Discharge of contract and remedies - Damages

Learning Outcomes

After studying this article, you will be able to identify and explain the main ways a contract can be discharged, distinguish between types of breach, and apply the rules governing the award of damages for breach of contract. You will understand the principles of expectation loss, remoteness, mitigation, and the enforceability of liquidated damages clauses. You will be able to apply these concepts to SQE1-style scenarios and avoid common pitfalls in exam questions.

SQE1 Syllabus

For SQE1, you are required to understand the legal principles relating to the discharge of contract and the remedies available for breach, with a particular focus on damages. In your revision, pay close attention to:

• the different ways in which contracts may be discharged (performance, breach, agreement, frustration)
• the distinction between repudiatory and non-repudiatory breach and their consequences
• the calculation of damages, including expectation loss, reliance loss, and restitution
• the rules of causation, remoteness, and mitigation in limiting recoverable damages
• the enforceability of agreed damages clauses (liquidated damages and penalties)
• how to apply these principles to practical problem scenarios

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. What is the difference between a repudiatory breach and a warranty breach, and what remedies are available for each?
2. How does the rule in Hadley v Baxendale limit the damages recoverable for breach of contract?
3. What must a claimant do to mitigate their loss following a breach of contract?
4. When will a liquidated damages clause be unenforceable as a penalty?

Introduction

When a contract is discharged, the parties are released from their obligations. Discharge may occur by performance, breach, agreement, or frustration. If a contract is discharged by breach, the non-breaching party may be entitled to remedies, with damages being the primary remedy in English contract law. The aim of damages is to compensate, not punish, and to place the injured party in the position they would have been in had the contract been properly performed.

Understanding the rules for awarding damages—including the principles of expectation loss, remoteness, mitigation, and the enforceability of agreed damages clauses—is essential for SQE1. This article explains these rules and demonstrates how to apply them to SQE1-style scenarios.

Discharge of Contract

A contract may be brought to an end in several ways, each with different legal consequences for the parties.

Discharge by Performance

Most contracts are discharged when both parties fully perform their obligations. No further duties remain, and the contract ends.

Key Term: discharge by performance
The ending of contractual obligations when both parties have fully carried out their agreed duties.

Discharge by Breach

A contract may be discharged if one party commits a breach so serious that it deprives the other of substantially the whole benefit of the contract. This is known as a repudiatory breach.

Key Term: repudiatory breach
A breach so serious that it entitles the innocent party to terminate the contract and claim damages.

A minor breach (breach of warranty) does not entitle the innocent party to terminate the contract, but damages may still be claimed.

Key Term: warranty
A less important term of the contract; breach gives rise to damages only, not termination.

Discharge by Agreement

Parties may agree to end their contract by mutual consent. This may be done by a new agreement (accord and satisfaction), novation, or release.

Key Term: accord and satisfaction
An agreement to discharge a contract, supported by new consideration.

Discharge by Frustration

A contract is frustrated if, after formation, an unforeseen event occurs which makes performance impossible or radically different from what was agreed. In such cases, both parties are automatically released from further obligations.

Key Term: frustration
The automatic discharge of a contract due to an unforeseen event making performance impossible or fundamentally different.

Remedies for Breach: Damages

Damages are the main remedy for breach of contract. The aim is to compensate the innocent party for loss caused by the breach, not to punish the party in breach.

Key Term: damages
A monetary award intended to compensate the innocent party for loss suffered due to breach of contract.

The Expectation Measure

The usual measure of damages is expectation loss. The court seeks to put the claimant in the position they would have been in had the contract been performed as agreed.

Key Term: expectation loss
The loss of the benefit the innocent party expected to receive from the contract.

Reliance Loss

If expectation loss is too speculative, the court may award reliance loss, compensating the claimant for expenses incurred in reliance on the contract.

Key Term: reliance loss
Compensation for expenses reasonably incurred in reliance on the contract.

Limiting Factors on Damages

Not all losses caused by a breach are recoverable. The law imposes several limits.

