The two main remedies for breach of contract in English law are damages and specific performance, and these provide the focus for this chapter. The following issues are discussed:
Purpose of damages. The general rule is that damages are compensatory, rather than punitive, and are intended to put claimants in the position they would have been in had the contract been performed properly.
Measure of damages. There are several methods of calculating damages:
Expectation interest. This is the usual measure. It allows the claimant to recover lost benefits, such as lost profits that would have been made. Problems can arise where:
the benefits were not certain – the claimant may be compensated for the loss of a chance to obtain the benefit;
the costs of providing the benefit are out of proportion to the value of the benefit itself – the court may refuse to allow full recovery in these circumstances.
Reliance interest. The claimant may choose to seek damages on this basis – compensating for expenses incurred in relation to the contract – where the expectation interest is difficult to calculate (though not where the claimant has simply made a bad bargain).
Non-pecuniary losses. The claimant can exceptionally recover for loss of enjoyment or mental distress caused by a breach of contract. Either the contract must be one which has the provision of non-pecuniary benefits as an important objective, or the breach must have caused physical discomfort which has led to the distress.
Non-compensatory damages. In limited circumstances a claimant has been allowed to recover the benefit that the defendant has obtained through breaking a contract, but this is exceptional.
Limitations on recovery. The claimant’s right to damages is limited by:
the rule of remoteness – the claimant can recover only those losses which were normally to be expected, or, if unusual, were in the reasonable contemplation of the parties at the time of the contract;
mitigation – the claimant must take reasonable steps to prevent the losses increasing.
Liquidated damages clauses are enforceable; penalty clauses, aiming to ‘terrorise’ the defendant into performance, are not.
Restitution. The principles of ‘restitution’ are designed to prevent ‘unjust enrichment’. They may require the return of money or property transferred under a contract which has been terminated, or in a situation where a contract has never come into existence.
Specific performance. This equitable remedy will only be available where damages would be inadequate. The order will not be made where:
it would need continuous supervision;
it relates to personal services;
it would cause undue hardship to the defendant;
the claimant has not acted equitably.
Injunctions. These can be used to prevent a breach of contract, but not as a means of indirectly obtaining specific performance where this remedy would not be permitted.
At various points during the earlier chapters, remedies of one kind or another have been considered. Rescission and damages for misrepresentation were discussed in Chapter 8, for example, and rescission for mistake in Chapter 9. The ‘self-help’ remedies of withholding performance and terminating on the basis of repudiatory breach were dealt with in Chapter 14.2 Here, we are considering more generally the award of damages for breach of contract, and the order of ‘specific performance’, which will instruct a party to perform its obligations under an agreement. Some discussion of injunctions will also be necessary.3
In general, as we shall see, the common law aims to put the parties into the position they would have been in had the contract been performed by ordering one party to pay money to the other. Where one of the parties has performed its side of the bargain and is awaiting payment from the other party, this can be achieved by the ‘action for an agreed sum’, or in sale of goods contracts the ‘action for the price’.4 In other words, the party who has promised to pay for goods or services which have been transferred or performed by the other party, can be required to make good that promise. This was, for example, the form of action taken by Mrs Carlill to compel the Carbolic Smoke Ball Co to pay her the £100,5 and it is in practice probably the most frequently used action following a breach of contract.6 In other situations, the normal requirement will be for the payment of compensatory damages. An order to perform part of the contract, other than paying money that is owed, is much more unusual.
We start, therefore, by considering the remedy of ‘damages’, and will then look at specific performance and injunctions.
The basic principle of contractual damages is that of restitutio in integrum, or full restitution, which involves putting the innocent party into the position it would have been in had the contract been performed. This principle can be traced back to Robinson v Harman,7 and recently restated by Lord Scott in Farley v Skinner.8
The basic principle of damages for breach of contract is that the injured party is entitled, so far as money can do it, to be put in the position he would have been in if the contractual obligation had been properly performed. He is entitled, that is to say, to the benefit of his bargain.
The main objective of contract damages is therefore compensation, not punishment.9 Although, of course, in some situations, a party thinking about breaking an agreement may be deterred by the prospect of having to pay damages, or a party who has broken an agreement may suffer considerably from having to pay compensation, nevertheless these consequences are not the purpose of the award. This is shown by the fact that if the party not in breach has suffered no quantifiable loss, only nominal damages will be awarded. If, for example, there is a failure to deliver goods, and the buyer is able to obtain an alternative supply without a problem, and at a price which is the same or lower than the contract price, no substantial damages will be recoverable.10
In relation to the fact that damages will generally only be awarded where the claimant has suffered a quantifiable loss, it is important to note the concept of the ‘efficient breach’. Looking at the law of contract from the economic point of view, as a means of wealth maximisation,11 it may make sense for a party to break a contract. The typical example12 given is where a seller (S) has contracted to sell an item to a buyer (B1) for £100. Before the transaction takes place a second potential buyer (B2) offers S £200 for the item. If S sells to B2, S will receive £200, but may have to pay compensation to B1 for not fulfilling the original contract. But as long as that compensation is below £100, S will still have made a profit. All parties are in theory happy. S has sold the item at a higher price, to B2, to whom the item is obviously more valuable than it would be to B1. B1 has not received the item, but has received damages which fully compensate for any losses.
The concept of ‘efficient breach’ is most commonly discussed in terms of the advantage to the party breaking the contract in ‘maximising gain’. As Campbell has pointed out, however, it should also be recognised as encompassing the situation where the party in breach acts to ‘minimise loss’.13 This may arise, for example, where circumstances change in a way that increases the costs of performance to an extent that the increase exceeds the damages which would be payable to the other party. Here again, the economic answer is that the efficient result is not to enforce the contract, but to allow the party whose costs have increased to escape from it by paying appropriate compensation.
