If you have suffered loss because of a breach of contract, you may be wondering what damages you are entitled to. Below is our guide to damages for breach of contract, explaining how damages are calculated and what might reduce the amount payable.
Summary
This article covers:
- Definition and Purpose of Damages
- Types of Damages
- Principles Governing Damages
- Calculation of Damages
- Limitations on Recovery
- When Am I Entitled to Damages in Contract Law?
- How Do You Claim Breach of Contract Damages?
- What Compensation Can I Claim for Breach of Contract?
- Contact our Breach of Contract Solicitors
- FAQ
Definition and Purpose of Damages
In contract law, damages refer to a sum of money awarded by way of compensation following a breach of the contract. The amount paid may aim to put the party who suffered from the breach in the financial position they would have been in, but for the breach.
The payment of compensation for breach of contract is more common than other remedies, such as ordering one party to carry out their obligations, known as specific performance, or an injunction preventing them from taking certain action.
Types of Damages
Different types of damages are available, depending on the claim and what the court considers to be an appropriate remedy. They can be broadly split into compensatory and non-compensatory damages. Compensatory damages are more common.
The award of non-compensatory damages can be punitive or symbolic, and aims to deal fairly with both the party in breach of the contract and the claimant.
When dealing with a breach of contract, the party suffering from the breach has a duty to take reasonable steps to mitigate the losses. If they do not, then they risk not fully recovering the amount claimed.
Compensatory Damages
Compensatory damages are a payment intended to put the party who has suffered from the breach of contract in the position they would have been in, had the contract been performed correctly. The court will assess how much it believes the claimant has lost as a direct cause of the breach of contract. Other issues will also be considered, including any potential benefit to the claimant and any failure on the part of the claimant to mitigate their losses.
Consequential/Special Damages
Consequential or special damages are awarded for indirect losses suffered by the claimant. Examples include damage to their reputation or a loss of profits. The claimant will need to demonstrate that the losses claimed were reasonably foreseeable at the time the contract was made.
They can also include damages for distress or psychiatric injury. In the case of Jarvis v Swan Tours (1973), Mr Jarvis booked a skiing holiday that promised a range of benefits. When the holiday turned out to fall short of the offering, he was awarded compensation for his suffering.
In the case of Ruxley Electronics and Construction Ltd v Forsyth (1996), damages were awarded for a loss of amenity. Mr Forsyth engaged the appellant to construct a swimming pool of a specified size. In fact, the pool constructed was shallower than ordered, although it was safe to dive into, and the error did not affect the value of the claimant’s property.
The House of Lords allowed an award of £2,500 for the claimant’s loss of amenity, but found that it would be unreasonable to award the full cost of rebuilding the pool. The cost of doing this was disproportionate to the size of the claimant’s loss.
Nominal Damages
Nominal damages are a minor but symbolic sum of money awarded by the court. This is the court’s way of allowing that the contract was breached, but without giving the claimant a payout. This could be because the court does not consider that they suffered a loss that should be compensated financially.
Because the claimant won their case, the court will also usually award them their costs of the action, meaning that the other party has to pay both sets of legal fees.
Liquidated Damages and Penalty Clauses
Liquidated damages are an agreed sum of money, generally specified in the contract, that will be payable should there be a breach of the contract or a delay in its performance. Penalty clauses in contracts are similar, but can be much higher than the loss sustained, and are often unenforceable because of this.
As liquidated damages are agreed on in advance, this type of dispute should be easier to resolve, as the circumstances surrounding the breach and the amount to be paid are already defined.
Restitution Damages
Restitution damages are designed to take away any benefits from the defaulting party that they may have obtained because of their breach of the contract. The sum awarded is based on the amount unfairly obtained by the defendant, not the amount claimed.
Aggravated and Exemplary Damages
Aggravated damages are unusual in breach of contract cases. They are awarded to compensate the party suffering from the breach for distress or injury arising from the defendant’s conduct. The sum awarded is based on the impact of the breach on the claimant’s life.
