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Damages for Breach of Contract and Tort, Study notes of Law

The University of SheffieldLaw

The primary remedy for achieving compensation in both contract and tort is damages. It outlines the general principles of compensatory damages, including the aim of putting the claimant in the same position as if the contract had been performed. The document explores the concepts of 'reliance damages' and 'expectation damages', and examines the rules of remoteness in tort and contract cases. It also discusses the role of contributory negligence in reducing damages and the various measures of damages for pecuniary and non-pecuniary loss.

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Introduction to Remedies
What is a remedy?
‘… The relief that a person can seek from a court’ (Burrows, 2019, p.3)
‘…the rights immediately arising from certain judicial commands and statements which aim
to redress a pre-suit grievance’ Zakrezewski ‘Remedies Reclassified (2005. p.2)
Why are remedies important?
‘Remedies are the vital element in shaping, moderating and at times extending the
substantive rules under which we live: and we must always remember that legal advice is, at
bottom, simply advice as to the remedy likely to be available (or unavailable) to the client.’
Tettenborn, ‘Remedies: A Neglected Contribution’ (1999, p.41)
• Types of remedies
•Monetary (pecuniary) and non-monetary (non-pecuniary) remedies
◦ Damages, account of profits
◦ Specific performance, injunction
• Final and temporary remedies
◦ Damages, account of profits, specific performance, final injunction
Interim injunction, freezing order, search order.
Legal and Equitable Remedies
•Legal remedies are those that originated historically from the common law courts.
•Equitable remedies are those that originated historically from the courts of equity.
• The two sets of courts were ‘fused’ via the Judicature Acts of 1873 – 1875.
• However, the distinction between the two sets of remedies remains significant to some
extent.
• Legal remedies are said to be available ‘as of right’.
Equitable remedies are said to be subject to the discretion of the court, and to
certain ‘bars to equitable relief’.
‘Every failure to perform a primary obligation is a breach of contract. The secondary
obligation on the part of the contract breaker to which it gives rise by implication of the
common law is to pay monetary compensation to the other party for the loss sustained by
him in consequence of the breach.’
Lord Diplock, Photo Production Ltd v Securicor Transport Ltd [1980] AC 827 (HL) 848-849
Aims and Functions of Remedies
➢ Compensation
➢Punishment
➢Restitution
➢Compelling performance of positive obligation
➢Preventing breach of obligation
➢Compelling undoing of a wrong
➢Declaring rights
What is compensation?
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Introduction to Remedies

What is a remedy? ‘… The relief that a person can seek from a court’ (Burrows, 2019, p.3) ‘…the rights immediately arising from certain judicial commands and statements which aim to redress a pre-suit grievance’ Zakrezewski ‘Remedies Reclassified (2005. p.2) Why are remedies important? ‘Remedies are the vital element in shaping, moderating and at times extending the substantive rules under which we live: and we must always remember that legal advice is, at bottom, simply advice as to the remedy likely to be available (or unavailable) to the client.’ Tettenborn, ‘Remedies: A Neglected Contribution’ (1999, p.41)

