16. Damages and liquidated damages

Question 1

When are damages carried out?

Answer 1

• If performance of the contract does not take place at all, or is late or defective, the creditor may have the possibility to claim damages
• This remedy is in line with the principle that an aggrieved party should be brought back as much as possible to the pecuniary position in which it would have been in if the contract had been properly performed (so called “positive interest” )

Question 2

General principle of damages

Answer 2

full compensation of the damages deriving from the breach of a contract

Question 3

Define expectation damages

Answer 3

Damages awarded when a party breaches a contract that are intended to put the injured party in as good of a position as if the breaching party fully performed its contractual duties.

Question 4

What does compensation cover?

Answer 4

1. The loss which the aggrieved party has suffered (immediate)
2. The gain which it has been deprived of (future)

Question 5

Rules to assess damages

Answer 5

1. Foreseeability
2. Duty to mitigate the damages

NOTE: This is only applicable for full compensation

Question 6

Forseeability

Answer 6

In awarding damages, the courts compensate the aggrieved party only for those injuries which were foreseeable or within the contemplation of the parties at the time the contract was made

Two types of injuries are deemed to be foreseeable

1. Injuries which will flow naturally from the breach in the ordinary course of events
2. Injuries which arise from the aggrieved party’s special needs or circumstances of which the other contracting party has knowledge or reason to know

Question 7

Note about forseeability

Answer 7

• Foreseeability does not require actual foresight but only reason to foresee
• One foreseeability could prevail over another
• First one is easier to reason whereas second is more difficult, need to be specified
• The debtor in an obligation which arises from a contract or other juridical act is liable only for loss which the debtor foresaw or could reasonably be expected to have foreseen at the time when the obligation was incurred as a likely result of the non-performance, unless the non-performance was intentional, reckless or grossly negligent.

Question 8

Hadley vs Baxendale (Facts)

Answer 8

1. The claimants, Mr Hadley and another, were millers and mealmen and worked together in a partnership as proprietors of the City Steam-Mills in Gloucester
2. The mill stopped by a breakage in a crank shaft. Hadley enters into a contract with Baxendale, a carrier, to have the shaft carried to the manufacturer for repair.
3. There was a delay on Baxendale behalf -> Hadley had to stop production -> loses business profits
4. However, Baxendale is not told that the mill will be stopped until the shaft is repaired

Question 9

Hadley vs Baxendale (Judegement)

Answer 9

• Hadley cannot recover the lost profits because Baxendale did not have reason to know that his delay would cause Hadley to lose profits
• Matter of informing the party because the foreseeability cannot be easily deduced

Question 10

Duty to mitigate damages

Answer 10

• A cardinal rule of contractual damages is that the aggrieved party cannot recover those losses which the party could have avoided by a reasonable effort and without undue expense by virtue of the opportunities that the party would not have had but for the breach
• Consequences of failure to comply with the duty: the gains that the aggrieved party could have made by reasonable effort are deducted from the amount that it could otherwise recover

Question 11

Example of reasonable effort

Answer 11

• X enters into a contract with Y, a licensed nurse, under the terms of which Y will live with and take care of X’s aged father for a three month period while X goes on vacation. Y is to be paid 4,000 Euro for his services. X repudiates the contract before Y performs any services or is paid any money.
• In an attempt to mitigate damages, Y places an advertisement in two local newspapers indicating that his private nursing services are available. No one responds to his ad; and consequently Y is unemployed for the entire three month period. Y sues for 4,000 Euro plus the cost of advertisements. X argues that Y did not fulfill his duty to mitigate damages.

Question 12

Note about reasonable effort

Answer 12

Only a reasonable effort to mitigate damages is required. The doctrine does not require that his efforts be successful

Question 13

Reduction of loss in damages

Answer 13

1. The debtor is not liable for loss suffered by the creditor to the extent that the creditor could have reduced the loss by taking reasonable steps.
2. The creditor is entitled to recover any expenses reasonably incurred in attempting to reduce the loss

Question 14

Define liquidated damages clauses

Answer 14

Instead of suing and asking for quantification, you have quantification (specific amount of compensation) written directly in the contract and will come into effect when there’s breach of contract

Question 15

Why do we have liquidated damage clauses?

