Contract: Monetary Remedies

Financial Remedies for Breach of Contract

Damages

The Purpose of Damages

The purpose of contractual damages is to put the claimant in the position they would be in had the contract been properly performed: Robinson v Harman (1848) 1 Ex 850. This is referred to as fulfilling the claimant’s expectation loss. If the claimant has not suffered any loss, they are only entitled to nominal damages. 

Causation

A claimant can only recover damages which were caused by the breach. A breach causes a loss if but for that breach, the loss would not have occurred: The Monarch Steamship [1949] AC 196. 

There must also not be any unforeseeable act of a third-party or nature which led to the breach, as this will break the chain of causation: The Monarch Steamship [1949] AC 196. The claimant’s own negligence can also break the chain of causation: Quinn v Burch Bros (Builders) Ltd [1966] 2 QB 370. 

However, there will be no break the causal chain if the defendant’s contractual duty was to guard against that kind of event or action: London Joint Stock Bank Ltd v Macmillan (1918) AC 777.

Measures of Damage

Damages are assessed according to the circumstances existing at the time of the breach, unless this would lead to injustice: Suleman v Shahsavari [1988] 1 WLR 1181. There are several measures of damages that the courts can use to calculate the claimant’s expectation loss: 

Market-Difference Measure
difference, time, clock

The market-difference measure is the most commonly used. This measure grants the difference in market value between the performance the claimant contracted for, and the performance that the claimant actually received, plus any consequential losses the claimant has suffered: The Caloric [1981] 2 Lloyd’s Rep 675.

Reliance Loss Measure
reliance, climbing, friends

As an alternative to claiming profits that they should have obtained if the contract had been correctly performed, the claimant can instead claim any expenditure wasted due to the contract: Anglia Television v Reed [1971] 3 All ER 690. However, losses which the claimant would have incurred anyway if the defendant had performed are not recoverable: C&P Haulage v Middleton [1983] EWCA Civ 5.

Cost of Cure Measure
cure, building work, handyman

As an alternative to the market-difference measure, the claimant can claim damages equal to the cost of repairing the defect or obtaining substitute performance. This measure is only available if the claimant actually intends to cure the performance and it is reasonable to do so: Ruxley Electronics and Construction Ltd v Forsyth [1996] AC 344.

Consumer Surplus
swimming pool, consumer surplus

In cases where no economic loss is suffered and the cost of cure is unavailable, the courts may award a small award for ‘consumer surplus’: Ruxley Electronics and Construction Ltd v Forsyth [1996] AC 344. This is available if the purpose of the contract was to provide some subjective benefit not reflected by the market value of the performance.

Hypothetical Fees
agreement, license, contract

If the defendant has breached a proprietary or quasi-proprietary right, the claimant can recover the hypothetical value of the fee they would have charged to release the defendant from their obligations. These were once thought to be a form of gains-based damages, but have recently been confirmed by the Supreme Court to be compensatory: Morris-Garner v One Step (Support) Ltd [2018] UKSC 20.  

Mental Distress
mental distress

Emotional loss is not normally recoverable, with two exceptions: Addis v Gramophone [1909] AC 488. The first is where the loss is consequent on physical inconvenience: Perry v Sidney Phillips [1982] 3 All ER 705. The second is where an important purpose of the term breached was to provide enjoyment, amenity or peace of mind: Jarvis v Swan Tours [1973] QB 233; Farley v Skinner [2001] UKHL 49.


Remoteness of Damage

Regardless of the measure of damages chosen, a loss is not recoverable in damages if it is ‘too remote’. A loss is too remote if it is not: 

  • A loss which happens naturally (‘according to the usual course of things’) due to that kind of breach, or
  • A loss which ‘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 of it’: Hadley v Baxendale [1854] EWHC J70.

In practice this means that if the loss is unusual, it will not be recoverable unless the other party was made aware of the possibility at the time of contracting: Victoria Laundry (Windsor) Ltd v Newman Industries Ltd [1949] 2 KB 528. However, even without being specifically told about the loss, it may still be recoverable if a reasonable person would have realised from the circumstances that it might occur: The Heron II [1967] UKHL 4. 

There is no need for the degree of the loss to be foreseeable, only its broad type: Parsons (Livestock) Ltd v Uttley Ingham & Co Ltd [1978] QB 791.

Mitigation of Loss

The claimant is under a duty to take all reasonable steps to mitigate his potential losses: British Westinghouse Electric Co Ltd v Underground Electric Railways Co of London Ltd [1912] AC 673. This has two consequences: 

  1. Any losses which are a result of a failure to reasonably mitigate are not recoverable;
  2. Any expenses which were unreasonably incurred in dealing with the breach are not recoverable. 

However, an unreasonable refusal to terminate the contract in response to a repudiatory breach is not considered a failure to mitigate unless the claimant has no legitimate interest in continuing the contract: White & Carter v McGregor [1961] UKHL 5.


Liquidated Damages Clauses

What is a Liquidated Damages Clause?

A liquidated damages clause is contract term whereby the parties agree in advance the amount payable for breach. It might relate to a particular obligation, or any breach of the contract. A breaching defendant will be liable to pay that sum unless the rule against penalty clauses applies.

