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 to pay
damages for breach of primary obligations: 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.
This is implied and is only an issue in court proceedings if made so by the defendant:
Foran v Wight (1989) 168 CLR 385.
NOMINAL AND SUBSTANTIAL DAMAGES
A plaintiff’s right to pursue a claim for damages arises for losses suffered as result of the
defendant’s breach of contract. Once a plaintiff’s right to damages is established the
plaintiff’s only obligation is to prove his or her loss, the relevant standard of proof being
on the balance of probabilities: The Commonwealth of Australia v Amann Aviation Pty
Ltd (1991) 174 CLR 64 at 80. A failure to prove any loss does not mean that the
plaintiff’s action fails. Rather, it means that he or she will only be awarded nominal
damages. This contrasts with substantial damages that are awarded where a plaintiff
establishes that he or she has suffered real and quantifiable losses. The word ‘substantial’
does not mean that a significant sum of money will be awarded. The concept of nominal
damages was explained in Owners of SS ‘Mediana’ v Owners of SS ‘Comet’ [1900] AC
113 at 116, where Lord Halsbury said:
‘Nominal damages’ is a technical phrase which means that you have
negatived anything like real damage, but that you are affirming by your
nominal damages that there is an infraction of a legal right which, though it
gives you no right to any real damages at all, yet gives you a right to the
verdict of judgment because your legal right has been infringed.
The sum awarded as nominal damages is a token amount. It will usually be an amount of
$10: Timpar Nominees Pty Ltd v Archer [2001] WASCA 430 at [111].
THE COMPENSATORY NATURE OF DAMAGES
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:
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[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.
A corollary of the principle in Robinson v Harman is that ‘a plaintiff is not entitled, by
the award of damages upon breach, to be placed in a superior position to which he or she
would have been in had the contract been performed’: Commonwealth v Amann Aviation,
at 82, 136, 163.
Although the purpose of damages is to compensate the plaintiff for losses suffered as a
result of the defendant’s breach of contract, an award of damages will not necessarily
compensate a plaintiff for all of his or her losses. The principle in Robinson v Harman is
qualified by other rules that will be discussed below.
Exemplary Damages
The compensatory nature of damages means that there can be no element of punishing a
defendant when a court assesses damages. Thus, unlike with claims for damages in some
areas of tort law, exemplary or punitive damages are not recoverable as part of a damages
award for breach of contract: Butler v Fairclough (1917) 23 CLR 28 at 89.
THE ONCE AND FOR ALL LUMP SUM RULE
Damages awards for breach of contract, and in tort law, are made on a once and for all
lump sum basis: Johnson v Perez (1988) 166 CLR 351 at 355. This means that a lump
sum is awarded to the plaintiff to cover all past and future losses and that damages cannot
be awarded in the form of periodical payments. The justifications for this rule are, first,
that an award finalises litigation and, second, that it would be unfair to have a defendant
subjected to a series of claims arising out of the same breach of contract. The rule has
been criticised, especially in the context of cases involving losses of an on-going kind
that continue after the hearing of the case, such as long-term personal injuries and losses
of income. Often awards will, in the light of subsequent events, be found to have not
adequately taken into account the impact of inflation, so that in real terms the sum of
money awarded under-compensates the plaintiff for the loss he or she has suffered.
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. Given that most awards for damages for
breach of contract are taxable, because they usually represent compensation for lost
profits and income, the court in such awards will not take into account the effects of
taxation when determining the amount of compensation to be paid. In the rare cases
where contractual damages are not taxable, the amount of damages is reduced by an
amount that reflects the tax that would be paid on such profits or income. In either case,
the court is taking into account what would have been the plaintiff’s tax liability if the
contract had been performed. By so doing, the court is giving effect to the compensation
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principle by putting the plaintiff in the position he or she would have been had the
contract been performed. These broad principles emerge from cases such as British
Transport Commission v Gourley [1956] AC 185, Atlas Tiles v Briers (1978) 144 CLR
202 and Cullen Trappell (1980) 146 CLR 1.
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. For example, if X and Y
contract on 1 March on terms that Y will pay $500 to X in return for X delivering a desk
to Y on 1 April, and X breaches the contract by refusing to deliver the desk, Y’s damages
will be assessed by reference to the value of the desk as at the date of X’s breach, in this
case, 1 April. If, at 1 April it would have cost $520 to purchase such a desk, Y’s damages
will total $20. This amount will properly compensate Y because he or she can purchase
the desk for $520 but in reality it will have cost him or her $500 because $20 of the
purchase price will, in effect have been paid by X. In other words, Y obtains the desk at a
cost he or she would have incurred had X not breached the contract.
In many cases the date of breach rule works well and the plaintiff is properly
compensated. However, the time it takes a case to be litigated, combined with inflation,
can lead to the plaintiff being under-compensated in real terms. In the above example, if
the case, through no fault of either party, were to take 12 months to litigate and in the
meantime inflation meant that the cost of the desk increased to $550, an award of $20 in
damages would mean that Y cannot acquire the desk at the cost he or she would have
incurred had X not breached the contract. Y now has to pay an extra $30 for the desk.
