CQUniversity
Division of Higher Education
School of Business and Law
LAWS11062
Contract Law B
Topic 10 Remedies in common law and equity
Term 2, 2014
Anthony Marinac
© CQUniversity 2014
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Table of Contents
1.0 Introduction ...................................................................................... 3
1.1 Objectives ....................................................................................... 4
1.2 Prescribed Readings ......................................................................4
1.3 Key Terms ...................................................................................... 5
2.0 Damages – the key remedy at common law .....................................6
2.1 Nature and objective of damages .................................................. 7
2.2 Quantum and assessment of damages ......................................... 8
2.3 Liquidated damages and penalties...............................................11
2.4 Expectation damages .................................................................. 13
2.5 Review questions......................................................................... 15
3.0 Causation – what must be compensated?....................................... 16
3.1 Remoteness and causation: Hadley v Baxendale ....................... 17
3.2 Mitigating measures ................................................................... 21
3.3 Contributory Negligence .............................................................24
3.4 Review questions ........................................................................26
4.0 Anticipatory breach ........................................................................ 27
5.0 Equitable remedies ........................................................................ 30
5.1 Specific performance ................................................................... 31
5.2 Injunction.................................................................................... 32
5.3 Rescission.................................................................................... 34
5.4 Restitution .................................................................................. 34
5.5 Review questions .........................................................................36
6.0 Review ............................................................................................. 37
7.0 Tutorial Problems .......................................................................... 38
8.0 Debrief ............................................................................................ 39
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Topic 10 Remedies in
Common Law and
Equity
1.0 Introduction
By now you can no doubt tell that we are quickly closing in
upon the end of our study of contract law. We started out by
learning how to form contracts, then we examined how to read
and interpret contractual documents. At the start of this term
we learned about circumstances which might vitiate a contract,
and then last week we examined the circumstances in which a
contract might be breached. This week we consider the
consequences of such a breach, at common law and in equity.
In other words, if the contract is not regulated by the Australian
Consumer Law, what remedies will be available to the innocent
party who successfully takes action in respect of contractual
obligations which have not been fulfilled by the other party?
We spent most of this week examining the fundamental
common law remedy of damages. Damages represent money
paid by the defaulting party to compensate the innocent party
for the fact that the contractual obligations have not been met.
This on its own is relatively simple. The concept of damages is
complicated by the consideration of precisely what should be
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compensated, and what the extent of that compensation should
be.
Finally this week we examine the more flexible range of
remedies which are available in equity. Equity law recognizes
that sometimes the most appropriate remedy will not be the
payment of money; instead, equity provides for a range of
alternative remedies. This week we will examine four: specific
performance, injunction, rescission and restitution.
1.1 Objectives
After studying Topic 10 you should be able to demonstrate:
 The operation of the common law remedy of damages,
specifically including:
o The objective of damages;
o The calculation of the appropriate quantum of
damages; and
o The operation of the rule in Hadley v Baxendale; and
 The operation of the equitable remedies of rescission,
restitution, specific performance and injunction.
1.2 Prescribed Readings
 Lindy Willmott, Sharon Christensen, Des Butler and Bill
Dixon, Contract Law (Australia Oxford University Press,
4th ed, 2013)
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 Dunlop Pneumatic Tyre co v New Garage & Motor Co
[1915] AC 79
 Hadley v Baxendale (1854) 156 ER 145
 Larking v Great Western (Nepean) Gravel (1940) 64 CLR
221
 Lexmead v Lewis [1982] AC 225
 Moses v MacFerlan (1760) 97 ER 676
 Radford v De Froberville [1977] 1 WLR 1262
 Shindler v Northern Raincoat [1960] 2 All ER 239
 Turner v Bladin (1951) 82 CLR 463
 Victoria Laundry v Newman Industries [1949] 2 KB 528
1.3 Key Terms
Causation: Describes a logical link between some event and
some outcome, where the event causes the outcome.
Continuing breach: A continuing breach occurs in
circumstances where the failure to complete contractual
obligations causes continuing losses to the innocent party.
Contributory negligence: Contributory negligence describes
a circumstance in which the innocent party has somehow
contributed to their own loss. Contributory negligence will
usually reduce the amount of damages payable.
Damages: An order by the court for the payment of money to
compensate the innocent party for the losses which they have
suffered as a result of the defaulting party’s failure to complete
their contractual obligations.
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Expectation damages: Expectation damages describe
compensation which is paid not to compensate the innocent
party for a harm they have suffered, but rather to compensate
them for the gain which they might have expected to obtain
under the contract.
Injunction: An order by the court to refrain from or (more
rarely) to undertake some action, not necessarily a contractual
obligation.
Liquidated damages: Where a contract specifies an amount
of money to be paid in the case of default, the amount of money
is referred to as liquidated damages.
Penalty: Where liquidated damages do not represent a
genuine and reasonable estimate of the damages likely to be
suffered in the event of a breach, liquidated damages will be
referred to as a penalty, and will often be unenforceable.
Restitution: An equitable remedy whereby a party which has
become unjustly enriched in the course of a contractual dispute
is required to forego that unjust enrichment in favour of the
innocent party.
Specific performance: An equitable remedy whereby a party
is required by the court to perform their contractual obligation.
2.0 Damages – the key remedy at
common law
I suspect most of us have a general idea of what damages are.
In short, the court orders the party at fault to pay a sum of
money to the plaintiff. The purpose of that sum of money is to
compensate the plaintiff for the harm they have suffered as a
result of the default. On its own, that sounds simple enough:
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however once we start to unpack this definition, the concept of
damages becomes surprisingly tricky.
