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
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.
Reliance Loss Measure
As an alternative to claiming profits that they should have obtained if the contract had been correctly performed, the claimant can instead claim expenditure wasted due to the contract: Anglia Television v Reed [1971] 3 All ER 690. However, this head of damage is not available where it would put the claimant in a better position than if the contract had been properly performed: C&P Haulage v Middleton [1983] EWCA Civ 5.
Cost of Cure Measure
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
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
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
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:
- Any losses which are a result of a failure to reasonably mitigate are not recoverable;
- 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.
