lecture # 14 common law remedies for breach of contract

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Lecture # 14

Common Law Remedies for breach of contract

By: Salik Aziz Vaince

[0313-7575311]

Introduction

As long as human kind can remember contracts has been in the existence. Goods were exchanged in

order to survive. Therefore a contract can be described as an agreement between two (or more)

people where one person offers to do something and another person accepts that offer. So when

someone agrees to sell and another agrees to buy or exchange something for it, they have entered into

a contract.

Having the right contract is always a good idea, but no matter how much protection it offers, no

contract can prevent a breach of contract by the other party. A breach of contract may take many

forms, ranging from a minor lapse to one that is so serious that it entitles the innocent party to bring

the contract to an end and claim damages.

If you enter into a contract and it is breached, there are several possible remedies available to you.

Breaches of contract occur when one party refuses to perform their obligations under the contract or

performs them defectively.

Meaning of term “Breach of Contract”

Violation of a contractual obligation by failing to perform one’s own promise by repudiating it, or by

interfering with another party’s performance. OR

A breaking of the obligation which a contract imposes, which confess a right of action for damages on

the injured party.

Meaning of the term “Remedies”

The field of law dealing with the means of enforcing rights and redressing wrong. OR

The means by which the violation of a right is prevented or redressed or compressed.

Relevant maxims

Ubi jus ibi remedium

Where there is a right there is a remedy

Ubi remedium, ibi ius

Where there is a remedy, there is a right

Types of remedies

The remedies available to the innocent party in the event of a breach of contract can be divided into

three categories:

1. Common law remedies

2. Equitable remedies


3. Remedies agreed by the parties

Common law remedies

All common law remedies are available as of right if a contract is breached.

Damages

An award of damages is the usual remedy for a breach of contract. It is an award of money that aims to

compensate the innocent party for the financial losses they have suffered as a result of the breach. The

general rule is that innocent parties are entitled to such damages as will put them in the position they

would have been performed. When a contract is breached a party may suffer pecuniary loss or non-

pecuniary loss.

Pecuniary loss

Damages aim to compensate the innocent party for their financial losses that result from not receiving

the performance bargained for.

Non-pecuniary loss

Damages for non-pecuniary losses are generally not recoverable in contract. Thus, the damages for

mental distress are not awarded in commercial contracts.

Addis v Gramophone Co Ltd (1909)

Facts: The claimant was employed as a manager by the defendant. The defendant in breach of contract

dispensed with his services and replaced him with a new manager. The claimant brought an action for

breach of contract claiming that the level of damages should reflect the circumstances in which he was

dismissed damaged his reputation and ability to find suitable employment.

Held: Contract law seeks to put the parties in the position they would have been in had the contract

been performed. He was therefore limited to claiming wages and loss of commission during the

contractually agreed notice period. There was no right to exemplary damages or damage to reputation

in contract claims. Such claims would have to be actioned in the law of tort.

Lord Atkinson: “In many other cases of breach of contract there may be circumstances of malice,

fraud, defamation, or violence, which would sustain an action of tort as an alternative remedy to an

action for breach of contract. If one should select the former mode of redress, he may, no doubt,

recover exemplary damages, or what is sometimes styled vindictive damages; but if he should choose

to seek redress in the form of an action for breach of contract, he lets in all the consequences of that

form of action: Thorpe v. Thorpe. One of these consequences is, I think, this: that he is to be paid

adequate compensation in money for the loss of that which he would have received had his contract

been kept, and no more.”

Recent cases have developed the principle that, in a limited number of situations, injury to feelings

(generally called mental distress) and loss of amenity will be compensated. Such compensation is

available where the contracts whole purpose was the provision of pleasure, relaxation and peace of

mind.

Jarvis v Swans Tours Ltd (1973)

Facts: Mr. Jarvis, a solicitor, booked a 15 day ski-ing (One of a pair of long flat runners attached to the

feet for gliding over snow) holiday over the Christmas period with Swan Tours. The brochure in which


the holiday was advertised made several claims about the provision of enjoyment relating to house

parties, a friendly welcome from English speaking hotel owner, a variety of ski–runs, afternoon tea and

cakes and a Yodler (A songlike cry in which the voice fluctuates rapidly) evening. Many of these either

did not go ahead or were not as described. Mr. Jarvis brought a claim for breach of contract based on

his disappointment. At trial, the judge awarded him £30 damages on the basis that he had only been

provided with half of what he had paid for and that no damages could be recovered for

disappointment. Mr. Jarvis appealed.

Held: Where a contract is entered for the specific purpose of the provision of enjoyment or

entertainment, damages may be awarded for the disappointment, distress, upset and frustration

caused by a breach of contract in failing to provide the enjoyment or entertainment.

Where a major object of the contract was to provide pleasure, relaxation and peace of mind.

Farley v Skinner (No 2) (2001)

Facts: Buyer employed a surveyor to investigate whether the countryside property he wanted to

purchase was affected by aircraft noise. He would not have bought the house, if he knew his

enjoyment was compromised.

The surveyor negligently failed at his job. The house was located under an aircraft spiral route.

Plaintiff’s enjoyment of the house was extremely compromised by the noise. Still, the buyer has no

intention of selling the house, since he made many constructions on it.

Claim for diminution of value of the property and non-pecuniary damages.

Issue: Can the plaintiff recover non-pecuniary damages?

Held: No

Reasoning: The claim is for damages for inconvenience and discomfort. These are non-pecuniary

damages arising from breach. The fact that the aircraft is what caused the discomfort does not matter,

as the issue is the contract breach.

