Law of Contract. Damages. Last updated 28-Jun-2015

Introduction

… it is the general intention of the law that, in giving damages for breach of contract, the party complaining should, so far as it can be done by money, be placed in the same position as he would have been in if the contract had been performed. That is a ruling principle. It is a just principle.
Per Lord Atkinson in Wertheim (Sally) v Chicoutimi Pulp Co. [1911] A.C. 301 at page 307.

Lord Holt once said that "every injury imports damage", where damage is a mischief wrongfully occasioned to the person as a result of the act or default of another. Such mischief may be injuria which gives rise to a legal right to recompense, or be a damage without the right to recompense, i.e. damnum absque injuria.

From ancient times the law was has been developing to adopt the most fair principle of assessing damages. Transforming from the act of private vengeance into a civil action, the law no longer permitted the person injured to redress his grievance himself. The court and jury were now to determine the amount of compensation which the claimant should receive. The law, however, was careful to give him much what he would have exacted himself if he had been allowed a free hand.

The word ‘damages’ is not plural of damage (mischief or disadvantage which is suffered by a person), but is a definition of monetary recompense given by process of law to a person for the actionable wrong that another has done him. The legal meaning of damages is to compensate the innocent party for the breach of the contract by the guilty party.

Damages for breach of contract are distinguishable from debt, as Millett LJ said at page 202G in Jervis v Harris [1995] EWCA Civ 9:

[A] debt is a definite sum of money fixed by the agreement of the parties as payable by one party to the other in return for the performance of a specified obligation by the other party or on the occurrence of some specified event or condition; whereas damages may be claimed from a party who has broken his primary contractual obligation in some way other than by failure to pay such a debt.

Nominal damages

In all such cases [Ashby v White (1704) 2 Ld. Raym. 938] the law presumes that some damage will flow in the ordinary course of things from the mere invasion of the plaintiff's right and calls it general damage.
Ratcliffe v Evans [1892] 2 QB 524 per Bowen LJ at 528.

In every breach of contract or an infringement of an absolute right the law presumes that some damage will flow in the ordinary course of things from the mere invasion of the claimant’s right. Every such breach therefore gives rise to a claim for damages, even when the claimant has not suffered any loss as a result of the breach, he is still entitled to recover damages, in which case, damages awarded will be nominal.

Holt CJ in Ashby v White (1704) 2 Ld. Raym. 938 replying to Powell judge who was insisting that an action upon the case is not maintainable, because there is no hurt or damage to the plaintiff said:

[B]ut surely every injury imports a damage, though it does not cost the party one farthing, and it is impossible to prove the contrary; for a damage is not merely pecuniary, but an injury imports a damage, when a man is thereby hindered of his right. As in an action for slanderous words, though a man does not lose a penny by reason of the speaking them, yet he shall have an action. So if a man gives another a cuff on the ear, though it cost him nothing, not so much as a little diachylon, yet he shall have his action, for it is a personal injury. So a man shall have an action against another for riding; over his ground, though it do him no damage; for it is an invasion of his property, and the other has no right to come there;

Illustrations given underline an idea that not only monetary losses brought by a wrongful act can be pursued in legal action but any other injury, which either damages personal dignity or causes a disadvantage of any kind to a person. In many instances it is said that the law, from the injurious nature of the wrongful act, presumes damage. One example is Marzetti v Williams (1830) 1 B & Ad 415, where Lord Tenterden CJ said at p.424:

Now this action is, in fact, founded on a contract, for the banker does contract with his customer that he will pay checks drawn by him, provided he, the banker, has money in his hands belonging to that customer. Here that contract was broken, for the defendants would not pay the check of the plaintiff, although they had in their hands money belonging to him, and had had a reasonable time to know that such was the fact. … [A]nd the plaintiff, though he may have not sustained a damage in fact, is entitled to recover nominal damages. At the same time I cannot forbear to observe, that it is a discredit to a person, and therefore injurious in fact, to have a draft refused payment for so small a sum, for it shows that the banker has very little confidence in the customer. It is an act particularly calculated to be injurious to a person in trade.

