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Damages in Law of Contract

Pragalbh Bhardwaj 2012/BBA LL.B/034

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Contents
TABLE OF AUTHORITIES .......................................................................................................................... 3 Cases ........................................................................................................................................... 3 Books ........................................................................................................................................... 3 Research Methodology ........................................................................................................................... 4 Introduction ............................................................................................................................................ 5 Classifying Damages ................................................................................................................................ 7 Compensatory Damages (Expectation Damages): ...................................................................... 7 Punitive Damages (Exemplary damages): ................................................................................... 7 Nominal Damages: ...................................................................................................................... 8 Consequential Damages (Special Damages, Value of loss award): ............................................. 9 Liquidation Damages (Ascertained damages):............................................................................ 9 Reliance Damages: .................................................................................................................... 10 Statutory Damages:................................................................................................................... 11

Equitable Remedies: ............................................................................................................................. 11 Specific Performance: ............................................................................................................... 11 Injunctions: ............................................................................................................................... 12

Conclusion ............................................................................................................................................. 13 Bibliography .......................................................................................................................................... 14

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TABLE OF AUTHORITIES

Cases

(1880) 15 Ch D 215 (CA) ........................................................................................................................ 11 [1854] EWHC J70................................................................................................................................. 8 [1964] AC 1129, [1964] 1 All ER 367 ................................................................................................ 7 [1968] 1 WLR 157 .................................................................................................................................. 11 [1968] AC 58.......................................................................................................................................... 11 [1998] 196 CLR 1 ..................................................................................................................................... 7 [2001] 1 AC 268 ....................................................................................................................................... 7 12 ALR 4th 891, 899 ................................................................................................................................. 9 197 U.S. 207 (1905) ............................................................................................................................... 11 541 N. E. 2d 359, 1989 ............................................................................................................................ 9 870 F.2d 761 (1st Cir. 1989) ..................................................................................................................... 9

Books

Farnsworth, E. Allan (1990). Contracts (2nd ed.) ..................................................................................... 9

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Research Methodology
Firstly relevant articles on trustable internet sources such as jstor, Manupatra etc were read. I referred to important text books about the topic and tried to analyse the content obtained by these primary sources into the various categories as seen in the paper. Further, extensive reading has been done on various subtopics mentioned in the paper and information has been obtained from different books, journals, web references, E-journal, reports etc.

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Introduction
Given the large number of works on the law of damages, one would expect the definition of damages to be fixed and beyond dispute, but it appears that this is not so. A breach of contract occurs when a party to a contract fails to perform some or all of its obligations in the contract. It entitles the other party to claim damages for any loss it suffers. A single breach of contract can result in the awarding of various types of remedies. Depending on the nature of the breach; you may have several different remedies available to you. When a breach of contract is sufficiently serious, the other party is entitled to treat itself as being discharged from further obligations under the contract, instead of or as well as, claiming damages. The existence of remedies and, in particular, damages is vital for the effective operation of contract law. Without effective remedies, the law of contract would lose much of its force and value, and the market economy, which it aims to support and facilitate, would be substantially undermined. The most important aspect of most contract lawsuits is the determination of damages. In common law, damages are the primary remedy for breach of contract. Damages are a monetary compensation allowed to the injured party for the loss suffered by him in a breach of contract. Damages should put the plaintiff in as good a position as if the defendant had fully performed as required by the contract. If one enters into a contract with someone and that person breaches the contract, the first party is entitled to damagesasaresult oftheotherpartysbreach. So, the object of damages offered in the case of a breach of contract is usually to put the injured party into the same financial position he would have been in had the contract been properly performed. There are two major types of judicial remedies: Legal Remedies (Damages) Equitable Remedies

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Main Body:
The major remedy available for a breach of contract at common law is an award of damages. This is generally a monetary sum which is fixed by the court to compensate the injured party of the damages incurred.

The court has two major considerations while making an award for damages:

REMOTENESS OF LOSS for what consequences of the breach is the defendant legally responsible? THE
MEASURE OF DAMAGES

the principles upon which the loss or damage is

evaluated or quantified in monetary terms. Remoteness of loss: There are two types of loss for which damages may be recovered: 1) For which that arises naturally; and 2) For which that the parties could foresee when the contract was being made as the likely result of breach. The measure (or quantum) of damages: The courts use the following principles while assessing the amount of damages payable: 1) The amount of damages is to compensate the claimant for his loss not to punish the defendant. 2) Damages are compensatory not restitutionary.

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Classifying Damages
Depending on the nature of the breach, there are several different remedies available. The remedies may be reduced if the injured party has also breached the contract. Damages are monetary awards, and they include:

Compensatory Damages (Expectation Damages):


Compensatory damages, called actual damages, are paid to compensate the claimant for loss or injury suffered as a result of another person's breach of duty. Expectation damages are used in contract law. Expectation Damages are those damages which intend to cover what the injured party expected to receive from the contract. Calculations, which are generally based on market values, are usually straightforward as they are based on the contract itself. These are damages for a monetary amount that is intended to compensate the non-breaching party for losses due to the breach of the contract. The aim is to make the party which has suffered loss, whole again. For a party to be eligible to be awarded compensatory damages, the plaintiff must prove that he or she has suffered a legally recognizable harm or loss that is compensable by a certain amount of money that can be objectively determined by a judge or jury.

