Damages In Contract Notes

II. Damages in Contract Damages General Where there is a breach of contract, the innocent party is entitled to sue for damages --- the right to claim damages is implied by law: Photo Production Ltd v Securicor Transport Ltd [1980] Damages operate as a means of compensation, which places the innocent party in the same position he / she would be in if the contract had been performed. Except in cases of anticipatory breach where termination is necessary, a plaintiff does not have to terminate a contract in order to claim damages: Luna Park v Tramways (1938) Damages are awarded for breach of the contract if the following can be proven: * that the plaintiff has suffered loss; * that the loss was caused by the breach (causation); * that the loss was reasonably foreseeable; and * reasonable efforts were taken to mitigate / prevent the loss from occurring. Nominal damages & Substantial damages * Damages awarded are only nominal in cases where the plaintiff can only prove breach of contract, i.e.the plaintiff proves no more than the defendant's breach: Luna Park v Tramways (1938). * Nominal damages are of a token amount, e.g., $5. * Where the plaintiff can prove loss or damage, then the damages claimed can be substantial: Holland v Wiltshire (1954) * Substantial damages is a technical term to mean the damages will be compensatory. It does not necessarily mean the damages will be 'substantial' in terms of the amount. The later date is generally chosen as the date for assessment, for example, the date of the performance instead of the date of the acceptance of the repudiation: Hoffman v Cali [1985] A party can choose to pursue both expectation and reliance damages: they are not mutually exclusive. Claims for damages must generally be brought within six years of the date of the breach: Limitation Act 1969 (NSW) s 14(1). Damages are assessed as at the date of the breach of the contract. Causation and Remoteness Where a plaintiff claims to have suffered loss or damage by reason of the defendant's breach, the onus of proving the extent of loss or damage rests on the plaintiff: Luna Park (NSW) Ltd v Tramways Advertising Pty Ltd (1938). It must be established: * that the loss or damage was caused by the defendant's breach; and * that the loss or damage was not too remote. 1. The building contractor entered into a contract with the employer, Panatown, for the construction of an office block and car park on a site which was owned by another company in the same group of companies as the employer. 2. In addition to the contract with the employer, the building contractor also entered into a duty of care deed with the owner of the site. 3. By that deed the owner acquired a direct remedy against the contractor in respect of any failure by the contractor to exercise reasonable skill, care and attention to any matter within the scope of the contractor's responsibilities under the contract. 4. The deed was expressly assignable by the owner to its successors in title. 5. Serious defects were found in the building and the employer served notice of arbitration claiming damages for defective work and delay. Identifying the Loss In identifying the loss, compare the situation of the plaintiff prior to and after the breach of contract: Alfred McAlpine Constructions Ltd v Panatown Ltd [2000] Concerned with what has been lost by the plaintiff, and not what has been gained by the defendant as a result of breaching the contract. In Luna Park v Tramways, Luna Park was unable to demonstrate and quantify the loss, an so was unable to obtain damages for loss. Alfred McAlpine Constructions Ltd v Panatown Ltd [2000] 3 WLR 946 Held, Panatown was not entitled to recover substantial damage on either of the following ground 1 II. Damages in Contract * Narrow ground: --> because there was already a duty of care deed between McAlpine and the third party (X), there was no justification for Panatown to recover damages on behalf of X when X had its own cause of action against McAlpine. Otherwise it might introduce new problems such as double liability. (unanimously agreed) * Broad ground: -->Lord Clye: where A contracts with B to pay a sum of money to C and B fails to do so. The loss to A is in the necessity to find other funds to pay to C and provided that he is going to pay C, or indeed has done so, he should be able to recover the sum by way of damages for breach of contract from B. in the present case because there was already a deliberate course adopted by Panatown such that X would have its own right of action against McAlpine in case of breach, an exception can not be admitted to the general rule that substantial damages can only be claimed by a party who has suffered substantial loss. Causation The defendant is only