PRINCIPLES OF BUSINESS LAW TOPIC 7: REMEDIES FOR BREACH DAMAGES DAMAGES: OVERVIEW • Damages consist of an award of money to be paid by the defendant to the plaintiff. • Damages for breach of contract are not intended to be punitive; they are compensatory. They compensate for a loss suffered by the plaintiff because of the breach of contract. • Damages aim to put the non-breaching party in the position she would have been in if the contract had been properly performed. COMMON LAW REMEDIES: DAMAGES: OVERVIEW When determining whether a person is entitled to damages, it is not necessary to consider the nature of the term nor the nature of the breach. • This is only relevant to ‘termination’ DAMAGES AIM TO PUT THE PLAINTIFF IN THE POSITION SHE WOULD HAVE BEEN IN IF THE CONTRACT HAD BEEN PROPERLY PERFORMED: RADFORD V DE FROBERVILLE • Facts • R owned two blocks of land • He sold one to F on the condition that she build an expensive brick wall on the boundary • F failed to build the wall • R sued for breach of contract, claiming the full costs of building the wall • F argued that damages should be limited to the reduction in the value of R’s property caused by the absence of a wall • Issue: • What was the appropriate measure of damages? • Decision • R could recover damages measured by reference to the cost of building the wall RADFORD V DE FROBERVILLE • Reason • Contractual damages aim to put the nonbreaching party in the position they would have been in had the breach not occurred • Had the breach not occurred, the wall would have been built on the property • R was entitled to damages equal to the cost of building the wall • Facts • B leased a building to T for ten years DAMAGES AIM TO PUT THE PLAINTIFF IN THE SAME POSITION AS IF THE CONTRACT HAD BEEN PROPERLY PERFORMED: TABCORP HOLDINGS V BOWEN INVESTMENTS • It was a term of the lease that T would not make substantial alterations to the building without B’s consent • T, in breach of this term, demolished and then rebuilt the building foyer • Issue: • Was B entitled to recover the full cost of restoring the foyer to its previous state? • Or, was B only entitled to damages if the building was worth less as a result of the T’s changes? • Decision • B was entitled to recover the full costs of restoring the foyer to its previous state TABCORP HOLDINGS V BOWEN INVESTMENTS • Reason • The aim is to put the non-breaching party in the position she would have been in had there been no breach – this does not simply mean financial position but rather the same actual position • Damages should thus cover the cost of restoring the foyer COMMON LAW REMEDIES: DAMAGES: COMPENSABLE LOSS • Damages can be claimed to compensate for two types of loss: 1. Direct loss • Koufos v C Czarnikow Ltd 2. Consequential loss • Hadley v Baxendale DAMAGES: DIRECT LOSS • A party who suffers direct loss because of the breach is entitled to recover that loss from the party in breach. • A direct loss arises naturally from the breach. • The Koufos case provides examples of direct loss. • Facts • C chartered K’s ship to carry cargo DIRECT LOSS: KOUFOS V CZARNIKOW LTD • The ship ran late and, when it arrived, the market price of the cargo was lower than the market price on the day that the cargo should have arrived • C sued for compensation for loss it suffered because it received a lower price • Issue • Was C entitled to damages to compensate for the loss flowing from the lower price? • Decision DIRECT LOSS: KOUFOS V CZARNIKOW LTD • Damages were payable to compensate for the losses caused by the drop in market price • Reason • A direct loss is a loss that naturally arises from the breach according to the usual course of things. • Given the fluctuation in market prices, the loss is a natural consequence of the breach • The loss was a direct loss and thus recoverable • A party who suffers consequential loss because of the breach is entitled to recover that loss from the party in breach. DAMAGES: CONSEQUENTIAL LOSS • Consequential loss is more remote than direct loss. • A consequential loss is a loss that may reasonably be supposed to have been in the contemplation of both parties (at the time of formation) as a probable result of a breach. • Hadley v Baxendale • Facts • H engaged B to deliver a broken mill shaft to the mill manufacturer (so that the manufacturer could make a replacement) CONSEQUENTIAL LOSS: HADLEY V BAXENDALE • B said he would make the delivery the following day but in fact took several days • During the periods of delay H’s mill stood idle • Issue • Was H entitled to compensation for lost profits? • Decision • H was not entitled to compensation for lost profits • Reason • The loss was not