Punitive Damages (Exemplary damages):


Punitive damages or exemplary damages are damages intended to deter the defendant and others from engaging in conduct similar to that which formed the basis of the earlier lawsuit. Even though the purpose of punitive damages is not to compensate the plaintiff, the plaintiff will, in fact, receive all or some portion of the punitive damage award. Punitive damages are often awarded where compensatory damages are deemed inadequate as a remedy. The position of English Law in regard to Punitive damages is that that the choice of award of punitive damages and the amount of the award is at the discretion of the judge or jury. The main purpose of awarding punitive damages is to punish the defendant for the misconduct and to deter the defendant and others from similar misbehaviour in the future. Punitive damages are only available for breach of contract in some common law jurisdictions. In Australia, punitive damages are not available for breach of contract, but are possible

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for tort cases. This fact was established in the landmark case of Gray v. Motor Accident Commission1. While in England and Wales, punitive damages are limited to the circumstances set out by Lord Devlin in the leading case of Rookes v. Barnard2 : Oppressive or unconstitutional actions by the servants of government. Where the defendant's conduct was to make a profit for himself. Whether a statute expressly authorizes the same

Rookes vs. Barnard has been criticised in various nations and has also not been followed in Canada or Australia or by the Privy Council. Another case that could arguably be seen as an example of punitive damages was that of Attorney-General v Blake3. In this case, the defendant profited from publishing a book; the publishing was, however, in breach of the contract of employment. The defendant was thus required to give an account of his profits that he gained from the publication of the book.

Nominal Damages:
Nominal damages are small damages which are awarded to show that the loss or harm suffered was technical rather than actual. Nominal damages are awarded when the injured plaintiff does not actually suffer a monetary loss. These damages are rare in contract cases because breaches of contract typically involve some sort of loss to one party. Plaintiffs have a right to nominal damages when their ordinary rights have been infringed, but the infringement caused no loss. The primary purpose of nominal damages awards is to provide a public declaration of the plaintiffs rights. An award of nominal damages is symbolic: it is understood to convey the message that the rights of plaintiff were infringed. In theory, an individuals own decision to pay nominal damages could have a similar meaning, but at present it does not, and so the act of sending a nominal sum to someone whose rights you have infringed does not serve the same purpose as an order to pay nominal damages.

1 2 3

[1998] 196 CLR 1


[1964] AC 1129, [1964] 1 All ER 367

[2001] 1 AC 268

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Consequential Damages (Special Damages, Value of loss award):


The origin of the legal theory underlying "consequential damages" is attributed to the case of Hadley v. Baxendale4 - this case set the basic rule for how to determine the scope of consequential damages arising from a breach of contract. Consequential damages, also known as special damages or value for loss award, are damages you can prove occurred because of the failure of one party to meet a contractual obligation. They go beyond the contract itself and into the actions garnished from the failure to fulfil their part of contract. Consequential damages, include loss of product and loss of profit or revenue and may be recovered if it is determined such damages were reasonably foreseeable or "within the contemplation of the parties" at the time of contract formation. In a contract dispute, a consequential damage could be the amount of lost revenue a business suffers because a contractor didnt complete a renovation on time. A consequential damage in this instance has to be something that was foreseeable when the contract was signed, and also something that can be measured with a monetary value. Consequential damages may be incurred if a breach of contract results in a loss of earnings or profit requires the repair or replacement of property, or results in the loss of an irreplaceable piece of property. An award for consequential losses, such as the loss of profits arising from a failure to deliver contractually promised goods, is a value of loss award. If consequential is defined sufficiently broadly, it is equivalent to value of loss.

Liquidation Damages (Ascertained damages):


Liquidated damages are those damages whose amount the parties designate during the formation of a contract for the injured party to collect as compensation upon a specific breach (e.g., late performance of the duty etc). Damages are determined during contract formation. Damages are specifically provided for in the contract. These are available when the damages may be hard to foresee and there must be a fair estimate of what damages might be in case of breach. Under common law, a liquidated damages clause will not be enforced if the purpose is to punish the party for the breach rather than to compensate the injured party. One reason for this is that the enforcement of the term would require an equitable order of specific performance. Specific relief will be discussed later on in the paper.
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[1854] EWHC J70

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For damages to be liquidated in a contract following conditions have to be met: The injury or loss has to be either "uncertain" or "difficult to quantify" The amount should be reasonable and must consider the actual or anticipated harm caused by the contract breach, the difficulty of proving the loss, and the difficulty of finding another, adequate remedy. The damages must be structured to function as damages, not as a penalty.

