Law of Contract II

Breach of Contract & Damages

Dr Carol Chi Ngang
 Introduction

 Breach of contract occurs when without lawful excuse, a party:

– Fails or refuses to perform a performance obligation impose on them
under the terms of the contract
– Wilfully delays or defaults (mora) in fulfilling a legal obligation
– Performs an obligation defectively in the sense of failing to meet the
required standards of performance
 The primary obligations determine the obligations due under the
terms of the contract
 Any breach of the primary obligations gives rise to a secondary
obligation to pay damages to the innocent party.
 In Photo Production v Securicor [1980], Lord Diplock stated:
– “It is therefore necessary to know the performance obligations – and the
standard of performance imposed – in order to determine whether a
breach has occurred”.
 Standard of Performance

 There are two types of performance obligations in a contract

 Contractual obligations will require either a strict standard of
performance or a qualified standard of performance.
 Strict contractual obligations
– Where there is a strict obligation, the general rule is that the obligation
must be completely and precisely performed.
– Failing to do so will result in breach of contract.
– There is however, an exception in the de minimis rule, which is minute
discrepancies that will not result in a breach.
 Qualified contractual obligations
– Where there is a qualified contractual obligation, there is no requirement
to achieve a stated result.
– There is only an obligation to exercise reasonable care and skills.
– In Liverpool CC v Irvin [1977], the court held that any failure to exercise
 Consequences of Breach

 Damages
 In general terms, upon proof of breach, the innocent party is
automatically entitled to claim damages, i.e. Compensation of
loss caused by that breach.
 This is because a failure to perform a primary or performance
obligation under the contract automatically gives rise to a
secondary obligation to pay damages.
 The right to damages may however, be excluded or limited by
an exemption clause in the contract.
 However, unless the breach is a repudiatory breach, the contract
will continue in force and both parties must continue to perform
their obligations under it.
 Consequences of Breach

 Repudiatory breach – the option to terminate or affirm.

 If a repudiatory breach occurs then, in addition to the right to
claim damages (compensation) for loss suffered, the innocent party
also has the choice or election either to terminate the contract, or
affirm the contract in spite of the repudiatory breach.
 This is because a failure to perform a primary or performance
obligation under the contract automatically gives rise to a
secondary obligation to pay damages.
 Terminate for repudiatory breach
– Where the innocent party chooses to terminate the contract, the future
obligations of both parties is discharged.
– However, the contract itself subsists for purposes of assessing remedies.
 Consequences of Breach

– For a contract to be terminated, the innocent party must have accepted

the breach and made then position known that they are bringing the
contract to an end.
– There musty be some communication to constitute acceptance.
– Although failure to perform may signify to the repudiating part an
election by the aggrieved party to treat the contract as ended, silence is
generally not sufficient.
 Terminate the contract
– Alternatively, the innocent party can affirm the contract.
– When the contract is affirmed, there is an obligation on both parties to
continue to perform all obligations due under the contract.
 Remedies for breach of contract:
– The common law remedies of damages.
– Equitable remedies and limitation of actions.
– Quasi-contract and the law of restitution.
 Damages

 Common law remedy for breach of contract is damages or

compensation.
 Damages are available as a right and the basis is to compensate the
injured party for the breach of contract.
 The fundamental principle is to place the injured party in the same
position they would have been in had the contract been
performed.
 The injured party therefore, is claiming for loss of bargain or loss of
profits – expectation loss.
 Alternatively, they may claim for expenses incurred because of a
reliance on the contract being performed – reliance loss – see Anglia
Television Ltd v Reed [1972].
 Damages

 The courts will not allow a claim for both expectation and
reliance loss.
 An injured party can also make a claim in restitution –
recovery of a benefit received by the defendant from the
unperformed contract.
– This claim places the parties in the position they were in before the
contract was made to prevent unjust enrichment.
 Damages are not intended to be punitive but
compensatory.
 Expectation Damages

