WISCONSIN INTERNATIONAL UNIVERSITY COLLEGE

FACULTY OF LAW

SUBJECT: CONTRACT LAW 2

LECTURER: MR PHILIP GLAH

TOPIC: REMEDIES FOR BREACH OF CONTRACT - DAMAGES

DAMAGES

Definition/Nature of Damages

Damages are a money award for loss suffered by the innocent contracting party as a result of the
breach of contract. It is financial compensation.

The usual and most common remedy for breach of a contract is damages.

Aim/Purpose of Damages

The aim of damages awarded for breach of contract is to compensate for loss and not to punish
(Addis v The Gramaphone Co Ltd [1909])

Addis v Gramaphone Company (1909)

The plaintiff could be dismissed by his employers on six months' notice, which he was given but,
at the same time, a new manager was appointed to take his place and the plaintiff was prevented
from acting as manager. The plaintiff claimed damages for the harsh and humiliating manner in
which he was dismissed, as well as for loss of salary and commission after his dismissal.
The plaintiff was held only to be entitled to the commission and salary he had lost, and not to
damages because his dismissal was harsh and humiliating. Lord Atkinson stated: "I can conceive
nothing more objectionable and embarrassing in litigation than trying in effect an action of libel
or slander as a matter of aggravation in an action for illegal dismissal"

Generally, the purpose of awarding such damages is to place the innocent party in the position he
would have been in and was expecting to be in had the contract not been breached (Robinson v
Harman [1848]); and Juxon-Smith v KLM Royal Dutch Airlines [1995-96] SCGLR

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Mandatory Nature of Damages

At common law, if a contracting party suffers loss as a result of a breach of contract and is able
to prove the loss then damages are automatically awarded to him. The court has no discretion
(equitable remedies are at the discretion of a court).

Types of Damages

The types of damages are: General damages or Special damages; Liquidated damages or Un-
liquidated damages; Substantial damages or Nominal damages

Limitations on Award of Damages

The common law places limits on the recoverability of damages by requiring that:

(i) Loss arising from a breach of contract must have been caused by the defaulting party
(causation);
(ii) The loss must not be too remote. If it is too remote, it cannot be recovered
(remoteness);
(iii) The innocent party must mitigate his loss. Those loses which are not mitigated cannot
be recovered (mitigation);
(iv) Liquidated damages which are not a genuine pre-estimate of the innocent party’s loss
will be treated as a penalty and therefore void (Liquidated damages and penalties);
and
(v) Expectation damages assessed so as to place the innocent party in the position he
would have been in had the contract not been breached do not, generally, include
damages for injury to feelings or reputation (assessment of damages).

Causation

The innocent party must prove that his loss was caused by the breach of contract. Losses not
caused by the breach cannot be claimed (Smith, Hogg & Co v Black Sea Insurance [1940]
AC 997; and The Monarch Steam Ship Case [1949] AC 196.

Smith, Hogg & Co v Black Sea Insurance (1940)

A shipowner was held liable to a charterer in damages for loss of a cargo which had
been caused by a combination of perils of the sea and the unseaworthiness of the ship.
The latter was sufficient to carry a claim for damages.

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Monarch Steamship Co Ltd v Karlshamns Oljefabriker (A/B) [1949] AC 196

The claimant purchased a quantity of soya beans to be shipped on the appellant’s vessel ,
The British Monarch(TBM), from Japan to Sweden. After the cargo had been loaded and
the journey commenced TBM developed problems with its boilers which caused
considerable delay in the shipment. By the terms of the charter, the appellant was to
provide a seaworthy vessel and thus the problems with the boiler amounted to a breach.
During the delay period the war broke out and TBM was ordered to unload in Glasgow.
The claimant arranged for the cargo to be shipped to Sweden and brought a claim
against the defendants to recover the costs. The defendant claimed the outbreak of the
war broke the chain of causation.

