Torts and Contracts II
TORTS AND CONTRACT II- NOTES
DAMAGES IN CONTRACT
The fundamental principle that informs all considerations of damages in contract is
that of compensation: putting the plaintiff back in the position they would have been
in had the breach never happened, had the loss not occurred [Robinson v Harman]. If
the plaintiff is getting over- or undercompensated, then this is an incorrect application
of the law of damages in contract.
CAUSATION'
REMOTENESS'
KIND'OF'LOSS'
RECOVERABLE'
FORESEEABILITY'
MEASURE'OF'DAMAGES'
A. CAUSATION
Causation is rarely the issue in contracts because there are defined parties and
relationships between them. However, where it does arise, the test is very similar to
torts; you take a common sense approach, applying the but for test if it is appropriate,
otherwise just looking at the factual context [Reg Glass]. In Reg Glass, they look at
the purpose of the contract (to stop thieves getting in and robbing), and hence
causally linked the faulty security door with the loss of stock. Cf Adell’s Palace.
[This common law approach to causation has been superseded by the Civil Liability
Act NSW 2002 for contractual claims arising out of NEGLIGENCE [s 5A CLA].
If the contractual claim arises from negligence, s 5D applies, and defines causation as
‘the negligence being a necessary condition of the occurrence of the harm’, while s
5D(2) says that if the negligence is not a necessary condition, in exceptional cases the
court can ask whether, in this case, causation should be satisfied anyway.]
B. REMOTENESS
Basic question: how far should liability extend? Different in contracts to torts.
Hadley v Baxindale
Defendant was engaged to transport plaintiff’s broken cranckshaft, defendant was late
in transporting it, plaintiff claimed that because of the breach of the time stipulation,
the plaintiff had lost business at his mill, sued for loss of profits. It was clear that the
delay caused the loss- but-for test. What damages are not too remote to be
compensated for?
1. 1st Limb: damages that, in the ordinary course of things, flow naturally from
the breach
1
Torts and Contracts II
2. 2nd Limb: damages that were, or can reasonable be supposed to have been, in
the contemplation of both the parties as the probable result of breach, at the
time of contract.
In this case, it was held that loss of profits do not come under the 1st limb, because in
the ordinary course of things other alternatives could be the case, delay does not
clearly lead to loss of profits, and they do not come under the 2nd limb because the
specific situation was not communicated to the defendant.
The 2 limbs of Hadley v Baxindale should be applied generally; the defendant need
not have been able to predict, as a serious possibility, the precise damage, but merely
losses of the general type that arose from the breach [Parsons].
Victorian Laundry
Restates the two limbs of Hadley v Baxindale; every defendant has imputed
knowledge of damages that flow naturally from the breach, and they can also have
special knowledge about the special circumstances of the case that will create
damages resultant from the breach. Imputed or special knowledge is required.
Secondly, the reasonable person in the defendant’s position must have thought the
damage liable to happen or a serious possibility, otherwise the damage is too remote
to attract compensation.
In this case, the general loss of profits from customers was within the defendant’s
imputed knowledge (1st limb), but the loss of lucrative government contracts was not
within the defendant’s special knowledge (2nd limb) because it was not communicated
to him by the plaintiff.
So the damage that is within the defendant’s contemplation must be liable to happen;
this test of foreseeability is narrower than the torts test of reasonable foreseeability,
which is ‘not far-fetched or fanciful’. So need to bear in mind that broad distinction
between ‘reasonable foreseeability’ in tort and ‘reasonable contemplation’ in
contract. You need a higher degree of probability, though it still does not need to be
over 50%, merely ‘not unlikely’ or ‘a serious possibility’ [Koufos]. Hence, the
damage must be a serious possibility, or not unlikely to result from the breach.
Scarman J in Parsons argues that this is a matter of common sense in the particular
circumstances of the case. The words are fairly unhelpful, the meaning behind them is
that the parties would have contemplated it; a risk that would have seemed unusual to
the defendant would be too remote, because the plaintiff should have brought that risk
within the contract if they wanted the defendant to be liable for damages resulting
from it.
The distinction between the remoteness test in tort and the remoteness test in contract
is a bit amorphous, it can operate poorly when there are concurrent duties, especially
in fixed term contracts. In such circumstances, perhaps the thoughts of Denning MR
in Parsons could be instructive; apply the less stringent torts test when the damage
suffered is personal injury or damage to property, and apply the more difficult
contracts test when the damage is for pure economic loss.
C. MEASURE OF DAMAGES
2
Torts and Contracts II
If no damage has been suffered, the plaintiff can only recover nominal damages to
show that they have been wronged by the breach of contract [Luna Park v Tramways].
Expectation damages attempt to place the plaintiff in the position they would have
been in had the contract been performed [Robinson v Harman]. The profit that would
have been made by the plaintiff is measured at the time for performance of the
contract; that is, the difference between market price and contract price at the
contractual date for completion [Hoffman v Cali].
The mere fact that damages are difficult to calculate does not mean the plaintiff fails;
the court should try to put a value down [Luna Park v Tramways]. However the court
cannot guess at the extent of the breach [Luna Park].
If the plaintiff cannot prove they lost the benefit itself, they can be compensated for
the loss of a chance, because that chance has a value [Howe v Teefy- racehorse;
Chaplin v Hicks- beauty pageant]. Occurs when either a term of the contrat promises a
chance, or when the defendant’s breach deprived the plaintiff of the chance [Howe v
Teefy].
Given the fundamental principle of compensation, the prima facie assessment of
damages for delay in arrival of goods, or non-acceptance of goods, is the difference
between the price that the plaintiff could have got under the contract, and the market
price. Hence there is a duty for the plaintiff to mitigate their loss by selling the goods
at market price [Sale of Goods Act ss 52-53; Koufos].
The plaintiff cannot recover exemplary damages for breach of contract [Addis v
Gramophone].
Reliance damages can be awarded where it cannot be established that the plaintiff
would have made a profit, or it is established that the plaintiff would have made a loss
[McRae, in which McRae could not prove that the ship would have been worth
anything at all, and so could not claim expectation damages. There was no market
into which the plaintiff could have gone to mitigate his loss- again, no expectation
damages]. Then, the plaintiff can be compensated for wasted expenditure in reliance
on the contract going ahead, prior to the breach. Or if there is no market for the goods
the subject matter of the contract.
In McRae, the plaintiff made out a prima facie case for reliance damages because the
Cth’s breach had made it inevitable that his costs were going to be wasted, it had
made it irrelevant that there was a chance that the ship would be worthless, and his
costs would be wasted in this way. Because the Cth had promised the ship would be
there, and it wasn’t, his costs were inevitably frustrated, and so the Cth were prima
facei liable for his wasted expenditure in reliance on the contract. The only way the
Cth could have rebutted this is if they showed that even if the tanker had been there,
McRae’s expenses would have inevitably been wasted.
The plaintiff always bears the onus of proof for damages [Amann]; in the context of
exemplary damages, they have to show the extent of the profits they would have
enjoyed had the contract gone ahead. In the context of reliance damages, the plaintiff
must show that their expenditure was reasonable [Amann]. Once the plaintiff has
3