Adequacy of damages

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The basic principles of contract

A Jolly Contrarian tiptoe through the tulips of consensus™

Formation: capacity and authority · representation · misrepresentation · offer · acceptance · consideration · intention to create legal relations · agreement to agree · privity of contract oral vs written contract · principal · agent
Interpretation and change: governing law · mistake · implied term · amendment · assignment · novation
Performance: force majeure · promise · waiver · warranty · covenant · sovereign immunity · illegality · severability · good faith · commercially reasonable manner · commercial imperative · indemnity · guarantee
Breach: breach · repudiation · causation · remoteness of damage · direct loss · consequential loss · foreseeability · damages · contractual negligence · process agent
Remedies: damages · adequacy of damages ·equitable remedies · injunction · specific performance · limited recourse · rescission · estoppel · concurrent liability
Not contracts: Restitutionquasi-contractquasi-agency

Index: Click to expand:

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You may be asked to acknowledge that the potential consequences of breach of contract are so severe that ordinary contractual damages might not be adequate and equitable relief might be the only means of protecting your counterparty’s position.

Now the law of equity is the cuddly yin to the the common law’s nasty, brutish and short yang. The common law trucks only in money. Equity offers injunctions, dawn raids, Anton Piller orders and so on. Whatever — ah — floats your boat.[1]

So why does this fellow want your acknowledgement that contractual damages “might not be enough”? Notionally, this is by way of excuse pre-loading so when this poor, sainted victim throws herself at the whim of the courts of chancery, seeking orders for a dawn raid, she can point to M’lud (or at the defendant) and say, “You see, your honour? That rascal knew perfectly well I might need an injunction here. He even admitted it.”

It is a legal eagle “gotcha”, in other words.

It falls to us to consider when the situation might arise that damages are not an adequate remedy. Not all that often, in this old buzzard’s opinion. Contractual damages generally compensate for actual loss, not to account for profits. If you can say you’ve suffered any loss from, say, disclosure of client lists, it will be consequential in nature, sufficiently speculative that courts are traditionally reluctant to award it, also presenting as it does uncomfortable questions as to causation: Was the reason you lost all that business to a competitor because your client list was disclosed, or because your client liked your competitor’s product a bit better? “Wantonly exposing the crapitude of a product offering” is not, last I heard, a recognised head of damages under law of contract.

Breach of confidentiality

The argument runs that it might be hard to prove that you’ve lost any money as a result of a confidentiality breach, so you want to be sure that equitable remedies like injunctions ordering the other guy to keep his mouth shut – those, under English law, that do not technically arise under the law of contract – are available to you.

In theory, this makes sense: one enters a confidentiality agreement to buy another man’s silence, whether or not there are gains or losses to be had from his doing so — but in practice, it is largely nonsense — who ever sought an injunction on a confi? The better question to ask, we think, is why contractual damages are often an “inadequate” remedy. Why? Because it is quite hard to prove loss through simple disclosure of confidential information. And why is it hard to prove that loss? Because, often, there won’t have been any.

Breach under financial transaction

There is at least a colour of an argument that the rights protected by a confidentiality undertaking are ineffable enough to be beyond the remedial powers of contractual damages. That argument is harder to make out for amounts due under a market transaction — a swap, option, forward, stock loan or repo. That won’t stop fastidious legal eagles trying. Even ones from reputable organisations.

Here is why you must resist this foolish talk.

When we trade financial products, we check our emotional lives at the door. The moment we step onto that trading floor our personal sensibilities are not at stake; we leave our peace-time selves as spouses, parents, Rotarians, and members of the church choir in the cloak-room. We become, in the eyes of the market, self-interested merchants in the most mercenary sense Adam Smith had in mind; profit is our only motive, and the sole propeller of the invisible guiding hand. We put aside our adorable proclivities and idiosyncrasies and become homo economici.

Should we cause or experience commercial upset when in this fugue state, we assess it along a single axis: pounds, shillings and pence.

Take the failure to meet a re-delivery obligation under a stock loan. The security in question has an observable price, by which you can track your loss in not having it delivered on time. You may incur financing costs while you wait; you may be bought in by your own counterparties further down the line: all these are reasonably foreseeable consequences of non-performance. so foreseeable, in fact, that they are enshrined in the very terms of the 2010 GMSLA. There is no need to go to the court for damages, let alone equitable relief: you may buy in your self, and pass the costs to your counterparty. The contract says so in black and white. but more to the point, a counterparty who has failed — assuming it has not simply forgotten — will have failed for a simple reason. It hasn’t got the security in question, and it can’t locate it in the market. These things happen from time to time. So what good is an injunction compelling a poor fellow to perform an obligation to deliver a security she plainly does not have?

Not much, in this fellow’s humble opinion.

See also