The first thing to understand about damages is that damages
are the quintessential common law remedy. Do you remember
that in Introduction to Law you learned about the separate
development of the common law and the law of equity? One of
the advantages which the law of equity had (at least as far as
contract law went) was that it developed a range of remedies,
whereas the common law courts were only able to award
damages.
So, let’s take a look at how damages work.
2.1 Nature and objective of damages
The first thing to understand is that, in general, damages are
intended as a form of compensation, not a form of punishment.
The general objective of damages is to compensate the original
party for the losses which they have suffered as a result of the
other party’s failure to complete their obligations under the
contract. It is not the objective to, for instance, impose a
penalty in order to deter the individual, or others in society,
from failing to meet their subsequent contractual obligations.
The court does not look into the question of whether moral
blame should be attached to the party which has failed to meet
their contractual obligations.
It follows, of course, that damages can only be awarded if a
breach is established, and if the plaintiff is able to show a loss.
The burden of proof for these things falls upon the plaintiff.
The plaintiff must show that there was a breach at law, and the
plaintiff must show what losses were suffered as a result of that
breach.
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2.2 Quantum and assessment of damages
Once a cause of action has been established (in other words,
once a breach has been shown), and once the issues of
causation (see below) have been dealt with, the purpose of the
court will be to impose damages which compensate the plaintiff
for the harm suffered as a result of the breach.
2.2.1 Date of assessment
The harm will usually be assessed as at the day of the breach
itself. An authority for this is our old friend Commonwealth v
Amann Aviation (1991) 174 CLR 64. As a result, in many cases,
any harm suffered following the breach will not be
compensable. The rationale for this is that once the breach has
occurred, the innocent party will be able to look out for their
own interests and prevent further losses.
This rule is not, however, hard and fast. The courts are able to
choose a different date of assessment if they consider that it
would be unjust to assess damages as of the date of the breach.
For instance, if the transaction was for the sale of goods, but
there was no other ready supplier of those goods, it might not
be possible for the innocent party to protect themselves from
further losses by obtaining the goods elsewhere. Under those
circumstances, the court might consider it appropriate to assess
the losses at a date some time after the actual breach.
For example, in the rather odd case of Radford v De Froberville
[1977] 1 WLR 1262, De Froberville purchased a house adjoining
the block of flats owned by Radford. As part of the purchase,
she covenanted (i.e. promised) to erect a very substantial wall
on the boundary between the properties. She failed to do so,
and Radford sued for damages. De Froberville, however,
argued that no damage had been suffered. The court found that
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Radford should receive damages sufficient to cover the cost of
building the wall himself.
Let’s think about this. When did the breach occur? Effectively,
the breach occurred when De Froberville failed to build the
wall. Radford’s efforts to build the wall himself came
afterwards. The cost of the building materials etc may have
fluctuated in the meanwhile – however the court found that in
these circumstances, the proper date of assessment related to
when the new wall was built, not when the breach occurred.
However, as a general rule, remember that the date of
assessment of damages will be the date of the breach itself. And
almost all of the time, this rule works out just fine.
2.2.2 Damages are “once and for all”
When the court imposes damages, the court’s judgment is held
to settle the matter finally and absolutely. Parties are not
entitled to subsequently come back for more, even if it turns out
that they later incur additional harm as a result of the breach
(which they had perhaps not anticipated or known about at the
time of their initial court action). However, there are a couple
of exceptions.
If there is more than one cause of action. OK, this isn’t
really an exception, I guess. It makes sense that if there are two
causes of action, then the resolution of the first cause of action
doesn’t stop the plaintiff from proceeding with the second.
If there is a continuing breach. Sometimes, a contract may
be for a period of time. If a warranty in that contract is
breached, there will be an entitlement to damages, but the
contract will not be terminated. It will continue to run. What
happens if the breach continues? For instance, what if the
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contract is for the hire of a ship which is to be maintained in
seaworthy condition by the owner? The ship becomes
seaworthy, and the hirer sues, and receives damages. However
the shipowner then takes no steps to rectify the breach. Can
you see that this is a continuing breach? The same breach is
continuing to do harm. In the alternative, let’s say the
shipowner did return the ship to seaworthiness, but then it later
became (again) unseaworthy. This would not be a continuing
breach. Instead, the second breach would give rise to an
entirely new cause of action.
In Larking v Great Western (Nepean) Gravel (1940) 64 CLR
221, Larking gave the company the right to extract gravel from
part of the Nepean river bed. As part of the deal, the company
was to erect some fences and gates. They did not do so. The
contract continued to run, and eventually came before the
courts. One question was whether the breach was a once-andfor-all breach, or a continuing breach (since the defendant had
continued to fail to erect the fences and gate). The court found
that this was a once-and-for-all breach, not a continuing
breach, and that the plaintiff had continued to accept royalties
from the dredging after the breach had occurred, so the plaintiff
had lost the opportunity to terminate the contract. As you can
see, the distinction between one-off and continuing breaches
can sometimes be complicated to make.
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2.3 Liquidated damages and penalties
Sometimes prudent parties will agree, in the contract itself,
what damages should be paid in the event of specified breaches
of the contract. Such damages are usually referred to as
liquidated damages. A liquidated damages clause makes a
great deal of sense for the parties, because it takes any potential
calculation of damages out of the hands of the court, and puts it
back in the hands of the parties. The contract – and the
consequences of any breach of the contract – becomes a lot
more predictable.
