Contractual damages

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The basic principles of contract
Quick reminder: in the law of contract “losses” and “damages are” different, though related things.

Losses are pecuniary misfortunes that you might suffer as a result of a breach of contract. They can be divided into:

Direct” losses, that are the natural and foreseeable consequence of breach of contract.
Indirect” or “consequential” losses, which are a more speculative nature.

Note that “loss of profit” and “loss of opportunity” are not judicially recognised categories of loss: they can be either direct — for example, foregone interest on a defaulted payment — or indirect — the winnings you would have got from putting that defaulted payment on a rank outsider who came good in the 2:35 at Kempton — but if in doubt (i.e., not a natural consequence of the breach) assume they will be indirect

Damages are the amounts a court orders a naughty counterparty to pay to an innocent to compensate for its loss of bargain (in a contract) or atone for its wrongdoing (in a tort or breach of trust). They may, or may not, be the same amount as the actual losses suffered:

General” damages compensate for direct losses.
Special” damages relate to indirect losses. They are rare in contracts, even when not specifically excluded which, in finance contracts, they usually will be.
Punitive” or “exemplary damages do not compenstate for loss at all, but rather punish a wrongdoer for outrageous behaviour. These are not available under English contract law but may be awarded — extremely rarely — in tort or for breach of trust.
There is also an “Account for profit”: an order to hand over profits made through the misuse of someone else’s physical or intellectual property. This remedy is not available for a simple breach of contract.
Grievances and remedies, charted
Grievance Remedy Contract Tort Fiduciary
Direct loss General damages Yes Yes Yes
Indirect/consequential loss Special damages Usually No Usually No Usually No
Egregious wrongdoing Exemplary/punitive damages No Yes Possibly
Profiting at owner’s expense Account for profit No Yes Yes
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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The measure of compensation one can expect as a result of another’s breach of contract. This is generally targeted at putting the claimant in the financial position it would have been in had the naughty little rabbit performed its obligations up to expectation. Financial, not physical: the common law could not generally insist on performance as such — for that, you need the equitable remedy of specific performance.

These ordinary principles apply pragmatically to limit the damages a party must pay to what is reasonable for what that party was responsible.

Hadley v Baxendale

All summed up very nicely in the case of Hadley v Baxendale where Baron Alderson said:

“Where two parties have made a contract which one of them has broken, the damages which the other party ought to receive in respect of such breach of contract should be such as may fairly and reasonably be considered either arising naturally, i.e., according to the usual course of things, from such breach of contract itself, or 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.
Now, if the special circumstances under which the contract was actually made were communicated by the plaintiffs to the defendants, and thus known to both parties, the damages resulting from the breach of such a contract, which they would reasonably contemplate, would be the amount of injury which would ordinarily follow from a breach of contract under these special circumstances so known and communicated.
But, on the other hand, if these special circumstances were wholly unknown to the party breaking the contract, he, at the most, could only be supposed to have had in his contemplation the amount of injury which would arise generally, and in the great multitude of cases not affected by any special circumstances, from such a breach of contract.
For, had the special circumstances been known, the parties might have specially provided for the breach of contract by special terms as to the damages in that case, and of this advantage it would be very unjust to deprive them.”

Since Hadley

A bunch of garlanded cases, some involving laundry and others named after ships, have drummed out this original dicta. Chitty would summarise these as concluding that a loss is not too remote a consequence of breach if, at the time of contract, the consequence it was within their reasonable contemplation as a not-unlikely result of their breach.

Heads of damage

General damages

These include the direct and foreseeable losses of a contract. If I have loaned you £100 against the collateral of your car, and you default, my damages are £100 minus the realised value of the car (£50 — it was a crappy car). These could conceivably by consequential losses — loss of profit and so on — provided it was genuinely within the contemplation of the parties, foreseeable, determinate and so on. Since consequential losses are of their nature indeterminate, it is very hard to get them awarded in normal circumstances.

Special damages

Special damages are damages the court awards you for the consequential or indirect losses it suffers upon a breach of contract. Compare with general damages which are the damages a court awards as a result of direct losses arising upon a breach of contract.

Remember, folks: “damages” are payment orders made by a court. You don’t suffer damages. You get paid damages if you suffer a loss. Well, an actionable one, any way.

Legal eagles are apt to confuse “losses” and “damages”, probably because “damage” is, in muggle-speak, a synonym for “loss”. In any case: consequential loss, indirect loss, special damages, consequential damages, indirect damages, special loss: all the same thing.

Aggravated damages

To compensate the defendant for mental distress

No punitive damages for breach of contract

Exemplary”, or “punitive” damagespunishing a defendant for the contumelious or high-handed way it wronged a plaintiff — isn’t “contumelious” a great word? — goes beyond the philosophical aims of a contractual remedy — to give a fellow what he bargained for — and so are not available as damages for breach of contract. As Lord Atkinson put it, in the great case of Addis v Gramophone:

“In many other cases of breach of contract there may be circumstances of malice, fraud, defamation, or violence, which would sustain an action of tort as an alternative remedy to an action for breach of contract. If one should select the former mode of redress, he may, no doubt, recover exemplary damages, or what is sometimes styled vindictive damages; but if he should choose to seek redress in the form of an action for breach of contract, he lets in all the consequences of that form of action: Thorpe v Thorpe (1832) 3B.&Ad. 580. One of these consequences is, I think, this: that he is to be paid adequate compensation in money for the loss of that which he would have received had his contract been kept, and no more.”

Vindictive damages”. I mean did you ever hear such a super phrase? How did it not catch on?

The Law Commission, considering the topic some ninety-odd years later, felt the same way: “we recommend that punitive damages should not be available unless the defendant has committed a tort, an equitable wrong, or a civil wrong that arises under a statute, and his conduct showed a ‘deliberate and outrageous disregard of the plaintiff’s rights’. We also recommend that punitive damages should never be available for breach of contract.[1]

See also