Adequacy of damages

In general, as we shall see, the common law aims to put the parties into the position they would have been in had the contract been performed by ordering one party to pay money to the other. Where one of the parties has performed its side of the bargain and is awaiting payment from the other party, this can be achieved by the 'action for an agreed sum', or in sale of goods contracts the 'action for the price'. In other words, the party who has promised to pay for goods or services which have been transferred or performed by the other party, can be required to make good that promise. In other situations, the normal requirement will be for the payment of compensatory damages. An order to perform part of the contract, other than paying money that is owed, is much more unusual.

We start, therefore, by considering the remedy of 'damages', and will then look at specific performance and injunctions.

Damages: Purpose.

The basic principle of contractual damages is that of restitutio in integrum, or full restitution, which involves putting the innocent party into the position it would have been in had the contract been performed.

The basic principle of damages for breach of contract is that the injured party is entitled, so far as money can do it, to be put in the position he would have been in if the contractual obligation had been properly performed. He is entitled, that is to say, to the benefit of his bargain.

The main objective of contract damages is therefore compensation, not punishment. Although, of course, in some situations, a party thinking about breaking an agreement may be deterred by the prospect of having to pay damages, or a party who has broken an agreement may suffer considerably from having to pay compensation, nevertheless these consequences are not the purpose of the award. This is shown by the fact that if the party not in breach has suffered no quantifiable loss, only nominal damages will be awarded. If, for example, there is a failure to deliver goods, and the buyer is able to obtain an alternative supply without a problem, and at a price which is the same or lower than the contract price, no substantial damages will be recoverable.

In relation to this aspect of contract damages, it is important to note the concept of the 'efficient breach'. Looking at the law of contract from the economic point of view, as a means of wealth maximisation, it may make sense for a party to break a contract. The typical example given is where the seller (S) has contracted to sell an item to a buyer (B1) for £100. Before the transaction takes place a second potential buyer (B2) offers S £200 for the item. If S sells to B2, S will receive £200, but may have to pay compensation to B1 for not fulfilling the original contract. But as long as that compensation is below £100, S will still have made a profit. All parties are in theory happy. S has sold the item at a higher price, to B2, to whom the item is obviously more valuable than it would be to B1. B1 has not received the item, but has received damages which fully compensate for any losses.

The concept of 'efficient breach' is most commonly discussed in terms of the advantage to the party breaking the contract in 'maximising gain'. As Campbell has pointed out, however, it should also be recognised as encompassing the situation where the party in breach acts to 'minimise loss'. This may arise, for example, where circumstances change in a way that increases the costs of performance to an extent that the increase exceeds the damages which would be payable to the other party. Here again, the economic answer is that the efficient result is not to enforce the contract, but to allow the party whose costs have increased to escape from it by paying appropriate compensation.

The concept of the efficient breach goes some way to explaining why the law of contract is generally more disposed to award damages than to insist on performance. The analysis works best, however, in relation to discrete business contracts which are fully executory. Once the parties are in a long term relationship, either in respect of the contract under consideration, or as regards a series of contracts, then the economic analysis of the possible advantages of breach becomes much more complex. The risks of endangering the future relationship need to be added in to the equation. Similarly, if one party has already performed part of its obligations (particularly if these are in the form of services, rather than goods or money, thus making restitution difficult), allowing breach plus compensation may not be straightforward. Finally, in relation to consumer transactions, it may well be felt that the need to protect the consumer means that the economically efficient answer is not the one which the courts should support. In addition, consumers may well place a value on what they are seeking to receive under the contract which is higher than the market value - thus giving rise to the concept of what has been called the 'consumer surplus'. It is also important to remember that parties will not always act in the most economically efficient way in relation to a particular transaction: for example, being seen as a firm which honours its contracts may be more 'valuable' (though difficult to quantify) than making a bigger profit on a particular deal. Nevertheless, provided that its limitations are recognised, the concept of the efficient breach is a useful tool to apply in the analysis of the law of damages for breach of contract.

