NB REFERENCES TO "HPH" OR JUST TO A PAGE NUMBER ARE TO HEFFEY, PATERSON AND HOCKER CONTRACT COMMENTARY AND MATERIALS 8TH ED 1998 (LBC INFORMATION SERVICES)
We have stressed throughout the year that the principal remedy for breach of contract is damages. Specific performance is available in limited circumstances, as is injunction. Damages is the legal remedy and the other two are equitable remedies. Equitable remedies are discretionary: this is one of the limitations which attach to the remedies of specific performance and injunction.
The fact that the principal remedy for breach of contract is damages represents a severe limitation on the efficacy of contract. People make contracts to get things done. What the law says is that a contracting party has in effect a choice: perform the contract or pay damages. Judges from time to time say that contracts are to be performed but this is a futile thing to say so long as specific performance is not the principal remedy (as it is, for example, in civil law systems). Indeed, those who examine the law through the spectacles of economic analysis have recognised the reality and they talk of efficient breach, that is, when a party to a contract calculates that it is preferable to break the contract and pay damages rather than perform.
The law of damages, like the law of breach, is complex for similar reasons: there are so many different types of contracts and there are so many ways in which they can be broken. In addition there are so many ways in which a breach can cause financial loss.
The starting position in relation to contract damages is that they are compensatory - damages are supposed to place the innocent party in the same position that he or she would have been had the contract been properly performed. Thus, at least in theory, contract damages cover what is referred to as the expectation interest, which includes the making of a profit. But, we will see that there are many refinements and limitations on this basic principle.
As with damages in other areas of the law (for example torts), there are some basic requirements in relation to contract damages. The issues of causation and remoteness can arise in breach of contract actions, just as they can in tort actions.
The plaintiff must prove that the breach has caused financial loss of some kind or another. This is sometimes a practical limitation on bringing an action for breach of contract. We saw earlier that every breach of contract generates a potential right to damages. But the plaintiff must be able to show what he or she has lost. Sometimes this may be impossible. An example is the Tramways Advertising case where, in the end, Luna Park won its case. It was held that Luna Park was justified in terminating when the advertising boards were not displayed for eight hours each day. Luna Park sought damages. The High Court awarded one shilling in damages, that is, nominal damages. This was because Luna Park could not calculate what the breach had cost it.
So, it is necessary to show that the breach caused some loss. Sometimes the issue is not so much that no measurable loss has been suffered so much as it is not clear that the loss which has been suffered was caused by the breach. This is the kind of causation issue which you will be familiar with from the torts course. In the vast majority of contract actions this is not a problem. But occasionally it is. This is illustrated by
You will see from this case that the law of contract, like the law of torts, gets itself into the mysteries of causation and remoteness. For example look at the list of propositions about causation and remoteness in the law of contract by Glass JA on pp 910-911. You will see Chapman v Hearse (remember?) referred to, which is an indication that the principles are basically the same in tort and contract. In this case, the auditors of a large finance company, Cambridge Credit, failed to do their job properly. This was a breach of contract. The issue in the case was whether that breach caused massive losses which occurred three years later when Cambridge Credit went under. The trial judge thought there was a direct line of causation in that, had the auditors reported properly in 1971, then a trustee would have been appointed and a large part of the losses which were subsequently incurred would have been avoided. So, on the old "but for" test, the auditors' breach was the cause of the losses.
The New South Wales Court of Appeal by a 2-1 majority came to the opposite conclusion. The majority judges (McHugh and Mahoney JJA) said that the proximate or common sense cause of the company going under was the economic downturn and the fact that Cambridge, through its managers, made various decisions which caused it to make a loss. Mahoney JA explicitly stated that the "but for" test is not an adequate test of causation.
McHugh in his extracted judgment also dealt with remoteness and found that, again, the things which happened to Cambridge Credit did not satisfy the test of remoteness, as it applies in contract - see below.
This case then illustrates how causation can arise as an issue in contract cases but, as I remarked earlier, it is rare. We saw another instance of a causation point when we looked at the Shevill case. Remember that was the case where the High Court said that a party who rightfully terminates a contract under a clause which gives the right to terminate may not be able to claim the full measure of contract damages. One justification for this was that the cause of the loss of future rent to the landlord was not so much the tenant's breach in not paying the rent on time but the landlord's precipitate decision to terminate the lease.