It was held that the outbreak of war did not break the chain of causation since the
defendants should have foreseen the possibility of this occurring and any delay of the
voyage may result in diversion of the vessel.

Weld-Blundell v Stephens (1920)

The plaintiff employed an accountant, the defendant, to investigate the affairs of a
company he had invested in. The defendant's partner negligently dropped a letter from
the plaintiff in the office of the company's manager, which the manager picked up and
showed to his directors, who sued the plaintiff in libel and won. The plaintiff sued the
defendant for breach of contract to recover the damages he paid out in the libel action.
The court declared that the claim must be dismissed since (1) the plaintiff's liability for
libel existed apart from the contract, and (2) the loss was not caused by breach of
contract, but by the act of the company's manager showing the letter to the directors.
This was an act the defendant could not have foreseen

Remoteness

It is not every loss arising from a breach of contract that the innocent party can recover by way
of a claim for damages.

Losses arising from a breach of contract and which cannot be claimed, are described as being too
remote or not proximate enough to the breach.

Those losses which are not too remote from he breach and which can therefore be claimed by the
innocent party are, according to Hadley v Baxendale 1854, those:

(i) Those which can fairly and reasonable be considered as arising naturally from the
breach (normal/usual losses: or

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(ii) Those which can reasonable be supposed to have been in the contemplation of the
parties at the time the contract was entered into (unusual/abnormal losses).

Hadley v Baxendale 1854

The claimants in this case were the owners of a mill. A crankshaft, which was essential for
the operation of their mill has broken down and needed to be replaced. In order to replace it,
the owners needed to make a template using the old crankshaft which was to be carried out
by engineers in Greenwich. The claimants therefore got in touch with the defendants, a firm
of carriers, to transport the broken part to the engineers. However the defendants failed to
deliver by the specified timeframe and thus delayed the arrival of the new crankshaft back to
the mill and caused the mill to stand inoperative. The claimants therefore sought damages to
compensate for the losses sustained whilst the mill was out of use and the question put to the
Court of Exchequer was whether or not this was too remote as a result recoverable or not.
Baron Sir Edward Hall Alderson, declined to allow Hadley to recover the lost profits,
concluding that Baxendale could only be held liable for the losses that were foreseeable.
Therefore the loss was too remote and should not be recoverable. The fact that a party sends
something to be repaired, isn’t an indication that they will suffer a loss in profits should
there be a late delivery unless it was directly communicated. Baxendale were not made
aware of the fact that the crankshaft in their possession was the only one and that the mill
would stand idle without it. According to Baron Alderson:
‘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.’ [4]
This created two different situations in which the requirement for remoteness will be satisfied,
and is usually known as the two limbs of the Hadley v Baxendale test. This new test to
determine the amount of damages to be recovered by the claimant was considered in a
further two subsequent cases.

Stansbie v Troman (1948)

A painter in breach of contract after he had completed decorations, left unlocked a house,
which was later burgled by thieves. The defendant was held liable for the value of goods
taken as this was exactly the sort of loss he should have guarded against and foreseen.

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 In Victoria Laundry v Newman 1949

The claimants who ran a laundry business had purchased a boiler from the defendants which
was due for delivery in July. The boiler was installed on the defendants’ premises and
therefore required dismantling before delivery could be made. The boiler was badly
damaged whilst being dismantled and consequently caused a five month delay from the
delivery date. The defendants were aware that the claimants owned a laundry business and
their intention to put the boiler ‘into use in the shortest possible space of time’. The
claimants bought an action for damages to recover the loss of profits they would have made
if the boiler had arrived as agreed, and also for the loss of a cleaning contract from the
Ministry of Supply.
It was held that the claimants could recover the damages for the loss of additional profits
that the boiler may have generated but nor for the loss of the cleaning contract from the
Government. The reason for this judgment was due to the fact that the defendants were
aware that the claimants aimed to increase business with an additional boiler in place.
Therefore this additional loss was ‘reasonably foreseeable’. However, the defendants were
not made aware of the cleaning contract the claimants may have had with the Ministry of
Supply and therefore this loss could not be recovered. This shows the second limb of the
Hadley v. Baxendale test in operation and sets the standard of remoteness as ‘reasonably
foreseeable. However, the House of Lords disagreed with this level of probability in another key case:

Czarnikov v Koufos 1968 (The Heron II)

The claimant had chartered a ship (The Heron II) to transport a cargo of sugar from
Czarnikow to Basra (in Iraq). The journey should have taken twenty days, but instead due
to a deviation from the set route, it was delayed by nine days during which the price of
sugar fell dramatically. Due to the breach of contract, the claimant suffered financial
loss and thus sought damages to cover the difference in the price he received for the
sugar and the higher price that he would have received had the ship not been delayed.
Although the claimant had not made it aware to the defendant his intention to sell sugar
at the destination point in Basra, the defendant was nonetheless aware that he was
carrying a sugar load and that Basra was a common trading place for sugar.
Although the defendant was not aware that the claimant wished to sell as soon as the
boat arrived, the House of Lords held that due to his awareness that the destination was
a popular place for sugar trade was sufficient knowledge to make it so probable that it
must have been within his contemplation at the time the contract was made. The House of
Lords criticised the ‘reasonably foreseeable test’ saying that it was more appropriate in
tort cases rather than contract. Each of the Law Lords had differing arguments as to
which test should apply in place of the ‘foreseeability test’, although the consensus was
that the damage must arise with a high degree of probability from the breach.

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Parsons v Uttley Ingham [1978] QB 791

The Claimant pig farmers purchased a food storage hopper from the defendant for the storage of
pig feed. The hopper was installed negligently and lack of ventilation caused the pig feed to go
mouldy. As a result, many of the pigs contracted e-coli and died. The Claimant claimed over
£36k in respect of the loss of profit, vet bills and other costs relating to the death of the pigs. The
Defendant contended this damage was too remote as it was not in the contemplation of the
parties that the poor ventilation would cause e-coli and death of the pigs.

It was held that the death of the pigs was a natural result of feeding the pigs mouldy food within
the first limb of Hadley v Baxendale [1854]. There was no need to consider whether the death by
e-coli was in the reasonable contemplation of the parties under the second limb.

Jackson v Royal Bank of Scotland [2005] 1 WLR 377

The claimants carried on business of importing goods and selling them on for resale. His main
customer was a business called Economy Bag. Both businesses banked at the Royal Bank of
Scotland (RBS), the defendant. RBS mistaken revealed some invoices to Economy Bag which
showed the mark-up that they were receiving for the services they provided. This revelation was
in breach of confidence and amounted to a breach of contract. Economy Bag were outraged at
the amount the claimants were receiving and they were also concerned that the claimants had
taken steps to hide that amount. Consequently, Economy Bag ceased to trade with the claimants.
Consequently the claimants were deprived of their main source of income and were forced to
cease trading. The claimants brought an action against RBS to recover their loss. The trial judge
found for the claimants and ordered RBS to pay damages based on their loss of profit from
trading with Economy Bag over a four year period. The Court of Appeal reduced this to one
year. The claimant’s appealed the reduction and RBS cross appealed contending that the loss of
profit was too remote.
It was held that the loss of profit was not too remote. The Court of Appeal had erred in its
application of Hadley v Baxendale to reduce the loss of profit to one year. The trial judge’s
findings as to assessment of damages restored.