This economic analysis is based on the assumption that, as stated at the beginning of this section, the purpose of contract damages is to compensate. It should be noted, however, that a possibly significant exception to the solely compensatory nature of contract damages has been opened up by the decision of the House of Lords in Attorney General v Blake. It was held there that a defendant could in certain circumstances be required to hand over to the claimant a benefit acquired by breaking a contract, even where there is no corresponding loss to the claimant.

Damages: Measure.

Within the general principle of compensation, there are three basic methods by which damages may be calculated. These are conveniently labelled as 'expectation', 'reliance' and 'restitution'. Some consideration also needs to be given to consequential losses and non-pecuniary losses.

Expectation interest. This is the approach which most clearly relates to putting the innocent party into the position he or she would have been in had the contract been performed. It is concerned with fulfilling the expectations of that party as to the benefits that would have flowed from the successful completion of the contract. In particular, where the innocent party, as will commonly be the case, was expecting to make a profit as a result of the contract, that will generally be recoverable, as well as any other consequential losses flowing from the breach.

In general, the calculation of the expectation interest is simply a matter of looking at where the claimant would have ended up if the contract had been performed properly. In making that calculation, account must of course be taken of any costs which the claimant may have saved by the defendant's non-performance. It is the claimant's profit on the contract that is recoverable, which will not necessarily involve the defendant in paying the full price of the missing performance.

There are two situations which may cause particular difficulty for calculation of the expectation interest, and which merit further consideration. First, where the profit was not certain; secondly, where the cost of fulfilling the claimant's full expectation may be disproportionate to the eventual benefit.

In the situation where the profit was not certain to be made, there may be a partial recovery, on the basis that the claimant has lost the chance to make it.

The second area of difficulty in finding the appropriate award to meet the claimant's expectations arises in connection with the situation (usually occurring in construction contracts) where the cost of providing the claimant with exactly what was bargained for may be out of all proportion to the benefit which would thereby be obtained.

The value of the benefit lost is by definition something personal to the claimant, yet the claimant's subjective view cannot be allowed to be the determining factor. It may be that all that can be done is to wait for practice to develop (as it has done in other areas of non-pecuniary loss) so that a standard level for this type of award gradually becomes established.

Finally, it should be noted that the award for loss of amenity is most likely to arise in non-business contracts.

In some situations, it may not be easy for the claimant to calculate the profits that would have been made. Here it may prove more sensible to abandon the attempt, and instead to seek recovery of the expenditure which has been incurred in anticipation of the contract. This is what is referred to as the 'reliance' interest. The result of this type of award is that the claimant is put back to the position prior to the contract being made, rather than in the position if the contract had been performed properly.

The decision as to whether to seek expectation or reliance damages will generally lie with the claimant.

The burden of proving that the bargain was 'bad' in this sense falls, however, on the defendant. The claimant does not have to prove that sufficient profit would have been made on the contract to cover the expenses incurred.

Although in general a choice must be made as to which measure of damages is being sought, in certain circumstances it may be possible to recover both expectation and reliance losses, as long as this does not lead to double recovery.

Restitution. 'Restitution' in relation to contract damages traditionally refers to the return of money paid, such 'damages' being largely a corollary of termination following a repudiatory breach. If such a breach has been accepted, and the claimant has returned any benefits received, or is willing to do so, then he or she will also be entitled to claim the restitution of anything which has been given to the defendant. The easiest example is the situation of defective goods. The buyer returns the goods and expects the refund of the price. In many situations, and in particular in relation to consumer contracts, that may be all that can be recovered by way of damages. The buyer may not have been expecting to make a profit out of the use or resale of the goods, and there may be no other losses resulting from the breach. In appropriate circumstances, however, it is possible to combine a claim for restitution with one for the reliance or expectation damages.

Restitution also has a more general role to play in relation to contracts which are void, or rescinded (for example, for mistake or misrepresentation), or where no contract has ever come into existence. These situations are not ones which arise on breach, and so are not discussed further here.

There is, however, another meaning to 'restitution', which refers to the rectification of a situation which has led to the 'unjust enrichment' of a party. Contract damages have not traditionally been awarded on this measure, and the idea that there could be recovery not only for the claimant's loss, but also for the defendant's gain.