The concept of the efficient breach goes some way to explaining why the law of contract is generally more disposed to award damages than to insist on performance.14 The analysis works best, however, in relation to discrete business contracts which are fully executory. Once the parties are in a long-term relationship, either in respect of the contract under consideration, or as regards a series of contracts, the economic analysis of the possible advantages of breach becomes much more complex. The risks of endangering the future relationship need to be added in to the equation. Similarly, if one party has already performed part of its obligations (particularly if these are in the form of services, rather than goods or money, thus making restitution difficult), allowing breach plus compensation may not be straightforward. Finally, in relation to consumer transactions, it may well be felt that the need to protect the consumer means that the economically efficient answer is not the one which the courts should support.15 In addition, consumers may well place a value on what they are seeking to receive under the contract which is higher than the market value – thus giving rise to the concept of what has been called the ‘consumer surplus’.16 It is also important to remember that parties will not always act in the most economically efficient way in relation to a particular transaction: for example, being seen as a firm which honours its contracts may be more ‘valuable’ (though difficult to quantify) than making a bigger profit on a particular deal. Nevertheless, provided that its limitations are recognised, the concept of the efficient breach is a useful tool to apply in the analysis of the law on damages for breach of contract.17
15.3.2 NON-COMPENSATORY DAMAGES?
As stated at the beginning of this section, the purpose of contract damages is generally accepted to be to compensate the claimant. It should be noted, however, that a possibly significant exception to the solely compensatory nature of contract damages has been opened up by the decision of the House of Lords in Attorney General v Blake.18 It was held there that a defendant could, in certain circumstances, be required to hand over to the claimant a benefit acquired by breaking a contract, even where there is no corresponding loss to the claimant. This decision and its implications are discussed fully below (see 15.5).
Within the general principle of compensation, there are two basic methods by which damages may be calculated. These are conveniently labelled as ‘expectation’ and ‘reliance’. Some consideration also needs to be given to consequential losses and non-pecuniary losses. Note also that in some situations the court may simply order the return of money or property which has been transferred. This is known as ‘restitution’ and is dealt with at 15.8.
15.4.1 EXPECTATION INTEREST
This is the approach which most clearly relates to putting the innocent party into the position he or she would have been in had the contract been performed. It is concerned with fulfilling the expectations of that party as to the benefits that would have flowed from the successful completion of the contract.19 In particular, where the innocent party, as will commonly be the case, was expecting to make a profit as a result of the contract, this will generally be recoverable,20 as well as any other consequential losses flowing from the breach. Suppose, for example, A has a piece of machinery that needs repair, and he engages B to carry out the work. A tells B that the work must be done on 1 November, because A has an order for which he needs the machine on 2 November, and which he will lose if it is unavailable. If B, in breach of contract, fails to carry out the work, A will probably be able to claim the lost profit on the 2 November contract. If B had performed the contract properly, A would have made the profit, and therefore it should be recoverable.
In general, the calculation of the expectation interest is simply a matter of looking at where the claimant would have ended up if the contract had been performed properly. In making that calculation, account must of course be taken of any costs which the claimant may have saved by the defendant’s non-performance. It is the claimant’s profit on the contract that is recoverable, which will not necessarily involve the defendant in paying the full price of the missing performance. If, for example, in the situation described in the previous paragraph, the non-availability of the machine has meant that A has employed less staff and therefore has a reduced wage bill, this must be taken into account in assessing the profit which has been lost. It also follows that if A would not in fact have made any profit from the transaction, only nominal damages will be recoverable.
There are two situations which may cause particular difficulty for calculation of the expectation interest, and which merit further consideration: first, where the profit was not certain and, second, where the cost of fulfilling the claimant’s full expectation may be disproportionate to the eventual benefit.
In the situation where the profit was not certain to be made, there may be a partial recovery on the basis that the claimant has lost the chance to make it. In Chaplin v Hicks,21 for example, the breach of contract prevented the plaintiff from taking part in an audition.22 She was allowed to recover a proportion of what she might have earned had she been successful in the audition. Similarly, in Simpson v London and North Western Railway Co,23 the defendant failed to deliver some specimens to a trade fair by the specified date. The plaintiff was allowed to recover compensation for the loss of sales he might have made had the specimens arrived on time. In these cases, it should be noted that the claimant may do better than would have been the case if the contract had not been broken. Ms Chaplin might not have been selected at the audition, and Mr Simpson might not have made any sales. The court may be said in fact to be placing a monetary value on what is essentially a non-pecuniary loss – that is, the loss of a chance. Alternatively, it might be said that in this situation the compensatory aspects of contract damages are tinged with a punitive element, in that the defendant is made to pay in order to show that his or her behaviour fell below an acceptable level.24 Another area of uncertainty may arise where the party in breach had a discretion as to how exactly to perform the contract. The Court of Appeal held, in Durham Tees Valley Airport Ltd,25 that in such a situation the court should base damages on the probable level of performance, not on the minimum level that the defendant could provide under the contract. The court was entitled to assume that the defendant would have operated the contract in line with its own best interests.
