Contractual obligations

The aim of damages is to make sure that the claimant doesn't suffer from the defendants breach of contract, but to put the claimant back into the position that they would have been in had the other party honoured their contractual obligation. Lord Atkinson in Addis v Gramophone Co. Ltd (1909) described damages as this; ‘I have always understood that damages for breach of contract were in the nature if compensation, not punishment.' The law of contract restricts the amount of damages payable in the event of a breach of contract. There are three factors that limit damages in contract and they include remoteness, mitigation of loss and Restitution.

The legal principle for Remoteness was established in Hadley v Baxendale (1854). The case set out the remoteness rule. The first limb of this rule is that loss arising naturally from the breach of contract. The second limb of the remoteness rule is that loss which was reasonably within the contemplation of both parties at the time the contract was formed. This rule was later interpreted in Victoria Laundry v Newman Industries [1949]. In Victoria Laundry it was held that the claimant could recover the damages for the profit that they lost as it was held that the defendants were aware that the claimants aim was to increase business, so therefore the loss of profit was a ‘reasonably foreseeable' consequence of the breach of contract. This set the benchmark of remoteness at ‘reasonable foreseeable' however this was disagreed with in The Heron II [1969]. Lord Reid stated; ‘The question for decision is whether a claimant can recover damages for a breach of contract a loss of the kind which the defendant, when he made the contract was not unlikely to result from a breach of contract…I use the words ‘'not likely'' as denoting a degree of probability considerably less than an even chance but nevertheless not very unusual and easily foreseeable.' The ruling in The Heron II changed ‘reasonably foreseeable' to ‘reasonable contemplation'.

The second factor is Mitigation loss, this is where the victim of the breach is entitled to damages to cover losses caused by the breach that are not too remote provide he has not failed to take action that would have reduced the extent of his losses. A claimant is bound to take all reasonable steps to mitigate his loss. A claimant must take reasonable steps to mitigate loss. Claimants are not entitled to recover damages that are represented by sums that are avoidable by taking reasonable steps. If the claimant has failed to take reasonable steps to avoid particular losses, the claimant is not entitled in law to recover them. This may take of the form of either failing to take action reasonable steps or allowing an act to continue that would have increases loss. In Pilkington v Wood [1953] the defendant's agreement was rejected. It was held that it was not reasonable to expect the claimant to take risks in pursuing the vendor so there was no duty to do so in order to mitigate the loss arising from the solicitor's breach of contract. Another example of Mitigating loss is Brace v Calder [1895] where it was held that the claimant couldn't claim damages that would cover the cost of his earnings as he had failed to take the opportunity to reduce his losses by accepting the offer of employment.

Restitution is to prevent a person being unjustly enriched. The remedy of restitution may be available if that contract is not properly performed. An example of this is where there is a total failures of consideration from one party, such as if one party has paid money to the other and there has been a total failure of consideration then the party that paid the money is entitled to bring an action in restitution to recover the money. In Attorney General v. Blake [2001] the claimant was entitled to claim compensatory damages but had suffered little or no identifiable loss. Therefore decided to seek restitution for the wrong of breach of contract. The claimant won the case and the defendant was ordered to pay over his profits to the claimant. However, the court was careful to point out that the normal legal response to a breach of contract is to award compensation.

Another remedy in Contract is that of Reliance Loss, the aim of reliance loss is to put the innocent party in the position that they would have been in had the contract had never been made. In Anglia Television Ltd v Reed [1972] it was held that there was no reason why costs prior to the contract could not be recovered providing that they weren't too remote. As the defendant was aware that the costs of making the film would be wasted if the contract did not go ahead as planned, so therefore the claimant was able to claim damages for money spent prior to the formation of the contract. Damages for the profit that the film would have made would have been too difficult to predict.

Bibliography

  • Jill Poole, Textbook on Contract Law (OUP) 9 th ed, 2008

  • Finch and Fafinski, Law Express Contract Law, Pearson Education 2008