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In Assessing Damages For Breach

In assessing damages for breach of contract the courts generally use ‘expectation loss’ to determine the damages payable by the defendant but in some cases courts use ‘reliance loss’ instead.

Using cases to illustrate your answer explain what is meant by the terms ‘expectation loss and ‘reliance loss’. Your answer should also explain in what circumstances ‘reliance loss’ may be preferred by the claimant.

This essay looks in particular at damages which can be awarded by the courts when there is a breach in a contract. Focusing on two, these being ‘expectation loss’ and ‘reliance loss’.

The meaning of ‘expectation loss’ is where the courts give the innocent party an award of damages which will put them in the same position as if the contract had been performed. For example if a company was expecting goods to be delivered which were delivered late and as a result of that lost profits. The damages entitlement would be the same as the profit he would have gained if he had the goods on time. This has been called the ‘expectation’ damages, the case in which decided this was Robinson v Harman (1848) 1 Ex 850.

On the other hand ‘reliance loss has a slightly different impact as this is where the loss is not a tangible loss as shown in McRea, where the defendants invited people to purchase a wrecked oil tank, they stated that it would be lying at a point which was a named spot and the plaintiff made an offer which was accepted. However it was later confirmed that there was no tanker, it had never existed. The high court held that the plaintiffs were entitled to recover damages from the defendants for breach of contract promising that there was a tanker at the given locality. Alternatively as shown in Chaplin, here by contract a man had a right to belong to a limited class of competitors for a prize, there was a breach of contract which prevented him from continuing membership, the consequence of this being that he was deprived of the chance of getting the prize. Lord Justice Farwell states in this case “I see no difficulty in the assessment of damage in the present case. It was a question for the jury, and, that being so, this Court is not entitled to interfere with their finding.” The courts decided they could award a sum that is greater than the investment, but less than the expected profit. They do this where it is not possible to say that the claimant would probably have made a profit; but it is possible to say that they have certainly lost a reasonable opportunity or chance of doing so hence the label damages for ‘loss of chance.’ So to reiterate in Chaplin, the claimant lost the chance of a part (a more tangible possibility than finding the oil in McRea).

‘Reliance loss’ may be a preferred award of damages to the claimant as shown above they could be awarded a sum that is greater than the investment which may have been more than what the expected profit.

When looking at ‘expectation loss’ there are different types and these are where the claimant will have other expectations and his damages will often also reflect where these expectations have not been fulfilled.

Firstly, injury, this is where the claimant did not expect to be caused injury (this includes physical or mental illness and deaths) by products or services supplied by the company in question, for example in Godley v Perry, a young boy was injured by goods sold in breach of the implied term as to quality (Sale of Goods Act s.14) he is entitled to damages for injury.

Secondly, physical inconvenience, where the claimant expects not to suffer result of which could lead to a claim. This means something affecting one physically, but not mounting to actual illness or injury caused by the breach. An example of this is if persons’ living conditions are bad and there have been successful for cramped living arrangements caused by a solicitor failing to do all that should have been done to ensure a house was available as was the case in Bailey v Bullock.

Thirdly, damage to property if for example B expects that property belonging to him will not be damaged or destroyed by products or services supplied by A. The leading case that shows this is Wilson v Rickett, where there was damage to the property caused by a detonator in smokeless fuel. B’s property is affected by goods sold in breach of the implied term as to quality (Sale of Goods Act s.14) he is entitled to damages for the injury.

Fourthly, harm to reputation. Here the traditional rule is that the courts do not accept that a person or business can expect his reputation not to be affected by a breach as was the case in Addis there was no claim for damage to his reputation caused by the way he was dismissed from his job. This appear to remain the doctrine in Johnson, however, the wrongful way in which one is treated or dismissed from work and which affects one’s reputation could well result in a level of upset that crosses the line, into the realms of psychiatric injury and there will sometimes be a claim in such cases, as was the situation in McCabe (this would then simply fall under injury).

Also it may be, in particular circumstances surrounding loss of employment for instance, someone involved in a scandal that involved the conduct of a business by the company he/she worked for. This has the opportunity to damage an individual’s reputation in such a way, that to find another job would be even more difficult. If this could be proven clearly enough, there might be a claim for loss as was the case in Mahmud and Malik, here the employee’s of the firm, found they could not move onto other jobs because of the company’s bad reputation.

Fifthly, distress and loss of enjoyment, the same rule that was established when looking at harm to reputation is used. For example the courts do not accept that B can expect that his peace of mind or enjoyment are not to be affected by a breach. This is also applied in commercial contracts, for example, where a person runs a business and his peace of mind and enjoyment was affected by a breach caused by another business. As was the case in Hayes, the buyers of a business could claim for the ‘aguish and vexation’ caused by their lawyers breach (the breach lay in the lawyer not fulfilling his promise, that the client would have the right to access a workshop area. Of course if the distress or loss of enjoyment crosses the line into psychiatric injury then there is a claim, however, this again would fall under injury.

An individual could also claim for actual loss of profits that occur and for ‘diminution in value’ damages, this for example is where the actual economic value of goods or business purchased is less than it was promised to be.