liable or the extent of the loss caused by the breach. Causation is a question of fact. Sufficient connection will be met where the plaintiff can show that 'but for' the breach, the loss would not have occurred: Reg Glass Pty Ltd v Rivers Locking Systems Pty Ltd (1968). However, the 'but for' test may not apply: * where multiple causes contributed to the loss where there are multiple causes, it is sufficient that the breach be the 'decisive ' or dominant causes: Monarch SS Co Ltd v A/B Karishamns Oliefabriker [1949] * where the chain of causation is broken Where some extraneous event or an act of a third party breaks the chain of causation between the breach and the loss suffered, the plaintiff can only claim nominal damages: Lexmead (Basingstoke) Ltd v Lewis [1982] Luna Park (NSW) Ltd v Tramways Advertising Pty Ltd (1938) 61 CLR 286 1. A shopkeeper seeking to protect its premises against burglary engaged a company which carried on the business of providing burglar-proof protection to supply security installations including the supplying, fitting and hanging of a steelsheeted back door "to suit opening" fitted with a non-break-out locking system. 2. Burglars broke into the shop in a comparatively short time by splintering and removing a door jamb and the lintel, chipping brickwork, and levering the door open. 3. In an action by the shopkeeper against the supplier of the door, verdict and judgment were given for the shopkeeper. Reg Glass Pty Ltd v Rivers Locking Systems Pty Ltd (1968) 120 CLR 516 Held, * that in installing the door as it did there was no breach by the defendant of the express terms of its contract, but a term was implied by the common law in the contract that the defendant, whose business was to provide burglar-proof protection and upon whose skill and ability the plaintiff relied, would supply, fit and hang a door which would provide reasonable protection against a person seeking to break in when the locking devices were in operation, and there was evidence on which the trial judge rightly found that this warranty had been broken. * The measure of damages was the value of the goods stolen. In this case, a breach of contract was established by proof that the door, when locked, was not reasonably fit to keep burglars out. Therefore, when burglars broke in through the door and stole stock from their premises the plaintiffs were able to recover damages. The position would have been different if it had been proved that the burglars would have gained entry through a door which was reasonably fit. Remoteness The plaintiff's loss caused by breach of contract must not be too remote. The question of whether loss is capable of failing under the concept of remoteness is a question of law, but once established, whether loss is remote is a question of fact. The party at fault is only expected to compensate for those losses which were reasonably within his or her contemplation as likely to flow from failure to perform. 2 II. Damages in Contract a. What kind of loss is to be compensated? Two limb test for remoteness: Hadley v Baxendale (1854) 9 Ex 341 * the damages claimed must flow 'according to the usual course of things' from the defendant's breach: Transfield Shipping Inc v Mercator Shipping Inc (The Achilleas) [2009] 1 AC 61; or 1. The plaintiff, owners of a flour mill, contracted with the defendants, who were common carriers, to have a broken crankshaft conveyed to Greenwich where a replacement would be made. 2. Delivery of the shaft was delayed and the consequence for the plaintiff was that the mill was stopped for five days longer than it should have been and profits which would otherwise have accrued were lost. 3. The plaintiff sought damages to compensate for the losses sustained whilst the mill was idle. 1. The contract in question was for the sale of a boiler by the defendants to the plaintiffs for use in the plaintiffs' laundry and dyeing business. 2. The boiler was delivered to the plaintiffs some 20 weeks after the time fixed by the contract. 3. The defendants knew that the plaintiffs needed the boiler for immediate use in their laundry business but did not know the precise use to which the boiler was to be put. 4. The plaintiffs claimed damages for the loss of profit they would have made had the boiler been delivered on time. Included in this claim were: * the loss of a large number of new customers * the loss of a highly lucrative contract with the Ministry of Supply 1. The plaintiffs time-chartered the vessel to the defendants at a daily rate and the vessel was due to be redelivered on 2 May 2004. 2. In anticipation of the expiry of the charter, the plaintiffs contracted to charter the vessel at US$39,500 per day (the market rate at that time) under a 'follow-on' charterparty with another charterer. 