In the Achilleas 2008

The House of Lords re-considered the law relating to remoteness of damage, signalling
that a narrower approach to the recovery of damages, although the precise ambit of the
decision remains unclear. The case concerns a dispute over the amount of damages that
should be paid out by the charterers of a ship for the late delivery back to its owners.
Transfield Shipping Inc, had chartered The Archilleas, a single decker bulk carrier, for
the duration of five to seven months at a daily hire rate of US$13,500. The parties at a
later date, agreed to a further five to seven months at a daily rate of US$16,750. The
latest date for redelivery was the 3nd of May, 2004. By April 2004 the market rates for
timed charter vessels had more than doubled compared to the previous year. On the 20th
April 2004, the charterers gave notice of redelivery and as result the owners, Mercator,

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fixed the vessel for a new four to six month hire to CargillI, another charterer at the new
daily rate of US$39,500. With less than a fortnight to go before the new charterers were
due to receive The Archilleas, they had fixed the vessel under a sub charter to carry coals
from Quingdao in China across the Yellow Sea to discharge at two Japanese ports,
Tobata and Oita.
By the 5th of May, it had become clear that the vessel wouldn’t be returned to the owners
before the final cancellation date of the 8th of May and by that time the rates had also
fallen. The owners wanted to make an extension to the cancellation date and take it to the
11th of May and as a result, the new charterer’s demanded a reduction to the daily hire
for the new fixture at a rate of US$31,500.
The Mercator claimed for damages for the loss of the difference between the original rate
and the reduced rate over the period of the fixture to the new charterers, Cargill. The
sum calculated by Mercator came to a total of US$1,364,584.37, with the daily rate of
US$8,000. However, the charterers argued that Mercator was not entitled to damages
calculated by reference to their dealings with other new charterers. Rather that they were
only entitled to the difference between the market rate and the charter rate for the
number of days that they were deprived of their ship. Transfield therefore claimed that
they should only pay out the sum of US$158,301.17.
The House of Lords held that liability would be confined to the latter figure. However,
while they all agreed in the end result, their Lordships reasoning differed significantly
making it a difficult task to determine the ratio of the case. Lord Hoffman and Lord Hope
said that the fact that the loss was foreseeable was not enough. They gave importance to
the question whether or not the defendant has, objectively assumed responsibility for the
loss in question at the time of contracting. Lord Hoffman gave the judgment that, ‘a party
cannot be expected to assume responsibility for something that he cannot control and,
because he does not know anything about it, cannot quantify. It is not enough for him to
know in general and on open-ended terms that there is likely to be a follow-on
fixture.’ He also held that having regard to the expectations of the market, the
contracting parties wouldn’t have considered that a late return of the ship, which caused
a financial loss in the follow up fixture, to be a kind of loss that the charterer was
assuming responsibility for.
Lord hope also added that the assumption of responsibility is ‘determined by more than
what at the time of the contract was reasonably foreseeable.’ Therefore in his judgment,
it wasn’t sufficient that the defendants knew general terms about the likelihood of a
follow-on fixture. Lord Walker was also of the viewpoint that foreseeability on its own
was not a satisfactory test.
In Lord Rodger’s view, the loss suffered by the owners wasn’t the ordinary consequence
of the breach of contract. The loss arose as a result of the ‘extremely volatile market
conditions’ which could not have been reasonably foreseen as being likely to arise out of
the delay. Both Lord Rodger and Baroness Hale decided the appeal on the more
traditional basis of Hadley v Baxendale foreseeability, i.e. that neither of the parties
would have reasonably thought that a late return by nine days would cause the kind of
loss for which the owners were trying to claim.