Where parties have agreed to liquidated damages, the court will
enforce the liquidated damages clause, and the parties will lose
any right to common law damages arising from the breach. In
other words, not only will liquidated damages be enforced, they
will also cancel out any common law remedy.
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However there are limits on the extent to which parties can
liquidate damages. For a sum to qualify as liquidated damages,
it must be a genuine predictive estimate of the likely loss. In
other words, the amount of the liquidated damages must bear
some reasonable relationship to the likely harm.
If it does not – if the liquidated damages are obviously higher
than the likely actual losses – then the liquidated damages will
be regarded as a penalty. As we have already learned in this
topic, the purpose of damages is to compensate, not to penalize.
This principle continues into the field of liquidated damages. If
a liquidated damages clause has the effect of penalizing the
defaulter, of imposing consequences which quite obviously
exceed the potential harm, then the liquidated damages clause
will be void. It will still, under those circumstances, be open to
the innocent party to seek common law damages.
Let’s look at an example, which may help. In Dunlop
Pneumatic Tyre Co v New Garage & Motor Co [1915] AC 79,
Dunlop supplied tyres, tyre tubes and tyre covers to New
Garage, which then sold them on to consumers. Part of the
contract specified that there was a minimum price for each
article, and that New Garage was not able to sell Dunlop’s
products for less than that minimum price. The contract
included a liquidated damages clause which imposed damages
of five pounds per item sold below the minimum cost.
Controlling for inflation and currency conversion, that amounts
to approximately the equivalent of $900 Australian per unit.
That’s a fair amount of money!
New Garage, as you may have guessed, sold Dunlop products
without adhering to the price-maintenance part of the contract.
Dunlop sued to enforce the liquidated damages clause, and it
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came before the courts. So, what do you say? Was this
liquidated damages, or was it a penalty?
The court found that this was liquidated damages, not a
penalty. I have always found this a hard decision to support.
To me, it seems like the damages really were exorbitant
compared to the losses Dunlop might have suffered as a result
of the challenge to their price-maintenance strategy. Some
level of damages – sufficient to ensure the retailer would not
engage in discounting – would seem to be appropriate, but the
actual amount seems to me to have been a penalty.
So, where is the boundary? As with so many other principles
we have come across in our study of contract law, there really is
no boundary. Whether an amount will be liquidated damages
or a penalty really will depend upon the facts in an individual
case. From our perspective, the test will always be whether the
amount of damages prescribed in the liquidated damages clause
is a genuine and reasonable estimate of the damages likely to be
suffered in the event of a breach.
2.4 Expectation damages
The final type of damages we need to consider is referred to as
expectation damages. At the outset, we stated that the purpose
of damages was to compensate the innocent party for the loss
they suffered as a result of the breach. However, very few
parties go into a contract without an expectation that they will
be in some way better off at the end of the contract. Sometimes
contracts are mere exchanges: I exchange $100 in cash for $100
worth of topsoil for my garden. However more often, contracts
are entered into in the expectation of making a gain. As a
result, the failure of one party to meet their obligations under
the contract may not just cost the other party any expenses they
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have incurred; they might also cost the other party the gain
they might have expected to obtain.
Under some circumstances, the innocent party will be able to
obtain “expectation damages” to compensate them not only for
the losses they have incurred, but also for the profits they will
now never see.
The classic example of this situation comes in the case
C.Czarnikow v Koufos (1969) 1 AC 350. In this situation,
Czarnikow chartered a ship owned by Koufos, to carry a load of
sugar for sale to merchants in the Middle East. However the
shipowners caused deviations to the ship’s route, with the result
that the sugar arrived in its destination port nine days after it
should have.
Ordinarily, one might think this was not too much of a
problem; the sugar could still be sold, and a profit realized. The
shipowners acknowledged that they would be liable to pay
interest on the value of the sugar for the nine days. So where’s
the problem? Well, during those nine days, another boat load
of sugar had arrived in the same port. The market was now
oversupplied with sugar, and the price had therefore dropped.
As a result, Czarnikow did not just want nine days’ interest –
they wanted the difference between the price they actually
obtained, and the price they would have obtained had the
contract been completed in a timely manner. The court
accepted this claim. Lord Reid set out the test, in his judgment,
which has since been used in Australian cases:
The crucial question is whether, on the information available to the
defendant when the contract was made, he should, or the
reasonable man in his position would, have realised that such loss
was sufficiently likely to result from the breach of contract to make
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it proper to hold that the loss flowed naturally from the breach or
that loss of that kind should have been within his contemplation.
So, if a reasonable person could foresee the loss of expectation
at the time the contract was formed, the expectation loss will
most likely be compensable.
2.5 Review questions
Question 1
Under what circumstances are damages not assessed on a “once
and for all” basis?
a) In the event of an anticipatory breach;
b) If the contract has been repudiated;
c) If there is a continuing breach;
d) If damages are liquidated.
Answer: (c)
Question 2
What is a penalty?
a) A free kick, usually given for rough play or another breach
of the rules;
b) An enforcement measure between parties, intended to
compel compliance with the contract;
c) An enforceable undertaking between the parties;
d) An unenforceable liquidated sum with no reasonable
relationship to the harm caused.
Answer: (d)
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Question 3
Who bears the burden of proving both breach and harm?
a) The promisor;
b) The promisee;
c) The plaintiff;
d) The defendant.
Answer: (c)
3.0 Causation – what must be
compensated?
To this point, we understand that damages must be paid, with
the intention of restoring the innocent party to the position they
might have been in, but for the breach: that is, to compensate
them for actual losses they have suffered, and also potentially
for the loss of expectations under the contract.
