LECTURE 7
COMMON LAW 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,
relating to the payment of damages, the nature of which was explained in 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.
See Foran v Wight (1989) 168 CLR 385 at 397, 451. Apart from two exceptions, there is
no requirement that the plaintiff also terminate the contract. The two exceptions are, first,
in relation to damages for anticipatory breach, and second, where the claim is for
expectation damages. Of course, the right to damages may be excluded or limited by an
appropriately drafted exclusion that is incorporated into the contract (see Lecture 6).
NOMINAL AND SUBSTANTIAL DAMAGES
What is standard of proof in damages claims? See The Commonwealth of Australia v
Amann Aviation Pty Ltd (1991) 174 CLR 64 at 80.
What is meant by the terms ‘nominal’ and ‘substantial’ damages? See Owners of SS
‘Mediana’ v Owners of SS ‘Comet’ [1900] AC 113 at 116.
THE COMPENSATORY NATURE OF DAMAGES
2
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:
[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.
Is a plaintiff entitled to be better off as a result of a damages award? See Commonwealth
v Amann Aviation, at 82, 136, 163. How rigidly is the compensation principle applied?
See Wenham v Ella (1972) 127 CLR 454 at 466; Ruxley Electronics and Constructions
Ltd v Forsyth [1996] AC 344 at 354, 356-7, 360-1, 365-8.
Disgorgement Damages
What is meant by ‘disgorgement’ damages? Can a plaintiff recover them for breach of
contract? Attorney General v Blake [2001] 1 AC 268; In Hospitality Group Pty Ltd v
Australian Rugby Union (2001) 110 FCR 157 at 196.
Exemplary Damages
Are exemplary damages recoverable for breach of contract? See Butler v Fairclough
(1917) 23 CLR 28 at 89.
THE ONCE AND FOR ALL LUMP SUM RULE
An award of damages for a breach of contract is made on a once and for all lump sum
basis: Johnson v Perez (1988) 166 CLR 351 at 355.
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. See Federal Commissioner of Taxation v
Wade (1951) 84 CLR 105 at 115.
3
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. Is this rule rigidly
applied? See Johnson v Perez at 371; Commonwealth v Amann Aviation, at 161-2; Castle
Constructions Pty Ltd v Fekala Pty Ltd [2004] NSWSC 672 at [28]; Hocking Stuart
(Hawthorn) Pty Ltd v Vernea [2005] VSCA 129.
INTERESTS REFLECTED IN A DAMAGES AWARD
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. For example see McRae v
Commonwealth Disposals Commission (1951) 81 CLR 377.
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
4
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, a contract may contain a right to terminate it for specified breaches of the
contract. If the specified breaches are not ones that would give 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; 42 ALR 305.
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.
See Chaplin v Hicks [1911] 2 KB 786; Sellars v Adelaide Petroleum NL (1994) 179 CLR
332 at 349, 355-6, 367-8; Fink v Fink (1946) 74 CLR 127 at 143; Sensis Pty Ltd v
McMaster-Fay [2005] NSWCA 163 at [57]; Commonwealth v Amann Aviation, at 83.
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. For exceptions see Boncristiano v Lohmann
5
[1998] 4 VR 82 at 94; Grant v Australian Knitting Mills Ltd [1936] AC 85 and Aldersea
v Public Transport Corporation (2001) 3 VR 499 at 515-18; Flamingo Park Pty Ltd v
Dolly Dolly Creation Pty Ltd (1986) 65 ALR 500 at 524-5.
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; Addis v Gramophone Co Ltd [1909] AC 488. What did the High Court say about
the rule in Hamlin in Baltic Shipping Co v Dillon (The Mikhail Lermontov) (1993) 176
CLR 344? Is there an exception to the Hamlin rule? See Baltic Shipping v Dillon, at 3812; Diesen v Samson [1971] SLT 49; Hamilton Jones v David & Snape [2004] 1 All ER
657; Farley v Skinner [2002] 2 AC 732; Ruxley Electronics v Forsyth; Boncristiano v
Lohmann, at 95.
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: McRae v
Commonwealth Disposals Commission; Commonwealth v Amann Aviation.
These two cases raise the following important issues concerning the recovery of damages
for reliance loss:

whether a plaintiff can recover damages for all his or her reliance loss. See
Commonwealth v Amann Aviation, at 81, 99, 127, 135, 157, 163.

