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Damages Notes from McKendrick

The aim of an award of damages is generally to put the claimant in the position he would have been in had the contract been performed according to the terms. Every breach of contract gives right to a claim for damages. In the case where the claimant has not suffered any loss as a result of the breach, he is still entitled to recover damages, but damages will be nominal. There are a range of measure available to the court, all of which can be described as different types of damages. Thus, we have nominal, compensatory, restitutionary and exemplary damages. However, English law does not, as yet, recognise an entitlement to recover exemplary damages for a breach of contract.

Damages: The different measures The most cited article ever written on the law of contract is Fuller and Perdue’s article entitled ‘The Reliance Interest in Contract Damages’. Its major impact has been on the terminology which we use when describing the different measures of damages that can be recovered on a breach of contract. In this, the opening section of their essay, they set out three different interests that the law of contract might protect: ‘It is convenient to distinguish between three principle purposes which may be pursued in awarding contract damages. These purposes may be stated briefly as follows:  Firstly, the plaintiff has in reliance on the promise of the defendant conferred some value on the defendant. The defendant fails to perform his promise. The court may force the defendant to disgorge the value he received from the plaintiff. The object here may be termed the prevention of gain by the defaulting promisor at the expense of the promisee; the prevention of unjust enrichment. The interest protected may be called the restitution interest.  Secondly, the plaintiff has in reliance on the promise of the defendant changed his position. For example, the buyer under a sale of land has neglected the opportunity to enter other contracts. We may award the plaintiff damages for the purpose of undoing the harm which his reliance on the defendant’s promise has caused him. Our object is to put him in as good a position as he was in before the promise was made. The interest protected in this case may be called the reliance interest.  Thirdly, without insisting on reliance by the promisee or enrichment of the promisor, we may seek to give the promisee the value of the expectancy which the promise created. We may in a suit for specific performance actually compel the defendant to render the promised performance to the plaintiff, or, in a suit for damages, we may make the defendant pay the money value of the performance. Here our object is to put the plaintiff in as

good a position as he would have been had the defendant performed his promise. The interest protected here is called the expectation (performance) interest.’ The performance interest In his article, Professor Freidmann argues that ‘one of the major trends in modern contract law is the strengthening of the protection afforded to the performance interest.’ It is certainly true that the courts’ commitment to the protection of the performance interest has been tested in the courts, but it is suggested that their commitment to the performance interest can be seen to be less than whole-hearted. It is the case that the starting point for the courts’ analysis is a commitment to the protection of the performance interest. This was expressed by Parke B in Robinson v Harman, when he stated that : ‘the rule of the common law is, that where a party sustains 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.’ This commitment to the performance interest has been challenged in the courts recently in two different ways: - The first relates to the method chosen by the courts to fulfil the performance interest. There are two principle methods. The first is two award the claimant the difference in value between the performance for which he contracted and the performance which he received. This measure is committed to putting the claimant in the financial position which he would have been in had the contract been performed. The alternative is to award the claimant damages assessed of a ‘cost of cure’ basis. On this basis, the claimant is given the sum of money needed in order to enable him to obtain the performance for which he contracted. This measure is committed to enabling the claimant to obtain performance itself rather than the economic value of performance. In many cases the difference is trivial, but in some cases the difference can be substantial  Ruxley Electronics and Construction v Forsyth - The second issue relates to the case in which the claimant has no direct financial interest in the performance of the contract. The classic example is a case in which the claimant enters into a contract under which he agrees to pay for repair work to be done on the property of a third party. What is the measure of the claimant’s recovery in the event that the repair work is carried out defectively? Can the party who carried out the work maintain that the claimant is only entitled to nominal damages on the basis that he has suffered no loss as a result of the fact the work on someone else’s property has been done defectively? This is the principle issue which arose in the case of McAlpine v Panatown. It was held in this case that the claimant was not entitled to recover damages because the third party has their own right of action against the defendant. Ruxley Electronics and Construction v Forsyth

