WEEK 4-6: REMEDIES FOR BREACH

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1 WEEK 4-6: REMEDIES FOR BREACH Overview of Remedies for breach (weeks 4-6) Damages Specific performance/injunction Liquidated damages/penalties Restitution/Action for debt Week 4: Remedies Damages (measures of damages & restrictions on the right to damages) INTRODUCTION TO DAMAGES Whenever a party (the defendant) breaches a contract, the other party (the plaintiff) will be entitled to to an award of damages. An award of damages for breach of contract is designed to put the plaintiff in the position he or she would have been in if the contract has been performed. Damages are available as a right if there is a breach of contract. You will be entitled to damages: - Where you can prove on the balance of probabilities that the breach caused you loss: you will be entitled to damages that compensate you for that loss (subject to limiting principles). - Where you cannot prove the breach caused you loss: you will only be entitled to nominal damages. Damages will be nominal unless the aggrieved party can prove (on the balance of probabilities) that they have suffered loss as a result of the breach. Relevance of a right to terminate: - If there was a right to terminate, full loss of bargain damages available (i.e. an amount to compensate for the value of the contract that has been terminated) - Otherwise damages are limited to an amount to compensate for the particular breach Structure for answering a problem Damages 1. Identify the breach 2. Consider measure of damages: - Apply compensation principle to identify possible losses that might be claimed (e.g. lost profit, specific expenses) look at the hypothetical situation that would have existed if the contract had been performed, and the situation that has resulted from the breach - Put a money value on these losses. 3. For each item of loss consider if any limitations apply: - Causation - Remoteness - Mitigation - Non pecuniary loss - Limit on loss of bargain damages/termination under contract Definitions: Damages: An amount awarded by a court to compensate for breach Liquidated damages: An amount specified in the contract to be paid (usually on breach) Specific performance/injunction: An order by a court to compel a party to perform or not breach a contract. Restitution: Compensation for unjust enrichment Action for debt: Payment of an amount due under a contract

2 Overview of this lecture: 1. The measure of damages - Compensation principle o Expectation damages o Reliance damages o Loss of chance damages 2. Restrictions on the right to damages - Causation - Remoteness - Mitigation - Non pecuniary loss - Damages after termination under express clause 1. THE MEASURE OF DAMAGES Note: A plaintiff will not recover an award of both reliance damages and expectation damages. Such an award would over-compensate the plaintiff. Compensation principle General rule: where a party sustains a loss by reason of a breach of contract, he is, so far as money can do it, to be placed in the same position with respect to damages, as if the contract had been performed. Measure of damages (giving effect to the compensation principle) - Damages specified under contract: agreed/liquidated damage. - Expectation damages: puts the wronged party in the position the would have been in had the contract been properly performed. - Reliance damages: Sometimes granted where it s difficult to work out how much benefit the wronged party would have received from a contract court may assume that they would have at least covered their costs. Can be seen as an approximation of expectation damages. - Nominal damages: An award of damages to indicate the infraction of a legal right where the plaintiff proves n more than the defendant s breach (no suffer damages). Expectation damages - Expectation damages compensate the plaintiff for any benefit they expected to gain from performance of the contract but lost because of the breach. This includes direct and consequential losses. o Might involve ordering the cost of rectification or repair. o Where a speculative contract is involved, loss of chance damages (a variety of expectation damages) may be awarded. o o o If you have a breach that results in lost profit, the aggrieved party s expectation interest can often be satisfied simply by awarding damages in the amount of that lost profit. If you have a breach that results in work not being performed, the aggrieved party s expectation interest can often be satisfied by awarding any increase in cost that arose as a result of having to get someone else to do the work instead. If you have a contract for the sale of goods, and those goods are found to have been defective, the general common law principle is that the expectation interest can be satisfied by making an award of damages for the difference between the value of the goods at the time of delivery and the value they would have had if they had conformed to the contractual specifications. - Direct and consequential loss: o Lawyers and judges often refer to direct and indirect/consequential loss. There is actually no settled definition for these terms. - Clear example of direct loss: Supplier s lost profit when purchaser repudiates - Clear example of consequential loss: Supplier s cost of storing machinery when rejected by purchaser. o Points to note: - Parties often try to exclude liability for consequential loss through exclusion clauses - The right to recover damages for consequential loss depends on the limiting rules, in particular remoteness.

