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DAMAGES IIKEY POINTSReading Fisher &Greenwood 15.1 -15.Hall 21-21-13, 21 - 21.QUANTIFICATION/ASSESSMENT OF DAMAGES(1) EXPECTATION DAMAGES/PERFORMANCE INTERESTOnce court decides loss is not too remote the next step is then to decide how much P's loss is worth in money-the measure of damages. ...

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DAMAGES II KEY POINTS Reading Fisher &Greenwood 15.1.4 -15.2.1 Hall 21.1-21-13, 21.41 - 21.109

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QUANTIFICATION/ASSESSMENT OF DAMAGES (1)

EXPECTATION DAMAGES/PERFORMANCE INTEREST Once court decides loss is not too remote the next step is then to decide how much P's loss is worth in money-the measure of damages. Object of court is to compensate P so far as money can do it by putting him in the same position he would have been in if D had carried out the contract. This is known as EXPECTATION damages (performance interest) (ROBINSON v HARMAN Compare THOMPSON v ROBINSON GUNMAKERS and CHARTER v SULLIVAN This rule is well illustrated by contracts for sale of goods. (a)

NON DELIVERY - S sells B 100 tons of coal at $500 per ton delivery May 1st. Fails to deliver. The natural result of the breach is that B has not got possession of 100 tons of coal on May 1st for which he was to pay $500 per ton. He should therefore be given the sum which would put him in same position he would have been in if S had carried out the contract and delivered 100 tons on May 1st. This will be the "extra" amount B will need to obtain 100 tons of coal elsewhere on May 1st e.g. if the market price of coal on May 1st is $600 per ton B will get $100 damages.

(a)

NON-ACCEPTANCE - similar rule e.g. if on May 1st S could only sell 100 tons elsewhere at $400 per ton S will get $100 damages.

In applying the expectation loss rule the courts often use one of two formulae .The first is the difference in value rule giving P the difference between what he has actually got and what C should have got if the contract had been properly performed. The second is the cost of cure rule which gives P the amount of money he needs to rectify the breach e.g. the cost of repair THE PROBLEM OF THE CONSUMER SURPLUS Whilst the rules concerning expectation damages work well in commercial contracts where the main objective of the agreement is to make a profit they do not work as well in many consumer contracts as consumers make contracts not primarily for the profit they make but mainly for the pleasure and enjoyment they are to get out of the contract and this cannot easily be estimated in terms of money. Therefore in such cases even though the cost of cure is greater than the difference in value the courts have sometimes awarded the cost of cure as they feel it is the only fair way

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to compensate the consumer for the loss of the amenity RADFORD v DE FROBERVILLE - consumer wants a wall not just to enhance value of his property but for aesthetic purposes and to increase privacy. The cost of cure will only be awarded in such circumstances where it is reasonable to do so and if, for example, the D has substantially carried out the contract and to cure the breach would involve great expense the court will not award the cost of cure, especially if it is clear P does not intend to use the money to cure the breach, and will simply award a small sum for the disappointment suffered by the consumer because he has not got what he contracted for. RUXLEY ELECTRONICS v FORSYTH. (2)

RESTITUTIONARY DAMAGES-RECOVERY OF PROFITS

Normally not the function of the court to punish the contract breaker by making him hand over the profits made from breaking the contract SURREY CC v BREDERO HOMES. Only in a very exceptional circumstances will the court make such an award known as RESTITUTIONARY damages A-G v BLAKE H.L. 2000 4 ALL ER 385.Unfortunately the H of L did not give clear guidelines as to when this exception would apply. There are also some land law authorities that state that sometimes a P can recover a percentage of the profits D had made from breaking the contract. This is known as Wrotham Park damages after the case Wrotham Park Estate v Parkside Homes[[1974] 2 All ER 321. In these cases a builder breaks a restrictive covenant and builds more houses than agreed on the land. No loss is suffered by the vendor as he would still have sold the land for the same price even if more houses were being built. But clearly the builder has made a greater profit by building more houses than agreed. It was held that the builder had to hand over part of these unauthorised profits based on the very artificial reasoning of guessing what fee the vendor would have charged the builder as the price for releasing the builder from the restrictive covenant and allowing him to build the extra houses. However in MORRIS-GARNER v ONE STEP (SUPPORT) LTD [2018] UKSC 20 the English Supreme Court rejected that idea that this principle applied to contract law in general as it was contrary to the principle that damages are compensatory and not punitive and refused to give Wrotham Park damages where a seller of a business broke a clause stating he would not set up a competing business.