15.4.2 WHAT IF THE COST OF COMPENSATING THE CLAIMANT IS DISPROPORTIONATE TO THE COST OF THE CONTRACT?
The second area of difficulty in finding the appropriate award to meet the claimant’s expectations arises in connection with the situation (usually occurring in construction contracts) where the cost of providing the claimant with exactly what was bargained for may be out of all proportion to the benefit which would thereby be obtained. This problem was given full consideration by the House of Lords in Ruxley Electronics and Construction Ltd v Forsyth.26
The position under previous case law on this type of situation involving building contracts was that the court would normally allow the recovery of the ‘cost of cure’ – that is, putting the building into the condition it should have been in if the breach had not occurred. This is subject to the limitation that if the cost of cure is significantly greater than the reduction in value of the property concerned, then the court may refuse to allow it.27 This limitation did not, however, normally apply to the situation where the ‘cure’ relates to the defendant providing something that was specifically promised in the contract. Thus, in Radford v De Froberville,28 the plaintiff was allowed to recover for the cost of building a brick wall, because this is what had been contracted for, even though a cheaper fence would have served the purpose (which was simply to mark a boundary).
This aspect of the courts’ approach must now be considered in the light of Ruxley Electronics and Construction Ltd v Forsyth.29
Key Case Ruxley Electronics and Construction Ltd v Forsyth (1996)
Facts: The defendant in this case entered into a contract for the construction of a swimming pool and building to enclose it, at a cost of £70,000. The depth of this pool at one end was to be 7ft 6in. After the work was completed, the depth of the pool was discovered to be only 6ft 9in. The plaintiff sought to recover payment for the installation of the pool. The defendant counterclaimed that the pool did not meet its specification and sought compensation for this. It was not possible for the pool to be adapted, and the only way to produce a pool with a depth of 7ft 6in would have been by total reconstruction. This would have cost over £20,000.
The trial judge found that the pool was entirely suitable for the purpose for which the defendant wished to use it and, given the very high cost of reconstruction, held that the measure of damages should be the difference in value between the pool as supplied, and a pool which met the contract specification. He assessed this difference as nil, but awarded the defendant £2,500 for ‘loss of amenity’. The defendant appealed, and the Court of Appeal held that he was entitled to have a pool which met the contract specification. It awarded him damages of over £20,000 to meet the cost of reconstruction. The customer appealed.
Held: The House of Lords restored the trial judge’s decision. It confirmed that in building contracts there are two principal measures of damages, namely, the difference in value and the cost of reinstatement. Where it would be unreasonable to award the cost of reinstatement (because, for example, the expense would be totally out of proportion to the benefit to be obtained), the court should award the difference in value. As Lord Jauncey put it:30
Damages are designed to compensate for an established loss and not to provide a gratuitous benefit to the aggrieved party…
Given that the defendant had a perfectly serviceable swimming pool, ‘were he to receive the cost of building a new one and retain the existing one he would have recovered not compensation for loss but a very substantial gratuitous benefit’.31 The appropriate measure here was therefore the difference in value, which (given the judge’s finding) meant that only nominal damages were recoverable under this head. The House of Lords was, however, prepared to allow the judge’s award of £2,500 for ‘loss of amenity’ to stand.
What do you think the outcome of Ruxley Electronics v Forsyth would have been if the swimming pool had been too shallow to allow the claimant to carry out some activity, such as diving? Would the claimant then have been able to claim the cost of having the pool rebuilt?
15.4.3 IN FOCUS: HOW FAR DOES THE RUXLEY DECISION GO?
The House of Lords’ decision in this case appears quite sensible on the facts. Nevertheless, it leaves open the problem that an unscrupulous contractor can apparently now play fast and loose with the contract specifications in a construction contract, provided that the final product is fit for the purposes for which the other party wishes to use it. If it is so fit, then the cost of reconstruction to meet the contract specification is likely to be considered unreasonable, and there may well be little or no difference in the market value of the building. The innocent party is effectively left without a remedy, despite the fact that what has been provided is not what he or she wanted. Comparison can be made with the position as regards sales of goods, where the purchaser may still have a remedy, even if goods are ‘fit for their purpose’, if they do not match the contract description. By virtue of s 13 of the Sale of Goods Act 1979, the purchaser will generally be able to reject such goods. The person who contracts for the construction of a building now seems to be in a much weaker position. Much will depend on just how far the courts are prepared to go. Suppose, for example, I contract for a house to be built with a special warm air heating system which has to be built into the walls during construction. The builder constructs a house with a conventional gas-fired central heating system and radiators. The house is perfectly fit to be lived in, and its value is not significantly different from the house with a warm air system (indeed, it may have a higher market value). Am I really to be left without any effective remedy against the builder? The principles applied by the House of Lords in Ruxley Electronics v Forsyth would seem to suggest so. This is a situation which might have been dealt with by the restitutionary approach suggested by the Court of Appeal in Attorney General v Blake.32 The constructors of the swimming pool had delivered a ‘skimped performance’ and the Court of Appeal’s approach would have allowed the court to award to the customer the money that had been saved in not building the swimming pool to the contract specification.33 This aspect of the Court of Appeal’s judgment in Blake was, however, specifically rejected by the House of Lords in that case.34
15.4.4 WHAT IS ‘LOSS OF AMENITY’?
As was noted above, the only award which the plaintiff received in Ruxley Electronics v Forsyth was for ‘loss of amenity’. What is the precise nature of this award? There are two possible answers. One is that it is based on the concept of the ‘consumer surplus’ – that is, that it compensates the claimant for something which has been contracted for going beyond the market value of what is to be provided. The expectation interest must therefore be increased to take account of this. The second possibility is that it is an example of one of the limited range of cases where the courts are prepared to award damages for ‘distress and inconvenience’ arising as a consequence of a breach of contract. This area is discussed further below (see 15.4.5). The House of Lords’ decision in Farley v Skinner35 has made it clear that the award in Ruxley Electronics v Forsyth should be put into the first category. Farley v Skinner concerned a contract for the survey of a house, where the surveyor had been specifically asked by the prospective purchaser to check on aircraft noise. The surveyor failed to do this properly, and the purchaser, having moved in, sought compensation for the fact that his enjoyment of the property was reduced, though there was no reduction in its market value. The House of Lords approved an award of £10,000 for loss of a benefit which had been contracted for, as distinct from consequential damages for ‘discomfort’, and in the process confirmed that this was also the correct way to view Ruxley Electronics v Forsyth.