- Types of remedies

  • Monetary (pecuniary) and non-monetary (non-pecuniary) remedies ◦ Damages, account of profits ◦ Specific performance, injunction
  • Final and temporary remedies ◦ Damages, account of profits, specific performance, final injunction Interim injunction, freezing order, search order. Legal and Equitable Remedies
  • Legal remedies are those that originated historically from the common law courts.
  • Equitable remedies are those that originated historically from the courts of equity.
  • The two sets of courts were ‘fused’ via the Judicature Acts of 1873 – 1875.
  • However, the distinction between the two sets of remedies remains significant to some extent.
  • Legal remedies are said to be available ‘as of right’. Equitable remedies are said to be subject to the discretion of the court, and to certain ‘bars to equitable relief’. ‘Every failure to perform a primary obligation is a breach of contract. The secondary obligation on the part of the contract breaker to which it gives rise by implication of the common law is to pay monetary compensation to the other party for the loss sustained by him in consequence of the breach.’ Lord Diplock, Photo Production Ltd v Securicor Transport Ltd [1980] AC 827 (HL) 848- Aims and Functions of Remedies ➢ Compensation ➢Punishment ➢Restitution ➢Compelling performance of positive obligation ➢Preventing breach of obligation ➢Compelling undoing of a wrong ➢Declaring rights What is compensation?
  • Compensation refers to an award of a sum of money which is equivalent to the claimant’s loss.
  • The primary remedy for achieving compensation in both contract and tort is damages.
  • The usual aim of compensatory damages for a tort is to put the claimant into as good a position as they would have been in had the tort not been committed. I do not think there is any difference of opinion as to its being a general rule that, where any injury is to be compensated by damages, in settling the sum of money to be given for reparation of damages you should as nearly as possible get at that sum of money which will put the party who has been injured or who has suffered in the same position as he would have been in if he had not sustained the wrong for which he is now getting his compensation or reparation. Lord Blackburn in Livingstone v Rawyards Coal Co (1880) 5 App Cas 25 at p.39. Compensation in contractual claims
  • The usual aim of compensatory damages for a breach of contract is to put the claimant into as good a position as they would have been in had the contract been performed. 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. Parke, B. in Robinson v Harman (1848) 154 ER 363) at p.365.
  • There are breach of contract cases in which claimants have been awarded an amount of damages to put them into the position they would have been in had the contract not been made.
  • These are sometimes described as ‘reliance damages’ or ‘reliance losses’ as opposed to the more usual ‘expectation damages’ or ‘expectation losses’. In some cases, this has been awarded as something of a ‘last resort’ where the claimant cannot show what position they would have been in had the contract been performed ( McRae v Commonwealth Disposals Commission [1951] HCA 79).
  • In some cases, the claimant is said to have a choice between the two compensatory measures ( Anglia Television v Reed [1972] 1 QB 60). However, the claimant cannot opt for ‘reliance damages’ instead of ‘expectation damages’ where this would allow the claimant to avoid the consequences of a bad bargain ( C&P Haulage v Middleton [1983] 1 WLR 1641). C has paid £1,000 for goods which would have been worth £1,200 if in accordance with the contract specification. However, they are faulty and only worth £900. What could C claim based on:
  • -The expectation interests. 200 -The reliance interests? the expressions "expectation damages", "damages for loss of profits", "reliance damages" and "damages for wasted expenditure" are simply manifestations of the

- Court held that L was liable for the death of S. A tortfeasor must take their victim as they find them (‘egg shell skull’ or ‘thin skull’ rule). The type of injury suffered (the burn) was foreseeable, and the cancer was merely an extension of the burn.

