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REMEDIES NOTES

Damages in Contract DAMAGES The purpose of damages in a breach of contract are to place the plaintiff in the position they would have been in had the contract been performed. Parke B in Robinson v Harman (1848) 1 Ex 850, 855 stated that the “where a part 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.” This statement of law has been accepted by a majority of the High Court of Australia in Tabcorp Holdings v Bowen Investments. For the court to award a plaintiff damages in contract, the plaintiff must satisfactorily prove that:  there is a cause of action (breach)  that the breach of contract led to the plaintiff’s loss (causation)  that the loss was not too remote, (remoteness) and;  that the plaintiff was unable to mitigate the loss (mitigation) A. Breach of contract Although “every failure to perform a primary obligation is a breach of contract” and will result in nominal damages, as per Lord Diplock in Photo Production v Securior, the right to full compensation arises when there has been a “loss sustained…inconsequence of the breach” (AC 827, 849). Termination of the contract is not a requirement, unless, per Mason CJ, the breach is a case of anticipatory breach or a claim of expectation damages in which case they are only recoverable “if the contract is at an end.” Sunbird Plaza v Mahoney (1988) 166 CLR 245, 260-1. Mason J in Foran v Wright (1989) at 408 stated that, in all circumstances, the plaintiff must show that they were or intended to be ready and willing to perform the contract “if it had not been repudiated”. B. Causation Causation is determined through the but for and common sense test to show that the loss suffered was caused by the breach. Although the causa sine qua non, or but for, test was used in the past as a definitive test of a ‘chain’ of causation linking the breach to the loss, the judgments of Mason CJ at 515 and Deane J at 523 in March v Stramare held that causation, in its capacity to assign legal responsibility, should be answered, “by applying common sense to the facts of the particular case” rather than through the exclusive use of the but for test. McHugh and Mahoney JJA at 358 in the NSWCA case of Alexander v Cambridge Credit Corp similarly held that the but for test was a “guide” with the “ultimate” question to be “whether, as a matter of common sense, the relevant act or omission was a cause.” The High Court in Fitzgerald v Penn at 276 opined that the common sense question is to be determined by considering “whether a particular act or omission…can fairly and properly be considered a cause of the accident.”

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REMEDIES NOTES

Contributory negligence In Chappel v Hart at [27], McHugh J stated contributory negligence in terms of “if tha wrongful act or omission results in an increased risk of injury to the plaintiff and that risk eventuates, the defendant’s conduct has materially contributed to the injury…whether or not other factors have also contributed.” Where there is a concurrent tortious cause for the breach, for example the plaintiff’s negligence which leads to a claim in contract, contributory negligence will intervene. In NSW, the Law Reform (Miscellaneous Provisions) Act 1965 (NSW) s 8 defines a wrong as an act or an omission that: (a) Gives rise to a liability in tort in respect of which a defence of contributory negligence is available at common law (b) Amounts to a breach of a contractual duty of care that is concurrent and coextensive with a duty of care in tort s 9(1) provides that “if a person (the claimant) suffers damage as the result partly of the claimant’s failure to take reasonable care (contributory negligence) and partly of the wrong of any other person: (a) a claim in any respect of the damage is not defeated by reason of the contributory negligence of the claimant, and (b) the damages recoverable in respect of the wrong are to be reduced to such extent as the court thinks just and equitable having regard to the claimant’s share in the responsibility for the damage” Concurrent and coextensive duties might be one where a contract specifies a service to be performed with due care and skill and a tortious duty also exists. If no such concurrent duty exists, then the common law in Astley v Austrust applies, where there is a 100% reduction for contributory negligence. Novus actus interveniens Where an intervening event or novus actus interveniens exists, the defendant’s breach may no longer be the cause of the plaintiff’s loss. The appropriate test in this circumstance is to assess whether the event was “reasonably foreseeable” by the defendant. The operation of this test is shown in the case of Alexander v Cambridge Credit Corp, where an action was brought by a company who had accrued debt by continuing to operate when its auditors breached their contract by failing to demand adjustments to their balance sheets. McHugh JA held at 350 held that the plaintiff only needed to show that the breach “causally contributed” to the loss, rather than being the sole or exclusive cause of the loss. McHugh JA at 358 modified this test to the common sense in view of potential multiple causes of the loss, to hold at 362-3 that the auditors’ breach was “so superseded in potency by supervening events as not to rank as a cause either in common-sense or in law. The package of economic factors together with the decisions of the directors of Cambridge to increase its borrowings and investment in real estate constituted a novus actus interveniens.” Clearly, the existence of a company does not automatically lead to its losses or profits – there are decisions to be made.