The other issue which may arise in assessing contract damages is remoteness. This can have various meanings but it is used here, as in tort cases, to mean that there are certain consequences which, though causally related to the defendant's breach, are not claimable by the plaintiff. As a matter of policy the law does not heap all the consequences of the breach onto one pair of shoulders. The way in which damages are limited in contract are twofold:
The first aspect - the foreseeability aspect - is dealt with by a formula which comes from a classic case called Hadley v Baxendale which you will see discussed in the cases (eg on p 917). The formula is slightly different in contract from that used in negligence. Basically the contract breaker does not have to be quite so much of a seer as the tortfeasor. You will recall from your negligence studies that the defendant is expected to be like a prophet, although he or she is justified in ignoring fantastic possibilities, as in Bolton v Stone. The contract breaker is not expected to be quite so all-seeing and all-knowing. The form of words which has been suggested in the cases has been the subject of a huge amount of judicial effort, most of it pretty fruitless. You can get a bit of a flavour for the debate from the judgment of McHugh JA in the Cambridge Credit case pp 917-918. The damage actually suffered by the plaintiff must have been, at the time of contract formation, something which was reasonably foreseeable as a "serious possibility", or a "real danger", or "on the cards", or "not unlikely", etc.
You will see a discussion of the so-called rule in Hadley v Baxendale in
Victoria
Laundry (Windsor) Ltd v Newman Industries Ltd
HPH 921.
The rule is quoted on p 922 middle para. "Where two parties have made a contract..."
The rule in Hadley v Baxendale has two limbs to it.
1. The defendant must compensate the plaintiff for those ordinary losses which were reasonably foreseeable, at the time of entering the contract, as a serious possibility as arising from the breach.
2. In addition, the defendant may have to compensate the plaintiff for extraordinary losses which arose from the breach, so long as those extraordinary losses were brought to the attention of the defendant at the time of formation of contract.
These two aspects of the rule in Hadley v Baxendale are neatly illustrated by the facts of the Victoria Laundry case. The defendant was some 20 weeks late in delivering a boiler to the laundry. As a result of this, the laundry lost profit from its ordinary day-to-day business (approximately £16 per week) but, in addition, it lost the opportunity of taking advantage of some particularly lucrative government contracts (approximately £262 per week). It was held that the defendant must be expected to contemplate the former loss but the defendant was not made aware at the time of formation of the contract about the particularly lucrative contracts and so was not liable for those extraordinary losses.
There is a useful statement of the relevant principles in the 6 propositions on pp 922-3.
Once the plaintiff has established that he or she can claim damages for breach of contract, the general duty, which is applied by the common law to all damages claims, is imposed on the plaintiff, namely, the duty to mitigate. What this means is to take reasonable steps to minimise the loss which flows from the breach. There is a good summary of the rules about mitigation, taken from McGregor on Damages, in HPH 927-928 with some exploration by the casebook editors of the underlying policy in connection with the plaintiff's duty to mitigate.
The point has already been made that the subject of contract damages is a complex one. The point has also been made that contract damages do not cover certain types of loss, such as the frustration and disappointment resulting from someone failing to perform their contractual obligations. So, damages are not perfect. One of the reasons why the subject of damages in contract is complex is because of the very many ways in which a breach of contract can cause various types of financial loss.
The basic interest which is protected is the expectation interest, that is, contract is about making promises and this naturally generates an expectation that the promise will be kept. So, contract should place the plaintiff in the same position which he or she would have been in had the contract been performed properly. This means that the plaintiff should be compensated for loss of profit. This was exactly the sort of claim which was brought in the Victoria Laundry case. The boiler was delivered late and the direct and obvious result of that was that the laundry could not use it to make a profit.
Another very common type of expectation loss which is claimed for breach of contract is the cost of alternative performance. If a contractor fails to perform and it is necessary to find someone else to do the job, then the innocent party can claim whatever the difference is between what the contractor quoted and what the alternative person charges.
But sometimes it is not possible to base a claim on loss of profit. To start with it may be impossible to prove what the profit would have been or it may be that the venture was far too speculative to calculate any projected profit. An example was McRae v Commonwealth where the profits to be made from recovering the tanker could not be estimated but it was possible to say how much the plaintiff had spent in his fruitless search for the tanker. So, the High Court allowed a damages claim on the basis of costs incurred, rather than profits contemplated. This is called the reliance interest.