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 The House of Lords decision in The Archilleas is significant for two main reasons, firstly
for its introduction of an ‘assumed responsibility test’ into the law of remoteness of
damages and secondly for confirming that the ‘reasonably foreseeable test’ was
becoming unpopular with the Law Lords as a means to assess whether damages are too
remote. The notion of the ‘assumed responsibility test’, as proposed by Lords Hoffman
and Hope, states that, a Court must look at the parties’ understanding and knowledge as
to the types of losses each party would bear, should there be a breach of contract in
order to determine the amount to damages to be paid. Lord Walker also stated that he
agreed with Lords Hoffman and Hope corroborating the notion of an ‘assumed
responsibility test’.
The question to be asked is whether this new test is an effective method which should be
applied to the law of remoteness for breach of contract. Lords Hoffman and Hope in their
judgments do not assess the difficulties in using this test to determine what ‘assumed
responsibilities’ are for the parties in relation to the types of loss, as this is in itself a
difficult task. When two parties enter into a contract, their main focus is on the
completion of the task at hand and not the possible types of losses they are ‘assuming
responsibility’ for should there be a breach. Therefore a court cannot determine what
losses the parties assumed responsibility for and thus look to what the reasonable party
would have contemplated.
It is also more than likely that the courts will look into the current market practice as it is
a key factor in ‘assessing the breadth of the presumed assumption of
responsibility’, which will aid in the decision of whether or not the loss is recoverable. In
the Transfield case, one of the critical factors which persuaded the House of Lords, to
conclude that the loss wasn’t recoverable was the general understanding at that time
amongst shipping lawyers, that liability was restricted to difference between the market
rate and the charter rate for the overrun period. Had their Lordships not considered this
point, the decision may have differed.
The House of Lords in The Archilleas has introduced a new assumed responsibility test, to
determine remoteness in relation to the awarding of damages for breach of contract. It also
suggests that courts may be less willing to see ‘foreseeability’ as the determinative factor as it
does not provide sufficient regard to commercial practice.
It must be noted that in applying the Hadley v Baxendale test of remoteness, the defaulting
party’s mere knowledge of special circumstances may not be enough to render him liable for the
loss. He must also be aware of the purpose and intention of the innocent party:

Horne v Midland Railway (1873)

The defendant contracted to carry a consignment of shoes to London by 3 February, but
delivered a day late. As a result of the delay, the plaintiff lost an opportunity of selling shoes at
an exceptionally high price. It was held that the defendant was not liable for this loss. Although
he knew the plaintiff would have to take the shoes back if they were not delivered by 3 February,
he did not know the plaintiff would lose an exceptionally high profit.

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Simpson v L&N Railway (1876)
The defendant contracted to carry the plaintiff's samples of cattle food from an agricultural show
at Bedford to another at Newcastle. He delivered certain goods to an agent of the defendant at
Bedford showground. The goods were marked 'must be at Newcastle by Monday certain'. No
express reference was made in the contract of carriage to the Newcastle show. The samples
arrived at Newcastle after the show was over.
The defendant was held to be liable for loss of profits which the plaintiff would have made had
the samples reached Newcastle on time. The plaintiff's purpose and intention could readily be
inferred from the circumstances, which clearly indicated that the contract was one to carry
samples to the Newcastle show and not simply to Newcastle.

See also Juxon-Smith v KLM Royal Dutch Airline; and also Frafra v Boakye; and KLM
Royal Dutch Airlines v Farmex

Mitigation

The innocent party must mitigate his loss. He must take reasonable steps to ensure that his losses
do not mount up (escalate) and must also take reasonable steps to reduce the losses (Brace v
Calder [1895]; and also Payzu v Saunders [1919]

Payzu v Saunders (1919)

The plaintiff agreed to buy certain goods from the defendant over a period of nine months
with payment within one month of delivery, and deliveries monthly. The plaintiff failed to
make prompt payment for the first installment, and the defendant, in breach of contract,
refused to deliver any more installments under the contract, but offered to deliver the
goods at the contract price if the plaintiff paid cash on delivery of the order. The plaintiff
refused this and claimed damages, these being the difference between the contract price
and the market price.
It was held that the plaintiff had permitted himself to sustain a large measure of the loss
which, as prudent and reasonable people, they ought to have avoided. He had the cash
available to meet the defendant's demands and could have mitigated by purchasing off
the defendant at the contract price as the defendant offered, instead of going into the
market to purchase at a higher price. He was, therefore, not entitled to damages

However, the innocent party is not required to take extraordinary steps to mitigate his loss:

Pilkington v Wood (1953)

The plaintiff bought a house in Hampshire and his solicitor, in breach of contract, negligently
failed to notice that the house had a defective title. The solicitor was held liable for the amount
by which the house's value had been lessened by the title not being good. The plaintiff shortly
afterwards took up work in Lancashire and suffered added loss as the house was hard to resell.

