The Law Upholds Bargains
An award of damages is the primary remedy for breach of contract. The basic principle of contract damages, is that a person who suffers loss by reason of a breach of contract, is entitled to compensation in money, in so far as money can do so, to place him in the same position and situation in which he would have been, if the contract had been performed and the breach had not occurred.
The general principle is that a party to a contract is entitled to have his financial expectations upheld. He is entitled to be put in the financial position in which he would have been if the contract had been performed.
If due to the party’s (the seller’s) particular arrangements, he suffers another type of loss, which does not flow naturally, probably and foreseeably from the breach, then the party in default (the seller) is not liable in respect of this type of loss.
If, however, the special type of loss is made known to the other party, here the seller, in advance of the contract, then the seller will be liable for it if he breaches the contract and that loss occurs. He is deemed to undertake the risk by reason of his knowledge of the matter prior to the contract.
Basis for Damages
The basis for assessment of compensation for breach of contract is different to that for torts /civil wrongs. In a claim based on tort, the purpose of damages is to put the person in the position he would have been in if the wrongful act had not occurred. The degree of recovery for torts is greater than that for breach of contract. The compensation for loss is more comprehensive for civil wrongs.
Contract damages protect the expectation of the contracting party, that the other party will perform his promise. They seek to give him what he was promised, had the contract been performed. If a contract represents a good deal or bargain the person entering the contract is entitled, economically, to the benefit of it.
If, for example, goods which are worth €200 are contracted for sale for €150, where the buyer can purchase from an alternative source at €170 then presumptively, the measure of loss is €20. Compensation is awarded for the additional cost of buying substituted goods in the open market.
Damages are awarded in financial terms, although the measurement and quantification may be difficult. Future financial loss, which involves the assessment of multiple compound probabilities, are nonetheless awarded, provided that they are not too remote.
Does not Punish; Incentivises Performance
Contract law upholds bargains. It thereby supports the free market in goods and services. It does not punish breaches of contract in themselves. Compensating the buyer gives the seller an incentive to perform his contracts. It discourages the seller from breaking a contract, so as to profit from his breach of contract.
There are no criminal consequences for failure to comply with a contract. Moreover, the civil consequences are not punitive. The law seeks only to uphold the party’s bargain.
The courts do not award damages in order to penalise a party who has not performed his contractual obligations. The principal (and almost exclusive) purpose of contract damages is to compensate the party who is not in default for the loss caused by the party who has defaulted.
Primary Test for Damages
The general principle of contract damages is to put the innocent party in the position in which he would have been if the party in default had performed his contractual obligations in the first place. He should be put in the financial position in which he would have been, but for the breach.
If the defendant may perform a contract in a number of different ways, then damages can be assessed on the basis that the contract is performed in the most economical and least onerous method available.
If a buyer agrees to buy a car for €2,000, which is worth €2,500 and the seller fails or refuses to perform, the buyer must minimise his loss. If he can only buy the same car for €2,200 he must be compensated for their difference of €200 together with the incidental expenses in putting himself in the same position.
If he can buy the same car for €1,950 his damages / compensation, if any, is limited to the incidental expenses involved in entering the second contract. He has suffered no other economic loss.
There are some categories of loss which are too distant or “remote” from the breach, to be the subject of compensation. Generally, a party may be awarded compensation, only in respect of a type of loss that is the natural and probable consequence of the breach.
The general position is that a party who has breached a contract is not liable for so called consequential or indirect loss. More accurately, the other party cannot recover loss that is too remote. Only loss of a type occurring in the ordinary and natural course of events may be recovered.
This principle limits the extent to which a party who has suffered a breach of contract, can recover for loss caused by the breach of contract. Indirect, or knock-on loss is not, cannot be recovered, unless the special circumstances which cause it to occur, were communicated to the party in breach in advance of the contract.
Party Aware of Prospective Loss
There is an exception to the above principle where the defendant is aware of the loss that may arise because of special circumstances of which he has been made specifically aware, prior to the contract. In this case, he is liable for the higher level of loss, if it occurs, due to the special circumstances. In this case, he may be liable for what might be otherwise described as consequential loss.
The test is one of knowledge. If a party is aware of a potential extraordinary loss, he may be liable for it. If, for example, a seller knows that a piece of machinery is to be used by the buyer, for a particular profitable purpose, then if he delays in delivering it in breach of contract, he may be liable for the lost profits concerned.