Yet another possible basis for calculating contract damages is to attempt to calculate loss of profit by reference to probabilities. The courts do this from time to time. For example if the plaintiff can establish that there was a 50% chance of making a profit of $100,000 then the court will award $50,000. Of course, things are never this simple and the court has to be convinced on the balance of probabilities of these matters.
All of these ways of calculating contract damages are discussed in
This is obviously a complex case if the length of the extract in the materials is anything to go by. First of all, the facts. Amann won a tender to provide coastal surveillance flights over the north of Australia. This required the purchase and special fitting out of a number of aeroplanes. The original deadline was extended by the Commonwealth to 12 September 1987. It was apparent that, even with this extended deadline, Amann was not going to be ready to start operations on the 12th. The Commonwealth waited until the 12th and then, on that day, terminated the contract. (The Commonwealth could probably have acted on the basis of anticipatory breach before the 12th but decided not to.)
The first and very important point which emerged from this case was that the trial judge held that a clause in the contract which provided for a show cause procedure - that is, the Commonwealth should ask Amann to show cause why the contract should not be terminated - that clause provided the exclusive procedure for terminating the contract. The Commonwealth had not asked Amann to show cause but had simply terminated the contract immediately. It was held that the Commonwealth had wrongfully terminated the contract and therefore the Commonwealth was in breach. This is a surprising finding (and again illustrates the hazards of termination) because it is at least arguable that a show cause procedure should be limited to those situations where there is some purpose in giving the contractor another chance. Anyway, this aspect of the case was not canvassed in the High Court. By the time it got there, the case was just about assessment of damages.
The contract was for 3 years. It was pretty clear that Amann would not have made a profit in that time. But, on the other hand, although Amann did not have the benefit of an option to renew, it would have been in a most advantageous position to win the next contract in which case it probably would have made a profit in the end.
Amann had spent nearly $6m buying and specially equipping the aeroplanes. Their residual value was a fraction of this. It could not show that it would have made a profit, at least on this contract, and so it had to claim its reliance loss in somewhat a similar fashion to McRae in McRae v Commonwealth.
So far, so good. The assessment of this loss by the various judges varied enormously. In the High Court alone this was true. And you can see from the editors' headnote on p 838 that the difference between the trial judge, Beaumont J, and the Full Federal Court was just over $400,000 versus $6.6m! How could there be such huge differences of opinion over what appears to be a not very complicated calculation?
The High Court judges themselves differed in the assessment of damages. Probably the simplest way to deal with this case is to state a number of propositions which are relevant to the assessment of damages.
1. A common measure of contract damages is loss of net profit.
2. Sometimes net profit cannot be calculated or the transaction was too speculative to say whether or not a profit would have been made. If so, then the plaintiff can claim wasted expenditure.
3. In a claim for wasted expenditure, a presumption is made that the plaintiff would have been able to recover at least that expenditure had the contract gone ahead, that is, the contractor would have broken even. This presumption may be rebutted by the other party (the onus being on him or her to do so) showing that the contractor would not have recovered the expenditure. If the defendant can discharge this onus, then the amount recoverable by the plaintiff is only the amount which would have been earned under the contract to cover part only of the expenditure.
4. A plaintiff is not restricted to claiming just what the contract provided for. If the plaintiff has been denied outside benefits because of the defendant's breach, then he or she can seek damages to cover that loss. The example given by Brennan J was the loss of tips by a waiter (pp 848-849). In short, the plaintiff is entitled in an appropriate case to claim loss of a chance. The relevance of this to Amann was the argument about the renewal of the contract at the end of the first three years. Amann did not have an option but it would have been in a very strong position to tender successfully for the next contract. This was a relevant benefit which it was denied by the Commonwealth's breach. Although Amann might not have recouped its expenditure during the first contract, it would have done had it won the second contract. The onus was on the Commonwealth to show that the value of the prospect of renewal was not sufficient to enable Amann to recoup its expenditure. The Commonwealth failed to discharge this onus. (For a contrary view on the loss of chance argument, see the judgment of McHugh J on p 869.)