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However, the solicitor was not liable for the latter loss as he could not anticipate that the
plaintiff would shortly move.

.
"The so-called duty to mitigate does not go so far as to oblige the injured party, even under an
indemnity, to embark on a complicated and difficult piece of litigation against a third party... it is
no part of the plaintiff's duty to embark on the proposed litigation in order to protect his solicitor
from the consequences of his own carelessness' (per Harman J)."

If the innocent party makes financial savings as a result of mitigation, then the savings will be
taken into account in awarding him damages.

British Westinghouse v Underground Electric Railway of London (1912)

The defendant agreed to supply the plaintiff with turbines of stated efficiency, but supplied less
efficient ones, which used more coal. The defendant accepted them and used them for some years
before replacing them with turbines which were even more efficient than those specified in the
contract with the defendant. After replacement, the plaintiff claimed damages from the defendant.
The plaintiff was held to be under no duty to mitigate by buying new turbines, but since he had
done so, the financial advantages he had gained from new turbines had to be taken into account.
Thus, as the plaintiff's saving in coal exceeded the cost of the new turbines, he was not entitled to
damages. However, if the plaintiff had claimed damages before buying the new turbines, the
defendant would have had no defence.

See also Nutakor v Adzrah [1960] GLR; and also Atittsogbe v Postal Telecommunication
Company Ltd [1996]

There is no duty to mitigate in the case of an anticipatory repudiatory breach where the innocent
party elects to affirm the breach
White & Carter (Councils) Ltd v McGregor [1961] UKHL 5 House of Lords

The claimant supplied bins to the Local Authority and were allowed to display adverts on these
bins. The defendant owned a garage. The defendant's sales manager entered a contract with the
claimant for them to place adverts on the bins for a period of 3 years. The agreed price was
payable by three annual installments and if one of the payments was late the whole price became
immediately due. The defendant had not authorised the sales manager to enter the contract and
phoned the claimant on the same day as the contract had been made telling them that he did not
want the advertising. The claimant ignored the defendant's communication and arranged for the
advertising plates to be made up and placed on the bins. The defendant refused to pay the first

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installment and the claimant submitted a bill for the full three years of advertising.

It was held by the English House of Lords that the claimant was not obliged to accept the breach
of contract and could continue with the contract. They were thus entitled to full payment for the
three years advertising.

Measure of Damages
There are generally 3 methods for measuring damages:
(i) Expectation damages -loss of bargain damages- see Charter v Sullivan 1957 and also
W.L Thompson v Robinson Gunmakers 1955)
(ii) Reliance damages (see Anglia TV v Reed 1972; and also McRae v Commonwealth
Disposal Commission 1950); and
(iii) Restitution damages (see Attorney General v Blake 2000)

Expectation Damages
Expectation damages are designed to put the innocent party in the position he would have been
in had the contract been performed.
Where a breach of contract arises because of a failure to deliver goods or services or a refusal to
accept the delivery of goods or services, the measure of damages is the difference between the
contract price and the market price depending on whether there is a ready and available market
for the goods or service.
Where the breach and loss arises because of the delivery of defective goods or services, the
measure of damages is the cost of cure or the cost of replacement (see Ruxley Electronics v
Forsyth (1995) below)

Thompson v Robinson (Gunmakers) Ltd (1955)

The defendant bought a Vanguard car from the plaintiff, and later refused to accept and pay for
it. The plaintiff's profit would have been £61. It was held that where, as here, the supply of
Vanguard cars exceeded the demand, had the plaintiff found another customer and sold to him
as well as the defendant, then there would have been two sales and two profits. Therefore, the
defendant was liable for £61.
Charter v Sullivan (1957)
The defendant bought a Hillman Minx car from the plaintiff but refused to accept it. The
plaintiff's profit would have been £97. However, only nominal damages were awarded because
he could only sell as many cars as he could get from the makers.

