When a contract is breached, contract law attempts to fulfil an expectation interest. The law takes the view that every contract has a starting and finishing financial position for each of the parties. The aim is to use money to put the parties in that financial position. Conversely, tort law tries to put parties back to where they were if an act had not occurred. This fulfils a party’s reliance interest. Finally, a restitution interest prevents unjust enrichment.
Following a breach, it will usually be up to the innocent party in their choice of election as to whether further performance is required. Performance cannot usually be required, but damages are usually available. There are 3 common remedies available for a breach of contract: damages, injunctions and specific performance.
Damages for breach
Looking back to the case of Photo Productions v Securicor  (see the page on discharge), we can see that damages for a breach actually arise from the contract itself; the primary obligations become secondary financial obligations. Confirming the purpose of contract law, Robinson v Harman  said that damages in contract law intend to put both parties in the ‘same’ positions as if the contract had been carried out. Or at least as far as damages can do so.
When a contract has been breached, the ‘golden rule’ was set out in Teacher v Calder : contract law compensates loss, and does not reflect gain. Therefore, when a party is in breach of contract, we should not look at the profit which that party attained from the breach; we should look at where the innocent party would have been (financially) if the contract had not been breached when assessing the quantum of damages. This was reiterated in Tito v Waddell (No. 2)  where there was a failure of a mining company to replant trees following their work in the area. Damages were awarded based on the loss to the land, rather than the profit which the company made by not replanting the trees.
Watts v Morrow  said that there is no easy formula to calculate damages and that cases should be assessed on a case by case basis, however, they are regulated by the parties and judicial regulation of penalty clauses. The Sale of Goods Act 1979 provides some particular quantifications of damages: S 51(3) provides that damages for non-delivery should be the difference between the price paid and the market value at the time of expected deliver, and s 53(3) provides that a damages for a breach of warranty will be the cost of correction.
As previously mentioned, the intention with any claim for damages for breach of contract is to find the loss which is attributable to the breach. In BTC v Gourley  the court considered that tax would have significant implications on the damages awarded. In Perry v Sidney Phillips , where a house was negligently surveyed, the difference in price paid and actual value due to defects was awarded, not the cost to repair. Contract law looks for the actual (minimum) loss caused by the breach of contract.
Where a contract has the option for variable performance, damages will attempt to compensate for the minimum loss. In Thornett & Fehr v Beers , where there was the option to deliver between 95% and 105% of the requested amount of product, damages were assessed at the lower 95% option. Similarly, the Lavarack principle from Lavarack v Woods of Colchester  provides that where wages are to be compensated, discretionary bonus should be ignored. However, Horkulak v Cantor  did say that bonus must be awarded fairly, and if predictable could form part of a quantum of damages.
Sometimes, damages cannot be simply quantified in terms of money. We may have to consider hypothetical events such as the loss of a chance or other loss of benefit.
In Vasiliou v Hajigeorgiou , business premises were not supplied, so there was no loss to be compensated for. Although, it was said that damages could be awarded, factoring in hypothetical profits if a chance of profitability could be proven. Similarly, in Chaplin v Hicks , the claimant was denied the opportunity to enter a beauty contest. Reduced damages were awarded as the claimant could not prove that she would have won. In Allied Maples Group v Simmon & Simmons , damages were awarded for the loss of a chance to renegotiate a contract.
A landmark case in identifying alternative losses was Ruxley Electronics v Forsyth , where a swimming pool was built, but was not as deep as the specification required. The House of Lords decided that it would not be economical to award damages equivalent to taking out the swimming pool and re-digging it to be slightly deeper: the defendant (who had refused to pay for the pool) had lost no ability to use the pool as he intended and there had been no quantifiable loss to value of his land. He was therefore awarded a much smaller quantum of damages to compensate for his ‘loss of amenity‘.
The loss of a negotiating opportunity is an alternative loss also found by the courts. Initially, in Wrotham Park v Parkside Homes , a developer built more homes than he was authorised to do under contract with the land owner. Damages for a loss of negotiating opportunity were awarded, although could have been increased had the claim been made sooner. In Experience Hendrix v PPX Enterprises , there was a similar scenario: the loss of a negotiating opportunity to extend broadcasting rights where initial rights were infringed upon was compensated.