In recognition of the fact that the date of breach rule does not always work well the law
permits exceptions to it. In Johnson v Perez at 371, Brennan J said that ‘[t]he time fixed
at which damages are assessed must be so fixed as to give effect to the governing
principle [of compensation]’. Thus, courts are able to choose some other date as the basis
for assessment of damages. In Commonwealth v Amann Aviation, at 161-2, McHugh J
suggested that departure from the date of breach rule would require ‘very special
circumstances’. However, subsequent cases have not so qualified the general rule,
preferring to state the exception as one that arises when required in the interests of justice
to ‘adequately compensate the plaintiff’: Smith New Court Securities Limited v Citibank
NA [1997] AC 254 at 265. If departure from the date of breach is justified the court will
select a date that is best suited to adequately compensating the plaintiff. Possible
alternative dates include the date the contract is lost, the date that the plaintiff, acting
reasonably, ventures into the marketplace, and, the date of hearing: Johnson v Agnew
[1980] AC 367 at 401. For an example see The Millstrean v Shultz [1980] 1 NSWLR 547.
INTERESTS REFLECTED IN A DAMAGES AWARD
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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. Thus, in McRae v
Commonwealth Disposals Commission (1951) 81 CLR 377 the High Court awarded
damages that included amounts reflecting reliance interest loss and restitution interest
loss.
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 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, if the termination is pursuant to a contractual right to terminate for a breach
which otherwise would not have given 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. Carter and Harland, at 861, criticise the decision in Shevill,
principally on the basis that its ‘effect is to require a plaintiff who seeks compensation to
do the very thing that the clause was intended to avoid, namely, to prove a breach which
would, apart from the clause, have justified termination’.
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.
In Chaplin v Hicks [1911] 2 KB 786, Chaplin, an aspiring actress entered a competition
organised by Hicks, a theatrical agent, who was in search of ‘young ladies desirous of
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obtaining engagements as actresses’. Chaplin was one of 50 finalists who were to be
interviewed by Hicks before he made his choice of 12 winners. The prize for each of the
winners was a three year acting contract worth £260 per annum for the first four, £208
per annum for the next four, and £156 per annum for the final four. Hicks breached the
contract by failing to give Chaplin adequate notice of the interview. Because she missed
the interview she lost all chance of being one of the 12 winners. The English Court of
Appeal awarded Chaplin damages of £100 as compensation for the loss of the chance.
In loss of chance cases an important prerequisite to recovery of damages is establishing
that the breach actually caused the loss. Once the causal link is established, the measure
of damages will be affected by the degree of probability that the chance would have
occurred had there been no breach. The fact that it may be difficult to assess the quantum
of damages does not relieve a court of its obligation to do so: Howe v Teefy (1927) 27 SR
(NSW) 301. The courts recognise that this often involves an element of guesswork:
Chaplin v Hicks at 792. The fact that it was more likely than not that the chance would
not have occurred, does not preclude recovery of damages. The chance has to be more
than a speculative possibility, but the degree of probability does not have to be more than
50 per cent:
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. Exceptions to this rule include recovery of
damages for:
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physical inconvenience caused by the breach of contract: Hobbs v London &
South Western Railway Co (1875) LR 10 QB 111.
physical injury, including psychological injury: Godley v Perry [1969] 1 WLR 9.
loss of reputation: Flamingo Park v Dolly Dolly Creation (1986) 65 ALR 500 at
524-5.
However, 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. Thus, in Addis v Gramophone Co Ltd [1909] AC 488, the
House of Lords refused to award damages in relation to injured feelings flowing from the
humiliating way in which an employee was dismissed from his employment.
The basis for the rule in Hamlin was criticised, but not over-ruled, by a majority of High
Court judges in Baltic Shipping Co v Dillon (The Mikhail Lermontov) (1993) 176 CLR
344 at 361-2, per Mason CJ. On the other hand Brennan J, at 369, justified the Hamlin
rule.
However, the rule in Hamlin is subject to an exception. In Baltic Shipping v Dillon, at
CLR 381-2, Deane and Dawson JJ set out the exception as follows:
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That category of case encompasses cases where the disappointment and
distress have been caused by breach of a contract under which the party
allegedly in breach is shown expressly or impliedly to have agreed to provide
pleasure, entertainment or relaxation or to prevent molestation or vexation.
A significant example of where the exception arises is with ‘holiday cases’ in which a
failure, in breach of an express or implied term of the contract, to provide a holiday in
accordance to a promised standard entitles the disappointed holidaymaker to be
compensated for the loss of enjoyment. This was the basis of damages being awarded in
Baltic Shipping v Dillon where Mrs Dillon was compensated for loss of enjoyment on a
pleasure cruise in circumstances where the ship sank on the 10th day of a 14 day cruise.
Other examples of damages being recovered for disappointment, anxiety and distress
include:
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a photographer’s failure to take wedding photographs.
a disc jockey’s failure to attend a wedding reception.
a solicitor’s failure, by neglecting to notify passport authorities that a passport
should not be issued to his client’s son, to prevent the removal from the United
Kingdom of the son: Hamilton Jones v David & Snape [2004] 1 All ER 657.
a surveyor’s failure to accurately report whether or not a property that was being
purchased by his client was under a flight path at Gatwick airport: Farley v
Skinner [2002] 2 AC 732; [2001] 4 All ER 801.
a builder’s failure to build a swimming pool to the required depth: Ruxley
Electronics v Forsyth [1996] 1 AC 344.
In making awards for non-economic losses of this kind courts have often stated that the
amounts awarded should be modest: Farley v Skinner, at 751. However, Australian cases
indicate a different approach focussing instead on proper compensation for the loss.
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.
In McRae v Commonwealth Disposals Commission, McRae was the successful tenderer
for the purchase of a sunken oil tanker lying on the Jourmaund Reef near New Guinea.
McRae spent considerable money in fitting out a salvage mission, but could not find the
tanker because it had never been on the reef. The High Court held that it was an implied
term of the contract that a tanker existed on the reef. Because the Commonwealth
Disposals Commission (CDC) breached that term, McRae was entitled to damages, in
this case being the reasonable costs of the failed salvage mission plus £285, being the
price McRae had paid for the tanker.