Reliance Damages

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Here the innocent party can claim for expenses he incurred in reliance on the contract which was
not performed or in anticipation of the contract being performed. This may even include pre
contractual expenses so long as they were foreseeable:

McRae v Commonwealth Disposals (1950)

The plaintiff recovered £3,000 spent on sending out a salvage expedition to salvage a wrecked
tanker, in a specified position, which they had purchased from the defendant. The tanker had
never, in fact, existed. See Handout on Mistake.

Anglia Television v Reed (1972)

The plaintiffs incurred expenses in preparation for filming a television play. They subsequently
entered into a contract with the defendant to play the leading role. The defendant repudiated the
contract. the plaintiffs tried hard to find a substitute but failed, and had to abandon the play. The
plaintiffs sued the defendant for expenses of production amounting to £2,750 incurred by the
plaintiffs on production before the contract. They were held to be entitled to recover the whole of
the wasted expenditure. The defendant must have known that much expenditure had already been
incurred and would be wasted.

Millar's Machinery v David Way (1935)

The plaintiff bought some machinery which was installed in his factory and paid for. However,
the machinery was not in accordance with the specifications laid down by the contract and the
plaintiff rejected it. It was held that the plaintiff could recover the price (restitution), installation
expenses (reliance loss) and the net loss resulting from the breach (loss of bargain).

Johnson v Agnew (1980)

The vendors agreed to sell a house and land to the purchaser, but the purchaser failed to
complete the transaction on the appointed day. The vendors then obtained an order for specific
performance, but it was not drawn up for five months, by which time it had become impossible as
the mortgagee had taken possession and sold. The vendors sought discharge of the order for
specific performance and to recover damages in its place.
The House of Lords found for the vendors and held that the damages were to be assessed at the
date when specific performance had become impossible. Lord Wilberforce said:
"In cases where a breach of contract for sale has occurred, and the innocent party reasonably
continues to try to have the contract completed, it would to me appear more logical and just
rather than to tie him to the date of the original breach, to assess damages as at the date when
(otherwise than by his default) the contract is lost."

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Where the expectation loss would be wholly unreasonable to award, the courts will award a
smaller sum for loss of amenity instead
Peevyhouse v Garland (1962)
A coal company took a mining lease of farmland, covenanting to restore the land to its original
state at the end of the lease. The work at the end of the lease would have cost $29,000, while the
result of not doing it would reduce the value of the land by only $300. It was held that damages
for the company's failure to do the work should be assessed at $300.

Ruxley Electronics v Forsyth (1995)

The defendants built a swimming pool for the plaintiffs. The swimming pool was not as deep as
specified, yet it was perfectly safe to dive into. To award the cost of digging it out and rebuilding
it, simply to add an extra three or four inches of depth would be unfair and unjust. Instead the
House of Lords ordered the payment of a much smaller sum by way of compensation for loss of
amenity.
Generally, in contract law, damages are not available for injury to feelings or reputation
Addis v Gramaphone Company (1909)
The plaintiff could be dismissed by his employers on six months' notice, which he was given but,
at the same time, a new manager was appointed to take his place and the plaintiff was prevented
from acting as manager. The plaintiff claimed damages for the harsh and humiliating manner in
which he was dismissed, as well as for loss of salary and commission after his dismissal.
The plaintiff was held only to be entitled to the commission and salary he had lost, and not to
damages because his dismissal was harsh and humiliating. Lord Atkinson stated: "I can conceive
nothing more objectionable and embarrassing in litigation than trying in effect an action of libel
or slander as a matter of aggravation in an action for illegal dismissal".

