Damages as a remedy for breach of contract syllabus 2015

Damages Detailed Syllabus © Paul Eden – January 2015

COMMERCIAL LAW - DAMAGES FOR BREACH OF CONTRACT DETAILED SYLLABUS 2015 H G Beale et al Chitty on Contracts 31st revised edition (2012) chapter 26 [WESTLAW] H G Beale et al Contract, Cases and Materials 5 ed (OUP 2008) chapter 22 Ewan McKendrick Contract Law 10th ed (Palgrave Macmillan, 2013) chapter 20 Ewan McKendrick Contract Law: Text, Cases and Materials 6th ed (OUP, 2014) chapter 23 Jill Poole Casebook on Contract Law 12th ed (OUP, 2014) chapters 9 and 10 Jill Poole Textbook on Contract Law 12th ed (OUP, 2014) chapters 9 and 10 Edwin Peel Treitel on the Law of Contract 13th ed (Sweet and Maxwell, 2011) chapter 20 1.

2.

Introduction The aim of an award of damages is to compensate the claimant for the loss which s/he has suffered as a result of the defendant’s breach of contract. The aim is not to punish the defendant. The traditional position was that English courts do not award exemplary damages in purely contractual actions (Addis v Gramophone Co Ltd [1909] AC 488 (HL)) but the decision in Attorney General v Blake [2001] 1 AC 268, [2000] 4 All ER 385 (HL) suggests otherwise. See section 6. Exemplary Damages. The Compensation Principle (i)

Contract “The general principle for the assessment of damages is compensatory, i.e. that the innocent party is to be placed, so far as money can do so, in the same position as if the contract had been performed.” Johnson v Agnew [1980] AC 367 at 400, [1979] 1 All ER 883 at 896 (per Lord Wilberforce)

(ii)

Tort The basic principle of damages for personal injury in tort is to award: “that sum of money which will put the party who has been injured, or who has suffered, in the same position as he would have been if he had not sustained the wrong for which he is now getting his compensation.” Livingstone v Raywards Coal (1880) 5 App Cas 25 at 39 (per Lord Blackburn).

(iii)

Obligations generally “The general rule in English law today as to the measure of damages recoverable for the invasion of a legal right, whether by breach of a contract or by commission of a tort, is that damages are compensatory. Their function is to put the person whose right has been invaded in the same position as if it had been respected so far as the award of a sum of money can do it.” The Albazero [1977] AC 774 at 801, [1976] 3 All ER 129 at 132d (per Lord Diplock)

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Damages Detailed Syllabus © Paul Eden – January 2015

3.

The influence of Fuller and Purdue Theoretically a claimant could claim compensation on a number of different grounds. The terminology that is generally used is taken from the most cited article ever written on the law of contract in 1936 by Fuller and Purdue. 1. Where the object is to place the claimant in as good a position had the defendant performed his promise. The interest protected may be called the expectation interest (the term performance interest is also used). 2. Where the object is to place the claimant in as good a position as she was before the promise was made, this is called the reliance interest. 3. Where the object is to force the defendant to disgorge the value received from the claimant in order to prevent any gains made by the defaulting promisor at the expense of the promise (i.e. the prevention of an unjust enrichment), the interest protected may be called the restitution interest. Commonwealth of Australia v Amann Aviation Pty Ltd (1991) 174 CLR 64, (1991) 66 ALJR 123 (noted by Treitel (1992) 108 LQR 226-235 – only read this!) LL Fuller & William R Perdue Jr. “The Reliance Interest in Contract Damages” (1936) 46 Yale LJ 52 (read only the extracts in the better contract law casebooks) D Friedman, “The Performance Interest in Contract Damages” (1995) 111 LQR 628 (a “convincing” challenge of the basic assumptions of Fuller and Purdue)

4.

The Measure of Damages “An award of compensation for breach of contract serves to protect three separate interests. The starting principle is that the aggrieved party ought to be compensated for loss of his positive or expectation interests. In other words, the object is to put the aggrieved party in the same financial position as if the contract had been fully performed. But the law also protects the negative interest of the aggrieved party. If the aggrieved party is unable to establish the value of a loss of bargain he may seek compensation in respect of his reliance losses. The object of such an award is to compensate the aggrieved party for expenses incurred and losses suffered in reliance of the contract. These two complementary principles share one feature. Both are pure compensatory principles. If the aggrieved party has suffered no loss he is not entitled to be compensated by invoking these principles. … There is however a third principle which protects the aggrieved party’s restitutionary interest. The object of such an award is not to compensate the plaintiff for a loss, but to deprive the defendant of the benefit he gained by the breach of contract. … It is not traditional to describe a claim for restitution following a breach of contract as damages.” Surrey County Council v Bredero Homes Ltd [1993] 1 WLR 1361, [1993] 3 All ER 705 (CA) at 1369 (at 714 All ER) (per Steyn LJ) - “the high water mark of the orthodox view that the plaintiff can only recover.. for.. his own loss” (Beale et al CC&M 639) (a)

Expectation, or “Performance Interest” “the rule of the common law is, that where a party sustains loss by reason of a breach of contract, he is, in so far as money can do it, to be placed in the same situation, with respect to damages, as if the contract had been performed.”