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REMEDIES NOTES Glass JA, in dissent at 215-6, applied the same test to a different conclusion, concluding that but for the breach by the auditors the company would not have continued to operate and have suffered a much less significant loss. C. Remoteness Remoteness must be satisfied to ensure that the damage resulting from the breach was in contemplation of the parties at the time of the breach. The two limbs of Hadley v Baxendale comprise the test of remoteness. The first limb, as stated by Baron Alderson at 354, contemplates damages arising “naturally” from a breach of the contract itself or damages resulting from the breach that may be presumed to have “reasonably supposed to have been in the contemplation of both parties, at the time they made the contract” The second limb, stated by Baron Alderson at 354, contemplates that a contract made under “special circumstances” would result in damages reflecting that special loss, provided that the circumstances were “known and communicated” by both parties. For the second limb, no presumption exists as in the first limb. This approach is reflected in the Sale of Goods Act 1923 (NSW) s 54(2) and s 55, respectively. Victoria Laundry The case of Victoria Laundry v Newman involved a claim for usual damages in operating losses and special damages in the loss of a lucrative government contract. The Court of Appeal held that as the plaintiff could not show that the defendant was aware of the special circumstances, they could not claim that the special loss was “within the contemplation of the parties” under the second limb of Hadley (at 540). Knowledge for special loss For special loss, the plaintiff must show the other party knew or ought to have known about the special circumstances and have accepted the risk of the unusual loss either through a contract or orally. This test was enunciated in the English case of Panalpina International v Densil Underwear, where although the defendant was made aware that it was important for the goods to arrive by a certain time there was no provision made for this in the contract. The undertaking to accept the unusual loss may be implied by examining the defendant’s actual knowledge until the creation of the contract, taking into account the characteristics of the contract and the bargain. D. Mitigation Viscount Haldane at 689 in British Westinghouse v Underground Electric Railways enunciated that the plaintiff has a general duty to take “all reasonable steps to mitigate the loss consequent on the breach” disallowing the plaintiff “from claiming any part of the damage which is due to his neglect to take such steps.” A breach of this duty lowers the damages the plaintiff is able to claim. The attempt to mitigate loss must be reasonable. The limits of reasonableness here were explored in Payzu v Saunders where the EWCA held that the refusal of a new contract following the repudiation of an old contract disallowed the defendant from claiming the difference between the market price of silk and the price offered by the contract. Credit for benefits If the breach of contract results in a benefit for the plaintiff in the long term, their damages may be reduced. For example, in British Westinghouse v Underground Electric Railway,