  • cf Tremain v Pike [1969] 1 WLR 1556: P negligently allowed his farm to become infested by rats. T, an employee, contracted Weil’s disease (a rare disease) as a result of exposure to rat urine. Court held that P was not liable, as Weil’s disease was not reasonably foreseeable, though physical injury from rat bites or food poisoning from contaminated food would be reasonably foreseeable. **Remoteness in Breach of Contract Cases
  • The rule concerning remoteness in breach of contract cases is set out in** Hadley v Baxendale (1854) 9 Ex 341. Hadley v Baxendale (1854) 9 Ex 341 ◦ Loss that may fairly and reasonably considered as arising naturally from the breach of contract; or ◦ Loss that 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. Victoria Laundry v Newman Industries [1949] 2 KB 528 (CA)-Reasonable contemplation
  • V purchased a boiler from N. N knew that V needed it for immediate use in V’s laundry business. In breach of contract, the boiler was delivered five months late.
  • N was liable to pay V compensatory damages for loss of the profits that V would ordinarily have made in the course of its business during these five months.
  • However, N was not liable to pay V damages for loss of profits that V would have made from some exceptionally lucrative government contracts, as N knew nothing about these contracts. Koufos v C Czarnikow Ltd (‘The Heron II’) [1969] 1 AC 350 (HL)
  • C charted K’s ship (The Heron II) to transport sugar to the port of Basrah. C’s intention was to sell the sugar there, but this was not communicated to K.
  • The ship was delayed by 9 days due to breaches of contract, leading to a fall in the price being paid for sugar.
  • The loss of profit was held to be recoverable because K was aware there was a market in sugar at Basrah.
  • The Lords all agreed a higher standard of foreseeability is required in contract than tort. Rethinking Remoteness for Breach of Contract
    • A taxi driver, A, is informed by her customer, B, that B must arrive at his destination by a certain time, or else B will lose a business contract worth £ 1 million.
    • In breach of contract, A fails to get B to his destination on time, and B loses the business contract. - Under the rule stated in Hadley v Baxendale , is A liable to pay B damages for the lost business contract? Should A be liable? Why or why not? Transfield Shipping v Mercator Shipping (‘The Achilleas’) [2009] 1 AC 61 (HL)
  • T chartered a ship from its owner, M. In breach of contract, T returned the ship late. This caused M to lose profits that it could have gained from a lucrative follow-on charter.
  • The High Court and Court of Appeal both found that this loss was foreseeable under the rule in Hadley v Baxendale.
  • However, the House of Lords refused to award damages to M for this loss. Transfield Shipping v Mercator Shipping (‘The Achilleas’) [2009] 1 AC 61 (HL)
  • Lord Hoffmann and Lord Hope (Lord Walker concurring): Party in breach may not be liable for foreseeable losses which are not of the type for which they can be treated as having assumed responsibility.
  • Within the shipping industry, there was a general understanding that liability for the late return of a ship was restricted to the difference between the charter rate and the market rate for the overrun period. In shipping cases, there was also a uniform series of dicta over many years in which judges had said or assumed that damages for late delivery were to be assessed in this way. Rethinking Remoteness for Breach of Contract
  • Has the assumption of responsibility test articulated in The Achilleas replaced the test of foreseeability/reasonable contemplation set out in Hadley v Baxendale?
  • See Supershield v Siemens Building Technologies [2010] EWCA Civ 7, Sylvia Shipping v Progress Bulk Carriers [2010] EWHC 542 (Comm), Wellesley Partners LLP v Withers LLP [2015] EWCA Civ 1146. ◦ Hadley v Baxendale remains the standard approach applicable to the vast majority of cases. ◦ However, there may be unusual cases where the standard approach does not accurately reflect the expectation of the parties, or the context of the case makes it necessary for the court to specifically consider whether there has been an assumption of responsibility for the particular loss suffere d. - Sylvia Shipping v Progress Bulk Carriers [2010] EWHC 542 (Comm): The approach in The Achilleas most likely to be applied where ◦ The application of the Hadley v Baxendale test may lead to an unquantifiable, unpredictable, uncontrollable or disproportionate liability; or ◦ There is clear evidence that imposing liability in accordance with the Hadley v Baxendale test would be contrary to market understanding and expectation. - Supershield v Siemens Building Technologies [2010] EWCA Civ 7: ◦ The approach in The Achilleas will not always lead to narrower liability compared to the Hadley v Baxendale test. It may also result in the imposition of broader liability being imposed, such as where the party in breach is held liable for loss that is unforeseeable under Hadley v Baxendale but for which they can be said to have assumed responsibility. A recent summary of the law on remoteness Attorney General of the Virgin Islands (Respondent) v Global Water Associates Ltd (Appellant) (British Virgin Islands) [2020] UKPC 18.

Banco de Portugal v Waterlow & Sons Ltd [1932] AC 452 (HL)-where the claimant did something that incurred additional expenses.

