#5636 - Remedies - GDL Contract Law

Purpose of damage in contract: compensate the claimant for the damage, loss or injury suffered – not to punish the defendant (no exemplary damages)

• A C who has not suffered to any loss is still entitled to a judgement but the damages will be nominal (btw 2 and 10) - awarded to acknowledge there has been a breach of contract

Agreed damages Clauses

• Parties can seek to remove role of the court – insert a clause which states the amount of money available if there is a breach

Penalty or liquidated damages?

• Liquidated damages - Binding on the parties – in the event of a breach the sum is fixed and no more/less can be claimed – pre-assessment of the loss which would flow from breach

• Penalty clauses – where sum inserted is intended as punishment and is not connected with the amount of loss contemplated – unenforceable and the injured party may bring an action for unliquidated damages

Dunlop Pneumatic Tyre CO v New Garage and Motor Co

• 5 sum for every breach of agreement –HL held that this was a genuine pre-estimate of the loss which might result

Lord Dunedin : guidance

1. Use by the parties of the word penalty or liquidated damages is not conclusive

2. Essence of a penalty is a payment stipulated in terorem (for the purpose of intimidation of the offending party); the essence of liquidated damages is genuine pre-estimate of loss

3. Issue is one of construction – judged at the time of making the contract and not at the time of the breach:

1. If the sum stipulated is extravagant of unconscionable in amount compared with the greatest loss which could conceivable be proved to have followed from the breach – it is a penalty

2. If the breach consists only of the non-payment of money, and the sum stipulated is greater – it is a penalty

3. Where a single lump sum is payable on the occurrence of one or more of several events, some of which may occasion serious and some trifling loss – then presumption that it is a penalty

4. No obstacle to the sum stipulated being a genuine pre-estimate that the consequences of the breach are such as t make precise pre-estimation almost a possibility

The Basis of Assessment of Damages

The Expectation Interest

Aim: to put the C, so far as money can do it in the position they would have been in had the contract been properly performed

• Claimants therefore able to recover damages in respect of the loss of gains which they have been deprived of by the breach

Robinson v Harman - ‘as if the contract had been performed’ (per Parke B)

• Principle confirmed as fundamental in – Golden Strait Corporation v Nippon, ‘The Golden Victory’

Three alternative mechanisms for calculating the expectation interest: cost of cure, diminution in value and loss of amenity

Cost of Cure and Diminution in Value

• Cost of Cure: Contracts involving defective works (e.g. building not built to contract specification) :Birse Construction Ltd. v Eastern Telegraph Co. Ltd

  • Cost of cure represents the cost of substitute or remedial work acquired to put the claimant in the position he would have been in if the contract had been properly performed

• Alternatively - can be calculated in reference to the difference in value btw the performance received and that promised in the contract (diminution in value)

• Often the two mechanisms will lead to the same result – but in Ruxley Electronics and Construction Ltd. v Forsyth – different results

  • Pool was supposed to be 7 feet 6 inches- but was only built to be 6 foot – pool was still safe for diving and there was no diminution of value

  • Cost of cure would have been 21.560 (he had paid 17 k to start with)

  • Courts recognised that there will be instances in which the innocent party should be compensated for their loss of enjoyment: an award for the cost of cure was unreasonable and there was no diminution in value - C was awarded 2,500 to compensate him for loss of a pleasurable amenity

• If it is 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 obtained – then the C is confined to the difference in value

• C’s intention (or lack of it) to cure the defect is relevant – if the C does not intend to cure the defect, he has lost nothing except the difference in value

• Where dimunition of value is nil – court will not automatically award the cost of cure as an alternative – not right to remedy injustice of awarding too little by unjustly awarding too much (see also Birse Construction v Eastern Telegraph Company Ltd applying Ruxley)

Loss of Amenity

• Ruxley – where there has been a breach resulting in loss of expectation of performance, satisfication of a personal preference or a pleasurable amenity, but there had been no dimunition of value – court could award modest damages to compensate the C

• Loss didn’t extend to the cost of reinstatement – would be unreasonable

• Loss of amenity is evidence of court’s growing willingness to accept that a consumer should have an available remedy where their loss is not economic in value (personal value)

• In commercial setting – ‘unusual if not impossible’ for damaged to be awarded for loss of amenity (Regus (UK) Ltd v Epcot Solutions Ltd)

Applying the mechanisms for calculating expectation interest

• Mechanisms of cost of cure and diminution are only of real value in situations where there is disparity (like in Ruxley)

• In the majority of situations the 2 mechanisms will create the same outcome – just ask what position the claimant would have been in if the contract had been properly performed

The Reliance Interest

• Allows the C 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

• More cautious – backward looking and aims to put the claimant in the position they would have been n had they never contracted

• Usually it will be more advantageous for a C to pursue expectation measure damages

General rule: Claimants have an unfettered choice when electing which measure to claim – Lord Denning MR in Anglia Television Ltd v Reed: ‘it seems t me that a plaintiff in such a case as this had an election’

However: courts will NOT award expectation damages if they are highly speculative; instead the C will be limited to his reliance loss: McRae v Commonwealth Disposals Commission

• Speculative nature of the salvage expedition made it impossible to quantify their expectations with any degree of precision

• Confined C to the recovery of their expenses incurred in mounting expedition

Anglia Television Ltd v Reed:

• C engaged the D to star in a film which they were making: breach of contract – D refused to perform in the film and the C had to abandon it because couldn’t find replacement

• Expectation losses were too speculative to prove – instead had to obtain damages in respect of expenses wasted y reason of the star’s refusal to perform

C&P Haulage v Middleton: C seeking reliance loss (where it had no expectation loss) – but failed as It could not show that had the contract gone ahead properly, it would have been able to recoup this expenditure in any event – so limited to recovering nominal damages in recognition of technical breach

• C&P Haulage contracted to allow Middleton to use their premises for a vehicle repair business – when he was ejected he had to continue his business from the garage at his own house - he claimed damages to recover the money spent on putting the premises in a fit state to use as a garage

• Accepted that he was not entitled to take any of the fixtures he had installed and that he was not entitled to payment for the work he had done – agreement could have been lawfully terminated 10 weeks after it actually ended

• Judge at first instance concluded that while there was a breach – the D had suffered no loss as was able to return to his own garage and pay no rent – on appeal:

  • Lord Ackner: ‘where it can be seen that a plaintiff would have incurred a loss on the contract as a whole, the expenses he has incurred are losses flowing from entering into the contract, not losses flowing from the defendant’s breach’ – award of damages would punish the D rather than compensate the C

  • Lord Fox: ‘while it is true that the expenditure could in a sense be said to be wasted in consequence of the breach, it was equally likely to be wasted if there had been no breach, because the C wanted to get the D out and could terminate the licence at quite short notice. A high risk of waste was from the very first inherent in the nature of the contract itself, breach or no breach. The reality of the matter is that the waste resulted from what was, on the defendant’s side, a very unsatisfactory and dangerous bargain’

• Principle that an aggrieved party cannot recover for expenses that would have been wasted whether or not the breach occurred

• Losses must flow from the breach, not the making of a bad bargain – he spent a lot of money improving a premise he only had a limited right to occupy

• Under the contract all fixtures and fittings would have to be left on the premise – so Mr Middleton’s loss came from making a bad bargain, not from the breach

• It is for the D to prove that the C would not have recouped the expenditure had the contract gone ahead (Omak Maritime Ltd v Mamola Challenger Shipping Co Ltd)

• 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 Restitution Interest (“Account of Profits”)

• Restoration of benefits which the defaulting party...