3. The contract included a clause under which it could be cancelled if the vessel was not made available on 8 May (the 'cancellation date'). 4. The defendants fixed the final voyage for the vessel less than 14 days prior to the end of their charter, which was not objected by the plaintiffs. 5. Unfortunately, the vessel was delayed and it became clear that the plaintiffs would not be able to make the vessel available under the follow-on charter prior to the cancellation date. 6. In order to obtain an extension of the cancellation date until 11 May, the plaintiffs agreed to reduce the rate of hire under the follow-on charterparty to US $31,500 per day. 7. The plaintiffs sustained a loss of US $1.36 million and they claimed from the defendants for this loss. 8. The normal (conventional) measure of damages in such a case is the difference between the market rate and the charter rate of hire for the period of delay, a sum of $158,301. * Loss which was reasonably within the contemplation of both parties at the time the contract was formed Victoria Laundry (Windsor) Ltd v Newman Industries Ltd [1949] 2 KB 528 Hadley v Baxendale (1854) 9 Ex 341 Held, the Loss was too remote and should not be recoverable. It would have been an entirely different position if the defendants had been made aware that the mill would be inoperable without the part but they were not aware that this was the only crankshaft that the claimant possessed. The judgement gave rise to the Hadley foreseeability test: * First Limb: Loss arising naturally from the breach of contract (so implicitly within the foresight of the parties). This requires no special or expert knowledge as it is loss that arises in the ordinary course of things. * Second Limb: Loss which was reasonably within the contemplation of both parties at the time the contract was formed. This covers loss that is not 'in the ordinary course of things'. i.e. abnormal loss, hence special knowledge or awareness is required. Victoria Laundry (Windsor) Ltd v Newman Industries Ltd [1949] 2 KB 528 Held, that the defendants must reasonably be presumed to foresee some loss of business if the boiler was not delivered on time. However, the plaintiff were not able to recover losses relating to the highly lucrative contracts. For the plaintiffs to recover the profits expected on the special contracts, the defendants would have had to know of the prospect of such contracts. The case is an example of the operation of the second limb of Hadley test and sets the standard of remoteness as 'reasonable foreseeability'. Transfield Shipping Inc v Mercator Shipping Inc [2009] 1 AC 61 Held, that the arbitrators had applied too crude a test. defendants only needed to pay extra for the overrun period at the prevailing market rate. Reasonable parties would not enter into a contract like this on the basis that the defaulting party would be liable for any loss, however large, occasioned by a delay in redelivery in circumstances where it had no knowledge of, or control over. The common intention of reasonable parties to a charterparty of this sort would not have been that, in the event of a relatively short delay in redelivery, an extraordinary loss, measured over the whole term of the renewed fixture, was sufficiently likely to result from the breach of contract to make it proper to hold that the loss flowed naturally from the breach or that loss of that kind should have been within the defaulting party's contemplation. Decision for trial: The arbitrators applied the first rule set in Hadley v Baxendale 156 E.R. 145 that the loss resulted "naturally, i.e. according to the usual course of things, from such breach of contract itself " - the parties should have realised such probability when they had signed the contract that such loss was "not unlikely" to result from a breach of contract. However, the decision was reversed by the House of Lords. 3 II. Damages in Contract 1. Respondent proprietor of subject land and respondent's neighbour entered into agreement in September 1999 to relocate right of way over respondent's property which benefited neighbour. 2. Appellant surveyor altered plan prior to registration without agreement or knowledge of either respondent or neighbour. 3. Neighbour lodged caveat against respondent's title and commenced proceedings against respondent seeking various orders against respondent including order respondent comply with specifications and conditions of right of way as agreed between parties. 4. Appellant did not reveal full extent of changes made to plan until receipt of survey done by surveyor retained by neighbour in 2004. 5. Neighbour and respondent continued to dispute construction of right of way until proceedings settled in 2007. 