Discharge of contract and remedies - Damages

Learning Outcomes

This article explains the main ways a contract can be discharged, distinguishes between types of breach, and covers the rules governing the award of damages for breach of contract, including expectation loss, reliance loss, and limits on recovery (causation, remoteness, mitigation, and the assessment date). It outlines when nominal damages and non-financial loss (including loss of amenity and distress in peace-of-mind contracts) are available, how courts choose between cost of cure and difference-in-value, and how reliance and restitutionary measures operate when expectation loss is uncertain. It examines the enforceability of agreed damages clauses, including liquidated damages, penalties, and the modern legitimate interest approach, and analyzes when contributory negligence can reduce contractual damages. It details how frustration, affirmation, and anticipatory repudiatory breach interact with damages claims, and how sale of goods rules apply where there is an available market. It discusses application to SQE1-style problem questions, highlighting common pitfalls such as confusing termination for breach with rescission, overlooking affirmation, misclassifying terms, or misapplying remoteness, mitigation, and the rules on agreed damages clauses.

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, with a focus on the following syllabus points:

• 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, loss of amenity, and restitutionary recovery in limited situations
• the rules of causation, remoteness, mitigation, and the date of assessment in limiting recoverable damages
• the enforceability of agreed damages clauses (liquidated damages and penalties), including the legitimate interest test
• classification of terms (conditions, warranties, innominate terms) and anticipatory repudiatory breach
• situations where contributory negligence can reduce contractual damages
• 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, the assessment date, and the enforceability of agreed damages clauses—is essential for SQE1. It is also important to distinguish termination for breach (prospective, preserving accrued rights) from rescission for misrepresentation (setting the contract aside), and to recognise that a repudiatory breach gives the innocent party a choice: terminate or affirm. 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. Some obligations are strict (must be performed exactly as agreed), others are qualified (e.g., reasonable care and skill, reasonable endeavours). In “entire obligations” contracts, a single lump-sum price for completion may mean that incomplete performance earns no payment. However, the doctrine of substantial performance may permit recovery of the price less the cost of defects where performance is substantially complete. Where one party voluntarily accepts partial performance, a reasonable sum (quantum meruit) may be payable.

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. The innocent party may terminate or affirm and in either case claim damages.

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

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

Classifying terms is key:

• Conditions are major terms; breach is repudiatory.
• Warranties are minor terms; breach is not repudiatory.
• Innominate terms are assessed by the effect of the breach; only breaches depriving substantially the whole benefit permit termination.

Key Term: condition
An essential term; its breach is repudiatory and permits termination plus damages.

Key Term: innominate term
A term whose classification depends on the consequences of breach; termination is available only if the breach deprives the innocent party of substantially the whole benefit.

Breach may be actual (at the time for performance) or anticipatory (before performance is due). An anticipatory repudiatory breach gives the innocent party an immediate right to accept the breach and terminate, or to affirm and keep the contract alive (bearing the risk that intervening events might later defeat the claim).

Key Term: anticipatory repudiatory breach
A pre-performance indication that a party will commit a repudiatory breach, entitling the other to terminate immediately or affirm.

Time stipulations matter. If time is of the essence (expressly or by notice), late performance can be repudiatory. Statutory guidance also assists: in business-to-business sales, certain implied terms (e.g., description, satisfactory quality, sample conformity) are “conditions”, but trivial breaches may be treated as warranties in limited circumstances.

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. Frustration discharges future obligations automatically, but it is narrowly applied. Mere impracticability or increased expense is insufficient; frustration cannot be self-induced. Force majeure clauses often allocate such risks contractually.

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.

Key Term: nominal damages
A small sum awarded where breach is established but no compensable loss is proven.

Key Term: date of assessment
The general rule that damages are assessed at the date of breach, subject to exceptions to avoid injustice.

As a general rule, damages are assessed at the date of breach, because that is when the innocent party can take steps to obtain substitutes or reallocate resources. If there is no ready market, the innocent party reasonably needs time to find an alternative; or if the breach is discovered later, the court may assess at a later date to avoid over- or under-compensation.