a direct loss CONSEQUENTIAL LOSS: HADLEY V BAXENDALE • It does not flow naturally from the breach. Ordinarily one would expect that a mill operator would have, or could acquire, a spare mill shaft • The loss was not a consequential loss • Damages for consequential loss can only be claimed if the losses may reasonably be supposed to have been in the contemplation of both parties (at the time the contract was made) as a probable result of such a breach • It was not within the common contemplation of the parties that the mill would stand idle while the broken shaft was being delivered to the mill manufacturer – H had in no way indicated to B that this would be the case DAMAGES: WASTED EXPENSES • Damages can be claimed for expenses reasonably incurred in anticipation of the other party performing his or her obligations. • Damages will not be payable if the breaching party can prove that the expenses would have been wasted even if there had been no breach of contract. • McRae v Cth Disposals Commission • Facts WASTED EXPENSES: MCRAE V COMMONWEALTH DISPOSALS COMMISSION • CDC invited tenders for the purchase of an oil tanker said to be lying on the Jourmaund Reef • M won the tender and was given the precise latitude and longitude of the tanker • M embarked on a salvage operation • There was no oil tanker lying anywhere near that location • The court concluded that CDC had made a contractual promise that the tanker was at that location and that this promise had been breached • Issue • Could McRae recover damages to compensate for wasted expenditure on the salvage operation? • Decision WASTED EXPENSES: MCRAE V COMMONWEALTH DISPOSALS COMMISSION • McRae was entitled to recover the costs of the wasted salvage operation • Reason • The parties must have contemplated, when contracting, that such expenses would be incurred • Generally speaking, damages cannot be sought to compensate for disappointment or distress caused by the breach. DAMAGES: STRESS AND DISAPPOINTMENT • One exception to this rule was recognised in Baltic Shipping v Dillon • Where a contract is for the provision of enjoyment, entertainment or pleasure, damages can be recovered where the breach causes disappointment or distress • Facts • Mrs D was a passenger on a cruise ship who sought damages for losses caused by the cruise ship sinking on the tenth day of a fourteen day cruise DAMAGES: STRESS AND DISAPPOINTMENT: BALTIC SHIPPING V DILLON • The cruise ship sank as a result of the B’s negligence. • B admitted liability for breach of contract, but disputed D’s claim for damages based on distress and disappointment said to be caused by the breach. • Issue • Was D entitled to damages for distress and disappointment? • Decision DAMAGES: STRESS AND DISAPPOINTMENT: BALTIC SHIPPING V DILLON • D could recover damages for loss in the form of distress or disappointment caused by the breach • Held • The general rule is that a plaintiff cannot claim contractual damages for disappointment, distress or injured feelings • However damages of this kind were payable in this instance as D had contracted for a trip meant to provide pleasure, relaxation and entertainment DAMAGES: DUTY TO MITIGATE • A plaintiff cannot claim losses from a defendant if those losses could have been avoided by the plaintiff taking reasonable steps to avoid them. • A plaintiff is under a duty to mitigate (minimise) the losses that flow from a breach of contract. • Facts DUTY TO MITIGATE: BURNS V MAN AUTOMOTIVE (AUST) PTY LTD • MAN supplied a defective commercial vehicle to B (which amounted to a breach of contract) • The defects could have been remedied if B had the vehicle’s engine repaired or replaced • B sued MAN to recover profits lost over a four year period (the expected operating life of the vehicle) • Issue • Had B taken reasonable steps to mitigate his loss? • Decision • B had taken adequate steps to mitigate the loss DUTY TO MITIGATE: BURNS V MAN AUTOMOTIVE (AUST) PTY LTD • Reason • The faulty engine could have been repaired or replaced • However, B could not afford to do so • Given B’s financial position, B had not acted unreasonably in not getting the engine repaired • B had not failed to mitigate his loss • Parties are, within limits, free to define the scope of the remedies that will be available in the event of breach. AGREED PENALTY CLAUSES • Parties may agree in advance what losses are likely to be suffered in the event of breach and insert a ‘liquidated damages’ clause into the contract which defines the level of damages that will be paid in the event of breach • Liquidated damages clauses must not penalise (impose damages that bear no relationship to any loss likely to be suffered)