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In Commonwealth v Amann Aviation, the Australian government contracted with Amann
Aviation for the latter to provide aerial surveillance services of Australia’s northern
coastline for a period of three years from 12 September 1987. Amann had approximately
six months to prepare itself to assume its obligations on the set date. Considerable money
was spent in acquiring and specially fitting out aircraft for the operation. However,
Amann Aviation was not completely ready on the appointed date. On the first day of
operations Amann Aviation was therefore unable to fully comply with its contractual
obligations. The Australian government gave notice of termination of the contract on 12
September 1987. This termination was wrongful because it did not comply with the
procedures for termination set out in the contract. The government’s wrongful
termination was treated by Amann Aviation as repudiation of the contract and Amann
Aviation sued for damages for breach of contract. Its claim was for the expenditure it had
incurred in setting up the surveillance operation but which was now wasted because of
the government’s breach of contract. The four majority judges in the High Court found in
favour of Amann Aviation and ordered the government to pay damages totalling
$6,600,207, this sum reflecting the value of all of Amman Aviation’s wasted expenditure.
These two cases raise the following important issues concerning the recovery of damages
for reliance loss:
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whether a plaintiff can recover damages for all his or her reliance loss;
the recovery of damages for reliance loss where the plaintiff’s expectation
damages cannot be determined;
the recovery of damages for reliance loss where the plaintiff’s expenditure was
incurred before the contract was entered into;
the recovery of damages for both reliance loss and expectation loss.
Extent of Reliance Loss that is Recoverable
In relation to whether a plaintiff can recover all his or her wasted expenditure, it is clear
that a plaintiff cannot do so if performance of the contract would have resulted in the
plaintiff recovering an amount that is less than the expenditure incurred in the course of
performing the contract: Commonwealth v Amann Aviation, at 81, 99, 127, 135, 157, 163.
Thus, if a plaintiff incurred expenditure of $500, but, in performing the contract, would
have recovered only $300, he or she will only recover $300 as wasted expenditure
damages.
Reliance Loss and Impossibility of Assessing Expectation Loss
In cases where the determination of expectation damages is impossible or too difficult to
ascertain with any certainty, the plaintiff is entitled to recover all of his or her wasted
expenditure. This was the situation in relation to the non-existent oil tanker in McRae v
Commonwealth Disposals Commission. In that case, the recovery of expectation damages
was impossible. Dixon and Fullagar JJ, at 414, observed that this was ‘not because what
was promised was valueless but because it is impossible to value a non-existent thing’.
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Therefore, McRae was entitled to the reasonable costs of the salvage mission which had
been wasted as a result of CDC’s breach.
Differing explanations of the decision in McRae v Commonwealth Disposals Commission
were suggested in Commonwealth v Amman Aviation. According to Mason CJ and
Dawson J, at 86, and Deane J, at 126 44, there is a presumption or assumption that
parties, in entering into a contract, will at least recover expenditures incurred in
performance of it and that the onus is on the defendant to prove (i) that profits either
would not have been made, in which case the plaintiff cannot recover any of his or her
wasted expenditure, or (ii) that the plaintiff would only recover an amount that would
partially cover his or her wasted expenditure, in which case the plaintiff would only
recover that amount as damages for wasted expenditure. In McRae v Commonwealth
Disposals Commission, because CDC was unable to rebut the presumption at all, McRae
was able to recover his wasted expenditure. According to Brennan J, in Commonwealth v
Amann Aviation, at 105-07, the justification for the same onus of proof being put on CDC
was the fact that it was CDC’s breach of the contract itself that made it impossible to
assess damages on an expectation basis. CDC was unable to discharge this onus of proof,
as would be the situation in any case where expectation damages are impossible to assess
or too difficult to assess with any certainty. On the other hand, the fact that this onus of
proof cannot be discharged in these circumstances was the reason why McHugh J, at 166,
rejected the explanations of his fellow judges. In his view, once a plaintiff established
that expectation damages could not be assessed at all or with any certainty, he or she was
entitled to recover his or her wasted expenditure. This was justified on a ‘broad principle
of justice’ that in such circumstances ‘it is only fair that the defendant should reimburse
the plaintiff for expenditure which is wasted as a result of the breach’. Irrespective of
which explanation is preferred, the result is the same. The plaintiff’s claim for recovery
of all of his or her wasted expenditure will succeed.
In Commonwealth v Amann Aviation, all four of the majority judges held that the
government was unable to discharge the onus of proof and show that Amann Aviation
would not have made a profit. A major aspect of this case on this issue was the fact that
Amann Aviation did not expect to make a profit on its investment in the three years that
the contract had to run. Rather, it expected that its profit would materialise if the contract
was renewed for a further three year term. Although there was no obligation on the
government to renew the contract, Amann Aviation, according to Brennan J, at 112, had
in this respect, as the existing operator, a ‘commercial advantage’ that was ‘substantial’.
This meant, according to Mason CJ and Dawson J, at 94, that it had a ‘strong prospect of
renewal’. Thus, for these three judges, the government’s breach of contract meant that
Amann Aviation lost the chance of making a profit by getting a second contract. Because
the government could not establish that the value of the chance of renewal, when
combined with receipts during the first contract, would have been less than Amann
Aviation’s wasted expenditure, Amann Aviation was entitled to recover all its wasted
expenditure: Commonwealth v Amann Aviation, at 94, per Mason CJ and Dawson J, at
115, per Brennan J. On the other hand, Gaudron J, at 157, held that, because the
government was unable to establish that the combined total of Amann Aviation’s receipts
during the original contract plus the value of its aircraft at the end of that contract was
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less than Amann Aviation’s wasted expenditure, Amann Aviation was entitled to recover
all its wasted expenditure. It should be noted that, on this issue, Deane J, at 131-2, and
Toohey J, at 147, proceeded along similar lines to first three of the majority judges, but
reduced the damages by 20 per cent and 50 per cent respectively to reflect the percentage
chance that the government would not have renewed Amann Aviation’s contract.
