Unit 4

Question 1

Damages for Breach of Contract

Answer 1

Right to claim for any breach. Claimant must prove loss. Aim is compensation, not punishment.

Question 2

Right to Damages & Requirement for Recovery

Answer 2

Breach of any term gives right to claim. Claimant must prove loss as a result of the breach.

Question 3

Nominal Damages

Answer 3

Awarded if breach proven but no actual loss shown (small sum).
Case: Obagi v Stanborough (breach of “best endeavours” but no loss caused)

Question 4

Compensation, Not Punishment

Answer 4

Fundamental aim is to compensate claimant’s loss, not punish defendant. Punitive/exemplary damages generally not available for pure contract claims. Damages based on claimant’s loss, not defendant’s gain.

Question 5

Aim of Damages: Expectation Interest

Answer 5

To put claimant in the same situation as if contract performed.
Case: Robinson v Harman
Often protects claimant’s “expectation interest”.

Question 6

Expectation Loss: Concept & Calculation

Answer 6

This is the usual measure. Damages are awarded to compensate the claimant for the benefit they would have received had the contract been properly performed (their lost expectation).

Aims to provide the claimant with the monetary equivalent of the expected outcome.

Question 7

Expectation Loss: Examples (Goods)

Answer 7

Fake Goods: Value if genuine - Actual value.
Seller Fails to Deliver: Cost of buying elsewhere - Contract price.
Buyer Refuses to Accept: Contract price - Price received elsewhere.

Question 8

Claimant prevented from performing service/work:

Answer 8

Damages = Contract price - Expenses claimant would have incurred to perform. (e.g., Jason the gardener: £250 - £30 = £220 lost profit).

Question 9

Expectation Loss: Defective (Traditional)

Answer 9

When goods or services provided under a contract are not up to the agreed standard (they are defective), the way damages are traditionally calculated depends on whether it’s goods or services:
Defective Goods: The usual measure is the difference in value between the goods as they were delivered (in their defective state) and what their value would have been if they had been as promised in the contract (not defective).

Defective Services/Work: The typical way to calculate damages is the cost of cure, which is the amount of money it would take to fix the defective work or services so that they meet the required standard.

Question 10

Expectation Loss - Defective Goods/Services (Modern / Loss of Amenity / Consumer Surplus)

Answer 10

More recently, courts have recognized that sometimes the traditional measures of difference in value or cost of cure don’t properly compensate the claimant for their actual loss, especially in cases where the contract was about personal preference or enjoyment. In such situations, the court might award damages for “loss of amenity” or “consumer surplus”. This acknowledges that the claimant has lost something beyond just the market value or the cost of fixing a defect.

Ruxley Electronics v Forsyth - swimming pool. Facts: Swimming pool built shallower than specified (6ft 9in instead of 7ft 6in). No difference in value, but cost of cure was high (£21,560).
Holding: The House of Lords refused the disproportionate cost of cure and the zero difference in value. They reinstated the trial judge’s award (£2,500) for loss of amenity or consumer surplus, recognising Mr Forsyth’s personal preference had not been met, even though it didn’t affect the pool’s market value or basic function. This is particularly relevant where the contract is for pleasure or amenity (like a swimming pool).

Question 11

Reliance Loss: Concept & When Used

Answer 11

Reliance loss is a different way of calculating damages. Instead of trying to put the claimant in the position they expected to be in, it aims to put them back in the position they were in before the contract was made. This is done by compensating them for the expenses they have already incurred because they relied on the contract being performed. Reliance loss is often claimed when it’s too difficult or impossible to accurately calculate the potential profit or benefit the claimant would have gained from the contract (expectation loss is too “speculative”).

Question 12

Reliance Loss: Example

Answer 12

Anglia Television v Reed. Anglia Television hired the actor Robert Reed to star in a TV play. Reed pulled out of the contract at the last minute, and Anglia had to abandon the entire production. It was very difficult for Anglia to prove how much profit the play would have made if Reed had participated (expectation loss was too speculative). However, Anglia had already spent money on things like hiring directors, designers, and studio space before Reed signed the contract. The Court of Appeal allowed Anglia to claim for these “wasted expenditure” costs (reliance loss). This shows that even costs incurred before the contract was finalized can sometimes be recovered as reliance loss if the defendant knew about them.

Question 13

Expectation vs. Reliance: Choice

Answer 13

Generally, the claimant gets to choose whether they want to claim for expectation loss (what they would have gained) or reliance loss (what they’ve spent). However, the court might step in and say that damages should be assessed on a reliance basis if the expectation loss is simply too uncertain to calculate reliably.