This means that the award for ‘loss of amenity’ is a separate element in the expectation interest which, in appropriate cases, will be awarded in addition to any other elements (for example, reduction in the market value of what has been supplied).36 The calculation of the value of a ‘loss of amenity’ is always going to be difficult, since it is by its nature ‘non-pecuniary’ loss. In both Ruxley Electronics and Farley v Skinner, the House of Lords clearly took the view that the amounts should be modest,37 and that the awards in both cases were generous to the claimant. No satisfactory method of calculating what should be awarded is put forward, however, and it seems to be left to the virtually unfettered discretion of the trial judge as to how much should be given under this head. This is clearly unsatisfactory, as O’Sullivan has pointed out,38 but it is difficult to find a solution. The value of the benefit lost is by definition something personal to the claimant, yet the claimant’s subjective view cannot be allowed to be the determining factor. It may be that all that can be done is to wait for practice to develop (as it has done in other areas of non-pecuniary loss) so that a standard level for this type of award gradually becomes established.
Finally, it should be noted that the award for loss of amenity is most likely to arise in non-business contracts. There seems little doubt that if the swimming pool in Ruxley Electronics had been built for a developer who was going to sell the property once it was completed, then no damages at all would have been recoverable for the failure to build it to the specified depth.
15.4.5 RELIANCE INTEREST39
In some situations, it may not be easy for the claimant to calculate the profits that would have been made. Here it may prove more sensible to abandon the attempt, and instead to seek recovery of the expenditure which has been incurred in anticipation of the contract. This is what is referred to as the ‘reliance’ interest. The result of this type of award is that the claimant is put back to the position prior to the contract being made, rather than in the position if the contract had been performed properly.40
An example of this type of situation is Anglia Television Ltd v Reed.41
Facts: Reed was an actor who was under contract to play a leading role in a television film. At a late stage, Reed withdrew, and the project was unable to go ahead. In suing Reed for breach of contract, Anglia did not seek their lost profits. It would have been very difficult to estimate exactly what these would have been, given the uncertainties of the entertainment industry. Instead, they sought compensation for all the expenses incurred towards setting up the film.
Held: The company was entitled to all its expenses, including, somewhat surprisingly, expenditure incurred before the contract with Reed was entered into (provided that these fell within the rule of remoteness).42 The basis for this was that at the time the contract was entered into the defendant must have been aware of the expenditure that had already taken place, and that therefore this would be wasted if the project collapsed.
The decision as to whether to seek expectation or reliance damages will generally lie with the claimant (as was made clear in Anglia Television Ltd v Reed). There have been examples, however, of the court deciding that reliance is the appropriate measure. This occurred in the Australian case of McRae v Commonwealth Disposals Commission,43 in relation to the contract to salvage a non-existent ship. In some situations, on the other hand, the court may say that the reliance measure should not be available. This will be the case, for instance, where the difficulty in identifying profits results primarily from the fact that the claimant has made a bad bargain, as, for example where the market rate for the charter of a ship is higher than the contract rate, so that on breach the shipowner is able to charter out the ship at the higher rate.44 In C and P Haulage v Middleton,45 some of the plaintiff’s costs were in fact reduced as a result of the breach, and the plaintiff’s loss of equipment (which had to be handed over to the defendant) was an integral part of the original contract. In that situation, the plaintiff was only allowed to sue for the expectation interest. The burden of proving that the bargain was ‘bad’ in this sense falls, however, on the defendant.46 The claimant does not have to prove that sufficient profit would have been made on the contract to cover the expenses incurred.
Although in general a choice must be made as to which measure of damages is being sought, in certain circumstances it may be possible to recover both expectation and reliance losses, as long as this does not lead to double recovery. Thus, in Naughton v O’Callaghan,47 which concerned a racehorse which turned out not to have the pedigree contracted for, the buyer recovered the difference in value resulting from this breach (expectation loss) and the costs of training and stabling (reliance loss). Where lost profits are claimed, however, it is only if net profits are claimed that reliance damages may also be available. If gross profits are recovered, the claimant cannot also recover the money that would have been spent in generating these profits. In the case of Cullinane v British ‘Rema’ Manufacturing Co Ltd,48 there appears to have been some confusion between gross and net profits, and the case is sometimes cited as authority for the proposition that expectation and reliance damages can never be recovered together.49 It is submitted, however, that the better view is that outlined above, which distinguishes between gross and net profits.50
15.4.6 CONSEQUENTIAL LOSSES
There are some losses which flow from the breach, but which cannot be put into the category of ‘expenses’ (that is, reliance) or thwarted expectations. Provided the causal link can be established, and they are not too remote,51 then they will be recoverable. If there is a contract for the purchase of a piece of machinery, for example, and it is defective, then the expectation interest may allow the recovery of lost profits that would have been gained by using the machine. If, however, the defect causes the machine to explode, which results in damage to the buyer’s premises, or personal injury to the buyer, compensation in relation to these consequential losses can also be recovered.