If these above mentioned criteria are not met, a liquidated damages clause will be void. The American Law Reports annotation about liquidated damages states, "Damages for breach by either party may be liquidated in the agreement but only at an amount that is reasonable in light of the anticipated or actual harm caused by the breach. A term fixing unreasonably large liquidated damages is unenforceable on grounds of public policy as a penalty5 Liquidated damages clauses are generally used in real estate contracts. The use and enforcement of liquidated damages clauses have changed over the years this can be seen from the cases such as Colonial at Lynnfield v. Sloan6 and Shapiro v. Grinspoon7, have granted courts permission to compare the amount set forth in the liquidated damages provision against the actual damages caused by a breach of the contract. These rulings have led several courts to honour the liquidated damages clauses only if they are almost equal to the actual damages.

Reliance Damages:
Reliance damage is the measure of compensation given to a person who has suffered an economic harm for acting in reliance on a party who failed to fulfil his obligation under a contract. Reliance damages are valued by a party's reliance interest for the foreseeable amount. They put the injured party in the same position as if the contract had never been formed 8. Reliance damages are generally the type of damages awarded in a promissory estoppel type of claim, although they can also be awarded in traditional contract breaches. This is appropriate
5 6

12 ALR 4 891, 899 st 870 F.2d 761 (1 Cir. 1989) 7 541 N. E. 2d 359, 1989 8 nd Farnsworth, E. Allan (1990). Contracts (2 ed.)

th

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because even though there is no bargain principle in the agreement; one party has relied on a promise and thus he is damaged to the extent of their reliance on that promise. These damages must be proven with reasonable certainty.

Statutory Damages:
According to statutory damages awarded in civil law, the amount awarded is stipulated within the statute rather than being calculated based on the degree of harm to the plaintiff. Lawmakers will provide statutory damages for those acts in which it is difficult to determine a precise value of the loss suffered by the victim. Cases, such as in intellectual property cases, where the volume of the infringement cannot be ascertained and calculation of a value is impractical. The award serves both as deterrence as well as compensation.

Equitable Remedies:
In quite a few jurisdictions, legal and equitable remedies have been merged and a single court can issue either one or both of these remedies. Equitable remedies are distinguished from legal remedies by the discretion of the court to grant them. In common law jurisdictions, there are a variety of equitable remedies also available, but the two main equitable remedies are:

Specific performance Injunctions

Specific Performance:
It is an alternative to awarding damages, and is classed as an equitable remedy. Specific performance is an order of a court which asks a party to perform a specific act, usually what is stated as a part in the contract. It is commonly used in the form of injunctive relief concerning confidential information or real property. Even though specific performance can be in the form of any type of forced action it is usually used to complete a previously

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established transaction, thus being the most effective as a remedy in protecting the expectation interest of the innocent party to a contract. The orders for specific performance are generally granted when damages are not an adequate remedy for the breach, and in some specific cases such as land sale cases. In the case of Clyatt v. United States9 it was held that there will be no specific performance granted in the case of employment contracts. In the case of Beswick v Beswick10, the House of Lords disagreed with Lord Denning MR's dicta in the Court of Appeal that a person who specifically intended to benefit from a contract could enforce it. In the case of Tamplin v James11 it was held by the Court of appeal of England and Wales that if a person enters a contract on the basis of a mistake that was not induced by the other party to the contract, specific performance will be awarded against that person.

Injunctions:
An injunction is a type of equitable remedy in the form of a court order which generally requires a party to do or refrain from doing certain specific acts. A party that fails to comply with an injunction faces criminal and sometimes even civil penalties and may have to pay damages or accept sanctions. In some cases, breaches of injunctions are considered serious criminal offenses by the court and that may lead to arrest and even prison sentences. In the case of Page One Records v Britton12, it was held that an injunction will not be granted in cases where it would force someone to continue to employ someone who they have lost confidence in. An injunction commands an act that the court usually regards as essential to justice, or it prohibits an act that is deemed to be contrary to good conscience. It is an extraordinary remedy, reserved only for the cases of special circumstances in which the temporary preservation of the status quo is necessary.

197 U.S. 207 (1905) [1968] AC 58 11 (1880) 15 Ch D 215 (CA) 12 [1968] 1 WLR 157
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Conclusion
As from this paper, with the help of various cases, we learned that depending on the nature of the breach; we may have several different remedies available to us. We also learned that damages are vital for the effective operation of contract law. We learned about the two main types of judicial remedies available to us: Legal Remedies, which are the damages, and the equitable remedies. Without the remedies, the law of contract would lose much of its force and value. In case of commercial contracts, damages are the most commonly claimed remedy by the commercial people. Contract damages are designedtoputtheplaintiff

inthepositionhewould have been in had the defendant performed the contract as it was expected to be performed.

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Bibliography
Contract Damages Domestic and International Perspectives by Djakhongir Saidov & Ralph Cunnigton Anson on contract Law by Sir William Reynell Anson and Jack Beaton Farnsworth on Contracts by E. Allan Farnsworth Blacks Law Dictionary Various internet websites like: Manupatra.com, Indiankanoon.com, jstor.org etc.