LECTURE 7

COMMON LAW DAMAGES FOR BREACH OF CONTRACT

INTRODUCTION

When a contract is breached by one of the parties (the defendant), there are various

remedies available to the party not in breach (the plaintiff). Entry into a contract creates

obligations or promises to be carried out by the respective parties which are referred to as

primary obligations. The contract also creates a secondary obligation on each party,

relating to the payment of damages, the nature of which was explained in Photo

Production Ltd v Securicor Transport Ltd [1980] AC 827 at 849.

In making a claim for damages a plaintiff must first establish that the defendant has

breached the contract. Second, a plaintiff must also show that he or she is ready willing

and able to perform his or her contractual obligations before the right to damages arises.

See Foran v Wight (1989) 168 CLR 385 at 397, 451. Apart from two exceptions, there is

no requirement that the plaintiff also terminate the contract. The two exceptions are, first,

in relation to damages for anticipatory breach, and second, where the claim is for

expectation damages. Of course, the right to damages may be excluded or limited by an

appropriately drafted exclusion that is incorporated into the contract (see Lecture 6).

NOMINAL AND SUBSTANTIAL DAMAGES

What is standard of proof in damages claims? See The Commonwealth of Australia v

Amann Aviation Pty Ltd (1991) 174 CLR 64 at 80.

What is meant by the terms ‘nominal’ and ‘substantial’ damages? See Owners of SS

‘Mediana’ v Owners of SS ‘Comet’ [1900] AC 113 at 116.

THE COMPENSATORY NATURE OF DAMAGES

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The compensatory nature of damages is confirmed in the often cited statement of

principle in Robinson v Harman (1848) 154 ER 363 at 365, where Baron Parker said:

[W]here a party sustains loss by breach of a contract, he is, so far as money can do it, to be placed in the same position, with respect to damages, as if the contract had been performed.

Is a plaintiff entitled to be better off as a result of a damages award? See Commonwealth

v Amann Aviation, at 82, 136, 163. How rigidly is the compensation principle applied?

See Wenham v Ella (1972) 127 CLR 454 at 466; Ruxley Electronics and Constructions

Ltd v Forsyth [1996] AC 344 at 354, 356-7, 360-1, 365-8.

Disgorgement Damages

What is meant by ‘disgorgement’ damages? Can a plaintiff recover them for breach of

contract? Attorney General v Blake [2001] 1 AC 268; In Hospitality Group Pty Ltd v

Australian Rugby Union (2001) 110 FCR 157 at 196.

Exemplary Damages

Are exemplary damages recoverable for breach of contract? See Butler v Fairclough

(1917) 23 CLR 28 at 89.

THE ONCE AND FOR ALL LUMP SUM RULE

An award of damages for a breach of contract is made on a once and for all lump sum

basis: Johnson v Perez (1988) 166 CLR 351 at 355.

Taxation of Damages Awards

In determining the amount of the lump sum to be awarded to a plaintiff, a court must take

into account the effect of taxation on the award. See Federal Commissioner of Taxation v

Wade (1951) 84 CLR 105 at 115.

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DATE FOR ASSESSMENT OF DAMAGES

Claims for damages for breach of a simple contract must be made with the court within

six years of the date of the breach: Limitation Act 1969 (NSW), s 14(1). If the contract is

set out in a deed the limitation period is 12 years: Limitation Act 1969 (NSW), s 16.

When a claim for damages is brought before a court the date of the breach of contract is

the date by which the measure of damages is generally assessed. Is this rule rigidly

applied? See Johnson v Perez at 371; Commonwealth v Amann Aviation, at 161-2; Castle

Constructions Pty Ltd v Fekala Pty Ltd [2004] NSWSC 672 at [28]; Hocking Stuart

(Hawthorn) Pty Ltd v Vernea [2005] VSCA 129.

