Chapter 14: Remedies Flashcards
Introduction
1) Specific Performance: A right would be of little value if it did not lead to a remedy. Therefore, the law has developed a range of remedial responses available where a breach of contract occurs. One remedy is an order for ‘specific performance’, requiring the defendant to carry out their undertaking exactly according to the terms of the contract.
2) Injuction: Another remedy is an injunction, preventing the defendant from doing something which the
contract says he may not do
3) Principal Remedy, Damages: However, the principal remedy for breach of contract is damages – payment of money. This is by
far the most common remedy and is available in the vast majority of instances of breach. The aim of an award of damages for breach of contract is to compensate the claimant for the damage, loss or injury they have suffered as a result of the defendant’s breach.
2 The assessment of damages,
2.1 The purpose of damages in the law of contract: The aim of an award of damages for breach of contract is to compensate the claimant for the damage, loss or injury they have suffered as a result of the defendant’s breach.
Punishing the defendant is not the aim.
A claimant who has not suffered any loss by reason of the breach is nevertheless entitled to a judgment; but the damages recoverable will be purely nominal. Nominal damages are a token amount (a very small amount eg £1) which are awarded to acknowledge that there has been a breach of contract in a case where no other remedy is available.
2.2 What does compensating the innocent party mean?
The default approach to compensating the innocent party means putting the innocent party in
the same position post-breach that they should have been in had the contract been performed.
This is sometimes called protecting the innocent party’s ‘expectation’ interest – putting them in
the position they ‘expected’ to be in.
Robinson v Harman (1848) 1 Ex 850, Parke 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.
This is normally what the innocent party will want – if they did not want to be in a position as if the contract has been performed, they would not have entered into the contract in the first place. As we will see, the apparently simple principle that, so far as money can do this, damages should be designed to put the innocent party in the same position as if the contract had been performed,
is sometimes difficult to apply.
2.3 Three mechanisms for calculating the expectation interest
The courts have developed three alternative mechanisms for calculating the expectation interest:
cost of cure, diminution in value and loss of amenity. We will look at these in turn.
Exercise: Engage
In Ruxley v Forsyth, Mr Forsyth employs Ruxley Electronics to build a swimming pool in his garden
at a cost of £17,797.40. The contract provides that the pool should be 7 feet 6 inches deep. Ruxley Electronics builds it only to a depth of 6 feet. The pool is still perfectly safe for swimming and diving.
2.3.1 Cost of cure
The usual method of calculating the expectation interest in contracts involving defective works (eg
where a building is not built to the contract specification) is the cost of cure (Birse Construction Ltd v Eastern Telegraph Co Ltd [2004] EWHC 2512). The cost of cure represents the cost of substitute or remedial work required to put the claimant in the position they would have been in
had the contract been properly performed.
McGlinn v Waltham Contractors [2007] EWHC 149 (TCC),
It should be noted that the claimant must act reasonably in relation to the defective works. In McGlinn v Waltham Contractors [2007] EWHC 149 (TCC), the claimant was found to have acted unreasonably in demolishing and rebuilding an entire property to cure defective works for purely aesthetic reasons and limited the award to the costs which would have been incurred in remedying the defects in the original building. In the case of Ruxley, the cost of cure was the cost of rebuilding the pool - £21,560. But the court
refused to award this,
2.3.2 Diminution in value
Alternatively, the claimant’s expectation interest may be calculated by reference to the difference in value between the performance received and that promised in the contract. In Ruxley the diminution in value was £0 – the pool had the same value whether 6 or 7.5 feet deep. But the court did not use this approach to valuation either.
Key case: Ruxley v Forsyth [1996] AC 344 Judgement
Their Lordships were of the opinion that it would be unreasonable for the claimant to insist on cost of cure because the expense of the work involved would be out of all proportion to the benefit to be obtained. Furthermore, the claimant’s lack of intention to carry out the remedial works was relevant to the extent of the loss which was sustained since, if the claimant did not intend to cure the defect, he had lost nothing except the difference in value, if any.
Where the diminution in value caused by the breach was nil, it was not correct automatically to award the
cost of cure as an alternative to the difference in value, since it could not be right to remedy the
injustice of awarding too little by unjustly awarding too much. Their Lordships went on to state
that diminution in value and cost of cure were not the only available measures for recovery for
breach of contract and considered an alternative – loss of amenity.