A person may be able to choose to seek damages for expenses incurred in reliance on the contract being performed, in place of compensation for expected profit.
Recovery of the costs and expenses incurred in reliance on the contract may be appropriate where there has been no economic loss or where it is difficult to prove what loss might have arisen. In some cases, the expectation loss cannot be measured for practical reasons. Reliance loss, which is incurred in reliance on the contract being performed, may be recovered, even if there is no expectation loss.
Reliance damages compensate for costs and expenses incurred in reliance on the contract being in force. For example, a buyer might incur expenses up to the point in time when the contract is breached. Damages are available for this loss irrespective of whether substitute goods might be acquired elsewhere with no loss.
The breach of contract must nonetheless cause the loss. Expenses incurred in the partial performance of a contract may not be recovered in some cases, where the activity is loss making, because causation is not satisfied.
Restitutionary damages are a further alternative basis of compensation. They should be claimed specifically in the pleadings. A person may have conferred a benefit on the defendant in anticipation of his performance. There may be no economically quantifiable loss, and no reliance expenditure may have been incurred.
The restitutionary basis of damages prevents unjust enrichment of the defaulting party, at the expense of the innocent party. More generally, unjust enrichment may be the subject of a restitutionary claim where there is no contract or where an apparent contract has failed.
Further types of damages may be allowed in some cases, where the loss cannot be measured in monetary terms. For example, damages for mental distress may be awarded in a limited category of cases, where for example, the contract is made for the provision of leisure services and personal pleasure, such as a package holiday contract.
Extent of Damages
Where a particular type of loss is such that it arises naturally from the breach, then the party who has breached the contract, is usually liable for the full extent of that loss. The type of loss must be such as would happen in the ordinary course of events. If the type of loss occurs, the party in breach is liable, even if the loss is greater in amount than would have been foreseeable. It may be that a highly unusual degree of that loss is outside the contemplation of the parties.
A party may recover for several types or heads of loss, provided that he is not over-compensated and there is no double counting. There may be both lost expenditure incurred and a lost profit in a single transaction.
A party will not receive damages/ compensation for both wasted expenditure and lost expectation if this would lead to double compensation. The injured party can choose between the alternative bases of claim, where he has incurred wasted expenditure and also suffered a loss of an expected profit in that expenditure.
Where a person obtains benefits from the breach, such as by replacing equipment with superior equipment, the additional benefit of the substituted equipment may be deducted, in assessing the damages.
The innocent party must take all reasonable steps to mitigate his loss. This requires that he take steps to ensure that the loss is minimised. He cannot “sit back” and allow avoidable loss to accrue and charge the cost to the party who has breached the contract.
If goods are not delivered and are required for his business, the purchaser should buy substitutes in an alternative market where this is possible.
His entitlement is limited to the difference in price and the incidental expenses. If the goods are damaged, they should not be allowed to deteriorate, steps should be taken to repair them.
Damages after Affirmation and Specific Performance Sought
There are certain types of contract which may be enforced by specific performance. This is a court order, which compels a party to perform his contractual obligations, under pain of committal to prison for contempt of court. The remedy is discretionary and will be awarded only where compensation by way of damages is not an adequate remedy.
At one time, a party who sought specific performance, could not then seek damages. This position was reversed by statute so that a person who has sought specific performance, may instead seek damages/compensation in the alternative. Generally, a party is not estopped from claiming damages, merely because he had first sought specific performance.
No Loss; No Damages
It may be that no party has incurred a measurable financial/economic loss by reason of the breach. In this case, there is no entitlement to compensation. The innocent party may be compensated for his lost expenditure and expenses.
This result generally accords with the needs of the free market in goods and services. If the breach of the contract is such that there is no actual loss, then there is no good economic reason to uphold it.Otherwise, the law would compensate inefficiency
Uneconomical Reinstatement Sometimes Allowed
In some cases, the cost of curing or remedying the defect may be allowed even though it may not be the most efficient course overall. It may be more economical to award the cost of a replacement. However, in some cases, the court may consider it just that the original thing is repaired
In the case of building contracts, the cost of remedying the breach is generally recoverable. Although the cost of undertaking further works may greatly exceed the difference in value between the job as completed and the job as specified, it is usually accepted as just and reasonable that the party gets what he has contracted for. The courts may award damages for the full cost of the job, as specified. However, the benefit to the claimant must not be out of all proportion to the cost.