3 - Example 1: Customer repudiates supplier s expectation loss is lost profit: If you have a breach that results in lost profit, the aggrieved party s expectation interest can often be satisfied simply by awarding damages in the amount of that lost profit. - Example 2: Repudiation by seller of goods purchaser s expectation loss is additional cost to get replacement goods: If you have a breach that results in failure to provide goods, the aggrieved party s expectation interest can often be satisfied by awarding the difference between the market price of obtaining substitute goods and the contract price of the goods. - Example 3: Repudiation by supplier of services customer s expectation loss is additional cost of substitute services: If you have a breach that results in work not being performed, the aggrieved party s expectation interest can often be satisfied by awarding any increase in cost that arose as a result of having to get someone else to do the work instead. - Example 4: Defective goods buyer s expectation loss is difference in value between goods supplied and goods promised: If you have a contract for the sale of goods, and those goods are found to have been defective, the general common law principle is that the expectation interest can be satisfied by making an award of damages for the difference between the value of the goods at the time of delivery and the value they would have had if they had conformed to the contractual specifications. Carr v Berriman example of builder s damages Builder was entitled to the following damages: Loss of profit on the job. Expenditure incurred in keeping a team of men ready to start work on the job when the site was cleared. Damages liability to its sub-contractor (re: steel fabrication). - EXPECTATION LOSS breach of an obligation to build or repair * What happens if a transaction involves defective work? Two methods of calculating aggrieved party s loss: - Cost of cure: money that plaintiff has to spend on substitute performance/rectification of faulty performance. - Diminution in value: diminution in overall financial position. Difference in a market value of the property without repairs or building having been done in accordance with the contract and value of the property would have had if building and repairs had been carried in accordance with the contract. Cases: - Bellgrove v Eldridge - Tabcorp Holdings v Bowen - Ruxley Electronics v Forsyth

4 Bellgrove v Eldridge Facts: Builder breached a contract with the owner by building a house not in line with the contract requirements. The house had been constructed with defective concrete and mortar. Rectification would require completely demolishing and reconstructing the house, according to expert evidence. Builder argued compensation should be amount between how much house was currently worth and how much it would have been worth if built properly. Issues: would the difference in market values (with defects and without defects) be adequate to compensate the owner? - The only measure that can genuinely give effect to the compensation principle is the award of damages for the cost of demolition and construction of a new house. - In other words, where there has been faulty building work, the starting point is that the wronged party will be entitled to rectification of the work - However, court may refuse to grant rectification (and grant remedies instead) where rectification would be unreasonable and unnecessary in all the circumstances - Given the defects and severe structural instability, demolition and reconstruction of the home was both necessary and reasonable. Tabcorp Holdings v Bowen Investments Facts: 10-year lease agreement for office spaces. o Via clause 2.13, the tenant promised: Not without the written approval of the Landlord first obtained (which consent shall not be unreasonably withheld or delayed) to make or permit to be made any substantial alteration or addition to the Demised Premises o Tenant applied for consent ( ) but was told to wait till proposed alterations can be examined at site (14.07). Tenant did not wait and began the works of the foyer without consent. This included the removal of high quality granite floor tiles landlords pride. Works continued despite landlord s protests. Landlord sued. Arguments: o Tenant argued and trial judge agreed: damages should be the difference in value between new foyer and old - $34,820 (diminution in value) o Landlord argued and Full Federal Court agreed: damages should be the cost of restoring foyer to original condition - $1.38M (cost of cure) - Putting the plaintiff in the same position as if the contract has been performed does not mean the same financial position. - It is for the plaintiff to judge what its interests are they may be financial, aesthetic or merely eccentric. - It will only be in fairly exceptional cases that it will be unreasonable to recover the cost of repair. - In order to claim rectification costs, work undertaken to rectify the premises must be both necessary to restore the premises to that state which was contracted for, and reasonable. - As the tenant was contractually obliged to preserve the premises, damages are the losses sustained by the landlord by that failure. The landlord is entitled to the cost of restoring the premises and it is not unreasonable for them to have damages assessed on that basis.