Alexander v Rolls Royce Motor Cars Ltd (1995)

The plaintiff argued that the purchase of a Rolls Royce had been the culmination of a lifelong
ambition, and that when the garage concerned had not repaired it properly or quickly enough he
had suffered distress and inconvenience. The Court of Appeal, while accepting that there was a
breach of contract to repair, were not prepared to award damages for the plaintiff's 'emotional
anguish' while his Rolls Royce was being repaired.

Restitution Damages
This measure of damages aims to pay to the innocent party any benefit attained by the defaulting
party as a result of the breach and especially where the circumstances are unconscionable. If the
very thing which the defaulting party agreed not to do earns him a benefit, then he will not be
permitted to keep that benefit.
See Attorney Generalv Blake [2000]

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Liquidated Damages and Penalty Clauses
Damages which have been fixed by the contracting parties in advance of the breach and which
are included in the contract are known as liquidated damages.

If the sum of liquidated damages amounts to a genuine pre estimate of the innocent party’s likely
loss then it will be enforceable as liquidated damages. Otherwise it will be considered a penalty
and therefore unenforceable.
If a pre agreed fixed sum of compensation is considered a penalty, it is automatically void and
the curt will then assess damages in the usual way (applying the rules on remoteness, mitigation,
and measure of damages).
The leading case on liquidated damages and penalties is Dunlop v New Garage 1915.
Dunlop Pneumatic Tyre Co v New Garage (1915)
The defendant bought tyres from the plaintiff and agreed not to: tamper with manufacturer's
marks; sell below the list price; sell to any person blacklisted by the plaintiff; exhibit or export
tyres without the plaintiff's consent. The defendant agreed to pay £5 for every tyre he sold or
offered in breach of the agreement. In breach, the defendant sold to the public below the list
price. It was held that the provision for payment of £5 was held not to be penal. Looking at the
language of the contract itself, the character of the transaction and the circumstances, it was
clear that the provision was to prevent a price war and so protect the plaintiff's sales. The clause
was, therefore, an attempt to estimate damage at a certain figure and as the figure was not
extravagant, it could only be concluded that it was a bargain to truly assess damages and not a
penalty clause.
Lord Dunedin laid down three rules concerning penalty clauses:
1. The use of the words 'penalty' or 'liquidated damages' may prima facie be supposed to mean
what they say, yet the expression used is not conclusive.
2. The essence of a penalty is a payment of money as in terrorem of the offending party; the
essence of liquidated damages is a genuine covenanted pre-estimate of damage.
3. Whether a sum stipulated is penalty or liquidated damages is a question of construction to
be decided upon the terms and inherent circumstances of each particular contract, judged as
of the time of making the contract, not as at the time of breach. There are a number of tests
which would prove helpful, or even conclusive:
(a) it will be held to be a penalty if the sum stipulated for is extravagant and unconscionable in
amount in comparison to the greatest loss that could conceivably be proved to have followed
from the breach;
(b) it will be held to be a penalty if the breach consists only in not paying a sum of paying, and
the sum stipulated is a sum greater than the sum which ought to have been paid.

Other cases are:

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Cellulose Acetate v Widnes Foundries (1933)
The defendant agreed to build a chemical plant for the plaintiff in 18 weeks. If it took longer than
this, they agreed to pay 'by way of penalty £20 per working week'. The defendant completed 30
weeks late, and the plaintiff lost £5,850 as a result of the delay. The defendant argued that they
were only liable for £600 damages. The plaintiff was held only to be able to recover £600. The
clause was not a penalty clause although it was described as such, because its object was not to
act in terrorem. The parties must have known that the actual loss would be more than £20 per
week, and the clause would, therefore, appear to have been an attempt to limit liability.

Wall v Rederiaktiebolaget Luggade (1915)

It was held that a ship owner could disregard a penalty clause and sue for the actual loss he
suffered where it exceeded the amount of the penalty.

See the very latest UK Supreme Court Authority on liquidated damages and penalties – Beavis v
Parking Eye Limited [2015] UKSC

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