Wasted expenditure was compensated for in Anglia TV v Reed , where an actor failed to attend filming, and in Omak Marine v Mamola Challenger Shipping , no damages were awarded where the repudiation of a charterparty led to a more profitable charterparty. This prevented the owner from becoming unjustly enriched. Similarly, in C&P Haulage v Middleton , no damages were awarded where the breach actually prevented the claimants from losing money. According to CCC Films v Impact Quadrant Films , the onus is on the contract breaker to prove that a breach was beneficial to the innocent party; the burden was not discharged.
There appears to be a divide between contract lawyers over the relevance of post-breach events. Those who favour certainty would say that post-breach events should not be accounted for in the award of damages for breach of contract. However, this can lead to harsh awards of damages, therefore the opposing argument is one for fairness. The case of The Golden Victory  favours the latter approach; damages were reduced where there was an early termination of a charterparty, as war broke out soon after the breach, an event which would have allowed termination without penalty. As a result of this, most commercial contracts now exclude the Golden Victory principle in the interest of certainty.
Pain, suffering, distress and inconvenience
As a general rule, according to Hobbs v London & South Western Railway , damages for breach of contract will not be awarded to compensate for distress, vexation or minor inconveniences. Although, damages for pain associated with the infliction of an injury is compensable, as was the case in Godley v Perry , where damages were awarded for the loss of an eye.
The exception to the general rule of no damages for inconvenience is where the purpose of the breached contract was to remove a person from the rigours of everyday life. As such, in Jarvis v Swans Tours , £125 in damages was awarded in compensation for a £63 holiday. Even where the contract does not precisely remove a person from the rigours of everyday life, damages may still be awarded. This occurred in Farley v Skinner , where a surveyor was ordered to pay £10,000 to a land owner where a survey failed to recognise that the land in question was directly under Gatwick Airport’s circling path. Jarvis v Swans Tours  has been overruled in part by Milner v Carnival (Cunard) , in which the Court of Appeal reduced damages significantly in order to put the parties in the equivalent financial position to if they had accepted the holiday company’s best offer of correction.
Limiting damages with mitigation
A general rule in contractual damages law is that an innocent party to a breach of contract must take reasonable steps to mitigate their loss. There is no duty to do this, however damages will not be awarded for losses which could reasonably have been mitigated. In ClatonGreene v De Courville , it was not reasonable for an actor to mitigate loss by accepting a lesser role, as doing so would have affected his career progression. Johnson v Agnew  said that blindly affirming a contract will not stop damages being reduced to account for mitigation which should reasonably have occurred. If expenses are occurred in the act of mitigation, they may be compensated for, according to Banco de Portugal v Waterlow & Sons . If an innocent party takes steps which are beyond reasonable, as was the case in British Westinghouse v Underground Electric Railway , this mitigation will also be factored in to the damage award, even though the party might not have been obliged to take such steps.
Limiting damages with remoteness
So far, we have not considered remoteness in damages; we have only talked about damages which flow from the breach. However, this quantum is also limited by common law. The initial rule was set out in Hadley v Baxendale  which said that damages are limited to those which flow reasonably from the contemplation of both parties at the time of formation, or from special communicated circumstances. In the context of this case, damages for taking too long to transport a mill’s crankshaft to and from a repair centre were not recoverable as the transporter could not have reasonably expected the mill not to have a spare crankshaft.
This reasonable contemplation test was construed in Victoria Laundry v Newman Industries  as a test of two limbs, one of damages to be awarded in normal contemplations and another of damages to be awarded in the communicated special circumstances. A 20 week delay in the installation of new boilers caused the claimant to lose out on attaining some particularly lucrative government contracts. Damages were only calculated at a rate of ‘normal’ lost profits, as the installers were not aware of the lucrative contracts.
The Heron II  disagreed with Victoria Laundry in respect of what type of test the Hadley v Baxendale test was. The Heron II  described the test as a one limb test: losses which may be awarded must be of the kind which the defendant realised would not be unlikely to flow from such a breach in the circumstances.
