Damages notes PDF

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key points regarding contractual damages...

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Damages Topic Damages

Concept Contract breach = automatic award of damages.

Issue Damages are available for every contract breach, unlike termination.

Rule/Requirements “where a party sustains a loss by reason of a breach of contract, he is, so far as money can do it, to be placed in the same situation, with respect to damages, as if the contract had been performed.” Parke B

Case Robinson v Harman (1848) 1 Ex 850

Notes Contract damages are NOT punitive or aimed at punishing the defendant. I.e. Exemplary damages not awarded in Aust for breach of contract.

CANNOT PROFIT FROM DAMAGES.   

Proof required

Contract damages designed to compensate the plaintiff for damage, loss or injury suffered. If plaintiff has suffered no loss then will only be able to recover nominal damages. Courts cannot award exemplary or punitive damages.

Rule of thumb – plaintiff bears the onus on proving (on the balance of probabilities) that they’ve suffered a loss as a result of the breach.

Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64

Where no loss is established, only nominal damages can be recovered.

Luna Park (NSW) v Tramways Advertising Pty Ltd (1938) 61 CLR 286

Where a loss can be established on the balance of probabilities, plaintiff is entitled to damages to compensate the loss.

Placer (Granny Smith) Pty Ltd v Thiess Contractors Pty Ltd [2003] HCA 10

Nominal damages

Sum of money awarded in recognition of the fact that the plaintiff’s legal rights have been infringed; but doesn’t compensate any actual loss.

Owners of SS Mediana v Owners etc of SS Comet [1900] AC 113

Date that damages is assessed

Rule of thumb is that damages are assessed at the date of the breach.

Johnson v Perez (1988) 166 CLR 351

BUT – courts can fix another date ‘whenever it is necessary to do so in the interests of justice’. e.g. when purchased goods are not delivered, damages are assessed at the date of non-delivery; except where there in no substitute market to buy replacement goods. Date then fixed later to allow for any increase in goods over the search period.

Mere difficulty in estimating damages doesn’t mean the court shouldn’t try and place a value on what has been lost.

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Types of damages

2 types of damages – Liquidated and Unliquidated

Unliquidated damages awarded for a breach are generally referred to as unliquidated damages. The distinction between liquidated damages and general damages is that the former is a fixed rate or amount in the contract between the parties, whereas the latter is an amount determined by a court when it hears the matter.

Liquidated the agreed amount written into a contract that a party must pay if it breaches the contract. That stipulation (specific or otherwise) is commonly referred to as a 'liquidated damages clause' Unliquidated Damages

Expectation damages

Divided into 3 categories: 1. Expectation damages 2. Reliance damages 3. Loss of chance

Plaintiff must prove on the balance of probabilities that their expectation of a certain outcome was more likely than not of being met.

Tabcorp Holdings v Bowen Investments [2009] HCA 8

court attempts to include the benefit the aggrieved party was meant to receive. A party is entitled to receive exactly what it contracted for.

Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64

Is a direct loss because it’s directly linked to the defendant’s breach. Also known as loss of bargain damages – loss of value of the promised performance, minus the price the plaintiff would receive by entering into a substitute transaction. Favoured approach is that the aggrieved party should be the compensated with the cost of remedying/repairing the defective work – not just be awarded the difference between the market value of the property and the value it would have had it the contract had been properly performed. "the general rule for assessing damages for breach...is the cost of putting the premises into the state of repair required by the covenant." When the common law requires the damages to place the Aggrieved party in the same situation it would be in as the contract had not been performed, the 'same situation' does not mean the same financial situation. May also be consequential loss – loss beyond the direct

Bellgrove v Eldridge (1954) 90 CLR 613

a party is entitled to receive exactly what it contracted for (not just similar financial value of it). I.e. is awarded not just the difference in the value of the performance rendered to that expected, but the cost of restoring it completely. “The award of damages for breach of contract protects a plaintiff’s expectation of receiving the defendant’s performance. That expectation arises out of or is created by the contract. Hence, damages for breach of contract are often described as ‘expectation damages.” If contract NOT terminated, damages will commonly be the difference between what the defendant has provided and what should have been provided. If terminated, damages will usually represent the value of the promised benefit. Consequential breach – e.g. loss of profit on a subsequent transaction or expenses which have been reasonably incurred by the plaintiff as a result of the breach.