Question 14

Reliance Loss: Limitations

Answer 14

They cannot recover reliance loss if doing so would put them in a better financial position than if the contract had actually been performed. For example, if the contract they entered into was a bad deal from the start (a “bad bargain”), and they would have lost money even if it was performed, they can’t use reliance loss to recover all their expenses and end up better off than they would have been.

Also, if the claimant hasn’t actually suffered any overall loss as a result of the breach (for example, if they managed to make more money through a replacement contract), they can’t claim reliance loss for expenses that were ultimately covered by their new profits. - Omak Maritime Ltd v Mamola Challenger Shipping Co (The Mamola Challenger).

Question 15

Types of Loss Recoverable in Contract Damages

Answer 15

Contract damages can cover harm to person, property, and economic position. Unlike tort, pure economic loss is generally recoverable.

Question 16

Examples of Recoverable Loss

Answer 16

Loss of Profit: Breach prevents expected earnings (e.g., defective machine leading to lost production).
Damage to Property: Physical harm to claimant’s assets due to breach (e.g., defective machine causes fire).
Physical Injury: Personal harm to claimant caused by breach (e.g., defective machine injures operator).

Question 17

Damages for Lost Opportunity

Answer 17

Courts may compensate for the loss of a chance, even if success wasn’t guaranteed (less than 100% probability).

Question 18

Damages for Lost Opportunity: Cases

Answer 18

Case: Chaplin v Hicks (contestant lost chance to be a winner due to breach - damages awarded for lost chance).
Principle: Damages for loss of chance awarded even if success not certain.
Case: Blackpool and Fylde Aero Club v Blackpool BC (tender not considered due to breach - damages for lost opportunity to have tender assessed).
Principle: Loss of opportunity to have a process followed can be compensated.

Question 19

Damages for Mental Distress: General Rule

Answer 19

Generally not awarded for mental distress, annoyance, disappointment, or upset caused by breach. Traditional stance to avoid “floodgates” of claims.
Case: Addis v Gramophone Co Ltd (distress from harsh dismissal not recoverable).

Question 20

Damages for Mental Distress: Exception

Answer 20

Can be awarded if a main object (not necessarily sole) of the contract was to provide pleasure, entertainment, enjoyment, peace of mind, or freedom from distress.

Question 21

Damages for Mental Distress - Case Examples (Holiday) Jarvis v Swans Tours

Answer 21

Holiday significantly failed to meet brochure description, causing misery.
Principle (Lord Denning MR): Damages for disappointment, distress, upset, and frustration recoverable for breach of contracts for holidays/enjoyment. Compensates for lost pleasure/amenity.

Question 22

Damages for Mental Distress - Case Examples (Surveyor) Farley v Skinner

Answer 22

Surveyor failed to report on noise affecting property purchase, where peace of mind about noise was important object (not just the sole object).

Principle: Damages for non-pecuniary loss (distress/disappointment) awarded if important object was pleasure, enjoyment, peace of mind, or freedom from distress.

Question 23

The claimant may obtain damages for:

Answer 23

Loss of profit (economic loss).

Damage to property.

Physical injury.

Loss of opportunity/chance.

Mental distress and disappointment (but only in limited situations, primarily where a main object of the contract was pleasure, enjoyment, or peace of mind).

Limitation: Not all loss suffered is recoverable. The loss or damage must not be too remote a consequence of the breach (linking to the next topic: Remoteness).

Question 24

The Remoteness Rule

Answer 24

A party will not be awarded damages for loss which is too remote a consequence of the breach. The remoteness rule limits the damages that can be recovered for a breach of contract. Its purpose is to prevent a party from being held liable for every single consequence of their breach, which could be unfairly extensive.

Question 25

The Rule from Hadley v Baxendale (Establishing Case)

Answer 25

Mill shaft broke, carrier delayed delivery of replacement. Mill idle, lost profit. Carrier unaware of no spare shaft. The Rule (Alderson B): Damages recoverable for breach of contract are such as may fairly and reasonably be considered: Arising naturally (i.e., according to the usual course of things) from the breach itself. (This is often referred to as Limb 1). Or such as may reasonably be supposed to have been in the contemplation of both parties at the time they made the contract, as the probable result of the breach,1 because of special circumstances known to them. (This is often referred to as Limb 2).  

