By Law Teacher
7.1.1 Damages Lecture – Introduction
Welcome to the seventh topic in this module guide – Damages! There are a wide variety of remedies available under English law, the most common and sought-after being damages. Generally, damages are a sum of money afforded to an innocent party in order to compensate them for a breach of a contract. Their primary purpose is to place the innocent party in the position they would have been in, had the contract been performed; in respect of this, if the court determines that damages will not properly compensate the innocent party, they may issue an award for specific performance.
There are two different types of damages: compensatory damages and non-compensatory damages.
Compensatory damages are an award of a sum of money which aims to compensate the claimant for the losses they have suffered under the contract. This need not be limited to loss from the contract itself, and may compensate the innocent party for losses relating to subsequent contracts.
Non-compensatory damages are an award of a sum of money in order to not only to compensate the claimant for his contractual losses, but also aim to compensate the claimant in relation to any bad conduct of the other party.
Goals for this section:
- To understand the six elements that should be considered in order to assess whether an innocent party may be entitled to claim damages: has the claimant suffered loss; is the loss suffered actionable; did the breach of contact cause the loss; was the type of loss reasonably foreseeable; did the claimant mitigate the loss and did the claimant contribute to the loss.
Objectives for this section:
- To be able to comprehend the two different ways in which the courts assess the amount of loss the claimant has suffered: reliance measure and expectation measure.
- To be able to appreciate the advantages of agreed damages clauses as they relate to liquidated damages clauses and penalty clauses.
- To be able to appreciate the categories the court look at in considering whether or not the loss the claimant has suffered is actionable, namely financial loss, the consumer surplus and distress.
- To be able to grasp how factual causation and legal causation applies to calculating whether the breach of contract caused the claimant’s loss.
7.1.2 Damages Lecture
Introduction to remedies and damages
Damages in contract law can be defined as a sum of money paid to the innocent party in compensation for a breach of contract.
When parties make an agreement, they will hope that they both fulfil their obligations. Therefore, the intentions of the parties cannot usually be used in order to calculate an amount of damages that should be awarded under the contract. Instead, the amount of damages will be awarded based on the value of the interest the innocent party has in the contract.
The different types of damages
Compensatory damages are an award of a sum of money which aims to compensate the claimant for his loss under the contract.
Non-compensatory damages are an award of a sum of money not only to compensate the claimant for his contractual losses, but also aim to compensate the claimant in relation to any bad conduct of the other party.
Compensatory damages
In order to assess whether an innocent party may be entitled to damages, there are six things that should be considered:
- Has the claimant suffered a loss?
The first step is to ascertain the loss the claimant has suffered under the contract. The general rule is that the claimant may only recover for his own loss – Alfred McAlpine Construction Ltd v Panatown Ltd.
Case in focus: Chaplin v Hicks [1911] 2 KB 786
Assessing the amount of the loss
The aim of damages is to put the non-breaching party in the position they would have been in had the contract been performed as agreed (Robinson v Harman). There are two different ways in which this can be measured:
Expectation measure
Expectation measure involves a comparison between the claimant’s current position, and the position they would have been in had the contract been performed correctly.
The first important rule of the expectation measure is that it is calculated on the expectation that the breaching party would have performed their obligations under the contract, but no more and no less (Lavarack v Woods of Colchester Ltd).
Case in focus: Durham Tees Valley Airport Ltd v Bmibaby Ltd [2010] EWCA Civ 485
The second important rule in relation to the expectation measure is the conversion of expectation loss to an amount of money which successfully puts the claimant into the position they would have been had the contract been completed correctly. There are two viable methods, and they often result in the same award.
The first is the difference between the value of performance provided and the value of performance that should have been provided.
The second is the cost of curing the breach.
Case in focus: Tabcorp Holdings Ltd v Bowen Investments Pty Ltd [2009] HCA 8
Reliance measure
The reliance measure aims to put the claimant back in the position he was before the contract was made. This is relevant for where one of the parties has incurred expenditure in preparing for their side of the bargain.
Generally, the expectation measure is more favourable, as the claimant should always be expecting to profit from the contract. However, where the claimant has entered into a bad bargain, meaning the contract would not have been profitable, the reliance measure will be advantageous.
However, the courts are unwilling to put the parties in a better position that they would have been in had the contract been properly performed. There are two situations where it still may be used:
- Where the reliance measure is less than the expectation measure (but in this case it would be preferable to just claim via the expectation measure)
- Where the expectation measure is difficult to calculate as it is hard to show what would have happened if the contract was properly performed
- Is the loss suffered actionable?
It must be considered whether or not the loss suffered is actionable.
Financial Loss
Financial loss refers to where the claimant is in a worsened financial position as a result of the contract, either through less money, or less assets.
The consumer surplus
This consumer surplus is the amount by which a particular consumer values the performance of a contract above its market value for some particular reason.
The matters are not of a financial value. It is difficult to assess the value of these consumer surpluses, and whether they should be an actionable loss.
The case of Watts v Morrow ruled that damages cannot be awarded for distress caused by breach of contract. Therefore, these consumer surpluses are not actionable. However, they created a particular category which would be actionable:
Where the contractual objective is to provide relaxation, pleasure or peace of mind, damages may be awarded if this is not provided.