(3) EXPENDITURE/RELIANCE DAMAGES – While the basic object of damages is to put P in same situation as if contract has been properly performed (loss of bargain or expectation loss) on occasions courts are prepared to put P in position he would have been in if the contract had never been made (expenditure loss or reliance loss). Will do so where it is impossible for P to estimate his loss of bargain ANGLIA T.V. v REED; McRAE v COMMONWEALTH DISPOSALS

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COMMISSION. However it will not do this merely to relieve P from the consequences of a bad bargain i.e. if the result would be to leave P better off than if the contract had been properly performed (C.P. HAULAGE v MIDDLETON). Burden of proof is on defendant to prove plaintiff would not have recouped his expenditure even if the contract had been performed CCC FILMS v IMPACT QUADRANT FILMS. (4) SPECULATIVE DAMAGES - Fact damages are difficult to assess and it is not possible to calculate accurately the amount of P's loss does not prevent P recovering compensation. This is the case where P has been deprived of the chance of some benefit CHAPLIN v HICKS. The greater the chance the greater percentage of the full figure the P will receive .Applied Hong Kong in SEMANA BACHICHA V POON SHIU MAN MITIGATION OF LOSS 减轻 减轻损失 损失 P must take all reasonable steps to minimise the extent of his loss (e.g. if wrongfully dismissed from his employment he must try to obtain alternative employment). If P fails to do so he cannot cover for the loss which is due to his failure to behave unreasonably after the breach. If steps are reasonable it is irrelevant that they increase the loss C has sustained HOFFBERGER v ASCOT INTERNATIONAL BLOODSTOCK BUREAU. What steps are reasonable is a question of fact. Not reasonable (1) to expect C to embark on complicated litigation to minimise his loss PICKINGTON v WOOD or (2) to risk his commercial reputation JAMES FINLAY v KWIK HOO TONG. See also PAYZU v SAUNDERS and WAYFOONG CREDIT v CHEUNG WAI WAH SAMUEL The mitigation rule often means the court will apply the cost of cure rule rather than the difference in value. Therefore if P buys a defective car he will usually get as damages the amount needed to repair the defects (cost of cure) as this is likely to be less than the difference between the market value of the car in its current condition (defective consumer goods usually have a very low resale value) and the market value of the car without these defects. .NOTE - in case of anticipatory breach if P refuses to "accept" breach as ending contract there is no duty on P to mitigate his loss until date fixed for commencement of performance. WHITE & CARTER v McGREGOR. Sometimes the rules on mitigation of loss and discharge by breach can clash see THE SOLHOLT. Whether the P should accept an offer by D to cure the breach is a question of fact but clearly if the D has had a history of unreliability it would be reasonable for P not to trust D and reject the offer TUNG GUAN CO v JIH DONG ENTERPRISES [1992] HKLR 225; KIN TONG LAND INVESTMENT v CAPELLA [2019] HKEC 221

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CONTRIBUTORY NEGLIGENCE. Damages cannot be reduced on this ground PARSONS v UTTLEY INGHAM. Either P obtains full damages or he is regarded as so much to blame that the chain of causation is broken and he gets nothing LAMBERT v LEWIS-winner takes all! In INTERNATIONAL TRADING CO LTD v LAI KAM MAN [2004] HK LRD 937 it was decided the Ordinance permitting reduction in damages for contributory negligence in tort S 21(1) LARCO did not apply to a claim in contract. LIQUIDATED DAMAGES AND PENALTIES Contract may provide that on a breach a fixed sum shall be paid by party responsible. E.g. building contract may state for each week builder delays in completing work he must pay $10000. Such clauses are very useful in situations where it is difficult for a party to calculate his actual loss if the contract is broken However while it is desirable for parties to know in advance what they liability may be, unjust to allow a party to recover a sum far in excess of his actual loss and thus to punish the D for his breach of contract Therefore fixed sum may be A.

LIQUIDATED DAMAGES . On breach P will receive this sum though his actual loss may be smaller or greater or impossible to prove. E.g. if contract states P will receive $1000 in event of breach and his actual loss is $700 P will still be entitled to $1000.LUEN YICK v TANG MAN KEE MACHINERY WORKSHOP [1958] HKLR 405

B.

PENALTY – D is being punished for breaking the contract P cannot recover this sum only his actual loss.Therefore if in the above example $1000 is held to be a penalty P will only be entitled to $700. N.B LIQUIDATED DAMAGES = Aim is to compensate for loss suffered PENALTY=Aim is to punish a party for breaking the contract. A clause is presumed to be liquidated damages. Therefore it is up to the party alleging the clause is a penalty to prove it. The courts are slow to come to the conclusion a clause is a penalty as liquidated damages clauses create certainty in commercial contracts , reducing the amount of litigation as they avoid disputes about quantum thus saving the parties time and legal costs.