Robinson v Harman (1848) 1 Exch 850 at 855 (per Parke B) 2

Damages Detailed Syllabus © Paul Eden – January 2015

Difference in value vs. “cost of cure” Tito v Waddell (No 2) [1977] Ch 106, [1977] 3 All ER 129 (ChD) Radford v De Froberville [1977] 1 WLR 1262 (noted in (1979) LQR 581) Watts v Morrow [1991] 1 WLR 1421, [1991] 4 All ER 937 (CA) Ruxley Electronics and Construction Ltd v Forsyth [1996] AC 344, [1995] 3 All ER 268 (HL) (noted by Phang [1996] JBL 362-381) (b)

Reliance McRae v Commonwealth Disposals Commission (1951) 84 CLR 377 (HCA) Anglia TV v Reed [1972] 1 QB 60 (CA) (noted by Ogus (1972) 35 MLR 423) C & P Haulage v Middleton [1983] 1 WLR 1461, [1983] 3 All ER 94 (CA) CCC Films (London) Ltd v Impact Quadrant Films Ltd [1985] 1 QB 16 Commonwealth of Australia v Amann Aviation Pty Ltd (1991) 174 CLR 64, (1991) 66 ALJR 123 (noted by Treitel in (1992) 108 LQR 226-235) Omak Maritime Ltd v Mamola Challenger Shipping Co [2010] EWHC 2026 (Comm), [2011] 1 Lloyd's Rep. 47 (noted by McLauchlan (2011) 127 LQR 23-27)

(c)

Gain-based damages Wrotham Park Estate Co Ltd v Parkside Homes Ltd [1974] 1 WLR 798 (ChD) Surrey CC v Bredero Homes Ltd [1993] 1 WLR 1361(CA) – “the appellant’s argument that the Wrotham Park case can be justified on the basis of a lost of a bargaining opportunity is a fiction” (criticised Birks (1993) 109 LQR 518) Jaggard v Sawyer [1995] 1 WLR 269, [1995] 2 All ER 189 (CA) Attorney General v Blake [2001] 1 AC 268, [2000] 4 All ER 385 (HL) Experience Hendrix v PPX Enterprises Inc [2003] EWCA Civ 323, [2003] 1 All ER (Comm) 830 (noted (2004) 120 LQR 26-30 and [2003] Cam. LJ 605) WWF - World Wide Fund for Nature v World Wrestling Federation Entertainment Inc [2007] EWCA Civ 286, [2008] 1 WLR 445

(d)

Non-pecuniary losses Addis v Gramophone Co Ltd [1909] AC 488 Jarvis v Swan Tours [1973] QB 233, [1973] 1 All ER 71 (CA) Jackson v Horizon Holidays Ltd [1975] 1 WLR 1468, [1975] 3 All ER 71 (CA) Watts v Morrow [1991] 1 WLR 1421, [1991] 4 All ER 937 (CA) Ruxley Electronics and Construction Ltd v Forsyth [1996] AC 344 (HL) Malik v BCCI [1998] AC 20, [1997] 3 All ER 1 (HL) Johnson v. Unisys Ltd [2001] UKHL 13, [2003] 1 AC 518 Farley v Skinner [2001] UKHL 49, [2002] 2 AC 732, [2001] 4 All ER 801 (noted [2002] LMCLQ 161, (2002) 118 LQR 193 and [2003] JBL 341) Hamilton Jones v David & Snape [2003] EWHC 3147, [2004] 1 WLR 924 Glen Haysman v Mrs Rogers Films Ltd [2008] EWHC 2494

(e)

Subsequent events Golden Strait Corporation v Nippon Yusen Kubishka Kaisha (The Golden Victory) [2007] UKHL 12, [2007] 2 AC 353 (noted (2008) 124 LQR 569) Transfield Shipping Inc v Mercator Shipping Inc (The Achilleas) [2008] UKHL 48, [2009] 1 AC 61 (noted (2009) 125 LQR 6, [2008] LMCLQ 461) – remoteness? 3

Damages Detailed Syllabus © Paul Eden – January 2015

5.