INTERESTS REFLECTED IN A DAMAGES AWARD

The following four interests may be reflected in an award of damages for breach of

contract: (i) expectation interest, (ii) reliance interest, (iii) restitution interest, and (iv)

indemnity interest. These labels ‘are simply manifestations of the central principle

enunciated in Robinson v Harman rather than discrete and truly alternative measures

which a party not in breach may elect to claim’: Commonwealth v Amann Aviation Pty

Ltd at 82. Subject to the rule that a plaintiff cannot be better off by an award of damages

than he or she would have been if the contract had been performed, a damages award can

include a combination of losses that reflect different interests. For example see McRae v

Commonwealth Disposals Commission (1951) 81 CLR 377.

The Expectation Interest

The expectation interest is the interest most commonly reflected in an order for damages

and which most clearly fits within the compensation principle set out in Robinson v

Harman. Expectation damages are sometimes referred to as loss of profit damages, and

reflect compensation for the loss of the expectation, or profit, that the plaintiff was

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entitled to under the contract but which he or she has been denied by the defendant’s

breach of contract.

Expectation Damages and Termination of Contracts

As expectation damages essentially compensate the plaintiff for the loss of the contract,

in order to gain compensation for such a loss, the contract must first be terminated by the

plaintiff: Progressive Mailing House Pty Ltd v Tabali Pty Ltd (1985) 157 CLR 17 at 31.

However, a contract may contain a right to terminate it for specified breaches of the

contract. If the specified breaches are not ones that would give rise to a right to terminate

the contract at common law, the plaintiff has no right to claim expectation damages:

Shevill v Builders Licencing Board (1982) 149 CLR 620; 42 ALR 305.

Damages for Loss of a Chance

A particular instance of an expectation interest for which assessment of damages presents

difficulties for courts is the loss of a chance or opportunity. Cases arise in situations

where (i) the contract’s principal purpose is to provide a party with the chance of

obtaining a benefit, or (ii) a term, express or implied, of the contract promises such a

benefit, or (iii) where an opportunity is lost as a consequence of the breach by the other

party.

See Chaplin v Hicks [1911] 2 KB 786; Sellars v Adelaide Petroleum NL (1994) 179 CLR

332 at 349, 355-6, 367-8; Fink v Fink (1946) 74 CLR 127 at 143; Sensis Pty Ltd v

McMaster-Fay [2005] NSWCA 163 at [57]; Commonwealth v Amann Aviation, at 83.

Damages for Non-economic Loss

An important aspect of expectation damages in contract law is that recovery is generally

limited to economic losses. Non-economic losses are generally not recoverable in an

action for damages for breach of contract. For exceptions see Boncristiano v Lohmann

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[1998] 4 VR 82 at 94; Grant v Australian Knitting Mills Ltd [1936] AC 85 and Aldersea

v Public Transport Corporation (2001) 3 VR 499 at 515-18; Flamingo Park Pty Ltd v

Dolly Dolly Creation Pty Ltd (1986) 65 ALR 500 at 524-5.

Damages cannot, as a general rule, be recovered for ‘disappointment of mind occasioned

by the breach of contract’: Hamlin v Great Northern Railway Company (1856) ER 1261

at 1262; Addis v Gramophone Co Ltd [1909] AC 488. What did the High Court say about

the rule in Hamlin in Baltic Shipping Co v Dillon (The Mikhail Lermontov) (1993) 176

CLR 344? Is there an exception to the Hamlin rule? See Baltic Shipping v Dillon, at 381-

2; Diesen v Samson [1971] SLT 49; Hamilton Jones v David & Snape [2004] 1 All ER

657; Farley v Skinner [2002] 2 AC 732; Ruxley Electronics v Forsyth; Boncristiano v

Lohmann, at 95.

The Reliance Interest

The reliance interest reflects compensation granted to a plaintiff in relation to expenditure

reasonably incurred in reliance on the defendant’s promise and which is wasted because

of the latter’s breach. The term ‘wasted expenditure damages’ is also often used to

describe this type of loss. Two cases serve as useful illustrations: McRae v

Commonwealth Disposals Commission; Commonwealth v Amann Aviation.