As you might imagine, there will always be a temptation for the
innocent party to “stretch” their claim; having established the
breach, there may be a natural inclination to try to obtain the
maximum possible damages as a result. In fact, many law firms
now quite openly advertise on the basis of their ability to
maximize payouts in all manner of legal matters.
Consider this possibility: I have a contract with a furniture
delivery company to deliver furniture which I have purchased,
to my home, no later than 3:00 pm. I have told the company
that it is imperative that I receive the goods by this time, as I
have an appointment at 3:30 pm. I did not tell them that the
appointment was for a job interview – that was none of their
business. Time was the essence of the contract.
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As many of you will no doubt have discovered for yourselves,
furniture deliverers are seldom, if indeed ever on time. On this
occasion, they arrived at 3:20 pm. Once they had completed
the delivery, I rushed out in my car, still hoping to make my
appointment. As a result, I blew straight through a speed trap
and was booked. This cost me a $132 fine. Once I had dealt
with the police I was still hoping to get to my interview on time,
so I continued to rush, and in my haste went through a stop
sign without stopping. I collided with another car and caused
$4000 damage, combined, to both vehicles. I then arrived at
my appointment, only to be told that they had rescheduled and
interviewed the person who was to have followed me … and
they had given that person the $80,000 per annum job.
As a matter of logic, it would be perfectly possible to argue that
the delivery drivers’ breach of the contract had led to everything
that followed. Had they been there on time, I would not have
needed to speed. I would have stopped at the stop sign. And I
would have gotten the job. So, can I sue them for expectation
damages of $84,132?
Of course not.
So, how do we draw a boundary around harm which must be
compensated by damages, and harm which need not be so
compensated?
3.1 Remoteness and causation: Hadley v
Baxendale
The key tests for remoteness and causation come to us from a
case called Hadley v Baxendale (1854) 156 ER 145. This is
another of those absolutely classic cases of English law which
have been handed down over the years. In Hadley v
Baxendale, the plaintiff contracted with the defendant to carry
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a broken crankshaft to a manufacturer, who was to use the
broken shaft as a model for the manufacture of a new one. The
crankshaft was a key component of a flour mill operated by
Hadley. Baxendale did not know that the crankshaft was the
only one which Hadley had, and that as a result the flour mill
would be sitting idle until the new one could be manufactured
and installed.
Delivery of the broken crankshaft to the manufacturer was
delayed, with the result being an additional five days in which
the mill was unable to operate. This, of course, meant five days
without profit for the mill owner. The question was therefore
whether Baxendale was liable for the lost profits as well as for
the delay itself.
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Alderson B gave the leading judgment, and set out what has
become known as the two limbs of Hadley v Baxendale. These
are:
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 First, the defendant should be liable for damage which
occurs “naturally … according to the usual course of
things.” This damage is the direct and immediate damage
which is clearly and demonstrably linked to the breach.
 Second, the defendant should be liable for damage 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.
This second limb requires a little unpacking. For the damage to
reasonably be in the contemplation of both parties, then one of
two things must occur:
 Either the plaintiff must tell the defendant the special
knowledge required to foresee the loss; or
 The plaintiff must know that the defendant has learned the
special knowledge from some other source.
The result is that any damage which is not “in the natural
course of things” and which cannot reasonably be supposed to
have been in the contemplation of both parties, will not be
compensable.
An example may help to bring this issue out more. Let’s look at
Victoria Laundry v Newman Industries [1949] 2 KB 528.
In this case, Victoria Laundry operated a laundry (obviously!)
and also a dyeing business. Apparently the dyeing side of the
business was more lucrative, and they had just obtained
contracts with the Ministry of Supply which would allow the
business to expand in both capacity and profitability. In order
to meet this contract, they needed an additional boiler. They
contracted to purchase one from Newman Industries, who
knew nothing about boilers but had two available for sale,
second hand. The boiler was inspected, and everyone was
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happy, but then after it had been dismantled for transport, the
boiler was damaged. This resulted in a delay, which in turn led
to a delay in the expansion of the business and its ability to
profit from the lucrative Ministry of Supply contracts.
The question before the court was what losses should be
compensated by Newman Industries. The court looked at the
limbs in Hadley v Baxendale separately. It found that the
normal profits of the laundry during the delay were “according
to the usual course of things” and should be compensated by
damages. However, the court found that the additional profits
to flow from the more lucrative dyeing business were not
“according to the usual course of things” and were not known to
Newman Industries at the time of the contract. Accordingly,
those additional profits fell outside the rule in Hadley v
Baxendale, and could not be compensated by damages.
3.1.1 Nonfinancial loss
Most of the time, nonfinancial losses or harm (for instance,
stress and anxiety) are not able to be compensated for by
damages. The exception to this is where the contract itself is
intended to provide for pleasure, and fails to do so. The key
example is a case we have already come across, Baltic Shipping
Co v Dillon (1992) 176 CLR 344. In this case, Baltic Shipping
contracted with Mrs Dillon to provide her with a 14 day cruise,
and the ship sank on the tenth day.
Mrs Dillon successfully argued that the whole purpose of the
contract had been to provide her with pleasure. This was a
pleasure cruise – not, for instance, a mere contract for
transportation – and the company failed to provide her with the
contracted pleasure, because she found herself aboard a sinking
ship! On its face this seems pretty reasonable. You should be
aware, however, that circumstances such as these are quite rare,
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and unless it is fairly obvious that a contract was for pleasure,
don’t be too hasty about arguing that a plaintiff should be
compensated for nonfinancial loss.