In this case, the very object of the contract was to provide pleasure and the damages are for physical

inconvenience cause by the breach. These are exceptions to the breach of contract rules. In general,

damages in contract breach are only for financial loss.

The principle of pacta sunt servanda would be eroded if the law did not account of the fact that the

consumer often demands specifications which, although of no economic value, have value to him (see

Ruxley v. Forsythe).

The Farley Rule: “A ruling that intangible interests only qualify for legal protection where they

are the ‘very object of the contract’ is tantamount to a ruling that contracts where these interests are

merely important, but not the central of the contract, are in part unenforceable.”

While peace of mind it is not major or sole part of the contract, it is a significant part of the contract,

upon which one can award non-pecuniary damages.

The Jarvis rule can apply here: For non-pecuniary damages to apply, it is sufficient that an important

object of the contract is to give pleasure, relaxation or peace of mind.

Issue of whether it matters that the contractant did not guarantee result (i.e., the surveyor didn't

guarantee that there would be no noise), but only undertook an obligation to take reasonable care

(i.e., the surveyor was only obliged to say whether he thought there would be noise):


- Court says that the distinction ought not to prevail.

- Proving breach of guarantee is usually more difficult than proving reasonableness of care taken during

performance.

- It is not fair that only those plaintiffs who negotiate guarantees may claim for non-pecuniary damages.

Plaintiff does not forfeit right to claim non-pecuniary damages for breach if he doesn’t move out.

Ratio: The scope of recovery for non-pecuniary damages is not limited by the object of the contract. It

is sufficient if an important object of the contract is to give pleasure, relaxation, or peace of mind.

One's claim for non-pecuniary damages is not limited by the lack of guarantees in the contract to

prevent mental distress, nor the choice of the plaintiff to sit back and continue to suffer.

If the mental suffering is related to physical inconvenience and discomfort caused by the breach of

contract.

What Types of Damages are Available in a Breach of Contract?

Depending on the nature of the breach, you may have several different remedies available to you. The

remedies may be subject to reduction or modification if the injured party has also breached the

contract. Damages are monetary awards, and they include:

Compensatory Damages: These are damages for a monetary amount that is intended to

compensate the non-breaching party for losses due to the breach. The aim is to “make the injured

party whole again”. There are two types of compensatory damages:

- Expectation Damages: Damages intended to cover what the injured party expected to receive from

the contract. Calculations are usually straightforward as they are based on the contract itself or

market values.

- Consequential Damages: These are intended to reimburse the aggrieved party for indirect damages

besides the contractual loss; for example, loss of business profits due to an undelivered machine.

They must “flow from the breach”, and be reasonably foreseeable upon entering into the contract.

Liquidation Damages: Damages that are specifically provided for in the contract. These are

available when damages may be hard to foresee and must be a fair estimate of what damages might

be in case of breach. Determined during contract formation.

Punitive Damages: Intended to punish the breaching actors and to deter them from committing

future breaches. Fairly rare in contract cases, though they may be available in certain fraud and tort

causes of action that overlap with contract law.

Nominal Damages: These are damages which are awarded when the injured plaintiff does not

actually incur a monetary loss. Also rare in contract cases because breaches of contract typically

involve some sort of loss to one party. May be available in tort crossover claims.

Restitutionary Damages: These are not really legal damages per se, but rather are an equitable

remedy to prevent the breaching party from being unjustly enriched. For example, if one party has

delivered goods but the other party failed to pay, they may be entitled to restitutionary damages to

prevent the unjust enrichment.


Limitations on awards of damages

The general rule is that innocent parties are entitled to such damages as will put them in the position

they would have been in if the contract had been performed, but there are three limitations, which will

be considered under the headings of causation, remoteness and mitigation. An award of damages in

contract law is subject to the application of the rules on causation, remoteness and a duty to mitigate

loss.

Causation

A person will only be liable for losses caused by their breach of contract. The defendant’s breach need

not be the sole cause of the claimant’s losses, but it must be an effective cause of their loss.

The Monarch Steamship v Karlshamns Oljefabrika [1949] AC 196

Facts: The claimant purchased a quantity of soya beans to be shipped on the appellant’s vessel, The

British Monarch (TBM), from Japan to Sweden. After the cargo had been loaded and the journey

commenced TBM developed problems with its boilers which caused considerable delay in the

shipment. By the terms of the charter, the appellant was to provide a seaworthy vessel and thus the

problems with the boiler amounted to a breach. During the delay period the war broke out and TBM

was ordered to unload in Glasgow. The claimant arranged for the cargo to be shipped to Sweden and

brought a claim against the defendants to recover the costs. The defendant claimed the outbreak of

the war broke the chain of causation.

Held: The outbreak of war did not break the chain of causation since the defendants should have

foreseen the possibility of this occurring and any delay of the voyage may result in diversion of the

vessel.

Remoteness

There are some losses which clearly result from the defendant’s breach of contract, but are considered

too remote from the breach for it to be fair to expect the defendant to compensate the claimant for

them. The rules concerning remoteness were originally laid down in.

Hadley v Baxendale (1854)

Facts: A shaft in Hadley’s (P) mill broke rendering the mill inoperable. Hadley hired Baxendale (D) to

transport the broken mill shaft to an engineer in Greenwich so that he could make a duplicate. Hadley

told Baxendale that the shaft must be sent immediately and Baxendale promised to deliver it the next

day. Baxendale did not know that the mill would be inoperable until the new shaft arrived.