2.3.3 Loss of amenity
Their lordships awarded £2,500 in
loss of amenity damages, reflecting the non-economic loss of pleasure Mr Forsyth suffered in not getting the pool he contracted for. The loss of amenity measure developed in Ruxley is a reflection of the court’s growing willingness to accept that a consumer should have an available remedy where their loss is not economic in
value, but nevertheless has a value to them. In a commercial setting, it would be ‘unusual, if not
impossible’ for damages to be awarded for loss of amenity (Regus (UK) Ltd v Epcot Solutions Ltd
[2007] EWHC 938 (Comm)).
2.3.4 Summary – Applying the mechanisms for calculating the expectation interest
Three mechanisms for calculating the expectation interest have been discussed above. We have
seen that loss of amenity arises in fairly rare instances. It should also be noted that distinguishing between the diminution in value and cost of cure measures is only relevant where there is a disparity between the two. A disparity is only likely to arise in circumstances similar to Ruxley v Forsyth, where the breach of contract relates to an asset where there is a dispute with regard to a
particular specification required by the purchaser.
In the vast majority of situations, the two measures will produce the same outcome, and in such instances it is sufficient to ask the following
question: what is the claimant’s expectation loss? Or to put it another way: in what position would
the claimant have been had the contract been properly performed (Robinson v Harman)?
2.4 The reliance interest
An alternative basis for the assessment of damages is the reliance measure. This measure allows the claimant to recover the expenses which have been incurred in preparing for, or in part performance of, the contract which have been rendered pointless by the breach. The reliance measure is inherently more cautious in its approach.
2.4 The reliance interest
It is backward looking (unlike the expectation measure, which is forward looking) and aims to put the claimant in the position they would have been in had they never contracted.
Reliance Losses
Reliance losses are most likely to become relevant because the courts will not award expectation damages if they are highly speculative; instead, the claimant will be limited to their reliance loss.
To consider the example above, it might be impossible to calculate the expectation interest, because it might be that there is no equivalent painting elsewhere that I want to buy (therefore no ‘cure’), and it could be hard to put a figure on the diminution in value or the loss of amenity. You
can say with confidence, however, that the £400 is wasted: I can’t use the bespoke frame for anything else
Wasted expenditure
Note that the reliance interest only allows recovery of wasted expenditure, not all expenditure. So,
if I am going to buy an alternative painting elsewhere and I can use the frame with that painting, I
cannot recover the £400. It is expenditure in connection with the breached contract, but it is not
wasted expenditure. The case of Anglia Television Ltd v Reed [1972] 1 QB 60 considered next is perhaps the leading case
on this measure.
Anglia TV v Reed [1972] 1 QB 60
Facts: The claimants engaged the defendant to star in a film which they were making. At the last moment, in breach of contract, the defendant refused to perform in the film, and the claimants had to abandon the film because they were unable to find a replacement actor. The claimants did
not claim on the basis of the expectation measure (ie for the profit they would have made if the
defendant had performed in the film) because they simply could not say what that would be – it was too speculative, too hard to predict. Instead, they claimed and obtained damages in respect of expenses of £2,750 in fees incurred for a director, a stage manager and others, which had been wasted by reason of the defendant’s refusal to perform, even though these expenses had been incurred before the contract was made.
Anglia TV v Reed [1972] 1 QB 60 Judgement
Held: The claimants were entitled to these damages on the basis of the ‘reliance measure’. As a final and important point, reliance losses are losses incurred prior to breach, not those incurred as a consequence of breach. Losses incurred remedying defective performance are not,
therefore, reliance losses.
The reliance damages = the amount incurred (underlined) = £10,000.
But – defendant might seek to prove expenditure would have been wasted in any event, in which case recovery will not be allowed.
2.5 Summary
- The aim of an award of damages for breach of contract is to compensate the claimant, not to punish the defendant.
