Core principles of contract law - Remedies, causation and re...

Learning Outcomes

This article explains core principles of contract law remedies, causation, and remoteness, including:

• The primary contractual remedies for breach and when damages, specific performance, and injunctions are available.
• How causation and remoteness operate to limit recoverable loss, distinguishing direct and consequential losses and considering scope of responsibility.
• The assessment and quantification of damages using expectation, reliance, restitutionary, and loss of amenity measures, including cost of cure, difference in value, and loss of profit.
• The impact of mitigation, betterment, and credit for benefits on the calculation and reduction of damages.
• The modern approach to liquidated damages and penalties, focusing on legitimate interest, proportionality, and the enforceability of pre-agreed sums.
• Application of these principles to SQE2-style fact patterns to analyse entitlement to remedies and evaluate likely outcomes in practice.

SQE2 Syllabus

For SQE2, you are required to understand contract law remedies, including how damages are calculated and limited by causation, remoteness, and mitigation, as well as the availability of equitable relief and the enforceability of liquidated damages, with a focus on the following syllabus points:

• Calculation and assessment of damages for breach of contract.
• Legal and equitable remedies, including specific performance and injunctions.
• Principles of causation and remoteness in contract.
• Mitigation of loss and limitations on recovery of damages.
• The difference between expectation and reliance measures of damages.
• Liquidated damages and penalty clauses.
• How contractual remedies interact with performance and the discharge of a contract.

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. Explain the primary aim of damages for breach of contract under English law.
2. What must a claimant prove to recover damages when a contract is breached?
3. What is the difference between direct and consequential loss, and how does remoteness limit recoverability?
4. In what circumstances may a party obtain specific performance rather than damages?

Introduction

Remedies for contract breach aim to put an injured party in the position they would have been in if the contract had been properly performed. Whether in assessment or practice, understanding these remedies—and the legal principles limiting their scope—is a core requirement for SQE2. This article sets out the legal basis for contractual remedies, then explains the limitations of causation and remoteness, and how they impact claims for loss.

Damages: The Primary Remedy

The usual remedy for breach of contract is damages—a payment of money to compensate for loss. These damages are compensatory, not punitive.

Key Term: damages
Financial compensation awarded to reflect the loss resulting from a breach of contract.

Where appropriate, courts may also award interest on damages (statutory or contractual) to reflect the time value of money between loss and judgment.

The Aims and Limits of Damages

The objective is to put the claimant in the position they would have been in had the contract been properly fulfilled. This is known as the expectation interest.

Key Term: expectation interest
The financial benefit a party would have gained from complete performance of the contract.

However, damages are not always assessed purely on expectation: other measures, such as reliance or restitution, may sometimes be relevant. Reliance damages compensate expenditure reasonably incurred in preparing or performing the contract. Restitutionary remedies are exceptional and focus on stripping gains from the breaching party where compensatory damages are inadequate and there is a strong reason to prevent retention of profits.

Importantly, certain losses are not recoverable—only those losses caused by the breach and not too remote. Even where recoverable heads of loss exist, damages may be reduced to avoid double recovery, windfalls, or “betterment” (where remedial action leaves the claimant in a better position than performance would have done).

Key Term: reliance (wasted expenditure)
Compensation for reasonable costs incurred in reliance on a contract, awarded where expectation profits are too uncertain, subject to limits if the bargain was inherently loss-making.

Causation

To recover damages, there must be a clear causal link between the breach and the loss.

Key Term: causation
The requirement that the breach led directly to the loss claimed.

The claimant must prove that "but for" the breach, the loss would not have occurred. In contract, this often aligns with the factual sequence of performance and breach; intervening events may break the chain, particularly where they are independent, unforeseeable, or where the loss stems from a different legal cause.

Worked Example 1.1

A retailer contracts to buy 100 units of stock from a supplier for £1,000 but the supplier fails to deliver. The retailer pays £1,300 to source replacement stock. Is the additional cost recoverable?

Answer:
Yes. The retailer can recover £300 because this cost was caused by the supplier’s breach and would not have been incurred "but for" the breach.

Remoteness

Causation is not enough: the loss must not be too remote. The test comes from Hadley v Baxendale: is the loss of a type that would arise naturally from the breach, or was it within the parties’ contemplation at contract formation?

Key Term: remoteness
The legal principle that limits damages to losses that were reasonably foreseeable at the time the contract was made.