Baxendale was negligent and did not transport the shaft as promised, causing the mill to remain shut

down for an additional five days. Hadley had paid 2 pounds four shillings to ship the shaft and sued for

300 pounds in damages due to lost profits and wages. The jury awarded Hadley 25 pounds beyond the

amount already paid to the court and Baxendale appealed.

Issue: What is the amount of damages to which an injured party is entitled for breach of contract?

Holding and Rule: An injured party may recover those damages reasonably considered to arise

naturally from a breach of contract, or those damages within the reasonable contemplation of the

parties at the time of contracting.


The court held that the usual rule was that the claimant is entitled to the amount he or she would have

received if the breaching party had performed; i.e. the plaintiff is placed in the same position she

would have been in had the breaching party performed. Under this rule, Hadley would have been

entitled to recover lost profits from the five extra days the mill was inoperable.

The court held that in this case however the rule should be that the damages were those fairly and

reasonably considered to have arisen naturally from the breach itself, or such as may be reasonably

supposed to have been in the contemplation of both parties at the time the contract was made.

The court held that if there were special circumstances under which the contract had been made, and

these circumstances were known to both parties at the time they made the contract, then any breach

of the contract would result in damages that would naturally flow from those special circumstances.

Damages for special circumstances are assessed against a party only when they were reasonably within

the contemplation of both parties as a probable consequence of a breach. The court held that in this

case Baxendale did not know that the mill was shut down and would remain closed until the new shaft

arrived. Loss of profits could not fairly or reasonably have been contemplated by both parties in case of

a breach of this contract without Hadley having communicated the special circumstances to Baxendale.

The court ruled that the jury should not have taken the loss of profits into consideration.

Disposition: Vacated and remanded for new trial.

Notes: Consequential damages are linked to knowledge and foreseeability at the time of contracting

and deal with the recovery of damages for loss other than those arising naturally. Modern courts do

not look at the implied tacit agreement discussed in this case, and instead use foreseeability as the

cornerstone to determine consequential damages. The object of damages as a remedy in a contract is

to make the parties finish in a position they would have been in had the contract been properly

performed. What is reasonably foreseeable at the time of contracting requires evidence of the

circumstances under which the parties entered into the contract and the knowledge that they possess.

Such knowledge can be imputed to the parties from customary trade practice and other sources.

The court laid down two situations where the defendant should be liable for loss caused by a breach of

contract.

Loss which would arise naturally, according to the usual course of things from their breach.

Loss as May reasonable is supposed to have been in the contemplation of the parties at the time when

they made the contract, as the probable result of the breach of it.

Victoria laundry (Windsor) Ltd v Newman Industries Ltd (1949)

Facts: The claimant purchased a large boiler for use in their dying and laundry business. The defendant

was aware that they wished to put it to immediate use and knew the nature of their business. The

delivery of the boiler was delayed in breach of contract and the claimants brought an action for the

loss of profit which the boiler would have made during the period in which the delivery was delayed.

The claim contained a sum for a particularly lucrative contract which they lost due to the absence of

the boiler. Late delivery of boiler from D to P. It was 20 weeks late and caused P to have to turn down a

very profitable government contract because they didn't have the boiler.

Issue(s): Can the plaintiff recover loss of profits, which they would have made if the boiler were

delivered on time?


Ratio: In cases of breached contract the party is only able to recover the part of the loss reasonably

foreseeable at time of contract. It’s enough if party was likely to see the loss.

For the plaintiffs to recover profit, the defendants would have had to know at the time of contract the

prospects and terms of such contracts.

Holding: P able to recover regular profits, not extraordinary profits.

The Heron ii (1969)] Czarnikow Ltd v Koufos (The Heron II) [1969] 1 AC 350

Facts: A contract for the carriage of a cargo of sugar was delayed by 9 days. The market price of sugar

dropped following this delay due to the arrival of another cargo of sugar. The claimant sought to

recover the difference from the defendant for their breach of contract. The defendant argued the

damages were too remote since it was just as likely that the market price could increase.

Held: Under the second limb in Hadley v Baxendale it was only necessary that the losses were in the

reasonable contemplation of the parties as a possible result of the breach. There was no requirement

as to the degree of probability of that loss arising. Since the defendant must have known that market

prices fluctuate, the loss would have been in his contemplation as a possible result of the breach.

The application of this principle can be seen in the following cases:

Kpohraror v Woolwich Building Society [1996] 4 All ER 119

Facts: The claimant was a self-employed importer and exporter of goods. He held a current account

with the defendant Building Society. The claimant purchased some goods for £4,550 from a wholesale

supplier who agreed to supply him with the goods and ship them to Nigeria for resale. He paid for the

goods by cheque; however the cheque was wrongly dishonored. The Defendants corrected their

mistake a day later. The claimant brought an action for breach of contract and claimed general

damages for loss of business reputation. The damages included a small allowance for loss of reputation

in Nigeria. The defendants admitted the breach but disputed the claim for loss of reputation. The

Master awarded £5,550. The defendant appealed contending the claimant should only have been

awarded nominal damages.

Held: The Master was entitled to award general damages. The Court of Appeal lifted the rule of no

recovery for general damages for damage to financial reputation which had previously only been

available in relation to tradesman.

Pilkington v Wood [1953] Ch 770

Facts: The claimant purchased a house which turned out to have a defective title. Shortly after the

purchase he, obtained employment elsewhere and needed to relocate. He had difficulty in selling the

house due to the defect in title He brought an action against his solicitor for his negligence in failing to

notice the defect.