The rules regarding claiming for consumer surplus were clarified in Farley v Skinner [2001] UKHL 49.
The court awarded Farley £10,000 worth of damages for discomfort. The judges in this case came to the same decision, but under two different grounds:
- The concept of consumer surplus – peace and quiet were evidently important to the claimant. It was not required to show that this was the sole object of the contract
- Distress (this will be covered in the next section of the chapter)
Therefore, it can be seen that the English courts are willing to accept consumer surplus as an actionable loss, but it must be treated with caution and be clear that the consumer surplus was important to the claimant. Here are some important things to remember:
- The award for non-financial loss will be small
- The foreseeability of the loss will be difficult to prove (see the section on causation)
Distress
Distress resulting from a contract was the basis of Lord Scott’s decision in Farley v Skinner. Distress is different to consumer surplus in that it actually results in a negative experience, physically or mentally, for the individual. Consumer surplus relates to an expectation, whereas distress is an actual result.
Usually, there is an overlap between the consumer surplus and distress. One or the other may be claimed. It is suggested that the legal basis for claiming under consumer surplus is favourable due to the majority of the judges opting for it in Farley v Skinner. This is not to say the test for distress from Lord Scott should not be applied, just that it should be done cautiously and you should explain the weakness of the concept.
- Did the breach of contract cause the loss?
In order for a loss to be actionable, the claimant must show that the breach of contract caused the loss. Causation requires both legal, and factual causation.
Factual causation
Factual causation requires an application of the ‘but for’ test; but for the breach of contract, would the claimant have suffered the loss?
Legal causation
Legal causation requires the breach of contract to be the direct cause of the loss. There must not be any subsequent actions which breach the ‘chain of causation’. These actions can be those of the claimant, or a third party.
If it is a third party who has broken the chain of causation, there are a number of things to consider:
- Did the claimant have a duty to prevent the act occurring? (Stansbie v Troman).
- How likely was the intervening act to happen? (Monarch Steamship Co Ltd v Karlshamms Oljefabriker).
- How reasonable was the intervening act?
- Was the type of loss reasonably foreseeable?
The purpose of this stage is to consider the remoteness of the damage.
This is a question of foreseeability. Therefore, the courts have some tests which impose limitations on what damages can be claimed.
In the case of Hadley v Baxendale, the test for foreseeability of damages was laid out. Alderson B explained that where there is a breach of contract, damages can be claimed under two different limbs:
- The damages which would fairly and reasonably be considered to arise naturally from the breach of contract itself
- Damages which reasonably would have been supposed to have been in the contemplation of both parties at the time of the making of the contract as a probably result of a breach
Case in focus:Hadley v Baxendale [1854] EWHC J70
The first limb of the test are damages that would be obvious under a contract.
The second limb of the test are those losses which would not normally be ordinarily expected for somebody to suffer as a result of the breach. Therefore, for them to be actionable, they must have been reasonably contemplated by both parties at the time of contracting.
Did the claimant mitigate the loss?
In order for a claim for damages to be successful, the claimant must take reasonable steps in order to mitigate the loss. There are three general rules relating to mitigation.
First, as per British Westinghouse Electric Co Ltd v Underground Electric Railways Co of London Ltd the claimant will be unable to claim for damages in respect of any loss that he could have reasonably avoided.
Secondly, the claimant may recover all expenses incurred whilst taking reasonable efforts to mitigate the loss.
Thirdly, if the claimant avoids further potential losses, they cannot recover for the loss they avoided.
- Did the claimant contribute to the loss?
If the claimant contributed to the loss in question, the courts may reduce the amount of damages the claimant is able to claim, proportionately in line with the fault of the claimant. This rule has statutory footing in Section 1 of the Law Reform (Contributory Negligence) Act 1945.
There are three types of contributory negligence in relation to breaches of contract:
- Where the defendant’s liability arises from a contractual provision which does not rely on the negligence of the defendant
- Where the defendant’s liability arises from a contractual obligation which is expressed in terms of ‘taking care’
- Where the defendant’s liability in contract is the same as his liability in the tort of negligence independently of the existence of any contract.
The case of Barclays Bank plc v Fairclough Building Ltd confirms that contributory negligence will only be available in situation ‘3’.
Agreed damages clauses
The contractual freedom of parties allows them to pre-agree an appropriate amount of damages in the event of certain things. These are common in commercial contracts, and are advantageous for a number of reasons:
- They provide certainty
- The claimant does not have to prove the amount of loss, as the amount will be pre-agreed under the contract
- The defendant cannot claim the loss was unforeseeable, as they are contracted into it
- They are efficient, and prevent the relationship between two parties being disrupted through large amounts of litigation
There are two types of damages clauses; a liquidated damages clause and a penalty clause.
Liquidated damages clause
A liquidated damages clause is one which can be considered a genuine attempt to pre-estimate the loss which will be suffered by the breach (Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd).
If a damages clause is identified as a liquidated damages clause, the sum in the clause will be payable, irrespective of whether the actual loss is greater or smaller than the sum in the clause.
