Contract Law: Remedies and Damages

The usual remedy for breach of contract is an award of damages, and the guiding aim is compensation, not punishment. Equitable remedies such as specific performance are available only where damages are inadequate. This guide covers the measure of damages, remoteness, mitigation, agreed-damages clauses, and the equitable remedies.

1. The Compensatory Aim

The starting point is the expectation interest: the claimant should be placed, so far as money can do it, in the position they would have been in had the contract been performed.

A claimant may instead claim the reliance interest, recovering wasted expenditure, which is useful where the expectation loss is too speculative to prove (Anglia Television v Reed).

2. Remoteness

Not every loss caused by a breach is recoverable. Losses are too remote unless they fall within one of two limbs.

The test is the parties' reasonable contemplation at the time of contracting (Victoria Laundry v Newman), and the loss must be a "not unlikely" result, a higher degree of probability than the "reasonably foreseeable" test used in tort (The Heron II).

3. Causation and Mitigation

The breach must cause the loss, and the claimant cannot recover for losses they could have avoided by reasonable steps. The claimant must take reasonable steps to mitigate, and cannot recover for loss flowing from a failure to do so (British Westinghouse v Underground Electric Railways). The burden of showing a failure to mitigate is on the defendant.

4. Measuring the Loss

Damages are usually the cost of cure or the diminution in value, but the court will not award a disproportionate cost of cure where the claimant's real loss is modest.

Damages for distress are not generally recoverable (Addis v Gramophone), but they are where a major object of the contract was pleasure, relaxation or peace of mind (Jarvis v Swans Tours; Farley v Skinner).

5. Agreed Damages: Liquidated Damages or Penalty?

Parties often fix a sum payable on breach. A genuine pre-estimate of loss (liquidated damages) is enforceable; a clause designed to punish (a penalty) is not. The modern test has moved on from the old Dunlop pre-estimate language.

6. Equitable Remedies

Where damages are inadequate, the court may order specific performance, compelling actual performance. It is discretionary and will not be ordered for contracts of personal service, or where it would require constant supervision. Prohibitory injunctions may restrain a breach of a negative undertaking.

7. Worked Example

The reprint cost arises naturally from the breach and is recoverable (first limb of Hadley). The lost modelling contract was a special loss not in the parties' contemplation, since the printer did not know of it, so it is too remote (second limb). Distress may be recoverable here because peace of mind was an important object of the contract (Farley v Skinner).

Examiner Insights

Conclusion

Damages aim to fulfil the claimant's expectation, but that aim is bounded by remoteness, causation and the duty to mitigate. Master Hadley v Baxendale, the cost-of-cure debate, and the modern penalty test, and you can handle almost any remedies question.