Pre-contractual Reliance Loss
In appropriate circumstances a plaintiff is able to recover expenditure incurred before the
contract was entered into but which is wasted as a result of the breach of contract:
Commonwealth v Amann Aviation, at 156, 163. Thus, in Anglia Television Ltd v Reed
[1972] 1 QB 60, Robert Reed, an American actor, contracted with Anglia Television to
play the lead role in a television play entitled ‘The Man in the Wood’. Prior to engaging
the services of Reed, Anglia Television had incurred pre-production expenses for the play
in the form of expenses relating to the services of a director, designer and stage manager.
Further production costs were incurred after Reed contracted to play the lead role. Shortly
before the play was to be produced Reed repudiated his contract as his agent had booked
Reed to perform in another play. Anglia Television was unable to get a replacement actor
at such short notice and the production of ‘The Man in the Wood’ was abandoned. The
English Court of Appeal held Reed liable for both the pre- and post-contract expenditure
that it had incurred but which was now wasted because of Reed’s breach. As to the precontractual wasted expenditure, Lord Denning, at 63-64, observed that it was recoverable
because Reed must have known that pre-contract expenditure had been incurred and that
it was reasonably contemplated by the parties at the time of contract that, if Reed
repudiated his contract, the expenditure would be wasted. It should be noted that the
wasted expenditure was recovered because it was, as in McRae v Commonwealth
Disposals Commission, impossible to assess damages on an expectation basis.
Recovery of Reliance Loss and Other Types of Loss
With respect to the recovery of damages for both expectation loss and reliance loss, in
Anglia Television v Reed, at 63-4, Lord Denning MR suggested that a plaintiff could not
recover both types of loss and had to elect which loss he or she would pursue. Lord
Denning’s underlying concern was to prevent a double recovery which would breach the
principle that a plaintiff cannot be put into a better position as a result of a damages
award than he or she would have been had the contract been performed rather than
breached. The notion of the plaintiff having to make an election between expectation
damages and reliance damages was emphatically rejected by the High Court in
Commonwealth v Amann Aviation, at 84-5, 136-7, 155, 162-3, where it was pointed out
that the two types of loss were simply different manifestations of the compensation
principle enunciated in Robinson v Harman.
Much of the confusion on this point stems from the meaning of profit in the context of
expectation damages. If the plaintiff’s profit is viewed in terms of ‘net profit’, that is
gross receipts pursuant to the contract less expenditure incurred, then a plaintiff is entitled
to recover his or her expectation damages as well as reliance damages.
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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. The most
common example is the price or part of the price paid by the plaintiff. Damages can
include recovery of the value of the benefit conferred by the plaintiff. Thus, in McRae v
Commonwealth Disposals Commission, McRae recovered as part of his damages the sum
of £285 that he had paid to CDC as the purchase price for the sunken tanker.
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 (see Chapter
33) and not in damages for breach of contract. Indeed, following Baltic Shipping v
Dillon, at 350, 375, 389, it appears that recovery of restitution loss must proceed under
the law of restitution rather than for damages for breach of contract.
The High Court decision in Baltic Shipping v Dillon is important in that it clarifies the
scope for remedies in the context of a claim that includes both restitution loss and
expectation loss. In that case Mrs Dillon also sought recovery of the fare she had paid for
the holiday cruise. The High Court rejected this part of her claim. The High Court
observed that recovery of the fare was possible on one of two bases. Mason CJ, at 350,
described the first basis, a claim based in the law of restitution, as follows:
When … an innocent party seeks to recover money paid in advance under a
contract in expectation of the entire performance by the contract-breaker of
its obligations under the contract and the contract-breaker renders an
incomplete performance, in general, the innocent party cannot recover unless
there has been a total failure of consideration. … If the incomplete
performance results in the innocent party receiving and retaining any
substantial part of the benefit expected under the contract, there will not be a
total failure of consideration.
Mason CJ, at 351, described the second basis as follows:
An alternative basis for the recovery of money paid in advance pursuant to a
contract in expectation of the receipt of the consideration to be provided by
the defendant may arise when the defendant’s right to retain the payment is
conditional upon performance of his or her obligations under the contract. ...
In this class of case the plaintiff may be entitled to recover so long as the
payment remains conditional.
As a matter of construction of the contract, the High Court held that Mrs Dillon’s claim
did not fall into the second basis for recovery and that her claim for the fare on the first
basis for recovery was unsuccessful as there had not been a total a total failure of
consideration. By this the court meant that Mrs Dillon had received, albeit only in part,
the benefits that she had been promised. McHugh J, at 393, in rejected Mrs Dillon’s claim
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to recovery of the fare said ‘once Baltic [Shipping] began to provide the promised
benefits to Mrs Dillon, the right of that company to retain the fare became unconditional’.
It followed that, Mrs Dillon’s claim thereafter was confined to damages for breach of
contract in relation to her expectation loss.