- There are two main ways of doing this: awarding the expectation interest or awarding the
reliance interest. The claimant can choose which. - The normal measure is the expectation interest – damages to put the innocent party in the
same position post-breach that they should have been in had the contract been performed. This is forward looking. This can be calculated by looking at: - The cost of curing the defective performance;
- The difference in value between the performance received and that promised (but note: the
cost of cure and difference in value are very often the same); or - The loss in amenity: a sum to represent that the performance received is less valuable to the
innocent party than that promised, even if the economic value is the same - An alternative measure is the reliance interest. It is backward looking and aims to put the
claimant in the position as if they had never contracted. It is more likely to be used when the
expectation measure is hard to calculate.
Particular Types of Loss
The aim of an award of damages for breach of contract is to compensate the claimant for the damage, loss or injury they have suffered as a result of the defendant’s breach. Usually (but not always) this means that damages should aim to put the defendant in the position they would
have been in had the contract been performed.
The court has developed specific rules for certain kinds of loss when it comes to putting this expectation measure of damages into effect.
3.1 Damages for mental distress
The general rule is that damages will not be awarded in relation to mental distress, anguish or annoyance caused by breach of contract (Addis v Gramophone Co Ltd [1909] AC 488). In Addis, the House of Lords refused to uphold an award which had been made in relation to the ‘harsh and humiliating’ way in which the claimant had been dismissed from his job in breach of contract.
Johnson v Unisys Ltd [2003] 1 AC 518
Confirmed that damages for distress and injury to feelings resulting from the manner of dismissal are unavailable in the law of contract.
Exceptions where mental distress is compensated
(a) Initially, such compensation was limited to cases involving contracts whose whole purpose was the provision of pleasure, relaxation and peace of mind (Jarvis v Swan Tours [1973] QB
233).
(b) More recently, the House of Lords has allowed damages for non-pecuniary loss (in this case loss of amenity) where a major object (though not the whole purpose) of the contract was to provide pleasure, relaxation and peace of mind (Farley v Skinner (No. 2) [2001] UKHL 49).
3.2 Damages for loss of reputation
The general rule is that damages will not be awarded for loss of reputation.
Malik v Bank of Credit and Commerce International [1998] AC 20
An employee had worked for the Bank of Credit and Commerce International (BCCI), which collapsed in 1991, amidst allegations that the bank had operated in a corrupt and dishonest manner. The employee claimed that having worked for BCCI had adversely affected his employment prospects.
The House of Lords found that the employee did have the basis for a cause of action against his former employer for the loss caused by the way it was alleged that its business had been run. This was based on the fact that contracts of employment contain an implied term of trust and confidence such that the employer is under an obligation to carry out its work in an honest way.
Judgement: Damages were awarded but were limited to the claimant’s financial loss, which was suffered due to an inability to obtain alternative employment resulting from breach of this implied term.
3.3 Damages for loss of chance
The loss of an opportunity is recoverable in damages if the lost chance is quantifiable in monetary
terms and there was a real and substantial chance that the opportunity might have come to fruition. Otherwise, the loss of opportunity will be treated as too speculative. The courts are
reluctant to treat the loss as too speculative and will award damages based on the expectation
interest even if the precise quantification of loss may not be straightforward
Chaplin v Hicks [1911] 2 KB 786,
The claimant was denied, in breach of contract, the chance to go through to the final round of a contest. The court held that she could be compensated for the loss of the chance of winning the competition. The courts have clarified that to claim loss of chance, the chance must be ‘real and substantial’. Applying Chaplin, awarding loss of chance
may be appropriate in the context of losing the chance of ‘winning’ along with other competitors.
Note also that in Chaplin, the claimant had a less than 50% chance of winning. Where the chance of winning or obtaining the benefit is 50% or greater, the claimant should seek to recover their expectation loss in full and they will succeed if this can be proved on the balance of probabilities.
3.4 Damages on behalf of another
The general rule is that damages cannot be recovered on behalf of another party/for losses suffered by another party. There are exceptions to this general rule, but they are not considered
in this section. If you have studied/go on to study privity of contract, that material relevant to privity will clarify this issue.
3.5 Summary
The court has developed specific rules on the recoverability of particular kinds of loss.
* Damages for mental distress, anguish or annoyance are not generally recoverable.
* By way of exception, they may be recoverable where the whole, or perhaps a major purpose of
the contract, is to provide pleasure, relaxation and peace of mind.
