Breach of Contract: Damages

Damages

• The primary remedy for breach of contract is damages, compensating the innocent party for losses resulting from the breach.
• The goal of damages is compensation, which means putting the claimant in the position they would have been in if the contract had been properly performed.

Compensation, Not Punishment

• Contract law damages are compensatory, not punitive, focusing on the claimant's loss, not the defendant's gain.
• Nominal damages (e.g., £5–£10) may be awarded if no actual loss is suffered.
• In Obagi v Stanborough (Developments) Ltd, the court awarded nominal damages (£5) because the defendant breached a contract term, but no actual loss occurred, and the claimant paid the defendant’s legal costs.

Assessment and Measure of Damages

• The aim is to place the claimant in the position they would have been in if the contract was performed correctly, according to Robinson v Harman (1848).
• The rule states that when a party sustains loss due to a breach of contract, they should be placed in the same situation as if the contract had been performed, as far as money can do it.

Expectation Loss (Loss of Bargain)

• This is the most common measure, compensating for the benefit the claimant expected to gain from the contract.
• For example, if Person A buys a fake vase for £50,000, believing it is genuine when the real vase is worth £60,000, damages awarded would be £59,000.
• In Ruxley Electronics v Forsyth, a pool was built 7 inches shallower than agreed, and even though there was no real loss in value, the House of Lords awarded £2,500 for "loss of amenity".

Reliance Loss

• Used when expectation loss is too uncertain (e.g., speculative future profits).
• Covers expenses incurred in reliance on the contract.
• In Anglia TV v Reed, the court awarded damages for wasted costs because the actor pulled out of a TV show, causing the production to be abandoned.
• In Omak Maritime Ltd v Mamola Challenger Shipping Co, no damages were awarded because the claimant profited from the breach.

Types of Loss

• Loss of Profit: If a faulty machine stops production.
• Property Damage: Defective goods cause damage to other property.
• Personal Injury: Faulty equipment injures a worker.
• Loss of Opportunity: Damages for a missed chance to gain a benefit.
• In Chaplin v Hicks (1911), a contestant lost the chance to attend an audition and damages were awarded.
• Mental Distress: Usually not recoverable unless the contract was meant to provide enjoyment (e.g., holidays).
• In Jarvis v Swans Tours, damages were awarded for disappointment as the holiday was not as described.
• In Farley v Skinner, damages were awarded because the surveyor failed to warn about aircraft noise.
• In Addis v Gramophone Ltd 1909, the House of Lords refused to award damages for mental distress in contract.

The Remoteness Rule

• Damages are not awarded for losses that are too remote or unexpected.
• The test was established in Hadley v Baxendale (1854), where the court ruled that loss of profits was too remote because the carrier didn’t know the mill had no spare shaft.
• The two-limb test dictates that the loss must arise naturally (ordinary course of things) and the loss must be within the reasonable contemplation of the parties at the time of contract.
• If the loss arises in the usual course under limb 1 in Hadley v Baxendale the defendant will have imputed knowledge of it, it will not be remote
• If the loss is unusual loss under limb 2 of Hadley v Baxendale, then it will be too remote unless the defendant had actual knowledge of the circumstances

Subsequent Interpretation of the Remoteness Rule

• In Victoria Laundry v Newman Industries, the late boiler delivery caused loss of normal profits (recoverable) and loss of lucrative contracts (too remote).
• In The Heron II (1969), the test was clarified where the loss must be "not unlikely", not just "reasonably foreseeable”.
• In Parsons v Uttley Ingham (1978), the court ruled all loss of that type was recoverable, even if worse than expected after pigs died from mouldy food stored in a defective hopper.

Mitigation of Loss

• The claimant must take reasonable steps to reduce losses.
• Failing to mitigate the loss means they cannot claim damages for avoidable losses.
• In British Westinghouse v Underground Electric (1912), the claimant could not recover full damages because replacement turbines worked better than the faulty ones.

Contributory Negligence

• Damages may be reduced if the claimant contributed to their own loss.
• This applies in negligence-based contract breaches, e.g., Supply of Goods and Services Act 1982, s.13.

Time for Assessment of Damages

• Losses are generally assessed at the time of the breach.
• An exception is made if justice requires, where courts may consider later events.
• In The Golden Victory (2007), courts considered later events to reflect actual loss suffered.

Specified Damages vs. Penalty Clauses

• Specified (Liquidated) Damages Clause is a genuine pre-estimate of loss, enforceable.
• A penalty clause is designed to punish the breaching party, which is unenforceable.
• A specified damages clause is defined as a genuine attempt to pre-estimate the loss which is likely to be cause by the breach
• A penalty may be defined as an attempt to put pressure on a party to perform the contracts
• Dunlop Pneumatic Tyre v New Garage (1915) found that £5 per tire resold below a set price was a genuine pre-estimate, therefore, not a penalty.
• Courts now consider whether a clause is "out of proportion to a legitimate interest" as seen in Cavendish Square v Makdessi and ParkingEye v Beavis (2015).
• Parkeye Ltd v Beavis had legitimate interest, involving receiving income to meet the legitimate costs of running the car parking scheme.