Consequential losses. There are some losses which flow from the breach, but which cannot be put into the category of 'expenses' (that is, reliance) or thwarted expectations. Provided the causal link can be established, and they are not too remote, then they will be recoverable. If there is a contract for the purchase of a piece of machinery, for example, and it is defective, then the expectation interest may allow the recovery of lost profits that would have been gained by using the machine. If, however, the defect causes the machine to explode, which results in damage to the buyer's premises, or personal injury to the buyer, compensation in relation to these consequential losses can also be recovered.

Non-pecuniary losses. Contract damages are primarily concerned with economic losses of one kind or another, which are more or less quantifiable in money terms. In some situations, however, non-pecuniary losses will be caused. If, for example, a defective product results in personal injury to the purchaser, there is no reason why damages should not be recovered in relation to the pain and suffering so caused. Of course, third parties who are injured will have to rely on tortious remedies at common law or under the Consumer Protection Act 1987.

A more difficult question arises in relation to mental distress, anguish or annoyance caused by a breach of contract. The courts have tended to be wary of awarding compensation under this heading, but the whole area has recently been reconsidered in a number of House of Lords decisions.

As Staughton LJ held:

... damages for mental distress in contract are, as a matter of policy, limited to certain classes of case. I would broadly follow the classification by Dillon LJ in Bliss v South East Thames RHA:'... where the contract which has been broken was itself a contract to provide peace of mind or freedom from distress.' It may be that the class is somewhat wider than that. But it should not, in my judgment, include any case where the object of the contract was not comfort or pleasure, or the relief of discomfort, but simply carrying on a commercial activity with a view to profit.[9]

Subsequent cases have taken a similar line. In Watts v Morrow, the general rule and its exceptions were restated by Bingham LJ, in a passage which has subsequently been approved by the House of Lords:

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 the 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 ... A contract to survey a house for a prospective purchaser does not fall within this exceptional category. 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.[10]

Limitations on Recovery. There are two main limitations on the amount of damages which can be recovered for a breach of contract, namely, the rule of remoteness and the requirement of mitigation. The issue of contributory negligence will also be considered below.

The rule of remoteness. At various points in this chapter, it has been mentioned that the award of damages under a particular head will be subject to the rule of remoteness. This is a rule which basically prevents consequential losses extending too far, and placing unreasonable burdens on the defendant. It should also be noted that in relation to the tort of deceit, and the remedy for negligent misrepresentation under s 2(1) of the Misrepresentation Act 1967, all consequential losses are recoverable without limitation. This is exceptional, however, and in general, in both tort and contract, damages are only recoverable in relation to losses which are not too remote.

The type of recovery the rule is designed to prevent is as follows. Suppose that a contract for the hire of a car is broken, because the one supplied is unfit for its purpose and breaks down. The hirer may as a result fail to arrive at a sale where he would have been able to buy a valuable painting which he could have resold for a £100,000 profit. Should the hire company be liable for the £100,000? English law will normally regard this loss as too remote from the breach to be recoverable. This approach ties in with the view of contract law as a mechanism by which the parties to an exchange transaction allocate the risks of their enterprise. In order to be able to do this properly, they must be aware of the risks at the time of contracting, so that they can be properly catered for in the contract price, exclusion clauses, or other terms of the contract. If unforeseen losses were recoverable, this would unbalance the contractual relationship.

Mitigation. Once a breach of contract has occurred, the claimant is not entitled to sit back and do nothing while losses accumulate. There is an obligation to take reasonable steps to mitigate losses.

This obligation imposes on a plaintiff the duty of taking all reasonable steps to mitigate the loss consequent on the breach, and debars him from claiming any part of the damage which is due to his neglect to take such steps.

This principle does not impose on the plaintiff an obligation to take any step which a reasonable and prudent man would not ordinarily take in the course of his business. But when in the course of his business he has taken action arising out of the transaction, which action has diminished his loss, the effect in actual diminution of the loss he has suffered may be taken into account even though there was no duty on him to act.

