Damages (Introduction)

A breach of contract is not an illegal act; at worst, it is something immoral Contracts are breached for a wide range of reasons; sometimes even deliberately Whenever there is a breach of contract, the defaulting party is entitled to a remedy

Lectures 25-27

Damages (Introduction)
Damages are the ordinary remedy for breach of contract
Consist of an award of money paid by the defendant (defaulting party) to the plaintiff (non-defaulting party)

They are awarded regardless of whether the breach is minor or major. Often damages are the only remedy available Damages are a substitute for actual performance and when paid the contract is discharged (substitutionary remedy)
Lectures 25-27 2

Damages (Introduction)
The purpose of an award of damages is to compensate for losses suffered by the plaintiff because of the defendants breach of contract:
Compensatory and not penal in nature

The object of damages for a breach of contract is to put the plaintiff in the same (financial) position as if the contract had been performed (Tabcorp Holdings Ltd v Bowen Investments Pty Ltd) the approach is forward looking In contrast, the object of tortious damages is to put the plaintiff in the position as if the tort had not occurred approach is backward looking (to protect the status quo of claimant)

Lectures 25-27

Damages (Introduction)
Whenever there is proof of breach of contract, a claim for damages can be made : A breach merely entitles the plaintiff to nominal damages (i.e. a nominal sum of money, such as 1 shilling), if no actual loss suffered (Luna Park (NSW) Ltd v Tramways Advertising Pty Ltd) For the plaintiff to be entitled to substantial damages (i.e. a substantial sum of money), the plaintiff must establish that actual loss was suffered as a result of the breach Exemplary damages (i.e., damages to punish the defendant) are rarely awarded (Ruxley Electronics Ltd v Forsyth)
Lectures 25-27 4

Damages (Introduction)
Damages are normally unliquidated (i.e., not agreed beforehand by the parties) and the plaintiff is not entitled to windfall damages (only compensation for actual loss suffered)
But if the contract has a valid agreed damages or liquidated damages clause, the damages may be greater than the actual loss suffered

Generally, damages are assessed at the date of breach (usually the date of performance), but courts have power to depart from this rule
Lectures 25-27 5

Limits on Award of Damages

A party that has breached a contract should not have to be liable for all losses suffered, as it would be unfair The law places a limit on damages awarded through the following:
Causation
losses caused by breach

Remoteness
losses not too remote

Mitigation
reasonable steps should be taken to minimise losses
Lectures 25-27 6

Damages (Causation)
For substantial damages to be recoverable, the loss must have been caused by the breach (causation):
Traditional test for causation is the BUT FOR test:
Would the loss have occurred but for the breach of contract? (Reg Glass Pty Ltd v Rivers Locking System Pty Ltd) If not, there is no causation and loss not recoverable

If there are multiple causes, the ultimate question is whether as a matter of commonsense, the relevant act or omission was a cause of the loss

Lectures 25-27

Damages (Causation)
Where the act of some third party, or event, intervenes to break the chain of causation, the defendant will not be liable for damages to the plaintiff (Alexander v Cambridge Credit Corp)

WA Apportionment legislation: [see Law Reform (Contributory Negligence and Tortfeasors' Contribution) Act 1947 (WA), sections 3A, 4]
Allows a reduction for contributory negligence in a claim for breach of contract where there is a concurrent claim for negligence for the same loss

Lectures 25-27

Damages (Remoteness)
There are many consequences that can flow from a single breach of contract; some more directly connected to the breach than others The law has to draw a line somewhere to determine the extent to which damages can be claimed for the consequences flowing from a breach: As a general rule, a plaintiff can claim damages for loss suffered, provided it is not too remote (in legal sense)

Loss arising from breach of contract can be sub-divided into: Direct loss (immediate loss), and Indirect loss (consequential loss)
Lectures 25-27 9

Damages (Remoteness)
Hadley v Baxendale: Facts:
Owners of a mill employed a carrier to transport a broken crankshaft to manufacturers to get a replacement made Carrier delayed delivery by several days and mill had to be shut down as it had no spare crankshaft Owners sued carrier for loss of profits arising from delay

Held:
Losses too remote and no damages awarded Loss of profits not direct loss, as normally expected mill would have spare crankshaft Loss of profits also not consequential loss, as carrier not told that mill out of operation without crankshaft
Lectures 25-27 10

Damages (Remoteness)
Hadley v Baxendale (continuation) Alderson B laid down the following test for remoteness:
Where two parties have made a contract which one of them have broken, damages for breach of contract should be such as may fairly and reasonably be considered either arising naturally, that is, according to the usual course of things from such breach of contract itself [DIRECT LOSS], or 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 [INDIRECT LOSS].