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loss which have been incurred by reason of the breach. Reliance damages where expected damages are impossible to assess, the court assesses damages according to the costs suffered by the aggrieved party.

Also known as 'wasted expenditure damages‘.

May be seen as an approximation of expectation damages. Reflects compensation granted to a plaintiff in relation to expenditure reasonably incurred in reliance on the defendant's promise and which is wasted because of the latter’s breach. Loss of chance May be awarded in cases where all the plaintiff expected to gain was ‘a chance’ of a benefit.

Gett v Tabet [2010] HCA 12

BUT – the plaintiff must prove that, but for the alleged negligence, he or she had better than 50% chance of a better outcome.

compensation for how much the 'chance' was worth. This can be done even if the chance was dependent on contingent conditions, and even if it is hard to assess. Liquidated Damages

specific or exact sum of money - amount agreed by the parties to represent a genuine pre-estimate of loss. the amount that a party must pay if it breaches the contract. That stipulation (specific or otherwise) is commonly referred to as a 'liquidated damages clause'. The principal can recover their loss without having to prove their actual loss, and the contractor will have certainty that the contract will cap their liability for damages at a certain amount. Is relevant where: 1. Contract clause specifies damages for breach (Liquidated Damages); 2. Following election not to terminate for breach, innocent party completes performance and seeks to recover price (Debt).

Can sue for agreed sum rather than have to prove damages.

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Agreed Damages clause Advantages  Can be recovered as a debt, not damages.  Don’t need evidence of actual loss.  Certainty for both parties - amount of damages known in advance.  No duty to mitigate loss. Penalties a liquidated sum which is not based on a genuine preestimate of the damage suffered as a result of the breach (i.e., there is no relationship between the breach and the sum), the clause will be deemed a penalty, which are invalid and unenforceable under contract law. A clause can be a penalty even if it is not triggered by a breach of the contract. A collateral stipulation can be categorised as a penalty if:  it imposes an additional detriment on a party upon failure of a primary stipulation;  it is security for and in terrorem of the satisfaction of the primary stipulation (meaning it is to force the party to perform its obligations); and  compensation can be made for the failure of the primary stipulation.   

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Based on equitable relief against unconscionability. Doesn’t matter if they call it a 'liquidated sum' or 'penalty' - has no effect. A penalty penalises the party in breach, rather than compensates innocent party for loss. Goes against rule of damages to return party to where they would’ve been if no breach. A penalty is a stipulated payment of money meant to frighten or intimidate a party from breaching a term (In terrorum). A liquidated sum is a genuine preestimate of the loss which would occur if the term is breached. The question of differentiating is a question of construction. Particular circumstances are relevant, judged at the time of the formation rather than the time of the breach. ‘extravagant, exorbitant or unconscionable’ – not sufficient to just be lacking in proportion to the

Dunlop Pneumatic Tyre Co Ltd v New Garage & Motor Co Ltd [1915] AC 79

Penalties can be seen to operate as a constraint on the freedom of contract – but so can vitiating factors…

Amev-Udc Finance Ltd v Austin [1986] HCA 63

The rule against penalties is unusual though, because it reviews process used in making the contract and ALSO its substance. Is an exception to the rule that courts don’t interfere with valid contracts.

Esanda Finance Corporation Ltd v Plessnig (1989) 166 CLR 131 Ringrow Pty Ltd v BP Australia Pty Ltd [2005] HCA 71 Paciocco v Australia and New Zealand Banking Group Ltd [2015] FCAFC 50 Andrews v Australia and New Zealand Banking Group Limited [2012] HCA 30

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greatest possible loss likely from the breach – must be ‘out of all proportion’. Presumption of being a penalty when its for a lump sum on one or many events, regardless of how trifling they may be.