On the basis of the principles set out in Baltic Shipping v Dillon, there is nothing to
prevent a plaintiff recovering restitution loss as well as expectation loss or reliance in the
appropriate case. Such cumulative claims are, however, subject to the principle that
double recovery cannot be allowed. Thus, a claim for both restitution loss and
expectation loss can succeed if the contract is one that falls within the second basis for
the recovery of restitution loss as outlined by Mason CJ in Baltic Shipping v Dillon. For
example, if X pays a deposit of $10,000 to Y in relation to a contract for the sale of land
and Y subsequently repudiates the contract, X can recover expectation damages in
relation to any loss of profit on the contract as well as the deposit in the form of
restitution loss: Re Daniel [1917] 2 Ch 405. The recovery of the deposit is permitted
because Y’s ‘title to retain the money has been considered not to be absolute but
conditional upon subsequent completion of the contract’: McDonald v Dennys Lascelles
Ltd (1933) 48 CLR 457 at 477.
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.
If a plaintiff, as a result of the defendant’s breach incurs a liability to a third party, the
plaintiff can, subject to satisfying the rules at to remoteness (see below), recover as
damages the amount by which the plaintiff is liable to the third party: 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
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.
In Bellgrove v Eldridge (1954) 90 CLR 613, Bellgrove built a two storey villa for
Eldridge. However, the building work was defective in relation to the concrete
foundations and the mortar used to cement the brick walls. The High Court held that
Bellgrove was liable to Eldridge for the cost of demolishing the building and re-building
the villa in accordance with the specifications in the contract. The High Court, at 618,
said that recovery of this cost met the requirements of being both ‘necessary’ and ‘a
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reasonable course to adopt’. By way of contrast, reinstatement costs were not allowed in
Ruxley Electronics v Forsyth. In that case Forsyth contracted with Ruxley for the
construction of a swimming pool. Ruxley built the pool that was 9 inches shallower than
it should have been. The shallower pool had no effect on the value of Forsyth’s property
and did not mean that it could not be used as originally intended. Forsyth claimed that he
was entitled to recover, as damages, the sum of £21,560, being the cost of rebuilding the
pool to it contractual specifications. The House of Lords refused the claim, but did award
him £2,500 as damages for loss of amenity (see above). In relation to the reinstatement
costs claim the House of Lords said it was unreasonable.
As with the other types of interest already discussed, indemnity losses can be recovered
in addition to other types of loss. Thus, in SS Ardennes (Cargo Owners) v SS Ardennes
(Owners) [1951] 1 KB 55; [1950] 2 All ER 517, exporters of mandarins shipped them for
sale to London. The cargo ship deviated in its voyage and was late in docking in London.
During the period of delay import duties on mandarins had increased and prices had
fallen due to the arrival of other cargoes of mandarins. The exporters were able to recover
the increased duty that had to be paid as indemnity loss, as well as the loss of profits due
to the drop in prices as expectation loss.
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 onus of proof in establishing causation is generally on the plaintiff.
The ‘but for’ Test
In establishing causation the traditional test, applied in both contract and tort, is the ‘but
for’ test. This test requires a court to be satisfied that the loss would not have occurred
but for the breach of contract. It follows that the issue of causation is thus a question of
fact. However, the ‘but for’ test has its problems. For example, it is inadequate in
situations where two independent events occur, each of which is sufficient on its own to
cause the loss. Accordingly, courts have recognised that the ‘but for’ test is only a guide
and that the ultimate question is whether the breach of contract should be regarded as the
cause of the loss as a matter of ordinary common sense and experience.
Few cases exist in which the plaintiff failed to establish the traditional test for causation.
One such case is Alexander v Cambridge Credit. In that case the liquidator of Cambridge
Credit sued the company’s auditors in relation to the auditor’s failure to qualify the
company’s balance sheet for the financial year 1970-1971. The auditor’s breach was not
noting certain failed investments by the company. Had this breach not occurred the
company would have gone into immediate receivership. Three years later the company
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went into receivership. The auditor’s reports during these three years repeated the breach
made for the 1970-1971 financial year. The company’s liquidator, relying only on the
initial breach by the auditor, sought damages for the losses suffered by the company in
those three years which totalled $145 million. A majority of the New South Wales Court
of Appeal, over-ruling the decision at first instance, ruled against the liquidator on the
ground that the breach did not cause the loss. Although a literal application of the ‘but
for’ test was satisfied, in that but for the auditor’s breach the company would not have
continued to trade for the next three years and would thus, not have suffered losses during
that period, this was not the approach adopted by the court’s majority judges.
McHugh JA, although adopting it, applied the ‘but for’ test only as a guide. His Honour,
at 359, said:
In the proved circumstances of this case, I do not think that the issue of the
certificates by the auditors constituted a cause of Cambridge’s loss … . The
existence of a company … cannot be a cause of its trading losses or profits.
Yet that is what the case for Cambridge comes to. Except in the sense that the
issue of the certificates induced the trustee not to take action against
Cambridge and thereby permitted Cambridge to exist as a trader, the issuing
of the certificates was not one of the conditions which were jointly necessary
to produce the loss … . To assert in these circumstances that the issue of the
certificates was a cause of the loss in my opinion is to depart from the
commonsense notion of causation which the common law champions.
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 extraneous event, an act of a third party or an act of the plaintiff. If the
intervening event breaks the causal link, the plaintiff will be confined to recovering only
nominal damages against the defendant.