Where a kind of damage is foreseeable, according to Brown v KMR Services , there will be no limit on the extent of those damages. This was confirmed in Jackson v RBS  where a leaking of profit margins to a buyer, causing a loss of trade, made a bank liable for 4 years of profits: a point to which damages could still be quantifiable. It does seem difficult to reconcile Jackson v RBS with Victoria Laundry, however one must assume that ‘normal’ profits are a different kind of damage to ‘exceptional’ profits.
The final case to mention concerning remoteness is The Achilleas , where a ship was returned late at the end of a charterparty. Damages were awarded only to cover charter fees for the extra days before delivery. During those few days, charter fees dropped exceptionally quickly, causing the ship’s owner lose significant potential profits. Damages for this loss for the duration of the (but abandoned) proceeding charterparty were not awarded as such a drop in charter fees was not foreseeable, and the charterer could not be assumed to have been contemplating the ship owner’s next contract when agreeing their own. It makes sense that in contract law, the test for remoteness is much higher than that in tort, as in contract law, parties have the option to warn each other of potential losses: this is the purpose of the Hadley v Haxendale test.
Liquidated damages clauses
It is possible for the parties themselves to limit damages payable in the event of a breach of contract. Clauses that limit secondary obligations are known as liquidated damages clauses. The courts also helped parties quantify damages. In Financings v Baldock , the courts said that where a single instalment was missed in a hire-purchase agreement, the contract was breached in a non-repudiatory manner and the payee would be liable for the arrears and interest. In Yeoman Credit v Waragowski , it was said that where more significant arrears were present in a hire-purchase agreement, damages would be calculated by taking the total hire-purchase price and then subtracting the amount paid, option fees, mitigation and arrears (if separate). As parties were free to use liquidated damages clauses as they wished following these two cases, finance companies started adding into their contracts that any non-payment would be classed as a repudiatory breach of contract and would give rise to Waragowski damages. This led to liquidated damages clauses being given a bad name, and the courts developing the penalty jurisdiction.
If a contractual term is within the scope of the penalty jurisdiction, it may classed as penal and within the court’s control. This prevents the abuse of liquidated damages clauses.
If a clause quantifies damages in a way that either increases the amount payable or provides for the transfer of property by a party who breaches a contract, that term will usually fall within the penalty jurisdiction. However, such a clause must be triggered by a breach of contract; it must control secondary obligations, not primary obligations, and it must generally be unconscionable.
Is it penal?
If a clause is within the scope of the penalty jurisdiction, the court must then decide whether the clause is penal or not. The case of Dunlop Pneumatic Tyre Co v New Garage and Motor Co  is the case which may assist a court in deciding what is and isn’t penal. The case concerned the selling of tyres below list prices, and said that clauses will be penal if:
- They require an amount to be paid which is extravagant and unconscionable in comparison with the greatest loss which could conceivably be proved to have followed from the breach
- They require for a greater sum of money to be paid as a secondary obligation than a primary obligation required (if that obligation was to pay money)
The case also said that a clause may or may not apply depending on how the contract was breached and that liquidated damages clauses are not always classed as penal as they provide certainty for both parties. In Murray v Leisureplay , a clause was not classed as penal where it required a full year of wages to be paid when 7 weeks’ notice was given for termination of employment. The contract required 1 year of notice to be given anyway, so although the clause required a generous sum of money to be paid, it was not unreasonable.
A key point to note here is that if a clause is not triggered by a breach, it cannot be classed as penal, therefore ‘reverse discount’ clauses are often used in lieu of liquidated damages clauses. In Lombard North Central v Butterworth , a computer rental contract applied Waragowski damages to any failure to pay an instalment. This was not classed as penal where another clause in the contract provided that time was of the essence regarding punctual payment. This appears to be an easy way to contract out of the penalty jurisdiction. In Phillips v A-G Hong Kong , it was again reiterated that a clause must be extravagant to be classed as penal.