15.4.7 SUPERVENING EVENTS
The issue of the measure of damages when supervening events have increased the claimant’s loss was considered by the Court of Appeal in Beoco Ltd v Alfa Laval.52 The first defendants had installed a heat exchanger at the plaintiffs’ works. A leak was discovered, and a repair attempted by the second defendants. The plaintiffs put the heat exchanger back in use without carrying out proper tests. In fact, the defects in the exchanger were more extensive than had been realised, and shortly afterwards it exploded. The plaintiffs sought to recover from the first defendants an amount relating to the loss of profits they would have suffered as a result of the need to further repair or replace the exchanger had it not exploded. Their action was based on the defendants’ breach of contract in their initially having supplied a defective exchanger. The Court of Appeal held that the measure of damages for hypothetical losses should be the same in contract as in tort.53 Thus, where a supervening event causes greater damage than the original breach of contract, the claimant cannot recover losses which would have been suffered had the event not occurred. Since the explosion was caused by the negligence of the plaintiffs’ employees, they could not recover the lost profits which they might otherwise have suffered as a result of the first defendants’ breach of contract. This conclusion is out of line with the normal approach to the assessment of contractual damages, which requires the issues to be looked at in the light of the parties’ knowledge at the time of the contract. This is the way in which the question of ‘remoteness’ is dealt with.54 Taking account of later events, as in this case, means that they may well have the effect of reducing the defendants’ liability. If, however, the event does not occur until after the damages have been assessed, then this will not apply. Thus, if in this case the explosion had not occurred until after trial, the plaintiffs would probably have been able to claim the lost profits they were seeking. This runs the risk of making the assessment of damages dependent on rather arbitrary factors, such as when exactly a particular event occurs.
A different approach to a particular type of supervening event was taken by the House of Lords in South Australia Asset Management Corp v York Montague Ltd.55 This was concerned with cases where there has been a negligent overvaluation of a property which has been used as security for a loan. The question at issue is to what extent should the negligent valuer be liable for the fact that the property has reduced in value because of a fall in the market. Suppose, for example, that the property is valued at £15m when its true value is £10m. The lender lends £12m. When the borrower defaults, the property is sold but, because of a fall in market values, only realises £5m. Should the valuer be liable for the full loss which the lender has suffered (that is, £7m) or only the difference between the valuation and the actual value at the time of the contract (£5m)? The House of Lords took the view that the valuer should only be liable for those losses which are properly attributable to having given wrong information. It held that the lender’s loss in this situation is having less security for the loan than was thought. The correct measure of damages is therefore the difference between the actual and true valuations – in the example given above, £5m. The decision, which reversed the judgment of the Court of Appeal, is not uncontroversial. There is some strength in the Court of Appeal’s view that if the valuer had given correct information, the lender would not have entered into the transaction at all, and that therefore the full losses should be recoverable. The House of Lords has, however, settled this issue for the time being.
The effect of a supervening event foreseen by the parties was considered by the House of Lords in Golden Strait Corporation v Nippon Yusen Kubishika Kaisa.56 The contract between the parties had provided that it could be determined by either party in the event of war breaking out between, for example, the United States and Iraq. In 2001 the defendants repudiated the contract. This breach was accepted by the claimants, who sued for damages. In 2003 war broke out between the United States and Iraq. The question was whether this event, which would have entitled the defendants to terminate the contract without being in breach, put a cap on the claimants’ damages. The House of Lords, by a majority of 3:2, held that it did. In deciding on an award of damages a judge or arbitrator was entitled to take account of possible future events that would have an impact on the amount of such an award. If the damages had been assessed in 2001, the award would have appropriately taken account of the possibility of a future war, which would have allowed termination. The chance of this occurring, which could range from extremely unlikely to virtual certainty, would have had to have been assessed. If, however, the assessment was being made, as was the case here, after the event justifying termination had occurred, it was appropriate for it to be fully taken into account in assessing the claimants’ losses.
15.4.8 NON-PECUNIARY LOSSES
Contract damages are primarily concerned with economic losses of one kind or another, which are more or less quantifiable in money terms. In some situations, however, non-pecuniary losses will be caused. If, for example, a defective product results in personal injury to the purchaser, there is no reason why damages should not be recovered in relation to the pain and suffering so caused. Of course, third parties who are injured will have to rely on tortious remedies at common law or under the Consumer Protection Act 1987.
A more difficult question arises in relation to mental distress, anguish or annoyance caused by a breach of contract. The courts have tended to be wary of awarding compensation under this heading, but the whole area has recently been reconsidered in a number of House of Lords decisions.57 The traditional view is that expressed in Addis v Gramophone Co Ltd.58 The House of Lords refused to uphold an award which had been made in relation to the ‘harsh and humiliating’ way in which the plaintiff had been dismissed from his job in breach of contract. This line was followed in a more recent dismissal case, Bliss v South East Thames RHA,59 where a surgeon had sued the health authority by which he was employed. The authority had, following a dispute between the surgeon and a colleague, required him to undergo a psychiatric examination. The surgeon refused and was suspended. The surgeon treated this as a repudiatory breach and sued for breach of contract. He succeeded at first instance, and was awarded £2,000 for mental distress. The Court of Appeal held, however, that it was bound by Addis v Gramophone, and held that it was not possible to recover damages for mental distress in an action for wrongful dismissal.
