CONTRACT LAW II

(LAW 61004)

ENGLISH LAW –
DAMAGES FOR BREACH OF CONTRACT
1

Dr Jenita Kanapathy (School of Law & Governance) 10/29/2023

2
1. INTRODUCTION

1) The Right to Damages : Arises whenever there is a breach of

contract, whether or not there is also a right to treat the contract as
discharged.
2) The Purpose of Awarding Damages:
a) Compensation for the Claimant’s losses arising out of the
Defendant’s breach of contract. In exceptional cases, the
compensation is based on the Defendant’s gains from the breach.
b) NOT punishment of Defendant’s conduct.

Dr Jenita Kanapathy (School of Law & Governance) 10/29/2023

 3 2. Summary of General Principles on
Damages for Breach of Contract
1. Damages = payment of money as compensation for
actual loss
d) Note: damages will be assessed after C shows
that the losses (i) were caused by the breach
and (ii) were not too remote.

2. Bases for Assessment of Damages payable

3. Limitations on Damages recoverable
a) EXPECTATION LOSSES i.e. putting claimant into
position as if contract had been performed as a) There must be a causal link between breach
best a monetary payment could do; assessed and loss claimed.
on 3 possible bases (i)Diminution in value (ii)
Cost of cure (iii)Loss of Amenities b) Nominal damages only if no actual loss.
b) Alternatively, RELIANCE LOSSES i.e. putting c) The loss must not be too remote.
claimant back into the position he was in before d) Claimant is under a duty to mitigate his losses.
the breach.
e) Certain types of non-pecuniary losses are not
c) Alternatively, GAIN-BASED damages i.e. recoverable
compensating claimant on the basis of
defendant’s gains.

Dr Jenita Kanapathy (School of Law & Governance) 10/29/2023

4 3. EXPECTATION LOSSES OF THE
CLAIMANT
 Expectation losses refers to losses suffered by C arising out of his expectations not
being fulfilled because of D’s breach of contract.
 3 alternative approaches of fulfilling claimant’s expectation interest: by awarding
C
1. either the diminution of value of his expectation i.e. value of what was expected
MINUS the value of what was actually received as a result of the breach;
2. or the cost of curing the defect (this would enable C to then put himself in the
position he would have been if D had fulfilled had not breached the contract;
3. or loss of amenities – awarded when neither (1) nor (2) reflect the actual loss
suffered by C.

Dr Jenita Kanapathy (School of Law & Governance) 10/29/2023

5 Robinson v Harman (1848) 1 Ex 850
Facts:
1. D granted P a 21-year lease of a
dwelling house.
2. It was invalid because of a defect in
D’s title.
3. P sued D for damages for breach of
contract.
Issue: on what basis should P be
compensated for D’s breach?
Held:
a) The plaintiff, in an action for breach of
contract, may recover, beyond his
Dr Jenita Kanapathy (School of Law & Governance)
expenses, damages resulting from the
loss of his bargain.
b) The rule of the common law is that
where a party sustains a loss by reason
of a breach of contract, he is, so far as
money can do it, to be placed in the
same situation, with respect to
damages, as if the contract had been
performed (per Parke B.)
c) The defendant must pay the loss which
the plaintiff has sustained by not
having that for which he contracted.
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6 Radford v De Froberville [1977] 1 WLR
1262 (HC)

Facts: b) This could be done by compensating

him for the cost of carrying out that
1. D, agreed but failed to erect a wall which D had failed to do, provided that
between his land P’s land. he was seeking compensation for a
2. Value of P’s land was not affected by genuine loss and not merely using a
D’s failure to erect any wall. technical breach to secure a profit.
3. P sued to recover damages for breach c) Thus, the correct measure was cost of
of contract equal to the cost (based on curing D’s non-performance.
the agreed specifications) of erecting d) This cost should be based on agreed
the wall himself. specifications for the wall, and not the
Held: cost of erecting a cheaper chain wall.
a) P was entitled so far as money could do
it, to be placed in the same situation as
if the contract had been performed.