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.

Expectation damages can be measured by:

• loss of profit (where the breach prevents profitable performance),
• difference in value (between what was promised and what was received),
• cost of cure (the reasonable cost of putting the defect right).

Courts choose the measure that best reflects the promised performance without granting a windfall. Cost of cure is limited to cases where it is reasonable and proportionate given the benefit to be obtained.

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. Reliance damages aim to restore the claimant to the pre-contract position, but they are not a vehicle to escape a bad bargain. If the evidence shows the claimant would not have recovered those costs even if the contract had been performed, reliance recovery is disallowed.

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

In some situations, restitutionary recovery (e.g., a quantum meruit for work done) may be available if the contract is terminated or never formed; money paid may be recoverable for a total failure of consideration.

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. Intervening acts can break the chain of causation where they are sufficiently independent, unreasonable or outside the scope of the risk undertaken.

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. Generally, recoverable losses are those arising naturally in the ordinary course of things, or those within the parties’ contemplation due to special knowledge of unusual circumstances disclosed at formation. In contract, the threshold is stricter than in tort.

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

Modern authority recognises that in unusual contexts a party may not be taken to have assumed responsibility for open-ended consequential losses, even if some loss was foreseeable. For most standard scenarios, apply the orthodox two-limb test: ordinary losses and special losses known to the other party at formation.

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. Reasonableness is judged case by case; claimants are not required to take onerous or risky steps, and are entitled to recoup reasonable mitigation costs—even if they increase the overall loss.

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

Contributory Negligence

In contract, contributory negligence can reduce damages only where the defendant’s breach is of a duty akin to tort (e.g., a duty to take reasonable care and skill) and there is concurrent tortious liability. It does not apply to strict contractual obligations. Where it applies, damages are reduced to reflect the claimant’s share of responsibility.

Key Term: contributory negligence
A partial defence reducing damages where the claimant’s negligence contributed to the loss and the defendant’s duty was one of care comparable to tort.

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), or where physical inconvenience leads to distress. In building and consumer contexts, “loss of amenity” can be awarded where defective performance diminishes enjoyment despite no measurable difference in value.

Key Term: loss of amenity
Damages for reduced enjoyment where performance falls short, even if market value is unchanged.

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. Where cost of cure is grossly disproportionate to any benefit, the court will use a different measure.

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. This is often the default in sale of goods where cost of cure would be excessive or impractical.

Loss of Profit

If the breach causes the claimant to lose profit they would otherwise have made, damages may be awarded for that loss. Claimants must prove the lost profit (with reasonable certainty), or rely on reliance loss if profit is too speculative.

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. A modest sum for loss of amenity may also be considered where the main impact is diminished enjoyment.

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. Avoidable losses caused by inaction are not compensated.

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 or protects a legitimate interest proportionately (e.g., managing sequencing costs and client impact), the clause is enforceable as liquidated damages. If it is extravagant or out of proportion to the innocent party’s legitimate interest, it is a penalty and unenforceable.

Worked Example 1.5

F buys equipment for routine business use. The seller knows F will use it in the ordinary course but is not told about a lucrative one-off government contract requiring immediate use. Delivery is delayed and F loses ordinary profits and the government contract profits. What is recoverable?

Answer:
Ordinary profit loss is recoverable as arising naturally in the ordinary course. The exceptional government contract profit is too remote unless the seller knew of that specific arrangement at the time of contracting.

Worked Example 1.6

G hires a contractor to install decorative brickwork in a precise pattern for a home feature, at £30,000. The pattern is misaligned but structurally sound. Reinstatement would cost £25,000, and the home’s market value is unchanged. What measure applies?

Answer:
Cost of cure is likely unreasonable and disproportionate. The court may award a modest sum for loss of amenity to reflect diminished enjoyment, rather than full reinstatement costs.

Worked Example 1.7

H spends £200,000 fitting out a leased unit under a contract that allows the landlord to retain fixtures on expiry. The landlord breaches by early termination. Can H recover the full £200,000 as reliance loss?