Held: The solicitor was liable for the difference in value between what it was worth without the defect

and what it was worth with the defect. However, he was not liable for the added loss caused by the

need to move as it was not in the reasonable contemplation of the parties that he would move so soon

after sale.

On the issue of mitigation: The claimant was entitled to sue the vendor, although the court held there

was no duty to sue the vendor in order to mitigate their loss arising from the defendant’s negligence.

Jackson v Royal Bank of Scotland [2005] 1 WLR 377


Facts: The claimants carried on business of importing goods and selling them on for resale. His main

customer was a business called Economy Bag. Both businesses banked at the Royal Bank of Scotland

(RBS), the defendant. RBS mistaken revealed some invoices to Economy Bag which showed the mark-

up that they were receiving for the services they provided. This revelation was in breach of confidence

and amounted to a breach of contract. Economy Bag was outraged at the amount the claimants were

receiving and they were also concerned that the claimants had taken steps to hide that amount.

Consequently, Economy Bag ceased to trade with the claimants. Consequently the claimants were

deprived of their main source of income and were forced to cease trading. The claimants brought an

action against RBS to recover their loss. The trial judge found for the claimants and ordered RBS to pay

damages based on their loss of profit from trading with Economy Bag over a four year period. The

Court of Appeal reduced this to one year. The claimant’s appealed the reduction and RBS cross

appealed contending that the loss of profit was too remote.

Held: The loss of profit was not too remote. The Court of Appeal had erred in its application of Hadley v

Baxendale to reduce the loss of profit to one year. The trial judge’s findings as to assessment of

damages restored.

Czarnikow Ltd v Koufos (The Heron II) [1969] 1 AC 350

Facts: A contract for the carriage of a cargo of sugar was delayed by 9 days. The market price of sugar

dropped following this delay due to the arrival of another cargo of sugar. The claimant sought to

recover the difference from the defendant for their breach of contract. The defendant argued the

damages were too remote since it was just as likely that the market price could increase.

Held: Under the second limb in Hadley v Baxendale it was only necessary that the losses were in the

reasonable contemplation of the parties as a possible result of the breach. There was no requirement

as to the degree of probability of that loss arising. Since the defendant must have known that market

prices fluctuate, the loss would have been in his contemplation as a possible result of the breach.

Parsons V Uttley Ingham [1978] QB 791

Facts: The Claimant pig farmers purchased a food storage hopper from the defendant for the storage

of pig feed. The hopper was installed negligently and lack of ventilation caused the pig feed to go

mouldy. As a result, many of the pigs contracted e-coli and died. The Claimant claimed over £36k in

respect of the loss of profit, vet bills and other costs relating to the death of the pigs. The Defendant

contended this damage was too remote as it was not in the contemplation of the parties that the poor

ventilation would cause e-coli and death of the pigs.

Held: The death of the pigs was a natural result of feeding the pigs mouldy food within the first limb of

Hadley v Baxendale [1854] EWHC Exch J70. There was no need to consider whether the death by e-coli

was in the reasonable contemplation of the parties under the second limb.

Mitigation

Claimants are under a duty to mitigate their loss, and cannot recover damages for losses which could

have been avoided by taking reasonable steps.

The claimant is not permitted to allow their losses to mount up. They are under a duty to take

reasonable steps to reduce their loss:


Payzu v Saunders [1919] 2 KB 581

Facts: By the terms of the contract, the defendant was to deliver goods to the claimant on a monthly

basis and the claimant was to pay for the goods within one month of delivery. The contract was to run

for nine months. The claimant received the goods at a discounted price because he had committed to

purchase from the supplier over the nine month period. The claimant was late in making the first

installment (This amounted to a breach of warranty not entitling the defendant to repudiate the

contract). The defendant refused to continue with the original contract but told the claimant that he

would deliver the goods in future if the claimant paid cash on delivery and would still let him have the

goods at the discounted price. The claimant rejected this offer and purchased the good elsewhere at a

higher price. He then sued the defendant claiming the difference between the contractually agreed

price and what he actually paid for them.

Held: The claimant was not entitled to damages. He was given the opportunity to purchase at the

discounted price but rejected this. He was under a duty to take reasonable steps to mitigate his loss.

The offer was a reasonable one and one which the claimant could easily have complied with.

Pilkington v Wood [1953] Ch 770

Facts: The claimant purchased a house which turned out to have a defective title. Shortly after the

purchase he, obtained employment elsewhere and needed to relocate. He had difficulty in selling the

house due to the defect in title He brought an action against his solicitor for his negligence in failing to

notice the defect.

Held: The solicitor was liable for the difference in value between what it was worth without the defect

and what it was worth with the defect. However, he was not liable for the added loss caused by the

need to move as it was not in the reasonable contemplation of the parties that he would move so soon

after sale.

On the issue of mitigation

The claimant was entitled to sue the vendor, although the court held there was no duty to sue the

vendor in order to mitigate their loss arising from the defendant’s negligence.

Heads of damages

There exist various heads of damage in contract law under which an amount can be claimed to reflect

different types of loss. These include loss of bargain, reliance loss, discomfort or disappointment,

inconvenience, diminution of future prospects, speculative damages and liquidated damages.

Reliance loss

Where it is difficult to quantify the position the claimant would have been in it may be possible to

recover expenses incurred in reliance of the contract:

Anglia TV v Reed [1971] 3 All ER 690

Facts: The claimant, Anglia Television, engaged Oliver Reed to play the leading role in a television play.

Subsequently Reed pulled out and Anglia was unable to find a replacement. They abandoned the play

but had incurred expenses amounting to £2,750.