Question 26

Hadley v Baxendale: Decision

Answer 26

Loss of profit not recoverable. Limb 1: Not natural as mills usually have spares. Limb 2: Carrier unaware of no spare shaft (special circumstance not communicated at contract formation). Key Requirement: Knowledge of the special circumstances must exist at the time the contract is made. Knowledge acquired after contract formation is irrelevant for the remoteness rule. The reason is that parties might adjust terms (e.g., price, liability clauses) based on known risks.

Question 27

Knowledge of Business Practices (Balfour Beatty v Scottish Power)

Answer 27

No general presumption of knowing all techniques in each other's businesses. Implied knowledge easier for simpler activities. Need for continuous concrete pour was complex, electricity supplier not deemed to know.

Question 28

How has the Hadley rule been refined?

Answer 28

Victoria Laundry v Newman (1949) - Test: "Reasonably foreseeable as liable to result from the breach" (criticised later). - Imputed Knowledge: Everyone assumed to possess (Limb 1 - natural loss). - Actual Knowledge: Specific knowledge of special circumstances (Limb 2). Koufos v Czarnikow (The Heron II) (Clarifying the Test) - Approved Victoria Laundry outcome, disapproved "reasonably foreseeable." Reinstated "within the reasonable contemplation of the parties" as correct test.

Question 29

Degree of Probability: Lord Reid stated the question for contract remoteness is ...

Answer 29

whether the loss was "of a kind which the defendant, when he made the contract, ought to have realised was not unlikely to result from [the] breach…"

Question 30

Parsons v Uttley Ingham (1978)

Answer 30

Defective pig food hopper, mouldy food, pigs died from rare infection. Loss of pigs not too remote.

Question 31

Parsons v Uttley Ingham: Reasoning

Answer 31

Was the type of consequence (loss of profit, physical injury) a serious possibility in the parties' contemplation at the time of the contract? If defendant can contemplate the type/kind of loss as a serious possibility, all loss of that type is recoverable, even if extent greater than expected. Some harm to pigs from mouldy food was foreseeable.

Question 32

Transfield Shipping v Mercator (The Achilleas) (Assumption of Responsibility)

Answer 32

Late ship return, owners lost lucrative follow-on charter due to volatile market. Lost profit held too remote. Lord Hoffman / Lord Hope: Focused on "assumption of responsibility". Did the defendant charterer, in the particular commercial context of the charterparty market, implicitly assume responsibility for this type of potentially large loss arising from the owner's follow-on contracts? They concluded that, based on market understanding, charterers were typically only responsible for the difference between the contract rate and the market rate during the period of overrun, not for losses on subsequent fixtures. This represented a potential departure from the strict Hadley v Baxendale "contemplation" test towards a test based on what risks the parties commercially intended to undertake.

Question 33

John Grimes Partnership Ltd v Gubbins [2013] EWCA Civ 37

Answer 33

The Court of Appeal stated that the standard rule for remoteness remains the Hadley v Baxendale test as interpreted in The Heron II – loss is recoverable if it was of a kind that was "not unlikely" to result from the breach, within the parties' reasonable contemplation at the time of contract. the "assumption of responsibility" approach may be a relevant consideration in exceptional circumstances, but the "not unlikely" contemplation test remains the general rule.

Question 34

Remoteness - Summary

Answer 34

Loss not too remote if of a kind within reasonable contemplation at contract formation as "not unlikely" to result from breach (Hadley, Heron II). Commercial context/assumed responsibilities relevant in unusual cases (Achilleas, John Grimes).

Question 35

Limitations on Damages

Answer 35

Even if loss is caused by breach and not too remote, damages may be limited by mitigation and contributory negligence rules.

Question 36

Mitigation: The Rule

Answer 36

Claimant has a duty to take reasonable steps to minimise losses resulting from defendant's breach. Case: British Westinghouse v Underground Electric Railway

Question 37

Mitigation - Effect of Failure

Answer 37

Claimant cannot recover damages for losses they could have avoided by taking reasonable steps. Avoidable loss deemed caused by failure to mitigate, not the breach.

Question 38

Mitigation: Expenses & Burden

Answer 38

If the claimant takes reasonable steps to mitigate, they can recover any expenses incurred in doing so, even if the mitigation attempt is ultimately unsuccessful. Burden on defendant to prove claimant failed to take reasonable steps.

Question 39

Mitigation: Examples of Reasonable Steps

Answer 39

Depends on circumstances (e.g., dismissed employee seeking work, buyer/seller seeking alternative transactions, obtaining quotes for incomplete work).

