Damages for breach of contract

Damages For Breach Of Contract

The principal (but not the only) remedy in English law for breach of contract is an award of damages. This blog focuses on the law of damages for breach of contract where damages are awarded by a court to compensate for the injured party’s loss. This blog does not cover “liquidated damages”, which are defined by the parties under the terms of the contract as specific amounts payable in the event of a party’s default.

Damages for breach of contract: the general rule for compensation

In English law, the purpose of an award of damages for breach of contract is to compensate the injured party for loss, rather than to punish the wrongdoer. The general rule is that damages should (so far as a monetary award can do it) place the claimant in the same position as if the contract had been performed (Robinson v Harman (1848) 1 Ex 850).

Damages for breach of contract are, therefore, essentially compensatory, measuring the loss caused by the breach. To put it another way, the damages enquiry involves comparing the position the claimant is in fact in, following the breach, and the position the claimant would have been in but for the breach. Accordingly, the awards are often called "expectation damages", because they seek to put the claimant in the position it expected. The net loss is calculated by quantifying all the harms caused by the breach and then deducting or crediting all the benefits caused by the breach.

Damages for monetary loss

The majority of damages for breach of contract award compensation for financial loss. This takes many forms, including costs or liability the claimant has incurred to a third party (but would not have incurred but for the breach), and profits the claimant has foregone (that is, would have earned but for the breach).

Difference in value or cost of cure

In many cases, even though the defendant has breached the contract, the claimant can pay for a third party to cure or reinstate so as to put the claimant in as good a position as if the defendant had performed. For example, the claimant might pay for repairs to rectify a breach of warranty of quality by a seller of goods, or a partial non-performance by a builder. Where already incurred by the time of trial, such a cost will be recoverable from the defendant providing it was not so unreasonable as to be a failure to mitigate and/or a break in the chain of causation. Where the cost of cure has not been incurred at the date of trial, it will only be recoverable where incurring the cost would be "reasonable" in all the circumstances. This is because a claimant will always have a choice not to cure the problem caused by the breach. A claimant may instead, either simply live with the consequences, or use the market to offload unwanted or defective property and replace it with better property.

The presumption of breaking even and "reliance loss"

In seeking to prove loss, the claimant benefits from a rebuttable presumption that but for the breach the claimant’s venture would have broken even. This means that if the claimant has already incurred costs but not yet had a chance to complete the venture, it is presumed that the breach which halts the venture caused the claimant to lose revenue equal in value to the expenditure already incurred.

This is important in cases where it is impractical for the claimant to prove the profits it would have made from a venture. For example, in Anglia Television v Reed [1972] 1 QB 60, a TV company entered into a contract with an actor to take part in a film, the actor broke the contract and the film could not be made. In that case the claimant was unable to say what the profit would have been had the actor performed the contract, but because of the presumption of breaking even, the claimant was able to recover the wasted expenditure it had incurred.

Damages for breach of contract: Lost management time

A particularly well-established application of the presumption of breaking even is the award of damages for lost management time. If, as a result of the defendant’s breach, the claimant’s staff are diverted from their usual tasks in order to investigate the breach or deal with the consequences of the breach, the claimant can recover its net cost of the staff (that is, their wages). This is not because that cost was itself caused by the breach. (Unless the staff were employed specifically to deal with the breach, their cost would have been incurred even but for the breach.) Rather, it is presumed that the claimant would have earned revenue from the staff at least equal to their cost to the claimant if they had not been diverted from revenue-producing activity but for the breach. In Azzurri Communications Ltd v International Telecommunications Equipment Ltd [2013] EWPCC 17 Birss J observed that: "if the breach can be said to have caused diversion of staff to an extent substantial enough to lead to a significant disruption of the business then it is reasonable to draw the inference of a loss of revenue equal to the cost of employing the staff."