Dr Jenita Kanapathy (School of Law & Governance) 10/29/2023

7 R u x l ey E l ec troni cs a n d C o nstructi on Ltd v Fo r sy th
[ 1 996] AC 3 4 4 ( H L )

Facts: Held: (at the High Court)

1. REC agreed to construct a 7 ½ ft deep
swimming pool for F, but constructed
one that was on 6 ft deep.
2. There was no difference in value (in
money terms) of a swimming pool 7 ½ ft b) Therefore, damages of £2,500 were
deep and a swimming pool only 6ft
deep.
3. Cost of constructing a new 7 ½ ft deep
pool was £21,650.
Issue: what was the correct basis of
assessing damages payable to F?
a) Damages on the cost of cure basis
would be unreasonable in the
circumstances as it did not reflect the
actual loss suffered.
awarded to F on the basis of loss of
amenities, which represented the actual
loss suffered by F.
c) F had suffered only a loss of satisfaction
of a personal preference or a
pleasurable amenity.

Dr Jenita Kanapathy (School of Law & Governance) 10/29/2023

8
4. Recovery of Reliance Losses

1. It is an alternative basis to recovery of expectation losses.

2. It aims to put C into the position he was in before he entered
the contract that has been breached.
3. It usually involves recovery of wasted expenditure and out of
pocket expenses incurred by C in relying on D’s promise to
perform.

Dr Jenita Kanapathy (School of Law & Governance) 10/29/2023

 9 Relevant case law on Reliance losses
McRae v M relied on CDC’s implied promise as to the existence of the subject-matter of
Commonwealth the contract. M’s claim to recover his wasted expenditure in trying to locate
Disposal Commission the subject-matter allowed.
(1951) 84 CLR 377
Anglia Television Ltd v ATV allowed to recover their wasted expenditure when R, who had agreed to
Reed [1972] 1 QB 60 be the lead actor in their television program, pulled out. Per Lord Denning MR:
(CA) A plaintiff in such a case as this had an election: he can either claim for his
loss of profit; or for his wasted expenditure. But he must elect between them.
He cannot claim both.
CCC Films (London) CCC paid a license fee of US$12,000 to IQF to show 3 of IQF’s films, but IQF
Ltd v Impact failed to send them the films. As CCC were unable to produce evidence of
Quadrant Films Ltd loss of profits, they sued IQF to recover the US$12,000 as damages for breach
[1984] 3 All ER 298 of contract.
(HC) Wasted expenditure may be recovered as an alternative to loss of profits.
However, wasted expenditure is NOT recoverable if it is proved by D that C
would not have recovered his expenditure even if the contract had been
performed.
Dr Jenita Kanapathy (School of Law & Governance) 10/29/2023
10
5. Gain-Based Damages

1. GBD are damages payable to C assessed 6. GBD is an equitable remedy.

by reference to the gain made by D
7. Whether all of the gains or only a part of
because of his breach of contract, and not
the gains will be awarded to C depends on
by reference to the actual loss suffered by
the circumstances of the case.
C.
8. Requirements for a GBD claim:
2. Awarded at the discretion of the court i.e.
C does NOT have an automatic right to a) D is enriched by his breach of contract.
GBD.
b) The enrichment is at the expense of C.
3. Resorted to C when he cannot show either
expectation losses or reliance losses. c) It is unjust to allow D to retain the benefit
of his breach (his gains) without
4. Awarded in exceptional circumstances. recompensing C.
5. GBD also referred to as ‘restitutionary
damages’ or ‘an account for profits’.

10/29/2023
Dr Jenita Kanapathy (School of Law & Governance)
 11 Relevant case law on GBD (I)

Wrotham Park Estate Co PHL built houses in breach of a restrictive covenant it had given to WPE, the owner
v Parkside Homes Ltd of adjacent land. No diminution in value of WPE’s land; also, no reliance losses.
[1974] 1 WLR 798 (HC) Held:
(i) WPE’s claim for a mandatory injunction for the houses to be pulled down
C recovered 5% of D’s
rejected;
gains (ii) WPE awarded £2,500 as damages being 5% of PHL’s anticipated profits.
Attorney General v B wrote a book on his exploits as a spy for the Crown in breach of his secrecy
Blake [2001] 1 AC 268, agreement. Crown claimed GBD against B.
HL Held:
(i) C’s interest in performance of a contract might render it just and equitable for
the court to make an order for specific performance; or grant an injunction; or
C recovered 100% of D’s in exceptional cases, to make an order that D should retain no benefit from his
remaining gains breach of contract.
(ii) A useful general guide, though not exhaustive, was whether the claimant had a
legitimate interest in preventing the defendant’s profit-making activity and,
hence, in depriving him of his profit.
(iii) Declaration that the AG was entitled to be paid a sum equal to whatever
amount was due and owing to B from the publishers.
10/29/2023