Held: Whilst damages generally seek to put the parties in the position they would have been in had the

contract been performed, the parties may elect to claim reliance loss and recover expenses incurred in

an abortive transaction. Thus Anglia was able to recover their expenses from the defendant.

Discomfort, disappointment

Damages to reflect discomfort and disappointment can only be claimed where enjoyment was part of

the bargain of the contract e.g. holidays or a meal out or entertainment. This most commonly seen in

holidays which fail to meet the standard the holiday maker was lead to believe would be enjoyed:

Jarvis v Swann Tours [1972] 3 WLR 954

Facts: Mr. Jarvis, a solicitor, booked a 15 day ski-ing holiday over the Christmas period with Swan

Tours. The brochure in which the holiday was advertised made several claims about the provision of

enjoyment relating to house parties, a friendly welcome from English speaking hotel owner, a variety

of ski–runs, afternoon tea and cakes and a Yodler evening. Many of these either did not go ahead or

were not as described. Mr Jarvis brought a claim for breach of contract based on his disappointment.

At trial, the judge awarded him £30 damages on the basis that he had only been provided with half of

what he had paid for and that no damages could be recovered for disappointment. Mr. Jarvis

appealed.

Held: Where a contract is entered for the specific purpose of the provision of enjoyment or

entertainment, damages may be awarded for the disappointment, distress, upset and frustration

caused by a breach of contract in failing to provide the enjoyment or entertainment.

Jackson v Horizon Holidays [1975] 1 WLR 1468

Facts: Mr. Jackson booked a 28 day holiday in Ceylon for himself and his family through Horizon

Holidays. The hotel turned out to be unsatisfactory for various reasons relating to cleanliness and

provision of services. The trial judge made an award for the disappointment suffered by Mr Jackson,

but stated he could not take into account the disappointment suffered by his wife and children since

they were not party to the contract. Mr. Jackson appealed.

Held: Mr. Jackson was able to recover for the disappointment suffered by his wife and children.

Inconvenience

Where the claimant has been put to physical inconvenience rather than anger or disappointment that

the defendant has not met his contractual obligation, the court may award a sum to reflect such

inconvenience:

Bailey v Bullock [1950] 2 All ER 1167

Facts: A solicitor failed to take action to recover the claimant’s house. As a consequence the claimant

and his wife had to move in with his in-laws for two years.

Held: It was held that he was entitled to recover damages to reflect the inconvenience of having to live

in overcrowded circumstances.

Barry J emphasized that there is a distinction between mere annoyance or disappointment at the

failure of the other party to carry out his contractual obligation and actual physical inconvenience and

discomfort caused by the breach.


Diminution of future prospects

Where a breach of contract adversely affects the claimant's future prospects, for example a contract

promising training and qualifications, a sum can be awarded to reflect the loss:

Dunk v George Waller [1970] 2 QB 163

Facts: The defendant engaged the claimant under a four year apprenticeship to train him as an

engineer. The defendant terminated the contract before the completion of the contractually agreed

time. The claimant bought an action for wrongful dismissal.

Held: The claimant had been wrongfully dismissed. He was entitled not only to his wages for the

remainder of the contractually agreed period, but also a sum to reflect his lack of training and the loss

of opportunities that the completion of the contract would confer.

Widgery LJ: “A contract of apprenticeship secures three things for the apprentice: it secures him, first,

a money payment during the period of apprenticeship, the training programme will allow him or her to

acquire valuable skills; and will provide employment opportunities in the labor market following the

successful completion of the training.

Speculative damages

Chaplin v Hicks [1911]2 KB 786

Facts: The claimant was an actress. She entered a beauty contest organized by Hicks. Hicks was a

famous actor and theatre manager and advertised the contest in a newspaper. The readers of the

newspaper were to vote and the top 50 would be invited to an interview where 12 would be selected

for employment. The claimant got through to final 50 but did not receive her invitation for interview

until it was too late to attend. She brought an action based on her loss of a chance of gaining

employment. She was awarded £100 assessed by the jury. Hicks appealed contending that the

damages were speculative in nature and incapable of assessment.

Held: The appeal was dismissed. The claimant was entitled to recover damages for her loss of a chance

of gaining employment. She did not have to demonstrate that she would have been successful at

interview.

Vaughan Williams LJ: “The fact that damages cannot be assessed with certainty does not relieve the

wrongdoer of the necessity of paying damages for his breach of contract.

Liquidated damages/Penalty clauses

Parties to a contract may legitimately agree the amount of damages to be paid in the event of a breach

and provide for this in their contract terms. This provides certainty to each party so that they know

exactly what they are liable to pay should they be unable to perform their obligations. Such a clause

will be enforceable by the courts only in so far as it is a genuine pre-estimate of loss. If it is a genuine

pre-estimate it is known as a liquidated damages clause. If however, the amount specified in the

contract is not a genuine pre-estimate but is aimed at deterring a breach of contract or punishing the

party in breach, this is known as a penalty clause which is not enforceable:

Dunlop v New Garage [1915] AC 79]

Facts: The claimant, Dunlop, manufactured tyres and distributed them to retailers for resale. The

contract between Dunlop and New Garage contained a clause preventing New garage from selling the


tyres below list price. In the event that they were in breach the contract specified that 5/. would be

payable for each tyre sold below the list price. The defendants sold some tyres below the list price and

the claimant brought an action for damages based on the amount specified in the contract. The

defendant argued that the relevant clause was a penalty clause and thus unenforceable. The trial judge

held it was a liquidated damages clause and awarded the claimant 5/. per tyre. The Court of Appeal

reversed this holding that the clause was a penalty clause and awarded the claimant 2/. per tyre

representing the actual loss suffered. The claimant appealed to the House of Lords.