Damages for breach of contract: Loss of profit

A claimant may prove that had the defendant’s breach not occurred, it would have earned greater revenue than its expenditure (that is, done better than broken even, and so has lost profits). Whenever a claimant is successful in a lost profits claim, it is because it proves exactly this. Alternatively, a defendant may prove that a claimant would not have broken even, or indeed that the claimant has suffered no loss because its venture or bargain was a bad one and the claimant would have made a loss but for the breach. For example, in Ampurius Nu Homes Holdings Ltd v Telford Homes (Creekside) Ltd [2012] EWHC 1820 (Ch), the defendant construction company avoided paying substantial damages by showing that the claimant would have suffered a loss from the development if it had gone ahead.

Damages for non-financial loss

The majority of damages for breach of contract provide compensation for financial loss or property damage. Recovery of damages for such losses is restricted by the ordinary rules of remoteness and causation. Non-pecuniary and non-property damage loss falling short of personal injury have traditionally been thought to be subject to a general bar to recovery to which narrow exceptions apply.

This traditional approach was applied by the House of Lords in the surveyor's negligence case of Farley v Skinner [2001] UKHL 49. In that case, the claimant specifically asked the surveyor whether the property he was intending to buy was affected by aircraft noise and the surveyor carelessly reported that it was not. Because "a major or important object of the contract was to give pleasure, relaxation or peace of mind", damages for non-pecuniary loss (of £10,000) were recoverable.

Professional negligence provides a range of examples in which an object of the contract was non-financial. Farley v Skinner is one example in the surveyor context. Solicitors’ negligence cases include that of a solicitor who failed to obtain a non-molestation order, another who failed to protect a mother’s custody of her children and one who mis-handled ancillary relief proceedings.

In contrast, damages for non-pecuniary loss will rarely be awarded in commercial cases. There will be no award where the object of the contract was "simply carrying on a commercial activity with a view to profit" (Hayes v Dodd [1990] 2 All ER 815, Staughton LJ). Similarly, "contract-breaking is treated as an incident of commercial life which players in the game are expected to meet with mental fortitude" (Johnson v Gore Wood & Co [2000] UKHL 65, Lord Bingham).

Personal injury and physical inconvenience

Where the non-pecuniary damage amounts to personal injury (whether physical or psychiatric), such damage is recoverable subject to the ordinary rules of damages. Such cases arise often in such varied contexts as employment, landlord and tenant, defective goods, or defective services (holidays, etc.). Moreover, damages are frequently awarded without reference to any special test in cases of physical inconvenience caused by defective construction, landlord failure to repair, and surveyor negligence, as well as services cases such as those of defective holidays.

Quantifying loss

Generally, there are no rigid rules for the quantification of damages for breach of contract. In the end the assessment of damages is a question of fact. However, there are various principles which delimit the damages that will be awarded. The quantification of damages in litigation is often complicated and requires specialist advice from forensic accountants.

Burden of proof

It is for the claimant to prove its loss. Where the claimant's proof of loss has been made more difficult by the defendant's wrong, there is authority for a rebuttable presumption in favour of the claimant that gives it the benefit of any relevant doubt (see Browning v Brachers [2005] EWCA Civ 753).

Factual causation

At the heart of the damages measure, which seeks to put the claimant in the position it would have been in but for the breach, is the question of factual causation, also known as the "but for" test. In other words, it is necessary to prove both the position the claimant is actually in post-breach, and the hypothetical position the claimant would have been in ‘but for’ the breach, and to compare the two. That is the measure of loss for breach of contract. A claimant cannot, therefore, look to recover losses that it would have sustained in any event (see Tiuta International Ltd (in liquidation) v De Villiers Surveyors Ltd [2017] UKSC 77).

Restrictions on recovery of damages

Not all losses that in fact flow from a breach of contract are recoverable. Just because a loss was in fact caused by the breach (that is, would not have occurred but for the breach) does not mean that the law holds the defendant responsible for it. The rules on mitigation, legal causation, remoteness and contributory negligence may restrict, and in some cases prevent, a damages award.