Penalty Clauses
A clause will be classified as a penalty clause where the sum in the clause is not a genuine pre-estimate of the loss suffered in event of a breach, but instead is a threat to compel the other party to perform.
Case in focus:Jobson v Johnson [1989] 1 WLR 1926
The general rule is that penalty clauses will be unenforceable.
Case in focus: ParkingEye Limited v Beavis [2015] UKSC 67
You should use the test from Makdessi v Cavendish Square Holdingswhen assessing whether a clause is a penalty. A sensible approach would be to consider:
- Is there a legitimate interest protected by the penalty?
- Is the amount exorbitant in comparison to other similar contracts/breaches of this type?
- Is the protection of the interest proportionate?
7.1.3 Damages Lecture – Hands on Example
The following section will test your knowledge of damages as a remedy under the law of contract. You should be able to identify when can damages can be claimed, how they are ascertained and how they are calculated. After studying the chapter on damages you should be able to identify the issues in these questions and apply the law correctly. The answers for the questions can be found at the very bottom of this page.
A question involving damages can be identified relatively easily. There will be a breach of contract and you will be asked to consider the potential calculation of damages. You also may be asked more generally about the potential remedies, which will usually include damages. The below example should allow you to get a general idea of how questions involving damages for a breach of contract may appear.
When addressing an issue involving the calculation of damages for a contract, this would be an appropriate approach:
- Has the claimant suffered a loss?
- Is the loss suffered actionable?
- Did the breach of contract cause the loss?
- Was the type of loss foreseeable or was it too remote?
- Did the claimant mitigate the loss?
- Did the claimant contribute to the loss?
- Is there anything in the contract which agrees to a particular amount of damages?
This step-by-step approach will ensure you consider all the relevant elements of a claim for damages. You will need to know the legal principles which relate to each step in order to apply them to the facts.
Scenario
John has entered into a contract with Joe for the sale of some of his land. John sells the land on the condition that Joe builds a wall between the two pieces of land to separate the property. Joe later resells the property without building the wall. John wants to claim for the cost of building the wall, and the cost of his loss of privacy due to the lack of the wall.
Can John claim damages for the cost of building the wall, and the loss of his privacy?
John has contracted with Robert for the purchase of some yarn. John intends to knit the yarn into jumpers and sell them to a clothes retailer. When John negotiated the contract he said to Robert ‘please ensure the yarn is of the required quality, I will need it to knit into jumpers and sell on in another contract’. When John receives the yarn and attempts to knit it, it is impossible due to the poor quality of it. As a result, John loses the contract with the clothes retailer.
Focusing on forseeability, what can John claim damages for in this case?
- First, you should consider the cost of building the wall. Clearly, John has suffered a loss which can be calculated by the ‘cost of cure’ expectation measure. The cost of curing the breach (building the wall) would not be disproportionate the value the cure would add to the land. The loss is clearly actionable as it is a financial loss, as he should have had a wall build on his land under the contract, and the wall has not been built.
It is clear the breach of contract caused the loss, as ‘but for’ Joe not breaching the contract, John would have had a wall on his land. There is clearly no break in the causation, therefore satisfying legal causation. Forseeability and remoteness are not at issue here – the building of the wall was part of the contract and therefore the loss flows naturally from the breach as per the first limb of the Hadley v Baxendale test. It is clear there is no way John could have mitigated this loss, and there is no contributory negligence on John’s part. Therefore, John could claim the ‘cost of cure’ for building the wall in damages.
The second claim for ‘loss of privacy’ is a question of whether the type of loss is actionable or not. The type of loss would be classified as a consumer surplus, as it is the particular value John places on the privacy the wall will provide him with. The relevant test for a consumer surplus comes from Watts v Morrow – if the contractual objective is to provide relaxation, pleasure or peace of mind damages may be awarded. In this case, the building of a wall would not have this objective. Farley v Skinner may have broadened this approach, and it does not need to be the sole objective of the contract.
It could be argued that the purpose of the building of the wall was to provide peace for John, meaning he may be able to claim damages for the loss of privacy. However, this amount would likely be small. There is no question of causation, forseeability, mitigation or contribution for this point – it is clear the breach caused the loss of privacy, and that it would be foreseeable that a loss of privacy would result from the breach of contract due to the natural consequences of the breach.
- The test for forseeability of damages comes from Hadley v Baxendale. There are two types of loss which can result in claims for damages – losses which arise naturally from the breach, and losses which are in the reasonable contemplation of both parties at the time the contract was made.
In John’s situation, the loss relating to the actual contract (the value of the yarn), would fall under the first type of loss, as it is a natural result of the breach, and would therefore definitely be foreseeable for the purposes of damages. The loss relating the loss of the subsequent contract would not be a natural result of the breach, and therefore it would need to be shown that that type of loss was in the reasonable contemplation of the parties at the time of contracting. In this case, it is clear that John informed Robert of the sub-contract, and it would therefore be in both parties’ reasonable contemplation. The case of Parsons (Livestock) Ltd v Uttley Ingham & Co Ltd confirms that only the type of loss must be contemplated, not the extent. Therefore John could claim damages relating to the consequential loss of the second contract.