5. In assessing damages it is legitimate in an appropriate case to discount the damages by reference to the possibility that the contract would have been terminated anyway. The Commonwealth argued that it would have terminated Amann legitimately if the contract had gone ahead. Mason and Dawson dealt with this in a curious way. They said (p 847) that the probability that the Commonwealth would have terminated the contract was 20 per cent. Instead of discounting the damages by 20 per cent, they said that termination by the Commonwealth was an event which on the balance of probabilities would not have happened and therefore that factor should be ignored altogether. (By contrast, the trial judge, Beaumont J, estimated that there was a 50 per cent chance that the Commonwealth would have terminated and that therefore the damages should have been discounted by 50 per cent.) Deane J and McHugh J accepted the figure of 20 per cent and discounted the damages by that amount. But this was not the majority position.
The majority view in the end was that Amann should be able to recover its full reliance loss (plus interest).
Generally speaking, contract damages do not cover intangible types of loss. They are almost always concerned only with financial loss. Unlike damages for negligence, where it is possible to claim for non-pecuniary loss (including what is quaintly called nervous shock), contract damages do not generally extend to these types of harm. There are, however, some exceptions. If someone were physically injured by a breach of contract, then the usual tort heads of damages can be claimed.
In addition, there is a special type of contract under which damages for intangible losses can be claimed. That type is a contract to provide pleasure. The typical case is a contract with a travel agency or other party involved in the holiday business where the holiday goes horribly wrong. In such cases the customer can claim damages for loss of enjoyment. An example is
A holiday cruise came to a disastrous end when the ship sank. The plaintiff, Mrs Dillon, sought return of the fare to the extent that she had not received value for money and damages under a number of heads, including damages for loss of enjoyment.
On the question of return of part of the fare, she had had some benefit in exchange for the fare and so there was not a total failure of consideration in the sense used in Fibrosa Spolka and in McDonald v Dennys Lascelles. Could she get back some of the fare as damages (rather than under the law of restitution)? The answer was No because she could not both sue for damages for breach and get back the fare. In other words, you have to pay for your right to damages - see Mason CJ on p 893 3rd para.
As to the question of damages for loss of enjoyment, etc, the discussion by McHugh J on pp 894-900 is pretty comprehensive. He made the point (pp 894-895) that the general rule, which does not allow damages in breach of contract actions for distress or disappointment, is not a rational rule and he put forward some convincing arguments against it. He then went on to consider established exceptions to the rule. These are discussed on pp 896-898. One example is where a solicitor has failed to do his or her job properly which has caused distress to the client. In one case, a solicitor failed to get a restraining order in a domestic violence case. The English courts seem to have confined the rule to those sorts of contracts where the contract itself is to provide relief from distress or to provide enjoyment, that is, it is the central obligation of the contract which has been broken. It is not enough that distress, anxiety or disappointment are an incidental consequence of the breach of contract. McHugh said that maybe it is time for the law to expand in this area but, in the end, he said that this case is not the proper time to do it.
All judges concluded that the fare, or part of it, could not be claimed back by Mrs Dillon but that she was entitled to damages of $5000 for disappointment and distress.
Contractual damages - liquidated damages and penalties
Because of the uncertainties associated with assessing damages at large, that is, the process which we have just been looking at whereby the plaintiff must satisfy the court what is the money measure of the loss she or he has suffered as a result of the breach, it is always possible for the parties themselves to decide and include in the contract what the measure should be. This is called liquidated damages. This is a perfectly legitimate device and, generally, the courts will enforce a liquidated damages clause. There is one qualification to this. Equity would intervene and strike out the clause if it considered it to be unconscionable in the circumstances. Equity would put the label of "penalty" on the clause and would simply not enforce it. It was "blue pencilled" from the contract. The innocent party was then able to seek damages at large in the usual way.
This leads to the question: what is the difference between a legitimate liquidated damages clause and an unconscionable (and unenforceable) penalty clause? The answer to this is contained in a classic statement in Dunlop Pneumatic Tyre Co Ltd v New Garage & Motor Co Ltd which you can see on p 958 of the case book. Broadly, a penalty is a sum which is used as a big stick to enforce performance (the Latin "in terrorem" is used in this context); it is a sum which is unconscionably excessive in the circumstances. Liquidated damages, on the other hand, are a genuine pre-estimate of damages. It does not have to be precise - it may be a bit too much or it may be not quite enough, as it turns out - but so long as it is a reasonable pre-estimate then it will be upheld. In coming to a decision on whether a clause is a penalty clause or a liquidated damages clause, a court will not be influenced by the language that is used by the parties in their contract.