 Normal measure of damages – expectation measure – as if contract

had fully been performed – described as forward looking.
 Four points follow from the compensatory aim:
– Only nominal damages if no loss: If a claimant has suffered no
recognised loss from the breach, he will receive no substantial damages
but only nominal damages.
– No protection from bad bargains: claimant cannot switch to a reliance
claim to avoid a bad bargain.
– No claim to the contract breaker‟s gain for breach: this is not allowed
traditionally but the courts now permit it in exceptional claims.
– No punishment of the contract breaker: punitive or exemplary
damages barred even where breach is deliberate or calculated to
increase profit by performing for some else.
Basis of calculation

 The basic measure is that of the claimant‟s position and the position
he would have been in had the contract been performed.
 The plus side is the claimant‟s expectation loss from breach,
comprising of the promised performance; consequential losses of
not getting the due performance and consequential losses of not
being made better off.
 In Parsons (Livestock) Ltd v Uttley Ingham & Co Ltd [1978]
– A pig farmer bought storage hopper from U for pig food. The storage
hopper was installed defectively and food became mouldy and many pigs
died. On the plus side P, claimed: not getting a hopper fit for purpose
(promised performance); the dead pigs (consequential loss – undue
performance); and the profits which would have been made on sale of pigs
(consequential loss not being made better off).
Measure of expectation damages

 The claimant‟s loss of the expected performance can be

measured by:
– Diminution of value: market value of performance promised minus that
actually given.
– Cost of cure: cost of buying substitute performance and rectifying damage
– Loss of amenity: loss of enjoyment.
 Reliance Damages

 Reliance damages seek to put the claimant into the position they
would have been in had they not entered into the contract.
 Reliance damages are therefore described as being backward
looking.
 In some cases, particularly where expectation damages are too
speculative, a claimant may be able to recover damages on the
reliance interest.
 The injured party can claim reliance damages where the reliance
loss does not exceed expectations (cannot avoid bad bargain).
 Expectation measure is usually more favourable because the
claimant would be profiting but where the contract would not
have been profitable, reliance measure would be favourable.
 Restitution

 Exceptionally, if damages would not be adequate on either the

expectation or reliance interests, the court may apply
restitutionary principles.
 The court will hold the defendant to account for any profit
they have made as a result of the breach.
 Such an award is referred to as restitutionary damages, as the
effect is to compensate the claimant based on the defendant‟s
gain.
 Limitations on the Award of Damages

 There are a number of factors that may limit an award of

damages in contract law.
 The most fundamental one is the principle of remoteness of
damage.
– Losses that are too remote from the breach, it will not be
recoverable, even though they may have in fact been
caused by the breach of contract.
 Hadley v Bazendale (1854) - (see next page)
 Hadley v Bazendale (1854)
 The claimant owned a mill which had a broken crankshaft. The claimant
engaged the defendant, to transport the crankshaft to a place to be repaired
and transport it back. Due to defendant‟s error, the crankshaft was returned
a week later during which time the claimant‟s mill was out of operation.
The claimant sued to claim for the loss of profit from the unexpected week-
long closure. The defendant‟s defence was that he had not known that the
delayed return of the crankshaft would necessitate the mill‟s closure and thus
that the loss of profit failed to satisfy the test of remoteness.
 The court found for the defendant, viewing that a party could only
successfully claim for losses stemming from breach of contract where the loss
is reasonably viewed to have resulted naturally from the breach, or where
such losses would result from breach ought reasonably to have been
contemplated of by the parties when the contract was formed. As defendant
had not reasonably foreseen the consequences of delay and claimant had
not informed him of them, he was not liable for the mill‟s lost profits.
 Hadley v Bazendale (1854)

 Hadley v Baxendale [1854] – established the test of remoteness of

damages for breach of contract.
 A contracting party is liable for losses either:
– Arising naturally, i.e. according to the usual course of things, 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 of it.
 This decision has been modified over the years into a single
principle of remoteness. See Victoria Laundry v Newman
Industries [1949].
 In order for loss to be recoverable it must have been in the
reasonable contemplation of the parties at the time the contract
was formed. See Koufos v Czarnikow (The Heron II) [1969].
 Hadley v Bazendale (1854)