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REMEDIES NOTES Underground replaced faulty Westinghouse turbines with more efficient products. Their claim for damages to recover the cost of new machines was rejected on the basis that the new turbines would result in savings in the long term. Their damages were restricted to the loss suffered when using Westinghouse machines. Cost of mitigation and increasing the loss The plaintiff can recover the cost of reasonable mitigation, but, per McClure J at [172] in Newmarket v Kee-vee, they are only “obliged to take such steps as are reasonable and need not resort to measures that are costly, complex or extravagant as where the expenditure in mitigation would exceed the loss.” Anticipatory breach Following an anticipatory breach, the plaintiff must either affirm or accept the repudiation by terminating the contract. If the plaintiff terminates, then they must mitigate any damages. Even though a repudiation generally doesn’t require mitigation, it may be “wholly unreasonable” for a plaintiff to not mitigate their losses. For example, in Clea Shipping v Bulk Oil, an owner let their vessel to a charterer for two years. In the course of repairs less than 1.5 years after initiating the contract the charterer repudiated. The owners did not accept the repudiation and continued to maintain the vessel to sail according to the charterers original intentions and claimed the hire charges for the remaining 8 months of the contract. Lloyd J at 136-7 decided that the arbitrator’s decision to favour the charterer was correct as “there comes a point at which the court will cease, on general equitable principles, to allow the innocent party to enforce his contract according to its strict legal terms….it involves drawing a line between conduct which is merely unreasonable and conduct which is wholly unreasonable…The court is not exercising a dispensing power; nor is it rewriting an improvident contract. It is simply refusing a certain kind of relief.” A party may affirm the contract by seeking specific performance instead of accepting the repudiation by termination. ASSESSMENT Mason Cj at 355-6 in Johnson v Perez stated that “there is a general rule that damages for torts or breach of contract are assessed at the date of breach or when the cause of action arises. But this rule is not universal” and courts will depart “from the general rule whenever it is necessary to do so in the interests of justice.” Anticipatory breach Where there has been an anticipatory breach, damages will be assessed at the date of performance, regardless of whether there has been an affirmation or a termination subject to, as Atkin J noted at 377 in Millet v Van Heck, “questions of mitigation.” Where a claim for damages is brought before the date for performance, the court must assess the market price as best as it can but it cannot shut its eyes to facts known at the trial date. Full Court in Hoffman v Cali. In Golden Strain v Nippon Yusen a charterer repudiated a contract with four years remaining, while the Gulf War broke out in 2003. The contract involved a clause allowing mutual cancellation if war broke out. The owner claimed damages until 6 December 2005, but the arbitrator found in favour of the respondents, as did the court, and damages were assessed till the date of outbreak of war on 6 December 2005. Lord Scott at [30] said the contract “might, if it had remained on foot, terminated early on the occurrence

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REMEDIES NOTES of a particular event, the chance of that event happening must…be taken into account in an assessment of damages payable for the breach. And if it is certain that the event will happen the damages must be assessed on that footing.” Once and for all rule An award of damages is a lump sum and periodic payments cannot be made; however, there are three exceptions to this rule. First – it does not apply to instalment contracts as each instalment is a separate cause of action Second – it does not apply where there is a continuing breach. In the case of Larking v great Western Gravel Dixon J at 236 observed that it will apply where there is a claim to “maintain a state or condition of affairs.” A failure to maintain will result in “a further breach…in every successive moment of time during which the state or condition is not as promised.” Third – statutory exceptions in Civil Procedure Act 2005 (NSW) pt 6 div 5 Heads of damage Heads of damage are cumulative subject to the rule against double recovery, as outlined in T C Industrial Plant v Roberts Queensland. As stated in Commonwealth v Amann Aviation at 80 per Mason CJ and Dawson J, the onus of proving the damages is on the plaintiff. 1. Expectation damages (loss of profits) Damage for loss of profits compensate the plaintiff as far as money can by objectively assessing the position they would be in had the contract been performed properly. This was enunciated in Commonwealth v Amann Aviation where Mason CJ and Dawson J at 81 described these damages as the “margin of gain” that is expected to be achieved in addition to the “expenses reasonably incurred…in the discharge of its contractual obligations.” Mason CJ and Dawson J further went on to state that even if there is no net profit that could have been made, damages are able to be recovered for wasted expenditure or reliance damages. Per Mason CJ at 260-1 in Sunbird Plaza v Maloney however, to claim expectation damages the contract will usually need to be terminated. 2. Reliance damages (actual costs or wasted expenditure) Reliance damages allow recovery for the actual or wasted expenditure as a result of the reliance on the contract breaker’s promise. Subject to the rule against double recovery, Mason CJ and Dawson J at 84-5 in Commonwealth v Amann Aviation have stated that the innocent party is able to claim both reliance and expectation damages if they are available. This was the case in McRae v Commonwealth Disposals Commission where a party searching for a non-existent tanker was able to claim reliance damages, but not expectation damages as it was impossible to value a non-existent thing. Commonwealth v Amann Aviation provides, in the judgment of Mason CJ and Dawson J, principles for the recovery of expenditure. In order to prove reliance damages the plaintiff must show that the expenditure was reasonable and it was incurred (at 87-8). This is a rebuttable presumption, as the defendant then is able to show that the wasted expenditure would not have been recouped if the contract had been performed (at 87-8). This stems from