Answer 15

1. Convenient method of determining the amount to be paid in the event of breach (good faith pre-estimate of the potential damages)
2. Coercing a party to perform its obligation (the sum stipulated will generally provide for liquidated damages greater than those actually likely to be suffered)
3. Diminish the amount of loss to be borne by a party in breach (the sum will be less than the probable amount of damages)

Question 16

Downsides of liquidated damage clauses

Answer 16

• In contrast to the more usual post-breach approaches to assessing damages, a liquidated damages provision anticipates a breach, setting the amount to be recovered before any party fails in his obligation under the contract
• Because the actual damages which will result from the potential breach are often difficult to assess at the time of contracting, liquidated damages («L.D.») represent the parties pre-estimate of the extent of probable damages
• Often this pre-estimate will turn out to be an inaccurate forecast of the harm actually caused by the breach

Question 17

2 types of liquidated damages clauses in common law

Answer 17

Enforceable

• Liquidated damage clause:
  
  • Function: to pre- estimate the probable extent of damages

Unenforceable

• Penalty clause:
  
  • Function: coerce the defaulting party to perform his/her obligation

They are labels that the court affixes after it has made a determination as to whether or not the stipulated sum represents a good-faith pre- estimate of potential damages

Question 18

Liquidated damage clauses in civil law approach

Answer 18

• Clauses that are not pre-estimate of damages are enforceable
• Civil law legal systems usually do not distinguish between ‘penalty’ and ‘liquidated damages’ clauses.
• Civil law jurisdictions only provide for one type of clause, variously named: clause pénale, clausola penale, Vertragsstrafe
• Civil law jurisdictions usually provide for the power of the judge to reduce the amount determined by the parties if it is manifestly excessive or in case of partial execution of the contractual obligation. The rule is mandatory: any agreement that has the effect of excluding the power of reduction is invalid.

Question 19

US vs. Bethlehem Steel (facts)

Answer 19

1. The government contracted with Manufacturer to supply gun carriages.
2. Haste was extremely important to the government, and it had therefore passed up lower bids on the gun carriages because Manufacturer had promised the fastest delivery.
3. Government and Manufacturer agreed that for each day a given delivery of the gun carriages was delayed, a sum of $35 would be imposed on Manufacturer, payable to Government.
4. This sum was reached by a computation based on the average difference in price between Manufacturer and cheaper, but slower, suppliers.
5. Manufacturer delayed the delivery of some of the gun carriages.

Question 20

US vs. Bethlehem Steel (judgement)

Answer 20

Clause enforceable because the aim of the clause was to compensate the government, by means of a reasonable formula (losses sustained: higher price for a speedy delivery)

Question 21

Define impossibility

Answer 21

• an excuse for the non-performance of duties under a contract, based on a change in circumstances (or the discovery of pre- existing circumstances)
• the non-occurrence of which was an underlying assumption of the contract, that makes performance of the contract literally impossible

Question 22

2 types of impossibility

Answer 22

• Subjective impossibility: inability of the individual promisor to perform, such as by illness or death
• Objective impossibility: no one can render the performance

Question 23

Taylor vs Cadwell (fact)

Answer 23

1. Caldwell & Bishop owned Surrey Gardens & Music Hall, and agreed to rent it out to Taylor & Lewis for £100 a day
2. Taylor had planned to use the music hall for four concerts and day and evening fetes
3. a week before the first concert was to be given, the music hall burned to the ground
4. Taylor & Lewis sued the music hall owners for breach of contract for failing to rent out the music hall to them
5. There was no clause within the contract itself which allocated the risk to the underlying facilities, except for the phrase “God’s will permitting” at the end of the contract

Question 24

Taylor vs Cadwell (judgement)

Answer 24

• The destruction of the music hall was the fault of neither party, and rendered the performance of the contract by either party impossible.
• Judge Blackburn cited the civil code of France and the Roman law for the proposition that when the existence of a particular thing is essential to a contract, and the thing is destroyed without fault of the seller, the parties are freed from the obligation to deliver the thing