Limiting the protection of the performance interest (a)

Causation – a question of fact “In all cases the question of whether the loss was caused by the breach will largely be a question of fact, on which it is difficult to give any guidance.”

Jill Poole Textbook on Contract Law 11th ed (OUP, 2012) 345 Chaplin v Hicks [1911] 2 KB 786 (CA) – loss of a chance = reliance interest Heskell v Continental Express Ltd [1950] 1 All ER 1033 at 1048 (per Devlin J) - must prove that the breach was a cause no need to prove sole cause C & P Haulage v Middleton [1983] 1 WLR 1461, [1983] 3 All ER 94 (CA) Galoo Ltd v Bright Grahame Murray [1994] 1WLR 1360, [1995] 1 All ER 16 (CA) effective or dominant cause test applied. Don’t use but for test (tort). County Ltd v Girozentrale Securities [1996] 3 All ER 834 (CA) where there were two (or more) contributing causes, don’t ask which had been of “greater efficiacy” – sufficient to found contract claim if cause was an effective cause. Beoco Ltd v Alfa Laval Co Ltd [1995] QB 137 – an intervening cause (novus actus interveniens) may break the chain of causation (very similar to tort test). South Australia Asset Management Corp v. York Montague Ltd (also known as SAAMCO v York Montague Ltd) [1997] AC 191; [1996] 3 All ER 365 (HL) (b)

Remoteness – losses arising “naturally” vs. “special” losses ‘where two parties have made a contract which one of them has broken, the damages

which the other party ought to receive in respect of such breach of contract should be such as may fairly and reasonably be considered either arising naturally, that is, according to the usual course of things, from such breach of contract, or such as may reasonably be supposed to have been in the contemplation of the parties, at the time they made the contract, as the probable result of the breach of it.’ Hadley v Baxendale (1854) 9 Exch 341, 156 ER 145 (per Alderson B) Victoria Laundry (Windsor) Ltd v Newman Industries Ltd [1949] 2 KB 528 (CA) – defendants had no knowledge of highly lucrative dyeing contracts Koufos v C Czarnikow (The Heron II) [1969] 1 AC 35 (HL) – Lord Reid rejected the “reasonably forseeablility” test as being limited to tort claims. H Parsons (Livestock) Ltd v Uttley Ingham & Co Ltd [1978] 1 QB 791 (CA) – the type of loss must be within the parties reasonable contemplation (not the extent). Lord Denning drew a distinction between the “loss of profit cases” (pure economic loss) and “physical damage cases” (remoteness test is same as tort). Orr and Scarman reached the same conclusion “by a different route”. Balfour Beatty Construction (Scotland) Ltd v Scottish Power plc [1994] SLT 807, (1994) 71 BLR 20 (HL) – there is no general rule that contracting parties are presumed to have knowledge of each other’s business practices. Brown v KMR Services Ltd [1995] 4 All ER 598, [1995] 2 L.L.Rep 513 (CA) – financial losses of Lloyd’s names type foreseeable therefore recoverable. Jackson v Royal Bank of Scotland [2005] UKHL 3, [2005] 1 WLR 377 (HL)

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(c)

Mitigation The victim of a breach of contract may not recover damages for losses which s/he could have avoided by taking reasonable steps to mitigate the loss consequent on the breach (British Westinghouse Electric and Manufacturing Co Ltd v Underground Electric Railways Co of London Ltd [1912] AC 673 (HL)). This duty to mitigate has two limbs: 1. the claimant should not increase his/her loss by unreasonable action (Banco de Portugal v Waterlow [1932] AC 452); and 2. the claimant cannot recover damages for losses which s/he could have avoided by taking reasonable action. NB – reasonable steps NOT onerous steps (Pilkington v Wood [1953] Ch 770). The law of contract takes a “tender approach to those who have been placed in a predicament by breach of contract” (Britvic Soft Drinks Ltd v Messer UK Ltd [2002] 1 Lloyd’s Rep 20 at 46 (per Tomlinson J)). The doctrine of mitigation can have the effect of requiring the innocent party to consider, and possibly accept, an offer of alternative performance by the party in breach. See Payzu v Saunders [1919] 2 KB 581 and The Solholt [1983] 1 Lloyd’s Rep 605 (CA) affirming [1981] 2 Lloyd’s Rep 574. For criticism see: M Bridge “Mitigation of Damages in Contract and the Meaning of Avoidable Loss” (1989) 105 LQR 398 at 421-422. N.B. – this principle does not apply to contracts for personal services. Can the duty to mitigate be seen as part of a broader principle that a claimant must always act reasonably? See the statement of Lord Lloyd in Ruxley Electronics and Construction Ltd v Forsyth that he did not accept the submission that “reasonableness is confined to the doctrine of mitigation”.