the recovery of damages for reliance loss where the plaintiff’s expectation
damages cannot be determined. See McRae v Commonwealth Disposals
Commission, at 414; Commonwealth v Amman Aviation at 86, 94, 105-07,
115,126, 132-2, 147,157, 166.
6

the recovery of damages for reliance loss where the plaintiff’s expenditure was
incurred before the contract was entered into. See Commonwealth v Amann
Aviation, at 86, 156, 163; Anglia Television Ltd v Reed [1972] 1 QB 60.

the recovery of damages for both reliance loss and expectation loss. See Anglia
Television Ltd v Reed at 63-4; Commonwealth v Amann Aviation, at 84-5, 136-7,
155, 162-3; TC Industrial Plant Pty Ltd v Robert’s Queensland (1963) 180 CLR
130 at 141.
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. For
example see McRae v Commonwealth Disposals Commission. 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 and not in damages for breach of
contract. For example see Foran v Wight. See also Baltic Shipping v Dillon, at 350, 375,
389. Note Mason CJ’s important points in Baltic Shipping v Dillon at 350-1. See also Re
Daniel [1917] 2 Ch 405.
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. See 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
7
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. See Bellgrove v Eldridge (1954) 90 CLR 613; Ruxley
Electronics v Forsyth. Note SS Ardennes (Cargo Owners) v SS Ardennes (Owners)
[1951] 1 KB 55.
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 ‘but for’ Test
In establishing causation the traditional test, applied in both contract and tort, is the ‘but
for’ test. What does this mean? See March v E & MH Stramare Pty Ltd (1991) 171 CLR
506 at 522; Alexander v Cambridge Credit.
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 act of the plaintiff, an extraneous event, or an act of a third party. See Medlin
v State Government Insurance Commission (1995) 182 CLR 1 at 6-7; Lexmead
(Basingstoke) Ltd v Lewis [1982] AC 225; Rolfe v Katunga Lucerne Mill Pty Ltd [2005]
NSWCA 252 at [105 Alexander v Cambridge Credit.
8
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. See Astley v
Austrust Ltd (1999) 197 CLR 1; Law Reform (Miscellaneous Provisions) Act 1965
(NSW), ss 8-9.
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. It had been recognised that the rationale for this principle is not based upon
‘pure logic’, but rather upon ‘practical reasons’: Liebosch Dredger v SS Edison [1933]
AC 449 at 460. The rule on remoteness for breach of contract was laid down in Hadley v
Baxendale (1854) 156 ER 145. 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
9
See Jackson v Royal Bank of Scotland [2005] 2 All ER 71 at 83-4; Victoria Laundry
(Windsor) Ltd v Newman Industries Ltd [1949] 2 KB 528; Koufos v C Czarnikow Ltd
[1969] 1 AC 350.
The Second Limb of Hadley v Baxendale
See Hungerfords v Walker (1988) 171 CLR 125 at 142; Robophone Facilities Ltd v Blank
[1966] 3 All ER 128 at 143; Jackson v Royal Bank of Scotland, at 79;McRae v
Commonwealth Disposals Commission, at 414.
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. See Victoria Laundry v Newman Industries, at 539-40; Koufos v Czarnikow
at 389-90; Alexander v Cambridge Credit at 363-4; Commonwealth v Amann Aviation at
99; Baltic Shipping v Dillon at 368.
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’. See H Parsons
(Livestock) Ltd v Uttley Ingham & Co Ltd [1978] QB 791.
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
10
defendant’s breach of contract. See British Westinghouse Electric and Manufacturing
Company Limited v Underground Electric Railways Company of London Limited [1912]
AC 673 at 689.
The principle of mitigation is set out in three rules:

a plaintiff cannot recover damages for loss that was avoidable. See Shindler v
Northern Raincoat Co Ltd [1960] 2 All ER 239 at 250; Dunkirk Colliery
Company v Lever [1878] 9 Ch D 20 at 25; The Clippens Oil Company Limited v
The Edinburgh and District Water Trustees [1907] AC 291 at 303-04; Simonius
Vischer & Co v Holt & Thompson [1979] 2 NSWLR 322; Payzu v Saunders
[1919] 2 KB 581; Yetton v Eastwoods Froy Ltd [1966] 3 All ER 353; Brace v
Calder [1895] 2 QB 253; Metal Fabrications (Vic) Pty Ltd v Kelcey [1986] VR
507 at 509.

a plaintiff cannot recover damages for loss that was avoided. See British
Westinghouse v Underground Electric Railways, at 689; Lavarack v Woods of
Colchester Ltd [1967] 1 QB 278; Hussey v Eels [1990] 2 QB 227; Manwelland
Pty Ltd v Dames & Moore Pty Ltd [2001] QCA 436.

a plaintiff can recover money spent in avoiding or attempting to avoid loss. See
Westwood v Secretary of State for Employment [1985] AC 20 at 44.
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: Ogle v Comboyuro
Investments Pty Ltd (1976) 136 CLR 444 at 450. 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: Huppert v Stock Options of
Australia Pty Ltd (1965) 112 CLR 414 at 431.
11
LOSS OF USE OF MONEY AND INTEREST ON DAMAGES
See Hungerfords v Walker. Note 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. For example see Withers v
General Theatre Corporation [1933] 2 KB 536 at 548-9. See also : Maradelanto
Compania Naviera SA v Bergbau-Handel GmbH (The Mihalis Angelos) [1971] 1 QB
164; Commonwealth v Amann Aviation, at 149-50; TCN Channel 9 Pty Ltd v Hayden
Enterprises Pty Ltd (1989) 16 NSWLR 130.
Loss of Discretionary Bonuses
A contract may stipulate that certain benefits may be conferred upon the promisee at the
discretion of the promisor. The question that arises in such a contract is whether an
employer, who has breached the employment contract, will be liable in damages to the
employee in relation to the discretionary bonus clause of the contract. See Cantor
Fitzgerald International v Horkulak [2004] EWCA Civ 1287.
CONCURRENT LIABILITY IN CONTRACT AND TORT
In recent decades the tort of negligence has expanded in scope and now offers the
possibility of a remedy in areas that had traditionally been the preserve of contract law.
What this means is that the defendant is potentially liable in alternate claims based upon
the tort of negligence or for breach of contract. In this sense, the plaintiff is concurrently
liable to the plaintiff.
12
In relation to cases of concurrent liability, most of the key decisions have involved the
liability of professionals, such as lawyers, medical practitioners and accountants, to their
clients. A significant case in this process was the House of Lords decision in Hedley
Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465. Prior to Hedley Byrne v Heller,
the liability of such professionals was in contract only. Although the existence of
concurrent liability is now beyond question, judges have expressed contrasting views as
to whether preference should be given in such cases to the tort of negligence claim or the
breach of contract claim. See Hawkins v Clayton (1988) 164 CLR 539 at 585; Astley v
Austrust Ltd at 22.
The Concurrent Liability Issue
The principal reason for the debate over concurrent liability is rooted in the fact that the
measure of damages awarded to a plaintiff will not necessarily be the same irrespective of
whether the claim is pursued in the tort of negligence or for breach of contract. See
Koufos v Czarnikow at 386; H Parsons (Livestock) v Uttley Ingham & Co at 807; Astley v
Austrust Ltd at 36-7.