Lectures 25-27

11

Damages (Remoteness)
In summary: Direct Loss:
Loss that flows naturally (arising naturally) from the breach according to the usual or normal course of events Defendant presumed to have known about this loss

Indirect or consequential loss:

Loss that is not closely linked to the breach to be direct loss, but must have been thought about by (in the contemplation of) both the parties when entering the contract as a probable result of the breach Special knowledge of this loss required on part of defendant

(See Hadley v Baxendale; Koufos v Czarnikow Ltd)

Lectures 25-27

12

Damages (Extent & Likelihood)

What is the degree of likelihood with which damage must be contemplated, presumed to be contemplated?
A high but not a near certainty or odd-on probability of damage (Koufos v Czarnikow Ltd)

What is the extent of damage that has to be contemplated, or presumed to have been contemplated?
Not necessary for the defendant to have contemplated the degree or extent of loss; sufficient if the defendant contemplated the type of loss (H Parsons (Livestock) Ltd v Uttley Ingham and Co Ltd)
Lectures 25-27 13

Damages (Assessment)
Bases for assessing damages:
Expectation damages (loss of bargain):
Damages for lost performance of the contract. This requires a valuation of what was promised e.g. X buys a car for $20,000 but due to a defect it is worth $15,000. The amount of damages recoverable is $5,000

Reliance damages (reliance loss):

Compensation for expenditure spent in reliance on the contract that has been wasted (McRae v Commonwealth Disposals Commission; The Commonwealth v Amman Aviation Pty Ltd)
Lectures 25-27 14

Damages (Assessment)
McRae v CDC Facts:
CDC invited tenders to salvage an oil tanker purportedly sunk near a reef Ms bid of 285 was accepted and M spent money searching for tanker and reef, but neither existed M sued for breach of contract and claimed price paid and wasted expenditure

Held:
As there was no basis for quantifying the loss of bargain, M was entitled to recover price paid and wasted expenditure

This is an example of reliance damages; not common basis of award of damages

Lectures 25-27 15

Damages (Mitigation)
A plaintiff is expected to do everything reasonable to mitigate (or minimise) the losses that flows from the breach The plaintiff cannot claim losses which could have been minimised by taking reasonable steps
But is not obliged to take risks or spend money he/she cannot afford (Burns v MAN Automotive (Aust) Pty Ltd) Even if the mitigating action is counter-productive, the plaintiff is still entitled to claim damages (Esso Petroleum Co Ltd v Mardon)
Lectures 25-27 16

Damages (Special Categories)

There are certain types of loss or injury which present problems:
Injured feelings or other mental distress:
No damages unless breach of contract also caused a physical injury (Addis v Gramophone Co Ltd)

But, damages will be awarded where the subject matter is the enjoyment or peace of mind of the party (and their family)
Baltic Shipping Co v Dillon

Loss of chance to earn or win money (Howe v Teefy; Chaplin v Hicks)

Lectures 25-27 17

Damages (Special Categories)

Baltic Shipping Co v Dillon Facts:
Dillon booked and paid for 14-day cruise on ship Ship sunk after eight day and she sustained injuries, emotional trauma, and disappointment She sued Baltic Shipping for damages for her distress and disappointment

Held:
Usually cannot claim damages for distress/disappointment arising from breach of contract, But, recoverable when defaulting party agreed to provide pleasure, relaxation and entertainment She was therefore entitled to damages
Lectures 25-27 18

Damages (Agreed Damages Clause)

Agreed damages clauses are also called liquidated damages clauses Purpose:
To overcome the need for proof of actual loss suffered in a claim for damages

A valid agreed damages clause is binding on both parties even if the actual damages are greater or less than damages set by the clause
Lectures 25-27 19

Damages (Agreed Damages Clause)

Must be a genuine pre-estimate of actual loss, or it will be treated as a penalty clause agreed damages must be reasonable Courts will strike down penalty clause and substitute with own determination (using normal rules for award of damages) Whether an agreed damages clause will be treated as a penalty clause depends on the circumstances existing at the time the contract is made

Lectures 25-27

20

Damages (Agreed Damages Clause)

