LAW 3010 REMEDIES FOR BREACH OF CONTRACT
The usual remedy for breach of contract is damages –
compensation for losses. Equitable remedies such as injunction and
specific performance may also be available.
Damages
Typically damages are designed to compensate for losses caused
by breach of contract. An exception is punitive damages which
will be addressed later. Damages seek to put the innocent party in
the position that she would have been in if the other party had
performed the contract.
Damages may be pecuniary or non-pecuniary, that is, financial
loss, or pain and emotional distress. The latter damages are unusual
in contract but we will consider examples later.
The test for recoverable damages is that of remoteness as laid
down in the leading decision of 1854 in Hadley v. Baxendale
(1854) 9 Exch. 341: (i) the damages must flow naturally from
the breach of contract; or (ii) the damages, although difficult to
predict in the ordinary case, were reasonably foreseeable
because the unusual circumstances were communicated to the
defendant.
For damages to be ordered, one of the foregoing remoteness tests
must be passed. This is to avoid unlimited liability. Information
about unusual circumstances gives the parties the opportunity to
turn down the offer, insure against the risk of breach and payment
of higher than usual damages, or ask a higher price for performing
the contract. In Hadley, delay of delivery of a part required to
operate a mill caused the mill to stop production, resulting in loss
of money to the owners. The delivery company was not informed
of the special circumstances so was not liable for the losses
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incurred by the delay. See also Horne v. Midland Railway (1873)
L.R. 8 C.P. 131 (C.P.) where the defendants were one day late in
delivery of shoes, but were unaware in advance that the delay
would prevent the plaintiff from selling the shoes at an unusually
high price. Note that there would be liability for loss of ordinary
profits but not for unusual profits. However, if the breaching party
was informed in advance of the potential loss of unusual profits, he
would be liable for such loss of profits, unless the contract
contained a clear exemption clause.
Non-pecuniary (general) damages
The case Newell v. Canadian Pacific Airlines Ltd. (1976) O.R.
(2d) 752 illustrates circumstances in which damages are paid for
non-pecuniary losses due to breach of contract. The plaintiffs’ dogs
were shipped to Mexico City in the plane’s cargo hold. One was
found dead, the other comatose. The plaintiffs claimed damages
for mental distress due to the loss of their pets. The court applied
the Hadley test of foreseeability and found, in the circumstances,
that it was foreseeable to both parties that the plaintiffs would be
greatly distressed if harm befell their pets during transit. Damages
of $500 were ordered by the courts. See also Jarvis v. Swan Tours
Ltd. [1973] Q.B. 233 (C.A.) where damages were awarded for loss
of enjoyment of a holiday due to the defendant’s breach of
contract.
Question. Is it appropriate for the courts to place a value on
mental distress due to the loss of a pet arising from breach of
contract? Is it possible to place an accurate monetary value on
such distress? If not, does it matter if one cannot be sure of the
monetary value of mental distress? What if a breach of
contract leads to the loss of an infant child? Can and should a
monetary value be assigned to such loss?
If a plastic surgeon asserts that the new nose he will create for Eric
or Anna will enhance their looks but it turns out to be hideous, and
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distresses the recipient every time he or she looks in the mirror,
should the courts award damages for such distress? What of the
distress created for the bride when the hired photographer fails to
turn up at the wedding ceremony to take pictures as contracted to
do so? What if the bride and groom arrive at their honeymoon
destination to find that the hotel paradise pictured and promised in
the brochure is in fact a squalid dump infested with bed bugs?
What of the student who enters a university due to the promise
from the University’s advertisement brochures that she will enter
an institution where she will be safe from harm and harassment,
and provided with learning opportunities tailored specifically to
her way of learning? If the university turns out to be unsafe and
unable to tailor its teaching to individual learning methods, is there
a breach of contract? If so, can and should damages be successfully
sought for mental distress caused by the breach?
Should such plaintiffs receive damages for disappointment,
annoyance, frustration or distress? Why? The psychological
contract is spoken of in employment relationships. Should a
psychological contract be recognized in contractual relationships
for the provision of such services? See the English case of Brian
Horan who traveled from Banff Alberta to England in a cramped
aircraft as part of a package holiday. See Keith McArthur,
“Cramped Airline Passenger Wins Case” The Globe and Mail
(18 April, 2002) at A1. The case applies only to package holidays
and tours because conditions of airline passenger contracts are
specified in the Warsaw Convention. Exemption clauses in that
convention preclude liability of the airline for such discomfort etc.
Pecuniary damages
Pecuniary damages compensate monetary losses due to a breach of
contract. These damages can be considered in three categories:
(i) restitution; (ii) reliance; (iii) expectation.
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Restitution
An example of restitution damages is the return of money already
paid by the innocent party to the party who breached the contract
by not performing the act or service for which the money was paid.
