UK: Breach Of Contract - Remedial Work

Last Updated: 6 December 2007
Article by Tom Coulson

You’ve performed all your obligations under the contract, but the other party hasn’t. What damages are you entitled to? Are there any other remedies which might serve your purposes? Lawrence Graham goes once more ‘unto the breach’.

The main remedy for breach of contract is damages – but, generally speaking, these are only to compensate the victim, not punish the party in breach. A court may award substantial damages where an innocent party has suffered a real loss, but it will make only a nominal award where there is no loss at all. So, to be entitled to substantial damages you must first establish that you have suffered a suitable loss, and even then it will be recoverable only if it is not too ‘remote’ – in other words, if:

  • the loss was a natural consequence of the breach, the type and extent of which a reasonable person would accept in the circumstances; or,
  • at the time the contract was entered into the loss was fairly and reasonably contemplated by both parties as the probable result of a breach – this would cover the more unusual types of loss due to special circumstances known to the parties from the start.

Measurement of damages

If a loss fits one of these categories, the court will determine whether the innocent party is entitled to damages, usually with the objective of returning the claimant to the position they would have occupied had the contractual responsibilities been properly performed (in so far as any award of money can do this). This is known as the expectation measure of damages; the loss suffered is derived from the gap between what was ‘expected’ to happen had the contract been performed satisfactorily and what actually happened when it was not. For instance, if you engaged a sub-contractor who did not complete his part of the project, then the measure of damages would be the cost of another contractor completing the undischarged responsibilities in a reasonable manner.

A second measure of damages is the reliance measure. This is used where loss of expectation is difficult to prove or where the damages assessment would be too speculative. It seeks to restore you to the position you were in before the breach occurred, and so enables you to claim expenditure wasted as a consequence of relying on the contract.

In exceptional cases you may be entitled to a restitutionary award of damages. These arise when the party in breach has been unjustly enriched by their actions; they are then forced to pay you a sum of money in respect of that gain. In the example of the sub-contractor, if he performed no services at all you may be able to seek the return of any payments you have made to him.

Sometimes it is possible to combine claims under the three different measures, but not if the overall result is to duplicate aspects of the damages claimed. So, for example, in a breach of contract case where a musician fails to turn up for a performance, a concert promoter cannot then claim the fees paid to the musician (restitution), the cost of hiring a venue (reliance) and the gross value of the ticket receipts which must now be returned (expectation). He would be entitled to claim only the lost profits on the ticket receipts, as in effect these would contain compensation for the musician’s fee and the cost of hiring the venue.

Importantly, damages will not be awarded for any part of a loss which could have been avoided had the claimant taken reasonable steps in mitigation; so, always try within reason to minimise your loss, but never be tempted to take unreasonable steps to increase it.

Liquidated damages

The position is simplified where the agreement contains express provisions setting out the amount of damages to be paid after a breach. Such terms are common in commercial agreements, their purpose being to fix the sum paid irrespective of the actual damage suffered and irrespective of whether an actual loss can be proved. These ‘liquidated damages’ have clear advantages over a judicial award (‘unliquidated damages’) in that they provide the certainty of knowing in advance the true cost of a breach – and they can also avoid the time and expense of going to court to prove actual loss.

Even so, take care when drafting liquidated damages clauses; a distinction must always be made between clauses that impose a penalty on the defaulting party and those that levy liquidated damages. Penalty clauses are generally not enforceable, whereas liquidated damages clauses are. However, for a liquidated damages clause to be valid the sum payable must be a genuine estimate of the anticipated loss likely to be suffered.

Case law has established the following guidelines to determine whether a clause will be considered to be a penalty rather than liquidated damages:

  • The sum specified is too extravagant, particularly if it is greater than the greatest loss that could possibly have been proved as a result of the breach.
  • The breach of contract consists of not paying a sum of money and the amount of liquidated damages is greater than the sum which ought to have been paid.
  • The same sum is stated to apply to different types of breach of contract, some of which are serious and others of which are not.

Specific performance

But what happens if the usual legal remedy, monetary damages, is inadequate? What if the subject matter of the contract is unique so that you could not buy a replacement with any amount of damages? In such circumstances an equitable remedy (called ‘specific performance’) may be available; under which the court compels the party in breach to perform its contractual obligations after all.

Unlike damages, which are available as of right, the court has broad discretion to order specific performance. In exercising this discretion it takes into account a number of factors, the most important being whether or not damages would be an adequate remedy, whether or not an award of money would permit the recipient to purchase a satisfactory substitute, and the difference between the benefit an order for specific performance would give to one party versus the cost it would impose on the other.

Injunction

Like specific performance, an injunction is an equitable remedy to be awarded at the discretion of the court where damages would not adequately compensate the claimant. In exercising its discretion the court will consider the same factors as for specific performance. However, unlike specific performance, which requires a positive action, an injunction imposes an obligation to refrain from doing something.

Time limits

Finally, it is important to bear in mind that an innocent party’s right of action is also affected by the simple passage of time. An action based on breach of contract must be brought within six years of the date on which the breach occurred; for an action based on a deed the time limit is 12 years.

Other remedies

Other non-contractual remedies may be available, either as an alternative for one of the remedies discussed above or where there is no remedy for breach of contract. These remedies are sometimes called "quasicontractual" but should not be confused with remedies for breach of contract, as they are a separate area of law. Unlike contract law, where the principle of remedies is based on compensation for losses suffered as a result of breach of the agreement, these quasicontractual or restitutionary remedies are concerned with the principle of unjust enrichment at another’s expense. The right to claim a restitutionary remedy does not depend on showing loss caused by breach. The law of restitution is complex and outside the scope of this article, but you should bear in mind that all is not necessarily lost if, for some reason, you are not entitled to a remedy for breach of contract.

www.lg-legal.com

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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