Damages for breach of contract: Legal causation

The first major principle at play here is that of legal causation. This principle (which is materially the same in contract and tort) holds that, even though some losses were factually caused by the breach (that is, but for the breach they would not have occurred), they are nevertheless treated legally as not having been caused by the breach. The essence of the rather fluid principle of legal causation is that it is not fair to hold the defendant responsible for these particular consequences of its breach. The courts adopt a common sense approach to what intervening acts or events "break the chain of causation" between the breach and the harm. As Lord Bingham explained in Corr v IBC Vehicles Ltd [2008] UKHL 13:

“The rationale of the principle that a novus actus interveniens [Latin for new intervening act] breaks the chain of causation is fairness. It is not fair to hold a [defendant] liable, however gross his breach of duty may be, for damage caused to the claimant not by the [defendant]'s breach of duty but by some independent, supervening cause for which the [defendant] is not responsible.”

Although separate from the principle of remoteness, the foreseeability of an intervening act or event, and whether it was something that the defendant’s duty aimed to protect against, will both be factors that point against a finding that the chain of causation was broken.

Damages for breach of contract: Mitigation

The essence of the principle is that if the claimant unreasonably fails to act to mitigate (avoid or reduce) its loss, or unreasonably acts so as to increase its loss, the law treats those actions as having broken the chain of causation and measures damages as if the claimant had instead acted reasonably. The claimant is said to have a "duty to mitigate" (although this is not a duty enforceable by anyone, rather it is a recognition that if the claimant fails to do so its damages recovery will be affected by that failure). (BPE Solicitors v Hughes-Holland [2017] UKSC 21).

The clearest application of this principle is in the sale of goods context. Thus where a defendant seller fails to deliver goods for which a market substitute is available, the claimant cannot simply claim against the defendant all the losses which result (for example, its lost profit on a sub-sale, or lost profit from the use to which it would have put the goods). This is the case even if it does suffer those losses, because the claimant should have acted reasonably to mitigate its losses by purchasing a replacement on the market.

Remoteness of damage

Remoteness of damage refers to a further important principle by which the law determines which consequences caused (in a factual/but for sense) by the defendant’s breach are within the scope of the defendant’s responsibility and should be brought into account. The traditional test of remoteness, which is in essence a test of foreseeability, is set out in Hadley v Baxendale [1854] EWHC Exch J70.

This test operates as follows:

  • A loss will only be recoverable if it was "in the contemplation of the parties", that is, foreseeable.
  • The loss must be foreseeable not merely as being possible, but as being "not unlikely", which is a more demanding test than in tort (Koufos v C Czarnikow Ltd (The Heron II) [1967] UKHL 4).
  • The loss must be foreseeable at the date of contracting, not the date of breach (Hadley v Baxendale, Jackson and another v Royal Bank of Scotland [2005] UKHL 3, Lord Hope at para 36).
  • It is not the precise circumstances that occur that must be foreseeable, but the type or kind of loss (H Parsons (Livestock) Ltd v Uttley Ingham & Co Ltd [1977] EWCA Civ 13).
  • The knowledge that is taken into account when assessing what is in the contemplation of the parties comes under two limbs: First, is the knowledge of what happens "in the ordinary course of things", which is imputed to the parties whether or not they knew it. Second, there is actual knowledge of special circumstances outside the ordinary course of things and that was communicated to the defendant or otherwise known by the parties.

Contributory negligence (but only in cases of breach of duty of care)

A defendant may seek to argue that the loss suffered by the claimant is partly due to the fault of the claimant. The Law Reform (Contributory Negligence) Act 1945 provides for apportionment of loss where a claimant has suffered loss "as the result partly of his own fault and partly of the fault of any other person" (section 1). "Fault" is defined as "negligence or other act or omission that gives rise to liability in tort or would, apart from this Act, give rise to the defence of contributory negligence" (section 4).

Here to help

Bringing or defending a breach of contract claim can be stressful, time consuming and complex. Unless it is a low value claim it is worth getting solicitors involved as early as possible. If you have any questions about damages for breach of contract or about contract law more generally or if you need help with resolving a dispute please contact Neil Williamson.