If unusual or unexpected loss occurs, it is recoverable only if both parties were, or should have been, aware of special circumstances. Modern decisions also consider whether the type of loss falls within the scope of responsibility the breaching party reasonably assumed under the contract. In commercial contexts, the standard of foreseeability is often articulated as loss that was a serious possibility (not a remote chance) at the time of contracting.

Worked Example 1.2

A manufacturer delivers a replacement part late. The buyer loses a lucrative resale contract with a third party as a result, and seeks to recover lost profits.

Answer:
If the supplier was not told of the buyer’s intentions at contract formation, the exceptional loss is likely too remote to satisfy the legal test, so the buyer cannot recover the profits.

Revision Tip

Assess remoteness by asking: could the loss have been foreseen as a real (serious) possibility at the time the contract was made? If the loss depends on special circumstances, ensure they were communicated when the contract was formed.

Assessment of Damages

Damages are most commonly calculated by reference to either:

• Difference in value: The value of what was supplied versus what was required under the contract.
• Cost of cure: The amount needed to remedy any defect or non-performance.
• Loss of profit: Profits reasonably expected but lost as a result of breach.

Only actual, proven loss caused by the breach is compensable. If no loss is suffered, nominal damages may be awarded.

Key Term: nominal damages
A token sum awarded where a breach occurred but no loss resulted.

Loss of Amenity and Reasonableness of Cure

In some cases, strict “cost of cure” would be disproportionate to the benefit obtained. Courts may instead award damages for loss of amenity (also referred to as consumer surplus) to reflect the loss of the promised performance where cure is unreasonable—for instance, where rebuilding would be out of all proportion to the deviation.

Key Term: loss of amenity
A modest award to reflect the loss of the promised performance where the cost of cure is unreasonable and there is no measurable diminution in value.

Date of Assessment and Market Measures

Damages are ordinarily assessed at the date of breach. In sale of goods and similar contracts, this often translates into the market difference measure: the cost of obtaining substitute performance compared to the contract price, assessed at the time and place when performance should have occurred. Courts may choose a different date to avoid injustice where markets are volatile or substitute transactions reasonably occur later.

Betterment and Credit for Benefits

When calculating damages, claimants generally must give credit for benefits arising from mitigation or remedial action, and avoid “betterment” (ending up better off than contractual performance would have provided). However, reasonable betterment may be allowed if unavoidable (for example, replacing obsolete components with modern equivalents), often with a reduction to reflect any incremental improvement.

Worked Example 1.3

A contractor agrees to build a pool to a depth of 2.3 metres but delivers 2.0 metres. The property value is unchanged, and the cost to rebuild the pool is very high relative to the difference in use. What damages are available?

Answer:
If the cost of cure is unreasonable and there is no demonstrable diminution in value, the court may award a modest sum for loss of amenity rather than full rebuilding costs.

Mitigation

A claimant must take reasonable steps to avoid or reduce loss. Damages will be reduced by any benefit which could have reasonably been obtained following the breach.

Key Term: mitigation
The obligation on a party to minimise loss—and not recover damages for loss which could have been reasonably avoided.

Mitigation does not require the claimant to take risky measures, accept inferior substitutes, or incur disproportionate costs. If reasonable steps increase loss (for example, a precautionary product recall to protect reputation), the additional loss may still be recoverable if the steps were reasonable in the circumstances.

Exam Warning

A claimant who rejects an opportunity to limit their loss cannot recover damages for avoidable extra amounts.

Worked Example 1.4

A supplier fails to deliver a component. The buyer can source a substitute at a 10% price premium and keep production on schedule, or delay production for several weeks at much lower component cost, risking the loss of key customers. What should the buyer do?

Answer:
Reasonable mitigation may involve buying substitutes at a moderate premium to avoid greater consequential losses. The price premium is recoverable as mitigation loss; speculative losses avoided by timely mitigation are not claimed separately but support the reasonableness of the chosen mitigation.

Expectation vs Reliance

Expectation damages aim to capture the net benefit of performance: profits and gains the claimant reasonably expected but lost. Reliance damages (wasted expenditure) compensate costs reasonably incurred in reliance on the contract where profits are too uncertain to prove. A claimant cannot recover reliance expenditure if the defendant establishes that, even with performance, the claimant would have made a net loss (the “bad bargain” limit).

Key Term: reliance (wasted expenditure)
Damages compensating reasonable expenditure incurred in reliance on the contract, available where expectation profits are too uncertain, subject to the bad bargain limit.

