REMEDIES AND DAMAGES ( PART 2)

Compensatory damages

In order to assess whether an innocent party may be entitled to damages, there are six things that should be considered:

1. Has the claimant suffered any loss?
2. Is the loss suffered actionable?
3. Did the breach of contract cause the loss?
4. Was the type of loss reasonably foreseeable?
5. Did the claimant mitigate the loss?
6. Did the claimant contribute to the loss?

We will now examine each step in turn and consider the relevant legal principles

1. 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 [2001] 1 AC 518.

The claimant does not need to be able to identify an exact amount of loss. The fact there is a loss at all is sufficient to satisfy this first requirement. The courts will attempt to quantify the loss no matter the difficulty.

Case in focus: Chaplin v Hicks [1911] 2 KB 786

In this case, the claimant was a finalist in a competition along with fifty other people. The prize was a job as an actress. Each finalist was to book an appointment to have an opportunity to showcase their skills. The defendant did not allow the claimant to have an appointment, and they therefore missed out on the opportunity to win the competition.

The court held that the defendant had breached the contract with the claimant by not giving her a fair opportunity to participate in the contract. The court awarded damages. Despite the difficulty in calculating the value of her lost opportunity, the court was happy to award damages on this basis.

Chaplin v Hicks brings us onto an important rule relating to loss. In that case, there was no tangible loss as such, it was a lost opportunity. The loss of an opportunity can only amount to an actionable loss where it is the actions of a third party which determine whether the claimant would have made a gain (Allied Maples Group Ltd v Simmons & Simmons [1995] 4 All ER 907). The claimant need only to show that there was a speculative chance that they would have made the gain, it does not need to be likelihood or a certainty. Assessing this rule in relation to Chaplin v Hicks, the third party in that case was the panel of judges who would decide the winners of the competition, whereas the contracting party did not determine the potential gain of the claimant, they were only required to arrange the appointment.

Assessing the amount of the loss

The court will assess the loss at the date of the breach, but under circumstances where this would not be appropriate may assess the loss at a chosen date (Johnson v Agnew [1980] AC 367).

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(1848) 1 Ex 850). In order to calculate this, we need to know the extent of the loss which results from the breach. There are two different ways in which this can be measured:

1. Expectation measure
2. Reliance measure

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. An example of this would be a contract for the sale of a car which should be worth £1,000. If the car is faulty, and is only worth £200, the expectation measure would be £800, as the car is worth £800 less than it should have been worth.

At this point it is worth noting that the expectation measure is subject to step four of our approach to assessing damages; whether or not the damage was foreseeable. This means that not absolutely everything under an expectation measure can be claimed, but this will become clearer when we move on to the forseeability later in the chapter.

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 [1966] EWCA Civ 4). Therefore, care should be taken when assessing the obligations under the contract – for example, take a contract of employment where a bonus may be awarded every month. This bonus would not fall under the expectation measure because it is not certain, it is only discretionary.

The above rule relating to discretionary parts of the contract does not apply where there is discretion as to how the contract is to be performed.

Case in focus: Durham Tees Valley Airport Ltd v Bmibaby Ltd [2010] EWCA Civ 485

In this case, Bmibaby agreed to operate two aircraft from the airport for ten years. The contract did not expressly state a minimum number of flights. The airport generated money from each flight. Bmibaby only operated one aircraft for some time, and eventually stopped operating an aircraft at all, therefore breaching the contract. There was a question as to the amount of damages that should be awarded, as there was no minimum number of flights, there was no clear expectation measure.

The court identified this contract as being discretionary as to how the contract is to be performed. In other words, it was up to the defendant to choose how many flights they wanted to do. Therefore, the expectation measure will be assessed by the court considering how the contract would have been performed if there was no breach, rather than considering the minimum level of performance.

Exam consideration: In light of the above case, consider a contract that does specify a minimum level/amount of performance. What would the result for the amount of damages be?

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. On some occasions, one method will be preferable as it will result in a higher amount of damages.

The first method is the difference between the value of performance provided and the value of performance that should have been provided. If we think back to the earlier example of the £1,000 car actually worth £200 – the value of performance £200, when it should have been £1,000, which gives us our difference of £800 which would be the amount awarded under damages. This is usually the applicable method for sales of goods.

The second method is the cost of curing the breach. In other words, how much will it cost the innocent party to rectify the breach of the defendant, either by paying someone else or the defendant to rectify it the breach. This method is more likely to be applicable in contracts for the provision of services. For example, in the case of a contract for the building of a house, if the contract was breached due to the unsatisfactory quality of the house, and it was going to cost £5,000 to get the house in a satisfactory state, the damages would amount to this cost. This is known as the ‘cost of cure’ approach.

There are certain circumstances which will not allow the ‘cost of cure’ approach to be used when calculating damages:

• If the claimant does not intend to rectify the issues with the damages (Tito v Waddell (No 2) [1977] Ch 106
• If the cost of cure is wholly disproportionate to the value the cure will add to the end product, for example, the cost of building an extension on a house which does not add little or no value to the market value of the house (Ruxley Electronics & Constructions Ltd v Forsyth [1995] UKHL 8)

Case in focus: Tabcorp Holdings Ltd v Bowen Investments Pty Ltd [2009] HCA 8

This case is an Australian case, and therefore is not binding on English law but only persuasive. However, it provides an excellent illustration of when the cost of cure might be disproportionate to the diminution in value.

In this case, a tenant of a commercial property destroyed the foyer of the property, with the knowledge that the landlord had specifically picked this foyer for the property. The tenant replaced the foyer with a different one. The landlord claimed for breach of contract, arguing that the tenant should pay the cost of the cure to replace the foyer with the previous one.

The new foyer only diminished the value of the property by $34,820 Australian Dollars, but to restore the foyer to its original condition would have costed $580,000 Australian Dollars. The court held that because of the actions of the defendant, removing a foyer they were aware the landlord had specifically chosen, the damages would not be limited to the $34,820 loss of value in the property, and the whole $580,000 was recoverable.

This case shows it is important to analyse the actions of the defendant in such cases, if they acted unconscionably the court are not likely to limit damages.

Exam consideration: If the tenant was never aware of the importance of the foyer in Tabcorp Holdings Ltd, do you think it would be likely that the damages would have been limited to the $34,820?