Tests of Construction for Penalties a) If the sum is extravagant or unconscionable in comparison to the greatest loss conceivable from the breach, it is a penalty. b) If the breach is the failure to pay money, and the sum is greater than the sum that out to have been paid, it is a penalty. c) If it is a single lump sum which is payable in the occurrence of one or multiple events, some of which only warranting trifling damages, there is a presumption that it is a penalty. d) Just because the consequences of the breach are very hard or maybe impossible to estimate, it doesn't mean it is a penalty. Rather, there is a presumption that it is a liquidated sum. Characterisation Decision as to whether a clause is penal depends on the circumstances of the case.

Dunlop Pneumatic Tyre Co Ltd v New Garage & Motor Co Ltd [1915] AC 79

Paciocco v Australia and New Zealand Banking Group Ltd [2015] FCAFC 50

Parol evidence rule does NOT preclude extrinsic evidence as the court uses the circumstances in which the contract was made to determine whether it’s a penalty or genuine pre-estimate. Consequences  Main issue is that a penalty will not be enforced.  Equity will not enforce a penalty.  Must distinguish whether actual clause is a genuine agreed damages clause or an unenforceable penalty clause.

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Is an agreed damages clause really just a penalty clause in disguise?

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Agreed Damages v Penalties  Assessed by looking at what was intended at the time the contract entered into.  Words used to describe the clause e.g. ‘penalty clause’ assumed to be a penalty clause, but presumption is rebuttable if substance indicates otherwise.  Degree of disproportion between stipulated sum and maximum loss - excess should be very large.  Difficulty in assessing actual loss - more likely to be a genuine agreed damages clause.  Where variety of breaches with a different consequence (e.g. minor/severe) trigger single agreed damages, more likely to be a penalty. Debt

Dunlop Pneumatic Tyre Co v New Garage and Motor Co Ltd [1915] AC 79

Recovery after Termination at Common Law 1. Does the contract impose an obligation to pay a ‘sum certain’? 2. Has the right to payment accrued? Has the Plaintiff performed contractual obligations? Exact performance required – BUT there are exceptions. Contract may be divisible into parts. Performance of one part may entitle party to payment 

Exceptions to exact performance

Severable/Divisible Contracts

Entire obligations An entire obligation must be wholly performed in order for a plaintiff to recover a liquidated sum for that performance. I.e. entire/complete performance is compulsory to earn payment. This is usually the case where the contract specifies a lump sum rather than various instalments.

Steele v Tardiani (1946) 72 CLR 386 Cutter v Powell (1795) 6 Term Rep 320 Sumpter v Hedges [1898] 1 QB 673

such as employment contracts for specific period of time.

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Divisible obligations Divisible obligations exist where the contract has been divided into specific tasks and payment in instalments for those tasks.

Steele v Tardiani (1946) 72 CLR 386

A plaintiff will be entitled to recover payment for each divisible obligation he has completed.

Woodcutting case – eligible for payment for wood that met size requirements – no lump sum payment for an entire contract therefore considered to be ‘infinitely divisible’.

BUT - Each divisible part of the contract can be considered ‘entire’ OR require substantial performance – because a party is only entitled to payment for work completed. Assessing Obligations Assessing whether the contract is entire or divisible is a matter of construction (i.e. what did the parties intend?). 

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Is entire if it appears the parties intended that performance would only be acceptable if it is complete. A contract will usually be entire where there is a single lump sum payable at completion. However, this is not conclusive. A contract will usually be divisible if the payment and obligations are divided into corresponding instalments. However, this is also not conclusive. De Minimus Non Curat Lex: o The law is not concerned with small things (trifles). o Minor defect in performance will not attract legal consequences. Substantial Performance. Partial Performance.

Such as building contracts which provide for progress payments as work proceeds; sale of goods with instalments of delivery and payments etc.