3.2 Mitigating measures
Let’s imagine for a moment that a contract between Party A and
Party B has gone pear-shaped. Party B has failed to complete
their obligations, and Party A is suffering damage as a result.
Now let’s imagine that Party A can take steps to limit or prevent
further damage (or they can do nothing, in which case the
damage will get worse). What should Party A’s obligation be?
A few rules apply here.
3.2.1 Rectification and repair
First and foremost, if a breach leaves the innocent party in a
situation where they must take steps to rectify or repair the
breach, they will be able to obtain damages to compensate them
for whatever expenditure was involved in the repair or
rectification.
The classic Australian case illustrating this point is called
Bellgrove v Eldridge (1954) 90 CLR 613. In this case, Bellgrove
was a builder, who contracted to build a house. Once building
of the house was well underway it was discovered that the
concrete used for both the foundations and the bricklaying was
seriously deficient in cement. The result was that both the
foundations and the walls themselves were unsafe. Eldridge
wished to have the house demolished and reconstructed;
Bellgrove argued that some form of underpinning, or
replacement of the foundations would be adequate.
The court found that the most appropriate solution in this
situation was to have the house demolished and rebuilt. The
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defaulting party, Bellgrove, was therefore liable to pay all of the
costs associated with demolition, and with the rebuilding of the
new structure.
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3.2.2 Mitigation proper
The innocent party in a transaction – that is, the party which
has not breached the contract – may nevertheless find
themselves with some responsibilities arising from the breach.
In particular, a duty will lie upon the innocent party to take
reasonable steps to mitigate the harm arising from the breach.
If they do not do so, they may not be able to recover damages
for the full extent of the harm caused. In other words, if there
are reasonable steps open to the innocent party to minimize the
extent of the harm, they should take those steps.
Having said this, if the party takes those steps to mitigate, and
those steps costs the innocent party money, the innocent party
may be compensated for that expenditure.
My favourite example of mitigation in action is a truly awesome
case. One of the best we look at in contract law, and I can’t
believe nobody has turned this into a movie yet. With the right
scriptwriter, it would be a killer. The case is called Banco de
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Portugal v Waterlow & Sons [1932] AC 452. Listen to this for a
set of facts.
The Banco de Portugal was the central bank of Portugal,
responsible for the issue of banknotes. They decided to release
a new banknote worth 500 escudo featuring explorer Vasco da
Gama, so they made a contract with Waterlow & Sons, printers,
to print 600,000 of the banknotes. Naturally, as you might
imagine, there is usually a great deal of security attached to the
issue of banknotes. This time, however, something went
dreadfully wrong.
A syndicate of criminals sent a representative to Waterlow &
Sons. The criminal representative convinced Waterlow he was
also a credentialed representative of the Banco de Portugal, and
he placed an order for a further 580,000 of the notes.
Waterlow duly printed the 580,000 notes – using the authentic
dyes, authentic printing plates and authentic paper they had
used for the actual notes!
It gets better. Having obtained these millions of escudo, the
criminals opened a bank – a genuine, government-registered
bank! They used the counterfeit money to capitalize the bank,
and put the rest in circulation. Soon enough, authorities
became aware that there was a problem. The Banco de Portugal
had few options. The only real way to control the problem was
to recall all of the da Gama banknotes, replacing them with
other notes of equivalent value. This meant they were stuck in
the position of paying for known counterfeit notes, but at least
it removed them from circulation and prevented any further
counterfeit notes from being circulated. Of course, all this came
at a massive cost – however the alternative was potentially the
collapse of the entire Portuguese economy.
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Naturally, Banco de Portugal sued. And naturally, Waterlow
admitted liability – however they said that the only liability was
for the paper and ink. They argued that the expenditure made
by the bank in honouring the counterfeit notes was the bank’s
own decision. The court disagreed. The bank’s decision to
honour all of the notes was a reasonable mitigating measure. If
the bank had attempted to honour none of the notes, this would
have utterly undermined confidence in the economy, with
disastrous results. As a result, the measures taken by the bank
were reasonable mitigating measures, and Waterlow & Sons
had to foot the entire bill – over £600,000. Adjusted for
inflation and converted to Australian dollars, this judgment was
for just under $65.7 Million Australian. Yes, you read that
right. 65 MILLION. What a fantastic heist.
3.3 Contributory Negligence
Contributory negligence is a concept which will likely be more
familiar to you from your study of torts, rather than your study
of contracts. However negligence on the part of the plaintiff
will now be relevant to the calculation of damages. This is a
relatively recent development in law, but a welcome one. In
short, if a plaintiff is negligent in relation to a breach and their
negligence contributes to the harm, they will be unable to
recover damages for that part of the harm which was due to
their own negligence.
The best contract case to understand this is Lexmead v Lewis
[1982] AC 225. In this case, a farmer purchased a towbar which
would allow him to tow a trailer behind his farm vehicle. The
hitch as delivered and installed was defective, and the farmer
knew it. So, at this point, we quite clearly have a breach on the
part of the supplier. What the farmer should have done at this
point is return the car to the supplier and demand that the
24
defect be repaired or replaced. However he did not do so. In
fact, he continued to use the towbar for months.
Eventually, the worst happened. The towbar failed dramatically
and the trailer tumbled free. The trailer crashed into a moving
car and killed two people in the car. A third person in the car
sued the trailer in tort. The farmer, in turn, took action against
the supplier of the towbar, claiming damages for the defective
towbar.
