10. DAMAGES
1. INTRODUCTION
Subject to any specific expectations enshrined in legislation or the contractual terms themselves, liability for breach of
contract is strict; the breaching party is liable if he fails to perform his obligations regardless of whether he breached
intentionally, negligently, or otherwise. The plaintiff typically need only show that: (1) there was a contractual obligation
binding on the defendant; and (2) the defendant failed to perform. It is therefore generally easier for a plaintiff to
establish liability in contract, if a contractual term has been breached, than in the tort of negligence.
2 TWO INTERESTS PROTECTED BY DAMAGES
The basic objective of damages in compensatory: ‘It aims to place the innocent party, so far as a monetary award can
do so, in the same position as if the contract had been performed in accordance with its terms’. The non-breaching
party must prove on the balance of probabilities both the breach itself and the amount of any loss. Damages may be
awarded to protect two interests. According to Steyn LJ in Surrey county Council v. Bredero Homes Ltd: “The starting
principle is that the aggrieved party ought to be compensated for loss of his positive or expectation interests. In other
words, the object is to put the aggrieved party in the same financial position as if the contract had been fully performed.
But the law also protects the negative interest of the aggrieved party. If the aggrieved party is unable to establish the value
of. Loss of bargain eh may seek compensation in respect of his reliance losses. The object of such an award is to compensate
the aggrieved party for expenses incurred and losses suffered in reliance on the contract. These two complementary
principles share one feature. Both are pure compensatory principles. If the aggrieved party has suffered no loss he is
entitled to be compensated by invoking these principles. The application of these principles to the present case would
result in an award of nominal damages only.”
3 PERFORMANCE INTEREST
The usual basis for the award of damages is, as Steyn LJ points out in Surrey County Council v Bredero Homes Ltd, to
protect the non-breaching party’s performance interest. The object of protecting this interest is, according to Steyn LJ
who articulates the classical common law view, ‘to put the aggrieved party in the same financial position as if the contract
had been fully performed’. The performance interest thus points to compensation of the non-breaching party rather than
punishment of the contract-breaker.
3.1 PERFORMANCE INTEREST ILLUSTRATED
v The ‘loss of bargain’ approach operates to compensate the innocent party for the losses he suffered by reason of
the breach.
Ø If X contracts Y to paint the walls in X’s flat for $1000, and then Y refuses to proceed with the Job, and the next best price that
X can reasonably agree with a third party to complete the same job is $1500, then X will be entitled to $500 damages from Y
v The ‘cost of cure’ approach operates to compensate the innocent party for the cost of putting right a breach which
usually takes the form of a defective or incomplete performance.
Ø If X contracts w/ Y to paint the walls in X’s flat, but Y instead papers the walls, then X will be entitled to damages equal to the
amount reasonably required to remove the wallpaper and have the walls painted in accordance with the agreement with Y
3.2 LIMITING DAMAGES FOR LOSS OF PERFORMANCE INTEREST
The common law recognises four bases for limiting the scope of damages recoverable for contractual breaches resulting
in a disappointment of the non-breaching party’s performance interest:
1. The loss must be caused by the breach (Causation)
2. The loss must not be too remote from the breach (Remoteness)
3. The non-breaching party is expected to mitigate the loss. (Mitigation)
4. The non-breaching party will be entitled to recover less if, in some situations, the breach involved negligence and
the non-breaching party has contributed to the negligence (Contributory Negligence)
Chloe T 56
, 3.3 LIMITING DAMAGES: CAUSATION
In order to succeed in a claim for more than nominal damages resulting from disappointment of the performance interest,
the claimant must show that the other party breached a term of the contract, and the breach has caused the loss justifying
the amount claimed. However, not every loss resulting from a contractual breach will necessarily have been ‘caused’, in
the relevant sense, by that breach.
Chain of Causation
Causation is rarely a source of difficulty in the law of contract, the answer is to be found in an ‘application of the court’s
common sense’, and an appeal court will extend ‘considerable respect’ to the trial judge’s findings on causation.
Nevertheless, there must be a ‘chain of causation’ connecting the breach of contractual duty with the claimant’s loss.
‘But for’ Test
The chain of causation will not be established unless the breach of contract is the ‘effective’ or ‘dominant’ cause of the
loss; it is not enough that the breach simply created the opportunity for the claimant to sustain a loss. In practice, a
claim for substantial damages will be refused where it fails a ‘but for’ test; would the loss have occurred but for the
defendant’s breach? The chain of causation can be established only if the answer is ‘no’.
Novus actus interveniens
Even where the ‘but for’ test has been satisfied, a novus actus interveniens (‘new intervening act’) can break the chain
of causation if it was (i) conduct by the claimant, the consequences of which were reasonably foreseeable, (ii) conduct
by a third party that was not reasonably foreseeable, or (iii) an event or a circumstance that was not reasonably
foreseeable.
