Damages Awards in Law of Contract - Essay Example

DAMAGES AWARDS IN LAW OF CONTRACT Damages Awards in Law of Contract Introduction The law of contract serves to govern contracts between two or more parties. In the United Kingdom, contracts and agreements are governed by a body of law called the English Contract Law. This law is regulating contracts across England and Wales. This law is widely shared by countries under Commonwealth such as Australia, India, Canada and the United States. It should be that this law is experiencing gradual changes due to the UK’s membership of EU and other international organizations like Unidroit.1 A contract per se is a binding agreement entered into by two parties. It is binding because any breach is punishable by law. When two parties enter into a binding agreement with each other, any breach gives the innocent party the right to damages from the party that is in breach. There are various damages that can result if any of the six principles mentioned is compromised. The rewarding of the damages depend on the following three conditions i.e. the injured party must show that the actual loss suffered is as a result of breach, the type of loss gives entitlement for compensation and the loss is not remote. There are cases when the damages are inadequate to remedy the loss. English law of Contract From the cases decided so far in England and the large Commonwealth group of states, not all damages can be sought after an injury. In contract law, the injured party has to prove that the damages suffered directly arise from the breach. Breaching of the contract can result due to some causes. They mostly result if any of the six principles governing the law of contract is broken. These principles include the agreement, consideration, capacity, intention, genuine consent, and legality. These principles lay down the base on which the law of contract is found. Any breach where one party becomes liable for damages must have broken one of the principles.2 Damage Awards Awarding of the damages serve to defend the interests of the claimant in any breach of the contract which include performance interest or the expectation interest (the promise made to the plaintiff), restitution interest (value conferred to the defendant to perform the contract)and finally, reliance interest (losses suffered by virtue of relying on the defendant).3 The injured party, however, cannot sue for all the damages suffered since some of them may be arising outside the contract. The law of contract specifies as and when it is reliable to be liable for the damages. The damages can be categorised as nominal or substantial. The nominal damages are awarded to the plaintiff when there is no loss suffered due to the contract breach by the defendant. Substantial damages, on the other hand, are awarded when the plaintiff suffered a loss.4 Substantial damages are awarded in the form of monetary compensation. The following interests that govern the awarding of damages to the injured party in the law of contract. Objectivity: Expectancy Expectancy is a mere hope that is based a direct promise or provision or trust. It is, therefore, the possibility of receiving something having any vested interest in it. In the English Contract Law. These damages are therefore recoverable from a breach committed by a non-breaching party. In Koufos v Czarnikow Limited (The Herron II) (1996), the contract was signed for carriage of cargo but was delayed for 9 days and the market price of sugar slumped, the plaintiff, sued for damages or the difference from the defendant but the defendant argued that he was not liable since the damages were too remote since it was likely that the prices were going to reduce anyway.5 The judges held that the losses were in reasonable contemplation of the parties taken to be the possible result of the breach. The degree of probability of the loss occurring was not a requirement, therefore. The judges ruled that since loss was due to price fluctuation, then it must have been known to the plaintiff as a possible result of the breach. In another case Hadley v, Baxendale (1854), the plaintiff sued for earnings lost due to delayed repair and negligence of the defendant to deliver a shaft of his mill as promised resulting to loss of profits and wages. The defendant argued that the damages were too remote since they were enforceable and not known to the defendant. The court ruled that the plaintiff was not entitled to damages due to negligence of the defendant, and thus referred the case to retrial arguing that the jury should not have considered the loss of profits.6 Reliance In reliance, the injured party suffers an economic loss or damage because he or she relied on the party who breached the contract. A good example is the Australian court case McRae v Commonwealth Disposals Commission (1951) where the defendant sold a shipwreck of a tanker that supposedly contained oil.7 There was no such tank, and the defendant argued that there was no liability for contract breach since the contract was void given that the subject matter never existed. The court ruled that the defendant was liable. The jury rejected the view that the contract was void because the defendant had promised that the tank did exist thereby causing an economic loss to the plaintiff who relied on the promise and thus was entitled to reliance damages only for the breach of the contract. Conversely, in Anglia v. Reed (1971), the actor repudiated that he could not find a substitute, and this hindered the production of the play.8 The plaintiff could not be awarded the damages because the loss profits could not be proved. The plaintiffs only entitlement was to recover the damages suffered due to wasted expenditure. Restitution In restitution, the gain taken away is the considered standard remedy for unjust enrichment. This law is applicable where one party makes a gain at the expense of another, and there is no relevant defence recognised by law. In the United Kingdom, some cases have been decided in this category. One such case is Lampleigh v Brathwait (1615) in which the defendant killed a man unlawfully and was due to be hanged for committing murder but he asked the plaintiff to do anything within his power to obtain pardon from the king and the claimant was able to obtain pardon on promise that he would be paid 100 pounds, but the defendant breached the agreement.9 The court ruled that the defendant was liable. In another case that is considered a landmark restitution in the English Contract Law, is Erlanger v New Sombrero Phosphate Co (1878).10 In this case, the defendant bought land for phosphate mining at 55,000 pounds. He then set up a mining company immediately and sold the island to the company for 110,000 pounds. The company after realising that the island was bought for 55,000 pounds, sued for rescission. The court unanimously agreed that the