Introduction
A breach of contract occurs when one party to a legally binding agreement fails to fulfill its obligations as stipulated within the contractual terms. The law provides various remedies for such breaches, with damages being the most common form. Damages for breach of contract are designed to compensate the non-breaching party for losses directly resulting from the other party’s failure to perform. The fundamental principle underlying the award of such damages is to place the claimant, so far as monetary compensation can achieve, in the position they would have occupied had the contract been properly fulfilled. This principle, established in the foundational case of Robinson v Harman (1848), dictates that the object of contract damages is not to punish the breaching party but to provide equitable restitution for the injured party’s loss. A successful claim requires the claimant to demonstrate that a contract existed, that a breach of that contract has occurred, that the breach caused loss, and that the damages are not too remote. Legal terminology is essential, and such terms will be used to ensure clear and precise legal understanding. This article will explain the key types, calculation methods and legal principles of breach of contract damages.
Types of Damages
Several types of damages may be awarded for a breach of contract. The type of damages applicable often depends on the specific nature of the contract and the extent of the breach. Key categories include:
Expectation Damages
Expectation damages are intended to put the claimant in the position they would have been had the contract been fully performed. This is the most common measure of damages awarded by the courts. It seeks to compensate the claimant for the value of the benefit they expected to receive from the contract. This can be demonstrated through a scenario where a buyer contracted a seller for £100,000 for goods. However, the seller failed to deliver the goods. On the date the delivery of goods was due to take place, the market value of the goods had increased to £110,000. In this context, expectation damages would be assessed at £10,000, representing the increased market value of the goods over and above the original contract price. In Robinson v Harman, the court specified that if a promise is made for a lease and the defendant has no title to grant it the claimant was entitled to damages to include the loss of the bargain rather than just the expenses incurred in reliance on that promise. Expectation damages can be difficult to assess, particularly in contracts for services, where the benefit expected is more difficult to quantify. In such instances, the courts may resort to alternative methods of assessment.
Reliance Damages
Reliance damages aim to put the claimant in the position they would have been in had the contract never been formed. This remedy is more typically found where the damages for loss of profit cannot be established. Instead reliance damages allow the victim to recover for wasted expenditure that was undertaken on the basis of reliance on the contract. Such expenses may include the cost of preparation for the performance of the contract or expenses incurred as a result of undertaking the contract. The case of Anglia Television v Reed (1972) illustrates reliance losses: Reed accepted an offer to star in a television drama which he repudiated. The company sought damages to cover wasted expenditure in preparation of the drama prior to Reed’s acceptance of the role. The Court of Appeal held the cost of preparation to be recoverable provided the expenses were reasonable and were in the contemplation of the parties at the time of entering into the contract, the burden of proof being on the claimant. It must be considered that a claim for reliance damages cannot be pursued where the claimant would have been in a losing situation had the contract been fully performed, since this would make the injured party better off than they were originally. This is demonstrated in the case of C and P Haulage v Middleton.
Restitutionary Damages
Restitutionary damages, which are less frequently awarded, aim to strip the defendant of gains unjustly obtained as a result of the breach. This remedy is not generally available for breach of contract but is more traditionally available for torts (such as breach of confidence) and where there is a breach of a fiduciary duty. The case of Attorney General v Blake (2001) is one of the few examples where restitutionary damages were awarded in contract law: Blake, a former secret service agent, disclosed sensitive information in breach of his contract. The House of Lords found that since damages for breach of contract were inadequate as it did not appropriately punish his behaviour as well as not removing any potential gain, his profits from the book were recoverable by the government, despite the information no longer being classified. In general, restitutionary damages will be limited to cases where the defendant has made a profit in a manner which the claimant is able to show a legitimate interest to prevent.
Nominal Damages
Nominal damages are a small sum awarded to acknowledge that a breach of contract has occurred even though the claimant has not suffered any quantifiable loss. This might occur in cases where the right of a party has been technically breached but has not resulted in any tangible loss. However, in most cases an action will not be brought forward for nominal damages, due to costs of the action being greater than the nominal damages awarded. In situations where a claimant seeks specific performance from the court, it may be the case that only nominal damages are awarded due to a third party being the primary beneficiary of the contract. This can be seen in Beswick v Beswick (1968).
Liquidated Damages
Liquidated damages are damages which have been pre-agreed by the contracting parties, where it may be difficult to ascertain what a proper damages figure would be. This clause can provide certainty and efficiency for the parties. In order to be binding, the sums stipulated must be a genuine pre-estimate of loss, where it must be clear they are not designed as a form of deterrence to prevent breach. If the clause is to punish as opposed to to provide compensation, the clause will be an unenforceable penalty clause (Dunlop Pneumatic Tyre Co. Ltd v New Garage & Motor Co. Ltd (1914)). Therefore it is important to accurately estimate a potential figure for breach when drafting a contract as opposed to selecting an arbitrary figure.