A case in which the plaintiff’s conduct constituted an intervening event is Lexmead
(Basingstoke) Ltd v Lewis [1982] AC 225. In that case Lewis purchased a towing hitch
from Lexmead. It was to be used to join his Land Rover to a trailer. The towing hitch was
faulty. As a result, the trailer became detached from the vehicle causing personal injuries
to members of the Lambert family. Lewis, who was liable for damages to the Lamberts,
sought to be indemnified for the damages by Lexmead on the basis that Lexmead had
breached its contract of sale with Lewis in selling a faulty towing hitch and that this
breach was the cause of the losses suffered by Lewis in the form of his liability to the
Lamberts. The House of Lords, however, ruled against Lewis on the ground that, after the
purchase of the towing hitch, Lewis became aware that the towing hitch was faulty, but
continued to use it. The continued use of the faulty towing hitch by Lewis constituted an
intervening event that broke the causal link between Lexmead’s breach and the loss
suffered by Lewis. In Alexander v Cambridge Credit, McHugh JA, at 363, said that even
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if he was wrong on the question of whether there was a causal connection between the
auditor’s breach and the losses suffered by Cambridge Credit, the auditor’s breach was so
‘superseded in potency by supervening events as not to rank as a cause either in common
sense or law’. The supervening events were significant changes in government monetary
policy, inflationary pressures, and a boom in housing prices.
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. At
common law such a reduction in the plaintiff’s damages is not possible unless there is an
express term in the contract to that effect: Astley v Austrust Ltd (1999) 197 CLR 1.
However, the principle enunciated in Astley v Austrust has been partially overturned by
statute: Law Reform (Miscellaneous Provisions) Act 1965 (NSW). The effect of this
legislation is to permit such reductions in the damages awarded to a plaintiff where he or
she has concurrent claims for breach of contract and the tort of negligence.
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. The consequence of the principle is that improbable or unpredictable losses are
seen as too remote and will not be compensated for by an order for damages.
The rule on remoteness for breach of contract was laid down in Hadley v Baxendale
(1854) 156 ER 145. In that case Hadley owned of flour mill in Gloucester. The mill’s
crankshaft broke and Hadley contracted with Baxendale, a common carrier, for the
broken crankshaft to be transported to Greenwich where it would be used as a model for a
new crankshaft to be produced by Joyce. In breach of contract, Baxendale was late in
delivering the broken crankshaft to Joyce. Delivery of the new crankshaft was thus
delayed for 5 days, with Hadley suffering losses of profits from not being able to operate
the flour mill for those 5 days. Hadley sued Baxendale for the lost profits, but failed on
the grounds that the loss of profits was too remote from the breach of contract. Alderson
B, at 151, set out the rule of remoteness as follows:
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Where two parties have made a contract which one of them has broken, the
damages which the other party ought to receive in respect of such breach of
contract should be such as 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.
The rule in Hadley v Baxendale has two limbs to it. Under the first limb, the plaintiff can
recover damages for losses that flow ‘naturally’ or ‘according to the usual course of
things’ as a result of the breach. Under the second limb, damages are recoverable for
losses that do not fall within the first limb, but which arise as the reasonable and natural
result of special circumstances known to the defendant at the time the contract was
entered into. In Hadley v Baxendale the loss of profits did not come within either of the
two limbs. 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
The first limb of Hadley v Baxendale proceeds upon the basis of the presumed knowledge
of the defendant as to the losses that will arise ‘naturally’ or ‘according to the usual
course of things’. An objective test is applied to determine just how far this presumed
knowledge extends.
In Victoria Laundry (Windsor) Ltd v Newman Industries Ltd [1949] 2 KB 528 Newman
Industries contracted with Victoria Laundry to supply the latter with a boiler for its
dyeing and dry-cleaning business. Delivery of the boiler was delayed by five months.
Victoria Laundry sought recovery of the profits lost as a result of not having the boiler
delivered on time. These losses included profits from its existing business as well as
profits from a highly lucrative contract with the Ministry of Supply. The lost profits in
relation to its existing business were recovered as being losses within the first limb of
Hadley v Baxendale. The lost profits from the Ministry of Supply contract were not
within the first limb. They could only have been recovered if Newman Industries had
been advised of the contract in accordance with the second limb of Hadley v Baxendale.
In Koufos v C Czarnikow Ltd [1969] 1 AC 350; [1967] 3 All ER 686 Czarnikow
contracted with Koufos for the latter to ship sugar from Constanza to Basrah. Koufos
deviated in the voyage and arrived nine days late into Basrah. In the meantime sugar
prices had fallen. Czarnikow sued for loss of profits in the sale of the sugar. The House of
Lords held that the loss was recoverable under the first limb of Hadley v Baxendale.
Although Koufos did not know that it was intended that the sugar be sold at Basrah, he
did know that Czarnikow was a sugar merchant and that there was a market for sugar in
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Basrah. This was enough knowledge for Koufos to have contemplated that Czarnikow
would suffer the loss in question.
The Second Limb of Hadley v Baxendale
The second limb of Hadley v Baxendale proceeds upon the basis of actual knowledge of
special circumstances possessed by the defendant at the time of contracting. Knowledge
of such special circumstances means that he or she is liable for the relevant losses that
flow from that knowledge.
Unless the defendant disclaims the potential liability for those losses, he or she implicitly
undertakes to bear the burden of liability for damages for the losses when they occur.
In McRae v Commonwealth Disposals Commission, at 414, the High Court held that the
wasted expenditure incurred by McRae was recoverable under the second limb of Hadley
v Baxendale. There was no explanation of the court’s reasoning on this point. However, it
must be presumed that the court was of the view that CDC had actual knowledge of the
need for a salvage mission. As already noted, part of the claim for lost profits in Victoria
Laundry v Newman Industries failed because Newman Industries did not have actual
knowledge of the relevant special circumstances.