These two cases raise the following important issues concerning the recovery of damages

for reliance loss:

• whether a plaintiff can recover damages for all his or her reliance loss. See

Commonwealth v Amann Aviation, at 81, 99, 127, 135, 157, 163.

• the recovery of damages for reliance loss where the plaintiff’s expectation

damages cannot be determined. See McRae v Commonwealth Disposals

Commission, at 414; Commonwealth v Amman Aviation at 86, 94, 105-07,

115,126, 132-2, 147,157, 166.

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• the recovery of damages for reliance loss where the plaintiff’s expenditure was

incurred before the contract was entered into. See Commonwealth v Amann

Aviation, at 86, 156, 163; Anglia Television Ltd v Reed [1972] 1 QB 60.

• the recovery of damages for both reliance loss and expectation loss. See Anglia

Television Ltd v Reed at 63-4; Commonwealth v Amann Aviation, at 84-5, 136-7,

155, 162-3; TC Industrial Plant Pty Ltd v Robert’s Queensland (1963) 180 CLR

130 at 141.

The Restitution Interest

The restitution interest refers to the value of any benefits that the plaintiff has conferred

on the defendant as a result of performance, in whole or in part, of the contract. For

example see McRae v Commonwealth Disposals Commission. In more recent times

claims for recovery of the value of benefits conferred upon a defendant pursuant to a

contract have been based upon the law of restitution and not in damages for breach of

contract. For example see Foran v Wight. See also Baltic Shipping v Dillon, at 350, 375,

389. Note Mason CJ’s important points in Baltic Shipping v Dillon at 350-1. See also Re

Daniel [1917] 2 Ch 405.

The Indemnity Interest

The indemnity interest refers to losses, usually, but not always, in the form of expenditure

of money, incurred by a plaintiff as a result of the defendant’s breach. Such losses can

arise in a variety of circumstances. See Hammond & Co v Bussey (1887) 20 QBD 79.

In cases concerning contracts to build or to do repair work, breaches by the person

contracted to the building or repair work, will usually mean that the plaintiff will be able

to recover the costs incurred in remedying the defective work done. Such damages are

sometimes referred to as ‘reinstatement costs’ or ‘costs of restoration’. However, in some

cases, an alternative method of assessment is employed and the plaintiff recovers an

amount based upon the difference between the value of the property as a result of the

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breach and the value of the property had the work been done as stipulated in the contract.

The issue of which method is used is, ultimately, a question of what is reasonable in the

circumstances of the case. See Bellgrove v Eldridge (1954) 90 CLR 613; Ruxley

Electronics v Forsyth. Note SS Ardennes (Cargo Owners) v SS Ardennes (Owners)

[1951] 1 KB 55.

CAUSATION

The recovery of damages for breach of contract requires a causal connection between the

breach and the loss suffered. For philosophers and scientists causation is seen as the sum

of conditions that together produced an event. This is not the approach of the common

law. Rather than looking at all the factors that lead to a breach of contract, the focus is on

whether the breach contributed to the loss suffered. The breach need not be the sole

contributing factor: Alexander v Cambridge Credit Corporation Ltd (1987) 9 NSWLR

310 at 350.

The ‘but for’ Test

In establishing causation the traditional test, applied in both contract and tort, is the ‘but

for’ test. What does this mean? See March v E & MH Stramare Pty Ltd (1991) 171 CLR

506 at 522; Alexander v Cambridge Credit.

Intervening Events

Even if there is a causal connection between the breach of contract and loss suffered by

the plaintiff, a subsequent intervening event which contributes to the loss may break the

causal link. Such an intervening event, often referred to as a novus actus interveniens,

could be an act of the plaintiff, an extraneous event, or an act of a third party. See Medlin

v State Government Insurance Commission (1995) 182 CLR 1 at 6-7; Lexmead

(Basingstoke) Ltd v Lewis [1982] AC 225; Rolfe v Katunga Lucerne Mill Pty Ltd [2005]

NSWCA 252 at [105 Alexander v Cambridge Credit.