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See Lord Wolf in PHILIPS HONG KONG v AG of HONG KONG(“The court has to be careful not to set too stringent a standard and bear in mind that what the parties have agreed should normally be uphold .Any other approach will lead to undesirable uncertainty in commercial contracts” Rules for deciding whether a sum is a penalty or liquidated damages were originally laid down in DUNLOP PNEUMATIC TYRE CO. v NEW GARAGE. These rules were merely presumptions which may be rebutted by evidence of a contrary intention. The use of the words "penalty" or "liquidated damages" in a contract are not conclusive. It is likely to be a penalty (1)

(2)

(3)

If the sum is extravagant and unconscionable in comparison with greatest loss which could have followed the breach e.g. clause in a contract to do building work worth $100,000 provides that builder should pay $1 million if he fails to do the work. However the court will only declare a clause a penalty on this ground if the sum is substantially greater than the actual loss and the there is no justification for it. Where D is under obligation to pay a certain sum of money and if he fails to do so he must pay a larger sum e.g. D has to pay C $1000 on June 1st if he does not then he must pay $1500 as liquidated damages. Extra $500 would be a penalty and could not be recovered. See also KEMBLE v FARREN. If a single sum is made payable on the occurrence of different breaches some of which may result in serious and others trifling damage.. FORD MOTOR CO v ARMSTRONG. LOMBARD NORTH CENTRAL v BUTTERWORTH. DUFFEN v FRA BO SPA.CMC GROUP PLC v ZHANG [2006] CA.

HOWEVER (4) The mere fact an accurate pre-estimation of the loss is impossible/difficult does not prevent the sum from being liquidated damages.

BUT In a landmark case in the UKSC CAVENDISH v EL MAKDESSI ; PARKING EYE v BEAVIS [2015] UKSC 67 ] it was decided the above test should not be taken as exhaustive and the court should only hold a clause to be a penalty if the detriment imposed on the contract-breaker is out of all proportion to any legitimate business interest (commercial justification) the innocent party has in enforcing the contract. In other words the SC recognised the parties can have a legitimate interest in seeking to deter a breach of contract by specifying consequences going beyond compensation. Thus in MURRAY v LEISURE PLAY a cl stating that an employee was

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entitled to one year’s gross salary if he was dismissed in breach of a term entitling him to one year’s notice was not a penalty, even though he would receive far less in compensation if he sued for breach of contract (would get damages based on his actual loss which would be his salary less the tax that he would have had to pay), as the commercial justification for the clause was it was part of an attractive financial package to persuade an in-demand employee to work exclusively for the D. Also the clause was in the employer’s business interests too as since claims for wrongful dismissal often involve lengthy and complicated disputes about quantum(could the employee have mitigated his loss by finding alternative employment?) employer was making substantial savings in lawyers’ fees and avoiding wasting management time in resolving the quantum dispute. Quotes from CAVENDISH “deterrence is not penal if there is a legitimate interest in influencing the conduct of the contracting party which is not satisfied by the mere right to recover damages” par [99] “The innocent party can have no proper interest in simply punishing the defaulter” par [32] NB Note that the rules on penalties only apply to clauses in contract imposing secondary liability. These are clauses which are state what the remedy is in the event of a breach e.g. clause saying if you break the contract you must pay HK$xxx. They do not apply to clauses concerning primary liability. These are clauses which define the extent of the parties’ contractual obligations such as what is the subject matter of the contract and what is the price. Thus a clause which says “in the event of late completion of the work there will be a 20% reduction in the price” is a clause concerning primary obligation, what is the price, and not subject to the above rules .The reason for this distinction is the rules concerning penalties are concerned with judges regulating on the grounds of justice the remedies available for breach but it is not the function of judges to review the fairness of the main terms of the contract (consideration does not have to be adequate) (Makdessi [13]). However this will mean that the rules concerning penalties can be easily overcome by clever drafting. Thus in PARKING EYE a clause which said ‘maximum stay 2 hours. If you fail to comply there is a charge of 85 pounds’ was a secondary liability provision. The contract was for two hours parking and if this was broken the “penalty” for breach was 85 pounds. However if the contract had said “Parking charges: Free for first 2 hours 85 pounds thereafter “ this would be simply a clause defining what the consideration is and a primary obligation. A very fine distinction indeed! (The approach taken in CAVENDISH has been adopted in Hong Kong see for example FORCE ENGINEERING v THE INCOPORATED OWNERS OF GRAND COURT [2017] HKCU 3267 paras [240]-[243] BANK OF CHINA(HONG

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KONG)LTD v EDDY TECHNOLOGY [2019] HKCA 339 para 38 CHAN CHAM PONG CEDRIC v TOO KA MAN [2019] HKDC 971

SPECIFIC PERFORMANCE This is an order from the court requiring the party in breach to perform his contractual obligations. While SP is supposed to be a discretionary remedy the courts are very reluctant to award outside of property transactions as the sanction for breach is extreme – imprisonment for contempt of court .The courts prefer to award damages-a simpler and easier one-off remedy. It will not be awarded if damages would be an adequate remedy or the enforcement of the order would require constant supervision of the court thus running the danger of further litigation as to whether the order has been broken The leading common law case is CO-OP INSURANCE v ARGYLL 1997 3 AER 297, where the House of Lords refused to make an order compelling the defendant to carry on running a business. See also ZINC COBHAM 1 LTD v ADDA HOTELS [2018] EWHC 1025 no SP of a term in a lease requiring leasee to keep their hotels up to certain quality standards.

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