There is a very difficult question to be answered here, isn’t
there? Were these deaths caused by the defective towbar? Or
were they in fact caused by the farmer’s negligence in
continuing to use the towbar, even though he knew it was
defective? In the end, the court found that the farmer’s
negligence had broken the chain of causation in this case. If the
accident had happened soon after the installation of the towbar,
or if the farmer had not known of the defect, things might have
been different. However, the fact that the farmer knew he was
towing the trailer with a defective towbar meant that his
decision-making was the key cause of the harm in question, not
the defective towbar. No doubt the supplier would have
remained liable for the breach (and therefore liable to replace
or repair the towbar) but the supplier was not responsible for
the fatal accident.
25
5461266
3.4 Review questions
Question 4
What is the first limb of the rule in Hadley v Baxendale?
a) Damages represent the usual remedy in common law;
b) Damages compensate the harm which arises naturally
from the breach;
c) Common law damages are given in preference to
liquidated damages;
d) Causation must be demonstrated to the satisfaction of a
reasonable person.
Answer: (b)
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Question 5
What rule was upheld in the case Bellgrove v Eldridge?
a) Damages cannot be given for non-economic loss;
b) Damages can be given for harm which was reasonably
contemplated by both parties at the time of contract
formation;
c) Parties must be ad idem in relation to liquidated damages;
d) The innocent party can obtain damages to cover the
reasonable cost of rectification or repair.
Answer: (d)
Question 6
When can damages be awarded for non-economic loss?
a) When the non-economic loss can be properly quantified
b) When the non-economic loss was reasonably within the
contemplation of the parties at the time of contract
formation;
c) When the explicit purpose of the contract was to provide a
non-economic benefit;
d) When the parties have failed to provide liquidated
damages in relation to non-economic loss
Answer: (c)
4.0 Anticipatory breach
Last week we looked at the topic of anticipatory breach. This
occurs when a party has, either explicitly or by implication,
repudiated the contract, but has done so before the time their
obligation falls due. We learned last week that when this
occurs, the innocent party has two options. First, they can
27
terminate the contract. Alternatively, they can allow the
contract to continue, and wait for the actual non-performance
of contractual obligations, at which time they can take action
for damages in the normal way.
Now, we are considering the damages arising from anticipatory
breach where the contract has been repudiated. It makes sense,
as a result, that we can only be talking about situations where
the innocent party has terminated the contract. After all, if they
have chosen not to terminate the contract, the breach hasn’t
happened yet – so we can’t be calculating damages!
Even though a party may choose to terminate a contract early
due to anticipatory breach, the date at which damages are
calculated remains the date at which the obligation was due.
This makes sense. If we are talking about a situation of
anticipatory breach, then the breach itself hasn’t occurred yet,
so it would make no sense to assess damages on the date the
contract was terminated.
However, as soon as the innocent party has chosen to terminate
the contract, they become subject to the usual duties to mitigate
their losses. So, in a case of anticipatory breach, the duty to
take reasonable steps to mitigate losses arises at the time of
termination, not at the time the obligation fell due.
Make sense? Perhaps a case example will help. Let’s look at
Shindler v Northern Raincoat [1960] 2 All ER 239. In this case
Shindler was appointed as the Managing Director of the
Northern Raincoat Company on a ten year contract. Sometime
later, a company named Mandleberg took a controlling interest
in Northern Raincoat. They indicated that they did not wish
Shindler to continue in his position as Managing Director, but
they were prepared to employ him in some other (initially
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unspecified) capacity, at the same salary he had earned as
Managing Director.
Shindler was informed of the intention to dismiss him. This, as
we know, was a repudiation of the contract, because it indicated
that the company was now unwilling to complete the contract.
Shindler was therefore in a position to terminate the contract if
he wished, at this point, on the basis of anticipatory breach.
Shindler played it more carefully than that. He indicated that
he was likely to sue for breach of contract if he was dismissed,
and he started to negotiate in relation to other potential
opportunities within the company. However he continued to
fulfil the duties of Managing Director, and did not terminate his
contract. In the end, he was unable to come to terms with the
company and sued, at that time, for anticipatory breach.
Now we come to the interesting question. Should Shindler be
able to recover for all of the wages he would have been paid had
he completed his term as Managing Director? Or, alternatively,
should he have mitigated his losses by accepting one of the
other job offers made by the company?
The court found that even though the company had repudiated
the contract by indicating its intent to dismiss Shindler,
Shindler had not initially accepted the repudiation, so the
contract had not initially been terminated. As a result, when
the subsequent job offers were made, the initial contract still
existed. Since the initial contract still existed, Shindler was not
under any obligation to mitigate his damages. By the time he
did terminate the contract, negotiations had broken down. As a
result, Shindler had never been under any obligation to
mitigate his damages.
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On the other hand, if Shindler had terminated the contract as
soon as he had been told he was to be sacked, then he would
have been obliged to take reasonable steps to mitigate his loss –
including accepting the offered substitute positions.
5.0 Equitable remedies
In this final section (of what has become a rather long topic –
but this could not be helped), we discuss equitable remedies.
The doctrines of equity were called into operation by some
plaintiffs who found that damages were not always a good
remedy for the breaches they had encountered. Equity, on the
other hand, offers a range of potential remedies which can
enable the court to fashion a more effective remedy.
However, before we get stuck into the remedies themselves,
there are two key points you must understand (especially since
none of you are likely to have studied equity as a subject just
yet).
First, an important equitable principle states that equity
follows the law. In other words, equitable remedies will only be
available if the court is satisfied that the common law remedy
(damages) is inadequate, and if there is no satisfactory remedy
in statute law (such as the Australian Consumer Law). If either
of those will work, equitable remedies will not be used.