Held: The clause was a liquidated damages clause not a penalty clause.

Lord Dunedin set out the differences between a liquidated damages clause and a penalty clause:

Though the parties to a contract who use the words "penalty" or "liquidated damages" may prima facie

be supposed to mean what they say, yet the expression used is not conclusive. The Court must find out

whether the payment stipulated is in truth a penalty or liquidated damages. This doctrine may be said

to be found passim in nearly every case.

The essence of a penalty is a payment of money stipulated as in terrorem of the offending party; the

essence of liquidated damages is a genuine covenanted pre-estimate of damage (Clydebank

Engineering and Shipbuilding Co. v. Don Jose Ramos Yzquierdo y Castaneda)

The question whether a sum stipulated is penalty or liquidated damages is a question of construction

to be decided upon the terms and inherent circumstances of each particular contract, judged of as at

the time of the making of the contract, not as at the time of the breach (Public Works Commissioner v.

Hills and Webster v. Bosanquet)

To assist this task of construction various tests have been suggested, which if applicable to the case

under consideration may prove helpful, or even conclusive. Such are:

(a) It will be held to be penalty if the sum stipulated for is extravagant and unconscionable in amount

in comparison with the greatest loss that could conceivably be proved to have followed from the

breach. (Illustration given by Lord Halsbury in Clydebank Case)

(b) It will be held to be a penalty if the breach consists only in not paying a sum of money, and the sum

stipulated is a sum greater than the sum which ought to have been paid (Kemble v. Farren)This though

one of the most ancient instances is truly a corollary to the last test. Whether it had its historical origin

in the doctrine of the common law that when A. promised to pay B. a sum of money on a certain day

and did not do so, B. could only recover the sum with, in certain cases, interest, but could never

recover further damages for non-timeous payment, or whether it was a survival of the time when

equity reformed unconscionable bargains merely because they were unconscionable, - a subject which

much exercised Jessel M.R. in Wallis v. Smith

(c) There is a presumption (but no more) that it is penalty when "a single lump sum is made payable by

way of compensation, on the occurrence of one or more or all of several events, some of which may

occasion serious and others but trifling damage" (Lord Watson in Lord Elphinstone v. Monkland Iron

and Coal Co)

On the other hand:

(d) It is no obstacle to the sum stipulated being a genuine pre-estimate of damage, that the

consequences of the breach are such as to make precise pre-estimation almost an impossibility. On the


contrary, that is just the situation when it is probable that pre-estimated damage was the true bargain

between the parties (Clydebank Case, Lord Halsbury; Webster v. Bosanquet, Lord Mersey).

Murray v Leisureplay Plc [2005] EWCA Civ 963

Facts: Mr. Morris was employed as Chief Executive Director. His employer dismissed him with 7 weeks’

notice. Under the terms of his contract of employment he was to be given 12 months’ notice or paid 12

months’ salary in lieu of notice. Mr. Murray sought to enforce this clause and the employer argued the

clause was unenforceable as a penalty. The trial judge followed the principle in Cine Bes and held that

in determining a penalty account had to be taken of Mr. Murray's duty to mitigate his loss and

therefore held the clause to be a penalty.

Held: The clause was not a penalty. The sum may have been generous but was not unconscionable and

may have taken into account the difficulty in obtaining alternative work of equal value.

Euro London Appointments Ltd. v Claessens [2006] EWCA Civ 385

Facts: The claimant was an employment agency the defendant was a client of the agency looking for

workers. The standard terms of the contract provided that the defendant would pay 20% of the annual

salary for each client they introduced whom the client wished to engage. In the event that a client

terminated the contract within 12 weeks of engagement the claimant would make a refund based on

the amount of time worked. However, this refund was conditional upon the fees having been paid

within 7 days of the invoice date. The defendant engaged two employees introduced by the claimant.

Neither of them worked 12 weeks. The claimant commenced an action demanding full fees. The

defendant argued they were entitled to a refund as the clause depriving them of the right to refund

was unenforceable as a penalty.

Held: The clause was not a penalty as it was not payable on breach of contract.

Repudiation

Repudiation is a remedy available for breach of contract. Repudiation involves bringing an end to the

contract. It is only available for breach of condition as oppose to breach of warranty:

Bettini v Gye (1876) QBD 183

Facts: Bettini agreed by contract to perform as an opera singer for a three month period. He became ill

and missed 6 days of rehearsals. The employer sacked him and replaced him with another opera

singer.

Held: Bettini was in breach of warranty and therefore the employer was not entitled to end the

contract. Missing the rehearsals did not go to the root of the contract.

Poussard v Spiers (1876) 1 QBD 410

Facts: Madame Poussard entered a contract to perform as an opera singer for three months. She

became ill five days before the opening night and was not able to perform the first four nights. Spiers

then replaced her with another opera singer.

Held: Madame Poussard was in breach of condition and Spiers were entitled to end the contract. She

missed the opening night which was the most important performance as all the critics and publicity

would be based on this night.

It may also be available for breach of an innominate term, where the breach substantially deprives the

claimant of the whole benefit of the contract.


Hong Kong Fir Shipping v Kawasaki Kisen Kaisha [1962] 2QB 26

Facts: A ship was chartered to the defendants for a 2 year period. The agreement included a term that

the ship would be seaworthy throughout the period of hire. The problems developed with the engine

of the ship and the engine crew was incompetent. Consequently the ship was out of service for a 5

week period and then a further 15 week period. The defendants treated this as a breach of condition

and ended the contract. The claimants brought an action for wrongful repudiation arguing the term

relating to seaworthiness was not a condition of the contract.

