Summary
Summary Damages
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Topic 7 of the contract law module. Used by a 1:1(1st) module.
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University of NottinghamLaw of Contract
1. GENERAL PRINCIPLES AND IDEAS
The obligation to pay damages for breach of contract arises out of the contract itself, by way of
implied secondary obligation implied by law: Photo Production Ltd v Securicor Transport Ltd [1980]
AC 827 at 849.
Liberty to buy one’s way out of a contract.
Contract law reflects not morality but practicality and economic efficiency.
Damages as substitute performance: quantify damages to place IP in as good a position financially as
if contract performed according to its primary obligations.
Robinson v Harman (1848) 1 Exch 850 at 855 per Parke B:
o ‘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.’
Golden rule: damages for breach of contract compensate for the loss caused by the breach.
Identification of the loss sustained by reason of the breach is, therefore, critical. May or may not be
straightforward. Note that need not correspond to a physical detriment or economic loss. See
especially Ruxley Electronics and Construction Ltd v Forsyth [1996] AC 344 (below).
Relevance of taxation: BTC v Gourley [1956] AC 185.
Role of contract damages is, therefore, to compensate IP for the adverse consequences of non-
performance. It is not to punish the contract breaker.
Teacher v Calder (1899) 1 F (HL) 39: D contracted to invest £15,000 in C’s timber business, but in
breach invested instead in a distillery. This investment proved profitable. Held: the measure of
damages is the loss to IP, not the gain to GP. D not liable to account to C for the profits generated
through his breach, but to pay damages quantified by reference to C’s loss.
Tito v Waddell (No 2) [1977] Ch 106: D was granted an exclusive licence to mine phosphate on Ocean
Island, a small island in the Pacific Ocean. The licence required D to replant the worked-out land with
indigenous trees. Action for, inter alia, failure to replant. Held: damages should be assessed on the
basis of diminution in the value of the land, not of money saved by the failure to replant. Megarry V-
C (at 332):
o ‘The question is not one of making the defendant disgorge what he has saved by committing the
wrong, but one of compensating the plaintiff ... [I]f the defendant has saved himself money, as by not
doing what he has contracted to do, that does not of itself entitle the plaintiff to recover the saving as
damages; for it by no means necessarily follows that what the defendant has saved the plaintiff has
lost.’
It follows, likewise, that Innocent and malicious breaches are treated the same; GP’s state of mind
does not affect loss sustained by IP. If C cannot prove any loss, entitled only to ‘nominal damages’
(could be £1 or even 1p). Once loss established, must then quantify. Again, may or may be
straightforward. Beware the attraction of simple, absolute propositions.
Watts v Morrow [1991] 1 WLR 1421 at 1444 per Bingham LJ:
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,University of Nottingham
Law of Contract
o ‘Since it is ultimately a question of fact what sum of money is necessary to put a particular
[claimant] in the position he would have been in if the particular defendant had properly
performed the contract in question, … the measure of damages cannot be governed by an
inflexible rule of law to be applied in all cases irrespective of the particular facts and regardless of
whether or not such measure gives effect to the underlying principle. But this does not mean that
there may not be sound prima facie rules to be applied in the ordinary run of cases. Examples
may be found in sections 51(3) and 53(3) of the Sale of Goods Act 1979: these are only prima
facie rules, but they reflect the same underlying principle and they govern cases to which they
are not shown to be inapplicable.’
Quantification may involve some elements of speculation (hypothetical events) or even artificiality
(pain and suffering), but the mere fact that damages cannot be quantified with scientific or
mathematical precision is no basis for not awarding any: Simpson v London & North Western
Railway Co (1876) 1 QB 274 at 277. The fact of the loss must be proved on a balance of probability,
but not its value (see further below).
The measure of damages must be consistent with the bargain struck by the parties: the secondary
obligation must properly reflect the primary obligations. The remedy must not operate so as to
impose on GP an assumption of responsibility more extensive than in truth assumed. This is the, or
at least a, function of the doctrine of ‘remoteness of loss’.
To what extent are the parties free to stipulate the damages payable in the event of breach?
Stipulate the nature of the breach as repudiatory or non-repudiatory.
Liquidated damages clause: but subject to the penalty jurisdiction.
Exemption clause: but subject to legislative controls.
Importance of assessing likely damages in practice: costs
Basic rule: loser pays winner’s costs as well as own.
However, to encourage settlement of cases, if D makes a payment into court, offering that
sum in settlement of the claim, and C (1) does not accept that sum and (2) recovers
judgment for no more than that figure, C, even if wins the case, liable for D’s costs incurred
after payment in.
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, University of Nottingham
Law of Contract
2. ASCERTAINING THE LOSS CAUSED BY THE BREACH (1): THE
OBLIGATION BROKEN
(a) To Do Work Or Confer Value?
C contracts with D, a builder, for certain work on a house at an agreed price of £10,000. D does the
work negligently. As a result, the market value of the house is £20,000 less than if the work done
properly. It will cost £15,000 to remedy the negligent work.
What did D promise? To produce a house with a certain market value or to carry out work with
reasonable care? Clearly the latter. The damages will be the cost of repair, not the shortfall in market
value: Perry v Sidney Philips & Son [1982] 1 WLR 1297 at 1301. This was the obligation undertaken
under the contract.
(b) Obligations Admitting Of Variable Or Optional Performance
General principle: C can prove loss of only the minimum benefit entitled to receive. Anything further
at D’s option and not, therefore, lost because of the breach. ‘A defendant is not liable in damages for
not doing that which he is not bound to do’: Abrahams v Herbert Reiach Ltd [1922] 1 KB 477 at 482
per Scrutton LJ. Therefore, quantify damages on the assumption that D chose to perform in the
manner least onerous to itself (sometimes termed the ‘minimum performance rule’ (MPR)).
Quantifiable minimum level of performance (minimum performance rule):
o C contracts to buy ‘200 tons of potatoes 5% more or less’ from D at a price of
£100 per ton. D repudiates the contract and fails to deliver any potatoes: Re
Thornett & Fehr [1921] 1 KB 219. How is damages measured? This is the
difference between the market price and the contract price – the difference
between what the buyer should have paid against what he should have received.
The minimum quantity the seller was obliged to deliver, in order to discharge
their obligations under the contract, is used. The seller is lawfully entitled to
deliver the 200 tonnes minus 5%. If previous dealing between the two has
occurred, and the seller has delivered in the range of 200 – 210 tonnes, this
likelihood will still be ignored.
o Employment contract over bonuses: range of performance available, unfettered
discretion, employer has an obligation not to act in a manner which is capricious,
doesn’t mean employer should award an objectively reasonable sum, however.
The court will look at what sort of figure would this employer have come up with
if a proper decision-making process had occurred. Damages will be calculated on
the basis of the court’s estimation of the employer having performed the
decision-making process of the contract.
Option to cancel: where the party in breach had the right to cancel the contract,
damages must be calculated on the basis that the right would have been exercised.
o D unlawfully terminates C’s contract of employment. C’s damages confined to
lost income until the earliest date for lawful termination of the employment.
o Repudiatory breach; accepted; but circumstances then occur such that, had
contract not been discharged, GP would have had contractual cancellation right.
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