According to Jobson v Johnson , if a clause is classed a penal, it is not ousted, but it is only enforceable to the extent of recoverable loss under common law. This was important on the facts of the case, which concerned the transfer of shares to attain a controlling interest in Southend United FC, rather than the transfer of money. According to Bridge v Campbell Discount Co , penalty clauses do not apply where one party opts to terminate, as the clause will not have been triggered by a breach.
Accounting for profits
As we have said many a time on this page, contract law should only award damages to the extent of a loss of an innocent party’s expectation interest. This was always the case, until 2001, and the case of A-G v Blake , in which damages were awarded to account for profits. It should be noted that the circumstances were exceptional, involving a double agent, traitor and criminal who resided outside of the UK. As he could not be prosecuted for publishing memoirs whilst in the UK, damages for all of the profits of his memoirs were awarded as the next best alternative. Such circumstances are extremely rare however, and as a general rule, the compensatory principle applies to contractual damages.
In most cases, damages are an adequate remedy for a breach of contract. In all cases, where damages are appropriate, an order for specific performance – requiring performance – will not be issued. Then, even if damages are inappropriate, specific performance will remain a discretionary remedy. For an order of specific performance to be issued, there usually needs to be some unique characteristic about the contract. There was no unique characteristic in Cohen v Roche  where, although unique furniture was being sold, the intent was to merchant the furniture for a profit, therefore damages were appropriate. However, in Sky Petroleum v VIP Petroleum , performance in the delivery of oil was enforced where there was a national shortage: it would be difficult to quantify an award of damage to compensate for a company going into liquidation. In Bronx Engineering , a machine was said to be available generally in the market, therefore specific performance was not granted.
The exception to discretion in specific performance remedies is where there is a contract for the sale of land. Specific performance will always be granted here, irrespective of motive, as land is unique.
Specific performance will not be granted where there is a misrepresentation issue – one cannot require a landlord to have a tenant who intends run a brothel on that landlord’s premises. As specific performance is an equitable remedy, specific performance will be denied if the maxims of equity have not been followed by the claimant. Furthermore, according to Patel v Ali , specific performance will not be ordered if it would cause undue hardship – in this case forcing a house to be sold where it was occupier by a pregnant women with cancer and a leg amputation. Co-operative Insurance v Argyll Stores  denied an order of specific performance where such an order would have required the running of a Safeway store at a loss just to avoid contempt proceedings. Constant supervision requirements may prevent an order for specific performance too.
Once again, damages are the primary remedy available for a breach of contract. The issues surrounding specific performance are generally applicable here, but injunctions are usually applicable to employer-employee relationships.
Injunctions against employers
An injunction may not require the continuation of an employer-employee contract, however one may be used to prevent an unfair dismissal process. In Hill v CA Parsons & Co , an injunction was used to enforce 6 months notice of termination, other the given 1 month, and in Robb v Hammersmith & Fulham LBC , an injunction prevented the unfair dismissal of a councillor who had engaged in illegal swap-contract dealings. He was entitled to suspension with pay while an investigation was carried out.
Injunctions against employees
Warren v Mendy  is the leading case on injunctions against employees. It was said that the question is whether the granting of an injunction would in reality force the employee to perform. This would be unacceptable as constant supervision would be required and there would be a slavery violation of the ECHR.
In Lumley v Wagner , an exceptional injunction was granted to prevent Wagner, a famous singer, from singing in an alternative venue. Specific performance was not granted as Wagner could have ‘missed’ high notes etc.
Two conflicting cases can be found working relationships are concerned. In Warner Bros v Nelson , an injunction was granted to prevent an actor working for a different film company. Apparently, the actor had good prospects to do ‘other things’ during the time of the injunction. Conversely, in Page One Records v Britton , no injunction was granted to prevent the splitting of a group with their manager as this would force a working relationship, it was said. The only difference between Nelson and Britton appears to be the financial means on the ’employee’; Nelson involved a new and young group of music artists, whereas Nelson was an established actor. It seems that both would effectively have enforced a working relationship. Warren v Mendy  settled the issue, refusing to order an injunction to force a boxer and his manager to work together: there was a realistic alternative available to the boxing manager who would be discarded. Britton was approved over Nelson.