In other words, the court will look at what the claimant's actual losses are, rather than what they might hypothetically have been had the claimant not acted, even though the claimant's actions in reducing the loss have gone beyond what might reasonably have been required. If the claimant has done nothing, however, the court will consider what steps might reasonably have been taken to reduce the losses. The claimant will be debarred from claiming any part of the damage which is due to a failure to take such steps. So, if the seller fails to deliver in a sale of goods contract, the buyer will be expected to go into the market and attempt to obtain equivalent goods. If such are available at, or below, the market price, then only nominal damages will be recoverable. If the buyer fails to enter the market until the price has risen, or pays over the odds, these increased losses will not be recoverable. Similarly, a reasonable offer of performance following a breach should not be spurned.

Mitigation only requires the claimant to act 'reasonably' in all the circumstances.

The principle of mitigation raises particular problems in cases of anticipatory breach. If the claimant accepts the breach, and the contract terminates immediately, then the normal rules will apply. If, however, the claimant does not accept the breach, but elects to affirm the contract and wait for the other party to perform, it seems that in some circumstances there is not any duty at that stage to reduce losses.

Contributory negligence. In tort, it is well established that the damages recoverable may be reduced by the claimant's own, contributory, negligence. Does the same principle apply in contract? The Law Reform (Contributory Negligence) Act 1945 did apply where there was concurrent liability in tort and contract (that is, where the breach of contract consisted of negligent performance, in a situation where there was also a tortious duty of care). Where, on the other hand, the breach of contract is based on strict liability, there is no scope for contributory negligence, and the 1945 Act is irrelevant. Where, however, the contractual liability is based on 'negligence', but there is no concurrent tortious duty, there is no clear authority.

The area is thus in some confusion, and a clear ruling from the House of Lords would be helpful. The Law Commission has recommended that contributory negligence should always be available to apportion losses where there has been breach of a contractual duty to take reasonable care, whether or not there is an overlap with tort, and this seems the most sensible solution.

One issue which has been considered by the House of Lords is the way in which contributory negligence should be dealt with in cases of overvaluation of property. Whether contributory negligence applies where the claimant's 'negligence' is different from the defendant's negligence; and, secondly, if it does, to what sum any reduction should be applied.

The analogy is used of the seat belt cases in tort; not wearing a seat belt will not contribute to the negligence of the driver, but it can be used as a reason for reducing the claimant's damages.

Liquidated Damages and Penalty Clauses. The parties to a contract may decide to include provision as to the compensation which is to be paid in the event of a breach. This is known as a liquidated damages' clause, and is generally a perfectly acceptable arrangement, to which the courts will happily give effect. It is an example of the parties deciding between themselves not only where the risks should lie, but the extent of such risks. Economic analysis is likely to conclude that such clauses are an efficient mechanism, in that they reduce the transaction costs which might otherwise follow a breach of contract, in terms of negotiating compensation or, in the worst case, having to take legal action to recover it.

The limitation which English law imposes on this approach is that the sum specified in the contract must be a 'genuine pre-estimate' of the plaintiff's loss, and not a 'penalty'. If it is the latter, then it will be unenforceable. . It may therefore be acceptable to use a single figure for compensation as a type of 'averaging' of the likely losses resulting from a range of breaches, the precise effects of which may be difficult to quantify.

Specific Performance. As noted at the beginning of the chapter, the only situation where the common law required performance of a contractual obligation was in relation to the action for an agreed sum, following performance by the claimant. The other aspect of what some commentators refer to as 'literal enforcement’ that is, the power to order a party to perform a non-monetary obligation, was left to the Chancery courts. The remedy of specific performance involves the court in issuing an order directing one of the parties to a contract to carry out his or her obligations. The sanction for a failure to comply is that the person concerned will be in contempt of court, and liable to fines and imprisonment as a consequence. Since the remedy is an equitable one, developed by the Chancery courts, it is discretionary, unlike damages, which are available as of right. This means that a claimant is not entitled to the order simply as a result of proving that the other party is in breach of its obligations. Once this has been established, the court will then decide whether it is appropriate in this particular case that the order should be made. For example, one way in which the courts will allow a party to escape the consequences of a mistake concerning the terms of the contract is by refusing to order specific performance. Similarly, the order may not be granted if the claimant has taken advantage of the defendant, for example, because he or she was drunk.

Although this discretionary element inevitably attaches a degree of uncertainty to the remedy, in fact, the courts have developed a number of rules about its use, which mean that in many cases, it will be fairly easy to determine whether or not the order is likely to be granted.