  • W contracted to print banknotes for BP. In breach of contract, they delivered a large number of banknotes to a criminal, who put them into circulation in Portugal.
  • On discovering this, BP withdrew the whole issue and undertook to exchange all the banknotes that had been illegally circulated for other notes.
  • W contended that its liability was confined to the cost of printing new banknotes, and that the further loss suffered by BP was due to its own voluntary action in giving value for the illegally circulated banknotes. Court held that W was liable for the further loss as the bank’s conduct was reasonable, given its commercial obligations to the public.

CONTRIBUTORY NEGLIGENCE

  • The old rule at common law was that contributory negligence operated as a complete defence.
  • The current law is now stated in the Law Reform (Contributory Negligence) Act 1945. LR(CN)A, s 1(1): ‘Where any person suffers damage as the result partly of his own fault and partly of the fault of any other person or persons, a claim in respect of that damage shall not be defeated by reason of the fault of the person suffering the damage, but the damages recoverable in respect thereof shall be reduced to such extent as the court thinks just and equitable having regard to the claimant’s share in the responsibility for the damage’.
  • The claimant failed to exercise reasonable care for their own safety.
  • This failure contributed to the loss or damage suffered by the claimant. The claimant’s failure to exercise reasonable care exposed them to the particular risk of the type of damage suffered. Jones v Livox Quarries Ltd [1952] 2 QB 608 (CA)
  • J was riding on the back of a ‘traxcavator’ at work, contrary to orders issued by L, when another vehicle driven by another employee of L crashed into the back of it, seriously injuring J.
  • L argued that J had contributed to his injuries by his own contributory negligence in riding on the back of the traxcavator. Court held that the award of damages payable to J should be reduced by 20% due to his contributory negligence. Froom v Butcher [1976] QB 286 (CA)
  • F suffered head and chest injuries and a broken finger when the car he was driving was negligently hit by B’s car.
  • F was not wearing a seat belt at the time. Court held that F was contributory negligent in respect of the injuries he could have avoided had he won a seat belt. His damages were reduced by 20%.
  • ‘Sometimes the evidence will show that the failure made no difference. The damage would have been the same, even if a seat belt had been worn. In such case the damages should not be reduced at all.’ -lord denning
  • ‘At other times the evidence will show that the failure made all the difference. The damage would have been prevented altogether if a seat belt had been worn. In such cases I would suggest that the damages should be reduced by 25 per cent.’ ‘But often enough the evidence will only show that the failure made a considerable difference. Some injuries to the head, for instance, would have been a good deal less severe if a seat belt had been worn, but there would still have been some injury to the head. In such case I would suggest that the damages attributable to the failure to wear a seat belt should be reduced by 15 per cent.’ Which torts? LR(CN) A, S.4 “fault” means negligence, breach of statutory duty or other act or omission which gives rise to a liability in tort or would, apart from this Act, give rise to the defence of contributory negligence. Is Contributory Negligence Applicable to Breach of Contract Claims?
  • Forsikringsaktieselskapet Vesta v Butcher [1988] 3 WLR 565 (CA): Contributory negligence applicable in ‘Category 3’ cases, but not in ‘Category 1’ or ‘Category 2’ cases. - Category 1 cases are those where the defendant is in breach of a strict contractual **duty.
  • Category 2 cases are those where the defendant is in breach of a contractual duty of** **care.
  • Category 3 cases are those where the defendant is in breach of a contractual duty of** care that co-exists with a tortious duty of care. Barclays Bank plc v Fairclough Building Ltd [1995] QB 214 (CA)
  • F contracted to clean the roofs of B’s warehouse, which were made of asbestos cement sheeting.
  • In breach of its contractual obligations, F did the cleaning in such a way that it caused the warehouse to be contaminated with asbestos fibres and dust, requiring remedial work of £4 million.
  • F alleged that B was contributorily negligent as it had failed to supervise the work. Court held that contributory negligence was not applicable, as this was a Category 1 case. F had breached its strict contractual obligations to carry out the work in accordance with contractual specifications. It was not a breach of a duty to take reasonable care. Raflatac Ltd v Eade [1999] 1 Lloyd’s Rep 506
  • E, who was R’s main contractor in respect of alteration works to be carried out at R’s premises, sub-contracted the installation of sprinkler systems to a third party, M.
  • M’s negligence resulted in damage to R’s property. R sued E in contract, and E alleged that there had been contributory negligence on the part of R.
  • Court acknowledged that E had breached its contractual duty of care, i.e. its contractual obligation to exercise reasonable care and skill in the conduct of its work on R’s premises, including reasonable care in procuring M to carry out some of the works in question. However, E did not owe R a parallel duty of care in tort for the acts of M. This was therefore a Category 2 case and contributory negligence was not applicable.