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CONTRIBUTORY NEGLIGENCE

The expression ‘contributory negligence’ refers, in the present context, to some

carelessness on the part of the plaintiff that contributes to the loss for which he or she

seeks compensation in the form of damages. Contributory negligence can impact on a

plaintiff’s claim in two possible ways. The first possibility is that a plaintiff’s negligence

can, as is illustrated by Lexmead v Lewis, constitute an intervening act that breaks the

chain of causation between the defendant’s breach and plaintiff’s loss. The second way in

which contributory negligence can impact on a plaintiff’s claim for damages is by

reducing the quantum of damages by an amount that is proportionate to the extent to

which the plaintiff’s negligence contributed to the loss he or she suffered. See Astley v

Austrust Ltd (1999) 197 CLR 1; Law Reform (Miscellaneous Provisions) Act 1965

(NSW), ss 8-9.

REMOTENESS

The principle of remoteness is one that places limits on the losses for which a plaintiff is

able to recover damages, even though the losses are caused by the defendant’s breach of

contract. It had been recognised that the rationale for this principle is not based upon

‘pure logic’, but rather upon ‘practical reasons’: Liebosch Dredger v SS Edison [1933]

AC 449 at 460. The rule on remoteness for breach of contract was laid down in Hadley v

Baxendale (1854) 156 ER 145. Two matters arise in relation to the rule in Hadley v

Baxendale, namely, the degree of knowledge of the parties that is required, and, the

degree of likelihood of loss resulting from the breach.

Degree of Knowledge

The First Limb of Hadley v Baxendale

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See Jackson v Royal Bank of Scotland [2005] 2 All ER 71 at 83-4; Victoria Laundry

(Windsor) Ltd v Newman Industries Ltd [1949] 2 KB 528; Koufos v C Czarnikow Ltd

[1969] 1 AC 350.

The Second Limb of Hadley v Baxendale

See Hungerfords v Walker (1988) 171 CLR 125 at 142; Robophone Facilities Ltd v Blank

[1966] 3 All ER 128 at 143; Jackson v Royal Bank of Scotland, at 79;McRae v

Commonwealth Disposals Commission, at 414.

Likelihood of Loss Occurring

Pursuant to both limbs of Hadley v Baxendale, if the loss is not one that arises ‘naturally’

or ‘according to the usual course of things’ as a result of the breach, it will not be

compensated for by an order for damages. This raises the question of the likelihood of the

loss arising. See Victoria Laundry v Newman Industries, at 539-40; Koufos v Czarnikow

at 389-90; Alexander v Cambridge Credit at 363-4; Commonwealth v Amann Aviation at

99; Baltic Shipping v Dillon at 368.

The Extent of the Loss to be Contemplated

For damages to be recovered the defendant does not have to have contemplated the

precise extent of the loss. It is enough if he or she contemplated the general type of loss

that would arise ‘naturally’ or ‘according to the usual course of things’. See H Parsons

(Livestock) Ltd v Uttley Ingham & Co Ltd [1978] QB 791.

MITIGATION

The principle of mitigation qualifies the compensation principle in Robinson v Harman

by imposing an obligation upon a plaintiff to, within reasonable limits, undertake steps

that will have the effect of avoiding or limiting the losses that are caused by the

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defendant’s breach of contract. See British Westinghouse Electric and Manufacturing

Company Limited v Underground Electric Railways Company of London Limited [1912]

AC 673 at 689.

The principle of mitigation is set out in three rules:

• a plaintiff cannot recover damages for loss that was avoidable. See Shindler v

Northern Raincoat Co Ltd [1960] 2 All ER 239 at 250; Dunkirk Colliery

Company v Lever [1878] 9 Ch D 20 at 25; The Clippens Oil Company Limited v

The Edinburgh and District Water Trustees [1907] AC 291 at 303-04; Simonius

Vischer & Co v Holt & Thompson [1979] 2 NSWLR 322; Payzu v Saunders

[1919] 2 KB 581; Yetton v Eastwoods Froy Ltd [1966] 3 All ER 353; Brace v

Calder [1895] 2 QB 253; Metal Fabrications (Vic) Pty Ltd v Kelcey [1986] VR

507 at 509.

