I recently met a futurist. He told me that clients of law firms are essentially interested in two things: (1) will I win? and (2) how much will it cost? I would add to that list a third question: (3) what will be the damages? In this three-part series I will discuss damages in contract, tort and equity and in that order. Whilst it may be tempting to think that a court simply works out the damages and that the amount will always be the same that is not the case since the quantum will depend on the type of cause of action and a party usually needs to make an election before judgement is delivered.

The basic rule is that as soon as someone breaches a contract the innocent party is entitled to “legal redress” even if there is no real loss. It is best to avoid legal proceedings where the loss is only small and only nominal damages would follow given the amount of time you’re likely to lose prosecuting your case and the “litigation anxiety” you may suffer. Assuming your loss is real and not insignificant you would be interested to know how the law goes about measuring it. Where damages for breach are an inadequate remedy specific performance should be considered instead.

The idea behind contractual losses is to place the plaintiff, in so far as money can do it, in the position that would have been occupied if the contract was properly performed usually assessed as at the date of the breach. This is also known as the “expectation loss” or “loss of bargain damages”. There are essentially two ways of measuring this type of loss that is by reference to: the diminution in value or the cost of substitute performance. This, by way of example, means that if for instance the seller of goods and services fails to deliver altogether then the purchaser under that contract would need to go into the open market and find substitute performance and sue for the difference in price. Alternatively, with respect to “marketable commodities” if something defective is bought and the buyer cannot reject those goods then the buyer would bring a claim for diminution in value being the difference in price between what was received and what should have been received.

As with many things in the law there isn’t a one size fits all approach that can be universally applied. For instance where there is a contract for the construction and repair of property that has been breached tricky questions may arise about whether diminution in value or substitute performance should be awarded. In this context the diminution in value means the difference in price between what the defective property is worth and what its value would have been if the contract for the construction/repair had been carried out properly whereas substitute performance would be the cost of getting another contractor to repair the property. Often, in such situations, a plaintiff would prefer to have substitute performance to diminution in value as that would more properly accord with the expectation and typically be a greater award. As such, for construction contracts, the law tends to favour awarding substitute performance i.e. rectifying defects unless a defendant can show that it would be unreasonable to carry out that work so that the plaintiff should be limited to diminution in value. In Bellgrove’s case the High Court gave an example of when it would be unreasonable to insist on rectification for instance when the contract is to build with secondhand bricks and in reality brand-new bricks are used preventing the homeowner from insisting the house should be demolished and rebuilt with old bricks.

In other contexts where a plaintiff can show that it suffered a loss of profits due to the defendant’s breach then the lost profits will be the expectation loss and can be claimed subject to remoteness and mitigation (discussed below). Sometimes a plaintiff has difficulty in proving its expectation losses being the profits it would have earned and may in such cases instead seek “wasted expenditure”. The limitation on wasted expenditure is that it must be reasonably incurred and there may be a need to deduct the residual value of goods for the price at which they can be sold. In other cases where a plaintiff has lost a chance of earning a profit the court may be prepared to perform a calculation based on the percentage chance that a profit in a particular amount would have been earned. Simplistically if we were to say that there was a 50% chance of making $100 profit arguably the plaintiff would be entitled to $50 in respect of such a loss of chance.

Not all contracts, when breached, result in a loss of profits. Clearly, a breach of contract could result in other forms of loss such as where safety requirements are breached causing personal injury or a contract for a holiday on a cruise ship is breached causing loss of enjoyment. In such cases the plaintiff may find an interaction between damages at contract and in the case of personal injury damages in tort. In New South Wales the position has been affected by the civil liability legislation which places various caps on what may be recovered.

In some cases where a contract has been breached the plaintiff may be interested in seeking equitable remedies that focus on the gain made by the defendant. These remedies will be discussed in a future publication but can flow from a breach of contract. For instance many employment contracts imply into the contract a duty to act with good faith and fidelity which when breached could potentially attract an account of profits/restitution.

Before a plaintiff will be entitled to damages there must be relevant causation that is the breach must cause the loss (and the chain must not be broken). This has been interpreted to mean that not only must there be factual causation but it must be appropriate in a legal sense for the liability to extend to that loss.

Some of the other limiting factors include remoteness of damage, the obligation to mitigate and defences such as contributory negligence [see: s 9 LRMPA]. When losses are too remote the plaintiff will not be able to recover in respect of them. In basic terms this means that a plaintiff will recover losses that normally and ordinarily flow from that breach and losses that the defendant was specifically aware of and contemplated at the time the contract was entered into. A plaintiff is also always under an obligation to mitigate losses. Obviously if a plaintiff can avoid a loss then it should do so as it cannot claim such avoidable losses from a defendant. Under the apportionment legislation it may be possible to reduce damages where there is contributory negligence.

Where a contract sets out an amount payable by a party in the event of a breach and that amount is not a genuine pre-estimate it will be considered to be a penalty. Such penalties can not be recovered as a court is likely to decline to enforce it.

If as a small business owner or private client you are aggrieved by someone else’s breach of your contract where this has caused you to suffer real and substantial losses you will no doubt be interested in exercising your rights before they expire. Please contact us to find out what rights you have regarding your contract dispute and the steps you need to take to try and make this right.

* This content does not purport to give legal advice. Readers must obtain their own legal advice, that applies to the particular circumstances of their case, before taking any action at all.

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