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. In Victoria Laundry v Newman Industries, at 539-40, Asquith LJ used
expressions such as ‘reasonably foreseeable as liable to result’, ‘serious possibility’, ‘real
danger’ as well as the colloquialism ‘on the cards’. In Koufos v Czarnikow these
expressions received a mixed reception from the various members of the House of Lords.
The speech of Lord Reid is of particular relevance as his views have been generally
accepted in Australia: Burns v MAN Automotive (Aust) Pty Ltd (1986) 161 CLR 653 at
667; Alexander v Cambridge Credit at 363-4; Commonwealth v Amann Aviation at 99;
Baltic Shipping v Dillon at 368; ALR at 307; Flamingo Park v Dolly Dolly Creation at
521-2.
In Koufos v Czarnikow, at 389-90, Lord Reid rejected all the expressions used by Asquith
LJ. Lord Reid stated the test as being one whether the loss was ‘likely’ or ‘not unlikely’
to result form the breach. To illustrate the different shades of meaning between the views
of Asquith LJ and his own, Lord Reid said:
Suppose one takes a well-shuffled pack of cards, it is quite likely or not
unlikely that the top card will prove to be a diamond: the odds are only 3 to 1
against. But most people would not say that it is quite likely to be the nine of
diamonds for the odds are then 51 to 1 against. On the other hand I think that
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most people would say that there is a serious possibility or a real danger of its
being turned up first and of course it is on the cards.
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’. Thus, in H
Parsons (Livestock) Ltd v Uttley Ingham & Co Ltd [1978] QB 791; [1978] 1 All ER 525,
an improperly installed pig-feeding machine resulted in the food to be fed to the pigs
becoming mouldy. A number of pigs died. The English Court of Appeal held that
although the death of pigs might not have been contemplated, it was enough that it was
contemplated that pigs might become ill as a result of the breach of contract. Damages for
loss resulting from the death of the pigs were recoverable on the basis that the death of
pigs came within the scope of illness to pigs.
Remoteness and Concurrent Liability
A breach of contract may give rise to a concurrent claim in the tort of negligence. A
plaintiff in such a case could choose to sue for damages for breach of contract or in
negligence. In tort law the rule on remoteness differs from that in contract law. Damages
for losses that would not be recoverable in contract law may be recovered in tort law. In
other words, a plaintiff’s claim in negligence could result in a higher damages award than
if it the claim was one based on breach of contract.
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
defendant’s breach of contract.
The classic formulation of principle relating to mitigation is located in British
Westinghouse Electric and Manufacturing Company Limited v Underground Electric
Railways Company of London Limited [1912] AC 673 at 689, where Viscount Haldane
LC said:
The fundamental basis is thus compensation for pecuniary loss naturally
flowing from the breach; but this first principle is qualified by a second,
which imposes on a claimant the duty of taking all reasonable steps to
mitigate the loss consequent on the breach, and debars him from claiming any
part of the damage which is due to his neglect to take such steps.
The principle of mitigation is set out in three rules:

a plaintiff cannot recover damages for loss that was avoidable;
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

a plaintiff cannot recover damages for loss that was avoided;
a plaintiff can recover money spent in avoiding or attempting to avoid loss.
Avoidable Loss
A failure to take reasonable steps to avoid loss will result in damages not being awarded
for loss that could have been avoided. The crucial point here is the element of
reasonableness. What is reasonable is very much dependant upon the particular facts and
circumstances of the case. As with the approach to causation, the courts will look at the
issue as a matter of common sense. If the plaintiff cannot afford to undertake steps that
would otherwise be reasonable and therefore avoid loss, he will not be held to have failed
to mitigate, especially where the financial difficulty is a consequence of the defendant’s
breach of contract: Burns v MAN Automotive, at 659. On the other hand, if reasonable
steps to mitigate are undertaken by a plaintiff have the effect of increasing, rather than
avoiding, loss, damages for that additional loss are, nevertheless, recoverable from the
defendant.
The rule in relation to avoidable loss does not require the plaintiff to undertake steps that
involve matters such as: (i) injury to his or her commercial reputation, (ii) expensive or
complex litigation, (iii) actions that are unduly risky and uncertain.
In cases of avoidable loss the question of whether the plaintiff should have entered into a
new contract with the defendant often arises. In cases involving commercial transactions
the courts are more willing to state that entry into such a contract is reasonable than in
cases of personal services contract. On the other hand, in Yetton v Eastwoods Froy Ltd
[1966] 3 All ER 353, in the context of an employment contract, a plaintiff’s rejection of a
defendant’s offer of a new employment contract was held to be reasonable. In this case,
Yetton was employed for a five year term by Eastwoods Froy as one of its joint managing
directors. After two years of the contract his employment was terminated and he was
offered re-employment for the remaining three years at the same salary, but as an
assistant to a new managing director. Yetton refused the offer and undertook steps to find
comparable employment, but without success. Blain J held that the refusal of the offer of
re-employment was reasonable, especially considering the loss of status that the new
position entailed. Furthermore, Yetton’s efforts to obtain alternative employment were
reasonable. Therefore, there was no reduction in damages on the ground of a failure to
mitigate. Thus, matters such as the nature of the position offered as compared with the
former position as well as the degree to which the personal relationship between the
employer and employee had deteriorated were relevant factors is assessing the
reasonableness of Yetton’s actions. If such matters do not arise, it is more likely that a
court will rule that rejecting an offer of re-employment, especially one at the same salary,
will be unreasonable, as was the case in Brace v Calder [1895] 2 QB 253.