(d)

Contributory Negligence Where a victim of a breach of contract has been negligent and this negligence has contributed to the damage that s/he has suffered but the negligence is insufficient to break the chain of causation, it is “a vexed issue” (McKendrick) whether the damages payable to the claimant can be reduced under The Law Reform (Contributory Negligence) Act 1945. (hereinafter the 1945 Act). Forsitrungsaklieselskapet Vesta v. Butcher [1989] AC 852 (CA) obiter the 1945 Act did apply where there was concurrent liability in tort and contract - accepted as correct in Platform Home Loans Ltd v.Oyston Shipways [1989] AC 852 (HL). Barclays Bank plc v Fairclough Building Ltd [1995] QB 214 (CA) – no scope for the application of the 1945 Act breach of contract based on strict liability. No clear authority for or against application of 1945 Act where the contractual liability is based on negligence but no concurrent tortuous duty of care. De Meza v Apple [1975] 1 Lloyd’s Rep 306 suggests that the 1945 Act applies but this is not supported by dicta in Forsitrungsaklieselskapet Vesta v. Butcher.

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Damages Detailed Syllabus © Paul Eden – January 2015

Contributory Negligence as a Defence in Contract (Law Commission Report No. 219) “has been overtaken by developing case law”. The Lord Chancellor (Lord Irvine) Hansard HL Written Answers col.WA 202 (29 July 1998). See also the approach taken by the High Court of Australia in Astley v Austrust Limited (1999) 197 CLR 1 at 31, 36-7. - application of 1945 Act “to breaches of contract are wrong and should not be followed in our country.” N.B. Astley has been reversed by various legislative amendments see e.g. the Law Reform (Miscellaneous Provisions) Amendment Act 2000 (NSW). 6.

Exemplary Damages – Disgorgement damages for enrichment by wrongdoing? Addis v Gramophone Co Ltd [1909] AC 488 (HL) Kuddus v Chief Constable of Leicester Constabulary [2001] UKHL 29 Attorney General v Blake [2001] 1 AC 268, [2000] 4 All ER 385 (HL) Esso v Niad [2001] EWHC Ch 458 (22nd November, 2001) (Morritt VC) AB Corporation v CD Company (The “Sine Nomine”) [2002] 1 Lloyd’s Rep 805 J. Edelman “Exemplary Damages for Breach of Contract” (2001) 117 LQR 539. See also James Edelman Gain Based Damages: Contract, Tort, Equity and Intellectual Property (Hart, 2002) chapter 3 where he distinguishes between “restitutionary damages” (RD) and “disgorgement damages”. RDs “subtract the objective benefit received by the defendant from a wrongful transfer of wealth. As a breach of contract is a wrong, RDs should be generally available for a breach of contract. Disgorgement damages by contrast are an exceptional remedy awarded to deter wrongdoing and only available where compensatory damages are an inadequate remedy.

7.

Agreed Damages Clauses – Liquidated/Quantified Damages or Penalty Clause? Dunlop Pneumatic Tyre Ltd v New Garage and Motor Co Ltd [1915] AC 79 (HL) Cellulose Acetate Silk Company Ltd v Widnes Foundry (1925) Ltd [1933] AC 20 Jobson v Johnson [1989] 1 WLR 1026 (CA) Phillips HK Ltd v AG of Hong Kong (1993) 61 BLR 41, (1993) 61 Build LR 41 Lordsvale Finance Ltd v Bank of Zambia [1996] QB 752 The “dichotomy between a genuine pre-estimate of damages and a penalty does not necessarily cover all the possibilities” (Cine Bes Filmclik ve Yapimcilik v United International Pictures [2003] EWCA Civ 1669, [2004] 1 CLC 401) See also the Unfair Terms in Consumer Contracts Regulations 1999 Schedule 2(1)(e)

8.

Deposits and Part Payments Dies v British and International Mining and Finance Co [1939] 1 KB 724 Hyundai Shipbuilding Co Ltd v Papadopoulos [1980] 1 WLR 1129 (HL) Workers Trust & Merchant Bank v Dojap Investments [1993] AC 573 [1993] 2 All ER 370 (PC) (noted by Beale (1993) 109 LQR 524 and Harpum [1993] CLJ 389) See also the Unfair Terms in Consumer Contracts Regulations 1999 Schedule 2(1)(d)

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