6. Neighbour withdrew caveats in 2009. 7. Respondent commenced proceedings against appellant for damages arising from appellant's breach of contract, duty of care and breach of (CTH) Trade Practice Act 1974 (TPA) s 52 and (NSW) Fair trading Act 1987 (FTA) s 42. 8. NSWDC found appellant liable for breach of contract, breach of duty of care to carry out survey and record results in accordance with respondent's and neighbour's instructions and breach of TPA s 52 and FTA s 42. * Ordered appellant to pay respondent sum of $474,360.89 for losses respondent incurred to correct title, remove encroachment on right of carriageway, costs of litigation between respondent and neighbour and loss resulting from inability to sell land as result of caveat lodged by neighbour. 9.The surveyors appealed. Monaghan Surveyors Pty Ltd v Stratford Glen-Avon Pty Ltd [2012] NSWCA 94 Nature of the Loss: The losses suffered by the respondent and claimed from the appellant fell into four categories. * First, there were the surveying and legal expenses required to correct the title. * Secondly, there were the costs of carrying out works on the land to move the retaining wall and fencing which encroached within the boundaries of the right of way. The appellants accepted that they were obliged to meet these heads of loss. * Thirdly, the respondent claimed the costs of litigation between it and the neighbours which commenced in August 2002 and continued for more than five years. * Fourthly, the respondent claimed costs resulting from its inability to sell the land during the period the land was subject to a caveat lodged by the neighbours, which was not finally withdrawn until 14 May 2009. The appellants deny responsibility for these expenses, or, in the alternative, for all but a limited part of them. Grounds for Claim: Appellant conceded liability and obligation to pay losses incurred to correct title and remove encroachment. * Claimed respondent not entitled to recover whole of legal costs in respect of litigation between respondent and neighbour. * Claimed respondent not entitled to recover loss incurred from not being able to sell property as result of caveat lodged by neighbour. Principle applied: * The first step in considering the question of causation is to identify the nature of the loss or losses suffered. In circumstances where a claimant seeks to recover legal costs incurred in defending proceedings brought against it, where the litigation is said to have been caused by a third party, the harm suffered may be identified as the loss of an opportunity to avoid the litigation. Where the claimant has successfully defended the litigation, the loss will be the difference between the costs incurred and the costs recovered from the other party. * The harm suffered by the respondent was economic loss. Putting to one side the claims under the Trade Practices Act and the Fair Trading Act for misleading or deceptive conduct, each of the other claims appears to have been assumed to involve a failure to exercise reasonable care and skill. That form of breach of duty constitutes "negligence" for the purposes of the Civil Liability Act 2002 (NSW), Pt 1A. Accordingly, that Part applied to the claims for damages brought in tort and contract: s 5A(1). To determine whether particular elements of harm were recoverable, the Court needed to apply s 5D, appearing in Div 3"Causation". * The purpose of s 5D(1) has been identified as establishing a two-stage test of causation whereby what is described as "factual causation" is to be addressed separately from "scope of liability": * First, there are normative considerations which will influence a finding that particular conduct constitutes a breach of duty, which cannot usefully be ignored in considering the relationship between the conduct and the harm asserted by the plaintiff. --> s 5D(1)(a) Causation * Secondly, it appears to have been intended that the normative inquiry under paragraph (b) would extend beyond what have traditionally been seen as elements of causation, to cover questions raised by intervening and successive causes, foreseeability and remoteness. * In tort, concepts of remoteness are at least partly determined by reference to that which was "reasonably foreseeable" at the time of the conduct. In contract, according to the classic statement of Alderson B in Hadley v Baxendale (1854) 156 ER 145 at 151, liability will extend to that which "may fairly and reasonably be considered either arising naturally, i.e., according to the usual course of things, from such breach of contract itself, or such as may reasonably be supposed to have been in the contemplation of both parties, at the time they made the contract, as the probable result of the breach of it". This test, with its two limbs, may operate differentially depending upon whether the claim is for loss of an expected benefit or for a loss which flows from reliance by the injured party on the proper performance of the contract. Reasoning: * Established appellant aware relations between neighbour and respondent acrimonious. * Established appellant attempted to justify conduct and failed to reveal full extent of changes made to plan when doubts were raised as to correctness of registered right of way. * Established full extent of departure from original plan not known until February 2004. 