#7428 - Liquidated Damages And Penalties - Contract Law

Week 6- Liquidated damages and penalties:

Mitigation of damage:

They must show on the balance of probabilities that the losses could have been reduced.

• Looks to the reasonable steps which have been or should reasonably have been taken by a plaintiff to reduce the loss caused by the defendant’s breach of contract.

• There are three rules in the requirements of mitigation:

  1. The Plaintiff cannot recover for avoidable loss.

     • Avoidable loss:

       • A plaintiff is expected to mitigate the loss if they are aware there is a breach giving rise to the loss or they could reasonably foresee one.

       • There is no contractual obligation to mitigate. But the defendant has the onus of proof to establish the plaintiff has not taken reasonable steps to mitigate their loss. If they succeed damages will be reduced.

       • E.g. If the defendant fails to deliver a machine, the plaintiff should buy another one and receive the differences in price.

       • There is a limit to what the defendant can argue should have been done. Only reasonable steps can be taken. They do not have to take excessive risk, cost or uncertainty.

  2. The plaintiff can recover for loss incurred in reasonable attempts to avoid loss. If you acted reasonably to mitigate and incurred more losses then you should be compensated.

     • When a plaintiff does take reasonable steps to mitigate their loss but actually increases the losses suffered:

       • In this case the plaintiff can recover damages to compensate for those additional losses.

3. The plaintiff cannot recover for avoided loss. If a resourceful person does more than he is reasonably expected to do and reduces the damages, then the defendant will get the gain from this. Contract law only awards damages for losses that are actually suffered.

   • A plaintiff may not recover damages for losses that have been diminished of avoided by the plaintiff’s actions even though that is not part of what is considered to be reasonable to avoid the losses.

   • Any benefits which arise out of the consequences of the breach are taken into account in calculating damages. This does not include those that are wholly collateral like insurance taken out.

• Mitigation and the sale of goods:

  • The Sale of Goods Acts assume that where a contract for the sale of goods is breached, the plaintiff will go into the market to reduce their losses. They have to try and mitigate their loss.

  • It is the difference between the market price and the contract price.

  • E.g. A failure to deliver wheat. Damages would be $200 if the contract price was $1000 and the market price was $1200 on the day of delivery. If the price was $900 in the market no damages would be claimed.

• It would be economic waste to allow a plaintiff to watch the damages pile up instead of mitigating their loss.

Remoteness:

• If the plaintiff establishes all the points. The defendant can still defeat their claim by showing one or more of the losses could have been avoided by taking steps to reduce them.

• If a defendant causes the plaintiff to suffer loss they are not liable for all the losses of which the breach is a significant cause. The remoteness rule is stricter. They only have to compensate the loss if they reasonably considered the loss a likely consequence of the type of breach that has occurred. Should the plaintiff’s loss be in reasonable contemplation? You have to foresee a higher degree of possibility (higher standard than torts) - It must be a likelihood and not a possibility. The defendant must have reasonably been taken to have assumed. Must be the kind of loss that can be reasonably been expected to be seen.

• E.g. A vendor agrees to supply machinery and the vendor wrongfully fails to deliver. The purchaser might have to purchase elsewhere, there may be a delay where his factory cannot operate, may suffer loss of reputation as an unreliable person to do business and he might suffer stress and won’t be able to sleep and he might crash his car. The defendant won’t be liable for all these things because it is not realistic that they are reasonably willing to compensate all these losses in the event of breach.

• The losses must be such that the defendant would not see as unlikely in the normal course of events or he can fairly be taken for this contract or this plaintiff because of special awareness of this plaintiff’s condition.

• Hedley v Baxendale - A miller broke his shaft and won’t turn and so he sends it to an engineer to get fixed. He makes a contract with Pickfords to carry the shaft and bring back a new one. Pickfords delay and wrongfully fail to carry back the new shaft and so the miller gets the new shaft four days later than he would have if the carrier had done what they had promised. In the four days the mill was not able to operate. The miller sues the carrier for loss of profits while there was a delay. The miller did not tell the carrier that he didn’t have a spare shaft. The miller has to show that each loss is one that would have occurred in the ordinary course of events following a breach of this kind or it is a loss which the defendant should have reasonably contemplated about a probable result of his breach because of special knowledge he had about this plaintiff’s special circumstances. The loss of profits are not those that would occur in the ordinary course of events because often the miller has a spare shaft. Not unless the miller had told him that he had no spare shaft would he have reasonably contemplated loss of profits.

• Remoteness rules:

  • Such losses following the defendants breach as would occur in the ordinary course of events following a breach of this kind. Losses within the first limb of Hedley v Baxendale.

  • Losses which the defendant should have contemplated were likely to arise in the consequences of this case due to special knowledge about the plaintiff. Losses recoverable under the second limb.

Limitations relating to specific types of claim:

Disappointment, distress, loss of reputation:

• In Baltic Shipping Co v Dillon, damages may be obtained for pain and suffering arising from physical injury caused by a breach of the contract. They will also be available where they related to physical inconvenience caused by a breach of contract. They will be available where an object of the contract was to provide enjoyment, relaxation or freedom from distress.

Contributory negligence:

• Australian law has abolished the common law doctrine of contributory negligence. Instead the legislation permits damages to be reduced if the plaintiff’s negligence has contributed to their own damage to the extent that is just and equitable.

  • For example the Wrongs Act 1958 (VIC) section 26 says that in subsection (a) that a claim of damages is not defeated by reason of the contributory negligence of the claimant. (b) says that damages however may be reduced to such an extent that is “just and equitable” considering the claimant’s share in the responsibility of the damage.

  • (1a) says that subsection 1 does not operate to defeat any defence under contract. (this means that contributory negligence will not reduce an award of damages for breach of contract). However this was altered by section 25 which says that is does relate to breach of a contractual duty of care (subsection b).

• In some cases it might be argued that carelessness or negligence on the part of the plaintiff has contributed to the loss suffered by him following a breach of contract by the defendant. There are two possible legal responses to negligence by a plaintiff:

  • Breaking the chain of causation:

    • Negligence on the part of a plaintiff has broken the chain of causation between the defendant’s breach and the plaintiff’s loss.

  • Reducing the damages of a careless plaintiff.

  • Background to contributory negligence and contract:

    • Damages can be reduced if a plaintiff’s negligence has contributed to their own loss to the extent that is just and equitable.

  • Legislation provides that a liability may be apportioned in respect of an act or omission that amounts to a breach of a contractual duty of care that is concurrent and co-extensive with a duty of care of tort.

Loss of bargain damages and termination under an express term:

• Loss of bargain damages are used when a contract is terminated and is based on the price the plaintiff would have received if the contract had been performed less the price of entering into a substitute transaction.

Damages for the late payment of money:

• There is a delay between the time the plaintiff suffers loss from a breach of contract and the time at which damages to compensate that loss are actually recovered following judgment in favour of the plaintiff.

• The rule that the plaintiff receives the damages at the time of breach makes them vulnerable to inflation. They may have an opportunity cost or have to borrow and incur interest. Statute gives the courts power to order interest paid on damages.

Damages for anticipatory breach:

• Repudiation must be accepted so that the contract can be terminated and damages can be collected.

• Where there is anticipatory repudiation and the contract is terminated before performance, damages are assessed at the date the performance was due.

• Where repudiation proceeds the time of performance and the plaintiff terminates (they have to terminate before performance to get damages), no question of mitigation will arise until that time. After termination they have to mitigate the loss.

The rule against penalties:

• Parties may specify an amount which is payable to the plaintiff in the event of breach. These are called liquidated or agreed damages clauses.

• This allows the...