Over the years, the courts' attitude to these types of clauses has gone through a bit of a shift. The High Court has looked at the area 3 times between 1983 and 1989. Broadly, the Court has decided to be less interventionist than in earlier times, saying that the court should enforce what the parties have agreed to. This is an interesting contrast to the attitude of the court in other areas where it has tended to take a more interventionist approach. In two areas, the High Court has exhibited this more laissez-faire approach, namely, in relation to exclusion clauses and in relation to liquidated damages clauses. An illustration of its new, tough approach is
This is a case of a hire-purchase agreement to buy a prime mover. Of course, the finance company calls the shots and the "little" people - Mr and Mrs Plessnig in this case - have no say in the terms which are imposed. The term which was questioned in this case was the term (cl 6) which provided that, if the agreement was terminated by the finance company for, among other reasons, default in making payments by the hirer, then an amount called the "recoverable amount" was to be paid by the hirer to the finance company. The recoverable amount was worked out according to a formula found in cl 5. The formula basically provided that the finance company was entitled to keep all payments already made, claim any outstanding payments, claim an amount for costs of repossession and then deduct any residual value of the truck and an amount to reflect the benefit of accelerated payments of the contract sum. This formula, as Deane J pointed out on p 972 2nd last para, represented "an obviously fair method of estimating in advance the owner's likely damages including loss of bargain".
The High Court held that this was not a penalty. You will see in the judgment of Wilson and Toohey JJ on p 967 2nd (indented) para a quote from Mason and Wilson JJ in an earlier High Court case AMEV-UDC in which the point is made that the courts should shift away from being too soft on these types of clauses. In short, they should be enforced unless the amount recoverable is "out of all proportion to damage likely to be suffered..."
Brennan J canvassed the possibility that the sum recoverable should be treated as a penalty because the cause of the loss to the finance company could be seen as its decision to terminate, particularly when the hirer has not committed a very serious breach. You can see that this is a similar argument to that adopted in Shevill (which is mentioned in the course of Brennan's judgment). But, in the end, Brennan J backed off from this argument. Thus, if the contract provides for what damages should be paid in the event of termination for breach and that amount is a genuine pre-estimate, then it will be upheld, even though the finance company can terminate pursuant to a contractual clause in circumstances which would not justify termination at common law.
It was argued that there were two aspects to the formula which were unconscionable. One was that the clause did not allow for the possibility that the truck may be worth more when sold than the outstanding liability. This did not in fact happen in this case and so it was ignored. The second argument was that the finance company only had to sell the truck at a wholesale price and not a retail price. Again, this was not thought to be sufficient reason to brand the clause a penalty clause.
That is all that we have time for in relation to damages.
The equitable remedy of specific performance is, of course, an order by the court that the contract should be performed. It is, as I have already noted, not the usual remedy for breach and, in fact, in ordinary commercial contracts it is rare. It is the principal remedy in land transactions.
We cannot go into the detailed law on the equitable remedies for breach of contract. Both specific performance and injunction are dealt with in the Equity and Trusts and Property courses.
General principles
Greig and Davis The Law of Contract 1469-1471
Seddon and Ellinghaus, Cheshire & Fifoot's Law of Contract (7 Aus ed 1997) para [24.4]
Contracts for the sale of an interest in land
Greig and Davis The Law of Contract 1471-1472
Limits on availability
· discretionary remedy
· conduct of plaintiff may preclude the remedy
· hardship
· the need for mutuality
· contracts requiring supervision
· contracts for personal services
Damages in lieu of specific performance
There is legislation (known generically as Lord Cairns' Act) which enables a court to order damages in lieu of specific performance where circumstances prevent an order for specific performance from being carried out.
Rarely, a contract may contain a negative stipulation which is broken. The appropriate remedy is an injunction. Injunction cannot be used to stop an ordinary breach of contract, that is, where someone refuses to perform a positive obligation. The possibility of using an injunction for breach of contract is discussed in