Answer:
Not if the fit-out costs would not have been recovered even on proper performance (a bad bargain). Reliance recovery cannot put H in a better position than performance would have; the court will limit recovery accordingly.

Worked Example 1.8

A beverage company discovers its drinks are negligibly contaminated due to a supplier’s defective ingredient. To protect reputation, it recalls and destroys stock at substantial cost. Can it recover that increased loss?

Answer:
Yes, if the recall is a reasonable mitigation step in the circumstances. Reasonable mitigation costs are recoverable even if they increase the overall loss.

Worked Example 1.9

I hires a consultant under a contract requiring reasonable care and skill. I’s own negligent failure to provide accurate data contributes to loss. Does contributory negligence reduce damages?

Answer:
In a duty-of-care context with concurrent tortious liability, the court can reduce damages to reflect I’s contributory negligence. This does not apply to strict contractual duties.

Worked Example 1.10

A SaaS licence contains a clause requiring a £25,000 fee for any unauthorised user access, to protect system integrity and client data. Actual loss is uncertain per incident. Is the clause penal?

Answer:
If the fee is a proportionate deterrent protecting a legitimate interest (system capacity, data security, service integrity), it is likely enforceable. If the sum is exorbitant in relation to that interest, it risks being struck down as a penalty.

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, or if it protects a legitimate interest proportionately. A term is penal if it imposes a detriment out of all proportion to the innocent party’s legitimate interest in performance.

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

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

The modern approach looks at substance over labels. In commercial contracts, courts respect parties’ risk allocation. In consumer contexts, fairness controls also apply. If a clause is penal, the innocent party falls back on unliquidated damages and must prove actual loss.

Exam Warning

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

Additional Principles and Practical Points

• Third-party loss: As a rule, a party cannot recover for another’s loss. Limited exceptions exist (e.g., contracts of convenience in domestic settings; transferred loss where the contract was intended to benefit a subsequent owner of the subject matter). Statutory third-party rights may also apply where the contract confers enforceable rights on a third party and is not excluded.
• Sale of goods: Where there is an available market, damages for non-delivery or wrongful refusal to accept are typically measured by the difference between the contract price and the market price at the due date for delivery.
• Affirmation: If the innocent party opts to affirm after a repudiatory or anticipatory breach, the contract continues; accrued rights remain and damages for the breach are still claimable, but future termination rights may be lost.

Summary

Key Point Checklist

This article has covered the following key knowledge points:

• The main ways a contract can be discharged: performance (including strict vs qualified obligations and substantial performance), breach, agreement, frustration.
• The distinction between repudiatory breach and warranty breach, and the consequences of termination vs affirmation.
• Classification of terms (conditions, warranties, innominate terms), and anticipatory repudiatory breach.
• The principles for awarding damages: expectation loss (loss of profit, difference in value, cost of cure), reliance loss, and limited restitutionary recovery.
• Limits on damages: causation, remoteness (ordinary vs unusual losses and disclosure), mitigation (including reasonable steps that increase loss), and the assessment date.
• When non-financial loss is available, including loss of amenity and distress in peace-of-mind contracts or where physical inconvenience occurs.
• Contributory negligence in contract: available only for breaches of a duty of care comparable to tort, not for strict obligations.
• The calculation of damages under sale of goods rules where a market exists.
• The enforceability of liquidated damages and penalty clauses using the modern legitimate interest approach; consequences if a clause is penal.
• Practical exceptions allowing recovery relating to third-party loss (contracts of convenience, transferred loss) and the role of statutory third-party rights where not excluded.

Key Terms and Concepts

• discharge by performance
• repudiatory breach
• warranty
• condition
• innominate term
• anticipatory repudiatory breach
• accord and satisfaction
• frustration
• damages
• nominal damages
• expectation loss
• reliance loss
• loss of amenity
• causation
• remoteness
• mitigation
• contributory negligence
• cost of cure
• date of assessment
• liquidated damages
• penalty