However, apart from these cases there can sometimes be a claim for distress of loss of enjoyment in its own right, so without taking into account diminution in value or any psychiatric injury. The key to finding this out is to look at whether an important element of the contract is to provide enjoyment, peace of mind, relief from stress and so on. This is arguably simply a logical application of the ‘expectation’ principle, as in such cases the basic thing that has been contracted and therefore ‘expected’ for example to get employment or peace of mind has not been received.

Usually the claims that have been successful have been by consumer or other private individuals (who sometimes make contracts where enjoyment or peace of mind etc are important. By comparison in most cases where a business makes a contract the basic thing contract for is to make financial gain not for its enjoyment or peace of mind.

So in Jarvis, the holidaymakers could claim not only for the ‘diminution value’ which could be a sum for having received a holiday worth economically less than what they paid for it, but also for the simple fact (the ‘distress’) of not having had a good time.

The case in which this differed was in Ruxley, here there was no diminution in value as the swimming pool was (in hard economic terms) worth no less than the one that had been built that had been built to the correct depth. However, because a private consumer has a swimming pool built for personal pleasure and enjoyment, the customers received so called ‘loss of amenity’ damages of £2,500, this was effectively damages for subjective (personal or individual) enjoyment that they expected to get from a swimming pool of the depth they had ordered.

In Farley and in Heywood, there were specific contractual promises to investigate aircraft noises (Farley) and to obtain a non molestation injunction (Heywood); so there were claims for the distress caused by the breach of these promises (because obviously, the avoidance of such distress was central to the contract).

The question remains, whether an important element of the contract is to provide enjoyment, peace of mind, relief from stress and so on, if the answer is yes then it is arguable that if this could be established in the case of commercial contractor, then recovery of such damages should be allowed.

In the case of Watts, Lord Bingham, now Lord Justice Bingham said that (where no physical inconvenience was involved) the pursuit of enjoyment or peace of mind had to be “the very object of the contract.” However in Farley, it was held that it was enough, if it was a major or important element of the contract. This makes it very difficult to predict what the outcome would be in similar cases. As there in room for debate as to when, enjoyment, peace of mind and freedom from stress is not the very object of the contract it is, nevertheless, a major and important element of a contract.

Lastly there is diminution in value and cost of repair. If (because of a breach) goods, services or businesses that have been purchased are not worth the amount that it should have been (in hard economic terms) the buyer is entitled to damages for diminution in value. Of course this is only applicable where the buyer is not rescinding or terminating the contract (if that was the case then he would get a full refund anyway). The point of damages, for diminution in value is to cover cases where he is keeping the object purchased, and the damages are supposed to reflect the fact that it is worth less than it should have been. It simply means damages to reflect how much less the object is worth than what it was paid for (partial refund). So in Jarvis, apart from the loss of enjoyment element of damages, Mr Jarvis also received damages to amount to half the cost of the holiday. A basic example would be is an individual pays for a car with a CD player and it has no CD player when it arrives, then he or she is entitled to damages, reflecting the cost of the CD player.

In many cases the cost (to the party who has broken the contract) when trying to repair/ instatement, the problem may not be significantly higher than the costs of paying diminution in value. If so the party affected by the breach is entitled to claim the cost of repair/reinstatement. However if the cost of the latter is disproportionately expensive for the party in breach, so much more than it would cost simply to provide a partial refund, then the courts will not award damages for repair/reinstatement. So in Ruxley, as seen mentioned before, there was actually no diminution in value at all in the sense that the pool had the same market value as it would have had if it had been built to the correct depth. However the cost of ‘repairing’ it, (making it the correct depth) would have been around £21,000. This was viewed as disproportionately expensive and the courts refused to award it. They did, of course award ‘loss of amenity damages for the loss of enjoyment that they expected to get from the swimming pool if the depth they had ordered. Normally they would have awarded an amount for diminution in value, but there was none. One problem was highlighted with the refusal to award repair/reinstatement damages (where this is viewed as disproportionate) is that it could be viewed as making it too easy for a ‘cowboy builder’ to cut costs by not doing a proper job as they are in the knowledge that he will often not actually be made to pay the cost of putting it right. One way of addressing this might be to make sure that a party in this position always has to hand over (as an additional element of any damages) the amount he actually saved by not doing the work properly. This would be ‘restitutionary’ damages designed to prevent the builder in a case such as this being ‘unjustly enriched’ by his breach. Such an approach would provide a contribution towards the customer’s cost by fixing the problem. In addition, if the contractors knew that such awards were possible, it would provide an incentive to do the job properly in the first place.

Another difficulty with the proportionality rule is the lack of certainty as to exactly what counts as disproportionate. In Ruxley, the pool was 18” shallower than it should have been it was 6 feet when it should have been 7 feet, 6”). It was in the light of this difference (which was obviously not viewed as being extreme enough) that the cost of £21,0000 to put it right was viewed as disproportionate. Obviously if the difference in depth had been less than 18” the result would have been the same. The question is a what depth would the builder have been expected to pay the cost of repair (bearing in mind, also, that this cost would probably be going up as it moves further away from the depth of 7 feet, six” depth that it should have been, it would cost more to put the problem right. The point being the answer is very unclear.

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