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REMEDIES NOTES the principle that the plaintiff should not be placed in a better position as a result of the breach (at 83). In Commonwealth v Amann it was found that the majority the damages to Amann stemmed from wasted expenditure, as the preparation of surveillance places was expensive and specific to the contract. The judgment of Deane J at 126 indicates that where it is “impossible or difficult to establish the value of any benefits” the plaintiff may have derived from performance “considerations of justice dictate that the plaintiff may rely on a presumption that the value of the benefits would have been at least equal to the total detriment which has been or would have been sustained by the plaintiff in doing whaever was reasonably necessary to procure and perform the contract.” 3. Restitution damages Per Mason CJ at [30] in Baltic Shipping v Dillon the court can order a refund of payments made to the defendant under the contract, which may be characterised as a type of reliance damages claim. In McRae v Commonwealth Disposals Commission, the salvage price was repaid to the plaintiff, as the ship did not exist. A damages claim where there is a total failure of consideration is more properly brought in a claim for moneys had and received. 4. Related personal injury or property damage (unsafe goods) As contractual damages are forward looking, a plaintiff may be able to claim damages not strictly related to the contractual promises, but incurred as a result of the breach. Mason CJ in Baltic Shipping at [39] states that “it is beyond question that a plaintiff can recover damages for pain and suffering, including mental suffering and anxiety, where the defendant’s breach of contract causes physical injury to the plaintiff.” 5. Loss of an opportunity or chance (social or commercial) In contract, the loss of an opportunity or chance is recoverable even though there was less than a 50% chance of occurring, even though the calculation is, per Vaughan Williams LJ in Chaplin v Hicks at 791, “not only difficult but incapable of being carried out with certainty or precision.” The likelihood of the chance is immaterial, rather the existence of the lost chance must be proven. The case of Howe v Sankip, where a trainer had a horse taken away and sued for lost potential winnings, is illustrative of this, in particular Street CJ’s judgment at 303, who held that damages capable of assessment are not too remote and that their capability of assessment must be determined based on “whether they were within the contemplation of both parties.” 6. Gratuitous benefits (where implied into a contract) Although a plaintiff is not entitled to damages for loss of benefits that the contract did not provide, per Gleeson CJ and Handley JA in NSW Cancer Council v Sarfaty at 78; however, Brennan J in Commonwealth v Amann at 102 stated that the assessment of damages spanned both express and implied terms of the contract. [Ie, in Manubens v Leon a hairdresser’s assistant was able to claim for lost wages and tips, as it was implied that she would be entitled to tips.]

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REMEDIES NOTES 7. Feelings, disappointment and mental distress Mason CJ at 365 in Baltic Shipping v Dillon stated that although, generally, “the innocent party’s disappointment and distress are seldom so significant as to attract an award of damages”, they may be awarded where “they proceed from physical inconvenience caused by the breach” or where the contract “is one the object of which is to provide enjoyment, relaxation or freedom from molestation.” [CLF 121 for examples – generally contracts for skiing holidays, cruise holidays, swimming pools of certain depths, a breach of a retainer to provide an injunction so molestation would not occur] For a contractual claim for mental distress, either on its own or as a consequence of other personal injuries,, it is likely that the damages would fall under the civil liability acts, per Spigelman CJ and Basten J and Sackville J in Insight Vacations v Young, and Flight Centre v Louw. 8. Loss of reputation Although damages are not generally recoverable per Lord Loreburn in Addis v Gramophone Co at 491. Although this was accepted by McHugh J at 396 in Baltic Shipping, he also stated that it may be appropriate to award damages for a loss of reputation if it would fulfil the “objective of compensating the plaintiff for the harm which he or she has suffered as a result of the defendants breach.” [Famingo Park v Dolly Dolly, Wilcox J at 455 ordered the defendant to pay the plaintiff $30,000 for loss of reputation after printing her exclusive design on inferior fabrics for third parties] Interest Interest on an amount can be awarded at common law and under s 94 of the S...