Adequacy of damages. One of the reasons why the remedy of specific performance developed is that, in certain situations, damages will be an inadequate remedy. If no pecuniary loss can be established, or if it is impossible to quantify, this would mean that there would be no effective sanction for a breach of contract, in the absence of the order for specific performance.

Now, of course, the remedy is available in all courts, and the question to be asked is: when will damages not be regarded as an adequate remedy?

If there is a contract for the sale of goods in which there is an active market, then it is very unlikely that an order for specific performance will be granted. The party not in breach can buy or sell in the market, and be compensated by way of damages for any financial loss resulting from a difference between the contract and market prices. If, on the other hand, what is being sold is a valuable antique, or some other item which is not generally available, specific performance may well be the appropriate remedy. This distinction is supported by s 52 of the Sale of Goods Act 1979, which allows for specific performance in relation to 'specific' or 'ascertained' goods, but not 'generic' goods. Even where the goods are 'specific', however, the discretion to order performance will not be exercised unless they are something out of the ordinary. It is not appropriate to order performance where the goods in question are 'ordinary articles of commerce and of no special value or interest'.

Similarly, it is normally the case that the order will be available to enforce contracts for the sale of land, since every piece of land is regarded as unique. This applies in favour of the seller as well as the purchaser, because it is a general principle that there should be mutuality in the availability of the remedy.

Injunctions. In some situations, the courts will be prepared to grant an injunction restraining a person from acting in a way which will amount to a breach of contract. The injunction may be 'interlocutory', that is, temporary, pending a full trial, or permanent. One example of a situation where this may be a valuable remedy is in relation to restrictive covenants relating to the sale of a business, or competing employment. In any contract in which a party promises not to do something, there will be potential scope for the use of an injunction. An injunction, however, like the order for specific performance, is an equitable remedy, and thus subject to the discretion of the court.

The courts will not allow an injunction to be used as an indirect means of specifically enforcing a contract for which a direct order to perform would not be granted.

SEMINAR PROGRAMME

Theme 1. Forming the Agreement (4 hrs)

1. Deeds and other formalities

2. General lack of formal requirement

3. The external signs of agreement

4. Offer

5. Self-service displays

6. Shop window displays

7. Advertisements

8. Unilateral and bilateral contracts

9. Acceptance. Methods of acceptance

10. Acceptance by conduct

11. Acceptance by silence

12. Acceptance in bilateral contracts

13. Inertia selling

14. Acceptance by post

15. Acceptance in Internet transactions

16. Acceptance in unilateral contracts. Unilateral contracts and ‘agreement’

17. Position in ‘reward’ contracts

18. Acceptance in ignorance of an offer

Sources:

1) Adams J. and Brownsword R. Contract, Consideration and the critical path. – London, 1990.

2) Jill Poole. Textbook on Contract Law. – 7^th edition. – Bristol, 2005.

3) Richard Stone. The modern Law of Contract. – 6^th edition. – London, 2005.

4) Frances Quinn and Catherine Elliott. Contract Law. – Oxford, 2005.

Keywords: deed, agreement, offer, acceptance, invitation to treat, promisor objectivity, promisee objectivity, bilateral contract, unilateral contract, inertia selling.

Questions:

1) What are the contracts where a deed is required?

2) What are the methods of acceptance in Ukraine?

3) Which difficulties arise in connection with acceptance in unilateral contracts?

Documents to be analised:

1) Law of Property (Miscellaneous Provisions) Act 1989

2) Directive on Electronic Commerce 2002

3) Restriction of Offensive Weapons Act 1959

4) Unsolicited Goods and Services Act 1971

5) Consumer Protection (Distance Selling) Regulations 2000

6) Electronic Commerce (EC Directive) Regulations 2002

7) Case Brogden v Metropolitan Railway (1877)

8) Case Felthouse v Bindley (1862)

9) Case Adams v Lindsell (1818)

Topics for essays:

1) The essential elements of a valid contract

2) Distinction of an Offer from “Invitation to Treat”

3) The rules of consideration

4) Offer and acceptance in Internet Transactions

Date: 2015-12-18; view: 819