Nominal damages may, on occasion, be awarded where the claimant has suffered no ascertainable damage or where he is not able or willing to show extent of damage.

[T]o entitle himself to more than nominal damages, the plaintiff was bound to shew the quantum of the interest he had in the land. He had the means of shewing it, for, he had a lease in writing which defined it. The non-production of the lease raised a presumption that the production of it would do the plaintiff no good.
Twyman v Knowles (1853) 13 CB 222, Maule J at p.224.


Liquidated damages

But, on the other hand, it is quite certain, and an established principle …, that the parties may agree beforehand to say, "Such and such a sum shall be damage if I break my agreement." The very reason why the parties do in fact agree to such a stipulation is that sometimes, although undoubtedly there is damage and undoubtedly damages ought to be recovered, the nature of the damage is such that proof of it is extremely complex, difficult and expensive.
Clydebank Engineering and Shipbuilding Co. v Don Jose Ramos Yzquierdo y Castaneda [1905] AC 6 per Earl of Halsbury LC at p.11.

The parties to a contract may agree in advance on amount of damages are to be paid in the event of breach by the party in default. Such pre-estimated damages are called "liquidated damages" and often incorporated into agreement by way of a liquidated damages clause. The parties should be cautious in wording of such clause because if "liquidated damages" thus agreed do not reflect genuine pre-estimate of the loss that is likely to be suffered by the injured party as a consequence of the breach; they will be considered by the court as penalties and thus unenforceable.

In Dunlop Pneumatic Tyre Co. Ltd. v. New Garage and Motor Co. Ltd. [1915] A.C. 79 Lord Dunedin said that "the question 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 of as at the time of the making of the contract, not as at the time of the breach". His Lordship furthermore suggested the following tests to assist this task of construction:

(a) It will be held to be penalty if the sum stipulated for is extravagant and unconscionable in amount in comparison with 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 money, and the sum stipulated is a sum greater than the sum which ought to have been paid …
(c) There is a presumption (but no more) that it is penalty when "a single lump sum is made payable by way of compensation, on the recurrence of one or more or all of several events some of which may occasion serious and others but trifling damage" (Per Lord Watson in Lord Elphinstone v Monkland Iron and Coal Co. [1886] 11 App Case 332)
(d) It is no obstacle to the sum stipulated being a genuine pre-estimate of damage, that the consequences of the breach are such as to make precise pre-estimation almost an impossibility. On the contrary, that is just the situation when it is probable that pre-estimated damage was the true bargain between the parties…

When the genuineness of the pre-estimate test satisfied, the defendant will be liable for the agreed sum irrespective of the loss actually caused by the breach.

The most common examples of liquidated damages are typical "delay and performance damages" such as laytime and demurrage provisions in charterparties. However, some recent cases illustrate use of liquidated damages beyond their traditional scope. In Azimut-Benetti SpA v Healey [2010] EWHC 2234 (Comm) an agreement to buy a luxury or super-yacht contained a clause stipulating that if the yacht builder lawfully terminated the contract it will be entitled to retain out of the payments made by the Buyer and/or recover from the Buyer an amount equal to 20% of the Contract Price by way of liquidated damages as compensation for its estimated losses. The High Court held that such provision was not penalty because:

[T]he purpose of the clause was not deterrent, and that it was commercially justifiable as providing a balance between the parties upon lawful termination by the builder… This was a contract for the construction and sale of a very expensive yacht, aptly described in the evidence as a "super-yacht". Both parties had the benefit of expert representation in the conclusion of the contract. The terms, including the liquidated damages clause, were freely entered into. As the authorities referred to above show, in a commercial contract of this kind, what the parties have agreed should normally be upheld.
By Blair J at para 29.