Breach of Contract – Pecuniary Loss

When awarding compensatory damages for pecuniary loss flowing from a breach of contract, what is the appropriate measure of damages? Note: the types of loss under discussion here are expectation losses which have already been established as being not too remote, not avoidable through mitigation, and not caused by the claimant’s contributory negligence. The diminution in value measure awards the claimant the financial advantage which the claimant has lost by being deprived of the benefit to which they were contractually entitled. What value has been lost by the contract not being successfully performed. The cost of cure measure awards the claimant the additional cost which the claimant would have to incur to put into as good a position as if they had received the benefit to which they were contractually entitled.

Pecuniary Loss

  • In many cases, it makes little practical difference which measure of damages is used.
  • C contracts to purchase goods from D at the price of £1,000. C intends to resell the goods to T at the price of £3,000, making a profit of £2,. - In breach of contract, D fails to deliver the goods. C purchases the goods from the open market at the price of £1,500 and resells them to T at the same price of £3,000. C makes

a profit of £1,.

  • Under the diminution in value measure, C is entitled to recover compensatory damages of £500 from D, as this is the financial advantage (profit) which C has lost due to D’s breach of contract. Under the cost of cure measure, C is entitled to recover compensatory damages of £ from D as this is the additional cost C had to incur in order to purchase substitute goods from the open market.
  • In some cases, the two measures will produce very different outcomes.
  • C enters into a contract with D under which D is to do certain work to C’s house. At the time of the contract, C’s house is worth £400,000. C’s house will be worth £500,000 once the works are complete.
  • D carries out some work on the house but, in breach of contract, D fails to complete the work in the manner specified. C’s house is only worth £450,000 after the partial completion of works by D. C would have to pay £300,000 to engage T to complete the work in the manner specified by the contract.
  • Under the diminution in value measure, C is entitled to recover £50,000 in damages from D, as this is the financial advantage (in terms of the value added to the house) which C has lost due to the D’s breach.
  • Under the cost of cure measure, C is entitled to recover £300,000 in damages from D, as this is the additional cost which C would have to incur in order to put themselves in the position they would have been had they received the benefit to which they were contractually entitled (i.e. to have all the work done to the house in the manner specified by the contract). Tito v Waddell (No 2) [1977] Ch 106
  • A British company mining phosphate on Ocean Island contracted with the islanders to restore the land mined by replanting trees on the island, but failed to do so.
  • Under the cost of cure measure, the islanders would be entitled to damages assessed on the basis of what it would cost to replant the island, which amounted to thousands of pounds. Under the diminution in value measure, the islanders would be entitled to damages assessed on the basis of the difference in value between the island as it currently was and as it would be if replanted, which amounted to a few hundred pounds.
  • Megarry VC held that the key factor was the existence of an intention to cure the breach, i.e. whether the islanders intended to use the damages to replant.
  • ‘if the plaintiff establishes that the contractual work has been or will be done, then in all normal circumstances it seems to me that he has shown that the cost of doing it is, or is part of, his loss, and is recoverable as damages’. On the facts, it was held that there was no sufficiently clear intention on the part of the islanders to do so, as they were now well-established on a different island which was larger, unaffected by mining, and located 1,500 miles away from Ocean Island. Ruxley Electronics & Construction v Forsyth [1994] 1 WLR 650 (CA); [1996] AC 344 (HL)
  • R contracted to build a swimming pool for F in F’s garden. The contract specified that the pool should have a diving area 7 feet 6 inches deep.
  • On completion, the pool was suitable for diving, but the diving area was only 6 feet deep.
  • R’s breach of contract had no adverse effect on the value of the property. Under the diminution of value measure, F would be entitled to no damages.