5 Ruxley v Forsyth Facts: Contract for the construction of a swimming pool in the garden with a diving area of 7 feet 6 inches deep. Swimming pool was constructed 7 inches shallower than the contract specified. Pool was still suitable for diving. The cost of rectification (demolishing and replacing the pool) would be about ; the owner had no intention of replacing the pool if those damages were granted. Issue: How much should be awarded by way of damages? - Costs of rectifying would be out of all proportion to the benefit obtained unreasonable - Damages granted based on the diminution in the value (about 2 500). - Absence of intention to carry out rectification was taken into account in determining the reasonableness of the award Reliance damages: - Reliance damages represent the expenditure incurred in reliance on a contract being performed ( wasted expenses ) - Usually reliance losses are included as part of expectation damages (don t need to make a separate claim). o Contract price = costs of performance + net profit - If the plaintiff cannot prove its expectation loss, it is presumed that it would have at least covered its reasonable expenses. - The onus is on the defendant to show that plaintiff would nonetheless have made a loss. - When will an aggrieved party be entitled to reliance damages only? o When an innocent party cannot prove the amount of benefit he/she expected to gain from the performance of the contract. o court may assume that they would have at least covered their costs. o However, reliance damages will NOT be available if the party in breach (defendant) can establish that, even if the contract was performed properly, the innocent party would have still been at loss (loss making contract for the innocent party). - Cases: o McRae v Commonwealth Disposals Commission o Commonwealth v Amann Aviation Pty Ltd McRae v Commonwealth Disposals Commission Facts: McRae won CDC s tender for the purchase of oil tanker. Vessel was said to contain oil. Sale proceeded, price was 283. No tanker was ever found. Only wreckage of a barge. CDC s officers relied on a gossip and made a serious mistake. Plaintiffs spent a lot of money fitting out their expedition and realised that they bought a non- existent tanker. Trial Judge: contract was void. No damages for the breach, only a compensation for deceit. Appeal to Full court. Issue: What damages was McRae entitled to? - It was not possible to assess expectation damages as it was impossible to value the non-existent tanker. - Onus was on Commonwealth to show that expenditure was wasted (they couldn t). - McRae was entitled to damages assessed by reference to wasted expenditure (reliance damages).

6 Commonwealth v Amann Aviation Facts: o Amann had a 3-year contract with Commonwealth to provide surveillance flights. o Clause: if Amann failed to carry out the contract properly the Commonwealth had power to give notice to A to show cause why the contract shouldn t be cancelled. o Commencement date: Amann did not have all its aircraft ready to perform its contractual obligation (only 7 out of 11). o However, they already incurred pre-operational expenditure of over $ ordered fitting out of the aircraft for over $ If resold, this aircraft would only get about as it was of limited use (particular purpose). o These costs meant that 3 years would not have been enough to generate profit under contract and Amann s only hope was to secure renewal. They had a good chance of doing so as the aircraft would be fully equipped. Commonwealth terminated the contract. Plaintiff sued for wrongful termination and claimed damages. Issue: Assessment of damages o Was Amman entitled to reliance damages? o Could the chance of the contract being renewed be taken into account? o Should damages be discounted for the possibility that Cth would later terminate contract under express clause? Arguments: o Cth argued damages should be the loss of profit (nil) o Amann argued damages should be wasted expenditure 6.6M (reliance damages) HC o The prospect of the renewal (of contract with Cth) was relevant to take into account in assessing likely benefit from contract. This was even though there was no legal obligation on Cth to renew the contract. o The prospect of renewal could not be valued. o Commonwealth could not show that the value of the prospect of renewal + remuneration under the original contract would have still put Amann at lost (A would not have been able to cover its expenditure). o Amann was entitled to reliance damages. o Mason and Dawson - Robinson v Harman is overriding principle (confirmed rule) expectation, loss of profits, reliance damages are all just examples of putting the plaintiff in position it would have been in if the contract had been performed. - Reliance damages will be sought where either no loss of profits or where impossible to assess what would have been the outcome of the contract. - Loss making contracts: Can t be put in a superior position than would have been in had the contract been performed. Therefore, if would have made a loss at most entitled to the amount payable under the contract. - Onus of proof: o Expectation damages: on the plaintiff to prove that he/she would have made some benefit o Reliance: plaintiff is not required to prove loss. Burden is on the defendant to show that the plaintiff has entered into a loss making contract since there is a presumption that the plaintiff would recoup its expenses. - Amann entitled to full reliance costs. - The prospect of the renewal (of contract with Cth) was relevant to take into account in assessing likely benefit from contract. This was even though there was no legal obligation on Cth to renew the contract. - The prospect of renewal could not be valued therefore Amann was entitled to reliance damages. - 4/3 No discount to be applied to reflect contingency that the contract may be terminated or not renewed.