Dr Jenita Kanapathy (School of Law & Governance)

12 Relevant case law on GBD (II)
Esso Petroleum N breached E’s marketing scheme that applied to all E’s outlets to sell petrol at the lowest
Co Ltd v Niad prices by selling at a higher rate. E brought action against N for damages for breach of
Ltd [2001] contract
Held:
EWHC 6
(i) Compensatory damages was an inadequate remedy in the circumstances, since it was
almost impossible to calculate the amount of sales lost by E due to N’s breach of
C recovered contract.
100% of D’s (ii) E therefore had a legitimate interest in preventing N from profiting from its breach of
gains obligation.
(iii) N liable to account for profits arising out of the breach to E.
Experience PPX breached a master settlement agreement with EH by licensing master recordings of
Hendrix LLC v certain songs belonging to EH (did not come within the scope of the agreement)to 3rd
PPX Enterprises parties. EH brought a claim for damages but conceded that it did not have any proof of
actual losses suffered due to PPX’s breach.
Inc [2003] 1 All
Held:
ER (Comm) 830 (i) PPX should make reasonable payment for their use of master recordings in breach of
(CA) the settlement agreement.
C recovered a (ii) However, the case was not exceptional to the point where the court should order a full
reasonable % account of all profits which had or might have been made by PPX by their breaches.
of D’s gains
Dr Jenita Kanapathy (School of Law & Governance) 10/29/2023
13 6. Limitation 1 – Remoteness of
Loss or Damage
1. C can only claim for losses caused by D’s breach of contract (London Joint
Stock Bank v MacMillan [1918] AC 777) BUT not all losses caused by D’s
breach are recoverable.
2. This idea is expressed in the doctrine of remoteness of loss or damage: i.e.
that C may claim only losses caused by the breach that are not too
remote.
3. Rationale: it would be unfair to impose liability for all losses flowing from
breach of contract no matter how unforeseeable by the parties when the
contract was made.
4. Remoteness of loss or damage is connected to foreseeability of the loss or
damage as a consequence of the breach.
Dr Jenita Kanapathy (School of Law & Governance) 10/29/2023
14 6. Limitation 1 – Remoteness of
Loss or Damage

➢ “Remoteness” relates to the foreseeability:

1. of the type of losses that may occur as a result of the breach [what?]
2. by the parties to the contract or, at least, the party in breach [by
whom?]
3. at the time the contract was made. [when?]
➢ And, foreseeability is clearly related to the knowledge of relevant
facts possessed by the party in breach (D) when the contract was
made.

Dr Jenita Kanapathy (School of Law & Governance) 10/29/2023

15
Hadley v Baxendale

o P owned a mill. Their shaft broke. Production at the mill stopped.

o P engaged D to deliver the broken shaft to a 3rd party as a model to enable 3rd
party to make a new shaft, and to bring back the new shaft.
o D delayed delivery to the 3rd party. Consequently, there was a 5-day delay in
delivering the new shaft.
o D was NOT informed that production at the mill had stopped.
o P sued D for the loss of profits for the 5 days.
o P’s claim was dismissed as the loss of profits was too remote. It did NOT fall
within either limb of the remoteness test.

Dr Jenita Kanapathy (School of Law & Governance) 10/29/2023

16
Hadley v Baxendale (1854) 9 Ex 341
The Hadley v Baxendale rules:
Per Alderson B:
Losses recoverable for breach of contract
are such losses “…as may fairly and
reasonably be considered
i. either arising naturally, that is, according
to the usual course of things, from such
breach of contract
ii. or such [losses] as may reasonably be
supposed to have been in the
contemplation of both parties, at the
Dr Jenita Kanapathy (School of Law & Governance)
time they made the contract, as the
probable result of the breach of it.”
 Students must read this case.
 The test for remoteness is in two parts: (a)
the 1st rule operates objectively,
according to what loss is a natural
consequence of the breach; (b) the 2nd
rule operate subjectively and is based on
the specific knowledge of potential losses
that is in the minds of both parties when
the contract is made.
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17
Hadley v Baxendale

 On the facts, the stoppage of production was not a “natural” consequence of D’s
delay in delivering the broken shaft to the manufacturer because P might have
had a spare shaft so as to be able to continue uninterrupted production.