The onus of proof in relation to the rule on avoidable loss rests upon the defendant who
must show that reasonable steps towards mitigation have not been undertaken by the
plaintiff, rather than the plaintiff having to prove that such steps have been taken: Metal
Fabrications (Vic) Pty Ltd v Kelcey [1986] VR 507 at 509. The issue of mitigation should
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be raised by the defendant at the time of filing a defence to the claim filed by the plaintiff
to initiate legal proceedings. If this is not done, the court proceeds upon the assumption
that the plaintiff has undertaken reasonable steps to avoid loss and the issue of mitigation
cannot be raised at the hearing of the case.
Avoided Loss
Although the principle of reasonableness is very much an issue in relation to
the question of steps that should have been taken to avoid loss, it is irrelevant
in the situation where steps have been taken and loss is avoided. Loss that has
been avoided cannot be compensated for ‘even though there was no duty on
[the plaintiff] to act’, provided that the steps undertaken by the plaintiff were
ones ‘arising out of the transaction’: British Westinghouse v Underground
Electric Railways, at 689. However, if the benefit obtained by the plaintiff is
one not arising ‘out of the transaction’, that benefit is not taken into account
by way of reducing the damages recoverable by the plaintiff.
The case of Lavarack v Woods of Colchester Ltd [1967] 1 QB 278 provides a useful
application of this principle. Lavarack was employed on a five year contract with Woods
of Colchester, but was wrongfully dismissed after two years. He obtained alternative
employment with Martindale Electrique SA. His salary was less than that with Woods of
Colchester, but he also acquired a 25% stake in Martindale. Lavarack also invested funds
in a company that was a rival to Woods of Colchester. The English Court of Appeal held
that the salary paid by Martindale, as well as the increase in value of his stake in
Martindale, were benefits that arose out of the steps he took to mitigate his loss.
However, the profit on Lavarack’s investment in the rival company was the result of
steps that were independent of those taken in mitigation. This ‘entirely collateral benefit’
was not taken into account in the assessment of damages even though Lavarack would
not have been able make that investment had he not been dismissed from his employment
with Woods of Colchester.
Recovery of Expenses
In cases of avoided loss the amount to be deducted from a plaintiff’s damages is the net
gain after the deduction of reasonable expenses incurred. In other cases, reasonable
expenses incurred will be recoverable from the defendant.
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. 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.
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LOSS OF USE OF MONEY AND INTEREST ON DAMAGES
In Hungerfords v Walker the High Court ruled that if a breach of contract deprived a
plaintiff of a specific sum of money which he or she would otherwise have had at his or
her disposal, damages can be awarded for the loss of the use of the money. In this case
Hungerfords were Walker’s accountants and made errors in calculating his deductions for
depreciation. This resulted in the overpayment of income tax for a number of years.
Because of the passage of time, Walker was unable to get a refund of some of the
overpaid tax. He successfully sued Hungerfords for damages to compensate him for the
overpaid tax that could not be refunded as well as for the loss of the use of the money.
The quantum of damages recovered in a case such as Hungerfords v Walker will be either
the interest that could have been earned by investing the money or the interest paid to a
lender if the plaintiff has had to borrow money as a result of the breach. Interest on
damages can be awarded by a court pursuant to statutory provisions: 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. Thus, if a contract stipulates that
a seller is to deliver ‘100 tonnes of widgets, plus or minus 2%’ and the seller fails to
deliver any widgets, the seller’s liability for damages will be assessed on the basis of a
failure to deliver 98 tonnes of widgets.
An analogous principle relates to contracts where there is an express right to cancel a
contract. If a defendant breaches a contract but also has a contractual right to terminate it,
are damages assessed on the basis of the position the plaintiff would have been had the
contract been performed as anticipated or only performed to the earliest date that the
contract could have been terminated pursuant to the defendant’s contractual right to
terminate? In the context of a breach of a charterparty where the charterer breached the
contract but also had a contractual right to terminate the charter by giving appropriate
notice in writing to the ship’s owners, damages were assessed on the basis of the losses
incurred from the date of breach to the earliest date that the charterparty could have been
terminated by pursuant to the contractual right to terminate: Maradelanto Compania
Naviera SA v Bergbau-Handel GmbH (The Mihalis Angelos) [1971] 1 QB 164. Simply
because a contract could have been terminated early does not necessarily mean that The
Mihalis Angelos principle is applicable. In Commonwealth v Amann Aviation, at 149-50,
Gaudron J said:
[T]here is nothing in The Mihalis Angelos or elsewhere to suggest … that it is
to be conclusively presumed that a repudiating party, if he or she had not then
repudiated, would have acted to bring the contract to an end by other means if
they were later to become available. What was decided in The Mihalis
Angelos is that contractual rights should be valued having regard to the
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known facts and, if the facts allow, it may be assumed that the contract would
have been performed in the manner which most reduces the damages payable.
But, and as a matter of common sense, in no case is an assumption to be made
or maintained in the face of evidence pointing to the contrary.
The principle in The Mihalis Angelos was unsuccessfully argued in TCN Channel 9 Pty
Ltd v Hayden Enterprises Pty Ltd (1989) 16 NSWLR 130, a case in which a contract
between the parties was repudiated by TCN Channel 9, and subsequently terminated by
Hayden. The contract gave TCN Channel 9 a right to terminate upon giving three months
notice. Such a termination would have meant the end of transmission of ‘The Midday
Show’, a highly successful program for TCN Channel 9. Its attempt to invoke the
principle in The Mihalis Angelos failed as the evidence showed that at all times TCN
Channel 9 exhibited a desire to broadcast the ‘The Midday Show’ and that it was very
unlikely that it would do so subsequently simply to limit the amount of damages to be
paid to Hayden.