In another case Bluewater Energy Services BV v Mercon Steel Structures BV [2014] EWHC 2132 the contract provided for substantial liquidated damages in the event of unauthorised changes of key personnel by subcontractor: "[Mercon] shall pay the liquidated damages specified in Attachment 9B for each replacement, unless otherwise agreed with Bluewater". Mercon claimed that the purpose of liquidated damages clause was to prevent Mercon from releasing its Key Personnel without Bluewater’s prior approval and that this is a penalty and it is repugnant that Bluewater should seek to control Mercon’s management of its employees in this way. The court explained that opportunity for Bluewater to be able to approve or disapprove the replacement of Key Personnel was an important safeguard for the proper performance of the Contract. If one of the key personnel is replaced in circumstances where approval should have been sought and there is an unsuitable replacement, then this would be capable of causing a great deal of disruption to the project. Moreover the rates were negotiated by experts from both sides and certain matters taken into account in arriving at the figures, in particular, the disruptive effect on the work. The question thus was whether the figure which the parties agreed was a genuine pre-estimate of loss? The learned judge held at para 1231:

In the present case it was not possible to put a precise figure on the damages but, rather, the relevant sums needed to be assessed by people who were experienced in such projects, as they were in this case. I have no doubt that this is what [experts] did and they were trying to reflect a pre-estimate of loss in the figures they agreed. I do not consider that in the context of this project the sums of €20,000 to €50,000 can be described as being unconscionable in terms of being extravagant or exorbitant. They were clearly not seen as being a penalty by Mercon at the time when it was deciding to replace Key Personnel. In those circumstances I do not consider that Mercon has come close to demonstrating that these sums were penalties.

Liquidated damages clauses remain to be very useful in post-breach settlement. However, as some legal writers note, with the expansion of liquidated damages clauses far beyond the traditional delay and performance failures, the parties likely to face more potential challenges related to issues as to whether these clauses are enforceable.


Exemplary damages

[T]here are certain categories of cases in which an award of exemplary damages can serve a useful purpose in vindicating the strength of the law, and thus affording a practical justification for admitting into the civil law a principle which ought logically to belong to the criminal
Per Lord Devlin in Rookes v Barnard [1964] 1 All ER 367 at p.410.

Exemplary damages are not intended to compensate the injured party for any loss, but aim to punish the wrongdoer. The right to receive exemplary damages for breach of contract were confined to single case of damages for breach of promise of marriage. But this practice was abolished with passing of the Law Reform (Miscellaneous Provisions) Act 1970.

Decision of the House of Lords in Rookes v Barnard [1964] 1 All ER 367 restricted the awarding of exemplary damages to two categories of cases in which an award of exemplary damages could serve a useful purpose, namely, in the case of oppressive, arbitrary or unconstitutional action by the servants of the government, and in the case where the defendant's conduct had been calculated by him to make a profit for himself, which might well exceed the compensation payable to the plaintiff. It makes exemplary damages no available when the fault is a breach of contract.

Principles under which the boundaries were so set as to limit application of exemplary damages as far as precedent permits, make any such claim fail however outrageous the defendant’s wrongdoing, and however inadequate the available alternative sanctions, simply because:

(1) it does not fall within one or other of two limited categories of case (abuse of power by public servants and wrongdoing which is calculatedly profitseeking);
(2) it is for a wrong, such as unlawful sex discrimination, for which no pre1964 authorities can be discovered in which exemplary damages were awarded for the wrong in question; or
(3) the wrongdoer’s conduct has affected a large number of people, and so caused a large number of claims to be made in respect of it.
Aggravated, Exemplary and Restitutionary Damages (Law Com no 247) (1997).

Authors of Aggravated, Exemplary and Restitutionary Damages (Law Com no 247) (1997), consider that availability of exemplary damages under English law is artificially restricted and

The ‘cause of action’ and ‘categories’ tests should be replaced with a general principled test of availability, but that that expansion of liability should be subject to major limitations.

A judge (and never a jury) should award exemplary damages (or as we prefer to call them, ‘punitive damages’) for any tort or equitable wrong, as well as for statutory wrongs if an award would be consistent with the policy of the statute under which the wrong arises. However, an award should be made only if the defendant’s conduct showed a deliberate and outrageous disregard of the plaintiff’s rights and the other remedies awarded would be inadequate to punish the defendant for his conduct.