Worked Example 1.5

A producer spends £50,000 preparing for a performer’s contracted appearance. The performer wrongfully cancels days before the event. Ticket sales were too limited to prove expected profit or loss either way. Can reliance damages be claimed?

Answer:
Yes, reliance (wasted expenditure) may be awarded where profits are too uncertain. However, if the breaching party proves the event would have made an overall loss even with performance, reliance may be reduced to avoid putting the claimant in a better position than performance.

Liquidated Damages and Penalties

Contracts may specify in advance the damages payable for breach. Clauses that provide a genuine pre-estimate of loss are known as liquidated damages and are generally enforceable. The modern approach also upholds clauses that protect a legitimate interest and are not out of proportion to that interest, even if precise pre-estimation is difficult. If, however, the amount stipulated is excessive and designed to penalise, it may be struck down as a penalty.

Key Term: liquidated damages
Contractual clauses setting a fixed or determinable sum for breach, enforceable if they protect a legitimate interest and are not out of proportion to potential loss.

Key Term: penalty
A clause imposing a detriment for breach that is out of proportion to any legitimate interest in performance.

Factors relevant to enforceability include the sophistication of the parties, whether the clause was negotiated, the nature of the interest protected (e.g., certainty, timing), and the proportionality of the sum to the foreseeable loss at the time of contracting.

Worked Example 1.6

A parking operator imposes a fixed £85 charge for overstaying a free two-hour limit. The operator cites a need to manage turnover and space for customers. Is the charge enforceable?

Answer:
Yes, where the sum protects a legitimate interest (efficient management of parking facilities) and is not out of proportion to that interest, the clause is likely enforceable as liquidated damages, not a penalty.

Equitable Remedies: Specific Performance and Injunctions

Sometimes, monetary damages will not provide adequate relief. In those cases, the court may order:

• Specific performance: Compelling the defaulting party to perform their contractual obligations.
• Injunction: An order not to breach some negative promise within the contract.

Orders for specific performance or an injunction are always discretionary and will rarely be granted if damages suffice. Additional bars include supervision difficulty, lack of mutuality, undue hardship, and contracts for personal services (which the court will not specifically enforce). Negative covenants (e.g., not to perform for another party) are more amenable to injunctions, especially where damages are difficult to quantify.

Key Term: specific performance
A court order requiring a party to carry out their contractual obligation.

Key Term: injunction
A court order requiring a party to do, or refrain from doing, a particular act.

Worked Example 1.7

A buyer contracts to buy a piece of art from a seller, but the seller refuses to complete the sale. Can the court order specific performance?

Answer:
Yes. As artwork is unique and damages would not adequately compensate the buyer, the court may compel the seller to hand over the painting.

Limits on Equitable Relief

Equitable relief will be refused where the claimant’s conduct disentitles them (unclean hands), where enforcement would require constant court supervision, or where performance would cause disproportionate hardship to the defendant relative to the claimant’s interest. In personal service contracts, courts will not force positive performance, though a negative injunction restraining competition may be available.

Summary Table: Legal Remedies Compared

Practical Points on Proving and Quantifying Loss

• Keep contemporaneous records of costs, market prices, and substitute transactions; these underpin causation and reasonableness of mitigation.
• Consider the date of breach and market conditions; where the market is volatile, act promptly and document decision-making.
• Avoid double recovery: do not claim both expectation and reliance where they overlap; choose the measure that best aligns with the facts.
• Give credit for benefits: insurance recoveries, salvage, and improvements must be set off where relevant.
• Interest: where applicable, claim interest under statute or contract for the period between breach and judgment.

Key Point Checklist

This article has covered the following key knowledge points:

• The principal remedy for breach of contract is compensatory damages.
• Only losses caused by the breach and not too remote are recoverable.
• The claimant must mitigate their loss and avoid claiming for avoidable losses or betterment.
• Reliance damages may be awarded where expectation profits are uncertain, subject to the “bad bargain” limit.
• Loss of amenity may be awarded where cost of cure is unreasonable and value is unchanged.
• Liquidated damages clauses are enforceable if they protect a legitimate interest and are not a penalty.
• Equitable remedies (specific performance, injunction) are discretionary and only available where damages are inadequate.

Key Terms and Concepts

• damages
• expectation interest
• causation
• remoteness
• nominal damages
• mitigation
• reliance (wasted expenditure)
• loss of amenity
• liquidated damages
• penalty
• specific performance
• injunction