 The stoppage was also not within the reasonable contemplation of both parties
when the contract was made as a probable result of the breach because P had
not informed D that any delay in delivering the broken shaft would cause
stoppage of production (i.e. the special circumstances were not made known to
D).

Dr Jenita Kanapathy (School of Law & Governance) 10/29/2023

18 Victoria Laundry (Windsor) Ltd v Newman
Industries Ltd [1949] 2 KB, 528 (CA)

Hadley v Baxendale rules explained as follows: actually possesses of special circumstances

1. What was reasonably foreseeable when the
contract was made depends on the knowledge
then possessed by the parties, or, at least, by the
party who later commits the breach.
2. For this purpose, knowledge ‘‘possessed’’ is of
two kinds—one imputed, the other actual.
3. Everyone, as a reasonable person, is taken to
know the ‘‘ordinary course of things’’ and
consequently what loss is liable to result from a
breach of that ordinary course. This is the subject-
matter of the ‘‘first rule’’ in Hadley v Baxendale.
[imputed knowledge]
4. But to this knowledge there may have to be
added in a particular case knowledge which he
outside the ‘‘ordinary course of things’’ of such a
kind that a breach in those special
circumstances would be liable to cause more
loss. [actual knowledge].
5. A case involving actual knowledge attracts the
operation of the ‘‘second rule’’ in Hadley v
Baxendale so as to make additional loss also
recoverable.
6. It is not necessary that the defendant should
actually have asked himself what loss is liable to
result from a breach. It is enough if the defendant
could foresee, based on the state of his
knowledge, it was likely so to result.

Dr Jenita Kanapathy (School of Law & Governance) 10/29/2023

19
T h e ‘A c h i l l e a s ’ [ 2 0 0 9 ] 1 A C 6 1 , H L

 A new test for remoteness was suggested  Due to the delay, shipowners had to
by Lord Hoffmann & Lord Hope. accept a lower rate of charter from the
3rd party for the whole of the duration of
 Charterers of ship redelivered the ship to
the charterparty with the 3rd party.
the shipowners 9 days late.
 Issue: were the charterers liable to the
 Meanwhile, unknown to charterers,
shipowners for the losses relating to (i) the
shipowners had entered into a
9-day delay or (ii) for the whole duration
charterparty with a 3rd party to take
of the charterparty with the 3rd party.
effect from the original redelivery date at
a particular rate of charter.  Held: liable only for (i). Loss (ii) was too
remote.

Dr Jenita Kanapathy (School of Law & Governance) 10/29/2023

20
T h e ‘A c h i l l e a s ’ [ 2 0 0 9 ] 1 A C 6 1 , H L

 Lord Hoffmann & Lord Hope’s test: The loss is charter that may occur if they were to
too remote if D did not assume redeliver the ship late.
responsibility (i.e. agree to be responsible),
 Lord Rodger, however, applied the
when the contract was made, for the type
traditional Hadley v Baxendale rules, and
of loss that occurred. Conversely, the loss is
decided that Loss (ii) was too remote
NOT too remote if the defendant did
because it could not be said that type of
assume responsibility for that loss
loss was reasonably within the
 Thus, they decided that, on the facts, Loss contemplation of the parties, since the
(ii) was too remote because it could not be charter had no knowledge that the
said that the charterers had assumed shipowners had entered into a follow-on
responsibility, when the contract was charter with a 3rd party.
made, for losses connected to a follow-on

Dr Jenita Kanapathy (School of Law & Governance) 10/29/2023

21 7. Limitation 2 – Innocent Party’s Duty
to Mitigate his Loss
1. C is under a “duty” to mitigate his loss. incurred expenses.
2. If he fails to do so, he will not be 5. If, as a result of the steps taken to
entitled to that portion of his loss which mitigate the losses, C in fact gains an
he could have avoided had he economic advantage, this will be
mitigated his losses. offset against C’s claim.
3. However, the duty is not an absolute 6. See: British Westinghouse Electric Co
one i.e. he is expected only to take Ltd v Underground Electric Railway Co
reasonable steps to mitigate his losses. [1912] AC 673 (HL)
4. Expenses that are reasonably incurred
in mitigating are also recoverable as
damages, but not unreasonably