Question 40

Contributory Negligence - General Position & Application in Contract

Answer 40

Tort: Damages reduced if claimant's negligence contributed to loss (Law Reform (Contributory Negligence) Act 1945). Contract: Act applies only if breach of contract is also a claimable tort of negligence (e.g., breach of contractual duty of reasonable care & skill). (e.g., the term implied by s. 13 of the SGSA 1982 in B2B service contracts). If applicable, the claimant's damages for breach of contract may be reduced to reflect the extent to which their own negligence contributed to the loss.

Question 41

Time for Assessment of Damages - Basic Rule

Answer 41

Damages are generally assessed by reference to the time of the breach. If goods were due on Jan 31st for £5,000 but not delivered, and replacement goods cost £7,000 on Jan 31st, damages are £2,000, even if the price rose further by the time of the court hearing.

Question 42

Time for Assessment of Damages - Reasoning & Exceptions

Answer 42

There are exceptions where assessing at the date of breach would not accurately reflect the true loss suffered. Golden Strait Corporation v Nippon Yusen Kubishiki Kaisha (The Golden Victory) [2007] 1 CLC 352 HL Principle: The majority held that the most important principle is that damages should reflect the actual loss suffered. While assessment at the date of breach normally achieves this, it should not be applied rigidly if it fails to do so.

Question 43

Specified Damages and Penalty Clauses - Purpose

Answer 43

Parties may include clauses in their contract specifying a fixed amount of compensation to be paid upon a particular breach. This provides certainty and can avoid litigation.

Question 44

Specified Damages and Penalty Clauses - Types of Clauses:

Answer 44

Specified Damages Clause (also called Liquidated Damages or Agreed Damages Clause): A genuine attempt to pre-estimate the loss likely to be caused by the breach at the time the contract is made. Penalty Clause: Primarily deters breach or punishes, not genuine pre-estimate.

Question 45

Specified Damages clause: Effect

Answer 45

Binding. Innocent party receives specified amount, regardless of actual loss. Usual rules of measure, remoteness, mitigation do not apply to calculation within the clause.

Question 46

Penalty Clause - Effect

Answer 46

A penalty clause is unenforceable. Where the clause is a penalty, the innocent party must prove their loss and damages will be assessed in the usual way, applying the normal principles of measure, remoteness, and mitigation.

Question 47

Distinguishing a penalty from specified damages clause - Traditional Approach (Dunlop)

Answer 47

Question of construction, parties' intentions at contract formation. (a) Extravagant/Unconscionable Sum: Penalty if disproportionate to greatest conceivable loss. (b) Greater Sum for Non-Payment: If the breach is simply failing to pay money, and the sum specified is greater than the amount that should have been paid, it is a penalty. (c) Single Lump Sum for Multiple Events: A single lump sum payable upon the occurrence of one or more events, some potentially causing serious damage and others minor, is presumed to be a penalty. This presumption can be rebutted. (d) Difficulty in Pre-estimating: A clause can be a specified damages clause even if it is difficult or impossible to precisely pre-estimate the loss

Question 48

Distinguishing: Modern (Cavendish/ParkingEye)

Answer 48

The penalty rule is concerned with two questions: The first was the circumstances in which the rule was engaged. The Supreme Court said a provision could not be a penalty unless it provided an exorbitant alternative to ordinary damages. The second question was concerned with whether the clause was penal and not whether it was a pre- estimate of loss. whether the clause imposed a detriment on the contract-breaker out of all proportion to any legitimate interest of the innocent party in the enforcement of the contract.

Question 49

Where can the Dunlop guidelines still be used?

Answer 49

Where compensation for breach is the only legitimate interest, the Dunlop guidelines are usually sufficient to determine if the clause is penal (i.e., if the sum is disproportionate to the likely loss). However, where other legitimate interests exist, the broader Cavendish/ParkingEye test is needed.

Question 50

is damages a common remedy?

Answer 50

Yes, it is the most common remedy, and should be considered first. Then, termination of contract: where there is a breach of a condition of a contract, or very serious breach of innominate term. Mainly used when there are future obligations. Specific performance/ injunction: only available if damages are inadequate. Cannot be ordered in employment contracts. Restitution as well.

Question 51

What else of importance was stated in the Ruxley case?

Answer 51

Lord Mustill stressed that the judge’s award was a question of everyday practical importance to all householders who engage contractors to carry out small building works on their property. Whatever the proper basis of such an award the point is that the employer will get something, even if it’s not the full cost of cure.