Held: The defendants were liable for wrongful repudiation. The court introduced the innominate term

approach. Rather than seeking to classify the term itself as a condition or warranty, the court should

look to the effect of the breach and ask if the breach has substantially deprived the innocent party of

the whole benefit of the contract. Only where this is answered affirmatively is it to be a breach of

condition. 20 weeks out of a 2 year contract period did not substantially deprive the defendants of

whole benefit and therefore they were not entitled to repudiate the contract.

Calculating loss

There are two main ways in which the losses of a claimant in a contract action can be calculated:

Loss of expectation

Where the loss of expectation is the basis for calculating damages, the courts aim to put claimants in

the position they would have been in if the contract had been performed. Thus, the parties would have

expected a certain result from the performance of the contract and the damages will compensate for

the loss of this expectation.

Reliance loss

Where reliance loss is the basis for calculating damages, the damages seek to put claimants in the

position they were in before the contract was made. The damages will therefore compensate for the

actual wasted expenditure and other losses incurred because of the contract which has been breached.

Choosing between the expectation and reliance principles

As a rule, a claimant can choose whether to base a claim on loss of expectation or on reliance. In

practice, loss of expectation is the usual basis for calculating contract damages. There are two main

restrictions on the claimant’s choice between the expectation and the reliance principles.

These are the bad bargain rule and the speculative damages rule.

- Bad bargain rule: If the claimant would have made a loss from the contract, then he or she will only be

entitled to nominal damages, and will not be entitled to claim their expenses on the basis of reliance

loss.

- Expectation losses are ‘too speculative’: The reliance basis for calculating damages must be used where

it is virtually impossible to calculate what profit the claimant would have made if the contract had been

performed correctly.

Quantifying the expectation loss

Contract damages based on expectation loss are essentially seeking to compensate the difference in

value between the promised performance and the actual performance.


The market price rule

Where a contract has been breached, the law assumes that the wronged party will immediately

mitigate their loss by buying similar goods which they had contracted for from another source or

selling the goods which they had contracted to sell to another source. The buyer’s damages will

therefore be assessed by subtracting the contract price from the market price at the time of breach.

The market price rule will not be used as the measure of loss either where there is no available market

or where, in the circumstances, the non-breaching party is not expected to avail itself of the market to

mitigate its loss.

Cost of cure

Cost of cure damages will only be awarded where this would be reasonable. They will not be awarded

where they would be out of all proportion to the consequences of the breach and there is a risk of

unjust enrichment if the claimant is awarded cost of cure damages but then does not use the money to

remedy the breach.

Ruxley Electronics and Construction Ltd v Forsyth (1995)

Facts: Ruxley Electronics Ltd was meant to build a seven foot six inch deep pool, but it was built to only

six feet nine inches. It was found that the pool was safe for diving, and anyway Forsyth never intended

to put in a diving board. Also, Forsyth had no intention to use the damages to correct the pool.

Moreover £21,560 was unreasonable for a new pool. But Forsyth refused to pay any money given the

defect. Ruxley Electronics Ltd sued for breach of contract. Forsyth counterclaimed requesting damages

to fix the pool as it should have been.

The trial judge gave the diminution of value was zero and the cost of cure was £21,560. He awarded

£750 for inconvenience and £2500 for loss of amenity. The Court of Appeal said the cost of rebuilding

the pool should be awarded.

Held: The House of Lords upheld an award of £2500 for loss of amenity. Lord Mustill said ‘the law must

cater for those occasions where the value of the promise to the promisee exceeds the financial

enhancement of his position which full performance will secure.’ So ‘consumer surplus’ was recognized

in an award for breach of contract. To award them nothing would be to say the promise was illusory,

and that was unsatisfactory. But correcting was too expensive, and too much for the loss of Mr.

Forsyth. It would be contrary to ‘common sense’ and unreasonable. So we must look to ‘the loss truly

suffered by the promisee’.

- A common feature of small building works performed on residential property that the cost of the work

is not fully reflected by an increase in the market value of the house, and that comparatively minor

deviations from specification or sound workmanship may have no direct financial effect at all.

Lord Lloyd said that though courts do not care what damages will be used for; the intention of the

innocent party for what he does with them may be relevant to the issue of reasonableness in awarding

damages.


Loss of opportunity damages

The loss of an opportunity is recoverable in damages if the lost chance is quantifiable in monetary

terms and there was a substantial chance that the opportunity might have come to fruition. Otherwise,

the loss of opportunity will be treated as too speculative.

Tax

Where a claimant’s claim includes money on which they would have had to pay income tax if it were

earned by performing the contract, the amount of tax payable can be deducted from the damages.

Profit made by the defendant

When calculating damages, the courts have traditionally not taken into account any profit the party in

breach has made by breaking the contract, only the loss caused to the innocent party. in the most

recent cases, the courts now appear to be willing to compensate for a loss of profit, the courts have

drawn a distinction between where defendants are ordered to hand over part of their profits, and

where they are ordered to hand over all their profit.

Attorney General V Blake (2000)

Facts: George Blake was a former member of the Secret Intelligence Service (MI6) from 1944 to 1961.