company promoters stand in a fiduciary relationship to investors. Rescission was, therefore, not barred by the laches and that the contract could be rescinded. In Allcard v Skinner (1887), the unmarried woman sought a confessor who was a clergyman; following year she became an associate in the sisterhood.11 Here she took vows of poverty and later made gifts of stock and money to mother superior on behalf of the sisterhood. She later sued for restitution of the money and stock gifts. The court held that, although, the plaintiff’s gifts were voidable, the undue influence made her not eligible for restitution due to her conduct and delay. Remoteness The English contract law provides that, for the damages to be awarded, the court must determine that they are not remote. The test of remoteness is known in the case of Hadley v Baxendale that was called into a question by the house of lords in The Achillea. They refined the decision in Hadley v Baxendale where they introduced a requirement that the defaulting party must contemplate and assume the responsibility for the resulting from the breach of the contract. In other words, Hadley v. Baxendale (1854) provides the point of departure from this rule.12 Where the House of Lords observed that the damage can only arise naturally from breach or may be reasonably contemplated by both parties to the contract during the contract inception as the probable result of the breach. This decision was further clarified further in Sylvia Shipping Co Limited v Progress Bulk Carriers Limited where this application of the Achilleas was limited. The limiting was set to comply to exceptional cases where circumstances, context, or the general understanding in the market provides the need to consider whether such an assumption of responsibility is there. Mr Justine Hamblin made a conclusion that there is no new legal test that can be generally applied to test remoteness of damages and that in Hadley v Baxendale the orthodox approach used remains the only test available for majority of the cases. The House of Lords further observed in Victoria Laundry (Windsor) Ltd. v. Neuman Industries Ltd. (1949) that, only a reasonable amount of the foreseeable loss can be recovered.13 The judges further observed that whether the loss occurred or not, it depends on the knowledge of the party in breach and the knowledge can be imputed or actual. The House of Lords, for instance, approved the damages in Victoria Laundry in The Heron II (1969) but discredited the use of “reasonably foreseeable” phrase. In other words, the test of remoteness in the contract law is determined by the whether the loss falls within the reasonable contemplation of both parties at the time of contract inception. This reasonable loss is what the party in breach is liable to pay. This distinction was, however, challenged by Denning in the case of H. Parsons (Livestock) Ltd. v. Uttley, Ingham & Co. Ltd. (1978) but the rule remained valid still. The explanation that was given is that, the parties to the contract must contemplate the extent of the loss at the inception of the contract for the breach to be enforceable on the defendant.14 Liquidated Damages This is where the parties to the contract specify a sum to be paid by the party in breach. The sum is not, however, automatically recovered if it is not a genuine estimate of the likely loss to in the event of the breach. When it is not a genuine estimate, the court considers it as a penalty, thus making it not conclusive; therefore, requiring the defendant to bear the burden of proof. This difference comes up well in Dunlop v. New Garage Motor Co. Ltd. (1915).15 Another case example that articulates it well is Robophone Facilities Ltd. v. Blank (1963). In these examples, it is not automatic that the injured party will recover all the damages but the plaintiff must proof the breach of contract for damages to be awarded. Remedies in Equity These are judicial remedies that were developed by the courts of equity to bring equity in the judicial system. Examples in contract law are misrepresentation that may lead to contract rescinding. Specific performance is another example of remedy awarded when the damages are not adequate. This is better brought out in Beswick v. Beswick (1968). In this case, it was observed that specific performance cannot be ordered in contracts involving personal services, in contracts lacking mutual agreements and in contracts where performance require constant supervision. The example is in Ryan v. Mutual Tontine Association (1893) and Co-operative Insurance Society Ltd. v. Argyll Stores (Holdings) Ltd. (1997). The law also requires that specific performance cannot be granted as an equitable remedy if the plaintiff fails to act equitably or if the award will cause hardship. Injunction Under equitable remedies, the court may offer a decree ordering an individual not to do or to do a certain act. The injunction is not granted if it compels one party to a contract to do what could not have been done subject to an order of specific performance as elaborated in Page One Records Ltd. V. Britton (1968).16 Conclusion From the discussion, it is not all damages that are awarded. There are specific limitations that render some damages unentitled to recoveries. In general, the law says that any binding agreement has to be in writing, and all the principles governing the law of contract have to be duly followed. Bibliography Allcard v Skinner (1887) 36 Ch D 145. In 1867 Anglia Television Ltd. v. Reed. 3 All E.R. 690 (Court of Appeal, 1971). Anson, William Reynell. Principles of the English law of contract and of agency in its relation to contract. Clarendon Press, 1906. Beswick v Beswick, [1966] 1 Ch 538, [1966] Collins, Hugh. "Good faith in European contract law." Oxford Journal of Legal Studies (1994): 229-254. Co-operative Insurance Society Ltd v Argyll Stores (Holdings) Ltd [1997] UKHL 17  Czarnikow Ltd v Koufos (The Heron II) [1969] 1 AC 350. Dunlop Pneumatic Tyre Co Ltd V New Garage Motor Co Ltd. [1915] Ac 79. Erlanger v New Sombrero Phosphate Co (1878) Hadley v Baxendale [1854] EWHC J70 Lampleigh v Braithwaite [1615] EWHC KB J17 Lando, Ole. "Principles of European Contract Law: An Alternative or a Precursor of European Legislation." Rabels Zeitschrift für ausländisches und internationales Privatrecht/The Rabel Journal of Comparative and International Private Law (1992): 261-273. McRae v Commonwealth Disposals Commission (1951) 84 CLR 377  Page One Records v Britton [1968] 1 WLR 157 Parsons (Livestock) Ltd v Uttley Ingham & Co Ltd [1978] QB 791 Robophone Facilities Ltd v. Blank [1966] 1 WLR 1428 at 1447 (CA) 57 Ryan v Mutual Tontine Association [1893] 1 Ch 116. Treitel, Guenter H. Remedies for breach of contract: A comparative account. Oxford University Press on Demand, 1988. Victoria Laundry (Windsor) Ltd v Newman Industries Ltd [1949] 2 KB 528. Read More