Purcell v Bacon (1914)19 CLR 241 Hoenig v Isaacs [1952] 2 AII ER 176 Smith v Jones (1924) 24 SR (NSW) 444

Shipton Anderson & Co v Weil Bros [1912] 1 KB 574

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Actions in Debt (action for a liquidated sum)

Definition

Differences to damages

Is an alternative to claiming damages. A debt can be recovered when sufficient performance of the corresponding obligation has been rendered. Sufficiency is determined according to the status of the obligation:  Entire obligations - debt only recoverable if obligation done in full. o Entire or complete performance is a condition precedent to payment.  Divisible/severable obligations - debt recoverable according to the divided, corresponding tasks he performed.  Substantial performance - if performance is substantial, i.e. achieves the main purpose, obligation will be deemed as performed. A party can recover a debt even if they are the breaching party and the contract has been terminated. 

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Requirements

Substantial Performance

Bolton v Mahdeva [1972] 1 WLR 1009 Phillips v Ellinson Brothers Pty Ltd (1941) 65 CLR 221

Is NOT a penalty though, in cases where a creditor agrees to a debt being paid in the future, or a lesser amount, so long as certain conditions are met. If the conditions fail, then the creditor is not entitled to damages, but can claim the original sum at once or in full – without it being deemed a penalty.

Onus is on the party defending the claim to prove that the contract price was already paid. Contrast with damages claim where the plaintiff must prove breach and loss. DO not have to mitigate against loss.

Where plaintiff is NOT in breach, action in debt can brought simultaneously with claim for damages. BUT can’t recover same sum twice. 1. Contract must impose an obligation to pay a certain or ascertainable sum of money; AND 2. The right to payment must have ‘accrued’. A debt will accrue where the contractual consideration has been provided. Ie the party claiming the debt must have earned the payment by performing the obligations that the payment relates to.

Performance Types

Steele v Tardiani (1946) 72 CLR 386

Doctrine allows a party to recover the contract price even though contract has not been fully performed, in circumstances where performance is substantial.

Westralian Farmers Ltd v Commonwealth Agricultural Service Engineers Ltd (1936) 54 CLR 361 McDonald v Dennys Lascelles Ltd (1933) 48 CLR 457

Hoenig v Isaacs [1952] 2 AII ER 176 Bolton v Mahdeva [1972] 1

Criteria to determine substantial performance is whether the breach goes to the root of the matter – e.g. abandonment of construction work

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Performance less than enough to invoke de minimus rule. Considered enough to justify enforcement of contract. Court will look at what is needed to cure the defect. If proportionately small, the court may require other party to perform, but allow innocent party damages for defect.

WLR 1009 (central heating case) Jacob & Youngs, Inc. v. Kent, 230 N.Y. 239 (1921)

when it is only half done. Strict performance as a condition precedent to payment has been waived due to accepting the performance (i.e. Cutter v Powell wouldn’t be allowed now) The difference in value between what has been done and what is supposed to be done as required by contract.

Claimant is entitled to the contract price minus the cost of remedying the defects in the performance (which he forfeits because he breached the contract). I.e. the other party has a right to compensation for remedying the defects in the less-than-complete performance. BUT - performance cannot be considered substantial if the plaintiff fails to achieve the main purpose for which he was paid. Unclear as to whether it applies to entire obligations or not. Currently seen as an exception re Steele case Partial Performance or Implied Contract

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Court infers agreement between parties for partial performance. Other party obtained benefit. Agreed to accept and pay for benefit obtained. Had a choice whether to accept.

Steele v Tardiani (1946) 72 CLR 386 (Wood cutting case)

Dixon J: “The contract is infinitely divisible. Defendant must have had a choice to reject or accept the goods the Defendant should have made it clear to the Plaintiffs that they would not receive payment unless the wood was cut properly before he fired them. Defendant took the benefit of the goods of his own free will and therefore Defendant is obliged to pay the value of the entire work done.”

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Quantum Meruit

quantum meruit claims generally made when plaintiff cannot make a contractual claim, generally because contract was made void, terminated, frustrated or is otherwise unenforceable.

literally means 'what the job is worth'. Under a quantum meruit claim, a contractor is entitled to a fair and reasonable sum for work performed and materials supplied. What is a reasonable sum? The courts take several factors into account in considering what is a reasonable sum. These include:  the commercial rate for the work;  site conditions;  whether the contract refers to certain p...