In coming to this conclusion, it disapproved the decision in Cox v Phillips Industries Ltd,60 where damages were recovered for distress and anxiety resulting from a demotion. Some doubts about Addis v Gramophone were raised by the decision of the House of Lords in Malik v BCCI,61 the facts of which have been given in Chapter 6, 6.6.7. The House took the view that where there was a breach of the implied term of trust and confidence in an employment contract, Addis should not be regarded as precluding an award of damages for loss of reputation or difficulty in obtaining future employment. The House was not, however, dealing with the manner of dismissal in this case, and was not concerned with ‘injury to feelings’. The House of Lords subsequently confirmed in Johnson v Unisys Ltd62 that Addis should not be regarded as having been overruled in Malik v BCCI. Damages for distress and injury to feelings resulting from the manner of a dismissal are still unavailable in an action for breach of contract.63 The Supreme Court, in Edwards v Chesterfield Royal Hospital NHS Foundation Trust has also now ruled that the Johnson approach applies to breach of an express term of a contract relating to dismissal procedures, as well as to an implied term.64 Exceptionally, however, it may be possible to claim damages for non-pecuniary loss in relation to a breach of contract which is constituted by treatment leading up to a dismissal. This was the view of the House of Lords in its most recent consideration of this area, Eastwood v Magnox Electric.65
On the other hand, it has been held that where one of the purposes of the contract is to provide pleasure and enjoyment, damages for distress and disappointment caused by a breach may be recovered. Thus, in Jarvis v Swan’s Tours Ltd,66 such damages were awarded in relation to breach of contract in the provision of a holiday which had promised to provide ‘a great time’.67 Where, however, the contract is a purely commercial one, damages for anguish and vexation will not be allowed. Thus, in Hayes v James and Charles Dodd,68 the plaintiffs were suing their solicitors for breach of contract. The solicitors had given an assurance that a right of way existed in relation to access to a property which the plaintiffs were purchasing for their business. This turned out to be untrue, and the plaintiffs’ business failed as a result. The trial judge awarded damages of £1,500 to each plaintiff for anguish and vexation. The Court of Appeal, however, applied the same approach as in Bliss v South East Thames RHA. This meant that, as Staughton LJ held:69
… damages for mental distress in contract are, as a matter of policy, limited to certain classes of case. I would broadly follow the classification by Dillon LJ in Bliss v South East Thames RHA: ‘… where the contract which has been broken was itself a contract to provide peace of mind or freedom from distress’. It may be that the class is somewhat wider than that. But it should not, in my judgment, include any case where the object of the contract was not comfort or pleasure, or the relief of discomfort, but simply carrying on a commercial activity with a view to profit.
Subsequent cases have taken a similar line. In Watts v Morrow, the general rule and its exceptions were restated by Bingham LJ, in a passage which has subsequently been approved by the House of Lords:70
A contract-breaker is not in general liable for any distress, frustration, anxiety, displeasure, vexation, tension or aggravation which his breach of contract may cause to the innocent party … But the rule is not absolute. Where the very object of the contract is to provide pleasure, relaxation, peace of mind or freedom from molestation, damages will be awarded if the fruit of the contract is not provided or if the contrary result is procured instead … A contract to survey a house for a prospective purchaser does not fall within this exceptional category. In cases not falling within this exceptional category, damages are in my view recoverable for physical inconvenience and discomfort caused by the breach and mental suffering directly related to that inconvenience and discomfort.
Bingham LJ’s analysis allows for two categories of case where non-pecuniary losses may be recoverable. The first is where the ‘very object’ of the contract is to provide pleasure, etc. This will include contracts for holidays, wedding photographs, etc.71 It will not include cases where disappointment is an incidental consequence of a breach. Thus, in Alexander v Rolls Royce Motor Cars Ltd,72 the Court of Appeal refused to award damages for disappointment, loss of enjoyment or distress resulting from a breach of a contract to repair the plaintiff’s motor car. The second of Bingham’s categories is where the breach of contract has caused ‘physical inconvenience and discomfort’. These two categories have now been fully reviewed by the House of Lords in Farley v Skinner.73
Facts: The claimant was seeking damages from a surveyor who had inspected and reported on a house which the claimant had then bought. Specific instructions had been given to the surveyor to check and report on any problems with aircraft noise.74 The surveyor failed to mention in his report that the house was near an aircraft navigation beacon, around which aircraft were often ‘stacked’ waiting to land, so that the use and enjoyment of the property was affected by aircraft noise (particularly at weekends). The county court judge found that the defendant was in breach. He held that the value of the house was not affected by the breach, but awarded the claimant £10,000 for non-pecuniary damage. The Court of Appeal overturned the award on the basis that, applying the Watts v Morrow tests, this was not a case where the ‘very object’ of the contract was to provide pleasure,75 nor could the annoyance caused by the aircraft noise be considered to amount to ‘physical inconvenience’.
Held: The House of Lords restored the judge’s award holding that this was a situation where non-pecuniary loss was recoverable, given that the specific obligation to check for aircraft noise was designed to enhance the claimant’s enjoyment.
The four speeches delivered in the House of Lords differ in some respects in their reasoning,76 but there is a fair degree of similarity between the positions of Lord Steyn and Lord Scott. Since Lord Browne-Wilkinson in concurring expressed agreement with both their speeches, their conclusions will be taken as representing the ratio of the case.
In analysing Bingham’s first category (in Watts v Morrow), where the ‘very object’ of the contract is to provide pleasure, etc., the view was taken that this should not be confined too narrowly. It did not mean that the overall contract had to be one concerned with the provision of pleasure. Lord Steyn said: ‘It is sufficient if a major or important object of the contract is to give pleasure, relaxation or peace of mind.’77 Lord Scott went even further. Relying on Ruxley Electronics and Construction v Forsyth,78 he concluded that:79
… if a party’s contractual performance has failed to provide to the other contracting party something to which that other was, under the contract, entitled, and which, if provided, would have been of value to that party, then, if there is no other way of compensating the injured party, the injured party should be compensated in damages to the extent of that value.