For his employment contract, he had signed an Official declaration to disclose no information about his

work. It applied after his employment ceased. In 1951, he became a Soviet agent, thus, being a double

agent. He was discovered in 1961 and the British government imprisoned him in Wormwood Scrubs

(HM Prison). He escaped in 1966 and fled to the Soviet Union. He wrote a book about it and his secret

services work called No Other Choice. He received a publishing contract for its release in 1989, with

Jonathan Cape Ltd. The information in the book was no longer confidential. Blake received advanced

payments and was entitled to more. The Crown brought an action for all the profits he made on the

book including those that he had not yet received. It argued a restitutionary principle should apply.

The court will now sometimes order the former, but only in very exceptional circumstances order the

latter.

Held: Lord Nicholls, Lord Goff of Chieveley, Lord Browne-Wilkinson and Lord Steyn held that in

exceptional cases, when the normal remedy is inadequate to compensate for breach of contract, the

court can order the defendant to account for all profits. This was an exceptional case. Blake had

harmed the public interest. Publication was a further breach of his undertaking of confidentiality.

Disclosure of non-confidential information was also a criminal offence under the Official Secrets Act

1911. An absolute rule against disclosure was necessary to ensure that the secret service was able to

deal in complete confidence. It was in the Crown’s legitimate interest to ensure Blake did not benefit

from revealing state information. The normal contractual remedies of damages, specific performance

or injunction were not enough, and the publishers should pay any money owing to Blake to the Crown.

Lord Hobhouse dissented. He would have held that since the information was no longer confidential,

there could be no misuse of confidential information. Lord Nicholls made the famous statement that

Restitution for breach of contract must be accepted in some situations. These situations may never be

as exceptional as that which we are passing judgment on today, but notwithstanding this there is no

other conclusion the court can reach.


Action for an agreed sum

Where a contract specifies a price to be paid for performance, and payment has not been made, the

party who has performed can claim the money owed by means of an action for the agreed sum. This is

a claim for a debt and not a claim for damages. The claimant is not seeking compensation, but simply

enforcement of the defendant’s promise to pay.

Restitution

Restitution is the remedy available when there has been unjust enrichment. Where money has been

paid under a contract, or purported contract and performance has not been received in return, or has

not been adequate, the payer may want to claim the money back, rather than claiming damages.

Traditionally, contract remedies and restitution do not overlap. In practice, restitution will therefore be

available if there is no contract. There may be no contract for one of the following reasons:

- A contract has not been made (e.g. because of a lack of agreement, uncertainty or the absence of

consideration)

- The contract has been discharged; or

- The contract was void (e. g. because of illegality)

Quantum meruit

Where work has been done or goods supplied but no payment has been received and cannot be

contained under a contract, an action is available, called a quantum meruit, under which claimants can

claim a reasonable price for their performance.

Class activity

Discussion – Why do we need remedies? What makes a good remedy?

Teacher-led information on the range of common law remedies.

Summary activity – learners read the article in the website opposite and make a presentation to

illustrate its key points.

Research activity – learners match relevant cases to types of damages such as nominal, contemptuous,

exemplary and aggravated.

Teacher-led information on the application of compensatory damages in personal injury cases.

Learners make a flow chart to show the steps which must be followed in order to achieve a remedy.

Discussion – To what extent is it true to say that the rules relating to remedies are necessary but

restrict justice?

Learners construct a set of facts giving rise to liability in tort. Apply each of the different types of

damages and explain the results to which the type would give rise – use figures to support their

reasoning.

Learners make a presentation of their findings to the rest of the group and see if they agree with the

conclusions.

Class activity – learners construct liability in tort, develop a plea in mitigation and let the group be the

judge – a key aspect of this is the type and amount of damages to be awarded.


Questions from past papers

Q1. The range of common law and equitable remedies available to complainants suggests that a solution is available for every breach of contract. Using suitable examples from case law, analyse the truth of this statement. [May/June 2007]

Q2. Innocent parties to a breach of contract are entitled to such damages as will put them in the position that they would have been in if the contract had been performed. Using case law to support your arguments, analyse the extent to which this statement can be substantiated. [October/November 2007]

Q3. The general rule is that innocent parties are entitled to such damages as will put them in the position they would have been in if the contract had been performed. Using case law to support your views, analyse any limitations to this rule. [October/November 2008]

Q4. Analyse critically the factors taken into account by the courts when making an award of damages where the terms of the contract have made no provision for this. [May/June 2009]

Q5. One of the remedies available to a claimant is a quantum meruit award. Using decided case law to illustrate your answer, - (a) Explain what a quantum meruit award is, - (b) Outline the circumstances under which such awards may be made and (c) critically assess its

relative value compared with other remedies. [May/June 2010] Q6. The bad bargain rule and the speculative damages rule are the two main restrictions on the choice

that a claimant may exercise when deciding whether to base a claim for damages on loss of expectation or on reliance. Explain what you understand by the concepts of expectation loss and reliance loss. Analyse the rules identified in the statement above and assess the extent to which the assertion made is true. [October/November 2010]

Q7. Damages are a common law remedy for breach of contract which can be obtained by a claimant as of right. Critically assess the limitations on the award of damages for contractual losses. [May/June 2012]

Q8. A claim for damages can be based on expectation loss or reliance loss principles. Discuss the concepts of expectation loss and reliance loss and critically analyse limitations imposed by the speculative damages and bad bargain rules. [October/November 2013]

Q9. The decision of the House of Lords in Transfield Shipping v Mercator Shipping (The Achilleas) [2008], represents a tightening up of the remoteness of damage principle that limits the potential award of damages for breach of contract. Using case law to illustrate, trace the development of the remoteness of damage principle and critically assess whether there has been a change in the application of the principle in subsequent cases. [October/November 2014]

lecture # 14 common law remedies for breach of contract

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