* It will be rare that a purely commercial contract has such a major purpose.
* Damages for loss of reputation are generally not awarded.
* Damages for loss of a chance are recoverable if the lost chance is quantifiable in monetary
terms and there was a real and substantial chance that the opportunity might have come to
fruition.
4 Causation, remoteness and mitigation
4.1 Introduction
1. Damages can only be recovered if they are caused by the breach.
2. Damages cannot be recovered if they are too remote from the breach.
3. Damages can be reduced if the claimant has failed to take reasonable steps to mitigate its losses.
4.2 Causation
The claimant must establish a causal link between the defendant’s breach of contract and its loss in order to recover damages.
This means assessing:
(a) Whether infact the breach by the defendant has caused the loss suffered by the claimant
(known as factual causation); and also
(b) Whether as a matter of law the defendant should be held responsible for it (legal causation)
Factual causation: Whether the breach by the defendant has, as a matter of fact, caused the loss suffered by the claimant.
Legal causation: Whether the defendant should be held responsible for loss which has, as a matter of fact, been caused by its breach. Legal causation: Whether the defendant should be held responsible for loss which has, as a matter of fact, been caused by its breach.
4.2.1 Factual causation
In contract, the courts have treated the determination of factual causation in a broad way, advocating a ‘common sense approach’ (Galoo Ltd v Bright Grahame Murray [1994] 1 WLR 1360). The court in Galoo suggested that the defendant’s breach should be a ‘dominant’ or ‘effective’ cause of the loss if that loss is to be recoverable.
4.2.2 Legal causation
Even if factual causation is established, the claim will fail if legal causation is not established, in particular if there is a novus actus interveniens – a particular category of intervening event which
will be treated as having broken the chain of causation.
Lambert v Lewis [1982] AC 225
A dealer supplied a defective trailer coupling to a customer who
went on using it, after it was obviously broken, until there was an accident. The defect in the trailer coupling was an effective cause of the accident (so factual causation was established). But
the question was whether, in terms of legal causation, the chain of causation was broken by the ‘intervening act’ of the customer’s use of an obviously broken coupling. It was held that the customer’s use of the coupling was not something which objectively one would deem ‘likely to happen’. It therefore was treated as breaking the chain of causation and the dealer was held not liable for the accident.
Likelihood of it happening
If the intervening event was ‘likely to happen’ (Monarch Steamship Co Ltd v A/B Karlshamns Oljefabriker [1949] AC 196), it generally will not be held to break the chain of causation.
4.3 Remoteness of damage
The law of contract provides that not all losses flowing from (ie caused by) a breach of contract are recoverable. A line must be drawn somewhere dictating which loss is recoverable and which is
not. The foundation of the law on remoteness in contract was set out by Baron Alderson in the decision of Hadley v Baxendale (1854) 9 Ex 341.
Key case: Hadley v Baxendale (1854) 9 Ex 341
Where two parties have made a contract which one of them has broken, the damages which the other party ought to receive in respect of such breach of contract should be such as may [1] fairly and reasonably be considered either arising naturally, ie, according to the usual course of things, from such breach of contract itself, or [2] 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.
Limbs to Hadley v Baxendale
The first limb – loss of a type ordinarily and naturally arising from the breach – is not based on actual knowledge of the particular parties. It looks at ‘the usual course of things’ and consequently what loss is liable to result from a breach of contract in that ‘usual course’. If the
loss is deemed a normal type of loss which would follow from the breach then it will be recoverable under the first limb of the Hadley v Baxendale test.
Limbs to Hadley v Baxendale
If losses are too unusual and far reaching to satisfy the first limb, then in order to recover those losses the claimant will have to establish, under the second limb of the Hadley v Baxendale test, that the particular defendant had sufficient actual knowledge of the particular and special circumstances to be aware of the risk of those losses.
Hadley v Baxendale Facts
Facts: The claimant, who was a mill owner, contracted with the defendant carrier to take a broken mill-shaft to the makers as a pattern for a new one. Owing to the carrier’s neglect, there was a delay in the transport of the broken mill-shaft, which resulted in considerable losses for the mill owner, because no spare shaft was available.