Dr Jenita Kanapathy (School of Law & Governance) 10/29/2023

 22 8. Limitation 3 – Non-pecuniary losses
Hobbs and Wife v London and South Western Railway Co (1874- Damages for C’s physical
75) 10 QB 111;Watts v Morrow [1991] 1 WLR 1421 (CA) discomfort and inconvenience
allowed
Addis v Gramophone Co Ltd [1909] AC 488 Damages for C’s mental distress
sets out the general rule- wrongfully dismissed without notice and injured feelings NOT allowed
Exception to the above general rule: where the contract is for C’s In all these cases, damages for
enjoyment or mental peace: C’s mental distress and injured
Jarvis v Swan Tours Ltd [1973] QB 233 (CA); Ruxley Electronics and were ALLOWED
Construction Ltd v Forsyth [1996] AC 344; Farley v Skinner [2002] 2
AC 732 (HL); Hamilton-Jones v David & Snape [2004] 1 WLR 924
(HC)
Bliss v South East Thames RHA [1987] ICR 700 (CA): employment Such contracts are NOT for
contract; enjoyment or peace of mind; the
Hayes v James & Charles Dodd [1990] 2 All ER 815 (CA) – purely exception does NOT apply; the
commercial contract general rule applies.

Dr Jenita Kanapathy (School of Law & Governance) 10/29/2023

 23 9. Liquidated Damages Clauses
and Penalty Clauses
Liquidated or Agreed Damages Clauses Penalty Clauses

1. The essence of LAD: it is a genuine, 1. The essence of a penalty: a payment of money

agreed pre-estimate of loss that will be stipulated as in terrorem of D: Dunlop Pneumatic
suffered by C as a result of D’s breach: Tyre Co Ltd v New Garage & Motor Co Ltd [1915]
Dunlop Pneumatic Tyre Co Ltd v New AC 79 (HL) i.e. to put fear into D of the liability D
Garage & Motor Co Ltd [1915] AC 79 (HL) would suffer in case of breach:

2. Valid and enforceable 2. Invalid and unenforceable

3. C does NOT have to lead any evidence 3. Invalidity of penalty clause does NOT bar C’s
as to his actual loss; he recovers what is right to claim for his actual loss i.e. C will have to
stated in the LAD clause. lead evidence as to his actual loss.

Dr Jenita Kanapathy (School of Law & Governance) 10/29/2023

24 Penalty or liquidated damages clause?
The Old Test.

Dunlop Pneumatic Tyre Co Ltd v New Garage 3. Rebuttable Presumption that the terms is a
& Motor Co Ltd [1915] AC 79 (HL): PENALTY when a single lump sum is made
payable by way of compensation, on the
1. If the sum stipulated (X) for is extravagant
occurrence of one or more or all of several
and unconscionable in amount in
events, some of which may occasion
comparison with the greatest loss which
serious and others but trifling damages.
could conceivably be proved to have
followed from the breach: PENALTY 4. If none of the above, X is a GENUINE PRE-
ESTIMATE of damages; this is so even if the
2. If the breach is only failing to pay a sum of
consequences of the breach are such as
money, and X is a sum greater than the
to make precise pre-estimation almost an
sum which ought to have been paid:
impossibility.
PENALTY.

Dr Jenita Kanapathy (School of Law & Governance) 10/29/2023

25 Penalty or liquidated damages clause?
The New Test.

Cavendish Square Holding BV v Talal El

Makdessi; ParkingEye Ltd v Beavis [2015]
UKSC 67.
1. The real question is whether the clause is
penal, not whether it is a pre-estimate of
loss.
2. First, consider whether any (and if so what)
legitimate interest is served and protected
by the clause. If not, it is a PENALTY.
3. Second, consider whether, assuming such
an interest exists, the provision made for
the interest is nevertheless in the
circumstances extravagant, exorbitant or
unconscionable. An extravagant
4. disproportion between the stipulated sum
and highest level of damages that could
possibly arise from the breach would
amount to a PENALTY.
5. If there is a legitimate interest being served,
and if the stipulated sum is not
extravagant, exorbitant, unconscionable
or disproportionate to the damages that
could possibly arise, it is an LAD Clause.

Dr Jenita Kanapathy (School of Law & Governance) 10/29/2023