Exemplary damages are punitive in nature and are only used when the breach is deliberate or malicious. They serve as a warning, intended to deter others from behaving in a similar way. The amount awarded is not based on loss, but aims to secure the outcome the court requires, either punishment or deterrence.
Principles Governing Damages
In calculating how much to award in a successful breach of contract case, the court will look at several issues, including whether the losses were reasonably foreseeable and whether the claimant took reasonable steps to mitigate their losses.
Remoteness
A loss claimed as a result of a breach of contract must be reasonably foreseeable.
The case of Hadley v Baxendale (1854) states that damages should only be awarded when a loss arises naturally from the breach of contract or where they were reasonably foreseeable to both parties when the contract was made.
The claimant was a miller, and the defendant was contracted to deliver a broken crankshaft to the manufacturer to be repaired. When a delay occurred, the claimant sued the carrier for their lost profits as they had been unable to mill any grain while waiting, and the mill had been closed.
The claimant was not successful, as the defendant had not been advised that late delivery would lead to such sizeable losses.
Mitigation
The party that suffers a loss following a breach of contract is obligated to take reasonable steps to mitigate those losses. This means that if part of the losses were reasonably avoidable, they cannot be recovered. The court will apportion the losses and only award those which could not have been reasonably avoided.
Certainty
The claimant will need to provide evidence to the court of the amount of its losses, to give the court figures to work with when assessing the amount of any damages award. It is acceptable to provide estimated figures, but these must be based on a sound method of estimation.
Evidence of the loss needs to be provided, along with the sums involved. This is because the court needs to be able to demonstrate why the sum in question was awarded and what it was based on.
Calculation of Damages
In quantifying damages, the court will look at the following:
· Loss of profits, where the party suffering from the breach will make less as a result
· The cost of curing or remedying the situation, for example, repairs or replacement
· Extra overheads incurred by the party suffering from the breach
· The difference in value of a relevant asset following the breach of contract
It is for the claimant to provide evidence of each of these points if including them in their claim.
Limitations on Recovery
The contract may include clauses that aim to reduce the amount recovered or, in some cases, exclude liability. It is important to take legal advice on the terms of a contract you intend to rely on in legal action. If a clause is unfair or too widely drafted, then it may not be enforceable.
In addition, there are statutory limits. This often means that a claim should be made no more than six years from the date of the breach.
Penalty clauses may limit recovery, although they can be unenforceable. The case of Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd (1915) set out the legal test for defining penalty clauses and liquidated damages clauses.
To be valid, a penalty clause must provide a genuine pre-estimate of loss, intended to compensate for actual losses, and cannot be ‘extravagant and unconscionable,’ ie, an excessive or punitive sum.
The more recent case of Cavendish v Makdessi (2013) set out a new test for penalty clauses. It states that a clause is a penalty clause and unenforceable if the amount is out of all proportion to the legitimate commercial interest of the claimant.
Practical Guidance on Damages for Breach of Contract
In bringing a claim for breach of contract, it is essential to have evidence for all parts of the claim.
This includes evidence of:
· The contract
· Fulfilment of your part of the contract
· The breach of contract
· That losses were incurred as a result of the breach
· The size of the losses
· Steps taken in mitigation
Breach of contract cases can involve voluminous documentation, and an expert breach of contract solicitor will be able to collate the right information and ensure your case is robust, with all essential paperwork in place.
Your solicitor will also be able to advise you on the strength of your case and any risks involved in proceeding. For example, if you were to be unsuccessful, you are likely to be required to pay the other side’s legal costs as well as your own.
A claim is generally commenced with a letter before action, setting out the complaint. The next step is to try and resolve matters out of court, which is faster and more cost-effective than litigation. This could be by way of negotiation, or an alternative form of dispute resolution such as mediation, arbitration or early neutral evaluation.
When Am I Entitled to Damages in Contract Law?