4 II. Damages in Contract Accordingly, legal costs incurred by respondent up to February 2004 would fall within scope of appellant's contractual liability and duty of care owed to respondent. * Established continuing dispute as to construction of road did not constitute part of appellant's breach of contract or duty of care owed to respondent because on-going litigation after February 2004 could not reasonably have been in contemplation of parties. Accordingly, appellant not liable for costs of litigation between respondent and neighbour after February 2004. * Not necessary to consider whether different results would apply to assessment of loss under statutory schemes because conduct of appellant involved no different consequences or considerations than those that arose in tort of breach of contract. * Consideration in tort would be: * Innocent misrepresentation --> Negligence * s 5D of the CLA * Causation test * Remoteness test Held, the land surveyor should only be held liable for breach of contract and duty of care up to the date when the surveyor admitted the full extent of the changes he made to the plan. Appropriate to reduce damages payable by respondent by excluding costs of litigation between respondent and neighbour after February 2004 and amount allowed for engineering and construction works on road. * Allowed amount for engineering and construction works on right of way totalling $20,453. Appeal allowed in part. S 5D of the Civil Liability Act 2002 (NSW) If you have a breach of contract in NSW in regards of negligence, have to mention s 5D of the CLA. b. Foreseeability * The test for remoteness is more generous in contract than in tort, where consequential losses must be very remote to preclude compensation: Koufos v C Czarnikow Ltd [1969] * Where parties contemplate the type of consequence which may follow a breach of contract, they will be liable for specific damage of that type. It is not necessary for the specific damage of that type foreseeable: Parson (H.) (Livestock) Ltd v Uttley Ingham & Co Ltd [1978] 1. Koufos chartered a ship (the Heron II) from Czarnikow to bring 3,000 tons of sugar to Basra. 2. Owing to those deviations the voyage was delayed by nine or ten days and the ship arrived at Basrah on December 2 instead of on November 22 3. The sugar price had dropped from PS32 10s to PS31 2s 9d. 4. Koufos claimed the difference in the loss of profit. Czarkinow knew there was a sugar market, but not that Koufos intended to sell it straight away. Koufos v C Czarnikow Ltd [1969] 1 AC 350 The sole rule as to the measure of damages for any kind of breach of any kind of contract was that the aggrieved party was entitled to recover such part of the damage actually caused by the breach as the defaulting party should reasonably have contemplated would flow from the breach; that since prices in a commodity market were liable to fluctuate, shipowners should reasonably contemplate that (per Lord Reid) it was not unlikely that, if their ships delayed their voyage, the value of marketable goods on board their ships would decline and that, therefore, where there was wrongful delay in the delivery of marketable goods under a contract of carriage of goods by sea the measure of damages was the difference between the price of the goods at their destination when they should have been delivered and the price of the goods when they were in fact delivered, accordingly, the charterers were entitled to recover that difference (PS4,183 16s. 8d. ) as damages. Interpretation of 'usual course of things': In this case, the House of Lords held that the loss occurred in the 'usual course of things' because the defendants knew: 1) that the plaintiffs were sugar merchants; and 2) that there was a market for sugar at Basrah. It did not matter that they had no actual knowledge of the plaintiffs' intention to sell because they ought to have contemplated that the plaintiffs would, under the criteria applied, suffer the loss in question. Interpretation of 'reasonable foreseeable' 5 II. Damages in Contract In this case, the view was taken that 'reasonable foreseeable' is more appropriate to tort than contract cases, and that 'on the cards' is far to imprecise. However, there was no