Aggravated Damages
Aggravated damages are awarded to compensate the claimant for the intangible injury they have suffered, such as hurt feelings or distress. These are often awarded where the method of breach is particularly outrageous or egregious in nature. These types of damages have a very limited scope within contract and are more readily applicable in tort.
Assessment of Damages
The assessment of damages is guided by several factors that seek to ensure the principle of compensation is upheld and to determine how to value specific losses. Key considerations include:
Remoteness
The principle of remoteness, established in Hadley v Baxendale (1854), limits the damages recoverable to losses that were reasonably foreseeable at the time of entering the contract. The defendant will be liable only for those losses that either arise naturally from the breach, according to the usual course of things, or as a consequence of special circumstances that were specifically communicated to and acknowledged by the defendant at the time that the contract was made. In applying this principle, courts will focus on those consequences of the breach which a reasonable person could have expected, had they been aware of the relevant facts, not the more specific damage that was actually suffered. The House of Lords has further refined the concept of remoteness in recent cases, such as The Achilleas (2008). This case introduced an additional consideration as to whether the scope of liability is the type that a ‘reasonable person’ would have assumed responsibility for, even if it was reasonably foreseeable. This additional test ensures that the assessment of damages is based on more than just reasonable foreseeability; it introduces the concept of an assumption of responsibility as a separate test to limit the scope of a contractual breach.
Mitigation
The principle of mitigation requires the claimant to take reasonable steps to minimise their losses following a breach. The claimant is not permitted to stand idly by and allow the losses to mount. If the claimant fails to take reasonable steps to minimize their losses, damages awarded may be reduced or the actions may be completely excluded by the courts. The test of reasonableness is determined objectively and any additional losses suffered because of the claimant’s failure to mitigate are not claimable. An example of mitigation is found in British Westinghouse Electric Co Ltd v Underground Electric Railways Co of London Ltd (1912), where despite receiving faulty turbines, the buyer was found to have mitigated their loss by replacing them with superior models that resulted in greater efficiency and the buyer was not entitled to more than nominal damages as a result. It is important to remember that an innocent party is under no obligation to mitigate in the case of a deliberate breach of contract.
Date of Assessment
The general rule is that damages should be assessed on the date of the breach, which is the time when the claimant’s cause of action has crystallised. However, this is only a presumption and will be applied only if the breach of contract gives no further guidance. Courts have also assessed the date of damages when a sale of land has become impossible due to a third party sale following non-completion on the basis that justice may require this assessment rather than an arbitrary date which may not reflect the claimant’s true loss. A more modern approach was developed in The Golden Victory (2007) where the House of Lords, ruled that where a terminating event has become apparent between the breach and the trial date, this should be factored into the damages awarded, even where the contract was for a one-off sale.
Non-Pecuniary Loss
The general rule is that the court does not award damages for the distress and hurt feelings an injured party may have suffered as a result of a breach of contract. The traditional rule on damages for non-pecuniary losses has been set out in Addis v Gramophone Co Ltd (1909).
However, recent cases have created exceptions for non-pecuniary losses where the object of the contract is to provide pleasure or relaxation. A more modern example is that of Farley v Skinner (2001), in which a claimant was able to recover damages for distress arising from aircraft noise, which a surveyor had negligently failed to identify as the claimant wanted to purchase a property free from aircraft noise. The more general exception is where the distress is a consequence of physical inconvenience caused by the breach and subsequent discomfort. In addition, damages for reputational damage may be recoverable if that damage results in a financial loss as determined by the remoteness test under Hadley v Baxendale. This was made clear in the case of Mahmud v BCCI.
Legal Principles
Key principles underpin the assessment of damages in breach of contract cases:
The Compensatory Principle
The primary purpose of damages is to compensate the claimant for their loss, not to punish the defendant for their breach. The aim is to place the claimant in the position they would have been in had the contract been properly performed.
The 'Once and For All' Rule
Damages for a breach of contract can only be made once; if the claimant recovers all the damages that they could potentially get, then, they cannot come back to court at a later time if a further loss manifests itself.
Burden of Proof
The burden of proving loss and causation lies on the claimant. However, if a defendant is seeking to rely on an exclusion clause, it is for that party to prove that they are entitled to use it. It will also be for the defendant to prove that the claimant failed to mitigate his loss or that the claimed loss is too remote.
The Principle of Reasonableness
The courts will always apply a reasonableness test when assessing contractual breaches and the measure of damages to be awarded.
Conclusion
Damages for breach of contract are a complex area of law, involving multiple different forms of damages, all subject to various considerations. Whilst there are a number of factors which will guide the court in its determination of an award, the overarching aim of such an award is to return the innocent party to the position it would have been had the contract been completed properly. This article has touched on the key considerations and approaches to the law relating to breach of contract, but it is important to appreciate that such cases are usually heavily dependent on their own facts and circumstances.