The Rule Against Penalty Clauses

A liquidated damages clause is not enforceable if it is a ‘penalty clause’: Azimut-Benetti SpA v Healey [2010] EWHC 2234. This is a liquidated damages which imposes a penalty on the other party which is ‘out of all proportion to any legitimate interest of the innocent party in the enforcement of the primary obligation’: Cavendish Square Holding BV v Makdessi [2016] AC 1172. This test is likely to be met if the level of damages has been assessed purely to punish non-performance.

This rule only applies to clauses that specify a sum payable on breach, and not to clauses which specify that a sum will be paid if some other event occurs: Alder v Moore [1961] 2 QB 57.


Action for an Agreed Sum

What is the Action for an Agreed Sum?

Where one party has performed an obligation which gives rise to a counter-obligation to pay an agreed sum (such as the price of goods), an action can be brought to claim that sum. There are no restrictions on when this remedy is available. 

This actions remains available if the contract is terminated, but only if the obligation to pay arose before termination.


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Contract Remedies Quiz

Test yourself on the principles which determine when contract remedies are available.

1 / 27

Pierre agrees to buy a priceless painting from Sophie to display in his house, for several million pounds. He does not intend to pay. Sophie is now saying that she will refuse to hand over the painting. Can Pierre obtain an order for specific performance?

 

2 / 27

Arthur contracts for a private car from Celestine, stressing that he needs to arrive before three o'clock. He does not explain the reason why, which is that if he is late he will miss a meeting with an important client and lose a valuable deal. Celestine drives painfully slowly and does not get Arthur to his destination on time. Arthur loses the deal. Can Arthur recover damages for the lost contract?

 

3 / 27

Complete this sentence: Damages are assessed according to the circumstances existing...

4 / 27

A claimant suing for breach of contract can claim both the market difference measure and the cost of cure measure at the same time. True or false?

 

5 / 27

When is specific performance available as a remedy to a breach of contract?

6 / 27

When are damages considered inadequate for the purposes of obtaining specific performance as a remedy? (Two answers)

7 / 27

Laura contracts Stephen to personally ghost-write her memoirs. Since Stephen knows her best, it is not possible for Laura to obtain another person to write the book. The relationship falls apart and Stephen refuses to write the book. Can Laura obtain an order for specific performance?

 

8 / 27

When is a liquidated damages clause void under the penalty clause rule?

9 / 27

Emmy purchases a new fish tank filter from Lee. The filter is defective, and it shuts down. Emmy's incredibly rare and expensive fish die as a result. Lee argues that he should not be liable as it was unforeseeable that the breach would cause such a high degree of loss. Is he correct?

 

10 / 27

Darrel makes a contract with Pierre, agreeing that he will tend to Pierre's garden while Pierre is away. Instead of performing, Darrel goes on holiday. During this time, there is a freak storm which floods Pierre's garden and causes a lot of damage. Can Pierre obtain damages from Darrel for the damage to his garden?

11 / 27

Is it a failure to mitigate to refuse to terminate a contract in response to a repudiatory breach, where this refusal leads to further loss?

12 / 27

In what two scenarios is a loss sufficiently non-remote to be recovered in an action for breach of contract?

13 / 27

Pierre agrees to rent a priceless painting from Sophie to display in his house, on condition that he first pay a deposit of several million. He has yet to pay the deposit. Sophie is now saying that she will refuse to hand over the painting. Can Pierre obtain an order for specific performance?

 

14 / 27

When can a claimant obtain a consumer surplus award of damages?

15 / 27

What is the purpose of general contract damages?

16 / 27

Micah contracts with John for a package holiday. In breach of contract, John fails to make the appropriate reservations, leaving Micah stranded abroad without a hotel for several days. Micah suffers a severe stress reaction as a result. Can Micah recover damages for her emotional distress?

 

17 / 27

What two elements must the claimant show to obtain the cost of cure measure of damages?

18 / 27

Alice contracts Bill to install new fans in her restaurant. Bill completes the work defectively, causing a fan to fall on Alice's head. She suffers a brain injury and develops depression as a result. Can Alice recover damages for her mental illness and emotional distress?

 

19 / 27

Sophie hires Anne to install a storm drainage system in her garden. Anne's work is defective, meaning that it does not drain water properly. That summer, an unexpected storm hits and causes considerable water damage to Sophie's garden. The storm was not forecast, and is described in the media as a 'freak' occurrence. Anne argues that the storm was an unforeseeable act of nature, meaning that her breach did not cause Sophie's loss. Is Anne correct?

20 / 27

Laura contracts Stephen to arrange for someone to ghost-write her memoirs. For various reasons, it is not possible for Laura to obtain another person to do this. The relationship falls apart and Stephen refuses to perform. Writing the book in accordance with the contract would take time and require supervision. Can Laura obtain an order for specific performance?

 

21 / 27

Alice contracts Bill to install new fans in her restaurant. Bill completes the work late, causing Alice considerable stress. Can Alice recover damages for her stress?

 

22 / 27

A claimant suing for breach of contract can claim both the market difference measure and the reliance loss measure at the same time. True or false?

 

23 / 27

When is the hypothetical fee measure of damages available in contract?

24 / 27

What are the elements for determining whether a prohibitory injunction should be granted? (Three answers)

25 / 27

What are the elements for determining whether a mandatory injunction should be granted? (Four answers)

26 / 27

What is the default measure of damages in contract?

27 / 27

When will an injunction be refused despite the relevant test being met? (Three answers)

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