Contract Law: Damages for Breach

Damages: Definition

• The main remedy for contract breach is damages, compensating the injured party for losses.
• Compensation aims to place the claimant where they would have been if the contract was properly fulfilled, not to punish the breaching party.

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) are awarded if no actual loss occurs.
• In Obagi v Stanborough (Developments) Ltd, nominal damages of £5 were awarded, and the claimant paid legal costs because there was a breach, but no actual loss.

Assessment and Measure of Damages

• The intention is to put the claimant in the position they would have been in if the contract had been correctly performed.
• The rule from Robinson v Harman dictates that the injured party should be placed in the same situation as if the contract had been performed.

Expectation Loss (Loss of Bargain)

• The most common measure involves compensation for the benefit the claimant expected from the contract.
• Example: If someone buys a fake vase believing its genuine, damages cover the difference between the fake's value and the real vases value.
• Ruxley Electronics v Forsyth resulted in an award of £2,500 for "loss of amenity" when a pool was built shallower than specified, despite no significant loss in value.

Reliance Loss

• Employed when expectation loss is too uncertain, such as when future profits are speculative.
• Covers expenses incurred based on reliance on the contract.
• Anglia TV v Reed awarded damages for wasted costs after an actor pulled out of a TV show, leading to abandonment of the production, since future profits could not be determined.
• No damages were awarded in Omak Maritime Ltd v Mamola Challenger Shipping Co, because the claimant profited from the contract termination and therefore suffered no loss.

Types of Loss

• Loss of Profit: Example: A broken piece of machinery stops production
• Property Damage: Example: Defective goods damage other property
• Personal Injury: Example: Faulty equipment injures a worker
• Loss of Opportunity: Damages for a missed chance to gain a benefit.
• Chaplin v Hicks awarded damages when someone lost a chance to attend an audition.
• Mental Distress: Recoverable only if the contract aimed to provide enjoyment.
• Jarvis v Swans Tours awarded damages for disappointment when a holiday was not as described.
• Farley v Skinner awarded damages when a surveyor failed to warn about aircraft noise.
• Addis v Gramophone Ltd states mental distress damages are not awarded unless the contract was for peace of mind.

The Remoteness Rule

• Damages are not awarded for unexpected consequences.
• Established in Hadley v Baxendale, losses must either arise naturally or be within the reasonable contemplation of both parties when the contract was made.
• The Hadley v Baxendale two-limb test states that loss must arise naturally (ordinary course of things), and must be within the reasonable contemplation of the parties at the time of contract.
• Victoria Laundry v Newman Industries allowed recovery for normal profit loss from late boiler delivery but deemed loss of lucrative contracts too remote.
• The Heron II clarified the test, stating that loss must be "not unlikely," not just "reasonably foreseeable."
• Parsons v Uttley Ingham ruled that all loss of a certain type was recoverable, even if worse than expected, after pigs died from mouldy food stored in a defective hopper.

Mitigation of Loss

• Claimants must take reasonable steps to reduce loss.
• Damages cannot be claimed for avoidable losses if mitigation is not attempted.
• British Westinghouse v Underground Electric held that the claimant could not recover full damages, because replacement turbines worked better than the faulty ones, resulting in the claimant actually benefiting.

Contributory Negligence

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

Time for Assessment of Damages

• Generally, losses are assessed at the time of the breach.
• Courts may consider later events if justice requires.
• The Golden Victory saw courts considering later events to accurately reflect actual loss.

Specified Damages vs. Penalty Clauses

• Specified (Liquidated) Damages Clause: A genuine, enforceable pre-estimate of loss.
• Penalty Clause: Designed to punish the breaching party, therefore unenforceable.
• A specified damages clause is a genuine attempt to pre-estimate loss caused by a breach
• A penalty clause attempts to put pressure on a party to perform the contract
• Dunlop Pneumatic Tyre v New Garage ruled that £5 per tyre resold below a set price was a genuine pre-estimate of loss, not a penalty.
• Cavendish Square v Makdessi; ParkingEye v Beavis established that courts now assess if a clause is "out of proportion to a legitimate interest."
• The £85 parking fine was related to a legitimate commercial interest.
• Azimut-benetti spa v healy states the yacht builder has the right to lawfully terminate a contract and a clause that would allow the claimant to retain 20% of the contract due to estimated losses is valid.
• Lord Dunedin Guidelines: Extravagant sums compared to greatest conceivable loss may be a penalty.
• Lord Dunedin Guidelines: If the breach involves paying money, a sum greater than what was owed is likely a penalty.
• Lord Dunedin Guidelines: A single sum payable for various events, some causing serious or minor damage, is presumed a penalty.
• Lord Dunedin Guidelines: A clause can still be a specified damages clause if it’s difficult to precisely pre-estimate loss.