The decision about how much to award as punitive damages, where they have been held to be available, should also always be for a judge, never a jury. An award should not exceed the minimum necessary to punish the defendant for his conduct, and should be proportionate to the gravity of his wrongdoing.

Aggravated damages

It is the class of case in which the injury to the plaintiff has been aggravated by malice or by the manner of doing the injury, that is, the insolence or arrogance by which it is accompanied. … Aggravated damages in this type of case can do most, if not all, of the work that could be done by exemplary damages. In so far as they do not, assaults and malicious injuries to property can generally be punished as crimes, whereas the objectionable conduct in the categories in which I have accepted the need for exemplary damages are not, generally speaking, within the criminal law and could not, even if the criminal law was to be amplified, conveniently be defined as crimes. I do not care for the idea that in matters criminal an aggrieved party should be given an option to inflict for his own benefit punishment by a method which denies to the offender the protection of the criminal law.
By Lord Devlin in Rookes v Barnard [1964] 1 All ER 367, at p.412.

Aggravated damages are compensatory in a sense that they compensate the victim of a wrong for mental distress, or injury to feelings, in circumstances in which that injury has been caused or increased by the manner in which the defendant committed the wrong, or the defendant’s conduct subsequent to the wrong.

Aggravated damages were not recognised as a separate category of damages differentiated from and additional to punitive awards until Rookes v Barnard [1964] 1 All ER 367. The courts had used the terms ‘punitive’, ‘exemplary’, ‘aggravated’, ‘retributory’, and ‘vindictive’, interchangeably when referring to such awards.

The authors of Law Commission Report: Aggravated, Exemplary and Restitutionary Damages (Law Com no 247) (1997), gave the following wider definition of aggravated damages, based on analysis of Lord Devlin in Rookes v Barnard [1964] 1 All ER 367:

They are damages awarded for a tort as compensation for the plaintiff’s mental distress, where the manner in which the defendant has committed the tort, or his motives in so doing, or his conduct subsequent to the tort, has upset or outraged the plaintiff. Such conduct or motive ‘aggravates’ the injury done to the plaintiff, and therefore warrants a greater or additional compensatory sum. …

The fact that aggravated damages are, by both their name and by the conditions of their availability, conceptually separated from ordinary (compensatory) damages for mental distress, may encourage the same conclusion. And although the courts have, in form at least, proceeded on the assumption that aggravated damages are compensatory in nature, the residual perception is arguably that they retain a quasi-punitive quality. This may explain why the courts have declined to award aggravated damages in claims based on negligence and breach of contract, where compensatory principles are perceived to be paramount and punitive considerations inappropriate.

Law Commission Report: Aggravated, Exemplary and Restitutionary Damages

Publication date: 16 December 1997
In this report we make recommendations for the reform of exemplary damages, which aim to punish the wrongdoer. We consider that aggravated damages should be viewed as purely compensatory and recommend that, if exemplary (or ‘punitive’) damages are retained, their availability must be placed on a principled footing. And we state our basic position that development of the law on restitution for wrongs is most appropriately left to the courts.
Source and full text downloadable: Law Commission


Case-law

Ashby v White (1704) 2 Ld. Raym. 938

Hadley v Baxendale (1854) 8 Ex 341

Robinson v Harman (1848) 1 Exch 850

Wilson v Lancashire and Yorkshire Ry. Co. (1861) 9 C. B. (N.S.) 632

Schulze & Co. v Great Eastern Ry. Co. (1887) 19 QBD 30

Wertheim (Sally) v Chicoutimi Pulp Co. [1911] A.C. 301

Golden Strait Corpn v Nippon Yusen Kubishika Kaisha (The Golden Victory) [2007] 2 A.C. 353

Glory Wealth Shipping Pte Ltd. v Korea Line Corporation [2011] EWHC 1819 (Comm)


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