Causation

Only losses caused by the breach are recoverable. The claimant must show that, but for the breach, the loss would not have occurred.

Key Term: causation
The requirement that loss must be caused by the breach to be recoverable.

Remoteness

Damages are limited to losses that were reasonably contemplated by both parties at the time the contract was made. The leading case is Hadley v Baxendale.

Key Term: remoteness
The rule that only losses foreseeable at the time of contracting are recoverable.

Mitigation

The claimant must take reasonable steps to reduce their loss after a breach. Losses that could have been avoided by reasonable action are not recoverable.

Key Term: mitigation
The duty of the innocent party to take reasonable steps to minimise their loss after a breach.

Non-Financial Loss

Generally, damages are not awarded for distress or disappointment, except where the contract’s main purpose is to provide pleasure, relaxation, or peace of mind (e.g., a holiday contract).

Calculating Damages

The court may use different methods to calculate damages, depending on the facts.

Cost of Cure

Damages may be awarded for the cost of remedying the breach, if reasonable.

Key Term: cost of cure
The cost of putting right the breach to achieve what was promised.

Difference in Value

Alternatively, damages may be assessed as the difference between the value of what was promised and what was actually received.

Loss of Profit

If the breach causes the claimant to lose profit they would otherwise have made, damages may be awarded for that loss.

Worked Example 1.1

A agrees to sell B a machine for £10,000. B pays, but A fails to deliver. B buys a similar machine elsewhere for £11,500. What damages can B claim?

Answer: B can claim £1,500, representing the extra cost incurred to obtain a replacement machine (expectation loss).

Worked Example 1.2

C contracts with D to build a swimming pool 2.5m deep for £20,000. D builds it only 2m deep. The pool is usable, but not as specified. The cost to rebuild is £15,000, but the difference in value is only £1,000. What damages are likely?

Answer: The court will usually award the difference in value (£1,000), unless the cost of cure is reasonable and proportionate. If rebuilding is unreasonable, only £1,000 is recoverable.

Worked Example 1.3

E’s supplier breaches a contract to deliver goods. E does not try to buy substitutes and suffers a large loss. Can E recover the full loss?

Answer: No. E must take reasonable steps to mitigate loss. If E could have bought substitutes at a small additional cost, only that cost is recoverable.

Agreed Damages Clauses

Parties may include a clause specifying the sum payable if the contract is breached (liquidated damages). Such a clause is enforceable if it is a genuine pre-estimate of loss, but not if it is a penalty intended to punish.

Key Term: liquidated damages
A contractually agreed sum payable on breach, enforceable if it is a genuine pre-estimate of loss.

Key Term: penalty
A sum stipulated in a contract that is out of all proportion to the innocent party’s legitimate interest; unenforceable.

Worked Example 1.4

A construction contract provides for £500 per day for late completion. The contractor is late by 10 days. Is the clause enforceable?

Answer: If £500 per day is a genuine pre-estimate of the likely loss, the clause is enforceable as liquidated damages. If it is excessive and punitive, it may be a penalty and unenforceable.

Exam Warning

In the SQE1 exam, always check whether a damages clause is a genuine pre-estimate of loss or a penalty. If the clause is a penalty, it will not be enforced and the innocent party must prove their actual loss.

Summary

Key Point Checklist

This article has covered the following key knowledge points:

• The main ways a contract can be discharged: performance, breach, agreement, frustration.
• The distinction between repudiatory breach and warranty breach, and their remedies.
• The principles for awarding damages: expectation loss, reliance loss, restitution.
• The limits on damages: causation, remoteness, mitigation.
• The calculation of damages: cost of cure, difference in value, loss of profit.
• The enforceability of liquidated damages and penalty clauses.

Key Terms and Concepts

• discharge by performance
• repudiatory breach
• warranty
• accord and satisfaction
• frustration
• damages
• expectation loss
• reliance loss
• causation
• remoteness
• mitigation
• cost of cure
• liquidated damages
• penalty