 The plaintiffs entered into a contract with the defendant under which they agreed to build a swimming pool for the defendant in his garden. It was agreed that the pool would be 7ft deep, however, in breach of contract, the plaintiffs only built it 6ft deep.  When the defendant discovered this, he refused to pay the contract price. The plaintiffs sued him for the price.  The trial judge held that the defendant was liable to pay for the price of the work done because the plaintiffs had ‘substantially performed’ their contractual obligations. The case was appealed to the House of Lords and they held that the defendant was not entitled to recover damages assessed on a cost of cure basis on the ground that the cost of carrying out the work was out of all proportion to the benefit which he would receive from the full performance. The House of Lords in this case concluded hat cost of cure damages were unreasonable on the facts of the case. First, the cost of carrying out the repair work was high; second, the work would not have been of benefit to the defendant. This balancing exercise, however, is a difficult one. On the one hand, the law does not wish to encourage contractors to render a performance which is different from that which they agreed to supply. For this reason, commentators have been critical of Ruxley as it gives contractors a licence to provide a different performance. On the other hand, the law does not generally wish to over-compensate claimants by giving them cost of cure damages in cases where they do not appear to have any intention of carrying out the repair work. Three final points can be noted about Ruxley: • The plaintiffs did not profit as a result of their breach of contract. • Ruxley has been the subject of judicial analysis in McAlpine v Panatown. • Professor Freidmann suggests that the decision does protect the performance interest of the defendant. However, it could be argued that it didn’t. The award did not enable the defendant to obtain the pool he wished for. He had to put up with something less and was given an award of damages to reflect the ‘loss of amenity’. In this sense, his full performance interest was not protected. The reliance interest A claimant may wish to bring a claim for damages to protect his reliance interest. The most widely-used conception of the reliance interest is that it enables the claimant to recover his out-of-pocket expenditure incurred in the course of performance of the contract. As Professor Freidmann points out, a party does not enter into a contract in order to obtain the return of the expenditure which he incurs in the course of performance of the contract. He enters into a contract in order to obtain the promised performance. Of course, in most cases the protection of the claimant’s performance interest will include the protection of his reliance interest on the basis that, in most cases,

contracting parties will expect to recover their expenditure and, in addition, make a profit on that transaction. The performance interest will therefore include reliance expenditure plus the profit made. This being the case, most claimants will obviously prefer to bring a claim that protects his performance interest rather than confine himself to reliance interest. The nature of a claim to recover wasted expenditure has proved to be a disputed matter. Professor Freidmann has stated that a reliance interest is not a contractual interest and is based on a different ‘method’ of compensation to that which underpins a claim for expectation damages. The law of contract permits a claimant to claim for either the reliance measure or the expectation measure of damages. However, where a claimant chooses to recover damages assessed on the reliance basis, the defendant is given the opportunity to prove that expenditure sought to be recovered would not in any event have been recovered because, for example, the contract was a loss-making contract. Generally speaking, however, claimants will wish to bring a claim for damages to protect their performance interests i.e. expectation measure of damages. The reason for this is that a reliance loss claim will generally be lower than a claim to protect the performance interest because the former will not include a claim for loss of profit. So, when will a claimant wish to bring a claim for his reliance losses? There are three principle situations: 1. When he cannot prove his loss of profit. 2. Where he wishes to recover damages in respect of his pre-contract expenditure. 3. Where he entered a losing bargain The restitution interest Fuller and Purdue conclude that the restitution interest presents the strongest claim for protection because there is both a benefit to the defendant and a loss to the claimant. But in fact, the law of restitution plays a residual role in breach of contract claims. In particular, it has no role to play unless and until the contract between the parties is set aside. In the case where the contract has not been set aside, the contract governs the rights and remedies of the parties. Where the contract is set aside as a result of the claimant’s acceptance of the defendant’s repudiatory breach, the claimant may have a claim to recover the value of any benefit conferred upon the defendant in the course of performance prior to the termination of the contract. But the right is only available within narrow confines. Where the claim is one to recover money that has already been paid to the defendant, it is only available where there has been a total failure of consideration, that is to say where the claimant has received no part of the performance for which he contracted. Where he has received part of the promised performance, he is confined to a claim for contractual damages (expectation or reliance measures).

