach of contract. Law Reform (Contributory Negligence) Act 1945 This act applies to reduce damages where the claimant has been at fault for the damage. Damages are reduced proportionately taking into account the causal potency and comparative blameworthiness of the parties conduct. As regards breach of contract, the interpretation of the definition of fault in the 1945 act has led to a tripartite classification of claims. The Act does not apply to the breach of a strict contractual duty (category one), nor to the breach of a DoC imposed by the contract that does not give rise to a liability in tort (category two). However, the act does apply to the breach of a DoC imposed by the contract where there is concurrent liability in the tort of negligence, as where services are negligently rendered to a client by lawyers or builders, for example (category three). This might seem illogical, but permitting apportionment in all cases would allow Courts to vary an agreed allocation of

risks, which would undermine the certainty that is important in the law of contract.

The Tax Element

Since damages are designed to compensate the claimant for the actual loss suffered, and no more, any liability to pay tax may have to be taken into account. In Gourley, where G claimed for loss of earnings arising out of personal injuries caused by negligence, HL held that damages awarded to G on the basis of his gross earnings should be reduced by the amount that he would have had to pay in tax. This only applies if two conditions are met, however first, the earnings or profits in respect of which the claim is made must be subject to tax, secondly the sum awarded as damages must either not be subject to tax in the claimants hands or, if it is, the tax payable on the damages must be taken into account in assessing the damages.

Interest
Until recently, the position at common law was that interest could not be awarded as damages for the late payment of money. In general, therefore, parties to a contract would have to rely either on a term of the contract requiring the payment of interest, or on the statutory power to award interest on debts and damages conferred by the Senior Courts Act 1981. However, all this was swept aside by the House of Lords dicta in Sempra Metals v IRC. Interest, including compound interest, can be awarded as damages where the loss of use, at the rate claimed, is proved and subject to the normal limitations, such as remoteness and the duty to mitigate.

Agreed Damages Clauses

Liquidated Damages and Penalties Parties often agree in the contract for the damages to be paid on a breach of contract. Such provision doesnt exclude the application of the general rule that damages for breach are intended to compensate for the actual loss sustained by the claimant. It is a question of construction to decide whether a sum fixed by the parties is a penalty or a genuine attempt to liquidate (to reduce to certainty prospective damages of an uncertain amount). In the former case it can be, but it cannot be recovered in the latter recovered (this rule stems from the rule against penalties in equity). The courts will look to substance, rather than form in construing the terms penalty and liquidated damages. Alongside the common law rules, the courts must also bear in mind the Unfair Terms in Consumer Contracts Regulations 1999. These allow the Courts to protect consumers by, for example, holding that unfair terms are not binding on the consumer. An example of an unfair term is one requiring any consumer who fails to fulfil his obligation to pay a disproportionately high sum in compensation. Rules of Construction The leading case on penalties is that of Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd. In the House of Lords, Lord Dunedin laid down the following rules for the rules of construction: 1. It will be held to be a penalty if the sum stipulated for is extravagant and unconscionable in amount in comparison with the greatest loss that could conceivably be proved to have followed from the breach. 2. It will be held to be a penalty if the breach consists only in not paying a sum of money, and the sum stipulated is a sum greater than the sum that ought to have been paid. However, it is important to note that accelerate payment clauses are not invalid as penalties,

as seen in Protector Loan Co v Grice, as it does not fulfil the test set out in Lordsvale Finance, which was to change the nature of the provision from compensatory to a deterrent. 3. There is a presumption that it is a penalty when a single lump sum is made payable by way of compensation, on the occurrence of one or more of several events, some of which may occasion serious and others but trifling damage. For example, an agreement not to sell goods below listed price might cause serious damage, and might cause trifling damage, thus it would be presumed to be a penalty. A single sum, as opposed to a sum proportioned to the seriousness of the breach is presumed to be penal because one tests it against the least serious breach possible. The presumption doesnt apply where the sum is payable for breach of a single obligation, which can be broken in a number of ways. Where it is difficult to estimate the loss and it is therefore uncertain that losses from one breach would be greater than those from another, a Court may hold that the presumption is rebutted. 4. It is no obstacle to the sum stipulated being a genuine pre-estimate of damage, that the consequences of the breach are such as to make precise pre-estimation almost an impossibility. Necessity for Breach At common law, the question whether the sum of money or other performance stipulated for is a penalty or liquidated damages can only arise when the even upon which it becomes payable is a breach. It does not arise where the obligation to pay exists on entering the contract as an advance payment or deposit, or is a true alternative mode of performing the contract. However, it has been held that a take or pay clause, where a buyer agreed to pay for a minimum quantity of goods per month whether it had ordered that minimum quantity or not does fall within the scope of the rule against penalties. The distinction between clauses within and outside the penalty jurisdiction has given rise to litigation in the context of h-p agreements. If the hiring is terminated as a result of a breach of the agreement by the hirer, the Courts may hold this payment to be a penalty in terrorem. However, if it is terminated voluntarily, or as a result of death or bankruptcy, such that there is no breach of the agreement, the question of a penalty or liquidated damages cannot arise. Thus, we have the anomaly at common law that it may be more expensive for a hirer to terminate the agreement than to repudiate and break the contract. Amounts Recoverable Where the clause is a liquidated damages one, the claimant will recover the stipulated sum irrespective of any actual damage. However, where the actual loss is greater, the claimant is limited to the stipulated sum. Where a clause is held to be penal, the damages recoverable must be assessed in the normal way.