7 Damages flowchart Damages for loss of chance - Generally, where you cannot prove on the balance of probabilities that you have lost a benefit, you are only entitled to nominal damages. - However, where this problem of proof is caused by the fact that the contract itself was highly speculative, a court may be willing to grant loss of chance damages to a plaintiff who can show (on the balance of probabilities) that they lost a chance of a benefit. - Loss of chance damages are a form of expectation damages. - They re calculated with reference to the probability of the plaintiff actually attaining that benefit. - The loss of a chance of a commercial opportunity (e.g. renewal of a contract) may be compensated for by damages: Commonwealth v Amann. - Cases: o Howe v Teefy o Chaplin v Hicks o Cth v Amann Howe v Teefy Facts: - Defendant leased a racehorse to the plaintiff (a horse trainer) for 3 years. - After 3 months, the defendant took the horse away without justification - Plaintiff claimed loss of opportunity to win prize money, win bets and profit from supplying information. - Once it has been established that a chance has been lost, some quantification of its value is required (even if it is difficult to quantify and even if the chance is dependent on others). - While the horse did not subsequently win any races, this was only relevant to the value of the chance; it did not render the chance worthless. - Plaintiff paid substantial amount for the right to the advantages to be got from training the horse. He lost this right. Loss of this right should be financially compensated was awarded.

8 Chaplin v Hicks Facts: - Beauty contest in which 12 of 50 finalists would be given employment at a theatre as an actress. Plaintiff was on of 50 finalists. - Defendant failed to notify plaintiff that she was a finalist and she missed the opportunity to attend an interview to be selected in the final Damages of 100 awarded for loss of chance. Fact that the benefit depended on a contingency and prospects were less than 50% no bar to damages. - is true that no market can be said to exist. None of the fifty competitors could have gone into the market and sold her right; her right was a personal right and incapable of transfer - This right is capable of having a value. - The fact that it was more likely than not that the chance would not have occurred does not preclude the recovery of damages. - It is not necessary that there should be an absolute measure of damages in each case. 2. RESTRICTIONS ON THE RIGHT TO DAMAGES The amount of contractual damages is restricted by various doctrines. The main limitations are: - Causation: requires the plaintiff s loss to have been caused by the defendant s breach - Remoteness of damage: sets limits beyond which the defendant s responsibility for the loss will not extend - Mitigation: the reasonable steps that have been / should be taken by the plaintiff to reduce his loss - General exclusion of compensation for non-pecuniary loss: damages are usually not awarded to compensate non-pecuniary losses, i.e. disappointment, anxiety, distress or loss of reputation (subject to exceptions, Baltic Shipping) 3. DISCOUNTING DAMAGES Expectation damages: - discounted to reflect possibility of profit/benefit not being obtained. Loss of chance damages - discounted to reflect possibility of profit/benefit not being obtained. Reliance damages: - Some controversy about this per Amann Aviation. Mason/Dawson suggested that if contract would have been completed on balance of probabilities, no discount. Brennan J also would not have discounted. Deane/Toohey/McHugh would have discounted damages by possibility contract would have been validly terminated.