Non-pecuniary losses It is clear that damages can be recovered for physical injury suffered by the claimant as a result of the defendant’s breach of contract, as demonstrated in Grant v Australian Knitting Mills. More difficult is the case where the claimant suffers physical inconvenience or ‘mental distress’ as a result of the breach. The leading modern authority on the latter issue is the following decision by the House of Lords: Farley v Skinner  Farley instructed Skinner to prepare a survey on a property he was considering purchasing. The property was 15 miles from an airport, and Farley specifically requested Skinner to ascertain whether it would be affected by aircraft noise because he did not wish to live on a flight path. Skinner reported the property was unlikely to be affected by aircraft noise. Farley purchased it and it was substantially affected by aircraft noise. He sought damages for breach of contract.  Farley recovered £10,000 for his discomfort. Damages could be recoverable for the loss of a pleasurable amenity which may be of no economic value, if they are of importance to the claimant. Recovery was not restricted to physical discomfort, and it was sufficient to show that the question of the amenity formed an important part of the contract.

The date of assessment Also known as the ‘breach date’ rule. The general rule is that damages are to be assessed as at the date of the breach of contract. The reason for this is that the innocent party is presumed to be able to go out into the market at the date of breach and obtain substitute performance and the cost of substitute performance will fix the measure of damages to which it is entitled. The rule is based on the assumption that there is an immediately available market for the subject matter of the contract. Where this is not the case, then the courts are more likely to defer the date of assessment to a later point in time, such as the date on which a sale is achieved: Hooper v Oats  The parties had agreed for the purchase of land, but the buyer, Mr Oates, failed to complete. A notice to complete was served, and on non-compliance, the repudiation was accepted. It proved difficult to resell and they suffered substantial losses.  The court was now asked whether the damages were to be measured by reference to the value at the date of the breach, or to some later date, when in this case, the vendor’s subsequent losses would be included.  Held: The judge had been right to reject the suggestion that the breach date was decisive. Thus, the rule that damages are to be assessed at the date of breach is now not without its exceptions. As Lord Wilberforce observed, ‘if to follow the rule would give rise to injustice, the court has the power to fix such other date as may be appropriate.’

Limiting the protection of the performance interest A claimant cannot in all circumstances claim the full protection of his performance interest. The law places various limits upon his ability to do so. Remoteness A claimant cannot recover damages in respect of a loss which is too remote a consequence of the defendant’s breach of contract. The remoteness rule is extremely important because, the greater the extent of the liability that is imposed at common law, the greater the steps have to be taken to draft clauses, such as exclusion and limitation clauses, which aim to keep liability within acceptable bounds. The difference between a loss that is too remote and one that it not can be complex. The leading case is Hadley v Baxendale. The rule laid down in this case was that the losses are recoverable if they flow naturally from the breach or if they are in contemplation of both parties at the time of entry into the contract. However, The Achilleas case appears to signal a new approach to the recovery of damages. It seems that it is no longer sufficient simply to show that the loss suffered was a reasonably foreseeable consequence of the breach. In deciding whether or not the loss is recoverable, it may be important to ask whether or not the defendant accepted responsibility for the loss. The default rule is that to be found in Hadley, namely that the contractbreaker is to be held liable for the types of loss which can reasonably be foreseen at the time of entry into the contract. But it is open to the parties to contract out of the default rule. They can do so by restricting the liability of the contract-breaker (as done so in The Achilleas) by stating that the defendant cannot be liable for a loss that he did not assume responsibility for. Mitigation The claimant must take reasonable steps to minimise the loss suffered by a breach of contract, as held in British Electric v Underground Electric. This is commonly expressed as the claimant being under a duty to ‘mitigate’ his loss. The sanction for failure to mitigate is that a claimant cannot recover damages in respect of losses attributable to his failure to do so. There are two aspects to the mitigation doctrine: 1. A claimant must not unreasonably increase the loss suffered as a result of the breach. 2. The claimant must take reasonable steps to minimise his loss....