3.4 LIMITING DAMAGES: REMOTENESS
The question as to whether a loss is to remote from the breach to be recoverable in the form of damages is one of degree
and relies heavily on the facts as reasonably understood.
The basic common law rule is that losses are recoverable in damages if they (a) arose naturally from the breach in the
usual course of things; or (b) may reasonably be supposed to have been in the contemplation of both parties, as the
probable result of the breach, at the time the contract was made.
Hadley v Baxendale (1854)
Facts The claimant, Hadley, owned a mill featuring a broken crankshaft. The claimant engaged Baxendale, the
defendant, to transport the crankshaft to the location at which it would be repaired and then subsequently
transport it back. The defendant then made an error causing the crankshaft to be returned to the claimant
a week later than agreed, during which time the claimant’s mill was out of operation. The claimant
contended that the defendant had displayed professional negligence and attempted to claim for the loss of
profit resultant from the unexpected week-long closure. The defendant retorted that such an action was
unreasonable as he had not known that the delayed return of the crankshaft would necessitate the mill’s
closure and thus that the loss of profit failed to satisfy the test of remoteness.
Issue Whether the loss of profits resultant from the mill’s closure was too remote for the claimant to be able to
claim.
Held The Court found for the defendant, viewing that a party could only successfully claim for losses stemming
from breach of contract where the loss is reasonably viewed to have resulted naturally from the breach, or
where the fact such losses would result from breach ought reasonably have been contemplated of by the
parties when the contract was formed. As Baxendale had not reasonably foreseen the consequences of
delay and Hadley had not informed him of them, he was not liable for the mill’s lost profits.
Reason Baron Alderson: “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 such as may fairly and
reasonably be considered either arising naturally, i.e., according to the usual course of things, from such
breach of contract itself, or such as may reasonably be supposed to have been in the contemplation of both
parties, at the time they made the contract, as probable result of the breach of it. Now, if the special
circumstances under which the contract was actually made were communicated by the plaintiffs to the
defendants, and thus known to both parties, the damages resulting from the breach of such a contract,
which they would reasonably contemplate, would be the amount of injury which would ordinarily follow
from a breach of contract under these special circumstances so known and communicated. But, on the other
hand, if these special circumstances were wholly unknown to the party breaking the contract, he, at the
most, could only be supposed to have had in his contemplation the amount of injury which would arise
generally, and in the great multitude of cases not affected by any special circumstances, from such a breach
of contract.”
Chloe T 57
1. INTRODUCTION
Subject to any specific expectations enshrined in legislation or the contractual terms themselves, liability for breach of
contract is strict; the breaching party is liable if he fails to perform his obligations regardless of whether he breached
intentionally, negligently, or otherwise. The plaintiff typically need only show that: (1) there was a contractual obligation
binding on the defendant; and (2) the defendant failed to perform. It is therefore generally easier for a plaintiff to
establish liability in contract, if a contractual term has been breached, than in the tort of negligence.
2 TWO INTERESTS PROTECTED BY DAMAGES
The basic objective of damages in compensatory: ‘It aims to place the innocent party, so far as a monetary award can
do so, in the same position as if the contract had been performed in accordance with its terms’. The non-breaching
party must prove on the balance of probabilities both the breach itself and the amount of any loss. Damages may be
awarded to protect two interests. According to Steyn LJ in Surrey county Council v. Bredero Homes Ltd: “The starting
principle is that the aggrieved party ought to be compensated for loss of his positive or expectation interests. In other
words, the object is to put the aggrieved party in the same financial position as if the contract had been fully performed.
But the law also protects the negative interest of the aggrieved party. If the aggrieved party is unable to establish the value
of. Loss of bargain eh may seek compensation in respect of his reliance losses. The object of such an award is to compensate
the aggrieved party for expenses incurred and losses suffered in reliance on the contract. These two complementary
principles share one feature. Both are pure compensatory principles. If the aggrieved party has suffered no loss he is
entitled to be compensated by invoking these principles. The application of these principles to the present case would
result in an award of nominal damages only.”
3 PERFORMANCE INTEREST
The usual basis for the award of damages is, as Steyn LJ points out in Surrey County Council v Bredero Homes Ltd, to
protect the non-breaching party’s performance interest. The object of protecting this interest is, according to Steyn LJ
who articulates the classical common law view, ‘to put the aggrieved party in the same financial position as if the contract
had been fully performed’. The performance interest thus points to compensation of the non-breaching party rather than
punishment of the contract-breaker.
3.1 PERFORMANCE INTEREST ILLUSTRATED
v The ‘loss of bargain’ approach operates to compensate the innocent party for the losses he suffered by reason of
the breach.
Ø If X contracts Y to paint the walls in X’s flat for $1000, and then Y refuses to proceed with the Job, and the next best price that
X can reasonably agree with a third party to complete the same job is $1500, then X will be entitled to $500 damages from Y
v The ‘cost of cure’ approach operates to compensate the innocent party for the cost of putting right a breach which
usually takes the form of a defective or incomplete performance.