Second, equitable remedies are discretionary. Damages are
available as a right: if a plaintiff can demonstrate the cause of
action, then they will have their damages. Equity doesn’t work
like that. A party can establish the cause of action, and yet a
court of equity may still decide that their desired remedy is not
available to them. So, while this section looks at some of the
equitable remedies, it is not possible to set out legal tests for
30
when each remedy will be available. Simply enough, they will
be available when the court decides they are available.
So, with that understood, let’s look at the remedies.
5.1 Specific performance
Specific performance is exactly what it sounds like: in this
situation, the contract has not been fully executed as yet. The
breach most likely consists of that part of the contract which
has not been completed. The court, in this situation, can direct
the defaulting party to perform their obligation.
The classic situation for specific performance is a contract for
the sale of an interest in land. In this situation, the defaulting
party has often failed to convey the title to the purchaser; or
else they have failed to convey the title in the form required
under the contract. An order for specific performance would
require them to proceed to complete their obligation.
In Turner v Bladin (1951) 82 CLR 463, the opposite was the
case. Bladin were selling a quarry to Turner, who was to pay in
a series of instalments. The quarry had been conveyed to
Turner, who had then failed to pay all of the instalments. An
order for specific performance was given, to force payment of
the rest of the money.
However, there are a range of circumstances in which specific
performance is very unlikely to be granted. First, specific
performance is unlikely to be granted if the obligation is not
sufficiently clearly spelt out in the contract. That makes sense:
the court must be certain about what it is requiring the party to
specifically perform!
Second, the court will not require specific performance if this in
turn would require the ongoing supervision of the court. This is
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held to especially apply to contracts for “personal services”
where performance would be ongoing for some period of time.
It would not be as though the court could oversee ongoing
performance in the same way that it can enforce a single (or
limited number of) discrete and identifiable acts.
5.2 Injunction
By now most of you will be familiar with at least the concept of
injunctions. An injunction is an order to undertake, or refrain
from, some specific act. Injunctions come in two types: an
interlocutory injunction, which is almost like an emergency
measure to freeze the parties in their current positions and
prevent further harm while the whole legal mess is sorted out;
and final injunctions. We will concentrate for the moment on
interlocutory injunctions, as these are the most common.
Interlocutory injunctions are a very useful tool for the court to
have, as they do preserve the status quo and prevent further
harm, especially where legal proceedings are likely to be
protracted or where the harm is likely to accumulate.
Having said this, interlocutory injunctions have the potential to
work injustice. The party subject to the injunction has its
freedom curtailed, and this should only occur on good grounds.
Consequently the court has developed a test for the application
of interlocutory injunctions:
 First, the application of equity must be appropriate. So,
the plaintiff must show that damages would not be an
appropriate remedy in the ultimate case.
 Second, the court must be satisfied that there is a serious
question to be tried. This does not mean the court must be
satisfied that the plaintiff will win; rather, the court must
be satisfied that the plaintiff has at least a prima facie case.
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 Third, the interim relief must be justified, taking into
account the potential future harm, and the limits upon the
defendant if the injunction is granted (this is called the
balance of convenience).
A good example of the High Court implementing this test can
be found in Castlemaine Tooheys v South Australia (1986) 161
CLR 148, although this is a constitutional case and not a
contract case. In this case, South Australia had amended its
legislative scheme for the recycling of bottles, to impose much
higher penalties. Castlemaine Tooheys sought an injunction to
prevent South Australia from prosecuting under the new
provisions, while a constitutional question (relating to tariffs on
interstate trade) was tried.
www.virtualtourist.com
Did somebody mention beer?
In this case damages were not available, so the first question
was disposed of. The court was satisfied that there was a
serious question to be tried. However, balancing the danger to
the environment of littered bottles against the plaintiff’s
interests in avoiding prosecution, the court found that the
33
balance of convenience did not favour the plaintiff. The
injunction was not granted.
5.3 Rescission
Rescission is a concept we have already come across several
times, and it requires little explanation. The best case is an old
friend: Luna Park v Tramways. Remember how in that case,
once a condition of the contract was breached, Luna Park
terminated the contract and stopped paying? That was
rescission in action. Rescission does not require the
intervention of the courts. Simply put, once a condition is
breached or a contract repudiated, the innocent party has the
right of rescission: the right to terminate the contract.
The other party can, of course, sue on the basis that the contract
was wrongfully terminated. If they win, then the court will hold
that the party which has wrongfully terminated the contract has
in fact repudiated the contract themselves – and they will be
liable for damages! Consequently, repudiation is only a good
idea if one is absolutely sure that it is justified.
5.4 Restitution
Finally, we come to restitution. Restitution arises from the
equitable concept of unjust enrichment. In essence, the
concept of restitution is that if one party is unjustly enriched at
the expense of the other party, then the court may make an
order in restitution to correct the injustice.
The doctrine was first noted in a rather aged and complicated
case called Moses v MacFerlan (1760) 97 ER 676. Much of the
case is almost incomprehensible by now, except perhaps to
legal historians. However what happened in the case was that
Moses held some promissory notes (formal IOUs) from a third
34
party. He endorsed them in favour of MacFerlan: that is, he
signed the debts over to MacFerlan, so that MacFerlan was now
the owner of the debts. Technically, MacFerlan could
potentially recover the money from either the third party or
from Moses. However MacFerlan stated that he would not
trouble Moses further in relation to the debts. Sometime later,
he apparently changed his mind, sued, and won.