Hadley v Baxendale Judgement
Held: Applying the above two-stage test, the court held (considering the first limb) that in most cases of a breach of this kind, no such losses would have followed (as a spare shaft would be available), so it could not be said that the losses followed naturally from the breach.
Recoverability of Losses
Nor (considering the second limb) was the defendant aware, at the time of the contract, that the mill would not be able to function at all without this particular shaft, and so the loss could not
‘reasonably be supposed to have been in the contemplation of both parties’. Therefore, the losses were not recoverable. The losses might have been recoverable under the second limb if the special circumstances (that delay would cause a loss of profit) had been communicated to the defendant
at the time of contracting, but they had not been.
Lord Hoffman in Transfield Shipping Inc of Panama v Mercator Shipping Inc of Monrovia, The Achilleas
[2009] 1 AC 61
It seems to me logical to found liability for damages upon the intention of the parties (objectively ascertained) because all contractual liability is voluntarily undertaken
First Limb = Identification of Risks
Second Limb = Pointing towards those Risks
Case of Jackson v Royal Bank of Scotland [2005] UKHL 3, the House of Lords, in applying Hadley v Baxendale (Timing)
Confirmed that what was in the contemplation (or knowledge) of the parties was to be judged at the time of contracting, as opposed to the time of the breach.
Victoria Laundry (Windsor) Ltd v Newman Industries Ltd [1949] 2 KB 528.
Victoria Laundry wished to expand their business, and they ordered a large boiler from the defendants, Newman Industries. Delivery was to take place on 5 June. The boiler was damaged before delivery, and delivery was delayed until 8 November. The claimant claimed for the profit
that they would have earned with the boiler in the time between 5 June and 8 November. In particular, they claimed for the loss of, first, the extra laundry business that they could have taken
on with immediate use of the new boiler, and, second, the loss of a number of highly lucrative dyeing contracts which they could have obtained with the Ministry of Supply.
Victoria Laundry (Windsor) Ltd v Newman Industries Ltd [1949] 2 KB 528 Judgement
The Court of Appeal held that the claimant could recover for the ordinary extra laundry business that they would have taken on. As the defendant knew at the time of contracting that the claimant was a launderer and dyer and required the boiler for immediate use in its business, these were losses occurring in the ‘usual course of things’ and satisfied the first limb of the Hadley v Baxendale test. The defendant must be presumed to have anticipated that some loss of profits would occur by reason of its delay, and these ordinary business profits were therefore recoverable
Satisfying the First Limb of the Hadley v Baxendale test.
It was therefore necessary for the claimant to prove that the defendant had sufficient actual knowledge of the particular and special circumstances to be aware of the risk. No notice had been given of the possible, highly lucrative,
dyeing contracts. In the absence of special knowledge on its part, the defendant could not have reasonably contemplated the additional losses suffered by the claimant’s inability to accept the highly lucrative dyeing contracts, and so these losses also failed to satisfy the second limb of the Hadley v Baxendale test and were therefore irrecoverable.
4.4 Mitigation
Where one party has suffered loss resulting from the other party’s breach of contract, the injured party should take ‘reasonable steps’ (British Westinghouse Electric and Manufacturing Co v Underground Electric Rail Co [1912] AC 673) to minimise the effect of the breach.
Technically, there is no obligation to mitigate, but losses attributable to a failure to do so are not legally recoverable. The innocent party cannot, therefore, seek compensation by the party in default for loss which is really due not to the breach itself, but its own failure to behave reasonably after the breach.
Pilkington v Wood [1953] CH 770
The question of what steps are ‘reasonable’ is one of fact. In Pilkington v Wood [1953] CH 770, it was held that there was no expectation that the claimant should embark on ‘a complicated and difficult piece of litigation’ in order to minimise the effects of the defendant’s breach.
Payzu v Saunders [1919] 2 KB 581
The case of Payzu v Saunders [1919] 2 KB 581 demonstrates that reasonable steps to mitigate may, in some circumstances, include accepting the performance offered by the defendant under a new contract even when that performance amounts to a breach of the original contract. If the defendant’s offer of performance remains the best substitute performance (as it was in Payzu) then it would seem unreasonable not to go to that source.