real agreement on the proper criterion to be applied: * Lord Reid preferred the criterion of 'not unlikely' to result; * Lord Morris did not dissent from that view but he indicated that 'liable to result' was also acceptable; * Lord Hodson indicated a preference for 'liable to result'; and * Lord Pearce found 'liable to result' somewhat ambiguous and, like Lord Upjohn, preferred to state the critetion in terms of 'serious possibility' or 'real danger'. The balance of Australian authority would seem to accept Lord Reid's approach. * He emphasised that the tests in tort and contract were very different, on the basis that where there is a contract the parties will have had the opportunity to apportion their liabilities already. Therefore, the test for remoteness should be more generous than in tort, where consequential losses must be very remote to preclude compensation. In another word, a fairly high degree of probability is indicated in contract, certainly higher than that applied to damages claims in tort. 1. In 1971, the plaintiffs ordered a bulk food storage hopper from the defendants for the purpose of storing pignuts for feeding their top grade pig herd. 2. When the defendants installed the hopper they failed to ensure that the ventilator was open, with the result that pignuts dispensed by the hopper were mouldy. 3. The condition of the nuts caused the outbreak of an intestinal infection in the herd which killed 254 pigs. 4. The plaintiffs brought an action for breach of contract claiming substantial damages including loss of profit. 5. The trial judge, giving judgment for the plaintiffs, held that the defendants were in breach of their warranty that the hopper should be reasonably fit for the purpose of storing pignuts in a condition suitable for feeding to the plaintiffs' pigs and that the illness of the pigs was a direct and natural consequence of such breach, but he also found that at the time of the contract in 1971 the parties could not have reasonably contemplated that there would be a serious possibility of mouldy pignuts causing serious illness in the pigs. 6. On appeal by the defendants. Parson (H.) (Livestock) Ltd v Uttley Ingham & Co Ltd [1978] QB 791 Where parties contemplate the type of consequence which may follow a breach of contract, they will be liable for specific damage of that type, even where the specific damage was not foreseeable. Held, dismissing the appeal, * that (per Scarman and Orr L.JJ.) damages for breach of contract were recoverable in respect of injury or loss where the parties, given the situation at the time of the contract, would have contemplated as a serious possibility the type of consequence, not necessarily the specific consequence, that ensued on breach of contract; and that it must have been within the contemplation of the parties that injury to the pigs was a serious possibility if, in breach of contract, the hopper was unfit for storing nuts suitable to be fed to the plaintiffs' pigs (post, pp. 805D , 813D-E ). * Per Lord Denning M.R. The defendants were liable for the loss of the pigs that died because they ought reasonably to have foreseen that there was a possibility that they might become ill, even though it was not a serious possibility, but were not liable for the loss of profits (post, p. 804E-G ). * Per curiam. The law must be such that, in a factual situation where all have the same actual or imputed knowledge and the contract contains no term limiting the damages recoverable for breach, the amount of damages recoverable does not depend on whether, as a matter of legal classification, the plaintiffs' cause of action is breach of contract or tort (post, pp. 804C , 807B ). * Decision of Swanwick J. affirmed. Measure of Damages Expectation Damages Expectation damages attempt to place the plaintiff in the same situation as if the contract had been performed: Koufos v C Czarnikow Ltd [1969] * However, it does not entail specific performance of the contract: Marks v GIO Australia Holding Ltd (1998) Particular expectation are presumed to apply, for instance, in case of non-delivery of goods and nonacceptance, the plaintiff will be able to recover the difference between the market price and the contract price: s 52, 53 Sales of goods Act 1923 (NSW). Difficulty in assessing damages does not prevent a court from assessing damages: Howe v Teefy (1927) If a party has a contractual right to termination, it is allowed to exercise the right, but it cannot gain expectation damage for the loss that was caused by its desire to terminate the contract, because the loss were caused by the termination, not the breach of the other party: Shevill v Builders Licensing Board (1982) a. Contract for sale of goods 6

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