Watts v Morrow [1991] 1 WLR 1421 (CA)

  • W purchased a property in reliance on a surveyor’s report prepared by M.

On entering into possession, W discovered defects beyond those set out in

M’s report.

  • W arranged for the defects to be rectified. They sought damages for physical

inconvenience and directly related mental distress resulting from having to

live in a house undergoing extensive repairs.

Court held that W were entitled to damages for physical inconvenience and

discomfort caused by the breach and mental distress directly related to that

inconvenience and discomfort, though not for mental distress not caused by

the physical inconvenience and discomfort..

‘A contract-breaker is not in general liable for any distress, frustration, anxiety,

displeasure, vexation, tension or aggravation which his breach of contract may

cause to the innocent party’.

‘But the rule is not absolute. Where the very object of a contract is to provide

pleasure, relaxation, peace of mind or freedom from molestation, damages will

be awarded if the fruit of the contract is not provided or if the contrary result is

procured instead’.

‘In cases not falling within this exceptional category, damages are in my view

recoverable for physical inconvenience and discomfort caused by the breach

and mental suffering directly related to that inconvenience and discomfort’.

Non-pecuniary loss

In some instances, damages have been recovered for non-pecuniary loss in the

form of mental distress without physical inconvenience or discomfort, e.g.

where the object of the contract is enjoyment.

Jarvis v Swan Tours Ltd [1973] QB 233 (CA)

  • J booked a 15-day holiday in Switzerland with S, whose brochure described

the holiday in very attractive terms.

  • In breach of contract, S provided a very disappointing holiday, with very few

of the attractions referred to in the brochure.

Court awarded J damages for his mental distress, disappointment, and

frustration at the loss of the entertainment and enjoyment promised by S’s

brochure.

Heywood v Wellers [1976] QB 446 (CA)

  • H engaged W, a firm of solicitors, to restrain M from continuing to harass

her.

  • In breach of contract, W failed to obtain an injunction to prevent M from

doing so. As a consequence, H experienced further harassment from M.

Court awarded H damages for the mental distress suffered as a consequence of

the continued harassment.

Farley v Skinner [2002] 2 AC 732 (HL)

  • F was considering buying a house 15 miles from Gatwick Airport. He engaged S to survey the property and specifically asked S to investigate whether the property would be affected by aircraft noise.
  • S reported that it was unlikely that the property would be affected by aircraft noise. F bought the property and moved in. Subsequently, he discovered that it was substantially affected by aircraft noise. F had not suffered any pecuniary loss, as the price paid by F for the house was the same as the market value of the property taking into account the aircraft noise.
  • F sought damages for the mental distress he suffered as a consequence of being unable to enjoy the property.
  • House of Lords upheld the trial judge’s award of damages for mental distress. ‘It is sufficient if a major or important object of the contract is to give pleasure, relaxation or peace of mind…’ (Lord Steyn) ‘The distinction between ‘physical’ and ‘non-physical’ is not always clear and may depend on the context. The critical distinction to be drawn is not a distinction between the different types of inconvenience or discomfort of which complaint may be made but a distinction based on the cause of the inconvenience or discomfort. If the cause is no more than disappointment that the contractual obligation has been broken, damages are not recoverable even if the disappointment has led to a complete mental breakdown. But, if the cause of the inconvenience or discomfort is a sensory experience (sight, touch, hearing, smell etc), damages can be recovered, subject to the usual rules on remoteness.’ (Lord Scott, para. ).