Reliance
For example, a construction contractor may respond to an
invitation by the University of Lethbridge to submit tenders to
build a campus daycare facility. The tenderer may incur significant
costs to submit the tender. The process of inviting tenders and
submitting them gives rise to a contractual obligation on the part of
the University to consider the tender. Even if the obligation to
consider the tender is not explicit in the invitation to tender, it is
implied in law. If the University negligently or intentionally fails
to consider the tender, and the tender is submitted in accordance
with the conditions stated in the invitation to tender, the
construction contractor can sue for breach of contract. It will seek
compensation for the costs incurred by it in creating the tender.
This was done in reliance on the University’s meeting its
contractual obligation to consider the tender. Even if the contractor
would not have been selected to perform the work, it is entitled to
damages for the costs incurred in creating and providing the
tender. That is, compensation for the costs incurred “in reliance”
on the other party’s performance of the contract, consideration of
the tender.
Expectation
Most contracts involve expectations of both parties to benefit
financially from the contract. Safeway contracts with a supplier to
supply potatoes from which profits will be made. If the supplier
fails to provide the potatoes as agreed, Safeway may lose the profit
expected from the sale of the potatoes. Damages are payable for
loss of expected profit caused by non-delivery of the potatoes (or
incomplete delivery) in breach of contract. This is consistent with
the courts’ principle of attempting to put the innocent party in the
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position he would have been in if the contract had not been
breached. Compare this with tort, where damages seek to put the
innocent party in the position she would have been in prior to the
tort being committed.
Special and General Damages
Damages for specific losses, such as the cost of getting another
farmer to deliver higher priced potatoes are referred to as special
damages. Damages to compensate mental distress are an example
of general damages.
Mitigation
The innocent party must take reasonable steps to mitigate her loss
from breach of contract. Also, a wrongfully dismissed employee
must take reasonable steps to find alternative similar employment,
and the retailer must seek an alternative source of potatoes to
replace those not delivered. Failure to mitigate may cause a
reduction in the award of damages. The innocent party need not
take personal risks or incur unreasonable expense in order to
mitigate loss. If reasonable attempts to mitigate loss do not bear
fruit, the plaintiff will still have discharged her duty to mitigate
loss due to the other party’s breach of contract.
Liquidated Damages
The contract may set the level of damages payable in the event of a
breach. See Elite Bailiff Services Ltd. V. British Columbia (2003)
223 D.L.R. (4th) 39 (B.C.C.A.) p. 291 of text. Liability was limited
to the cost of preparing the tender not loss of expected profit.
Deposits can be a form of liquidated damages if the depositor fails
to perform the contract. Note however, the invalidity of such a
clause if the amount of liquidated damages is substantially
excessive and is effectively a penalty not an estimate of damages
incurred. See Meunier v. Cloutier (1984), 9 D.L.R. (4th) 486 (Ont.
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H.C.) (p. 285/292 of text), where the court found the liquidated
damages to be a penalty not a reasonable estimate of damages for
possible breach. See also H.F. Clarke Ltd. V. Thermidaire Corp.
Ltd. [1976] 1 S.C.R. 319 (S.C.C.) which found that liquidated
damages must be “reasonable in the circumstances”. A minor
breach in Meunier was a circumstance that made $50,000
excessive in the circumstances and not recoverable.
Equitable Remedies
Specific performance
The courts may on occasion order the performance of a contract in
addition to or instead of awarding damages. Specific performance
(SP) will not be awarded if it involves employment or provision
of personal service by the defendant. Nor will courts award SP if
it would require ongoing supervision. As it is an equitable remedy
the plaintiff must come “with clean hands”. So the plaintiff must
not have committed a breach of contract, or failed to seek the
remedy within reasonable time. The courts will not award SP if it
will cause hardship to the parties or a third party.
SP may be awarded in contracts such as grand masters’ paintings,
or specific pieces of land.
Sky Petroleum Ltd. v VIP Petroleum Ltd. [1974] 1 WLR 576.
-Facts: Sky contracts to buy fuel from VIP. VIP claims Sky is demanding
too much credit. VIP rescinds the contract, refusing to sell except at
unreasonably high prices. Sky was unable to locate an alternative supplier
and sought an interim injunction to compel VIP to supply fuel. The court
decided for Sky, making an exception to the general rule that, for sale of
non-specific goods, damages are the remedy. In this case, fuel was not
available elsewhere for Sky who would go out of business without fuel.
While there was nothing unique about product, performance of the contract
was unique. An order of specific performance (SP) was provided by the
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court in order to avoid unique, detrimental results which would be
faced by a party if damages were awarded.
Injunction
SP is an order to do something. Injunction is an order to refrain
from doing something. Striking workers in breach of contract
may be ordered to refrain from the strike. Injunction won’t be
awarded if it harms a third party. See Island Properties v.
Entertainment Enterprises (1986) 26 D.L.R. (4th) 347 (Nfld. C.A)
p. 288/295 of text or if damages will suffice. An interlocutory
injunction may be awarded to stop a breach of contract prior to the
matter being heard in court.
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