The question for Lord Scott is therefore simply whether there is an obligation of the relevant type within the contract; it does not necessarily have to be a major part of the contract.80
The statements of Lord Steyn and Lord Scott clearly apply where there is a positive obligation to bring about a result – for example, to provide a holiday of the right quality, or a swimming pool of a specified depth. In Farley v Skinner, the obligation was not of this kind. The surveyor did not undertake to guarantee that the property was unaffected by aircraft noise, but simply to take reasonable care in checking whether it was so affected. It was partly on this basis that the Court of Appeal had distinguished Farley v Skinner from Ruxley Electronics v Forsyth. Lord Steyn, however, refused to accept that this made any difference. He could not see, for example, that there was any difference between a travel agent who guarantees that there is a golf course next to a hotel and one who negligently advises that all hotels in a particular chain have golf courses nearby. In both cases the holidaymaker’s holiday may be spoilt by the breach of contract.81 It was therefore ‘difficult to see why in principle only those plaintiffs [sic] who negotiate guarantees may recover non-pecuniary damages for a breach of contract’.82 Any distinction between obligations of ‘guarantee’ and those to take reasonable care should therefore be rejected. Lord Scott did not specifically deal with this point, but it is implicit in his conclusions that he agreed with the line taken by Lord Steyn. The conclusion of the House was, therefore, that the buyer could in this case recover damages under Bingham LJ’s first category, as applied in Ruxley Electronics v Forsyth.
Both Lord Steyn and Lord Scott, however, also took the view that there could be recovery under Bingham LJ’s second category. The Court of Appeal had felt that the aircraft noise did not constitute ‘physical inconvenience’. The House disagreed. Their view is most clearly stated by Lord Scott. Noting that the distinction between ‘physical’ and ‘non-physical’ may be unclear (for example, is being awoken at night by aircraft noise ‘physical’?), he concludes:83
In my opinion, the critical distinction to be drawn is not a distinction between the different types of inconvenience or discomfort of which complaint may be made, but a distinction based on the cause of the inconvenience or discomfort. If the cause is no more than disappointment that the contractual obligation has been broken, damages are not recoverable even if the disappointment has led to a complete mental breakdown. But, if the cause of the inconvenience or discomfort is a sensory (sight, touch, hearing, smell etc.) experience, damages can, subject to the remoteness rules, be recovered.
Since in this case it was clear that the effect was ‘physical’ in this sense, the buyer was entitled to damages under this heading, as an alternative to those under the first category.
As to the amount that should be awarded, the House was clearly of the view that the judge’s £10,000 was on the high side, but did not interfere with it, nor give any clear guidance on how judges should approach this issue in the future. The problem is the same as that which has been discussed above in relation to Ruxley Electronics v Forsyth,84 and the only answer is probably to wait for case law to establish a ‘going rate’ for particular types of non-pecuniary loss.
In Hamilton Jones v David Snape,85 the principles set out in Farley v Skinner were applied to a contract with a solicitor, where the solicitor had negligently failed to prevent the claimant’s children being removed from the jurisdiction by their father. The High Court held that damages for the consequent distress to the claimant were recoverable in an action for breach of contract. A significant purpose of the contract was to ensure that the claimant retained custody of her children and the pleasure and peace of mind that would result from this. On the basis of Watts v Morrow, as interpreted in Farley v Skinner, the claimant was awarded damages of £20,000 for mental distress. This fairly substantial award suggests that the courts may be prepared to move beyond the very cautious approach to the issue of the appropriate level of damages in this area taken in Farley v Skinner.
Farley v Skinner has clearly expanded the scope for recovery for non-pecuniary losses. Exactly how far remains to be seen. The High Court decision in Wiseman v Virgin Atlantic Airways Ltd86 suggests that the courts will remain reluctant to allow compensation in this area. The claimant had been refused access to a flight by the defendant’s staff, in breach of contract. He had also been falsely accused of having a false passport, and claimed to have been ridiculed by the defendant’s staff and called a criminal. The court held that there could be no recovery for any of these non-pecuniary losses (though without making any reference to Farley v Skinner). The court clearly did not regard a normal flight from Nigeria to England as being a contract for which enjoyment was a main objective. As regards the claimant’s mental distress, there was limited medical evidence, and in any case it was not linked to ‘physical inconvenience or discomfort’ as required by the Watts v Morrow test. As this case shows, the courts are likely to continue to adopt a restrictive line towards claims for non-pecuniary loss.
Do you think the outcome would have been the same if the claimant had been returning from holiday, and had booked the flight as part of that contract?
As regards the long-term influence of Farley v Skinner, one of the most interesting developments is Lord Scott’s interpretation of Ruxley Electronics v Forsyth as establishing a general right to damages in relation to the ‘consumer surplus’,87 as expressed in this passage:88
In summary, the principle expressed in the Ruxley Electronics case should be used to provide damages for deprivation of a contractual benefit where it is apparent that the injured party has been deprived of something of value but the ordinary means of measuring the recoverable damages are inapplicable. The principle expressed in Watts v Morrow should be used to determine whether and when contractual damages for inconvenience or discomfort can be recovered.
If these categories of damages do expand as a result of this decision, this will place more weight on the rule of remoteness, to be discussed in the next section, as a means of keeping the floodgates closed.
The methods of calculating damages dealt with in the previous section are all focused on compensating the claimant for losses, rather than requiring the defendant to hand over any benefits obtained. This is in line with the general principles of contract damages as stated in cases such as Robinson v Harman.89 In other words, the purpose of contract damages is not the punishment of the defendant, but the compensation of the claimant. If the defendant has happened to gain a benefit from breaking the contract, this is irrelevant, as long as all the claimant’s losses are fully compensated. The idea that there could be recovery not only for the claimant’s loss, but also for the defendant’s gain, was specifically rejected by the Court of Appeal in Surrey CC v Bredero Homes Ltd.90 Here a developer deliberately built more houses on a piece of land than it was entitled to under its contract with the local authority from which the land was acquired. The Court of Appeal held that the damages would only be nominal because the local authority had suffered no loss. The case of Attorney General v Blake,91 however, reopened this issue.