What parties call a clause is not conclusive, i.e. a clause described as agreed damages clause may still be treated as a penalty clause, and vice-versa Reasonableness of the damages stated in the clause is judged at the date the contract was entered into and not the date of breach The clause will generally be construed as a penalty clause where it does not discriminate between a major breach and a minor breach (one lump sum payment)

Difficulties in making a pre-estimate of damages is not a bar to a valid agreed damages clause; precisely the reason why such clauses used

Lectures 25-27

21

Damages (Action for a Debt)

A party can claim money owing under a contract through an action for debt This is not a claim for damages but a claim for a liquidated sum and rules relating to damages do not apply Two requirements must be satisfied:
Contract provides for payment of a fixed sum Right to payment must have accrued (e.g., goods delivered, or work done, but not paid for)
Lectures 25-27 22

Termination of Performance (Common Law)

To be able to terminate performance, a plaintiff must be able to prove either:
Less than substantial performance of a condition, (Associated Newspaper v Bancks) or Serious breach of an innominate term (Cehave NV v Bremer Handelsgesellschaft mbH)

The remedy of termination allows the plaintiff to either:

Reject unsatisfactory performance, and/or Put an end to future performance of the contract
Lectures 25-27 23

Termination of Performance (Common Law)

The plaintiff must elect to terminate for anticipatory breach within a reasonable time and once done, the decision is final The decision to terminate must be unambiguous, either by way of word or conduct (Holland v Wiltshire)

The contract may stipulate what procedures should be followed for termination
Lectures 25-27 24

Termination of Performance (Sale of Goods Act)

Under SGA, a plaintiff has the right to reject the goods and treat the contract as repudiated for breach of a condition implied into the contract by the Act

The plaintiff can claim damages following rejection of the goods

But a breach of the condition must be treated as a breach of warranty if the goods have been accepted or ownership has passed (SGA of WA, s 11(3))

Lectures 25-27

25

Specific Performance
Court order requiring performance of contractual obligations: Injunctions may achieve the same result but indirectly An equitable remedy; discretionary in nature (e.g., court can refuse if plaintiff does not come with clean hands) Restricted to sale of land; extended to sale of unique goods (Dougan v Ley) Not granted under certain circumstances, e.g., damages are adequate relief; or where performance involves a close personal relationship; or where continuous supervision is necessary (Lumley v Wagner)

Lectures 25-27

26

Injunction
Also an equitable remedy; discretionary in nature May be prohibitory in nature e.g., prevent D from doing something D agreed not to do

May be mandatory in nature e.g., compel D to perform a contractual obligation that D agreed to do
Will not be granted under certain circumstances, e.g., where damages are an adequate remedy Injunctions used to prevent a threatened breach of contract (or stop a continuing breach of contract)
Lectures 25-27 27

Restitution
A remedy whereby the Defendant is required to return or pay for a benefit received from Plaintiff (even if no loss was suffered) Basis of restitution is unjust enrichment
Defendant received a benefit, At Plaintiff's expense, and Retention of benefit is unjust (See Sumpter v Hedges)

Not strictly a contractual remedy, may be available even if no valid contract

Proof of receipt of benefit required
Lectures 25-27 28

Restitution
Cases where restitution may be awarded in the contract law context
Recovery of money under a void contract Recovery of money where there is a total failure of consideration Quantum meruit claim for services provided (Pavey & Matthews Pty Ltd v Paul) Quantum valebant claim for goods provided (Sumpter v Hedges)
Lectures 25-27 29

Limitation on Remedies
Limitation Act 1935(WA):
Deadline for bringing legal action E.g., 6 years for breach of simple contract

Laches:
Undue delay in applying for an equitable remedy E.g., court may not allow rescission of a contract if unreasonable delay involved
Lectures 25-27 30

Limitation on Remedies
Relief against forfeiture:
Purpose to avoid a remedy out of proportion to nature of the breach and actual damages suffered An equitable doctrine whereby court will intervene to limit remedies for breach of contract to avoid forfeiture of proprietary rights (see Stern v McArthur)
Lectures 25-27 31

Limitation on Remedies
Stern v McArthur Facts:
Couple bought land and built house Paid $250 deposit for land and agreed to repay balance of $5,000 and interest in monthly instalments Couple divorced and wife remained in house She was unaware that husband had stopped repayments for several months Seller tried to reclaim land and keep instalments paid

Held:
As land had appreciated in value to $120,000, it was unjust to allow seller to reclaim land and keep instalments Seller could only claim damages for losses suffered
Lectures 25-27 32