 There was an attempt by Lord Denning in Parsons v Uttley [1978]

to introduce the tortuous test of reasonable foreseeability when
the claimant suffered physical harm, irrespective of whether the
cause of action rested in contract or tort.
 This would ask whether the damage suffered was reasonably
foreseeable by the defendant at the time of the breach of duty.
This means that the defendant will be liable for any type of
damage which is reasonably foreseeable as liable to happen.
 This distinction was not accepted by the majority and it is clear
that the stricter test of reasonable contemplation applies to
contractual claims for damages.
 Agreed Damages
 Parties to a contract are free to agree the amount of damages
before the breach occurs. These damages are referred to as
liquidated damages.
 This provides certainty for the parties and the claimant will
not have to prove the amount of damages.
 It also prevents a defendant from claiming that the loss was
not foreseeable as it was contracted for.
 However, the courts distinguish a liquidated damage clause
(which is lawful) from a penalty clause (which is unlawful).
 The key test is whether the amount claimed is
unconscionable or extravagant in light of any legitimate
interest.
 Contributory Negligence

 A claimant‟s damages may also be reduced owing to

contributory negligence.
 If the claimant contributed to the loss due to their negligence,
the court will reduce the amount of damages awarded
proportionate with the fault.
 Claimant‟s damages may also be reduced for a failure to act
reasonably in mitigating their loss.
 Losses that may reasonably have been avoided cannot be
recovered but expenses incurred while taking reasonable steps
to mitigate loss can be claim.
 A claimant cannot recover for future losses avoided.
 Non-Pecuniary Losses

 Pecuniary losses are losses that can be quantified while non-

pecuniary losses are losses that are not quantified or valued in
money.
 Traditionally, damages have been concerned with economic
and physical losses readily quantifiable in financial terms.
 What about when the breach of contract causes
disappointment, distress, particularly in consumer contracts
where the aim of the contract is not to make a profit but to
have a good time?
 In Addis v Gramophone [1909], the court refused damages for
injured feelings caused by a humiliating and wrongful dismissal.
 Non-Pecuniary Losses
 However, there have always been exceptions for pain and suffering
consequent upon personal injury and for actual physical
inconvenience, see Baily v Bullock [1950] where a breach of contract
caused the claimant to have to live with his in-laws.
 The consumer surplus – this is where the consumer values the
performance of the contract above its market value.
 It is difficult to assess this in monetary terms and the courts would
not usually award damages for this.
 But where the contractual objective is to provide pleasure or
relaxation, damages will be awarded if it is not provided.
 A claimant may also be able to claim for damages where distress is
caused as a result of the contract – see Farley v Skinner [2001].
 Non-Pecuniary Losses
 In Jarvis v Swans Tour Ltd [1973]
– Claimant was promised a great time on a holiday costing £63
and was awarded £125 when he did not get it. Two
exceptional categories were identified: main purpose of the
contract is to provide mental satisfactions or relief from
distress; and second, where the mental distress suffered is a
direct consequence of physical injury or inconvenience caused
by the defendant‟s breach.
 Main Cases
 Victoria Laundry (Windsor) Ltd v Newman Industries [1949] –
„reasonably foreseeable is liable to result‟ in;
– Normal loss will be recoverable as a natural consequence of the breach.
– Abnormal loss will be recoverable if it was within the reasonable
contemplation of both parties when entering into the contract. The
relevant knowledge of the parties will determine whether such loss was
reasonably contemplated.
 Koufos v Czarnikow (The Heron II) [1969] – in order for loss to be
recoverable;
– It must have been in the reasonable contemplation of the parties at the
time the contract was formed. Still unclear what standard is required.
Most authors speak of „serious possibility‟ that the loss would have
resulted from the breach (as opposed to the „slight possibility‟ in tort).
 Main Cases

 Parsons (Livestock) Ltd v Uttley Ingham & Co Ltd [1978] – the majority
view was that only type of harm, not the extent of the harm, needs to
be within the reasonable contemplation of the parties. Lord Denning
was however, of the view that the relevant test of remoteness should
be determined by the type of harm suffered, drawing a distinction
between physical and economic harm.
 Dunlop Pneumatic Tyre Co Ltd v New Garage & Motor Co Ltd [1915]
– The House of Lords, in distinguishing between liquidated damages
and a penalty clause, the court should have regard to whether the
amount agreed is a genuine pre-estimate of loss. The court will
interpret the clause as a penalty if the sum stipulated is extravagant in
comparison to the loss that could be proved to have followed from
the breach.