Ø If X contracts w/ Y to paint the walls in X’s flat, but Y instead papers the walls, then X will be entitled to damages equal to the
amount reasonably required to remove the wallpaper and have the walls painted in accordance with the agreement with Y
3.2 LIMITING DAMAGES FOR LOSS OF PERFORMANCE INTEREST
The common law recognises four bases for limiting the scope of damages recoverable for contractual breaches resulting
in a disappointment of the non-breaching party’s performance interest:
1. The loss must be caused by the breach (Causation)
2. The loss must not be too remote from the breach (Remoteness)
3. The non-breaching party is expected to mitigate the loss. (Mitigation)
4. The non-breaching party will be entitled to recover less if, in some situations, the breach involved negligence and
the non-breaching party has contributed to the negligence (Contributory Negligence)
Chloe T 56
, 3.3 LIMITING DAMAGES: CAUSATION
In order to succeed in a claim for more than nominal damages resulting from disappointment of the performance interest,
the claimant must show that the other party breached a term of the contract, and the breach has caused the loss justifying
the amount claimed. However, not every loss resulting from a contractual breach will necessarily have been ‘caused’, in
the relevant sense, by that breach.
Chain of Causation
Causation is rarely a source of difficulty in the law of contract, the answer is to be found in an ‘application of the court’s
common sense’, and an appeal court will extend ‘considerable respect’ to the trial judge’s findings on causation.
Nevertheless, there must be a ‘chain of causation’ connecting the breach of contractual duty with the claimant’s loss.
‘But for’ Test
The chain of causation will not be established unless the breach of contract is the ‘effective’ or ‘dominant’ cause of the
loss; it is not enough that the breach simply created the opportunity for the claimant to sustain a loss. In practice, a
claim for substantial damages will be refused where it fails a ‘but for’ test; would the loss have occurred but for the
defendant’s breach? The chain of causation can be established only if the answer is ‘no’.
Novus actus interveniens
Even where the ‘but for’ test has been satisfied, a novus actus interveniens (‘new intervening act’) can break the chain
of causation if it was (i) conduct by the claimant, the consequences of which were reasonably foreseeable, (ii) conduct
by a third party that was not reasonably foreseeable, or (iii) an event or a circumstance that was not reasonably
foreseeable.
3.4 LIMITING DAMAGES: REMOTENESS
The question as to whether a loss is to remote from the breach to be recoverable in the form of damages is one of degree
and relies heavily on the facts as reasonably understood.
The basic common law rule is that losses are recoverable in damages if they (a) arose naturally from the breach in the
usual course of things; or (b) may reasonably be supposed to have been in the contemplation of both parties, as the
probable result of the breach, at the time the contract was made.
Hadley v Baxendale (1854)
Facts The claimant, Hadley, owned a mill featuring a broken crankshaft. The claimant engaged Baxendale, the
defendant, to transport the crankshaft to the location at which it would be repaired and then subsequently
transport it back. The defendant then made an error causing the crankshaft to be returned to the claimant
a week later than agreed, during which time the claimant’s mill was out of operation. The claimant
contended that the defendant had displayed professional negligence and attempted to claim for the loss of
profit resultant from the unexpected week-long closure. The defendant retorted that such an action was
unreasonable as he had not known that the delayed return of the crankshaft would necessitate the mill’s
closure and thus that the loss of profit failed to satisfy the test of remoteness.
Issue Whether the loss of profits resultant from the mill’s closure was too remote for the claimant to be able to
claim.
Held The Court found for the defendant, viewing that a party could only successfully claim for losses stemming
from breach of contract where the loss is reasonably viewed to have resulted naturally from the breach, or
where the fact such losses would result from breach ought reasonably have been contemplated of by the
parties when the contract was formed. As Baxendale had not reasonably foreseen the consequences of
delay and Hadley had not informed him of them, he was not liable for the mill’s lost profits.
Reason Baron Alderson: “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 such as may fairly and
reasonably be considered either arising naturally, i.e., according to the usual course of things, from such
breach of contract itself, or such as may reasonably be supposed to have been in the contemplation of both
parties, at the time they made the contract, as probable result of the breach of it. Now, if the special
circumstances under which the contract was actually made were communicated by the plaintiffs to the
defendants, and thus known to both parties, the damages resulting from the breach of such a contract,
which they would reasonably contemplate, would be the amount of injury which would ordinarily follow
from a breach of contract under these special circumstances so known and communicated. But, on the other
hand, if these special circumstances were wholly unknown to the party breaking the contract, he, at the
most, could only be supposed to have had in his contemplation the amount of injury which would arise
generally, and in the great multitude of cases not affected by any special circumstances, from such a breach
of contract.”
Chloe T 57