Key Case Attorney General v Blake (2001)
Facts: The case concerned the notorious spy George Blake, who had been a member of the British secret service. He was convicted in 1961 of spying for Russia and sentenced to a total of 42 years’ imprisonment. In 1966, he escaped and fled to Moscow where he continues to live. While there, he wrote his autobiography, which was published in 1990. The book included descriptions of his life as a member of the secret service. He was to be paid £50,000 on the signing of the contract, £50,000 on the delivery of the manuscript and £50,000 on publication. At the time of the legal action, £90,000 remained payable by the publishers. The Attorney General brought an action to prevent Blake receiving any further benefit from the book.
Held: The House of Lords held that in exceptional circumstances a claimant could recover an account of profits in an action for breach of contract. Here the government had a legitimate interest in preventing the disclosure of official information by current or former members of the security services. On that basis, the Attorney General’s action was successful.
This decision requires further analysis. The Court of Appeal had held that the Attorney General could succeed in that, in his role as guardian of the public interest, he could obtain an injunction to prevent a person benefiting from criminal activity (the disclosures made by Blake in the book amounting to offences under the Official Secrets Act 1989). However, the court, in addition, considered the situation as regards contract law. Blake was in breach of contract since, when he joined the secret service, he undertook a lifelong contractual obligation not to disclose anything about his work. The problem was to establish any loss for which compensation could be awarded to the Crown. If no such loss existed, then the damages could only be nominal. The Court of Appeal, however, felt that although the Attorney General at that stage had declined to argue the point, this was a situation where an exception to the general compensatory rule might be made. It suggested that the law was ‘now sufficiently mature to recognise a restitutionary claim for profits made from a breach of contract in appropriate circumstances’. What are the ‘appropriate circumstances’? The Court of Appeal suggested two. First, in relation to ‘skimped performance’:92
The example given is of a fire service which did not provide the contracted number of firemen, horses, or length of hosepipe.93 The fire service had saved expenses, but had not failed to put out any fires. Nevertheless, it was suggested by Lord Woolf that it would be just to allow the other contracting party to recover damages based on the amount that the fire service had saved by this ‘skimped’ performance.94
The second situation in which the court suggested that damages based on the defendant’s gain might be appropriate is where the defendant has obtained a profit ‘by doing the very thing which he contracted not to do’.95 This was exactly Blake’s situation. He had promised not to disclose information about his work, but this was precisely what he had done in writing and publishing the book. It is clear that, had the Attorney General pursued this issue, the Court of Appeal would have been prepared to award damages for breach of contract on this basis. It reconciled this approach with that taken in Surrey CC v Bredero Homes Ltd on the basis that that decision should be regarded as allowing restitutionary damages to be available in exceptional cases.
When the case reached the House of Lords, the contractual basis of the claim was fully argued. The House reached the same effective result as the Court of Appeal by rejecting the public law claim, but allowing the Attorney General to recover the money due to Blake on the basis of breach of contract. Lord Nicholls, who delivered the main speech on behalf of the majority,96 found support for such an approach in a first instance decision which preceded Surrey v Bredero Homes, but was approved in it, namely Wrotham Park Estate Co Ltd v Parkside Homes Ltd.97 In this case houses had been built on land in breach of a restrictive covenant, and the plaintiff sought an injunction which would have led to their demolition. The court was reluctant, ‘for social and economic reasons’,98 to grant such an injunction. Instead the judge awarded damages based on an estimate of what the defendant would have had to pay to obtain a release from the restrictive covenant. This he valued at 5 per cent of the profit which the defendants had made on the development. This decision is difficult to reconcile with Surrey v Bredero, though it is true that in the latter case no injunction was sought, so the earlier case may be thought to be based on the power to award damages in lieu of an injunction.99 This analysis was not accepted by the Court of Appeal, however, in Jaggard v Sawyer.100 Moreover, the House of Lords in Johnson v Agnew101 has clearly held that the damages awarded in relation to a breach of contract should be the same whether awarded in equity (as would be the case if given in substitution for an equitable remedy such as an injunction) or under common law.
In Blake, Lord Nicholls did not attempt to achieve a reconciliation of these issues. His conclusion was simply that ‘in so far as the Bredero Homes Ltd decision is inconsistent with the approach adopted in the Wrotham Park case, the latter approach is to be preferred’.102 He went on to declare that Wrotham Park stood as a ‘solitary beacon’ showing that contract damages are not always confined to the recovery of financial losses. Damages on the Wrotham Park basis were not, however, what the Attorney General was seeking in Blake. He was not asking for a sum by which Blake could have bought his release from the restrictive provision in his contract of employment; on the facts the Crown would not have agreed to such a release on any terms. The Attorney General was, therefore, seeking a full ‘account of profits’ made by Blake from the breach. Lord Nicholls, despite the assistance of counsel, was unable to find any cases in which the courts have made such an order in a contract case,103 but noted that there is a ‘light sprinkling’ of cases in which an order to the same effect as an account of profits has been made, but not with that label.104 From here he jumped to the somewhat surprising general conclusion that ‘there seems to be no reason, in principle, why the court must in all circumstances rule out an account of profits as a remedy for breach of contract’.105
Having opened this box, however, the difficulty is to find a way to keep the remedy within bounds, and in particular to avoid it disrupting the normal expectations of commercial contracts.106 Lord Nicholls’ response to this is to state that the remedy of an account of profits will only be available ‘in exceptional circumstances’.107