• a plaintiff cannot recover damages for loss that was avoided. See British

Westinghouse v Underground Electric Railways, at 689; Lavarack v Woods of

Colchester Ltd [1967] 1 QB 278; Hussey v Eels [1990] 2 QB 227; Manwelland

Pty Ltd v Dames & Moore Pty Ltd [2001] QCA 436.

• a plaintiff can recover money spent in avoiding or attempting to avoid loss. See

Westwood v Secretary of State for Employment [1985] AC 20 at 44.

Mitigation and Damages for Anticipatory Breach

An anticipatory breach of contract does not of itself give rise to a right on the part of the

innocent party to damages for breach of contract. The right to sue for damages only arises

if the innocent party accepts the breach and terminates the contract: Ogle v Comboyuro

Investments Pty Ltd (1976) 136 CLR 444 at 450. Accordingly, no question of mitigation

can arise until termination of the contract has taken place. If the innocent party elects to

keep the contract on foot the right to damages only arises when actual breach occurs. No

question of mitigation arises whilst the contract is on foot: Huppert v Stock Options of

Australia Pty Ltd (1965) 112 CLR 414 at 431.

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LOSS OF USE OF MONEY AND INTEREST ON DAMAGES

See Hungerfords v Walker. Note Federal Court Act 1976 (Cth), ss 51A-52; Supreme

Court Act 1970 (NSW), ss 94-95.

ALTERNATIVE METHODS OF ASSESSMENT

If a defendant could perform a contract in a number of different ways, damages for

breach of the contract will be assessed on the basis that the defendant was in breach of

the least burdensome means of performing the contract. For example see Withers v

General Theatre Corporation [1933] 2 KB 536 at 548-9. See also : Maradelanto

Compania Naviera SA v Bergbau-Handel GmbH (The Mihalis Angelos) [1971] 1 QB

164; Commonwealth v Amann Aviation, at 149-50; TCN Channel 9 Pty Ltd v Hayden

Enterprises Pty Ltd (1989) 16 NSWLR 130.

Loss of Discretionary Bonuses

A contract may stipulate that certain benefits may be conferred upon the promisee at the

discretion of the promisor. The question that arises in such a contract is whether an

employer, who has breached the employment contract, will be liable in damages to the

employee in relation to the discretionary bonus clause of the contract. See Cantor

Fitzgerald International v Horkulak [2004] EWCA Civ 1287.

CONCURRENT LIABILITY IN CONTRACT AND TORT

In recent decades the tort of negligence has expanded in scope and now offers the

possibility of a remedy in areas that had traditionally been the preserve of contract law.

What this means is that the defendant is potentially liable in alternate claims based upon

the tort of negligence or for breach of contract. In this sense, the plaintiff is concurrently

liable to the plaintiff.

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In relation to cases of concurrent liability, most of the key decisions have involved the

liability of professionals, such as lawyers, medical practitioners and accountants, to their

clients. A significant case in this process was the House of Lords decision in Hedley

Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465. Prior to Hedley Byrne v Heller,

the liability of such professionals was in contract only. Although the existence of

concurrent liability is now beyond question, judges have expressed contrasting views as

to whether preference should be given in such cases to the tort of negligence claim or the

breach of contract claim. See Hawkins v Clayton (1988) 164 CLR 539 at 585; Astley v

Austrust Ltd at 22.

The Concurrent Liability Issue

The principal reason for the debate over concurrent liability is rooted in the fact that the

measure of damages awarded to a plaintiff will not necessarily be the same irrespective of

whether the claim is pursued in the tort of negligence or for breach of contract. See

Koufos v Czarnikow at 386; H Parsons (Livestock) v Uttley Ingham & Co at 807; Astley v

Austrust Ltd at 36-7.