If you have signed a contract which is breached by the other party, then there may be a range of remedies available, including:
- Damages
- Specific performance, requiring the other party to carry out their obligations under the contract
- An injunction, preventing the other party from doing something
- Termination of the contract
The payment of damages is the most common remedy. If a contract is breached, the courts will aim to put you in the position you would have been in, had the breach not taken place. It is usually used to provide compensation rather than impose a punishment, although punitive damages may be awarded in certain circumstances.
How Do You Claim Breach of Contract Damages?
To claim damages for breach of contract, you will need to show the following:
- The terms of the contract were breached
- This breach caused the loss complained of
- The loss was reasonably foreseeable as a result of the breach
You will also be expected to mitigate your losses so far as is reasonable. This means taking steps to reduce the loss where possible. By way of example, if an item was not supplied to you, making you late in fulfilling an order, it would be reasonable to try and source this elsewhere to prevent further losses.
The courts prefer that, wherever possible, those involved in a breach of contract dispute make attempts to resolve matters out of court. When we deal with a case, we aim to negotiate a settlement before starting a legal claim.
What Compensation Can I Claim for Breach of Contract?
The amount payable for compensatory breach of contract damages is assessed by looking at the position you would have been in but for the breach.
The courts will look at the loss you have sustained because of the breach and aim to provide a level of compensation that is fair but not punitive.
In addition, you may be entitled to contractual damages if the contract sets out circumstances in which a penalty is payable.
Non-compensatory damages:
In some cases, you may be able to claim other types of damages, including:
- Restitutionary Damages, where you can ask for payment in respect of profits made by the other party because of the breach of contract
- Negotiating Damages, or the sum that the other party would have paid to be released from the contract, for example, if a builder built on land in breach of a contract, the sum they would have had to pay to secure release from the contract and permission to build
If the court finds that a contract has been breached but no financial loss has occurred, it can award nominal damages, such as the sum of £1. This is an acknowledgement that the contract has not been complied with.
How Can Damages Be Limited in Breach of Contract Claims?
If the defendant can show that other events have occurred which contributed to the loss, then they may be able to claim that the chain of causation was broken. This could reduce the amount of compensation payable.
As far as possible, you will need to show that the loss directly resulted from the breach of contract, that the loss is not too remote and that it was reasonably foreseeable.
Contact our Breach of Contract Solicitors
If you have suffered a loss because of a breach of contract or you are facing a breach of contract claim, our team of contract lawyers can provide expert advice, remedies and representation. We routinely handle breach of contract cases and are often able to reach prompt out-of-court settlements.
If you would like to speak to one of our expert breach of contract solicitors, ring us at 0330 173 3980, email us at info@witansolicitors.co.uk or fill in our contact form, and we will talk through your situation with you and discuss how we can help.
FAQ
How are Damages for Breach of Contract Calculated?
If a claim for breach of contract is successful, the court will look at whether compensatory or non-compensatory damages are appropriate.
When calculating the amount of compensatory damages, it will use the evidence supplied to restore the claimant to the position they would have been in, had the breach not occurred. This will include direct financial losses, loss of profits and associated expenses.
The sum will be based on the evidence provided to the court.
What are the types of damages in contract law?
Damages available in contract law include:
o Compensatory damages
o Consequential/special damages
o Nominal damages
o Liquidated damages and penalty clauses
o Restitution damages
o Aggravated and exemplary damages
Can you claim damages for inconvenience?
While damages are not normally recoverable for inconvenience in contract law, they may be available if the purpose of the contract was peace of mind or a leisure activity, for example, a holiday or social event.
What is the difference between liquidated damages and penalties?
Liquidated damages should be based on a realistic calculation of the loss that could be expected if a specified breach of contract were to occur. A contract can include clauses requiring the payment of liquidated damages in particular situations.
Penalty clauses require the payment of an excessive sum, and they are used to try to deter a party to a contract from defaulting. They are usually unenforceable.