The judgment cited here considered whether it would be
conscionable for MacFerlan to retain the money, even though
he had been awarded it by a court. Lord Mansfield indicates, in
his judgment, that it would be inequitable for MacFerlan to do
so because even though MacFerlan was right at law, natural
justice demanded otherwise. This is the foundation of
restitution.
In its modern sense, restitution is really only applied in a few
limited situations:
 To recover money paid by mistake (for instance, under the
mistaken impression that a debt was due);
 To recover money paid when there has been a total failure
of consideration;
 To recover money which was to have been paid for work
preceding a contract (so, for instance, someone has
commenced work in anticipation of a contract being
formed, but the contract then fails to be formed); and
 To recover money for work done under a contract which
cannot, for some reason, be enforced (for instance,
because the contract is or becomes void).
You can see that each of these represent situations in which it
would be contrary to equity for the recipient of the money to
35
retain it. If necessary, the courts can exercise the doctrine of
restitution to force this money to be repaid.
5.5 Review questions
Question 7
Under what circumstances is specific performance unlikely to
be granted?
a) If performance would require the ongoing supervision of
the court;
b) If performance is rendered impossible because the
contract has been repudiated;
c) If performance has been rendered impossible by a selfinduced frustrating event;
d) If performance would require expenditure not reasonably
within the contemplation of the parties at the time of
contract formation.
Answer: (a)
Question 8
If damages would be an adequate remedy for a breach, but
equitable remedies would provide a more convenient manner of
addressing the breach, which remedy will be applied?
a) The common law remedy (damages);
b) The equitable remedy;
c) Whichever remedy is claimed by the plaintiff;
d) Whichever remedy the court considers most appropriate.
36
Answer: (a)
6.0 Review
Last week we examined the circumstances in which a contract
may be breached. This week we’ve taken the final step in our
logical process, by examining the circumstances which follow
such a breach. If you think about it, this week’s material is
perhaps the most important material of all. This material tells
us what the court can do to bring justice to a party which has
been innocent in its conduct; which is anticipated in a contract
and accepted obligations from another party, but then found
that those obligations were not delivered upon.
In some cases, perhaps the easiest cases to understand, the
parties have agreed in the contract itself what the consequences
should be if either party were to default. In this situation, if they
had specified damages to be paid in, those damages will be
called liquidated damages and payment of such damages will
settle the dispute. Liquidated damages will not, however, be
enforced when they amount to a penalty. So, if they look less
like compensation and more like punishment, liquidated
damages will not be enforceable.
If the contract does not contain a liquidated damages clause,
the court’s first preference will be to award damages to the
innocent party; that is, an amount of money intended to restore
the innocent party to the circumstances they would have
encountered but for the breach. This may include expectation
damages, to compensate the innocent party for the gain which
they might reasonably expect to have obtained if the contract
was properly completed.
The test for the assessment of common-law damages is found in
the case Hadley v Baxendale. The defaulting party will be
37
liable for damages to compensate for any harm flowing
naturally from the breach, and also for any harm which was
reasonably within the contemplation of the parties at the time
the contract was made.
In some cases, of course, no amount of money can properly
compensate the innocent party. If, for one reason or another,
damages will not be an appropriate remedy, the court may look
to the remedies available in equity. This week we have
discussed rescission, restitution, specific performance, and
injunction. The latter two, in particular, provide the court with
great flexibility to force the defaulting party to undertake acts
which will make good the harm caused by that party’s breach.
It is important to understand that these remedies are the
primary form of legal redress for most contracts other than
those to which the Australian Consumer Law applies. Next
week we go on to examine the remedies which are available
under the Australian Consumer Law.
7.0 Tutorial Problems
Problem 10
This is why Crossfit and Paleo are bad for you …
Please watch the short animated video at the following link, and
then consider the questions below. Assume that Queensland
contract law applies throughout.
https://www.youtube.com/watch?v=mpjjEp-bVKM
38
Has the contract been breached?
Assume that the Yoga Resort’s manager was secretly in league
with the terrorists, and assisted them by turning off the resort’s
security systems. Is there a breach now?
If there is a breach, what will be subject to compensation under
the first limb of Hadley v Baxendale?
Would Shanna be entitled to any compensation for noneconomic loss? How would such a loss be justified under
Hadley v Baxendale?
[30 Minutes]
8.0 Debrief
After completing this topic you should recognize:
 That the key remedy available in the common law is
damages;
 That the purpose of damages is to compensate the plaintiff
for the harm suffered as a result of the breach;
 That damages are usually assessed at the day of the
breach;
 That damages are awarded once and for all, except in the
case of a continuing breach;
 That damages may be awarded for the loss of expectation
if a reasonable person in the position of the defendant
would have realized that such losses were sufficiently
likely to result from the breach;
39
 That damages may only be awarded for harm which is
caused by, and not too remote from, the breach. The tests
for this are set out in Hadley v Baxendale:
o The defendant is liable for harm which occurs
naturally, according to the usual course of things;
o The defendant is liable for harm which may
reasonably be supposed to have been within the
contemplation of both parties at the time they made
their contract;
 That the court will also enforce liquidated damages,
provided those damages do not amount to a penalty;
 That a plaintiff may receive damages to compensate for
expenditure undertaken in reasonable mitigation of the
harm;
 That the damages received by a plaintiff will be reduced if
the plaintiff has contributed to the harm by their own
negligence; and
 That in the event that common-law damages are
insufficient or inappropriate, equitable remedies including
specific performance, injunction, rescission and restitution
are available to the courts.
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